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DEM, INC.
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DEM, INC.
ANNUAL REPORT
December 31, 1996
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Page 1 of 2
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DEM, INC.
STATEMENT OF PORTFOLIO INVESTMENTS
AS OF DECEMBER 31, 1996
Shares Value
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CASH AND MONEY MARKETS - 46.2%:
Cash - 44.0% $ 6,013,933
Fidelity U.S. Treasury
Portfolio II - 2.2% 298,066
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Total money markets 6,311,999
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COMMON STOCK - 53.8%:
Apparel - 1.3%
5,000 Donna Karan International* 70,625
7,000 Supreme International Corp*. 101,500
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172,125
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Banking - 6.5%
17,000 Banponce Corporation 573,750
10,000 Capital Bancorp FLA 280,000
5,500 Carver Federal Savings Bank* 45,375
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899,125
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Communications - 3.4%
2,500 Mastec, Inc.* 132,500
10,000 Premisys Communications, Inc.* 337,500
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470,000
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Consumer Products - 3.0%
15,000 Movado Group 408,750
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Consumer Services - 2.2%
10,000 Verifone* 295,000
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Electronics - 2.9%
10,000 Ault Incorporated* 67,500
20,000 S3, Inc.* 325,000
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392,500
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Environmental Services - .9%
6,000 Tetra Tech, Inc.* 118,500
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Financial Services - .5%
5,000 Capital Factor Holdings, Inc.* 62,500
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The accompanying notes are an integral part of this statement.
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Page 2 of 2
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DEM, INC.
STATEMENT OF PORTFOLIO INVESTMENTS
AS OF DECEMBER 31, 1996
Shares Value
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COMMON STOCK (Continued):
Furniture - 2.8%
10,000 Ethan Allen $ 385,000
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Healthcare - 2.4%
5,000 CRA Managed Care, Inc.* 225,000
4,000 Health Systems International, Inc.* 99,000
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324,000
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Media/Publishing - 4.3%
15,000 BET Holdings* 431,250
15,000 Granite Broadcasting Corp.* 159,375
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590,625
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Retail - 2.0%
12,000 Gymboree* 274,500
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Software and Technology Service - 4.8%
11,500 Computer Associate International* 572,125
3,000 Integrated Systems, Inc.* 78,000
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650,125
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Technology - 12.5%
15,000 ESS Tech, Inc.* 421,875
10,000 Lattice Semiconductor Corp.* 460,000
20,000 Osicom Technologies, Inc.* 151,250
15,000 Sigma Designs* 157,500
10,000 Solectron Corp.* 533,750
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1,724,375
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Textile - 4.3%
20,000 Warnaco Group, Inc., Class A 592,500
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Total common stock 7,359,625
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Total investments $ 13,671,624
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* Non-income producing for the year ended December 31, 1996.
The accompanying notes are an integral part of this statement.
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DEM, INC.
STATEMENTS OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1996 AND 1995
1996 1995
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ASSETS:
Common stock investments (Cost $7,370,297) $ 7,359,625 $ -
Cash and cash equivalents 6,311,999 4,812,175
Interest receivable 689 2,431
Prepaid expenses 8,572 -
Deferred organizational costs, net
(Note 2) 39,742 49,675
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Total assets 13,720,627 4,864,281
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LIABILITIES:
Payable for investments purchased 2,675,787 -
Accounts payable and accrued expenses 19,688 121,481
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Total liabilities 2,695,475 121,481
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NET ASSETS - equivalent to $14.17 and $13.77
per share on 777,813 and 344,457 shares of
common stock outstanding, respectively $ 11,025,152 $ 4,742,800
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SUMMARY OF SHAREHOLDERS' EQUITY (Note 4):
Common stock, $.00001 par value,
500,000,000 shares authorized,
777,813 and 344,457 shares issued
and outstanding, respectively $ 8 $ 3
Additional paid-in capital 10,786,241 4,740,912
Accumulated net realized gain on
investments 413,340 -
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Unrealized loss on investments (10,672) -
Undistributed investment income, net (163,765) 1,885
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Net assets applicable to
outstanding common stock $ 11,025,152 $ 4,742,800
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The accompanying notes are an integral part of these statements.
