Rule 497(c)
Registration No. 333-03079
Prospectus
August 16, 1996
Daruma Mid-Cap Value Fund
D A R U M A
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DARUMA MID-CAP VALUE FUND
237 PARK AVENUE
SUITE 801
NEW YORK, NY 10017
(800) 435-5076
August 16, 1996
The Daruma Mid-Cap Value Fund (the 'Fund') is a series of The Daruma
Funds, Inc. (the 'Company'), a no-load diversified, open-end management
investment company incorporated in the State of Maryland. The Fund's objective
is to seek long-term capital appreciation by investing primarily (at least 65%
of its total assets) in the common stocks of medium capitalization companies.
Current income is incidental to the Fund's investment objective. The Fund seeks
to provide investors an opportunity to participate in the long-term growth of
the economy through the investment returns offered by the common stocks of
companies which are undervalued and whose earnings growth prospects are
improving. The Fund is designed for long-term investors who can accept stock
market risk as well as the more volatile returns of mid-cap stocks vs. 'blue
chip' stocks. There can be no assurance that the Fund's investment objective
will be met.
INVESTMENT ADVISER -- CASTLEROCK CAPITAL MANAGEMENT, INC.
The Fund is offered on a no-load basis and there are no sales commissions,
exchange, redemption or 12b-1 fees. The Fund's minimum initial investment is
$1,000 and the minimum subsequent investment is $100. The minimum initial
purchase requirement for retirement and UGMA (Uniform Gifts to Minors Act)
accounts as well as accounts established with automatic investment plans is
$500.
This Prospectus concisely sets forth information about the Fund a
prospective investor should know before investing. It should be read and
retained for future reference. The Statement of Additional Information, dated
August 16, 1996, has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. For a free copy of the Statement of
Additional Information, write or call the Fund at the address or telephone
number shown above.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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FUND FACTS
INVESTMENT OBJECTIVE
To provide long-term capital appreciation by investing, under normal
circumstances, at least 65% of its total assets in medium capitalization
(mid-cap) companies.
INVESTMENT STRATEGY
The Fund invests in undervalued mid-cap companies whose anticipated
earnings growth will accelerate. The Fund believes that buying the common stock
of companies that are cheap and changing provides the best combination of risk
and reward.
The Fund will invest in a portfolio normally composed of approximately 35
common stocks representing CastleRock's best ideas, diversified among a broad
range of industries.
WHY FOCUS ON MID-CAP STOCKS?
The cumulative performance of mid-cap stocks since 1926 falls slightly
below that of small-cap stocks, but well ahead of large-cap stocks. At the same
time, mid-cap stocks are subject to less volatility than small-cap stocks. By
focusing on the mid-cap sector, the Fund hopes to capture most of the long-term
outperformance smaller companies generate versus larger companies, while
experiencing less volatility and risk.
Secondly, the mid-cap universe is not well followed on Wall Street,
allowing CastleRock's emphasis on primary research to add value.
Thirdly, medium-sized companies historically undergo evolutionary changes
in their businesses at a faster rate than large companies do, allowing for more
frequent investment opportunities.
WHO SHOULD INVEST IN THE FUND?
Investors who have a long-term time horizon and are willing to take on the
additional risk of investing in mid-cap stocks. This is an appropriate vehicle
for individuals, educational funding accounts, trusts, foundations, endowments,
as well as IRAs and other tax-deferred accounts.
FEES & SALES CHARGES
The Daruma Mid-Cap Value Fund is 100% no-load. There are no sales charges,
no 12b-1 fees, no redemption fees and no fees associated with the reinvestment
of dividends.
PURCHASE AND REDEMPTION OF FUND SHARES
A complete description regarding the alternatives available to
shareholders for the purchase and/or redemption of Fund shares is provided
under 'Purchase of Shares' on page 8 and 'Redemption of Shares' on page 10 of
this Prospectus.
MINIMUM INVESTMENT
The Fund's minimum initial investment is $1,000 and subsequent investments
are $100. For retirement and UGMA (Uniform Gifts to Minors Act) accounts and
accounts established with automatic investment plans, the minimum initial
requirement is $500.
