THE DARUMA FUNDS, INC.
237 Park Avenue, Suite 801
New York, NY 10017
(212) 808-2424
July 31, 1997
Securities and Exchange Commission
450 Fifth Street, NW
Washington DC 20549
VIA EDGAR TRANSMISSION
Re: The Daruma Funds, Inc.
Proxy Statement for Special Meeting of Shareholders September 1997
Reg. No. 333-03709
ICA No. 811-07621
Gentlemen:
Pursuant to Rule 14a-6 of the Securities and Exchange Act of 1934 and Rule 20a-1
under the Investment Company Act of 1940, I transmit for filing a preliminary
proxy statement and form of proxy in the form furnished to security holders.
The purpose of the Special Meeting of Shareholders of the Fund is (i) to approve
or disapprove a new Advisory Agreement; (ii) to elect five directors of the
Fund;
(iii) to ratify or reject the selection of Ernst & Young LLP as independent
accountants of the Fund for its fiscal year end June 30, 1998; (iv) to approve
an amendment to the Fund's fundamental investment polices to permit the Fund to
invest in the securities of other investment companies; and (v) to transact such
other business as may properly come before the meeting.
Consideration of a new Advisory Agreement is necessitated by reason of a change
to the ownership of CastleRock Capital Management, Inc. (the "Advisor"). This
change is being treated, for purposes of the Investment Company Act of 1940, as
amended (the "1940 Act"), as a change of control of the Advisor. Under the 1940
Act, such a change of control constitutes an "assignment" (as defined in the
1940 Act) of the Advisory Agreement between the Advisor and the Corporation,
on behalf of each Portfolio of the Fund.
The materials will be sent to shareholders on or about August 15, 1997.
Very truly yours,
/s/Mary B. O'Byrne
Secretary
cc: Thomas R. Westle, Battle Fowler LLP
<PAGE>
THE DARUMA FUNDS, INC.
NOTICE OF SPECIAL MEETING TO SHAREHOLDERS
To the Shareholders of
The Daruma Funds, Inc.
Daruma Mid-Cap Value Fund
NOTICE IS HEREBY GIVEN that a Special Meeting of
Shareholders of the The Daruma Funds, Inc. (the "Corporation")
will be held at the offices of the Corporation at 237 Park Avenue,
Suite 801, New York, NY 10017 on September 2, 1997 at 10:00 am (E.T.)
for the following purposes:
1.To elect a board of five directors of the Corporation, each to
hold office until his or her successor is duly elected and qualified.
2.To approve or disapprove a new Advisory Agreement (the "Contract")
to be effective immediately based upon a new Shareholder Agreement
among the shareholders of CastleRock Capital Management, Inc.
(the "Advisor"). Such Contract will be identicial in all material
respects to the Advisory Agreement in effect for the Corporation prior
to signing of the new Shareholder Agreement.
3.To ratify or reject the selection of Ernst & Young LLP as independent
accountants of the Corporation for its fiscal year ending June 30, 1998.
4.To approve an amendment to the Corporation's fundamental investment
policies to permit the Corporation to invest in the securities of other
investment companies.
5.To transact any other business as may come before the meeting or any
adjournment thereof.
Only shareholders of record at the close of business on July 24,
1997 are entitled to notice of, and to vote at, the meeting.
By Order of the Board of Directors
Mary B. O'Byrne, Secretary
July 31, 1997
Your vote is important no matter how many shares you owned on the record date.
Please indicate your voting instructions on the enclosed proxy ballot,
date and sign it and return it in the enclosed envelope, which is addressed
for your convenience and requires no postage is mailed in the United States.
To save the Corporation the expense of additional proxy solicitation, we ask
for your cooperation in mailing your proxy promptly.
<PAGE>
SPECIAL MEETING OF SHAREHOLDERS
OF
THE DARUMA FUNDS, INC.
237 Park Avenue, Suite 801
New York, NY 10017
PROXY STATEMENT
Accompanying this Proxy Statement is a Notice of Special Meeting of
Shareholders and a form of Proxy for the meeting solicited on behalf of the
Board of Directors of The Daruma Funds, Inc. (the "Corporation"). Supplemental
solicitations may be made by mail, telephone, or personal interviews by officers
and representatives of the Corporation. The expenses in connection with
preparing and mailing this statement and the material accompanying it,
and of such supplemental solicitations, will be borne by the Corporation.
This Proxy Statement and the accompanying Proxy are first being sent to
shareholders on or about August15, 1997. The Daruma Mid-Cap Value Fund's
annual report dated June 30, 1997 is available upon request.
