Registration No. 2-26011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 36
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 36
(Check appropriate box or boxes)
The Rainbow Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
7 Hanover Square
New York, New York 10004
(Address of Principal Executive Offices) (Zip Code)
David A. Rosen, Esq.
Herrick, Feinstein, LLP
2 Park Avenue
New York, New York 10016
(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 fililng 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>
The Rainbow Fund Inc.
7 Hanover Square, 2nd Floor
New York, NY 10004
(212) 820-0502
PROSPECTUS
COMMON STOCK ($.10 PAR VALUE)
The Rainbow Fund, Inc. is a non-diversified, open-end investment company
which seeks growth of capital, primarily though investments in common stocks.
The Fund is designed for investors who, aware of the risks involved, seek the
possibility of obtaining capital growth. The Fund may 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 Fund will
seek to avoid investment in companies whose employee and business policies do
not meet certain criteria relating to the gay and lesbian community. (See
"Certain Social Goals")
The minimum initial subscription is $500 and the minimum subsequent
investment is $50. There are no sales or redemption charges. The Fund does not
charge its shareholders for advertising, promotion and marketing activities.
Please read this Prospectus before investing, and keep it on file for
future reference. It contains important information, including how the Fund
invests and the services available to shareholders.
To learn more about the Fund, you can obtain a copy of its most recent
financial reports and portfolio listings, or a copy of the Statement of
Additional Information dated the same date as this Prospectus, which has been
filed with the Securities and Exchange Commission and is incorporated by
reference into this Prospectus. For a free copy of these documents call or write
to the Fund at the telephone number or address shown above.
Investment Advisor
Furman, Anderson & Co.
7 Hanover Square, 2nd Floor,
New York, NY 10004
(212 820-0502)
<PAGE>
TABLE OF CONTENTS
Fund Expenses
Sales Charges
Total Investment Return
Financial Highlights
Investment Objectives and Policies
Social Goals
Special Risks
Put and Call Options
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 Sales
The Fund's Non-Diversified Classification
Fundamental Investment Policies and Restrictions
Net Asset Value
How to Buy Shares
Redemption of Shares
Other Shareholder Services
Redemption of Shares
Management
Taxes, Dividends and Distributions
Additional Information
Share 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>
Financial Highlights (for a share outstanding throughout each of the periods)
The following table, which provides information about the Fund's financial
history, is based on a single share outstanding throughout each fiscal year, and
has been examined by Harold Keller, CPA, whose audited report is contained in
the Fund's Annual Report to Shareholders for the year ended October 31, 1997.
The Fund's Annual Report, which is incorporated by reference in the Statement of
Additional Information, is available upon request without charge.
<TABLE>
<CAPTION>
Fiscal Year Ended October 31
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988*
---- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $5.71 $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) (.12) (.13) (.08) (.06) (.06) (.03) .01 .00 .06 (.01)
Net Gains (Losses) on Securities
(Both Realized & Unrealized) 1.10 .79 .67 (.01) .07 (.25) 1.81 (.79) .47 .59
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total From Investment Operations .90 .66 .59 (.09) .01 (.28) 1.82 (.79) .53 .58
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less Distributions
Dividends
(From Net Investment Income) .00 .00 .00 .00 .00 .01 .00 .07 .00 .00
Distributions
(From Capital Gains) .13 .54 .34 .36 .00 .53 .00 .51 .00 .00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions .13 .54 .34 (.36) .00 (.54) .00 (.58) .00 .00
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value, End of Year $6.56 $5.71 $5.51 $5.21 $5.66 $5.60 $6.42 $4.60 $5.97 $5.44
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Return +14.89% +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) $1,381 $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 3.69% 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%) (.02%) (.01%) (.01%) (.05%) .19% .10% 1.11% (.28%)
Portfolio Turnover Rate 90% 46% 102% 66% 81% 81% 103% 212% 193% 90%
*Five Month Period
</TABLE>
<PAGE>
<TABLE>
<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 illustrates all expenses and fees that a shareholder of
the Fund will incur. 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.
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 (as a percentage of Average
Net Assets)
-----------------------------------------------------------------------
Investment Advisory Fees ..................................... .06%
12b-1 Fees ................................................... None
Other Expenses ............................................... 3.61%
Total Fund Operating Expenses ................................ 3.67%
If, an example, you invested $1,000, the Fund returned 5% annually, expense
ratios remained as listed above and you closed your account at the end of the
time periods shown, your expenses would be:
1 Year 3 Years 5 Years 10 Years
------- ------- -------- --------
$37 $112 $190 $392
This is only an example. Actual expenses may be higher or lower than those
shown.
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, 1988 through October
31, 1997 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 Fund S & P 500
------ ------------- ---------
1 Year 17.55% 29.7%
5 Years 43.38% 86.8%
10 Years 94.78% 144.7%
Average Annual Rate of Return
9.48% 14.5%
<PAGE>
Management's Discussion of Performance
During the fiscal year ended October 31, 1997, the Fund's net asset
value increased by 17.55%. The Fund's goal is to identify opportunities to buy
securities with sound fundamental investment qualities at reasonable prices.
During the fiscal year, the Advisor generally adopted a defensive stance, which
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, and as a result, the Fund did not benefit
to a fuller extent from the substantial general increase in market price during
the 12-month period ending October 31, 1997. As of the date of this Prospectus
the Advisor continues to maintain a relatively conservative position, in the
belief that the equity markets as a whole could suffer a substantial correction
which would offset the possible gains to be obtained from a more aggressive
investment posture.
INVESTMENT OBJECTIVES AND POLICIES
The Fund seeks to provide a sophisticated investment program for
investors whose objective is growth of capital. The Fund selects portfolio
securities primarily on the basis of potential capital enhancement. Most of the
Fund's investments will be in common stocks, although the Fund may also retain
cash and invest in defensive securities, such as 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 allow the use of speculative
market techniques such as 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. These techniques are not frequently
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.
Within the investment criteria stated above, the Fund has determined to
invest in companies which have either been identified as having progressive
policies in respect of the gay and lesbian community, or which, upon reasonable
inquiry, have not adopted policies or engaged in practices which would suggest
hostility or discriminatory behavior towards members of the gay and lesbian
community. The Fund's policies in this regard are hereafter referred to as its
"Social Goals." The Fund does not believe that its Social Goals will
significantly limit the availability of investments suitable for the Fund's
investment objectives.
The Advisor has also committed to contributing 10% of its advisory fees
from the Fund to charitable organizations which are concerned with gay and
lesbian issues. See "Social Goals - Advisory Committee." These contributions
will be made in consultation with an advisory committee assembled by the Advisor
for such purpose. See "Social Goals - Advisory Committee."
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
<PAGE>
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. Incorrect market judgments,
however, can lead to losses in connection with option trading as with any other
form of investment.
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.
Writing 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. Writing a covered call does not protect the Fund from a decline in the
price of the underlying security, although the premium received would mitigate
the Fund's loss. Writing 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 price 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.
Further information on purchasing and writing put and call and stock
options, including risk factors involved various techniques which may be
employed, is provided in the Statement of Additional Information.
<PAGE>
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 Advisor 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 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.
Further information on put and call and stock index options, including risk
factors involved various techniques which may be employed, is provided in the
Statement of Additional Information.
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.
In recent years, the Fund has rarely invested in warrants or foreign
securities, nor has it engaged in short sales. Such techniques may be used at
any time, however, if in the Advisor's view such techniques will enhance or
protect the value of the Fund's shares.
<PAGE>
THE FUND'S NON-DIVERSIFIED
CLASSIFICATION
The Fund is a "non-diversified" investment company under the Investment
Company Act of 1940. This means that it is not restricted 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.
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 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.
SOCIAL GOALS
The Fund has determined that it will seek to invest in companies which,
having the characteristics necessary to satisfy the Fund's fundamental and other
investment policies, have also been identified either as having progressive
policies in respect of the gay and lesbian community, or which, upon reasonable
inquiry, have not adopted policies or engaged in practices which would suggest
hostility or discriminatory behavior towards members of the gay and lesbian
community. The Fund's policies in this regard are hereafter referred to as its
"Social Goals." The Fund believes that the management of companies which are
responsive towards members of the gay and lesbian community may also exhibit
forward-looking approaches in other vital management areas, and that such
policies may result in improved employee morale which is conducive to efficient
operation and will result in the company being less likely to be exposed to
costly litigation involving discrimination issues in general. Such companies may
also experience long term benefits in the form of investor support from minority
groups, including, in particular, members of the gay and lesbian community.
The Advisor has indicated to the Fund's Board of Directors that it will
contribute 10% of its advisory fees from the Fund to charitable organizations
concerned with issues affecting the gay and lesbian community. The Advisor
intends to call upon an advisory committee (the "Committee") constituted by the
Advisor, consisting of persons whose careers and/or records on social issues
suggest sensitivity to issues concerning gay and lesbian interests, to assist
the Advisor in identifying appropriate charitable recipients. The names and
brief business biographies of members of the Committee will be furnished to
shareholders together with the Fund's annual and semiannual reports. In <PAGE>
addition, Shareholders are invited to submit to the Advisor suggestions as to
the names of suitable charitable institutions, which suggestions will be
forwarded to each member of the Committee. The Advisor's commitment will not
increase the cost to the Fund of the Advisor's services. The Fund's shareholders
will be advised annually of the recipients and amounts of such charitable
contributions. Investors are also invited to submit the names and brief
descriptions of companies they believe may satisfy the Fund's Social Goals.
The Advisor may also request the views of the Committee concerning the
conformity with the Fund's social goals of a company in which the Advisor
proposes to invest or in which the Fund already has an investment. The
Committee's advice will relate solely to Social Goals and will not deal with
other items of investment merit, which will remain the sole province of the
Advisor subject to the overall supervision of the Board of Directors. Although
the Advisor intends, with the assistance of the Committee, to seek out publicly
available information concerning company policies from public interest groups
concerned with gay and lesbian issues, such information may not be readily
available.
The Advisor's judgments concerning a particular company's Social Goals
will necessarily be subjective, and it cannot be assured that all of the
companies selected for the Fund's portfolio will completely satisfy the Fund's
Social Goals. The Fund may invest in companies as to which it has no information
pertaining to its Social Goals, provided that the Advisor has not become aware
of information indicating a hostile or discriminatory attitude of a company's
management relating to the gay and lesbian community. While the Fund's Social
Goals do not constitute a "fundamental investment policy" as defined under the
Investment Company Act of 1940, the Board of Directors, has no present intention
of changing such Social Goals.
NET ASSET VALUE
The Net Asset Value ("NAV") of each Fund share is calculated as of the close of
business of the New York Stock Exchange on each business day when the New York
Stock Exchange. To calculate the NAV the Fund's assets are valued and totaled,
liabilities are subtracted and the balance, called net assets, is divided by the
number of shares outstanding. See "Net Asset Value" in the Statement of
Additional Information.
HOW TO BUY SHARES
The minimum initial investment is $500, except as otherwise described in this
Prospectus. Subsequent purchases must be at least $50. The minimum subsequent
purchase requirements are waived on purchases made by reinvesting dividends. No
share certificates will be issued for Fund shares unless specifically requested
in writing by an investor or the dealer or broker. 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. Shares of the Fund may be
purchased without a sales load at the net asset value next determined after an
order for shares is received and accepted by the Fund.
Initial Share Purchases By Mail Investors desiring to purchase Fund shares by
mail should complete a Share Purchase Application and mail it to the Fund at the
address noted below, together with a check in U.S. dollars payable to "The
Rainbow Fund:"
The Rainbow Fund
7 Hanover Square, 2nd Floor
New York, NY 10004
<PAGE>
If the Fund receives an order in proper form by 4 p.m. eastern time, it will
issue shares at that day's NAV. If an order is received after 4 p.m. it will be
priced at the next business day's NAV.
Additional Share Purchases Account holders may make additional share purchases
($50 minimum) at net asset value by mailing a check to the Fund at the address
noted above.
Investments Through Broker Dealers or BanksFund shares may also be purchased
through broker-dealers or banks, which may charge transaction fees for such
services. The Fund does not charge any such fees for purchase transactions
directly with the Fund.
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; and (3) other supporting legal documents, if
required, as in the case of corporations, estates, trusts or other owners in
fiduciary capacity. In certain cases to protect shareholder accounts, the Fund
and the Transfer Agent may require a guarantee of the signature of each
registered owner by a bank, member of a national security exchange or other
eligible guarantor institution.
Requests for redemption must be made directly to Investor Data
Services, 7 Hanover Square, 2nd Floor. New York, NY 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.
<PAGE>
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 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. 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. Such reduction
will also be effected with regard to brokerage fees which are received by any
affiliate of the Advisor. Robert M. Furman, who is the principal equity owner of
the Adviser, is currently a registered representative with Drake & Company,
broker-dealers with offices at 7 Hanover Square, New York, NY 10004, and is
principally responsible for the execution of the Fund's transactions, 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 Mr. Furman,
and fees paid to Investor Data Services.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare dividends on an annual basis in October of
each year, on a date set by the Board of Directors. As current income is not a
principal objective of the Fund, the amount of dividends, if any, will likely be
small. In addition, distributions may be made annually in December out of any
net short-term or long-term capital gains realized from the sale of securities,
premiums from expired calls written by the Fund, and net profits from hedging
transactions, realized in the twelve months ending on October 31st of that year.
Any long-term capital gains distributions and any non-taxable return of capital
will be separately identified when tax information is distributed by the Fund.
There is no fixed dividend rate and there can be no assurance as to the payment
of any dividends or the realization of any capital gains.
All dividends and capital gains distributions are automatically
reinvested in Fund shares at net asset value, as of a date selected by the Board
of Directors, unless the shareholder asks the Transfer Agent in writing to pay
dividends or capital gains distributions in cash, as described in "Reinvestment
of Dividends and Distributions" in the Statement of Additional Information. That
request must be received prior to the record date for a dividend to be effective
as to that dividend.
Tax Status of the Fund's Dividends and Distributions
This discussion relates solely to Federal tax laws and is not
exhaustive; a qualified tax Advisor should be consulted. The Fund's dividends
and distributions may also be subject to state and local taxation. See "Tax
Aspects of Covered Calls and Hedging Instruments" and "Performance, Dividend and
Tax Information" in the Statement of Additional Information for information on
tax aspects of the Fund's investments in Hedging Instruments and other tax
matters.
<PAGE>
The Fund qualifies as a "regulated investment company" under the
Internal Revenue Code, it will not be liable for Federal income taxes on amounts
paid by it as dividends and distributions. To so qualify, among other
requirements, the Fund's income 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 as a regulated
investment company but reserves the right not to do so.
Dividends paid by the Fund derived from net investment income or net
short-term capital gains are taxable to shareholders as ordinary income, whether
received in cash or reinvested. Long-term capital gains distributions, if any,
are taxable as long-term capital gains whether received in cash or reinvested
and regardless of how long Fund shares have been held. Dividends are taxable
whether they received in cash or reinvested in shares of the Fund. An investor
purchasing Fund shares shortly prior to the declaration of a dividend or capital
gains distribution would receive a distribution subject to income tax, and the
distribution would have the effect of reducing the Fund's net asset value per
share by the amount of the distribution. A purchase shares shortly before a
record date for a distribution you would, in effect, result in a return of a
portion of a shareholder's investment, but the distribution would be taxable to
the shareholder even if the net asset value of his or her shares is reduced
below the cost of such shares. However, for federal income tax purposes, the
shareholder's original cost would continue as the tax basis of such shares.
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.
Additional information concerning the Fund's tax status is set forth in the
Statement of Additional Information.
YEAR 2000 PROCESSING ISSUE
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the Adviser, the Distributor or other service providers
to the Fund do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Adviser is taking steps that it believes are reasonably designed
to address the Year 2000 Problem with respect to computer systems that it uses
and the Adviser is taking steps to obtain reasonable assurances that comparable
steps are being taken by the Fund's other service providers. At this time,
however, there can be no assurance that these steps will be sufficient to avoid
any adverse impact to the Fund.
The Year 2000 Problem is expected to impact corporations, which may include
issuers of portfolio securities held by the Fund, to varying degrees based upon
various factors, including, but not limited to, the corporation's industry
sector and degree of technological sophistication. The Fund is unable to predict
what impact, if any, the Year 2000 Problem will have on issuers of the portfolio
securities held by the Fund.
<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
dividend, 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 July 15, 1998 he
owned of record and beneficially 126,277 shares of the Fund's common stock,
representing 44.4% 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>
[Front Cover]
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
7 Hanover Square, 2nd Floor
New York, NY 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.
7 Hanover Square, 2nd Floor
New York, New York 10004
(212) 820-0502
STATEMENT OF ADDITIONAL INFORMATION
October ____, 1998
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 as of the date hereof
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
Net Asset Value
Reinvestment of Dividends and Distributions
Tax Information
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.
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
<PAGE>
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.
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.
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.
<PAGE>
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: 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 is maintained 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 Robert Furman, as the
principal broker for the Fund, would benefit from the Fund's option
transactions. See "Portfolio Turnover."
Stock Index Options
The Fund may 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
<PAGE>
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 would incur 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.
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. 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.
<PAGE>
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.
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. 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
<PAGE>
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.
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;
<PAGE>
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:
Invest in, or retain investments in, companies whose policies or practices are,
to the knowledge of the Fund's Board of Directors or its Advisor, inconsistent
with the Fund's Social Goals (as described under "Social Goals" in the
Prospectus);
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.
PORTFOLIO TURNOVER
The portfolio turnover rate of the Fund for the last three fiscal years is set
forth under "Financial Highlights" 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. The because of the fund's use of option
techniques, the turnover rate of the Fund has been higher in some years than
that of other mutual funds (90% in 1997) and may in the future exceed the
turnover rate of a majority of mutual funds.
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. Robert M.
Furman, a controlling person of Furman, Anderson & Co., is also the principal
broker for the Fund. See "Management of the Fund."
<PAGE>
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 had been associated
since 1959.
*ROBERT M. FURMAN (64) Chairman of the Board, and Treasurer of the Fund since
August 1974; Principal General Partner, Furman, Anderson & Co. Adviser to the
Fund, for over 10 years; 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
is presently acting as the Fund's principal broker. Mr. Furman is a co-founder
of the Juvenile Diabetes Foundation and a member of its Board of Chancellors
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).
*ARIEL GOODMAN (31) Director and President of the Fund; partner of Furman,
Anderson & Co., Adviser to the Fund; General Partner of Investor Data Services,
all since August, 1997; previously, registered representative Shamus Group,
broker-dealer February - July, 1997; registered representative A. G. Edwards,
brokers dealer, March 1995-January, 1997; financial consultant, Dreyfus Service
Corp., September, 1993-January 1995; registered representative, Prudential
Securities, broker-dealer, October 1990-September 1993.
STUART BECKER (53), Director. Principal partner, Becker & Company, P.C., public
accountants, since November, 1990.
- --------------------
* Mr. Furman and Ms. Goodman are "interested persons" of the Fund, as such term
is defined in the Investment Company Act of 1940.
REMUNERATION OF OFFICERS AND DIRECTORS
During the fiscal year ended October 31, 1997, 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, 1997, such fees and expenses aggregated
$1,187. 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
<PAGE>
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 August 15, 1998 he owned of
record and beneficially 126,277 shares of the Fund's common stock, representing
44.4% of all of the Fund's issued and outstanding common stock.
As of the same date, none of the officers and directors of the Fund owned of
record or beneficially any of the Fund's shares.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisory Services
Furman, Anderson & Co. (the "Adviser") whose offices are located at 7 Hanover
Square, New York, New York, is the Fund's investment adviser. The Adviser was
organized as a New York limited partnership by Robert M. Furman, who is its
principal partner. Robert M. Furman, a controlling person of the Advisor, is a
member of the New York Stock Exchange and serves as the principal broker for
Fund portfolio transactions. See "Brokerage Allocation."
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;
<PAGE>
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."
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
Annual Net Assets By Amount 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 Robert M. Furman, who currently serves
as the Fund's principal broker.
The following table sets forth the advisory fee computation during the
periods indicated:
Reduction Reduction of Fee
----------- ----------------------------
Fiscal Year Gross Due to Due to Net
Ended Advisory Expense Brokerage Advisory
October 31 Fee Limitation Commissions Fee
---------- --- ---------- ----------- ---
1995 9,530 2,619 -0- 6,911
1996 8,718 4,335 -0- 4,383
1997 8,657 5,479 -0- 3,178
<PAGE>
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.