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DEM, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE PERIOD FROM INCEPTION (NOVEMBER 30, 1995) THROUGH DECEMBER 31, 1995
For the Year For the
Ended Period Ended
December 31, December 31,
1996 1995
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INVESTMENT INCOME:
Dividend income (net of withholding tax of $702) $ 10,870 $ -
Interest income (Note 2) 94,164 2,431
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Total investment income 105,034 2,431
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EXPENSES:
Advisory fees (Note 3) 44,827 468
Transfer agent fees 30,579 -
Legal and auditing fees 61,737 -
Directors' fees and expenses 13,043 -
Organizational expenses 9,933 -
Administrative fees (Note 3) 7,471 78
Custodian fees 8,074 -
Insurance expenses 14,105 -
Marketing expenses 50,960 -
Other expenses 12,733 -
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Total expenses 253,462 546
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Net investment (loss) income (148,428) 1,885
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REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Accumulated net realized gain on investments 413,340 -
Unrealized loss on investments (10,672) -
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Net gain on investments 402,668 -
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Net increase in net assets resulting
from operations $ 254,240 $ 1,885
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The accompanying notes are an integral part of these statements.
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DEM, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE PERIOD FROM INCEPTION (NOVEMBER 30, 1995) THROUGH DECEMBER 31, 1995
For the Year For the
Ended Period Ended
December 31, December 31,
1996 1995
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INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income $ (148,428) $ 1,885
Accumulated net realized gain on investments 413,340 -
Unrealized loss on investments (10,672) -
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Net increase in net assets
resulting from operations 254,240 1,885
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DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (17,222) -
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Net decrease in net assets resulting
from distribution to shareholders (17,222) -
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CAPITAL SHARE TRANSACTIONS (Note 4):
Common shares issued, net of issuance costs 6,044,996 4,740,915
Common shares issued in reinvestment of
dividends 338 -
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Net increase in net assets resulting
from capital shares transactions 6,045,334 4,740,915
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TOTAL INCREASE IN NET ASSETS 6,282,352 4,742,800
NET ASSETS, beginning of the period 4,742,800 -
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NET ASSETS, end of the period $ 11,025,152 $ 4,742,800
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The accompanying notes are an integral part of these statements.
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DEM, INC.
FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE PERIOD FROM INCEPTION (NOVEMBER 30,1995) THROUGH DECEMBER 31, 1995
For the Year For the
Ended Period Ended
December 31, December 31,
1996 1995
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PER SHARE DATA:
Net asset value on issuance of shares $ - $ 13.97
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Dilution effect from shares-
Organizational costs - (.21)
Shares issued (.28) -
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Investment income .30 .01
Expenses (.72) .00
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Net investment income (.42) .01
Distributions from net investment income (.05) -
Net realized and unrealized gain on securities 1.15 -
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Net increase in net asset value .68 .01
Net asset value-
Beginning of year 13.77 -
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End of year $ 14.17 $ 13.77
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Weighted average shares outstanding during
the year 349,219 344,457
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Per share market value, end of period $ 15.50 $ 15.00
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Total investment return 3.68% -
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RATIOS TO AVERAGE NET ASSETS:
Expenses 3.21% .04%
Net investment income (1.89)% 1.45%
Average commission rate paid 4.38% -
Portfolio turnover rate 332.60% -
SUPPLEMENTAL DATA:
Net assets, end of the period $ 11,025,152 $ 4,742,800
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The accompanying notes are an integral part of these statements.
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DEM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
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 are considered in
the selection of investments, but primary emphasis is on capital appreciation.
The Company retains maximum flexibility as to the types of investments it may
make and it is permitted to invest in portfolio companies with large and small
market capitalizations. The Company, however, seeks to invest a substantial
portion of its assets in securities of domestic emerging companies with smaller
market capitalizations. There can be no assurance that the Company's objectives
will be achieved. The Company's investment objectives and policies may be
changed by the Board of Directors without the approval of shareholders. Most of
the Company's investments are expected to be in marketable common stocks or
marketable securities convertible into common stock traded on an exchange or in
the over-the-counter markets.
