Registration No. 2-26011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 35
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 35
(Check appropriate box or boxes)
The Rainbow Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
33 Whitehall Street, New York, New York 10004
(Address of Principal Executive Offices) (Zip Code)
(212) 482-0803
Registrant's Telephone Number, including Area Code
David A. Rosen, Esq.
Wise & Shepard, LLP
1271 Avenue of the Americas
New York, New York 10020
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering continuous offering
It is proposed that this filing will become effective
(check appropriate box)
[ X ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
<PAGE>
[GRAPHIC -- COMPANY LOGO]
The Rainbow Fund Inc.
33 Whitehall Street
30th Floor
New York, N.Y. 10004
Telephone Number (212) 482-0803
A No-Load Fund
----------
Prospectus
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April 24, 1997
<PAGE>
THE RAINBOW FUND INC.
[GRAPHIC -- COMPANY LOGO]
PROSPECTUS
April 24, 1997
33 Whitehall Street, 30th Floor, New York, N.Y. 10004
Telephone Number (212) 482-0803
COMMON STOCK ($.10 PAR VALUE)
The Rainbow Fund, Inc. is a no-load, non-diversified, open-end investment
company which seeks possible growth of capital. The Fund is designed for
investors who, aware of the risks involved, seek the possibility of obtaining
capital growth. The Fund's investments will emphasize common stock. The Fund may
also use certain speculative techniques including the acquisition of put and
call options, the writing of covered and uncovered put and call options, and
short selling.
The subscription price is the net asset value per share (see page 7). The
minimum initial subscription is $300 and the minimum subsequent investment is
$50. There are no sales charges. Unlike some mutual funds, The Rainbow Fund does
not charge its shareholders for advertising, promotion and marketing activities.
This Prospectus briefly tells you information you should know before
investing and should be retained for future reference. A statement of Additional
Information has been filed with the Securities and Exchange Commission and
contains further information about the Fund. You may obtain a copy without
charge by calling or writing the Fund at the telephone number or address shown
above. The Statement of Additional Information is dated the same date as this
Prospectus and is hereby incorporated by reference into this Prospectus.
Furman, Anderson & Co., 33 Whitehall Street, 30th Floor, New York, NY
10004 (212 482-0801) is the Fund's investment advisor.
<PAGE>
TABLE OF CONTENTS
Per Share Income and Capital Changes
Fund Expense Table
Sales
Total Investment Return
Investment Objectives and Policies
Special Risks
Put and Call Options
Definitions
Investment Goals and Risks in the
Purchase and Writing of Options on
Securities
Investment Objectives and Risks in the
Purchase and Writing of Stock Index
Options
Other Investment Techniques
Short Sales
Collateral and Segregation Requirements
For Options and Short
The Fund's Non-Diversified Classification
Fundamental Investment Policies and
Restrictions
Net Asset Value
How to Buy Shares
Other Shareholder Services
Redemption of Shares
Management
Taxes, Dividends and Distributions
Additional Information
Purchase Application
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
Per Share Income and Capital Changes
(Based upon the monthly average number of outstanding shares)
The following table has been examined by Harold Keller, CPA. The auditors
report is contained in the Fund's Annual Report to Shareholders for the year
ended October 31, 1996 which is incorporated by reference in the Fund's
registration statement, and may be requested by shareholders. See "Reports".
<TABLE>
<CAPTION>
Fiscal Year Ended October 31
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988*
---- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $5.51 $5.21 $5.66 $5.60 $6.42 $4.60 $5.97 $5.44 $4.86
Income From Investment Operations
Net investment income (Loss) (.13) (.08) (.06) (.06) (.03) .01 .00 .06 (.01)
Net Gains (Losses) on Securities .79 .67 (.01) .07 (.25) 1.81 (.79) .47 .59
(Both Realized & Unrealized)
----- ----- ----- ----- ----- ----- ----- ----- -----
Total From Investment Operations .66 .59 (.09) .01 (.28) 1.82 (.79) .53 .58
----- ----- ----- ----- ----- ----- ----- ----- -----
Less Distributions
Dividends
(From Net Investment Income) .00 .00 .00 .00 .01 .00 .07 .00 .00
Distributions
(From Capital Gains) .54 .34 .36 .00 .53 .00 .51 .00 .00
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions .54 .34 (.36) .00 (.54) .00 (.58) .00 .00
----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value, End of Year $5.71 $5.51 $5.21 $5.66 $5.60 $6.42 $4.60 $5.97 $5.44
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Return +13.43% +12.28% -.02% +.01% +.01% +32.00% -14.66% +9.74% +11.32%
Ratios/Supplemental Data
Net Assets, End of Year
(in Thousands) $1,248 $1,587 $1,686 $1,856 $2,245 $2,518 $1,883 $2,173 $2,094
Ratio of Expenses to
Average Net Assets 3.67% 3.68% 3.36% 2.86% 2.66% 2.84% 3.41% 3.22% 1.39%
Ratio of Net Income to
Average Net Assets (.02%) (.02%) (.01%) (.01%) (.05%) .19% .10% 1.11% (.28%)
Portfolio Turnover Rate 46% 102% 66% 81% 81% 103% 212% 193% 90%
*Five Month Period
<PAGE>
<CAPTION>
First Year
ended May 31,
-------------
1988
-----
<S> <C>
Net Asset Value, Beginning of Year $6.18
Income From Investment Operations
Net investment income (Loss) (.01)
Net Gains (Losses) on Securities (.55)
(Both Realized & Unrealized) -----
Total From Investment Operations (.56)
-----
Less Distributions
Dividends
(From Net Investment Income) .00
Distributions
(From Capital Gains) .76
-----
Total Distributions (.76)
-----
Net Asset Value, End of Year $4.86
-----
Total Return -10.30%
Ratios/Supplemental Data
Net Assets, End of Year
(in Thousands) $1,897
Ratio of Expenses to
Average Net Assets 3.53%
Ratio of Net Income to
Average Net Assets (.20%)
Portfolio Turnover Rate 133%
</TABLE>
<PAGE>
FUND EXPENSES
The following table illustrated all expenses and fees that a shareholder
of the Fund will incur:
Shareholder Transaction Expenses
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases ............................................None
Sales Load Imposed on Reinvested Dividends .................................None
Redemption Fees ............................................................None
Exchange Fees ..............................................................None
Annual Fund Operating Expenses
- --------------------------------------------------------------------------------
Investment Advisory Fees ................................................. .08%
12b-1 Fees ............................................................... None
Other Expenses ........................................................... 3.59%
----
Total Operating Expenses .............................................. 3.67%
====
The purpose of this table is to assist the investor in understanding the
various costs and expenses that an investor in the fund will bear directly or
indirectly.
The following example illustrates the expenses that you would pay on a
$1,000 investment over various time periods assuming (1) a 5% annual rate of
return and (2) redemption at the end of each time period. As noted in the table
above, the fund charges no redemption fees of any kind:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
37.00 112.00 190.00 392.00
This example should not be considered a representation of past or future
expenses or performance. Actual expense may be greater or lesser than those
shown.
<PAGE>
TOTAL INVESTMENT RETURN
The following graph illustrates the results of a $10,000 investment in
The Rainbow Fund, Inc. for the ten year period from October 31, 1986 through
October 31, 1996 compared to the S & P Index. The percentage figures show
results on a "total return" basis and assume the reinvestment of both income and
capital gains distributions. The results shown should not be considered as a
representation of the dividend income or capital gain or loss that may be
realized from an investment made in the Fund today.
[GRAPHIC -- Bar Graph Plotted to Points in Chart Below]
Period Rainbow S & P 500
------ ------- ---------
1 Year 13.2% 21.3%
5 Years 27.4% 68.5%
10 Years 82.6% 189.1%
Avg. Annual Rate of Return 7.2% 11.8%
During the fiscal year ended October 31, 1996, the Fund's net asset value
increased by 13.2%. The Fund's goal is to identify opportunities to buy good
fundamentals at reasonable prices, and to avoid paying high prices for mediocre
fundamentals. This defensive stance resulted in a larger than usual cash
position during the year. Where the opportunity arose, the Fund wrote calls
against portfolio holdings which in management's opinion were fully priced. The
result of this cautious strategy limited the Fund's upside potential. As a
result, net asset value did not grow in line with the most common stock
averages.
INVESTMENT OBJECTIVES AND POLICIES
The purpose of the Fund is to provide a sophisticated investment program
for investors whose objective is growth of capital. Portfolio securities are
selected primarily on the basis of potential capital enhancement. Common stocks
will comprise most of the Fund's investment portfolio, although the Fund may
also retain cash and invest in defensive securities, including preferred stocks,
bonds or other fixed income securities. No attempt will be made to create a
regular flow of current income. The Fund's investment policies permit management
to employ speculative market techniques, the purchase of listed put and call
options, the writing of "covered" and "uncovered" put and call options, and the
purchase and writing of options on stock indexes, techniques which are rarely
employed by conventional mutual funds and involve special risks. The Fund is
designed for investors who are aware of and are able to assume the risks
involved in investing, and there is no assurance that professional management
can eliminate such risks.
<PAGE>
SPECIAL RISKS
Put and Call Options
The Fund may purchase and write put and call option contracts on
securities and on stock indexes. Option transactions will be limited, however,
so that at the time any option is written, the aggregate amount of the Fund's
assets required to be posted as collateral or maintained in a segregated account
to cover the Fund's obligations in respect thereof will not exceed (i) 5% of the
Fund's net assets in respect of options pertaining to the securities of any
single issuer; or (ii) 25% of the Fund's net assets in respect of all unexpired
uncovered options written by the Fund. Further, the aggregate sums represented
by premiums paid for options then held by the Fund shall not exceed 10% of the
Fund's net asset value. Existing uncovered option positions would not be covered
or closed out, and options held by the Fund would not be exercised however,
solely because a change in the market value of the underlying securities or a
change in relative values caused the aforesaid percentage limitations to be
exceeded.
Management intends to utilize the purchase and sale of put and call
options on securities for a number of purposes, including (i) the earning of
premium income in connection with the writing of options; (ii) as a means of
achieving capital appreciation in upward, neutral and downward markets; and
(iii) as a defensive technique in downward markets. The Fund will purchase and
write stock index options only as a hedge against the effect that changes in
general market conditions may have on the values of securities held in the
Fund's portfolio, or which the Fund intends to purchase, and where such
transactions are economically feasible. Incorrect market judgments, however, can
lead to losses in connection with option trading as with any other form of
investment.
Definitions
The following terms are commonly used in referring to the options
markets.
A put is an option contract which obliges the writer to buy and gives the
holder the right to sell a particular security (the "underlying security") at a
specified price (the "exercise price") within a period expiring on a specified
date (the "expiration date"). A call is an option contract which obliges the
writer to sell and gives the holder the right to buy the underlying security at
a specified price on or before the expiration date.
A Stock Index assigns relative values to the common stocks included in
that index (for example, Standard & Poor's 500 Index). The index fluctuates with
changes in the market values of the common stocks underlying the index. A Stock
Index Option is a contract which obliges the writer, upon exercise by the holder
at a specified exercise price, to pay to the holder an amount equal to the
difference between the exercise price and the value of the securities comprising
the Stock Index ("Index level").
The premium is the price which is paid to the option writer by the buyer.
"Covered Call Options" -- The writer of a put option is obliged to buy
the underlying security and the writer of a call is obliged to sell the
underlying security at the exercise price. The write of a covered call limits
his risk by owning the underlying security or a security convertible into such
security.
<PAGE>
An Exchange Listed Option is an option traded on a national securities
exchange. These exchanges provide a central primary market for purchasing and
writing options, and a secondary market in which holders may resell their
options and writers may "close out" their option positions. The holder of an
exchange listed put or call which is in a profitable position need not exercise
his option to realize his profit. Instead, he may sell the option on the
exchange's auction market.
The Fund can terminate its position in an option in several ways:
(1) If the Fund holds a put or call on a security and such option is in a
profitable position, it may exercise the option, in which case it will be a
seller of the stock underlying the put or a purchaser of the stock underlying
the call. The Fund can also terminate its position in a Stock Index Option it
holds by exercising the option through the Options Clearing Corporation. The
Fund would receive a "cash settlement" equal to the spread between the closing
value of the index and the exercise price of the option.
(2) The Fund may also enter into a Closing Purchase or a Closing Sale
Transaction with respect to an option on a security or a Stock Index Option it
has previously written or purchased. The Fund would execute a Closing Purchase
Transaction as to an option previously written by the Fund (thus terminating
further market risk as to such option) by purchasing, on the exchange on which
the option is traded, an option of the same series and exercise price as the
option previously written. The Fund would have a profit or loss with respect to
a Closing Purchase Transaction depending on whether the premium paid for the
option purchased was lower or higher than the premium received when the option
was written. In a Closing Sale Transaction, the Fund would sell an option of the
same series and exercise price as an option it had previously purchased, and
would have a profit or loss depending upon whether the premium received on the
sale was higher or lower than the premium paid for the option previously
purchased.
Further information on put and call and stock index options is provided
in the Statement of Additional Information.
Investment Goals and Risks in the Purchase
and Writing of Options on Securities
The Purchase of a call would allow the Fund to profit by a rise in the
price of the underlying security, while limiting its investment to the premium.
If the price of the underlying security did not rise sufficiently to cover the
premium paid, or the price declined, the Fund would suffer a loss.
The purchase of a put would place the Fund in a position equivalent to
that of a short seller, while limiting its risk to the premium paid. If the
market price of the underlying security rose, the Fund would suffer a loss.
Thus, the purchase of a put is potentially profitable only when a market decline
in the underlying security is anticipated.
The writing of a covered call provides a possible means of increasing the
Fund's income in respect of securities held in the Fund's portfolio. If the
price of the security should rise above the exercise price, however, the holder
of the call would exercise, thus requiring the Fund to sell the underlying
security at the exercise price and to forego the benefit of any additional price
rise. The writing of a covered call does not protect the Fund from a decline in
<PAGE>
the price of the underlying security, although the premium received would
mitigate the Fund's loss. The writing of an uncovered call or a put would be
effected principally for the purpose of earning additional income from the
premiums generated, where the Fund does not anticipate that an adverse
difference will develop between the exercise and the market price. An uncovered
put might also be sold where the Fund desires to establish a position in the
underlying security, but has not determined the exact timing of the purchase; if
the Fund wrote such a put (with an exercise price deemed to be within an
acceptable rate) its cost for such security if the put were exercised would, in
effect, be reduced by the premium received. Theoretically, however, the writing
of an uncovered call or a put would subject the Fund to a limitless loss in the
event of adverse market movements.
Investment Objective and Risks in the
Purchase and Writing of Stock Index Options
The Fund may purchase or write stock index put and call options which are
traded on national securities exchange. Such transactions may be effected if the
adviser determines that the securities underlying the index correlate
sufficiently with the securities in the Fund's portfolio so as to provide a
hedge against changes in market conditions affecting the Fund's portfolio. For
example, if the Fund anticipates a market decline but concludes that a rapid
liquidation of its portfolio would be disadvantageous, it may purchase put
options on a stock index. To the extent that the index correlates to the Fund's
portfolio securities, a decline in the Fund's portfolio values would be offset
by an increase in the value of the stock index put option. Conversely, if the
Fund anticipates a general market advance, the purchase of a stock index call
affords a hedge against not participating in such advance at a time when the
Fund is not fully invested.
The Fund might write a put on a stock index when the Fund is not fully
invested and anticipates a market advance, but where, in the Fund's opinion, the
purchase of a call would be too expensive. If the index in fact advanced, the
Fund would realize a profit on the premium received from the sale of the put;
however, if the index declined below the amount of the premium received on the
put, the Fund would suffer a loss. The Fund might write a call on a stock index
when it is fully invested and anticipates a modest index rise, a basically
neutral market or a market decline. In such an event, it would realize a profit
from the call premium received.
If the index advanced at a greater rate than anticipated, the Fund could
suffer a loss on the call, but, assuming correlation of the index with its
portfolio, such loss would be mitigated by an advance in the portfolio
positions. If, conversely, the market declined, the Fund's profit on the call
premium would mitigate the loss in the Fund's portfolio position.