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FUND TABLE OF CONTENTS
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Fund Expenses........................... 3
Investment Objective.................... 4
Investment Policies..................... 4
Investment Risks........................ 6
Investment Restrictions................. 6
Management of the Fund.................. 7
Dividends and Distributions............. 11
Taxes................................... 12
Net Asset Value......................... 13
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SHAREHOLDER GUIDE
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Purchasing Shares....................... 8
Choosing a Distribution Option.......... 12
Redeeming Your Shares................... 10
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FUND EXPENSES
The following table illustrates all expenses and fees that you would incur
as a shareholder of the Fund.
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Shareholder Transaction Expenses:
Sales Load Imposed on Purchases......................................................... None
Sales Load Imposed on Reinvested Dividends.............................................. None
Deferred Sales Load..................................................................... None
12b-1 Fee............................................................................... None
Redemption Fee.......................................................................... None
Estimated Fund Annual Operating Expenses (as a percentage of average net assets)
Management Fees......................................................................... 1.00%
Estimated Other Expenses (after expense reimbursements)................................. 0.50
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Total Estimated Fund Operating Expenses (after expense reimbursements).................. 1.50%
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The above table is designed to assist you in understanding the various
costs and expenses that a shareholder would bear directly or indirectly as an
investor in this Fund. The management fee will decline as the Fund's assets
increase. See 'Management of the Fund'. The Fund's investment adviser,
CastleRock Capital Management, Inc. ('CastleRock'), is committed to keeping the
total expenses of the Fund at or below 1.50% and intends to waive all
management fees and assume other expenses, if necessary, to maintain that
expense ratio. IT IS ESTIMATED THAT, FOR THE CURRENT FISCAL YEAR, THE FUND'S
'OTHER EXPENSES' WOULD BE APPROXIMATELY 1.50% AND, THEREFORE, THE ANNUAL
OPERATING EXPENSES WOULD BE APPROXIMATELY 2.5% ABSENT EXPENSE REIMBURSEMENTS.
The following example illustrates the expenses that you would incur on a
$1,000 investment over various periods, assuming a 5% annual rate of return,
and at a 1.50% expense ratio:
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1 YEAR 3 YEARS
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Daruma Mid-Cap Value Fund................................................... $16 $49
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THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE
SHOWN.
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INVESTMENT OBJECTIVE
The Fund's investment objective is to seek long-term capital appreciation
by investing, under normal circumstances, at least 65% of its total assets in
the common stocks of medium capitalization companies (companies with market
capitalization ranging from $500 million to $7 billion, including common stocks
of companies listed on the S&P MidCap Index. Current income is incidental to
the Fund's investment objective. There can be no assurance that the Fund's
investment objective will be met. The Fund attempts to achieve its investment
objective by investing primarily in common stocks.
INVESTMENT POLICIES
CastleRock believes that original research drives performance. CastleRock,
on behalf of its clients, invests in companies that it believes are about to
undergo significant positive changes in earnings growth, and whose valuations
do not yet reflect such changes. CastleRock attempts to identify those mid-cap
companies who meet these investment criteria by conducting its own thorough and
original research.
The Fund will normally consist of a portfolio of approximately 35
securities considered by CastleRock to be the companies with the most
compelling risk/reward profiles. CastleRock believes that by investing in a
portfolio of approximately 35 companies, the Fund will be able to diversify its
holdings and avoid certain of the risks associated with an investment in
mid-cap companies. Although the Fund will invest, under normal circumstances,
at least 65% of its total assets in the common stocks of medium capitalization
companies, it may also invest in other types of securities such as
nonconvertible and convertible preferred stocks, bonds and warrants, foreign
securities (ADRs), short-term fixed income securities, and cash equivalents,
when the investment in such securities is considered consistent with the Fund's
investment objective by CastleRock. The Fund will only invest in investment
grade bonds and short-term fixed income securities having an S&P rating of at
least, or equivalent to, BBB (which rating may have speculative
characteristics) or, if unrated, determined by CastleRock to be of comparable
quality. Securities in the lowest investment grade debt category generally have
higher yields, may have speculative characteristics and, as a result, changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case with
higher investment grade securities.
ADDITIONAL INVESTMENT POLICIES
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Borrowing.................................... The Fund may from time to time, borrow money from banks for
temporary, and/or extraordinary purposes. The Fund does not
intend to engage in reverse repurchase agreements. Such
borrowing will not exceed an amount equal to one-third of the
value of the Fund's total assets less its liabilities. The Fund
will not purchase additional securities when borrowings exceed
5% of total assets.