While the primary objective of the Company is to seek long-term growth through
capital appreciation, the Company may invest its assets in income producing
securities such as non-convertible preferred stock, bonds, debentures, notes and
other similar securities, if the Investment Adviser deems such investments
advisable.
2. SIGNIFICANT ACCOUNTING POLICIES:
SECURITY VALUATION
Investments in securities traded on a national securities exchange (or reported
on the NASDAQ national market) are stated at the last reported sales price on
the day of valuation; other securities traded in the over-the-counter market and
listed securities for which no sale was reported on that date are stated at the
last quoted bid price.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of December 31, 1996 and 1995, consist of funds
invested in the money market funds stated at cost which is market.
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DEFERRED ORGANIZATIONAL COSTS
Costs incurred to organize the Company have been deferred and are amortized on a
straight-line basis over a five-year period starting in 1996.
INTEREST INCOME
Interest income is recorded on the accrual basis to the extent that such amounts
will be collected.
INCOME TAXES
The Company elected to be treated as a regulated investment company (a RIC) for
Federal income tax purposes in accordance with Subchapter M of the Internal
Revenue Code of 1986, as amended. In order to so qualify, the Company must
satisfy certain tests regarding the source of its income, diversification of its
assets and distribution of its income. If the Company otherwise qualifies as a
regulated investment company and distributes to its stockholders at least 90% of
its investment company taxable income, then the Company will not be subject to
Federal income tax on the income so distributed. However, the Company would be
subject to corporate income tax on any undistributed income. In addition, the
Company will be subject to a nondeductible 4% excise tax on the amount by which
the amount it distributes in any calendar year is less than a statutorily-
designated, required amount of its regulated investment company income and its
capital gain net income (generally 98%).
OTHER
The Company follows industry practice and records security transactions on the
trade date. Dividend income is recognized on the ex-dividend date, and interest
income is recognized on an accrual basis. Discounts and premiums on securities
purchased are amortized over the life of the respective securities.
USE OF ESTIMATES
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, liabilities, revenues and expenses in the
financial statements and the disclosure of contingent assets and liabilities.
While actual results could differ from those estimates, management believes that
actual results will not be materially different from amounts provided in the
accompanying financial statements.
3. INVESTMENT ADVISORY AGREEMENT:
The investment adviser to the Company is Chapman Capital Management, Inc. (the
Investment Advisor and CCM). Pursuant to an Investment Advisory Agreement, the
Investment Adviser receives 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.
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4. CAPITAL SHARE TRANSACTIONS:
As of December 31, 1996, there were 500,000,000 shares of $.00001 par value
capital stock authorized and additional paid-in capital aggregated $10,786,249.
Transactions in capital stock were as follows:
Shares Dollar Value
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1996 1995 1996 1995
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Shares sold 433,333 344,457 $ 6,044,996 $ 4,740,915
Shares issued as
reinvestment of
dividends 23 - 338 -
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Net increase 433,356 344,457 $ 6,045,334 $ 4,740,915
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The dollar amounts in the above table are net of sales commissions and fees of
$455,000 paid to The Chapman Co. for underwriting management fees and broker
commissions.
The Company has a dividend reinvestment plan (the Plan). Shareholders of
record, whose shares are registered in his or her name, will automatically be a
participant in the Plan, unless the shareholder specifically elects to receive
dividends and capital gains in cash paid by check. The Company instructs the
stock transfer agent to buy shares in the open market or to issue new shares.
When the Company issues new shares, the price is equal to the last sale price at
the close of the previous trading day. If there is no sale on that date, then
the mean between the closing bid and asked quotations for such common stock on
such date is used.
5. DISTRIBUTIONS TO SHAREHOLDERS:
Dividends to shareholders are recorded on the ex-dividend date.
On April 25, 1996, a distribution of $.05, aggregating $17,221, was declared
from net investment income during 1996. The dividend was paid on May 31, 1996,
to shareholders of record on May 7, 1996.
