As filed with the Securities and Exchange Commission on August 2, 1996
Registration No. 333-03709
ICA No. 811-07621
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 1 [X]
(Check appropriate box or boxes)
THE DARUMA FUNDS, INC.
---------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
237 Park Avenue, Suite 801
New York, New York 10017
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Registrant's Telephone Number, including Area Code: (212) 808-7407
Mariko O. Gordon
CastleRock Capital Management, Inc.
237 Park Avenue, Suite 801
New York, New York 10017
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(Name and Address of Agent for Service)
Copy to: THOMAS R. WESTLE, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Approximate date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.
It is proposed that this filing will become effective: (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
The Registrant declares that an indefinite amount of its shares of beneficial
interest is being registered by this Registration Statement pursuant to Section
24(f) under the Investment Company Act of 1940, as amended, and Rule 24f-2
thereunder.
352686.2
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THE DARUMA FUNDS, INC.
Registration Statement on Form N-1A
-----------------------
CROSS REFERENCE SHEET -
Pursuant to Rule 404(c)
-----------------------
Part A
Item No. Prospectus Heading
- -------- ------------------
1. Cover Page.................... Cover Page
2. Synopsis...................... Fund Facts and Fund Expenses
3. Condensed Financial
Information................... Not Applicable
4. General Description of
Registrant.................... Cover Page; Investment Objective;
Additional Investment Policies;
Investment Restrictions
5. Management of the Fund........ Management of the Fund; Custodian,
Transfer and Dividend Agent
5a. Management's Discussion
of the Fund.................. Management of the Fund; Dividends
and Distributions and Net Asset Value
6. Capital Stock and Other
Securities.................... Purchase of Shares; Redemption of
Shares; Description of Common Stock
7. Purchase of Securities Being
Offered....................... Purchase of Shares; Description of
Common Stock
8. Redemption or Repurchase...... Redemption of Shares
9. Legal Proceedings............. Not Applicable
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Part B
Item No. Caption in Statement of Additional
- -------- Information
----------------------------------
10. Cover Page................... Cover Page
11. Table of Contents............ Table of Contents
12. General Information and
History...................... The Fund; Management of the Fund;
Description of the Fund
13. Investment Objectives and
Policies..................... Investment Objective, Policies and
Restrictions; Risk Factors and other
Considerations
14. Management of the Fund....... Management of the Fund and Investment
Adviser
15. Control Persons and
Principal Holders of
Securities................... Management of the Fund and Investment
Adviser
16. Investment Advisory and
Other Services............... Management of the Fund; Pricing of
Shares; Redemptions In Kind and Exchange;
Counsel and Independent Auditors
17. Brokerage Allocation......... Portfolio Transactions
18. Capital Stock and Other
Securities................... Description of the Fund
19. Purchase, Redemption and
Pricing of Securities
Being Offered................ Pricing of Shares; Redemptions In Kind
20. Tax Status................... Taxation
21. Underwriters................. Not Applicable
22. Calculations of Yield........ Performance Data
23. Financial Statements......... Not Applicable
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352686.2
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DARUMA MID-CAP VALUE FUND
237 Park Avenue
Suite 801
New York, NY 10017
(800) 435-5076
August 2, 1996
The Daruma Mid-Cap Value Fund (the "Fund") is a series of The Daruma Funds,
Inc., 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 net
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 1, 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.
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 the 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 Redemptions 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 7 and "Redemption of Shares" on page 9 of this Prospectus.
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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
Page Page
Fund Expenses SHAREHOLDER GUIDE
Investment Objective Purchasing Shares
Investment Policies Choosing a Distribution option
Investment Risks Redeeming Your Shares
Investment Restrictions
Management of the Fund
Dividends and Distributions
Taxes
Net Asset Value
- --------------------------------------------------------------------------------
FUND EXPENSES
The following table illustrates all expenses and fees that you would incur as a
shareholder of the Fund.
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
Total Estimated Fund Operating Expenses (after expense reimbursements).....1.50%
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 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:
1 Year 3 Years
Daruma Mid-Cap Value Fund......................... $15 $479
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 Mid Cap 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 combines the best aspects of controlling
risk by diversification and by adding value through active portfolio
management. 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 stock, 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 a rating of, or
equivalent to, at least an S&P rating of 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
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
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366002.4
<PAGE>
and sold only to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933, and the
Fund's Board of Directors may 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 When CastleRock believes that market conditions warrant
Investments 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 The Fund may enter into repurchase agreements. In a
Agreements repurchase agreement 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 The Fund will not invest more than 15% of its total
Securities assets in foreign debt and/or Securities 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"
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366002.4
<PAGE>
as a form of hedging to offset potential declines in
long positions in the same or similar securities.
Portfolio The Fund's portfolio turnover rate will be influenced
Turnover 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.)
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:
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(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;
(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; or
(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.
(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
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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.
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 Registration 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
c/o American Data Services, Inc.
24 West Carver Street
Huntington, New York 11743
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Overnight: Daruma Mid-Cap Value Fund
c/o American Data Services, Inc.
24 West Carver Street
Huntington, New York 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 below). 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 (800)
532-7862 to set up your account and obtain an account number. You should be
prepared 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 Custodian at the above
address 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
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<PAGE>
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.
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
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<PAGE>
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 the
Shareholder Services at (800) 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 (800) 532-7862 for
further details.
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 (800) 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
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<PAGE>
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 net 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.
-12-
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<PAGE>
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 one of the other two options.
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 are 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
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<PAGE>
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.
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 Director 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
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<PAGE>
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 Mid-Cap Index and the
Russell 2000.
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in the State of Maryland on May 13, 1996, and began
operations on 1996. The authorized capital stock of the Fund consists of one
billion shares of stock having a par value of one-tenth of one cent ($0.001)
per share. The Fund'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. On July __, 1996, certain persons
purchased in the aggregate 10,188 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 Fund 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.
-15-
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<PAGE>
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 agent, and dividend and
disbursing 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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<PAGE>
DARUMA MID-CAP VALUE FUND
Statement of Additional Information
-----------------------------
This Statement of Additional Information sets forth information which
may be of interest to investors but which is not necessarily included in the
Fund's Prospectus, dated August 1, 1996 (the "Prospectus"). This Statement of
Additional Information is not a prospectus and should be read in conjunction
with the Prospectus, a copy of which may be obtained without charge by writing
to the Fund at 237 Park Avenue, Suite 801, New York, New York 10017, or by
calling Shareholder Services at (800) 435-5076.
Investment Adviser
CastleRock Capital Management, Inc.
Custodian Transfer Agent
Star Bank, N.A. American Data Services, Inc.
August 2, 1996
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
THE FUND........................................................ 1
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS................. 1
RISK FACTORS AND SPECIAL CONSIDERATIONS......................... 3
MANAGEMENT OF THE FUND.......................................... 6
INVESTMENT ADVISER.............................................. 8
PORTFOLIO TRANSACTIONS.......................................... 10
PRICING OF SHARES............................................... 11
REDEMPTIONS IN KIND............................................. 11
TAXATION........................................................ 11
DESCRIPTION OF THE FUND......................................... 13
PERFORMANCE DATA................................................ 14
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT............ 18
COUNSEL AND INDEPENDENT AUDITORS................................ 18
STATEMENT OF ASSETS AND LIABILITIES............................. 19
REPORT OF INDEPENDENT AUDITORS.................................. 21
366007.2
<PAGE>
THE FUND
Daruma Mid-Cap Value Fund (the "Fund"), is a no-load diversified,
open-end, investment company, and a series of The Daruma Funds, Inc. which was
incorporated under Maryland law on May 13, 1996. This Fund is designed for
long-term investors who understand and are willing to accept the risk of loss
involved in seeking long-term capital appreciation. The Fund should not be used
as a trading vehicle. CastleRock Capital Management Inc. ("CastleRock"),
manages the investments of the Fund from day-to-day in accordance with the
Fund's investment objective and policies.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
A detailed description of the types and quality of the securities in
which the Fund may invest is given in the Prospectus and is incorporated herein
by reference. The investment objective is fundamental and may be changed only
with the approval of a "majority of the outstanding voting securities" (as
defined in the Investment Company Act of 1940) of the Fund. There can be no
assurance that the Fund's investment objective will be achieved.
The Fund's investment objective is to seek long-term capital
appreciation by investing primarily in the common stocks of medium
capitalization U.S. companies. Current income is incidental to the Fund's
investment objective. The Fund is designed for long-term investors who
understand and are willing to accept the risk of loss involved in 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 risks before investing in the Fund.
CastleRock believes that the Fund is suitable for investment only by
persons who can invest without concern for current income and who are in a
financial position to assume above-average investment risks in search for
long-term capital appreciation.
CastleRock believes that original research drives performance.
CastleRock invests for its clients in companies that are about to undergo
significant positive changes in earnings growth, and whose valuations do not
yet reflect those 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 concentrate its portfolio in companies whose market cap
ranges from $750 million to $5 billion, across a wide array of industry
sectors. CastleRock's overall stock selection for the Fund is not based on the
capitalization or size of the company but rather on an assessment of the
company's fundamental prospects. The Fund will normally consist of a portfolio
normally made up of approximately 35 securities representing CastleRock's best
ideas, diversified among a broad range of industries which are considered to be
companies with the most compelling risk/reward profiles. As such, the Fund is
not an appropriate investment for individuals who are not long-term investors
and who, as their primary objective, require safety of principal or stable
income from their investments.
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<PAGE>
The Fund may not, as a matter of fundamental policy:
(1) Issue any senior securities except insofar as the Fund may be
deemed to have issued a senior security in connection with
any permitted borrowing.
(2) Purchase securities on margin or write call options on its
portfolio securities; or purchase securities while borrowings
exceed 15% of its total assets.
(3) Sell securities short except to sell securities "short
against the box";
(4) Borrow money, except from banks for temporary and/or
extraordinary purposes in an amount not to exceed one-third
of the value of the Fund's total assets less its liabilities
(total net assets).
(5) Underwrite the securities of other issuers, except insofar as
the Fund may be deemed an underwriter under the Securities
Act of 1933 in disposing of a portfolio security.
(6) Invest more than an aggregate of 15% of its total assets in
repurchase agreements maturing in more than seven days,
variable rate demand instruments exercisable in more than
seven days or securities that are not readily marketable.
(7) Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, or oil and
gas interests, but this shall not prevent the Fund from
investing in Government obligations secured by real estate or
an interest in real estate.
(8) Make loans to others, except through the purchase of
portfolio investments, including repurchase agreements, as
described under "Risk Factors and Special Considerations".
(9) Invest more than 25% of its assets in the securities of
"issuers" in any single industry and provided also that there
shall be no limitation on the Fund to purchase obligations
issued or guaranteed by the United States government, its
agencies or instrumentalities. When the assets and revenues
of an agency, authority, instrumentality or other political
subdivision are separate from those of the government
creating the issuing entity and a security is backed only by
the assets and revenues of the entity, the entity would be
deemed to be the sole issuer of the security. Similarly, in
the case of an industrial revenue bond, if that bond is
backed only by the assets and revenues of the
non-governmental issuer, then such non-governmental issuer
would be deemed to be the sole issuer. If, however, in either
case, the creating government guarantees a security, such a
guarantee would be considered a separate security and would
be treated as an issue of such government.
