Registration No. 2-26011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 37
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 37
(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)
Ariel J. Goodman
The Rainbow Fund, Inc.
7 Hanover Square
New York, New York 10004
(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)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ X ] 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.
September , 1999
7 Hanover Square, 2nd Floor
New York, NY 10004
(212) 820-0502
Prospectus
Common Stock ($.10 Par Value)
The Rainbow Fund, Inc., or the Fund, is a no-load mutual fund that
seeks growth of capital, primarily though investment in the common stock of
companies that have progressive policies with respect to the gay and lesbian
community or that have not adopted policies or engaged in practices that suggest
hostility or discriminatory behavior towards members of the gay and lesbian
community. The Fund is designed for investors who are aware of the risks
involved and 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 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.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
Page No.
INVESTMENTS, RISKS AND PERFORMANCE.............................................1
Investment Objectives and Strategies..................................1
Principal Risks of Investing .........................................1
Fees and Expenses ....................................................2
IMPORTANT INVESTMENT INFORMATION...............................................3
Investment Objectives.................................................3
Fund Investments......................................................5
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE....................................7
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE.................................9
SHAREHOLDER INFORMATION.......................................................10
Pricing of Fund Shares...............................................10
Purchase of Fund Shares..............................................10
Redemption of Fund Shares............................................11
Dividends and Distributions..........................................11
Tax Consequences.....................................................12
Retirement Plans.....................................................12
Year 2000 Processing Issue...........................................13
FINANCIAL HIGHLIGHTS..........................................................13
ADDITIONAL INFORMATION........................................................14
Description of Common Stock..........................................14
Reports..............................................................15
-i-
<PAGE>
INVESTMENTS, RISKS AND PERFORMANCE
Investment Objectives and Strategies
The Fund seeks to provide a sophisticated investment program for investors whose
objective is growth of capital by selecting 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.
In addition, the Fund seeks to invest in companies that have progressive
policies with respect to the gay and lesbian community or that have not adopted
policies or engaged in practices that suggest hostility or discriminatory
behavior towards the gay and lesbian community. These policies are referred to
as "social goals."
Principal Risks of Investing
The Fund involves the risk that an investor may lose money. Prices of common
stocks and other equity securities acquired by the Fund will rise and fall in
response to events that affect entire financial markets. In addition, the Fund's
investment policies allow the use of speculative market techniques. These
techniques are not frequently employed by conventional mutual funds and involve
special risks. The Fund's social goals may also adversely affect the Fund's
performance, because they may limit the availability of companies in which the
Fund can invest.
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
policy prohibiting the investment of more than 25% of its assets in a particular
industry. Non-diversification may lead to greater investment risk.
The following bar chart and table show the Fund's performance year-by-year, the
Fund's best and worst performance for a quarter, and the Fund's average annual
total return for the past 1, 5 and 10 calendar year periods. The table also
shows the corresponding returns of the Fund's benchmark index, Standard and
Poor's Corporation, the "S&P," 500 Index. The variability of the performance
over time provides an indication of the risks of investing in the Fund. The
Fund's past performance is not necessarily an indication of how the Fund will
perform in the future.
1
<PAGE>
[GRAPHIC OMITTED -- BAR CHART]
HIGH LOW
Quarter Ended 12/31/96 Quarter Ended 9/30/98
17.22% -19.13%
The Fund's fiscal year-to-date return as of June 30, 1999, was 6.7%.
Average Annual Total Return
- --------------------------------------------------
Period Rainbow S & P 500
Fund
- --------------------------------------------------
1 Year -19.41% 20.10%
5 Years 5.14% 19.04%
10 Years 5.59% 15.40%
Fees and Expenses This table describes the fees and expenses an investor pays to
buy and hold shares of the Fund:
Sales Charge (Load) Imposed on Purchases....................................None
Deferred Sales Charge (Load)................................................None
Sales Charge (Load) Imposed on Reinvested Dividends ........................None
Redemption Fees.............................................................None
Exchange Fees...............................................................None
This table describes the annual operating expenses that are deducted from Fund
assets:
Management Fees*...........................................................0.20%
12b-1 Marketing Fees........................................................None
Other Expenses.............................................................3.53%
Total Annual Fund Operating Expenses.......................................3.73%
2
<PAGE>
*The sole component of managements fees is the advisory fee which is reduced,
but not below zero, by the amount, if any, by which the expenses of the Fund,
exclusive of 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%.
This example is intended to permit the comparison of the cost of investing in
the Fund with the cost of investing in other mutual funds. This example assumes
that $10,000 is invested in the Fund for the time periods indicated and that all
shares are redeemed at the end of each period. The example also assumes that the
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although an investor's actual costs may be higher or lower,
based on these assumptions the cost of investing in the Fund would be:
1 Year 3 Years 5 Years 10 Years
$376 $1,143 $1,930 $3,984
The costs are the same if shares are not redeemed.
IMPORTANT INVESTMENT INFORMATION
This section describes the social goals and investment policies that
govern the investment of the Fund's assets.
Social Goals: The Fund believes that the companies responsive to members of the
gay and lesbian community may also exhibit forward-looking approaches in other
vital management areas. These policies may result in improved employee morale
that is conducive to efficient operation and may reduce the company's exposure
to costly litigation involving discrimination issues. These companies may also
experience long term benefits in the form of investor support from minority
groups, including members of the gay and lesbian community.
The adviser's judgments concerning a particular company's social goals will
necessarily be subjective. The adviser and the Fund 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 about social goals, provided that the adviser is not aware of
information indicating a hostile or discriminatory attitude towards the gay and
lesbian community. While the Fund's social goals do not constitute a
"fundamental investment policy," as defined under the Investment
3
<PAGE>
Company Act of 1940, the board of directors has no present intention of changing
the social goals.
Fundamental Investment Policies: The Fund has adopted
fundamental investment policies that govern its investment activities.