Illiquid Securities.......................... The Fund may invest up to 15% of its net assets in illiquid
securities, including restricted securities (i.e., securities
not readily marketable). Any illiquid securities purchased by
the Fund will have been registered under the Securities Act of
1933. The Fund may purchase restricted securities that may be
offered and sold only to 'qualified institutional buyers' under
Rule 144A of the Securities Act of 1933, and the Fund's Board of
Directors may
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determine, when appropriate, that specific Rule 144A securities
are liquid and not subject to the 15% limitation on illiquid
securities. Should the Board of Directors make this
determination, it will carefully monitor the security (focusing
on such factors, among others, as trading activity and
availability of information) to determine that the Rule 144A
security continues to be liquid. It is not possible to predict
with assurance exactly how the market for Rule 144A securities
will further evolve. This investment practice could have the
effect of increasing the level of illiquidity in the Fund to the
extent that qualified institutional buyers become for a time
uninterested in purchasing Rule 144A securities.
Temporary Investments........................ When CastleRock believes that market conditions warrant a
temporary defensive position, the Fund may invest up to 100% of
its assets in short-term instruments such as U.S. Treasury
bills, high quality commercial paper, bank certificates of
deposit, bankers' acceptances, or repurchase agreements
collateralized by U.S. Government securities.
Repurchase Agreements........................ The Fund may enter into repurchase agreements. In a repurchase
agreement the Fund effectively makes a loan by purchasing a U.S.
Government security and simultaneously committing to resell that
security to the seller at an agreed upon price on an agreed upon
date (usually not more than seven days) from the date of
purchase. Repurchase agreements may be entered into with a
Federal Reserve System bank or 'primary dealers' in U.S.
Government securities.
Foreign Securities........................... The Fund will not invest more than 15% of its total assets in
foreign debt and/or equity securities, or ADRs. Foreign
securities investments involve certain risks, such as political
or economic instability of the issuer or of the country of
issue, fluctuating exchange rates and the possibility of
imposition of exchange controls. These securities may also be
subject to greater fluctuations in price than the securities of
U.S. corporations, and there may be less publicly available
information about their operations. Foreign companies may not be
subject to accounting standards or governmental supervision
comparable to U.S. companies, and foreign markets may be less
liquid or more volatile than U.S. markets and may offer less
protection to investors such as the Fund. In addition, dividends
and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, and transaction costs such
as brokerage commissions are generally higher than in the United
States.
Short Sales.................................. The Fund will only make short sales that are short sales of
securities 'against the box'. A short sale 'against the box' is
a sale of a security that the Fund either owns an equal amount
of or has the immediate and unconditional right to acquire at no
additional cost. The Fund will make short sales 'against the
box' as a form of hedging to
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offset potential declines in long positions in the same or
similar securities.
Portfolio Turnover........................... The Fund's portfolio turnover rate will be influenced by the
Fund's investment objectives, other investment policies, and the
need to meet redemptions. While the rate of portfolio turnover
will not be a limiting factor when CastleRock deems changes
appropriate, it is anticipated that given the Fund's objective,
its annual portfolio turnover should not generally exceed 50%.
(A portfolio turnover rate of 50% would occur, for example, if
half of the stocks in the Fund were replaced over a period of
one year.)
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Except as noted elsewhere in this prospectus, the aforementioned
investment policies and practices are not fundamental and the Board of
Directors of the Fund may change such policies without the vote of a majority
of outstanding voting securities of the Fund as defined by the Investment
Company Act of 1940, as amended. A more detailed description of the Fund's
investment policies, including a list of those restrictions on the Fund's
investment activities which cannot be changed without such a vote, appears in
the Statement of Additional Information.
INVESTMENT RISKS
The Fund is designed for long-term investors who are willing to accept the
risks associated with investing in a mutual fund seeking long-term capital
appreciation. Investors should consider their investment goals, their time
horizon for achieving them and their tolerance for risk before investing in the
Fund. The Fund which will be primarily invested in common stocks of mid-cap
companies is subject to different risk profiles. Market risk is risk associated
with price declines over short or extended periods of time. As the U.S. economy
has expanded, corporate profits have grown and share prices have risen.
Economic growth has been punctuated by periodic declines where share prices of
even the best managed and most profitable companies decline. Stocks of mid-cap
companies may not be well known to the public, have lower trading volume and
may be more volatile in price than larger capitalized stocks included in the
S&P 500 Stock Index. Thus, the Fund should only be used as an investment
vehicle for those with longer time horizons, and should not be used to capture
short-term swings in the market.