(10) Invest in securities of other investment companies, except
(i) the Fund may purchase unit investment trust securities
where such unit investment trusts meet the investment
objective of the Fund and then only up to 5% of the Fund's
total
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<PAGE>
assets, except as they may be acquired as part of a merger,
consolidation or acquisition of assets and (ii) as permitted
by Section 12(d) of the Act.
(11) Invest in companies for the purpose of exercising control of
management.
(12) Own more than 10% of the outstanding voting securities of any
one issuer;
(13) With respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer, excluding
obligations of the U.S. Government.
(14) Mortgage, pledge or hypothecate any assets except that the
Fund may pledge not more than one-third of its total assets
to secure borrowings. 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.
Percentage Restrictions
Any investment restrictions herein which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or disposition of securities or assets of, or borrowings by, the Fund.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Fund's Rights as Stockholder
As noted above, the Fund may not invest in a company for the purpose
of exercising control or management. However, the Fund may exercise its rights
as a stockholder and communicate its views on important matters of policy to a
company's management, the board of directors and/or stockholders if CastleRock
or the Board of Directors determine that such matters could have a significant
effect on the value of the Fund's investment in the company. The activities
that the Fund may engage in, either individually or in conjunction with others,
may include, among others, supporting or opposing proposed changes in a
company's corporate structure or business activities; seeking changes in a
company's board of directors or management; seeking changes in a company's
direction or policies; seeking the sale or reorganization of a company or a
portion of its assets; or supporting or opposing third party takeover attempts.
This area of corporate activity is increasingly prone to litigation, and
therefore it is possible but not likely that the Fund could be involved in
lawsuits related to such activities. CastleRock will monitor such activities
with a view to mitigating, to the extent possible, the risk of litigation
against the Fund and the risk of actual liability if the Fund is involved in
litigation. However, no guarantee can be made that litigation against the Fund
will not be undertaken or liabilities incurred.
The Fund may, at its expense or in conjunction with others, pursue
litigation or otherwise exercise its rights as a security holder to seek to
protect the interests of security holders if CastleRock and the Fund's Board of
Directors determine this to be in the best interest of the Fund's shareholders.
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<PAGE>
Foreign Securities
The Fund may invest up to 15% of its assets in certain foreign debt
and equity securities or ADRs. Investment in foreign equity securities,
obligations of foreign issuers and in direct obligations of foreign nations
involves somewhat different investment risks from those of United States
domestic issuers. There may be limited publicly available information with
respect to foreign issuers and foreign issuers are not generally subject to
uniform accounting, auditing and financial standards and requirements
comparable to those applicable to domestic companies. There may also be less
government supervision and regulation of foreign securities exchanges, brokers
and listed companies than in the United States. Foreign securities markets have
substantially less volume than domestic securities exchanges and securities of
some foreign companies are less liquid and more volatile than securities of
comparable domestic companies. Brokerage commissions and other transaction
costs on foreign securities exchanges are generally higher than in the United
States. Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid to the Fund by
domestic companies. Additional risks include future political and economic
developments, the possibility that a foreign jurisdiction might impose or
change withholding taxes on income payable with respect to foreign securities,
the possible seizure, nationalization or expropriation of foreign issuer or
foreign deposits and the possible adoption of foreign governmental restrictions
such as exchange controls.
American Depository Receipts (ADRs) are certificates held in trust by
a bank or similar financial institution evidencing ownership of shares of a
foreign-based issuer. Designed for use in U.S. securities markets, ADRs are
alternatives to the purchase of the underlying foreign securities in their
national markets and currencies.
ADR facilities may be established as either unsponsored or sponsored.
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the cost of such facilities. The depository usually charges
fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distributions and the performance of other services. The depository of an
unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through voting rights to ADR holders in respect of the deposited
securities. Sponsored ADR facilities are created in generally the same manner
as unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreement with the depository. The deposit agreement sets
out the rights and responsibilities of the issuer, the depository and the ADR
holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as deposit
and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities.
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<PAGE>
U.S. Government Obligations
U.S. Government obligations are obligations which are backed by the
full faith and credit of the United States, by the credit of the issuing or
guaranteeing agency or by the agency's right to borrow from the U.S. Treasury.
They include (i) U.S. Treasury Obligations, which differ only in their interest
rates, maturities and times of issuance as follows: U.S. Treasury bills
(maturity of one year or less), U.S. Treasury notes (maturity of one year or
ten years), U.S. Treasury bonds (generally maturities of more than ten years);
and (ii) obligations issued or guaranteed by U.S. Government agencies and
instrumentalities that are supported by the full faith and credit of the United
States (such as securities issued by the Government National Mortgage
Association, the Federal Housing Administration, the Department of Housing and
Urban Development, the Export- Import Bank, the General Services Administration
and the Maritime Administration and certain securities issued by the Farmers'
Home Administration and the Small Business Administration. The maturities of
U.S. Government obligations usually range from three months to thirty years.
Repurchase Agreements
When the Fund purchases securities, it may enter into a repurchase
agreement with the seller wherein the seller agrees, at the time of sale, to
repurchase the security at a mutually agreed upon time and price. The Fund may
enter into repurchase agreements with member banks of the Federal Reserve
System and with broker-dealers who are recognized as primary dealers in the
United States government securities by the Federal Reserve Bank of New York.
Although the securities subject to the repurchase agreement might bear
maturities exceeding one year, settlement for the repurchase would never be
more that 397 days after the Fund's acquisition of the securities and normally
would be within a shorter period of time. The resale price will be in excess of
the purchase price, reflecting an agreed upon market rate effective for the
period of time the Fund's money will be invested in the security, and will not
be related to the coupon rate of the purchased security. At the time the Fund
enters into a repurchase agreement the value of the underlying security,
including accrued interest, will be equal to or exceed the value of the
repurchase agreement and, in the case of a repurchase agreement exceeding one
day, the seller will agree that the value of the underlying security, including
accrued interest, will at all times be equal to or exceed the value of the
repurchase agreement. The Fund may engage in a repurchase agreement with
respect to any security in which it is authorized to invest, even though the
underlying security may mature in more than one year. The collateral securing
the seller's obligation must be of a credit quality at least equal to the
Fund's investment criteria for securities in which it invests and will be held
by the Custodian or in the Federal Reserve Book Entry System.
For purposes of the Investment Company Act of 1940, a repurchase
agreement is deemed to be a loan from the Fund to the seller subject to the
repurchase agreement and is therefore subject to the Fund's investment
restriction applicable to loans. It is not clear whether a court would consider
the securities purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund to the seller.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the securities before repurchase of the security under
a repurchase agreement, the Fund may encounter delay and incur costs before
being able to sell the security. Delays may involve loss of interest or decline
in price of the security. If the court characterized the transactions as a loan
and the Fund has not perfected a security interest in the security, the Fund
may be required to
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<PAGE>
return the security to the seller's estate and be treated as unsecured creditor
of the seller. As an unsecured creditor, the Fund would be at the risk of
losing some or all of the principal income involved in the transaction. As with
any unsecured debt obligation purchased for the Fund, CastleRock seeks to
minimize the risk of loss thorough repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller. Apart from the risk
of bankruptcy or insolvency proceedings, there is also the risk that the seller
may fail to repurchase the security, in which case the Fund may incur a loss if
the proceeds of the sale to a third party are less than the repurchase price.
However, if the market value of the securities subject to the repurchase
agreement becomes less than the repurchase price (including interest), the Fund
involved will direct the seller of the security to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement will equal or exceed the repurchase price. It is possible that a Fund
will be unsuccessful in seeking to impose on the seller a contractual
obligation to deliver additional securities.
Selling Short Against the Box
The Fund may make 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 offset potential declines in long positions in the same or similar
securities.
MANAGEMENT OF THE FUND
The directors and officers of the Fund and their principal occupations
during the past five years are set forth below. Their titles may have varied
during this period. Unless otherwise indicated, the address of each director
and officer is 237 Park Avenue, Suite 801, New York, NY 10017.
The following table sets forth certain information as to each director
and officer of the Fund:
Compensation Table
(Estimated for the fiscal year ended June 30, 1997)
Retirement Benefits
Name of Person Aggregate Compensation Accrued as Part of
Position From Fund Fund Expenses
Fred Ali -0- -0-
Director
25542 Novela Way
Valencia, CA 91355
Elizabeth A. Duffy -0- -0-
Director
230 W. 55th Street, #3D
New York, NY 10019
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<PAGE>
Brian J. Heidtke -0- -0-
Director
Colgate-Palmolive
300 Park Avenue
New York, NY 10022
Mariko Gordon* -0- -0-
President and Director
of the Fund; & President
and CEO of CastleRock
Noreen McKee* -0- -0-
Vice President, Treasurer
and Director of the Fund; &
Vice President & Treasurer
of CastleRock.
Fred Ali, 46, Director of the Fund. Executive director of Covenant House
California since February 1991.
Elizabeth A. Duffy, 30, Director of the Fund. Program & Research Associate
of The Andrew W. Mellon Foundation since June 1993. From September 1991 to
June 1993, she attended and completed the MBA program at Stanford
University Graduate School of Business.
Brian J. Heidtke, 56, Director of the Fund. Vice President, Finance and
Treasurer of Colgate- Palmolive Company since June 1986.
Mariko O. Gordon, 34, President and Director of the Fund, and President and
Chief Investment Officer of CastleRock 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") 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.
Noreen D. McKee, 46, Vice-President, Treasurer and Director of the Fund and of
CastleRock is a certified public accountant and has over 10 years experience in
the investment management business. For one year prior to joining CastleRock in
1995, she was the Chief Operating Officer at Valenzuela Capital Management,
Inc. At VCM she was responsible for the financial,
- --------
*An interested person of the Fund and/or CastleRock within the meaning of
Section 2(a)(19) of the Investment Company Act of 1940 (the "1940 Act").
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administrative and compliance functions of the firm. From 1985 to 1993,
she worked as the Controller of Quest Advisory Corp. ("Quest"). At Quest, her
primary responsibilities included the accounting, tax and managerial functions
for six mutual funds and two limited partnerships in compliance with the
Investment Advisors Act and the Investment Company Act of 1940. Ms. McKee has
an M.S. in Accounting from Pace University and a B.S. in Behavioral Science
from York College of Pennsylvania.
Mary B. O'Byrne, 35, Secretary of the Fund and Director of Operations. Prior to
joining the Fund, from 1985 to 1996, Ms. O'Byrne worked at The Royce Funds
("the funds"), a family of ten mutual funds with over $2 billion in assets. She
was primarily responsible for all Blue Sky registrations and assisted with SEC
filings. In addition, she handled the funds' day-to-day financial management
activities interfacing with the funds' custodian and transfer agent. Ms.
O'Byrne has extensive knowledge and experience in all aspects of mutual fund
administration. In 1980, she received a certificate of business administration
from the College of Further Studies, Cavan, Ireland.
Each Director who is not an interested person of the Fund receives a base
annual fee of $0.
