THE DARUMA FUNDS, INC.
237 Park Avenue, Suite 801
New York, NY 10017
tel:(212) 808-2424
fax:(212) 808-2480
October 23, 1997
VIA EDGAR TRANSMISSION
Securities and Exchange Commission
450 Fifth Street, NW
Washington DC 20549
Re: Daruma Mid-Cap Value Fund, a series of
The Daruma Funds, Inc. (the "Fund")
Registration No. 333-03709
ICA No. 811-07621
Gentlemen:
Transmitted herewith for filing is Post-Effective Amendment No.3 to Registration
Statement No. 333-03709 on Form N-1A, including exhibits, under the Securities
Act of 1933 and the Investment Company Act of 1940.
This Post-Effective Amendment is being filed solely because of a change in the
ownership of the Fund's advisor which caused a technical assignment and
termination of the advisory contract. There have been no material changes
to the prospectus or Statement of Additional Informtion since the last filing.
Please do not hesitate to contact me at (212) 808-2424 with any questions or
comments you may have regarding this letter.
Very truly yours,
/s/Mary B. O'Byrne
Secretary
/mo'b
Enclosures
cc: Thomas R. Westle, Battle Fowler LLP
<PAGE>
As filed with the Securities and Exchange Commission on October 23, 1997
Registration No. 333-03709
ICA No. 811-07621
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 2054
9FORM N-1AREGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Post-Effective Amendment No. 3 [X]and/orREGISTRATION
STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ] Post-Effective
Amendment No. 3 [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
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
(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
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)
[X] 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 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
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..............Financial Statements
PART C - OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
Included in Prospectus:
(1) Fund Expenses
(2) Financial Highlights
Included in Part C:
* (1) Annual Report to Shareholders dated June 30, 1997
EHIBITS
** (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) 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.
(10.1) Consent of Messrs. Battle Fowler LLP.
(11) Consent of Ernst & Young, LLP, Independent Auditors.
* Incorporated herein by reference from the Annual Report to Shareholders
dated June 30, 1997, filed with the SEC on September 4, 1997.
** Filed as an exhibit to the Registrant's Registration Statement, 333-03709,
filed on May 14, 1996 and incorporated herein by reference.
*** Filed as an exhibit to the Pre-Effective Amendment No. 1 to the
Registration Statement, 333-03709, filed on August 2, 1996 and
incorporated herein by referece.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15) Not Applicable.
(16) Not Applicable.
(17) Not Applicable.
(18) Not Applicable.
(19) Not Applicable
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 September 30, 1997
Common Stock 75
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 limitor 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.
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 Hauppage, 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) 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.
(b) 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).
DARUMA MID-CAP VALUE FUND
237 Park Avenue
Suite 801
New York, NY 10017
(800) 435-5076
December 22, 1997
The Daruma Mid-Cap Value Fund (the "Fund") is a series of The Daruma Funds,
Inc. (the "Company"), a no-load diversified, open-end management investment
company incorporated in the State of Maryland. The Fund's objective is
to seek long-term capital appreciation by investing primarily (at least 65%
of its total assets) in the common stocks of medium capitalization companies.
Current income is incidental to the Fund's investment objective. The Fund
seeks to provide investors an opportunity to participate in the long-term
growth of the economy through the investment returns offered by the
common stocks of companies which are undervalued and whose earnings
growth prospects are improving. The Fund is designed for long-term investors
who can accept stock market risk as well as the more volatile returns of
mid-cap stocks vs. "blue chip" stocks. There can be no assurance that the
Fund's investment objective will be met.
Investment Adviser - CastleRock Capital Management, Inc.
The Fund is offered on a no-load basis and there are no sales commissions,
exchange, redemption or 12b-1 fees. The Fund's minimum initial investment
is $1,000 and the minimum subsequent investment is $100. The minimum
initial purchase requirement for retirement and UGMA (Uniform Gifts to
Minors Act) accounts as well as accounts established with automatic
investment plans is $500.
This Prospectus concisely sets forth information about the Fund a prospective
investor should know before investing. It should be read and retained for
future reference.
The Statement of Additional Information, dated December 22, 1997, 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.
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 8 and "Redemption of Shares" on page 10 of this Prospectus.
