<PAGE> 1
As filed with the Securities and Exchange Commission on April 4, 1996
Registration No. 33-79068
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ X /
Pre-Effective Amendment No. _____ / /
Post-Effective Amendment No. 1 / X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Amendment No. 5 / X /
(Check appropriate box or boxes)
VALLEY FORGE CAPITAL HOLDINGS TOTAL RETURN FUND, INC.
(Exact Name of Registrant as Specified in Charter)
595 MARKET STREET
SUITE 1980
SAN FRANCISCO, CALIFORNIA 94105
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (800) 688-1688
MISTY S. GRUBER, ESQ.
SHEFSKY FROELICH & DEVINE LTD.
444 NORTH MICHIGAN AVENUE
CHICAGO, ILLINOIS 60611
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: April 29, 1996
It is proposed that this filing will become effective (check appropriate box):
/___/ Immediately upon filing pursuant to paragraph (b)
/ X / on April 29, 1996 pursuant to paragraph (b)
/___/ 60 days after filing pursuant to paragraph (a)
/___/ on (date) pursuant to paragraph (a)(2) of Rule 485
/___/ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/___/ this post-effective amendment designates a new effective date for a
prevously filed post-effective amendment.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933+
Pursuant to Section 24f-2 of the Investment Company Act of 1940, the Registrant
has registered on indefinite number of securities under the Securities Act of
1933.
+Not applicable, as no securities are being registered by this Post-Effective
Amendment No. 1 to the Registration Statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE> 2
The Registration Statement of Valley Forge Capital Holdings Total
Return Fund, Inc. on Form N-1A (File No. 33-79068) is hereby amended under the
Securities Act of 1933 to update the Registrants financial statements, make
other changes in the Registrants Prospectus and Statement of Additional
Information, and to satisfy the annual amendment requirements of Rule 8b-16
under the Investment Company Act of 1940.
This Amendment consists of the Following:
Cross Reference Sheet
Part A of Form N-1A, Revised Prospectus
Part B of Form N-1A, Statement of Additional Information
Part C of Form N-1A, Other Information
Opinion of Counsel
Accountant's Consent
<PAGE> 3
VALLEY FORGE CAPITAL HOLDINGS TOTAL RETURN FUND, INC.
PROSPECTUS - APRIL 4, 1996
<TABLE>
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Investment Valley Forge Capital Holdings Total Return Fund, Inc. (the "Fund") invests in a diversified portfolio
Objective: of equity securities (typically common stocks and securities which carry the right to buy common
stocks) and fixed income securities (typically bonds and preferred stock), with equity securities
expected to usually represent approximately 80% of total fund assets. The Fund is designed for
investors primarily seeking the potential for dividend income from, and capital appreciation of,
securities and the income and relative principal stability of bonds over the long term. See
"Investment Program."
Purchase of Please complete and return the Account Application Form. If you need assistance in completing this
Shares: Form, please call our Shareholder Services Department (see below). The Fund's shares may be
purchased at a price equal to their net asset value plus a sales commission not exceeding 5.75% of
the offering price. The minimum initial investment is $250 ($25 minimum for subsequent investments).
Prospectus This Prospectus sets forth concisely information about the Fund that a prospective investor ought to
Information: know before investing. Investors are advised to read and retain this Prospectus for future
reference. A Statement of Additional Information ("SAI") dated April 4, 1996, has been filed with
the Securities and Exchange Commission and is incorporated in its entirety by reference, in and made
a part of, this Prospectus. The SAI is available without charge upon request from Valley Forge
Distributors, Inc. ("Valley Forge Distributors"), an affiliate of the Fund, 595 Market Street, Suite
1980, San Francisco, California 94105.
Shareholder 1-800-797-6706 (8:30 A.M. to 5:00 P.M. Eastern Time)
Services
Department
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
FOR ARIZONA AND TEXAS RESIDENTS:
THE FUND'S INVESTMENT ADVISOR HAS NOT PREVIOUSLY SERVED AS AN ADVISOR TO AN
INVESTMENT COMPANY.
ii
<PAGE> 4
VALLEY FORGE CAPITAL HOLDINGS TOTAL RETURN FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
N-1A Item No. Summary Location
- --------------------- --------
<S> <C> <C>
PART A
Item 1. Cover Page Cover Page
Item 2. Synopsis Investment Objective; Investment Program; Certain Risk Considerations;
Offering Price and Summary of Fund Expenses
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Investment Objective; Investment
Program; Risk Factors; The Fund; Investment Policies;
Item 5. Management of the Fund Fund Expenses and Management Fees; Management of the Fund
Item 5A. Management's Discussion of +
Fund Performance
Item 6. Capital Stock and Other Securities The Fund; Dividends and Distributions; Shareholder Services; Taxes
Item 7. Purchase of Securities Being
Offered How to Buy Shares; Opening a New Account; Purchasing Additional Shares;
Completing the New Account Form; Net Asset Value, Pricing and Effective
Date; Conditions of Your Purchase; Shareholder Services
Item 8. Redemption or Repurchase Redeeming Shares; Net Asset Value, Pricing and Effective Date; Receiving
Your Proceeds
Item 9. Pending Legal Proceedings +
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History +
Item 13. Investment Objectives and Policies Investment Objective;
Investment Program; Investment Restrictions; Risk Factors; Investment
Performance
</TABLE>
iii
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<TABLE>
<S> <C> <C>
Item 14. Management of the Registrant Management of the Fund
Item 15. Control Persons and Principal Principal Holders of
Holders of Securities Securities
Item 16. Investment Management and Other Investment Management
Services Services; Custodian;
Independent Accountants; Legal Counsel
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Securities Dividends; Capital Stock
Item 19. Purchase, Redemption and Pricing Redemptions in Kind; Pricing
of Securities Being Offered of Securities; Net Asset Value Per Share; Ratings of Corporate Debt
Securities; Federal and State Registration of Shares
Item 20. Tax Status Tax Status
Item 21. Underwriters Distributor for Fund
Item 22. Calculation of Yield Quotations of
Money Market Funds +
Item 23. Financial Statements Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement
__________________________________
+ Not applicable or negative answer
iv
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VALLEY FORGE CAPITAL HOLDINGS TOTAL RETURN FUND, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT PROGRAM . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SPECIAL RISK CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . 4
OFFERING PRICE AND SUMMARY OF FUND EXPENSES . . . . . . . . . . . . . . . 4
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . 7
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FUNDAMENTAL AND OTHER INVESTMENT POLICIES . . . . . . . . . . . . . . . . 13
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 15
HOW TO BUY SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
OPENING A NEW ACCOUNT AND PURCHASING SHARES . . . . . . . . . . . . . . . 19
PURCHASING ADDITIONAL SHARES . . . . . . . . . . . . . . . . . . . . . . 19
COMPLETING THE NEW ACCOUNT FORM . . . . . . . . . . . . . . . . . . . . . 19
NET ASSET VALUE, PRICING AND EFFECTIVE DATE . . . . . . . . . . . . . . . 20
REDEEMING SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
RECEIVING YOUR PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . 22
DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . 22
CONDITIONS OF YOUR PURCHASE . . . . . . . . . . . . . . . . . . . . . . . 22
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . 23
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . 25
FUND EXPENSES AND MANAGEMENT FEES . . . . . . . . . . . . . . . . . . . . 26
THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
1
<PAGE> 7
INVESTMENT The Fund seeks capital appreciation,
OBJECTIVE current income, and preservation of capital by
investing in a diversified portfolio of equity
The Fund securities (typically common stocks and
invests in both securities which carry the right to buy common
stocks and bonds. stocks) and fixed-income securities (typically
bonds and preferred stock). Equity securities
are generally expected to represent
approximately 80% of total assets, with fixed
income securities, including cash reserves,
generally representing the remaining assets.
See "Investment Program."
The Fund's share price will fluctuate
with changing market conditions. Therefore,
your investment may be worth more or less
when redeemed than when purchased. The Fund
should not be relied upon for short-term
financial needs, nor used to play short-term
swings in the stock market. The Fund
cannot guarantee it will achieve its
investment objective.
INVESTMENT The Fund is designed for investors
PROGRAM primarily seeking the potential for dividend
income from and capital appreciation of,
equity securities and the income and relative
principal stability of bonds over the long
term. The Fund's investment in common stocks
is intended to provide sufficient capital
growth to offset the erosive effects of
inflation. For an IRA, retirement plan, or
other long-term investment, the Fund offers an
investment program which seeks to combine
attractive returns with the benefits of broad
diversification.
To achieve its investment objective, the
Fund will normally invest approximately 80% of
its assets in equity securities (primarily
common stocks) and the remainder in fixed
income securities (primarily bonds). While this
portfolio mix may vary depending on the
Investment Advisor's (as hereinafter defined)
short-term and long-term assessments of market
conditions, the Fund will not attempt to time
short-term moves in the market. In no event
will the Fund invest less than 50% or more than
80% of its assets in equity securities, except
for the purpose of effecting temporary
defensive strategies. The investment of Fund
assets in fixed income securities (primarily
bonds) adds diversification that may serve to
lessen the volatility normally associated with
funds dedicated primarily to investment in
common stock. However, movements in interest
rates may still affect the overall value of the
Fund.
At times the Investment Advisor may
judge that conditions in the securities market
make pursuing the Fund's basic investment
strategy inconsistent with the best interests
of its shareholders. At such times, the Fund
may temporarily use alternative investment
strategies, primarily designed to reduce
fluctuation of the value of the Fund's assets.
In implementing these "temporary defensive
strategies," the Fund may in some instances
maintain cash reserves on a temporary basis
equal to 100% of its assets.
2
<PAGE> 8
The Fund will make common stock
investments primarily in established companies
which the Investment Advisor believes to
exhibit good prospects for growth.
Consistent with its investment program,
the Fund may invest in equity securities
issued by real estate investment trusts
("REITs"). Bond and other fixed income
investments will include U.S. Treasury and
agency securities, investment-grade (rated BBB
or Baa or better) corporate debt securities,
mortgage-backed securities (rated BBB or Baa
or better) and other types of fixed income
investments. The average maturity of the
Fund's fixed income investments will vary with
economic conditions.
The Fund's investments are managed by
Valley Forge Advisors, Inc. ("Valley Forge
Advisors" or the "Investment Advisor").
Up to 15% of the Fund's assets may be
invested in foreign securities, including
American Depository Receipts (ADRs). The
international component of the Fund's
investment program is intended to increase
diversification of the Fund's portfolio.
See "Investment Policies" for a more
detailed description of the Fund's
investments.
SPECIAL RISK The Fund may or may not be a suitable
CONSIDERATIONS or appropriate investment for all investors.
Although the Fund seeks to reduce risk by
investing in a diversified portfolio, such
diversification does not eliminate all risk.
Because the Fund may invest in, among other
things, foreign securities, equity securities,
a variety of fixed income securities, and
other securities such as futures contracts,
options and foreign currency exchange
contracts, investment in the Fund involves
risks that are different in some respects
from an investment in a fund which does not
engage in such investment activities. For a
more comprehensive discussion of the risks
associated with investing in the Fund, see
"Risk Factors" and "Investment Policies."
OFFERING PRICE The offering price to the public on
AND SUMMARY purchases of the Fund's shares made at one
OF FUND time by a single purchaser, by an individual,
EXPENSES his spouse and their children under the age
of 21, or by a single trust or fiduciary
account other than an employee plan, is the
net asset value per share plus a sales
commission not exceeding 5.75% of the offering
price (equivalent to 6.10% of the net asset
value), which is reduced on larger sales as
shown below:
3
<PAGE> 9
<TABLE>
<CAPTION>
Total Sales Commission*
---------------------------------------------
As a Percentage of As a Percentage of Portion of Total
Amount of Single Sale Offering Price of the Net Asset Value of Offering Price
at Offering Price Shares Purchased Shares Purchased Retained by Dealers
- --------------------- --------------------- ------------------ -------------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 5.00% 5.26% 4.40%
$100,000 but less than $250,000 4.00% 4.17% 3.50%
$250,000 but less than $500,000 3.00% 3.09% 2.50%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%
$1,000,000 or more none none see below**
- --------------------
</TABLE>
* At the discretion of Valley Forge Distributors, the entire sales
commission may at times be reallowed to dealers. Valley Forge
Distributors also may, at its expense, provide additional promotional
incentives or payments to dealers that sell the Fund's shares. In
some instances, the full reallowance, incentives or payments may be
offered only to certain dealers who have sold or may sell significant
amounts of Shares. When 90% or more of the sales commission is
reallowed, such dealers may be deemed to be underwriters as that term
is defined in the Securities Act of 1933.
** The following commissions will be paid by Valley Forge Distributors to
dealers who initiate and are responsible for purchases of $1 million
or more and for purchases made at net asset value by certain
retirement plans of organizations with collective retirement plan
assets of $10 million or more: 1.00% on sales of up to $2 million,
plus 0.80% on sales of $2 million to $3 million, plus 0.50% on sales
of $3 million to $10 million, plus 0.25% on sales of $10 million to
$25 million, plus 0.15% on sales in excess of $25 million.
A sales commission equal to 4.00% of the offering price (4.17% of the
net asset value) is applicable to all purchases of Shares, regardless
of amount, made for any qualified or non-qualified employee benefit
plan. Of the 4.00% sales commission applicable to such purchases,
3.20% of the offering price will be reallowed to dealers.
Shown below are all the expenses
and fees the Fund is expected to incur.
Such expenses and fees are expressed as a
percentage of average Fund net assets.
The table and Example are provided for
purposes of assisting current and
prospective shareholders in understanding
the various costs and expenses that an
investor in the Fund will bear, directly
or indirectly.
EXPENSE TABLE
<TABLE>
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SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases
(as a percentage of Offering Price) . . . . . . . . . . . . . . . . 5.75%
Maximum Sales Load Imposed on Reinvested
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Deferred Sales Load on Redemptions . . . . . . . . . . . . . . . . None
Redemption Fees . . . . . . . . . . . . . . . . . . . . . . . . . . None *
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Management Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 0.80%**
12b-1 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.35%***
Other Expenses (audit, legal, shareholder services,
transfer agent and custodian based on estimated
amounts for the first full fiscal year) . . . . . . . . . . . . . 0.80%
Total Fund Operating Expenses . . . . . . . . . . . . . . . . . . . 1.95%
</TABLE>
4
<PAGE> 10
<TABLE>
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EXAMPLE
You would pay the following expenses 1 Yr 3 Yrs
on a $1,000 investment, assuming (1)
5% average annual return and (2)
redemption at the end of each time period: $76 $115
</TABLE>
____________________
* The information in the table does not
reflect a charge of up to $30 that may
be imposed for the transfer of
redemption proceeds by wire.
** The Management Fee is higher than that
charged by many other mutual funds.
*** Long-term shareholders may pay more
than the economic equivalent of the
maximum front-end sales charges
permitted by the National Association of
Securities Dealers, Inc. See "Fund
Expenses and Management - Plan of
Distribution." A trailer fee of .25%
of the .35% 12b-1 fee will be paid by
Valley Forge Distributors to dealers
whose shareholder accounts with the Fund
equal or exceed $500,000.
THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND
ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN
THOSE SHOWN. Federal regulations require the
Example to assume a 5% annual return. Actual
returns will vary.
No projection can be made with respect
to total expenses to be incurred in future
years of operation. Although fees and
expenses exceeded 1.95% in the first five
months of operations and may continue to
exceed 1.95% during fiscal year 1996, Valley
Forge Capital Holdings Inc. ("Valley Forge
Capital") has agreed to limit the operational
expense to be paid by the Fund during its
first five years of operations, by paying
such fees and expenses as exceed 1.95% during
each of such first five years of operation.
More information about these expenses may be
found under "Management of the Fund" and
"Fund Expenses and Management Fee."
5
<PAGE> 11
FINANCIAL HIGHLIGHTS The table below presents per share
financial information for the Shares. This
information has been audited and reported on
by the Fund's independent accountants. The
Report of Independent Accountants and
financial statements included in the Fund's
Annual Report to shareholders for the 1995
fiscal year are incorporated by reference
into this Prospectus. The Fund's Annual
Report, which contains additional unaudited
performance information, is available without
charge upon request.
<TABLE>
<CAPTION>
Financial Highlights (For a share outstanding throughout the period)
FOR THE PERIOD
AUGUST 11, 1995
(COMMENCEMENT
OF OPERATIONS)
TO DECEMBER 31, 1995+
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.00
-------
INVESTMENT OPERATIONS
Net Investment Income 0.04
Net Unrealized Loss
on Investments (0.33)
-------
TOTAL FROM INVESTMENT
OPERATIONS (0.29)
-------
LESS DISTRIBUTIONS FROM:
Net Investment Income (0.04)
-------
NET ASSET VALUE,
END OF PERIOD $9.67
=======
TOTAL INVESTMENT
RETURN AT NET
ASSET VALUE (%)(a) (2.89)(b)
NET ASSETS, END OF
PERIOD $1,126,410
Ratio of Expenses to
Average Net Assets (%) 1.95%(c)(d)
Ratio of Net Investment
Income to Average
Net Assets (%) 1.72%(d)
Portfolio Turnover Rate (%) 0%
</TABLE>
+ Per share net investment income for
the year ended December 31, 1995 has
been determined on the basis of the
weighted average number of shares
outstanding during the period.
(a) Total investment return assumes
dividend reinvestment and does not
reflect the effect of sales charges.
(b) Not annualized.
(c) Annualized.
(d) Had certain reimbursements not been
in effect, the ratio of expenses to
average net assets and the ratio of
net investment income to average net
assets for the period ended December
31, 1995, would have been 11.17% and
(7.50%), respectively.
6
<PAGE> 12
RISK FACTORS General. All investments involve risk.
There can be no guarantee against loss
resulting from an investment in the Fund, nor
can there be any assurance that the Fund's
investment objective will be attained. As with
any investment in securities, the value of,
and income from, an investment in the Fund can
decrease as well as increase depending on a
variety of factors which may affect the values
and income generated by the Fund's portfolio
securities, including general economic
conditions, market factors and currency
exchange rates. Because of it investment
policy, the Fund may or may not be a suitable
or appropriate investment for all investors.
The Fund is not a money market fund and is not
an appropriate investment for those investors
whose primary objective is principal
stability. Although the Fund seeks to reduce
risk by investing in a diversified portfolio,
such diversification does not eliminate all
risk. There are risk considerations other
than those disclosed herein described in the
SAI.
Debt Obligations. Yields on short,
intermediate, and long-term securities are
dependent on a variety of factors, including
the general conditions of the money and bond
markets, the size of a particular offering,
the maturity of the obligation, and the rating
of the issue. Debt securities with longer
maturities tend to produce higher yields and
are generally subject to potentially greater
capital appreciation and depreciation than
obligations with shorter maturities and lower
yields. The market prices of debt securities
usually vary, depending upon available yields.
An increase in interest rates will generally
reduce the value of portfolio investments, and
a decline in interest rates will generally
increase the value of portfolio investments.
The ability of the Fund to achieve its
investment objectives is also dependent on the
continuing ability of the issuers of the debt
securities in which the Fund invests to meet
their obligations for the payment of interest
and principal when due.
Foreign Investing. The Fund may invest
in the securities of foreign issuers, but
intends to limit any such investments to not
more than 15% of its assets. Because the Fund
may invest in foreign securities, investment
in the Fund involves risks that are different
in some respects from an investment in a fund
which invests only in securities of U.S.
domestic issues. Foreign investments may be
affected favorably or unfavorably by changes
in currency rates and exchange control
regulations. There may be less publicly
available information about a foreign company
than about a U.S. company, and foreign
companies may not be subject to accounting,
auditing, and financial reporting standards
and requirements comparable to those
applicable to U.S. companies. Securities of
some foreign companies are less liquid or more
volatile than securities of U.S. companies,
and foreign broker commissions and custodian
fees are generally higher than in the United
States. Investments in foreign securities may
also be subject to other risks different from
those affecting U.S. investment, including
local political or economic
7
<PAGE> 13
developments, expropriation or nationalization
of assets, imposition of withholding taxes on
dividend or interest payments, and currency
blockage (which would prevent cash from being
brought back to the United States).
Possible Investment of Certain Assets
in Specific Industry . As a matter of
fundamental policy, the Fund may not purchase
the securities of any issuer if, as a result,
25% or more of the value of the Fund's total
assets would be invested in the securities of
issuers having their principal business
activities in the same industry (other than
obligations issued or guaranteed by the U.S.
Government, its agencies or
instrumentalities). Consistent with this
policy, the Fund will limit its investment in
equity securities of issuers having their
principal business activities in the real
estate industry, including securities of real
estate investment trusts ("REITs") to less
than 25% of its assets. In the event the Fund
makes a significant investment in equity REIT
securities, any prolonged downturn in the REIT
securities market could have a negative impact
on the Fund's assets and/or its overall
performance. Certain of the general risks
associated with investment in REITs may
include cash flow dependency, inability to
service debt and the possibility of failing to
qualify for tax-free pass-through of income
under the Internal Revenue Code of 1986, as
amended (the "Code").
INVESTMENT TYPES OF INVESTMENTS. The Fund's
POLICIES investments include, but are not limited to,
the equity and fixed income securities
described below.
EQUITY SECURITIES. The Fund may
invest in equity securities of domestic and
foreign entities. For a general discussion of
the equity securities in which the Fund may
invest see "Fundamental and Other Investment
Policies." With respect to foreign securities,
the Fund may invest up to 15% of its total
assets in U.S. dollar-denominated and non U.S.
dollar-denominated securities issued by
foreign issuers. While investments in foreign
securities are intended to reduce risk by
providing further diversification, such
investments involve sovereign risk in addition
to credit and market risks. Sovereign risk
includes local political or economic
developments, potential nationalization,
withholding taxes on dividend or interest
payments, and currency blockage (which would
prevent cash from being brought back to the
United States). Foreign investments may be
affected favorably or unfavorably by changes
in currency rates and exchange control
regulations. Foreign companies may have less
public or less reliable information available
about them and may be subject to less
governmental regulation than U.S. companies.