In engaging in stock index option transactions, the Fund incurs several
risks, including (1) the risk of imperfect correlation between the index and the
Fund's portfolio securities (which ordinarily will not be the same as those
underlying the index) and (2) the risk that lack of liquidity in the option
markets will make it difficult for the Fund to effect a closing transaction in
order to limit a developing loss or realize a gain in an option. The Fund
intends, however, to limit its index option transactions to options in which the
Fund believes a liquid market has developed.
<PAGE>
OTHER INVESTMENT TECHNIQUES
Warrants. The Fund may invest in warrants to the extent of 10% of its net asset
value. Warrants held in its portfolio would not be sold, however, solely because
a change in relative values causes such percentage limitation to be exceeded.
Foreign Securities. The Fund may invest in securities issued by foreign
companies to the extent of 25% of its net asset value. Foreign securities held
in its portfolio, however, would not be liquidated solely because a change in
relative values causes such percentage limitation to be exceeded. The foregoing
25% limitation will not apply to investments in securities which are listed in
the United States on a national securities exchange.
Short Sales. The Fund may sell securities short as a defensive measure. Short
selling involves the sale of borrowed securities, which the Fund is obligated to
replace at the market price prevailing at the time the Fund purchases it for
delivery to the lender regardless of the cost. The Fund could thus realize a
profit if the market value of a security sold short declined; on the other hand,
if the market value of such security increased, the Fund would sustain a loss.
Potential losses on short positions are greater than those on securities owned
by the Fund.
No short sale will be effected which will cause the then aggregate
current market value of all securities sold short to exceed 25% of the value of
the Fund's net assets or cause the then aggregate current market value of the
unlisted securities sold short to exceed 5% of such value.
COLLATERAL AND SEGREGATION REQUIREMENTS
FOR OPTIONS AND SHORT SALES
The fund has determined that it will maintain in a segregated account
with its custodian, cash or United States government securities at such a level
that the amount segregated plus the amount held as collateral by the broker will
equal the current market value of the securities sold short (or the options
written). See "Collateral and Segregation Requirements" in the Statement of
Additional Information.
THE FUND'S NON-DIVERSIFIED
CLASSIFICATION
The Fund is classified as a "non-diversified" investment company under
the Investment Company Act of 1940. This means that it is not restricted under
said act as to the percentage of its assets it may invest in the securities of
any issuer (subject to the Fund's fundamental investment policy which prohibits
investment of more than 25% of its assets in a particular industry) or the
percentage of a given class of securities which it may purchase. Since a
non-diversified investment company is permitted to concentrate its investments
in the securities of relatively few issuers, such non-diversification may lead
to greater investment risk. The Fund, however, qualifies as a "diversified"
investment company for federal income tax purposes. See "Taxes, Dividends and
Distributions," for a discussion of investment restrictions which must be
observed by the Fund in order to maintain such tax status.
<PAGE>
FUNDAMENTAL INVESTMENT POLICIES
AND RESTRICTIONS
The Fund operates pursuant to certain fundamental investment policies and
restrictions which cannot be changed without the vote of holders of a majority
of the outstanding voting securities of the Fund (as defined in the Investment
Company Act of 1940). The investment restrictions set forth on pages 4 through 6
under the captions "Special Risks" and "Other Investment Techniques" constitute
such fundamental investment policies. As a further fundamental investment
policy, the Fund will not invest more than 25% of its assets in a particular
industry. The Fund has also adopted additional fundamental investment policies
and restrictions, and other policies which may be changed by the Board of
Directors. These policies are explained in detail in the Statement of Additional
Information.
NET ASSET VALUE
The net asset value of each share is determined as of the close of
business of the New York Stock Exchange on each business day when the New York
Stock Exchange is open by dividing the net assets of the Fund by the total
number of the Fund's outstanding shares. Each listed security is valued at the
last reported sale price; where no trade has occurred, securities will be valued
at the last reported sale price on the day last traded. Securities not traded on
any exchange will be valued at their last quoted bid price in the over-the-
counter market. Any securities or other assets for which market quotations are
not readily available will be valued at fair value as determined in good faith
by the Board of Directors.
HOW TO BUY SHARES
Investors may buy shares of the Fund at the net asset value next
determined after receipt of their order at the office of the Fund's transfer
agent:
Investor Data Services
33 Whitehall Street
30th Floor
New York, New York 10004
The full amount of any payment received will be used to purchase the
greatest number of full and fractional shares possible. Certificates
representing the Fund's whole shares will not be issued unless specifically
requested in writing by the shareholder. Fractional shares will be held for the
account of the shareholder by Investor Data Services. Each shareholder will
receive an accumulative account receive statement with a confirmation of each
transaction.
The services of a broker are not required for the purchase of Fund
shares; however, if the services of a broker are utilized, the broker may charge
a fee.
The Fund reserves the right to suspend the offering of its shares, to
reject any specific order and to change or waive minimum investment
requirements.
<PAGE>
OTHER SHAREHOLDER SERVICES
Retirement Plans
An Individual Retirement Account (IRA) may be funded with shares of the
Fund. Custodial fees may be charge for these services.
Further information, a fees schedule and application forms may be
obtained by writing or telephoning the Fund.
REDEMPTION OF SHARES
The Fund's shares are redeemable at the net asset value next determined
after receipt of a written request for redemption in good order. The Fund will
make payment within 7 days after receipt of the redemption request. Good order
means that the redemption request must include (1) the stock certificate, if
issued; (2) a letter of instruction or a stock assignment specifying the number
of shares to be redeemed, signed by all registered owners in the exact manner in
which the shares are registered; (3) a guarantee of the signature of each
registered owner by any bank, member of a national security exchange, or other
eligible guarantor institution; and (4) other supporting legal documents, if
required, as in the case of corporations, estates, trusts or other owners in
fiduciary capacity.
Requests for redemption must be made directly to Investor Data Services,
33 Whitehall Street, 30th Floor, New York, New York 10004. It is unnecessary to
use the services of a broker to redeem shares of the Fund; if such services are
used, the broker may charge a fee.
MANAGEMENT
Furman, Anderson & Co., is the Fund's Investment advisor (the "Advisor"),
and in such capacity manages the investment of the Fund's portfolio and
administers its affairs, subject to the supervision of the Fund's Board of
Directors. The Advisor (including its predecessor, Robert M. Furman, sole
proprietor) has been the Fund's advisor since 1974.
The Fund pays the Advisor an annual advisory fee at the rate of (i) 5/8
of 1% of the Fund's average annual net asset value not exceeding $2,000,000;
(ii) 1/2 of 1% of the average annual net asset value with respect to net assets
between $2,000,000 and $5,000,000; and (iii) 3/8 of 1% of the average annual net
asset value with respect to assets exceeding $5,000,000. The advisory fee is
paid once yearly. The Advisory Agreement also provides that the Fund will pay
for substantially all of its operating expenses.
The advisory fee to be paid to the Advisor described above is to be
reduced, but not below zero, by the amount, if any, by which the expenses of the
Fund (exclusive of such compensation, interest, brokerage commissions, taxes,
dividends on short sales and legal fees incurred in connection with litigation
in which the Fund is a plaintiff) exceed 3% of that portion of the Fund's
average annual net assets below $10,000,000; 1/2% of average annual net assets
from $10,000,000 to $30,000,000; and 1/4% of average annual net assets above
$30,000,000. The Advisor's fee will also be reduced (but not below zero) by 50%
of the amount by which brokerage fees received by the Advisor in respect to the
Fund's portfolio transactions exceed 2% of the Fund's average annual net assets.
The Advisor has agreed that such reduction will also be effected with regard to
brokerage fees which are received by any affiliate of the Advisor.
<PAGE>
The Advisory Agreement recognizes that the Advisor will act as the Fund's
regular broker, and will execute portfolio transactions except when better price
or execution is obtainable through another broker. Since January 1994, an
affiliate of the Advisor. Shamus Group, Inc., has been acting as the Fund's
principal broker, subject to the availability of better price and execution
service through other brokers.
The Fund also pays transfer agency and shareholder service fees to
Investor Data Services, an affiliate of the Advisor. The Statement of Additional
Information sets forth information concerning the investment advisory fee
payable to the Advisor, portfolio brokerage policy, brokerage commissions paid
to the Advisor, and fees paid to Investor Data Services.
TAXES, DIVIDENDS AND DISTRIBUTIONS
Subchapter M of the Internal Revenue Code imposes various requirements of
qualifications as a "regulated investment company." Among other requirements,
the income of a qualifying company from the sale of securities held less than
three months may not exceed 30% of its gross income. Additionally, as of the end
of any fiscal quarter, not more than 50% of its total assets may be invested in
securities comprising more than five percent of the value of its total assets
nor may more than 25% of its assets be represented by its investment in the
securities of one issuer. An investment company which qualifies under Subchapter
M, and distributes substantially all of its net investment income and realized
gains to shareholders is not subject to federal income taxation.
Management presently intends to cause the Fund to qualify under
Subchapter M for the fiscal year ending October 31, 1996 and future years.
Dividends will customarily be declared within 45 days following the end of each
fiscal year.
Shareholders of the Fund who are required to pay Federal income tax must
treat dividends from net investment income, including any net short-term capital
gains, as ordinary income. Distribution of long-term capital gains are taxable
as long-term capital gains regardless of the length of time a shareholder has
held his shares in the Fund. After the close of each calendar year, the Fund
will send a notice to shareholders specifying what portion of the payments they
received was ordinary income and what portion was long-term capital gains for
income tax reporting purposes. Dividends are taxable whether they received in
cash or reinvested in shares of the Fund.
If you purchase shares shortly before a record date for a distribution
you will, in effect, receive a return of a portion of your investment, but the
distribution will be taxable to you even if the net asset value of your shares
is reduced below your cost. However, for federal income tax purposes, your
original cost would continue as your tax basis. If you redeem shares within six
months or less, any loss on the sale of those shares would be long-term capital
loss to the extent of any long-term capital gains that you have received on
those shares.
Additional information concerning the Fund's tax status is set forth in
the Statement of Additional Information.
<PAGE>
ADDITIONAL INFORMATION
Description of Common Stock
The authorized capital stock of the Fund consists of two million shares
of Common Stock, par value of $.10 per share. Each of the Fund's shares has
equal divided, voting, liquidation and distribution rights except that
fractional shares do not have voting power. There are no conversion or
preemptive rights in connection with any of the Fund's shares.
Matthew Furman, an adult child of Robert M. Furman, may be deemed to be a
control person of the Fund by virtue of the fact that as of February 27, 1997 he
owned of record and beneficially 83,997 shares of the Fund's common stock,
representing 38% of all the Fund's issued and outstanding common shares.
The Fund was organized as a corporation in 1967 under the Delaware
General Corporation Law. On March 1, 1990 the Fund was reincorporated in the
State of Maryland.
Reports
Each shareholder will receive an annual report containing audited
financial statements of the Fund and a semi-annual report containing unaudited
financial statements. Copies of the auditor's report on the condensed financial
information contained under the caption "Per Share Income and Capital Changes"
and copies or the Fund's annual and semi-annual reports may be obtained by
writing or calling the Fund at the address and telephone number on the cover
page of this Prospectus.
<PAGE>
[GRAPHIC -- COMPANY LOGO]
The Rainbow Fund Inc.
Mail this completed application form to:
Investor Data Services
33 Whitehall Street
30th Floor
New York, N.Y. 10004
REGISTRATION INFORMATION
(Please Print)
A. Name in which account in to be registered:
Individual __________________________________
Joint Owner _________________________________
Joint ownership means "joint tenants with rights
of survivorship and not as tenants in common"
Or B. Gifts to Minors _______________________
Custodian's Name
(one custodian only)
Custodian for _________________________
Minor's Name
(one minor only)
Under _____________ the Uniform Gifts to Minors Act
State
Or C. Trusts, Corporations, etc. _____________
________________________________________
Trust Date: ____________________________
Address ______________________________________
______________________________________________
City State Zip
Telephone ( ) ____________________________
U.S. Citizen [ ] Yes [ ] No
AMOUNT
A. $________________________ make check payable to:
The Rainbow Fund ($300 minimum).
<PAGE>
DIVIDENDS
All income dividends and capital gains distributions will
be reinvested unless here noted.
[ ] Pay all income and capital gains in cash.
[ ] Pay all ordinary income in cash and reinvest long term
capital gains.
TAX INFORMATION/SIGNATURE
Under the Federal Income Tax Law, you are subject to certain penalties, as well
as withholding of tax at a 31 percent rate if you do not complete the following
section.
Social Security or Taxpayer I.D. No. __________________________________________
A. [ ] I have [ ] have NOT been notified by the IRS that I am subject to
Backup Withholding as a result of failure to report dividend or interest
income.
B. [ ] The IRS has notified me that I am no longer subject to Backup
Withholding.
Under penalties of perjury, I certify that the information in this section
is true , correct and complete.
I (we) have full right, power, authority, and legal capacity and am (are)
of legal age in state of residence to purchase shares of the Fund. I (we)
affirm that I (we) have received and read the current prospectus of the
Fund and agree to its terms.
Signature ________________________________________
(as registered) joint owner, Trustee, etc.
Signature ________________________________________
(or joint owner, if applicable)
Date _____________________________________________
(Check One):
[ ] Owner
[ ] Trustee
[ ] Custodian
[ ] Other
Please Be Sure You Have Signed This Form. Your Signature is Required For Social
Security Number Certification and Establishing Your Account.
<PAGE>
The Rainbow Fund, Inc.
_____________________________________________________
Custodian for the Securities
and Cash of the Fund:
Star Bank
P.O. Box 1118
425 Walnut Street
ML 6118
Cincinnati, Ohio 45201
Transfer, Dividend Disbursing and
Redemption Agent for Fund Shares
and all Shareholder Inquiries:
Investor Data Services
33 Whitehall Street
30th Floor
New York, N.Y. 10004
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection
with the offer continued in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been made by the
Fund or the Investment Advisor. This Prospectus is not an offer in any state in
which such offer may not lawfully be made.
<PAGE>
THE RAINBOW FUND, INC.
30th Floor
33 Whitehall Street
New York, New York 10004
(212) 482-0803
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1997
This Statement of Additional Information is not a prospectus. It should
be read in connection with the Prospectus of the Fund which contains important
information concerning the Fund's investment objectives, investment policies and
restrictions, the Fund's management, redemption or repurchase of Fund shares,
and other information which the Fund's management considers to be material and
important to any person considering an investment in the Fund's shares. Such
Prospectus is incorporated herein by reference.
A copy of the Fund's Prospectus may be obtained at no charge by writing
to the Fund at the address shown above or by calling the Fund at the number
listed above.
This Statement of Additional Information relates to the Prospectus of
the Fund dated April 30, 1997.
<PAGE>
TABLE OF CONTENTS
General Information and History
Investment Objectives and Policies
Special Risks
Portfolio Turnover
Management of the Fund
Remuneration of Officers and Directors
Control Persons and Principal Holders
of Securities
Investment Advisory and Other Services
Brokerage Allocation
Capital Stock and Other Securities
Purchase, Redemption and Pricing of
Securities Being Offered
Tax Status
Financial Statements
<PAGE>
GENERAL INFORMATION AND HISTORY
The Fund was organized in 1967 and during its history has not engaged in
any business other than that of an investment company.
INVESTMENT OBJECTIVES AND POLICIES
The purpose of the Fund is to provide a sophisticated investment program
for investors whose objective is growth of capital. Portfolio securities are
selected primarily on the basis of potential capital enhancement. While common
stocks will comprise most of the Fund's portfolio, the Fund may also invest in
defensive securities, including preferred stocks, bonds or other fixed income
securities, or retain funds in cash.
The Fund's investment policies permit management to employ speculative
market techniques, including the purchase and sale of listed put and call
options. The Fund may also purchase and write options on stock indexes, sell
securities short, invest in warrants and foreign securities and borrow money for
purposes of investing it in securities.