INVESTMENT ADVISER
CastleRock Capital Management Inc., a registered investment adviser,
is a New York corporation, with its principal offices located at 237 Park
Avenue, Suite 801, New York, NY 10017. CastleRock has been employed by the
Board of Directors to serve as the investment adviser of the Fund pursuant to
an Investment Advisory Agreement entered into by the Fund. Currently,
CastleRock's only investment company client is the Fund. CastleRock supervises
all aspects of the Fund's operations and provides investment advice and
portfolio management services to the Fund. Pursuant to the Advisory Agreement
and subject to the supervision of the Fund's Board of Directors, CastleRock
makes the Fund's day-to-day investment decisions, arranges for the execution of
portfolio transactions and generally manages the Fund's investments.
Mariko O. Gordon, President and Chief Investment Officer of
CastleRock, is primarily responsible for supervising the Fund's investment
management activities. Paul P. Tanico, Vice President of CastleRock,
participates in the investment management activities. CastleRock had assets
under management of approximately $25,000,000 at April 30, 1996.
CastleRock provides persons satisfactory to the Board of Directors of
the Fund to serve as officers of the Fund. Such officers, as well as certain
other employees and directors of the Fund, may be directors, officers or
employees of CastleRock or it affiliates.
CastleRock also may provide the Fund with supervisory personnel who
will be responsible for supervising the performance of administrative services,
accounting and related services, net asset value calculation, reports to and
filings with regulatory authorities, and services relating to such functions.
The personnel rendering such supervisory services may be employees of
CastleRock, of its affiliates or of other organizations. The Advisory Agreement
was approved on July 19, 1996, by the Board of Directors, including a majority
of the directors who are not
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<PAGE>
interested persons (as defined in the Investment Company Act of 1940) of
the Fund or CastleRock.
The Advisory Agreement has a term which extends to July 19, 1998 and
may be continued thereafter for successive twelve-month periods beginning each
July 19, provided that such continuance is specifically approved annually by a
majority vote of the Fund's outstanding voting securities or by the Board of
Directors, and in either case by a majority of the directors who are not
parties to the Advisory Agreement or interested persons of any such party, by
votes cast in person at a meeting called for the purpose of voting on such
matter.
The Advisory Agreement is terminable without penalty by the Fund on
sixty days' written notice when authorized either by a majority vote of the
outstanding voting shares of the Fund or by a vote of a majority of the Fund's
Board of Directors, or by CastleRock on sixty days' written notice, and will
automatically terminate in the event of its assignment. The Advisory Agreement
provides that in the absence of willful misfeasance, bad faith or gross
negligence on the part of CastleRock, or of reckless disregard of its
obligations thereunder, CastleRock shall not be liable for any action or
failure to act in accordance with its duties thereunder.
Adviser's Fees
Pursuant to the terms of the Advisory Agreement, the Fund will pay a
monthly advisory fee 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 over $200 million. This fee is
higher than the fee paid by most other mutual funds; however, the Board of
Directors believes that this fee is reasonable in light of the advisory
services performed by CastleRock for the Fund. Any portion of the advisory fees
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 or all 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 yield to investors. See "Expense Limitations" below.
Expense Limitations
CastleRock has agreed to reimburse the Fund for its expenses
(exclusive of interest, taxes, brokerage, and extraordinary expenses) which in
any year exceed the limits on investment company expenses prescribed by any
state in which the Fund's shares are qualified for sale or 1.5%. For the
purpose of this obligation to reimburse expenses, the Fund's annual expenses
are estimated and accrued daily, and any appropriate estimated payments are
made to it on a monthly basis. From time to time, CastleRock may voluntarily
assume certain expenses of the Fund. This would have the effect of lowering the
overall expense ratio and of increasing yield to investors. Subject to the
obligations of CastleRock to reimburse the Fund for its excess expenses as
described above, the Fund has, under the Advisory Agreement, confirmed its
obligation for payment of all other expenses, including without limitation:
fees payable to CastleRock, Custodian and Transfer and Dividend Agent;
brokerage and commission expenses; federal, state or local taxes, including
issuance and transfer taxes incurred by or levied on it; commitment fees,
certain insurance premiums and membership fees and dues in investment company
organizations; interest charges on borrowings; telecommunications expenses;
recurring and non-recurring legal and accounting expenses; costs of
organization and maintaining the Fund's existence as a
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<PAGE>
corporation; compensation, including directors's fees, of any directors,
officers or employees who are not also officers of CastleRock or its affiliates
and costs of other personnel providing administrative and clerical services;
costs of stockholders' services and costs of stockholders reports, proxy
solicitations and corporate meetings, fees and expenses or registering its
shares under the appropriate Federal securities laws and of qualifying its
shares under applicable state securities laws, including expenses attendant
upon the initial registration and qualification of these shares and attendant
upon renewals of, or amendments to, those registrations and qualifications; and
expenses of preparing, printing and delivering the Prospectus and financial
statements to existing shareholders and of printing shareholder application
forms for shareholder accounts.
The Fund may from time-to-time hire its own employees or contract to
have management services performed by third parties, and the management of the
Fund intends to do so whenever it appears advantageous to the Fund. The Fund's
expenses for employees and for such services are among the expenses subject to
the expense limitation described above.
PORTFOLIO TRANSACTIONS
CastleRock is responsible for selecting the brokers who effect the
purchases and sales of the Fund's portfolio securities. No broker is selected
to effect a securities transaction for the Fund unless such broker is believed
by CastleRock to be capable of obtaining the best price and execution for the
security involved in the transaction. In addition to considering a broker's
execution capability, CastleRock generally considers the brokerage and research
services which the broker has provided to it, including any research relating
to the security involved in the transaction and/or to other securities. Such
services may include general economic research, market and statistical
information, industry and technical research, strategy and company research,
and may be written or oral. CastleRock determines the overall reasonableness of
brokerage commissions paid, after considering the amount another broker might
have charged for effecting the transaction and the value placed by CastleRock
upon the brokerage and/or research services provided by such broker, viewed in
terms of either that particular transaction or CastleRock's overall
responsibilities with respect to its accounts.
CastleRock is authorized, under Section 28(e) of the Securities
Exchange Act of 1934 and under its Investment Advisory Agreement with the Fund,
to pay a brokerage commission in excess of that which another broker might have
charged for effecting the same transaction, in recognition of the value of
brokerage and research services provided by the broker.
Brokerage and research services furnished by brokers through whom the
Fund effects securities transactions may be used by CastleRock in servicing all
of its accounts and not all of such services may be used by CastleRock in
connection with the Fund.
Even though investment decisions for the Fund are made independently
from those for other accounts managed by CastleRock, the same security is
frequently purchased, held or sold by the Fund and the other accounts because
such security may be suitable for all of them. When the Fund and such other
accounts are simultaneously engaged in the purchase or sale of the same
security, CastleRock seeks to average the transactions as to price and allocate
them as to amount in a manner believed to be equitable to each. In some cases,
this procedure may adversely affect the price paid or received by the Fund or
the size of the position obtainable for the Fund.
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<PAGE>
PRICING OF SHARES
The purchase and redemption price of the Fund's shares is based on its
current net asset value per share. See "Net Asset Value Per Share" in the
Fund's prospectus.
As set forth under "Net Asset Value Per Share", the Fund's custodian
determines the net asset value per share of the Fund at the close of regular
trading on the New York Stock Exchange (the "Exchange") on each day that the
Exchange is open. The Exchange is open on all weekdays which are not holidays.
Thus, it is closed on Saturdays and Sundays and on New Year's Day, Washington's
Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
and Christmas.
REDEMPTIONS IN KIND
It is possible that conditions may arise in the future which would, in
the judgement of the Fund's Board of Directors or management, make it
undesirable for the Fund to pay for all redemptions in cash. In such cases,
payment may be made in portfolio securities or other property of the Fund.
However, the Fund has obligated itself under the Investment Company Act of 1940
to redeem for cash all shares presented for redemption by any one shareholder
up to $250,000 (or 1% of the Fund's net assets if that is less) in any 90-day
period. Securities delivered in payment of redemptions would be valued at the
same value assigned to them in computing the net asset value per share for
purposes of such redemption. Shareholders receiving such securities would incur
brokerage costs when securities are sold.
TAXATION
The Fund will elect to qualify under the Internal Revenue Code of
1986, as amended ("the Code"), as a regulated investment company. As a
regulated investment company, the Fund will not be subject to federal income
taxes on its investment company taxable income and the long-term capital gains
that it distributes to its shareholders, provided that at least 90% of its
investment company taxable income for the taxable year is distributed, and
numerous other requirements concerning regulated investment companies are
satisfied. The Fund's policy is to distribute as dividends each year 100% (and
in no event less than 90%) of its investment company taxable income. The Fund
will be treated as a separate corporation and generally will have to comply
with the qualifications and other requirements applicable to regulated
investment companies. If for any taxable year the Fund does not qualify as a
regulated investment company, all of its taxable income would be taxable at
corporate rates and no distributions would qualify as tax exempt.
The Fund has adopted a policy of declaring dividends annually in an
amount based on its net investment income. The amount of each dividend may
differ from actual net investment income calculated in accordance with federal
income tax purposes. Dividends paid from taxable income, if any, and
distributions of any realized short-term capital gains are taxable to
shareholders as ordinary income, whether received in cash or reinvested in
additional shares of the Fund. Distributions of new realized capital gains
after utilization of capital loss carryforwards, if any, are made annually to
meet applicable distribution and excise tax requirements.
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<PAGE>
The Fund may be subject to state or local tax in jurisdictions in
which the Fund is organized or may be deemed to be doing business. However,
Maryland taxes regulated investment companies in a manner that is generally
similar to the federal income tax rules described herein.
Distributions may be subject to state and local income taxes. In
addition, the treatment of the Fund and its shareholders in those states that
have income tax laws might differ from their treatments under the federal
income tax laws.
The Code imposes a nondeductible 4% excise tax on the Fund unless it
meets certain requirements with respect to distributions of ordinary income and
capital gain net income. The formula requires payment to shareholders during a
calendar year of distributions representing at least 98% of the Fund's ordinary
income for the calendar year, plus at least 98% of the excess of its capital
gains over its capital losses realized during the one-year period ending
October 31 during such year, which shall be reduced but not below net capital
gain) by the amount of the Fund's net ordinary loss for the year. It is
anticipated that this provision will not have any material impact on the Fund.
Dividends and interest paid by foreign issuers may be subject to
withholding and other foreign taxes, which may decrease the net return on
foreign investments as compared to dividends and interest paid by domestic
issuers. The Fund does not expect that it will qualify to elect to pass through
to its shareholders the rights to take a foreign tax credit for foreign taxes
withheld from dividends and interest payments.
For federal income tax purposes, distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital loss),
if any, are taxable as long-term capital gains regardless of the length of time
shareholders have owned their shares. Although the Tax Reform Act of 1986
eliminated the preferential treatment previously available for net capital
gains, the preferential treatment for net capital gains was restored, to some
extent, by the Revenue Reconciliation Act of 1990, which, in limited
circumstances, places a 28% ceiling on the marginal rate applicable to net
capital gains realized by individuals. Distributions attributable to short-term
capital gains (whether from tax exempt or taxable obligations) are taxable as
ordinary income for federal income tax purposes. Generally, on the sale or
exchange of obligations held for more than one year, gain realized by the Fund
will be long-term capital gain.