Securities of foreign companies may be less
liquid or more volatile than securities of
U.S. companies. Foreign securities of the
Fund are subject to currency risk, that is,
the risk that the U.S. dollar value of these
securities may be affected favorably or
unfavorably by changes in foreign
8
<PAGE> 14
currency exchange rates and exchange control
regulations. To manage this risk and to facilitate the
purchase and sale of foreign securities, the Fund may
engage in foreign currency transactions. Although
transactions in foreign currency may be used in
attempting to protect the Fund from adverse currency
movements, they also involve the risk that anticipated
currency movements will not be accurately predicted and
may result in losses to the Fund.
FIXED INCOME SECURITIES. The Fund may invest in
fixed income securities of any type that are
considered investment grade (e.g., AAA, AA, A, or BBB
by Standard & Poor's Corporation ("S&P"), or Aaa, Aa,
A, or Baa by Moody's Investors Service, Inc.
("Moody's")), or, if not rated, are of equivalent
investment quality as determined by the Investment
Advisor. Debt Securities within the top credit
categories (e.g., AAA and AA by S&P) comprise what are
generally known as high-quality bonds. Medium grade
bonds (e.g., BBB by S&P or Baa by Moody's) are regarded
as having an adequate capacity to pay principal and
interest, although adverse economic conditions or
changing circumstances are more likely to lead to a
weakening of such capacity than that for higher grade
bonds. In light of the possible risks associated with
an economic downturn, medium grade bonds are considered
speculative in some respects. The Fund has no current
intent to purchase any security which at the time of
purchase is rated below investment grade or, if not
rated, is not of equivalent investment quality. Such
policy will not preclude the Fund from retaining a
security whose credit quality is downgraded to a
non-investment grade level after purchase. In no event
will the Fund purchase or hold non-investment grade
securities if as a result such securities would, in the
aggregate, comprise 5% or more of the Fund's net
assets.
A fixed income security's yield reflects the fixed
annual interest as a percent of its current price. This
price (the fixed income security's market value) must
increase or decrease in order to adjust the fixed
income security's yield to current interest rate
levels. Therefore, fixed income security prices
generally move in the opposite direction of interest
rates.
Movements in interest rates typically have a
greater effect on the prices of longer fixed income
securities than on those with shorter maturities. The
following table illustrates the effect of a one
percentage point change in interest rates on a $1,000
bond with a 7% coupon.
9
<PAGE> 15
<TABLE>
<CAPTION>
Principal value if rates:
-------------------------
Maturity Increase 1% Decrease 1%
--------- ----------- -----------
<S> <C> <C> <C>
Intermediate fixed
income security 5 years $959 $1,043
Long-term fixed
income security 20 years $901 $1,116
</TABLE>
The other types of fixed income securities in
which the Fund may invest include the securities
described below.
Asset-Backed Securities. Asset-backed securities
are securities which represent a participation in, or
are secured by and payable from, a stream of payments
generated by particular assets, most often a pool or
pools of similar assets (e.g. trade receivables).
Asset-backed commercial paper, one type of asset-backed
security, is issued by a special purpose entity,
organized solely to issue the commercial paper and to
purchase interests in the assets. The credit quality
of these securities depends primarily upon the quality
of the underlying assets and the level of credit
support and/or enhancement provided. The Fund may
invest in asset-backed securities which are rated in
one of the two highest rating categories by a
nationally recognized rating agency such as Standard &
Poor's Corporation, Moody's Investors Services, Inc. or
Duff & Phelps or if not so rated, of equivalent
investment quality in the opinion of the Investment
Advisor. Certain of the asset-backed securities in
which the Fund may invest include automobile and credit
card receivable securities. See the "Investment
Objectives and Policies" section of the SAI for a more
detailed discussion of asset-backed securities.
Bonds. The quality of a bond is measured by
credit risk--the ability of the issuer to meet interest
and principal payments on a timely basis. Issuers who
are believed to be good credit risks receive high
quality ratings, and those believed to be poor credit
risks receive low quality ratings. High-quality bonds
involve less credit risk and typically offer a lower
yield than bonds of low quality.
Convertible Securities and Preferred Stock . The
Fund may invest in preferred equity securities and/or
debt and equity securities convertible into or
exchangeable for common equity securities. Preferred
stocks are securities that represent an ownership
interest in a corporation providing the owner with
claims on the company's earnings and assets before
common stock owners, but after debt owners. It is not
anticipated that the investment quality of the
preferred equity or debt convertible securities in
which the Fund may invest will be rated; however, the
Fund will not invest in securities that the Investment
Advisor does not deem to be investment grade.
10
<PAGE> 16
Mortgage Obligations. The Fund may invest in
mortgage obligations issued or guaranteed by non-
governmental entities as well as the U.S. Government,
its agencies or instrumentalities. Such mortgage
obligations may include, but are not limited to,
collateralized mortgage obligations, which are
obligations fully collateralized by a portfolio of
mortgages or mortgage-related securities ("CMOs"),
principal obligations ("POs"), interest obligations
("IOs") and other mortgage-backed securities. Some
mortgage-backed securities, such as GNMA certificates,
are backed by the full faith and credit of the U.S.
Treasury while others, such as Freddie Mac
certificates, are not. Risks associated with investment
in mortgage obligations include, but are not limited
to, principal volatility, fluctuations in interest
rates and prepayment. Payments of principal and
interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are
received, although certain classes of CMOs have
priority over others with respect to the receipt of
prepayments in the mortgages. Therefore, depending on
the type of CMOs in which the Fund invests, the
investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage-related
securities, which prepayments could have an adverse
impact on the Fund's overall yield. CMOs may also be
less marketable than other securities.
Other Fixed Income Securities . Certain of the
other fixed income securities in which the Fund may
invest include, but are not limited to, the following:
U.S. Government Obligations (debt securities issued by
the U.S. Treasury); U.S. Government Agency Securities
(securities issued or guaranteed by U.S. Government
sponsored enterprises and federal agencies); Bank
Obligations (certificates of deposit, bankers'
acceptances, and other debt obligations); and Savings
and Loan Obligations (negotiable certificates of
deposit and other debt obligations of savings and loan
associations).
HYBRID INSTRUMENTS. As part of its investment
program and to maintain greater flexibility, the Fund
may invest in instruments which have the
characteristics of futures and securities. Such
instruments may take a variety of forms, such as debt
instruments with interest or principal payments
determined by reference to the value of a currency or
commodity at a future point in time. Examples of hybrid
instruments in which the Fund may invest include swaps,
options on swaps and inverse floaters. The risks of
such investments would reflect both the risks of
investing in futures and the risks of investing in
securities, including volatility and illiquidity. The
Fund's investments in hybrid instruments will be
limited to less than 5% of the Fund's net assets.
OTHER SECURITIES. Other securities in which the
Fund may invest include, but are not limited to, the
following:
11
<PAGE> 17
Futures Contracts and Options . The Fund
may enter into futures contracts (or options
thereon) to hedge all or a portion of its
portfolio, as a hedge against changes in
prevailing levels of interest rates or currency
exchange rates, or as an efficient means of
adjusting its exposure to the bond, stock and
currency markets. The Fund will limit its use
of futures contracts so that no more than 5% of
the Fund's total assets would be committed to
initial margin deposits or premiums on such
contracts. The Fund may write covered call and
put options and purchase put and call options on
securities, financial indices, and currencies,
also for hedging purposes. The aggregate market
value of the Fund's portfolio securities or
currencies covering call or put options will not
exceed 25% of the Fund's net assets. Futures
contracts and options can be highly volatile and
could result in reduction of the Fund's total
return, and the Fund's attempt to use such
investments for hedging purposes may not be
successful. The Fund could suffer substantial
and even unlimited losses if the prices of its
futures contracts and options were poorly
correlated with its other investments, or if it
could not close out its position because of an
illiquid secondary market. For additional
information regarding the risks that may be
associated with futures contracts and options,
see "Investment Objective and Policies - Special
Risks of Transactions in Futures Contracts" in
the SAI.
Repurchase Agreements. The Fund may enter
into repurchase agreements with a
well-established securities dealer or a bank
that is a member of the Federal Reserve System.
In the event of a bankruptcy or default of
certain sellers of repurchase agreements, the
Fund may experience costs and delays in
liquidating the underlying security which is
held as collateral, and the Fund might incur a
loss if the value of the collateral held
declines during this period.
FUNDAMENTAL AND OTHER Fundamental Investment Policies. As a matter
INVESTMENT POLICIES of fundamental policy, the Fund will not,
among other things: (i) purchase a security of
any issuer if, as a result, it would (a) cause
the Fund to have 25% or more of its total assets
concentrated in any one industry, or (b) with
respect to 75% of its assets, cause the Fund's
holdings of any issuer to amount to more than 5%
of the Fund's total assets or cause the Fund to
own more than 10% of the outstanding voting
securities of any issuer, provided that, as an
operating policy, the Fund will not purchase a
security if, as a result, more than 10% of the
outstanding voting securities of any issuer
would be held by the Fund; (ii) borrow money,
except temporarily from banks to facilitate
redemption requests, in amounts exceeding 30% of
its total assets valued at market; or (iii) in
any manner transfer as collateral for
indebtedness any securities owned by the Fund
except in connection with permissible
borrowings, which in no event will exceed 30% of
the Fund's total assets valued at market. For
the purpose of realizing income, as a
fundamental policy, the Fund may lend securities
with a value of up to 30% of its total assets to
domestic broker-
12
<PAGE> 18
dealers or institutional investors. Any such loan will
be continuously secured by collateral at least equal to
the value of the security loaned; however, such lending
could result in delays in receiving additional
collateral or in the recovery of the securities or
possible loss of rights in the collateral should the
borrower fail financially. See "Investment Restrictions
- Fundamental Policies" in the SAI.
Other Investment Policies. As a matter of
operating policy, the Fund will not, among other
things: (i) purchase securities of an issuer if, as a
result, (a) more than 10% of the value of the Fund's
net assets would be invested in illiquid securities,
including repurchase agreements which do not provide
for payment within seven days, or other securities
which are not readily marketable or (b) more than 5% of
the value of the Fund's total assets would be invested
in the securities of unseasoned issuers which at the
time of purchase have been in operation for less than
three years, including predecessors and unconditional
guarantors; (ii) purchase securities when money
borrowed exceeds 5% of the Fund's total assets; (iii)
purchase or hold the securities of other open-end or
closed-end (as such term is defined in the Investment
Company Act of 1940) investment companies; (iv)
purchase or hold the securities of investment companies
other than open-end investment companies, if, as a
result, more than 10% of the value of the Fund's net
assets would be invested in such investment companies;
(v) purchase interests in oil, gas or other mineral
exploration or development programs; (vi) purchase
warrants, valued at the lower of cost or market, if, as
a result, more than 5% of the value of the Fund's net
assets would be invested in warrants, more than 2% of
which are not listed on the New York Stock Exchange,
American Stock Exchange or Nasdaq National Market, and
(vii) purchase POs and IOs, if, as a result, more than
5% of the value of the Fund's net assets would be
invested in POs and IOs. The Fund may acquire illiquid
securities which are privately placed, subject to the
foregoing operating policies. Because an active trading
market may not exist for such securities, the sale of
any such privately placed securities may be subject to
delay and additional costs. In addition, the Fund may
purchase securities which while privately placed, are
eligible for purchase and sale under Rule 144A under
the Securities Act of 1933, as amended (the "Act").
The liquidity of Rule 144A securities would be
monitored, and, if as a result of changed conditions it
is determined by the Board of Directors of the Fund
that a Rule 144A security is no longer liquid, the
Fund's holdings of illiquid securities would be
reviewed to determine what, if any, steps are required
to assure that the Fund does not invest more than 10%
of its assets in illiquid securities. In any event,
the Fund will not purchase 144A securities if, as a
result, more than 5% of the value of the Fund's net
assets would be invested in 144A securities. In
addition, the Fund may establish and maintain cash
reserves for temporary defensive purposes or to enable
it to take advantage of buying opportunities. For a
discussion of the Fund's temporary defensive strategy
see "Investment Program." The Fund's reserves may be
invested in domestic and foreign money market
instruments including, but not limited to, government
13
<PAGE> 19
obligations, certificates of deposit, bankers'
acceptances, commercial paper, short-term
corporate debt issues, and repurchase
agreements.
Portfolio Turnover. Generally, the Fund does not
intend to purchase securities for short-term
trading; however, when circumstances warrant,
securities may be sold without regard to the length
of time held. The Fund cannot accurately predict
its annual portfolio turnover rate for either the
equity or fixed income portion of its portfolio;
however, for the period from August 11, 1995
(commencement of operations) to December 31, 1995,
the Fund's portfolio turnover rate was 0%.
Further Information. The Fund's investment
program and policies, discussed above, are subject
to further restrictions and risks which are
described in the SAI. The Fund's investment
objective and investment program, unless otherwise
specified, are not fundamental policies and may be
changed without shareholder approval. Shareholders
will be notified of any material change in such
program. Fundamental policies may be changed only
with shareholder approval.
PERFORMANCE Total Return Performance. The Fund may advertise
INFORMATION total return figures on both a compound average
annual and cumulative basis. Cumulative total
return compares the amount invested at the
beginning of a period with the amount redeemed at
the end of the period, assuming the reinvestment of
all dividends and capital gain distributions. The
compound average annual total return, derived from
the cumulative total return figure, indicates a
yearly average of the Fund's performance. The
annual compound rate of return for the Fund may
vary from its average annual return.
Total Return Components. The total return
from the Fund consists of the change in its net
asset value per share and the income it generates.
The net asset value of the Fund will be affected
primarily by changes in stock values and interest
rate levels, the maturity and credit quality of the
Fund's debt securities, as well as changes in the
values of foreign currencies.
Yield. The Fund may advertise a yield figure
derived by dividing the Fund's net investment
income per share (as defined by applicable SEC
regulations) during a 30-day base period by the
maximum offering price on the last day of the base
period.
HOW TO BUY Shares of the Fund may be purchased on any
SHARES Business Day (as defined below) at the offering
price through any broker which has a dealer
agreement with Valley Forge Distributors++, the
Principal Under-
- ------------------------
++ Valley Forge Distributors may recommend brokers who have dealer
agreements with Valley Forge Distributors for potential shareholders
residing in states in which Valley Forge Distributors is not
registered. Texas residents may not purchase Fund shares directly
from Valley Forge Distributors.
14
<PAGE> 20
writer of the Fund's shares, or directly from Valley
Forge Distributors upon receipt of a completed Account
Application Form and a check made payable to the Fund,
by the Fund's transfer agent, PFPC, Inc. ("PFPC"), at
P.O. Box 8926, Wilmington, DE 19809-8926, Attention:
Valley Forge Capital Account Services. A "Business
Day" is any weekday that the New York Stock Exchange
(the "NYSE") and the Federal Reserve Bank of
Philadelphia (the "FRB") is open for business. The
minimum initial purchase order is $250 with subsequent
investments of $25 or more.
With respect to telephone orders placed with
Valley Forge Distributors by dealers, the dealer must
receive the investor's order before the close of the
NYSE and transmit it to PFCP by 4:00 p.m., Eastern
Standard Time ("E.S.T."), for the investor to receive
that day's Offering Price. Payment for such orders
must be by check in U.S. currency and must be promptly
submitted to Valley Forge Distributors c/o PFPC, Box
8926, Wilmington, DE 19809-8926.
Orders mailed to Valley Forge Distributors c/o
PFPC by dealers or individual investors are effected at
the offering price next computed after the purchase
order accompanied by payment has been received by PFPC.
Such payment must be by check in U.S. currency drawn on
a commercial bank in the U.S. Any subscription may be
rejected by Valley Forge Distributors or by the Fund.
Investors should promptly check the confirmation
advice that is mailed after each purchase (or
redemption) to insure that it has been accurately
recorded in the investor's account.
CUMULATIVE QUANTITY DISCOUNT. The schedule of
reduced sales commissions also may be applied to
qualifying sales on a cumulative basis. For this
purpose, the dollar amount of the sale is added to the
higher of: (i) the value (calculated at the applicable
offering price); or (ii) the purchase price of any
other shares of the Fund owned at that time by the
investor. For example, if the investor held shares
valued at $40,000 (or, if valued at less than $40,000,
had been purchased for $40,000) and purchased an
additional $20,000 of the Fund's shares, the sales
commission for the $20,000 purchase would be at the
rate of 5.00%. IT IS VALLEY FORGE DISTRIBUTORS' POLICY
TO GIVE INVESTORS THE BEST SALES COMMISSION RATE
POSSIBLE; HOWEVER, THERE CAN BE NO ASSURANCE THAT AN
INVESTOR WILL RECEIVE THE APPROPRIATE DISCOUNT UNLESS,
AT THE TIME OF PLACING THE PURCHASE ORDER, THE INVESTOR
OR THE DEALER MAKES A REQUEST FOR THE DISCOUNT AND
GIVES VALLEY FORGE DISTRIBUTORS SUFFICIENT INFORMATION
TO DETERMINE WHETHER THE PURCHASE WILL QUALIFY FOR THE
DISCOUNT. On telephone orders from dealers for the
purchase of shares to be registered in "street name,"
PFCP will accept the dealer's instruc-
15
<PAGE> 21
tions with respect to the applicable sales commission
rate to be applied. The cumulative quantity discount
may be amended or terminated at any time. Any money
market funds which may be offered now or in the future
will not qualify for the cumulative quantity discount
(see Shareholder Services - Exchange Privileges, page
21).
LETTER OF INTENT. Investors may also reduce sales
charges on all investments by means of a Letter of
Intent ("LOI") which expresses the investor's intention
to invest a certain amount within a 13-month period in
the Fund's shares. See the Account Application Form.
The minimum initial investment under an LOI is 5% of the
total LOI amount. Shares purchased with the first 5% of
such amount will be held in escrow to secure payment of
the higher sales charge applicable to the Shares
actually purchased if the full amount indicated is not
purchased, and such escrowed shares will be
involuntarily redeemed to pay the additional sales
charge, if necessary. Such escrowed Shares will be
registered in the Shareholder's name and will continue
to earn any dividends and capital gains paid by the
Fund. Dividends declared on escrowed shares will be
paid to the shareholder or as otherwise instructed by
the shareholder. The escrowed Shares will be released
when the full amount indicated has been purchased. Any
redemptions made during the 13-month period will be
subtracted from the amount of purchase in determining
whether the LOI has been completed. A purchase not
originally made pursuant to an LOI may be included under
a subsequent LOI executed within 90 days of the
purchase. The Shareholder must instruct the transfer
agent upon making subsequent purchases that such
purchases are subject to an LOI. All dividends and
capital gains of the Fund that are invested in
additional Shares are applied to the LOI. For a further
description of the Letter of Intent, see "How to Buy
Shares--Letter of Intent" in the SAI.
GROUP PURCHASES. An individual who is a member of
a qualified group may also purchase shares of the Fund
at the reduced sales charge applicable to the group as a
whole. The sales charge is based upon the aggregate
dollar value of shares previously purchased and still
owned by the group, plus the amount of the current
purchase. For example, if members of the group had
previously invested and still held $80,000 of the Fund
shares and now were investing $25,000, the sales charge
would be 4.00%. Information concerning the current
sales charge applicable to a group may be obtained by
contacting Valley Forge Distributors at 1-800 688-1688.
A "qualified group" is one which: (i) has been in
existence for more than six months; (ii) has a purpose
other than acquiring Fund shares at a discount; and
(iii) satisfies uniform criteria which enable Valley
Forge Distributors to realize economies of scale in its
costs of distributing shares. A qualified group must
have more than 10 members, must be available to arrange
for group meetings between representatives of the Fund
and the members, must agree to include sales and other
materials
16
<PAGE> 22
related to the Fund in its publications and mailings to
members at reduced or no cost to Valley Forge
Distributors, and must seek to arrange for payroll
deduction or other bulk transmission of investments to
the Fund.
NET ASSET VALUE PURCHASES. Shares of the Fund may
be purchased at net asset value ("NAV") without
imposition of a sales commission by the following
persons: (i) dealers who initiate and are responsible
for purchases of $1 million or more; (ii) trustees or
other fiduciaries purchasing securities for certain
retirement plans with assets of $10 million or more;
(iii) directors, trustees and officers of the
investment companies sponsored by Valley Forge Capital
and its affiliates (collectively, the "Valley Forge
Group"), directors, officers and employees (current or
retired) in the Valley Forge Group (and their
families), and retirement plans established by the
Valley Forge Group for employees; (iv) companies
exchanging shares with or selling assets to the Fund
pursuant to a merger, acquisition or exchange offer;
(v) dealers or brokers who have a sales agreement with
Valley Forge Distributors for their own accounts, or
for retirement plans for their employees or sold to
registered representatives or full time employees (and
their families) that certify to Valley Forge
Distributors at the time of purchase that such purchase
is for their own account (or for the benefit of their
families); (vi) insurance company separate accounts;
(vii) accounts managed by the Valley Forge Group
affiliates; and (viii) certain unit investment trusts
and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund.
Shares of the Fund may also be purchased at NAV by
employee benefit plans qualified under Section 401 of
the Code, including salary reduction plans qualified
under Section 401(k) of the Code, subject to minimum
requirements with respect to number of employees or
amount of purchase, which may be established by Valley
Forge Distributors. Currently, those criteria require
that the employer establishing the plan have 500 or
more employees or that the amount invested or to be
invested during the subsequent 13-month period in the
Fund totals at least $1 million. Employee benefit
plans not qualified under Section 401 of the Code may
be afforded the same privilege if they meet the above
requirements as well as the uniform criteria for
qualified groups described above under "Group
Purchases" which enable Valley Forge Distributors to
realize economies of scale in its sales efforts and
sales-related expenses.