A fundamental investment policy cannot be changed without the vote
of the holders of a majority of the outstanding voting securities. Under
these fundamental policies, the Fund cannot:
o Purchase or sell real estate, unless it purchases interests in real
estate investment trusts that are registered under the Securities Act
of 1933 and are readily marketable;
o Purchase or sell commodities or commodity contracts; o Underwrite the
securities of other issuers; o Lend money, except in connection with
the acquisition of a portion of an issue of publicly distributed bonds,
debentures or other corporate obligations;
o Purchase stock on margin; or
o Invest more than 25% of its assets in a particular industry.
The Fund has adopted additional fundamental investment policies that govern the
purchase, holding, and sale of put and call options, warrants and foreign
securities and the borrowing of money. These limitations are described below.
Other Investment Policies: The Fund has adopted other investment policies that
may be changed by the board of directors, without a vote of the shareholders,
provided that any change does not permit investments inconsistent with the
Fund's fundamental investment policies. These policies currently prohibit the
Fund from:
o Investing in, or retaining investments in, companies whose policies or
practices are inconsistent with the Fund's social goals;
o Acquiring more than 5% of the outstanding securities of a single
issuer, or more than 10% of the estimated public float in the
securities of an issuer, whichever is lower;
o Investing in companies for the purpose of exercising control or
management of the companies;
o Investing in securities of other investment companies, except in the
open market; and
Under these investment policies, the Fund may purchase the securities of
"money-market" investment companies. The Fund will normally
4
<PAGE>
make money-market investments 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 1% or less of the
issuer's total outstanding securities.
Fund Investments
The following section describes some of the types of securities
that the Fund may acquire, including some of the risks associated with these
securities and the fundamental investment policies that limit the purchase,
holding and sale of these securities.
Put and Call Options: The Fund may purchase and write put and call option
contracts on securities and on stock indices. Management intends to purchase and
sell put and call options on securities for a number of purposes, including the
following:
o The earning of premium income in connection with the writing of
options;
o As a means to achieve capital appreciation in upward, neutral and
downward markets; and
o As a defensive technique in downward markets.
The purchase of a call will 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 does not rise sufficiently to cover the premium
paid, or the price declines, the Fund will suffer a loss. The purchase of a put
will 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 rises, the Fund will suffer a loss. 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, the holder of the call will
exercise. This will require the Fund to sell the underlying security at the
exercise price and to forego the benefit of any additional price increase.
Writing a covered call does not protect the Fund from a decline in the price of
the underlying security, although the premium received will mitigate the Fund's
loss.
Writing an uncovered call or an uncovered put will be effective principally for
the purpose of earning additional income from the premiums generated, when the
Fund does not anticipate that an adverse difference will develop between the
exercise price and the
5
<PAGE>
market price. An uncovered put might also be sold when the Fund desires to
establish a position in the underlying security, but has not determined the
exact timing of the purchase. If the Fund writes a put with an exercise price
deemed to be within an acceptable range, its cost for such security, if the put
were exercised, will be reduced by the premium received. The writing of an
uncovered call or an uncovered put will subject the Fund to a limitless loss in
the event of adverse market movements.
The Fund may purchase or write stock index put and call options that are traded
on national securities exchange. These transactions may be effected if the
adviser determines that the securities underlying the index correlate
sufficiently with the securities in the Fund's portfolio so as to provide a
hedge against changes in market conditions affecting the Fund's portfolio. For
example, if the Fund anticipates a market decline but concludes that a rapid
liquidation of its portfolio would be disadvantageous, it may purchase put
options on a stock index. To the extent that the index correlates to the Fund's
portfolio securities, a decline in the Fund's portfolio values will 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 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 securities that the Fund intends to purchase, if the
transactions are economically feasible.
Option transactions will be limited so that at the time any option is written,
the aggregate amount of the Fund's assets required to be posted as collateral or
maintained in a segregated account to cover the Fund's obligations will not
exceed 5% of the Fund's net assets in respect of options pertaining to the
securities of any single issuer or 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 held by the Fund will not exceed 10% of
the Fund's net asset value. Existing uncovered option positions will not be
covered or closed out, and options held by the Fund will not be exercised,
solely because a change in the market value of the underlying securities or a
change in relative value, causes the percentage limitations to be exceeded.
Warrants: The Fund may invest in warrants to the extent of 10% of its net asset
value. Warrants held in its portfolio will not be sold solely
6
<PAGE>
because a change in relative values causes this 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 will not be liquidated solely because a change in relative
values causes this percentage limitation to be exceeded. The 25% limitation will
not apply to investments in securities that 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. The Fund is obligated to
replace the securities at the market price prevailing at the time the Fund
purchases the securities for delivery to the lender, regardless of the cost. The
Fund can realize a profit if the market value of a security sold short declines.
If the market value of the security increases, the Fund will sustain a loss.
Potential losses on short positions are greater than those on securities owned
by the Fund. No short sale will be effected that 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 the value.
In recent years, the Fund has rarely invested in warrants or foreign securities
or engaged in short sales. These techniques may be used at any time, however, if
the adviser determines that they will enhance or protect the value of the Fund's
shares.
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The Fund's goal is to identify opportunities to buy securities with sound
fundamental investment qualities at reasonable prices. During the Fund's fiscal
year ended October 31, 1998, the Fund's net assets decreased by 9.95%. The
adviser generally adopted a defensive stance that resulted in a larger than
usual cash position during the year. When the opportunity arose, the Fund wrote
calls against portfolio holdings, which in management's opinion were fully
priced. This cautious strategy limited the Fund's upside potential, and, as a
result, the Fund did not benefit to the maximum extent from the substantial
general increase in market price during the 12-month period ending October 31,
1998. As of the date of this prospectus, the adviser continues to maintain a
relatively conservative position in the belief that the equity
7
<PAGE>
markets as a whole could suffer a substantial correction that would offset the
possible gains to be obtained from a more aggressive strategy.