Although the Fund is diversified within the meaning of the Investment
Company Act of 1940, it will normally invest in a limited number (approximately
35) of securities. Thus this Fund may contain more risk than other funds with a
similar objective invested in a broader range of securities. To the extent that
the Fund invests in a limited number of securities, it may be more susceptible
to any single, corporate, economic, political or regulatory occurrence than a
more widely diversified fund.
INVESTMENT RESTRICTIONS
As a diversified investment company the Fund has adopted certain
fundamental restrictions which may not be changed without the approval of a
majority of the outstanding voting shares, as that term is defined in the
Investment Company Act of 1940. These restrictions are provided in greater
detail in the Statement of Additional Information and provide, in part, that
the Fund will not:
(a) with respect to 75% of its total assets, invest more than 5% of
its assets in the securities of any one issuer, excluding obligations of
the U.S. Government;
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(b) own more than 10% of the outstanding voting securities of any one
issuer;
(c) invest more than 25% of its total assets in any one industry
except U.S. Government obligations; or
(d) invest in companies for the purpose of exercising control of
management.
In addition to the aforementioned investment restrictions, and in addition
to other restrictions listed in the Statement of Additional Information, the
Fund may not (except where specified):
(i) purchase securities on margin or borrow money, except from banks
for temporary and/or extraordinary purposes;
(ii) mortgage, pledge or hypothecate any assets except that the Fund
may pledge not more than one-third of its total assets to secure
borrowings made in accordance with paragraph (i) above. However, although
not a fundamental policy of the Fund, as a matter of operating policy in
order to comply with certain state statutes, the Fund will not pledge its
assets in excess of an amount equal to 15% of total assets;
(iii) lend portfolio securities of value exceeding in the aggregate
one third of the market value of the Fund's total assets less liabilities
other than obligations created by these transactions; or
(iv) make loans to others, except through the purchase of portfolio
investments, including repurchase agreements.
MANAGEMENT OF THE FUND
ADVISER
CastleRock Capital Management, Inc., a registered investment adviser, is a
New York corporation with its principal office located at 237 Park Avenue,
Suite 801, New York, New York 10017. CastleRock has been retained by the Board
of Directors as the investment adviser for the Fund pursuant to an Investment
Advisory Agreement entered into with the Fund. Mariko O. Gordon, President and
Chief Investment Officer of CastleRock, is primarily responsible for
supervising the Fund's daily investment management activities. CastleRock had
assets under management of approximately $25,000,000 at April 30, 1996.
CastleRock, however, has not managed the assets of a mutual fund prior to the
Fund. Ms. Gordon has over ten years' experience in the investment management
business. Prior to co-founding CastleRock in 1995, Ms. Gordon was an equity
owner in and Director of Research at Valenzuela Capital Management, Inc.
('VCM') from 1990 to 1995, a firm specializing in small to mid-cap stocks with
over $1 billion under management. Ms. Gordon's sole responsibility at VCM was
portfolio management. Prior to joining VCM, from 1987 to 1990, she was the
Director of Systematic Research at Quest Advisory Corp., an investment firm
specializing in small-cap value stocks and adviser to several mutual funds,
including Pennsylvania Mutual Fund. Ms. Gordon started her investment career as
a research analyst at Manning & Napier Advisors, Inc., a firm managing $2
billion for ERISA and Taft-Hartley clients. Ms. Gordon is a Chartered Financial
Analyst and a graduate of Princeton University.
The Fund's Annual Report to shareholders will contain information
regarding the Fund's performance and will be provided without charge, upon
request.
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ADVISER'S FEES
According to the terms of the Investment Advisory Agreement, the Fund will
pay a monthly advisory fee at an annual rate equal to 1% of the first $100
million of the Fund's average daily net assets; 0.75% of the next $100 million
of such net assets; and 0.50% of the Fund's average daily net assets more than
$200 million. Any portion of the advisory fee received by CastleRock may be
used by CastleRock to provide investor and administrative services and for
distribution of Fund shares. CastleRock may voluntarily waive a portion of its
fee or assume certain expenses of the Fund. This would have the effect of
lowering the overall expense ratio of the Fund and of increasing total return
to investors in the Fund. See 'Expense Limitation' in the Statement of
Additional Information.
OTHER EXPENSES
In addition to CastleRock's management fee, the Fund bears the costs of
the following: shareholder servicing expenses; custodial, transfer agent,
accounting, legal and audit fees; costs of preparing and printing prospectuses
and reports sent to shareholders; state and federal registration fees and
expenses; proxy and annual meeting expenses (if any); and director/trustee fees
and expenses.