Back-up Withholding/Withholding Tax
Under the Code, certain non-corporate shareholders may be subject to
31% withholding on reportable dividends, capital gains distributions and
redemption payments ("back-up withholding"). Generally, shareholders subject to
back-up withholding will be those for whom a taxpayer identification number and
certain required certifications are not on file with the Fund or who, to the
Fund's knowledge, have furnished an incorrect number. In addition, the Fund is
required to withhold from distributions to any shareholder who does not certify
to the Fund that such shareholder is not subject to back-up withholding due to
notification by the Internal Revenue Service that such shareholder has
under-reported interest or dividend income. When establishing any account, an
investor must certify under penalties of perjury that such investor's taxpayer
identification number is correct and that such investor is not subject to or is
exempt from back-up withholding.
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Ordinary income distributions paid to shareholders who are
non-resident aliens or which are foreign entities will be subject to 30% United
States withholding tax unless a reduced rate of withholding or a withholding
exemption is provided under an applicable treaty. Non-U.S. shareholders are
urged to consult their own tax advisers concerning the United States tax
consequences to them of investing in the Fund.
Timing of Purchases and Distributions
At the time of an investor's purchase, the Fund's net asset value may
reflect undistributed income or capital gains or net unrealized appreciation of
securities held by the Fund. A subsequent distribution to the investor of such
amounts, although it may in effect constitute a return of her or its investment
in an economic sense, would be taxable to the shareholder as ordinary income or
capital gain as described above. Investors should carefully consider the tax
consequences of purchasing Fund shares just prior to a distribution, as they
will receive a distribution that is taxable to them.
Sale or Redemptions of Shares
Gain or loss recognized by a shareholder upon the sale, redemption or
other taxable disposition of shares in the Fund (provided that such shares are
held by the shareholder as a capital asset) will be treated as capital gain or
loss, measured by the difference between the adjusted basis of the shares and
the amount realized on the sale, redemption or other taxable disposition. Such
gain or loss will be long-term capital gain or loss if the shares disposed of
were held for more than one year. Wash sale losses will be disallowed. A wash
sale loss occurs when the shares disposed of are replaced (including by
receiving shares upon the reinvestment of distributions) within a period of 61
days, beginning 30 days before and ending 30 days after the sale of the shares.
In such a case, the basis of the shares acquired will be increased to reflect
the disallowed loss. A loss recognized upon the sale, redemption or other
taxable disposition of shares held for 6 months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain
distributions received with respect to such shares.
The foregoing relates to Federal income taxation. Distributions, as
well as any gains from a sale, redemption or other taxable disposition of Fund
shares, also may be subject to state and local taxes. Under current law, so
long as the Fund qualifies for Federal income tax treatment described above, it
is believed that the Fund will not be liable for any income or franchise tax
imposed by Maryland.
Investors are urged to consult their own tax advisers regarding the
application to them of Federal, state and local tax laws.
DESCRIPTION OF THE FUND
The Fund was incorporated in the State of Maryland May 13, 1996. The
authorized capital stock of the Fund consists of one billion shares of stock
having a par value of $0.001 per share. The Fund's Board of Directors is
authorized to divide the unissued shares into separate classes and 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 class or series will have identical voting rights, except
where, by law,
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certain matters must be approved by a majority of the shares of the affected
class or series. Each share of any class or series of shares when issued has
equal dividend, distribution, liquidation and voting rights within the class or
series for which it was issued, and each fractional share has those rights in
proportion to the percentage that the fractional share represents a whole
share. Shares will be voted in the aggregate. There are no conversion or
preemptive rights in connection with any shares of the Fund. 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.
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.
As a general matter, the Fund will not hold annual or other meetings
of the Fund's shareholders. This is because the By-laws of the Fund provide for
annual meetings only (a) for the election of directors, (b) for approval of
revisions to the Fund's investment advisory agreement, and (c) upon the written
request of holders of shares entitled to cast not less than twenty-five percent
of all the votes entitled to be cast at such meeting. Annual and other meetings
may be required with respect to such additional matters relating to the Fund as
may be required by the Investment Company Act of 1940 (the "Act") including the
removal of Fund directors and communication among shareholders, any
registration of the Fund with the Securities and Exchange Commission or any
state, or as the Directors may consider necessary or desirable. Each Director
serves until the next meeting of shareholders called for the purpose of
considering the election or reelection of such Director or of a successor to
such Director, and until the election and qualification of his or her
successor, elected at such meeting, or until such Director sooner dies,
resigns, retires or is removed by the vote of the shareholders.
PERFORMANCE DATA
The Fund's performance may be compared in advertisements to the
performance of other mutual funds in general or to the performance of
particular types of mutual funds, especially those with similar investment
objectives. Such comparisons may be expressed as mutual fund rankings prepared
by Lipper Analytical Services, Inc. ("Lipper"), an independent service that
monitors the performance of registered investment companies. Money market funds
and municipal funds are not included in the Lipper survey. The Lipper
performance analysis ranks funds on the basis of total return, assuming
reinvestment of distributions, but does not take sales charges or redemption
fees payable by shareholders into consideration and is prepared without regard
to tax consequences.
The Lipper General Equity Funds Average can be used to show how the
Fund's performance compares to a broad-based set of equity funds. The Lipper
General Equity Funds Average is an average of the total returns of all equity
funds (excluding international funds and funds that specialize in particular
industries or types of investments) tracked by Lipper.
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Ibbotson Associates (Ibbotson) provides historical returns of the
capital markets in the United States. The Fund's performance may be compared to
the long-term performance of the U.S. capital markets in order to demonstrate
general long-term risk versus reward investment scenarios. Performance
comparisons could also include the value of a hypothetical investment in common
stocks, long-term bonds or U.S. Treasury securities. Ibbotson calculates total
returns in the same manner as the Fund.
The capital markets tracked by Ibbotson are common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, U.S. Treasury bills and the U.S. rate of
inflation. These capital markets are based on the returns of several different
indices. For common stocks, the S&P 500 is used. For small capitalization
stocks, return is based on the return achieved by Dimensional Fund Advisors
(DFA) Small Company Fund. This fund is a market-value-weighted index of the
ninth and tenth deciles of the New York Stock Exchange (NYSE), plus stocks
listed on the American Stock Exchange (AMEX) and over-the-counter (OTC) with
the same or less capitalization as the upper bound of the NYSE ninth decile.
The S&P 500 Composite Stock Price Index is an unmanaged index of
common stocks frequently used as a general measure of stock market performance.
The Index's performance figures reflect changes of market prices and quarterly
reinvestment of all distributions.
T The S&P Mid-Cap Index is an unmanaged index of 400 domestic
companies frequently used as a general measure of stock market performance. The
Index's performance figures reflect changes of market prices and quarterly
reinvestment of all distributions.
The Russell 2000, prepared by the Frank Russell Company, tracks the
return of the common stock of the 2,000 smallest out of the 3,000 largest
publicly traded U.S.-domiciled companies by market capitalization. The Russell
2000 tracks the return on these stocks based on price appreciation or
depreciation and includes dividends.
U.S. Treasury bonds are securities backed by the credit and taxing
power of the U.S. government, and, therefore, present virtually no risk of
default. Although such government securities fluctuate in price, they are
highly liquid and may be purchased and sold with relatively small transaction
costs (direct purchase of U.S. Treasury securities can be made with no
transaction costs). Returns on intermediate-term government bonds are based on
a one-bond portfolio constructed each year, containing a bond that is the
shortest non-callable bond available with a maturity of not less than five
years. This bond is held for the calendar year and returns are recorded.
Returns on long-term government bonds are based on a one- bond portfolio
constructed each year, containing a bond that meets several criteria, including
having a term of approximately 20 years. The bond is held for the calendar year
and returns are recorded. Returns on U.S. Treasury bills are based on a
one-bill portfolio constructed each month, containing the shortest term bill
having not less than one month to maturity. The total return on the bill is the
month-end price divided by the previous month-end price, minus one. Data up to
1976 is from the U.S. Government Bond file at the University of Chicago's
Center for Research in Security Prices; the Wall Street Journal is the source
thereafter. Inflation rates are based on the Consumer Price Index.
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From time to time, in reports and promotional literature, the Fund's
performance also may be compared to other mutual funds tracked by financial or
business publications and periodicals, such as Kiplinger's, Individual
Investor, Money, Forbes, Business Week, Barron's, The Financial Times, Fortune,
Mutual Fund Magazine and The Wall Street Journal. In addition, financial or
business publications and periodicals as they relate to fund management,
investment philosophy and investment techniques may be quoted.
The Fund's performance may also be compared to those of other
compilations or indices.
Advertising for the Fund may contain examples of the effects of
periodic investment plans, including the principle of dollar cost averaging. In
such a program, an investor invests a fixed dollar amount in a fund at periodic
intervals, thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not assure a profit or guard
against loss in a declining market, the investor's average cost per share can
be lower than if fixed numbers of shares are purchased at the same intervals.
In evaluating such a plan, investors should consider their ability to continue
purchasing shares during periods of low price levels.
The Fund may be available for purchase through retirement plans or
other programs offering deferral of or exemption from income taxes, which may
produce superior after-tax returns over time. For example, a $1,000 investment
earning a taxable return of 10% annually would have an after-tax value of
$2,004 after ten years, assuming tax was deducted from the return each year at
a 28% rate. An equivalent tax-deferred investment would have an after-tax value
of $2,147 after ten years, assuming tax was deducted at a 28% rate from the
tax-deferred earnings at the end of the ten-year period.
Total Return Calculations
Total return quotes reflect all aspects of the Fund's return,
including the effect of reinvesting dividends and capital gains distributions,
and any change in the Fund's net asset value per share (NAV) over the period.
Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical historical investment in the Fund over a
stated period, and then calculating the annually compounded percentage rate
that would have produced the same result if the rate of growth or decline in
value had been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual total return of 7.18%,
which is the steady annual rate of return that would equal 100% growth on a
compounded basis in ten years. While average annual total returns are a
convenient means of comparing investment alternatives, investors should realize
that the Fund's performance is not constant over time, but changes from year to
year, and that average annual total returns represent averaged figures as
opposed to the actual year-to-year performance of the Fund.
In addition to average annual total returns, the Fund's unaveraged or
cumulative or total returns, reflecting the simple change in value of an
investment over a stated period, may be quoted. Average annual and cumulated
total returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a series of
redemptions, over any time period. Total returns may be broken down into their
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components of income and capital (including capital gains and changes in share
prices) in order to illustrate the relationship of these factors and their
contributions to total return. Total returns and other performance information
may be quoted numerically or in a table, graph or similar illustration.
Risk Measurements
Quantitative measures of "total risk", which quantify the total
variability of a portfolio's returns around, or below, its average return, may
be used in advertisements and in communications with current and prospective
shareholders. These measures include standard deviation of total return and the
Morningstar risk statistic. Such communications may also include market risk
measures, such as beta , and risk-adjusted measures of performance such as the
Sharpe Ratio and Morningstar's star rating system.
