<PAGE>
------------------------------
COMBINED PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION
------------------------------
RCM SMALL CAP FUND
Offered by:
RCM CAPITAL FUNDS, INC.
Four Embarcadero Center, Suite 3000
San Francisco, California 94111
(415) 954-5400
THIS COMBINED PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION RELATES TO RCM
SMALL CAP FUND, A SERIES OF RCM CAPITAL FUNDS, INC., SPECIALIZING IN EQUITY AND
EQUITY-RELATED SECURITIES OF SMALL CAPITALIZATION COMPANIES
-----------------------------
RCM SMALL CAP FUND (THE "FUND") is a diversified no-load series of RCM Capital
Funds, Inc. (the "Company"), an open-end management investment company. Shares
of the Fund may be purchased and redeemed at their net asset value without a
sales or redemption charge. (See HOW TO PURCHASE SHARES and REDEMPTION OF
SHARES.) THE COMPANY CURRENTLY OFFERS SHARES OF THE FUND SOLELY TO INSTITUTIONS
AND INDIVIDUALS ("CLIENTS") WHO HAVE ENTERED INTO AN INVESTMENT MANAGEMENT
AGREEMENT OR INVESTMENT ADVISORY AGREEMENT WITH THE FUND'S INVESTMENT MANAGER,
RCM CAPITAL MANAGEMENT (THE "INVESTMENT MANAGER"). THE COMPANY EXPECTS TO
CONTINUE THIS POLICY IN THE FUTURE. THE INVESTMENT MANAGER MAY FOR DISCRETIONARY
ACCOUNT CLIENTS BE AUTHORIZED TO DETERMINE THE AMOUNT AND TIMING OF PURCHASES
AND REDEMPTIONS OF SHARES OF THE FUND HELD BY SUCH CLIENTS, SUBJECT ONLY TO
GENERAL AUTHORIZATIONS AND GUIDELINES OF THOSE CLIENTS. (See INVESTMENT BY
EMPLOYEE BENEFIT PLANS.)
The Fund's investment objective is to seek appreciation of capital by investing,
during normal conditions, at least 80% of its assets in equity and equity-
related securities of small-sized concerns (common stocks or securities
convertible into common stocks). (See INVESTMENT OBJECTIVE AND POLICIES.) Such
investments will be chosen with regard to their potential for capital
appreciation. The Investment Manager will not take into consideration the tax
effect of long-term versus short-term capital gains loss recognition when making
investment decisions as it is anticipated that the majority of investors will be
tax-exempt institutions. Current income will be considered only as part of total
investment return and will not be emphasized. "Small-sized concerns" is defined
as encompassing companies whose equity securities have a total market
capitalization of up to $750 million at the time of purchase; however, under
normal market conditions, at least 65% of the Fund's assets will be invested in
equity and equity-related securities of companies whose equity securities have a
total market capitalization of up to $500 million at the time of purchase. There
can be no assurance the Fund will meet its investment objective.
This Combined Prospectus and Statement of Additional Information sets forth
concisely the information about the Fund that prospective investors should know
before investing. Investors should read this document and retain it for future
use.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS COMBINED PROSPECTUS AND STATEMENT OF ADDITIONAL
INFORMATION. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
No person has been authorized to give any information or to make any
representations other than those contained in this Combined Prospectus and
Statement of Additional Information in connection with the offer contained in
this Combined Prospectus and Statement of Additional Information, and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company. This Combined Prospectus and Statement
of Additional Information is not an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby in any jurisdiction, or to
any person to whom it is unlawful to make such offer or solicitation in such
jurisdiction.
------------------------------
The Date of this Combined Prospectus and Statement of
Additional Information is April 29, 1996.
------------------------------
<PAGE>
-----------------
TABLE OF CONTENTS
-----------------
PAGE
Synopsis . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary of Fees and Expenses . . . . . . . . . . . . . . 2
Financial Highlights . . . . . . . . . . . . . . . . . . 4
Investment Results . . . . . . . . . . . . . . . . . . . 5
Investment Objective and Policies. . . . . . . . . . . . 6
Stock Index Futures Transactions . . . . . . . . . . . . 10
Investment Restrictions. . . . . . . . . . . . . . . . . 14
Directors and Officers . . . . . . . . . . . . . . . . . 16
The Investment Manager . . . . . . . . . . . . . . . . . 19
Execution of Portfolio Transactions. . . . . . . . . . . 21
Investment by Employee Benefit Plans . . . . . . . . . . 24
How to Purchase Shares . . . . . . . . . . . . . . . . . 26
Net Asset Value. . . . . . . . . . . . . . . . . . . . . 28
Redemption of Shares . . . . . . . . . . . . . . . . . . 29
Dividends, Distributions and Tax Status. . . . . . . . . 30
Description of Capital Stock . . . . . . . . . . . . . . 33
Shareholder Reports. . . . . . . . . . . . . . . . . . . 35
Counsel. . . . . . . . . . . . . . . . . . . . . . . . . 35
Independent Accountants. . . . . . . . . . . . . . . . . 35
Safekeeping of Securities, Distributor, and
Transfer and Redemption Agent . . . . . . . . . . . . . 36
Additional Information . . . . . . . . . . . . . . . . . 36
Financial Statements . . . . . . . . . . . . . . . . . . 37
<PAGE>
-------------------
SYNOPSIS
-------------------
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) in RCM
Small Cap Fund's Annual Report to Shareholders for the year ended December
31, 1995, incorporated by reference herein, and elsewhere in this Combined
Prospectus and Statement of Additional Information (hereinafter this
"Prospectus").
RCM CAPITAL FUNDS, INC. (THE "COMPANY") is an open-end management investment
company. RCM Small Cap Fund (the "Fund") is a diversified no-load series of
the Company. THE COMPANY CURRENTLY OFFERS SHARES OF THE FUND SOLELY TO
INSTITUTIONS AND INDIVIDUALS ("CLIENTS") WHO HAVE ENTERED INTO AN INVESTMENT
MANAGEMENT AGREEMENT OR INVESTMENT ADVISORY AGREEMENT WITH THE FUND'S
INVESTMENT MANAGER, RCM CAPITAL MANAGEMENT (THE "INVESTMENT MANAGER"). THE
COMPANY EXPECTS TO CONTINUE THIS POLICY IN THE FUTURE. THE INVESTMENT MANAGER
MAY FOR DISCRETIONARY ACCOUNT CLIENTS BE AUTHORIZED TO DETERMINE THE AMOUNT
AND TIMING OF PURCHASES AND REDEMPTIONS OF SHARES OF THE FUND HELD BY SUCH
CLIENTS SUBJECT ONLY TO GENERAL AUTHORIZATIONS AND GUIDELINES OF THOSE
CLIENTS. (See INVESTMENT BY EMPLOYEE BENEFIT PLANS.)
The Fund's investment objective is to seek appreciation of capital by
investing, during normal market conditions, at least 80% of its assets in
equity and equity-related securities of small-sized concerns (common stocks,
or securities convertible into common stocks). Such investments will be
chosen with regard to their potential for capital appreciation. Current
income from the Fund's investment portfolio will be considered only as a part
of total investment return and will not be emphasized. "Small-sized concerns"
is defined as encompassing companies whose equity securities have a market
capitalization, at the time of acquisition of up to $750 million at the time
of purchase; however, under normal market conditions, the Fund will invest at
least 65% of its assets in equity and equity-related securities of companies
whose equity securities have a total market capitalization up to $500 million
at the time of purchase and no more than 35% of its net assets in equity and
equity-related securities of companies whose equity securities have a total
market capitalization in excess of $500 million, but less than $750 million.
There can be no assurance that the Fund will meet its investment objective.
The Fund will sell or transfer securities whenever, as of the end of a
calendar quarter, the issuer's market capitalization exceeds $1 billion.
The Fund will accept subscriptions only when its net assets, at cost, are
below $750 million. When the value of its net assets reaches $750 million,
the Fund will be closed to new investments until such time as the Fund's net
assets, at cost, are reduced by redemption to a level below $750 million.
This restriction on new investments shall not apply to reinvestments of
dividends and capital gains distributions.
Investments in small-sized concerns may involve greater risks than
investments in larger or more established firms. These firms may have limited
or unprofitable operating histories, limited financial resources and
inexperienced management, and they may face competition from larger or more
established firms that have greater resources. Their securities are
frequently traded in the over-the-counter market or on regional exchanges
where low trading volumes may result in erratic or abrupt price movements.
The value of the Fund's shares will fluctuate because of the fluctuations in
the value of securities in the Fund's portfolio. When the Fund sells
portfolio securities, it may realize a gain or a loss. (See DIVIDENDS,
DISTRIBUTIONS AND TAX STATUS.)
The Investment Manager is actively engaged in providing investment
supervisory services, as
<PAGE>
defined in the Investment Advisers Act of 1940, to institutional and
individual clients.
Shares of the Fund are purchased without a sales charge. The minimum initial
investment is $10,000 and the minimum subsequent investment is $1,000. The
Company acts as transfer and redemption agent for the Fund's shares. (See HOW
TO PURCHASE SHARES and REDEMPTION OF SHARES.)
Shareholder inquiries may be directed to the Company or the Investment
Manager in writing to Four Embarcadero Center, Suite 3000, San Francisco,
California 94111, or by telephone at (415) 954-5400.
--------------------------------
SUMMARY OF FEES AND EXPENSES
--------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------
All Sales Loads and Redemption and Exchange Fees None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
(as a percentage of average net assets)
Management Fees 1.00%
Other Expenses (Custodian) 0.01%
------
Total Fund Operating Expenses 1.01%
HYPOTHETICAL EXAMPLE OF
EFFECT OF EXPENSES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------- ------ ------- ------- --------
You would pay the following total
expenses on a $1,000 investment,
assuming (1) a 5% annual return
and (2) redemption at the end of
each time period. $10 $32 $56 $124
THIS EXAMPLE HAS BEEN PREPARED IN ACCORDANCE WITH APPLICABLE REGULATIONS OF
THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC" OR THE "COMMISSION"), BASED
ON THE EXPENSES OF THE FUND FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
RETURN. ACTUAL EXPENSES AND/OR RETURN MAY BE GREATER OR LESSER THAN THOSE
SHOWN. The purpose of the above table is to give you information in order to
understand various costs and expenses of the Fund that an investor will bear
directly or indirectly.
For more information concerning fees and expenses of the Fund, see FINANCIAL
HIGHLIGHTS, THE INVESTMENT MANAGER, EXECUTION OF PORTFOLIO TRANSACTIONS, and
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS.
In accordance with applicable SEC regulations, this example assumes that: (1)
the percentage amounts listed under Annual Fund Operating Expenses remain the
same in each year of the one, three, five, and ten year periods; (2) the
- -----------------------------------------------------------------------------
Page 2
<PAGE>
amount of the Fund's assets remains constant at the level at the end of its
most recently completed fiscal year; and (3) all dividends and distributions
will be reinvested by the shareholder. This example also reflects recurring
fees charged to all investors. SEC regulations require that the example be
based on a $1,000 investment, although the minimum initial purchase of Fund
shares is actually $10,000. (See HOW TO PURCHASE SHARES.)
The Fund is responsible for the payment of certain of its operating expenses,
including brokerage and commission expenses; taxes levied on the Fund;
interest charges on borrowings (if any); charges and expenses of the Fund's
custodian; and payment of investment management fees due to the Investment
Manager. The Investment Manager is responsible for all of the Fund's other
ordinary operating expenses (e.g., legal and audit fees, securities
registration expenses and compensation of non-interested directors of the
Company). Expenses attributable to the Fund are charged against the assets of
the Fund. General expenses of the Company's three series, the Fund, RCM
Growth Equity Fund and RCM International Growth Equity Fund A, are allocated
among the three series in a manner proportionate to the net assets of each
series, on a transactional basis or on such other basis as the Board of
Directors deems equitable. (See THE INVESTMENT MANAGER.)
Clients of the Investment Manager who are shareholders of the Fund will,
through the Fund, pay a fee to the Investment Manager on the portion of their
assets invested in shares of the Fund. However, such clients will not pay
additional fees to the Investment Manager on the portions of their assets
invested in the Fund. A Client's assets not invested in shares of the Fund
will be subject to fees in accordance with the Investment Management
Agreement or Investment Advisory Agreement between the Client and the
Investment Manager. Clients who invest in shares of the Fund will generally
pay an aggregate fee which is higher than that paid by other Clients not
invested in the Fund. (See INVESTMENT MANAGER and INVESTMENT BY EMPLOYEE
BENEFIT PLANS.)
- -----------------------------------------------------------------------------
Page 3
<PAGE>
RCM SMALL CAP FUND
FINANCIAL HIGHLIGHTS
The following supplementary information has been audited by Coopers & Lybrand
L.L.P., independent accountants, as stated in their opinion appearing elsewhere
in the Fund's 1995 Annual Report to Shareholders (which has been incorporated
herein by reference). This supplementary information should be read in
conjunction with the financial statements and related notes, which are included
in the Annual Report to Shareholders.
