As filed with the Securities and Exchange Commission on April 28, 1997
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. 2 / X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Post-Amendment No. 2
(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.
Sachnoff & Weaver, Ltd.
30 S. Wacker Drive
Suite 2900
Chicago, Illinois 60606
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/ / Immediately upon filing pursuant to paragraph (b)
/ X / on April 28, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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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.
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>
VALLEY FORGE CAPITAL HOLDINGS TOTAL RETURN FUND, INC.
PROSPECTUS - APRIL 28, 1997
Investment Valley Forge Capital Holdings
Objective: Total Return Fund, Inc. (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
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."
Please complete and return the
Purchase of New Account Form. If you need assistance
Shares: in completing this Form, please call our
Stockholder 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
Information: concisely information about the Fund that
a prospective investor ought to know
before investing. Investors are advised to
read and retain this Prospectus for future
reference. A Statement of Additional
Information ("SAI") dated April 28, 1997,
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.
Stockholder 1-800-628-4077 (8:30 A.M. to 5:00 P.M.
Services Department: Eastern Time)
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.
<PAGE>
VALLEY FORGE CAPITAL HOLDINGS TOTAL RETURN FUND, INC.
TABLE OF CONTENTS
INVESTMENT OBJECTIVE.........................................................1
INVESTMENT PROGRAM...........................................................1
SPECIAL RISK CONSIDERATIONS..................................................2
OFFERING PRICE AND SUMMARY OF FUND EXPENSES..................................3
FINANCIAL HIGHLIGHTS.........................................................5
RISK FACTORS.................................................................6
INVESTMENT POLICIES..........................................................7
FUNDAMENTAL AND OTHER INVESTMENT POLICIES...................................11
PERFORMANCE INFORMATION.....................................................13
HOW TO BUY SHARES...........................................................13
OPENING A NEW ACCOUNT AND PURCHASING SHARES.................................17
PURCHASING ADDITIONAL SHARES................................................17
COMPLETING THE NEW ACCOUNT FORM.............................................18
NET ASSET VALUE, PRICING AND EFFECTIVE DATE.................................18
REDEEMING SHARES............................................................18
RECEIVING YOUR PROCEEDS.....................................................20
DIVIDENDS AND DISTRIBUTIONS.................................................20
CONDITIONS OF YOUR PURCHASE.................................................20
STOCKHOLDER SERVICES........................................................22
TAXES.......................................................................23
MANAGEMENT OF THE FUND......................................................24
FUND EXPENSES AND MANAGEMENT FEES...........................................24
THE FUND....................................................................26
i
<PAGE>
INVESTMENT
OBJECTIVE
The Fund The Fund seeks capital
invests in appreciation, current income, and both
stocks and bonds. preservation of capital by investing 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 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
PROGRAM investors 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.
1
<PAGE>
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
stockholders. 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.
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.
(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
CONSIDERATIONS suitable 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."
2
<PAGE>
OFFERING PRICE The offering price to the public
AND SUMMARY OF on purchases of the Fund's shares made at
FUND EXPENSES one time by a single purchaser, by an
individual, 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:
<TABLE>
<CAPTION>
<S> <C>
Total Sales Commission*
-----------------------
As a Percentage of As a Percentage of
Amount of Single Sale Offering Price of the net Asset Value of Portion of total Offering
at Offering Price Shares Purchased Shares Purchased Price Retained by Dealers
----------------- ---------------- ---------------- -------------------------
Less than $500,000 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 stockholders in understanding the various
costs and expenses that an investor in the Fund will bear
directly or indirectly.
3
<PAGE>
EXPENSE TABLE
Stockholder 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, stockholder services,
transfer agent and custodian based on estimated amounts for the first full
fiscal year)......................................................0.80%
Total Fund Operating Expenses ......................................1.95%
Example
You would pay the following expenses 1 Yr 3 Yrs 5 Yrs 10 Yrs
on a $1,000 investment, assuming (1) ---- ----- ----- ------
5% average annual return and (2)
redemption at the end of each time period: $76 $115 $155 $268
--------------------
* 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 stockholders 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 stockholder 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. 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."
4
<PAGE>
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
stockholders for the 1996 fiscal year are
incorporated by reference into this
Prospectus. The Fund's Annual Report,
which contains additional unaudited
performance information, and the Fund's
most recent Semi-Annual Report succeeding
the Annual Report, will be provided when
available, upon request, without charge.