The following graph illustrates the results of $10,000 invested in the Fund for
the 10-year period from October 31, 1989 through October 31, 1998, compared to
the S&P 500 Index. The graph is computed on a "total return" basis and assumes
the reinvestment of both income and capital gains distributions. The following
table provides the Fund's average annual total returns for the 1, 5, and 10 year
periods as of the end of the last day of the Fund's most recent fiscal year. 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 OMITTED]
Average Annual Total Return
- --------------------------------------
Period Rainbow
Fund
1 Year -9.95%
5 Years 6.13%
10 Years 5.77%
8
<PAGE>
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
The Fund's investment adviser is Furman, Anderson & Co. The adviser's address is
7 Hanover Square, Second Floor, New York, NY 10004. The adviser including its
predecessor, Robert M. Furman, sole proprietor, has been the Fund's adviser
since 1974. The adviser manages the investment of the Fund's portfolio and
administers its affairs, subject to the supervision of the Fund's board of
directors.
The aggregate fee paid to the adviser for the fiscal year ending October 31,
1998, was 0.6% of the Fund's average net assets. The amount paid to the adviser
as an annual fee is computed as follows:
o 0.625% of the Fund's average annual net asset value not exceeding
$2,000,000;
o 0.5% of the average annual net asset value with respect to net assets
between $2,000,000 and $5,000,000; and
o 0.375% of the average annual net asset value with respect to assets
exceeding $5,000,000.
The advisory agreement provides that the Fund will pay for substantially all of
its operating expenses. The advisory fee to be paid to the adviser described
above is to be reduced, but not below zero, by the amount, if any, that the
expenses of the Fund, exclusive of the 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; 0.5% of
average annual net assets from $10,000,000 to $30,000,000; and 0.25% of average
annual net assets above $30,000,000.
The advisory agreement recognizes that the adviser 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 adviser's fee will
also be reduced, but not below zero, by 50% of the amount that the brokerage
fees received by the adviser with 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 that are received by any affiliate of the
adviser.
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
9
<PAGE>
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 adviser.
SHAREHOLDER INFORMATION
Pricing of Fund Shares
The price of the Fund's shares is based on the Fund's net asset value, or NAV.
The Fund values its shares at market value and the NAV of each Fund share is
calculated as of the close of business of the New York Stock Exchange on each
business day. To calculate the NAV, the Fund's assets are valued and totaled,
liabilities are subtracted and the balance, or net assets, is divided by the
number of shares outstanding. The price at which a purchase or redemption is
effectuated is based on the next calculation of NAV after the order is placed.
The value of the Fund's shares will not be priced on weekends and the following
holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Purchase of Fund Shares
The minimum initial investment is $500. 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 investor's 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
NAV next determined after an order for shares is received and accepted by the
Fund.
Investors desiring to purchase Fund shares by mail may obtain a share purchase
application by calling 212-820-0502. The share purchase application should be
completed and mailed to the Fund at The Rainbow Fund, 7 Hanover Square, 2nd
Floor, York, NY 10004 together with a check in U.S. dollars payable to "The
Rainbow Fund".
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.
Shares may also be purchased through broker-dealers or banks. Some broker
dealers and banks may charge transaction fees for these
10
<PAGE>
services. The Fund does not charge any fees for purchase transactions directly
with the Fund.
Redemption of Fund Shares
The Fund's shares are redeemable at the NAV next determined after receipt of a
written request for redemption in good order. The Fund will make payment within
seven days after receipt of the redemption request. Good order means that the
redemption request includes the following:
o The stock certificate, if issued;
o 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 that the shares are registered; and
o Other supporting legal documents, if required, as in the case of
corporations, estates, trusts or other owners in fiduciary capacity.
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 broker services are used,
the broker may charge a fee.
Dividends and The Fund intends to declare dividends on an annual basis in
Distributions October of each year as of the date set by the board of directors.
Because current income is not a principal objective of the Fund, the amount of
dividends, if any, will likely be small. Distributions may also 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 12 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 capital gain.
All dividends and capital gains distributions are automatically reinvested in
Fund shares at NAV, as of a date selected by the board of directors, unless the
shareholder asks the transfer agent, in writing, to
11
<PAGE>
pay dividends or capital gains distributions in cash. To be effective, the
request must be received prior to the record date for a dividend.
Tax Consequences
This discussion relates solely to federal tax laws and is not intended to be
exhaustive. A qualified tax adviser should be consulted by each shareholder. The
Fund's dividends and distributions may also be subject to state and local
taxation.
The Fund presently qualifies as a "regulated investment company" under
Subchapter M of the Internal Revenue Code, and it will not be liable for federal
income taxes on amounts paid by it as dividends and distributions. Management
intends 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. An investor purchasing Fund
shares shortly before the declaration of a dividend or capital gains
distribution will receive a distribution subject to income tax. The distribution
will have the effect of reducing the Fund's NAV per share by the amount of the
distribution and result in a return of a portion of the investment. The
distribution will be taxable to the investor, even if the net asset value of his
or her shares is reduced below the cost of such shares. For federal income tax
purposes, the shareholder's original cost will continue as the tax basis of such
shares.
An exchange of the Fund's shares for shares of another fund will be treated as a
sale of the Fund's shares and any gain on the transaction may be subject to
federal income tax.
After the close of each calendar year, the Fund will send a notice to
shareholders specifying which portion of the payments they received was ordinary
income and which portion was long-term capital gains for income tax reporting
purposes.
Retirement Plans
An Individual Retirement Account may be funded with shares of the Fund.
Custodial fees may be charge for these services. Further information, a fee
schedule and application forms may be obtained by writing or telephoning the
Fund.
12
<PAGE>
Year 2000 Processing Issue
Like other investment companies, the Fund can be adversely affected if the
computer systems used by the adviser, the distributor or other service providers
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 the 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, there can
be no assurance that these steps will be sufficient to avoid any adverse impact
to the Fund.
The Year 2000 Problem is also expected to impact corporations. The degree to
which issuers of portfolio securities held by the Fund will be impacted will
depend on 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.
FINANCIAL HIGHLIGHTS
This financial highlight table is intended to help an investor understand the
Fund's financial performance for the past five fiscal years. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned, or lost, on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information, for the fiscal year ending October 31, 1998,
has been audited by Tait, Weller & Baker, whose report, along with the Fund's
financial statements, are included in the Statement of Additional Information or
annual report, each of which is available upon request. Information for periods
prior to October 31, 1998 has been audited by the Fund's former independent
auditors.