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
principally owned by Robert M. Furman 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:
Accounting and
Fiscal Year Ended Transfer Agency Portfolio Pricing
October 31 Fees Fees
---------- ---- ----
1995 $7,200 $16,800
1996 $7,200 $16,800
1997 $7,200 $16,800
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 audited the Fund's financial statements since 1977, was 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, 1997.
<PAGE>
Mr. Keller resigned as the auditor of the Fund as of September 30, 1998. The
Board of Directors has retained Tait, Weller & Baker, whose principal offices
are at 8 Penn Center Plaza, Philadelphia, PA 19103-2108 as independent auditors
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, 1998.
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 or an affiliate
of the Adviser are being considered 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 or its affiliates. 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, although the
Adviser considers this to be unlikely is most if not all cases. 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 the Adviser assumed its
advisory obligations, almost all of the Fund's portfolio transactions have been
handled through the Adviser or its affiliates. Mr. Furman, principal equity
owner of the Adviser, currently acts as such principal broker. The Adviser will
request Mr. Furman 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 Mr. Furman for
the Fund may not be less favorable to the Fund than its contemporaneous charge
for the execution of similar transactions to Mr. Furman'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
<PAGE>
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.
The following table sets forth gross brokerage commissions paid by the Fund, and
that portion of the gross commissions paid to the Adviser or Mr. Furman for the
fiscal years specified:
Fiscal Year
Ended Gross Commission Paid to
October 31 Commissions Adviser or Affiliate %
---------- ----------- -------------------- -
1995 29,410 27,410 93%
1996 16,696 15,744 94%
1997 27,436 21,949 80%
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. 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
The net asset value ("NAV") of each Fund 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 at the close of its regular trading session (normally
4:00 p.m., New York time, Monday through Friday). The of Fund shares is not
determined on days the NYSE is closed (generally, New Year's Day, Martin Luther
King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas). The per share NAV of each Fund is determined
by dividing the total value of a Fund's securities and other assets, less
liabilities, by the total number of shares outstanding. Each listed security is
valued at the last reported sale price; where no trade has occurred, securities
<PAGE>
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. Exchange-traded options are valued at the
last sale price unless there is no timely sale price, in which event current
prices provided by market makers will be used. Fixed-income securities are
valued daily on the basis of valuations furnished by an independent pricing
service. 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.
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.
REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
If investors do not elect in writing or by phone to receive their dividends and
distributions in cash, all income dividends and capital gains distributions, if
any, on their shares are reinvested automatically in additional shares of that
Fund at the NAV determined on the first business day following the record date.
Checks for cash dividends and distributions and confirmations of reinvestments
are usually mailed to shareholders within ten days after the record date. Any
election of the manner in which a shareholder wishes to receive dividends and
distributions (which may be made on the New Account Application form or by
phone) will apply to dividends and distributions the record dates of which fall
on or after the date that a Fund receives such notice. Changes to distribution
options must be received at least three days prior to the record date to be
effective for such date. Investors receiving cash distributions and dividends
may elect in writing or by phone to change back to automatic reinvestment at any
time.
TAX INFORMATION The Federal tax status of the Fund and the treatment of the
Fund's dividends and distributions is explained in the Prospectus under the
caption "Dividends, Distributions and Taxes." Additional information is set
forth below.
To qualify under Subchapter M, among other requirements, the Fund's income from
the sale of securities held less than three months may not exceed 30% of its
gross income. Due to this limitation, the Fund will limit the extent to which it
engages in, but will not be precluded from, the following activities: (i)
selling investments, including Stock Index Futures, held for less than three
months, whether or not they were purchased on the exercise of a call held by the
Fund; (ii) purchasing calls or puts that expire in less than three months; (iii)
effecting closing transactions with respect to calls or puts purchased less than
three months previously; (iv) exercising puts or calls held by the Fund for less
than three months; and (v) writing calls on investments held for less than three
months.
<PAGE>
FINANCIAL STATEMENTS
Reference is made to the information supplied under the caption "Financial
Highlights" in the Prospectus. This Statement of Additional Information
constitutes Part B of the Post-Effective Amendment of the Fund's Registration
Statement # 36, which has been filed with the Securities and Exchange Commission
on Form N-1A.
The following audited financial statements for the period ended October 31, 1997
are hereby incorporated into this Statement of Additional Information by
reference to the Funds' Annual Report dated October 31, 1997. Copies of such
reports accompany this SAI.
DOCUMENTS INCORPORATED BY REFERENCE TO THE ANNUAL REPORT:
Schedules of Investments as of October 31, 1997
Statements of Operations for the period ended October 31, 1997
Statements of Assets and Liabilities as of October 31, 1997
Statements of Changes in Net Assets for the periods ended October 31, 1997 and
1996
Notes to Financial Statements
Report of Independent Accountant
The portions of such Annual Report that are not specifically listed above are
not incorporated by reference into this Statement of Additional Information and
are not part of the Registration 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. 36 to the Registration Statement of the Rainbow Fund, Inc. pursuant to the
Securities Act of 1933 and the Investment Company Act of 1940.
<PAGE>
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, 1997:
Statement of Assets and Liabilities as October 31, 1997.
Statement of Changes in Net Assets for the years ended October 31, 1997
and October 31, 1996.
Statement of Operations for the year ended October 31, I997.
Schedule of Investments in Securities as of October 31, 1997.
Schedule VI - Open Option Contracts Written - Included in Schedule of
Investments.
Notes to Financial Statements as of October 31, 1997.
Independent Auditor's Report
(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 refiled herewith.
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 and refiled herewith.
4. Specimen of Certificate of Common Stock issued
by the Registrant. Filed as Exhibit 4 to Post-Effective Amendment No. 28.
5. Copy of Investment Advisory Contract between
the Registrant and Furman, Anderson & Co., as amended through June 1, 1982.
Filed as Exhibit 5 to Post-Effective Amendment No. 22 to the Fund's Registration
Statement on Form N-lA and and refiled herewith.
8. Copy of Custodian Agreement between the
Registrant and the Star Bank National Association, dated in 1996. Filed
herewith.
<PAGE>
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 refiled herewith.
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 Post-Effective Amendment No. 25 to the Fund's
Registration Statement on Form N-lA and refiled herewith.
11. Report and Consent of Harold Keller, C.P.A.
(filed herewith).
12. Annual Report for the fiscal year ended
October 31, 1997 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. See also Item 28.
Mr. Furman is a majority owner 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
Approximate
Number of
Record Holders as of
Title of Class September 1, 1998+
-------------- ------------------
Common Stock 500
Item 27. Indemnification
There are no contracts or arrangements pertaining
to indemnification.
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.
<PAGE>
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.
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
<PAGE>
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
Mr. Furman, Chairman of the Fund, is the majority
partner in Furman, Anderson & Co., the Fund's investment adviser. Ariel Goodman,
President of the Fund, became a minority partner of Furman, Anderson & Co., in
August of 1997. Reference is made to "Management of the Fund" in the Statement
of Additional Information." Furman, Anderson & Co. has been the Fund's
investment adviser since 1974.
Mr. Furman is also a majority partner of Investor
Data Services, which provides transfer agency, administrative and accounting
services to the Fund. See Items 25 and 31.
Mr. Furman, who is a registered representative
with Drake & Company, broker-dealers with offices at 7 Hanover Square, New York,
NY 10004, is principally responsible for the execution of the Fund's
transactions.
Item 29. Principal Underwriters
None
Item 30. Location of Accounts and Records
Physical possession of records required under
Regulation 270.31a-1(b) (1), (2), (3), (5), (6), (7) and (8) is maintained with
Investor Data Services, 7 Hanover Square, New York, New York 10004.
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, 7 Hanover Square, New York, New York 10004..
Records required to be maintained under Regulation
270.31A-1(f) are maintained at the office of Furman, Anderson & Co., 7 Hanover
Square, New York, New York 10004.
<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.
EXHIBIT 1(a)
ARTICLES OF INCORPORATION
OF
THE RAINBOW FUND, INC.
The undersigned, being a natural person and acting as
incorporator, does hereby adopt the following Articles of Incorporation for the
purpose of forming a business corporation in the State of Maryland, pursuant to
the provisions of the Maryland General Corporation Law.
FIRST:
(1) The name of the Incorporator is Robert M. Furman.
(2) The said incorporator's address, -including the street and
number, if any, including the county or municipal area, and includirIg the state
or country, is 19 Rector Street, New York City, New York County, New York 10006.
(3) The said incorporator is at least eighteen years of age.
(4) The said incorporator is forming the corporation named in
these Articles of Incorporation under the general laws of the State of Maryland,
to wit, the Maryland General Corporation Law.
SECOND: The name of the corporation is THE RAINBOW FUND, INC.,
(hereinafter called the "Corporation").
THIRD: The purpose for which the Corporation is formed and the
business or objects to be transacted, carried on and promoted by It, is to act
as an open-end management Investment company registered as such with the
Securities and Exchange Commission pursuant to the Investment Company Act of
1940 and to exercise and generally to enjoy all of the powers, rights and
privileges granted to, or conferred upon, corporations by the laws of the State
of Maryland now or hereafter in force.
FOURTH: The post office address of the principal office of the
Corporation is the State of Maryland, c/o The Prentiss-Hall Corporation System,
Maryland, 1123 North Eutaw Street, Baltimore, County of Baltimore, Maryland
21201. The name of the resident agent of the Corporation in the State of
Maryland is c/o The Prentiss-Hall Corporation System, Maryland, 1123 North Eutaw
Street, Baltimore, County of Baltimore, Maryland 21201. The resident agent is a
Maryland corporation.
FIFTH: The total number of shares of capital stock which the
Corporation Initially has authority to issue Is 2,000,000 shares of Common Stock
of the par value of $.10 per share, having an aggregate par value of $200,000.
SIXTH: The preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms or
conditions of redemption of the Common Stock of -the Corporation, shall be as
follows:
<PAGE>
(a) To the extent that the Corporation has funds or property
legally available therefor, each holder of the shares of stock of the
Corporation, upon proper written request (including signature guarantees, If
required by the Board of Directors) to the Corporation accompanied, when stock
certificates representing such shares are outstanding, by surrender of the
appropriate stock certificate or certificates in proper form for transfer, or
any such form as the Board of Directors may provide, shall be entitled to
require the Corporation to redeem all or any number of the shares standing in
the name of such holder on the books of the Corporation, at the net asset value
of such shares computed as hereinafter provided. Notwithstanding the foregoing,
the Board of Directors of the Corporation may suspend the right of the holders
of the shares of stock of the Corporation to require the Corporation to redeem
such shares when permitted or required to do so by the Investment Company Act of
1940 or any rule or regulation of the Securities and Exchange Commission
promulgated thereunder.
When the Board of Directors of the Corporation, Including a
majority of the Directors who are not interested persons as defined in Section
2(a)(19) of the Investment Company Act of 1940, determines in Its sole
direction, that the action is necessary for the business success and general
welfare of the Corporation in order to reduce disproportionate and unduly
burdensome expenses in the operation of the Corporation's affairs, to achieve
efficiencies in the administration of Its activities, or to reduce or eliminate
excessive expenditures and undue difficulties in servicing, accounting and
reporting requirements with respect to the accounts of shareholders, it may by
resolution order the redemption of all shares of the stock of the Corporation at
the net asset value of such shares computed as hereinafter provided in accounts
having less than 50 shares (such minimum being subject to change by action of
the Board of Directors) for a period of three months following notice to
affected holders by mail, postage prepaid, at their addresses contained in the
books and records of the Corporation or its transfer agent, and subject to such
other reasonable terms and conditions as the Board of Directors may, in its sole
discretion, determine appropriate and desirable and to any requirements of
applicable statutes or regulations.
In the absence of any specification as to the purposes for
which shares are redeemed or repurchased by the Corporation, all shares so
redeemed or repurchased shall be deemed to be acquired for retirement in the
sense contemplated by the General Corporation Law of the State of Maryland.
Shares returned by redemption or repurchase shall thereafter have the status of
authorized but unissued shares.
(b) No holder of shares of stock of the Corporation
shall, as such holder, have any right to purchase or subscribe
for any shares of stock of the Corporation, other than such
rights, If any, as the Board of Directors of the Corporation,
in Its sole discretion, may from time to time determine.
(c) All persons who shall acquire stock or securities
of the Corporation shall acquire the same subject to the
provisions of these Articles of Incorporation.
(d) At all meetings of stockholders, each stockholder
of the Corporation shall be entitled to one vote for such
share of stock standing In his name on the books of the
Corporation. The presence in person or by proxy, of the
holders of one-third of the shares of capital stock of the
Corporation outstanding and entitled to vote thereat shall
<PAGE>
constitute a quorum at any meeting of the stockholders. If at
any meeting of the stockholders there shall be less than a
quorum present, the stockholders present at such meeting may,
without further notice, adjourn the same from time to time
until a quorum shall attend, but no business shall be
transacted at any such adjourned meeting except such as might
have been lawfully transacted had the meeting not been
adjourned.
SEVENTH: The number of directors of the Corporation shall be
Initially five and the names of those who will serve as such directors until the
first annual meeting and until their successors are duly chosen and qualified
are as follows:
Robert M. Furman Linda C. Anderson Mark S. Chanko
Jesse H. Riebman Stuart Becker
The By-Laws of the Corporation may fix the number of directors
at a number greater or less than that named in these Articles of Incorporation
and may authorize the Board of Directors, by the votes of a majority of the
entire Board of Directors, to Increase or decrease the number of directors fixed
by these Articles of Incorporation or by the By-Laws within the limits specified
from time to time in the by-Laws, provided that in no case shall the number of
directors be less than three or the number of stockholders, whichever is less,
and to fill the vacancies created by any such increase in the number of
directors. Unless otherwise provided by the By-Laws of the Corporation, the
directors of the Corporation need not be stockholders therein.
EIGHTH: In furtherance and not in limitation of the powers
conferred by the laws of the State of Maryland, the following provisions are
hereby adopted for the purpose of defining and regulating the powers of the
Corporation and of the directors and stockholders:
(a) The Board of Directors of the Corporation is
hereby empowered to authorize the issuance from time to time
of shares of Its stock of any class, whether now or hereafter
authorized, and securities convertible into shares of Its
stock of any class or classes, whether now or hereafter
authorized, in each case upon such terms and conditions and
for such consideration as such Board of Directors shall from
time to time determine.
(b) The Board of Directors of this Corporation is
hereby empowered to authorize the issuance from time to time
of fractional shares of stock of this Corporation, whether now
or hereafter authorized. Any fractional shares so issued shall
entitle the holders thereof to receive dividends and
participate in the distribution of assets of the Corporation
In the event of liquidation or dissolution to the extent of
their proportionate interest represented by such fractional
shares.
(c) The Corporation reserves the right to make, from
time to time, any amendment of Its Articles of Incorporation,
now or hereafter authorized by law, including, but without
limitation, any amendment which alters the contract rights as
expressly set froth In such Articles of Incorporation of any
outstanding stock.
<PAGE>
(d) Except to the extent otherwise prohibited by
applicable law, the Corporation may enter Into any management
or investment advisory contract or underwriting contract or
any other type of contract with, and may otherwise engage in
any transaction or do business with, any person, firm or
corporation or any subsidiary or other affiliate of any such
person, firm or corporation and may authorize such person,
firm or corporation, or such subsidiary or other affiliate to
enter into any other contracts or arrangements with any other
person, firm or corporation which relate to the Corporation or
the conduct of Its business, notwithstanding that any
directors or officers of the Corporation are or may
subsequently become partners, directors, officers,
stockholders or employees of such person, firm or corporation
or of such subsidiary or other affiliate or may have a
material financial Interest In any such contract, transaction
or business and no such contract or arrangement shall be
Invalidated or voidable or In any way affected thereby nor
shall any of such directors or officers of the Corporation be
liable to the Corporation or to any stockholder or creditor
thereof or to any other person for any loss Incurred solely
because of the entering Into and performance of such contract,
or the engaging in such transaction or business or the
existence of such material financial Interest therein,
provided that such relationship to such person, firm or
corporation or said subsidiary or affiliate or such material
financial interest was disclosed or otherwise known to the
Board of Directors prior to the Corporation's entering into
such contract or engaging In such transaction or business and
In the case of directors of the Corporation that any
requirements of the Maryland General Corporation Law have been
satisfied; and provided further that nothing herein shall
protect any director or officer of the Corporation from
liability to the Corporation or Its security holders to which
he would be otherwise subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
(e) The method of computing the "net asset value" of
each share of stock of the Corporation shall be determined by
or pursuant to the direction of the Board of Directors of the
Corporation in accordance with the method prescribed in the
Corporation's By-Laws or as otherwise established by the Board
of Directors in accordance with the Investment Company Act of
1940.
(f) The stockholders of the Corporation may remove
any director of the Corporation prior to the expiration of his
term of office for cause, and not otherwise, by the
affirmative vote of a majority of all votes entitled to be
cast for the election of directors.
(g) Except to the extent otherwise specifically
provided in the Articles of Incorporation or By-Laws of the
Corporation, the Corporation may authorize or take any
corporate action (including, but without limitation, any
amendment to its Articles of Incorporation) upon the
<PAGE>
affirmative vote of the holders of a majority of the
outstanding shares of stock entitled to vote thereon,
notwithstanding any provision of the Maryland General
Corporation Law which would otherwise require more than a
majority vote of the outstanding shares of stock to authorize
or take such action.
NINTH: A director or officer of the Corporation shall not be
liable to the Corporation or Its stockholders for monetary damages for breach of
fiduciary duty as a director or officer, except to the extent such exemption
from liability or limitation thereof Is not permitted by law (including the
Investment Company Act of 1940) as currently In effect or as the same may
hereafter be amended.
No amendment, modification or repeal of this Article NINTH
shall adversely affect any right or protection of a director or officer that
exists at the time of such amendment, modification or repeal.
TENTH: The Corporation shall Indemnify to the fullest extent
permitted by law (including the Investment Company Act of 1940) as currently in
effect or as the same may hereafter be amended, any person made or threatened to
be made a party to any action, suit or proceeding, whether criminal, civil ,
administrative or investigative, by reason of the fact that such person or
person's testator or intestate is or was a director or officer of the
Corporation or serves or served at the request of the Corporation any other
enterprise as a director or officer. To the fullest extent permitted by law
(including the Investment Company Act of 1940) as currently in effect or as the
same may hereafter be amended, expenses incurred by any such person in defending
any such action, suit or proceeding shall be paid or reimbursed by the
Corporation promptly upon receipt by it of an undertaking of such person to
repay such expenses if It shall ultimately be determined that such person Is not
entitled to be Indemnified by the Corporation. The rights provided to any person
by this Article TENTH shall be enforceable against the Corporation by such
person who shall be presumed to have relied upon It in serving or continuing to
serve as a director or officer as provided above. No amendment of this Article
TENTH shall impair the rights of any person arising at any time with respect to
events occurring prior to such amendment. For purposes of this Article TENTH,
the term "Corporation" shall Include the Corporation, any predecessor of the
Corporation and any constituent corporation (including any constituent of a
constituent) absorbed by the Corporation in a consolidation or merger; the term
"other enterprise" shall include any corporation, partnership, joint venture,
trust or employee benefit plan; service mat the request of the Corporation"
shall include service as a director or officer of the Corporation which Imposes
duties on, or involves services by, such director or officer with respect to an
employee benefit plan, Its participants or beneficiaries; any excise taxes
assessed on a person with respect to any employee benefit plan shall be deemed
to be in the interest of the participants and beneficiaries of such plan shall
be deemed to be action not opposed to the best interest of the Corporation.
Nothing in this Article TENTH shall be construed to protect
any director or officer of the Corporation against any liability to the
Corporation or Its stockholders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
ELEVENTH: The duration of the Corporation shall be perpetual.
<PAGE>
TWELFTH: The following provision are for the management of the
business and for the conduct of the affairs of the Corporation, and for
creating, defining, limiting and regulating the power's of the Corporation, the
directors and the stockholders.