PURCHASE OF SHARES
INITIAL INVESTMENTS BY MAIL
Subject to acceptance by the Fund, an account may be opened by completing
and signing an Account Application Form and mailing it to the Fund at the
address noted below, together with a check (subject to the Fund's minimum
investment) payable to:
U.S. Mail: Daruma Mid-Cap Value Fund
or c/o American Data Services, Inc.
Overnight 24 West Carver Street
Huntington, NY 11743
The minimum initial investment in the Fund is $1,000. Retirement and UGMA
(Uniform Gifts to Minors Act) accounts, as well as accounts established with
automatic investment plans, however, may initially invest a minimum of $500.
Subject to acceptance by the Fund, payment for the purchase of shares received
by mail will be credited to a shareholder's account at the net asset value per
share of the Fund next determined after receipt. Your purchase of shares of the
Fund will be effected at the next share price calculated after receipt of your
investment.
INITIAL INVESTMENTS BY WIRE
Subject to acceptance by the Fund, shares of the Fund may be purchased by
wiring immediately available federal funds (subject to the Fund's minimum
investment) to the Fund's custodian, Star Bank (the 'Custodian') (see
instructions on following page). The minimum initial investment in the Fund is
$1,000. Retirement and UGMA (Uniform Gifts to Minors Act) accounts, as well as
accounts established with automatic investment plans, however, may initially
invest a minimum of $500. In order to wire funds, you must first call the
Fund's transfer agent, American Data Services, Inc. (the 'Transfer Agent'), at
888-532-7862 to set up your account and obtain an account number. You should be
prepared
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to provide the information on the application to the Transfer Agent. Then, you
should provide your bank with the following information for purposes of wiring
your investment:
Star Bank, N.A. Cinti/Trust
ABA #0420-0001-3
Ref: Daruma Mid-Cap Value Fund
DDA #485776538
Shareholder Account Number: ______________________
Account Name: ____________________________________
You are required to mail a signed application to the transfer agent,
American Data Services, Inc., 24 West Carver Street, Huntington, NY, 11743, in
order to complete your initial wire purchase. Wire orders will be accepted only
on a day which the Fund and the Custodian and Transfer Agent are open for
business. A wire purchase will not be considered made until the wired money is
received and the purchase is accepted by the Fund. Any delays which may occur
in wiring money, including delays which may occur in processing by the banks,
are not the responsibility of the Fund or the Transfer Agent. There is
presently no fee for the receipt of wired funds, but the right to charge
shareholders for this service is reserved by the Fund.
ADDITIONAL INVESTMENTS
Additional investments may be made at any time subject to the Fund's
minimum subsequent investment of $100, by mailing a check to the Fund at the
address noted under 'Initial Investments by Mail' (payable to Daruma Mid-Cap
Value Fund) or by wiring monies to the Custodian using the instructions
outlined above (Initial Investments by Wire).
The purchase price paid for shares of the Fund is the current public
offering price, that is, the next determined net asset value of the shares
after the order is placed. See 'Net Asset Value' herein. The Fund reserves the
right to reject any subscription for shares.
The Fund must receive an order and payment by the close of business for
the purchase to be effective and dividends to be earned on the same day. If
funds are received after the close of business, the purchase will become
effective and dividends will be earned on the next business day. Purchases made
by check will be invested and begin earning income on the next business day
after the check is received.
The Fund will not cancel any trade (purchase or redemption) believed to be
authentic once the trade has been received. If your check or wire does not
clear your transaction will be canceled and you will be responsible for any
loss the Fund incurs. If you are already a shareholder, the Fund can redeem
shares from any identically registered account in the Fund as reimbursement for
any loss incurred.
Shares of the Fund may also be sold to corporations or other institutions
such as trusts, foundations or broker-dealers purchasing for the accounts of
others ('Shareholder Organizations'). Investors purchasing and redeeming shares
of the Fund through a Shareholder Organization may be charged a
transaction-based fee or other fee for the services of such organization. Each
Shareholder Organization is responsible for transmitting to its customers a
schedule of any such fees and information regarding any additional or different
conditions regarding purchases and redemptions. Customers of Shareholder
Organizations should read this Prospectus in light of the terms governing
accounts with their organization. THE FUND DOES NOT PAY TO OR RECEIVE
COMPENSATION FROM SHAREHOLDER ORGANIZATIONS FOR THE SALE OF THE FUND'S SHARES.