13
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $6.56 $5.71 $5.51 $5.21 $5.66
----- ----- ----- ----- -----
Net Investment Income (.12) (.12) (.13) (.08) (.08)
Net Gains or Losses on
Securities (both
realized and unrealized) (.10) 1.10 .87 .72 (.01)
---- ---- --- --- ----
Total From Investment
Operations (.22) .98 .74 .64 (.09)
-----
Dividends (from net
investment income) .00 .00 .00 .00 .00
Distributions (from
capital gains) (2.75) (.13) (.54) (.34) (.36)
Returns of Capital None None None None None
---- ---- ---- ---- ----
Total Distributions (2.75) (.13) (.54) (.34) (.36)
----- ---- ---- ---- ----
Net Asset Value,
End of Year $3.59 $6.56 $5.71 $5.51 $5.21
===== ===== ===== ===== =====
Total Return (9.95%) +14.89% +13.43% +12.28% (0.02%)
Net Assets,
End of Period $997 $1,381 $1,248 $1,587 $1,686
Ratio of Expenses to
Average Net Assets* 3.73% 3.69% 3.67% 3.68% 3.36%
Ratio of Net Income to
Average Net Assets (2.64%) (1.87%) (2.00%) (2.00%) (1.00%)
Portfolio Turnover Rate 64.00% 90.00% 46.00% 102.00% 66.00%
Ratio of Expenses to
Average Net Assets
Before Custody Fee
Credits 3.74% -- -- -- --
</TABLE>
*Years prior to October 31, 1998 have been changed to reflect correct amounts.
ADDITIONAL INFORMATION
Description of Common Stock
The authorized capital stock of the Fund consists of two million shares of
common stock with a 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.
14
<PAGE>
Matthew Furman, an adult child of Robert M. Furman, may be deemed to be a
control person of the Fund because as of August 31, 1999, he owned of record and
beneficially 126,277 shares of the Fund's common stock, representing 44.4% of
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 of 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.
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 contained 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
adviser. This prospectus is not an offer in any state in that such offer may not
lawfully be made.
15
<PAGE>
The Statement of Additional Information includes additional information about
the Fund. The Statement of Additional Information is incorporated by reference
into this prospectus and legally forms a part of this prospectus.
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual report to shareholders.
The Statement of Additional Information and the Fund's annual and semi-annual
reports are available, without charge, upon request. Investors may call collect
at 212-820-0502 to request a copy of the Statement of Additional Information,
the Fund's annual and semi-annual report and/or to make inquiries about the
Fund.
Information about the Fund, including the Statement of Additional Information,
may be reviewed and copies at the SEC's Public Reference Room in Washington,
D.C. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC- 0330. Reports and other information about the
Fund are available on the SEC's Internet site at http:/ /www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
750809105
16
<PAGE>
THE RAINBOW FUND, INC.
7 Hanover Square, 2nd Floor
New York, New York 10004
(212) 820-0502
Statement of Additional Information
September , 1999
This statement of additional information is not a prospectus. It should be
read in connection with the prospectus of The Rainbow Fund, Inc., or 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 that the Fund's
management considers to be material and important to any person considering an
investment in the Fund's shares. The prospectus is incorporated 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 September ___, 1999.
<PAGE>
TABLE OF CONTENTS
Page No.
FUND HISTORY...................................................................1
DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS..........................1
Fundamental Investment Policies...........................................1
Social Goals..............................................................2
Other Investment Policies.................................................2
Put and Call Options......................................................3
Short Sales...............................................................8
Collateral and Segregation Requirements...................................9
Warrants..................................................................9
Foreign Securities........................................................9
Borrowing Money..........................................................10
Portfolio Turnover.......................................................11
MANAGEMENT OF THE FUND .......................................................11
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...........................13
INVESTMENT ADVISORY AND OTHER SERVICES........................................14
Investment Advisory Services.............................................14
Administrative Services..................................................16
Custodian................................................................17
Auditing Services........................................................17
BROKERAGE ALLOCATION AND OTHER PRACTICES......................................17
CAPITAL STOCK AND OTHER SECURITIES............................................19
SHAREHOLDER INFORMATION.......................................................19
Net Asset Value..........................................................19
Redemption...............................................................20
Reinvestment of Dividends and Distributions..............................20
Taxation of the Fund.....................................................20
PERFORMANCE DATA..............................................................21
FINANCIAL STATEMENTS..........................................................21
DOCUMENTS INCORPORATED BY REFERENCE TO THE ANNUAL REPORT......................21
-i-
<PAGE>
FUND HISTORY
The Fund was initially organized in 1967 as a Delaware corporation. In 1990, the
Fund was organized as a Maryland corporation. The Fund has never engaged in any
business, other than that of an investment company.
DESCRIPTION OF THE FUND AND
ITS INVESTMENTS AND RISKS
The Fund is an open-end, management investment company and is "non-diversified"
as defined in the Investment Company Act of 1940. As a non-diversified fund, it
is able to concentrate in investments in fewer issuers than would be permitted
if the Fund were classified as a "diversified" fund.
The purpose of the Fund is to provide a sophisticated investment program for
investors whose objective is the growth of capital. The Fund's securities are
selected primarily on the basis of potential capital enhancement. While common
stocks will comprise most of the portfolio, the Fund may also invest in
defensive securities, including preferred stocks, bonds or other fixed income
securities, or retain funds in cash or cash equivalents.
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 also may purchase and write options on stock indices, sell securities
short, invest in warrants and foreign securities and borrow money for purposes
of investing in securities.
Fundamental Investment Policies
The Fund has adopted fundamental investment policies and restrictions. These
policies and restrictions cannot be changed without the vote of a majority of
the outstanding voting securities. Under these policies and restrictions, the
Fund cannot:
o Purchase or sell real estate, unless it purchases interests in real
estate investment trusts whose securities are registered under the
Securities Act of 1933 and are readily marketable;
o Purchase or sell commodities or commodity contracts;
o Invest more than 25% of its assets in a particular industry;
o Underwrite the securities of other issuers;
o Lend money, except in connection with the acquisition of publicly
distributed bonds, debentures or other corporate obligations;* or
o Purchase stock on margin.