(a) The Board of Directors shall have the management
and control of the property, business and affairs of the
Corporation and is hereby vested with all the powers possessed
by the Corporation itself so far as Is not inconsistent with
law or these Articles of Incorporation. In furtherance and
without limitation of the foregoing provisions, It Is
expressly declared that, subject to these Articles of
Incorporation, the Board of Directors shall have power:
(i) to make, alter, amend or repeal from
time to time the By-Laws of the Corporation, except
as such power may otherwise be limited in the By
Laws;
(ii) to issue stock;
(iii) to authorize the repurchase of shares
in the open market or otherwise, at prices not in
excess of the net asset value of such shares
(computed In accordance with these Articles of
Incorporation and the ByLaws), provided the
Corporation has assets legally available for such
purpose, and to pay for such shares in cash,
securities or other assets then held or owned by the
Corporation;
(iv) to declare and pay dividends and
distributions on shares from funds legally available
therefor, In such amounts, N any, and in such manner
(including declaration by means of a formula or other
similar method of determination whether or not the
amount of the dividend or distribution so declared
can be calculated at the time of such declaration)
and to the stockholders of record as of such date, as
the Board of Directors may determine;
(b) Any determination made in good faith and, so far
as accounting matters are Involved, In accordance with
generally accepted accounting principles by or pursuant to the
direction of the Board of Directors, shall be final and
conclusive, and shall be binding upon the Corporation and all
holders of shares, past, present and future, and shares are
Issued and sold on the condition and undertaking, evidenced by
acceptance of certificates for such shares by, or confirmation
of such shares being held for the account of any stockholder,
that any and all such determinations shall be binding as
aforesaid.
(c) The directors of the Corporation may receive
compensation for their services, subject, however, to such
limitations with respect thereto as may be determined from
time to time by the stockholders.
<PAGE>
(d) Except as required by law, the holders of shares
shall have only such right to Inspect the records, documents,
accounts and books of the Corporation as may be granted by the
Board of Directors of the Corporation.
(e) Any vote authorizing liquidation of the
Corporation or a proceeding for Its dissolution may authorize
the Board of Directors to determine in accordance with
generally accepted principles what constitutes the assets
available for distribution to stockholders and may authorize
the Board of Directors to divide such assets among the
stockholders of the Corporation in such manner that every
stockholder will receive a proportionate amount of the value
of such assets (determined as aforesaid) upon such liquidation
or dissolution.
THIRTEENTH: The Corporation reserves the right from time to
time to amend, alter or repeal any of the provisions of these Articles of
Incorporation (including any amendment that changes the terms of any of the
outstanding shares by classification, reclassification or otherwise), and any
contract rights, as expressly set forth in these Articles of Incorporation of
any outstanding shares, and to add or Insert any other provisions that may,
under the statutes of the State of Maryland at the time in force, be lawfully
contained in articles of incorporation, and all rights at any time conferred
upon the stockholders of the Corporation by these Articles of Incorporation are
subject to the provisions of this Article THIRTEENTH.
IN WITNESS WHEREOF, I have adopted and signed these Articles
of Incorporation and do hereby acknowledge that the adoption and signing are my
act.
Dated: December 22, 1989
/s/ROBERT M. FURMAN
-------------------
ROBERT M. FURMAN
EXHIBIT 2
RESTATED BY - LAWS
OF
THE RAINBOW FUND, INC.
(A Maryland Corporation)
ARTICLE I
OFFICES
SECTION 1. Principal Office. The principal office shall be at
1123 North Eutlan Street, Baltimore, Maryland, 21201, and the name of the
resident agent in charge thereof is THE PRENTICE-HALL CORPORATION SYSTEM, INC.
SECTION 2. Other Offices. The corporation may also have an
office or offices at such other place or places, within or without the State of
Maryland as the Board of Directors may from time to time designate or the
business of the corporation requires.
ARTICLE II
STOCKHOLDERS' MEETINGS
SECTION 1. Annual Meetings. The annual meeting of the
stockholders of the corporation, commencing with the year 1991, shall be held in
New York City at such place therein as the Board of Directors may fix and shall
specify in the notice on a date within 90 and 120 days after the end of the
corporation's fiscal year.
Notwithstanding the foregoing the Board of Directors shall not
be required to convene an annual meeting in any year in which none of the
following is required to be acted on by stockholders under the Investment
Company Act of 1940:
(1) Election of directors;
(2) Approval of the investment advisory contract;
(3) Ratification of the selection of independent public
accountants; and
(4) Approval of a distribution agreement.
SECTION 2. Special Meetings. Special meetings of the
stockholders shall be held at the principal office of the corporation in the
State of Maryland, or at such other place within or without the State of
Maryland as may be designated in the notice of said meeting, upon call of the
Board of Directors or of the Chairman or President or by the Secretary at the
request in writing of stockholders owning at least twenty-five percent of the
issued and outstanding capital stock of the corporation entitled to vote
thereat.
SECTION 3. Notice and Purpose of Meetings. Notice of the
purpose or purposes and of the time and place within or without the State of
Maryland of every meeting of stockholders shall be given by the Chairman or
President or the Secretary or an Assistant Secretary either personally or by
mail or by telegraph or by any other lawful means of communication not less than
ten days nor more than ninety days before the meeting, to each stockholder of
<PAGE>
record entitled to vote at such meeting. If mailed such notice shall be directed
to each stockholder at his address as it appears on the stock book unless he
shall have filed with the Secretary of the corporation a written request that
notices intended for him be mailed to some other address, in which case it shall
be mailed or transmitted to the address designated in such request. Except as
otherwise expressly provided by statute, no publication of any notice of a
meeting of stockholders shall be required to be given to any stockholder who
shall attend such meeting in person or by proxy, or who shall, in person or by
attorney hereunto authorized, waive such notice in writing or by telegraph,
cable, radio, or wireless either before or after such meeting. Except where
otherwise required by law, notice of an adjourned meeting of the stockholders of
the corporation shall not be required to be given.
SECTION 4. Quorum. A quorum at all meetings of stockholders
shall consist of the holders of record of a majority of the shares of the
capital stock of the corporation, issued and outstanding, entitled to vote at
the meeting, present in person or by proxy, except as otherwise provided by law
or Articles of Incorporation. In the absence of a quorum at any meeting or any
adjournment thereof, a majority of those present in person or by proxy and
entitled to vote may adjourn such meeting from time to time. At any such
adjourned meeting at which a quorum is present any business may be transacted
which might have been transacted at the meeting as originally called.
SECTION 5. Organization. Meetings of the stockholders shall be
presided over by the Chairman, or if he is not present, by the President, or if
neither the Chairman nor the President is present, by a chairman to be chosen by
a majority of the stockholders entitled to vote who are present in person or by
proxy at the meeting. The Secretary of the corporation, or in his absence, an
Assistant Secretary, shall act as secretary of every meeting, but if neither the
Secretary nor an Assistant Secretary is present, the meeting shall choose any
person present to act as secretary of the meeting.
SECTION 6. Voting. Except as otherwise provided in the
By-Laws, the Articles of Incorporation, or in the laws of the State of Maryland,
at every meeting of the stockholders, each stockholder of the corporation
entitled to vote at such meeting shall have one vote in person or by proxy for
each share of stock having voting rights held by him and registered in his name
on the books of the corporation at the time of such meeting. Any vote on stock
of the corporation may be given by the stockholder entitled thereto in person or
by his proxy appointed by an instrument in writing, subscribed by such
stockholder or by his attorney thereunto authorized and delivered to the
secretary of the meeting. Except as otherwise required by statute, by the
Articles of Incorporation or these By-Laws, or in electing directors, all
matters coming before any meeting of the stockholders shall be decided by the
vote of a majority in interest of the stockholders of the corporation present in
person or by proxy at such meeting and entitled to vote therat, a quorum being
present. Unless otherwise required by law, at all elections of directors the
voting may but need not be by ballot and a plurality of the votes cast thereat
shall elect.
SECTION 7. List of Stockholders. A complete list of the
stockholders entitled to vote at the ensuing election, showing the address of
each stockholder and the number of shares registered in the name of each
stockholder shall be prepared by the Secretary, or other officer of the
corporation having charge of said stock ledger. Such list shall be open to the
examination of any stockholder during ordinary business hours, for a period of
at least ten days prior to the election, either at a place within the city, town
or village where the election is to be held, which place shall be specified in
the notice of the meeting, and the list shall be produced and kept at the time
and place of election during the whole time thereof, a subject to the inspection
of any stockholder who may be present.
<PAGE>
SECTION 8. Inspectors of Election. At all elections of
directors, or in any other case in which inspectors may act, one or more
inspectors or election may be appointed by the chairman of the meeting, except
as otherwise provided by law. The inspectors of election shall take and
subscribe an oath faithfully to execute the duties of inspectors at such meeting
with strict impartiality, and according to the best of their ability, and shall
take charge of the polls and after the vote shall have been taken shall make a
certificate of the result thereof, but no director or candidate for the office
of director shall be appointed as such inspector.
ARTICLE III
DIRECTORS
SECTION 1. Powers, Number, Qualification, Term, Quorum and
Vacancies. The property, affairs and business of the corporation shall be
managed by its Board of Directors, consisting of five (5) persons. Except as
hereinafter provided, directors shall be elected at the annual meeting of the
stockholders and each director shall be elected to serve for one year and until
his successor shall be elected and shall qualify. The directors shall have power
from time to time, and at any time, when the stockholders as such are not
assembled in any meeting, regular or special, to increase or decrease their own
number by an amendment to these By-Laws. If the number of directors be
increased, the additional directors may be elected by a majority of the
directors in office at the time of the increase.
Directors need not be stockholders.
A majority of the members of the Board of Directors acting at
a meeting duly assembled, shall constitute a quorum for the transaction of
business. If at any meeting of the Board of Directors there shall be less than a
quorum present, a majority of those present may adjourn the meeting, without
further notice, from time to time until a quorum shall have been obtained.
Except as otherwise provided by law, by the Articles of Incorporation, or these
by-Laws, the act of majority of the directors at a meeting at which a quorum is
present shall be the act of the Board.
If the office of any director or directors becomes vacant for
any reason, a majority of the remaining directors, though less than a quorum,
shall choose a successor or successors, who shall hold office for the unexpired
term in respect to which such vacancy occurred or until the next election of
directors,* provided that immediately after filling any such vacancy, at least
2/3 of the directors then holding office shall have been elected to such office
by the shareholders of the corporation entitled to vote at any annual or special
meeting of the shareholders; otherwise such vacancy shall be filled by vote of
the shareholders at a special meeting called for such purpose.
SECTION 2. Meetings. Meetings of the Board of directors shall
be held at such place within or outside the State of Maryland as may from time
to time be fixed by resolution of the Board of Directors, or as may be specified
in the notice of the meeting. Regular meetings of the Board of Directors shall
be held at such times as may from time to time be fixed by resolution of the
Board of Directors, and special meetings may be held at any time upon the call
of the Chairman or President or the Secretary or any two directors by oral,
telegraphic or written notice duly served on or sent or mailed to each director
<PAGE>
not less than two days before such meeting. A meeting of the Board of Directors
may be held without notice immediately after the annual meeting of stockholders.
Notice need not be given of regular meetings of the Board of Directors. Meetings
may be held at any time without notice if all the directors are present, or if
at any time before or after the meeting those not present waive notice of the
meeting in writing.
SECTION 3. Committees. The Board of Directors may, in its
discretion, by the affirmative vote of a majority of the whole Board of
directors, appoint committees which shall have and may exercise such powers as
shall be conferred or authorized by the resolutions appointing them. A majority
of any such committee, if the committee be composed of more than two members,
may determine its action and fix the time and place of its meetings, unless the
Board of Directors shall otherwise provide. The Board of Directors shall have
power at any time to fill vacancies in, to change the membership of, or to
discharge any such committee.
SECTION 4. Telephonic Meetings, etc. The members of the Board
of Directors or any committee of the Board of Directors may participate in a
meeting by means of a conference telephone call or similar communications
equipment if all persons participating in such meeting can hear each other at
the same time and, to the extent permitted by applicable law, such participation
in a meeting by these means constitutes presence in person at such meeting.
SECTION 5. Dividends. Subject always to the provisions of the
law and the Article of Incorporation, the Board of Directors shall have full
power to determine whether any, and if any, what part of any, funds legally
available for the payment of dividends shall be declared in dividends and paid
to stockholders; the division of the whole or any part of such funds of the
corporation shall rest wholly within the lawful discretion of the Board of
Directors, and it shall not be required at any time, against such discretion, to
divide or pay any part of such funds among or to the stockholders as dividends
or otherwise; and the Board of Directors may fix a sum which may be set aside or
reserved over and above the capital paid in of the corporation as working
capital for the corporation or as a reserve for any proper purpose, and from
time to time may increase, diminish, and vary the same in its absolute judgment
and discretion.
SECTION 6. Removal of Directors. At any special meeting of the
stockholders, duly called as provided in these By-Laws, any director or
directors may by the affirmative vote of the holders of a majority of all the
shares of stock outstanding and entitled to vote for the election of directors
be removed from office, either with or without cause, and his successor or their
successors may be elected at such meeting. The remaining directors may, to the
extent vacancies are not filled by such election, fill any vacancy or vacancies
created by such removal.
SECTION 7. Informal Action. Any action required or permitted
to be taken at any meeting of the Board of Directors or any committee thereof
may be taken without a meeting if prior to such action a written consent thereto
is signed by all members of the Board or of the committee, as the case may be,
and such written consent is filed with the minutes of proceedings of the Board
or the committee.
<PAGE>
ARTICLE IV
OFFICERS
SECTION 1. Number and Qualifications. The officers of the
Corporation shall include the Chairman of the Board, the President, one or more
Vice Presidents (one of whom may be designated an Executive Vice President), the
Treasurer and the Secretary. Any two or more offices may be held by the same
person. Such officers shall be elected by the Board of Directors each year at
the organization meeting held after the annual meeting of stockholders, each to
hold office until the meeting of the Board and until his successor shall have
been duly elected and shall have qualified, or until his death, or until he
shall have resigned, or have been removed, as hereinafter provided in these
By-Laws. If there shall be no meeting of stockholders the directors shall elect
or re-elect officers at such time or times as they shall determine to be in the
best interests of the corporation. The Board may from time to time elect, or
delegate to the Chairman of the Board or the President or both the power to
appoint, such officers (including one or more Assistant Vice Presidents, one or
more Assistant Treasurers and one or more Assistant Secretaries) and such
agents, as may be necessary or desirable for the business of the Corporation.
Such other officers and agents shall have such duties and shall hold their
offices for such terms as may be prescribed by the Board or by the appointing
authority.
SECTION 2. Resignations. Any officer of the corporation may
resign at any time by giving written notice of his resignation to the Board, the
Chairman of the Board, the President or the Secretary. Any such resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt;
and, unless otherwise specified therein, the acceptance of such resignation
shall be necessary to make it effective.
SECTION 3. Removal. Any officer or agent of the Corporation
may be removed, either with or without cause, at any time, by the vote of the
majority of the entire Board at any meeting of the Board or, except in the case
of an officer or agent elected or appointed by the Board, by the Chairman of the
Board or the President.
SECTION 4. Vacancies. A vacancy in any office, whether arising
from death, resignation, removal or any other cause, may be filled for the
unexpired portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election of appointment to such
office.
SECTION 5. The Chairman. The Chairman of the Board shall be
the chief executive officer of the Corporation and shall have the general and
active management of the business of the corporation and general and active
supervision and direction over the other officers, agents and employees and
shall see that their duties are properly performed, except for any
responsibilities delegated to an Investment Advisor pursuant to any written
contract, as provided for in the Article of Incorporation. He shall, if present,
preside at each meeting of the stockholders and of the Board and shall be an
ex-officio member of all committees of the Board. He shall perform all duties
incident to the office of Chairman of the Board and chief executive officer and
such other duties as may from time to time be assigned to him by the Board. The
Chairman of the Board shall be authorized to do or cause to be done all things
necessary and appropriate, including preparation, execution and filing of any
documents, to effectuate the registration of the corporation with the Securities
<PAGE>
and Exchange Commission pursuant to the Securities Act of 1933, as amended and
its continuous compliance with such act and any other federal or state statute.
In the case of the absence of the President or his inability to act, the
Chairman of the Board shall perform the duties of the President and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the President. He shall perform all duties incident to the office of
President and such other duties as from time to time be assigned to him by the
Board or these By-Laws.
SECTION 6. The President. The President shall be the chief
administrative officer of the corporation and shall have general and active
supervision and direction over the business and affairs of the corporation and
over its several officers, subject, however, to the direction of the Chairman of
the Board and the control of the Board and except as any such responsibilities
shall be delegated to an Investment Adviser pursuant to any written contract
with such Investment Adviser. At the request of the Chairman of the Board, or in
the case of his absence or inability to act, the President shall perform the
duties of the Chairman of the Board and when so acting shall have all the powers
of, and be subject to all the restrictions upon, the Chairman of the Board. He
shall perform all duties incident to the office of Chairman of the Board and
such other duties as from time to time may be assigned to him by the Board, the
Chairman of the Board or these By-Laws.
SECTION 7. Vice President. Each Vice President shall perform
all such duties as from time to time may be assigned to him by the Board, the
Chairman of the Board or the President.
SECTION 8. The Treasurer. The Treasurer shall (a) have charge
and custody of, and be responsible for, all the funds and securities of the
corporation, except those which the corporation has placed in the custody of a
bank or trust company pursuant to a written agreement designating such bank or
trust company as custodian of the property of the corporation;
(b) keep full and accurate accounts of receipts and disbursements in books
belonging to the corporation;
(c) cause all moneys and other valuables to be deposited to the credit of the
corporation;
(d) receive, and give receipts for, moneys due and payable to the corporation
from any source whatsoever;
(e) disburse the funds of the corporation and supervise the investment of its
funds as ordered or authorized by the Board, taking proper vouchers therefor;
and
(f) in general, perform all the duties incident to the office of Treasurer and
such other duties as from time to time may be assigned to him by the Board, the
President, or the Chairman of the Board.
SECTION 9. The Secretary. The Secretary shall
(a) keep or cause to be kept in one or more books provided for the purpose, the
minutes of all meetings of the Board, the committees of the Board and the
stockholders;
(b) see that all notices are duly given in accordance with the provisions of
these By-Laws and as required by law;
<PAGE>
(c) be custodian of the records and the seal of the corporation and affix and
attest the seal to all stock certificates of the corporation (unless the seal of
the corporation on such certificates shall be a facsimile, as hereinafter
provided) and affix and attest the seal to all other documents to be executed on
behalf of the corporation under its seal;
(d) see that the books, reports, statements, certificates and other documents
and records required by law to be kept and filed are properly kept and filed;
and
(e) in general, perform all the duties incident to the office of Secretary, and
such other duties as from time to time may be assigned to him by the Board, the
President, or the Chairman of the Board.
SECTION 10. Officers' Bonds or Other Security. If required by
the Board, any officer of the corporation shall give a bond or other security
for the faithful performance of his duties, in such amount and with such surety
or sureties as the Board may require.
SECTION 11. Term and Removal. The term of office of all
officers shall be one year and until their respective successors are elected and
qualify, but any officer may be removed from office, either with or without
cause, either with or without cause, at any time by the affirmative vote of a
majority of the members of the Board or Directors then in office. A vacancy in
any office arising from any cause may be filled for the unexpired portion of the
term by the Board of Directors.
SECTION 12. Powers and Duties. The Officers of the corporation
shall each have such powers and duties as generally pertain to their respective
offices, as well as such powers and duties as from time to time may be conferred
by the Board of Directors. The Vice President or Vice Presidents, the Assistant
Secretary or Assistant Secretaries and the Assistant Treasurer or Assistant
Treasurers shall, in the order of their respective seniorities, in the absence
or disability of the President, Secretary or Treasurer, respectively, perform
the duties of such officer and shall generally assist the President, Secretary
or Treasurer respectively.
SECTION 13. Voting Corporation's Securities. Unless otherwise
ordered by the Board of Directors, the Chairman or the President, or, in the
event of his inability to act, the Vice President designated by the Board of
Directors to act in the absence of the President, shall have full power and
authority on behalf of the corporation to attend and to act and to vote at any
meetings of security holders of corporations in which the corporation may hold
securities, and at such meetings shall possess and may exercise any and all
rights and powers incident to the ownership of such securities, and which as the
owner thereof the corporation might have possessed and exercised, if present.
The Board of Directors by resolution from time to time may confer like powers
upon any other person or persons.
ARTICLE V
CERTIFICATES OF STOCK
SECTION 1. Form and Transfers. The interest of each
stockholder of the corporation shall be evidenced by certificates for shares of
stock, certifying the number of shares represented thereby and in such form as
the Board of Directors may from time to time prescribe.