Minimum Investment
The Fund's minimum initial investment is $1,000 and subsequent investments are
$100. For retirement and UGMA (Uniform Gifts to Minors Act) accounts and
accounts established with automatic investment plans, the minimum initial
requirement is $500.
FUND TABLE OF CONTENTS
Page Page
Fund Expenses SHAREHOLDER GUIDE
Financial Highlights Purchase of Shares
Investment Objective Choosing a Distribution Option
Investment Policies Redemption of Shares
Investment Risks
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
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees (after waivers)* 0.00%
Other Expenses (after expense reimbursements)** 1.49%
Total Fund Operating Expenses (after expense fee waivers
and expense reimbursements)*** 1.49%
The above table is designed to assist you in understanding the various costs and
expenses that a shareholder would bear directly or indirectly as an investor in
this Fund. The management fee will decline as the Fund's assets increase. See
"Management of the Fund". The Fund's investment adviser, CastleRock Capital
Management, Inc. ('CastleRock"), is committed to keeping the total expenses of
the Fund at or below 1.50% and intends to waive all management fees and
assume other expenses, if necessary, to maintain that expense ratio.
*Management fees would be 1.00% before taking into account fee waivers.
**Exstimated other expenses would be 4.10% before taking into account
reimbursement of expenses.***Estimated total Fund Operating Expenses would
be 5.10% before waiver of fees and reimbursement of expenses by the adviser.
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 $49
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.
Financial Highlights
The following financial highlights are part of the Fund's financial statements
andhave been audited by Ernst & Young LLP, Independent Auditors. The Fund's
financialstatements and Ernst & Young LLP's reports on them are included in
the Fund's AnnualReport to Shareholders and are incorporated by reference
into the Statement of AdditionalInformation and this Prospectus. Futher
information about the Fund's performance is contained elsewhere in this
Prospectus and in the Fund's Annual Report to Shareholders for the period
ended June 30, 1997.
<TABLE>
<C>
For the period
8/16/96
through
6/30/97
<C>
Net Asset Value, Beginning of Period 10.00
Income from Investment Operations:
Net investment loss (0.07)
Net realized and unrealized gain on investments 2.98
Total from Investment Operations 2.91
Less Distributions:
Distributions from net realized gains (0.01)
Total Distributions (0.01)
Net Asset Value, End of Period $12.90
Total Investment Return 29% (c)
Ratios/Supplemental Data:
Net Assets, End of Period (a) $1,459,161
Ratio of Expenses to Average Net Assets(b) 1.49% (c)
Ratio of Net Investment Loss to Average Net Assets (b) (0.60%) (c)
Portfolio Turnover Rate 46%
Average Commission Rate (d) $0.04
</TABLE>
(a) The ratio of expenses to average ent assets before waiver of fees and
reimbursement of expenses by the investment adviser would have been
5.10% for the period ended June 30,1997.
(b) the ratio of net investment losss to average net assets before the waiver
of fees and reimbursements of expenses by the investment adviser would
have been (4.21%) for the period ended June 30, 1997.
(c) Not annualzied.
(d) The Fund is required to disclose its average commission rate paid per
share for purchases and sales of investment securities.
Investment Objective
The Fund's investment objective is to seek long-term capital appreciation
by investing, under normal circumstances, at least 65% of its total assets
in the common stocks of medium capitalization companies (companies
with market capitalization ranging from $500 million to $7 billion,
including common stocks of companies listed on the S&P MidCap
Index. Current income is incidental to the Fund's investment objective.
There can be no assurance that the Fund's investment objective will be met.
The Fund attempts to achieve its investment objective by investing primarily
in common stocks.
Investment Policies
CastleRock believes that original research drives performance. CastleRock,
on behalf of its clients, invests in companies that it believes are about to
undergo significant positive changes in earnings growth, and whose valuations
do not yet reflect such changes. CastleRock attempts to identify those
mid-cap companies who meet these investment criteria by conducting its own
thorough and original research.
The Fund will normally consist of a portfolio of approximately 35 securities
considered by CastleRock to be the companies with the most compelling
risk/reward profiles. CastleRock believes that by investing in a portfolio
of approximately 35 companies, the Fund will be able to diversify its
holdings and avoid certain of the risks associated with an investment in
mid-cap companies. Although the Fund will invest, under normal
circumstances, at least 65% of its total assets in the common stocks
of medium capitalization companies, it may also invest in other types
of securities such as nonconvertible and convertible preferred stocks,
bonds and warrants, foreign securities (ADRs), short-term fixed income
securities, and cash equivalents, when the investment in such securities
is considered consistent with the Fund's investment objective by CastleRock.