Standard Deviation. The risk associated with a fund or portfolio can
be viewed as the volatility of its returns, measured by the standard deviation
of those returns. For example, a fund's historical risk could be measured by
computing the standard deviation of its monthly total returns over some prior
period, such as three years. The larger the standard deviation of monthly
returns, the more volatile, i.e., spread out around the fund's average monthly
total return, the fund's monthly total returns have been over the prior period.
Standard deviation of total return can be calculated for funds of different
objectives, ranging from equity funds to fixed income funds, and can be
measured over different time frames. The standard deviation figures presented
are annualized statistics based on the trailing 36 monthly returns.
Approximately 68% of the time, the annual total return of a fund will differ
from its mean annual total return by no more than plus or minus the standard
deviation figure. 95% of the time, a fund's annual total return will be within
a range of plus or minus 2x the standard deviation from its mean annual total
return.
Beta. Beta measures the sensitivity of a security's, or a portfolio's,
return to the market's returns. It measures the relationship between a fund's
excess return (over 3-month T-bills) and the excess return of the benchmark
index (S&P500 for domestic equity funds). The market's beta is by definition
equal to 1. Portfolios with betas greater than 1 are more volatile than the
market, and portfolios with betas less than 1 are less volatile than the
market. For example, if a portfolio had a beta of 2, a 10% market excess return
would be expected to result in a 20% portfolio excess return, and a 10% market
loss would be expected to result in a 20% portfolio loss (excluding the effects
of any firm-specific risk that has not been eliminated through
diversification).
Morningstar Risk. The Morningstar proprietary risk statistic evaluates
a fund's downside volatility relative to that of other funds in its class based
on the underperformance of the fund relative to the riskless T-bill return. It
then compares this statistic to those of other funds in the same broad
investment class.
Sharpe Ratio. Also known as the Reward-to-Variability Ratio, this is
the ratio of a fund's average return in excess of the risk-free rate of return
("average excess return") to the standard deviation of the fund's excess
returns. It measures the returns earned in excess of those that could have been
earned on a riskless investment per unit of total risk assumed.
-17-
366007.2
<PAGE>
Morningstar Star Ratings. Morningstar, Inc. is a mutual fund rating
service that rates mutual funds on the basis of risk-adjusted performance.
Ratings may change monthly. Funds with at least three years of performance
history are assigned ratings from one star (lowest) to five stars (highest).
Morningstar ratings are calculated from the funds' three-, five- and ten-year
average annual returns (when available). Funds' returns are adjusted for fees
and sales loads. Ten percent of the funds in an investment category receive
five stars, 22.5% receive four stars, 35% receive three stars, 22.5% receive
two stars, and the bottom 10% receive one star.
None of the quantitative risk measures taken alone can be used for a
complete analysis and, when taken individually, can be misleading at times.
However, when considered in some combination and with the total returns of a
fund, they can provide the investor with additional information regarding the
volatility of a fund's performance. Such risk measures will change over time
and are not necessarily predictive of future performance or risk.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
Star Bank, N.A. (the "Custodian"), serves as custodian for the Fund's cash
and securities. Pursuant to a Custodian Agreement with the Fund, it is
responsible for maintaining the books and records of the Fund's portfolio
securities and cash. The Custodian does not assist in, and is not responsible
for, investment decisions involving assets of the Fund. American Data Services,
Inc. (the "Transfer Agent") acts as the Fund's TRANSFER and DIVIDEND AND
DISBURSING 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. Ernst & Young LLP,
independent auditors, has been selected as auditors of the Fund.
-18-
366007.2
<PAGE>
<TABLE>
<CAPTION>
THE DARUMA MID-CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
July 24, 1996
<S> <C> <C>
Assets:
Cash in Bank.............................................................................$101,889
Prepaid registration fees (Note 3)..........................................................2,880
Deferred organization expenses (Note 4)....................................................10,000
Total Assets:.................................................................................................... $ 114,769
Accrued Expenses............................................................................8,500
Payable to Investment Advisor (Note 2).....................................................4,380
Total Liabilities: ...............................................................................................$ 12,880
Net Assets (equivalent to $10.00 per share on 10,188.8470 shares of Common
Stock (par value $.001) outstanding with 100,000,000 shares
authorized)(Note 1):.....................................................................................$ 101,889
</TABLE>
Notes
(1) The Daruma Mid-Cap Value Fund (the "Fund") is a series of The Daruma Funds,
Inc. a no- load diversified, open-end management investment company
incorporated in the State of Maryland on May 13, 1996. To date, the Fund has
not had any transactions other than those relating to organizational matters
and the sale of 10,188.8470 total shares of common stock to Mariko O. Gordon,
Hugh Cosman and Noreen D. McKee. Ms. Gordon and Ms. McKee are officers and
directors of CastleRock Capital Management, Inc. (the "Investment Advisor"),
and also serve as officers and directors of the Fund.
(2) The Fund has entered into an Investment Advisory Agreement with the
Investment Adviser for investment advisory services provided to the Fund.
According to the terms of the 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; .75% of the next $100 million of such net assets; and
.50% of the Fund's average daily net assets over $200 million. The Adviser 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. At July 24, 1996, the Fund owed the Investment
Adviser an amount equal to $4,380 which represents $1,500 in initial filing
fees with the Securities and Exchange Commission and $2,880 in initial state
registration fees. It is anticipated that these expenses will be repaid to the
Adviser from the Fund's operating income during the Fund's first year in
operation unless waived by the Adviser to comply with its expense ratio
committment.
(3) Prepaid registration fees are charged to expense as the related shares are
issued.
-19-
366007.2
<PAGE>
(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event that
Ms. Gordon, Mr. Cosman or Ms. McKee (or any subsequent shareholder) redeems any
of their original shares prior to the end of the five-year period, the proceeds
of the redemption payable shall be reduced by the pro rata share of the
unamortized deferred organization expenses. In the event that the Fund is
liquidated prior to the end of the five-year period, Ms. Gordon, Mr. Cosman and
Ms. McKee shall bear the unamortized deferred organization expenses.
-20-
366007.2
<PAGE>
Report of Independent Auditors
To the Board of Directors of The Daruma Funds, Inc.
We have audited the accompanying statement of assets and liabilities of the
Daruma Mid-Cap Value Fund (a series of The Daruma Funds, Inc.) as of July 24,
1996. This statement of assets and liabilities is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this
statement of assets and liabilities based on our audit.
We conducted our audit in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Daruma
Mid-Cap Value Fund (a series of The Daruma Funds, Inc.) at July 24, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
July 25, 1996
-21-
366007.2
<PAGE>
PART C - OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Included in Prospectus:
(1) Fund Expenses
Included in Statement of Additional Information:
*(1) Report of Ernst & Young LLP, independent
auditors, dated July 25, 1996; and
*(2) Statement of Assets and Liabilities dated
July 25, 1996.
(B) EXHIBITS
**(1) Articles of Incorporation of the Registrant.
**(2) Form of By-Laws of the Registrant.
(3) Not Applicable.
(4) Not Applicable.
**(5) Form of Investment Advisory Agreement.
(6) Not Applicable.
(7) Not Applicable.
*(8) Form of Custody Agreement.
**(9) Transfer Agency and Service Agreement
**(9.1) Fund Accounting Service Agreement
*(10) Consent of Messrs. Battle Fowler LLP as to the
legality of the securities being registered,
including their consent to the filing thereof
and as to the use of their name under the
heading "Counsel and Independent Auditors" in
the Prospectus and the Statement of Additional
Information.
*(11) Consent of Ernst & Young, LLP, Independent
Auditors.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15) Not Applicable.
(16) Not Applicable.
(17) Not Applicable.
(18) Not Applicable.
***(19) Power of Attorney.
- --------
* Filed herewith.
** Filed as an exhibit to the Registrant's Registration Statement,
333-03709, filed on May 14, 1996 and incorporated herein by reference.
*** To be filed by amendments.
-i-
352686.2
<PAGE>
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
Item 26. NUMBER OF HOLDERS OF SECURITIES.
Number of Record Holders
Title of Class as of July 25, 1996
--------------- -----------------------
Common Stock 3
Item 27. INDEMNIFICATION.
In accordance with Section 2-418 of the General Corporation Law
of the State of Maryland, Article NINTH of the Registrant's Articles of
Incorporation provides in part that, the Corporation shall indemnify (i) its
currently acting and former directors and officers to the fullest extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the fullest extent permitted by law, and (ii) other employees and agents to
such extent as shall be authorized by the Board of Directors or the By-Laws and
as permitted by law, provided, however, that no director or officer of the
Corporation shall be indemnified against any liability to the Corporation or
its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office. Such indemnification shall not be
exclusive of any other rights to which those seeking indemnification may be
entitled and the Board of Directors may take such action as is necessary to
carry out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time such by-laws, resolutions or contracts
implementing such provisions or such indemnification arrangements as may be
permitted by law. No amendment of the charter of the Corporation or repeal of
any of its provisions shall limit or eliminate the right of indemnification
provided hereunder with respect to acts or omissions occurring prior to such
amendment or repeal.
In addition, and to the fullest extent permitted by Maryland
statutory or decisional law, as amended or interpreted, and the Investment
Company Act of 1940, no director or officer of the Corporation shall be
personally liable to the Corporation or its stockholders for money damages;
provided, however, that such indemnification shall not be construed to protect
any director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. No amendment of
the charter of the Corporation or repeal of any of its provisions shall limit
or eliminate the limitation of liability provided to directors and officers
hereunder with respect to any act or omission occurring prior to such amendment
or repeal.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, directors, officers and
controlling persons of the Registrant by the Registrant pursuant to the
Articles of Incorporation or otherwise, the Registrant is aware that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and, therefore, is unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by trustees,
directors, officers or controlling persons of the Registrant in connection with
the successful defense of any act, suite or proceeding) is asserted by such
trustees, directors, officers or controlling persons in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issues.
-ii-
352686.2
<PAGE>
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The description of the Registrant's adviser, CastleRock Capital
Management, Inc., under the caption "Management of the Fund" in the Prospectus
and "Management of the Fund" in the Statement of Additional Information
constituting parts A and B, respectively, of the Registration Statement are
incorporated herein by reference.
Item 29. PRINCIPAL UNDERWRITERS.
NONE.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
Accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder, in general, are maintained in the physical possession of the
Registrant at 237 Park Avenue, Suite 801, New York, New York 10017; records
relating to the investment advisory or management of the Registrant will be
maintained by the Registrant's Investment Adviser at 237 Park Avenue, Suite
801, New York, New York 10017; the Registrant's transfer and dividend
disbursing agent, American Data Services, Inc. of Huntington, New York will
maintain physical possession of Registrant's shareholder and fund accounting
records; and the custodian, Star Bank, N.A. at 425 Walnut Street, Cincinnati,
Ohio 45201 will maintain physical possession of the Registrant's custodial
records.
Item 31. MANAGEMENT SERVICES.
Not Applicable.
Item 32. UNDERTAKINGS.
(a) Not Applicable.
(b) The Registrant undertakes to file a post-effective
amendment, using financial statements which need not be
certified, within four to six months from the effective
date of its Registration Statement.