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RETIREMENT PLANS
The Fund offers a wide range of plans for individuals and institutions,
including large and small businesses: IRAs, SEP-IRAs and Keoghs (profit
sharing, money purchase pension). For information on IRAs and all other
retirement plans, please call the Fund at (800) 435-5076.
REDEMPTION OF SHARES
The Fund allows you to redeem shares without redemption fees. You may
redeem any portion of your account at any time. Shares of the Fund may be
redeemed by mail, or, if authorized, by telephone. The value of shares redeemed
may be more or less than the purchase price, depending on the market value of
the investment securities held by the Fund.
BY MAIL. The Fund will redeem its shares at the net asset value next
determined after the request is received if all the required documentation is
received in 'good order'. The net asset value per share of the Fund is
determined as of 4:15 p.m., New York time, on each day that the New York Stock
Exchange (the 'NYSE') and the Fund are open for business. Requests should be
addressed to Daruma Mid-Cap Value Fund, c/o American Data Services, 24 West
Carver Street, Huntington, NY 11743.
Requests in 'good order' must include the following information and
documentation:
(1) The account number and fund name;
(2) The amount of the transaction (specified in dollars or shares);
(3) Signatures of all owners EXACTLY as they are registered on the
account;
(4) Any certificates that you hold for the account; any required
signature guarantees (see 'Signature Guarantees' below); and
(5) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianships, corporations, pension and
profit sharing plans and other organizations.
If you are not certain of the requirements for a redemption, please call
Shareholder Services at (888) 532-7862. Redemptions specifying a certain date
or share price cannot be accepted and will be returned.
SIGNATURE GUARANTEES
To protect shareholder accounts, the Fund and its transfer agent from
fraud, signature guarantees are required to enable the Fund to verify the
identity of the person who has authorized a redemption from an account.
Signature guarantees are required for (1) redemptions where the proceeds are to
be sent to someone other than the registered shareholder(s) and the registered
address, and (2) share transfer requests. Signature guarantees may be obtained
from certain eligible financial institutions, including but not limited to, the
following: banks, trust companies, credit unions, securities brokers and
dealers, savings and loan associations and participants in the Securities
Transfer Association Medallion Program ('STAMP'), the Stock Exchange Medallion
Program ('SEMP') or the New York Stock Exchange Medallion Signature Program
('MSP'). Shareholders may contact Shareholder Services at (888) 532-7862 for
further details.
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BY TELEPHONE
Shareholders, who have elected on their application form telephone
redemption privileges, may redeem by telephone provided the proceeds are mailed
to their address of record. To redeem shares by telephone, you or your
preauthorized representative may call shareholder services at (888) 532-7862.
Redemption requests received by telephone by 4:15 p.m. eastern time are
processed on the day of receipt; redemption requests received by telephone
after 4:15 p.m. eastern time are processed on the business day following
receipt. TELEPHONE REDEMPTIONS WILL NOT BE PERMITTED FOR A PERIOD OF SIXTY DAYS
AFTER A CHANGE IN THE ADDRESS OF RECORD. The Fund has authorized the Transfer
Agent to act on telephone instructions from any person representing himself or
herself to be a shareholder and reasonably believed by the Transfer Agent to be
genuine. The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated are genuine and, if it does not, the
Fund or the Transfer Agent may be liable for any losses due to unauthorized or
fraudulent instructions. The procedures employed by the Fund in connection with
transactions initiated by telephone include tape recording of telephone
instructions and requiring some form of personal identification prior to acting
upon instructions received by telephone. Neither the Fund nor the Transfer
Agent will be liable for following telephone instructions reasonably believed
to be genuine. The Fund reserves the right to revise or terminate the telephone
redemption privilege at any time. If you have trouble making a telephone
redemption during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It will be
implemented at the net asset value next determined after your request has been
received by our transfer agent in Good Order.
FURTHER REDEMPTION INFORMATION
Redemption proceeds for shares of the Fund recently purchased by check may
not be distributed until payment for the purchase has been collected, which may
take up to fifteen business days from the purchase date. Shareholders can avoid
this delay by utilizing the wire purchase option.
Other than as described above, payment of the redemption proceeds will be
made within five days after receipt of an order for a redemption. The Fund may
suspend the right of redemption or postpone the date at times when the NYSE or
the bond market is closed or under any emergency circumstances as determined by
the United States Securities and Exchange Commission (the 'SEC').