6. RELATED PARTY TRANSACTIONS:
The Company issued 6,667 shares of common stock to Chapman Capital Management,
Inc. (CCM) on November 3, 1995, for $15 per share and another 337,790 shares to
the public on December 23, 1995. In 1996, CCM purchased 196,333 shares of the
Company's common stock from the public. Also, in 1996, CCM sold all of the
Company's common stock back to the public. Included in the accompanying
statement of operations for the year ended December 31, 1996 and 1995, is
$52,289 and $546, respectively, of investment advisory and administrative fees
related to the Investment Advisory Agreement discussed in Note 3, of which
$4,682 and $546 are included in accounts payable accrued expenses in the
accompanying statement of assets and liabilities as of December 31, 1996 and
1995, respectively. Also included in accounts payable and accrued expenses is
$5,087
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payable to The Chapman Co. as of December 31, 1996, and $16,306 payable to CCM,
Inc. and $45,000 payable to an officer of the Company as of December 31, 1995,
for costs paid on behalf of the Company. Commissions on trading activity were
paid of $33,450 to the Chapman Co. for the year ended December 31, 1996.
7. SUBSEQUENT EVENT:
On January 31, 1997, the Company declared a $.19 per share dividend, totaling
$147,784, to shareholders of record on February 14, 1997, to be paid on
February 28, 1997.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
DEM, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the statement of portfolio investments, of DEM, Inc. (a Maryland corporation),
as of December 31, 1996 and 1995, and the related statements of operations,
changes in net assets and financial highlights for the year ended December 31,
1996, and the period from inception (November 30, 1995) through December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities and portfolio
investments referred to above presents fairly, in all material respects, the
financial position of DEM, Inc. as of December 31, 1996 and 1995, and the
results of its operations, changes in net assets and financial highlights for
the year ended December 31, 1996, and the period from inception (November 30,
1995) through December 31, 1995, in conformity with generally accepted
accounting principles.
Baltimore, Maryland,
February 14, 1997
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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.
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LIMITED EXPERIENCE OF THE INVESTMENT ADVISER
Chapman Capital Management, Inc., the Company's investment advisor,
(the "Investment Adviser") has acted as investment manager for various balanced
and equity portfolios. Further, the Investment Adviser has acted and is
currently acting as an investment adviser and manager for The Chapman Funds,
Inc., an open-end, diversified management investment company which currently
offers one money market fund. However, prior to advising the Company, the
Investment Adviser had not acted as an adviser to a closed-end management
investment company.
NON-DIVERSIFIED STATUS
The Company is classified as a non-diversified management investment
company under the 1940 Act, which means that the Company is not limited by that
Act in the proportion of its assets that may be invested in the securities of a
single issuer. However, the Company complies and intends to continue to comply
with the diversification requirements imposed by the U.S. Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as a regulated investment
company. 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.
POTENTIAL CONFLICT OF INTEREST
The Company may utilize The Chapman Co., a broker-dealer registered
under the Securities and Exchange Act of 1934 and a member of the National
Association of Securities Dealers, in connection with the purchase or sale of
portfolio securities in certain circumstances. The Investment Adviser is a
wholly-owned subsidiary of The Chapman Co. Mr. Nathan A. Chapman, Jr., the
President and Chairman of the Board of Directors of the Company, is also the
President and Chairman of the Board of Directors of the Investment Adviser and
The Chapman Co. Mr. Chapman owns approximately 92% of the voting securities of
The Chapman Co. on a fully diluted basis. Accordingly, these relationships
represent a potential conflict of interest with respect to commissions and other
fees on brokerage transactions conducted on the Company's behalf by The Chapman
Co. A majority of the Company's board of directors are independent directors
and such directors have adopted procedures in compliance with the Investment
Company Act of 1940 to address such conflict.
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DIVIDEND REINVESTMENT PLAN
1. Each holder of shares (a "Shareholder") of common stock, par value
.00001 per share (the "Common Stock"), in DEM, Inc. (the "Fund") whose Fund
shares are registered in his or her own name will automatically be a participant
("Participant") in the Dividend Reinvestment Plan (the "Plan"), unless any such
Shareholder specifically elects to receive all dividends and capital gains in
cash paid by check mailed directly to the Shareholder. A Shareholder whose
shares are registered in the name of a broker-dealer or any nominee (the
"Nominee") will be a Participant if (a) such a service is provided by the
Nominee and (b) the Nominee makes an election on behalf of the Shareholder to
participate in the Plan. The Chapman Co. intends to make such an election on
behalf of Shareholders whose shares are registered in its name, as Nominee,
unless a Shareholder specifically instructs his or her broker to pay dividends
and capital gains in cash. Fund/Plan Services, Inc. (the "Agent") will act as
agent for Participants and will open an account under the Plan for each
Participant in the same name as such Participant's Common Stock is registered on
the books and records of the transfer agent for the Common Stock.
