<PAGE>
DEM, Inc.
- -------------------------------------------------------------------------------
DEM, INC.
SEMIANNUAL REPORT
JUNE 30, 1998
- -------------------------------------------------------------------------------
<PAGE>
DEM, INC.
STATEMENT OF PORTFOLIO INVESTMENTS
AS OF JUNE 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Shares Value
- ------------ ----------
<S> <C> <C>
CASH AND MONEY MARKETS - 25.1%:
Cash - 25.1% $ 5,068,377
Fidelity U.S. Treasury Portfolio II - 0.0% 8,166
--------------
Total cash & money markets 5,076,543
--------------
COMMON STOCK - 69.9%:
Apparel - 1.4%
17,000 Supreme International Corp.* 278,375
--------------
278,375
--------------
Banking - 6.9%
5,500 Carver Bancorp, Inc.* 72,875
20,000 Popular Inc. 1,330,000
--------------
1,402,875
Communications - 4.2%
11,000 LCC International Inc.* 203,500
20,000 Mastec Inc.* 477,500
14,500 Startec Global Communications Corp.* 166,750
--------------
847,750
--------------
Computers - 0.3%
4,000 Smart Modular Technologies* 58,500
--------------
Consumer Products - 3.0%
20,000 Movado Group 605,000
--------------
Consumer Services - 0.7%
7,000 Vincam Group, Inc.* 137,375
--------------
Financial Services - 1.0%
12,000 Doral Financial Corp. 210,000
--------------
Furniture - 6.4%
26,000 Ethan Allen Interiors, Inc. 1,296,750
--------------
Healthcare - 0.9%
5,000 Pediatrix Medical Group* 185,938
--------------
Media/Publishing - 6.9%
18,000 BET Holdings* 1,132,875
7,000 Univision Communications, Inc.* 260,750
--------------
1,393,625
--------------
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
DEM, INC.
STATEMENT OF PORTFOLIO INVESTMENTS
AS OF JUNE 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Shares Value
- -------------- -----------
<S> <C> <C>
COMMON STOCK (Continued):
Retail - 5.9%
26,000 CHS Electronics, Inc. * 464,750
5,000 PC Connection, Inc.* 76,250
20,000 Wet Seal, Inc.* 640,000
--------------
1,181,000
--------------
Software and Technology Service - 18.5%
16,000 Autodesk Inc. 618,000
8,000 Broadvision Inc.* 191,000
12,000 Complete Business Solutions, Inc.* 431,250
21,000 Computer Associate International 1,166,813
10,000 I2 Technologies, Inc.* 351,250
9,000 Information Management Resources, Inc.* 304,312
3,000 Integrated Systems, Inc.* 46,125
7,000 Intelligroup Inc.* 124,250
6,000 Open Market, Inc.* 113,250
10,000 QRS Corporation* 376,250
--------------
3,722,500
--------------
Technology - 8.9%
5,000 Gemstar International Group Ltd.* 187,188
25,000 Lattice Semiconductor Corp.* 710,156
20,000 Osicom Technologies, Inc.* 52,500
20,000 Solectron Corp.* 841,250
--------------
1,791,094
--------------
Textiles - 3.2%
15,000 Warnaco Group Inc. 636,563
--------------
Transportation - 1.7%
10,000 Atlas Air Inc.* 338,125
--------------
Total common stock 14,085,469
--------------
Par Value
- -------------- --------------
U.S GOVERNMENT - 5.0%:
1,000,000 U. S Treasury Bill 5.187%, Due 9-17-98 989,180
12,000 U. S Treasury Bill 5.239%, Due 2-04-99 11,629
--------------
1,000,809
--------------
Total investments $ 20,162,820
--------------
--------------
</TABLE>
*Non-income producing for the six months ended June 30, 1998.
The accompanying notes are an integral part of this statement.
