<PAGE>
Page 1
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 MarketSM 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 30, 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>
- ----------------------------------------------------------------------------------------------------------------------
Price to Public(1) Sales Load (1)(2) Proceeds to
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $15.00 $1.05 $13.95(1)
- ----------------------------------------------------------------------------------------------------------------------
Total $17,923,755 $1,254,663 $16,669,092(4)
- ----------------------------------------------------------------------------------------------------------------------
</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.
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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.
May 30, 1997 THE CHAPMAN CO.
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AVAILABLE INFORMATION
The Company has filed with the SEC in Washington, DC, a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Common Stock offered by this Prospectus. This Prospectus
does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules
and regulations of the SEC. For further information with respect to the
Company and this Offering, reference is made to the Registration Statement,
including the exhibits filed therewith, copies of which may be obtained at
prescribed rates from the SEC at the public reference facilities maintained
by the SEC at Judiciary Plaza Building, 450 Fifth Street, NW, Washington, DC
20549. Descriptions contained in this Prospectus as to the contents of any
contract or other documents filed as an exhibit to the Registration Statement
are not necessarily complete and each such description is qualified by
reference to such contract or document. The SEC maintains a Web site on the
Internet that will contain all future reports, proxy and information
statements and other information that the Company is required to file
electronically with the SEC. The address of the SEC's Web site is
http://www.sec.gov.
The Company will furnish to its stockholders annual reports containing
financial statements for each fiscal year audited by an independent
accounting firm.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. CROSS REFERENCES IN THIS
SUMMARY ARE TO HEADINGS IN THE BODY OF THE PROSPECTUS.
THE COMPANY. The Company is a non-diversified, closed-end management
investment company. See "THE COMPANY."
INVESTMENT OBJECTIVES AND POLICIES. The principal investment objective of
the Company is aggressive long-term growth through capital appreciation
through investment in Domestic Emerging Markets-TM- that it believes are
positioned for growth. "Domestic Emerging Markets-TM-" are public companies
that are controlled by African Americans, Hispanic Americans, Asian Americans
and women that are located in the United States and its territories. Both
capital appreciation and income are considered in choosing specific
investments, but the primary emphasis is on capital appreciation. The
Company retains maximum flexibility as to the types of investments it may
make and is permitted to invest in portfolio companies with large and small
market capitalizations. Some of these investments may involve the purchase
of securities directly from portfolio companies in initial or other public
offerings of their securities. See "RISK FACTORS--Investment in Small
Companies." The Company's investment objectives and policies, other than
those specified under "INVESTMENT OBJECTIVES AND POLICIES--Fundamental
Policies" in the Statement of Additional Information, may be changed by the
Board of Directors without the approval of stockholders.
To achieve the Company's investment objectives, the Company invests in a wide
variety of types of portfolio companies and seeks to identify those companies
it believes are positioned for growth. While the Company expects to invest
in portfolio companies with large and small market capitalizations, the
Company believes that investing in small companies offers the potential for
significant long-term capital appreciation. Most of the Company's
investments are in marketable common stocks or marketable securities
convertible into common stock traded on an exchange or in the
over-the-counter markets. To the extent the Company invests in companies
with smaller market capitalization, the securities of such companies may be
traded in such over-the-counter markets as the OTC Bulletin BoardSM and the
Pink SheetsSM.
While the primary objective of the Company is long-term growth through
capital appreciation, the Company may invest its assets in income producing
securities such as non-convertible preferred stock, bonds, debentures, notes,
and other similar securities if the Investment 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
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Page 5
grade" or "junk" securities. See "INVESTMENT OBJECTIVES AND POLICIES," "RISK
FACTORS -- Lower Rated Securities" and Appendix A.
The Company will not invest in foreign securities (including American
Depository Receipts) or restricted securities as defined under Rule 144.
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
MarketSM.
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
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million, respectively, of the Company's net assets, subject to a minimum
monthly fee of $400. See "MANAGEMENT OF THE COMPANY-- Administrator."
CUSTODIAN. UMB Bank, N.A., acts as the Company's custodian. See "CUSTODIAN,
TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT."
TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT. Fund/Plan
Services, Inc. acts as the Company's transfer agent, dividend-paying agent,
registrar and agent under the Company's Dividend Reinvestment Plan. See
"CUSTODIAN, TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT."
DIVIDENDS AND DISTRIBUTIONS. The Company pays quarterly dividends from its
net investment income, if any (that is, income other than net realized
capital gains) and distributes net realized capital gains, if any, annually.
All dividends or distributions with respect to shares of Common Stock are
reinvested automatically in additional shares through participation in the
Company's Dividend Reinvestment Plan, unless a 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 BoardSM and the Pink SheetsSM where the
trading market is thinner and the spread between bid and offer prices is
larger than on the major exchanges or Nasdaq system. The nature of these
trading markets may limit the flexibility of the Company to divest of
portfolio securities quickly and at a reasonable price in response to market
conditions. 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 MarketSM. However, of the 811,775 shares of outstanding
Common Stock of the
<PAGE>
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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 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
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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."
ANTI-TAKEOVER PROVISIONS IN CHARTER. Certain provisions of the
Company's Charter may have the effect of inhibiting the Company's possible
conversion to open-end status and limiting the ability of other persons to
acquire control of the Company's Board of Directors. In certain
circumstances, these provisions might also inhibit the ability of
stockholders to sell their shares at a premium over prevailing market prices.
See "COMMON STOCK --Anti-Takeover Provisions in the Charter."
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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 1,194,917 600,000 300,000
(4)
- --------------------------------------------------------------------------------
Management Fees 0.90% 0.90% 0.90%
- --------------------------------------------------------------------------------
Other Expenses (5) 1.10% 1.50% 1.87%
- --------------------------------------------------------------------------------
Total Annual Expenses 2.00% 2.40% 2.77%
(estimated)
- --------------------------------------------------------------------------------
- ----------------------
(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.
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(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.
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
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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."
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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>
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Page 13
<PAGE>
Page 14
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.
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Page 15
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.
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 BoardSM and the Pink SheetsSM.
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
<PAGE>
Page 16
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 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.
<PAGE>
Page 17
The following are some of the Company's fundamental policies which it
may not change without the approval of the holders of a majority of its
outstanding voting securities. The Company will not invest in foreign
securities (including American Depository Receipts) or restricted securities as
defined in Rule 144. For more information about the Company and its investment
objectives and policies, including fundamental policies, see "INVESTMENT
OBJECTIVES AND POLICIES" in the Statement of Additional Information.
RISK FACTORS
INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS ASSOCIATED WITH
AN INVESTMENT IN THE COMPANY.
An investment in the Company's shares does not constitute a complete
investment program since it involves the greater market risks inherent in
seeking higher returns and is not recommended for short-term or risk averse
investors. No assurance can be given that securities of small emerging
companies will appreciate, that a sufficient number of appropriate investments
will be available or that the Company's particular investment choices will be
successful. The prices of securities in which the Company may invest may also
be more volatile than securities of issuers with larger market capitalizations
and the Company's net asset value may therefore be subject to greater
fluctuation than other investment companies that invest in equity securities.
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
<PAGE>
Page 18
any strategy seeking capital appreciation by investing in a portfolio of equity
securities. Furthermore, such companies are often traded on markets such as the
OTC Bulletin BoardSM and the Pink SheetsSM where the trading market is thinner
and the spread between bid and offer prices is often larger than on the major
exchanges or Nasdaq system. The nature of these trading markets may limit the
flexibility of the Company to divest of portfolio securities quickly and at a
reasonable price in response to market conditions.
LIMITED PUBLIC MARKET
The Common Stock trades on the Nasdaq SmallCap Stock MarketSM.
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
<PAGE>
Page 19
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 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 $1.69 per share to new investors. Further, due to the ongoing nature of the
offering, the dilution at any given time will fluctuate with the net asset value
per share of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
As of April 30, 1997, 650,879 shares of Common Stock, or approximately
80.2% of the outstanding Common Stock was held by four stockholders. The sale
of a large number of shares of Common Stock or the availability of a large
number of shares of Common Stock for sale could adversely affect the market
price of the Common Stock prevailing from time to time. See "PRINCIPAL
STOCKHOLDERS."