Selected data for each share of capital stock outstanding for the four years
ended December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------
1995 1994 1993 1992
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 113.01 $ 124.94 $ 121.82 $ 100.00
---------- ---------- ---------- ---------
Net investment income (loss) (0.44) (0.51) (0.01) 0.31
Net realized and unrealized gain (loss)
on investments 38.49 (2.43) 10.90 21.82
---------- ---------- ---------- ---------
Net increase (decrease) in net asset value
resulting from investment operations 38.05 (2.94) 10.89 22.13
---------- ---------- ---------- ---------
Distributions:
Net investment income (0.00) (0.00) (0.00) (0.31)
Net realized gain on investments (14.85) (8.99) (7.77) (0.00)
---------- ---------- ---------- ---------
Total distributions (14.85) (8.99) (7.77) (0.31)
---------- ---------- ---------- ---------
NET ASSET VALUE, END OF YEAR $ 136.21 $ 113.01 $ 124.94 $ 121.82
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
TOTAL RETURN* 34.08% (2.16%) 9.20% 22.14%
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
AVERAGE COMMISSION RATE PAID 0.05421
----------
----------
RATIO AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) $ 409,567 $ 415,647 $ 660,049 $ 457,994
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Ratio of expenses to average net assets 1.0% 1.1% 0.9% 0.7%
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Ratio of net investment income (loss) to
average net assets (0.2%) (0.3%) 0.0% 0.4%
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Portfolio turnover 83.9% 117.7% 80.0% 72.0%
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
- -----------------------
* Total return measure the change in value of an investment over the period
indicated.
- -----------------------------------------------------------------------------
Page 4
<PAGE>
-------------------------
INVESTMENT RESULTS
-------------------------
The Fund may, from time to time, include information on its investment
results and/or comparisons of its investment results to various unmanaged
indices or results of other mutual funds or groups of mutual funds in
advertisements or in reports furnished to present or prospective
shareholders. See ADDITIONAL INFORMATION for a brief description of these
comparisons. Investment results will include information calculated on a
total return basis in the manner set forth below.
Average total return ("T") will be calculated as follows: an initial
hypothetical investment of $1,000 ("P") is divided by the net asset value as
of the first day of the period in order to determine the initial number of
shares purchased. Subsequent dividends and capital gain distributions are
reinvested at net asset value on the reinvestment date determined by the
Board of Directors. The sum of the initial shares purchased and shares
acquired through reinvestment is multiplied by the net asset value per share
as of the end of the period ("n") to determine ending value ("ERV"). The
ending value divided by the initial investment converted to a percentage
equals total return. The formula thus used, as required by the SEC, is:
n
P(1+T) = ERV
The resulting percentage indicates the positive or negative investment
results that an investor would have experienced from reinvested dividends and
capital gain distributions and changes in share price during the period.
This formula reflects the following assumptions: (1) all share sales at net
asset value, without a sales load deduction from the $1,000 initial
investment; (2) reinvestment of dividends and distributions at net asset
value on the reinvestment date determined by the Board; and (3) a complete
redemption at the end of any period illustrated. Total return may be
calculated for one year, five years, ten years, and for other periods, and
will typically be updated on a quarterly basis. The average annual compound
rate of return over various periods may also be computed by utilizing ending
values as determined above.
Average total returns for the one and four year periods ended December 31,
1995 are 34.08% and 15.01%, respectively.
In addition, in order more completely to represent the Fund's performance or
more accurately to compare such performance to other measures of investment
return, the Fund also may include in advertisements and shareholder reports
other total return performance data based on time-weighted, monthly-linked
total returns computed on the percentage change of the month-end net asset
value of the Fund after allowing for the effect of any cash additions and
withdrawals recorded during the month. Returns may be quoted for the same or
different periods as those for which average total return is quoted.
The Fund's investment results will vary from time to time depending upon
market conditions, the composition of the Fund's portfolio, and operating
expenses, so that any investment results reported should not be considered
representative of what an investment in the Fund may earn in any future
period. These factors and possible differences in calculation methods should
be considered when comparing the Fund's investment results with those
published for other investment companies, other investment vehicles and
unmanaged indices. Results also should be considered relative to the risks
associated with the Fund's investment objectives and policies.
- -----------------------------------------------------------------------------
Page 5
<PAGE>
-------------------------
INVESTMENT OBJECTIVE AND POLICIES
-------------------------
The Fund is designed to provide investors with a vehicle for investment
primarily in a diversified group of equity and equity-related securities of
small-sized concerns. The Fund's investment objective is to seek appreciation
of capital by investing, during normal conditions, at least 80% of its assets
in equity and equity-related securities of small-sized concerns (common
stocks or securities convertible into common stocks). Such investments will
be chosen with regard to their potential for capital appreciation. Current
income from the Fund's investment portfolio will be considered only as a part
of total return and will not be emphasized. "Small-sized concerns" is defined
under applicable law as encompassing companies whose equity securities have a
total market capitalization of up to $750 million (at the time of purchase of
the securities of such a company). This investment objective is fundamental
and cannot be changed without shareholder approval. Under normal market
conditions, the Fund will invest at least 65% of its assets in equity and
equity-related securities of companies whose equity securities have a total
market capitalization up to $500 million at the time of purchase and no more
than 35% of its assets in equity and equity-related securities of companies
whose equity securities have a total market capitalization at the time of
purchase in excess of $500 million, but less than $750 million.
Under normal market conditions, the Fund will not purchase equity and
equity-related securities of companies whose equity securities have a total
market capitalization of greater than $750 million at the time of purchase.
The market capitalization of each issuer's equity securities will be
evaluated on a quarterly basis. The Fund will not be required to sell
portfolio securities solely on account of the fact that the market
capitalization of the issuer's equity securities has exceeded $750 million,
or be prevented from purchasing or be required to sell other portfolio
securities as a result of such change. However, the Fund will sell or
transfer portfolio securities whenever, as of the end of a calendar quarter,
the issuer's market capitalization exceeds $1 billion. There is no minimum
market capitalization for an issuer's equity securities to be considered an
appropriate investment for the Fund. Although the market capitalization of
portfolio securities at the time of purchase is used for compliance purposes,
the Fund anticipates that the average market capitalization of the portfolio
at market value will approximate $300 million to $400 million and that the
average market capitalization of the portfolio at market value will not
exceed $450 million. There can be no assurance that the Fund's investment
objective will be achieved.
Critical factors which will be considered by the Investment Manager in the
selection of securities will include the economic and political outlook, the
values of individual securities relative to other securities investment
alternatives, trends in the determinants of corporate profits, and management
capability and practices. Generally speaking, disposal of a portfolio
security will be based upon such factors as (i) actual or potential
deterioration of the issuer's earning power which the Investment Manager
believes may adversely affect the price of its securities, (ii) increases in
the price level of the security or of securities generally which the
Investment Manager believes reflect expected earnings growth too far in
advance of realization, and (iii) changes in the relative investment
opportunities offered by other securities.
The Fund will accept subscriptions only when its net assets, at cost, are
below $750 million. When the value of its net assets, at cost, reaches $750
million, the Fund will be closed to new investments until such time as the
Fund's net assets, at cost, are reduced by redemption, changes in market
value or otherwise to a level below $750 million. This restriction on new
investments shall not apply to reinvestments of dividends and capital gains
distributions or to additional investments by existing shareholders.
- -----------------------------------------------------------------------------
Page 6
<PAGE>
The Fund may invest in securities on either a long-term or short-term basis.
ALTHOUGH TAXABLE INDIVIDUALS AND INSTITUTIONS ARE PERMITTED TO INVEST IN THE
FUND, PROSPECTIVE TAXABLE INVESTORS NEED TO BE AWARE THAT THE FUND'S
INVESTMENT MANAGER WILL NOT CONSIDER THE TAX EFFECT OF CAPITAL GAIN OR LOSS
RECOGNITION OR ANY DIFFERENCE IN THE TREATMENT OF LONG- AND SHORT-TERM
CAPITAL GAINS UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE") WHEN MAKING INVESTMENT DECISIONS FOR THE FUND'S PORTFOLIO. (See
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS.) The Fund may invest with the
expectation of short-term capital appreciation if the Fund believes that such
action will benefit its shareholders. The Fund also may sell securities that
have been held on a short-term basis if the Fund's investment objective for
such securities has been achieved or if other circumstances make the sale of
such securities advisable. This may result in a taxable shareholder paying
higher income taxes than would be the case with investment companies
emphasizing the realization of long-term capital gains. Because the
Investment Manager will purchase and sell some securities for the Fund's
portfolio without regard to the length of the holding period for such
securities, it is possible that the Fund's portfolio will have a higher
turnover rate than might be expected for investment companies that invest
substantially all of their funds for long-term capital appreciation or
generation of current income. Although the Investment Manager generally does
not intend to trade on behalf of the Fund for short-term profits, securities
in the Fund's portfolio will be sold whenever the Investment Manager believes
it is appropriate to do so, regardless of the length of time that securities
have been held. Turnover will be influenced by sound investment practices,
the Fund's investment objectives, and the need for funds for the redemption
of the Fund's shares.
The Investment Manager anticipates that annual portfolio turnover rate should
not exceed 90%, but the turnover rate will not be a limiting factor when the
Investment Manager deems portfolio changes appropriate. A 90% portfolio
turnover rate would occur if the value of purchases OR sales of portfolio
securities (whichever is less) for a year (excluding purchases of U. S.
Treasury issues and securities within a maturity of one year or less) were
equal to 90% of the average monthly value of the securities held by the Fund
during such year. A higher portfolio turnover rate would increase aggregate
brokerage commission expenses, which must be borne directly by the Fund and
ultimately by the Fund's shareholders. (See EXECUTION OF PORTFOLIO
TRANSACTIONS.) The portfolio turnover for the years ended December 31, 1995,
1994 and 1993 was 83.9%, 117.7% and 80.0%, respectively.
Except when taking a defensive investment position (as described below), the
Investment Manager expects under normal circumstances to have at least 80% of
total assets invested in equity or equity-related securities of small-sized
concerns (as defined above). When business or financial conditions warrant,
the Investment Manager temporarily may take a defensive position and invest
without regard to the above policies up to 100% of the Fund's assets in one
or more of the following: (1) cash or cash equivalents having a maturity date
no more than one year from the date of acquisition; or (2) obligations of, or
securities guaranteed by, the United States Government, its agencies or
instrumentalities having a maturity date no later than five years from the
date of acquisition.
Other than as described below under INVESTMENT RESTRICTIONS, the Fund is not
restricted with regard to the types of cash-equivalent investments it may
make. Financial instruments of this nature include certificates of deposit,
bankers' acceptances, repurchase agreements, and other short-term debt
obligations. Certificates of deposit are short-term obligations of commercial
banks. A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with international commercial transactions.
Repurchase agreements involve transactions by which an investor (such as the
Fund) purchases a security and simultaneously obtains the commitment of the
seller (a member bank of the Federal
- -----------------------------------------------------------------------------
Page 7
<PAGE>
Reserve System or a recognized securities dealer) to repurchase the security
at an agreed-upon price on an agreed-upon date within a number of days
(usually not more than seven) from the date of purchase.
The Fund may invest in domestic listed and unlisted securities and in
securities of foreign issuers which are available in American Depository
Receipt ("ADR") form or are traded on any United States or foreign securities
exchange or over-the-counter. ADRs represent ownership of securities of
non-U. S. issuers deposited with a depository agent, typically a commercial
bank. The Fund may invest in ADRs sponsored by persons other than the
underlying issuers. Issuers of the stock of such unsponsored ADRs are not
obligated to disclose material information in the United States and,
accordingly, there may not be a correlation between such information and the
market value of such ADRs.
An ADR will be treated as an illiquid security for purposes of the Fund's
restriction on the purchase of such securities, unless the ADR is convertible
by the Fund within seven days into cash. The Fund may invest in foreign
securities if investment therein, at the time of purchase, would not cause
more than 10% of the value of the Fund's total assets to be invested in
foreign securities. Investment in foreign securities may be riskier than
investment in domestic securities. In many cases, foreign securities markets
are not as developed or as efficient as those in the United States. As a
result, securities of foreign issuers often may be less liquid and more
volatile than securities of comparable U.S. issuers. In addition, foreign
securities may be subject to risks from restrictions on monetary
repatriation; oppressive regulation; heavy or confiscatory taxation; less
governmental supervision of securities markets and issuers of securities;
lack of uniform settlement periods and trading practices; limited publicly
available corporate information; lower accounting, auditing, and financial
reporting standards; less understandable financial statements; less
advantageous legal, operational, and financial protections applicable to
foreign subcustody arrangements; nationalization or expropriation of assets;
and political, economic, or social instability. In addition, custodial
expenses for non-U.S. securities often may be higher than for U.S.
securities. Fluctuations in the rates of exchange between U.S. and foreign
currencies may also offset the value of the Fund's investments.
The Fund may invest up to 5% of the value of its net assets in securities
that are illiquid. (See INVESTMENT RESTRICTIONS.) Securities may be
considered illiquid if the Fund cannot reasonably expect to receive
approximately the amount at which the Fund values such securities within 7
days. The Company's Board of Directors has the authority to determine whether
specific securities, including restricted securities eligible for resale
pursuant to Rule 144A under the Securities Act of 1933, are liquid or
illiquid. The Board of Directors monitors the liquidity of securities in the
Fund's portfolio based on reports furnished periodically by the Investment
Manager. The Investment Manager takes into account a number of factors in
reaching liquidity decisions, including, but not limited to: the frequency of
trading in the security; the number of dealers who publish quotes for the
security; the number of dealers who serve as market makers for the security;
the apparent number of other potential purchasers; and the nature of the
security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited, and the mechanics of transfer).
The Fund's investments in illiquid securities may include securities that are
not registered for resale under the Securities Act of 1933, as amended, and
therefore are subject to restrictions on resale. In some cases, such
securities may be eligible for resale to qualified institutional buyers under
Rule 144A under the Securities Act of 1933. Investing in Rule 144A securities
could have the effect of increasing Fund illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
such securities. When the Fund purchases unregistered securities, the Fund
may, in appropriate circumstances, obtain the right to registration of such
securities at the expense of the issuer. In
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such cases, there may be a lapse of time between the Fund's decision to sell
any such security and the registration of the security permitting sale.