The Fund will only invest in investment grade bonds and short-term fixed
income securities having an S&P rating of at least, or equivalent to, BBB
(which rating may have speculative characteristics) or, if unrated, determined
by CastleRock to be of comparable quality. Securities in the lowest investment
grade debt category generally have higher yields, may have speculative
characteristics and, as a result, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher investment
grade securities.
Additional Investment Policies
Borrowing The Fund, may from time to time , borrow money
from banks for temporary, and/or extraordinary purposes.
The Fund does not intend to engage in reverse repurchase
agreements. Such borrowing will not exceed an amount
equal to one-third of the value of the Fund's total assets
less its liabilities. The Fund will not purchase additional
securities when borrowings exceed 5% of total assets.
Illiquid Securities The Fund may invest up to 15% of its net assets in
illiquid securities, including restricted securities (i.e.,
securities not readily marketable). Any illiquid securities
purchased by the Fund will have been registered under the
Securities Act of 1933. The Fund may purchase restricted
securities that may be offered and sold only to "qualified
institutional buyers" under Rule 144A of the Securities
Act of 1933, and the Fund's Board of Directors may
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 repurchase
Agreements 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 assets in
Securities foreign debt and/or equity securities, or ADRs. Foreign
securities investments involve certain risks, such as political
or economic instability of the issuer or of the country
of issue, fluctuating exchange rates and the possibility of
imposition of exchange controls. These securities may also
be subject to greater fluctuations in price than the securities
of U.S. corporations, and there may be less publicly available
information about their operations. Foreign companies may
not be subject to accounting standards or governmental
supervision comparable to U.S. companies, and foreign
markets may be less liquid or more volatile than U.S.
markets and may offer less protection to investors such
as the Fund. In addition, dividends and interest paid
by foreign issuers may be subject to withholding and
other foreign taxes, and transaction costs such as
brokerage commissions are generally higher than in the
United States.
Short Sales The Fund will only make short sales that are short sales of
securities "against the box". A short sale "against the box"
is a sale of a security that the Fund either owns an equal
amount of or has the immediate and unconditional right
to acquire at no additional cost. The Fund will make
short sales "against the box" as a form of hedging to
offset potential declines in long positions in the same
or similar securities. See "Selling Short Against
the Box" in the Statement of Additional Information.
Portfolio The Fund's portfolio turnover rate will be influenced by the
Turnover 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 numberof securities, it may be more
susceptible to any single, corporate, economic, political or regulatory
occurrence than a more widely diversified fund.
INVESTMENT RESTRICTIONS
As a diversified investment company the Fund has adopted certain fundamental
restrictions which may not be changed without the approval of a majority of
the outstanding voting shares, as that term is defined in the Investment
Company Act of 1940. These restrictions are provided in greater detail in
the Statement of Additional Information and provide, in part, that the Fund
will not:
(a) with respect to 75% of its total assets, invest more than 5% of its assets
in the securities of any one issuer, excluding obligations of the U.S.
Government;
(b) own more than 10% of the outstanding voting securities of any one issuer,;
(c) invest more than 25% of its total assets in any one industry except U.S.
Government obligations; or
(d) invest in companies for the purpose of exercising control of management.
In addition to the aforementioned investment restrictions, and in addition to
other restrictions listed in the Statement of Additional Information, the Fund
may not (except where specified):
(i) purchase securities on margin or borrow money, except from banks for
temporary and/or extraordinary purposes;
(ii) mortgage, pledge or hypothecate any assets except that the Fund may
pledge not more than one-third of its total assets to secure borrowings made
in accordance with paragraph (i) above. However, although not a fundamental
policy of the Fund, as a matter of operating policy in order to comply with
certain state statutes, the Fund will not pledge its assets in excess of an
amount equal to 15% of total assets;
(iii) lend portfolio securities of value exceeding in the aggregate one third
ofthe market value of the Fund's total assets less liabilities other than
obligations created by these transactions; or
(iv) make loans to others, except through the purchase of portfolio
investments, including repurchase agreements.