The outstanding voting stock of the Corporation as of the close of
business on July 24, 1997 consisted of 115,828.500 shares of capital stock
of the Daruma Mid-Cap Value Fund (the "Fund"). The shareholders entitled to
vote are those of record on that date. Each share is entitled to one vote
on each item of business at the meeting. The Proxy may be revoked at any
time before it is exercised by written instructions to the Corporation or
by filing a new Proxy with a later date, and any shareholder attending the
meeting may vote in person, whether or not he or she has previously filed
a Proxy. The shares represented by all properly executed proxies received
in time for the meeting will be voted. Where a shareholder has specified
a choice on the Proxy with respect to Proposals 1, 2, 3 or 4 in the Notice
of Special Meeting, his or her shares will be voted accordingly. If no
directions are given, the shareholder's shares will be voted in favor of
these Prospoals. Unless authority to vote for all nominees or for an
individual nominee pursuant to Proposal 2 is specifically withheld,
the Proxy will be voted for the election of the persons nominated by
the Board of Directors to become directors.
One third of the outstanding shares of the Fund, represented in person
or by proxy, shall be required to constitute a quorum at the meeting, although
more than one third of the outstanding shares may be required to be present to
approve a particular issue. If a quorum is not present at the meeting, or if
a quorum is present but sufficient votes to approve any of the proposals are
not received, the persons named as proxies may propose one or more adjournments
of the meeting to permit futher solicitation of proxies. In determing whether
to adjourn the meeting, the following factors may be considered: the nature of
the proposals that are the subject of the meeting, the percentage of votes
actually cast, the percentage of negative votes actually cast, the nature
of any further solicitation and the information to be provided to shareholders
with respect to the reasons for the solicitation. Any adjournment will require
the affirmative vote of a majority of those shares represented at the meeting
in person or by proxy.
<PAGE>
A shareholder vote may be taken on one or more of the proposals in this proxy
statement prior to any adjournment if sufficient votes
have been received for approval. Any signed proxy will be voted in favor of
the proposals unless a choice is indicated to vote against or to abstain from
voting on that proposal. An abstention on any proposal will have the same legal
effect as a vote against such proposal.
The following persons were known to the Fund to be beneficial owners or
owners of record of 5% or more of its outstanding shares of Capital Stock as of
the record date:
<TABLE>
Name and Address of Owner Amount and Nature of Ownership % of Class
<S> <C> <C>
William F. & Donald Gratz TTEEs 23,455 shares -- Record 20.25%
Treitel-Gratz Co. Inc. Pft. Shs. Tr
u/a dtd 1/1/83
13-01 Queens Plaza South
Long Island City, NY 11101
Anthony D'Ottavio 15,997 shares -- Record 13.81%
47 East Maple Street
Dallastown, PA 17313
John W. Baackes 10,431 shares -- Record 9.01%
Capital Area Community Health Plan 403(B)
15 Pateman Circle
Menands, NY 12204
Alec J. Wilkinson TTEE 9,287 shares -- Record 8.02%
A.J. Wilkinson Profit Sharing Plan
310 West End Avenue, #5A
New York, NY 10023
Mariko O. Gordon 6,990 shares -- Record 6.04%
410 West End Avenue
New York, NY 10024
Janis Burenga, IRA 5,800 shares -- Record 5.01%
4 Sanford Road
Stockton, NJ 08559
</TABLE>
PROPOSAL 1. ELECTION OF DIRECTORS
At the meeting, it is proposed to elect five directors, each director to
hold office until the next Annual Meeting of Shareholders and until his or her
successor shall have been elected or qualifies. The Fund's Board of Directors
has nominated the following five persons, each of whom has served as a director
since the Corporation's inception in 1996, to become directors of the Fund.
Certain information concerning them is set forth below. Each of these persons
has agreed to serve if elected, and the Fund's management has no reason to
believe
that any of them will be unavailable for election as a director. However, if
any of them become unwilling or unable to serve, the persons named in the
accompanying form of Proxy will vote for the election of such other persons,
if any, as the Board of Directors may nominate.
<PAGE>
<TABLE>
Position with
Name, Age and Address The Fund Business Experience
<S> <C> <C>
*Mariko O. Gordon, 36 President & Director President, Chief Investment
410 West End Ave. Officer and Director of
CastleRock
New York, NY 10024 Capital Management, Inc., the
investment advisor to the Corporation.
Prior to forming CastleRock in 1995, she was an equity owner in and Director
of Research at Valenzuela Capital Management, Inc. ("VCM"). Prior to joining
VCM,from 1987 to 1990 she was the Director of Systematic Research at Quest
Advisory Corp.She started her investment career as a research analyst at
Manning & Napier Advisors, Inc. Ms. Gordon is a Chartered Financial Analyst.