During any such period, the price of the security will be subject to market
fluctuations.
In making purchases within the above policies (which may be changed without
shareholder consent), the Fund and the Investment Manager will be subject to
all of the restrictions referred to under INVESTMENT RESTRICTIONS. If a
percentage restriction on an investment or utilization of assets set forth
under INVESTMENT RESTRICTIONS is adhered to at the time the investment is
made, a later change in percentage resulting from changing value or a similar
type of event will not be considered a violation of the Fund's investment
policies or restrictions. The Fund may exchange securities, exercise
conversions or subscription rights, warrants or other rights to purchase
common stock or other equity securities and may hold, except to the extent
limited by the Investment Company Act of 1940 ("1940 Act"), any such
securities so acquired without regard to the Fund's investment policies and
restrictions. The Fund will not knowingly exercise rights or otherwise
acquire securities when to do so would jeopardize the Fund's status under the
1940 Act as a "diversified" investment company.
Investments in small-sized concerns may involve greater risks than
investments in larger companies. For this reason, the Fund is not intended as
a complete investment vehicle. The Fund is designed for that portion of a
portfolio that can appropriately be invested in securities with greater risk
but also greater potential for appreciation. The securities of small-sized
concerns, as a class, have shown market behavior which has had periods of
more favorable results, and periods of less favorable results, relative to
securities of larger companies as a class. In addition, small-sized concerns
in which the Fund will invest may be unseasoned; that is, these companies may
have limited or unprofitable operating histories, limited financial resources
and inexperienced management. Small-sized concerns often face competition
from larger or more established firms that have greater resources.
Smaller-sized concerns may not have as great an ability to raise additional
capital, may have a less diversified product line (making them susceptible to
market pressure), and may have a smaller public market for their shares as
compared to larger companies. Securities of small and unseasoned companies
are often less liquid than securities of larger companies and are frequently
traded in the over-the-counter market or on regional exchanges where low
trading volumes may result in erratic or abrupt price movements. To dispose
of these securities, the Fund may have to sell them over an extended period
of time or below the original purchase price. Investments by the Fund in
these small or unseasoned companies may be regarded as speculative. The Fund
has investment restrictions that limit the amount of its assets that can be
invested in companies that have a record of less than three years of
continuous operations and prohibit investment of more than 5% of the value of
its net assets in securities that are illiquid. (See INVESTMENT RESTRICTIONS.)
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--------------------------
STOCK INDEX FUTURES TRANSACTIONS
--------------------------
The Fund may purchase and sell stock index futures as a hedge against changes
in market conditions that may result in changes in the value of the Fund's
portfolio securities, in accordance with the strategies more specifically
described below. The Fund will engage in transactions in stock index futures
contracts or related options consistent with the Fund's objectives and not
for speculation. A stock index assigns relative values to the common stocks
included in the index, and the index fluctuates with changes in the market
values of the common stocks so included. A futures contract on an index (such
as the S&P 500) is an agreement between two parties (buyer and seller) to
take or make delivery of an amount of cash equal to the difference between
the value of the index at the close of the last trading day of the contract
and the price at which the index contract was originally written. In the case
of futures contracts traded on U.S. exchanges, the exchange itself or an
affiliated clearing corporation assumes the opposite side of each transaction
(i.e., as buyer or seller). A futures contract may be satisfied or closed out
by payment of the change in the cash value of the index. No physical delivery
of the underlying stocks in the index is made.
STOCK INDEX FUTURES CHARACTERISTICS. Stock index futures contracts can be
purchased or sold with respect to various broad-based and other stock
indices. Differences in the indices may result in differences in correlation
of the futures with movements in the value of the securities being hedged.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the Fund's Custodian (in
the name of the futures commission merchant ("the FCM")) an amount of cash or
U.S. Treasury bills which is referred to as an "initial margin" payment. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon termination
of the futures contract, assuming all contractual obligations have been
satisfied. Futures contracts customarily are purchased and sold on initial
margins that may range upwards from less than 5% of the value of the futures
contract being traded. Subsequent payments, called variation margin, to and
from the FCM, will be made on a daily basis as the price of the underlying
stock index fluctuates, making the long and short positions in the futures
contract more or less valuable. This process is known as "marking to the
market." For example, when the Fund has purchased a stock index futures
contract and the price of the underlying stock index has risen, that position
will have increased in value and the Fund will receive from the FCM a
variation margin payment equal to that increased value. Conversely, when the
Fund has purchased a stock index futures contract and the price of the
underlying stock index has declined, the position would be less valuable and
the Fund would be required to make a variation margin payment to the FCM. At
any time prior to expiration of the futures contract, the Fund may elect to
close the position by taking an identical opposite position which will
operate to terminate the Fund's position in the futures contract. A final
determination of variation margin is then made, additional cash is required
to be paid by or released to the Fund, and the Fund realizes a loss or a
gain. (See RISKS OF TRANSACTIONS IN STOCK INDEX FUTURES AND FUTURES OPTIONS
below.)
CHARACTERISTICS OF OPTIONS ON STOCK INDEX FUTURES. The Fund may also purchase
call options and put options on stock index futures contracts ("futures
options"). A futures option gives the holder the right, in return for the
premium paid, to assume a long position (in the case of a call) or short
position (in the case of a put) in a futures con-
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<PAGE>
tract at a specified exercise price prior to the expiration of the option.
Upon exercise of a call option, the holder acquires a long position in the
futures con-tract and the writer is assigned the opposite short position. In
the case of a put option, the opposite is true. A futures option may be
closed out (before exercise or expiration) by an offsetting purchase or sale
of a futures option of the same series. (See RISKS OF TRANSACTIONS IN STOCK
INDEX FUTURES AND FUTURES OPTIONS below.)
PURCHASE OF STOCK INDEX FUTURES. When the Investment Manager anticipates a
significant stock market or stock market sector advance, the purchase of a
stock index futures contract affords a hedge against not participating in
such advance at a time when the Fund is not fully invested in equity
securities. Such purchase of a futures contract would serve as a temporary
substitute for the purchase of individual stocks which may later be purchased
(with attendant costs) in an orderly fashion. As such purchases of individual
stocks are made, an approximately equivalent amount of stock index futures
would be terminated by offsetting sales.
SALE OF STOCK INDEX FUTURES. The Fund may sell stock index futures contracts
in anticipation of or during a general stock market or market sector decline
that may adversely affect the market values of the Fund's portfolio of equity
securities. To the extent that the Fund's portfolio of equity securities
changes in value in correlation with a given stock index, the sale of futures
contracts on that index would reduce the risk to the portfolio of a market
decline and, by so doing, provides an alternative to the liquidation of
securities positions in the portfolio with resultant transaction costs.
PURCHASE OF PUT OPTIONS ON STOCK INDEX FUTURES CONTRACTS. The purchase of put
options on stock index futures contracts is analogous to the purchase of puts
on individual stocks, where an absolute level of protection from price
fluctuation is sought below which no additional economic loss would be
incurred by the Fund. Put options may be purchased to hedge a portfolio of
stocks or a position in the futures contract upon which the put option is
based against a possible decline in market value.
PURCHASE OF CALL OPTIONS ON STOCK INDEX FUTURES. The purchase of a call
option on stock index futures represents a means of obtaining temporary
exposure to market appreciation with risk limited to the premium paid for the
call option. It is analogous to the purchase of a call option on an
individual stock, which can be used as a substitute for a position in the
stock itself. Depending on the pricing of the option compared to either the
future upon which it is based, or to the price of the underlying stock index
itself, it may be less risky, because losses are limited to the premium paid
for the call option, when compared to the ownership of the stock index
futures or the underlying stocks. Like the purchase of a stock index future,
the Fund would purchase a call option on a stock index future to hedge
against a market advance when the Fund is not fully invested.
LIMITATIONS ON PURCHASE AND SALE OF STOCK INDEX FUTURES AND OPTIONS ON STOCK
INDEX FUTURES. The Fund will not engage in transactions in stock index
futures contracts or related options for speculation, but only as a hedge
against changes in the value of securities held in the Fund's portfolio, or
securities which the Investment Manager intends to purchase for the
portfolio, resulting from actual or anticipated changes in general market
conditions. Such transactions will only be effected when, in the view of the
Investment Manager, they are economically appropriate to the reduction of
risks inherent in the ongoing management of the Fund's investment portfolio.
The Fund may not purchase or sell stock index futures or purchase related
options if, immediately thereafter, more than 30% of the value of its net
assets would be hedged. In addition, the Fund may not purchase or sell stock
index futures or purchase related options if, immediately thereafter, the sum
of the amount of margin deposits on the Fund's existing futures positions and
premiums paid for related options would exceed 5% of the market value of the
Fund's total assets. In Fund
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<PAGE>
transactions involving stock index futures contracts, to the extent required
by applicable SEC guidelines, an amount of cash and cash equivalents equal to
the market value of the futures contracts will be deposited in a segregated
account with the Fund's Custodian, or in other segregated accounts as
regulations may allow, to collateralize the position and thereby to insure
that the use of such futures is unleveraged.
RISKS OF TRANSACTIONS IN STOCK INDEX FUTURES AND FUTURES OPTIONS. There are
several risks in connection with the use of stock index futures in the Fund
as a hedging device. One risk arises because of the correlation between
movements in the price of the stock index future and movements in the price
of the securities which are the subject of the hedge is not always perfect.
The price of the stock index future may move more than, or less than, the
price of the securities being hedged. If the price of the stock index future
moves less than the price of the securities which are the subject of the
hedge, the hedge will not be fully effective but, if the price of the
securities being hedged has moved in an unfavorable direction, the Fund would
be in a better position than if it had not hedged at all. If the price of the
securities being hedged has moved in a favorable direction, this advantage
will be partially offset by the future. If the price of the future moves more
than the price of the stock, the Fund will experience either a loss or a gain
on the future which will not be completely offset by movements in the price
of the securities which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of securities being hedged
and movements in the price of the stock index futures, the Fund may buy or
sell stock index futures contracts in a greater dollar amount than the dollar
amount of securities being hedged, if the historical volatility of the price
of such securities has been greater than the historical volatility of the
index. Conversely, the Fund may buy or sell fewer stock index futures
contracts if the historical volatility of the price of the securities being
hedged is less than the historical volatility of the stock index. It is also
possible that, when the Fund has sold futures to hedge its portfolio against
decline in the market, the market may advance and the value of the securities
held in the Fund's portfolio may decline. If this occurs, the Fund will lose
money on the future and also experience a decline in value in its portfolio
securities.
When futures are purchased to hedge against a possible increase in the price
of stock before the Fund is able to invest its cash (or cash equivalents) in
stock in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest in stock at that time
because of concern as to possible further market decline or for other
reasons, the Fund will realize a loss on the futures contract that is not
offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation, or
no correlation at all, between movements in the stock index futures and the
portion of the portfolio being hedged, the price of stock index futures may
not correlate perfectly with movement in the stock index due to certain
market distortions. First, all participants in the futures market are subject
to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through offsetting transactions. This practice could distort the normal
relationship between the index and futures markets. Second, from the point of
view of speculators, the deposit requirements in the futures market may be
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market also may cause
temporary price distortions. Due to the possibility of price distortion in
the futures market and because of the imperfect correlation between movements
in the stock index and movements in the price of stock index futures, a
correct forecast of general market trends by the Investment Manager still may
not result in a successful hedging transaction over a very short time frame.
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<PAGE>
Compared to the use of stock index futures, the purchase of options on stock
index futures involves less potential risk to the Fund because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances when the use of an option on a stock
index future would result in a loss to the Fund when the use of a stock index
future would not, such as when there is no movement in the level of the
index. In addition, daily changes in the value of the option due to changes
in the values of the underlying futures contracts, are reflected in the net
asset value of the Fund.
The Fund will only enter into futures contracts or purchase futures options
that are standardized and traded on a U.S. exchange or board of trade, or
similar entity, or quoted on an automated quotation system. However, there is
no assurance that a liquid secondary market on an exchange or board of trade
will exist for any particular futures contract or futures option or at any
particular time. In such event, it may not be possible to close a futures
position, and, in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can
be terminated. In such circumstances, an increase in the price of the
securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price
of the securities will, in fact, correlate with the movements in the futures
contract and thus provide an offset to losses on a futures contract.
Successful use of stock index futures by the Fund is also subject to the
Investment Manager's ability to predict correctly movements in the direction
of the market. For example, if the Fund hedged against the possibility of a
decline in the market adversely affecting stocks held in its portfolio and
stock prices increased instead, the Fund would lose part or all of the
benefit of the increased value of its stocks which it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund had insufficient cash, it might have to sell
securities to meet daily variation margin requirements. Such sales of
securities might be, but would not necessarily be, at increased prices which
would reflect the rising market. The Fund might have to sell securities at a
time when it might be disadvantageous to do so. The Investment Manager has
been actively engaged in the provision of investment supervisory services for
institutional and individual accounts since 1970, but the skills required for
the successful use of stock index futures and options on stock index futures
are different from those needed to select portfolio securities, and the
Investment Manager has limited prior experience in the use of futures or
options techniques in the management of assets under its supervision.
TAX TREATMENT. The extent to which the Fund may engage in stock index futures
and related option transactions may be limited by the Code's requirements for
qualification as a regulated investment company and the Fund's intention to
continue to qualify as such. (See DIVIDENDS, DISTRIBUTIONS AND TAX STATUS.)