Shares of the Fund may be purchased at NAV by trust
companies and bank trust departments for funds over
which they exercise exclusive discretionary investment
authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases
are subject to minimum requirements with respect to
amount of purchase, which may be established by Valley
Forge Distributors. Currently, those criteria require
that the amount invested or to be invested during the
subsequent 13-month period in the Fund must total at
least $1 million. Orders for such accounts will be
accepted by mail accompanied by a
17
<PAGE> 23
check, or by wire transfer directly from the bank
or trust company, with payment by federal funds
received by the close of business on the next
business day following such order.
OPENING A NEW Minimum initial investment: $250
ACCOUNT AND
PURCHASING SHARES By Mail Send your New Account Form and check
by Regular, Express, Registered, or
Certified Mail, to:
Checks payable to Valley Forge Capital
Valley Forge Account Services
c/o PFPC, Inc.
Box 8926
Wilmington, DE 19809-8926
PURCHASING Minimum subsequent investment: $25
ADDITIONAL
SHARES
Shareholder Services By Wire Call Shareholder Services and use the
1-800-797-6706 Wire Address below.
Wire Address
(to give to
your bank): PNC - Bank, NA
Philadelphia, PA
ABA #031000053
CREDIT: 8551035097
FURTHER CREDIT:
Valley Forge Capital Purchase Account
By Mail Indicate your account number
and the name of the Fund on your
check. (Please use the additional
investment portion (tear-off stub)
from a confirmation statement.)
COMPLETING THE Tax Identification Number. We must have your
NEW ACCOUNT correct social security or corporate tax
FORM identification number and a signed New Account
Form or W-9 Form. Otherwise, federal law requires
You must provide your the Fund to withhold 31% of your dividends,
tax ID number and sign capital gain distributions, and upon redemption or
the New Account Form exchange of your shares and may subject you to a
fine. You also will be prohibited from opening
another account. If this information is not
received within 60 days after your account is
established, the Fund will begin withholding.
Services. By signing up for services on
the New Account Form, rather than after the
account is opened, you will avoid having to
complete a separate form and obtain a signature
guarantee (see Conditions of Your Purchase -
Signature Guarantees page 22).
18
<PAGE> 24
NET ASSET VALUE, Net Asset Value Per Share (NAV). The NAV per
PRICING AND share, or share price, for the Fund is determined at the
EFFECTIVE DATE close of trading normally 4:00 p.m. E.S.T. each day the
New York Stock Exchange is open. The Fund's share price
is calculated by subtracting its liabilities from its
total assets and dividing the result by the total number
of shares outstanding. Among other things, the Fund's
liabilities include accrued expenses and dividends
payable, and its total assets include portfolio
securities valued at market as well as income accrued
but not yet received.
If your order is Purchased shares are priced at that day's NAV plus
received before sales charge if your request is received before 4:00
4:00 p.m. E.S.T., p.m. E.S.T. in good order. If received later than 4:00
you will receive p.m., shares will be priced at the next business day's
that day's NAV. NAV plus sales charge. We cannot accept requests which
specify a particular date for purchase or which specify
any special conditions.
Redemptions are priced at that day's NAV if your
request is received before 4:00 p.m. E.S.T. in good
order. If received after 4:00 p.m., shares will be
priced at the next business day's NAV. Requests mailed
to our San Francisco office must be forwarded to
Wilmington, Delaware and will not be effective until
received there in good order. Also, we cannot accept
requests which specify a particular date for redemption
or which specify any special conditions. If your
redemption request cannot be accepted, you will be
notified and given further instructions.
The Fund reserves the right to change the time at
which purchases, redemptions and exchanges are priced if
the New York Stock Exchange closes earlier than 4:00
p.m. E.S.T.
REDEEMING By Phone Call Shareholder Services at
SHARES 1-800-797-6706. If you find our phones
busy during unusually volatile markets,
please consider placing your order by
express mail.
Redemption proceeds can be mailed or
wired to your bank. The Fund's bank
charges a $7.50 fee for all wire
redemptions, subject to change without
notice. Your bank may also charge you
for receiving wires.
By Mail Indicate account name(s) and
numbers, fund name(s), and exchange or
redemption amount. For exchanges, mail
to the attention of the Fund you are
exchanging from and indicate the Fund(s)
you are exchanging to (see Exchange
Privileges-page 21). We require the
signature of all owners exactly as
registered, and possibly a signature
guarantee (see Conditions of Your
Purchase - Signature Guarantees, page
20).
19
<PAGE> 25
Note: Distributions from retirement
accounts, including IRAs, must be in
writing. For employer-sponsored
retirement accounts, call Shareholder
Services or your plan administrator for
instructions.
Repurchase of Shares. The Fund, through Valley
Forge Distributors, also repurchases shares through
securities dealers. The Fund normally will accept
orders to repurchase such shares by wire from dealers
for their customers at the NAV next computed after the
dealer has received the shareholder's request for
repurchase, if the dealer received such request before
closing time of the NYSE on that day. Dealers have the
responsibility of submitting such repurchase requests by
calling not later than 4:00 p.m. E.S.T. on such day in
order to obtain that day's applicable redemption price.
Repurchase of shares is for the convenience of
shareholders and does not involve a charge by the Fund;
however, securities dealers may impose a charge on the
shareholder for transmitting the notice of repurchase to
the Fund. The Fund reserves the right to reject any
order for repurchase, which right of rejection might
adversely affect shareholders seeking redemption through
the repurchase procedure; however, such shareholders may
redeem shares other than through repurchase. Ordinarily
payment will be made to the securities dealer within
seven days after receipt of a repurchase order in "Good
Order" as set forth above. The Fund will also accept,
from member firms of the NYSE, orders to repurchase
shares by wire or telephone with a redemption request
signed by the shareholder, provided the member firm
indemnifies the Fund and Valley Forge Distributors from
any liability resulting from the absence of the
shareholder's signature. Forms for such indemnity
agreement can be obtained from Valley Forge
Distributors.
Stock Certificates. To facilitate redemptions and
transfers, shareholders will not receive stock
certificates. Call Shareholder Services for further
information.
Systematic Withdrawal Plan. Shareholders owning
$10,000 or more of the Fund shares may elect to have
periodic redemptions from his account to be paid on a
monthly basis. The minimum periodic payment is $50. A
sufficient number of shares to make the scheduled
redemption will be redeemed on the first or fifteenth
day of the month. Redemptions for the purpose of making
such payments may reduce or even exhaust your account if
the monthly redemption payments exceed the dividends,
interest and capital appreciation, if any, on your
shares. A shareholder may request that these payments
be sent to a predesignated bank or other designated
party.
Amounts paid to you pursuant to the Systematic
Withdrawal Plan are not a return on your investment.
Payments to you pursuant to the Systematic Withdrawal
Plan are derived from the redemption of shares in your
account and are taxable transactions on which gain or
loss may be recognized for Federal, state and city
income tax purposes.
20
<PAGE> 26
RECEIVING YOUR Generally, redemption proceeds will be mailed to
PROCEEDS the address you designated on your New Account Form or
wired to your bank the next business day after receiving
your redemption request in good order. In addition,
under unusual conditions, or when deemed to be in the
best interests of the Fund, redemption proceeds may not
be sent for up to seven calendar days after your request
is received to allow for the orderly liquidation of
securities. Requests by mail for wire redemptions
(unless previously authorized) must have a signature
guarantee.
DIVIDENDS AND The Fund normally distributes all net income and
DISTRIBUTIONS capital gains to shareholders. Dividends from net
investment income will be declared and paid quarterly.
Distributions from capital gains, if any, are normally
declared in December and paid in early January.
Dividends and capital gains declared by the Fund will be
reinvested unless you choose an alternative payment
option on the New Account Form. Dividends not
reinvested are paid by check or ACH transfer. Your bank
must be a member of the National Automatic Clearing
House Association. If the U.S. Postal Service cannot
deliver your check, then your dividends will be held by
the Fund and will not be reinvested.
CONDITIONS OF Account Balance. If, as a result of redemptions,
YOUR PURCHASE your account drops below $250 for three months or more,
the Fund has the right to close your account, after
giving 60 days' notice, unless you make additional
investments to bring your account value to $250 or more.
Nonpayment. If your check or wire does not clear,
you will be responsible for any loss the Fund incurs.
If you are already a shareholder, the Fund can redeem
shares from any identically registered account in this
Fund as reimbursement for any loss incurred.
Non-U.S. Bank Checks. Checks drawn on foreign
banks must be in U.S. dollars and have the routing
number of the U.S. bank indicated on the check.
Redemptions in Excess of $250,000. Redemption
proceeds are normally paid in cash. However, if you
redeem more than $250,000, or 1% of the Fund's net
assets, in any 90-day period, the Fund may in its
discretion: (i) pay the difference between the
redemption amount and the lesser of $250,000 or 1% of
the Fund's assets with securities owned by the Fund; or
(ii) delay the transmission of your proceeds for up to
five business days (but in no event more than seven
calendar days) after your request is received. In the
event the Fund elects to pay any portion of your
redemption proceeds with Fund securities, you will bear
the market risk associated with the ownership of such
securities and the brokerage costs associated with the
disposition of any such securities.
21
<PAGE> 27
Signature Guarantees. A signature guarantee is
designed to protect you and the Fund by verifying your
signature. You will need a signature guarantee to:
(1) Establish certain services after the account
is opened.
(2) Redeem over $5,000 by written request if you
do not have telephone redemption services.
(3) Redeem or exchange shares when someone who is
not a registered owner of the account will
receive the proceeds, or when proceeds are
being sent to a bank account not listed on
your fund account.
(4) Transfer shares to another owner.
(5) Send us written instructions asking us to wire
redemption proceeds.
These requirements may be waived or modified in certain
instances.
"Eligible guarantors" are: national or state
banks, savings associations, savings and loan
associations, trust companies, savings banks,
industrial loan companies and credit unions; national
securities exchanges, registered securities
associations and clearing agencies; or brokers,
dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, and
government securities brokers. We cannot accept
guarantees from institutions or individuals who do not
provide reimbursement in the case of fraud, such as
notaries public.
Fifteen-Day Hold. The mailing of proceeds on
redemption requests involving any Shares recently
purchased by personal, corporate or government check,
or ACH Transfer, may be delayed by the Fund's Transfer
Agent for a period of up to 15 calendar days after the
purchase date, pending a determination that the check
has cleared or funds have been received. Proceeds of
redemption requests sent by mail or telegram will be
mailed no later than the seventh day following receipt
unless the check has not cleared. The clearing period
does not apply to purchases made by wire or cashier's,
treasurer's, or certified checks.
The Fund and its agents reserve the right to: (i)
reject any purchase or exchange and cancel any purchase
due to nonpayment; (ii) waive or lower the investment
minimums; (iii) accept initial purchases by telephone or
telegram; (iv) waive the limit on subsequent purchases
by telephone; (v) reject any purchase or exchange prior
to receipt of the confirmation statement; (vi) redeem
your account (see Tax Identification Number); and (vii)
modify the conditions of purchase at any time.
SHAREHOLDER The following is a brief summary of our services,
SERVICES some of which may be restricted or unavailable to
retirement plan accounts. You must authorize most of
these services on an Account Form. Services may be
modified at any time without notice.
22
<PAGE> 28
Be sure to sign up Exchange Privileges. Shares of one Fund may be
for all telephone exchanged for shares of other Valley Forge Funds, if
services on any. Exchanges of shares will be made at their relative
the New Account Form. net asset values. Shares may only be exchanged if the
amount being exchanged satisfies the minimum investment
required and the shareholder is a resident of a state
where shares of the appropriate Fund are qualified for
sale. Investors should note that an exchange may result
in a taxable event. Exchange privileges may be
terminated, modified or suspended by the Fund upon 60
days' notice to shareholders.
Telephone Exchange and Redemption Services. All
telephone calls to Shareholder Services, including
transaction-related calls to Shareholder Services are
recorded in order to protect you, the Fund, and its
agents. You may elect to effect exchanges or
redemptions by telephone. By establishing telephone
exchange or redemption services, you authorize us to:
(i) redeem or exchange shares from your account based on
any instructions believed to be genuine; and (ii) honor
any written instructions for a redemption or exchange
without a signature guarantee (other than as required
under Signature Guarantees). The Fund reserves the
right to change or suspend these services upon 60 days
prior written notice. The Fund and Valley Forge
Distributors will not be liable for any loss, liability,
cost or expense for acting upon telephone instructions
that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are
genuine, the Fund will use such procedures as are
considered reasonable, including reporting of
instructions and requesting information as to account
registration (such as the name in which an account is
registered, the account number, recent transactions in
the account, and the accountholder's Social Security
Number, address and/or bank). To the extent that the
Fund fails to use reasonable procedures as the basis for
its belief, it and/or its service contractors may be
liable for instructions that prove to be fraudulent or
unauthorized.
Automated Investment Program. If your bank is a
member of the Automated Clearing House ("ACH") network,
we offer a method of purchasing Fund Shares in amounts
of $25 to $100,000 through automatic transfers from your
bank account to your Fund account. Although the Fund
does not impose any additional fees for automatic
transfers, your bank may impose a fee for such services.
See "Net Asset Value, Pricing and Effective Date" for
additional information.
Wire Transfers. Bank-Fund transfers can be made
through bank wires (a $7.50 charge applies to all wire
redemptions). While this is usually the quickest
transfer method, the Fund reserves the right to
temporarily suspend wires under unusual circumstances.
23
<PAGE> 29
TAXES Taxes on Dividends and Distributions. In January,
the Fund will mail you Form 1099-DIV indicating the
Form 1099-DIV federal tax status of your dividends and capital gain
will be mailed to distributions. Generally, dividends and distributions
you in January. are taxable in the year they are paid. However, any
dividends and distributions paid in January but declared
during the prior three months are taxable in the year
they are declared. Dividends and distributions are
taxable to you regardless of whether they are taken in
cash or reinvested. Dividends and short-term capital
gains are taxable as ordinary income; distributions from
long-term capital gains are taxable as long-term capital
gains. The capital gains holding period for such
distributions is determined by the length of time the
Fund has held the securities, not the length of time you
owned Fund shares.
Taxes on Foreign Transactions. Distributions
resulting from the sale of foreign currencies and debt
securities, to the extent of foreign exchange gains, are
taxed as ordinary income. The payment of foreign taxes
will not be passed through to investors. Such taxes
will be captured and paid at the Fund level or offset
against other taxes at the Fund level. If the Fund pays
taxes to foreign governments during the year, the taxes
will reduce the Fund's dividends.
Taxes on Redemptions (Shares Sold or Exchanged). A
redemption or exchange of Fund shares is treated as a
sale for tax purposes which will result in a short or
long-term capital gain or loss, depending on how long
you have owned the shares. In January, the Fund will
mail you Form 1099-B indicating the date of and proceeds
from all sales and exchanges.
Taxes on Undistributed Income and Gains. At the
time of purchase, the Share price of the Fund may
reflect undistributed income, capital gains or
unrealized appreciation of securities. Any income or
capital gains from these amounts which are later
distributed to you are fully taxable, even though they
represent a portion of the price you paid for your
shares.
Tax-Qualified Retirement Plans. Tax-qualified
retirement plans generally will not be subject to
federal tax liability on either distributions from the
Fund or redemption of shares of the Fund. Rather,
participants in such plans will be taxed when they begin
taking distributions from the plans.
MANAGEMENT OF Fund Advisor. Valley Forge Advisors, a wholly
THE FUND owned subsidiary of Valley Forge Capital manages the
Fund's investments. Valley Forge Advisors has a limited
operating history upon which investors may base an
evaluation of the likely performance of the Fund.
Investment decisions made by Valley Forge Advisors are
made primarily by Frederick A. Wolf, President and
Nelson J. Kjos, Chief Investment Analyst of Valley Forge
Advisors. Mr. Wolf has over 20 years experience as an
equity portfolio
24
<PAGE> 30
manager to individuals, governments, corporations and
pension and profit sharing plans. Mr. Wolf is also
President and Chief Portfolio Manager for Valley
Forge-Barrington, Ltd., an affiliate of the Fund.
Nelson Kjos, a registered investment advisor, has been a
portfolio manager since founding his own firm in 1967.
Mr. Kjos is currently Chief Analyst and Chairman of TTI
Investment Committee for Valley Forge-Barrington, Ltd.
Mr. Kjos, a frequent speaker at investment seminars,
recently published "The Poet of Wall Street," his second
book. Valley Forge Advisors has not previously served
as an investment advisor to an investment company.
Board of Directors. The management of the Fund's
business and affairs is the responsibility of the Fund's
Board of Directors. The Board of Directors sets broad
policies for the Fund and chooses its officers. The
officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors.
Investment Services. Valley Forge Distributors, a
wholly-owned subsidiary of Valley Forge Capital, is the
distributor for this Fund.
Transfer and Dividend Disbursing Agent. PFPC, Inc.
("PFPC") serves the Fund as transfer agent and dividend
disbursing agent. PFPC's main office is in Wilmington,
Delaware and may be contacted at PFPC, Inc., P.O. Box
8926, Wilmington, Delaware 19809-8926.
PFPC will perform the transfer and dividend
disbursing agent functions as well as: (i) certain
shareholder services for all accounts, for which PFPC
may be paid fees totaling approximately $4,250 per
month; (ii) and calculation of daily share price and
maintenance of portfolio and general accounting records
of the Fund, for which PFPC may be paid fees totaling
approximately $8,333 per month.
FUND EXPENSES Fund Expenses. Fund expenses include: the
AND MANAGEMENT management fee; shareholder servicing fees and expenses;
FEES custodian and accounting fees and expenses; legal and
auditing fees; expenses of preparing and printing
prospectuses and shareholder reports; registration fees
and expenses; proxy and annual meeting expenses, if any;
and directors' fees and expenses. In addition, the
expenses of organizing, registering, and qualifying its
shares under federal, state, and other securities laws
will be charged to the Fund's operations, as an expense,
over a period not to exceed 60 months.
Valley Forge Capital has agreed to bear any
expenses for the Fund's first five years of operations,
which would cause the Fund's ratio of operating expenses
to average net assets to exceed 1.95%. This guarantee
is not subject to later reimbursement.
Management Fee. The Fund pays its Investment
Advisor an investment management fee equal to .80% of
the Fund's net assets ("Management Fee").
25
<PAGE> 31
Distribution Plan and Agreement. The Fund has
adopted a Distribution Plan and Agreement pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
The purpose of the Plan is to permit the Fund to
compensate Valley Forge Distributors for services
provided and expenses incurred by it in promoting the
sale of shares of the Fund, reducing redemptions, and
maintaining or improving services provided to
shareholders by Valley Forge Distributors or dealers.
The Plan provides for payments by the Fund to Valley
Forge Distributors at the annual rate of .35% of the
Fund's average net assets subject to the authority of
the Fund's Board of Directors to reduce the amount of
payments or to suspend the Plan for such periods as they
may determine. Subject to these limitations, the amount
of such payments and the specific purposes for which
they are made shall be determined from time to time by
the Board of Directors. At present, the Board of
Directors have approved payments under the Plan for the
purpose of compensating Valley Forge Distributors for
services provided and reimbursing Valley Forge
Distributors for expenses incurred and payments made by
it to dealers whose shareholder accounts with the Fund
equal or exceed $500,000, as described below, subject to
the overall limitation that payments under the Plan
shall not exceed a maximum annual rate of .35% of
average net assets. The Plan may not be amended to
materially increase the costs which the Fund may bear
for distribution pursuant thereto without shareholder
approval.
Dealers whose shareholder accounts with the Fund
equal or exceed $500,000 are paid a continuing trailer
fee by Valley Forge Distributors at the annual rate of
0.25% of the value of the shares purchased in those
shareholder accounts, as adjusted to reflect
redemptions. This fee is paid in order to promote
selling efforts and to compensate dealers for providing
certain services, including processing purchase and
redemption transactions, establishing shareholder
accounts and providing certain information and
assistance with respect to the Fund.
THE FUND The Fund is a Maryland corporation organized in
January 1994 and registered with the Securities and
Exchange Commission under the Investment Company Act of
1940 as a diversified, open-end investment company,
commonly known as a "mutual fund." A mutual fund, such
as the Fund, enables shareholders to: (i) obtain
professional management of investments, including Valley
Forge Advisors' proprietary research; (ii) diversify
their portfolio to a greater degree than would be
generally possible if they were investing as individuals
and thereby reduce, but not eliminate risks; and (iii)
simplify the record keeping and reduce transaction costs
associated with investments. As of the date of this
Prospectus, the Fund has had no operations.
Shareholder Rights. The Fund issues one class of
capital stock, all shares of which have equal rights
with regard to voting, redemptions, dividends,
distributions, and liquidations. Fractional shares have
voting rights and participate in any distribution and
dividends. Shareholders have
26
<PAGE> 32
no preemptive or conversion rights. When the Fund's
shares are issued, they are fully paid and
nonassessable. Shares of the Fund do not have
cumulative voting rights. The Fund does not routinely
hold annual meetings of shareholders. However, if
shareholders representing at least 10% of all votes of
the Fund entitled to vote so desire, they may call a
special meeting of shareholders of the Fund for the
purpose of voting on the question of the removal of any
director(s). The total authorized capital stock of the
Fund consists of 1,000,000,000 shares, each having a par
value of $0.01. As of March 29, 1996, Valley Forge
Capital owned 10,000 shares of the Fund which
represented approximately seven percent of the Fund's
outstanding shares.
To Open an Account:
Shareholder Services
1-800-797-6706
Prospectus
Existing Account: Valley Forge Capital Holdings Total Return Fund, Inc.
Shareholder Services
1-800-797-6706 April 4, 1996
27
<PAGE> 33
STATEMENT OF ADDITIONAL INFORMATION
VALLEY FORGE CAPITAL HOLDINGS TOTAL RETURN FUND, INC. (THE "FUND")
Part B
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Fund's prospectus dated April 4, 1996, which may
be obtained from Valley Forge Distributors, Inc., 595 Market Street, Suite
1980, San Francisco, CA 94105 or by calling 1-800-797-6706.
The date of this Statement of Additional Information is April 4, 1996.