<PAGE>
Page 20
NET ASSET VALUE AND MARKET PRICE INFORMATION
The outstanding shares of Common Stock of the Company trade on the
Nasdaq SmallCap Stock MarketSM. The following table shows, for each full
quarterly period within the two most recent fiscal years and each full fiscal
quarter since the beginning of the current fiscal year, the high and low bid
information for the Common Stock; the net asset value per share of the Company
as determined on the date closest to each quotation; and the percentage by which
the shares of Common Stock of the Company traded at a premium over, or discount
from, the Company's net asset value per share.
<TABLE>
<CAPTION>
QUARTER ENDED BID QUOTATIONS NET ASSET VALUE PREMIUM OR
($) ($) (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 MarketSM 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.
<PAGE>
Page 21
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.
<PAGE>
Page 22
ADMINISTRATOR
The Investment Advisor also serves as the Company's administrator
(the "Administrator") pursuant to the Advisory and Administrative Services
Agreement. The Administrator is located at The World Trade Center -
Baltimore, 401 East Pratt Street, 28th Floor, Baltimore, Maryland 21202.
Under the Advisory and Administrative Services Agreement, the administration
fee payable to the Administrator is payable monthly in arrears computed at
the amortized rate of .15% of the Company's average weekly net assets during
the preceding month.
The Administrator provides office facilities and personnel adequate
to perform the following services for the Company: oversight of the
determination and publication of the Company's net asset value in accordance
with the Company's policy as adopted from time to time by the Board of
Directors; maintenance, and oversight of the maintenance, of the books and
records of the Company as required under the 1940 Act; assistance in the
preparation and filing of the Company's U.S. federal, state and local income
tax returns; review of and arrangement for payment of the Company's expenses;
preparation of financial information for the Company's proxy statements and
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.
<PAGE>
Page 23
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.
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
<PAGE>
Page 24
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.
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
<PAGE>
Page 25
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 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
<PAGE>
Page 26
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.
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
<PAGE>
Page 27
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.
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
<PAGE>
Page 28
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.
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,
<PAGE>
Page 29
the minimum price at which shares will be sold in the offering will be
$15.00. Further, to the extent the Company's net asset value per share is
below $15.00, new investors in the Company will pay a premium to net asset
value per share and will be diluted to the extent of such premium. See "RISK
FACTORS--Dilution." Because the offering price is not related to the market
price of the Common Stock, in the event the market price per share is below
the greater of $15.00 or the Company's net asset value per share, a
prospective investor may find it more advantageous to purchase Common Stock
in secondary trading on the Nasdaq SmallCap Stock Market then in this
offering.
The following chart demonstrates the determination of offering price
in relation to certain hypothetical net asset values per share. PLEASE NOTE,
THAT THESE NET ASSET VALUES PER SHARE ARE PURELY HYPOTHETICAL AND HAVE NO
CURRENT RELATION TO THE COMPANY'S ACTUAL NET ASSET VALUE PER SHARE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Hypothetical Net Asset Value Per Share Public Offering Price Per Share
Of Common Stock
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
$13.00 $15.00
- ----------------------------------------------------------------------------------------------------------------------
$15.00 $15.00
- ----------------------------------------------------------------------------------------------------------------------
$17.00 $17.00
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
PLAN OF DISTRIBUTION
The Company is offering up to 1,194,917 shares of Common Stock. The
shares of Common Stock will be offered on a "best-efforts" basis, by, the
Underwriter, The Chapman Co., acting as the dealer-manager on an agency
basis. No minimum number of shares must be sold before the offering will
close and, accordingly, the proceeds of the offering may be substantially
less than would be the case if all the shares offered are sold. The
Termination Date of the offering is on the earlier to occur of the date the
sale of all of the shares of Common Stock offered hereby is completed or the
date determined by the Company or the Underwriter.
The Administrator and Investment Advisor, Chapman Capital
Management, Inc., is a wholly-owned subsidiary of the Underwriter. The
principal business address of the Underwriter is 401 E. Pratt Street, 28th
Floor, Baltimore, Maryland 21202.