<PAGE>
DEM, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities
(Cost - $10,789,970) 14,085,469
Cash and cash equivalents 6,075,043
Deffered organizational expense 24,945
Prepaid expense 20,761
Discount receivable 2,196
Accrued interest receivable 34
----------
Total assets 20,208,448
----------
LIABILITIES:
Accrued expenses 38,458
----------
Total liabilities 38,458
----------
NET ASSETS - equivalent to $17.56 per share on
1,148,776 shares of Common Stock outstanding 20,169,990
----------
----------
SUMMARY OF STOCKHOLDERS' EQUITY
Common Stock, par value $.00001 per share: authorized
500,000,000 shares; issued and outstanding
1,148,776 shares 11
Capital paid-in 16,526,177
Accumulated net realized gain on investments 1,271,750
Unrealized gain on investments 3,295,498
Overdistributed net investment income (923,446)
----------
Net assets applicable to outstanding common stock 20,169,990
----------
----------
<PAGE>
DEM, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
INVESTMENT INCOME:
Dividend Income (Net of withholding tax of $699) 22,582
Interest/Amortization Income 2,982
----------
25,564
EXPENSES:
Management and administrative fees 105,251
Auditing and legal fees 25,796
Transfer agent fees 15,038
Directors fees 12,492
Insurance expense 5,117
Organizational expense 4,864
Custodian fees 3,894
Blue sky fees 3,363
Other expenses 12,588
----------
Total expenses 188,403
----------
Net Investment Loss (162,839)
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized gain on investments 1,545,988
Unrealized appreciation of investments 837,084
----------
Net realized and unrealized gain on investments 2,383,072
Net increase in net assets resulting from operations 2,220,233
----------
----------
</TABLE>
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six Months
Ended For the Year
June 30, 1998 Ended
(Unaudited) December 31, 1997
------------------ -----------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income (loss) (162,839) $ (294,820)
Accumulated net realized loss on investments 1,545,988 (687,578)
Unrealized gain on investments 837,084 2,469,085
------------- ------------
Net increase in net assets resulting from operations 2,220,233 1,486,687
------------- ------------
Distributions paid to shareholders from:
Net investment income 0 $ (302,021)
------------- ------------
Net decrease in net assets resulting from distributions 0 $ (302,021)
------------- ------------
Capital share transactions
Common shares issued, net of issuance costs 0 5,739,892
Common shares issued in reinvestment of dividends 0 47
------------- -------------
Increase in net assets derived from capital share
transactions 0 5,739,939
------------- -------------
Total increase 2,220,233 6,924,605
NET ASSETS:
Beginning of year 17,949,757 11,025,152
------------- -------------
End of year 20,169,990 $ 17,949,757
------------- -------------
------------- -------------
</TABLE>
<PAGE>
DEM, INC.
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.
<TABLE>
<CAPTION>
For the Six Months
Ended For the Year For the Year * Period
June 30, 1998 Ended Ended November 30, 1995
(Unaudited) December 31, 1997 December 31, 1996 to December 31, 1995
----------------- ------------------ ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period . . . . . . . . . . . . . 15.63 14.17 13.77 13.97
----- ----- ----- -----
Net investment (loss)/gain . . . . . . . . . . . . . (0.14) (0.34) (0.42) 0.01
Net gain on securities (realized and unrealized) . . 2.07 2.15 1.15 0.00
---- ---- ---- ----
Total from investment operations . . . . . . . . . . . . . . . 1.93 1.81 0.73 0.01
Distributions paid from:
Net investment income. . . . . . . . . . . . . . . . 0.00 (0.35) (0.05) 0.00
Net realized gain on investments . . . . . . . . . . 0.00 0.00 0.00 0.00
Dilutive effect of shares. . . . . . . . . . . . . . . . . . . 0.00 0.00 (0.28) (0.21)
Net asset value, end of period . . . . . . . . . . . . . . . . 17.56 15.63 14.17 13.77
----- ----- ----- -----
----- ----- ----- -----
Market value per share, end of period. . . . . . . . . . . . . $16.00 $16.13 $15.50 $15.00
Total Return . . . . . . . . . . . . . . . . . . . . . . . . . -1.55% * * 9.89% 3.68% 0.00%
Ratios/Supplemental Data:
Net Assets, end of period (000 omitted). . . . . . . . . $20,170 $17,950 $11,025 $4,743
Average commission rate paid. . . . . . . . . . . . . . . 5.00% 5.00% 4.38% 0.00%
Portfolio Turnover . . . . . . . . . . . . . . . . . . . 32.80% * * 18.50% 332.60% 0.00%
Ratios to Average Net Assets:
Expenses . . . . . . . . . . . . . . . . . . . . . . . . 1.89% * * * 2.30% 3.21% 0.04%
Net investment income . . . . . . . . . . . . . . . . . . -1.64% * * -2.04% -1.89% 1.45%
</TABLE>
* Commencement of operations
* * Annualized
* * * Does not reflect sales load
<PAGE>
DEM, INC.