[The Balance of This Page
Intentionally Left Blank]
<PAGE> 34
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . . . . . . . . . . . . . . 1
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Investment Program . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. Fixed Income Securities. . . . . . . . . . . . . . . . . . . . 2
A. U.S. Government Obligations . . . . . . . . . . . . . . . 2
B. U.S. Government Agency Securities . . . . . . . . . . . . 2
C. Bank Obligations. . . . . . . . . . . . . . . . . . . . . 2
D. Savings and Loan Obligations. . . . . . . . . . . . . . . 3
E. Asset-Backed Securities . . . . . . . . . . . . . . . . . 3
F. Mortgage Obligations. . . . . . . . . . . . . . . . . . . 5
2. Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3. Futures Contracts. . . . . . . . . . . . . . . . . . . . . . . 11
4. Lending of Portfolio Securities. . . . . . . . . . . . . . . . 17
5. Foreign Securities . . . . . . . . . . . . . . . . . . . . . . 17
6. Foreign Currency Transactions. . . . . . . . . . . . . . . . . 18
7. Hybrid Commodity and Security Investments. . . . . . . . . . . 20
8. Private Placements (Restricted Securities) . . . . . . . . . . 20
9. Repurchase Agreements. . . . . . . . . . . . . . . . . . . . . 21
10. When-Issued Securities . . . . . . . . . . . . . . . . . . . . 21
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Debt Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Foreign Investing. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Possible Investment of Certain Assets in Specific Industry . . . . . . . 22
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Fundamental Policies . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Operating Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Redemption in Kind . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
MANAGEMENT OF FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Compensation of Executive Officers and Directors . . . . . . . . . . . . 28
PRINCIPAL HOLDERS OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . 29
INVESTMENT MANAGEMENT SERVICES . . . . . . . . . . . . . . . . . . . . . . . 29
Management Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Limitation on Fund Expenses. . . . . . . . . . . . . . . . . . . . . . . 29
DISTRIBUTOR FOR FUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Sales Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Distribution Plan and Agreement. . . . . . . . . . . . . . . . . . . . . 31
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
i
<PAGE> 35
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 32
PRICING OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
NET ASSET VALUE PER SHARE. . . . . . . . . . . . . . . . . . . . . . . . . 34
TAX STATUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Taxation of Foreign Shareholders. . . . . . . . . . . . . . . . . . . 35
Foreign Currency Gains and Losses . . . . . . . . . . . . . . . . . . 35
YIELD INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Investment Performance. . . . . . . . . . . . . . . . . . . . . . . . 36
THE FUND'S CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . 38
FEDERAL AND STATE REGISTRATION OF SHARES . . . . . . . . . . . . . . . . . 39
LEGAL COUNSEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
RATINGS OF CORPORATE DEBT SECURITIES . . . . . . . . . . . . . . . . . . . 40
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
ii
<PAGE> 36
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies discussed on pages 3 and 4 and 8 through 13 of
the Prospectus. Unless otherwise specified, the investment program,
restrictions and operating policies of the Fund are not fundamental policies and
are subject to change by its Board of Directors without shareholder approval.
However, shareholders will be notified of a material change in the investment
program, restrictions or operating policies. The fundamental policies of the
Fund may not be changed without the approval of at least a majority of the
outstanding shares of the Fund; however, if holders of 50% or more of the shares
are represented at a meeting of shareholders, such percentage must be at least
67% of the shares represented.
INVESTMENT OBJECTIVE.
The Fund invests in a diversified portfolio of equity securities (typically
common stocks and securities which carry the right to buy common stocks) and
fixed income securities (typically bonds and preferred stocks) with equity
securities expected to usually represent approximately 80% of total Fund assets.
The Fund is designed for investors primarily seeking potential for dividends and
capital appreciation from equity securities as well as the income and relative
principal stability from fixed-income securities.
The Fund's share price will fluctuate with changing market conditions;
therefore, your investment may be worth more or less when redeemed than when
purchased. The Fund should not be relied upon for short-term financial needs,
nor used to play short-term swings in the stock market. The Fund cannot
guarantee it will achieve its investment objective.
INVESTMENT PROGRAM.
The Fund invests in both stocks and bonds.
The Fund is designed for investors primarily seeking the potential for
dividend income from, and capital appreciation of, common stocks and the income
and principal stability of bonds over the long term. The Fund's investment in
common stocks is intended to provide sufficient capital growth to offset the
erosive effects of inflation. For an IRA, retirement plan, or other long-term
investment, the Fund offers an investment program which seeks to combine
attractive returns with the benefits of broad diversification.
To achieve its investment objective, the Fund will normally invest
approximately 80% of its assets in equity securities (primarily common stocks)
and the remainder in fixed income securities (primarily bonds). While this
portfolio mix may vary depending on the Fund Advisor's (as hereinafter defined)
short-term and long-term assessments of market conditions, the Fund will not
attempt to time short-term moves in the market. In no event will the Fund
invest less than 50% or more than 80% of its assets in equity securities, except
for the purpose of effecting temporary defensive strategies. The investment of
Fund assets in fixed income securities (primarily bonds) adds diversification
that may serve to lessen the volatility normally associated with funds dedicated
primarily to investment in common stock. However, movements in interest rates
may still affect the overall value of the Fund.
The Fund's common stock investments will be concentrated primarily in
established companies which are believed to exhibit good prospects for growth.
<PAGE> 37
Consistent with the investment program, the Fund may invest in equity
securities issued by real estate investment trusts ("REITs"). Bond and other
fixed income investments will include U.S. Treasury and agency securities,
investment-grade (rated BBB or better) corporate securities, mortgage-backed
securities and other types of fixed income investments. The average maturity
of the Fund's fixed income investments will vary with economic conditions.
The Fund's investment portfolio is managed by Valley Forge Advisors, Inc.
("Valley Forge Advisors" or the "Investment Advisor"). The Fund's equity
security portfolio (excluding investments in REITs) was previously managed by
The Marshall Plan, L.P. (the "Marshall Plan"). By mutual agreement among the
Marshall Plan, the Board of Directors of the Fund and Valley Forge Advisors,
the Marshall Plan resigned as an investment advisor to the Fund, effective
March 31, 1996. See "Management of Fund."
Up to 15% of the Fund's assets may be invested in foreign securities,
including sponsored American Depository Receipts ("ADRs"). The international
component of the Fund's investment program is intended to increase
diversification and provide the potential for higher returns with lower overall
volatility.
1. Fixed Income Securities. Fixed income securities in which the Fund may
invest include, but are not limited to, those described below.
A. U.S. Government Obligations. Debt securities issued by the U.S.
Treasury. These are direct obligations of the U.S. Government and differ mainly
in the length of their maturities.
B. U.S. Government Agency Securities. Securities issued or guaranteed
by U.S. Government sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate Credit
Banks, Federal Financing Bank, Farm Credit Banks, and the Tennessee Valley
Authority. Some of these securities are supported by the full faith and credit
of the U.S. Treasury, and the remainder are supported only by the credit of the
instrumentality, which may include the right of the issuer to borrow from the
Treasury.
C. Bank Obligations. Certificates of deposit, bankers' acceptances, and
other debt obligations. Certificates of deposit are short-term obligations of
commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. The Fund will not invest in any security issued by a commercial
bank unless: (i) the bank has total assets of at least $1 billion, or the
equivalent in other currencies, or, in the case of domestic banks which do not
have total assets of at least $1 billion, the aggregate investment made in any
one such bank is limited to $100,000 and the principal amount of such investment
is insured in full by the Federal Deposit Insurance Corporation; (ii) in the
case of U.S. banks, it is a member of the Federal Deposit Insurance Corporation;
and (iii) in the case of foreign banks, the security is, in the opinion of
Valley Forge Advisors, of an investment quality comparable with other debt
securities which may be purchased by the Fund. These limitations do not
prohibit investments in securities issued by foreign branches of U.S. banks,
provided such branches meet the foregoing requirements.
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D. Savings and Loan Obligations. Negotiable certificates of deposit and
other debt obligations of savings and loan associations. The Fund will not
invest in any security issued by a savings and loan association unless: (i) the
savings and loan association has total assets of at least $1 billion, or, in the
case of savings and loan associations which do not have total assets of at least
$1 billion, the aggregate investment made in any one savings and loan
association is limited to $100,000 and the principal amount of such investment
is insured in full by the Federal Deposit Insurance Corporation; and (ii) the
savings and loan association issuing the security is a member of the Federal
Home Loan Bank System.
The Fund will not purchase any security of a small bank or savings and loan
association which is not readily marketable if, as a result, more than 10% of
the value of its net assets would be invested in such securities or illiquid
securities, including repurchase agreements maturing in more than seven days.
(See Investment Restrictions on page 22.)
E. Asset-Backed Securities. As described in the prospectus, the Fund may
invest a portion of its assets in debt obligations known as "asset-backed
securities" which are rated in one of the two highest rating categories by a
nationally recognized rating agency such as Standard and Poor's Corporation,
Moody's Investors Services, Inc. or Duff & Phelps, or if not so rated, of
equivalent investment quality in the opinion of Valley Forge Advisors. The
credit quality of most asset-backed securities depends primarily on the credit
quality of the assets underlying such securities, how well the entity issuing
the security is insulated from the credit risk of the originator or any other
affiliated entities and the amount and quality of any credit support provided to
the securities. The rate of principal payment on asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets which in turn may be affected by a variety of economic and other factors.
As a result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity. Asset-backed securities may be classified as "pass-through
certificates" or "collateralized obligations."
"Pass-through certificates" are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because pass
through certificates represent an ownership interest in the underlying assets,
the holders thereof bear directly the risk of any defaults by the obligors on
the underlying assets not covered by any credit support. See "-Types of Credit
Support," below.
"Collateralized obligations" are asset-backed securities issued in the form
of debt instruments and are generally issued as the debt of a special purpose
entity organized solely for the purpose of owning such assets and issuing such
debt. The assets collateralizing such asset-backed securities are pledged to a
trustee or custodian for the benefit of the holders thereof. Such issuers
generally hold no assets other than those underlying the asset-backed securities
and any credit support provided. As a result, although payments on such
asset-backed securities are obligations of the issuers, in the event of defaults
on the underlying assets not covered by any credit support, the issuing entities
are unlikely to have sufficient assets to satisfy their obligations on the
related asset-backed securities.
There are various types of credit support for asset-backed securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets to make payments, such securities may contain
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elements of credit support. Such credit support falls into two classes:
liquidity protection and protection against ultimate default by an obligor on
the underlying assets. Liquidity protection refers to providing advances,
generally by the entity administering the pool of assets, to ensure that
scheduled payments on the underlying pool are made in a timely fashion.
Protection against ultimate default ensures ultimate payment of the protection
may be provided through guarantees, insurance policies or letters of credit
obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
asset-backed securities with certain classes subordinate to other classes as to
the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve funds" (where cash or investments,
sometimes funded from a portion of the initial payments on the underlying
assets, are held in reserve against future losses) or that have been
"overcollateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceeds that required to make payment of
the asset-backed securities and pay any servicing or other fees). The degree of
credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an asset-backed security.
While many asset-backed securities are issued with only one class of
security, many asset-backed securities are issued in more than one class, each
with different payment terms. Multiple class asset-backed securities are issued
for two main reasons. First, multiple classes may be used as a method of
providing credit support. This is accomplished typically through creation of
one or more classes whose right to payments on the asset-backed security is made
subordinate to the right to such payments of the remaining class or classes.
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (asset-backed securities entitling the holder to disproportionate
interests with respect to the allocation of interest and principal of the assets
backing the security), and securities with class or classes having
characteristics which mimic the characteristics of non-asset-backed securities,
such as floating interest rates (i.e., interest rates which adjust as a
specified benchmark changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Fund may invest in such asset-backed securities if
such investment is otherwise consistent with its investment objective and
policies and with the investment restrictions of the Fund.
"Automobile Receivable Securities" are asset-backed securities backed by
receivables from motor vehicle installment sales contracts or installment loans
secured by motor vehicles ("Automobile Receivable Securities"). Since
installment sales contracts for motor vehicles or installment loans related
thereto ("Automobile Contracts") typically have shorter durations and lower
incidences of prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in violation of its
obligation not to do so, there is a risk that such party could
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acquire an interest in the Automobile Contracts superior to that of the holders
of Automobile Receivable Securities. Also, although most Automobile Contracts
grant a security interest in the motor vehicle being financed, in most states
the security interest in a motor vehicle must be noted on the certificate of
title to create an enforceable security interest against competing claims of
other parties. Due to the large number of vehicles involved, however, the
certificate of title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually is not amended
to reflect the assignment of the seller's security interest for the benefit of
the holders of the Automobile Receivable Securities. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on the securities. In addition, various state and
federal securities laws give the motor vehicle owner the right to assert against
the holder of the owner's Automobile Contract certain defenses such owner would
have against the seller of the motor vehicle. The assertion of such defenses
could reduce payments on the Automobile Receivable Securities.
"Credit Card Receivable Securities" are asset-backed securities backed by
receivables from revolving credit card agreements ("Credit Card Receivable
Securities"). Credit balances on revolving credit card agreements ("Accounts")
are generally paid down more rapidly than are Automobile Contracts. Most of the
Credit Card Receivable Securities issued publicly to date have been Pass Through
Certificates. In order to lengthen the maturity of Credit Card Receivable
Securities, most such securities provide for a fixed period during which only
interest payments on the underlying Accounts are passed through to the security
holder and principal payments received on such Accounts are used to fund the
transfer to the pool of assets supporting the related Credit Card Receivable
Securities of additional credit card charges made on an Account. The initial
fixed period usually may be shortened upon the occurrence of specified events
which signal a potential deterioration in the quality of the assets backing the
security, such as the imposition of a cap on interest rates. The ability of the
issuer to extend the life of an issue of Credit Card Receivable Securities thus
depends upon the continued generation of additional principal amounts in the
underlying accounts during the initial period and the non-occurrence of
specified events. An acceleration in cardholders' payment rates or any other
event which shortens the period during which additional credit card charges on
an Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could shorten the weighted average life and
yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state and
federal consumer credit laws, many of which give such holder the right to set
off certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike most other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
Other Assets. The asset-backed securities backed by assets other than
those described above may be issued in the future. The Fund may invest in such
securities in the future if such investment is otherwise consistent with its
investment objective and policies.
F. Mortgage Obligations. The Fund may invest in mortgage obligations
issued or guaranteed by non-governmental entities as well as the U.S.
Government, its agencies or instrumentalities. Such mortgage obligations may
include, but are not limited to, collateralized mortgage obligations, which are
obligations fully collateralized by a portfolio of mortgages or mortgage-related
securities ("CMOs"), principal obligations ("POs"), interest obligations ("IOs")
and other mortgage-backed securities. Some mortgage-backed securities, such as
GNMA certificates, are backed by the full faith and credit of the U.S. Treasury
while others, such as Freddie Mac certificates, are not. Risks associated with
investment in mortgage obligations include, but are not limited to, principal
volatility, fluctuations in interest rates and
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prepayment. Payments of principal and interest on the mortgages are passed
through to the holders of the CMOs on the same schedule as they are received,
although certain classes of CMOs have priority over others with respect to the
receipt of prepayments in the mortgages. Therefore, depending on the type of
CMOs in which the Fund invests, the investment may be subject to a greater or
lesser risk of prepayment than other types of mortgage-related securities, which
prepayments could have an adverse impact on the Fund's overall yield. CMOs may
also be less marketable than other securities. The Fund will not invest in POs
and IOs, if, as a result, more than 5% of the value of the Fund's net assets
would be invested in POs and IOs.
2. Options.
Writing Covered Call Options. The Fund may write (sell) "covered" call
options and purchase options to close out options previously written by the
Fund. In writing covered call options, the Fund expects to generate premium
income which should serve to enhance the Fund's total return and reduce the
effect of any price decline of the security or currency involved in the option.
Covered call options will generally be written on securities or currencies
which, in a Fund Advisor's opinion, are not expected to make any major price
increases or moves in the near future but which, over the long term, are deemed
to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a security
or currency at a specified price (the exercise price) at any time until a
certain date (the expiration date). So long as the obligation of the writer of
a call option continues, he may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring him to deliver the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by repurchasing
an option identical to that previously sold. To secure his obligation to
deliver the underlying security or currency in the case of a call option, a
writer is required to deposit in escrow the underlying security or currency or
other assets in accordance with the rules of a clearing corporation. The Fund
will write only covered call options. This means that the Fund will own the
security or currency subject to the option or an option to purchase the same
underlying security or currency having an exercise price equal to or less than
the exercise price of the "covered" option, or will establish and maintain with
its custodian for the term of the option, an account consisting of cash, U.S.
Government securities or other liquid high grade debt obligations having a value
equal to the fluctuating market value of the option securities or currencies.
In order to comply with the requirements of the securities or currencies laws in
several states, the Fund will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities or currencies covering
call options or put options exceeds 25% of the market value of the Fund's net
assets. Should these state laws change or should the Fund obtain a waiver of
their application, the Fund reserves the right to increase this percentage. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, the Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely retains the risk of loss should the price of the
security or currency
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decline. Unlike one who owns securities or currencies not subject to an option,
the Fund has no control over when it may be required to sell the underlying
securities or currencies, since it may be assigned an exercise notice at any
time prior to the expiration of its obligation as a writer. If a call option
which the Fund has written expires, the Fund will realize a gain in the amount
of the premium; however, such gain may be offset by a decline in the market
value of the underlying security or currency during the option period. If the
call option is exercised, the Fund will realize a gain or loss from the sale of
the underlying security or currency. The security or currency covering the call
will be maintained in a segregated account of the Fund's custodian. The Fund
does not consider a security or currency covered by a call to be "pledged" as
that term is used in the Fund's policy which limits the pledging or mortgaging
of its assets.
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Fund
Advisor, in determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Fund for writing covered call
options will be recorded as a liability of the Fund. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that the Fund will be able to
effect such closing transactions at a favorable price. If the Fund cannot enter
into such a transaction, it may be required to hold a security or currency that
it might otherwise have sold. When the Fund writes a covered call option, it
runs the risk of not being able to participate in the appreciation of the
underlying securities or currencies above the exercise price, as well as the
risk of being required to hold on to securities or currencies that are
depreciating in value. This could result in higher transaction costs. The Fund
will pay transaction costs in connection with the writing of options to close
out previously written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.
Call options written by the fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to
time, the Fund may purchase an underlying security or currency for delivery in
accordance with a exercise notice of a call option assigned to it, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
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The Fund will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the underlying
security or currency owned by the Fund.
Writing Covered Put Options. The Fund may write covered put options and
purchase options to close out options previously written by the Fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at the
exercise price during the option period. So long as the obligation of the
writer continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to make payment of the
exercise price against delivery of the underlying security or currency. The
operation of put options in other respects, including their related risks and
rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered basis, which means that
the Fund would maintain in a segregated account cash, U.S. Government
Securities or other liquid high-grade debt obligations in an amount not less
than the exercise price or the Fund will own an option to sell the underlying
security or currency subject to the option having an exercise price equal to or
greater than the exercise price of the "covered" option at all times while the
put option is outstanding. (The rules of a clearing corporation currently
require that such assets be deposited in escrow to secure payment of the
exercise price.) The Fund would generally write covered put options in
circumstances where a Fund Advisor wishes to purchase the underlying security
or currency for the Fund's portfolio at a price lower than the current market
price of the security or currency. In such event the Fund would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Fund would
also receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance the
current return during periods of market uncertainty. The risk in such a
transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received.
Such a decline could be substantial and result in a significant loss to the
Fund. In addition, the Fund, because it does not own the specific securities
or currencies which it may be required to purchase in the exercise of the put,
can not benefit from appreciation, if any, with respect to such specific
securities or currencies.
Purchasing Put Options. The Fund may purchase put options on securities
which give the Fund the right to sell the underlying security or currency at
the exercise price at any time during the option period. The Fund may enter
into closing sale transactions with respect to such options, exercise them or
permit them to expire. The Fund may purchase put options for defensive
purposes in order to protect against an anticipated decline in value of its
securities or currencies. An example of such use of put options is provided
below.
The Fund may purchase a put option on an underlying security or currency
(a "protective put") owned by the Fund as a defensive technique in order to
protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the Fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange value.
For example, a put option may be purchased in order to protect unrealized
appreciation of a security or currency where a Fund Advisor deems it desirable
to continue to hold the security or currency because of tax considerations. The
premium paid for the put option and any transaction costs would reduce any
capital gain otherwise available for distribution when the security or currency
is eventually sold.
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The Fund may also purchase put options at a time when the Fund does not
own the underlying security or currency. By purchasing put options on a
security or currency it does not own, the fund seeks to benefit from a decline
in the market price of the underlying security or currency. If the put option
is not sold when it has remaining value, and if the market price of the
underlying security or currency remain equal to or greater than the exercise
price during the life of the put option, the Fund will lose its entire
investment in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale transaction.
To the extent required by the laws of certain states, the Fund may not be
permitted to commit more than 5% of its assets to premiums when purchasing put
and call options. Should these state laws change or should the Fund obtain a
waiver of their application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and input options. The premium paid by the Fund
when purchasing a put option will be recorded as an asset of the Fund. This
asset will be adjusted daily to the option's current market value, which will
be the latest sale price at the time at which the net asset value per share of
the Fund is computed (close of New York Stock Exchange), or, in the absence of
such sale, the latest bid price. This option will be terminated upon
expiration of the option, the selling (writing) of an identical option in a
closing transaction, or the delivery of the underlying security or currency
upon the exercise of the option.
Purchasing Call Options. The Fund may purchase call options, on various
securities which give the Fund the right to purchase the underlying security
or currency at the exercise price at any time during the option period. The
Fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The Fund may purchase call options for
the purpose of increasing its current return or avoiding tax consequences which
could reduce its current return. The Fund may also purchase call options in
order to acquire the underlying securities or currencies. Examples of such
uses of call options are provided below.