The Fund is a "non-diversified" investment company (as such term is
defined in the Investment Company Act of 1940) and is accordingly able to
concentrate in investments in fewer issuers than would be permitted if the Fund
were classified as a "diversified" Fund. The Fund, however, operates as a
"diversified" investment company for federal income tax purposes. See "The
Fund's Non-Diversified Status" in the Prospectus and "Tax Status" in this
Statement of Additional Information.
SPECIAL RISKS
Put and Call Options
The Prospectus describes the investment goals and risks in the purchase
and writing of options on securities and options on stock indexes, and reference
to the Prospectus at the caption "Put and Call Options" is made for a full and
complete description of such investment goals and risks. The following are
explanations of certain techniques which the Fund may use in connection with its
transactions in put and call options which may be of interest to investors.
A covered call is a call whose writer owns the underlying security or a
security convertible into such security. For example, assume the Fund has sold a
call to A relating to 100 shares of XYZ Company with an exercise of $30, and
charged A a premium of $200. If the market in XYZ then moved to $40, A would
most likely exercise the call, since the market difference would give A a profit
of $800 ($1,000 less the $200 premium A paid into the Fund) if A immediately
resold the XYZ stock he acquired upon exercise. If the Fund owned 100 shares of
XYZ stock, the Fund would be "covered". However, if the Fund were not covered,
then the Fund would be obliged to purchase XYZ stock in the open market at $40
(or possibly higher) in order to acquire the XYZ stock which it must deliver to
A at $30. Theoretically, in a rapidly rising market, the Fund, as writer of such
an uncovered call, would be exposed to limitless risk.
The use of a put option as a "hedge" against a decline in the price of a
security owned by the Fund may be illustrated by the following example:
<PAGE>
If the Fund had purchased 100 shares of XYZ Company at $30 and the price
had risen to $50, the Fund might seek to protect its profit by purchasing a put
on XYZ stock exercisable at $50. While the Fund would pay a premium for the put,
thus reducing its profit, it would, in effect, "lock in" its market profit of 20
points for the life of the put. If the market price declined, the Fund could
exercise the put by selling its XYZ stock at $50. Of course, if the price of the
underlying security were to rise still further, the Fund would not exercise the
put.
To the extent that option investment activities are designed to generate
premium income rather than capital gains, such activities must be compared with
the relatively risk-free opportunities offered by the purchase of government or
corporate obligations. The Fund will utilize option strategies, including
combinations such as those described below, where the anticipated income return
is substantially greater than that obtainable from investments presenting lesser
risk; but there can be no assurance against loss if the market moves in a
direction adverse to the Fund's position.
It is contemplated that put and call option transactions may be effected
in combinations. In management's view, the securities markets have become
increasingly erratic, and portfolio securities, despite favorable performances
by issuing companies, often do not develop buying support. As a result,
securities with fundamental investment merit may nevertheless exhibit meandering
price movements over an extended period. Management believes that the ability to
write and purchase options in various combinations can assist the Fund in
generating income even in periods of lateral or downward market activity. While
the Fund's principal objective is growth of capital, management believes that
the interests of the Fund would be better served if additional income
opportunities were available during periods in which the market outlook does not
appear favorable to capital growth. In determining whether or not to seek income
from the use of options, the Fund will consider the availability of income from
other sources involving lesser risk, including government obligations, "money
market" securities and other income-oriented instruments, and will only engage
in option transactions where it believes the income producing opportunities may
be significantly greater.
The following are examples of the types of option combinations which the
Fund may utilize:
A spread is created by the purchase of an option and the concurrent sale
of a different option on the same underlying security. A ratio spread is created
by the current purchase and sale of different options in unequal quantities on
the same underlying security. As an example, the Fund might purchase an XYZ
call, exercisable at $60 and expiring in July, paying a premium of $500, and
sell two calls exercisable at $65 with the same expiration date, receiving two
premiums of $250 each. The Fund's only net cost incurred would be brokerage
fees. (Since the Fund has written two calls and purchased only one call, the
purchased call covers one of the written calls, leaving the Fund uncovered on
the second call written.) The maximum profit on this spread would be $500, which
would occur only if XYZ stock were at $65 at expiration of the calls, since the
Fund would sell its $60 call for a profit of $500, and the two calls it had
written would expire unexercised or worthless. Its potential profit on the
spread would decline to zero if XYZ declined to $60 or rose to $70. At $60 or
below, all calls would expire unexercised, with the Fund having lost only its
initial brokerage fees. At $70, however, the Fund would be at risk as to the one
uncovered call.
<PAGE>
A straddle is created by purchasing or writing equal numbers of both put
and call options on the same underlying security, with all options having the
same exercise price and expiration date. As an example, the Fund, selecting the
stock of ABC Company as the underlying security, might sell July $60 puts at a
$450 premium and July $60 calls at a $500 premium, for aggregate premiums of
$950. The Fund would be "uncovered" as to each of the options, but as long as
the market price of ABC remained between $69.50 and $50.50, the Fund would be in
a net profit position by virtue of the $950 in premiums it had received, with
its maximum profit attained if ABC remains at $60. The exercise against the Fund
of either of the options at a time when the adverse spread exceeded $950 (i.e.
if the market price of ABC declined below $50.50 or rose above $69.50) would
result in a net loss to the Fund.
A strangle is similar to a straddle, involving the writing of both a put
and a call on the same underlying security. In the case of a strangle, however,
the put and call would be written at exercise prices on different sides of the
prevailing price of the underlying security. For example, the Fund might write a
UVW July $85 put for $300 and write a UVW July $90 call for $500, at a time when
the market price of UVW is $88. If UVW closed between $85 and $9O in July the
entire premium would be retained. At a market price of over $90 or under $85,
one of the options written by the Fund would be exercised against it, with the
loss on that option reducing the Fund's overall gain from the premium received.
At market prices below $77 or above $98, the loss to the Fund on the option
exercised would exceed the premium received.
There are several other combinations of put and calls which the Fund
might use. In each case, the nature of the combinations would depend upon the
adviser's estimate of future market movement of the underlying security. In a
combination in which any option is uncovered, the Fund would be accepting the
risk that the market would move in a direction opposite to that anticipated.
Such strategies, therefore, do not eliminate risk, and certain strategies could
entail greater than ordinary risk.
Exchange Listed Options
Liquidity of exchange listed options by The Options Clearing Corporation
("OCC"), which acts as an intermediary between purchasers and sellers of
Exchange Listed Options. The writer of an option makes a commitment to the OCC,
which in turn becomes the actual issuer of the option. The holder of an option
exercises his right to buy or sell the underlying security by delivering an
exercise notice to the OCC. The OCC then assigns the notice to a clearing member
who has acted on behalf of a writer of an option having the same terms as the
exercised option, and the clearing member in turn assigns the exercise notice to
the writer of such an option. A writer which has been assigned an exercise
notice will be unable to execute a Closing Transaction in that option.
Transaction costs are incurred on the sales and purchases of options and
the exercise of options in the form of brokerage commissions Shamus Group, Inc.,
as the principal broker for the Fund would benefit from the Fund's option
transactions. See "Portfolio Turnover."
Short Sales
The Fund may sell securities short as a defensive measure. A discussion
of the technique of short selling and the investment objectives of the Fund in
respect thereof is set forth in the Prospectus under the caption "Short Sales".
In addition, the following information may be of interest to investors in
connection with that technique.
<PAGE>
Among the factors which management might consider in making short sales
are a decreasing demand for a company's product, lower profit margins,
management deficiencies, and a belief that a disparity exists between the price
of a company's stock and its underlying assets or other values.
Since short selling can result in profits when stock prices generally
decline, the Fund in this manner could to a certain extent hedge the market risk
to the value of its other investments and protect its equity in a declining
market. However, the Fund could, at any given time, incur both the risk of a
loss on the purchase or retention of a security, if the security should decline
in value, and the risk of loss on a short sale if the security sold short should
increase in value.
In addition to the restrictions in respect of short sales set forth in
the Prospectus, the following are additional investment restrictions applicable
to short selling activities.
Short sales by the Fund will generally be made in respect of securities
listed on a national securities exchange, although the Fund is authorized to
sell short securities not so listed. The Fund may not sell short securities of
any one issuer which are listed on a national securities exchange to an extent
greater than 5% of the then aggregate net asset value of the Fund or securities
of any one issuer which are not so listed to an extent greater than 1% of the
then aggregate net asset value of the Fund. Existing short sale transactions,
however, will not be liquidated solely because a change in relative values
causes one or more of the above percentage limitations to be exceeded. The Fund
further may not sell short securities of any one class of an issuer to an extent
greater than 2% of the outstanding securities of the class if the securities are
listed on a national securities exchange or to an extent greater than 1/2% of
the outstanding securities of the class if the securities are not so listed. All
short sales will be made in accordance with applicable regulations of the
Federal Reserve Board.
In addition to the short sales discussed above, the Fund may also make
short sales "against the box". This is a short sale made at a time when the Fund
owns securities identical to those sold short. Short sales against the box will
be made only for the purpose of deferring for federal income tax purposes
recognition of a gain or loss with respect to the sale of securities "in the
box". No income can result, and no gain or loss can be realized, from securities
sold short against the box until the short position is closed out. The Fund will
conduct its transactions so that at no time more than 15% of the value of its
net assets will be in deposits on short sales against the box at the time of the
transaction.
The Fund will not engage in short sales except with respect to (i)
securities listed on one or more national securities exchanges or (ii) unlisted
securities registered under Section 12(g) of the Securities and Exchange Act of
1934 (securities of issuers having total assets exceeding $1,000,000 and a class
of equity securities held of record by 500 or more persons) and of which there
are more than 2,000,000 shares outstanding.
<PAGE>
Collateral and Segregation Requirements
The Fund has determined that it will, at the time it makes a short sale
or writes any option, maintain in a segregated account with its custodian, cash
or United States government securities equal in amount to the difference between
(a) the market value of the securities sold (or the market value of the option
written) at the date sold (or written) and (b) any cash or United States
government securities required to be deposited with the broker in connection
with the short sale or option (not including the proceeds from the short sale or
option premium). The fund will at all times maintain the segregated account at
such initial level and, in addition, will adjust it daily, if necessary, to
maintain it at such a level that the amount segregated plus the amount held as
collateral by the broker will equal the current market value of the securities
should short (or the options written). Redundant collateral or segregated funds
will not be maintained, however; for example, if a put is written on the same
security as to which a short sale is made, collateral and/or segregation will be
maintained only for the short sale, since the put would, in effect, be covered
by the short sale position. The Fund may change its collateral and segregation
policies if the Board of Directors determines that any such change is in the
best interests of the shareholders and consistent with law.
Warrants
The Fund may invest in warrants to the extent of 10% of its net asset
value. Warrants held in its portfolio would not be sold, however, solely because
a change in relative values caused such percentage limitation to be exceeded. A
warrant is a speculative security in that it carries no voting rights, no
dividends, and no underlying right to a share of the assets of the issuing
corporation. A warrant represents an option to purchase a particular security,
within a specified period at a specified price. It does not represent ownership
of a security, but only the right to buy it. Moreover, the market prices of
warrants tend to fluctuate more widely than the market prices of the underlying
securities. Warrant prices do not necessarily change parallel to the prices of
the underlying securities. The Fund did not acquire any warrants during its most
fiscal recent year and held no warrants as of the date hereof.
Foreign Securities
The Fund may invest in securities issued by foreign companies to the
extent of 25% of its net asset value. Foreign securities held in its portfolio,
however, would not be liquidated solely because a change in relative values
causes such percentage limitation to be exceeded. The foregoing 25% limitation
will not apply to investments in securities which are listed in the United
States on a national securities exchange. Dividends paid by foreign companies
may be subject to a foreign withholding tax, which would reduce the Fund's
income without a corresponding tax credit for the Fund's shareholders.
<PAGE>
Investments in foreign securities involve certain considerations which
are not typically associated with investing in domestic companies. An investment
may be affected by changes in currency rates and in exchange control
regulations. There may be less publicly available information about a foreign
company than about a domestic company. Most foreign companies are not generally
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. Most foreign stock markets
have substantially less volume than the New York Stock Exchange and securities
of some foreign companies are less liquid and more volatile than securities of
comparable domestic companies. There is generally less government regulation of
stock exchanges, brokers and listed companies than in the United States. In
addition, with respect to certain foreign countries there is a possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments which could effect investments in those countries.
Individual foreign economies may differ favorably or unfavorably from the United
States' economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self sufficiency and balance of
payments. The Fund has not acquired any foreign securities (other than foreign
securities listed on a national securities exchange) in many years but it may do
so in the future if the acquisition of such securities appears consistent with
the Fund's investment objectives.
Borrowing of Money
The Fund may borrow money from banks for leverage purposes which will
enable it to purchase additional securities with the proceeds of such
borrowings. This money may be borrowed only from banks and then only if
immediately after such borrowing there is an asset coverage for such borrowings
of at least 300%. In the event that such asset coverage falls below 300%, the
Fund within 3 days thereafter, must reduce the amount of its borrowings with the
lending bank. The directors will take into account the necessity of liquidity
for redemption purposes in deciding the amount of assets which may be pledged as
collateral.
Any investment gains made with borrowed monies in excess of interest paid
will cause the net asset value of the Fund's common shares to rise faster than
would otherwise be the case. On the other hand, if the investment performance of
the securities purchased with borrowed monies fails to cover their cost to the
Fund, the net asset value will decrease faster than would otherwise be the case.
This is the speculative factor known as "leverage". Accordingly, borrowing for
leverage purposes increases the risk to the investor. The Fund has not borrowed
from any bank in many years, and management has no present intention to do so;
nevertheless, under changing circumstances leveraging may be utilized in the
future.
<PAGE>
Additional Fundamental Investment
Policies and Restrictions
The restrictions and policies in respect of sales, put and call options,
warrants and foreign securities, as described under the captions relating to
those investment techniques in the Prospectus and under the same captions and
the caption "Borrowing of Money' herein, constitute fundamental investment
policies and restrictions. In addition to such fundamental investment policies
and restrictions, the Fund cannot:
Invest more than 25% of its assets in a particular industry;
Underwrite the securities of other issuers;
Purchase or sell real estate; however, the Fund may purchase interests in
real estate investment trusts whose securities are registered under the
Securities Act of 1933 and readily marketable;
Purchase or sale of commodities or commodity contracts;
Lend money except in connection with the acquisition of a portion of an
issue of publicly distributed bonds, debentures or other corporate obligations.
This policy, however, does not prohibit the Fund from lending portfolio
securities which are adequately collateralized pursuant to Rules and Regulations
of the Securities and Exchange Commission or the announced policies of the staff
of the Commission, although the Fund has never made any such loans of its
securities and has no present intention to do so;
Purchase stock on margin.
Other Investment Policies
The Fund has also adopted additional policies with respect to investment
of the Fund's assets. These policies may be changed by the Board of Directors
without a vote of the shareholders, but no so as to permit investments
inconsistent with the Fund's investment objectives. Pursuant to these policies
the Fund will not:
Acquire more than 5% of the outstanding securities of a single issuer, or
more than 10% of the estimated float in the securities of such issuer, whichever
is lower. (Float is defined as the outstanding securities of the issuer less
such securities held by corporate officers, directors and major stockholders as
disclosed in the issuer's proxy statement);
Invest in companies for the purpose of exercising control or management
of such companies;
Invest in securities of other investment companies except in the open
market. However, the Fund may purchase the securities of "money-market"
investment companies. The Fund would normally invest in "money-market"
investment companies as a defensive strategy and as an alternative to investment
in other interest-paying securities. The Fund will limit its investment in any
single money-market investment company to one (1%) percent or less of the
issuer's total outstanding securities.
<PAGE>
PORTFOLIO TURNOVER
The portfolio turnover rate of the Fund for the last three fiscal years
is set forth under "Per Share Income and Capital Changes" and "Portfolio
Turnover" in the Prospectus. "Turnover" is defined as the lesser of purchases or
sales of portfolio securities for the fiscal year divided by the monthly average
of the value of the portfolio securities owned by the Fund during the fiscal
year. Because of the fund's use of option techniques and may continue to be so
in the future.