REGULATORY MATTERS. The Fund has filled a claim of exemption from
registration as a commodity pool with the Commodity Futures Trading
Commission (the "CFTC"). The Fund intends to conduct its futures trading
actively in a manner consistent with that exemption. The Investment Manager
is registered with the CFTC as both a Commodity Pool Operator and as a
Commodity Trading Advisor.
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--------------------
INVESTMENT RESTRICTIONS
--------------------
The Fund has adopted certain investment restrictions that are fundamental
policies and that may not be changed without approval by the vote of a
majority of the Fund's outstanding voting securities. The "vote of a majority
of the outstanding voting securities" of the Fund, as defined in Section
2(a)(42) of the 1940 Act, means the vote (i) of 67% or more of the voting
securities of the Fund present at any meeting, if the holders of more than
50% of the outstanding voting securities of the Fund are present or
represented by proxy, or (ii) of more than 50% of the outstanding voting
securities of the Fund, whichever is less. These restrictions provide that
the Fund may not:
1. Invest in securities of any one issuer (other than the United States of
America, its agencies and instrumentalities), if immediately after and as
a result of such investment the value of the holdings of the Fund in the
securities of such issuer exceeds 5% of the value of the Fund's total
assets;
2. Invest more than 25% of the value of its total assets in the securities of
companies primarily engaged in any one industry (other than the United
States of America, its agencies and instrumentalities);
3. Invest in foreign securities if immediately after and as a result of such
investment the value of the holdings of the Fund in foreign securities
exceeds 10% of the value of the Fund's total assets;
4. Acquire more than 10% of the outstanding voting securities, or 10% of all
of the securities, of any one issuer;
5. Invest in companies for the purpose of exercising control or management;
6. Purchase or sell real estate; provided that the Fund may invest in readily
marketable securities secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein;
7. Invest in interests in oil, gas, or other mineral exploration or
development programs, or warrants to buy equity securities; provided
however, that this policy shall not prevent the ownership, holding or sale
of warrants or other rights where the grantor of the warrants or other
rights is the issuer of underlying securities owned by the Fund;
8. Issue senior securities, except that the Fund may borrow amounts, up to 5%
of the total assets taken at cost or at market value, whichever is lower,
and only from banks as a temporary measure for extraordinary or emergency
purposes and the Fund may engage in activities listed in Investment
Restriction 10. The Fund will not mortgage, pledge, hypothecate or in any
other manner transfer as security for an indebtedness any of its assets;
9. Purchase securities on margin, but it may obtain such short-term credit
from banks as may be necessary for the clearance of purchases and sales of
securities;
10. Make loans of its funds or assets to any other person, which shall not be
considered as including: (i) the purchase of a portion of an issue of
publicly distributed debt securities, and (ii) the purchase of bank
obligations such as certificates of deposit, bankers' acceptances and
other short-term debt obligations. Notwithstanding the foregoing, the Fund
may: (i) enter into repurchase agreements with respect to commercial
paper, certificates of deposit and obligations issued or guaranteed by the
U. S. Government, its agencies or instrumentalities, and (ii) loan portfolio
securities to brokers, dealers and other financial institutions where
such loan is callable by the Fund at any time on reasonable notice and is
fully
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<PAGE>
secured by collateral in the form of cash or cash equivalents. The
Fund will not enter into repurchase agreements with maturities in excess
of 7 days if immediately after and as a result of such transaction the
value of the Fund's holdings of such repurchase agreements and other
illiquid securities exceeds 5% of the value of the Fund's total assets. The
Fund will not lend portfolio securities which, when valued at the time of
loan, have a value in excess of 10% of the Fund's net assets;
11. Make short sales of securities;
12. Act as an underwriter of securities issued by other persons, or invest
more than 5% of the value of its net assets in securities that are illiquid;
13. Invest more than 5% of its net assets in the securities of any issuer
which shall have a record of less than three years of continuous
operation (including the operation of any predecessor);
14. Purchase the securities of any other investment company or investment
trust, except by purchase in the open market where, to the best
information of the Company, no commission or profit to a sponsor or dealer
(other than the customary broker's commission) results from such purchase
and such purchase does not result in such securities exceeding 5% of the
value of the Fund's total assets, or except when such purchase is part of
a merger, consolidation, acquisition of assets, or other reorganization
approved by the Fund's stockholders;
15. Participate on a joint or a joint-and-several basis in any trading
account in securities (the aggregation of orders for the sale or purchase
of marketable portfolio securities with other accounts under the management
of the Investment Manager to save brokerage costs or average prices among
them, is not deemed to result in a securities trading account);
16. Purchase from or sell portfolio securities to its officers, directors, or
other "interested persons" (as defined in the 1940 Act) of the Company,
other than otherwise unaffiliated broker-dealers;
17. Purchase or retain the securities of an issuer if, to the Company's
knowledge, one or more of the directors, officers, partners or employees
of the Company or the Investment Manager individually own beneficially more
than 1/2 of 1% of the securities of such issuer and together own
beneficially more than 5% of such securities;
18. Purchase or sell stock index futures or purchase related options if,
immediately thereafter, more than 30% of the value of its net assets would
be hedged, or the sum of the amount of "margin" deposits on the Fund's
existing futures positions and premiums paid for related options would
exceed 5% of the market value of the Fund's total assets; or
19. Purchase commodities or commodity contracts, except that the Fund may
purchase securities of an issuer which invests or deals in commodities or
commodity contracts, and except that the Fund may enter into futures and
options contracts only for hedging purposes. The Fund has no current
intention of entering into commodities contracts except for stock index
futures and related options.
The Fund also is subject to other restrictions under the 1940 Act; however,
the registration of the Company under the 1940 Act does not involve any
supervision by any Federal or other agency of the Company's management or
investment practices or policies, other than incident to occasional or
periodic compliance examinations conducted by the SEC staff.
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--------------------
DIRECTORS AND OFFICERS
--------------------
The names and addresses of the directors and officers of the Company and
their principal occupations and certain other affiliations during the past
five years are given below. Unless otherwise specified, the address of each
of the following persons is Suite 3000, Four Embarcadero Center, San
Francisco, California 94111.
WILLIAM L. PRICE,*+ Chairman of the Board, President and Director. Mr. Price
is a Principal of RCM Capital Management ("RCM"), with which he has been
associated since 1977.1 He is also a limited partner of RCM Limited L.P., a
California limited partnership ("RCM Limited"), the sole General Partner of
RCM; a Director, Executive Vice President, and a shareholder of RCM General
Corporation ("RCM General"), the sole General Partner of RCM Limited;
Chairman of the Board, President, Chief Executive Officer and Director of RCM
Equity Funds, Inc., an open-end management investment company ("RCM Equity");
Executive Vice President and Trustee of RCM Capital Trust Company ("RCM
Trust"); a General Partner of RREEF Partners, a California general
partnership comprised of principals of RCM Limited (RREEF Partners owns an
interest in RREEF America Partners, a real estate investment manager); and a
shareholder of The RREEF Corporation, a real estate investment manager.
CLAUDE N. ROSENBERG, JR.,*+ Vice Chairman of the Board and Director. Mr.
Rosenberg is the Senior Principal of RCM, with which he has been associated
since 1970. (See THE INVESTMENT MANAGER.) He is also a limited partner of RCM
Limited; a shareholder of RCM General; Chairman of the Board, Director and
Chief Executive Officer of RCM Trust; a General Partner of RREEF Partners;
and a shareholder of The RREEF Corporation.
JOHN D. LELAND, JR.,*+ Vice President and Director. Mr. Leland is a Principal
of RCM, with which he has been associated since 1972. He is also a limited
partner of RCM Limited; a shareholder of RCM General; Vice President of RCM
Trust; a General Partner of RREEF Partners; and a shareholder of The RREEF
Corporation.
G. NICHOLAS FARWELL,+ Vice President and Director. Mr. Farwell is a Principal
of RCM, with which he has been associated since 1980. He is also a limited
partner of RCM Limited; a shareholder of RCM General; and a General Partner
of RREEF Partners.
MICHAEL J. APATOFF,+ Vice President, Chief Operating Officer and Director.
Mr. Apatoff is a Principal and Chief Operating Officer of RCM, with which he
has been associated since 1991. He is also a limited partner of RCM Limited;
a Director, Executive Vice President and shareholder of RCM General; Vice
President of RCM Strategic Global Government Fund, Inc.; a closed-end
management investment company ("RCS"); Vice President, Chief Operating
Officer and Director of RCM Equity; and Director and Vice President of RCM
Trust. From 1986 to 1991 he was an Executive Vice President and Chief
Operating Officer of the Chicago Mercantile Exchange.
KENNETH B. WEEMAN, JR.,+ Vice President and Director. Mr. Weeman is a
Principal of RCM, with which he has been associated since 1979.
- --------------------------------
* Member, Executive Committee of the Company.
+ Director who is an "interested person" of the Company, as defined in
Section 2(a)(19) of the 1940 Act.
1 RCM Capital Management ("RCM") was established in July 1986, as the
successor to Rosenberg Capital Management (which was established in 1970).
Any historical references herein to RCM prior to July 1986, refer to the
operations of Rosenberg Capital Management.
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<PAGE>
He is also a limited partner of RCM Limited; a shareholder of RCM General;
Vice President of RCM Equity; Vice President of RCM Trust; and a General
Partner of RREEF Partners.
JOHN A. KRIEWALL,+ Director. Mr. Kriewall is a Principal of RCM, with which
he has been associated since 1973. He is also a limited partner of RCM
Limited; Executive Vice President and a shareholder of RCM General; and a
General Partner of RREEF Partners.
KENNETH E. SCOTT,** Director. Mr. Scott is the Ralph M. Parsons Professor of
Law and Business at Stanford Law School, where he has been since 1967. He is
also a director of certain registered investment companies managed by Benham
Capital Management.
WALTER C. PRICE, JR., Vice President. Mr. Price is a Principal of RCM, with
which he has been associated since 1974. He is also a limited partner of RCM
Limited; a shareholder of RCM General; Vice President of RCM Equity; and a
General Partner of RREEF Partners.
HUACHEN CHEN, Vice President. Mr. Chen is a Principal of RCM, with which he
has been associated since 1985. He is also a limited partner of RCM Limited,
a shareholder of RCM General and Vice President of RCM Equity.
SUSAN C. GAUSE, Treasurer and Chief Financial Officer. Ms. Gause is the
Director of Finance at RCM, with which she has been associated since 1994.
She is also Treasurer and Chief Financial Officer of RCS; Treasurer and Chief
Financial Officer of RCM Equity; and Chief Financial Officer, Treasurer and
Trust Officer of RCM Trust. From December 1990 to June 1994, she was employed
by Citicorp Bankers Leasing, where she was Chief Financial Officer and
Controller.
ANTHONY AIN, Vice President and General Counsel. Mr. Ain is a Senior Vice
President and General Counsel at RCM, with which he has been associated since
April 1992. He is also General Counsel and Secretary of RCM Limited; Vice
President, General Counsel and Secretary of RCM General; Vice President and
General Counsel of RCS; Vice President, General Counsel and Secretary of RCM
Equity; and Vice President, General Counsel and Secretary of RCM Trust. From
September 1988 to April 1992, he was employed by the United States Securities
and Exchange Commission, where he was senior special counsel and counsel to a
Commissioner.
CAROLINE M. HIRST, Vice President and Principal Accounting Officer. Ms. Hirst
is Director of Investment Operations at RCM, with which she has been
associated since December 1994. She is also Vice President and Principal
Accounting Officer of RCS and Vice President and Principal Accounting Officer
of RCM Equity. From February 1980 to April 1994 she was employed by Morgan
Grenfell Asset Management, Ltd., where she served as Head of International
Administration.
WILLIAM S. STACK, Vice President. Mr. Stack is a member of the Equity
Portfolio Management Team and the Chief Investment Officer of International
Equities at RCM, with which he has been associated since 1994. He is also a
Director of RCM General and Vice President and Director of RCM Equity. From
October 1985 to August 1994, he was employed by Lexington Management
Corporation, where he was a Managing Director and Chief Investment Officer
and managed mutual funds and investment in global, international and domestic
securities.
- --------------------------------
** Member, Audit Committee of the Company.
+ Director who is an "interested person" of the Company, as defined
in Section 2(a)(19) of the 1940 Act.
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<PAGE>
TIMOTHY B. PARKER, Secretary and Associate General Counsel. Mr. Parker is
Deputy General Counsel of RCM, with which he has been associated since 1993.
He is also Secretary and Associate General Counsel of RCS; Assistant
Secretary and Associate General Counsel of RCM Equity; and Assistant
Secretary of RCM Trust. From 1989 to 1993, he was an associate in the law
firm of Orrick, Herrington & Sutcliffe.
It is presently anticipated that regular meetings of the Board of Directors
will be held on a quarterly basis. The Executive Committee of the Company
will meet as required when the full Board does not meet, for the purpose of
reviewing the Fund's investment portfolio. The Executive Committee has the
authority to exercise all of the powers of the Company's Board of Directors
at any time when the Board is not in session, except the power to declare
dividends or distributions, authorize the issuance of securities, amend the
Company's ByLaws, recommend to stockholders of the Company any action requiring
their approval or as otherwise required by the 1940 Act. The Company's Audit
Committee, whose sole present member is Mr. Scott, meets with the Company's
independent accountants to exchange views and information and to assist the
full Board in fulfilling its responsibilities relating to corporate
accounting and reporting practices. Mr. Scott receives a fee of $6,000 per
year plus $1,000 for each Board meeting attended, and is reimbursed for his
travel and other expenses incurred in connection with attending Board
meetings. The Investment Manager bears this expense. Mr. Scott receives no
pension or retirement benefits from the Company and is not a director of any
other registered investment Company advised by the Investment Manager or any
of its affiliates, or any other fund that holds itself out to investors as
related to the Company.