Call options may be purchased by the Fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the Fund to acquire the
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities or currencies
directly. This technique may also be useful to the Fund in purchasing a large
block of securities that would be more difficult to acquire by direct market
purchases. So long at is holds such a call option rather than the underlying
security or currency itself, the Fund is partially protected from any
unexpected decline in the market price of the underlying security or currency
and in such event could allow the call option to expire, incurring a loss only
to the extent of the premium paid for the option.
To the extent required by the laws of certain states, the Fund may not be
permitted to commit more than 5% of its assets to premiums when purchasing call
and put options. Should these state laws change or should the Fund obtain a
waiver of their application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The Fund may also purchase call
options on underlying securities or currencies it owns in order to protect
unrealized gains on call options previously written by it. A call option would
be purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may
also be purchased at times to avoid realizing losses that would result in a
reduction of the Fund's current return. For example, where the Fund has
written a call option on an underlying security or currency having a
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current market value below the price at which such security or currency was
purchased by the Fund, an increase in the market price would result in the
exercise of the call option written by the Fund and the realization of a loss
on the underlying security or currency with the same exercise price and
expiration date as the option previously written.
Dealer Options. The Fund may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While the Fund would
look to a clearing corporation to exercise exchange-traded options, if the Fund
were to purchase a dealer option, it would rely on the dealer from whom it
purchased the option to perform if the option were exercised. Failure by the
dealer to do so would result in the loss of the premium paid by the Fund as
well as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the Fund originally wrote the option. While the Fund will seek to
enter into dealer options only with dealers who will agree to and which are
expected to be capable of entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to liquidate a dealer
option at a favorable price at any time prior to expiration. Until the Fund,
as a covered dealer call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency
of the contract party, the Fund may be unable to liquidate a dealer option.
With respect to options written by the Fund, the inability to enter into a
closing transaction may result in material losses to the Fund. For example,
since the Fund must maintain a secured position with respect to any call option
on a security it writes, the Fund may not sell the asset which it has
segregated to secure the position while it is obligated under the option. This
requirement may impair the Fund's ability to sell portfolio securities at a
time when such sale might be advantageous.
The Staff of the Securities and Exchange Commission (the "SEC") has taken
the position that purchased dealer options and the assets used to secure the
written dealer options are illiquid securities. The Fund may treat the cover
used for written OTC options as liquid if the dealer agrees that the Fund may
repurchase the OTC option it has written for a maximum price to be calculated
by a predetermined formula. In such cases, the OTC option would be considered
illiquid only to the extent the maximum repurchase price under the formula
exceeds the intrinsic value of the option. Accordingly, the Fund will treat
dealer options as subject to the Fund's limitation on unmarketable securities.
If the SEC changes its position on the liquidity of dealer options, the Fund
will change its treatment of such instruments accordingly.
Federal Income Tax Treatment of Options. Certain option transactions have
special tax results for the Fund. Listed non-equity options, including options
on currencies will be considered to have been closed out at the end of the
Fund's fiscal year and any gains or losses would be characterized as 60%
long-term capital gain or loss and 40% short-term capital gain or loss
regardless of the holding period of the option. Gains or losses on unlisted
currency options will not be subject to this treatment and will generally
result in ordinary income or loss.
In addition, losses on purchased puts and written covered calls, excluding
"qualified covered call options" on equity securities, to the extent they do
not exceed the unrealized gains on the securities or currencies covering the
options, may be subject to deferral until the securities or currencies covering
the
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options have been sold. The holding period of the securities covering these
option will be deemed not to begin until the option is terminated. For
securities covering a purchased put, this adjustment of the holding period may
increase the gain from sales of securities held less than three months. The
holding period of the security covering an "in-the-money qualified covered
call" option on an equity security will not include the period of time the
option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for more
than twelve months prior to the writing of the option.
3. Futures Contracts. The Fund may enter into financial futures contracts,
including stock index, interest rate and currency futures ("futures or futures
contracts").
Stock index futures contracts may be used to provide a hedge for a portion
of the Fund's portfolio, as a cash management tool, or as an efficient way for
a Fund Advisor to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Fund may purchase or
sell stock index futures contracts with respect to any stock index whose
movements will, in its judgment, have a significant correlation with movements
in the prices of all or portions of the Fund's portfolio securities.
Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the Fund. In this regard, the
Fund could sell interest rate futures as an offset against the effect of
expected increases in interest rates or currency exchange rates and purchase
such futures as an offset against the effect of expected declines in interest
rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on national or
foreign futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal stock index, interest rate and
currency futures exchanges in the United States are the Board of Trade of the
City of Chicago and the Chicago Mercantile Exchange. Futures exchanges and
trading in the United States are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (the "CFTC"). Futures are traded in
London at the London International Financial Futures Exchange, in Paris at the
MATIF and in Tokyo at the Tokyo Stock Exchange. Although techniques other than
the sale and purchase of futures contracts could be used for these purposes,
futures contracts offer an effective and relatively low cost means of
implementing the Fund's objectives in these areas.
Regulatory Limitations. The Fund will engage in transactions in financial
futures contracts and options thereon only for bona fide hedging, yield
enhancement and risk management purposes, in each case in accordance with the
rules and regulations of the CFTC, and not for speculation.
In accordance with CFTC regulations, as an operating, non-fundamental
policy, the Fund may not purchase or sell futures contracts or options thereon
if immediately thereafter the sum of the amounts of initial margin deposits on
the Fund's existing futures and premiums paid for options on futures would
exceed 5% of the market value of the Fund's total assets; provided, however,
that in the case of an option that is in the money at the time of purchase, the
in the money amount may be excluded in calculating the 5% limitation. In
instances involving the purchase of futures contracts and options thereon (less
any related margin deposits), amounts will be deposited in a segregated account
with the Fund's custodian to
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cover the position, or alternative cover will be employed thereby limiting
amounts leveraged by the Fund in its use of such futures contracts and options.
The segregated account the Fund maintains with the custodian to cover its
futures or options positions will consist of cash, U.S. government securities
or other liquid high-grade debt securities that, when added to the amounts or
premiums deposited with respect to the futures contract or option, are equal to
the market value of the underlying security not otherwise covered.
As an alternative to bona fide hedging as defined by the CFTC, the Fund
may comply with a different standard established by CFTC rules with respect to
futures contracts and options thereon purchased by the Fund incidental to the
Fund's activities in the securities markets, under which the value of the
assets underlying such positions will not exceed the sum of: (i) cash set
aside in an identifiable manner or short-term U.S. securities segregated for
this purpose; (ii) cash proceeds on existing investments due within thirty (30)
days; and (iii) accrued profits on the particular futures contract or option
thereon.
In addition, CFTC regulations may impose limitations on the Fund's ability
to engage in certain yield enhancement and risk management strategies. If the
CFTC or other regulatory authorities adopt different (including less stringent)
or additional restrictions, the Fund would comply with such new restrictions.
Trading in Futures. A futures contract provides for the future sale by
one party and purchase by another party of a specified amount of a specific
financial instrument (units of a stock index, debt security or currency) for a
specified price, date, time and place designated at the time the contract is
made. Brokerage fees are incurred when a futures contract is bought or sold
and margin deposits must be maintained. Entering into a contract to buy is
commonly referred to as buying or purchasing a contract or holding a long
position; entering into a contract to sell is commonly referred to as selling a
contract or holding a short position.
For example, one contract in the Financial Times Stock Exchange 100 Index
future is a contract to buy 25 pounds sterling multiplied by the level of the
UK Financial Times 100 Share Index on a given future date. Settlement of a
stock index futures contract may or may not be in the underlying security. If
not in the underlying security, then settlement will be made in cash,
equivalent over time to the difference between the contract price and the
actual price of the underlying asset at the time the stock index futures
contract expires.
Unlike when the Fund purchases or sells a security, no price would be paid
or received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain the Fund's open positions in
futures contracts, the Fund would be required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of cash, U.S.
government securities, suitable money market instruments, or liquid, high-grade
debt securities, known as "initial margin." The margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased
and sold on margins that may range upward from less than 5% of the value of the
contract being traded.
If the price of an open futures contract changes (by increase in the case
of a sale or by decrease in the case of a purchase), so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of favorable price
changes in the futures contract so that the margin deposit exceeds the required
margin, the broker will pay the excess to the Fund.
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These subsequent payments, called variation margin, to and from the
futures broker, are made on a daily basis as the price of the underlying assets
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.
Although interest and currency futures contracts, by their terms,
typically require actual future delivery of and payment for financial
instruments or currencies, while stock index futures settle in cash, in
practice most futures contracts are usually closed out before the delivery
date. Closing out an open futures contract sale or purchase is effected by
entering into an offsetting futures contract purchase or sale, respectively,
for the same aggregate amount of the identical securities and the same delivery
date. If the offsetting purchase price is less than the original sale price,
the Fund realizes a gain; if it is more, the Fund realizes a loss. The
transaction costs also must be included in these calculations. There can be no
assurance, however, that the Fund will be able to enter into an offsetting
transactions with respect to a particular futures contract at a particular
time. If the Fund is not able to enter into an offsetting transaction, the
Fund will continue to be required to maintain the margin deposits on the
futures contract; thus, the Fund could be required to make daily cash payments
of variation margin. In addition, the inability of the Fund to enter into an
offsetting transaction to close out its position could subject the Fund
to substantial losses.
As an example of an offsetting transaction in which the financial
instrument or currency is not delivered, the contractual obligations arising
from the sale of one contract or September Treasury Bills on an exchange may be
fulfilled at any time before delivery of the contract is required (i.e., on a
specified date in September, the "delivery month") by the purchase of one
contract of September Treasury Bills on the same exchange. In such instance,
the difference between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for transaction costs,
represents the profit or loss to the Fund.
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are volatile and
are influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international policies and economic events.
Most United States futures exchanges have established limits in the amount
of fluctuation permitted in futures contract prices during a single trading
day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached
in a particular type of contract, no trades may be made on that day at a price
beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses because
the limit may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to
substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss or
gain to the investor. For example, if at the time of purchase, 10% of the
value of the futures contract is deposited as margin, a subsequent 10% decrease
in the value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the
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<PAGE> 49
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, the Fund would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.
Furthermore, in the case of a futures contract purchase, in order to be certain
that the Fund has sufficient assets to satisfy its obligations under a futures
contract, the Fund earmarks to the futures contract an amount of money market
instruments equal in value to the current value of the underlying instrument,
less the margin deposit.
Liquidity. The Fund may elect to close some or all of its futures
positions at any time prior to their expiration. The Fund would do so to
reduce exposure represented by long futures positions or increase exposure
represented by short futures positions. The Fund may close its positions by
taking opposite positions which would operate to terminate the Fund's position
in the futures contracts. Final determinations of variation margin would then
be made, additional cash would be required to be paid by or released to the
Fund, and the Fund would realize a loss or gain.
Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
at any particular time. In such event, it might not be possible to close a
futures contract, and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge portfolio
securities or currencies, the Fund would continue to hold securities or
currencies subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of the securities
or currencies, if any, might partially or completely offset losses on the
futures contract. However, as described below, there is no guarantee that the
price of the securities or currencies will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Hedging Risk. A decision of whether, when, and how to hedge involves
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior or interest rate trends. There
are several risks in connection with the use by the Fund of futures contracts
as a hedging device. One risk arises because of the imperfect correlation
between movements in the prices of the futures contracts and movements in the
prices of securities or currencies which are the subject of the hedge. The
Investment Advisor will, however, attempt to reduce this risk by entering into
futures contracts whose movements, in its or their judgment, will have
significant correlation with movements in the prices of the Fund's portfolio
securities or currencies sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is
also subject to the ability of a Fund Advisor to correctly predict movements in
the direction of the market. It is possible that, when the Fund has sold
futures to hedge its portfolio against a decline in the market, the index or
indices, securities or currencies on which the futures are written might
advance and the value of securities or currencies held in the Fund's portfolio
might decline. If this were to occur, the Fund would lose money on the futures
and also would experience a decline in value in its portfolio securities or
currencies. However, while this might occur to a certain degree, the
Investment Advisor believes that over time the value of the Fund's portfolio
will tend to move in the same direction as the securities or currencies
underlying the futures, which are intended to correlate to the price movements
of the portfolio securities or currencies sought to be hedged. It is also
possible that if the Fund were to hedge against the possibility
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<PAGE> 50
of a decline in the market (adversely affecting securities or currencies held
in its portfolio) and prices instead increased, the Fund would lose part of all
of the benefit of increased value of those securities or currencies that it has
hedged, because it would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash, it might have
to sell securities or currencies to meet daily variation margin requirements.
Such sales of securities or currencies might be, but would not necessarily be,
at increased prices (which would reflect the rising market). The Fund might
have to sell securities or currencies at a time when it would be
disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contract and the portion of the portfolio being hedged, the price movements of
future contracts might not correlate perfectly with price movements in the
underlying stock index, security or currency due to certain market distortions.
First, all participants in the futures market are subject to margin deposit
and maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements in the
futures market are less onerous than margin requirement in the securities
markets, and as a result the futures market might attract more speculators than
the securities markets do. Increased participation by speculators in the
futures market might also cause temporary price distortions. Due to the
possibility of price distortion in the futures market and also because of the
imperfect correlation between price movements in the underlying instruments and
movements in the prices of futures contracts, even a correct forecast of
general market trends by Valley Forge Advisors might not result in a successful
hedging transaction over a very short time period.
Options on Futures Contracts. Options on futures are similar to options
on securities or currencies except that options on futures give the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract (a long position in the option is a call and a short position if the
option is a put), rather than to purchase or sell the futures contract, at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by the delivery of
the accumulated balance in the writer's futures margin account which represents
the amount by which the market price of the futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the futures contract. Alternatively,
settlement may be made totally in cash. Purchasers of options who fail to
exercise their options prior to the exercise date suffer a loss of the premium
paid.
As an alternative to writing or purchasing call and put options on stock
index futures, the Fund may write or purchase call and put options on stock
indices. Such options would be used in a manner similar to the use of options
on futures contracts.
Special Risks of Transactions in Options on Futures Contracts. The Fund
may seek to close out an option position by writing or buying an offsetting
option covering the same index, securities, currencies or contract and having
the same exercise price and expiration date. The ability to establish and
close out positions on such options will be subject to the maintenance of a
liquid secondary market. Reasons for the absence of a liquid secondary market
on an exchange include the following: (i) there may be insufficient trading
interest in certain options; (ii) restrictions may be imposed by an exchange on
opening transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options, or underlying securities or currencies,; (iv)
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities
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of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange for the options
(or in the class or series of options) would cease to exist, although
outstanding options that had been issued by a clearing corporation as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of any of the clearing corporations inadequate, and thereby result
in the institution by an exchange of special procedures which may interfere
with the timely execution of customers' orders.
Federal Tax Treatment of Futures Contracts. Generally, the Fund is
required, for federal income tax purposes, to recognize as income for each
taxable year its net unrealized gains and losses on futures contracts as of the
end of the year as well as those actually realized during the year. Gain or
loss recognized with respect to a futures contract will generally be 67%
long-term capital gain or loss and 33% short-term capital gain or loss, without
regard to the holding period of the contract.
Futures contracts which are intended to hedge against a change in the
value of securities or currencies may be classified as "mixed straddles," in
which case the recognition of losses may be deferred to a later year. In
addition, sales of such futures contracts on securities or securities indexes
may affect the holding period of the hedged security and, consequently, the
nature of the gain or loss on such security on disposition.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Pending tax regulations could limit the extent to
which net gain realized from futures contracts on currencies is qualifying
income for purposes of the 90% requirements. In addition, gains realized on
the sale or other disposition of securities, including futures contracts on
securities or securities indices and, in some cases, currencies, including
futures contracts on currencies, held for less than three months, must be
limited to less than 30% of the Fund's annual gross income. In order to avoid
realizing excessive gains on securities or currencies held less than three
months, the Fund may be required to defer the closing out of futures contracts
beyond the time when it would other wise be advantageous to do so. It is
anticipated that unrealized gains on futures contracts, which have been open
for less than three months as of the end the Fund's fiscal year and which are
recognized for tax purposes, will not be considered gains on securities or
currencies held less than three months for purposes of the 30% test.
The Fund will distribute to shareholders annually any net gains which have
been recognized for federal income tax purposes from futures transactions
(including unrealized gains at the end of the Fund's fiscal year). Such
distributions will be combined with distributions of ordinary income or capital
gains realized on the Fund's other investments. Shareholders will be advised
of the nature of the payments.
Foreign Futures and Options. Participation in foreign futures and foreign
options transactions involves the execution and clearing of trades on or
subject to the rules of foreign board of trade. Neither the National Futures
Associates nor any domestic exchange regulates activities of any foreign board
of trade, including the execution, delivery and clearing of transactions, or
has the power to compel enforcement of the rules of a foreign board of trade or
any applicable foreign law. This is true even if the exchange is formally
linked to a domestic market so that a position taken on the market may be
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liquidated by a transaction on another market. Moreover, such laws or
regulations will vary depending on the foreign country in which the foreign
futures or foreign options transaction occurs. For these reasons, customers
who trade foreign futures or foreign options contracts may not be afforded
certain of the protective measures provided by the Commodity Exchange Act, the
CFTC's regulations and the rules of the National Futures Association and any
domestic exchange, including the right to use reparations proceedings before
the Commission and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from customers for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign futures
or foreign options contract and, therefore, the potential profit and loss
thereon may be affected by any variance in the foreign exchange rate between
the time your order is placed and the time it is liquidated, offset or
exercised.
Additional Futures Contracts. Although the Fund has no current intention
of engaging in financial futures transactions other than those described above,
it reserves the right to do so. Such futures trading might involve risks which
differ from those involved in the futures and options described above.
4. Lending of Portfolio Securities.
For the purposes of realizing additional income, the Fund may make secured
loans of portfolio securities amounting to not more than 30% of its total
assets. This policy is a fundamental policy. Securities loans will be made to
broker-dealers or institutional investors pursuant to agreements requiring that
the loans be continuously secured by collateral at least equal at all times to
the value of the securities lent market to market on a daily basis. The
collateral received will consist of cash, U.S. government securities, letters
of credit or such other collateral as may be permitted under its investment
program. The cash collateral received by the Fund will be invested only in
money market securities. While the securities are being lent, the Fund will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Fund has a right to call each loan
and obtain the securities on five business days' notice or, in connection with
securities trading on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and sales of such
securities in such foreign markets. The Fund will not have the right to vote
securities while they are being lent, but it will call a loan in anticipation
of any important vote. The risks in lending portfolio securities, as with
other extensions of secured credit, consist of possible delay in receiving
additional collateral or in the recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. Loans will only
be made to persons deemed by a Fund Advisor to be of good standing and will not
be made unless, in the judgment of a Fund Advisor, the consideration to be
earned from such loan would justify the risk.
5. Foreign Securities.
The Fund may invest up to 15% of its total assets in U.S.
dollar-denominated and non U.S. dollar-denominated securities issued by foreign
issuers. While investments in foreign securities are intended to reduce risk
by providing further diversification, such investments involve sovereign risk
in addition to credit and market risks. Sovereign risk includes local
political or economic developments, potential nationalization, withholding
taxes on dividend or interest payments, and currency blockage (which would
prevent cash from being brought back to the United States). Foreign
investments may be affected
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favorably or unfavorably by changes in currency rates and exchange control
regulations. Foreign companies may have less public or less reliable
information available about them and may be subject to less governmental
regulation than U.S. companies. Securities of foreign companies may be less
liquid or more volatile than securities of U.S. companies.
6. Foreign Currency Transactions.
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded
in the interbank market conducted directly between currency traders (usually
large, commercial banks) and their customers. A forward contract generally has
no deposit requirement, and no commissions are charged at any stage for trades.
The Fund will generally enter into forward foreign currency exchange
contracts under two circumstances. First, when the Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency, it
may desire to "lock in" the U.S. dollar price of the security. By entering
into a forward contract for the purchase or sale, for a fixed amount of
dollars, of the amount of foreign currency involved in the underlying security
transactions, the Fund will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar
and the subject foreign currency during the period between the date the
security is purchased or sold and the date on which payment is made or
received.
Second, when the management of the Fund believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, including the U.S. dollar, it may enter into forward contract
to sell or buy the amount of the former foreign currency, approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency. Alternatively, where appropriate, the Fund may hedge all or
part of its foreign currency exposure through the use of a basket of currencies
or a proxy currency where such currency or currencies act as an effective proxy
for other currencies. In such a case, the Fund may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the value
of the securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Fund. The precise matching of
the forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above, the Fund will
also not enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities will
be incorporated in to the longer term investment decisions made with regard to
overall diversification strategies. However, management of the Fund believes
that it is important to have the flexibility to enter into such forward
contracts when it determines that the best interests of the Fund will be
served.
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At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute precision
the market value of portfolio securities at the expiration of the forward
contract. Accordingly, it may be necessary for the Fund to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security is less than the amount of foreign currency
the Fund is obligated to deliver and if a decision is made to sell the security
and make delivery of the foreign currency. Conversely, it may be necessary to
sell on the spot market some of the foreign currency received upon the same of
the portfolio security if its market value exceeds the amount of foreign
currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for sale
of a foreign currency and the date it enters into an offsetting contract for
the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealings in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. In instances involving
the purchase of forward foreign currency exchange contracts, amounts will be
deposited in a segregated account with the Fund's custodian to cover the
position, or alternative cover will be employed, thereby limiting amounts
leveraged by the Fund in its use of such forward contracts. Of course, the
Fund is not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
Valley Forge Advisors. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange at a future risk of loss due to a decline in the value of the hedged
currency, and, at the same time, tends to limit any potential gain which might
result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and investors should be
aware of the cost of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resale that currency to the dealer.
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7. Hybrid Commodity and Security Investments.
Recently, instruments have been developed which combine the elements of
futures contracts or options with those of debt, preferred equity or a
depository instrument (hereinafter "Hybrid Instruments"). Often these Hybrid
Instruments are indexed to the price of a commodity or particular currency.