*Noreen D. McKee, 47 Vice President, Treas. Vice President, Treasurer,
Director
and
& Director Chief Operating Officer of CastleRock.
Prior to joining CastleRock in 1995, she
was the Chief Operating Officer at
VCM. From 1985 to 1993, she was the
Controller of Quest Advisory Corp.
Ms. McKee is a CPA.
Fred F. Ali, 47 Director Executive director of Covenant House
California since February 1991.
Elizabeth A. Duffy, 31 Director 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 Vice President, Finance and Treasurer
of Colgate-Palmolive Company since
June 1986.
</TABLE>
*Interested persons as defined in the 1940 Act.
The Board of Directors has an Audit Committee, comprised of Fred F. Ali,
Elizabeth A. Duffy and Brian J. Heidtke, which is responsible for recommending
the selection and nomination of the independent auditors of the Fund and for
conducting post-audit reviews of the Fund's financial condition with the
auditors. The Audit Committee held a meeting on July 31, 1997, and each
member of the Audit Committee attended the meeting. The Board of Directors
also has a Nominating Committee.
<PAGE>
There are no family relationships between any of the Fund's directors
and its officers.
As of the record date, the Fund's directors beneficially owned
the following shares of its Capital Stock.
<TABLE>
Name of Director Amount Percentage
<S> <C> <C>
Mariko O. Gordon 6,990.260 6.04%
Noreen D. McKee 5,718.388 4.94%
Fred Ali 758.725 0.66%
Elizabeth A. Duffy 610.461 0.53%
Brian J. Heidtke 2,297.794 1.98%
</TABLE>
As of July 24, 1997, the officers and directors of the Fund,
collectively, beneficially owned, directly or indirectly (including
the power to vote or to dispose of any shares), 18,752.118 (16.19%)
of the shares of the total outstanding shares of the Fund.
No director of of the Corporation received remuneration for
services as a director for the year ended June 30, 1997.
The Board of Directors recommends a vote FOR all nominees.
PROPOSAL 2. APPROVAL OR DISAPPROVAL OF A NEW ADVISORY AGREEMENT
The Directors of the Corporation unanimously recommend that
the shareholders of the Corporation vote to approve a new Advisory
Agreement (the "Advisory Agreement") between the Corporation and
CastleRock Capital Management, Inc. (the "Advisor"), on behalf of
the Daruma Mid-Cap Value Fund (the "Fund"), to be effective
immediately. Your consideration of the Advisory Agreement is
necessitated by reason of a change in the ownership of the
Advisor. The proposed new Advisory Agreement will be identical
in all material aspects to the Advisory Agreement in effect
immediately prior to the change in ownership, except for the
dates of execution and termination. The Investment Company
Act of 1940 (the "1940 Act") provides that such a change of
ownership constitues an "assignment" of the Advisory Agreement
under which the Advisor provides advisory services to the
Corporation. The 1940 Act further provides that such an
"assignment" results in the automatic termination of the
Agreement, at the time of the change in ownership.
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.
<PAGE>
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. CastleRock had assets under
management of approximately $50,000,000 at June 30, 1997.
Ms. Gordon's ownership in CastleRock has increased from 51%
to 54%. There are four new shareholders in CastleRock; Noreen D.
McKee, Vice President & Chief Operating Officer owns 31%; Mary B.
O'Byrne, Vice President & Secretary owns 5% and two shareholders,
Andrew J. Knuth and Ronald H. Oliver each have ownership of 5%.
Ms. Gordon, Ms.McKee and Ms. O'Byrne are all employee-owners.
Messrs. Knuth and Oliver are outside shareholders who are
principals in Westport Asset Management, an institutional
money management firm.
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.
<PAGE>
Adviser's Fees
Pursuant to the terms of the Advisory Agreement, the Fund will pay a monthly
advisory fee equal to 1% of the first $100 million of the Fund's average daily
net assets; 0.75% of the next $100 million of such net assets; and 0.50% of the
Fund's average daily net assets over $200 million. This fee is higher than the
fee paid by most other mutual funds; however, the Board of Directors
believes that this fee is reasonable in light of the advisory services
performed by CastleRock for the Fund. Any portion of the advisory fees
received by CastleRock may be used by CastleRock to provide investor and
administrative services and for distribution of Fund shares. CastleRock
may voluntarily waive a portion or all of its fee or assume certain
expenses of the Fund. This would have the effect of lowering the overall
expense ratio of the Fund and of increasing yield to investors. See "Expense
Limitations" below.