MANAGEMENT OF THE FUND
Adviser
CastleRock Capital Management, Inc., a registered investment adviser, is a
New York corporation with its principal office located at 237 Park Avenue,
Suite 801, New York, New York 10017. CastleRock has been retained by the
Board of Directors as the investment adviser for the Fund pursuant to an
Investment Advisory Agreement entered into with the Fund. Mariko O. Gordon,
President and Chief Investment Officer of CastleRock, is primarily
responsible for supervising the Fund's daily investment management
activities. CastleRock had assets under management of approximately
$52,000,000 at July 31, 1997.
CastleRock, however, has not managed the assets of a mutual fund prior to
the Fund. Ms. Gordon has over ten years experience in the investment
management business. Prior to co-founding CastleRock in 1995, Ms. Gordon
was an equity owner in and Director of Research at Valenzuela Capital
Management, Inc. ("VCM") from 1990 to 1995, a firm specializing in small
to mid-cap stocks with over $1 billion under management. Ms. Gordon's
sole responsibility at VCM was portfolio management. Prior to joining VCM,
from 1987 to 1990, she was the Director of Systematic Research at Royce &
Associates, Inc., 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 Application Form and mailing it to the Fund at the address
noted below, together with a check (subject to the Fund's minimum investment)
payable to:
U.S. Mail: Daruma Mid-Cap Value Fund
or c/o American Data Services, Inc.
Overnight 150 Motor Parkway, Suite 109
Hauppauge, NY 11788
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 888-532-7862 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 American Data Services,
Inc. 105 Motor Parkway, Suite 109, Hauppauge, NY 11788 in order to complete
your initial wire purchase. Wire orders will be accepted only on a day
which the Fund and the Custodian and Transfer Agent are open for business.
A wire purchase will not be considered made until the wired money is
received and the purchase is accepted by the Fund. Any delays which may
occur in wiring money, including delays which may occur in processing by
the banks, are not the responsibility of the Fund or the Transfer Agent.
There is presently no fee for the receipt of wired funds, but
the right to charge shareholders for this service is reserved by the Fund.
Additional Investments
Additional investments may be made at any time subject to the Fund's minimum
subsequent investment of $100, by mailing a check to the Fund at the address
noted under "Initial Investments by Mail" (payable to Daruma Mid-Cap Value
Fund) or by wiring monies to the Custodian using the instructions outlined
above (Initial Investments by Wire).
Additional investments may also be made by Automatic Investment Plan which
allows you to make regular, automatic transfers ($50 minimum) from your bank
account to purchase shares in your Daruma Fund account on the monthly or
quarterly schedule you select. For more information on the Automatic
Investment Plan please call the Fund at 800-435-5076.
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
purchaseto be effective and dividends to be earned on the same day. If
funds are receivedafter 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
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,
150 Motor Parkway, Suite 109, Hauppauge, NY 11788.
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 organizataions.
If you are not certain of the requirements for a redemption, please call
Shareholder Services at (888) 532-7862. Redemptions specifying a certain
date or share price cannot be accepted and will be returned.
Signature Guarantees
To protect shareholder accounts, the Fund and its transfer agent from fraud,
signature guarantees are required to enable the Fund to verify the identity of
the person who has authorized a redemption from an account. Signature
guarantees are required for (1) redemptions where the proceeds are to be sent
to someone other than the registered shareholder(s) and the registered
address, and (2) share transfer requests. Signature guarantees may be
obtained from certain eligible financial institutions, including but not
limited to, the following: banks, trust companies, credit unions,
securities brokers and dealers, savings and loan associations and
participants in the Securities Transfer Association
Medallion Program ("STAMP"), the Stock Exchange Medallion Program
("SEMP") or the New York Stock Exchange Medallion Signature Program
("MSP"). Shareholders may contact Shareholder Services at (888) 532-7862
for further details.
By Telephone
Shareholders, who have elected on their application form telephone redemption
privileges, may redeem by telephone provided the proceeds are mailed to their
address of record. To redeem shares by telephone, you or your preauthorized
representative may call shareholder services at (888) 532-7862. Redemption
requests received by telephone by 4:15 p.m. eastern time are processed on
the day of receipt; redemption requests received by telephone after 4:15
p.m. eastern time are processed on the business day following receipt.