The Common Stock will be offered to the public at the greater of
$15.00 or the Company's net asset value per share (calculated within 48 hours
prior to any sale). The Underwriter will be paid a management fee of 2.7%
per share sold (or $.40 per share assuming the offering price is $15.00) and
the Underwriter and any other broker-dealer participating in the selling
group will be paid a commission not in excess of 4.3% per share sold (or $.65
per share assuming the offering price is $15.00). The
<PAGE>
Page 30
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 MarketSM 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Title of Class Amount Authorized Amount Held by the Amount
Company or for its Outstanding
Account Exclusive of
Amount Held by
Company
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, par 500,000,000 -0- 811,775
value $.00001
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Page 31
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, 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
<PAGE>
Page 32
(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
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
<PAGE>
Page 33
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
<PAGE>
Page 34
information about the Company. The table of contents of the Statement of
Additional Information is as follows:
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.
<PAGE>
Page 35
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"
<PAGE>
Page 36
through "B". The modifier 1 indicates that the company ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the company ranks in the lower end of its
generic rating category.
Caa Bonds that are rated Caa are of poor standing. These issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds that are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds that are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Standard & Poor's Ratings Group
AAA This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay interest and repay
principal.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A Principal and interest payments on bonds in this category are regarded
as safe. Debt rated A has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB This is the lowest investment grade. Debt rated BBB has an adequate
capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
<PAGE>
Page 37
Speculative Grade
Debt rated BB, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation, and C the highest degree
of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions. Debt rated C1
is reserved for income bonds on which no interest is being paid and
debt rated D is in payment default.
In July 1994, S&P initiated an "r" symbol to its ratings. The "r"
symbol is attached to derivatives, hybrids and certain other
obligations that S&P believes may experience high variability in
expected returns due to non-credit risks created by the terms of the
obligations.
"AA" to "CCC" may be modified by the addition of a plus or minus sign to show
relative standing within the major categories.
"NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
<PAGE>
Page 38
<PAGE>
Page 39
No dealer, salesman, or other person has been authorized to give any
information or to make any representation not contained in this Prospectus. If
given or made, such information or representation must not be relied upon as
having been authorized by the Company or any underwriter. This Prospectus does
not constitute an offer to sell or the solicitation of an offer to buy any
security other than the shares of Common Stock offered by this Prospectus, nor
does it constitute an offer to sell or the solicitation of an offer to buy
shares of Common Stock by anyone in any jurisdiction in which such offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the facts as set forth in the Prospectus or in the
affairs of the Company since the date hereof.
---------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary 3
Company Expenses 8
Financial Highlights 10
The Company 11
Use of Proceeds 11
Investment Objectives and Policies 11
Risk Factors 14
Net Asset Value and Market
Price Information.... 17
Management of the Company 17
Dividends and Distributions 21
Dividend Reinvestment Plan 21
Taxation 22
Custodian, Transfer and Dividend-
Paying Agent and Registrar 25
Determination of Offering Price 25
Plan of Distribution 25
Common Stock 26
Stock Purchases and Tenders 29
Legal Matters 29
Reports to Stockholders 29
Experts 29
Further Information 29
Corporate Bond Ratings Appendix A
-----------------------
1,194,917 SHARES
DEM, INC.
COMMON STOCK
--------
PROSPECTUS
--------
MAY 30,1997
<PAGE>
Page 40
UNTIL JULY 9, 1997, 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.
<PAGE>
Page 41
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 30, 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
<PAGE>
Page 42
no charge.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 30, 1997
<PAGE>
Page 43
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
<PAGE>
Page 44
market capitalizations, the Company believes that investing in small companies
may offer the potential for significant long-term capital appreciation. Most of
the Company's investments are in marketable common stocks or marketable
securities convertible into common stock traded on an exchange or in the
over-the-counter markets. To the extent the Company invests in companies with
smaller market capitalization, the securities of such companies may be traded in
such over-the-counter markets as the OTC Bulletin BoardSM and the Pink SheetsSM.
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
<PAGE>
Page 45
loan; and (6) voting rights on the loaned securities may pass to the borrower,
except that, if a material event adversely affecting the investment in the
loaned securities occurs, the Company's Board of Directors must terminate the
loan and regain the Company's right to vote the securities. Such investment
techniques are commonly referred to as "derivatives." Up to 20% of the
Company's assets may be invested in derivatives such as options for hedging and
risk management purposes or when, in the opinion of the Investment Advisor,
derivatives can be expected to yield a higher investment return than other
investment options.