Expense Limitations
CastleRock has agreed to reimburse the Fund for its expenses (exclusive
of interest, taxes, brokerage, and extraordinary expenses) which in any year
exceed 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 directors's fees, of any directors,
officers or employees who are not also officers of CastleRock
or its affiliates and costs of other personnel providing
administrative and clerical services; costs of stockholders'
services and costs of stockholders reports, proxy solicitations
and corporate meetings, fees and expenses or registering
its shares under the appropriate Federal securities laws
and of qualifying its shares under applicable state securities
laws, including expenses attendant upon the initial qualification
of these shares and attendant upon renewals of, or amendments to,
those 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.
For the period August 16, 1996 through June 30, 1997,
the Fund incurred $8,090 in fees which were voluntarily waived
by CastleRock.
<PAGE>
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.
The Directors recommend a vote FOR Proposal 2.
PROPOSAL 3. RATIFICATION OR REJECTION OF SELECTION OF
INDEPENDENT ACCOUNTANTS
The Board of Directors recommends that the shareholders ratify
the selection of Ernst & Young LLP, independent public accountants, to
audit the accounts of the Corporation for the fiscal year ending June
30, 1998. Ernst & Young LLP have audited the accounts of the
Corporation since its inception and do not have any direct
financial interest or any material indirect financial interest
in the Corporation.
A representative of Ernst & Young LLP is not expected to be
present at the shareholder's meeting. If the shareholders do not
ratify the Board's recommendation, the Board will submit another
proposal to the shareholders with a recommendation for independent
public accountants. The ratification of selection of Independent
Accountants requires the approval of a majority present at the meet
ing in person or by proxy.
The Board of Directors recommends a vote FOR proposal 3.
PROPOSAL 4. APPROVAL OF AMENDMENT TO FUNDAMENTAL
POLICIES TO PERMIT THE FUND TO INVEST IN THE SECURITIES
OF OTHER INVESTMENT COMPANIES.
The Corporation is currently prohibited from investing in the
securities of other investment companies, except (i) the Corporation
may purchase unit investment trust securities where such unit investment
trusts meet the investment objective of the Fund and then only up to 5%
of the Fund's total assets, except as they may be acquired as part of a
merger, consolidation or acquisition of assets and (ii) as permitted by
Section 12(d) of the Act. If adopted, investment restriction number 10
in the Fund's statement of additional information will be changed to read
in its entirety;
"The Fund may invest up to 25% of the value of its total assets in the
securities of other investment comapnies (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."
<PAGE>
The purpose of allowing the Corporation to invest in the
securities of other investment companies is to allow the cash
reserves of the Corporation to be invested in money funds from
time to time.
The Board of Directors recommends a vote FOR Proposal 4.
PROPOSAL 5. OTHER BUSINESS
As a Maryland corporation, the Corporation is not required,
and does not intend to hold regular annual meetings. Shareholders
who wish to present proposals at any future shareholder meeting
must present such proposals to the Board at a reasonable time
prior to the solicitation of any shareholder proxy.
Management knows of no other business to be brought before
the meeting other than Proposals 1, 2, 3 and 4 in the Notice of the
Special Meeting. If other matters do come before the meeting, it
is intended that the shares represented by Proxies will be voted
in accordance with the judgement of the person or persons exercising
at the meeting the authority conferred by the Proxies.
ADDITIONAL INFORMATION
CastleRock Capital Management, Inc. the Corporation's
investment adviser, is located at 237 Park Avenue, Suite 801,
New York, NY 10017.
PLEASE FILL IN, DATE AND SIGN THE PROXY AND RETURN IT
IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE.
PROXY
The Daruma Funds, Inc.
Daruma Mid-Cap Value Fund
September 2, 1997 at 10:00 am
1. Directors recommend a vote for election of the following:
[ ] FOR ALL NOMINEES [ ] WITHHOLD ALL NOMINEES
01 - Fred Ali [ ] WITHOLD AUTHORITY TO
02 - Elizabeth A. Duffy VOTE FOR ANY INDIVIDUAL
03 - Mariko O. Gordon WRITE NUMBER(S) OF
04 - Brian J. Heidtke NOMINEE(S) BELOW:
05 - Noreen D. McKee
Directors
Proposals Recommend For Against Abstain
2.To approve a new Investment Advisory Agreement FOR ( ( (
3. Ratificiation of the selection by the Board of FOR ( ( (
Directors of Ernst & Young LLP as
independent accountants of the Corporation
for the year ending June 30, 1998.
4. To adopt an amendment to the Corporation's FOR ( ( (
fundamental investment restrictions to permit the
Corporation to invest in the securities of other
investment companies up to 25% of the Fund's total assets.
Note: Such other business as may properly come
before the Meeting or any Adjournment thereof.
Please indicate your prosposal selections by placing an "X" in the appropriate
box. If held jointly both owners must sign below.
SIGNATURE DATE
SIGNATURE DATE
10