<PAGE>
Transfers of shares of the capital stock of the corporation
shall be made only on the books of the corporation by the registered holder
thereof, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the corporation, or with a transfer
clerk or a transfer agent appointed as in Section 4 of this Article provided,
and on surrender of the certificate or certificates for such shares, if any,
properly endorsed and the payment of all taxes thereon. The person in whose name
shares of stock stand on the books of the corporation shall be deemed the owner
thereof for all purposes as regards the corporation. The Board may, from time to
time, make such additional rules and regulations as it may deem expedient, not
inconsistent with these By-Laws, concerning the issue, transfer, and
registration of certificates for shares of the capital stock of the corporation
The certificates of stock shall be signed by the Chairman or
the Vice Chairman of the Board, if any, the President or a Vice President and by
the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer, and sealed with the seal of the corporation. Such seal may be a
facsimile, engraved or printed. Where any such certificate is signed by a
transfer agent or a transfer clerk and by a registrar, the signatures of the
Chairman or the Vice Chairman of the Board, if any, the President, Vice
President, Secretary, Assistant Secretary, Treasurer or Assistant Treasurer upon
such certificate may be facsimiles, engraved or printed. In case any such
officer who has signed or whose facsimile signature has been placed upon such
certificate shall have ceased to be such before such certificate is issued, it
may be issued by the corporation with the same effect as is such officer had not
ceased to be such at the time of its issue.
In lieu of the issuance of share certificates the corporation
may record share ownership by means of book entries under such procedures
generally followed by registered open-end investment companies as the Board
shall from time to time adopt.
SECTION 2. Closing of Transfer Books. The Board of Directors
shall have power to close the stock transfer books of the corporation for a
period not exceeding that prescribed by law before any stockholders' meeting, or
the last day on which the consent or dissent of stockholders may be effectively
expressed for any purpose without a meeting, or the date fixed for the payment
of any dividend or the making of any distribution, or for the delivery of
evidences of rights or evidences of interests arising out of any change,
conversion or exchange of capital stock. In lieu of closing the stock transfer
books as aforesaid the Board of Directors may in its discretion fix a time not
more than sixty days before the date of any meeting of stockholders, or the last
day on which the consent or dissent of stockholders may be effectively expressed
for any purpose without a meeting, or the date fixed for the payment of any
dividend or for the delivery of evidences of rights or evidences or interests
arising out of any change, conversion or exchange of capital stock, as the time
as of which stockholders entitled to notice of and to vote at such meeting or
whose consent or dissent is required or may be expressed for any purpose or
entitled to receive any such dividend, distribution, rights or interests shall
be determined; and all persons who are holders of record of voting stock at such
time and no others shall be entitled to notice of and to vote at such meeting or
to express their consent or dissent, as the case may be, and only stockholders
of record at the time so fixed shall be entitled to receive such dividend,
distributions, rights or interests.
<PAGE>
SECTION 3. Lost, Stolen, Destroyed, or Mutilated Certificates.
No certificate for shares of stock in the corporation shall be issued in place
of any certificate alleged to have been lost, destroyed or stolen, except on
production of such evidence of such loss, destruction or theft and on delivery
to the corporation, if the Board of Directors shall so require, of a bond of
indemnity in such amount (not exceeding twice the value of the shares
represented by such certificate), upon such terms and secured by such surety as
the Board of Directors may in its discretion require.
SECTION 4. Transfer Agent and Registrar. The Board of
Directors may appoint one or more registrars and/or transfer agents, and may
require all certificates of stock to bear the signature or signatures of any of
them.
ARTICLE VI
FISCAL YEAR
The fiscal year of the corporation shall begin on the first
day of November in each year and shall end on the thirty-first day of October
next following, unless otherwise determined by the Board of Directors.
ARTICLE VII
INVESTMENT AND OTHER RESTRICTIONS
The corporation will comply at all times with the investment
policies and restrictions set forth in its registration statement under the
Investment Company Act of 1940 and as otherwise mandated by law. The corporation
shall operate as a "non-diversified" investment company under said Act until
otherwise determined by the Board of Directors.
ARTICLE VIII CUSTODIAN
The corporation shall cause all securities and funds owned by
its corporation to be maintained with a custodian complying with, and under a
written agreement complying with the Investment Company Act of 1940 and
applicable rules and regulations thereunder.
ARTICLE IX INVESTMENT ADVISER
The Board of Directors, with the approval of the shareholders
may enter into a contract with any person, firm or corporation to act as
investment adviser for the corporation and to perform such other duties and
render such other services as shall be deemed necessary. Any such contract shall
provide that it may be terminated at any time by the corporation without penalty
and upon not more than sixty (60) days written notice and shall be automatically
terminated in the event of its assignment by such person, firm or corporation.
Any such contract which shall continue in effect for a period of more than two
(2) years from the date of its execution, shall be specifically approved at
least annually by vote of a majority of the outstanding voting securities of the
corporation or by the Board of Directors of the corporation, including approval
by a majority of the directors who are interested persons of the investment
adviser. Such contract may contain any other provision not inconsistent with
law, the Articles of Incorporation and these By-Laws.
<PAGE>
ARTICLE X
INDEMNIFICATION
The Corporation shall indemnify to the fullest extent
permitted by law (including the Investment Company Act of 1940) as currently in
effect or as the same may hereafter be amended, any person made or threatened to
be made a party to any action, suit or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that such person or
person's testator or intestate is or was a director or officer of the
Corporation or serves or served at the request of the Corporation any other
enterprise as a director or officer. To the fullest extent permitted by law
(including the Investment Company Act of 1940) as currently in effect or as the
same may hereafter be amended, expenses incurred by any such person in defending
any such action, suit or proceeding shall be paid or reimbursed by the
Corporation promptly upon receipt by it of an undertaking of such person to
repay such expenses if it shall ultimately be determined that such person is not
entitled to be indemnified by the Corporation. The rights provided to any person
by this Article shall be enforceable against the Corporation by such person who
shall be presumed to have relied upon it in serving or continuing to serve as a
director or officer as provided above. No amendment of this Article shall impair
the rights of any person arising at any time with respect to events occurring
prior to such amendment. For purposes of this Article, the term "Corporation"
shall include the Corporation, any predecessor of the Corporation and any
constituent corporation (including any constituent of a constituent) absorbed by
the Corporation in a consolidation or merger; the term "other enterprise" shall
include any corporation, partnership, joint venture, trust or employee benefit
plan; service "at the request of the Corporation" shall include service as a
director or officer of the corporation which imposes duties on, or involves
services by, such director or officer with respect to an employee benefit plan,
its participants or beneficiaries; any excise taxes assessed on a person with
respect to any employee benefit plan shall be deemed to be indemnifiable
expenses; and action by a person with respect to any employee benefit plan which
such person reasonably believes to be in the interest of the participants and
beneficiaries of such plan shall be deemed to be action not opposed to the best
interests of the Corporation.
Nothing in this Article shall be construed to protect any
director or officer of the Corporation against any liability to the Corporation
or its stockholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless diregard of the duties
involved in the conduct of his office.
ARTICLE XI
DIRECTORS AND OFFICERS INSURANCE
The corporation may purchase and maintain insurance on behalf
of any person who is or was a director or officer, employee or agent of the
corporation or who is or was serving at the request of the corporation as a
director, officer, agent or employee of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity or arising out of his position, whether
or not the corporation would have power to indemnify him.
<PAGE>
ARTICLE XII
AMENDMENTS
Either the Board of Directors or the shareholders may amend,
alter or repeal the ByLaws at any meeting duly held, the notice of which
includes notice of the proposed amendment, alteration or repeal of such By-Laws.
ARTICLE XIII
DETERMINATION OF NET ASSET VALUE
As of the close of business of the New York Stock Exchange on
each business day, the net asset value of each share of common stock of the
corporation shall be determined by dividing the value, as at such close, of the
net assets of the corporation less its liabilities exclusive of capital stock
and surplus), by the total number of shares outstanding at such close. The
assets and liabilities of the corporation shall be determined in accordance with
generally accepted accounting principles; provided, however, that in determining
the value of the assets of the corporation for the purpose of obtaining the net
asset value, each security traded on a national stock exchange shall be valued
at the last reported sale price on the day as of which such value is being
determined; if there has been no such sale, on such day or on the previous day
on which such exchange was open (if a week has not elapsed between such days)
then the value of such security shall be taken to be the average between the
reported bid and asked prices at the time as of which the value is being
ascertained, unless it is considered that such average does not reasonably
reflect the true market value, in which case the value shall be taken at such
amount as shall be deemed reasonable but not less than said bid price nor more
than said asked price. Any security not traded on a security exchanged or traded
in the over-the-counter markets and any foreign exchange shall be valued at its
last quoted bid price.
Any security or other asset for which market quotations are not readily
available shall be valued at fair value as determined in good faith by the Board
of Directors.
Such net asset value may be determined at additional times if
the Board of Directors consider such determination advisable and any such
additional determination may be made either in accordance with the provisions of
the next preceding paragraph or it may be made by applying to the price based
upon the previous day's close of business, such adjustments as shall be deemed
reasonable to reflect material changes in the market value of the holdings of
the corporation.
Liabilities for accounts payable shall be stated at face
amounts payable therefor, expenses and taxes shall be accrued daily at estimated
amounts, and dividends payable by the fund shall be deducted as of the close of
business on the record date thereof.
No accrual shall be made for taxes on unrealized appreciation
of securities owned by the corporation unless the Directors shall otherwise
determine. Adjustments for fractions will be made to the nearer cent.
The Board of Directors is empowered in its absolute discretion
to establish other methods of determining net asset value of the shares of stock
whenever such methods are deemed by it to be necessary or desirable in order (i)
to enable the corporation to comply with any provision of the Investment Company
Act of 1940, or any rule or regulation thereunder or (ii) to more fairly and
accurately reflect the net asset value of such shares of stock.
EXHIBIT 5
AGREEMENT
AGREEMENT, made as of the 1st day of June, 1982 by and between
THE RAINBOW FUND, INC., a corporation organized under the laws of the State of
Delaware (hereinafter called the "Fund") and ROBERT M. FURMAN (hereinafter
called "RMF").
WHEREAS, the Fund is engaged in business as an open-end
management investment company and is registered under the Investment Company Act
of 1940; and
WHEREAS, RMF operates a brokerage business and is a registered
investment adviser; and
WHEREAS, the Fund has retained RMF to render such services to
the Fund pursuant to an Investment Advisory Agreement effective as of September
6, 1974; and
WHEREAS, the Fund desires to continue to retain RMF to render
such services to the Fund in the manner and on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and of the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. The Fund hereby employs RMF to advise it with respect to
the investment and reinvestment of the assets of the Fund and the administration
of the Fund's affairs, subject to the supervision of the Board of Directors of
the Fund and RMF hereby accepts such employment upon the terms and conditions
hereinafter set forth. The Investment Advisory Agreement effective as of
September 6, 1974 by and between Mates Investment Fund and RMF (the "Agreement")
annexed hereto as Exhibit A is hereby readopted in its entirety, as the
Investment Advisory Agreement
between the Fund and RMF effective as of the date hereof which Agreement sets
forth all of the terms and conditions of the Investment Advisory Agreement being
entered into herein as if set forth herein with such modifications as are
hereinafter provided.
2. Notwithstanding the provisions of Paragraph 7 of the
Agreement, and independent of the provisions of Paragraph 8 thereof, the
compensation to be paid to RMF pursuant to Paragraph 7 shall be further reduced,
but not below zero, by 50% of the amount by which portfolio brokerage
commissions received by RMF exceed 2% of the Fund's average annual net assets.
3. Any notices required to be given hereunder shall be given
in writing by certified or registered mail addressed, if to RMF at 60 Broad
Street, New York, New York 10004, and if to the fund at 60 Broad Street, New
York, New York 10004, or to such other address as any party may give to the
other party, provided such request for a change of address shall be forwarded by
certified or registered mail, as aforesaid.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective officers, thereunder duly authorized
and their respective corporate seals to be hereunto affixed, as of the day and
year first above written.
THE RAINBOW FUND, INC.
By: ___________________________
President
---------------------------
Robert M. Furman
Investment Adviser
<PAGE>
Exhibit A
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 6th day of September, 1974 by and between
MATES INVESTMENT FUND., a corporation organized and existing under the laws of
the State of Delaware (hereinafter called the "Fund") and ROBERT M. FURMAN
(hereinafter called "RMF").
WHEREAS, the Fund is engaged in business as an open-end management
investment company and is registered under the Investment Company Act of 1940;
and
WHEREAS, RMF operates a brokerage business and is a registered
investment adviser;
WHEREAS, Fund desires to retain RMF to render such services to the Fund
in the manner and on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. The Fund hereby employs RMF to advise it 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,
for the period and on the terms in this Agreement set forth, RMF hereby accepts
such employment and agrees during such period, to render the services and to
assume the obligations herein set forth, for the compensation herein provided.
RMF shall for all purposes herein be deemed to be and independent contractor and
shall, unless otherwise expressly provided or authorized, have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
2. RMF shall furnish the Fund with 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 shall regularly
review the Fund's portfolio in order to assure that it remains consistent with
the stated objectives of the Fund as set forth in its most recent Prospectus. In
connection with the foregoing, RMF shall furnish continuous advice with respect
to the purchase and sale of portfolio securities or the retention of a portion
of the Fund's assets uninvested or in interest bearing obligations.
3. (a) MF shall furnish, without expense to the Fund, the services of
members of his organization) including persons who are officers or employees of
the Fund) to extent such persons are engaged in rendering the services
undertaken pursuant to paragraph 2 hereof. In addition, all sales and
promotional expenses such as "tombstone" advertising in newspapers, financial
publications or periodicals, in connection with distribution of shares of the
Fund (excluding expenses incurred in complying with federal and state laws
regulating the sale of securities) shall be paid by RMF.
(b) In addition to the services set forth in paragraph 3(a), RMF
shall supply and pay for suitable office space and such secretarial and
administrative personnel as shall be necessary to (i) maintain Fund books and
records not maintained, and to process general Fund administrative requirements
not processed, pursuant to any administrative agreement as described in
paragraph 4;
- 1 -
<PAGE>
and (ii) carry out appropriate stockholder relations programs and administer
stockholder correspondence related thereto.
4. RMF shall not be obligated to provide any services to the Fund,
other than those specified in paragraphs 2 and 3 above. Except as provided in
paragraphs 2 and 3, all of the costs of administering the Fund and carrying on
its day-to-day operations shall be borne by the Fund. Without limiting the
foregoing, the Fund shall be responsible and pay directly for 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; the charges of the transfer agent and custodian;
auditors' fees; brokerage commissions; taxes and corporate fees; office
administration expense such as telephone and postage charges, equipment rental
and stationary costs; the cost of stock certificates; the costs of issue, sale,
repurchase and redemption of the Fund's shares; the costs and expenses of
compliance with federal and state statutes regulating the issue and sale of its
securities; expenses of shareholders' and directors' meetings and of preparing,
printing and mailing proxy statements, notices and reports to shareholders; fees
and travel expenses of independent and unaffiliated directors; legal fees,
including, without limitation, services rendered in connection with the Fund's
corporate structure, relations with its shareholders, and litigation to which
the Fund is a party; and interest payable on the Fund's borrowings.
5. RMF shall only be obligated to use its best efforts in the
furnishing of investment supervisory services to be rendered hereunder, RMF may,
at its expense, employ other persons to furnish to RMF statistical and other
factual information, advise regarding economic factors and trends, information
with regard to technical and scientific developments, and such other information
and assistance as RMF may desire.
6. Each of the parties agree that in all matters relating to the
performance of this Agreement, it will conform to and comply with the
requirements of the Investment Company Act of 1940, the Investment Advisers Act
of 1940 and all other applicable federal or state laws and regulations. Nothing
herein contained shall be deemed to require the Fund to take any action contrary
to its certificate of incorporation or by-laws or to any applicable statute or
regulation, or to relieve or deprive the board of directors of the Fund of its
responsibility for and control of the conduct of the affairs of the Fund. RMF
agrees that in all matters relating to the administration of the Fund and the
supervision of its investments it will act in conformity with the investment
policies and objectives contained in the Registration Statement and Prospectuses
of the Fund.
7. As full compensation for all services rendered and expenses assumed
by RMF hereunder and subject to paragraph 8 below, the Fund agrees to pay to RMF
and RMF agrees to accept, a yearly 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; and (ii)
one-half of one percent (1/2 of 1%) of the average annual-net asset value with
respect to that portion of net assets and three-eights of one percent (3/8 of
1%) of the average annual net value in excess of $5,000,000. Net asset value
shall be determined in accordance with the provisions of the Investment Company
Act of 1940 and Rule 2(a)(4) thereunder.
- 2 -
<PAGE>
Such amounts shall be accrued daily on the basis of the number of
market days in each year, by computing the net asset value of the Fund, in the
manner provided by its certificate of incorporation, as at the close of the New
York Stock Exchange on each day on which said Exchange is open.
The amounts thus accrued during each calendar month shall be paid to
RMF on the fifteenth business day succeeding the date upon which the annual
financial statement of the Fund is certified by its independent public
accountants, less appropriate accrued credits to the Fund arising by virtue of
the provisions of paragraph 8 hereof.
8. Notwithstanding the provisions of paragraph 7 above, the
compensation to be paid to RMF pursuant to paragraph 7 shall be reduced by
making the calculations set forth below:
The said compensation shall be reduced, but not below zero, by the
amount, if any, b y 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:
Portion of Average Management Fee Reduced By
Annual Net Assets: Amount Expenses Exceed:
Below $10,000,000 3%
From $10,000,000 to $30,000,000 1/2%
Above $30,000,000 1/4%
9. The services of RMF to the Fund are not to be deemed to be
exclusive, and RMF shall be free to render investment advisory and corporate
administrative or other services to the other investment companies and to engage
in other activities. Employees or agents of RMF, to the extent permitted by law
and any other applicable regulations, are not prohibited from engaging in any
other business activity or from rendering services to any other person, or from
serving as partners, officers or directors of any other firm or corporations,
including other investment companies.
10. RMF agrees that neither it nor any of its officers or directors
will take any long or short position in the capital stock of the Fund, except
that it or they may purchase shares of such capital stock for investment at the
price at which such shares are available to the public at the time of purchase.
11. In the absence of wilful misfeasance, bad faith or gross negligence
or reckless disregard for its obligations under this contract, RMF shall not be
liable for any act or omission in the course of or in connection with the
rendition of services hereunder.
-3-
<PAGE>
12. In the purchase and sale of the Fund's portfolio securities RMF
shall employ such brokers, including RMF, as may, in the best judgment of RMF,
implement the policy of the Fund to obtain the best execution of the Fund's
portfolio transactions. Consistent with the policy, RMF is authorized to direct
the execution of the Fund's portfolio transactions to brokers furnishing
investment information or research deemed by RMF to be useful or valuable to the
performance of its investment advisory functions for the Fund. Transactions in
portfolio securities on a securities exchange of a size such that there is no
fixed commission as to a portion thereof ("negotiated transactions"), may be
directed for execution to any broker, which, in the good faith judgment of RMF,
(i) is qualified to obtain the best price and execution of the particular
transaction; and (ii) may be expected to charge a commission in respect of such
transaction at least as favorable to the Fund as other brokers similarly
qualified to execute that transaction. As to brokers other than RMF, RMF shall
have discretion in assigning an execution or negotiating a commission to be paid
therefor, to consider the full range and quality of a broker's services which
benefit the Fund, including bona fide investment research or other services
which RMF believes are valuable to the Fund's interest. RMF shall have
discretion to pay a commission rate that will assure reliability and quality of
service provided that it is reasonable. Where the commission rate reflects
services furnished to the Fund in addition to the cost of execution. RMF shall
maintain such records as shall permit it to demonstrate upon request of the Fund
that such expenditures were bona fide. It is understood and agreed that all such
expenditures must be rendered in the b est interest of the Fund.
In the selection of a broker for the execution of any negotiated
transaction, RMF shall not have an obligation to seek advance competitive
bidding for the most favorable negotiated commission rate to be applicable to
such transaction, or to select any broker solely on the basis of its purported
or "posted" commission rate applicable to negotiated transaction. However, RMF
shall be required to consider such "posted" commission rates, if any, as may be
applicable to the transaction as well as any other information available at the
time, as to the level of commission known to be charged on comparable
transactions by other qualified brokerage firm. In reaching a judgment relative
to the qualifications of a broker to obtain the best execution of any particular
negotiated transaction, RMF may take into account all relevant factors and
circumstances, including the size of any contemporaneous market in such
securities; the importance of the Fund of speed, efficiency and confidentiality
of execution; the execution capabilities required by the circumstances of the
particular transactions; and the broker's apparent knowledge or familiarity with
sources from or to whom such securities may be purchased or sold.