Hybrid Instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity at a future
point in time, preferred stock with dividend rates determined by reference to
the value of a currency, or convertible securities with the conversion terms
related to a particular commodity. Examples of hybrid instruments in which the
Fund may invest include swaps, options on swaps and inverse floaters.
The risks of investing in Hybrid Instruments reflect a combination of the
risks from investing in securities, futures and currencies, including
volatility and lack of liquidity. (See the discussion of risks associated with
futures transactions beginning on page 13 and forward contracts beginning on
page 17. Further, the prices of the Hybrid Instrument and the related
commodity or currency may not move in the same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below market
(or even relatively nominal) rates. In addition,because the purchase and sale
of Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Fund and the seller of the Hybrid Instruments,
the creditworthiness of the contra party to the transaction would be a risk
factor which the Fund would have to consider. Because Hybrid Instruments are
illiquid, any investment in such instruments is subject to the Fund's
restriction of investing no more than 10% of its assets in illiquid securities.
Hybrid Instruments also may not be subject to regulation of the CFTC, which
generally regulates the trading of commodity futures by U.S. persons, or the
SEC, which regulates the offer and sale of securities by and to U.S. persons,
or any other governmental regulatory authority.
8. Private Placements (Restricted Securities).
The Fund may invest in restricted securities (privately placed debt
securities) and other securities without readily available market quotations
but will not acquire illiquid securities, including repurchase agreements which
do not provide for payment within seven days, if as a result they would
comprise more than 10% of the value of the Fund's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a securities under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at
fair value as determined in good faith by the Board of Directors. If through
the appreciation of restricted securities or the depreciation of unrestricted
securities, the Fund should be in a position where more than 10% of the value
of its net assets are invested in illiquid assets, including restricted
securities, the Fund will take appropriate steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities which while
privately placed, are eligible for purchase and sale under Rule 144A under the
Securities Act of 1933, as amended (the "1933 Act"). This rule, adopted in
April, 1990, permits certain qualified institutional buyers, such as the Fund,
to trade in privately placed securities even though such securities are not
registered under the 1933 Act. The Investment Advisor, under the supervision
of the Fund's Board of Directors, will consider whether
20
<PAGE> 56
securities purchased under Rule 144A are illiquid and thus subject to the
Fund's restriction of investing no more than 10% of its assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not
is a question of fact. In making this determination, the Investment Advisor
will consider trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the Fund Advisor
could consider the: (i) frequency of trades and quotes; (ii) number of dealers
and potential purchasers; (iii) dealer undertakings to make a market; and (iv)
the nature of the security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored, and, if
as a result of changed conditions it is determined that a Rule 144A security is
no longer liquid, the Fund's holdings of illiquid securities would be reviewed
to determine what, if any, steps are required to assure that the Fund does not
invest more than 10% of its assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities. In any event, the Fund will not purchase
144A securities if, as a result, more than 5% of the value of the Fund's net
assets would be invested in 144A securities.
9. Repurchase Agreements.
The Fund may enter into repurchase agreements through which an investor
(such as the Fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus specified interest.
Repurchase agreements are generally for a short period of time, often less than
a week. The Fund will not enter into a repurchase agreement which does not
provide for payment within seven days if, as a result, more than 10% of the
value of its net assets would then be invested in such repurchase agreements.
The Fund will only enter into repurchase agreements where: (i) the underlying
securities are of the type (excluding maturity limitations) which the Fund's
investment guidelines would allow it to purchase directly; (ii) the market
value of the underlying security, including interest accrued, will be at all
times equal to or exceed the value of the repurchase agreement; and (iii)
payment for the underlying security is made only upon physical delivery or
evidence of book-entry transfer to the account of the custodian or a bank
acting as agent. In the event of a bankruptcy or other default of a seller of
a repurchase agreement, the Fund could experience both delays in liquidating
the underlying securities and losses, including: (i) possible decline in the
value of the underlying security during the period while the Fund seeks to
enforce its rights thereto; (ii) possible subnormal levels of income and lack
of access to income during this period; and (iii) expenses of enforcing its
rights.
10. When-Issued Securities.
The Fund may from time to time purchase securities on a "when-issued"
basis. The price of such securities, which may be expressed in yield terms, is
fixed at the time the commitment to purchase is made, but delivery and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within 90 days of the purchase. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. Forward commitments involve a risk of
loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of
the Fund's other assets. Such when-issued securities may be sold prior to the
settlement date. At the time the Fund makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The Fund does not
believe that its net asset value
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<PAGE> 57
or income will be adversely affected by its purchase of securities on a
when-issued basis. The Fund will maintain (and mark-to-market) liquid assets
such as cash, U.S. government securities or other appropriate high-grade debt
obligations equal in value to commitments for when-issued securities. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date.
RISK FACTORS
General. Because of its investment policy, the Fund may or may not be a
suitable or appropriate investment for all investors. The Fund is not a money
market fund and is not an appropriate investment for those investors whose
primary objective is principal stability. There is risk in all investment.
The value of the portfolio securities of the Fund will fluctuate based upon
market conditions. Although the Fund seeks to reduce risk by investing in a
diversified portfolio, such diversification does not eliminate all risk. There
can, of course, be no assurance that the Fund will achieve these results.
Neither Fund Advisor has previously managed the assets of an investment
company. See "Management of the Fund" and "Investment Management Services."
Debt Obligations. Yields on short, intermediate, and long-term securities
are dependent on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. Debt securities with longer
maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market prices of debt securities
usually vary, depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio investments, and a decline in
interest rates will generally increase the value of portfolio investments. The
ability of the Fund to achieve its investment objectives is also dependent on
the continuing ability of the issuers of the debt securities in which the Fund
invests to meet their obligations for the payment of interest and principal
when due.
Foreign Investing. The Fund may invest in the securities of foreign
issuers, but intends to limit any such investments to not more than 15% of its
assets. Because the Fund may invest in foreign securities, investment in the
Fund involves risks that are different in some respects from an investment in a
fund which invests only in securities of U.S. domestic issues. Foreign
investments may be affected favorably or unfavorably by changes in currency
rates and exchange control regulations. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing, and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid or more volatile than
securities of U.S. companies, and foreign broker commissions and custodian fees
are generally higher than in the United States. Investments in foreign
securities may also be subject to other risks different from those affecting
U.S. investment, including local political or economic developments,
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments, and currency blockage (which would prevent cash
from being brought back to the United States).
Possible Investment of Certain Assets in Specific Industry. As a matter
of fundamental policy, the Fund may not purchase the securities of any issuer
if, as a result, 25% or more of the value of the Fund's total assets would be
invested in the securities of issuers having their principal business
activities in the same industry (other than obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities). Consistent with this
policy, the Fund will limit its investment in equity securities of
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<PAGE> 58
issuers having their principal business activities in the real estate industry,
including securities of real estate investment trusts ("REITs") to less than
25% of its assets. In the event the Fund makes a significant investment in
equity REIT securities, any prolonged downturn in the REIT securities market
could have a negative impact on the Fund's assets and/or its overall
performance. Certain of the general risks associated with investment in REITs
may include cash flow dependency, inability to service debt and the possibility
of failing to qualify for tax-free pass-through of income under the Internal
Revenue Code of 1986, as amended (the "Code").
INVESTMENT RESTRICTIONS
Fundamental policies of the Fund may not be changed without the approval
of the lesser of: (i) 67% of the Fund's shares present at a meeting of
Shareholders if the holders of more than 50% of the outstanding shares are
present in person or by proxy; or (ii) more than 50% of the Fund's outstanding
shares. Other restrictions, in the form of operating policies, are subject to
change by the Fund's Board of Directors without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowings by, the Fund.
Fundamental Policies.
As a matter of fundamental policy, the Fund may not:
(1) Borrowing. Borrow money, except the Fund may borrow from
banks as a temporary measure for extraordinary or emergency
purposes, and then only in amounts not exceeding 30% of its total
assets valued at market. The Fund will not borrow in order to
increase income (leveraging), but only to facilitate redemption
requests which might otherwise require untimely disposition of
portfolio securities (see page 11 of the prospectus). Interest paid
on any such borrowings will reduce net investment income. The Fund
may enter into futures contracts as set forth in (3) below;
(2) Commodities. Purchase or sell commodities or commodity
contracts, except that it may: (i) enter into futures contracts and
options on futures contracts, subject to (3) below; (ii) enter into
forward foreign currency exchange contracts, so long as no more than
5% of the Fund's total assets are invested in forward foreign
currency exchange contracts (although the Fund does not consider
such contracts to be commodities); and (iii) invest in instruments
which have the characteristics of both futures contracts and
securities;
(3) Futures Contracts. Enter into a futures contract or an
option thereon, although the Fund may enter into financial and
currency futures contracts or options on financial and currency
futures contracts;
(4) Industry Concentration. Purchase the securities of any
issuer if, as a result, 25% or more of the value of the Fund's
total assets would be invested in the securities of issuers having
their principal business activities in the same industry (other than
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities);
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<PAGE> 59
(5) Loans. Make loans, although the Fund may: (i) purchase
money market securities and enter into repurchase agreements; (ii)
acquire publicly-distributed bonds, debentures, notes and other debt
securities and purchase debt securities in private placements; and
(iii) lend portfolio securities;
(6) Margin. Purchase securities on margin, except that the Fund may use
short-term credit necessary for clearance of purchases of portfolio
securities and make margin deposits in connection with futures
contracts, subject to (3) above;
(7) Mortgaging. Mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the Fund as security for indebtedness
except as may be necessary in connection with permissible borrowings
and then such mortgaging, pledging or hypothecating may not exceed
30% of the Fund's total assets valued at market at the time of the
borrowing;
(8) Percent Limit on Assets Invested in Any One Issuer. Purchase
a security if, as a result, more than 5% of the value of the Fund's
total assets would be invested in the securities of a single issuer,
except securities issued or guaranteed by the U.S. Government, or
any of its agencies or instrumentalities;
(9) Percent Limit on Share Ownership of Any One Issuer. Purchase
a security if, as a result, with respect to 75% of the value of the
Fund's total assets, more than 10% of the outstanding voting
securities of any issuer would be held by the Fund (other than
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities) provided that, as an operating
policy, the Fund will not purchase a security if, as a result, more
than 10% of the outstanding voting securities of any issuer would be
held by the Fund;
(10) Real Estate. Purchase or sell real estate or real estate
limited partnerships (although it may purchase securities secured by
real estate or interests therein, or issued by REITs (whether
organized as corporations or as trusts) which invest in real estate
or interests therein);
(11) Senior Securities. Issue senior securities;
(12) Short Sales. Effect short sales of securities;
(13) Underwriting. Underwrite securities issued by other persons,
except to the extent that the Fund may be deemed to be an
underwriter within the meaning of the Securities Act of 1933 in
connection with the purchase and sale of its portfolio securities in
the ordinary course of pursuing its investment program;
Operating Policies. As a fundamental policy, the Fund may not invest in
companies for the purpose of exercising management or control.
Under the Investment Company Act of 1940, the Fund may not invest in any
securities of any issuer which, in its most recent fiscal year, derived more
than 10% gross revenues from "securities related activities," as defined by
rules of the Investment Company Act of 1940, unless certain conditions are met.
As a result of these restrictions, the Fund may not invest in the securities
of certain banks, broker-dealers and other companies in foreign countries. If
the Fund finds that this restriction prevents it from pursuing
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<PAGE> 60
its investment objective, it may apply to the SEC for an order which would
permit it to acquire such securities, but no assurance can be given that any
such order will be granted. It is also possible the law in this area will
change, in which case the Fund could have greater flexibility in the purchase
of the securities of foreign banks, broker-dealers, and other companies.
As a matter of operating policy, the Fund will not, among other things:
(i) purchase securities of an issuer if, as a result, (a) more than 10% of the
value of its net assets would be invested in illiquid securities, including
repurchase agreements which do not provide for payment within seven days, or
other securities which are not readily marketable or (b) more than 5% of the
value of the Fund's total assets would be invested in the securities of
unseasoned issuers which at the time of purchase have been in operation for
less than three years, including predecessors and unconditional guarantors;
(ii) purchase securities when money borrowed exceeds 5% of the Fund's total
assets; (iii) purchase or hold the securities of other open-end investment
companies; (iv) purchase or hold the securities of investment companies other
than open-end investment companies, if, as a result, more than 10% of the value
of its net assets would be invested in such investment companies; (v) purchase
interests in oil, gas or other mineral exploration or development programs;
(vi) purchase warrants, valued at the lower of cost or market, if, as a result,
more than 5% of the value of the Fund's net assets would be invested in
warrants, more than 2% of which are not listed on the New York Stock Exchange,
American Stock Exchange or Nasdaq National Market; and (vii) purchase POs and
IOs, if, as a result, more than 5% of the value of the Fund's net assets would
be invested in POs and IOs.
Redemption in Kind. In the unlikely event a shareholder were to receive an
in kind redemption of portfolio securities of the Fund, brokerage fees
generally would be incurred by the shareholder in the subsequent sale of such
securities.
MANAGEMENT OF FUND
The directors and executive officers of the Fund are listed below. The
address of each of Ms. Gong, Mr. Wolf and Mr. Mao is c/o Valley Forge Capital
Holdings Inc., 595 Market Street, Suite 1980, San Francisco, CA 94105 ("Valley
Forge Capital"). The addresses of Mr. Greenfield, Mr. MacDonald and Mr. Ghiai
are 595 Market Street, Suite 1450, San Francisco, CA 94105, 1032 Justin Way,
Dixon, California 95602, and 2660 Gough Street, #101, San Francisco, CA 94123,
respectively. In the list below, the Fund's directors who are considered
"interested persons" of Valley Forge Capital, as defined under Section 2(a)
(10) of the Investment Company Act of 1940 are noted with an asterisk(*).
These directors are referred to as inside directors by virtue of their
directorship and/or employment with Valley Forge Capital. No family
relationship exists between the persons listed below.
Name Position
---- --------
Victoria S. Gong* President and Director
Frederick A. Wolf* Treasurer and Director
Larry S. Mao* Senior Vice President - Operations and Secretary
Ronald N. Greenfield Director
Dougal C. MacDonald Director
Yves Ghiai Director
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<PAGE> 61
Victoria S. Gong (age 54) is President and a Director of the Fund and
Senior Vice President, Treasurer and a Director of Valley Forge Capital and
each of its subsidiaries, other than Valley Forge Distributors. From February
1993 until joining Valley Forge Capital in October 1993, Ms. Gong was the
Senior Vice President and the Cashier of the California National Bank. Ms.
Gong has been a consultant to the California National Bank since January 1994.
Ms. Gong was a Vice President and the Chief Operations Officer of America
California Bank from 1987 until joining the California National Bank. From
1964 until she joined the America California Bank, Ms. Gong worked for the Bank
of Canton of California in a variety of positions, serving as a Vice President
and Branch Manager at the time of her departure. Ms. Gong's responsibilities
at these banks have included management of the banks' investment portfolios,
oversight of regulatory compliance and accounting functions, development of
the bank's loan portfolios, and responsibility for the daily operations of
multiple branch banking facilities.
Frederick A. Wolf (age 43) is Treasurer and a Director of the Fund and
President and Chief Portfolio Manger for Valley Forge-Barrington, Ltd., and
President of Valley Forge Advisors, both of which are subsidiaries of Valley
Forge Capital. Mr. Wolf was employed by Barrington, Ltd. for 22 years prior to
its acquisition by Valley Forge-Barrington, Ltd. in April 1994 where he managed
equity portfolios for individuals, governments, corporations and pension and
profit sharing plans. Mr. Wolf is a graduate of the University of Detroit and
is a member of the Detroit Society of Financial Analysts and the American
Finance Association. He is also a board member of A.R.C. Credit Union, a
Trustee and Investment Advisor to the Southeast Michigan Taxsavers Association,
a non-profit organization, and a member of numerous community and fraternal
organizations.
Larry S. Mao (age 51) is a Senior Vice President - Operations and
Secretary of the Fund and Valley Forge Capital and its subsidiaries other than
Valley Forge Distributors. Mr. Mao was a Senior Vice President of the
California National Bank from January 1993 until joining Valley Forge Capital
in December 1993, where his duties included managing loan portfolios and
marketing financial products. Mr. Mao has been a director of California
National Bank since July 1994. From 1989 until he joined the California
National Bank, he was a Vice President, the Senior Lending Officer, and
Chairman of the Management Loan Committee of America California Bank. Prior to
this time, Mr. Mao served in senior executive positions at Western Federal
Savings and Loan, National American Bank, Bank of Canton, and other financial
institutions, where he managed loan portfolios, developed retail credit card
services, and coordinated corporate strategic planning. Mr. Mao received a
Bachelor of Arts degree in Economics and Mathematics from Park College,
Missouri, and continued his education through the American Institute of Banking
and Robert Morris Associates. Mr. Mao serves as President of his local Lions
Club and Merchants Association and is active in many other civic programs.
Ronald N. Greenfield, (age 57) is a director of the Fund. Mr. Greenfield
is the Chief Financial Officer and a founder of G-5 Global Investments, Inc., a
foreign currency trading firm, in which capacity he is responsible for fiscal
and administrative disciplines and for currency analysis and trading. Mr.
Greenfield's business experience spans over twenty years, and includes
authoring the G-5 Global Investment's Foreign Currency Trading System, as well
as managing and evaluating securities, real estate and mortgage portfolios, and
foreign currency. Prior to founding G-5, Mr. Greenfield served as a Foreign
Currency Trader and Section Manager with Tokyo International Investment, Ltd.,
where he trained and supervised Portfolio Managers, provided fundamental and
technical analyses, and managed foreign currency portfolios. Mr. Greenfield is
also the founder and past President and CEO of Indigo Financial Corp., where he
created and implemented a program of purchasing and insuring second mortgages,
which were then converted into $50 million bond issues in the form of insured,
AAA securities for sale to institutional investors. As a Vice-President with
Westcap Corp., Mr. Greenfield served as an Investment
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<PAGE> 62
Banker and Portfolio Manager, managing investments for financial institutions,
pension plans, and not-for-profit corporations. Mr. Greenfield is a licensed
real estate broker in the State of Tennessee and holds several securities
licenses. He earned a Bachelor of Arts degree in Business and Economics from
Vanderbilt University.
Dougal C. MacDonald (age 55) is a director of the Fund. Mr. MacDonald is
an attorney in private practice, specializing in real property and business law
since 1966. During that time he has represented issuers in real estate and
research and development partnership offerings. Mr. MacDonald is also a real
estate developer and principal in numerous real estate development
partnerships. Mr. MacDonald served on the Subdivision Advisory Committee of
the California Department of Real Estate from 1975 to 1992. He received a B.A.
in Philosophy from Stanford University, a Juris Doctor from Yale Law School,
and an M.B.A. in Taxation from Golden Gate University. Mr. MacDonald is
admitted to practice law in California and New York.
Yves Ghiai (age 38) is a Director of the Fund. Mr. Ghiai is the President
and founder of Ghiai Development Corporation ("GDC"), an international
architecture, design, development, and general contracting firm based in San
Francisco, California and Nice, France, and is a Vice President - International
Projects for Schmidt Garden & Erikcson, Architects, Chicago, Illinois. GDC, a
continuation of 36 year old Ghiai Real Estate Development, develops hotel and
residential projects in many countries including France, Sweden, Germany,
Mexico, Costa Rica, Ecuador, El Salvador, Saudi Arabia, Iran, and the USA.
Prior to founding GDC, Mr. Ghiai was employed by Del Campo & Maru, San
Francisco as a construction contract administrator for federal projects. He
received his baccalaureate degree from Lycee Janson de Sailly, Paris, France,
and his Masters of Architecture from Pratt Institute, New York. Mr. Ghiai is a
licensed general contractor and architect in the U.S. and is a member of the
Ordre des Architectures of France. In addition, Mr. Ghiai is a guest lecturer
at U.C. Berkeley, C.C.A.C., and San Francisco Academy of Art College.
It is anticipated that an Executive Committee may be established
consisting of two or more Directors. The Executive Committee would likely
exercise all powers of the Directors except for those which require actions by
all of the Directors or independent Directors under the Fund's Articles of
Incorporation or By-Laws or under applicable law.
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<PAGE> 63
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS.
The following table sets forth certain information with respect to the
aggregate compensation paid by the Fund during the fiscal year ended December
31, 1995 to the executive officers and directors of the Fund.
COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
NAME OF PERSON, AGGREGATE PENSION OR ESTIMATED ANNUAL TOTAL COMPENSATION
POSITION COMPENSATION FROM RETIREMENT BENEFITS BENEFITS UPON FROM FUND AND FUND
FUND ACCRUED AS PART OF RETIREMENT COMPLEX PAID TO
FUND EXPENSES DIRECTORS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Victoria S. Gong President * N/A N/A *
and Director
Frederick A. Wolf, * N/A N/A *
Treasurer, Director
Larry S. Mao, Senior
Vice President-Operations, * N/A N/A *
Secretary
Ronald N. Greenfield, ** N/A N/A **
Director
Dougal C. MacDonald, ** N/A N/A **
Director
Yves Ghiai, ** N/A N/A **
Director
</TABLE>
* Executive officers of the Fund and directors of the Fund, who are
considered "interested persons" within the meaning of Section 2(a)(19) of
the Investment Company Act of 1940, do not receive compensation from the
Fund.
** Directors of the Fund, who are not considered "interested persons" within
the meaning of Section 2(a)(19) of the Investment Company Act of 1940 may
at sometime in the future receive, a fee for their services as outside
directors of the Fund. As of the date of the registration statement which
includes this SAI, such disinterested directors have received no
compensation for their attendance at meetings of the Board of Directors.
28
<PAGE> 64
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the prospectus, the officers and directors of the Fund,
as a group, owned less than five percent of the outstanding shares of the Fund.
Certain of the officers and directors of the Fund are officers and directors
of Valley Forge Capital, which owns 10,000 (approximately seven percent) of the
outstanding shares of the Fund.