* This policy does not prohibit the Fund from lending portfolio securities
that are adequately collateralized pursuant to the Rules and Regulations of the
SEC or the
1
<PAGE>
announced policies of the staff of the SEC, although the Fund has never made any
such loans of its securities and has no present intention to do so.
Social Goals
The Fund seeks to invest in companies that have progressive policies with
respect to the gay and lesbian community or that have not adopted policies or
engaged in practices that suggest hostility or discriminatory behavior towards
the gay and lesbian community. These policies are referred to as "social goals."
The Fund believes that the companies responsive to members of the gay and
lesbian community may also exhibit forward-looking approaches in other vital
management areas. These policies may result in improved employee morale that is
conducive to efficient operation and may reduce the company's exposure to costly
litigation involving discrimination issues. These companies may also experience
long-term benefits in the form of investor support from minority groups,
including members of the gay and lesbian community. The Fund's social goals may
adversely affect the performance of the Fund because they limit the companies in
which the Fund may invest.
Other Investment Policies
The Fund has also adopted additional policies for the investment of its assets.
These policies may be changed by the board of directors, without a vote of the
shareholders, provided that the changes do not permit investments inconsistent
with the Fund's fundamental investment policies. Pursuant to these policies the
Fund will not:
o Invest in, or retain investments in, companies whose policies or
practices are, to the knowledge of the Fund's board of directors or its
adviser, inconsistent with the Fund's social goals;
o 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 the securities held by corporate
officers, directors and major stockholders as disclosed in the issuer's
proxy statement;
o Invest in companies for the purpose of exercising control or
management of the companies; or
o Invest in securities of other investment companies except in the
open market.
Under the policies, the Fund may purchase the securities of "money-market"
investment companies. The Fund will 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 1% or less of the issuer's total outstanding
securities.
2
<PAGE>
Put and Call Options
Among the speculative techniques the Fund may employ are the purchase and sale
of put and call options. The prospectus describes the investment goals and risks
associated with the purchase and writing of options on securities and options on
stock indices. Below is an explanation of certain techniques that the Fund may
use in connection with its transactions in put and call options.
Put and Call Options: A put is an option contract that 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 that 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.
The premium is the price that is paid to the option writer by the buyer.
A covered call option obliges the writer of a put option to buy the underlying
security and the writer of a call is obliged to sell the underlying security at
the exercise price. The writer of a covered call limits his risk by owning the
underlying security or a security convertible into the underlying security.
The Fund can terminate its position in an option in the following ways:
o If the Fund holds a put or call on a security and the option is in a
profitable position, it can 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.
o If the Fund holds a stock index option, it can exercise the option
through the options clearing corporation. The Fund will receive a "cash
settlement" equal to the spread between the closing value of the index
and the exercise price of the option.
o The Fund also may enter into a closing purchase or a closing sale
transaction for an option on a security or a stock index option it has
previously written or purchased. The Fund will execute a closing
purchase transaction for an option previously written by the Fund
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. This will terminate further market risk for that
option. The Fund will have a profit or loss on a closing purchase
3
<PAGE>
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 will sell an
option of the same series and exercise price as an option it had
previously purchased, and will 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 the 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
premium of $200. If the market in XYZ then moved to $40, A would most likely
exercise the call, since the market difference will give 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." 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 that it must deliver to A at $30.
Theoretically, in a rapidly rising market, the Fund, as writer of an uncovered
call, will be exposed to limitless risk.
The use of a put option as a "hedge" against a decline in the price of a
security owned by the Fund may be illustrated by the following example: If the
Fund purchased 100 shares of XYZ Company at $30 and the price rose to $50, the
Fund might seek to protect its profit by purchasing a put on XYZ stock
exercisable at $50. While the Fund will pay a premium for the put, and reduce
its profit, it will "lock in" its market profit of 20 points for the life of the
put. If the market price declines, 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, these activities are comparable to 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. There can be no assurance against loss if the market moves in a direction
adverse to the Fund's position.
Put and call option transactions may be effected in combinations. In
management's view, the securities markets have become increasingly
4
<PAGE>
erratic, and portfolio securities, despite favorable performance 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 will be better served if additional income opportunities are
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 when it believes the income producing opportunities may be
significantly greater.
The following are examples of the types of option combinations that 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 will 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 will be $500, and will occur only if
XYZ stock were at $65 at expiration of the calls, since the Fund will sell its
$60 call for a profit of $500 and the two calls it had written will expire
unexercised or worthless. Its potential profit on the spread will decline to
zero if XYZ declined to $60 or rose to $70. At $60 or below, all calls will
expire unexercised, with the Fund having lost only its initial brokerage fees.
At $70, however, the Fund will be at risk as to the one uncovered call.
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. For 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
5
<PAGE>
aggregate premiums of $950. The Fund will 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 will 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-- will result in a net loss to the Fund.
A strangle is similar to a straddle. It involves the writing of both a put and a
call on the same underlying security. In the case of a strangle, the put and
call will 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 $90 in July, the
entire premium will be retained. At a market price of over $90 or under $85, one
of the options written by the Fund will 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 will exceed the premium received.
There are several other combinations of put and calls that the Fund might use.
In each case, the nature of the combinations will 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 will be accepting the risk that the
market will move in a direction opposite to that anticipated. These strategies
do not eliminate risk. Some of these strategies entail greater than ordinary
risk.
Exchange Listed Options: 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 that 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.
Liquidity of exchange listed options is maintained by the Options Clearing
Corporation, or OCC, that 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
6
<PAGE>
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. The clearing member
assigns the exercise notice to the writer of such an option. A writer that 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
registered representative of Drake & Company, which is the Fund's principal
broker, will benefit from the Fund's option transactions.