A high turnover rate indicates correspondingly high brokerage commissions
payable by the Fund. Furman, Anderson & Co. is responsible for all portfolio
decisions and for the allocation of all brokerage transactions. An affiliate of
Furman, Anderson & Co. is also the principal broker for the Fund. See
"Management."
MANAGEMENT OF THE FUND
Set forth below are the names, ages and principal occupations for the
previous five years of the directors and officers of the Fund:
JESSE H. RIEBMAN (67) Director. Retired; Formerly Treasurer, AEL
Industries, Inc. (manufacturer of electronic components), with which he has been
associated since 1959.
*ROBERT M. FURMAN (62) Chairman of the Board, and Treasurer of the Fund
since August 1974; Principal General Partner, Furman, Anderson & Co., Adviser to
the Fund; General Partner of Investor Data Services, a Registered transfer agent
and portfolio pricing and accounting services company, which performs such
services for the Fund. (See "Administrative Services"). Mr. Furman, President
Emeratas of Shamus Group, Inc. (formerly named U.S. Equities, Inc.), a
broker-dealer which commenced operations in January, 1994. Shamus Group, Inc. is
also the Fund's principal broker.
MARK S. CHANKO (69), Director. Retired; Formerly Vice President of
Finance, Treasurer and Secretary of Standard Motor Products, Inc. (manufacture
and sale of automotive replacement parts).
*LINDA ANDERSON (47), Director, President and Secretary of the Fund.
General Partner, Furman, Anderson & Co. since February 1983; General Partner of
Investor Data Services. (See "Administrative Services"). Ms. Anderson is the
Chief Financial & Operations Officer of Shamus Group I.
STUART BECKER (53), Director. Principal partner, Becker & Company, P.C.,
public accountants, since November, 1990; partner, Laventhol & Horwath,
certified public accountants, March 1988 to October 1990; principal Partner of
Stuart Becker & Co., P.C. a firm of public accountants, until March, 1988.
- --------------------
* Mr. Furman and Ms. Anderson are "interested persons" of the Fund, as such term
is defined in the Investment Company Act of 1940. See "Remuneration of
Officers and Directors."
<PAGE>
REMUNERATION OF OFFICERS AND DIRECTORS
During the fiscal year ended October 31, 1996, all remuneration received
by officers or employees of the Fund affiliated with Furman, Anderson & Co. for
services in such capacities was paid by Furman, Anderson & Co. Fees and expenses
of directors who are not officers or employees of the Fund or affiliated with
the investment adviser were paid and will continue to be paid by the Fund.
During the fiscal year ended October 31, 1996, such fees and expenses aggregated
$2,492. The compensation for such directors is presently $300 per meeting
attended, plus travel expenses, except that directors traveling more than 25
miles to a meeting receive $500 per meeting.
To the extent that the investment adviser or any affiliate of the adviser
receives advisory fees and brokerage commissions on Fund portfolio transactions,
the adviser might be deemed to receive compensation from the Fund. The Fund also
pays Investor Data Services, an affiliate of the investment adviser for transfer
agency, record keeping, pricing and shareholder services. See "Administrative
Services." See also "Investment Advisory and Other Services." See also
"Brokerage Allocation" for a discussion of brokerage commissions received by the
investment adviser. Other than such fees and brokerage commissions, however, the
Fund does not have to pay any direct or indirect compensation to the investment
adviser, nor will the services of any other person furnishing research and
analysis with respect to the Fund's portfolio be compensated by the Fund, except
pursuant to the terms of the Agreement with the investment adviser and except as
discussed under "Brokerage Allocation."
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Matthew Furman, an adult child of Robert M. Furman may be deemed to be a
control person of the Fund by virtue of the fact that as of February 27, 1997 he
owned of record and beneficially 83,997 shares of the Fund's common stock,
representing 38% of all of the Fund's issued and outstanding common stock.
As of the same date, all of the officers and directors of the Fund, as a
group, owned of record and beneficially an aggregate of 453 shares of the Fund's
common stock.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisory Services
Furman, Anderson & Co. (the "Adviser") whose offices are located at 33
Whitehall Street, 30th Floor, New York, New York, is the Fund's investment
adviser. Shamus Group, Inc.,(formerly named U.S. Equities, Inc.) an affiliate of
the Adviser operates a general securities brokerage business and is a member of
the New York Stock Exchange. Shamus Group, Inc. is also the principal broker for
Fund portfolio transactions. See "Brokerage Allocation". The Adviser was
organized as a New York limited partnership by Robert M. Furman, who is its
principal partner.
<PAGE>
Pursuant to the Investment Advisory Agreement, the Adviser advises the
Fund with respect to the investment and reinvestment of the assets of the Fund
and the administration of its affairs, subject to the supervision of the Board
of Directors of the Fund. The Agreement provides that the Adviser will furnish
the Fund such research, statistical analysis and studies on companies and
industries, as shall be required in order to formulate a continuous investment
program for the Fund, and will regularly review the Fund's portfolio in order to
assure that it remains consistent with its investment objectives. The Agreement
further requires the Adviser to furnish, without expense to the Fund other than
payment of the advisory fee, the services of members of its advisory
organization (including persons who are officers or employees of the Fund) to
the extent such persons are engaged in rendering such services. In addition, all
sales and promotional expenses in connection with distribution of shares of the
Fund, except expenses relating to printing and mailing of prospectuses to
existing shareholders, will be paid by the Adviser. The Adviser will also supply
and pay for suitable office space and such secretarial and administrative
personnel as shall be necessary to (a) maintain Fund books and records not
otherwise maintained, and to process general Fund administrative requirements
not otherwise processed, pursuant to any administrative agreement as described
below; and (b) carry out stockholder relations programs and process and respond
to stockholder correspondence. All other expenses not specifically assumed by
the Adviser are paid by the Fund. The Agreement lists examples of such expenses,
including the charges of any firm or corporation which by administrative
agreement with the Fund keeps and maintains the Fund's books and accounts and
receives and processes Fund share orders and redemptions (Investor Data Services
presently performs these services for the Fund -- see "Administrative
Services"); transfer agent and custodian fees; auditors' fees; brokerage
commissions; taxes and corporate fees; office administration expenses such as
telephone and postage charges, equipment rental and stationery costs; the cost
of stock certificates; legal fees; printing and registration costs; fees to
certain directors who are not interested persons of the Adviser, and interest
payable on the Fund's borrowings.
The Fund pays to the Adviser an annual advisory fee at the rate of (i)
five-eighths of one percent (5/8 of 1%) of the average annual net asset value of
the Fund with respect to that portion of net assets not exceeding $2,000,000;
(ii) one-half of one percent (1/2 of 1%) of the average annual net asset value
of the Fund with respect to that portion of net assets between $2,000,000 and
$5,000,000; and (iii) three-tenths of one percent (3/10 of 1%) of such net
assets in excess of $5,000,000. The advisory fee is to be paid once yearly. The
Adviser or its affiliates may also receive economic benefits through the receipt
of brokerage commissions on Fund portfolio transactions. See "Brokerage
Allocation".
<PAGE>
Under the present agreement, the fee to be paid to the Adviser described
above is to be reduced, but not below zero, by the amount, if any, by which the
expenses of the Fund (exclusive of such compensation, interest, brokerage
commissions, taxes, dividends on short sales and legal fees incurred in
connection with litigation in which the Fund is a plaintiff) exceed the
following percentages of the indicated portions of the average annual net assets
of the Fund.
Advisory Fee Reduces
Portion of Average By Amount
Annual Net Assets Expenses Exceed
--------------------- ---------------
Below $10,000,000 3%
From $10,000,000 to
$30,000,000 1/2%
Above $30,000,000 1/4%
The Adviser's fee will also be reduced (but not below zero) by 50% of the
amount by which brokerage fees received by the Adviser in respect of Fund
portfolio transactions exceed 2% of the Fund's average annual net assets. The
Adviser has agreed that such fee reduction will also apply as to brokerage fees
received by any affiliate of the Adviser, including Shamus Group, Inc.
The following table sets forth the advisory fee computation
during the periods indicated:
<TABLE>
<CAPTION>
Reduction Reduction
of Fee of Fee
Fiscal Year Gross Due to Due to Net
Ended Advisory Expense Brokerage Advisory
October 31 Fee Limitation Commission Fee
----------- -------- ---------- ---------- -----
<S> <C> <C> <C> <C>
1994 10,892 -0- -0- 10,892
1995 9,530 2,619 -0- 6,911
1996 8,718 4,335 -0- 4,383
</TABLE>
The Agreement provides that in the absence of willful misfeasance, bad
faith or gross negligence or reckless disregard for his obligations, the Adviser
shall not be liable for any act or omission in the course of or in connection
with the services he renders under the new Agreement. The Agreement provides for
termination without penalty (i) upon its assignment, or (ii) upon 60 days
written notice from either the Adviser or the Fund.
<PAGE>
Administrative Services
As of December 1, 1986 the Fund retained Investor Data Services to
perform certain management-related services for the Fund, principally consisting
of record keeping, pricing, share purchase and redemption processing and
shareholder services. Investor Data Services is a partnership which is owned by
Robert M. Furman and Linda Anderson. see "Management of the Fund." These
services are set forth in an Accounting Services Agreement filed as an Exhibit
to Part C of Post-Effective Amendment No. 25 to the Fund's Registration
Statement effective July 10, 1987 and incorporated herein by reference. Fees
paid by the Fund to Investor Data Services for transfer agency services and for
record keeping pricing and shareholder services during the last three fiscal
years are set forth below:
<TABLE>
<CAPTION>
Accounting and
Fiscal Year Ended Transfer Agency Portfolio Pricing
October 31 Fees Fees
- ----------------- --------------- -----------------
<S> <C> <C>
1994 $7,200 $16,800
1995 $7,200 $16,800
1996 $7,200 $16,800
</TABLE>
Custodian
The Star Bank, P.O. Box 1118, 425 Walnut Street ML6118, Cincinnati, OH
45201, is the custodian for the Fund. It is responsible for holding all
securities and cash of the Fund, receiving and paying for securities purchased,
delivering against payment securities sold, receiving and collecting income from
investments, making all payments covering expenses of the Fund, and performing
other administrative duties, all as directed by authorized persons. The
Custodian does not exercise any supervisory function in such matters as purchase
and sale of portfolio securities, payment of dividends or payment of expenses of
the Fund. The Fund has authorized the Custodian to deposit certain portfolio
securities in central depository systems as permitted under Federal law.
Auditing Services
Harold Keller, CPA, with offices at 150 Main Street, Port Washington, New
York 10050 has been retained by the Fund as independent auditor to examine and
report upon the financial statements filed with the Securities and Exchange
Commission and other matters with respect to the audit of the accounts of the
Fund for the fiscal year ended October 31, 1996. Mr. Keller has audited the
Fund's financial statements since 1977.
<PAGE>
BROKERAGE ALLOCATION
In placing its portfolio transactions, the Adviser may select brokers
other than an affiliate of the Adviser who have furnished the Fund or the
Adviser with statistical, research or other services, provided that the best
price and execution for processing the Fund transactions is obtained. Although
such services from other brokers may be useful to the Adviser, it is the opinion
of management of the Fund that such services are only supplementary to the
Adviser's own research efforts, and it is not possible to put a dollar value on
such services. The Adviser has advised the Fund that such services from brokers
will not reduce the Adviser's expenses. No regular formula will be used in
connection with brokerage allocations.
Transactions in portfolio securities may be directed for execution to
qualified brokers charging commissions at least as favorable as other brokers
similarly qualified. As to brokers other than affiliates of Furman, Anderson &
Co., the Adviser has discretion to consider the full range and quality of a
broker's services which benefit the Fund, including research services. Where the
commission rate reflects services furnished to the Fund in addition to the cost
of execution, the Adviser is required to stand ready to demonstrate that such
expenditures were bona fide.
Occasions may arise when sales or purchases of investments consistent
with their investment policies of the Fund and other clients of the Adviser are
being considered by the Adviser at or about the same time. When the Fund and
such clients are simultaneously engaged in the purchase or sale of the same
security, the transactions will be averaged as to price and allocated as to the
amounts in accordance with a formula equitable to the Fund and each such client.
Such formula will take into account the size of the transaction and the
proportion in which the Fund participates in the transactions. As a result, some
portfolio securities held by the Fund may also be held by one or more of the
other clients of the Adviser. It is recognized that in some cases combined
purchases or sales may have a detrimental effect on the price or volume of the
security involved insofar as the Fund is concerned. The Fund believes, however,
that the ability of the Fund to participate in volume transactions will produce
better executions for the Fund, and this ability outweighs the possible
occasional disadvantage.
The Advisory Agreement provides that the Fund recognizes and intends that
the Adviser will act as the Fund's regular broker. Since January 1, 1994 such
principal brokerage services have been provided by Shamus Group, Inc. (formerly
U.S. Equities, Inc.), an affiliate of the Adviser. Since the Adviser assumed its
advisory obligations, almost all of the Fund's portfolio transactions have been
handled through the Adviser or, since January 1994, by Shamus Group, Inc.
(formerly U.S. Equities, Inc.). The Adviser will request Shamus Group, Inc. to
execute portfolio transactions of the Fund except when it has determined better
price or execution to be obtainable through another broker. Brokerage charges on
negotiated transactions executed by Shamus Group, Inc. for the Fund may not be
less favorable to the Fund than its contemporaneous charge for the execution of
similar transactions to the Shamus Group, Inc.'s most favored unaffiliated
customers and will be priced on the basis of obtaining the best price and
execution. Such brokerage commissions may not reflect anything other than
payment for the execution services performed on such transactions. Research
services will not be a consideration in the allocation of brokerage to any
affiliate of the Adviser. Neither the Adviser nor any affiliate receives or
seeks to receive reciprocal brokerage business related to or generated through
the execution of Fund portfolio transactions. Such policies may be altered in
the future depending upon changing commission rates and practices in the
brokerage community.
<PAGE>
The following table sets forth gross brokerage commissions paid by the
Fund, and that portion of the gross commissions paid to the Adviser or its
affiliate Shamus Group, Inc. for the fiscal years specified:
<TABLE>
<CAPTION>
Fiscal Year
Ended Gross Commission Paid to
October 31 Commissions* Adviser or Affiliate %
- ----------- ------------ -------------------- ---
<S> <C> <C> <C>
1994** 18,126 16,386 90%
1995 29,410 27,410 93%
1996 16,696 15,744 94%
</TABLE>
- --------------------
* Substantially all of the gross commissions were paid to Ernst & Co., though
whom most of the Fund's transactions were cleared.
**Since 1994 commisions received by Shamus Group, Inc. an affiliate of the
Adviser.
CAPITAL STOCK AND OTHER SECURITIES
Reference is made to "Description of Common Stock" in the Prospectus. All
shares of the Fund, when issued, will be fully paid and non-assessable by the
Fund. Shareholders have the right to obtain repurchase of their shares by the
Fund at any time. See "Redemption of Shares" in the Prospectus. The common stock
does not have cumulative voting rights, which means that the holders of a
majority of the outstanding shares may elect all of the directors.
PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED
The Fund's common stock is offered to the public at a price per share
equal to the net asset value per share. See "Net Asset Value" in the Prospectus.
The Fund is a "no-load" Fund, which means that there is no sales charge imposed
in respect of the sale of the Fund's common stock. See "How to Buy Shares", and
"Other Shareholder Services" in the Prospectus. The Statements of Assets and
Liabilities included in the financial statements demonstrates the manner in
which the total offering price per share of the Fund is computed. Net asset
value is calculated as of 4:00 P.M. on each day on which the New York Stock
Exchange is open for trading.
The Fund's shares are redeemable at any time by a shareholder at the net
value next determined after receipt of a written request for redemption. See
"Redemption of Shares" in the Prospectus for instructions as to the proper
manner of redeeming shares.
TAX STATUS
Pursuant to the provisions of Subchapter M of the Internal Revenue Code,
a "Regulated Investment Company" which meets the qualifications under Subchapter
M and which pays out its net income and any realized capital gains as dividends
or capital gains distributions in amounts necessary to meet the requirements of
Subchapter M will have no income tax liability on the amounts so paid out. Such
dividends and capital gains, however, would be taxable to the investment
company's stockholders.