INVESTMENT MANAGEMENT SERVICES
The Fund's investment portfolio is managed by Valley Forge Advisors. See
"Management of Fund."
Valley Forge Advisors has entered into a Management Agreement with the
Fund. Under the Management Agreement, Valley Forge Advisors provides
discretionary investment services to the Fund. Valley Forge Advisors is
responsible for supervising and directing the Fund's investments in equity and
fixed income securities in accordance with the Fund's investment objectives,
and restrictions as provided in the Prospectus and this Statement of Additional
Information. Valley Forge Advisors also is responsible for effecting all
securities transactions with respect to the Fund's portfolio on behalf of the
Fund, including the negotiation of commissions and the allocation of principal
business and portfolio brokerage. In addition to these services, Valley Forge
Advisors provides the Fund with certain corporate administrative services,
including: maintaining the Fund's corporate existence, corporate records, and
registering and qualifying Fund Shares under federal and state laws; monitoring
the financial, accounting, and administrative functions of the Fund;
maintaining liaison with the agents employed by the Fund, such as the Fund's
custodian and transfer agent; assisting the Fund in the coordination of such
custodian's and transfer agent's activities; and permitting Valley Forge
Advisors' employees to serve as officers, directors, and committee members of
the Fund without cost to the Fund. The Management Agreement also provides that
Valley Forge Advisors, its directors, officers, employees, and certain other
persons performing specific functions for the Fund will only be liable to the
Fund for losses resulting from willful misfeasance, bad faith, gross
negligence, or reckless disregard of duty.
Management Fees. The Fund pays the Investment Advisor a management fee
(the "Management Fee") equal to .80% of the Fund's net assets per annum. The
Management Fee is payable monthly on the first business day of the next
succeeding calendar month and is calculated as described below.
The monthly Management Fee ("Monthly Management Fee") is the sum of the
daily fund fee accruals ("Daily Fund Fee Accruals") for each month. The Daily
Fund Fee Accrual for any particular day is computed by multiplying the fraction
of one (1) over the number of calendar days in the year by the fund fee rate of
.80% and multiplying this product by the net assets of the Fund for that day,
as determined in accordance with the Fund's prospectus as of the close of
business on the previous business day on which the Fund was open for business.
Limitation on Fund Expenses. The Management Agreement between the Fund and
Valley Forge Advisors provides that the Fund will bear all expenses of its
operations not specifically assumed by Valley Forge Advisors. In the interest
of limiting the expenses of the Fund during its initial period of operation,
Valley Forge Capital has agreed to bear any expenses for the Fund's first five
years of operations, which would cause the Fund's ratio of operating expenses to
average net assets to exceed 1.95%. However, if
29
<PAGE> 65
in any year following such five-year period, the Fund's expenses exceed the
limits prescribed by any state in which the Fund's shares are qualified for
sale, the Investment Advisor will be required to reimburse the Fund for such
excess, but may be reimbursed in subsequent years therefor to the extent such
reimbursement would not cause the Fund to exceed such limits. Presently, the
most restrictive expense ratio limitation imposed by any state is 2.5% of the
first $30 million of the Fund's average daily net assets, 2% of the next $70
million of the average daily net assets, and 1.5% of net assets in excess of
$100 million. For the purpose of determining whether the Fund is entitled to
reimbursement, the expenses of the Fund are calculated on a monthly basis. If
the Fund is entitled to reimbursement, that month's management fee will be
reduced or postponed, with any adjustment made after the end of the year.
DISTRIBUTOR FOR FUND
Valley Forge Distributors, a Nevada corporation formed in 1993 as a
wholly-owned subsidiary of Valley Forge Capital, serves as the Fund's
distributor. Valley Forge Distributors is registered as a broker-dealer under
the Securities Exchange Act of 1934 and is a member of the National Association
of Securities Dealers, Inc. The offering of the Fund's shares is continuous.
Valley Forge Distributors is located at the same address as the Fund -- 595
Market Street, Suite 1980, San Francisco, CA 94105.
Valley Forge Distributors serves as distributor to the Fund pursuant to an
underwriting agreement ("Underwriting Agreement"), which provides that the Fund
will pay all fees and expenses in connection with registering and qualifying
its shares under the various state "blue sky" laws, preparing, setting in type,
printing, and mailing its prospectuses and reporting to shareholders, and
issuing its shares, including expenses of confirming purchase orders.
The Underwriting Agreement provides that Valley Forge Distributors will
pay all fees and expenses in connection with distributing prospectuses and
reports for use in offering and selling Fund shares, preparing, setting in
type, printing, and mailing all sales literature and advertising, Valley Forge
Distributors's federal and state registrations as a broker-dealer, and offering
and selling Fund shares, except for those fees and expenses specifically
assumed by the Fund. Valley Forge Distributors's expenses are paid by Valley
Forge Capital to the extent they exceed revenues.
Sales Commission. Valley Forge Distributors acts as the agent of the Fund
in connection with the sale of its shares in all states in which the shares are
qualified and in which Valley Forge Distributors is qualified as a
broker-dealer. Under the Underwriting Agreement, Valley Forge Distributors
accepts orders for Fund shares at net asset value. The following sales
commission are paid by investors:
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<PAGE> 66
<TABLE>
<CAPTION>
Total Sales Commission+
-----------------------
As a Percentage of As a Percentage of Portion of Total
Amount of Single Sale Offering Price of the Net Asset Value of Offering Price
at Offering Price Shares Purchased Shares Purchased Retained by Dealers
- --------------------- --------------------- ------------------ -------------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 5.00% 5.26% 4.40%
$100,000 but less than $250,000 4.00% 4.17% 3.50%
$250,000 but less than $500,000 3.00% 3.09% 2.50%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%
$1,000,000 or more none none see below++
</TABLE>
- --------------------
+ At the discretion of Valley Forge Distributors, the entire sales
commission may at times be reallowed to dealers. Valley Forge
Distributors also may, at its expense, provide additional promotional
incentives or payments to dealers that sell the Fund's shares. In some
instances, the full reallowance, incentives or payments may be offered
only to certain dealers who have sold or may sell significant amounts of
shares. When 90% or more of the sales commission is reallowed, such
dealers may be deemed to be underwriters as that term is defined
in the 1933 Act.
++
The following commissions will be paid by Valley Forge Distributors to
dealers who initiate and are responsible for purchases of $1 million or
more and for purchases made at net asset value by certain retirement plans
or organizations with collective retirement plan assets of $10 million or
more: 1.00% on sales of up to $2 million, plus 0.80% on sales of $2
million to $3 million, plus 0.50% on sales of $3 million to $10 million,
plus 0.25% on sales of $10 million to $25 million, plus 0.15% on sales
in excess of $25 million.
A sales commission equal to 4.00% of the offering price (4.17% of the net
asset value) is applicable to all purchases of shares, regardless of
amount, made for any qualified or non-qualified employee benefit plan. Of
the 4.00% sales commission applicable to such purchases, 3.20% of the
offering price will be reallowed to dealers.
Distribution Plan and Agreement. The Fund has adopted a Distribution Plan
and Agreement (the "Plan") pursuant to Rule 12b-1 of the Investment Company Act
of 1940, for the purpose of compensating Valley Forge Distributors for services
provided and expenses incurred by it in promoting the sale of shares of the
Fund, reducing redemptions, and maintaining and improving services provided to
shareholders by Valley Forge Distributors.
Continuance of the Plan is subject to annual approval by a vote of the
Board of Directors, including a majority of the Directors who are not
interested persons of the Fund and who have no direct or indirect interest in
the Plan or related arrangements ("Qualified Directors"), cast in person at a
meeting called for that purpose. All material amendments to the Plan must be
likewise approved by the Directors and the Qualified Directors. The Plan may
not be amended to materially increase the costs which the Fund may bear for
distribution pursuant thereto without shareholder approval. The Plan
terminates automatically in the event of its assignment and may be terminated
without penalty, at any time, by a vote of a majority of the Qualified
Directors or by approval of a vote of a majority of the outstanding voting
securities of the Fund.
31
<PAGE> 67
CUSTODIAN
PNC Bank, N.A. ("PNC Bank") serves as the custodian for the Fund's
securities and cash, but it does not participate in the Fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust Corporation.
PNC Bank's mailing address is as follows: PNC Bank, N.A., 200 Stevens Drive,
Airport Business Center, Lester, PA 19113.
PORTFOLIO TRANSACTIONS
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the Fund are made by Valley Forge Advisors. Valley Forge Advisors is
responsible for implementing these decisions with respect to the Fund's
portfolio, including the allocation of portfolio brokerage and principal
business. For fixed income securities, it is expected that purchases and sales
of portfolio securities will ordinarily be transacted with the issuer or with a
primary market maker acting as principal on a net basis, with no brokerage
commission being paid the Fund.
In purchasing and selling the Fund's portfolio securities, it is the
Investment Advisor's policy to obtain quality execution at the most favorable
prices through responsible broker-dealers and, in the case of agency
transactions, at competitive competition rates. However, under certain
conditions, the Fund may pay higher brokerage commissions in return for
brokerage and research services, although it has no current arrangement to do
so. In selecting broker-dealers to execute the Fund's portfolio transactions,
the Investment Advisor will consider such factors as the price of the security,
the rate of the commission, the size and difficulty of the order, the
reliability, integrity, financial condition, general execution and operation
capabilities of competing broker-dealers, and the brokerage and research
services they provide to the Investment Advisor.
The Investment Advisor may cause the Fund to pay a broker-dealer who
furnishes brokerage and/or research services a commission that is in excess of
the commission another broker-dealer would have received for executing the
transaction if it is determined that such commission is reasonable in relation
to the value of the brokerage and/or research services which would have been
provided. In some cases, research services are generated by third parties, but
are provided to the Investment Advisor by or through broker-dealers.
The Investment Advisor may effect principal transactions on behalf of the
Fund with a broker-dealer who furnishes brokerage and/or research services, or
designate any such broker-dealer to receive selling concessions, discounts or
other allowances, or otherwise deal with any such broker-dealer in connection
with the acquisition of securities in underwritings. Additionally, purchases
and sales of fixed income securities are transacted with the issuer, the
issuer's underwriter, or with a primary market maker acting as principal or
agent. The Fund does not usually pay brokerage commissions for these purchases
and sales, although the price of the securities generally includes compensation
which is not disclosed separately. The prices the Fund pays to underwriters of
newly-issued securities usually include a concession paid by the issuer to the
underwriter. Transactions placed through dealers who are serving as primary
market makers reflect the spread between the bid and asked prices.
32
<PAGE> 68
The Investment Advisor may receive a wide range of research services from
broker-dealers, including information on securities markets, the economy,
individual companies, statistical information, accounting and tax law and
interpretations, technical market action, pricing and appraisal services, and
credit analyses. Research services are received primarily in the form of
written reports, telephone contacts, personal meetings with security analysts,
corporate and industry spokespersons, economists, academicians, government
representatives, and access to various computer-generated data. Research
services received from broker-dealers are supplemental to the Investment
Advisor's own research efforts and, when utilized, are subject to internal
analysis before being incorporated into the investment process.
The Investment Advisor assesses the contribution of the brokerage and
research services provided by broker-dealers, and allocates a portion of the
brokerage business of its clients on the basis of these assessments. In
addition, broker-dealers sometimes suggest a level of business they would like
to receive in return for the various brokerage and research services they
provide. Actual brokerage received by any firm may be less than the suggested
allocation, but can (and often does) exceed the suggestions because total
brokerage is allocated on the basis of all the considerations described above.
In no instance is a broker-dealer excluded from receiving business because it
has not been identified as providing research services.
The Investment Advisor can not readily determine the extent to which net
prices charged by broker-dealers reflect the value of their research services.
In some instances, the Investment Advisor will receive research services it
might otherwise have had to perform for itself. The research services provided
by broker-dealers can be useful to the Investment Advisor in serving its other
clients, but they can also be useful in serving the Fund.
The Fund does not allocate business to any broker-dealer on the basis of
its sales of the Fund's shares. However, this does not mean that
broker-dealers who purchase Fund shares for their clients will not receive
business from the Fund.
As provided in the Management Agreement between the Fund and Valley Forge
Advisors, Valley Forge Advisors is responsible not only for making decisions
with respect to the purchase and sale of the Fund's portfolio securities, but
also for implementing these decisions, including the negotiation of commissions
and the allocation of portfolio brokerage and principal business.
Other clients of the Valley Forge Advisors have investment objectives and
programs similar to those of the Fund. The Investment Advisor may make
recommendations to its other clients which result in its purchasing or selling
securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold may increase,
and this could have an adverse effect on the price of those securities. It is
the policy of Valley Forge Advisors not to favor one client over another in
making recommendations or in placing orders. If two or more of a Investment
Advisor's clients are purchasing a given security on the same day from the same
broker-dealer, the Investment Advisor may average the price of the transactions
and allocate the average among the clients participating in the transactions.
Valley Forge Advisors has established a general investment policy that it will
ordinarily not make additional purchases of a security for its clients
(including other funds of Valley Forge Capital) if, as a result of such
purchases, 10% or more of the outstanding securities of such company would be
held by its clients in the aggregate.
33
<PAGE> 69
PRICING OF SECURITIES
Securities listed or traded on a national securities exchange are valued
at the last quoted sales prices on the date the valuations are made. Securities
regularly traded in the over-the-counter market are valued at the last quoted
sales price on the NASDAQ System. If no sales price is available for a listed
or NASDAQ security, or if the security is not listed on NASDAQ, such security is
valued at a price equal to the mean of the latest bid and ask prices.
Securities listed or traded on certain foreign exchanges are valued at the last
quoted sales prices on the date the valuations are made. A security which is
listed or traded on more than one exchange is valued at the quotations on the
exchange determined to be the primary market for such security by the Board of
Directors or its delegates.
Fixed income securities are generally traded in the over-the-counter
market and will be valued at a price deemed best to reflect a fair value as
quoted by dealers who make markets in these securities or by an independent
pricing service. Short-term securities (maturing or expiring in 60 days or
less) are valued at their cost in local currency which, when combined with
accrued interest, approximate fair value.
In instances where the price of a security determined by these methods is
deemed not to be representative, the security is valued in the manner
prescribed by the Board to reflect its fair value.
For purposes of determining the Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are converted
to U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by any major bank, as determined from time to time
by the Board of Directors. If such quotations are not available, the rate of
exchange will be determined in accordance with policies established in good
faith by the Board. On an ongoing basis, the Board monitors the Fund's method
of valuation.
DIVIDENDS
Unless you elect otherwise, dividends or distributions will be reinvested
on the reinvestment date using the NAV per share of that date. The
reinvestment date normally precedes the payment date by about 10 days although
the exact timing is subject to change.
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is equal to the
Fund's net asset value per share or share price, plus the applicable sales
commission. The Fund determines its net asset value per share by subtracting
the Fund's liabilities from its total assets and dividing the result by the
total number of shares outstanding. Among other things, the Fund's liabilities
include accrued expenses and dividends payable and its total assets include
portfolio securities valued at market as well as income accrued but not yet
received. The net asset value per share of the Fund is calculated as of the
close of trading on the New York Stock Exchange ("Exchange") every day the
Exchange is open for trading. The Exchange is closed on the following days:
New Year's Day, Presidents Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
34
<PAGE> 70
TAX STATUS
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code.
A portion of the dividends paid by the Fund may be eligible for the
dividends-received deduction for corporate shareholders. For tax purposes, it
does not make any difference whether dividends and capital gain distributions
are paid in cash or in additional shares. The Fund must declare dividends
equal to at least 98% of ordinary income (as of December 31) and capital gains
(as of October 31) in order to avoid a federal excise tax and distribute 100%
of ordinary income and capital gains as of December 31 to avoid federal income
tax.
At the time of your purchase, the Fund's net asset value may reflect
undistributed income, capital gains or net unrealized appreciation of
securities held by the Fund. A subsequent distribution to you of such amounts,
although constituting a return of your investment, would be taxable either as
dividends or capital gain distributions. For federal income tax purposes, the
Fund is permitted to carry forward its net realized capital losses, if any, for
eight years, and realize net capital gains up to the amount of such losses
without being required to pay taxes on, or distribute such gains.
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (i) the Fund would be taxed at normal
corporate rates on the entire amount of its taxable income without deduction
for dividends or other distributions to shareholders; and (ii) the Fund's
distribution to the extent made out of the Fund's current or accumulated
earnings and profits would be taxable to shareholders as ordinary dividends
(regardless of whether they would otherwise have been considered capital gain
dividends).
Taxation of Foreign Shareholders. The Code provides that dividends from
net income will be subject to U.S. tax. For shareholders who are not engaged
in a business in the U.S., this tax would be imposed at the rate of 30% upon
the gross amount of the dividends in the absence of a Tax Treaty providing for
a reduced rate or exemption from U.S. taxation. Distributions of net
long-term capital gains realized by the Fund are not subject to tax unless the
foreign shareholder is a nonresident alien individual who was physically
present in the U.S. during the tax year for more than 182 days.
To the extent the Fund invests in foreign securities, the following would
apply:
Foreign Currency Gains and Losses. Foreign currency gains and losses,
including the portion of gain or loss on the sale of debt securities
attributable to foreign exchange rate fluctuations are taxable as ordinary
income. If the net effect of these transactions is a gain, the dividend paid
by the Fund will be increased; if the result is a loss, the income dividend
paid by the Fund will be decreased. Adjustments to reflect these gains and
losses will be made at the end of the Fund's taxable year.
YIELD INFORMATION
From time to time, the Fund may advertise a yield figure calculated in the
following manner:
An income factor is calculated for each security in the portfolio, which
in the case of bonds is based upon the security's market value at the beginning
of the period and expected yield-to-maturity, and in the case of stocks is
based upon the stated dividend rate. The income factors are then totalled for
all
35
<PAGE> 71
securities in the portfolio. Next, expenses of the Fund for the period are
deducted from the income to arrive at net income, which is then converted to a
per-share amount by dividing net income by the average number of shares
outstanding during the period. The net income per share is divided by the net
asset value on the last day of the period to produce an annualized yield.
Quoted yield factors are for comparison purposes only, and are not
intended to indicate future performance or forecast the dividend per share of
the Fund.
Investment Performance
Total Return Performance. The Fund's calculation of total return
performance includes the reinvestment of all capital gains distributed and
income dividends for the period or periods indicated, without regard to tax
consequences to a shareholder in the Fund. Total return is calculated as the
percentage change between the beginning value of a static account in the Fund
and the ending value of that account measured by the then current net asset
value, including all shares acquired through reinvestment of income and capital
gains dividends. The results shown are historical and should not be considered
indicative of the future performance of the Fund. Each average annual compound
rate of return is derived from the cumulative performance of the Fund over the
time period specified. The annual compound rate of return for the Fund over
any other period of time will vary from the average.
From time to time, in reports and promotional literature, one or more
existing or future Valley Forge funds, including the Fund, may compare its
yield to Overnight Government Repurchase Agreements, Treasury bills, notes, and
bonds, certificates of deposit, and six-month money market certificates.
Performance or yield may also be compared to indices of broad groups of
unmanaged securities considered to be representative of or similar to Fund
portfolio holdings such as:
Advertising News Services Inc., - "Bank Rate Monitor - the Weekly
Financial Rate Reporter" - a weekly publication which lists the yields on
various money market instruments offered to the public by 100 leading
banks and thrift institutions in the U.S., including loan rates offered
by these banks. Bank certificates of deposit differ from mutual funds in
several ways: the interest rate established by the sponsoring bank is
fixed for the term of a CD; there are penalties for early withdrawal from
CDs; and the principal on a CD is insured.
Donaghue Organization, Inc., - "Donaghue's Money Fund Report" - a weekly
publication which tracks net assets, yield, maturity, and portfolio
holdings on approximately 380 money market mutual funds offered in the
U.S. These funds are broken down into various categories such as U.S.
Treasury, Domestic Prince and Euros, Domestic Prime and Euros and
Yankees, and Aggressive.
Lipper Analytical Services, Inc. - Average of Balanced Funds - a widely
used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets.
Lipper Analytical Services, Inc., - "Lipper Mutual Fund Performance
Analysis" - a monthly publication which tracks net assets, total return,
principal return and yield on approximately 950 fixed income mutual funds
offered in the United States. Fund categories include: Growth, Mixed
Income, and Flexible Portfolios.
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<PAGE> 72
Major Competitors - the average of the following mutual funds: Fidelity
Balanced, Vanguard Wellington, Twentieth Century Balanced, or other
similar mutual funds.
Merrill Lynch, Pierce, Fenner & Smith, Inc., - "Taxable Bond Indices" - a
monthly publication which lists principal, coupon and total return on
over 100 different taxable bond indices which Merrill Lynch tracks,
together with the par weighted characteristics of each Index. The index
used as a benchmark for the High Yield Fund is the High Yield Index. The
two indices used as benchmarks for the Short-Term Bond Fund are the
91-Day Treasury Bill Index and the 1-2.99 Year Treasury Note Index.
Mutual Fund Values, published by Morningstar, Inc. - a mutual fund
tracking system which provides a top performer list every two weeks based
on performance and risk management.
Salomon Brothers, Inc. "Market Performance" - a monthly publication which
tracks principal return, total return and yield on the Salomon Brothers
Broad Investment Grade Bond Index and the components of the Index.
Salomon Brothers Broad Investment Grade Index - a widely used index
composed of U.S. domestic government, corporate and mortgage-backed fixed
income securities.
Shearson Lehman Brothers, Inc., "The Bond Market Report" - a monthly
publication which tracks principal, coupon and total return on the
Shearson Lehman Govt./Corp. Index and Shearson Lehman Aggregate Bond
Index, as well as the components of these indices.
Tolerate Systems, Inc., a computer system to which we subscribe which
tracks the daily rates on money market instruments, public corporate debt
obligations and public obligations of the U.S. Treasury and agencies of
the U.S. Government.