The Investment Manager uses a system of multiple portfolio managers to manage
the Fund's assets. Under this system, the portfolio of the Fund is divided
into smaller segments ("portfolios"). Each portfolio is assigned to an
individual portfolio manager who is employed as a research and portfolio
management professional by the Investment Manager. Some of the Fund's
portfolios may be limited to particular industry groups, and a particular
portfolio manager may be responsible for more than one portfolio. Subject to
the objectives for that portfolio and to the Fund's overall investment
objectives, guidelines, and restrictions, the portfolio manager for each
portfolio determines how that portfolio will be invested. The primary
portfolio managers for the Fund are the following individuals:
JOHN A. KRIEWALL. Mr. Kriewall has managed one or more of the Fund's
portfolios since the Fund's inception in 1992. He is a member of the
Investment Manager's Equity Portfolio Management Team and is the Head of its
Equity Research Division and a principal of the firm, and he is a director of
the Company. Mr. Kriewall is also one of the primary portfolio managers of
the RCM Growth Equity Fund. He has been associated with the Investment
Manager since 1973.
G. NICHOLAS FARWELL. Mr. Farwell has managed one or more of the Fund's
portfolios since the Fund's inception in 1992. He is a member of the
Investment Manager's Equity Portfolio Management Team, and he is a director
of the Company. Mr. Farwell is also one of the primary portfolio managers of
the RCM Growth Equity Fund. He has been associated with the Investment
Manager since 1980.
GARY B. SOKOL. Mr. Sokol has managed one or more of the
Fund's portfolios since the Fund's inception in 1992. He is a senior research
analyst and a senior vice president of the Investment Manager. He has been
associated with the Investment Manager since 1988.
The establishment of objectives for each portfolio, the distribution and
redistribution of assets among portfolios, and the oversight of the
investment management of each portfolio is the responsibility of the
Investment Manager's Steering Committee. The Steering Committee is chaired by
William L. Price, the Chairman and President of the Company; the other members
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of the Steering Committee are John A. Kriewall, G. Nicholas Farwell and
Huachen Chen.
The RCM Capital Management Profit Sharing Plan (the "Plan") is a plan limited
to principals and employees of the Investment Manager. The Plan, which is
exempt from federal income taxation under Section 501 of the Internal Revenue
Code of 1986, was the owner of 18,753 shares of the Fund's Capital Stock on
March 31, 1996, constituting less than 1% of total shares outstanding at that
date. Each director or officer of the Company listed in this Prospectus
(other than Mr. Scott) is a beneficiary of this trust and has vested rights
in its assets. Otherwise, no director or officer of the Company was a
beneficial owner of any shares of the Fund's outstanding Common Stock as of
March 31, 1996.
--------------------
THE INVESTMENT MANAGER
--------------------
The Company's Board of Directors has overall responsibility for the operation
of the Fund. Pursuant to such responsibility, the Board has approved
contracts for various financial organizations to provide, among other things,
day to day management services required by the Fund. The Company, on behalf
of the Fund, has retained as the Fund's Investment Manager RCM Capital
Management (the "Investment Manager"), a limited partnership with principal
offices at Suite 3000, Four Embarcadero Center, San Francisco, California
94111. The Investment Manager is actively engaged in providing investment
supervisory services to institutional and individual clients, and is
registered under the Investment Advisers Act of 1940.
The Investment Manager was established in July, 1986, as the successor to the
business and operations of Rosenberg Capital Management (established in
1970). The General Partner and controlling person of the Investment Manager
is RCM Limited, which is the successor in interest to RCM General, the former
General Partner. RCM Limited is managed by its General Partner, RCM General
Corporation, a California corporation. RCM Limited also has 19 limited
partners, all of whom are principals of the Investment Manager and
shareholders of RCM General Corporation: Claude N. Rosenberg, Jr.; John D.
Leland, Jr.; Lee N. Price; Gary W. Schreyer; William L. Price; Walter C.
Price, Jr.; John A. Kriewall; Edward C. Derkum; Jeffrey S. Rudsten; Kenneth
B. Weeman, Jr.; Andrew C. Whitelaw; G. Nicholas Farwell; Ellen M. Courtien;
Melody L. McDonald; Michael J. Apatoff; Eamonn F. Dolan, Joanne L. Howard;
Stephen Kim; and Huachen Chen.
The sole limited partner of the Investment Manager is RCM Acquisition, Inc.,
a wholly owned, indirect subsidiary of The Travelers Inc. ("Travelers").
Travelers, whose principal executive offices are located at 65 East 55th
Street, New York, New York 10022, is a financial services holding company
engaged, through its subsidiaries, principally in the businesses of life and
property and casualty insurance services, consumer finance services, and
investment services. The common stock of Travelers is listed for trading on
the New York Stock Exchange. Neither RCM Acquisition, Inc. nor Travelers has
the power to control the management or operations of the Investment Manager.
Pursuant to the agreement between Primerica Corporation, the predecessor of
Travelers, and RCM Limited L.P., Travelers has an option to acquire the
remaining interest of the Investment Manager from RCM Limited L.P. in the
year 2000.
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<PAGE>
In December 1995, the Investment Manager entered into an Agreement of
Purchase and Sale pursuant to which it will become an entity wholly owned by
Dresdner Bank AG, an international banking organization headquartered in
Frankfurt, Germany. It is expected that the day-to-day operations of the
Investment Manager will not be affected and that the individuals who are
primarily responsible for the management of the Fund's portfolio will remain
the same. The closing of the transaction is subject to a number of
contingencies, including the receipt of certain regulatory approvals. The
transaction is currently expected to close in mid-1996. Because the
transaction may constitute an "assignment" of the Fund's Management Agreement
with the Investment Manager under the 1940 Act, and thus a termination of
such Management Agreement, the Fund will seek prior approval of a new
management agreement from the Fund's Board of Directors and stockholders
prior to the closing of the transaction. The terms of the new management
agreement are expected to be substantially the same as those of the current
Management Agreement, and the transaction will be described in more detail in
the proxy statement being sent to stockholders.
The Investment Manager provides the Fund with investment supervisory services
pursuant to an Investment Management Agreement, Power of Attorney and Service
Agreement (the "Management Agreement") dated January 1, 1992. The Investment
Manager manages the Fund's investments, provides various administrative
services, and supervises the Fund's daily business affairs, subject to the
authority of the Board of Directors. In addition, the Investment Manager
provides persons satisfactory to the Company's Board of Directors to act as
officers and employees of the Company. Such officers and employees, as well
as certain directors of the Company, may be principals or employees of the
Investment Manager. The Investment Manager is also the investment manager for
RCM Growth Equity Fund and RCM International Growth Equity Fund A, the two
other series of the Company, RCM Technology Fund, a series of RCM Equity
Funds, Inc., an open-end management investment company, RCM Strategic Global
Government Fund, Inc., a closed-end management investment company, and is
sub-adviser to Bergstrom Capital Corporation, a closed-end management
investment company.
The Management Agreement was approved by the Fund's stockholders on April 28,
1993, and was most recently approved for renewal by the unanimous vote of the
Board of Directors of the Company on June 12, 1995. The Management Agreement
will continue in effect until July 1, 1996. The Management Agreement may be
renewed from year to year, provided that any such renewals have been
specifically approved at least annually by (i) a majority of the Board of the
Directors of the Company, including a majority of the Directors who are not
parties to the Management Agreement or interested persons of any such person,
cast in person at a meeting called for the purpose of voting on such
approval, or (ii) the vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Fund and the vote of a majority of the
Directors who are not parties to the contract or interested persons of any
such party.
The Fund has, under the Management Agreement, assumed the obligation for
payment of the following ordinary operating expenses: (a) brokerage and
commission expenses, (b) federal, state, or local taxes incurred by, or
levied on, the Fund, (c) interest charges on bor-rowings, (d) charges and
expenses of the Fund's custodian, and (e) payment of all invest-ment advisory
fees (including fees payable to the Investment Manager under the Management
Agreement). The Fund is also responsible for expenses of an extraordinary
nature subject to good faith determination of the Company's Board of
Directors. Expenses attributable to the Fund are charged against the assets
of the Fund. General expenses of the Company's three series, the Fund, RCM
Growth Equity Fund and RCM International Growth Equity Fund A, are allocated
among the three series in a manner proportionate to the net assets of each
series, on a transactional basis, or on such other basis as the Board of
Directors deems equitable.
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<PAGE>
The Investment Manager is, under the Management Agreement, responsible for
all of the Company's other ordinary operating expenses (e.g., legal and audit
fees, SEC and "Blue Sky" registration expenses, and compensation, if any,
paid to officers and employees of the Company), including the compensation of
the disinterested director of the Company. (See DIRECTORS AND OFFICERS.)
For the services rendered by the Investment Manager under the Management
Agreement, the Fund pays a quarterly fee to the Investment Manager equal to
1/4 of 1% (1% on an annual basis) of the average month end net assets of the
Fund. This is higher than the fee paid by most other registered investment
companies. For the years ended December 31, 1995, 1994 and 1993, the Fund
incurred investment management fees aggregating $4,385,825, $6,060,756 and
$5,028,115, respectively.
CLIENTS OF THE INVESTMENT MANAGER WHO ARE SHAREHOLDERS OF THE FUND WILL PAY A
FEE AT THIS RATE ONLY ON THE PORTION OF THEIR ASSETS INVESTED IN SHARES OF
THE FUND. HOWEVER, SUCH CLIENTS WILL NOT PAY ADDITIONAL FEES TO THE
INVESTMENT MANAGER ON THE PORTIONS OF THEIR ASSETS INVESTED IN THE FUND.
ASSETS NOT INVESTED IN SHARES OF THE FUND WILL BE SUBJECT TO FEES IN
ACCORDANCE WITH THE INVESTMENT MANAGEMENT AGREEMENT OR THE INVESTMENT
ADVISORY AGREEMENT BETWEEN THE CLIENT AND THE INVESTMENT MANAGER. CLIENTS WHO
INVEST IN SHARES OF THE FUND WILL GENERALLY PAY AN AGGREGATE FEE WHICH IS
HIGHER THAN THAT PAID BY OTHER CLIENTS NOT INVESTED IN THE FUND.
On the first business day of February, the Investment Manager will pay the
Fund the amount, if any, by which ordinary operating expenses of the Company
attributable to the Fund for the preceding fiscal year (except interest,
taxes and extraordinary expenses) exceed 1.25% of the average net assets of
the Fund for that year, determined monthly. However, in paying the quarterly
investment management fee to the Investment Manager, the Fund will reduce the
amount of such fee by the amount, if any, by which the Fund's ordinary
operating expenses for the previous quarter (except interest, taxes and
extraordinary expenses) exceeded on an annualized basis 1.25% of the average
net assets of the Fund, determined monthly; provided, however, that the Fund
will pay to the Investment Manager on the first day of June the amount, if
any, by which any such reductions in the preceding fiscal year exceeded the
amount to which the Fund would have been entitled in the preceding February
under the immediately preceding sentence if such reductions had not occurred.
For the years ended December 31, 1992 through December 1995, no payment was
due under these provisions from either the Fund or the Investment Manager.
The Management Agreement is terminable without penalty on sixty days' written
notice by a vote of the majority of the Fund's outstanding voting securities,
by a vote of the majority of Company's Board of Directors, or by the
Investment Manager on sixty days' written notice, and will automatically
terminate in the event of its assignment.
--------------------------
EXECUTION OF PORTFOLIO TRANSACTIONS
--------------------------
The Investment Manager, subject to the overall supervision of the Company's
Board of Directors, makes the Fund's investment decisions and selects the
broker or dealer for each specific transaction using its best judgment to
choose the broker or dealer most capable of
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<PAGE>
providing the services necessary to obtain the best execution of that
transaction. In seeking the best execution of each transaction, the
Investment Manager evaluates a wide range of criteria including any or all of
the following: the broker's commission rate, promptness, reliability and
quality of executions, trading expertise, positioning and distribution
capabilities, back-office efficiency, ability to handle difficult trades,
knowledge of other buyers and sellers, confidentiality, capital strength and
financial stability, and prior performance in serving the Investment Manager
and its clients and other factors affecting the overall benefit to be
received in the transaction. When circumstances relating to a proposed
transaction indicate that a particular broker or dealer is in a position to
obtain the best execution, the order is placed with that broker or dealer.
This may or may not be a broker or dealer that has provided investment
information and research services to the Investment Manager. Such investment
information and research services may include, among other things, a wide
variety of written reports or other data on the individual companies and
industries; data and reports on general market or economic conditions;
information concerning pertinent federal and state legislative and regulatory
developments and other developments that could affect the value of actual or
potential investments; attendance at meetings with corporate management
personnel, industry experts, economists, government personnel, and other
financial analysts; comparative issuer performance and evaluation and
technical measurement services; subscription to publications that provide
investment-related information; accounting and tax law interpretations;
availability of economic advice; quotation equipment and services; execution
measurement services; market-related and survey data concerning the products
and services of an issuer and its competitors or concerning a particular
industry that are used in reports prepared by the Investment Manager to
enhance its ability to analyze an issuer's financial condition and prospects;
and other services provided by recognized experts on investment matters of
particular interest to the Investment Manager. In addition, the foregoing
services may include the use of or be delivered by computer systems whose
hardware and/or software components may be provided to the Investment Manager
as part of the services. In any case in which information and other services
can be used for both research and non-research purposes, the Investment
Manager makes an appropriate allocation of those uses and pays directly for
that portion of the services to be used for non-research purposes.