TELEPHONE REDEMPTIONS WILL NOT BE PERMITTED FOR
A PERIOD OF SIXTY DAYS AFTER A CHANGE IN THE ADDRESS
OF RECORD. The Fund has authorized the Transfer Agent to act on telephone
instructions from any person representing himself or herself to be a
shareholder and reasonably believed by the Transfer Agent to be genuine.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated are genuine and, if it does not,
the Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent instructions. The procedures employed by the Fund
in connection with transactions initiated by telephone include tape recording
of telephone instructions
and requiring some form of personal identification prior to acting upon
instructions received by telephone. Neither the Fund nor the Transfer
Agent will be liable for following telephone instructions reasonably
believed to be genuine. The Fund reserves the right to revise or terminate
the telephone redemption privilege at any time. If you have trouble
making a telephone redemption during periods of drastic economic
or market changes, your redemption request may be made by regular
or express mail. It will be implemented at the net asset value next
determined after your request has been received by our transfer agent in Good
Order.
Further Redemption Information
Redemption proceeds for shares of the Fund recently purchased by check may
not be distributed until payment for the purchase has been collected, which may
take up to fifteen business days from the purchase date. Shareholders can
avoid this delay by utilizing the wire purchase option.
Other than as described above, payment of the redemption proceeds will be
made within five days after receipt of an order for a redemption. The Fund may
suspend the right of redemption or postpone the date at times when the NYSE
or the bond market is closed or under any emergency circumstances as
determined by the United States Securities and Exchange Commission (the "SEC").
If the Board of Directors determines that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make a payment wholly
or partly in cash, the Fund may pay the redemption proceeds in whole or in
part by a distribution in-kind of readily marketable securities held by the
Fund
in lieu of cash in conformity with applicable rules of the SEC. Investors
generally will incur brokerage charges on the sale of portfolio securities so
received in payment of redemptions.
DIVIDENDS AND DISTRUBITONS
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.
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
unlessthe investor has elected the all cash option.
2. All Cash Option. Both dividend and capital gains distributions will
be paid in cash.
TAXES
The Fund intends to qualify under the Internal Revenue Code of 1986,
as amended, as a regulated investment company. As a regulated investment
company, the Fund will not be subject to federal income taxes on the investment
company taxable income and long-term capital gains that it distributes to its
investors, provided that at least 90% of its investment company taxable income
for the taxable year is distributed. Shareholders will receive information
annually as to the tax status of distributions made by the Fund for the
calendar year. Distributions 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. The
Taxpayer Relief Act of 1997 ("Act") enacted in August 1997, dramatically
changes the taxation of net capital gains by applying different rates thereto
depending on the taxpayer's holding period and marginal rate of
federal income tax. The Act, however, does not address the
application of these rules to distributions by regulated investment
companies and instead authorizes the issuance of regulations to do so.
Accordingly, shareholders should consult their tax advisers as to the
effect of the Act on distributions by the Fund to them of net capital gains.
The redemption of shares is a taxable event, and a shareholder may
realize a capital gain or capital loss. The Fund will report to
redeeming shareholders the proceeds of the redemptions. However,
because the tax consequences of a redemption will also depend on
the shareholder's basis in the redeemed shares for tax purposes,
shareholders should retain their account statements for use in determining
their tax liability on a redemption.
At the time of the shareholder's purchase, the Fund's net asset value may
reflect undistributed income or capital gains. A subsequent
distribution of these amounts by the Fund will be taxable to the
shareholder even though the distribution economically is a return
of part of the shareholder's investment.
Keep in mind that if you purchase shares in the Fund shortly
before the record date for a dividend or capital gains distribution,
regardless of whether you are investing your distributions or receiving
them in cash, you will be assessed taxes on the amount of the capital
gain and/or dividend distribution later paid even though you owned
the Fund shares for just a short period of time. While the total value
of your investment will be the same after the distribution -- the amount
of the distribution will offset the drop in the net asset value of the
shares --
you should be aware of the tax implications the timing of your purchase
may have. Prospective investors should, therefore, inquire about potential
distributions before investing.
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
NYS E, 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 performance and are
not intended to indicate future performance. Total returns assume the
reinvestment of all dividends and capital gains distributions.
The Fund may compare its performance with performance rankings compiled by
independent organizations and publications that monitor the performance of
mutual funds (such as Lipper Analytical Services, Inc., Morningstar, Inc.,
or Barron's). Performance information may be quoted numerically or may be
presented in a table, graph or other illustration. In addition, Fund
performance may be compared to well-known indices of market performance
including the Standard & Poor's ("S&P") 500 Index, S&P MidCap Index and
the Russell 2000.