---------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
JUNE 30, 1998
-------------
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 is on capital appreciation.
The Company retains maximum flexibility as to the types of investments it may
make and it is permitted to invest in portfolio companies with large and small
market capitalizations. The Company, however, seeks to invest a substantial
portion of its assets in securities of domestic emerging companies with smaller
market capitalizations. There can be no assurance that the Company's objectives
will be achieved. The Company's investment objectives and policies may be
changed by the Board of Directors without the approval of shareholders. Most of
the Company's investments are expected to be in marketable common stocks or
marketable securities convertible into common stock traded on an exchange or in
the over-the-counter markets.
While the primary objective of the Company is to seek long-term growth through
capital appreciation, the Company may invest its assets in income producing
securities such as non-convertible preferred stock, bonds, debentures, notes and
other similar securities, if the Investment Adviser deems such investments
advisable.
2. SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------
Security Valuation
- -------------------
Investments in securities traded on a national securities exchange (or reported
on the NASDAQ national market) are stated at the last reported sales price on
the day of valuation; other securities traded in the over-the-counter market and
listed securities for which no sale was reported on that date are stated at the
last quoted bid price.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents as of June 30, 1998, consist of funds invested in the
money market funds stated at cost which is market.
Deferred Organizational Costs
- -----------------------------
Costs incurred to organize the Company have been deferred and are amortized on a
straight-line basis over a five-year period starting in 1996. Accumulated
amortization cost as of June 30, 1998, was $4,864.
<PAGE>
Income Taxes
- ------------
The Company elected to be treated as a regulated investment company (a RIC) for
Federal income tax purposes in accordance with Subchapter M of the Internal
Revenue Code of 1986, as amended. In order to so qualify, the Company must
satisfy certain tests regarding the source of its income, diversification of its
assets and distribution of its income. If the Company otherwise qualifies as a
regulated investment company and distributes to its stockholders at least 90% of
its investment company taxable income, then the Company will not be subject to
Federal income tax on the income so distributed. However, the Company would be
subject to corporate income tax on any undistributed income. In addition, the
Company will be subject to a nondeductible 4% excise tax on the amount by which
the amount it distributes in any calendar year is less than a
statutorily-designated, required amount of its regulated investment company
income and its capital gain net income (generally 98%).
Other
- -----
The Company follows industry practice and records security transactions on the
trade date. Dividend income is recognized on the ex-dividend date, and interest
income is recognized on an accrual basis. Discounts and premiums on securities
purchased are amortized over the life of the respective securities.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses in the
financial statements and the disclosure of contingent assets and liabilities.
While actual results could differ from those estimates, management believes that
actual results will not be materially different from amounts provided in the
accompanying financial statements.
3. INVESTMENT ADVISORY AGREEMENT:
------------------------------
The investment adviser to the Company is Chapman Capital Management, Inc. (the
Investment Advisor and CCM). The President of the Company is also the President
and a Board Member of CCM. Pursuant to an Investment Advisory Agreement, the
Investment Advisor receives an advisory fee from the Company at an annual rate
of .90% of the average weekly net assets of the Company. CCM also serves as the
Company's administrator and is compensated for those services at an annual rate
of .15% of the average weekly net assets of the Company. The Company paid
Chapman Capital Management $106,251 during the six months ended June 30, 1998
for advisory and administrative services.