The Fund recognizes and intends that RMF will act as the Fund's regular
broker and may be the major recipient of brokerage fees paid by the Fund. RMF
may execute portfolio transactions of the Fund except when better price or
execution has been determined to be obtainable through another broker. Brokerage
charges on negotiated transactions executed by RMF for the Fund may not be less
favorable to the Fund than his contemporaneous charge for the execution of
similar transactions to its most favored unaffiliated customers. 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 RMF, nor will RMF nor any
affiliate receive or seek to receive reciprocal brokerage business related to or
generated through the executions of the Fund portfolio transactions.
-4-
<PAGE>
13. The term of this Agreement shall begin on the date first above
written and this Agreement shall remain in effect for a period of (1) year from
that date, unless sooner terminated as hereinafter provided. This Agreement
shall continue in effect from years to year thereafter, subject to the
provisions for termination and all of the other terms and conditions hereof, if
such continuation shall be specifically approved at least annually (a) by the
board of directors, including the vote of a majority of the directors who are
not parties to this agreement or "interested persons" of any such party (as that
term is defined in the Investment Company Act of 1940, as amended) cast in
person at a meeting called for that purpose; or (b) by such vote of such
directors of the Fund and by a vote of a majority of the outstanding voting
securities of the Fund. Anything in this paragraph to the contrary
notwithstanding, this Agreement shall terminate without penalty:
(i) in the event of its assignment (withing the meaning of the
Investment Company Act of 1940) by RMF or the Fund, or
(ii) at any time upon sixty (60) days notice in writing by RMF
or the Fund, provided that in the case of the Fund, such termination is
approved by a vote of the board of directors of the Fund or by vote of
a majority of the outstanding voting securities of the Fund.
14. Any notices required to be given hereunder shall be given in the
writing by certified or registered mail addressed, if to RMF at 1230 Broadway,
New York, NY., and if to the Fund at 1354 First Avenue, New York, N.Y., or to
such other address as any party may give to the other party, provided such
request for a change of address shall be forwarded by certified or registered
mail, as aforesaid.
15. This Agreement contains the entire agreement between the parties,
shall be governed by the laws of the State of New York and may not be altered or
changed, except as otherwise provided herein, except by an agreement in writing
signed by all of the parties hereto.
16. This Agreement shall inure to the benefit and be binding upon the
parties hereto and their respective successors and assigns (to the extent
permitted by law).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers, thereunto duly authorized and their
respective corporate seals to be hereunto affixed, as of the day and year first
above written.
MATES INVESTMENT FUND, INC.
ATTEST
By __________________________
_________________________ President
Secretary
__________________________
Robert M. Furman
- 5 -
EXHIBIT 8
CUSTODY AGREEMENT
This agreement (the "Agreement") is entered into as the third 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, Cincinnati, Ohio
45202.
WHEREAS, the Fund and the Custodian desire to enter into this Agreement
to provide for the custody and safekeeping of the assets of the Fund as required
by the Investment Company Act of 1940, as amended (the "Act").
WHEREAS, the Fund hereby appoints the Custodian as custodian of all the
Fund's Securities and moneys at any time owned by the Fund during the term of
this Agreement (the "Fund Assets").
WHEREAS, the Custodian hereby accepts such appointment as Custodian and
agrees to perform the duties thereof as hereinafter set forth.
THEREFORE, in consideration of the mutual promises hereinafter set
forth, the Fund and the Custodian agree as follows:
ARTICLE I
Definitions
The following words and phrases, when used in this Agreement, unless
the context otherwise requires, shall have the following meanings:
Authorized Person - the Chairman, President, Secretary, Treasurer,
Controller, or Senior Vice President of the Fund, or any other person, whether
or not any such person is an officer or employee of the Fund, duly authorized by
the Board of Trustees of the Fund to give Oral Instructions and Written
Instructions on behalf of the Fund, and listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
Book-Entry System - the Federal Reserve Bank book-entry system for
United States Treasury securities and federal agency securities.
Depository - The Depository Trust Company ("DTC"), a limited purpose
trust company its successor(s) and its nominee(s) or any other person or
clearing agent.
Dividend and Transfer Agent - the dividend and transfer agent
appointed, from time to time, pursuant to a written agreement between the
dividend and transfer agent and the Fund.
Foreign Securities - (a) securities issued and sold primarily outside
of the United States by a foreign government, a national of any foreign country,
or a 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 following receipt of such Oral Instructions.
Prospectus - the Fund's then currently effective prospectus and
Statement of Additional Information, as filed with and declared effective from
time to time by the Securities and Exchange Commission.
Security or Securities - Money Market Securities, common stock,
preferred stock, options, financial futures, bonds, notes, debentures, corporate
debt securities, mortgages, and any certificates, receipts, warrants, or other
instruments representing rights to receive, purchase, or subscribe for the same
or evidencing or representing any other rights or interest therein, or any
property or assets.
Written Instructions - communication received in writing by the
Custodian from an Authorized Person.
<PAGE>
ARTICLE II
Documents and Notices to be Furnished by the Fund
A. The following documents, including any amendments thereto, will be
provided contemporaneously with the execution of the Agreement, to the Custodian
by the Fund:
1. A copy of the Articles of Incorporation of the Fund
certified by the Secretary.
2. A copy of the By-Laws of the Fund certified by the
Secretary.
3. A copy of the resolution of the Board of Trustees of the
Fund appointing the Custodian, certified by the Secretary.
4. A copy of the then current Prospectus.
5. A Certificate of the President and Secretary of the Fund
setting forth the names and signatures of the Officers of
the Fund.
B. The Fund agrees to notify the Custodian in writing of the
appointment of any Dividend and Transfer Agent.
ARTICLE III
Receipt of Fund Assets
A. During the term of this Agreement, the Fund will deliver or cause to
be delivered to the Custodian all moneys constituting Fund Assets. The Custodian
shall be entitled to reverse any deposits made on the Fund's behalf where such
deposits have been entered and moneys are not finally collected within 30 days
of the making of such entry.
B. During the term of this Agreement, the Fund will deliver or cause to
be delivered to the Custodian all Securities constituting Fund Assets. The
Custodian will not have any duties or responsibilities with respect to such
Securities until actually received by the Custodian.
C. As and when received, the Custodian shall deposit to the account(s)
of the Fund any and all payments for shares of the Fund issued or sold from time
to time as they are received from the Fund's distributor or Dividend and
Transfer Agent or from the Fund itself.
ARTICLE IV
Disbursement of Fund Assets
A. The Fund shall furnish to the Custodian a copy of the resolution of
the Board of Trustees of the Fund, certified by the Fund's Secretary, either (i)
setting forth the date of the declaration of any dividend or distribution in
respect of shares of the Fund, the date of payment thereof, the record date as
of which Fund shareholders entitled to payment shall be determined, the amount
payable per share to Fund shareholders of record as of that date, and the total
amount to be paid by the Dividend and Transfer Agent on the payment date, or
<PAGE>
(ii) authorizing the declaration of dividends and distributions in respect of
shares of the Fund on a daily basis and authorizing the Custodian to rely on a
Certificate setting forth the date of the declaration of any such dividend or
distribution, the date of payment thereof, the record date as of which Fund
shareholders entitled to payment shall be determined, the amount payable per
share to Fund shareholders of record as of that date, and the total amount to be
paid by the Dividend and Transfer Agent on the payment date.
On the payment date specified in such resolution or
Certificate described above, the Custodian shall segregate such amounts from
moneys held for the account of the Fund so that they are available for such
payment.
B. Upon receipt of Written Instructions so directing it, the Custodian
shall segregate amounts necessary for the payment of redemption proceeds to be
made by the Dividend and Transfer Agent from moneys held for the account of the
Fund so that they are available for such payment.
C. Upon receipt of a Certificate directing payment and setting forth
the name and address of the person to whom such payment is to be made, the
amount of such payment, and the purpose for which payment is to be made, the
Custodian shall disburse amounts as and when directed from the Fund Assets. The
Custodian is authorized to rely on such directions and shall be under no
obligation to inquire as to the propriety of such directions.
D. Upon receipt of a Certificate directing payment, the Custodian shall
disburse moneys from the Fund Assets in payment of the Custodian's fees and
expenses as provided in Article VIII hereof.
ARTICLE V
Custody of Fund Assets
A. The Custodian shall open and maintain a separate bank account or
accounts in the United States in the name of the Fund, subject only to draft or
order by the Custodian acting pursuant to the terms of this Agreement, and shall
hold all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund in a bank account established and used by the Fund
in accordance with Rule 17f-3 under the Act. Moneys held by the Custodian on
behalf of the Fund may be deposited by the Custodian to its credit as Custodian
in the banking department of the Custodian. Such money 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.
<PAGE>
D. With respect to all Securities held for the Fund, the Custodian
shall on a timely basis (concerning items 1 and 2 below, as defined in the
Custodian's Standards of Service Guide, as amended from time to time, annexed
hereto as Appendix C):
1. Collect all income due and payable with respect to such
Securities;
2. Present for payment and collect amounts payable upon all
Securities which may mature or be called, redeemed, or
retired, or otherwise become payable;
3. Surrender Securities in temporary form for definitive
Securities; and
4. Execute, as agent, any necessary declarations or
certificates of ownership under the Federal income tax
laws or the laws or regulations of any other taxing
authority, including any foreign taxing authority, now or
hereafter in effect.
E. Upon receipt of a Certificate and not otherwise, the Custodian
shall:
1. Execute and deliver to such persons as may be
designated in such Certificate proxies, consents,
authorizations, and any other instruments whereby the
authority of the Fund as beneficial owner of any
Securities may be exercised;
2. Deliver any Securities in exchange for other
Securities or cash issued or paid in connection with
the liquidation, reorganization, refinancing, merger,
consolidation, or recapitalization of any
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.
<PAGE>
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 of 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 am not Money Market Securities, Written Instructions, and (ii) with
respect to each purchase of Money Market Securities, Written Instructions or
Oral Instructions, specifying with respect to each such purchase the:
1. name of the issuer and the title of the Securities,
2. principal amount purchased and accrued interest, if any,
3. date of purchase and settlement,
4. purchase price per unit,
5. total amount payable, and
6. name of the person from whom, or the broker through which,
the purchase was made.
The Custodian shall, against receipt of Securities purchased by or for the Fund,
pay out of the Fund Assets, the total amount payable to the person from whom or
the broker through which the purchase was made, provided that the same conforms
to the total amount payable as set forth in such Written Instructions or Oral
Instructions, as the case may be.
B. Promptly after each sale of Securities by the Fund, the Fund shall
deliver to the Custodian (i) with respect to each sale of Securities which are
not Money Market Securities, Written Instructions, and (ii) with respect to each
sale of Money Market Securities, Written Instructions or Oral Instructions,
specifying with respect to each such sale the:
1. name of the issuer and the title of the Securities,
2. principal amount sold and accrued interest, if any,
3. date of sale and settlement,
4. sale price per unit,
5. total amount receivable, and
6. name of the person to whom, or the broker through which,
the sale was made.
<PAGE>
The Custodian shall deliver the Securities against receipt of the total amount
receivable, provided that the same conforms to the total amount receivable as
set forth in such Written Instructions or Oral Instructions, as the case may be.
C. On contractual settlement date, the account of the Fund will be
charged for all purchased Securities settling on that day, regardless of whether
or not delivery is made. Likewise, on contractual settlement date, proceeds from
the sale of Securities settling that day will be credited to the account of the
Fund, irrespective of delivery.
D. Purchases and sales of Securities effected by the Custodian will be
made on a delivery versus payment basis. The Custodian may, in its sole
discretion, upon receipt of a Certificate, elect to settle a purchase or sale
transaction in some other manner, but only upon receipt of acceptable
indemnification from the Fund.
E. The Custodian shall, upon receipt of a Written Instructions so
directing it, establish and maintain a segregated account or accounts for and on
behalf of the Fund. Cash and/or Securities may be transferred into such account
or accounts for specific purposes, to-wit:
1. in accordance with the provision of any agreement among
the Fund, the Custodian, and a broker-dealer registered
under the Securities and Exchange Act of 1934, as amended,
and also a member of the National Association of
Securities Dealers (NASD) (or any futures commission
merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of the Options
Clearing Corporation and of any registered national
securities exchange, the Commodity Futures Trading
Commission, any registered contract market, or any similar
organization or organizations requiring escrow or other
similar arrangements in connection with transactions by
the Fund;
2. for purposes of segregating cash or government securities
in connection with options purchased, sold, or written by
the Fund or commodity futures contracts or options thereon
purchased or sold by the Fund;
3. for the purpose of compliance by the fund with the
procedures required for reverse repurchase agreements,
firm commitment agreements, standby commitment agreements,
and short sales by Act Release No. 10666, or any
subsequent release or releases or rule of the Securities
and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies;
and
4. for other corporate purposes, only in the Case of this
clause 4 upon receipt of a copy of a resolution of the
Board of Trustees of the Fund, certified by the Secretary
of the Fund, setting forth the purposes of such segregated
account.
<PAGE>
F. Except as otherwise may be agreed upon by the parties hereto, the
Custodian shall not be required to comply with any Written Instructions to
settle the purchase of any Securities on behalf of the Fund unless there is
sufficient cash in the account(s) at the time or to settle the sale of any
Securities from an account(s) unless such Securities are in deliverable form.
Notwithstanding the foregoing, if the purchase price of such Securities exceeds
the amount of cash in the account(s) at the time of such purchase, the Custodian
may, in its sole discretion, advance the. amount of the difference in order to
settle the purchase of such Securities. The amount of any such advance shall be
deemed a loan from the Custodian to the Fund payable on demand and bearing
interest accruing from the date such loan is made up to but not including the
date such loan is repaid at a rate per annum customarily charged by the
Custodian on similar loans.
ARTICLE VII
Fund Indebtedness
In connection with any borrowings by the Fund, the Fund will cause to
be delivered to the Custodian by a bank or broker requiring Securities as
collateral for such borrowings (including the Custodian if the borrowing is from
the Custodian), a notice or undertaking in the form currently employed by such
bank or broker setting forth the amount of collateral. The Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to each such
borrowing: (a) the name of the bank or broker, (b) the amount and terms of the
borrowing, which may be set forth by incorporating by reference an attached
promissory note duly endorsed by the Fund, or a loan agreement, (c) the date,
and time if known, on which the loan is to be entered into, (d) the date on
which the loan becomes due and payable, (e) the total amount payable to the Fund
on the borrowing date, and (f) the description of the Securities securing the
loan, including the name of the issuer, the title and the number of shares or
the principal amount. The Custodian shall deliver on the borrowing date
specified in the Certificate the required collateral against the leader'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
<PAGE>
hereunder or any other action or inaction of the Fund or its Trustees, officers,
employees or agents, except such as may arise from the negligent action,
omission, willful misconduct or breach of this Agreement by the Custodian. The
Custodian may, with respect to questions of law, apply for and obtain the advice
and opinion of counsel, at the expense of the Fund, and shall be fully protected
with respect to anything done or omitted by it in good faith in conformity with
the advice or opinion of counsel. The provisions under this paragraph shall
survive the termination of this Agreement.
B. Without limiting the generality of the foregoing, the Custodian,
acting in the capacity of Custodian hereunder, shall be under no obligation to
inquire into, and shall not be liable for:
1. The validity of the issue of any Securities purchased by
or for the account of the Fund, the legality of the
purchase thereof, or the propriety of the amount paid
therefor;
2. The legality of the sale of any Securities by or for the
account of the Fund, or the propriety of the amount for
which the same are sold;
3. The legality of the issue or sale of any shares of the
Fund, or the sufficiency of the amount to be received
therefor;
4. The legality of the redemption of any shares of the Fund,
or the propriety of the amount to be paid therefor;
5. The legality of the declaration or payment of any dividend
by the Fund in respect of shares of the Fund;
6. The legality of any borrowing by the Fund on behalf of the
Fund, using Securities as collateral;
C. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount due to the Fund from any Dividend and
Transfer Agent of the Fund nor to take any action to effect payment or
distribution by any Dividend and Transfer Agent of the Fund of any amount paid
by the Custodian to any Dividend and Transfer Agent of the Fund in accordance
with this Agreement.
D. Notwithstanding Section D of Article V, the Custodian shall not be
under any duty or obligation to take action to effect collection of any amount,
if the Securities upon which such amount is payable are in default, or if
payment is refused after due demand or presentation, unless and until (i) it
shall be directed to take such action by a Certificate and (ii) it shall be
assured to its satisfaction (including prepayment thereof) of reimbursement of
its costs and expenses in connection with any such action.
E. The Fund acknowledges and hereby authorizes the Custodian to hold
Securities through its various agents described in Appendix B annexed hereto.
The Fund hereby represents that such authorization has been duly approved by the
Board of Trustees of the Fund as required by the Act. The Custodian acknowledges
that although certain Fund Assets are held by its agents, the Custodian remains
primarily liable for the safekeeping of the Fund Assets.
<PAGE>
In addition, the Fund acknowledges that the Custodian may
appoint one or more financial institutions, as agent or agents or as
sub-custodian or sub-custodians, including, but not limited to, banking
institutions located in foreign countries, for the purpose of holding Securities
and moneys at any time owned by the Fund, The Custodian shall not be relieved of
any obligation or liability under this Agreement in connection with the
appointment or activities of such agents or sub-custodians. Any such agent or
sub-custodian shall be qualified to serve as such for assets of investment
companies registered under the Act. Upon request, the Custodian shall promptly
forward to the Fund any documents it receives from any agent or sub-custodian
appointed hereunder which may assist trustees of registered investment companies
fulfill their responsibilities under Rule 17f-5 of the Act.
F. The Custodian shall not be under any duty or obligation to ascertain
whether any Securities at any time delivered to or held by it for the account of
the Fund are such as properly may be held by the Fund under the provisions of
the Articles of Incorporation and the Fund's By-Laws.
G. The Custodian shall treat all records and other information relating
to the Fund and the Fund Assets as confidential and shall not disclose any such
records or information to any other person unless (i) the Fund shall have
consented thereto in writing or (ii) such disclosure is required by law.
H. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian such compensation as shall be determined pursuant to
Appendix D attached hereto, or as shall be determined pursuant to amendments to
such Appendix D. The Custodian shall be entitled to charge against any money
held by it for the account of the Fund, the amount of any of its fees, any loss,
damage, liability or expense, including counsel fees. The expenses which the
Custodian may charge against the account of the Fund include, but are not
limited to, the expenses of agents or sub-custodians incurred in settling
transactions involving the purchase and sale of Securities of the Fund.
I. The Custodian shall be entitled to rely upon any Oral Instructions
and any Written Instructions. The Bind 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 3la-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.
<PAGE>
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.
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 IX
Termination
A. Either of the parties hereto may terminate this Agreement for any
reason by giving to the other party a notice in writing specifying the date of
such termination, which shall be not less than ninety (90) days after the date
of giving of such notice. If such notice is given by the Fund, it
shall be accompanied by a copy of a resolution of the Board of Trustees of the
Fund, certified by the Secretary of the Fund, electing to terminate this
Agreement and designating a successor custodian or custodians. In the event such
notice is given by the Custodian, the Fund shall, on or before the termination
date, deliver to the Custodian a copy of a resolution of the Board of Trustees
of the Fund, certified by the Secretary, designating a successor custodian or
custodians to act on behalf of the Fund. In the absence of such designation by
the Fund, the Custodian may designate a successor custodian which shall be a
bank or trust company having not less than $100,000,000 aggregate capital,
surplus, and undivided profits. Upon the date set forth in such notice this
Agreement shall terminate, and the Custodian, provided that it has received a
notice of acceptance by the successor custodian, shall deliver, on that date,
directly to the successor custodian a Securities and moneys then owned by the
Fund and held by it as Custodian. Upon termination of this Agreement, the Fund
shall pay to the Custodian on behalf of the Fund such compensation as may be due
as of the date of such termination. The Fund agrees on behalf of the Fund that
the Custodian shall be reimbursed for its reasonable costs in connection with
the termination of this Agreement.
B. If a successor custodian is not designated by the Fund, or by the
Custodian in accordance with the preceding paragraph, or the designated
successor cannot or will not serve, the Fund shall, upon the delivery by the
Custodian to the Fund of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund, be deemed to be the custodian for the Fund, and the Custodian shall
thereby be relieved of all duties and responsibilities pursuant to this
Agreement, other than the duty with respect to Securities held in the Book-Entry
System, which cannot be delivered to the Fund, which shall be held by the
Custodian in accordance with this Agreement.