<PAGE>
Subchapter M imposes various requirements for qualification as a
"regulated investment company". Among other requirements, the income of a
qualifying company from the sale of securities held less than three months may
not exceed 30% of its gross income. Additionally, as of the end of any fiscal
quarter, not more than 50% of its total assets may be invested in securities
comprising more than five percent of the value of its total assets, nor may more
than 25% of the Fund's assets be represented by its investment in the securities
of one issuer.
The Fund qualified under Subchapter M for the fiscal year ended October
31, 1992, 1993 and 1994 and presently intends to continue to so qualify. Under
Subchapter M, shareholders of the Fund who are required to pay Federal income
tax will be required to treat dividends from net investment income, including
any net short-term capital gains, as ordinary income, and dividends from Fund
long-term capital gains as capital gains. After the close of each fiscal year
the Fund will send a notice to shareholders specifying what portion of the
payments they received was ordinary income and what portion was long-term
capital gains.
The Fund presently intends to continue to operate as a non-diversified
investment company under the Investment Company Act of 1940. Under said Act, the
Fund would remain non-diversified provided that less than 75% of its total
assets are represented by cash, cash items, governmental securities, securities
of other investment companies and other securities limited in respect of any one
issuer to an amount not greater in value than 5% of the value of the total
assets of the Fund.
FINANCIAL STATEMENTS
Reference is made to the information supplied under the caption "Per
Share Income and Capital Changes" in the Prospectus.
The Fund hereby incorporates by reference the Annual Report of the Fund
to shareholders for the fiscal year ended October 31, 1996; provided, however,
that the letter to shareholders from Robert M. Furman, Chairman, included in
such Report is not incorporated by reference. The Fund will furnish, without
charge, a copy of such Report upon request addressed to the Fund in writing at
its address set forth on the cover page of this Statement or in response to a
telephone request to the Fund at the telephone number set forth on the cover
page of this Statement.
This Statement of Additional Information has been filed with the
Securities and Exchange Commission, Washington, D.C., 20549 as part of Post
Effective Amendment No. 35 to the Registration Statement of the Rainbow Fund,
Inc. ("Fund") pursuant to the Securities Act of 1933 and the Investment Company
Act of 1940. This Statement of Additional Information constitutes Part B of said
Post Effective Amendment, which has been filed on Form N-1A.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial statements and Exhibits
(a) Financial Statements:
1. Per share income and capital changes: included in Part A of the
Registration Statement.
2. The following financial statements are included in Part B of the
Registration Statement by incorporation by reference to the Annual Report of the
Registrant to shareholders for the fiscal year ended October 31, 1996
Statement of Assets and Liabilities as October 31, 1996.
Statement of Changes in Net Assets for the years ended October 31, 1996
and October 31, 1995.
Statement of Operations for the year ended October 31, 1996.
Schedule of Investment in Securities as of October 31, 1996.
Schedule VI - Open Option Contracts Written - Included in Schedule of
Investments.
Notes to Financial Statements as of October 31, 1996.
3. The following financial statements are included as part of this Part C
of the Registration Statement:
Schedule III - Not Applicable
(b) Exhibits and Index of Exhibits:
1. (a) Copy of the Registrant's Articles of Incorporation. Filed as
Exhibit 1 to Post-Effective Amendment No. 28 to the Fund's Registration
Statement on Form N-lA and incorporated herein by reference.
(b) Copy of Agreement and Plan of Reorganization between predecessor
corporation (The Rainbow Fund, Inc. - a Delaware corporation) and the registrant
(The Rainbow Fund, Inc. - a Maryland corporation) as filed March 1, 1990. Filed
as Exhibit 1(b) to Post-Effective Amendment No. 28 and incorporated herein by
reference.
(c) Certificate of Merger filed in Delaware, effective March 1, 1990.
Filed as Exhibit 1(c) to Post-Effective Amendment No. 28 and incorporated herein
by reference.
(d) Certificate of Merger filed in Maryland, effective March 1, 1990.
Filed as Exhibit 1(d) to Post-Effective Amendment No. 28 and incorporated herein
by reference.
2. Copy of the By-Laws of the Registrant. Filed as Exhibit 2 to
Post-Effective Amendment No. 28 to the Fund's Registration Statement on Form
N-lA and incorporated herein by reference.
<PAGE>
4. Specimen of Certificate of Common Stock issued by the Registrant.
Filed as Exhibit 4 to Post-Effective Amendment No. 28 and incorporated herein by
reference.
5. Copy of Investment Advisory Contract between the Registrant and
Furman, Anderson & Co., dated as of June 1, 1982. Filed as Exhibit 5 to
Post-Effective Amendment No. 22 to the Fund's Registration Statement on Form
N-lA and incorporated herein by reference.
8. Copy of Custodian Agreement between the Registrant and the Star Bank,
dated May 3, 1996.
9.(a) Omitted
9.(b) Omitted
9.(c) Omitted
9.(d) Copy of Accounting Services Agreement dated as of December 1, 1986
between Registrant and Investor Data Services. Filed as Exhibit 9(d) to
Post-Effective Amendment No. 25 to the Fund's Registration Statement on Form
N-lA and incorporated herein by reference.
9.(e) Copy of Transfer Agency and Administration Agreement dated as of
December 1, 1986 between the Registrant and Investor Data Services. Filed as
Exhibit 9(e) to PostEffective Amendment No. 25 to the Fund's Registration
Statement on Form N-lA and incorporated herein by reference.
11. Consent of Harold Keller, C.P.A. (filed herewith).
12. Annual Report for the fiscal year ended October 31, 1996 (filed
herewith).
Item 25. Persons controlled by or under Common Control with Registrant
Robert M. Furman, Chairman and Chief Executive Officer of the Registrant,
is also the principal partner of Furman, Anderson & Co., the investment adviser
to the Registrant. Mr. Furman owns a 90% interest in Furman, Anderson & Co.,
which is a New York limited partnership. See also Item 28.
Mr. Furman and Linda Anderson, President of Registrant, each own 50% of
Investor Data Services, a New York Partnership which, since December 1, 1986,
has provided management and transfer agency services to Registrant. See Exhibits
9(d) and 9(e).
Item 26. Number of Holders of securities
Number of
Record Holders as of
Title of Class February 27, 1997
-------------- --------------------
Common Stock 782
Item 27. Indemnification
There are no contracts or arrangements pertaining to indemnification.
<PAGE>
The Fund is required under Article TENTH of its Articles of Incorporation
and Article TENTH of its By-Laws to indemnify any person to the fullest extent
permitted by Maryland law by reason of the fact that any such person is or was
an officer or director of the fund. Reference is made to Article TENTH of the
Fund's Articles of Incorporation and By-Laws, both of which documents have been
filed as Exhibits to this Registration Statement and are incorporated in this
Item 27 by reference.
Section 2-418 of the Maryland General Corporation Law generally provides
that a corporation may indemnify any director made a party to any proceeding by
reason of service in that capacity unless it is established that the act or
omission of the director was material to the matter giving rise to the
proceeding and was either committed in bad faith or was the result of active and
deliberate dishonesty or that the director actually received an improper
personal benefit in money, property or services or, in the case of any criminal
proceeding, the director had reasonable cause to believe that the act or
omission was unlawful. However, if the proceeding was one by or the right of the
corporation! indemnification may not be made in respect of any proceeding in
which the director shall have been adjudged to be liable to the corporation.
A director may not be indemnified in respect of any proceeding charging
improper personal benefit to the director in which the director was adjudged to
be liable on the basis that personal benefit was improperly received.
Further, unless limited by the Articles of Incorporation, a director who
has been successful on the merits or otherwise in the defense of any proceeding
referred to above, shall be indemnified against reasonable expenses incurred by
the director in connection with the proceeding. A court of appropriate
jurisdiction may nevertheless award indemnification if it determines that a
director is fairly and reasonably entitled to indemnification in view of all of
the relevant circumstances, whether or not the director has met the standards of
conduct set forth above or has been adjudged liable on the basis that personal
benefit was improperly received; however, in the latter case, indemnification
shall be limited to expenses.
A determination that a director is entitled to indemnification must be
made (a) by the Board of Directors by a majority vote of a quorum consisting of
directors not, at the time, parties to such proceeding, (b) by special legal
counsel selected by the Board of Directors, or (c) by the stockholders.
Reasonable expenses incurred by a director who is a party to a proceeding
may be paid or reimbursed by a corporation in advance of the final disposition
of the proceeding upon receipt of the corporation of a written affirmation by
the director of such director's good-faith belief that he has met the standard
of conduct necessary for indemnification and that he will repay the amount so
indemnified if it is ultimately determined that the standard of conduct has not
been met. Such undertaking need not be secured and may be accepted without
reference to financial ability to make the repayment.
Maryland General Corporation Law specifically provides that the
indemnification permitted under said law may not be deemed exclusive of any
other rights, by indemnification or otherwise, by which a director may be
entitled under the Articles of Incorporation, the By-Laws, a Resolution of
Stockholders or Directors, an Agreement or otherwise, both as to action in an
official capacity and as to action in any other capacity while holding such
office.
<PAGE>
The Maryland General Corporation Law also provides that an officer of the
corporation who is successful on the merits or otherwise in the defense of any
proceeding shall be indemnified against reasonable expenses incurred by him in
connection with the proceeding to the same extent as a director would be
indemnified, and may advance expenses to an officer to the same extent that it
may indemnify directors. A corporation is further entitled to indemnify and
advance its expenses to an officer, consistent with law, as may be provided in
its Articles of Incorporation, By-Laws, General or Specific Action of Board of
Directors or Contract.
The By-Laws of the Fund referred to above specifically allow
indemnification of officers to the same extent available to directors.
Item 28. Business and other Connections of Investment Adviser
Furman, Anderson & Co. is a member of the New York Stock Exchange and it
and its predecessor (Robert M. Furman, sole proprietor) have conducted a general
business as a broker in securities for over fourteen years.
Mr. Furman holds 90% of the partnership interests in Furman, Anderson &
Co. Linda Anderson, a 10% general partner of Furman, Anderson & Co., has served
as such since February, 1983. Prior thereto she was employed by Robert M.
Furman, broker-dealer from April 1, 1980 to February, 1983 (registered
representative from August, 1980 and Branch Office Manager from February 1981).
Since January 1994 Shamus Group, Inc. (previously named U.S. Equities,
Inc.) a broker-dealer has acted as principal broker for Fund transactions. 80%
of the equity securities of Shamus Group, Inc. are held by Messrs. Furman and
Anderson in a 70/10 ratio.
See also Item 25.
Item 29. Principal Underwriters
None
Item 30. Location of Accounts and Records
Physical possession of records required to be maintained under Regulation
270.31a-1(b) (1), (2), (3), (5), (6), (7) and (8) is with Investor Data
Services, 19 Rector Street, New York, New York 10006.
Records required to be maintained under Regulation 270.31(a)-l(b), (4),
(5), (6), (7), (9), (10) and (n) are maintained at the Fund's offices.
Records required to be maintained under Regulation 270.31A-1(f) are
maintained at the office of Furman, Anderson & Co., 19 Rector Street, New York,
New York 10006.
<PAGE>
Item 31. Management Services
Investor Data Services, an affiliate of Furman, Anderson & Co. furnished
certain administrative, record keeping and accounting services for the
Registrant, including certain records required to be maintained in accordance
with Rule 31a-1 under the Investment Company Act of 1940. See Item 25 and the
Administrative Services Agreement (Exhibit (9)(d)). The services performed by
Investor Data Services are set forth in Section 2 of said Agreement.
See "Administrative Services" in the Statement of Additional Information
for information concerning amounts paid to Investor Data Services during the
past three fiscal years.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Post-Effective Amendment No. 35 to its Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of New
York and State of New York on the 28th day of April, 1996.
THE RAINBOW FUND, INC.
(Registrant)
By: /s/Robert M. Furman
-----------------------
Robert M. Furman
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/Robert M. Furman Chairman April 25, 1997
- ------------------------- Chief Executive,
ROBERT M. FURMAN Financial and
Accounting Officer
/s/Linda C. Anderson President, April 25, 1997
- ------------------------- Chief Operating
LINDA C. ANDERSON Officer, Secretary
and Director
/s/Stuart Becker Director April 25, 1997
- -------------------------
STUART BECKER
/s/Mark Chanko Director April 25, 1997
- -------------------------
MARK CHANKO
/s/Jesse H. Riebman Director April 25, 1997
- -------------------------
JESSE H. RIEBMAN
CUSTODY AGREEMENT
This agreement (the "Agreement") is entered into as of the 3rd day of
May, 1996, by and between Rainbow Fund, Inc., (the "Fund"), an open-end
diversified investment business corporation organized under the laws of Maryland
and having its office at 33 Whitehall Street, 30th Floor, New York, New York
10004 and Star Bank, National Association, (the "Custodian"), a national banking
association having its principal office at 425 Walnut Street, Cinncinati, Ohio,
45202.
WHEREAS, the Fund and the Custodian desire to enter into this Agreement
to provide for the custody and safekeeping of the assets of the Fund as required
by the Investment Company Act of 1940, as amended (the "Act").
WHEREAS, the Fund hereby appoints the Custodian as custodian of all the
Fund's Securities and moneys at any time owned by the Fund during the term of
this Agreement (the "Fund Assets").
WHEREAS, the Custodian hereby accepts such appointment as Custodian and
agrees to perform the duties thereof as hereinafter set forth.
THEREFORE, in consideration of the mutual promises hereinafter set forth,
the Fund and the Custodian agree as follows:
ARTICLE I
Definitions
The following words and phrases, when used in this Agreement, unless the
context otherwise requires, shall have the following meanings:
Authorized Person - the Chairman, President, Secretary, Treasurer,
Controller, or Senior Vice President of the Fund, or any other person, whether
or not any such person is am officer or employee of the Fund, duly authorized by
the Board of Trustees of the Fund to give Oral Instructions and Written
Instructions on behalf of the Fund, and listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
Book-Entry System - the Federal Reserve Bank book-entry system for United
States Treasury securities and federal agency securities.
Depository - The Depository Trust Company ("DTC"), a limited purpose
trust company its successor(s) and its nominee(s) or any other person or
clearing agent
Dividend and Transfer Agent - the dividend and transfer agent appointed,
from time to time, pursuant to a written agreement between the dividend and
transfer agent and the Fund
Foreign Securities - a) securities issued and sold primarily outside of
the United States by a foreign government, a national of any foreign country, or
a corporation or other organization incorporated or organized under the laws of
any foreign country or; b) securities issued or guaranteed by the government of
the United States, by any state, by any political subdivision or agency thereof,
or by any entity organized under the laws of the United States or of any state
thereof, which have been issued and sold primarily outside of the United States.
<PAGE>
Money Market Security - debt obligations issued or guaranteed as to
principal and/or interest by the government of the United States or agencies or
instrumentalities thereof, commercial paper, obligations (including certificates
of deposit, bankers' acceptances, repurchase agreements and reverse repurchase
agreements with respect to the same), and time deposits of domestic banks and
thrift institutions whose deposits are insured by the Federal Deposit Insurance
Corporation, and short-term corporate obligations where the purchase and sale of
such securities normally require settlement in federal funds or their equivalent
on the same day as such purchase and sale, all of which mature in not more than
thirteen (13) months.
Officers - the Chairman, President, Secretary, Treasurer, Controller, and
Senior Vice President of the Fund listed in the Certificate annexed hereto as
Appendix A, or such other Certificate as may be received by the Custodian from
time to time.
Oral Instructions - verbal instructions received by the Custodian from an
Authorized Person (or from a person that the Custodian reasonably believes in
good faith to be an Authorized Person) and confirmed by Written Instructions in
such a manner that such Written Instructions are received by the Custodian on
the business day immediately foliowing receipt of such Oral Instructions.
Prospectus - the Fund's then currently effective prospectus and Statement
of Additional Information, as filed with and declared effective from time to
time by the Securities and Exchange Commission.