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in the State of Maryland on May 13, 1996,
and began operations on August 16, 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 Company's Board
of Directors is authorized to divide the unissued shares into separate
series of stock, each series representing a separate, additional investment
portfolio. The Board currently has authorized the division of the unissued
shares into one series. Shares of any series or class will have identical
voting rights, except where, by law, certain issues must be approved by
a majority of the shares of the affected series or class. Each share of
any series or class of shares when issued will have equal dividend,
distribution, liquidation and voting rights for which it will be issued
and each fractional share will have those rights in proportion to the
percentage that the fractional share represents of a whole share.
Shares will be voted in the aggregate. All shares, when issued
in accordance with the terms of the offering, will be fully paid
and non-assessable. Shares are redeemable at net asset value,
at the option of the investor. On July 24 , 1996, certain persons
purchased 10,189 shares of the Fund at an initial purchase price of $10.00
per share.
The shares of the Fund have non-cumulative voting rights, which means
that the holders of more than 50% of the shares outstanding voting for the
election of directors can elect 100% of the directors if the holders choose
to do so, and, in that event, the holders of the remaining shares will
not be able to elect any person or persons to the Board of Directors.
Unless specifically requested by an investor who is an investor
of record, the Fund does not issue certificates evidencing Fund shares.
Annual meetings of shareholders will not be held except as required
by the Investment Company Act of 1940 and other applicable law.
An annual meeting will be held to vote on the removal of a Director
or Directors of the Company if requested in writing by the holders
of shares entitled to cast not less than 10% of all the votes entitled
to be cast at such meeting. Special meetings may be called
for purposes such as electing and removing Directors,
changing fundamental investment policies or approving an
investment management contract. If a meeting is held and
you cannot attend, you can vote by proxy. Before the meeting,
the Fund will send you proxy materials that explain the issues
to be decided and include a voting card for you to mail back.
SHAREHOLDER INFORMATION
General information about the Fund may be requested in writing
to the shareholder servicing department of the Fund, 237 Park Avenue,
Suite 801, New York, New York 10017 or by calling the Fund at (212)
808-2424 or (800) 435-5076.
CUSTODIAN, TRANSFER AND DIVIDEND AGENT
Star Bank, N.A. of Cincinnati, Ohio, serves as custodian for the Fund's
cash and securities. The Custodian does not assist in, and is not responsible
for, investment decisions involving assets of the Fund. American Data Services,
Inc., Hauppauge, 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.
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 December 22, 1997 (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.
December 22, 1997
TABLE OF CONTENTS
PAGE
THE FUND 2
INVESTMENT OBJECTIVE, POLICES AND RESTRICTIONS 2
RISK FACTORS AND SPECIAL CONSIDERATIONS 4
MANAGEMENT OF THE FUND 8
INVESTMENT ADVISOR 11
PORTFOLIO TRANSACTIONS 13
PRICING OF SHARES 13
REDEMPTIONS IN KIND 14
TAXATION 14
DESCRIPTION OF THE FUND 16
PERFORMANCE DATA 17
CUSTODIAN AND TRANSFER AND DIVIDEND AGENT 21
COUNSEL AND INDEPENDENT ACCOUNTANTS 21
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.
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 more than 25% of the value of its total assets in the securities
of other investment companies (open or closed-end) and up to 5% of its total
assets in the securities of any one other investment company. All such
securities must be acquired by the Fund in the open market, in
transactions involving no commissions or discounts to a sponsor
or dealer (other than customary brokerage commissions). The issuers
of such securities acquired by the Fund are not required to redeem them
in an amount exceeding 1% of such issuers' total outstanding securities
during any period of less than 30 days, and the Fund will vote all proxies
with respect to such securities in the same proportion as the vote of all
other holders of such securities.
(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 dispositionof 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.
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.
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 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. Under recent tax legislation, short sales "against the
box" will generally require the Fund to treat such transactions
as constructive sales whereby the Fund will be required to treat
any appreciation on the underlying asset as a recognized gain.
This requirement may restrict the Fund's ability to defer
recognition of gains when entering into such transactions
and may require the Fund to make additional distributions to shareholders.