<PAGE>
ARTICLE X
Miscellaneous
A. Appendix A sets forth the names and the signatures of all Authorized
Persons, as certified by the Secretary of the Fund. The Fund agrees to furnish
to the Custodian a new Appendix A in form similar to the attached Appendix A, if
any present Authorized Person ceases to be an Authorized Person or if any other
or additional Authorized Persons are elected or appointed. Until such new
Appendix A shall be received, the Custodian shall be fully protected in acting
under the provisions of this Agreement upon Oral Instructions or signatures of
the then current Authorized Persons as set forth in the last delivered Appendix
A.
B. No recourse under any obligation of this Agreement or for any claim
based thereon shall be had against any organizer, shareholder, Officer,
Director, past, present or future as such, of the Fund or of any predecessor or
successor, either directly or through the Fund or any such predecessor or
successor, whether by virtue of any constitution, statute or rule of law or
equity, or be the enforcement of any assessment or penalty or otherwise; it
being expressly agreed and understood that this Agreement and the obligations
thereunder are enforceable solely against the Fund, and that no such personal
liability whatever shall attach to, or is or shall be incurred by, the
organizers, shareholders, Officers, Trustees of the Fund or of any predecessor
or successor, or any of them as such. To the extent that any such liability
exists, it is hereby expressly waived and released by the Custodian as a
condition of, and as a consideration for, the execution of this Agreement.
C. The obligations set forth in this Agreement as having been made by
the Fund have been made by the Board of Trustees, acting as such Trustees for
and on behalf of the Fund, pursuant to the authority vested in them under the
laws of the State of 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.
<PAGE>
G. This Agreement, with the exception of the Appendices, may not be
amended or modified in any manner except by a written agreement executed by both
parties with the same formality as this Agreement, and authorized and approved
by a resolution of the Board of Trustees of the Fund.
H. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund or by the Custodian, and no
attempted assignment by the Fund or the Custodian shall be effective without the
written consent of the other party hereto.
I. This Agreement shall be construed in accordance with the laws of the
State of Ohio.
J. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized as of the day
and year first above written.
ATTEST: Rainbow Fund, Inc.
- ------------------------- By: -----------------
Title: --------------
ATTEST: Star Bank, N.A.
- ------------------------- By: -----------------
Title: --------------
<PAGE>
APPENDIX A
Authorized Person Specimen Signatures
Chairman: -------------------- ---------------------------
President: -------------------- ---------------------------
Secretary: -------------------- ---------------------------
Treasurer: -------------------- ---------------------------
Controller: -------------------- ---------------------------
Adviser Employees: -------------------- ---------------------------
-------------------- ---------------------------
-------------------- ---------------------------
Transfer Agent/Fund Accountant
Employees: -------------------- ---------------------------
-------------------- ---------------------------
-------------------- ---------------------------
-------------------- ---------------------------
<PAGE>
APPENDIX B
The following agents are employed currently by Star Bank, N.A. for securities
processing and control
The Depository Trust Company (New York)
7 Hanover Square
New York, New York 10004
The Federal Reserve Bank
Cincinnati and Cleveland Branches
Bankers Trust Company
16 Wall Street
New York, New York 10005
(For Foreign Securities and certain non-DTC eligible Securities)
<PAGE>
APPENDIX C
Standards of Service Guide
<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 Cinti/Spec
Agreement Collateral Only) for Star Bank, N.A. ABA #042000013
For Account # ___________
PTC Securities (GNMA Book Entry) 12:00 P.M. on Settlement Date PTC for Account BTRST/CUST
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 Settlement 16 Wall Street 4th Floor, Window 43
Date Minus 1) for Star Bank Account #090334
CEDEL/EURO-CLEAR 11:00 A.M. on Settlement Date minus 2 Euroclear Via Cedel Bridge
In favor of Bankers Trust Company
Cedel 53355
For Star Bank Account #501526354
Cash Wire Transfer 3:00 P.M. Star Bank, N.A. Cinti/Trust ABA #042000013
Credit Account #9901877
Further Credit to ______________
Account # ______________________
</TABLE>
- --------
* All times listed are Eastern Standard Time.
<PAGE>
Star Bank Payment Standards
Security Type Income Principal
- ------------- ------ ---------
Equities Payable Date
Municipal Bonds* Payable Date Payable Date
Corporate Bonds* Payable Date Payable Date
Federal Reserve Bank Book Payable Date Payable Date
Entry*
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 + 1
SBA Loan Certificates When Received When Received
Unit Investment Trust Payable Date Payable Date
Certificates*
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.
<PAGE>
<TABLE>
<CAPTION>
Star Bank Corporate Reorganization Standards
Type of Action Notification to Client
- -------------- ----------------------
<S> <C>
Rights, Warrants, and Optional Later of 10 business days prior to expiration or
Mergers receipt of notice
Mandatory Puts with Option to Later of 10 business days prior to expiration or
Retain receipt of notice
Class Actions 10 business days prior to expiration date
Voluntary Tenders, Exchanges, and Later of 10 business days prior to expiration or
Conversions receipt of notice
Mandatory Puts, Defaults, At posting of funds or securities received
Liquidations, Bankruptcies, Stock
Splits, Mandatory Exchanges
Full and Partial Calls Later of 10 business days prior to expiration or
receipt of notice
<CAPTION>
Deadline for Client Instructions to Transaction
Star Bank Posting
--------- -------
<S> <C>
5 business days prior to expiration Upon receipt
5 business days prior to expiration Upon receipt
5 business days prior to expiration Upon receipt
5 business days prior to expiration Upon receipt
None Upon receipt
None Upon receipt
</TABLE>
NOTE: Fractional shares/par amounts resulting from any of the above will be
sold.
<PAGE>
APPENDIX D
Schedule of Compensation
<PAGE>
Star Bank, N.A.
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 $9.00
Federal Reserve
(c) For each portfolio transaction processed through our New $25.00
York custodian
(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 Points) on Next $20
.00015 (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. IRA Documents
Per Shareholder/year to hold each IRA Document $8.00
VI. Earnings Credits
On a monthly basis any earnings credits generated from uninvested
custody balances will be applied against any cash management service
fees generated. Earnings credits are based on the average yield on the
91 day U.S. Treasury Bill for the preceding thirteen weeks less the 10%
reserve.
Revised March 25, 1996
<PAGE>
Star Bank, N.A.
Cash Management Fee Schedule for the Rainbow Fund, Inc.
Services Unit Cost ($) Monthly Cost ($)
-------- ------------- ---------------
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
o with copy of check .32
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
- -----------------
Star Bank Prime Rate as of first of month plus 4%
*** Uncollected Charge
* Price can vary depending upon what information needs to be captured.
** With the use of lockbox, the collected balance int he demand deposit
account will be significantly increased and therefore earnings to offer
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
<PAGE>
Standards of Service Guide
STAR BANK, N.A.
MAIL LOCATION #6118,
425 WALNUT STREET,
CINCINNATI, OH 45202
March, 1996
<PAGE>
TABLE OF CONTENTS
ARTICLE I Definitions..............................................
ARTICLE II Documents and Notices to be Furnished by the Fund........
ARTICLE III Receipt of Fund Assets...................................
ARTICLE IV Disbursement of Fund Assets..............................
ARTICLE V Custody of Fund Assets...................................
ARTICLE VI Purchase and Sale of Securities..........................
ARTICLE VII Fund Indebtedness.......................................
ARTICLE VIII Concerning the Custodian................................
ARTICLE IX Termination.............................................
ARTICLE X Miscellaneous...........................................
APPENDICES
APPENDIX A............................................................
APPENDIX B............................................................
APPENDIX C............................................................
APPENDIX D............................................................
EXHIBIT 9(d)
ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT, dated as of the 1st day of December, 1986 made by and
between THE RAINBOW FUND, INC. (the "Fund") a corporation operating as an open
end investment company, duly organized and existing under the laws of the State
of Delaware and INVESTOR DATA SERVICES (IDS), a general partnership duly
organized and existing under the laws of New York.
WITNESSETH THAT:
WHEREAS, the Fund desires to appoint IDS as its Accounting Services
Agent to maintain and keep current the books, accounts, records, journals or
other records of original entry relating to the business of the Fund as set
forth in Section 2 of this Agreement (the "Accounts and Records") and to perform
certain daily functions in connection with such Accounts and Records; and
WHEREAS, IDS is willing to perform such functions upon the terms and
conditions set forth below; and
WHEREAS, IDS shall perform the duties of administrator and transfer
agent pursuant to a separate agreement ("Administration Agreement").
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto, intending to be legally bound, do hereby
agree as follows:
Section 1. The Fund shall promptly turn over to IDS such of the
Accounts and Records previously maintained by or for it as are necessary for IDS
to perform its functions under this Agreement. The Fund authorizes IDS to rely
on such Accounts and Records turned over to it and hereby indemnifies and holds
IDS, its successors and assigns, harmless of and from any and all expenses,
damages, claims, suits, liabilities, actions, demands and losses whatsoever
arising out of or in connection with any error, omission, inaccuracy or other
deficiency of such Accounts and Records or in "the"failure of the Fund to
provide any portion of such or to provide any information needed by IDS to
knowledgeably perform its functions.
Attached hereto is a list of all inaccuracies, omissions,
discrepancies, and other deficiencies in the Accounts and Records known to the
Fund as of the close of business on 11/30/86. The Fund agrees promptly to advise
IDS in writing of all additions to or deletions from said list necessary to
maintain the list in current status. IDS shall make reasonable efforts to
isolate and correct any inaccuracies, omissions, discrepancies, or other
deficiencies in the Accounts and Records delivered to IDS, to the extent such
matters are disclosed to IDS or are discovered by it and are relevant to its
performance of its functions under this Agreement. The Fund shall provide IDS
with such assistance as it may reasonably request in connection with its efforts
to correct such matters. The Fund agrees to pay IDS on a current and ongoing
basis for its reasonable time and costs expensed on the correction of such
matters, said payment to be in addition to the fees and charges agreed to for
the normal services rendered under this Agreement.
IDS expressly makes no warranty or representation that any error,
omission or deficiency can be satisfactorily corrected. The Fund further agrees
that if IDS is subject to any claim, suit or other expense which, in IDS's sole
<PAGE>
reasonable judgment is due to any inaccuracy, omission, discrepancy or other
deficiency of the Accounts and Records delivered to IDS hereunder or is due to
failure to provide any record or material required hereunder, the Fund shall
advise IDS in writing of all additions to or deletions from said list necessary
to maintain the list in current status. IDS shall make reasonable efforts to
isolate and correct any inaccuracies, omissions, discrepancies, or other
deficiencies in the Accounts and Records delivered to IDS, to the extent such
matters are disclosed to IDS or are discovered by it and are relevant to its
performance of its functions under this Agreement. The Fund shall provide IDS
with such assistance as it may reasonably request in connection with its efforts
to correct such matters. The Fund agrees to pay IDS on a current and ongoing
basis for its reasonable time and costs expended on the correction of such
matters, said payment to be in addition to the fees and charges agreed to for
the normal services rendered under this Agreement.
IDS expressly makes no warranty or representation that any error,
omission or deficiency can be satisfactorily corrected. The Fund further agrees
that if IDS is subject to any claim, suit or other expense which, in IDS's sole
reasonable judgment is due to any inaccuracy, omission, discrepancy or other
deficiency of the Accounts and Records delivered to IDS hereunder, or is due to
failure to provide any record or material required hereunder, the Fund shall pay
IDS on a monthly basis for all costs in connection therewith and indemnify and
hold IDS harmless from and against all costs in connection therewith, including
all attorney fees and costs, provided, however, that if such error, omission,
inaccuracy or other deficiency is caused directly or indirectly by gross
negligence or reckless disregard by IDS of its duties and responsibilities
hereunder, the Fund shall have no obligation to indemnify and hold harmless IDS,
its successors or assigns.
Section 2. To the extent it receives the necessary information from the
Fund and its agents by Written or Oral Instructions, IDS shall maintain in
accord with Rule 3la-l under the Investment Company Act of 1940, as amended and
keep current, the following Accounts and Records relating to the business of the
Fund, in such form as may be mutually agreed to between the Fund and IDS:
(a) Cash Receipts Journal
(b) Cash Disbursements Journal
(c) Purchase and Sales Journals - Portfolio Securities
(d) Subscription and Redemption Journals
(e) Security Ledgers
(f) Broker Ledger
(g) General Ledger
(h) Daily Expense Accruals
(i) Daily Interest Accruals
(j) Securities and Monies borrowed or loaned and collateral therefor
(k) Daily Trial Balances
(l) Investment Income Journal
Unless necessary information to perform the above functions is
furnished by Written or Oral Instructions to IDS daily prior to 1:00 p.m. New
York time and the calculation of the Fund's net asset value, as provided below,
IDS shall incur no liability, and the Fund shall indemnify and hold harmless IDS
from and against any liability arising from any failure to provide complete
information or from any discrepancy between the information received by IDS and
used in such calculations and any subsequent information received from the Fund
or any of its designated agents.
<PAGE>
It shall be the responsibility of the Fund to furnish or cause to be
furnished to IDS, the declaration, record, payment dates and amounts of any
dividends or income and any other special actions required on or concerning each
of its portfolio securities.
Section 3. IDS shall perform the ministerial calculations necessary to
calculate the Fund's net asset value daily, in accordance with the Fund's
current prospectus and utilizing the information described in this Section.
Portfolio items for which market quotations are available by IDS's use of
Quotron Financial Information Services shall be based on the Quotron closing
prices, except where the Fund has given or caused to be given specific Written
or Oral Instructions to utilize a different value. All other portfolio
securities shall be given such values as the Fund provides by Written or Oral
Instructions, including all foreign securities, restricted securities and other
securities requiring valuations not readily ascertainable solely by Quotron. IDS
shall have no responsibility or liability for the accuracy of prices quoted by
Quotron; for the accuracy of the information supplied by the Fund; or for tiny
loss, liability, damage or cost arising out of any inaccuracy of such data. IDS
shall have no responsibility or duty to include information or valuations to be
provided by the Fund in any computation unless and until it is timely supplied
to IDS in usable form. Unless the necessary information to calculate the net
asset value daily. Is furnished by Written or Oral Instructions from the Fund,
IDS shall incur no liability, and the Fund shall indemnify and hold harmless IDS
from and against any liability arising from any failure to provide complete
information or from any discrepancy between the information received by IDS and
used in such calculation and any subsequent information received from the Fund
or any of its designated agents.
Section 4. For all purposes under this Agreement, IDS is authorized to
act upon receipt of this first of any Written or Oral Instruction it receives
from the Fund or its agents on behalf of the Fund. In cases where the first
Instruction is an Oral Instruction, that is not in the form of a document or
written record, a confirmatory Written Instruction or Oral Instruction in the
form of a document or written record shall be delivered, and in cases where IDS
receives an Instruction, whether Written or Oral, to enter a portfolio
transaction on the records, the Fund shall cause the Broker-Dealer to send a
written confirmation to IDS. IDS shall be entitled to rely on the first
instruction received, and for any act or omission undertaken in compliance
therewith shall be free of liability and fully indemnified and held harmless by
the Fund, provided however, that in the event a Written or Oral Instruction
received by IDS is countermanded by a timely later Written or Oral Instruction
received by IDS prior to acting upon such countermanded instruction, IDS shall
act upon such later Written or Oral Instruction. The sole obligation of IDS with
respect to any follow-up or confirmatory Written Instruction, Oral Instruction
in documentary or written form, or Broker-Dealer written \confirmation shall be
to make reasonable efforts to detect any discrepancy between the original
instruction and such confirmation and to report such discrepancy to the Fund.
The Fund shall be responsible, at the Fund's expense, for taking any action,
including any reprocessing, necessary to correct any discrepancy or error, and
.to the extent such action requires IDS to act the Fund shall give IDS specific
Written Instruction as to the action required.
Section 5. At the end of each month, the Fund shall cause the Custodian
to forward to IDS a monthly statement of cash and portfolio transactions, which
will be reconciled with IDS's Accounts and Records maintained for the Fund. IDS
will report any discrepancies to the Custodian, and report any unreconciled
items to the Fund.
<PAGE>
Section 6. IDS shall promptly supply daily and periodic reports to the
Fund or its agents as requested by the Fund and agreed upon by IDS. IDS shall
prepare and maintain work papers to support the following accounts: cash
reconciliation, portfolio of investments, accrued interest, amounts due to/from
brokers, subscriptions and redemptions of Shares, Share reconciliation and
dividends payable.
Section 7. The Fund shall and shall require each of its agents
(including without limitation its Transfer Agent and its Custodian) to provide
IDS as of the close of each business day, or on such other schedule as the Fund
determines is necessary, with Written or Oral Instructions (to be delivered to
IDS by 10:00 a.m. the next following business day) containing all data and
information necessary for IDS to maintain the Fund's Accounts and Records and
IDS may conclusively assume that the information it receives by Written or Oral
Instructions is complete and accurate. The Fund is responsible to provide to IDS
reports of Share purchases, redemptions, and total shares outstanding on the
next business day after each net asset valuation.
Section 8. The Accounts and Records, in the agreed upon format,
maintained by IDS shall be the property of the Fund, and shall be made available
to the Fund promptly upon request and shall be maintained for the periods
prescribed in Rule 31a-2 under the Investment Company Act of 1940, as amended.
IDS shall assist the Fund's independent auditors, or upon approval of the Fund,
or upon demand, any regulatory body, in any requested review of the Fund's
Accounts and Records but shall be reimbursed for all expenses arid employee time
invested in any such review outside of routine and normal periodic reviews.
Upon, receipt from the Fund of the necessary information, IDS shall supply the
necessary data for the Fund or accountant's completion of any necessary tax
returns, questionnaires, periodic reports to shareholders and such other reports
and information requests as the Fund and IDS shall agree upon from time to time.
Section 9. IDS and the Fund may from time to time adopt such procedures
as they agree upon in writing, and IDS may conclusively assume, unless it shall
have specific notice to the contrary, that any procedure approved by the Fund or
directed by the Fund, does not conflict with or violate any requirements of its
Prospectus, Articles of Incorporation, By-Laws, or any rule or regulation of any
regulatory body or governmental agency. The Fund shall be responsible for
notifying IDS of any changes in regulations or rules which might necessitate
changes in IDS's procedures, and for jointly implementing with IDS such changes
as are required.
Section 10. IDS, in performing under the terms and conditions of this
Agreement, shall incur no liability for its status hereunder or for any actions
taken or omitted in good faith and the Fund hereby agrees to indemnify and hold
the Bank harmless from any and all loss, liability and expense, including any
legal expenses, arising out of the IDS's performances, or status, or any act or
omission of IDS, under this Agreement. Without limitation of the foregoing:
(a) IDS may rely upon the advice of the Fund or of counsel who may be
counsel for the Fund or counsel for IDS and upon statements of accountants,
brokers and other persons reasonably believed by it in good faith to be expert
in the matters upon which they are consulted and for any actions taken in good
faith upon such statements, IDS shall not be liable to anyone.
(b) IDS may act upon any Oral Instruction which it receives and which
it believes in good faith transmitted by the person or persons authorized by the
Board of Directors of the Fund to give such Oral Instruction. IDS shall have no
duty or obligation to make any inquiry or effort of certification of such Oral
Instruction.
<PAGE>
(c) IDS shall not be liable for any action taken in good faith reliance
upon any Written Instruction or certified copy of any resolution of the Board of
Directors of the Fund, and IDS may rely upon the genuineness of any such
document or copy thereof believed in good faith by IDS to have been validly
executed.
(d) IDS may rely and shall be protected in acting upon any signature,
instruction, request, letter of transmittal, certificate, opinion of counsel,
statement, instrument, report, notice, consent, order, or other paper or
document believed by it to be genuine and to have been signed or presented by
the purchaser, Fund, the Adviser or other proper party or parties.
Section 11. All financial data provided to, processed by, and reported
by IDS under this Agreement shall be stated in United States dollars or
currency. IDS shall have no obligation to convert to, equate, or deal in foreign
set forth in amendments to such Schedule approved in writing by the Fund and
IDS.
Section 12. IDS shall pay and shall be responsible for all costs and
expenses (including counsel fees), incurred by IDS in the Fund in connection
with the transfer of the services subject to this Agreement to IDS. IDS's
compensation shall be as set forth in Schedule A hereto attached, or as shall be
set forth in amendments to such Schedule approved in writing by the Fund and
IDS.