Security or Securities - Money Market Securities, common stock, preferred
stock, options, financial futures, bonds, notes, debentures, corporate debt
securities, mortgages, and any certificates, receipts, warrants, or other
instruments representing rights to receive, purchase, or subscribe for the same
or evidencing or representing any other rights or interest therein, or any
property or assets.
Written Instructions - communication received in writing by the Custodian
from am Authorized Person.
ARTICLE II
Documents and Notices to be Furnished by the Fund
A. The following documents, including any amendments thereto, will be
provided contemporaneously with the execution of the Agreement, to the Custodian
by the Fund:
1 . A copy of the Articles of Incorporation of the Fund certified by
the Secretary.
2. A copy of the By-Laws of the Fund certified by the Secretary.
3. A copy of the resolution of the Board of Trustees of the Fund
appointing the Custodian, certified by the Secretary.
4. A copy of the then current Prospectus.
5. A Certificate of the President and Secretary of the Fund setting
forth the names and signatures of the Officers of the Fund.
B. The Fund agrees to notify the Custodian in writing of the appointment
of any Dividend and Transfer Agent.
<PAGE>
ARTICLE III
Receipt of Fund Assets
A. During the term of this Agreement, the Fund will deliver or cause to
be delivered to the Custodian all moneys constituting Fund Assets. The Custodian
shall be entitled to reverse any deposits made on the Fund's behalf where such
deposits have been entered and moneys are not finally collected within 30 days
of the making of such entry.
B. During the term of this Agreement, the Fund will deliver or cause to
be delivered to the Custodian all Securities constituting Fund Assets. The
Custodian will not have any duties or responsibilities with respect to such
Securities until actually received by the Custodian.
C. As and when received, the Custodian shall deposit to the account(s) of
the Fund any and all payments for shares of the Fund issued or sold from time to
time as they are received from the Fund's distributor or Dividend and Transfer
Agent or from the Fund itself
ARTICLE IV
Disbursement of Fund Assets
A. The Fund shall furnish to the Custodian a copy of the resolution of
the Board of Trustees of the Fund, certified by the Fund's Secretary, either (i)
setting forth the date of the declaration of any dividend or distribution in
respect of shares of the Fund, the date of payment thereof, the record date as
of which Fund shareholders entitled to payment shall be determined, the amount
payable per share to Fund shareholders of record as of that date, and the total
amount to be paid by the Dividend and Transfer Agent on the payment date, or
(ii) authorizing the declaration of dividends and distributions in respect of
shares of the Fund on a daily basis and authorizing the Custodian to rely on a
Certificate setting forth the date of the declaration of any such dividend or
distribution, the date of payment thereof, the record date as of which Fund
shareholders entitled to payment shall be determined, the amount payable per
share to Fund shareholders of record as of that date, and the total amount to be
paid by the Dividend and Transfer Agent on the payment date.
On the payment date specified m such resolution or Certificate described
above, the Custodian shall segregate such amounts from moneys held for the
account of the Fund so that they are available for such payment.
B. Upon receipt of Written Instructions so directing it, the Custodian
shall segregate amounts necessary for the payment of redemption proceeds to be
made by the Dividend and Transfer Agent from moneys held for the account of the
Fund so that they are available for such payment.
C. Upon receipt of a Certificate directing payment and setting forth the
name and address of the person to whom such payment is to be made, the amount of
such payment, and the purpose for which payment is to be made, the Custodian
shall disburse amounts as and when directed from the Fund Assets. The Custodian
is authorized to rely on such directions and shall be under no obligation to
inquire as to the propriety of such directions.
<PAGE>
D. Upon receipt of a Certificate directing payment, the Custodian shall
disburse moneys from the Fund Assets in payment of the Custodian's fees and
expenses as provided in Article VIII hereof
ARTICLE V
Custody of Fund Assets
A. The Custodian shall open and maintain a separate bank account or
accounts in the United States in the name of the Fund, subject only to draft or
order by the Custodian acting pursuant to the terms of this Agreement, and shall
hold all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund in a bank account established and used by the Fund
in accordance with Rule 17f-3 under the Act. Moneys held by the Custodian on
behalf of the Fund may be deposited by the Custodian to its credit as Custodian
in the banking department of the Custodian. Such moneys shall be deposited by
the Custodian in its capacity as such, and shall be withdrawable by the
Custodian only in such capacity.
B. The Custodian shall hold all Securities delivered to it in safekeeping
in a separate account or accounts maintained at Star Bank, N.A. for the benefit
of the Fund.
C. All Securities held which are issued or issuable only in bearer form,
shall be held by the Custodian in that form; all other Securities held for the
Fund shall be registered in the name of the Custodian or its nominee. The Fund
agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold, or deliver in proper form for transfer, any Securities that
it may hold for the account of the Fund and which may, from time to time, be
registered in the name of the Fund.
D. With respect to all Securities held for the Fund, the Custodian shall
on a timely basis (concerning items I and 2 below, as defined m the Custodian's
Standards of Service Guide, as amended from time to time, annexed hereto as
Appendix C):
1.) Collect all income due and payable with respect to such
Securities;
2.) Present for payment and collect amounts payable upon all
Securities which may mature or be called, redeemed, or retired, or
otherwise become payable;
3.) Surrender Securities in temporary form for definitive Securities;
and
4.) Execute, as agent, any necessary declarations or certificates of
ownership under the Federal income tax laws or the laws or regulations
of any other taxing authority, including any foreign taxing authority,
now or hereafter in effect.
<PAGE>
E. Upon receipt of a Certificate and not otherwise, the Custodian shall:
1.) Execute and deliver to such persons as may be designated in such
Certificate proxies, consents, authorizations, and any other
instruments whereby the authority of the Fund as beneficial owner of
any Securities may be exercised;
2.) Deliver any Securities in exchange for other Securities or cash
issued or paid in connection with the liquidation, reorganization,
refinancing, merger, consolidation, or recapitalization of any
corporation, or the exercise of any conversion privilege;
3.) Deliver any Securities to any protective committee, reorganization
committee, or other person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization, or sale of
assets of any corporation, and receive and hold under the terms of
this Agreement such certificates of deposit, interim receipts or other
instruments or documents as may be issued to it to evidence such
delivery;
4.) Make such transfers or exchanges of the assets of the Fund and
take such other steps as shall be stated in said Certificate to be for
the purpose of effectuating any duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the Fund;
and
5.) Deliver any Securities held for the Fund to the depository agent
for tender or other similar offers.
F. The Custodian shall promptly deliver to the Fund all notices, proxy
material and executed but unvoted proxies pertaining to shareholder meetings of
Securities held by the Fund. The Custodian shall not vote or authorize the
voting of any Securities or give any consent, waiver or approval with respect
thereto unless so directed by a Certificate or Written Instruction.
G. The Custodian shall promptly deliver to the Fund all information
received by the Custodian and pertaining to Securities held by the Fund with
respect to tender or exchange offers, calls for redemption or purchase, or
expiration of rights.
ARTICLE VI
Purchase and Sale of Securities
A. Promptly after each purchase of Securities by the Fund, the Fund
shall deliver to the Custodian (i) with respect to each purchase of Securities
which are not Money Market Securities, Written Instructions, and (ii) with
respect to each purchase of Money Market Securities, Written Instructions or
Oral Instructions, specifying with respect to each such purchase the;
1.) name of the issuer and the title of the Securities,
2.) principal amount purchased and accrued interest, if any,
3.) date of purchase and settlement,
<PAGE>
4.) purchase price per unit,
5.) total amount payable, and
6.) name of the person from whom, or the broker through which, the
purchase was made.
The Custodian shall, against receipt of Securities purchased by or for
the Fund, pay out of the Fund Assets, the total amount payable to the person
from whom or the broker through which the purchase was made, provided that the
same conforms to the total amount payable as set forth in such Written
Instructions or Oral Instructions, as the case may be.
B. Promptly after each sale of Securities by the Fund, the Fund shall
deliver to the Custodian (i) with respect to each sale of Securities which are
not Money Market Securities, Written Instructions, and (ii) with respect to each
sale of Money Market Securities, Written Instructions or Oral Instructions,
specifying with respect to each such sale the;
1 .) name of the issuer and the title of the Securities,
2.) principal amount sold and accrued interest, if any,
3.) date of sale and settlement,
4.) sale price per unit,
5.) total amount receivable, and
6.) name of the person to whom, or the broker through which, the sale
was made.
The Custodian shall deliver the Securities against receipt of the total
amount receivable, provided that the same conforms to the total amount
receivable as set forth in such Written Instructions or Oral Instructions, as
the case may be.
C. On contractual settlement date, the account of the Fund will be
charged for all purchased Securities settling on that day, regardless of whether
or not delivery is made. Likewise, on contractual settlement date, proceeds from
the sale of Securities settling that day will be credited to the account of the
Fund, irrespective of delivery.
D. Purchases and sales of Securities effected by the Custodian will be
made on a delivery versus payment basis. The Custodian may, in its sole
discretion, upon receipt of a Certificate, elect to settle a purchase or sale
transaction in some other manner, but only upon receipt of acceptable
indemnification from the Fund.
<PAGE>
E. The Custodian shall, upon receipt of a Written Instructions so
directing it, establish and maintain a segregated account or accounts for and on
behalf of the Fund. Cash and/or Securities may be transferred into such account
or accounts for specific purposes, to-wit:
1.) in accordance with the provision of any agreement among the Fund,
the Custodian, and a broker-dealer registered under the Securities and
Exchange Act of 1934, as amended, and also a member of the National
Association of Securities Dealers (NASD) (or any futures commission
merchant registered under the Commodity Exchange Act), relating to
compliance with the rules of the Options Clearing Corporation and of
any registered national securities exchange, the Commodity Futures
Trading Commission, any registered contract market, or any similar
organization or organizations requiring escrow or other similar
arrangements m connection with transactions by the Fund;
2.) for purposes of segregating cash or government securities in
connection with options purchased, sold, or written by the Fund or
commodity futures contracts or options thereon purchased or sold by
the Fund;
3.) for the purpose of compliance by the fund with the procedures
required for reverse repurchase agreements, firm commitment
agreements, standby commitment agreements, and short sales by Act
Release No. 10666, or any subsequent release or releases or rule of
the Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies; and
4.) for other corporate purposes, only in the case of this clause 4
upon receipt of a copy of a resolution of the Board of Trustees of the
Fund, certified by the Secretary of the Fund, setting forth the
purposes of such segregated account.
F. Except as otherwise may be agreed upon by the parties hereto, the
Custodian shall not be required to comply with any Written Instructions to
settle the purchase of any Securities on behalf of the Fund unless there is
sufficient cash in the account(s) at the time or to settle the sale of any
Securities from an account(s) unless such Securities are in deliverable form.
Notwithstanding the foregoing, if the purchase price of such Securities exceeds
the amount of cash in the account(s) at the time of such purchase, the Custodian
may, in its sole discretion, advance the amount of the difference in order to
settle the purchase of such Securities. The amount of any such advance shall be
deemed a loan from the Custodian to the Fund payable on demand and bearing
interest accruing from the date such loan is made up to but not including the
date such loan is repaid at a rate per annum customarily charged by the
Custodian on similar loans.
<PAGE>
ARTICLE VII
Fund Indebtedness
In connection with any borrowings by the Fund, the Fund will cause to be
delivered to the Custodian by a bank or broker requiring Securities as
collateral for such borrowings (including the Custodian if the borrowing is from
the Custodian), a notice or undertaking in the form currently employed by such
bank or broker setting forth the amount of collateral. The Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to each such
borrowing: (a) the name of the bank or broker, (b) the amount and terms of the
borrowing, which may be set forth by incorporating by reference an attached
promissory note duly endorsed by the Fund, or a loan agreement, (c) the date,
and time if known, on which the loan is to be entered into, (d) the date on
which the loan becomes due and payable, (e) the total amount payable to the Fund
on the borrowing date, and (f) the description of the Securities securing the
loan, including the name of the issuer, the title and the number of shares or
the principal amount. The Custodian shall deliver on the borrowing date
specified in the Certificate the required collateral against the lender's
delivery of the total loan amount then payable, provided that the same conforms
to that which is described in the Certificate. The Custodian shall deliver, in
the manner directed by the Fund, such Securities as additional collateral, as
may be specified in a Certificate, to secure further any transaction described
in this Article VII. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it.
The Custodian may, at the option of the lender, keep such collateral in
its possession, subject to all rights therein given to the lender because of the
loan. The Custodian may require such reasonable conditions regarding such
collateral and its dealings with third-party lenders as it may deem appropriate.
ARTICLE VIII
Concerning the Custodian
A. Except as otherwise provided herein, the Custodian shall not be liable
for any loss or damage resulting from its action or omission to act or
otherwise, except for any such loss or damage arising out of its own gross
negligence or willful misconduct. The Fund shall defend, indemnify and hold
harmless the Custodian and its directors, officers, employees and agents with
respect to any loss, claim, liability or cost (including reasonable attorneys'
fees) arising or alleged to arise from or relating to the Fund's duties
hereunder or any other action or inaction of the Fund or its Trustees, officers,
employees or agents, except such as may arise from the negligent action,
omission, willful misconduct or breach of this Agreement by the Custodian. The
Custodian may, with respect to questions of law, apply for and obtain the advice
and opinion of counsel, at the expense of the Fund, and shall be fully protected
with respect to anything done or omitted by it in good faith in conformity with
the advice or opinion of counsel. The provisions under this paragraph shall
survive the termination of this Agreement.
<PAGE>
B. Without limiting the generality of the foregoing, the Custodian,
acting in the capacity of Custodian hereunder, shall be under no obligation to
inquire into, and shall not be liable for:
1.) The validity of the issue of any Securities purchased by or for
the account of the Fund, the legality of the purchase thereof, or the
propriety of the amount paid therefor;
2.) The legality of the sale of any Securities by or for the account
of the Fund, or the propriety of the amount for which the same are
sold;
3.) The legality of the issue or sale of any shares of the Fund, or
the sufficiency of the amount to be received therefor;
4.) The legality of the redemption of any shares of the Fund, or the
propriety of the amount to be paid therefor;
5.) The legality of the declaration or payment of any dividend by the
Fund in respect of shares of the Fund;
6.) The legality of any borrowing by the Fund on behalf of the Fund,
using Securities as collateral;
C. The Custodian shall not be under any duty or obligation to take action
to effect collection of any amount due to the Fund from any Dividend and
Transfer Agent of the Fund nor to take any action to effect payment or
distribution by any Dividend and Transfer Agent of the Fund of any amount paid
by the Custodian to any Dividend and Transfer Agent of the Fund in accordance
with this Agreement.
D. Notwithstanding Section D of Article V, the Custodian shall not be
under any duty or obligation to take action to effect collection of any amount,
if the Securities upon which such amount is payable are in default, or if
payment is refused after due demand or presentation, unless and until (i) it
shall be directed to take such action by a Certificate and (ii) it shall be
assured to its satisfaction (including prepayment thereof) of reimbursement of
its costs and expenses m connection with any such action.
E. The Fund acknowledges and hereby authorizes the Custodian to hold
Securities through its various agents described in Appendix B annexed hereto.
The Fund hereby represents that such authorization has been duly approved by the
Board of Trustees of the Fund as required by the Act. The Custodian acknowledges
that although certain Fund Assets are held by its agents, the Custodian remains
primarily liable for the safekeeping of the Fund Assets.
In addition, the Fund acknowledges that the Custodian may appoint one or
more financial institutions, as agent or agents or as sub-custodian or
sub-custodians, including, but not limited to, banking institutions located in
foreign countries, for the purpose of holding Securities and moneys at any time
owned by the Fund. The Custodian shall not be relieved of any obligation or
liability under this Agreement in connection with the appointment or activities
of such agents or sub-custodians. Any such agent or sub-custodian shall be
qualified to serve as such for assets of investment companies registered under
the Act. Upon request, the Custodian shall promptly forward to the Fund any
documents it receives from any agent or sub-custodian appointed hereunder which
may assist trustees of registered investment companies fulfill their
responsibilities under Rule 17f-5 of the Act.