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
<PAGE>
Page 46
the Company will employ defensive strategies, and to the extent it is so
invested, the Company may not achieve its investment objectives.
FUNDAMENTAL POLICIES
The following investment restrictions are fundamental and cannot be
changed without the approval of holders of a majority of the Company's
outstanding voting shares, which, as used here, means the lesser of (i) 67% of
the shares represented at a meeting at which more than 50% of the outstanding
shares are present in person or represented by proxy or (ii) more than 50% of
the outstanding shares. The Company's investment policies that are not
designated fundamental policies may be changed by the Company without
stockholder approval. The percentage limitations set forth below, as well as
those described in the Prospectus, are 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
<PAGE>
Page 47
(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.
<PAGE>
Page 48
NET ASSET VALUE
Net asset value is calculated (a) no less frequently than weekly,
(b) on the last business day of each month and (c) at any other times
determined by the Company's Board of Directors. Net asset value is
calculated by dividing the value of the Company's net assets (the value of
its assets less its liabilities, exclusive of capital stock and surplus) by
the total number of shares of Common Stock outstanding. All securities for
which market quotations are readily available are valued at the closing price
quoted for the securities prior to the time of determination (but if bid and
asked quotations are available, at the mean between the last current bid and
asked prices, rather than the quoted closing price). Although the Company
seeks to take into account material changes in value occurring after the
close of a market and before the time the Company's net asset value is
determined, there can be no assurance that it will always be able to do so.
Securities that are traded over-the-counter are valued, if bid and asked
quotations are available, at the mean between the current bid and asked
prices. If bid and asked quotations are not available, then over-the-counter
securities are valued as determined in good faith by the Board of Directors.
In making this determination the Board considers, among other things,
publicly available information regarding the issuer, market conditions and
values ascribed to comparable companies. In instances where the price
determined above is deemed not to represent fair market value, the price is
determined in such manner as the Board may prescribe. Investments in
short-term debt securities having a maturity of 60 days or less are valued at
amortized cost if their term of maturity from the date of purchase was less
than 60 days, or by amortizing their value on the 61st day prior to maturity
if their term to maturity from the date of purchase when acquired by the
Company was more than 60 days, unless this is determined by the Board of
Directors not to represent fair value. All other securities and assets are
taken at fair value as determined in good faith by the Board of Directors,
although the actual calculation may be done by others.
The Common Stock trades on the Nasdaq SmallCap MarketSM under the
symbol "DEMI". In recent periods, shares of closed-end investment companies
have generally traded at a discount from net asset value, but in some cases have
traded above net asset value. Among the factors which may be expected to affect
whether shares of the Company trade above or below net asset value are portfolio
investment results and supply and demand for shares of the Company. The Company
cannot predict whether the Common Stock will trade at, above or below net asset
value.
TAXATION
The following discussion reflects certain applicable tax laws as of
the date of this Statement of Additional Information. For additional tax
information see "TAXATION" in the Company's Prospectus.
TAXATION OF THE COMPANY
The Company has elected and intends to qualify each year to be treated
<PAGE>
Page 49
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.
<PAGE>
Page 50
The Company may acquire securities which do not pay interest currently
in an amount equal to their effective interest rate, such as zero coupon,
pay-in-kind, or delayed interest securities. As the holder of such a security,
the Company is required to include in taxable income the original issue discount
that accrues on the security for the taxable year, even if the Company receives
no payment on the security during the year. Because the Company must distribute
annually substantially all of its investment company taxable income, including
any original issue discount, in order to qualify as a regulated investment
company and to avoid imposition of the 4% excise tax, the Company may be
required in a particular year to distribute dividends in an amount that is
greater than the total amount of cash the Company actually receives as
distributions on the securities it owns. Those distributions will be made from
the Company's cash assets or from the proceeds of sales of portfolio securities,
if necessary. The Company may realize capital gains or losses from those sales,
which would increase or decrease the Company's investment company taxable income
or net capital gain. In addition, such gains may be realized on the disposition
of securities held for less than three months. Because of the short-short rule,
(as described above) and its possible effect on the Company's qualification as a
regulated investment company for tax purposes, such gains could reduce the
Company's ability to sell other securities, or certain options, futures or
forward contracts, held for less than three months that it might wish to sell in
the ordinary course of its portfolio management.