Section 13. Nothing contained in this Agreement is intended to or shall
require IDS, in any capacity hereunder, to perform any functions or duties on
any holiday, day of special observance or any other day on which IDS or the New
York Stock Exchange is closed. Functions or duties normally scheduled to be
performed on such days shall be performed on, and as of, the next succeeding
business day on which both the New York Stock Exchange and IDS are open.
Section 14. This Agreement may be executed in two or more counterparts,
each of which, when so executed shall be deemed to be an original, but such
counterparts shall together constitute but one and the same instrument.
Section 15. The Fund shall file with IDS a certified copy of each
resolution of its Board of Directors authorizing the execution of Written
Instructions or the transmittal of Oral Instructions.
Section 16. The Fund or IDS may give written notice to the others of
the termination of this Agreement, such termination to take effect at the time
specified in the notice not less than sixty (60) days after the giving? of the
notice. Upon effective termination date, subject to payment to IDS by the Fund
of all amounts due to IDS as of said date, IDS shall make available to the Fund
or its designated record keeping successor, all of the records of the Fund
maintained under this Agreement then in IDS's possession.
Section 17. The terms as defined in this Section wherever used in this
Agreement, or in any amendment or supplement hereto, shall have the meanings
herein specified unless the context otherwise requires.
The Fund: The term Fund shall mean The Rainbow Fund, Inc.
<PAGE>
Custodian: The term Custodian shall mean FIRST PENNSYLVANIA BANK in its
capacity as custodian under a separate agreement with the Fund.
Securities: The term Securities shall mean bonds, debentures, notes,
stocks, shares, evidences of indebtedness, and other securities and investments
from time to time owned by the Fund.
Share Certificates: The term Share Certificates shall mean the stock
certificates for the Shares of the Fund.
Shareholders: The term Shareholders shall mean the registered owners
from time to time of the Shares of the Fund in accordance with the stock
registry records of the Fund.
Shares: The term Shares shall mean the issued and outstanding shares of
common stock of the Fund.
Oral Instructions: The term Oral Instructions shall mean an
authorization, instruction, approval, item or set of data, or information of any
kind transmitted to the Custodian in person or by telephone, telegram, telecopy
or other mechanical or documentary, means lacking original signature, by a
person or persons believed in good faith by IDS to be a person or persons
authorized by a resolution of the Board of Directors of the Fund to give Oral
Instructions on behalf of the Fund.
Written Instructions: The term Written Instruction shall mean an
authorization, instruction, approval, item or set of data, or information of any
kind transmitted to IDS in original writing containing original signatures or a
gnat copy of such documents transmitted by telecopy including transmission of
such signature, believed in good faith by IDS to be the signature of a person
authorized by a resolution of the Board of Directors of the Fund to give Written
Instructions on behalf of the Fund.
Securities Depository: The term Securities Depository shall mean a
system for the central handling, of securities where all securities of any
particular class or series of any issuer deposited within the system are treated
as fungible and may be transferred or pledged by bookkeeping entry without
physical delivery of the securities.
Book-Entry Securities: The term Book-Entry Securities shall mean
securities issued by the Treasury of the United States of America and federal
agencies of the United States of America which are maintained in the book-entry
system as provided in Subpart 0 of Treasury Circular No. 300, 31 CFR 306,
Subpart B of 31 CFR Part 350 (as amended from time to time) mid the book-entry
regulations of federal agencies substantially in the form of Subpart 0 and the
term Book-Entry Account shall mean an account maintained by a Federal Reserve
Bank in accordance with the aforesaid Circular and regulations as amended from
time to time.
Section 18. 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 without the
written consent of IDS, or by IDS without the written consent of the Fund,
authorized or approved by resolutions of its respective Boards of Directors.
Section 19. This Agreement shall be governed by the laws of the State
of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized officers and their corporate seals hereunto duly
affixed and attested, as of the day and year first above written.
By: _________________
Title:
(SEAL)
Attest:
INVESTOR DATA SERVICES
By: _________________
Title:
<PAGE>
SCHEDULE A
Attached to and part of Accounting Services Agreement
Dated 12/1/86, between The Rainbow Fund, Inc. ("Fund") and
Investor Data Services
PORTFOLIO PRICING & GENERAL LEDGER ACCOUNT
CURRENT SCHEDULE OF FEES
FULL ACCOUNTING:
Compute net asset value daily
Maintain investment ledgers
Maintain general ledgers
Prepare the following financial reports:
Daily Trial Balances
Statement of Assets and Liabilities
Statement of Operation - (income and expense statement)
Statement of Changes in Net Assets
Schedule of Purchase and Sales of Securities
FUND NET ASSETS ANNUAL FEE
- --------------- ----------
First $25 Million in Assets $14,000
Next $25 Million in Assets 6,000
Each Additional $25 Million in Assets 3,000
In addition, all out-of-pocket expenses shall be separately charged, postage,
stationery, retention of records, mailing, insurance and conversion, etc.
<PAGE>
Attached to and part of
Accounting Services Agreement
Dated 12/1/86, between
The Rainbow Fund, Inc. ("Fund") and
Investor Data Services
Periodic Reports Supplied to Client
Under Our
Portfolio Pricing and General Ledger Accounting Services
DAILY
- -----
1. Daily trial balance with a computation sheet of net asset value
2. Daily performance sheet
3. Daily cash available sheet
4. Daily reconcilement of Fund's shares
5. Daily interest calculations
6. Daily portfolio calculation with comparison to previous day
MONTHLY
- -------
1. Statement of assets and liabilities
2. Statement of operations
3. Statement of changes in net assets
4. Schedule of purchases and sales of securities
5. Brokerage commission schedule for the month and year to date
6. Compliance report
7. Security Ledger
8. Schedule of Fund's shares sold and repurchased and the outstanding shares
registered with the SEC
9. Interest evaluation
10. Dividend Schedule
ANNUALLY
- --------
1. To follow up on all fail items, within two business days after settlement
day
2. Prepare the unaudited reports that are required either quarterly or
semi-annually
3. Prepare the basis work papers for the independent auditor and to assist
them in the audit
<PAGE>
EXHIBIT 9(e)
TRANSFER AGENCY
AND
ADMINISTRATION AGREEMENT
This Agreement, dated as of the first day of December, 1986, made by
and between THE RAINBOW FUND, INC. (the "Fund"), a corporation operating as an
open-end investment company, duly organized and existing under the laws of the
State of Delaware, and INVESTOR DATA SERVICES ("IDS") a New York general
partnership located at 19 Rector Street, New York, New York.
WITNESSETH THAT:
WHEREAS, IDS has agreed to act as Transfer, Redemption and Dividend
Disbursing Agent and as Administrator of the Plans of the Fund, and IDS also has
agreed to act for the Fund in other respects as hereinafter stated; and
WHEREAS, pursuant to a separate agreement (the "Accounting Services
Agreement") IDS will perform certain accounting services for the Fund, the IDS
hereinafter being referred to as Accounting Services Agent.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto, intending to be legally bound, do hereby
agree as follows:
Section 1. The Fund hereby appoints IDS as its Transfer and Redemption
Agent and as Administrator of its Plans, and IDS accepts such DR19 appointments
and agrees to act in such capacities upon the terms set forth in this Agreement.
TRANSFER AGENCY
Section 2. The Fund shall furnish to IDS as Transfer Agent a sufficient
supply of blank Share Certificates and from time to time will renew such supply
upon the request of IDS. Such blank Share Certificates shall be signed manually
or by facsimile signatures of officers of the Fund authorized by law or the
bylaws of the Fund to sign Share Certificates and, if required, shall bear the
corporate seal or a facsimile thereof.
Section 3. IDS as Transfer Agent, shall make original issues of Shares
in accordance with Sections 13 and 14 below and with the Fund's Prospectus upon
the written request of the Fund and upon being furnished with (i) a certified
copy of a resolution or resolutions of the Board of Directors of the Fund
authorizing such issue; (ii) an opinion of counsel as to the validity of such
additional Shares; and (iii) necessary funds for the payment of any original
issue tax applicable to such additional Shares.
Section 4. Transfers of Shares shall be registered and new Share
Certificates issued by IDS upon surrender of outstanding Share Certificates (i)
In form deemed by IDS to be properly endorsed for transfer, (ii) with all
necessary endorsers' signatures guaranteed by a member firm of a national
securities exchange or a commercial bank, accompanied by (iii) such assurances
as IDS shall deem necessary or appropriate to evidence the genuineness and
effectiveness of each necessary endorsement, and (iv) satisfactory evidence of
compliance with all applicable laws relating to the payment or collection of
taxes.
<PAGE>
Section 5. When mail is used for delivery of Share Certificates IDS
shall forward Share Certificates in "non-negotiable" form by first-class mail,
and Share Certificates in "negotiable" form by registered mail, all mail
deliveries to be covered while in transit to the addressee by insurance arranged
for by IDS.
Section 6. In registering transfers IDS as Transfer Agent may rely upon
the Uniform Commercial Code or any other statutes which in the opinion of
counsel protect IDS and the Fund in not requiring complete documentation, in
registering transfer without inquiry into adverse claims, in delaying
registration for purposes of such inquiry, or in refusing registration where in
its judgment an adverse claim requires such refusal.
Section 7. IDS as Transfer Agent may issue new Share Certificates in
place of Share Certificates represented to have been lost, destroyed or stolen,
upon receiving indemnity satisfactory to IDS and may issue new Share
Certificates in exchange for, and upon surrender of mutilated Share
Certificates.
Section 8. In case any officer of the Fund who shall have signed
manually or whose facsimile signature shall have been affixed to blank Share
Certificates shall die, resign or be removed prior to the issuance of such Share
Certificates, IDS as Transfer Agent may issue or register such Share
Certificates as the Share Certificates of the Fund notwithstanding such death,
resignation or removal; and the Fund shall file promptly with IDS such approval,
adoption or ratification as maybe required by law.
Section 9. IDS will maintain stock registry records in the usual form
in which it will note the issuance, transfer and redemption of Shares and the
issuance and transfer of Share Certificates, and is also authorized to maintain
an account entitled Unissued Certificate Account in which it will record the
Shares and fractions issued and outstanding from time to time for which issuance
of Share Certificates is deferred. The Fund is responsible to provide IDS
reports of Fund Share purchases, redemptions and total Shares outstanding on the
next business day after each net asset valuation. IDS is authorized to keep
records, which will be part of the stock transfer records, as well as its
records of the Plans, in which it will note the names and registered addresses
of Shareholders and Planholders, and the number of Shares and fractions from
time to time owned by them for which no Share Certificates are outstanding. Each
Shareholder or Planholder will be assigned a single account number even though
Shares held under each Plan and Shares for which Certificates have been issued
will be accounted for separately. Whenever a Shareholder deposits Shares
represented by Share Certificates in a Plan permitting the deposit of Shares
thereunder, IDS, as Transfer Agent, upon receipt of the Share Certificates
registered in the name of the Shareholder (or if not so registered, in proper
form for transfer), shall cancel such Share Certificates, debit the
Shareholder's individual stock account and credit the Shares to the Unissued
Share Certificate Account pursuant to Section 10 hereof. IDS, as Plan
Administrator, shall credit the Shares so deposited to the proper Plan account.
Section 10. IDS will issue Share Certificates for Shares only upon
receipt of a written request from a Shareholder. In all other cases, the Fund
authorizes IDS to dispense with the issuance and countersignature of Share
Certificates whenever Shares are purchased. In such case IDS, as Transfer Agent,
shall merely note on its stock registry records the issuance of the Shares and
fractions (if any), shall credit the Unissued Certificate Account with the
<PAGE>
Shares and fractions issued and shall credit the proper number of Shares and
fractions to the respective Shareholders. Whenever IDS has occasion to surrender
for redemption Shares and fractions owned by Shareholders, it shall be
unnecessary to issue Share Certificates for redemption purposes. The Fund
authorizes IDS in such cases to process the transactions by making appropriate
entries in its stock transfer records, and debiting the Unissued Certificate
Account and the record of issued Shares outstanding.
Section 11. IDS in its capacity as Transfer Agent will, in addition to
the duties and functions above-mentioned, perform the usual duties and functions
of a stock Transfer Agent for a corporation. It will countersign for issuance or
reissuance Share Certificates representing original issue or reissued treasury
Shares as directed by the Written Instructions of the Fund, and will transfer
Share Certificates registered in the name of Shareholders from one Shareholder
to another in the usual ___________ IDS may rely conclusively and act without
further investigation upon _____ list, instruction, certification,
authorization, Share Certificate or other instrument or paper reasonably
believed by it in good faith to be genuine and unaltered, and to have been
signed, countersigned, or executed by duly authorized person or persons, or upon
the instructions of any duly authorized officer of the Fund, or upon the advice
of counsel for the Fund or for IDS. IDS may record any transfer of Share
Certificates which is reasonably believed by it in good faith to have been duly
authorized or may refuse to record any transfer of Share Certificates if in good
faith IDS in its capacity as Transfer Agent deems such refusal necessary in
order to avoid any liability either to the Fund or to IDS. The Fund agrees to
indemnify and hold harmless IDS from and against any and all losses, costs,
claims, and liability which it may suffer or incur by reason of so relying or
acting or refusing to act.
Section 12. In case of any request or demand for the inspection of the
share records of the Fund, IDS as Transfer Agent, shall endeavor to notify the
Fund to secure instructions as to permitting or refusing such inspection.
However, IDS may exhibit such records to any person in any case where it is
advised by its counsel that it may be held liable for failure to do so.
ISSUANCE OF SHARES
Section 13. Prior to the daily determination of net asset value in
accordance with the Fund's Prospectus, IDS shall process all purchase orders
received since the last determination of the Fund's net asset value.
IDS shall calculate daily the amount available for investment in Shares
at the net asset value determined by the Fund as of the close of trading on the
New York Stock Exchange, the number of Shares and fractional Shares to be
purchased and the net asset value to be deposited with the Custodian. IDS as
agent for the Shareholders and Planholders, shall place a purchase order daily
with the Fund for the proper number of Shares and fractional Shares to be
purchased and promptly thereafter confirm such number to the Fund in writing.
Section 14. IDS, having made the calculations provided for in Section
13, shall thereupon pay over the net asset value of Shares purchase to the
Custodian. The net asset value shall then be deposited in the account maintained
under the Custodian Agreement. The proper number of shares and fractional Shares
shall then be issued daily and credited by IDS to the Unissued Certificate
Account. The Shares and fractional Shares purchased for each Shareholder and
<PAGE>
Planholder will be credited by IDS to each respective separate account. IDS
shall promptly thereafter mail to each Shareholder and Planholder a confirmation
of each purchase, with copies to the Fund if requested. Such confirmations will
show the prior Share balance, the new Share balance, the Shares held under a
Plan (if any), the Shares for which Stock Certificates are outstanding (if any),
the amount invested and the price paid for the newly purchased Shares.
REDEMPTIONS
Section 15. IDS shall, prior to the daily determination of net asset
value in accordance with the Fund's Prospectus, process all requests from
Shareholders to redeem Shares and determine the number of Shares required to be
redeemed to make monthly payments, automatic payments or the like. Thereupon,
IDS shall advise the Fund of the total number of shares available for redemption
and the number of Shares and fractional Shares requested to be redeemed. The
Fund shall then quote to IDS the applicable net asset value, whereupon IDS shall
furnish the Fund with an appropriate confirmation of the redemption and process
the redemption by filing with the Custodian an appropriate statement and making
the proper distribution and application of the redemption proceeds in accordance
with the Fund's Prospectus. The stock registry books recording outstanding,
Shares, the Unissued Certificate Account and the individual account of the
Shareholder or Planholder shall be properly debited.
In lieu of carrying out the redemption procedures hereinabove provided
for in this Section 15, IDS may, at the request of the Fund, sell Shares to the
Fund as repurchases from Shareholders and/or Planholders, provided that in each
such case the sale price shall be not less than the applicable redemption price.
In such case the redemption procedures shall be appropriately modified.
Section 16. The proceeds of redemption shall be remitted by IDS in
accordance with the Fund's Prospectus by check mailed to Shareholder or
Planholder at his registered address. The request and stock certificates, if
any, for Shares being redeemed, must have the owner's signature guaranteed by a
domestic commercial bank or trust company or a member firm of a national
securities exchange. If Share Certificates have not been' Issued to the
redeeming Shareholder or Planholder, the signature of the Shareholder or
Planholder on the redemption request must be similarly guaranteed. The Fund may
authorize IDS to waive the signature guarantee' in certain cases by Written
Instructions.
For the purposes of redemption of Shares which have been purchased
within 15 days of a redemption request, the Fund shall provide IDS, from time to
time, with Written Instructions concerning the time within which such requests
may be honored.
DIVIDENDS
Section 17. Upon the declaration of each dividend and each capital
gains distribution by the Board of Directors of the Fund, the Fund shall notify
IDS of the date of such declaration, the amount payable per share, the record
date for determining the Shareholders entitled to payment, the payment and the
reinvestment date price.
<PAGE>
Section 18. On or before each payment date the Fund will transfer, or
cause the Custodian to transfer, to IDS in its capacity as Dividend Disbursing
Agent, the total amount of the dividend or distribution currently payable. IDS
will, on the designated payment date, automatically reinvest all dividends in
additional shares except in cases where Shareholders have elected to receive
Shares in cash, in which case IDS will mail distribution checks to the
Shareholders for the proper amounts payable to them.
GENERAL PROVISIONS
Section 19. IDS shall maintain records (which may be part of the stock
transfer records) in connection with the issuance and redemption of Shares, the
disbursement of dividends and the administration of the Plans and dividend
reinvestments, in which will be noted the transactions effected for each
Shareholder and Planholder and the number of Shares and fractional Shares owned
by each for which no Share Certificates are outstanding. IDS agrees to make
available upon request and to preserve for the periods prescribed In Rule 31a-2
any records relating to services provided pursuant to Rule 31a-1.
Section 20. In addition to the services as Transfer and Redemption
Agent and as Administrator as above set forth, IDS will perform other services
for the Fund as agreed from time to time, including but not limited to,
preparation of and mailing Federal Tax Information Forms, mailing reports of the
Fund, preparation of one annual list of Shareholders, and mailing notices of
Shareholders' meetings, proxies and proxy statements.
Section 21. Nothing contained in this Agreement is intended to or shall
require IDS in any capacity hereunder, to perform any functions or duties on any
holiday, day of special observance or any other day on which IDS or the New York
Stock Exchange are closed. Functions or duties normally scheduled to be
performed on such days shall be performed on, and as of, the next business day
on which both the New York Stock Exchange is open.
Section 22. The Fund shall not be charged for any costs and expenses
(including counsel fees), in connection with the transfer of administration of
the Fund from Fund Plan Services, Inc., IDS's compensation shall bb as set forth
in Schedule A hereto attached, or as shall set forth in amendments to such
Schedule approved by the Fund and IDS.
Section 23. IDS in acting for Planholders, or in any other capacity set
forth in this Agreement, shall not be personally liable for any taxes,
assessments, or governmental charges which may be levied or assessed on any
basis whatsoever In connection with the administration of the Plans, excepting
only for taxes assessed against _________ corporate capacity arising out of its
compensation hereunder.
Section 24. The Fund shall indemnify IDS and save it harmless from any
and against any and all actions, suits and claims, whether groundless or
otherwise, arising directly or indirectly out of or in connection with its
performance under this Agreement as Transfer Agent, Dividend Disbursing Agent
and Administrator of Plans and from and against any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liabilities incurred by IDS
in connection with any such action, suit, or claim. IDS shall not be under any
obligation to prosecute or to defend any action, suit or claim arising out of or
in connection with its performance under this Agreement as Transfer Agent,
Dividend Disbursing Agent and Administrator of Plans, which, in the opinion of
its counsel, may involve it in expense or liability, and the Fund shall, so
<PAGE>
often as reasonably requested, furnish IDS with satisfactory indemnity against
such expense or liability, and upon request of IDS the Fund shall assume the
entire defense of any action, suit, or claim subject to the foregoing Indemnity;
provided, however, that IDS shall give the Fund notice, and reasonable
opportunity to defend, any such action, suit, or claim, in the name of the Fund
or IDS or both.
Without limitation of the foregoing:
(a) IDS may rely upon the advice of the Fund, or of counsel, who may be
counsel for the Fund or counsel for IDS and upon statements of accountants,
brokers and other persons believed by it in good faith to be expert in the
matters upon which they are consulted, and for any actions taken in good faith
upon such statements, IDS shall not be liable to anyone.