2. Whenever the Fund declares a capital gains distribution or an income
dividend payable in shares of Common Stock or cash, Participants will receive
such distribution or dividend in the manner described in paragraph 3 below as
determined on the date such distribution or dividend becomes payable.
3. Whenever the market price of the Fund's Common Stock is equal to or
exceeds the net asset value per share at the time shares of Common Stock are
valued for the purpose of determining the number of shares equivalent to the
cash dividend or capital gains distribution, Participants will be issued shares
of Common Stock valued at the greater of (i) the net asset value per share most
recently determined or (ii) 95% of the then current market price. Participants
will receive any such distribution or dividend entirely in shares of Common
Stock, and the Agent shall automatically receive such shares of Common Stock,
including fractions, for all Participants' accounts. If the net asset value per
share of the Common Stock at the time of valuation exceeds the market price of
the Common Stock, or if the Fund should declare a dividend or capital gains
distribution payable only in cash, a broker-dealer not affiliated with The
Chapman Co. will, as purchasing agent (the "Purchasing Agent") for the
Participants, buy shares of Common Stock in the open market, on the Nasdaq
SmallCap Market (the "Nasdaq") or elsewhere, for each Participant's account.
If, following the commencement of such purchases and before the Purchasing Agent
has completed its purchases, the market price exceeds the net asset value per
share, the average per share purchase price paid by the Purchasing Agent may
exceed the net asset value of the Common Stock, resulting in the acquisition of
fewer shares of Common Stock than if the dividend or capital gains distribution
had been paid in Common Stock issued by the Fund at net asset value per share.
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 Fund 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 Fund 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 Fund issues remaining
shares.
<PAGE>
The Agent will apply all cash received as a dividend or capital gains
distribution to purchase shares of Common Stock on the open market as soon as
practicable after the payment date of such dividend or capital gains
distribution, but in no event later than 30 days after such date, except where
necessary to comply with applicable provisions of the Federal securities laws.
4. For all purposes of the Plan: (a) the market price of the Fund's
Common Stock on a particular date shall be the last sale price on the Nasdaq at
the close of the previous trading day or, if there is no sale on the Nasdaq on
that date, then the mean between the closing bid and asked quotations for such
Common Stock on the Nasdaq on such date and (b) net asset value per share of
Common Stock on a particular date shall be as determined by or on behalf of the
Fund.
5. The open market purchases provided for above may be made on any
securities exchange where the shares of Common Stock of the Fund are traded in
the over-the-counter market or in negotiated transactions, and may be on such
terms as to price, delivery and otherwise as the Purchasing Agent shall
determine. Funds held by the Purchasing Agent uninvested will not bear
interest, and it is understood that, in any event, the Purchasing Agent shall
have no liability in connection with any inability to purchase shares of Common
Stock within 30 days after the initial date of such purchase as herein provided,
or with the timing of any purchases effected. The Purchasing Agent shall have
no responsibility as to the value of the shares of Common Stock of the Fund
acquired for any Participant's account.
6. The Agent will hold shares of Common Stock acquired pursuant to the
Plan in noncertificated form in the Participant's name. The Agent will forward
to each Participant any proxy solicitation material and will vote any shares of
Common Stock so held for each Participant only in accordance with the proxy
returned by any such Participant to the Fund. Upon any Participant's written
request, the Agent will deliver to her or him, without charge, a certificate or
certificates for the full shares of Common Stock.
7. The Agent will confirm to each Participant acquisitions made for his
or her account as soon as practicable but not later than 60 days after the date
thereof. Although a Participant may from time to time have an undivided
fractional interest (computed to three decimal places) in a share of Common
Stock of the Fund, no certificates for fractional shares will be issued.