The Company may also acquire securities at a market discount. Market
discount is generally equal to (other than in the case of an obligation issued
with original issue discount) the excess of the stated redemption price of the
obligation at maturity over the purchase price at which it is acquired by a
subsequent purchaser. Market discount is treated as interest income, rather
than as capital gain, when recognized by the purchaser.
The Company's taxable income will in part be determined on the basis
of reports made to the Company by the issuers of the securities in which the
Company invests. The tax treatment of certain securities in which the Company
may invest is not free from doubt and it is possible that an Internal Revenue
Service examination of the issuers of such securities or of the Company could
result in adjustments to the income of the Company.
TAXATION OF STOCKHOLDERS
Dividends (other than capital gain dividends) distributed by the
Company may be eligible for the dividends received deduction in the hands of
corporate stockholders, to the extent that the Company's taxable income consists
of dividends received from domestic corporations and certain other requirements
as generally described in Section 854 of the Code are met.
Dividends and other distributions by the Company are generally taxable
to the stockholders at the time the dividend or distribution is made. However,
any dividends declared by the Company in October, November or December and made
<PAGE>
Page 51
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.
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.
<PAGE>
Page 52
OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS REGISTRANT AGE DURING PAST 5 YEARS
DIRECTORS TO SERVE UNTIL THE 2000 ANNUAL MEETING (CLASS III)
<S> <C> <C> <C>
* Nathan A. Chapman, Jr. Director and 39 President, Chief Executive Officer and Treasurer
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.
<PAGE>
Page 53
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 Rancho,
401 E. Pratt St., 28th Flr 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.
<PAGE>
Page 54
OFFICERS
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
401 E. Pratt St., 28th Floor of 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.
<PAGE>
Page 55
Directors of the Company who are not officers receive from the Company a
fee of $1,000 for each Board of Directors meeting attended and are reimbursed
for all out-of-pocket expenses relating to attendance at meetings. Messrs.
Lewis and White and Ms. Shackelford are also directors of The Chapman Funds,
Inc., an open end management investment company in the same "fund complex" as
the Company (as that term is defined under the Investment Company Act of 1940,
as amended (the "1940 Act")) and are paid $1,000 per meeting of the board of
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.
<PAGE>
Page 56
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
<PAGE>
Page 57
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 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.
<PAGE>
Page 58
In connection with the provision of advisory services, the Investment
Advisor will obtain and provide investment research and will supervise the
Company's investments and conduct a continuous program of investment, evaluation
and, if appropriate, sale and reinvestment of the Company's assets. The
Investment Advisor will place orders for the purchase and sale of portfolio
securities and will solicit brokers to execute transactions, including The
Chapman Co., in accordance with the Company's policies and restrictions
regarding brokerage allocations. The Investment Advisor will furnish to the
Company such statistical information with respect to the investments which the
Company may hold or contemplate 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
<PAGE>
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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 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
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those of other investment accounts managed by the Investment Advisor. If those
accounts are prepared to invest in, or desire to dispose of such investments at
the same time as the Company, however, available investments or opportunities
for sales will be allocated equitably to each client of the Investment Advisor.
In some cases, this procedure may adversely affect the size of the position
obtained for or disposed of by the Company or the price paid or received by the
Company.
STOCK PURCHASES AND TENDERS
Although shares of closed-end investment companies sometimes trade at
premiums over net asset value, they frequently trade at discounts. The Company
cannot predict whether the Common Stock will trade above, at or below net asset
value. The Company believes that, if the Common Stock trades at a discount to
net asset value, the share price will not adequately reflect the value of the
Company to investors and that investors' financial interests will be furthered
if the market price of the Common Stock more closely reflects net asset value
per share of the Common Stock. For these reasons, the Company's Board of
Directors currently intends to consider from time to time repurchases of Common
Stock on the open market or in private transactions or the making of tender
offers for Common Stock. The Company may 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
<PAGE>
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Company's overall attractiveness as an investment as compared with other
investment alternatives. The Company's acquisition of Common Stock will
decrease the total assets of the Company and therefore have the effect of
increasing the Company's expense ratio. The Company may borrow money to finance
the repurchase of shares subject to the limitations described in this Statement
of Additional Information. Any interest on the borrowings will reduce the
Company's net income. Because of the nature of the Company's investment
objectives, policies and securities holdings, the Investment Advisor does not
anticipate that, under normal market conditions, (1) repurchases and tenders
will have an adverse effect on the Company's investment performance or (2) it
will have any material difficulty in disposing of securities to consummate
Common Stock repurchases and tenders.