If the Board of Directors determines that it would be detrimental to the
best interests of the remaining shareholders of the Fund to make a payment
wholly or partly in cash, the Fund may pay the redemption proceeds in whole or
in part by a distribution in-kind of readily marketable securities held by the
Fund in lieu of cash in conformity with applicable rules of the SEC. Investors
generally will incur brokerage charges on the sale of portfolio securities so
received in payment of redemptions.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to pay dividends from net investment income annually in
December. The Fund also intends to distribute its net realized capital gains,
if any, in December. Dividends and distributions will be automatically
reinvested in additional shares of the Fund unless the shareholder chooses
otherwise. Dividends and distributions may be made on a more frequent basis to
comply with the distribution requirement of the Internal Revenue Code.
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CHOOSING A DISTRIBUTION OPTION
Distribution of dividends from the Fund may be made in accordance with
several options. A shareholder may select one of two distribution options:
1. Automatic Reinvestment Option. Both dividends and capital gains
distributions will be automatically reinvested in additional shares of the
Fund unless the investor has elected the all cash option.
2. All Cash Option. Both dividend and capital gains distributions will
be paid in cash.
TAXES
The Fund intends to qualify under the Internal Revenue Code of 1986, as
amended, as a regulated investment company. As a regulated investment company,
the Fund will not be subject to federal income taxes on the investment company
taxable income and long-term capital gains that it distributes to its
investors, provided that at least 90% of its investment company taxable income
for the taxable year is distributed. Shareholders will receive information
annually as to the tax status of distributions made by the Fund for the
calendar year. Distributions paid from a Fund's net investment income and
short-term capital gains are taxable to shareholders as ordinary income
dividends. A portion of the Fund's dividend may qualify for the corporate
dividends-received deduction, subject to certain limitations. The portion of a
Fund's dividends qualifying for such deduction is generally limited to the
aggregate taxable dividends received by the Fund from domestic corporations.
Distributions paid from long-term capital gains of a Fund are treated by a
shareholder for Federal income tax purposes as long-term capital gains,
regardless of how long a shareholder has held Fund shares. If a shareholder
disposes of shares held for six months or less at a loss, such loss will be
treated as a long-term capital loss to the extent of any long-term capital
gains reported by the shareholder with respect to such shares.
The redemption of shares is a taxable event, and a shareholder may realize
a capital gain or capital loss. The Fund will report to redeeming shareholders
the proceeds of the redemptions. However, because the tax consequences of a
redemption will also depend on the shareholder's basis in the redeemed shares
for tax purposes, shareholders should retain their account statements for use
in determining their tax liability on a redemption.
At the time of the shareholder's purchase, the Fund's net asset value may
reflect undistributed income or capital gains. A subsequent distribution of
these amounts by the Fund will be taxable to the shareholder even though the
distribution economically is a return of part of the shareholder's investment.
Keep in mind that if you purchase shares in the Fund shortly before the
record date for a dividend or capital gains distribution, regardless of whether
you are investing your distributions or receiving them in cash, you will be
assessed taxes on the amount of the capital gain and/or dividend distribution
later paid even though you owned the Fund shares for just a short period of
time. While the total value of your investment will be the same after the
distribution -- the amount of the distribution will offset the drop in the net
asset value of the shares -- you should be aware of the tax implications the
timing of your purchase may have. Prospective investors should, therefore,
inquire about potential distributions before investing.
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The Fund is required to withhold 31% of taxable dividends, capital gain
distributions and redemptions that are paid to non-corporate shareholders who
have not complied with Internal Revenue Service taxpayer identification
regulations. Shareholders may avoid the withholding requirement by certifying
on the Account Application Form their proper Social Security or Taxpayer
Identification Number and certifying that they are not subject to backup
withholding.
NET ASSET VALUE
Purchases and redemptions are made at net asset value. The Transfer Agent
determines net asset value per share as of the close of regular trading on the
NYSE, on each day the NYSE is open for trading. Net asset value is determined
by dividing the total assets of the Fund, less all liabilities, by the total
number of shares outstanding.
Market values for securities listed on an exchange are based upon the
latest quoted sales prices as of 4:00 p.m. eastern time, on the valuation date.
Securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange are
valued at the latest quoted bid price. Temporary cash investments and debt
obligations with 60 days or less remaining to maturity are valued at cost,
unless the Board of Directors determines that this does not represent fair
value. All prices of listed securities are taken from the exchange where the
security is primarily traded. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities. Securities for which market quotations are not
readily available or which are restricted as to sale, and other assets are
valued by such methods the Board of Directors deems in good faith to reflect
fair value.
The Transfer Agent computes the Fund's net asset value once daily on
Monday through Friday, at 4:15 p.m. New York time, except on the holidays
listed under 'Net Asset Value' in the Statement of Additional Information.
FUND PERFORMANCE
From time to time, the Fund may include in communications to current or
prospective shareholders figures reflecting total return over various time
periods. 'Total return' is the rate of return on an amount invested in a Fund
from the beginning to the end of the stated period. 'Average annual total
return' is the annual compounded percentage change in the value of an amount
invested in a Fund from the beginning until the end of the stated period. Total
returns are historical measures of past performance and are not intended to
indicate future performance. Total returns assume the reinvestment of all
dividends and capital gains distributions.
The Fund may compare its performance with performance rankings compiled by
independent organizations and publications that monitor the performance of
mutual funds (such as Lipper Analytical Services, Inc., Morningstar, Inc., or
Barron's). Performance information may be quoted numerically or may be
presented in a table, graph or other illustration. In addition, Fund
performance may be compared to well-known indices of market performance
including the Standard & Poor's ('S&P') 500 Index, S&P MidCap Index and the
Russell 2000 Index.
DESCRIPTION OF COMMON STOCK
The Company was incorporated in the State of Maryland on May 13, 1996, and
began operations on August 16, 1996. The authorized capital stock of the
Company consists of one billion shares of stock
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having a par value of one-tenth of one cent ($0.001) per share. The Company's
Board of Directors is authorized to divide the unissued shares into separate
series of stock, each series representing a separate, additional investment
portfolio. The Board currently has authorized the division of the unissued
shares into one series. Shares of any series or class will have identical
voting rights, except where, by law, certain issues must be approved by a
majority of the shares of the affected series or class. Each share of any
series or class of shares when issued will have equal dividend, distribution,
liquidation and voting rights for which it will be issued and each fractional
share will have those rights in proportion to the percentage that the
fractional share represents of a whole share. Shares will be voted in the
aggregate. All shares, when issued in accordance with the terms of the
offering, will be fully paid and non-assessable. Shares are redeemable at net
asset value, at the option of the investor. As of July 24th, 1996, certain
persons purchased 10,189 shares of the Fund at an initial purchase price of
$10.00 per share.
The shares of the Fund have non-cumulative voting rights, which means that
the holders of more than 50% of the shares outstanding voting for the election
of directors can elect 100% of the directors if the holders choose to do so,
and, in that event, the holders of the remaining shares will not be able to
elect any person or persons to the Board of Directors. Unless specifically
requested by an investor who is an investor of record, the Fund does not issue
certificates evidencing Fund shares.
Annual meetings of shareholders will not be held except as required by the
Investment Company Act of 1940 and other applicable law. An annual meeting will
be held to vote on the removal of a Director or Directors of the Company if
requested in writing by the holders of shares entitled to cast not less than
10% of all the votes entitled to be cast at such meeting. Special meetings may
be called for purposes such as electing and removing Directors, changing
fundamental investment policies or approving an investment management contract.
If a meeting is held and you cannot attend, you can vote by proxy. Before the
meeting, the Fund will send you proxy materials that explain the issues to be
decided and include a voting card for you to mail back.
SHAREHOLDER INFORMATION
General information about the Fund may be requested in writing to the
shareholder servicing department of the Fund, 237 Park Avenue, Suite 801, New
York, New York 10017 or by calling the Fund at (212) 808-2424 or (800)
435-5076.
CUSTODIAN, TRANSFER AND DIVIDEND AGENT
Star Bank, N.A. of Cincinnati, Ohio, serves as custodian for the Fund's
cash and securities. The Custodian does not assist in, and is not responsible
for, investment decisions involving assets of the Fund. American Data Services,
Inc., Huntington, New York, is the Fund's transfer and dividend agent.
COUNSEL AND INDEPENDENT AUDITORS
Legal matters in connection with the issuance of shares of common stock of
the Fund are passed upon by Battle Fowler LLP, 75 East 55th Street, New York,
New York 10022. Ernst & Young LLP, independent auditors, has been selected as
auditors for the Fund.
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