Stock Index Options: A stock index, such as Standard & Poor's 500 Index, assigns
relative values to the common stocks included in that index. The index
fluctuates with changes in the market values of the common stocks underlying the
index. A stock index option is a contract that 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.
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 advances, the Fund will realize a
profit on the premium received from the sale of the put. If the index declines
below the amount of the premium received on the put, the Fund will suffer a
loss.
The Fund may write a call on a stock index when it is fully invested and
anticipates a modest index rise, a neutral market or a market decline. In such
an event, it will realize a profit from the call premium received. If the index
advances at a greater rate than anticipated, the Fund could suffer a loss on the
call. Assuming that the index correlates with its portfolio, the loss will be
mitigated by an advance in the portfolio positions. If, conversely, the market
declines, the Fund's profit on the call premium will mitigate the loss in the
Fund's portfolio position.
In engaging in stock index option transactions, the Fund will incur several
risks, including the following:
o 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
7
<PAGE>
o 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 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. Among the factors
that 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 can hedge the market risk to the value of its other investments and
protect its equity in a declining market. The Fund can, 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 on 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 for 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 that 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 that are not so listed to an extent greater than 1% of the then
aggregate net asset value of the Fund. Existing short sale transactions 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 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 0.5% 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.
The Fund will not engage in short sales except for securities listed on one or
more national securities exchanges or unlisted securities registered under
Section 12(g) of the Securities and Exchange Act of 1934 and of which there are
more than 2,000,000 shares outstanding.
8
<PAGE>
Collateral and Segregation Requirements
The Fund has determined that it will, at the time it makes a short sale or
writes any option, maintain in a segregated account with its custodian in cash
or United States government securities in an amount equal to the difference
between (1) the market value of the securities sold, or the market value of the
option written, at the date sold or written, and (2) any cash or United States
government securities required to be deposited with the broker in connection
with the short sale or option, excluding the proceeds from the short sale or
option premium. The Fund will at all times maintain the segregated account at
this initial level and will adjust it daily, if necessary, to maintain it at a
level that ensures that the amount segregated plus the amount held as collateral
by the broker equals the current market value of the securities sold short or
the options written. Redundant collateral or segregated funds will not be
maintained. 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 will 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
A warrant is a speculative security because 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 rather only the right to buy the security. 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.
The Fund may invest in warrants to the extent of 10% of its net asset value.
Warrants held in its portfolio will not be sold solely because a change in
relative values causes the 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 will not be
liquidated because a change in relative values causes the percentage limitation
to be exceeded. The 25% limitation will not apply to investments in securities
that are listed in the United States on a national securities exchange.
Investments in foreign securities involve certain considerations that are not
typically associated with investing in domestic companies. An investment may be
affected by changes in currency rates and in exchange control
9
<PAGE>
regulations. There may be less publicly available information about a foreign
company than about a domestic company. Most foreign companies generally are not
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 that could effect investments in those countries.
Individual foreign economies may differ favorably or unfavorably from the United
States economy with respect to growth of gross national product, rate of
inflation, capital reinvestment, resource self sufficiency and balance of
payments. Dividends paid by foreign companies may be subject to a foreign
withholding tax, which will reduce the Fund's income without a corresponding tax
credit for the Fund's shareholders.
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 foreign securities appears consistent with the
Fund's investment objectives.
Borrowing Money
The Fund may borrow money from banks for leverage purposes that will enable it
to purchase additional securities with the proceeds of the borrowings. This
money may be borrowed only from banks and then only if immediately after the
borrowing there is an asset coverage for the borrowings of at least 300%. In the
event that the asset coverage falls below 300%, within three days, the Fund 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 that 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 an investor. The Fund has not borrowed
from any bank in many years, and management has no present intention to do so.
Under changing circumstances leveraging may be utilized in the future.
10
<PAGE>
Portfolio Turnover
"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. Due to 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 and may in the future exceed the
turnover rate of a majority of mutual funds. For example, in 1998 the Fund's
turnover rate was 64%.
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 a registered
representative of Drake & Company, which is the Fund's principal broker.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed by a board of directors. Among
other things, the board of directors possesses the authority to issue shares in
the Fund, enter into management or investment advisory contracts, authorize the
repurchase of shares of the Fund, and declare and pay dividends and
distributions from the Fund. Below is information about each officer and
director of the Fund.
<TABLE>
<CAPTION>
Principal
Position(s) Occupation(s) During
Name, Address and Age Held with Past Five Years
Fund
<S> <C> <C>
Jesse H. Riebman Director Retired, 1996 to present;
1680 Huntingdon Pike
Unit 121 Treasurer of AEL
Industries, Inc., manufacturer
of Huntingdon Valley, PA 19006
electronic components, 1959 to 1996.
Age 69
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Principal
Position(s) Occupation(s) During
Name, Address and Age Held with Past Five Years
Fund
<S> <C> <C>
Robert M. Furman* Chairman of the Principal general partner of Furman, Anderson &
1070 Park Avenue Board Co., the Fund's adviser, 1982 to present;
Apt. 15C Treasurer
New York, NY 10128 Registered representative of Drake & Company,
which is the Fund's principal broker, March, 1998
Age 65 to present;
Principal registered representative for the Fund,
1974 to present;
General Partner of Investor Data Services,
transfer agent and portfolio pricing and
accounting services company that performs
services for the Fund, 1986 to present.
Mark S. Chanko Director Retired, 1993 to present;
460 East 79th Street
Apt. 6B Vice president of finance, treasurer and secretary
New York, NY 10021 of Standard Motor Products, Inc., manufacturer
and seller of automotive replacement parts, 1993
Age 71 to present.
Ariel J. Goodman* Director Partner of Furman, Anderson & Co., the Fund's
375 South End Avenue President Adviser, 1997 to present;
New York, NY 10280 Secretary
General Partner of Investor Data Services, transfer
Age 32 agent and portfolio pricing and accounting
services company that performs services for the
Fund, 1997 to present;
Registered representative of Drake & Company,
broker-dealer, 1998;
Registered representative of A.G. Edwards &
Sons, broker-dealer, 1995-1997;
Dreyfus, financial
consultant, 1993-1995.