(c) The Registrant undertakes to furnish each person to
whom a prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders, upon
request and without charge.
(d) The Registrant undertakes (although not required to
hold annual shareholder meetings) if requested to do so
by the holders of at least 10% of its outstanding
shares, to call a meeting of shareholders for the
purpose of voting upon the question of removal of a
director or directors and to assist in communications
with other shareholders as required by Section 16(c).
-iii-
352686.2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of New York,
and State of New York, on the 19th day of July, 1996.
THE DARUMA FUNDS, INC.
By: /s/ Mariko O. Gordon
---------------------------
Mariko O. Gordon, President
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
Signature Title Date
(i) Principal Executive Officer:
By:/s/ Mariko O. Gordon President July 19, 1996
------------------------
Mariko O. Gordon
(ii) Majority of Directors
By:/s/ Fred Ali Director July 19, 1996
----------------------
Fred Ali
By:/s/ Elizabeth A. Duffy Director July 19, 1996
----------------------
Elizabeth A. Duffy
By:/s/ Brian J. Heidtke Director July 19, 1996
----------------------
Brian J. Heidtke
By:/s/ Mariko O. Gordon Director July 19, 1996
----------------------
Mariko O. Gordon
By:/s/ Noreen McKee Director July 19, 1996
Noreen McKee
-iv-
352686.2
<PAGE>
Exhibit Index
**(1) Articles of Incorporation of the Registrant.
**(2) Form of By-Laws of the Registrant.
(3) Not Applicable.
(4) Not Applicable.
**(5) Form of Investment Advisory Agreement.
(6) Not Applicable.
(7) Not Applicable.
*(8) Form of Custody Agreement.
**(9) Transfer Agency and Service Agreement
**(9.1) Fund Accounting Service Agreement
*(10) Consent of Messrs. Battle Fowler LLP as to the legality
of the securities being registered, including their
consent to the filing thereof and as to the use of their
name under the heading "Counsel and Independent
Auditors" in the Prospectus and the Statement of
Additional Information.
*(11) Consent of Ernst & Young, LLP, Independent Auditors.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15) Not Applicable.
(16) Not Applicable.
(17) Not Applicable.
(18) Not Applicable.
***(19) Power of Attorney.
- --------
* Filed herewith.
** Filed as an exhibit to the Registrant's Registration Statement,
333-03709, filed on May 14, 1996 and incorporated herein by reference.
*** To be filed by amendment.
352686.2
CUSTODY AGREEMENT
This agreement (the "Agreement") is entered into as of the _____ day of
___________, 1996 by and between __________________________, (the "Fund"), an
open-end diversified investment business trust organized under the laws of
_________________ and having its office at ___________________________________
and Star Bank, National Association, (the "Custodian"), a national banking
association having its principal office at 425 Walnut Street, Cincinnati, Ohio,
45202.
WHEREAS, the Fund and the Custodian desire to enter into this Agreement
to provide for the custody and safekeeping of the assets of the Fund as
required by the Investment Company Act of 1940, as amended (the "Act").
WHEREAS, the Fund hereby appoints the Custodian as custodian of all the
Fund's Securities and moneys at any time owned by the Fund during the term of
this Agreement (the "Fund Assets").
WHEREAS, the Custodian hereby accepts such appointment as Custodian and
agrees to perform the duties thereof as hereinafter set forth.
THEREFORE, in consideration of the mutual promises hereinafter set
forth, the Fund and the Custodian agree as follows:
ARTICLE I
Definitions
The following words and phrases, when used in this Agreement, unless
the context otherwise requires, shall have the following meanings:
Authorized Person - the Chairman, President, Secretary, Treasurer,
Controller, or Senior Vice President of the Fund, or any other person, whether
or not any such person is an officer or employee of the Fund, duly authorized
by the Board of Trustees of the Fund to give Oral Instructions and Written
Instructions on behalf of the Fund, and listed in the Certificate annexed
hereto as Appendix A, or such other Certificate as may be received by the
Custodian from time to time.
Book-Entry System - the Federal Reserve Bank book-entry system for
United States Treasury securities and federal agency securities.
Depository - The Depository Trust Company ("DTC"), a limited purpose
trust company its successor(s) and its nominee(s) or any other person or
clearing agent
Dividend and Transfer Agent - the dividend and transfer agent
appointed, from time to time, pursuant to a written agreement between the
dividend and transfer agent and the Fund
Foreign Securities - a) securities issued and sold primarily outside of
the United States by a foreign government, a national of any foreign country,
or a trust or other organization incorporated or organized under the laws of
any foreign country or; b) securities issued or guaranteed by the government of
the United States, by any state, by any political subdivision or agency
thereof, or by any entity organized under the laws of the United States or of
any state thereof, which have been issued and sold primarily outside of the
United States.
Money Market Security - debt obligations issued or guaranteed as to
principal and/or interest by the government of the United States or agencies or
instrumentalities thereof, commercial paper, obligations (including
certificates of deposit, bankers' acceptances, repurchase agreements and
reverse repurchase agreements with respect to the same), and time deposits of
domestic banks and thrift institutions whose deposits are insured by the
Federal Deposit Insurance Corporation, and short-term corporate obligations
where the purchase and sale of such securities normally require settlement in
federal funds or their equivalent on the same day as such purchase and sale,
all of which mature in not more than thirteen (13) months.
Officers - the Chairman, President, Secretary, Treasurer, Controller,
and Senior Vice President of the Fund listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
Oral Instructions - verbal instructions received by the Custodian from
an Authorized Person (or from a person that the Custodian reasonably believes
in good faith to be an Authorized Person) and confirmed by Written Instructions
in such a manner that such Written Instructions are received by the Custodian
on the business day immediately following receipt of such Oral Instructions.
Prospectus - the Fund's then currently effective prospectus and
Statement of Additional Information, as filed with and declared effective from
time to time by the Securities and Exchange Commission.
Security or Securities - Money Market Securities, common stock,
preferred stock, options, financial futures, bonds, notes, debentures,
corporate debt securities, mortgages, and any certificates, receipts, warrants,
or other instruments representing rights to receive, purchase, or subscribe for
the same or evidencing or representing any other rights or interest therein, or
any property or assets.
Written Instructions - communication received in writing by the
Custodian from an Authorized Person.
ARTICLE II
Documents and Notices to be Furnished by the Fund
A The following documents, including any amendments thereto, will be
provided contemporaneously with the execution of the Agreement, to the
Custodian by the Fund:
1. A copy of the Articles of Incorporation of the Fund
certified by the Secretary.
2. A copy of the By-Laws of the Fund certified by the Secretary.
3. A copy of the resolution of the Board of Trustees of the
Fund appointing the Custodian, certified by the Secretary.
4. A copy of the then current Prospectus.
5. A Certificate of the President and Secretary of the Fund
setting forth the names and signatures of the Officers of
the Fund.
B. The Fund agrees to notify the Custodian in writing of the
appointment of any Dividend and Transfer Agent.
ARTICLE III
Receipt of Fund Assets
A. During the term of this Agreement, the Fund will deliver or cause to
be delivered to the Custodian all moneys constituting Fund Assets. The
Custodian shall be entitled to reverse any deposits made on the Fund's behalf
where such deposits have been entered and moneys are not finally collected
within 30 days of the making of such entry.
B. During the term of this Agreement, the Fund will deliver or cause to
be delivered to the Custodian all Securities constituting Fund Assets. The
Custodian will not have any duties or responsibilities with respect to such
Securities until actually received by the Custodian.
C. As and when received, the Custodian shall deposit to the account(s)
of the Fund any and all payments for shares of the Fund issued or sold from
time to time as they are received from the Fund's distributor or Dividend and
Transfer Agent or from the Fund itself.
ARTICLE IV
Disbursement of Fund Assets
A. The Fund shall furnish to the Custodian a copy of the resolution of
the Board of Trustees of the Fund, certified by the Fund's Secretary, either
(i) setting forth the date of the declaration of any dividend or distribution
in respect of shares of the Fund, the date of payment thereof, the record date
as of which Fund shareholders entitled to payment shall be determined, the
amount payable per share to Fund shareholders of record as of that date, and
the total amount to be paid by the Dividend and Transfer Agent on the payment
date, or (ii) authorizing the declaration of dividends and distributions in
respect of shares of the Fund on a daily basis and authorizing the Custodian to
rely on a Certificate setting forth the date of the declaration of any such
dividend or distribution, the date of payment thereof, the record date as of
which Fund shareholders entitled to payment shall be determined, the amount
payable per share to Fund shareholders of record as of that date, and the total
amount to be paid by the Dividend and Transfer Agent on the payment date.
On the payment date specified in such resolution or Certificate
described above, the Custodian shall segregate such amounts from moneys held
for the account of the Fund so that they are available for such payment.
B. Upon receipt of Written Instructions so directing it, the Custodian
shall segregate amounts necessary for the payment of redemption proceeds to be
made by the Dividend and Transfer Agent from moneys held for the account of the
Fund so that they are available for such payment.
C. Upon receipt of a Certificate directing payment and setting forth
the name and address of the person to whom such payment is to be made, the
amount of such payment, and the purpose for which payment is to be made, the
Custodian shall disburse amounts as and when directed from the Fund Assets. The
Custodian is authorized to rely on such directions and shall be under no
obligation to inquire as to the propriety of such directions.
D. Upon receipt of a Certificate directing payment, the Custodian shall
disburse moneys from the Fund Assets in payment of the Custodian's fees and
expenses as provided in Article VIII hereof.
ARTICLE V
Custody of Fund Assets
A. The Custodian shall open and maintain a separate bank account or
accounts in the United States in the name of the Fund, subject only to draft or
order by the Custodian acting pursuant to the terms of this Agreement, and
shall hold all cash received by it from or for the account of the Fund, other
than cash maintained by the Fund in a bank account established and used by the
Fund in accordance with Rule 17f-3 under the Act. Moneys held by the Custodian
on behalf of the Fund may be deposited by the Custodian to its credit as
Custodian in the banking department of the Custodian. Such moneys shall be
deposited by the Custodian in its capacity as such, and shall be withdrawable
by the Custodian only in such capacity.
B. The Custodian shall hold all Securities delivered to it in
safekeeping in a separate account or accounts maintained at Star
Bank, N.A. for the benefit of the Fund.
C. All Securities held which are issued or issuable only in bearer
form, shall be held by the Custodian in that form; all other Securities held
for the Fund shall be registered in the name of the Custodian or its nominee.
The Fund agrees to furnish to the Custodian appropriate instruments to enable
the Custodian to hold, or deliver in proper form for transfer, any Securities
that it may hold for the account of the Fund and which may, from time to time,
be registered in the name of the Fund.
D. With respect to all Securities held for the Fund , the Custodian
shall on a timely basis (concerning items 1 and 2 below, as defined in the
Custodian's Standards of Service Guide, as amended from time to time, annexed
hereto as Appendix C):
1.) Collect all income due and payable with respect to such
Securities;
2.) Present for payment and collect amounts payable upon
all Securities which may mature or be called, redeemed, or retired, or
otherwise become payable;
3.) Surrender Securities in temporary form for definitive
Securities; and
4.) Execute, as agent, any necessary declarations or
certificates of ownership under the Federal income tax laws or the laws or
regulations of any other taxing authority, including any foreign taxing
authority, now or hereafter in
effect.