Wall Street Journal - a daily newspaper publication which lists the
yields and current market values on money market instruments, public
corporate debt obligations, public obligations of the U.S. Treasury and
agencies of the U.S. government as well as common stocks, preferred
stock, convertible preferred stocks, options and commodities; in addition
to indices prepared by the research department of such financial
organizations as Shearson Lehman/American Express, Inc., and
Merrill Lynch, Pierce, Fenner and Smith, Inc., including information
provided by the Federal Reserve Board.
Performance rankings and ratings periodically in national financial
publications such as MONEY, FORBES, BUSINESS WEEK, BARRON's, etc., will also be
used.
From time to time, in reports and promotions literature: (i) the Fund's
total return performance or P/E ratio may be compared to: (a) the Standard &
Poor's 500 Stock Index and Dow Jones Industrial Average so that you may compare
the Fund's results with those of a group of unmanaged securities widely
regarded by investors as representative of the stock market in general; (b)
other groups of mutual funds tracked by: (1) Lipper Analytical Services, a
widely used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets; or (2) other financial or
Business publications, such as Business Week, Money Magazine, Forbes and
Barron's, which provide similar information; or (c) indices of stock comparable
to those in which the Fund invests; (ii) the Consumer Price Index (the measure
for inflation) may be used to assess the real rate of return from an investment
in the Fund; (iii)
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<PAGE> 73
other government statistics such as GNP, and import and export figures derived
from governmental publications, e.g., the Survey of Current Business, may be
used to illustrate investment attributes of the Fund or the general economic,
business, investment, or financial environment in which the Fund operates; (iv)
the effect of tax-deferred compounding on the Fund's investment returns, or on
return in general, may be illustrated by graphs, charts, etc., where such graphs
or charts would compare, at various points in time, the return from an
investment in the Fund (or returns in general) on a tax-deferred basis (assuming
one or more tax rates) with the return on a taxable basis; and (v) the sectors
or industries in which the Fund invests may be compared to relevant indices or
surveys (e.g., S&P Industry Surveys) in order to evaluate the Fund's historical
performance or current or potential value with respect to the particular
industry or sector. In connection with (iv) above, information derived from the
following chart may be used.
IRA Versus Taxable Return
Assuming 9% annual rate of return, $2,000 annual contribution and 28% tax
bracket.
<TABLE>
<CAPTION>
Year Taxable Tax Deferred (IRA)
<S> <C> <C>
10 $ 28,700 $ 33,100
15 52,400 64,000
20 82,500 111,500
25 125,100 184,600
26 183,300 297,200
</TABLE>
An IRA is a long-term investment whose objective is to accumulate personal
savings for retirement. Due to the long-term nature of the investment, even
slight differences in performance will result in significantly different assets
at retirement. Mutual funds, with their diversity of choice, can be used for
IRA investments. Generally, individuals may need to adjust their underlying
IRA investment as their time to retirement and tolerance for risk changes.
THE FUND'S CAPITAL STOCK
The Fund's amended and restated Articles of Incorporation ("Articles")
authorize the Board of Directors to classify and reclassify any and all shares
which are then unissued, including unissued shares of capital stock into any
number of classes or series, each class or series consisting of such number of
shares and having such designations, such powers, preferences, rights,
qualifications, limitations, and restrictions, as shall be determined by the
Board of Directors subject to the Investment Company Act of 1940, and other
applicable law. The shares of any such additional classes or series might
therefore differ from the shares of the present class and series of capital
stock and from each other as to preferences, conversions or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption, subject to applicable law, and might thus be
superior or inferior to the capital stock or to other classes or series in
various characteristics. The Board of Directors may increase or decrease the
aggregate number of shares of stock or the number of shares of stock of any
class or series that the Fund has authorized to issue without shareholder
approval.
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<PAGE> 74
Except to the extent that the Fund's Board of Directors might provide by
resolution that holders of shares of a particular class are entitled to vote as
a class on specified matters presented for a vote of the holders of all shares
entitled to vote on such matters, there would be no right of class vote unless
and to the extent that such a right might be construed to exist under Maryland
law. The Articles contain no provision entitling the holders of the present
class of capital stock to a vote as a class on any matter. Accordingly, the
preferences, rights, and other characteristics attaching to any class of
shares, including the present class of capital stock, might be altered or
eliminated, or the class might be combined with another class or classes, by
action approved by the vote of the holders of a majority of all the shares of
all classes entitled to be voted on the proposal, without any additional right
to vote as a class by the holders of the capital stock or of another effected
class or classes.
Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and until
such time as less than a majority of the directors holding office have been
elected by shareholders, at which time the directors then in office will call a
shareholders' meeting for the election of directors. Except as set forth
above, the directors shall continue to hold office and may appoint successor
directors. Voting rights are not cumulative, so that the holders of more than
50% of the shares voting in the election of directors can, if they choose to do
so, elect all the directors of the Fund, in which event the holders of the
remaining shares will be unable to elect any person as a director. As set
forth in the By-Laws of the Fund, a special meeting of shareholders of the Fund
shall be called by the Secretary of the Fund on the written request of
shareholders entitled to cast at least 10% of all votes of the Fund entitled to
be cast at such meeting. Shareholders requesting such a meeting must pay to
the Fund the reasonably estimated costs of preparing and mailing the notice of
the meeting. The Fund, however, will otherwise assist the shareholders seeking
to hold the special meeting in communicating to the other shareholders of the
Fund to the extent required by Section 16(c) of the Investment Company Act of
1940.
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the 1933 Act, and the Fund
or its shares are registered under the laws of all states requiring
registration in which it intends to sell its shares, as well as the District of
Columbia and Puerto Rico.
LEGAL COUNSEL
Shefsky Froelich & Devine Ltd., whose address is 444 North Michigan
Avenue, Suite 2500, Chicago, Illinois 60611, is legal counsel to the Fund.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, whose address is 50 Fremont Street, San Francisco,
California 94105-2230, are independent auditors to the Fund.
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<PAGE> 75
RATINGS OF CORPORATE DEBT SECURITIES
Moody's Investors Services, Inc. (Moody's)
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge."
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known of high
grade bonds.
A - Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations.
Baa - Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interests payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Standard & Poor's Corporation (S&P) or Duff & Phelps Investor Services.
AAA - This is the highest rating assigned to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
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<PAGE> 76
Financial Statements
The financial statements of the Fund for the year ended December 31, 1995,
and the report of independent accountants are included in the Fund's Annual
Report for the year ended December 31, 1995. A copy of the Annual Report
accompanies this Statement of Additional Information. The following financial
statements and the report of independent accountants appearing in the Annual
Report for the year ended December 31, 1995, are incorporated into this
Statement of Additional Information by reference:
- Report of Independent Accountants (p. 11)
- Statement of Net Assets, December 31, 1995 (p. 4-5)
- Statement of Operations for the period August 11, 1995 (commencement
of operations) through December 31, 1995 (p.6)
- Statement of Changes in Net Assets for the period August 11, 1995
(commencement of operations) through December 31, 1995 (p.7)
- Notes to Financial Statements (p. 9-10)
41
<PAGE> 77
PART C
Other Information
Item 24. Financial Statements and Exhibits
(a) Condensed Financial Information (Financial
Highlights) is included in Part A of the Registration
Statement.
Statement of Net Assets, Statement of Operations, Statement
of Changes in Net Assets and Notes to Financial Statements
are included in the Annual Report to Shareholders, the
pertinent portions of which are incorporated by reference in
Part B of the Registration Statement.
(b) Exhibits.
(1) Articles of Amendment and Restatement (Exhibit (1) to
the Company's Registration Statement on Form N-1A (No.
33-79068) as filed with the SEC on May 16, 1994)*
(2) By-Laws of Registrant, dated January 20, 1994
(Exhibit (2) to the Company's Registration Statement on
Form N-1A (No. 33-79068) as filed with the SEC on May
16, 1994)*
(3) Inapplicable
(4)(a) Specimen Stock Certificate - Inapplicable (Shares to
be uncertificated)
(b) The Articles of Amendment and Restatement and By-Laws
of the Registrant included as Exhibits (1) and (2) are
incorporated herein by reference.
(5)(a) Investment Management Agreement between Registrant and
Valley Forge Advisors, Inc. (Exhibit (5)(a) to the
Company's Registration Statement on Form N-1A (No.
33-79068) as filed with the SEC on March 1, 1995)*
(b) Investment Management Agreement between Registrant and
The Marshall Plan, L.P.**
(6)(a) Distribution Agreement between Registrant and Valley
Forge Distributors, Inc. (Exhibit (6)(a) to the
Company's Registration Statement on Form N-1A (No.
33-79068) as filed with the SEC on March 1, 1995)*
(6)(b) Dealer Agreement of Valley Forge Distributors, Inc.
(Exhibit (6)(b) to the Company's Registration Statement
on Form N-1A (No. 33-79068) as filed with the SEC on
March 1, 1995)*
(7) Inapplicable
i
<PAGE> 78
(8)(a) Custodian Services Agreement between Registrant and PNC
Bank, N.A. (Exhibit (8)(a) to the Company's
Registration Statement on Form N-1A (No. 33-79068) as
filed with the SEC on March 1, 1995)*
(9)(a) Transfer Agency Services Agreement, between Registrant
and PFPC, Inc. (Exhibit (9)(a) to the Company's
Registration Statement on Form N-1A (No. 33-79068) as
filed with the SEC on March 1, 1995)*
(b) Administration and Accounting Services Agreement.
(Exhibit (9)(b) to the Company's Registration Statement
on Form N-1A (No. 33-79068) as filed with the SEC on
March 1, 1995)*
(c) Expense Limitation Agreement between Registrant and
Valley Forge Capital Holdings Inc. (Exhibit (9)(c) to
the Company's Registration Statement on Form N-1A (No.
33-79068) as filed with the SEC on March 1, 1995)*
(10) Opinion and Consent of Counsel dated March 1, 1995
(filed herewith)
(11) Consent of Independent Auditors (filed herewith)
(12) Inapplicable
(13) Initial Capitalization Agreement between Registrant and
Valley Forge Capital Holdings Inc. (Exhibit (13) to
the Company's Registration Statement on Form N-1A (No.
33-79068) as filed with the SEC on March 1, 1995)*
(14) Inapplicable
(15) Distribution Plan and Agreement between the Fund and
Valley Forge Distributors. (Exhibit (15) to the
Company's Registration Statement on Form N-1A (No.
33-79068) as filed with the SEC on March 1, 1995)*
(16) Inapplicable
(27) Financial Data Schedule (filed herewith)
- ---------------------
* These exhibits are incorporated herein by reference to the registration
statement referenced after each exhibit next to which an asterisk appears.
** This Agreement was terminated effective March 31, 1996.
Item 25. Persons Controlled by or Under Common Control With Registrant.
None.
ii
<PAGE> 79
Item 26. Number of Holders of Securities
As of March 31, 1996, there were 89 record holders of the capital
stock of Valley Forge Capital Holdings Total Return Fund, Inc.
Item 27. Indemnification
The Registrant does not presently have an Officers and Directors
insurance policy for the benefit of its officers and directors.
Article X, Section 10.01 of the Registrant's By-Laws provides as
follows:
Section 10.01. Indemnification and Payment of Expenses in
Advance: The Corporation shall indemnify any individual
("Indemnitee") who is a present or former director, officer, employee,
or agent of the Corporation, or who is or has been serving at the
request of the Corporation as a director, officer, employee, or agent
of another corporation, partnership, joint venture, trust or other
enterprise, who, by reason of his position was, is, or is threatened
to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or
investigative (hereinafter collectively referred to as a "Proceeding")
against any judgments, penalties, fines, settlements, and reasonable
expenses (including attorneys' fees) incurred by such Indemnitee in
connection with any Proceeding, to the fullest extent that such
indemnification may be lawful under Maryland law. The Corporation
shall pay any reasonable expenses so incurred by such Indemnitee in
defending a Proceeding in advance of the final disposition thereof to
the fullest extent that such advance payment may be lawful under
Maryland law. Subject to any applicable limitations and requirements
set forth in the Corporation's Articles of Incorporation and in these
By-Laws, any payment of indemnification or advance of expenses shall
be made in accordance with the procedures set forth in Maryland law.
Notwithstanding the foregoing, nothing herein shall protect or
purport to protect any Indemnitee against any liability 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 ("Disabling Conduct").
Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee
unless:
(a) there is a final decision on the merits by a court or
other body before whom the Proceeding was brought that the
Indemnitee was not liable by reason of Disabling Conduct; or
(b) in the absence of such a decision, there is a reasonable
determination, based upon a review of the facts, that the
Indemnitee was not liable by reason of Disabling Conduct,
which determination shall be made by:
iii
<PAGE> 80
(i) the vote of a majority of a quorum of directors who are
neither "interested persons" of the Corporation as defined
in Section 2(a)(19) of the Investment Company Act of 1940,
nor parties to the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Anything in this Article X to the contrary notwithstanding, any
advance of expenses by the Corporation to any Indemnitee shall be made only
upon the undertaking by such Indemnitee to repay the advance unless it is
ultimately determined that such Indemnitee is entitled to indemnification
as above provided, and only if one of the following conditions is met:
(a) the Indemnitee provides security for his undertaking; or
(b) the Corporation shall be insured against losses arising by reason
of any lawful advances; or
(c) there is a determination, based on a review of readily available
facts, that there is reason to believe that the Indemnitee will
ultimately be found entitled to indemnification, which
determination shall be made by:
(i) a majority of a quorum of directors who are neither
"interested persons" of the Corporation as defined in
Section 2(a)(19) of the Investment Company Act, nor parties
to the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.02 of the Registrant's By-Laws provides as follows:
Section 10.02. Insurance of Officers, Directors, Employees and
Agents: To the fullest extent permitted by applicable Maryland Law and by
Section 17(h) of the Investment Company Act, as from time to time amended,
the Corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee, or agent of the Corporation,
or who is or was serving at the request of the Corporation as a director,
officer, employee, or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against
him and incurred by him in or arising out of his position, whether or not
the Corporation would have the power to indemnify him against such
liability.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director,
iv
<PAGE> 81
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Advisor.
Valley Forge Advisors, Inc. ("Valley Forge Advisors"), a wholly
owned subsidiary of Valley Forge Capital, is newly formed and is not
currently substantially employed other than as investment advisor to
the Fund.
Set forth below are the officers and Directors of the
Investment Advisor who have other substantial businesses,
professions, vocations, or employment aside from that of Director or
officer of the Investment Advisor:
Valley Forge Advisors
---------------------
Victoria S. Gong is President and a Director of Valley
Forge Advisors and the Fund and Valley Forge Capital
and each its subsidiaries (other than Valley Forge
Distributors). From February 1993 until joining Valley
Forge Capital in October 1993, Ms. Gong was the Senior
Vice President and Chief Financial Officer of the
California National Bank.
Frederick A. Wolf is President of Valley Forge
Advisors, Treasurer and a Director of the Fund, and
President and Chief Portfolio Manager for Valley
Forge-Barrington, Ltd. Mr. Wolf was employed by
Barrington, Ltd. for 22 years prior to its acquisition
by Valley Forge-Barrington, Ltd. in April 1994.
Nelson J. Kjos (age 58) is the Chief Investment Analyst
of Valley Forge Advisors and is Chief Analyst and
Chairman of TTI Investment Committee for Valley Forge
Barrington, Ltd. Mr. Kjos, a registered investment
advisor, has been a portfolio manager since founding
his own firm in 1967. Mr. Kjos, a frequent speaker at
investment seminars, recently published "The Poet of
Wall Street," his second book.
Larry S. Mao is a Senior Vice President - Operations
and Secretary of Valley Forge Advisors and the Fund,
and a Senior Vice President - Operations and Secretary
of Valley Forge Capital and its other subsidiaries,
other than Valley Forge Distributors. Mr. Mao was a
Senior Vice President of the California National Bank
from January 1993 until joining Valley Forge Capital in
December 1993. Mr. Mao has been a director of
California National Bank since July 1994. The principal
business address of Valley Forge Advisors, the Fund and
Valley Forge Capital and its other subsidiaries is:
595 Market Street, Suite 1980, San Francisco, CA
94105.
v
<PAGE> 82
Certain directors and officers of the Investment Advisor also
may, in the future, serve as officers and/or directors of one or
more of other mutual funds sponsored by Valley Forge Capital and/or
one or more of the affiliated entities listed herein. See also
"Management of Fund," in Registrant's Statement of Additional
Information.
Item 29. Principal Underwriters.
(a) The principal underwriter for the Registrant is
Valley Forge Distributors, Inc., Valley Forge Distributors,
Inc. may serve, in the future, as the principal underwriter
for one or more other funds. Valley Forge Distributors, Inc.
is a wholly-owned subsidiary of Valley Forge Capital, is
registered as a broker-dealer under the Securities Exchange
Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. Valley Forge Distributors, Inc. has
been formed for the limited purpose of distributing the shares
of the Valley Forge Funds and will not engage in the general
securities business. Valley Forge Distributors, Inc. will
receive commissions or other compensation for acting as
principal underwriter as set forth below.
(b) The address of each of the directors and officers
of Valley Forge Distributors listed below is 595 Market
Street, Suite 1980, San Francisco, California 94105.
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
------------------ --------------------- ---------------------
Carol Auyeung President None
Deborah Mello Director None
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books, and other documents required to be maintained
by the Fund under Section 31(a) of the Investment Company Act of
1940 and the rules thereunder will be maintained by the Fund at its
offices at 595 Market, Suite 1980, San Francisco, CA 94105. Its
transfer, dividend disbursing, and shareholder service activities
are performed by PFPC, Inc., P.O. Box 89950, Wilmington, Delaware
19899. Custodian activities for Valley Forge Capital Holdings Total
Return Fund, Inc. are performed at PFPC, Inc., P.O. Box 8950,
Wilmington, Delaware 19899. Although the Company does not
presently intend to purchase portfolio securities outside of the
United States, at such time as it determines to make such purchases,
appropriate service providers will be retained to perform such
services as are necessary.
Item 31. Management Services.
Registrant is not a party to any management related service
contract, other than as set forth in the Prospectus.
vi
<PAGE> 83
Item 32. Undertakings.
-------------
(a) The Fund will file, within four to six months from the
effective date of its Registration Statement, a post-effective
amendment using reasonably current financial statements which
need not be certified.
(b) If requested to do so by the holders of at least 10% of all
votes to be cast, the Fund will call a meeting of shareholders
for the purpose of voting on the question of removal of a
director or directors and will assist in communications with
other shareholders to the extent required by Section 16(c).
vii
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant (certifies
that it meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and) has
duly caused this Post-Effective Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Francisco and State of California, this 28th day of March, 1996.
VALLEY FORGE CAPITAL HOLDINGS TOTAL
RETURN FUND, INC.
By: /s/ Victoria S. Gong
-----------------------------
Victoria S. Gong, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Victoria S. Gong and Frederick A. Wolf, jointly
and severally, his or her attorneys-in-fact, each with power of substitution
for him or her in any and all capacities, to sign any future amendments to the
Registration Statement, and to file the same, with the exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission hereby ratifying and confirming all that each of said attorneys-in-
fact, or his substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- ----------------------- -------------------------- --------------
/s/ Victoria S. Gong President (Principal March 28, 1996
----------------------- Executive Officer) and
Victoria S. Gong Director
/s/ Frederick A. Wolf Treasurer (Chief Financial March 28, 1996
----------------------- Officer) and Director
Frederick A. Wolf
/s/ Dougal C. MacDonald Director March 28, 1996
-----------------------
Dougal C. MacDonald
/s/ Yves Ghiai Director March 28, 1996
-----------------------
Yves Ghiai
<PAGE> 85
INDEX TO EXHIBITS
PAGE
Exhibit (10) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit (11) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit (27) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE> 1
EXHIBIT 10
9947-01-A
April 4, 1996
Board of Directors
Valley Forge Capital Holdings
Total Return Fund, Inc.
595 Market Street
Suite 1980
San Francisco, California 94105
Re: Valley Forge Capital Holdings Total Return Fund, Inc.
Post-Effective Amendment to Registration Statement on Form N-1A
Registration No. (33-79068)
To The Board of Directors:
At your request, we have examined the above-referenced Post-Effective
Amendment to the Registration Statement on Form N-1A (the "Registration
Statement") filed by Valley Forge Capital Holdings Total Return Fund, Inc., a
Maryland corporation (the "Fund") with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended, with respect to the offering on a continuous basis of an
indefinite number of shares of capital stock of the Fund, par value $.01 per
share (the "Capital Stock").
As counsel to the Fund, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Articles of Incorporation of
the Fund, as amended, and the bylaws of the Fund and such other documents,
corporate records, certificates of public officials and instruments as we have
considered necessary or advisable for the purpose of this opinion. We have
assumed the authenticity of all documents submitted to us as originals and the
conformity to original documents of all documents submitted to us as copies.
We have not independently verified such assumptions.
We are members of Bar of the State of Illinois and we express no opinion
as to the law of any jurisdiction other than the laws of the State of Illinois
and the Federal laws of the United States.
<PAGE> 2
April 4, 1996
Page 5
Subject to the foregoing and based on such examination, we are of the
opinion that the shares of the Fund's capital stock to be issued and sold by
the Company pursuant to the Registration Statement will be, upon issuance, sale
and delivery in the manner and under the terms and conditions described in the
Registration Statement, legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us contained in the "Legal
Matters" section of the Registration Statement, including the Statement of
Additional Information constituting a part thereof.
Very truly yours,
/s/ SHEFSKY FROELICH & DEVINE LTD.
<PAGE> 1
EXHIBIT 99.B11
CONSENT OF INDEPENDENT AUDITORS
Valley Forge Capital Holdings Total Return Fund, Inc.
We consent to the use in Post-Effective Amendment No. 1 to Registration
Statement No. 33-79068 of our report dated February 7, 1996 appearing in the
Annual Report, dated December 31, 1995, which has been incorporated by
reference in the Statement of Additional Information, which is a part of such
Registration Statement, and to the reference to us under the caption "Financial
Highlights" appearing in the Prospectus, which also is a part of such
Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Princeton, New Jersey
April 4, 1996
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