However, dividends and distributions on fractional shares of Common Stock will
be credited to Participants' accounts. In the event of termination of a
Participant account under the Plan, the Agent will adjust for any such undivided
fractional interest in cash at the market value of the shares of Common Stock at
the time of termination.
8. Any stock dividends or split shares distributed by the Fund on shares
of Common Stock held by the Agent for any Participant will be credited to such
Participant's account. In the event that the Fund makes available to
Participants rights to purchase additional shares of Common Stock or other
securities, the Agent will sell such rights and apply the proceeds of the sale
to the purchase of additional shares of Common Stock of the Fund for the account
of Participants.
9. The Agent's service fee for handling capital gains distributions or
income dividends will be paid by the Fund. Participants will be charged a pro
rata share of brokerage commissions on all open market purchases.
<PAGE>
10. Any Participant may withdraw shares from such Participant's account or
terminate such Participant's account under the Plan by notifying the Agent in
writing. Such withdrawal or termination will be effective immediately if notice
is received by the Agent not less than 10 days prior to any dividend or
distribution record date; otherwise such withdrawal or termination will be
effective, with respect to any subsequent dividend or distribution, on the first
trading day after the dividends paid for such record date have been credited to
the Participant's account. The Plan may be terminated by the Agent or the Fund
upon notice in writing mailed to each Participant at least 30 days prior to any
record date for the payment of any dividend or distribution by the Fund. Upon
any withdrawal or termination, the Agent will cause to be delivered to each
Participant a certificate or certificates for the appropriate number of full
shares and a cash adjustment for any fractional share (valued at the market
value of the shares at the time of withdrawal or termination); provided,
however, that any Participant may elect by notice to the Agent in writing in
advance of such termination to have the Agent sell part or all of the shares in
question and remit the proceeds to such Participant, net of any brokerage
commissions. A $5.00 fee will be charged by the Agent upon any cash withdrawal
or termination, and the Agent is authorized to sell a sufficient number of the
Participant's shares to cover such fee and any brokerage commissions on such
sale.
11. These terms and conditions may be amended or supplemented by the Agent
or the Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 90 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by
each Participant unless, with respect to any such Participant, prior to the
effective date thereof, the Agent receives written notice of the termination of
that Participant's account under the Plan. Any such amendment may include an
appointment by the Agent in its place and stead of a successor Agent under these
terms and conditions, with full power and authority to perform all or any of the
acts to be performed by the Agent under these terms and conditions. Upon any
such appointment of an Agent for the purpose of receiving dividends and
distributions, the Fund will be authorized to pay to such successor Agent, for
Participants' accounts, all dividends and distributions payable on the shares of
Common Stock held in each Participant's name or under the Plan for retention or
application by such successor Agent as provided in these terms and conditions.
12. The Agent shall at all times act in good faith and agree to use its
best efforts within reasonable limits to ensure the accuracy of all services
performed under this agreement and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damages due to errors unless
such error is caused by its or its employees' gross negligence, bad faith or
willful misconduct.
13. The Participant shall have no right to draw checks or drafts against
such Participant's account or to give instructions to the Plan Agent in respect
of any shares or cash held therein except as expressly provided herein.
14. The Participant agrees to notify the Plan Agent promptly in writing of
any change of address. Notices to the Participant may be given by the Plan
Agent by letter addressed to the Participant as shown on the records of the Plan
Agent.
15. This Agreement and the account established hereunder for the
Participant shall be governed by and construed in accordance with the laws of
the State of Maryland and the Rules and Regulations of the Securities and
Exchange Commission, as they may be changed or amended from time to time.
<PAGE>
APPENDIX A - CORPORATE BOND RATINGS
Moody's Investors Service, Inc.
Aaa Bonds that are rated Aaa are judged to be of the best quality. they
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risk appear somewhat larger than in Aaa Securities.
A Bonds that are rated A possess may favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa Bonds that are rated Baa are considered as medium-grade obligations
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
Moody's applies numerical modifiers (l, 2, and 3) with respect to the
bonds rated "Aa" through "B". The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
Caa Bonds that are rated Caa are of poor standing. These issues may
be in default or there may be present elements of danger with respect
to principal or interest.
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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.
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.