Subject to the requirement of seeking best available price and execution, the
Investment Manager may, in circumstances in which two or more brokers are in
a position to offer comparable prices and execution, give preference to a
broker or dealer that has provided investment information to the Investment
Manager. In so doing, the Investment Manager may effect securities
transactions which cause the Fund to pay an amount of commission in excess of
the amount of commission another broker would have charged. In selecting such
broker or dealer, the Investment Manager will make a good faith determination
that the amount of commission is reasonable in relation to the value of the
brokerage services and research and investment information received, viewed
in terms of either the specific transaction or the Investment Manager's
overall responsibility to the accounts for which the Manager exercises
investment discretion. The Investment Manager continually evaluates all
commissions paid in order to ensure that the commission represents reasonable
compensation for the brokerage and research services provided by such
brokers. Such investment information as is received from brokers or dealers
may be used by the Investment Manager in servicing all of its clients
(including the Fund) and it is recognized that the Fund may be charged a
commission paid to a broker or dealer who supplied research services not
utilized by the Fund. However, the Investment Manager expects that the Fund
will benefit overall by such practice because it is receiving the benefit of
research services and the execution of such transactions not otherwise
available to it without the
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<PAGE>
allocation of transactions based on the recognition of such research services.
Subject to the requirement of seeking the best available prices and
execution, the Investment Manager may also place orders with brokerage firms
that have sold shares of the Fund. However, to date the Fund has not marketed
any of its shares through brokers and the Investment Manager has thus not
utilized the above authority. The Investment Manager has made and will make
no commitments to place orders with any particular broker or group of
brokers. It is anticipated that a substantial portion of all brokerage
commissions will be paid to brokers who supply investment information to the
Investment Manager. During 1995, all brokerage commissions paid by the Fund
were paid to such brokers.
The Fund may in some instances invest in U.S. and/or foreign securities that
are not listed on a national securities exchange but are traded in the
over-the-counter market. The Fund may also purchase listed securities through
the third market or fourth market. When transactions are executed in the
over-the-counter market or the third or fourth market, the Investment Manager
will seek to deal with the primary market-makers for each security; however,
when necessary in order to obtain the best price and execution, it will
utilize the services of others. In all cases, the Investment Manager will
attempt to negotiate the best market price and execution.
For the fiscal years ended December 31, 1995, 1994 and 1993, the Fund paid in
brokerage commissions $754,813, $4,228,279 and $3,304,283, respectively, and
its turnover rates during such periods were 83.9%, 117.7% and 80.0%,
respectively.
As noted above, the limited partner of the Investment Manager is RCM
Acquisition, Inc., a wholly owned, indirect subsidiary of Travelers. Smith
Barney Inc. ("Smith Barney") is a wholly owned subsidiary of Travelers, and
The Robinson-Humphrey Company Inc. ("Robinson-Humphrey") is a wholly owned
subsidiary of Smith Barney. Smith Barney and Robinson-Humphrey are registered
broker-dealers. The Investment Manager believes that it is in the best
interests of the Fund to have the ability to execute brokerage transactions
through Smith Barney and Robinson-Humphrey. Accordingly, the Investment
Manager intends to execute brokerage transactions on behalf of the Fund
through Smith Barney and Robinson-Humphrey, when appropriate, and to the
extent consistent with applicable laws and regulations. In all such cases,
Smith Barney or Robinson-Humphrey will act as agent for the Fund, and the
Investment Manager will not enter into any transaction on behalf of the Fund
in which Smith Barney or Robinson-Humphrey is acting as principal for its own
account. In connection with such agency transactions, Smith Barney or
Robinson-Humphrey may receive compensation in the form of a brokerage
commission separate from the Investment Manager's management fee. It is the
Investment Manager's policy that such commissions be reasonable and fair when
compared to the commissions received by other brokers in connection with
comparable transactions involving similar securities and that the commissions
paid to Smith Barney or Robinson-Humphrey, as the case may be, are no higher
than the commissions paid to that broker by any other similar customer of
that broker who receives brokerage and research services that are similar in
scope and quality to those received by the Fund.
The Investment Manager performs investment management and advisory services
for various clients, including pension, profit sharing and other employee
benefit trusts, as well as individuals. In many cases, portfolio transactions
may be executed in an aggregated transaction as part of concurrent
authorizations to purchase or sell the same security for numerous accounts
served by the Investment Manager, some of which accounts may have investment
objectives similar to those of the Fund. The objective of aggregated
transactions is to obtain favorable execution and/or lower brokerage
commissions, although there is no certainty that such objective will be
achieved. Although executing portfolio transactions in an
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<PAGE>
aggregated transaction potentially could be either advantageous or
disadvantageous to any one or more particular accounts, aggregated
transactions will be effected only when the Investment Manager believes that
to do so will be in the best interest of the Fund, and the Investment Manager
is not obligated to aggregate orders into larger transactions. These orders
generally will be averaged as to price. When such aggregated transactions
occur, the objective will be to allocate the executions in a manner which is
deemed fair and equitable to each of the accounts involved over time. In
making such allocation decisions, the Investment Manager will use its
business judgment and will consider, among other things, any or all of the
following: each client's investment objectives, guidelines, and
restrictions, the size of each client's order, the amount of investment funds
available in each client's account, the amount already committed by each
client to that or similar investments, and the structure of each client's
portfolio. Although the Investment Manager will use its best efforts to be
fair and equitable to all clients, including the Fund, there can be no
assurance that any investment will be proportionately allocated among clients
according to any particular or predetermined standard or criteria. The
Investment Manager will not include orders on behalf of any affiliated or
related entities in any aggregated transaction that includes orders placed on
behalf of the Fund.
----------------------------
INVESTMENT BY EMPLOYEE BENEFIT PLANS
----------------------------
All shareholders of the Fund are (and are expected in the future to be)
organizations and individuals to whom the Investment Manager also provides
discretionary investment supervisory or investment advisory services. For
discretionary account clients that are employee benefit plans subject to the
Employee Retirement Income Security Act of 1974 ("ERISA"), investment in
shares of the Fund requires a special form of approval procedure by the
plans' independent "fiduciaries," as described below.
ERISA provides that, when an employee benefit plan invests in any security
issued by an investment company registered under the 1940 Act (such as the
Company), the assets of such plan will be deemed to include that security,
but shall not, solely by reason of such investment, be deemed to include any
assets of the investment company. ERISA also provides that the investment by
an employee benefit plan in securities issued by an investment company
registered under the 1940 Act will not cause the investment company or the
investment company's advisor to be deemed a "fiduciary" or a "party in
interest" with respect to such employee benefit plan, as those terms are
defined in Title I of ERISA, or a "disqualified person" with respect to such
plan for purposes of the Internal Revenue Code of 1986.
The Investment Manager does not intend to cause the Fund to invest in the
securities of a company that is a sponsor of an employee benefit plan owning
shares of the Fund. However, should such an investment occur, either by
portfolio decisions of the Investment Manager or by the purchase of shares by
an employee benefit plan, the shares held by the Fund would not be considered
"employer securities" within the meaning of ERISA Section 407 (which limits
the amount of employer securities which may be held by certain employee
benefit plans) for an employee benefit plan owning shares of the Fund.
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<PAGE>
Although only the shares of the Fund and not its underlying investments will
be considered assets of an employee benefit plan purchasing the Fund's
shares, the ERISA Conference Report of the U. S. Congress indicates that, for
purposes of determining whether the investments of an employee benefit plan
meet the diversification requirements of ERISA Section 404, it is appropriate
to apply the diversification rule by examining the diversification of
investments by the Fund. The Department of Labor has indicated its
concurrence in this position in Advisory Opinion 75-93 (November 4, 1975).
The Investment Manager presently anticipates that shares of the Fund will be
purchased by employee benefit plans that have appointed or may appoint the
Investment Manager as "investment manager" (within the meaning of ERISA
Section 3(38)) of some or all of their assets. The Department of the Treasury
and the Department of Labor have promulgated a "Prohibited Transaction Class
Exemption" (Prohibited Transaction Exemption 77-4, 42 Fed. Reg. 18732 (April
8, 1977)) exempting from the prohibited transaction restrictions of ERISA the
purchase and sale by an employee benefit plan of shares of a registered,
open-end investment company when a fiduciary with respect to the plan (e.g.,
an investment manager) is also the investment adviser for the investment
company, provided certain conditions are met. It is the intention of the Fund
and the Investment Manager to take all necessary steps to satisfy these
conditions when the transaction so requires. The applicable conditions are:
1. The employee benefit plan (the "plan") does not pay a sales commission in
connection with such purchase or sale. (The Fund does not charge a sales
commission in connection with the sale of its common stock.)
2. The plan does not pay a redemption fee in connection with the sale by the
plan to the investment company of its shares unless:
(a) the redemption fee is paid to the investment company, and
(b) the fee is disclosed in the investment company prospectus in
effect both at the time of the purchase of such shares and at
the time of such sale. (The Fund does not charge a redemption fee.)
3. The plan does not pay an investment management fee with respect to plan
assets invested in such shares for the entire period of the investment.
This does not preclude payment of fees by the investment company under the
terms of the Management Agreement adopted in accordance with Section 15 of
the 1940 Act. (The Investment Manager does not charge a separate management
fee on plan assets invested in shares of the Fund.)
4. A second fiduciary with respect to the plan, who is independent of and
unrelated to the fiduciary/investment adviser or any affiliate of the
adviser, must receive a prospectus issued by the investment company, and a
full and detailed written disclosure of the investment advisory and other
fees charged to or paid by the plan and the investment company, including the
nature and extent of any differential between the rates of such fees, the
reasons why the fiduciary/investment adviser may consider purchases of
investment company stock to be appropriate, and whether there are any
limitations on the fiduciary/investment adviser with respect to which plan
assets may be invested in shares of the investment company and, if so, the
nature of such limitations.
5. On the basis of the prospectus and the additional disclosure materials
described above, the second fiduciary approves the purchases and sales.
The approval may be limited solely to the investment advisory and other fees
paid by the investment company in relation to the fees paid by
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<PAGE>
the plan and need not relate to any other aspect of the investment. The
approval must be either:
(a) set forth in the plan document or investment management agree-ment, or
(b) indicated in writing prior to each purchase or sale, or
(c) indicated in writing prior to the commencement or continuation of a
specified purchase or sale program in the shares of such investment
company.
6. The second fiduciary or any successor thereto is notified in writing of
any change in any of the rates of fees referred to in Paragraph 5 and
approves in writing the continuation of the purchases and sales and the
continued holding of shares acquired prior to the change. Such approval
may be limited solely to the investment advisory and other fees.
As noted above, the Fund and the Investment Manager intend to conform with
the above provisions in connection with investments in the Fund by employee
benefit plans managed by the Investment Manager. The Fund and Investment
Manager solicit approval of specified purchase programs as described in
Paragraph 5(c) above. Such a program will establish a purchase limitation
based either on a specific dollar amount or on a percentage of the total
assets of a plan which are committed to investment in equity and
equity-related securities supervised by the Investment Manager.
------------------
HOW TO PURCHASE SHARES
------------------
THE FUND CURRENTLY OFFERS ITS SHARES SOLELY TO INSTITUTIONS AND INDIVIDUALS
WHO HAVE ENTERED INTO AN INVESTMENT MANAGEMENT AGREEMENT OR AN INVESTMENT
ADVISORY AGREEMENT WITH THE FUND'S INVESTMENT MANAGER, RCM CAPITAL
MANAGEMENT. THE FUND EXPECTS TO CONTINUE THIS POLICY IN THE FUTURE. IN THIS
CAPACITY, THE INVESTMENT MANAGER MAY BE AUTHORIZED TO DETERMINE THE AMOUNT
AND TIMING OF PURCHASES AND REDEMPTIONS OF SHARES HELD BY DISCRETIONARY
CLIENTS SUBJECT ONLY TO GENERAL AUTHORIZATIONS AND GUIDELINES OF THE
INVESTMENT MANAGER'S DISCRETIONARY CLIENTS. (See INVESTMENT BY EMPLOYEE
BENEFIT PLANS above.)
Shares of the Fund are offered on a continuous basis at the net asset value
per share (next determined after acceptance of orders), without any sales or
other charge. The initial investment must be at least $10,000, and there is a
$1,000 minimum for additional investments other than through the Fund's
automatic dividend reinvestment plan (see DIVIDENDS, DISTRIBUTIONS AND TAX
STATUS). The Company reserves the right at any time to waive, increase, or
decrease the minimum requirements applicable to initial or subsequent
investments.
Eligible investors or their duly authorized agents may purchase shares from
the Company by sending a signed, completed subscription form to the Company
at Suite 3000, Four Embarcadero Center, San Francisco, California 94111
(telephone (415) 954-5400). Subscription forms can be obtained from the
Investment Manager or the Company. The Company, on behalf of the Fund, does
not have dealer agreements.
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<PAGE>
Orders for shares received by the Company prior to the close of the New York
Stock Exchange composite tape, on each day the New York Stock Exchange is
open for trading, will be priced at the net asset value (see NET ASSET VALUE)
computed as of the close of the New York Stock Exchange composite tape on
that day. The Company reserves the right to reject any order at its sole
discretion. Orders received after the close of the New York Stock Exchange
composite tape, or on any day on which the New York Stock Exchange is not
open for trading, will be priced at the close of the New York Stock Exchange
composite tape on the next succeeding date on which the New York Stock
Exchange is open for trading. Net asset value normally is not calculated for
any day on which an order for shares is not received or on which shares are
not surrendered for redemption.