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:
<TABLE>
Compensation Table
(Estimated for the fiscal year ended June 30, 1997)
<C> Retirement Benefits
<C>Name of Person <C>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
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.
</TABLE>
*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")
Fred Ali, 47, Director of the Fund. Executive director of Covenant House
California since February 1991.
Elizabeth A. Duffy, 31, 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, 36, 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 Royce &
Associates, Inc., 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, 47, Vice-President and Treasurer 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, administrative and compliance
functions of the firm. From 1985 to 1993, she worked as
the Controller of Royce & Associates, Inc. ("Royce").
At Royce, 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, 37, 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 in 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.
PRINCIPAL HOLDERS OF SHARES
As of July 24, 1997, the following persons were known to the
Fund to be the beneficial owners of 5% or more of the outstanding
shares of the Fund:
<TABLE>
<C> Percentage of
<C>Name <C>Number of Shares Outstanding Shares
Wm. F. & Donald Gratz TTEE 23,455 20.25%
Treitel-Gratz Co. Inc. Pft. Sh. Tr.
U/A Dtd 1/1/83
13-01 Queens Plaza South
Long Island City, NY 11101
Anthony D'Ottavio 15,997 13.81%
47 East Maple St.
Dallastown, PA 17313
John W. Baackes 10,431 9.01%
Capital Area Community
Health Plan 403(B)
15 Pateman Circle
Menands, NY 12204
Alec J. Wilkinson TTEE 9,287 8.02%
A.J. Wilkinson Profit Sharing Plan
310 West End Avenue, #5A
New York, NY 10023
Mariko O. Gordon 6,990 6.04%
410 West End Avenue
Apt. 3E
New York, NY 10024
Janis Burenga IRA 5,800 5.01%
Star Bank NA Cust.
4 Sanford Rd.
Stockton, NJ 08559
</TABLE>
As of July 24, 1997, all of the directors and officers of the Fund,
collectively,
beneficially owned, directly or indirectly (including the power to vote or to
dispose of any shares), approximately 16.2% of the outstanding shares.
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 $52,000,000 at July 31, 1997.
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 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 31,
1999 and may be continued thereafter for successive twelve-month periods
beginning each July 31, 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. For the period ended June 30, 1997, the net advisory fee paid by the
Fund was $0 (after fee waivers of $8,090).
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 corporation; compensation, including
director'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.
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 net realized capital gains
after utilization of capital loss carryforwards, if any, are made annually to
meet applicable distribution and excise tax requirements.
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.
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.
Ordinary income distributions paid to shareholders who are non-resident
aliens orwhich 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 on May 13,
1996. The authorized capital stock of the Fund consists of one
billion shares of stock having a par value of $.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, 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.
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 bondsor 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 reinvestmen
of all distributions.
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
thecommon 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.
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 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 incommunications 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.
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 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.
<PAGE>
CONSENT OF MESSRS. BATTLE FOWLER LLP
We consent to the reference of our Firm in Post-Effective Amendment No. 3
to the Registration Statement on Form N-1A of The Daruma Funds, Inc. as filed
with the Securities and Exchange Commission on October 23, 1997.
BATTLE FOWLER LLP
New York, New York
October 21, 1997
<\PAGE>
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Counsel and Independent Auditors" in the
Statement of Additional Information" and to the use of our report dated August
13, 1997 in this Registration Statement (Form N-1A No. 333-03709) of The Daruma
Funds, Inc.
ERNST & YOUNG LLP
New York, New York
October 21, 1997
</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 Post-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 15th day of October, 1997.
THE DARUMA FUNDS, INC.
By: /s/ Mariko O. Gordon
Mariko O. Gordon, President
Pursuant to the requirements of the Securities Act of 1933, this Post-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
Principal Executive Officer:
By:/s/ Mariko O. Gordon President October 15, 1997
Mariko O. Gordon
Majority of Directors
By:/s/ Fred Ali Director October 15, 1997
Fred Ali
By:/s/ Elizabeth A. Duffy Director October 15, 1997
Elizabeth A. Duffy
By:/s/ Brian J. Heidtke Director October 15, 1997
Brian J. Heidtke
By:/s/ Mariko O. Gordon Director October 15, 1997
Mariko O. Gordon
By:/s/ Noreen McKee Director October 15, 1997
Noreen McKee