(b) IDS shall not be liable for any action taken in good faith reliance
upon any Written Instruction or certified copy of any resolution of the Board of
Directors of the Fund, and IDS may rely upon the genuineness of any such
document or copy thereof believed in good faith by it to have been validly
executed.
(c) IDS may rely and shall be protected in acting upon any signature,
instruction, request, letter of transmittal, certificate, opinion of counsel,
statement, instrument, report, notice, consent, order, or other paper or
document believed by it to be genuine and to have been signed or presented by
the Fund or other proper party or parties.
(d) The indemnification provisions of this Section shall not be
enforceable to the extent that any such liability arises by reason of the
negligence of IDS.
Section 25. IDS is authorized, upon receipt of Written Instructions
from the Fund, to make payment upon redemption of Shares without a signature
guarantee. The Fund hereby agrees to indemnify and hold IDS its successors and
assigns, harmless of and from any and all expenses, damages, claims, suits,
liabilities, actions, demands, losses whatsoever arising out of or in connection
with a payment by IDS upon redemption of Shares without a signature guarantee
and upon the request of IDS the Fund shall assume the entire defense of any
action, suit or claims subject to the foregoing indemnity. IDS shall notify the
Fund of any such action, suit or claim within 30 days after receipt by IDS of
notice thereof.
Section 26. The Fund shall promptly cause to be turned over to IDS (i)
an accurate list of Shareholders of the Fund showing the proper registered
address and number of Shares owned and whether such shares are represented by
outstanding Share Certificates or by non-certified share accounts, (ii) all
records relating to Plans, including original applications signed by the
Planholders and original plan accounts recording payments, deductions,
reinvestments, withdrawals and liquidations, and (iii) all shareholder records,
files,.and other materials necessary or appropriate for proper performance of
the functions assumed by IDS under this Agreement (hereinafter called
"Materials") and hereby agrees to indemnify and hold IDS, its successors and
assigns, harmless of and from any and all expenses, damages, claims, suits,
liabilities, actions, demand and losses whatsoever arising out of or in
connection with any error, omission, inaccuracy or other deficiency of such
Materials, or out of the failure of the Fund to provide any portion of such or
to provide any information needed by IDS to knowledgeably perform its functions.
<PAGE>
Attached hereto is a list of all inaccuracies, omissions,
discrepancies, and other deficiencies in the Materials known to the Fund or its
prior transfer agent as of the close of business on _________________. The Fund
agrees promptly to advise IDS in writing of all additions to or deletions from
said list necessary to maintain the list in current status. IDS shall make
reasonable efforts to isolate and correct any inaccuracies, omissions,
discrepancies, or other deficiencies in the Materials delivered to IDS, to the
extent such matters are disclosed to IDS or are discovered by it and are
relevant to Its performance of its functions under this Agreement. The Fund
shall provide IDS with such assistance as it may reasonably request in
connection with its efforts to correct such matters. The Fund agrees to pay IDS
on a current and ongoing basis for its reasonable time and costs expended on the
correction of such matters, said payment to be in addition to the fees and
charges agreed to for the normal services rendered under this Agreement.
IDS expressly makes no warranty or representation that any error,
omission or deficiency can be satisfactorily corrected. The Fund further agrees
that if IDS is subject to any claim, suit or other expense which, in its sole
reasonable judgment is due to any inaccuracy, omission, discrepancy or other
deficiency of the Materials delivered to IDS hereunder, or is due to failure to
provide any record or material required hereunder, the Fund shall pay IDS on a
monthly basis for all costs in connection therewith and indemnify and hold IDS
harmless from and against all costs in connection therewith, including all
attorney fees and costs; provided, however, that if such error, omission,
inaccuracy or other deficiency is caused directly or indirectly by negligence or
disregard by IDS of its duties and responsibilities hereunder, the Fund shall
have no obligation to indemnify and hold harmless IDS, Its successors or
assigns.
With respect to any matter involving a possible assertion of any past,
present or future potential or contingent liability of IDS as Transfer Agent,
Dividend Disbursing Agent or Administrator of Plans, the Fund warrants that it
has not committed and shall not commit any act or omission that constitutes a
waiver, release, estoppel, or other impairment or any kind of any rights it may
heretofore have had, may now have, or may hereafter have against its prior
transfer agent, and that it shall do everything necessary to preserve, and, if
appropriate, enforce all of such rights against said prior transfer agent.
Without limitation of the foregoing, the Fund agrees that if any suit is
instituted against IDS arising, in IDS's sole reasonable judgment, out of any
act or omission of said prior transfer agent, which created a deficiency of the
Materials delivered hereunder, or out of any failure of said prior transfer
agent to deliver material, information, or assistance contemplated hereunder,
then the Fund shall take whatever steps are necessary to join said prior
transfer agent as a party defendant or additional defendant in said litigation.
Section 27. The terms defined in the Accounting Services Agreement
shall have the same meanings wherever used in this Agreement. The Fund shall
file with IDS a certified copy of each resolution of its Board of Directors
authorizing the execution of Written Instructions or the transmittal of Oral
Instructions. The following additional terms, for purposes of this Agreement or
any amendment or supplement thereto, shall have the meanings herein specified
unless the context otherwise requires:
<PAGE>
Plan: The term Plan shall include such investment plan, dividends or
capital gains reinvestment plans, systematic withdrawal plans or other types of
plans set forth in the then currently effective prospectus of the Fund, but not
including any qualified retirement plan which is a Shareholder of the Fund, in
form acceptable to IDS, which the Fund may from time to time adopt and make
available to its Shareholders, including plans or accounts by self-employed
Individuals or partnerships.
Planholder: The term Planholder shall mean a Shareholder who, at the
time of reference, is participating in a Plan, and shall include any
underwriter, representative or broker-dealer.
Section 28. This Agreement may be amended from time to time by a
supplemental agreement executed by the Fund and IDS.
Section 29. Either the Fund or IDS may give 60 days' written notice to
the other of the termination of this Agreement, such termination to take effect
at the time specified in the notice.
Section 30. Any notice or other communication required by or permitted
to be given in connection with this Agreement shall be in writing, and shall be
delivered in person or sent by first class mail, postage prepaid, to the
respective parties as follows:
If to the Fund and/or:
The Rainbow Fund, Inc.
19 Rector Street
New York, New York 10006
Attention: Robert M. Furman, Chairman of the Board
If to IDS:
19 Rector Street
New York, New York 10006
Attention: Linda C. Anderson
Section 31. The Fund represents and warrants to IDS that the execution
and delivery of this Administration Agreement by the undersigned officers of the
Fund has been duly and validly authorized by resolution of the Board of
Directors of the Fund.
Section 32. This Agreement may be executed in two or more counterparts,
each of which when so executed shall be deemed to be an original, but such
counterparts shall together constitute but one and the same instrument.
Section 33. 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 without the
written consent of IDS or by IDS without the written consent of the Fund,
authorized or approved by a resolution of its Board of Directors.
Section 34. This Agreement shall be governed by the laws of the State
of New York.
<PAGE>
SCHEDULE A
Attached to and part of Administration Agreement
dated December 1, 1986,
between THE RAINBOW FUND, INC. and
INVESTOR DATA SERVICES
CURRENT FEE SCHEDULE
Transfer Agent, Dividend Disbursing Agent and Shareholder Accounting Agent:
$6.00 Per Account, Annually*
Services:
o Opening new accounts
o Processing all payments
o Issuing and canceling certificates
o Processing partial and complete redemptions
o Regular and legal transfers of accounts
o Mailing up to four reports
o Process 0 dividend(s) and one capital gain distribution
annually, if any, when processed concurrently with a dividend.
This includes mailing of cash dividends and/or preparing
statements to shareholders for reinvested distributions.
o Blue Sky reports. This indicates shares sold to investors in
various States. There is also a "warning system" that informs
the Fund when they are within a certain percentage of the
shares registered in the State, or within a certain time
period when the registration statement is up for renewal.
o Account Maintenance
1. Maintaining shareholder records of certificate and whole
and fractional unissued ("Book") shares
2. Changing shareholders' addresses
3. Daily or periodic reports on number of shares, accounts
4. Addressing and tabulating annual proxy cards
5. Supplying an annual stockholder list
6. Preparation of Federal Tax Information Forms and 1042S
preparation
7. Replying to shareholder correspondence other than that for
Fund performance or Fund related inquiries
In addition, all out-of-pocket expenses shall be separately charged, i.e.,
postage, stationery, retention of records, mailing, insurance, conversion, etc.
and expenses in the development of Agreements between the company and First
Pennsylvania Bank N.A.
- --------
* MINIMUM MONTHLY FEE $500.00
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANT
I consent to the incorporation by reference in Post-Effective Amendment No. 36
to the Registration Statement of The Rainbow Fund, Inc. on Form N-1A (File No.
2-26001) of my report dated November 11, 1997, on my audit of the financial
statements and financial highlights of The Rainbow Fund, Inc., which report is
included in the Annual Report to Shareholders for the year ended October 31,
1997, and which is also incorporated by reference in this Post-Effective
Amendment to the Registration Statement.
I consent to the reference to our Firm under the caption "Financial Highlights"
in the Prospectus and the caption "Counsel and Independent Accountants" in the
Statement of Additional Information.
/s/ Harold Keller, CPA
----------------------
Harold Keller, CPA
Port Washington, NY
September 25, 1998
The
Rainbow
Fund
Inc.
ANNUAL
REPORT
October 31, 1997
<PAGE>
Dear Shareholders:
We enter 1998 still continuing to believe that there is room for growth on
selected equities, but we will continue to use caution and maintain a
conservative stance.
There are a larger number of uncertainties on our plate than usual, but that is
not the main reason for our stance of extra prudence. It is the action of the
stock market since October. Selloffs have been sharper, and rallies have lacked
the "oomph" we have seen in prior years. The message of this market action is
that investors have developed a "prove it to me" attitude. They want to see
proof of earnings growth and more corrections. We will be in for some wild rides
up and down in 1998, but a year from now, we hope to be happy with our stock
selections and timing.
Very truly yours,
/s/Robert M. Furman
-------------------
Robert M. Furman
Chairman of the Board
January 09, 1998
<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, 1997 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. These 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, 1997, 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 of presentation. I believe that my audits provide a reasonable basis
for my opinion.
In my opinion, the financial statements and per share data ratios referred to
above present fairly, in all material respects, the financial position of The
Rainbow Fund, Inc. as of October 31, 1997, 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.
HAROLD KELLER
Certified Public Accountant
Port Washington, New York
November 11, 1997
<PAGE>
<TABLE>
<CAPTION>
Statement Assets and Liabilities
October 31, 1997
<S> <C>
ASSETS:
Investments in securities, at market value (Note 1A) ........................ $898,572
(Identified Cost $754,373)
Cash ........................................................................ 495,423
Receivables:
Dividends and Interest ............................................... 1,788
-----------
TOTAL ASSETS ................................................................ $1,395,783
===========
LIABILITIES:
Options Sold (Selling price $890) .................................... 406
Accrued expenses ............................................................ 14,863
-----------
TOTAL LIABILITIES ........................................................... $15,269
===========
Net Assets (equivalent to $6.56 per share based on 210,371 shares
of capital stock outstanding) (Note 3) ............................... $1,380,514
Accumulated undisturbed income (loss):
Accumulated undisturbed loss ......................................... $(1,387,202)
Accumulated undisturbed net realized losses on investment transactions $(4,141,072)
NET AMOUNT ......................................................... $(5,528,274)
===========
<CAPTION>
Statement of Changes in Net Assets
Year Ended October 31, 1997 and 1996
October 31, October 31,
1997 1996
---------- ----------
<S> <C> <C>
Increase (decrease) in net assets from operations:
Investment income (loss) net .............................................. $ (25,307) $ (31,638)
Net realized gain (loss) from investments ................................. 446,400 25,368
Increase (decrease) in unrealized appreciation ............................ (208,906) 176,454
---------- ----------
Net increase (decrease) in net assets resulting from operations ........... 212,187 170,184
Distributions to Shareholders from:
Investment income net .................................................. 0 0
Net realized gain on investments ....................................... (25,372) (137,909)
Capital share transactions (Note 3) ....................................... (54,301) (370,999)
---------- ----------
TOTAL Increase (Decrease) .............................................. 132,514 (338,724)
NET ASSETS:
Beginning of year ................................................ 1,248,000 1,586,724
---------- ----------
End of year ...................................................... $1,380,514 $1,248,000
========== ==========
</TABLE>
The notes to financial statements are an integral part of these statements
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
For the year ended October 31, 1997
<S> <C>
Investment Income:
Income:
Dividends .................................................. $ 6,907
Interest ................................................... 18,683
----------
TOTAL INCOME ........................................... $ 25,590
----------
Expenses:
Investment Advisory Fee (Note 5) .............................. $ 3,178
Professional Fees ............................................. 15,500
Custodian Fees ................................................ 2,647
Transfer Agent Fees ........................................... 7,200
Portfolio Pricing and Accounting Fees ......................... 16,800
Reports to Shareholders ....................................... 2,052
State and Local Taxes ......................................... 688
Directors' Fees and Expenses .................................. 1,645
Other ......................................................... 1,187
----------
TOTAL EXPENSES ......................................... $ 50,897
----------
INVESTMENT INCOME (LOSS) NET .................................. $ (25,307)
----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
NET REALIZED GAIN ON INVESTMENTS .............................. 446,400
CHANGE IN UNREALIZED APPRECIATION OF INVESTMENTS FOR THE YEAR . (200,854)
----------
NET (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ........ $ 220,239
==========
</TABLE>
The notes to financial statements are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
Per Share Income and Capital Changes
(Based upon the monthly average number of outstanding shares)
October 31
-------------------------------------------------------------
Income and Expenses 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Income ........................... $.11 $.07 $.10 $.10 $.11
Operating expenses ............... .23 .20 .18 .18 .17
Net investment Income (loss) ..... (.12) (.13) (.08) (.08) (.06)
----- ----- ----- ----- -----
Dividends from net income ........ .00 .00 .00 .00 .00
Capital Changes
Net realized & unrealized gains
(losses) on securities ......... 1.10 .79 .67 (.01) .07
Distribution from realized
capital gains .................. (.13) (.54) (.34) (.36) .00
----- ----- ----- ----- -----
Net increase (decrease) in
net asset value ................ .85 .12 .25 (.45) .01
Increase due to decrease in
capital shares ................. .08 .05 .05
Net asset value at beginning
of period ...................... 5.71 5.51 5.21 5.66 5.60
----- ----- ----- ----- -----
Net asset value at end of period . $6.56 $5.71 $5.51 $5.21 $5.66
===== ===== ===== ===== =====
Ratios to Average Net Asset Value
Operating expenses ............... 3.67% 3.67% 3.68% 3.36% 2.86%
Net income (loss) ................ (.02%) (.02%) (.02%) (.01%) (.01%)
Portfolio turnover rate .......... 90% 46% 102% 66% 81%
Number of shares outstanding at
end of period (000 omitted) .... 210 218 288 324 328
</TABLE>
<PAGE>
Investments in Securities
Common Stocks:
Market
Shares Item Value(a)
- ------ ---- --------
ADVERTISING (1.9%)
4,000 Cordiant PLC $ 25,500
AEROSPACE (2.1%)
1,000 Rohr Industries Inc. 30,313
BANKS (18.3%)
7,600 Golden State Bancorp, Inc. 252,700
CONSUMER NON DURABLE (1.4%)
500 Gucci group NV 18,188
INFORMATION SERVICES (2.8%)
1,000 Cognizant Corp. 39,188
INSURANCE (7.7%)
1,000 Aetna 71,063
500 Travelers 35,000
------------
106,063
------------
CHEMICALS (1.6%)
1,000 Geon Co. 21,688
ELECTRICAL EQUIPMENT (3.7%)
2,100 Mark IV Industries, Inc. 50,925
FERTILIZER (7.3%)
9,000 Agrium 100,692
HEAVY DUTY VEHICLES (1.7%)
1,000 Navistar Int'l Corp. 23,188
PHARMACEUTICALS (2.3%)
2,000 Columbia Labs Inc. 32,250
FOOD/BEVERAGES (4.9%)
4,000 Chiquita Brands Int'l 67,252
TITANIUM MFG (9.5%)
5,500 RMI Titanium common New 130,625
------------
TOTAL COMMON STOCKS (65.2%) $ 898,572
------------
OPTIONS SOLD
5 CALLS TRAVELERS NOV 97@75 $ (406)
------------
OTHER ASSETS LESS LIABILITIES (34.8%) $ 482,348
------------
TOTAL NET ASSETS (100%) $ 1,380,514
============
(a) See Note 1A of Notes to the Financial Statements.
<PAGE>
Notes to Financial Statements
October 31, 1997
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 - Investors in securities traded on a national
securities exchange are stated at the last reported sales price on the day of
valuation; securites 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. Distributions to Shareholders
On December 18, 1997, a distribution of $446,400 capital gains was declared
as a dividend; said dividned to be paid on December 18 to stockholders of record
on such date.
3. Capital Share Transactions
At October 31, 1997, there were 2,000,000 shares of par value stock
authorized and capital paid-in aggregate $6,772,049.
Transactions in capital stock were as follows:
Shares Amount
------ ------
(000's Omitted)
Oct 31 Oct 31 Oct 31 Oct 31
1996 1997 1996 1997
---- ---- ---- ----
Shares sold and
reinvestments ................. 26 44 137 28
Shares redeemed ................. 96 125 508 82
--- --- ---- ---
Net increase (decrease) ......... (70) (81) (371) (54)
4. Investments Transactions
Purchases and sales of investment securities other than U.S. Government
obligations and short term notes were $1,252,408 and $1,690,990 respectively.
<PAGE>
Based on cost for federal income tax purposes:
(a) Aggregate gross unrealized apreciation
for all securities in which there is an ex-
cess of value over costs ...................... $203,520
--------
(b) Aggregate gross unrealized depreciation
for all securities in which there is an ex-
cess of costs over value ...................... $58,837
--------
(c) Net unrealized appreciation ................... $144,683
--------
(d) Aggregate cost of common stocks for
federal income tax purposes ................... $754,374
--------
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 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,
1997 follows:
Reduction Due to
Limitations
----------------------
Gross Net
Fiscal Advisory Commis- Advisory
Year Fee Expenses sions Fees
---- --- -------- ----- ----
1996 $8,718 $4,335 -0- $4,383
1997 $8,657 $5,479 -0- $3,178
Under the Advisory Agreement, it is recognized that the advisor will act as
the Fund's principal broker. During the period, the Fund paid aggregate
commissions of $27,436 to brokers, through whom the advisor's brokerage
transactions were cleared. Of the commissions paid, $21,949 was paid to the
advisor.
<PAGE>
NOTE:
Option Contracts Written: Number Amount
------------------------- ------ ------
Beginning of year 40 $ 5,246
During the year 149 23,801
Expired during the year 82 13,639
Closed during the year 0 0.00
Exercised during the year 102 14,518
Balance at end of year 5 $ 890
<PAGE>
THE RAINBOW FUND, INC.
7 Hanover Square
New York, NY 10004
(212) 820-0502
CUSTODIAN
Star Bank, N.A.
425 Walnut St. Mall location 6118
Cincinnati, OH 45201
TRANSFER AGENT
Investor Data Services
40 Wall Street, 61st Floor
New York, NY 10005
COUNSEL
Herrick, Feinstein, LLP
2 Park Avenue
New York, NY 10016
INDEPENDENT AUDITOR
Harold Keller, CPA
150 Main Street
Port Washington, NY 11050
OFFICERS AND DIRECTORS:
ROBERT M. FURMAN
Chairman of the Board & Treasurer
Managing Partner of Furman Anderson & Co.
General Partner of Investor Data Services
Chairman of the Board Republic Equities of
America, LTD Member NASD
ARIEL J. GOODMAN
President & Secretary
Operations Partner of Furman Anderson & Co.
General Partner of Investor Data Servcies
Operations Manager of Republic Equities of
America, LTD Member 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.
<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. 36 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 15th day of October, 1998.
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, October 15, 1998
-------------------- Director, Chief
Robert M. Furman Executive,
Financial and
Accounting Officer
/s/ Ariel Goodman President, October 15, 1998
----------------- Director and Chief
Ariel Goodman Operating Officer
/s/ Stuart Becker Director September 30, 1998
-----------------
Stuart Becker
/s/ Mark Chanko Director September 30, 1998
---------------
Mark Chanko
/s/ Jesse H. Riebman Director September 30, 1998
--------------------
Jesse H. Riebman