Upon receipt of the subscription form in good order, the Company will open a
shareholder account in accordance with the investor's registration
instructions. A confirmation statement reflecting the current transaction
along with a summary of the status of the account as of the transaction date
will be forwarded to the investor.
Payment for shares purchased should be made by check or money order, payable
to:
State Street Bank and Trust Company
U.S. Mutual Funds Services Division
P.O. Box 1713
Boston, Massachusetts 02105
Attn: RCM Small Cap Fund
Account I002
For overnight delivery, the address is:
1776 Heritage Drive
North Quincy, Massachusetts 02171
Investors may also wire funds in payment of orders to the above address.
Wired funds should include the following: the shareholder's registration name
and account number with the Company and the name of the Fund.
The Company will issue share certificates of the Fund only for full shares
and only upon the specific request of the shareholder. Confirmation
statements showing transactions in the shareholder account and a summary of
the status of the account serve as evidence of ownership of shares of the
Fund.
In its discretion, the Company may accept securities of equal value instead
of cash in payment of all or part of the subscription price for the Fund's
shares offered by this Prospectus. Any such securities (a) will be valued at
the close of the New York Stock Exchange composite tape on the day of
acceptance of the subscription in accordance with the method of valuing the
Fund's portfolio described under NET ASSET VALUE; (b) will have a tax basis
to the Fund equal to such value; (c) must not be "restricted securities"; and
(d) must be permitted to be purchased in accordance with the Fund's
investment objectives and policies set forth in this Prospectus and must be
securities that the Fund would be willing to purchase at that time.
Prospective shareholders considering this method of payment should contact
the Company in advance to discuss the securities in question and the
documentation necessary to complete the transaction. Share purchases with
securities will not be taxable transactions to shareholders of the Fund that
are exempt from Federal income taxation under Section 501(a) of the Code.
The Fund will accept subscriptions only when its net assets, at cost, are at
or below $750 million. When the value of its net assets, at cost, reaches
$750 million, the Fund will be closed to new investments until such time as
the Fund's net assets, at cost, are reduced by redemption, changes in market
value or otherwise to a level below $750 million. This restriction on new
purchases shall not apply to reinvestments of dividends and capital gains
distributions on to additional investments by existing shareholders.
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<PAGE>
-----------------------
NET ASSET VALUE
-----------------------
The net asset value of each share of the Fund on which the subscription and
redemption prices are based is determined by the sum of the market value of
the securities and other assets owned by the Fund less its liabilities,
computed in accordance with the Articles of Incorporation and By-Laws of the
Company. The net asset value of a share is the quotient obtained by dividing
the net assets of the Fund (i.e., the value of the assets of the Fund less
its liabilities, including expenses payable or accrued but excluding capital
stock and surplus) by the total number of shares of the Fund outstanding. The
net asset value of the Fund's shares will be calculated as of the close of
regular trading on the New York Stock Exchange, currently 4:00 p.m., New York
time, (unless weather, equipment failure or other factors contribute to an
earlier closing time) on the last day of each month that the New York Stock
Exchange is open for trading, and on any day that the New York Stock Exchange
is open for trading and on which there is a sale or redemption of the Fund's
shares.
For purposes of this computation, equity securities traded on stock exchanges
are valued at the last sale price on the exchange or in the principal
over-the-counter market in which such securities are traded as of the close
of business on the day the securities are being valued. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange determined by the Investment Manager to be the primary market
for the securities. If there has been no sale on such day, the security will
be valued at the closing bid price on such day. If no bid price is quoted on
such day, then the security will be valued by such method as a duly
constituted committee of the Board of Directors of the Company shall
determine in good faith to reflect its fair market value. Readily marketable
securities traded only in the over-the-counter market that are not listed on
NASDAQ or similar foreign reporting service will be valued at the mean BID
price, or such other comparable sources as the Board of Directors of the
Company in good faith deems appropriate to reflect their fair market value.
Other portfolio securities held by the Fund will be valued at current market
value, if current market quotations are readily available for such
securities. To the extent that market quotations are not readily available
such securities shall be valued by whatever means a duly constituted
committee of the Board of Directors of the Company in good faith deems
appropriate to reflect their fair market value.
Futures contracts and related options are valued at their last sale or
settlement price as of the close of the exchange on which they are traded or,
if no sales are reported, at the mean between the last reported bid and asked
prices. All other assets of the Fund will be valued in such manner as a duly
constituted committee of the Board of Directors of the Company in good faith
deems appropriate to reflect their fair market value.
The Fund may use a pricing service approved by its Board of Directors to
value long-term debt obligations. Prices provided by such a service represent
evaluations of the mean between current bid and asked market prices, may be
determined without exclusive reliance on quoted prices, and may reflect
appropriate factors such as institution-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, individual
trading characteristics, indications of value from dealers, and other market
data. Such services may use electronic data processing techniques and/or a
matrix system to determine valuations. The procedures of such services are
reviewed periodically by the officers of the Fund under the general
supervision of the Board of Directors. Short-term investments are amortized
to maturity based on their cost, adjusted for foreign exchange translation,
provided such valuations equal fair market value.
- -------------------------------------------------------------------------------
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<PAGE>
----------------------
REDEMPTION OF SHARES
----------------------
Subject only to the limitations described below, the Company's Articles of
Incorporation require that the Company redeem the shares of the Fund tendered
to it, as described below, at a redemption price equal to the net asset value
per share as next computed following the receipt of all necessary redemption
documents. There is no redemption charge.
Payment for shares redeemed will be made within seven days after receipt by
the Company of: (a) a written request for redemption, signed by each
registered owner or his duly authorized agent exactly as the shares are
registered, which clearly identifies the exact names in which the account is
registered, the account number and the number of shares or the dollar amount
to be redeemed; (b) stock certificates for any shares to be redeemed that are
held by the stockholder; and (c) the additional documents required for
redemptions by corporations, executors, administrators, trustees, and
guardians, as applicable. Redemptions will not become effective until all
documents in the form required have been received by the Company. A
shareholder in doubt as to what documents are required should contact the
Company.
If the Company is requested to redeem shares for which it has not yet
received payment, the Company will delay or cause to be delayed the mailing
of a redemption check until such time as it has assured itself that payment
has been collected for the purchase of such shares. The delay may be up to 15
days. Delays in the receipt of redemption proceeds may be avoided if shares
are purchased through the use of wire-transferred funds or other methods
which do not entail a clearing delay in the Fund receiving "good funds" for
its use.
Upon execution of the redemption order, a confirmation statement will be
forwarded to the shareholder indicating the number of shares sold and the
proceeds thereof. Proceeds of all redemptions will be paid by check or
federal funds wired no later than seven calendar days subsequent to execution
of the redemption order except as may be provided below.
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven days after shares are tendered for
redemption, except for any period during which the New York Stock Exchange is
closed (other than customary weekend or holiday closing) or during which the
SEC determines that trading thereon is restricted, or for any period during
which an emergency (as determined by the SEC) exists as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable,
or as a result of which it is not reasonably practical for the Fund fairly to
determine the value of its net assets, or for such other periods as the SEC
may by order permit for the protection of stockholders of the Fund.
Payments will be made wholly in cash unless the Board of Directors believes
that economic conditions exist which would make such a practice detrimental
to the best interests of the Fund. Under such circumstances, payment of the
redemption price could be made either in cash or in portfolio securities
(selected in the discretion of the Board of Directors of the Company and
taken at their value used in determining the redemption price), or partly in
cash and partly in portfolio securities. Payment for shares redeemed also may
be made wholly or partly in the form of a pro rata portion of each of the
portfolio securities held by the Fund at the request of the redeeming
shareholder, if the Fund believes that honoring such request is in the best
interests of the Fund. If payment for shares redeemed were to be made wholly
or partly in portfolio securities, brokerage costs would be incurred by the
investor in converting the securities to cash.
- -------------------------------------------------------------------------------
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<PAGE>
Because the net asset value of the Fund's shares will fluctuate as a result
of changes in the market value of securities owned, the amount a shareholder
receives upon redemption may be more or less than the amount paid for the
shares.
-------------------------
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
-------------------------
It is the intention of the Fund to distribute to its shareholders all of each
fiscal year's net investment income and net realized capital gains, if any,
on the Fund's investment portfolio. The amount and time of any such
distribution must necessarily depend upon the realization by the Fund of
income and capital gains from investments.
Until the Board of Directors otherwise determines, each income dividend and
capital gains distribution, if any, declared by the Fund will be reinvested
in full and fractional shares based on the net asset value as determined on
the payment date for such distributions unless the shareholder or its duly
authorized agent has elected to receive all such payments or the dividend or
distribution portions thereof in cash. Changes in the manner in which
dividend and distribution payments are made may be requested by the
shareholder or its duly authorized agent at any time through written notice
to the Company and will be effective as to any subsequent payment if such
notice is received by the Company prior to the record date used for
determining the shareholders entitled to such payment. Any dividend and
distribution election will remain in effect until the Company is notified by
the shareholder in writing to the contrary.
Any dividend or distribution received by a shareholder on shares of the Fund
will have the effect of reducing the net asset value of such shares by the
amount of such dividend or distribution.
Dividends generally are taxable to shareholders at the time they are paid.
However, dividends declared in October, November and December by the Fund and
made payable to shareholders of record in such a month are treated as paid
and are thereby taxable as of December 31, provided that the Fund pays the
dividend no later than January 31 of the following year.
ALTHOUGH TAXABLE INDIVIDUALS AND INSTITUTIONS ARE PERMITTED TO INVEST IN THE
FUND, PROSPECTIVE TAXABLE INVESTORS NEED TO BE AWARE THAT THE FUND'S
INVESTMENT MANAGER WILL NOT CONSIDER THE TAX EFFECT OF CAPITAL GAIN OR LOSS
RECOGNITION OR ANY DIFFERENCE IN THE TREATMENT OF LONG- AND SHORT-TERM
CAPITAL GAINS UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE") WHEN MAKING INVESTMENT DECISIONS FOR THE FUND'S PORTFOLIO. This may
result in a taxable shareholder paying higher income taxes than would be the
case with investment companies emphasizing the realization of long-term
capital gains.
The Company has qualified and intends to continue to qualify the Fund as a
"regulated investment company" under Subchapter M of the Code. The Fund will
be treated as a separate fund for tax purposes and thus the provisions of the
Code applicable to regulated investment companies generally will be applied
to the Fund. In addition, net capital gains, net investment income, and
operating expenses will be determined separately for the Fund. By complying
with the applicable provisions of the Code, the Fund will not be subjected to
federal income taxes with respect to net investment
- -------------------------------------------------------------------------------
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<PAGE>
income and net realized capital gains distributed to its shareholders.
To qualify under Subchapter M, the Fund must (a) derive at least 90% of its
gross income from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of stock or securities or
certain options, futures, forward contracts on foreign currencies; (b) derive
less than 30% of its gross income from the sale or other disposition of stock
or securities held less than three months; and (c) diversify its holdings so
that, at the end of each fiscal quarter, (i) at least 50% of the market value
of the Fund's assets is represented by cash, cash items, U.S. Government
securities and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the Fund assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of
its total assets is invested in the securities of any one issuer (other than
U.S. Government securities or the securities of other regulated investment
companies), or in two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses.
In any fiscal year in which the Fund so qualifies and distributes at least
90% of the sum of its investment company taxable income (consisting of net
investment income and the excess of net short-term capital gains over net
long-term capital losses) and its tax-exempt interest income (if any), it
will be taxed only on that portion, if any, of such investment company
taxable income and any net capital gain that it retains. The Fund expects to
so distribute all of such income and gains on an annual basis, and thus will
generally avoid any such taxation.
Even though the Fund qualifies as a "regulated investment company," it may be
subject to certain federal excise taxes unless the Fund meets certain
additional distribution requirements. Under the Code, a nondeductible excise
tax of 4% is imposed on the excess of a regulated investment company's
"required distribution" for the calendar year ending within the regulated
investment company's taxable year over the "distributed amount" for such
calendar year. The term "required distribution" means the sum of (i) 98% of
ordinary income (generally net investment income) for the calendar year, (ii)
98% of capital gain net income (both long-term and short-term) for the
one-year period ending on October 31 (as though the one year period ending on
October 31 were the regulated investment company's taxable year), and (iii)
the sum of any untaxed, undistributed net investment income and net capital
gains of the regulated investment company for prior periods. The term
"distributed amount" generally means the sum of (i) amounts actually
distributed by the Fund from its current year's ordinary income and capital
gain net income and (ii) any amount on which the Fund pays income tax for the
year. The Fund intends to meet these distribution requirements to avoid the
excise tax liability.
Shareholders who are subject to federal or state income or franchise taxes
will be required to pay taxes on dividends and capital gains distributions
they receive from the Fund whether paid in additional shares of the Fund or
in cash. To the extent that dividends received by the Fund would qualify for
the 70% dividends received deduction available to corporations, the Fund must
designate in a written notice to shareholders the amount of the Fund's
dividends that would be eligible for this treatment. In order to qualify for
the dividends received deduction, a corporate shareholder must hold the Fund
shares paying the dividends upon which a dividend received deduction is based
for at least 46 days. Shareholders, such as qualified employee benefit plans,
who are exempt from federal and state taxation generally would not have to
pay income tax on dividend or capital gain distributions. Prospective
tax-exempt investors should consult their own tax advisers with respect to
the tax consequences of an investment in the Fund's shares under federal,
state and local tax laws.