E. Upon receipt of a Certificate and not otherwise, the
Custodian shall:
1.) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents, authorizations, and any other
instruments whereby the authority of the Fund as beneficial owner of any
Securities may be exercised;
2.) Deliver any Securities in exchange for other
Securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, merger, consolidation, or recapitalization of any
trust, or the exercise of any conversion privilege;
3.) Deliver any Securities to any protective committee,
reorganization committee, or other person in connection with the
reorganization, _____________________________________ refinancing, merger,
consolidation, recapitalization, or sale of assets
_____________________________ of any trust, and receive and hold under the
terms of this Agreement ______________________________ such certificates of
deposit, interim receipts or other instruments or documents as may be issued to
it to evidence such delivery; 4.) Make such transfers or exchanges of the
assets of the Fund and take ____________________________ such other steps as
shall be stated in said Certificate to be for the
__________________________________ purpose of effectuating any duly authorized
plan of liquidation, ____________________________________ reorganization,
merger, consolidation or recapitalization of the Fund;
__________________________ and
5.) Deliver any Securities held for the Fund to the
depository agent for tender or other similar offers.
F. The Custodian shall promptly deliver to the Fund all notices, proxy
material and executed but unvoted proxies pertaining to shareholder meetings of
Securities held by the Fund. The Custodian shall not vote or authorize the
voting of any Securities or give any consent, waiver or approval with respect
thereto unless so directed by a Certificate or Written Instruction.
G. The Custodian shall promptly deliver to the Fund all information
received by the Custodian and pertaining to Securities held by the Fund with
respect to tender or exchange offers, calls for redemption or purchase, or
expiration of rights.
ARTICLE VI
Purchase and Sale of Securities
A. Promptly after each purchase of Securities by the Fund, the Fund
shall deliver to the Custodian (i) with respect to each purchase of Securities
which are not Money Market Securities, Written Instructions, and (ii) with
respect to each purchase of Money Market Securities, Written Instructions or
Oral Instructions, specifying with respect to each such purchase the;
1.) name of the issuer and the title of the Securities,
2.) principal amount purchased and accrued interest, if any,
3.) date of purchase and settlement,
4.) purchase price per unit,
5.) total amount payable, and
6.) name of the person from whom, or the broker through
which, the purchase was made.
The Custodian shall, against receipt of Securities purchased by or for the
Fund, pay out of the Fund Assets, the total amount payable to the person from
whom or the broker through which the purchase was made, provided that the same
conforms to the total amount payable as set forth in such Written Instructions
or Oral Instructions, as the case may be.
B. Promptly after each sale of Securities by the Fund, the Fund shall
deliver to the Custodian (i) with respect to each sale of Securities which are
not Money Market Securities, Written Instructions, and (ii) with respect to
each sale of Money Market Securities, Written Instructions or Oral
Instructions,
specifying with respect to each such sale the;
1.) name of the issuer and the title of the Securities,
2.) principal amount sold and accrued interest, if any,
3.) date of sale and settlement,
4.) sale price per unit,
5.) total amount receivable, and
6.) name of the person to whom, or the broker through
which, the sale was made.
The Custodian shall deliver the Securities against receipt of the total amount
receivable, provided that the same conforms to the total amount receivable as
set forth in such Written Instructions or Oral Instructions, as the case may
be.
C. On contractual settlement date, the account of the Fund will be
charged for all purchased Securities settling on that day, regardless of
whether or not delivery is made. Likewise, on contractual settlement date,
proceeds from the sale of Securities settling that day will be credited to the
account of the Fund, irrespective of delivery.
D. Purchases and sales of Securities effected by the Custodian will be
made on a delivery versus payment basis. The Custodian may, in its sole
discretion, upon receipt of a Certificate, elect to settle a purchase or sale
transaction in some other manner, but only upon receipt of acceptable
indemnification from the Fund.
E. The Custodian shall, upon receipt of a Written Instructions so
directing it, establish and maintain a segregated account or accounts for and
on behalf of the Fund. Cash and/or Securities may be transferred into such
account or accounts for specific purposes, to-wit:
1.) in accordance with the provision of any agreement
among the Fund, the Custodian, and a broker-dealer registered under the
Securities and Exchange Act of 1934, as amended, and also a member of the
National Association of Securities Dealers (NASD) (or any futures commission
merchant registered under the Commodity Exchange Act), relating to compliance
with the rules of the Options Clearing Corporation and of any registered
national securities exchange, the Commodity Futures Trading Commission, any
registered contract market, or any similar organization or organizations
requiring escrow or other similar arrangements in connection with transactions
by the Fund;
2.) for purposes of segregating cash or government
securities in connection with options purchased, sold, or written by the Fund
or commodity futures contracts or options thereon purchased or sold by the
Fund;
3.) for the purpose of compliance by the fund with the
procedures required for reverse repurchase agreements, firm commitment
agreements, standby commitment agreements, and short sales by Act Release No.
10666, or any subsequent release or releases or rule of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies; and
4.) for other corporate purposes, only in the case of this
clause 4 upon receipt of a copy of a resolution of the Board of Trustees of the
Fund, certified by the Secretary of the Fund, setting forth the purposes of
such segregated account.
F. Except as otherwise may be agreed upon by the parties hereto, the
Custodian shall not be required to comply with any Written Instructions to
settle the purchase of any Securities on behalf of the Fund unless there is
sufficient cash in the account(s) at the time or to settle the sale of any
Securities from an account(s) unless such Securities are in deliverable form.
Notwithstanding the foregoing, if the purchase price of such Securities exceeds
the amount of cash in the account(s) at the time of such purchase, the
Custodian may, in its sole discretion, advance the amount of the difference in
order to settle the purchase of such Securities. The amount of any such advance
shall be deemed a loan from the Custodian to the Fund payable on demand and
bearing interest accruing from the date such loan is made up to but not
including the date such loan is repaid at a rate per annum customarily charged
by the Custodian on similar loans.
ARTICLE VII
Fund Indebtedness
In connection with any borrowings by the Fund, the Fund will cause to
be delivered to the Custodian by a bank or broker requiring Securities as
collateral for such borrowings (including the Custodian if the borrowing is
from the Custodian), a notice or undertaking in the form currently employed by
such bank or broker setting forth the amount of collateral. The Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such borrowing: (a) the name of the bank or broker, (b) the amount and terms of
the borrowing, which may be set forth by incorporating by reference an attached
promissory note duly endorsed by the Fund, or a loan agreement, (c) the date,
and time if known, on which the loan is to be entered into, (d) the date on
which the loan becomes due and payable, (e) the total amount payable to the
Fund on the borrowing date, and (f) the description of the Securities securing
the loan, including the name of the issuer, the title and the number of shares
or the principal amount. The Custodian shall deliver on the borrowing date
specified in the Certificate the required collateral against the lender's
delivery of the total loan amount then payable, provided that the same conforms
to that which is described in the Certificate. The Custodian shall deliver, in
the manner directed by the Fund, such Securities as additional collateral, as
may be specified in a Certificate, to secure further any transaction described
in this Article VII. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it.
The Custodian may, at the option of the lender, keep such collateral in
its possession, subject to all rights therein given to the lender because of
the loan. The Custodian may require such reasonable conditions regarding such
collateral and its dealings with third-party lenders as it may deem
appropriate.
ARTICLE VIII
Concerning the Custodian
A. Except as otherwise provided herein, the Custodian shall not be
liable for any loss or damage resulting from its action or omission to act or
otherwise, except for any such loss or damage arising out of its own gross
negligence or willful misconduct. The Fund shall defend, indemnify and hold
harmless the Custodian and its directors, officers, employees and agents with
respect to any loss, claim, liability or cost (including reasonable attorneys'
fees) arising or alleged to arise from or relating to the Fund's duties
hereunder or any other action or inaction of the Fund or its Trustees,
officers, employees or agents, except such as may arise from the negligent
action, omission, willful misconduct or breach of this Agreement by the
Custodian. The Custodian may, with respect to questions of law, apply for and
obtain the advice and opinion of counsel, at the expense of the Fund, and shall
be fully protected with respect to anything done or omitted by it in good faith
in conformity with the advice or opinion of counsel. The provisions under this
paragraph shall survive the termination of this Agreement.
B. Without limiting the generality of the foregoing, the
Custodian, acting in the capacity of Custodian hereunder, shall
be under no obligation to inquire into, and shall not be liable
for:
1.) The validity of the issue of any Securities purchased
by or for the account of the Fund, the legality of the purchase thereof, or the
propriety of the amount paid therefor;
2.) The legality of the sale of any Securities by or for
the account of the Fund, or the propriety of the amount for which the same are
sold;
3.) The legality of the issue or sale of any shares of the
Fund, or the sufficiency of the amount to be received therefor;
4.) The legality of the redemption of any shares of the
Fund, or the propriety of the amount to be paid therefor;
5.) The legality of the declaration or payment of any
dividend by the Fund in respect of shares of the Fund;
6.) The legality of any borrowing by the Fund on behalf of
the Fund, using Securities as collateral;
C. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount due to the Fund from any Dividend and
Transfer Agent of the Fund nor to take any action to effect payment or
distribution by any Dividend and Transfer Agent of the Fund of any amount paid
by the Custodian to any Dividend and Transfer Agent of the Fund in accordance
with this Agreement.
D. Notwithstanding Section D of Article V, the Custodian shall not be
under any duty or obligation to take action to effect collection of any amount,
if the Securities upon which such amount is payable are in default, or if
payment is refused after due demand or presentation, unless and until (i) it
shall be directed to take such action by a Certificate and (ii) it shall be
assured to its satisfaction (including prepayment thereof) of reimbursement of
its costs and expenses in connection with any such action.
E. The Fund acknowledges and hereby authorizes the Custodian to hold
Securities through its various agents described in Appendix B annexed hereto.
The Fund hereby represents that such authorization has been duly approved by
the Board of Trustees of the Fund as required by the Act. The Custodian
acknowledges that although certain Fund Assets are held by its agents, the
Custodian remains primarily liable for the safekeeping of the Fund Assets.
In addition, the Fund acknowledges that the Custodian may appoint one
or more financial institutions, as agent or agents or as sub-custodian or
sub-custodians, including, but not limited to, banking institutions located in
foreign countries, for the purpose of holding Securities and moneys at any time
owned by the Fund. The Custodian shall not be relieved of any obligation or
liability under this Agreement in connection with the appointment or activities
of such agents or sub-custodians. Any such agent or sub-custodian shall be
qualified to serve as such for assets of investment companies registered under
the Act. Upon request, the Custodian shall promptly forward to the Fund any
documents it receives from any agent or sub-custodian appointed hereunder which
may assist trustees of registered investment companies fulfill their
responsibilities under Rule 17f-5 of the Act.
F. The Custodian shall not be under any duty or obligation to ascertain
whether any Securities at any time delivered to or held by it for the account
of the Fund are such as properly may be held by the Fund under the provisions
of the Articles of Incorporation and the Fund's By-Laws.