When a tender offer is authorized to be made by the Company's Board of
Directors, it will be an offer to purchase at a price equal to the net asset
value of all (but not less than all) of the shares owned by a Common Stock
stockholder (or attributed to the stockholder for federal income tax purposes
under the Code). A stockholder who tenders all Common Stock shares owned or
considered owned by him or her, as required, will realize a taxable gain or loss
depending upon such person's basis in such shares.
The policy of the Company's Board of Directors with respect to tender
offers and to repurchases, which may be changed by the Board of Directors, is
that the Company will not accept tenders or effect repurchases if (1) those
transactions, if consummated, would (a) result in the exclusion of the Common
Stock from the Nasdaq SmallCap Stock MarketSM or (b) impair the Company's status
as a regulated investment company under the Code; (2) the Company would not be
able to liquidate securities to repurchase Common Stock in an orderly manner
that is consistent with the Company's investment objectives and policies; or
(3) there is, in the Board's judgment, any material (a) legal action or
proceeding instituted or threatened challenging the transactions or otherwise
materially adversely affecting the Company, (b) suspension of or limitation on
prices for trading securities generally on the Nasdaq SmallCap Stock MarketSM 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
<PAGE>
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disposition of securities held for less than three months in order to retain the
Company's regulated investment company status under the Code, gains realized by
the Company upon a liquidation of securities held for less than three months
would reduce the amount of gain on the sale of other securities held for less
than three months that the Company could realize in the ordinary course of its
investment operations, which may adversely affect the Company's performance.
The Company's turnover rate may or may not be affected by the Company's
repurchases of shares of Common Stock pursuant to a tender offer.
PERFORMANCE INFORMATION
The performance of the Company may be compared to the record of the
Standard & Poor's Corporation 500 Stock Index ("S&P 500 Stock Index"), the
Nasdaq Composite Index, the Russell 2000 Index, the Wilshire 5000 Equity Index,
the DEM-TM- Index, the DEM-TM- Universe of companies and returns quoted by
Ibbotson Associates. The S&P 500 Stock Index is a well known measure of the
price performance of 500 leading larger domestic stocks which represents
approximately 80% of the market capitalization of the United States equity
market. In comparison, the Nasdaq National Market System is comprised of all
stocks on Nasdaq's National Market System. The Nasdaq Composite Index has
typically included smaller, less mature companies representing 10% to 15% of the
capitalization of the entire domestic equity market. Both indices are unmanaged
and capitalization weighted. In general, the securities comprising the Nasdaq
Composite Index are more growth oriented and have a somewhat higher "beta" and
P/E ratio than those in the S&P 500 Stock Index. The Russell 2000 Index is a
capitalization weighted index which measures total return (and includes in such
calculation dividend income and price appreciation). The Russell 2000 is
generally regarded as a measure of small capitalization performance. It is a
subset of the Russell 3000 Index. The Russell 3000 is comprised of the 3000
largest U.S. companies. The Russell 2000 is comprised of the smallest 2000
companies in the Russell 3000 Index. The Wilshire 5000 Index is a broad measure
of market performance and represents the total dollar value of all common stocks
in the United States for which daily pricing information is available. This
index is also capitalization weighted and captures total return. The DEM-TM-
Universe is a growing list of companies identified by the Investment Advisor
that are controlled by African-Americans, Asian-Americans,
Latin/Hispanic-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
<PAGE>
Page 63
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.
<PAGE>
Page 64
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 Financial Statements F-5
Portfolio of Investments F-7
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Page 65
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
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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
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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
-------------------- ------------------
</TABLE>
See notes to financial statements
<PAGE>
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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
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Page 69
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.
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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
---------
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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
---------
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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