Stuart Becker Director Principal partner of Becker & Company, P.C.,
Becker & Company public accountants, 1990 to present.
551 Madison Avenue
8th Floor
New York, NY 10022
Age 53
</TABLE>
12
<PAGE>
* Mr. Furman and Ms. Goodman are "interested persons" of the Fund, as defined in
the Investment Company Act of 1940.
The following table describes the compensation paid to directors and the three
highest paid officers of the Fund during the fiscal year ended October 31, 1998.
All remuneration received by officers or employees of the Fund for the
performance of services in such capacities was paid by Furman, Anderson & Co.
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Accrued Annual From Fund and
Name of Person, Compensation As Part of Fund Benefits Upon Fund Complex
Position From Fund Expenses Retirement Paid to Directors
<S> <C> <C> <C> <C>
Jesse H. Reibman $1000 none none $1000
Director
Robert M. Furman none none none none
Chairman of the Board
Mark S. Chanko $600 none none $600
Director
Ariel J. Goodman none none none none
Director
President
Stuart Becker $600 none none $600
Director
</TABLE>
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 because as of August 31, 1999, 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. Matthew Furman's address
is 200 East 72nd Street, Apt. 26H, New York, NY 10021. Mr. Furman possesses a
substantial minority of the Fund's issued and outstanding shares, which may
permit him to exercise some control over matters which are subject to
shareholder vote.
Julie Rosenthal, an adult child of Robert M. Furman, owns of record and
beneficially 18,270 shares of the Fund's common stock, representing
6.71% of all of the Fund's issued and outstanding common stock. Julie
Rosenthal's address is 22 Driftwood Drive, Port Washington, New York
10050.
13
<PAGE>
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
The Fund's investment adviser is Furman, Anderson & Co., whose offices are
located at 7 Hanover Square, New York, New York. 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 adviser, is a member of the New
York Stock Exchange and serves as the registered representative of Drake &
Company, which is the Fund's principal broker for Fund portfolio transactions.
Pursuant to an investment advisory agreement, the adviser advises the Fund on
the investment and reinvestment of the Fund's assets and the administration of
its affairs, subject to the supervision of the board of directors. The agreement
provides that the adviser will:
o Furnish the research, statistical analysis and studies on companies and
industries that is required to formulate a continuous investment
program for the Fund;
o Regularly review the Fund's portfolio to assure that it remains
consistent with its investment objectives;
o 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;
o Pay for all sales and promotional expenses in connection with
distribution of the Fund's shares, except expenses relating to the
printing and mailing of prospectuses to existing shareholders; and
o Supply and pay for suitable office space and secretarial and
administrative personnel necessary to:
o Maintain Fund books and records not otherwise maintained and process
general Fund administrative requirements not otherwise processed,
pursuant to any administrative agreement as described below; and
o 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 these expenses, including the charges of any
firm or corporation that, pursuant to an administrative agreement with the Fund,
keeps and maintains the Fund's books and accounts and receives and processes
share orders and redemptions, transfer
14
<PAGE>
agent and custodian fees, auditors' fees, brokerage commissions, taxes and
corporate fees, office administration expenses such as telephone and postage
charges, equipment rental and stationery costs, the cost of stock certificates,
legal fees, printing and registration costs, fees to certain directors who are
not interested persons of the adviser, and interest payable on the Fund's
borrowings.
The Fund pays the adviser an annual advisory fee at the rate of:
o 0.625% of the average annual net asset value of the Fund with respect
to that portion of net assets not exceeding $2,000,000;
o 0.5% 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
o 0.3% of net assets in excess of $5,000,000.
The adviser or its affiliates may also receive economic benefits through the
receipt of brokerage commissions on Fund portfolio transactions.
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 By Amount
Average Annual Net Assets Expenses Exceed
Below $10,000,000 3.00%
From $10,000,000 to $30,000,000 0.5%
Above $30,000,000 0.25%
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 for Fund portfolio transactions
exceed 2% of the Fund's average annual net assets. The adviser has agreed that
the fee reduction will also apply as to brokerage fees received by any affiliate
of the adviser, including Robert M. Furman, who is the registered representative
of Drake & Company, which is the Fund's principal broker.
15
<PAGE>
The following table sets forth the advisory fee computation during the periods
indicated:
<TABLE>
<CAPTION>
Reduction Reduction of Fee
- --------------------------------- ---------------------------------------------------
Fiscal Year Gross Due to Due to Net
Ended Advisory Expense Brokerage Advisory
October 31 Fee Limitation Commissions Fee
<S> <C> <C> <C> <C>
1995 $9,530 $2,619 0 $6,911
1996 $8,718 $4,335 0 $4,383
1997 $8,657 $5,479 0 $3,178
1998 $7,978 $5,440 0 $2,538
</TABLE>
The agreement provides that in the absence of willful misfeasance, bad faith or
gross negligence or reckless disregard for his obligations, the adviser shall
not be liable for any act or omission in the course of, or in connection with,
the services rendered under the new agreement. The agreement provides for
termination without penalty, upon its assignment, or upon 60 days written
notice, from either the adviser or the Fund.
Administrative As of December 1, 1986, the Fund retained Investor Data Services
to Services perform certain management-related services for the Fund. These
services principally consist of record keeping, pricing, share purchase and
redemption processing and shareholder services. Investor Data Services is a
partnership that is principally owned by Robert M. Furman. These services are
set forth in the 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 Transfer Portfolio
Year Ended October 31 Agency Fees Pricing Fees
1996 $7,200 $16,800
1997 $7,200 $16,800
1998 $7,200 $16,800
16
<PAGE>
Custodian
The Star Bank, P.O. Box 1118, 425 Walnut Street ML6118, Cincinnati, OH 45201, is
the Fund's custodian. It is responsible for holding all securities and cash of
the Fund, receiving and paying for securities purchased, delivering against
payment for 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, and was retained
by the Fund as independent auditor to examine and report upon the financial
statements filed with the SEC and other matters with respect to the audit of the
accounts of the Fund for the fiscal year ended October 31, 1998.