4. DISTRIBUTIONS TO SHAREHOLDERS:
------------------------------
Dividends to shareholders are recorded on the ex-dividend date.
On January 31, 1997, and April 18, 1997, a distribution of $.19, aggregating
$147,784 and $154,237, respectively, was declared from net investment income
during 1997. The dividends were paid on February 28, 1997, and May 23, 1997,
respectively, to shareholders of record on February 14, 1997, and May 9, 1997,
respectively.
<PAGE>
5. CAPITAL SHARE TRANSACTIONS:
---------------------------
As of June 30, 1998, there were 500,000,000 shares of $.00001 par value capital
stock authorized and additional paid-in capital aggregated $16,526,188.
Transactions in capital stock for the six months ended June 30, 1998, and year
ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Shares Dollar Value
-------------------------------------- ----------------------------------
1998 1997 1998 1997
------------------ ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 0 370,960 $ 0 $ 5,739,892
Shares issued as
reinvestment of
dividends 0 3 0 47
-------- ------- ------- -------------
Net increase 0 370,963 $ 0 $ 5,739,939
-------- ------- ------- -------------
-------- ------- ------- -------------
</TABLE>
The dollar amounts in the above table are net of sales commissions and fees of
$432,008 paid to The Chapman Co. (Chapman) for underwriting management fees and
broker commissions.
The Company has a dividend reinvestment plan (the Plan). Stockholders of record,
whose shares are registered in his or her name, will automatically be a
participant in the Plan, unless the stockholder specifically elects to receive
dividends and capital gains in cash paid by check. The Company instructs the
stock transfer agent to buy shares in the open market or to issue new shares.
When the Company issues new shares, the price is equal to the last sale price at
the close of the previous trading day. If there is no sale on that date, then
the mean between the closing bid and asked quotations for such common stock on
such date is used.
6. RESULTS OF THE ANNUAL MEETING OF STOCKHOLDERS:
----------------------------------------------
DEM, Inc.'s Annual meeting of stockholders was held on April 23, 1998. The
stockholders were asked to act upon the following matters:
1. Election of Class I and Class III directors to serve until their
respective successors are elected and qualify;
2. Approval of the Investment Advisory and Administrative Services
Agreement between the Company and Chapman Capital Management, Inc.;
3. Approval of a change in the Company's fundamental policies to remove
the investment restriction against investment in "restricted
securities"; and
4. Ratification of the selection of Arthur Andersen LLP as certified
independent auditors for the Company.
The following directors were elected to serve on the board until their
respective successors are elected and qualify. Each director received
686,598 votes for, 0 votes against, 462,178 votes withheld, 0 votes
abstained and 0 broker non- votes.
<TABLE>
<CAPTION>
<S> <C> <C>
James Lewis Class I 2001
Glenda Glover Class I 2001
Benjamin Hooks Class III 2000
</TABLE>
<PAGE>
In addition, the following directors will continue as directors until their
respective successors are elected and qualify:
<TABLE>
<CAPTION>
<S> <C> <C>
Lottie H. Shackelford Class II 1999
Robert L. Wallace Class II 1999
Nathan A. Chapman, Jr. Class III 2000
Ronald A. White Class III 2000
</TABLE>
The Investment Advisory and Administrative Services Agreement was approved. The
matter received 686,394 votes for, 0 votes against, 462,178 votes withheld, 204
votes abstained and 0 broker non-votes.
The change in the Company's fundamental policies was not approved. The matter
received 433,857 votes for, 252,639 votes against, 462,178 votes withheld, 102
votes abstained and 0 broker non-votes.
The selection of Arthur Andersen LLP to serve as certified independent auditors
for the Company was ratified. The matter received 686,598 votes for, 0 votes
against, 462,178 votes withheld, 0 votes abstained and 0 broker non-votes.