<PAGE>
F. The Custodian shall not be under any duty or obligation to ascertain
whether any Securities at any time delivered to or held by it for the account of
the Fund are such as properly may be held by the Fund under the provisions of
the Articles of Incorporation and the Fund's By-Laws.
G. The Custodian shall treat all records and other information relating
to the Fund and the Fund Assets as confidential and shall not disclose any such
records or information to any other person unless (i) the Fund shall have
consented thereto in writing or (ii) such disclosure is required by law.
H. The Custodian shall be entitled to receive and the Fund agrees to pay
to the Custodian such compensation as shall be determined pursuant to Appendix D
attached hereto, or as shall be determined pursuant to amendments to such
Appendix D. The Custodian shall be entitled to charge against any money held by
it for the account of the Fund, the amount of any of its fees, any loss, damage,
liability or expense, including counsel fees. The expenses which the Custodian
may charge against the account of the Fund include, but are not limited to, the
expenses of agents or sub-custodians incurred in settling transactions involving
the purchase and sale of Securities of the Fund.
I. The Custodian shall be entitled to rely upon any Oral Instructions and
any Written Instructions. The Fund agrees to forward to the Custodian Written
Instructions confirming Oral Instructions in such a manner so that such Written
Instructions are received by the Custodian, whether by hand delivery, facsimile
or otherwise, on the same business day on which such Oral Instructions were
given. The Fund agrees that the failure of the Custodian to receive such
confirming instructions shall in no way affect the validity of the transactions
or enforceability of the transactions hereby authorized by the Fund. The Fund
agrees that the Custodian shall incur no liability to the Fund for acting upon
Oral Instructions given to the Custodian hereunder concerning such transactions.
J. The Custodian will (i) set up and maintain proper books of account and
complete records of all transactions in the accounts maintained by the Custodian
hereunder in such manner as will meet the obligations of the Fund under the Act,
with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder and those records are the property of the Fund, and (ii) preserve for
the periods prescribed by applicable Federal statute or regulation all records
required to be so preserved. All such books and records shall be the property of
the Fund, and shall be open to inspection and audit at reasonable times and with
prior notice by Officers and auditors employed by the Fund.
K. The Custodian shall send to the Fund any report received on the
systems of internal accounting control of the Custodian, or its agents or
sub-custodians, as the Fund may reasonably request from time to time.
L. The Custodian performs only the services of a custodian and shall have
no responsibility for the management, investment or reinvestment of the
Securities from time to time owned by the Fund. The Custodian is not a selling
agent for shares of the Fund and performance of its duties as custodian shall
not be deemed to be a recommendation to the Fund's depositors or others of
shares of the Fund as an investment.
M. The Custodian shall take all reasonable action, that the Fund may from
time to time request, to assist the Fund in obtaining favorable opinions from
the Fund's independent accountants, with respect to the Custodian's activities
hereunder, in connection with the preparation of the Fund's Form N-IA, Form
N-SAR, or other annual reports to the Securities and Exchange Commission.
<PAGE>
N. The Fund hereby pledges to and grants the Custodian a security
interest in any Fund Assets to secure the payment of any liabilities of the Fund
to the Custodian, whether acting in its capacity as Custodian or otherwise, or
on account of money borrowed from the Custodian. This pledge is in addition to
any other pledge of collateral by the Fund to the Custodian.
ARTICLE X
Termination
A. Either of the parties hereto may terminate this Agreement for any
reason by giving to the other party a notice in writing specifying the date of
such termination, which shall be not less than ninety (90) days after the date
of giving of such notice. If such notice is given by the Fund, it shall be
accompanied by a copy of a resolution of the Board of Trustees of the Fund,
certified by the Secretary of the Fund, electing to terminate this Agreement and
designating a successor custodian or custodians. In the event such notice is
given by the 15 Custodian, the Fund shall, on or before the termination date,
deliver to the Custodian a copy of a resolution of the Board of Trustees of the
Fund, certified by the Secretary, designating a successor custodian or
custodians to act on behalf of the Fund. In the absence of such designation by
the Fund, the Custodian may designate a successor custodian which shall be a
bank or trust company having not less than $100,000,000 aggregate capital,
surplus, and undivided profits. Upon the date set forth in such notice this
Agreement shall terminate, and the Custodian, provided that it has received a
notice of acceptance by the successor custodian, shall deliver, on that date,
directly to the successor custodian all Securities and moneys then owned by the
Fund and held by it as Custodian. Upon termination of this Agreement, the Fund
shall pay to the Custodian on behalf of the Fund such compensation as may be due
as of the date of such termination. The Fund agrees on behalf of the Fund that
the Custodian shall be reimbursed for its reasonable costs in connection with
the termination of this Agreement.
B. If a successor custodian is not designated by the Fund, or by the
Custodian in accordance with the preceding paragraph, or the designated
successor cannot or will not serve, the Fund shall, upon the delivery by the
Custodian to the Fund of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund, be deemed to be the custodian for the Fund, and the Custodian shall
thereby be relieved of all duties and responsibilities pursuant to this
Agreement, other than the duty with respect to Securities held m the Book-Entry
System, which cannot be delivered to the Fund, which shall be held by the
Custodian in accordance with this Agreement.
ARTICLE XI
Miscellaneous
A. Appendix A sets forth the names and the signatures of all Authorized
Persons, as certified by the Secretary of the Fund. The Fund agrees to furnish
to the Custodian a new 16 Appendix A in form similar to the attached Appendix A,
if any present Authorized Person ceases to be an Authorized Person or if any
other or additional Authorized Persons are elected or appointed. Until such new
Appendix A shall be received, the Custodian shall be fully protected in acting
under the provisions of this Agreement upon Oral Instructions or signatures of
the then current Authorized Persons as set forth in the last delivered Appendix
A.
<PAGE>
B. No recourse under any obligation of this Agreement or for any claim
based thereon shall be had against any organizer, shareholder, Officer,
Director, past, present or future as such, of the Fund or of any predecessor or
successor, either directly or through the Fund or any such predecessor or
successor, whether by virtue of any constitution, statute or rule of law or
equity, or be the enforcement of any assessment or penalty or otherwise; it
being expressly agreed and understood that this Agreement and the obligations
thereunder are enforceable solely against the Fund, and that no such personal
liability whatever shall attach to, or is or shall be incurred by, the
organizers, shareholders, Officers, Trustees of the Fund or of any predecessor
or successor, or any of them as such. To the extent that any such liability
exists, it is hereby expressly waived and released by the Custodian as a
condition of, and as a consideration for, the execution of this Agreement.
C. The obligations set forth in this Agreement as having been made by the
Fund have been made by the Board of Trustees, acting as such Trustees for and on
behalf of the Fund, pursuant to the authority vested in them under the laws of
the State of Maryland, the Articles of Incorporation and the By-Laws of the
Fund. This Agreement has been executed by Officers of the Fund as officers, and
not individually, and the obligations contained herein are not binding upon any
of the Trustees, Officers, agents or holders of shares, personally, but bind
only the Fund.
D. Provisions of the Prospectus and any other documents (including
advertising material) specifically mentioning the Custodian (other than merely
by name and address) shall be reviewed with the Custodian by the Fund prior to
publication and/or dissemination or distribution, and shall be subject to the
consent of the Custodian.
E. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at Star
Bank Center, 425 Walnut Street, M. L. 6118, Cincinnati, Ohio 45202, attention
Mutual Fund Custody Department, or at such other place as the Custodian may from
time to time designate in writing.
F. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given when
delivered to the Fund or on the second business day following the time such
notice is deposited in the U.S. mail postage prepaid and addressed to the Fund
at its office at 33 Whitehall Street, 30th Floor, New York, New York 10004 or at
such other place as the Fund may from time to time designate in writing.
G. This Agreement, with the exception of the Appendices, may not be
amended or modified in any manner except by a written agreement executed by both
parties with the same formality as this Agreement, and authorized and approved
by a resolution of the Board of Trustees of the Fund.
H. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund or by the Custodian, and no
attempted assignment by the Fund or the Custodian shall be effective without the
written consent of the other party hereto.
I. This Agreement shall be construed in accordance with the laws of the
State of Ohio.
<PAGE>
J. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized as of the day
and year first above written.
Rainbow Fund, Inc.
By: /s/Robert M. Furman
-------------------
Robert M. Furman
Title: Chairman
ATTEST: Star Bank, N.A.
/s/Linda C. Anderson By: /s/Lynnette C. Gibson
- ------------------------- ---------------------
Linda C. Anderson Lynnette C. Gibson
President Title: Senior Trust Officer
/s/Marsha Crofton
- -----------------
Marsha Crofton
<PAGE>
APPENDIX A
Specimen Signatures
<PAGE>
APPENDIX B
The following agents are employed currently by Star Bank, N.A. for securities
processing and control . . .
The Depository Trust Company (New York)
7 Hanover Square
New York, NY 10004
The Federal Reserve Bank
Cincinnati and Cleveland Branches
Bankers Trust Company
16 Wall Street
New York, NY 10005
(For Foreign Securities and certain non-DTC eligible Securities)
<PAGE>
APPENDIX C
Standards of Service Guide
<PAGE>
Standards of Service Guide
STAR BANK, N.A.
MAIL LOCATION #6118,
425 WALNUT STREET,
CINCINNATI, OH 45202
March, 1996
<PAGE>
Star Bank, N.A.
Standards of Service Guide
Star Bank, N.A. is committed to providing superior quality service to
all customers and their agents at all times. We have compiled this guide as a
tool for our clients to determine our standards for the processing of security
settlements, payment collection, and capital change transactions. Deadlines
recited in this guide represent the times required for Star Bank to guarantee
processing. Failure to meet these deadlines will result in settlement at our
client's risk. In all cases, Star Bank will make every effort to compete all
processing on a timely basis.
Star Bank is a direct participant of the Depository Trust Company, a
direct member of the Federal Reserve Bank of Cleveland, and utilizes the Bankers
Trust Company as its agent for ineligible and foreign securities.
For corporate reorganizations, Star Bank utilizes SEI's Reorg Source,
Financial Information, Inc., XCITEK, DTC Important Notices, and the Wall Street
Journal.
For bond calls and mandatory puts, Star Bank utilizes SEI's Bond
Source, Kenny Information Systems, Standard & Poor's Corporation, and DTC
Important Notices. Star Bank will not notify clients of optional put
opportunities.
Any securities delivered free to Star Bank or its agents must be
received three (3) business days prior to any payment or settlement in order for
the Star Bank standards of service to apply.
Should you have any questions regarding the information contained in
this guide, please feel free to contact your account representative.
The information contained in this Standards of Service Guide is subject to
change Should any changes be made Star Bank will provide you with an updated
copy of its Standards of Service Guide.
<PAGE>
<TABLE>
<CAPTION>
Star Bank Security Settlement Standards
Transaction Type Instructions Deadlines* Delivery Instructions
- ---------------- ----------------------- ---------------------
<S> <C> <C>
DTC 1:30 P.M. on Settlement Date DTC Participant #2219
Agent Bank ID 27895
Institutional #
For Account #
Federal Reserve Book Entry 12:30 P.M. on Settlement Date Federal Reserve Bank of Cinti Trust
for Star Bank, N.A. ABA# 042000013
For Account #
Federal Reserve Book Entry (Repurchase 1:00 P.M. on Settlement Date Federal Reserve Bank of Cmti Spec
Agreement Collateral Only) for Star Bank, N.A. ABA# 042000013
For Accoumt #
PTC Securities 12:00 P.M. on Settlement Date PTC For Account BTRST/CUST
(GNMA Book Entry) Sub Account: Star Bank, N.A. #090334
Physical Securities 9:30 A.M. EST on Settlement Date Bankers Trust Company
(for Deliveries, by 4:00 P.M. on 16 Wall Street 4th Floor, Wmdow 43
Settlement Date minus 1) for Star Bank Account #090334
CEDEL/EURO-CLEAR 11:00 A.M. on Settiement Date Euroclear Via Cedel Bridge
minus 2 In favor of Bankers Trust Comp
Cedel 53355
For Star Bank Account #501526354
Cash Wire Tramsfer 3.00 P.M. Star Bank,N.A. Cinti/Trust ABA# 042000013
Credit Account #9901877
Further Credit to
Account
*All times listed are Eastern Standard Time.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Star Bank Payment Standards
Security Type Income Principal
- ------------- ------ ---------
<S> <C> <C>
Equities Payable Date
Municipal Bonds* Payable Date Payable Date
Corporate Bonds* Payable Date Payable Date
Federal Reserve Bank Book Entry* Payable Date Payable Date
PTC GNMA's (P&I) Payable Date + 1 Payable Date + 1
CMOs *
DTC Payable Date + 1 Payable Date + 1
Bankers Trust Payable Date + 1 Payable Date + I
SBA Loan Certificates When Received When Received
Unit Investment Trust Certificates* Payable Date Payable Date
Certificates of Deposit* Payable Date + 1 Payable Date + 1
Limited Partnerships When Received When Received
Foreign Securities When Received When Received
*Variable Rate Securities
Federal Reserve Bank Book Entry Payable Date Payable Date
DTC Payable Date + 1 Payable Date + 1
Bankers Trust Payable Date +1 Payable Date + 1
NOTE: If a payable date falls on a weekend or bank holiday, payment will be
made on the immediately following business day.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Star Bank Corporate Reorganization Standards
Deadline for Client
Instructions Transaction
Type of Action Notification to Client to Star Bank Posting
- -------------- ---------------------- ------------ -------
<S> <C> <C> <C>
Rights, Warramts, Later of 10 business days prior to expiration 5 busmess days prior Upon receipt
amd Optional Mergers or receipt of notice to expiration
Mandatory Puts with Later of 10 business days prior to expiration 5 business days prior Upon receipt
Option to Retain or receipt of notice to expiration
Class Actions 10 business days prior to expiration date 5 business days prior Upon receipt
to expiration
Voluntary Tenders, Later of 10 business days prior to expiration 5 business days prior Upon receipt
Exchanges, or receipt of notice to expiration
and Conversions
Mandatory Puts, Defaults, At posting of funds or securities received None Upon receipt
Liquidations, Bankruptcies, Stock
Splits, Mandatory Exchanges
Full and Partial Calls Later of 10 business days prior to expiration None Upon receipt
or receipt of notice
NOTE: Fractional shares/par amounts resulting from any of the above will be sold.
</TABLE>
<PAGE>
APPENDIX D
Schedule of Compensation
<PAGE>
Star Bank, NA
Custody Fee Schedule for the Rainbow Fund, Inc.
Star Bank, N.A., as Custodian, will receive monthly compensation for services
according to the terms of the following Schedule:
I. Portfolio Transaction Fees:
(a) For each repurchase agreement transaction $ 7.00
(b) For each portfolio transaction processed through
DTC or Federal Reserve $ 9.00
(c) For each portfolio transaction processed through
our New York custodian $25.00
(d) For each GNMA/Amortized Security Purchase $16.00
(e) For each GNMA Prin/Int Paydown, GNMA Sales $ 8.00
(f) For each option/future contract written,
exercised or expired $40.00
(g) For each Cedel/Euro clear transaction $80.00
(h) For each Disbursement (Fund expenses only) $ 5.00
A transaction is a purchase/sale of a security, free receipt/free delivery
(excludes initial conversion), maturity, tender or exchange:
II. Market Value Fee
Based upon an annual rate of: Million
.0003 (3 Basis Points) on First $20
.0002 (2 Basis Pornts) on Next $20
.OO015 (1.5 Basis Points) on Balance
III. Monthly Minimum Fee-Per Fund $200.00
IV. Out-of-Pocket Expenses
The only out of-pocket expenses charged to your account will be
shipping fees or transfer fees.
V. IFA Documents
Per Shareholder/year to hold each IRA Document $ 8.00
Vl. Earnings Credits
On a monthly basis any earnings credits generated from uninvested
custody balances will be applied against any cash management service
fees generated. Earnings credits are based on the average yield on the
91 day U.S. Treasury Bill for the preceding thirteen weeks less the 10%
reserve.
Revised March 25, 1996
<PAGE>
<TABLE>
<CAPTION>
Star Bank, N.A.
Cash Management Fee Schedule for the Rainbow Fund, Inc.