G. The Custodian shall treat all records and other information relating
to the Fund and the Fund Assets as confidential and shall not disclose any such
records or information to any other person unless (i) the Fund shall have
consented thereto in writing or (ii) such disclosure is required by law.
H. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian such compensation as shall be determined pursuant to
Appendix D attached hereto, or as shall be determined pursuant to amendments to
such Appendix D. The Custodian shall be entitled to charge against any money
held by it for the account of the Fund, the amount of any of its fees, any
loss, damage, liability or expense, including counsel fees. The expenses which
the Custodian may charge against the account of the Fund include, but are not
limited to, the expenses of agents or sub-custodians incurred in settling
transactions involving the purchase and sale of Securities of the Fund.
I. The Custodian shall be entitled to rely upon any Oral Instructions
and any Written Instructions. The Fund agrees to forward to the Custodian
Written Instructions confirming Oral Instructions in such a manner so that such
Written Instructions are received by the Custodian, whether by hand delivery,
facsimile or otherwise, on the same business day on which such Oral
Instructions were given. The Fund agrees that the failure of the Custodian to
receive such confirming instructions shall in no way affect the validity of the
transactions or enforceability of the transactions hereby authorized by the
Fund. The Fund agrees that the Custodian shall incur no liability to the Fund
for acting upon Oral Instructions given to the Custodian hereunder concerning
such transactions.
J. The Custodian will (i) set up and maintain proper books of account
and complete records of all transactions in the accounts maintained by the
Custodian hereunder in such manner as will meet the obligations of the Fund
under the Act, with particular attention to Section 31 thereof and Rules 31a-1
and 31a-2 thereunder and those records are the property of the Fund, and (ii)
preserve for the periods prescribed by applicable Federal statute or regulation
all records required to be so preserved. All such books and records shall be
the property of the Fund, and shall be open to inspection and audit at
reasonable times and with prior notice by Officers and auditors employed by the
Fund.
K. The Custodian shall send to the Fund any report received on the
systems of internal accounting control of the Custodian, or its agents or
sub-custodians, as the Fund may reasonably request from time to time.
L. The Custodian performs only the services of a custodian and shall
have no responsibility for the management, investment or reinvestment of the
Securities from time to time owned by the Fund. The Custodian is not a selling
agent for shares of the Fund and performance of its duties as custodian shall
not be deemed to be a recommendation to the Fund's depositors or others of
shares of the Fund as an investment.
M. The Custodian shall take all reasonable action, that the Fund may
from time to time request, to assist the Fund in obtaining favorable opinions
from the Fund's independent accountants, with respect to the Custodian's
activities hereunder, in connection with the preparation of the Fund's Form
N-1A, Form N-SAR, or other annual reports to the Securities and Exchange
Commission.
N. The Fund hereby pledges to and grants the Custodian a security
interest in any Fund Assets to secure the payment of any liabilities of the
Fund to the Custodian, whether acting in its capacity as Custodian or
otherwise, or on account of money borrowed from the Custodian. This pledge is
in addition to any other pledge of collateral by the Fund to the Custodian.
ARTICLE X
Termination
A. Either of the parties hereto may terminate this Agreement for any
reason by giving to the other party a notice in writing specifying the date of
such termination, which shall be not less than ninety (90) days after the date
of giving of such notice. If such notice is given by the Fund, it shall be
accompanied by a copy of a resolution of the Board of Trustees of the Fund,
certified by the Secretary of the Fund, electing to terminate this Agreement
and designating a successor custodian or custodians. In the event such notice
is given by the Custodian, the Fund shall, on or before the termination date,
deliver to the Custodian a copy of a resolution of the Board of Trustees of the
Fund, certified by the Secretary, designating a successor custodian or
custodians to act on behalf of the Fund. In the absence of such designation by
the Fund, the Custodian may designate a successor custodian which shall be a
bank or trust company having not less than $100,000,000 aggregate capital,
surplus, and undivided profits. Upon the date set forth in such notice this
Agreement shall terminate, and the Custodian, provided that it has received a
notice of acceptance by the successor custodian, shall deliver, on that date,
directly to the successor custodian all Securities and moneys then owned by the
Fund and held by it as Custodian. Upon termination of this Agreement, the Fund
shall pay to the Custodian on behalf of the Fund such compensation as may be
due as of the date of such termination. The Fund agrees on behalf of the Fund
that the Custodian shall be reimbursed for its reasonable costs in connection
with the termination of this Agreement.
B. If a successor custodian is not designated by the Fund, or by the
Custodian in accordance with the preceding paragraph, or the designated
successor cannot or will not serve, the Fund shall, upon the delivery by the
Custodian to the Fund of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund, be deemed to be the custodian for the Fund, and the Custodian
shall thereby be relieved of all duties and responsibilities pursuant to this
Agreement, other than the duty with respect to Securities held in the
Book-Entry System, which cannot be delivered to the Fund, which shall be held
by the Custodian in accordance with this Agreement.
ARTICLE XI
MISCELLANEOUS
A. Appendix A sets forth the names and the signatures of all Authorized
Persons, as certified by the Secretary of the Fund. The Fund agrees to furnish
to the Custodian a new Appendix A in form similar to the attached Appendix A,
if any present Authorized Person ceases to be an Authorized Person or if any
other or additional Authorized Persons are elected or appointed.
Until such new Appendix A shall be received, the Custodian shall be fully
protected in acting under the provisions of this Agreement upon Oral
Instructions or signatures of the then current Authorized Persons as set forth
in the last delivered Appendix A.
B. No recourse under any obligation of this Agreement or for any claim
based thereon shall be had against any organizer, shareholder, Officer,
Director, past, present or future as such, of the Fund or of any predecessor or
successor, either directly or through the Fund or any such predecessor or
successor, whether by virtue of any constitution, statute or rule of law or
equity, or be the enforcement of any assessment or penalty or otherwise; it
being expressly agreed and understood that this Agreement and the obligations
thereunder are enforceable solely against the Fund, and that no such personal
liability whatever shall attach to, or is or shall be incurred by, the
organizers, shareholders, Officers, Trustees of the Fund or of any predecessor
or successor, or any of them as such. To the extent that any such liability
exists, it is hereby expressly waived and released by the Custodian as a
condition of, and as a consideration for, the execution of this Agreement.
C. The obligations set forth in this Agreement as having been made by
the Fund have been made by the Board of Trustees, acting as such Trustees for
and on behalf of the Fund, pursuant to the authority vested in them under the
laws of the State of ___________, the Articles of Incorporation and the By-Laws
of the Fund. This Agreement has been executed by Officers of the Fund as
officers, and not individually, and the obligations contained herein are not
binding upon any of the Trustees, Officers, agents or holders of shares,
personally, but bind only the Fund.
D. Provisions of the Prospectus and any other documents (including
advertising material) specifically mentioning the Custodian (other than merely
by name and address) shall be reviewed with the Custodian by the Fund prior to
publication and/or dissemination or distribution, and shall be subject to the
consent of the Custodian.
E. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at Star
Bank Center, 425 Walnut Street, M. L. 6118, Cincinnati, Ohio 45202, attention
Mutual Fund Custody Department, or at such other place as the Custodian may
from time to time designate in writing.
F. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given when
delivered to the Fund or on the second business day following the time such
notice is deposited in the U.S. mail postage prepaid and addressed to the Fund
at its office at __________________________________ or at such other place as
the Fund may from time to time designate in writing.
G. This Agreement, with the exception of the Appendices, may not be
amended or modified in any manner except by a written agreement executed by
both parties with the same formality as this Agreement, and authorized and
approved by a resolution of the Board of Trustees of the Fund.
H. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund or by the Custodian, and no
attempted assignment by the Fund or the Custodian shall be effective without
the written consent of the other party hereto.
I. This Agreement shall be construed in accordance with the
laws of the State of Ohio.
J. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original,
but such counterparts shall, together, constitute only one
instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized as of the day
and year first above written.
ATTEST: ABC Company
By:_________________________
Title:
ATTEST: Star Bank, N.A.
By:__________________________
Title:
<PAGE>
APPENDIX A
Authorized Persons Specimen Signatures
Chairman:
President:
Secretary:
Treasurer:
Controller:
Adviser Employees:
Transfer Agent/Fund Accountant
Employees:
<PAGE>
APPENDIX B
The following agents are employed currently by Star Bank, N.A.
for securities processing and control . . .
The Depository Trust Company (New York)
7 Hanover Square
New York, NY 10004
The Federal Reserve Bank
Cincinnati and Cleveland Branches
Bankers Trust Company
16 Wall Street
New York, NY 10005
(For Foreign Securities and certain non-DTC eligible
Securities)
<PAGE>
APPENDIX C
Standards of Service Guide
<PAGE>
APPENDIX D
Schedule of Compensation
BATTLE FOWLER LLP
A LIMITED LIABILITY PARTNERSHIP
75 East 55th Street
New York, New York 10022
(212) 856-7000
WRITER'S DIRECT DIAL NUMBER
(212) 856-7053
WRITER'S DIRECT FACSIMILE NUMBER
(212) 856-7816
August 2, 1996
Daruma Mid-Cap Value Fund
A series of The Daruma Funds, Inc.
237 Park Avenue
New York, New York 10017
Gentlemen:
We have acted as counsel to Daruma Mid-Cap Value Fund, a
series of The Daruma Funds, Inc., a Maryland corporation (the "Fund"), in
connection with the preparation and filing of Registration Statement No.
333-03709 on Form N-1A and all amendments thereto (the "Registration
Statement") covering shares of Common Stock, par value $.001 per share, of the
Fund.
We have examined copies of the Articles of Incorporation and
By-Laws of the Fund, the Registration Statement, and such other corporate
records, proceedings and documents, including the consent of the Board of
Directors and the minutes of the meeting of the Board of Directors of the Fund,
as we have deemed necessary for the purpose of this opinion. In our examination
of such material, we have assumed the genuineness of all signatures and the
conformity to original documents of all copies submitted to us. As to various
questions of fact material to such opinion, we have relied upon statements and
certificates of officers and representatives of the Fund and others.
We are not admitted to the practice of law in any
jurisdiction but the State of New York and we do not express any opinion as to
the laws of other states or jurisdictions except as to matters of Federal law
and, with respect to the limited scope of this opinion, Maryland corporate law.
388971.1
<PAGE>
2
Daruma Mid-Cap Value Fund August 2, 1996
Based upon and subject to the foregoing, we are of the
opinion that the shares of Common Stock, par value $.001 per share, of the
Fund, to be issued in accordance with the terms of the offering, as set forth
in the Prospectus and Statement of Additional Information included as part of
the Registration Statement, and when issued and paid for, will constitute
validly authorized and legally issued shares of Common Stock, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the reference to us in
the Registration Statement under the heading in the Prospectus and
in the Statement of Information: "Counsel and Independent Auditors".
Very truly yours,
Battle Fowler LLP
388971.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Custodian and
Independent Auditors" and to the use of our report dated July 25, 1996, in this
Registration Statement (Form N-1A No. 333-03709) of The Daruma Funds, Inc.
ERNST & YOUNG LLP
New York, New York
July 25, 1996
389974.1