Mr. Keller resigned as the auditor of the Fund as of September 30, 1998. The
board of directors 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 SEC and other
matters with respect to the audit of the accounts of the Fund for the fiscal
year ended October 31, 1998.
BROKERAGE ALLOCATION AND OTHER PRACTICES
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 the
services from other brokers may be useful to the adviser, it is the opinion of
the Fund's management that the services are only supplementary to the adviser's
own research efforts, and it is not possible to put a dollar value on the
services. The adviser has advised the Fund that the services from such 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 that benefit the Fund, including research
17
<PAGE>
services. When 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 the expenditures were bona fide.
Occasions may arise when sales or purchases of investments consistent with the
Fund's investment policies and with other clients of the adviser or an affiliate
of the adviser are being considered at or about the same time. When the Fund and
these 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 other client
of the adviser. The formula will take into account the size of the transaction
and the proportion in which the Fund participates in the transaction. As a
result, some portfolio securities held by the Fund also may 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.
However, the adviser considers this to be unlikely in most, if not all, cases.
The Fund believes that its ability 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, is a registered representative of Drake & Company, which
is the Fund's principal broker. The adviser will request Mr. Furman to execute
portfolio transactions except when it has determined that a better price or
execution can be obtained through another broker. Brokerage charges on
negotiated transactions executed by Mr. Furman for the Fund may not be less
favorable to the Fund than the 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. The
brokerage commissions may not reflect anything other than payment for the
execution services performed on the 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. These policies may be altered in the future depending
upon changing commission rates and practices in the brokerage community.
18
<PAGE>
The following table sets forth gross brokerage commissions paid by the Fund and
that portion of the gross commissions paid to the adviser or Mr.
Furman for the fiscal years specified:
<TABLE>
<CAPTION>
Fiscal Year Ended Gross Commission Paid to
October 31 Commissions Adviser or Affiliate Percentage
<S> <C> <C> <C>
1996 $16,696 $15,744 94%
1997 $27,436 $21,949 80%
1998 $15,388 $14,267 93%
</TABLE>
CAPITAL STOCK AND OTHER SECURITIES
All shares of the Fund, when issued, will be fully paid and non-assessable by
the Fund. Shareholders have the right to require the Fund to obtain repurchase
of their shares by the Fund at any time. The common stock does not have
cumulative voting rights. This means that the holders of a majority of the
outstanding shares may elect all of the directors.
SHAREHOLDER INFORMATION
The Fund's common stock is offered to the public at a price per share equal to
the net asset value, or NAV, per share. The Fund is a "no-load" fund. This means
that there is no sales charge imposed for the sale of the Fund's common stock.
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 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. The NAV of Fund shares is not
determined on days the New York Stock Exchange is closed, i.e., 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 share
is determined by dividing the total value of the 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. If no trade has occurred,
securities will be valued at the last reported sale price on the day last
traded. Securities not traded on any exchange will be valued at their last
quoted bid price in the over-the-counter market. Exchange-traded options are
valued at the last sale price unless there is no timely sale price,
19
<PAGE>
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.
Redemption
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.
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 the
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 that 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 that date. Investors receiving cash distributions and dividends may elect in
writing or by phone to change back to automatic reinvestment at any time.
Taxation of the Fund
The federal tax status of the Fund and the treatment of the Fund's dividends and
distributions is explained in the section entitled "Taxes, Dividends and
Distributions" in the prospectus.
To qualify under Subchapter M of the Internal Revenue Code of 1986, 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 the following activities:
o 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;
o Purchasing calls or puts that expire in less than three months;
o Effecting closing transactions with respect to calls or puts purchased
less than three months previously;
o Exercising puts or calls held by the Fund for less than three months;
and
o Writing calls on investments held for less than three months.
20
<PAGE>
PERFORMANCE DATA
Reference is made to the information supplied under this section entitled
"Investments, Risks and Performance" in the prospectus. This Statement of
Additional Information constitutes Part B of the Post-Effective Amendment of the
Fund's Registration Statement No. 36 that has been filed with the SEC on Form
N-1A.
FINANCIAL STATEMENTS
Reference is made to the information supplied under the section entitled
"Financial Highlights" in the prospectus. This statement of additional
information constitutes Part B of the Post-Effective Amendment of the Fund's
Registration Statement No. 36 that has been filed with the SEC on Form N-1A.
The audited financial statements for the period ended October 31, 1998 are
hereby incorporated into this statement of additional information by reference
to the Fund's Annual Report, dated October 31, 1998. Copies of these reports
accompany this statement of additional information.
DOCUMENTS INCORPORATED BY REFERENCE
TO THE ANNUAL REPORT
Schedules of Investments as of October 31, 1998
Statements of Operations for the period ended October 31, 1998
Statements of Assets and Liabilities as of October 31, 1998
Statements of Changes in Net Assets for the periods ended October 31,
1998 and 1997
Notes to Financial Statements
Report of Independent Accountant
The portions of the 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 SEC,
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.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Investment Company Act and, to the
extent applicable, the requirements of the Securities Act, the Fund has duly
caused this Post-Effective Amendment Number 37 to its Prospectus on Form N-1,
Commission File Number 2-26011, to be signed on its behalf by the undersigned,
duly authorized, in the City of New York, State of New York, on this 9th day of
September, 1999.
THE RAINBOW FUND, INC.
By: /s/Ariel J. Goodman
-------------------
Ariel J. Goodman
President
Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment Number 37 to the Prospectus on Form N-1 has been signed below by the
following persons in the capacities indicated on September 9, 1999.
Signature Title
--------- -----
/s/ Robert M. Furman Chairman of the Board, Treasurer and
-------------------- Principal Accounting Officer
Robert M. Furman
Director
-----------------
Stuart Becker
/s/ Mark S. Chanko Director
---------------
Mark S. Chanko
/s/Ariel J. Goodman President, Secretary and Director
- -------------------
Director
--------------------
Jesse H. Riebman
S-1