Clients who purchase shares of the Fund shortly before the record date of a
dividend or capital gain distribution will pay full price for the shares
("buying a dividend") and then receive
- -------------------------------------------------------------------------------
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<PAGE>
some portion of the price back as a taxable dividend or capital gain
distribution.
Federal law requires the Company to withhold 31% of income from dividends,
capital gains distributions and/or redemptions (including exchanges) that
occur in certain shareholder accounts if the shareholder has not properly
furnished a certified correct Taxpayer Identification Number and has not
certified that withholding does not apply. Amounts withheld are applied to
the shareholder's federal tax liability, and a refund may be obtained from
the Internal Revenue Service if withholding results in an overpayment of
taxes.
Under the Code, distributions of net investment income by the Fund to a
shareholder who, as to the U.S., is a nonresident alien individual,
nonresident alien fiduciary of a trust or estate, foreign corporation, or
foreign partnership (a "foreign shareholder") will be subject to U.S.
withholding tax (at a rate of 30% or lower treaty rate, whichever is less).
Withholding will not apply if a dividend paid by the Fund to a foreign
shareholder is "effectively connected" with a U.S. trade or business, in
which case the reporting and withholding requirements applicable to U.S.
citizens or domestic corporations will apply. Distributions of net long-term
capital gains are not subject to tax withholding, but in the case of a
foreign shareholder who is a nonresident alien individual, such distributions
ordinarily will be subject to U.S. income tax at a rate of 30% if the
individual is physically present in the U.S. for more than 182 days during
the taxable year.
Futures contracts and related options entered into by the Fund may be
"Section 1256 contracts" under the Code. Any gains or losses on Section 1256
contracts are generally considered 60% long-term and 40% short-term capital
gains or losses, although certain foreign currency gains and losses from such
transactions may be treated as ordinary income in character. Section 1256
contracts held by the Fund at the end of each taxable year (and for purposes
of the 4% nondeductible excise tax, on October 31 or such other dates as
prescribed under the Code) are "marked to market," with the result that
unrealized gains or losses are treated as though they were realized.
Generally, transactions in stock index futures contracts and related options
undertaken by the fund may result in "straddles" for U.S. federal income tax
purposes. The straddle rules may affect the character of gains or losses
realized by the Fund. In addition, losses realized by the Fund on positions
that are part of a straddle position may be deferred under the straddle
rules, rather than being taken into account for the taxable year in which
these losses are realized. Because only a few regulations implementing the
straddle rules have been promulgated, the tax consequences of such
transactions to the Fund are not entirely clear.
Transactions in futures contracts and related options may increase the amount
of short-term capital gain realized by the Fund which is taxed as ordinary
income when distributed to shareholders. The Fund may make one or more of the
elections available under the Code which are applicable to straddle
positions. If the Fund makes any of the elections, the amount, character and
timing of the recognition of gains or losses from the affected straddle
positions will be determined under the rules that vary according to elections
made. The rules applicable under certain of the elections operate to
accelerate the recognition of gains or losses from the affected straddle
positions. Because the application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the recognition
of gains or losses form the affected straddle positions, the amount which
must be distributed to shareholders, and which will be taxed to shareholders
as ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions. The qualification rules of Subchapter M may limit the extent to
which the Fund will be able to engage in transactions involving stock index
futures contracts and all related options.
Under the Code, gains or losses attributable to fluctuations and exchange
rates which occur between the time the Fund accrues interest or
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<PAGE>
other receivables, or accrues expenses or other liabilities, denominated
in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities, generally are treated as ordinary
income or loss. Similarly, on the disposition of certain futures contracts
and related options, gains or losses attributable to fluctuation in the value
of foreign currency between the dates of acquisition and disposition are also
treated as ordinary gain or loss. These gains or losses, referred to under
the code as "Section 988" gain or losses, may increase or decrease the amount
of the Fund's investment company taxable income to be distributed to
shareholders as ordinary income.
The Fund may be required to pay withholding and other taxes imposed by
foreign countries which would reduce the Fund's investment income, generally
at rates from 10% to 40%. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. To the extent the Fund does
pay foreign withholding or other foreign taxes on certain of its investments,
investors will not be able to deduct their pro rata shares of such taxes in
computing their taxable income and will not be able to take their share of
such taxes as a credit against their United States income taxes.
Each shareholder will receive following the end of each fiscal year of the
Company, full information on dividends, capital gains distributions and other
reportable amounts with respect to shares of the Fund for tax purposes,
including information such as the portion taxable as capital gains, and the
amount of dividends, if any, eligible for the federal dividends received
deduction for corporate taxpayers.
The foregoing is a general abbreviated summary of present United States
Federal income tax laws and regulations applicable to dividends and
distributions by the Fund. Investors are urged to consult their own tax
advisers for more detailed information and for information regarding any
foreign, state, and local tax laws and regulations applicable to dividends
and distributions received.
---------------------
DESCRIPTION OF CAPITAL STOCK
---------------------
The Company was incorporated in Maryland on March 16, 1979. The authorized
capital stock of the Company is 25,000,000 shares of Capital Stock (par value
$0.10 per share) of which 8,000,000 shares have been designated as shares of
RCM Small Cap Fund. 12,000,000 shares have been designated as shares of RCM
Growth Equity Fund and 4,500,000 shares have been designated as shares of RCM
International Growth Equity Fund A. The Company's Board of Directors has
authorized the issuance of three series of shares of capital stock, each
representing an interest in one of three investment portfolios, RCM Growth
Equity Fund, RCM Small Cap Fund and RCM International Growth Equity Fund A,
and the Board of Directors may, in the future, authorize the issuance of
other series of capital stock representing shares of additional investment
portfolios or funds. All shares of the Company have equal voting rights and
will be voted in the aggregate, and not by series, except where voting by
series is required by law or where the matter involved affects only one
series. There are no conversion or preemptive rights in connection with any
shares of the Company. All shares of the Fund when duly issued will be fully
paid and non-assessable. The rights of the holders of shares of the Fund may
not be modified except by vote of the majority of the out-
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<PAGE>
standing shares of the Fund. Certificates are not issued unless requested and
are never issued for fractional shares. Fractional shares are liquidated when
an account is closed. As of March 31, 1996, there were 2,862,449.562 shares of
the Fund outstanding; on that date the following were known to the Fund to own
of record more than 5% of the Fund's capital stock:
NAME AND % OF SHARES
ADDRESS OF SHARES OUTSTANDING AS OF
BENEFICIAL OWNER HELD MARCH 31, 1996
- ------------------------------- ----------- -----------------
Fidelity Management Trust Co. 624,134.674 21.80%
American Stores Retirement Portfolio
82 Devonshire Street
Boston, Massachusetts 02109
The Northern Trust Company 212,211.923 7.41%
The J. Paul Getty Trust
P.O. Box 3577
Terminal Annex
Los Angeles, California 90051
Bankers Trust Company 174,651.656 6.10%
Chevron Corporation Annuity Trust
648 Grassmere Park Road
Nashville, Tennessee 37211
Chase Manhattan Bank, N.A 170,972.498 5.97%
Employees Retirement Plan
Florida Progress Corporation
3 Metro Tech Center
Brooklyn, New York 11245
State Street Bank & Trust Company 160,803.791 5.62%
General Mills, Inc.
P.O. Box 1992
Boston, Massachusetts 02105-1992
Except as described above, the Fund has no information regarding the
beneficial owners of such shares. All shareholders of the Fund are also
clients of the Investment Manager. (See INVESTMENT BY EMPLOYEE BENEFIT
PLANS.) As investment manager for discretionary account clients, the
Investment Manager may be authorized to determine the amount and timing of
purchases and redemptions of the Fund's shares held by such clients, subject
only to general restrictions and approvals of such clients. As a result, the
Investment Manager under law may also be deemed the beneficial owner of all
of the outstanding shares of the Fund and in "control" of the Fund on account
of such beneficial ownership. Nevertheless, each shareholder of the Fund that
is a client of the Investment Manager retains the general authority to
restrict or instruct the Investment Manager with respect to investments in
shares of the Fund.
Shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of all series of the Company's shares voting for the
election of directors can elect 100% of the directors if they wish to do so.
In such event, the holders of the remaining less
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<PAGE>
than 50% of the shares voting for the election of directors will not be able
to elect any person or persons to the Board of Directors.
The Company is not required to hold a meeting of shareholders in any year in
which the 1940 Act does not require a shareholder vote on a particular
matter, such as election of directors. The Company will hold a meeting of its
shareholders for the purpose of voting on the question of removal of one or
more directors if requested in writing by the holders of at least 10% of the
Company's outstanding voting securities, or to assist in communications with
its shareholders as required by Section 16(c) of the 1940 Act.
---------------------
SHAREHOLDER REPORTS
---------------------
The fiscal year of the Fund ends on December 31 of each year. The Fund will
issue to its shareholders semi-annual and annual reports; each annual report
will contain a schedule of the Fund's portfolio securities, audited annual
financial statements and related footnotes, and information regarding
purchases and sales of securities during the period covered by the report, as
well as information concerning the Fund's performance in accordance with
rules promulgated by the SEC. In addition, shareholders will receive
quarterly statements of the status of their accounts reflecting all
transactions having taken place within that quarter. The Federal income tax
status of shareholders' distributions will also be reported to shareholders
after the end of each fiscal year.
---------------------
COUNSEL
---------------------
The validity of the shares offered by this Prospectus has been passed upon by
Paul, Hastings, Janofsky & Walker, 555 South Flower Street, Los Angeles,
California 90071. Paul, Hastings, Janofsky & Walker have acted and will
continue to act as counsel to the Investment Manager in various matters.
---------------------
INDEPENDENT ACCOUNTANTS
---------------------
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, have been appointed as independent auditors for the Company. Coopers &
Lybrand L.L.P. will conduct an annual audit of the Fund, assist in the
preparation of the Fund's federal and state
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<PAGE>
income tax returns, and consult with the Company as to matters of accounting,
regulatory filings, and federal and state taxation.
The financial statements of the Fund incorporated by reference herein have been
audited by Coopers & Lybrand L.L.P., independent accountants, as stated in their
opinion appearing therein and are included in reliance upon such opinion given
upon the authority of said firm as experts in accounting and auditing.
---------------------
SAFEKEEPING OF SECURITIES, DISTRIBUTOR, AND TRANSFER
AND REDEMPTION AGENT
---------------------
State Street Bank and Trust Company, U.S. Mutual Funds Services Division,
P.O. Box 1713, Boston, Massachusetts 02105 serves as custodian of all
securities and funds owned by the Fund in accordance with the terms of a
Custodial Agreement between the Company and the Custodian. The Custodian also
provides dividend paying services to the Fund.
The Company acts as its own transfer and redemption agent for its common
stock and solicits orders from qualified investors to purchase shares of the
Fund.
---------------------
ADDITIONAL INFORMATION
---------------------
This Prospectus does not contain all of the information set forth in the
Company's registration statement and related forms as filed with the SEC,
certain portions of which are omitted in accordance with rules and
regulations of the Commission. The registration statements and related forms
may be inspected at the Public Reference Room of the Commission at Room 1024,
450 5th Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and copies
thereof may be obtained from the Commission at prescribed rates.
Under an Agreement dated March 16, 1979, the Investment Manager (through its
predecessor, Rosenberg Capital Management) has granted the Company the right
to use the "RCM" name and has reserved the right to withdraw its consent to
the use of such name by the Company at any time, or to grant the use of such
name to any other company. In addition, the Company has granted the
Investment Manager, under certain conditions, the use of any other name it
might assume in the future, with respect to any other investment company
sponsored by the Investment Manager.
The Fund may from time to time compare its investment results with the
following:
1. The Russell 2000 Index which is the 2,000 smallest stocks in the Russell
3000 Index.
2. The Standard & Poor's 500 Index, which is a widely recognized index
composed of
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<PAGE>
the capitalization-weighted average of the price of 500 of the largest
publicly traded stocks in the United States.
3. The Value Line Composite Index, which consists of approximately
1,700 common equity securities.
4. The NASDAQ Over-the-Counter Composite Index, which is a value-weighted
index composed of 4,500 stocks traded over the counter.
5. Data and mutual fund rankings published or prepared by Lipper Analytical
Services, Inc., which ranks mutual funds by overall performance,
investment objectives, and assets.
---------------------
FINANCIAL STATEMENTS
---------------------
Incorporated by reference herein are the financial statements of RCM Small
Cap Fund, contained in the Fund's Annual Report to Shareholders for the year
ended December 31, 1995, including the Report of Independent Accountants,
dated February 9, 1996, the Statement of Investment in Securities and Net
Assets, the Statement of Assets and Liabilities, the Statement of Operations,
the Statement of Changes in Net Assets, and the related Notes to Financial
Statements. A copy of the Fund's Annual Report to Shareholders is available,
upon request, by calling the Fund at (415) 954-5400, or by writing the Fund
at Four Embarcadero Center, Suite 3000, San Francisco, CA 94111.
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<PAGE>
INVESTMENT MANAGER
RCM Capital Management
Four Embarcadero Center, Suite 3000
San Francisco, California 94111
TRANSFER AND REDEMPTION
AGENT
RCM Capital Funds, Inc.
Four Embarcadero Center, Suite 3000
San Francisco, California 94111
CUSTODIAN
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
Paul, Hastings, Janofsky & Walker
555 South Flower Street
Los Angeles, California 90071
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Combined Prospectus and
Statement of Additional Information
April 29, 1996