Services Unit Cost ($) Monthly Cost ($)
-------- ------------- ----------------
<S> <C> <C>
D.D.A. Account Maintenance 14.00
Deposits .399
Deposited Items .109
Checks Paid .159
Balance Reporting - P.C. Access 50.00
ACH Transaction .095
ACH Monthly Maintenance 40.00
Controlled Disbursement (1st account) 110.00
Each additional account 25.00
Deposited Items Returned 6.00
International Items Returned 10.00
NSF Returned Checks 25.00
Stop Payments 22.00
Data Transmission per account 110.00
Data Capture .10
Drafts Cleared .179
Lockbox Maintenance** 55.00
Lockbox items Processed .32
o with copy of check
o without copy of check .26
Checks Printed .20
Positive Pay .06
Issued Items .015
Wires Incoming
o Domestic 10.00
o International 10.00
Wires Outgoing
o Domestic
o Repetitive 12.00
o Non-Repetitive 13.00
o International
o Repetitive 35.00
o Non-Repetitive 40.00
PC - Initiated Wires:
o Domestic
o Repetitive 9.00
o Non-Repetitive 9.00
o International
o Repetitive 25.00
o Non-Repetitive 25.00
*** Uncollected Charge Star Bank Prime Rate as of first of month plus 4%
* Price can vary depending upon what information needs to be captured.
** With the use of lockbox, the collected balance in the demand deposit
account will be significantly increased and therefore earnings to offset
cash management service fees will be maximized.
*** Fees for uncollected balances are figured on the monthly average of all
combined accounts.
**** Other available cash management services are priced separately.
Revised 10/31/95
</TABLE>
Exhibit 99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of The Rainbow Fund, Inc.
We hereby consent to the following with respect to Post-Effective
Amendment No. 35 to the Registration Statement on Form N-1A (File No. 2-26011)
under the Securities Act of 1940, as amended, of The Rainbow Fund, Inc.:
1. The reference to our firm under the heading "Per Share Income and
Capital Changes" in the Fund's Prospectus.
2. The incorporation by reference of our report dated November 2,
1996 accompanying the Fund's Annual Report for the year ended
October 31, 1996, in the Fund's Prospectus and the Statement of
Additional Information.
/s/Harold Keller
----------------
April 15, 1997 Harold Keller, C.P.A.
The
{GRAPHIC-LOGO} Rainbow
Fund
Inc.
ANNUAL
REPORT
October 31, 1996
<PAGE>
Dear Shareholders:
During the fiscal year ended October 31, 1996, our Fund was up 12.3%.
Although the market has continued its winning ways throughout the year,
much of the rise has come from money pouring into large cap" mutual funds, and
not from economic fundamentals. The current market environment calls for greater
selectively and attention to fundamentals which determine the quality of a
company's earnings. Therefore, we took some profits after year end, and are in a
significantly higher cash position since October 31st. Our strategy going into
the new year is to continue to look for attractive companies which are
reasonably valued based on business fundamentals.
We would like to thank our Board of Directors for their time and
energy, and our shareholders for your continued confidence in management.
Very truly yours,
/s/Robert M. Furman
-------------------
ROBERT M. FURMAN
Chairman of the Board
/s/Linda C. Anderson
--------------------
LINDA C. ANDERSON
President
November 26, 1996
<PAGE>
Independent Auditor's Report:
To: The Shareholders and Board of Directors
The Rainbow Fund, Inc.
I have audited the accompanying Statement of Assets and Liabilities of
The Rainbow Fund, Inc., including the Schedule of Portfolio Investments, as of
October 31, 1996, and the related Statement of Operations for the year then
ended, the Statement of Changes in Net Assets for each of the two years in the
period then ended, and the Selected Per Share Data and Ratios for each of the
five years in the period then ended. These financial statements and per share
data and ratios are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements and per
share data and ratios based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per share data
and ratios are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. My procedures included confirmation of securities owned as of
October 31, 1996, by correspondence with the Fund's custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audits provide a reasonable basis for
my opinion.
In my opinion, the financial statements and per share data and ratios
referred to above present fairly, in all material respects, the financial
position of The Rainbow Fund, Inc. as of October 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for the year
then ended, in conformity with generally accepted accounting principles.
Port Washington, New York Harold Keller
November 26, 1996 Certified Public Accountant
<PAGE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
October 31, 1996
ASSETS:
<S> <C>
Investments in securities, at value (Note 1A) ............................... $1,087,986
(Identified Cost $743,195)
Cash ........................................................................ 180,072
Receivables:
Dividends and Interest .................................................... 970
----------
TOTAL ASSETS ........................................................... $1,269,028
----------
LIABILITIES:
Options Sold (Selling Price $5,246) ....................................... $ 4,500
Accrued expenses .......................................................... $ 16,528
----------
TOTAL LIABILITIES ...................................................... $ 21,028
----------
Net Assets (equivalent to $5.71 per share based on 218,526 shares
of capital stock outstanding) (Note 3) .................................... $1,248,000
==========
Accumulated undistributed income (loss):
Accumulated undistributed loss ............................................ ($1,361,895)
Accumulated undistributed net realized losses on investment transactions .. ($4,562,104)
-----------
NET AMOUNT ............................................................. ($5,923,999)
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Year Ended October 31, 1996 and 1995
October 31, October 31,
1996 1995
----------- -----------
<S> <C> <C>
Increase (decrease) in net assets from operations:
Investment income (loss) net ..................................... $ (31,638) $ (24,387)
Net realized gain (loss) from investments ........................ 25,368 138,950
Increase (decrease) in unrealized appreciation ................... 176,454 (64,826)
--------- ---------
Net increase (decrease) in net assets resulting from operations .. 170,184 (179,389)
--------- ---------
Distributions to Shareholders from:
Investment income net .......................................... -0- -0-
Net realized gain on investments ............................... (137,909) (102,907)
Capital share transactions (Note 3) .............................. (370,999) (175,693)
--------- ---------
TOTAL Increase (Decrease) ...................................... (338,724) (99,211)
--------- ---------
NET ASSETS:
Beginning of year .............................................. 1,586,724 1,685,822
--------- ---------
End of year .................................................... $1,248,000 $1,586,611
========== ==========
The notes to financial statements are an Integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
For the year ended October 31, 1996
<S> <C>
Investment Income:
Income:
Dividends ..................................................... $ 10,322
Interest ...................................................... 9,266
--------
TOTAL INCOME ............................................... $ 19,588
--------
Expenses:
Investment Advisory Fee (Note 5) ................................ $4,353
Professional Fees ............................................... 13,500
Custodian Fees .................................................. 2,431
Transfer Agent Fees ............................................. 7,200
Portfolio Pricing and Accounting Fees ........................... 16,800
Reports to Shareholders ......................................... 2,799
State and Local Taxes ........................................... 579
Directors' Fees and Expenses .................................... 2,492
Other ........................................................... 1,072
--------
TOTAL EXPENSES ............................................. $ 51,226
--------
INVESTMENT INCOME (LOSS) NET .................................... $(31,638)
--------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
NET REALIZED GAIN ON INVESTMENTS ................................ 25,368
CHANGE IN UNREALIZED APPRECIATION OF INVESTMENTS FOR THE YEAR ... 176,454
--------
NET (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .......... $170,184
========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Per Share Income and Capital Changes
(Based upon the monthly average number of outstanding shares)
October 31
---------------------------------------------------------
Income and Expenses 1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Income .................................................... $ .07 $ .10 $ .10 $ .11 $ .13
Operating expenses ........................................ .20 .18 .18 .17 .16
----- ----- ----- ----- -----
Net Investment Income (loss) .............................. (.13) (.08) (.08) (.06) (.03)
Dividends from net income ................................. .00 .00 .00 .00 (.01)
Capital Changes
Net realized & unrealized gains (losses) on securities .... .79 .67 (.01) .07 (.25)
Distribution from realized capital gains .................. (.54) (.34) (.38) .00 (.53)
----- ----- ----- ----- -----
Net increase (decrease) in net asset value ................ .12 .25 (.45) .01 (.82)
Increase due to decrease in capital shares ................ .08 .05 .05
Net asset value at beginning of period .................... 5.51 5.21 5.66 5.60 6.42
----- ----- ----- ----- -----
Net asset value at end of period .......................... $5.71 $5.51 $5.21 $5.66 $5.60
===== ===== ===== ===== =====
Ratios to Average Net Asset Value
Operating expenses ........................................ 3.67% 3.68% 3.36% 2.86% 2.66%
Net Income (loss) ......................................... (.02%) (.02%) (.01%) (.01%) (.05%)
Portfolio turnover rate ................................... 46% 102% 66% 81% 81%
Number of shares outstanding at end of period (000 omitted) 218 288 324 328 401
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investments in Securities
Common Stocks:
% of Market
Shares Item Net Assets Value(a)
- ------ ---- ---------- --------
<S> <C> <C> <C>
BANKS 21.9%
10,000 Glendale Federal Bank $ 183,750
1,040 Chase Manhattan Corp. 89,180
-----------
272,930
-----------
INSURANCE 13.1%
1,500 American International Group 162,937
-----------
CONSUMER PRODUCTS 5.9%
1,000 American Brands 47,750
7,000 Steven Madden, Ltd. 25,812
-----------
73,562
-----------
FERTILIZER 5.7%
1,000 Potash Corp. 70,875
-----------
COMPUTERS 21.4%
4,000 Seagate Technology, Inc. 267,000
-----------
OIL & GAS 9.0%
2,000 Tosco Corp. 112,250
-----------
ELECTRICAL/INDUSTRIAL EQUIPMENT 5.5%
3,150 Mark IV Industries, Inc. 68,119
-----------
TITANIUM MANUFACTURER 4.8%
2,500 RMI Titanium 60,313
-----------
TOTAL COMMON STOCKS 87.2% $ 1,087,986
-----------
OPTIONS SOLD -0.4%
40 CALLS Seagate Technology, Nov. '96 @ 70 (4,500)
-----------
OTHER ASSETS LESS LIABILITIES 13.2% $ 164,514
-----------
TOTAL NET ASSETS 100% $ 1,248,000
===========
(a) See Note 1 A of Notes to the Financial Statements
</TABLE>
<PAGE>
Notes to Financial Statements
October 31, 1996
1. Significant Accounting Policies
The company is registered under the Investment Company Act of 1940, as a
non-diversified, open-end management investment company.
A. Security Valuation - Investments in securities traded on a national
securities exchange are stated at the last reported sales price on the day of
valuation; securities traded in the over-the-counter market and listed
securities for which no sale was reported on that date are stated at the last
quoted bid price, except for short positions and call options written, for which
the last quoted asked price is used. Short-term notes are stated at amortized
cost, which is equivalent to value.
B. Federal Income Taxes - The company's policy is to comply with the
requirements of the Internal Revenue Code that are applicable to regulated
investment companies and to distribute all its taxable income to its
shareholders. Therefore, no federal income tax provision is required.
C. Other - The company follows industry practice and records security
transactions on the trade date. Dividend income is recognized on the ex-dividend
date and interest income is recognized on an accrual basis.
2. On December 9, 1996, a distribution of $25,368 capital gains was declared as
a dividend; said dividend to be paid on December 19th to stockholders of record
on such date.
At Octob
3. Capital Share Transactions
At October 31, 1996, there were 2,000,000 shares of par value stock
authorized and capital paid-in aggregated $6,826,349.
Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Shares Amount
------ ------
(000s Omitted)
Oct 31 Oct 31 Oct 31 Oct 31
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares sold and
reinvestments........ 26 14 $137 $102
Shares redeemed. ...... 96 580 508 278
--- ---- ---- ----
Net increase (decrease) (70) (566) (371) (176)
=== ==== ==== ====
</TABLE>
<PAGE>
4. Investment Transactions
Purchases and sales of investment securities other than U.S. Government
obligations and short term notes were $638,855 and $958,810 respectively
Based on cost for federal income tax purposes:
<TABLE>
<CAPTION>
<S> <C>
(a) Aggregate gross unrealized appreciation
for all securities in which there is an
excess of value over costs ............ $ 367,271
(b) Aggregate gross unrealized depreciation
for all securities in which there is an
excess of costs over value............. $ 22,480
---------
(c) Net unrealized appreciation............ $ 344,791
---------
(d) Aggregate cost of common stocks for
federal income tax purposes ........... $ 743,195
---------
</TABLE>
5. Investment Advisory Fees
The company pays advisory fees for investment management and advisory
services under a management agreement ("Agreement") that provides for fees to be
computed at an annual rate of .625 percent of the average annual net asset value
with respect to that portion of net assets not exceeding $2,000,000; .5 percent
with respect to that portion of net assets between $2,000,000 and $5,000,000;
and .375 of such assets in excess of $5,000,000. The Agreement provides for a
fee reduction, but not below zero, by the amount, if any, by which the expenses
of the Fund (exclusive of such compensation, interest, brokerage commissions,
taxes, dividends on short sales and legal fees incurred in connection with
litigation in which the Fund is a plaintiff) exceed the following percentages of
average annual net assets of the Fund: $0 -- $10,000,000 -- 3%; $10,000,000 --
$30,000,000 - 1/2%; and above $30,000,000 - 1/4%. The advisor's fee will also be
reduced (but not below zero) by 50% of the amount by which brokerage fees
received by the advisor in respect of the Fund's portfolio transactions exceed
2% of the Fund's average annual net assets.
The advisory fee computation during the two year period ended October 31,
1996 follows:
<TABLE>
<CAPTION>
Reduction Due to
Limitations
-----------
Gross Net
Fiscal Advisory Commis- Advisory
Year Fee Expenses sions Fees
---- --- -------- ----- ----
<S> <C> <C> <C> <C>
1995 $ 9,530 $ 2,619 -0- 6,911
1996 $ 8,718 $ 4,335 -0- 4,383
</TABLE>
<PAGE>
Under the Advisory Agreement, it is reoognized that the advisor will act as
the Fund's principal broker. During the period, the Fund paid aggregate
commissions of $16,696 to brokers, through whom the advisor's brokerage
transactions were cleared. Of the commissions paid, $15,744 was paid to an
affiliate of the advisor.
<TABLE>
<CAPTION>
NOTE:
Option Contracts Written: Number Amount
- ------------------------- ------ ------
<S> <C> <C>
Beginning of year.......... -0- -0-
During the year .......... 249 $56,325
Expired during the year ... 160 42,650
Closed during the year. ..... 49 10,430
Exercised during the year.. -0- -0-
Balance at end of year....... 40 5,246
</TABLE>
<PAGE>
THE RAINBOW FUND, INC.
33 Whitehall Street, 30th Floor
New York NY 10004
(212) 482-0803
CUSTODIAN
Star Bank
PO. Box 1118
425 Walnut Street
ML 6118
Cincinnati, OH 45201
TRANSFER AGENT
Investor Data Services
33 Whitehall Street 30th Floor
New York, NY 10004
COUNSEL
Herrick, Feinstein, LLP
2 Park Avenue
New York, NY 10016
INDEPENDENT AUDITOR
Harold Keller, CPA
150 Main Street
Port Washington, NY 10050
OFFICERS AND DIRECTORS:
ROBERT M. FURMAN
Chairman of the Board & Treasurer
Managing Partner of Furman Anderson & Co.
General Partner of Investor Data Services
President Emeritus of Shamus Group, Inc.
Member NYSE & NASD
LINDA C. ANDERSON
President & Secretary
Operations Partner of Furman Anderson & Co.
General Partner of Investor Data Services
Financial, Operations & Chief Compliance Officer
of Shamus Group, Inc.
Member NYSE & NASD
STUART BECKER
Certified Public Accountant
President of Becker & Company, LLC
MARK S. CHANKO
Retired; Formerly Chief Financial Officer
Standard Motor Products, Inc.
JESSE H. RIEBMAN
Retired; Formerly Vice President and Treasurer
AEL Industries, Inc.
This report is authorized for distribution only when preceded or accompanied by
the prospectus of The Rainbow Fund, Inc, which includes information about
Investment policies, redemption of shares of the Fund, voting privileges, and
shareholders' purchase plans.