<TABLE>
-------------------------------------------------------------------------------
Financial Highlights
(For a share outstanding throughout the period)
-------------------------------------------------------------------------------
<CAPTION>
For the period For the period
August 11, 1995 January 1, 1996
(commencement of operations) to December 31,1996
to December 31, 1995+
-------------------------------------------------------------------------------
<S> <C>
Net Asset Value,
Beginning of Period $10.00 $9.67
Investment Operations
Net Investment Income 0.04 0.13
Net Realized and
Unrealized Gain (Loss)
on Investments (0.33) 0.44
Total from Investment
Operations (0.29) 0.57
Less Distributions from:
Net Investment Income (0.04) (0.12)
Net Realized Gain on
Investments --- (0.40)
Total Distributions (0.04) (0.52)
Net Asset Value,
End of Period $9.67 $9.72
Total Investment
Return at Net
Asset Value (%)(a) (.92)(b) 5.89%
Net Assets, End of
Period $1,126,410 $4,925,736
Ratio of Expenses to
Average Net Assets (%) 1.95%(c)(d) 1.95%
Ratio of Net Investment
Income (Loss) to Average
Net Assets (%) 1.72%(d) 2.06%
Portfolio Turnover Rate (%) 0% 1.14%
---------------------
</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.
5
<PAGE>
(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.
<PAGE>
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 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. 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
6
<PAGE>
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 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.
7
<PAGE>
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 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.
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Principal value if rates:
-------------------------
Maturity Increase 1% Decrease 1%
-------- ----------- -----------
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.
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
9
<PAGE>
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:
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
10
<PAGE>
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 Fundamental Investment Policies.
OTHER INVESTMENT As a matter of fundamental policy, the
POLICIES 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-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.
11
<PAGE>
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 investment
companies if, as a result: (a) the Fund
owns, in the aggregate, more than 3% of
the total outstanding voting stock in such
investment companies; (b) securities
issued by such investment companies are in
excess of 5% of the value of the Fund's
total assets; or (c) more than 10% of the
value of the Fund's assets would be
invested in such investment companies;
(iv) purchase interests in oil, gas or
other mineral exploration or development
programs; (v) 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 (vi) 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 obligations,
certificates of deposit, bankers'
acceptances, commercial paper, short-term
corporate debt issues, and repurchase
agreements.
12
<PAGE>
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 January 1,
1996 to December 31, 1996, the Fund's
portfolio turnover rate was 1.14%.
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 stockholder
approval. Stockholders will be notified of
any material change in such program.
Fundamental policies may be changed only
with stockholder approval.
PERFORMANCE Total Return Performance. The
INFORMATION Fund may advertise 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 Shares of the Fund may be
purchased on any Business Day (as defined
below) at the offering price through any
broker which has a dealer agreement with
Valley Forge Distributors++, the Principal
Underwriter of the Fund's shares, or
directly from Valley Forge Distributors
upon receipt of a completed New Account
- ----------
++ Valley Forge Distributors may recommend brokers who have dealer
agreements with Valley Forge Distributors for potential stockholders
residing in states in which Valley Forge Distributors is not
registered.
13
<PAGE>
Form and a check made payable to Valley
Forge, by the Fund's transfer agent, Fund
Services Inc., ("FSI") 1500 Forest Avenue,
Suite 111, Richmond, VA 23229, 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 Richmond (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 FSI 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 FSI, P.O. Box 26305,
Richmond, VA 23260-6305.
Orders mailed to Valley Forge
Distributors c/o FSI by dealers or
individual investors are effected at the
offering price next computed after the
purchase order accompanied by payment has
been received by FSI. 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,"
FSI will accept the dealer's instructions
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
14
<PAGE>
now or in the future will not qualify for
the cumulative quantity discount (See
Stockholder 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 New Account 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 Stockholder'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 stockholder or
as otherwise instructed by the
stockholder. 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 Stockholder 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.
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 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.
15
<PAGE>
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
16
<PAGE>
such accounts will be accepted by mail
accompanied by a 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 ACCOUNT AND Minimum initial investment: $250
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 FSI
P.O. Box 26305
Richmond, VA 23260-6305
PURCHASING ADDITIONAL Minimum subsequent investment: $25
SHARES
Stockholder Services By Wire: Call Stockholder Services and
1-800-628-4077 use the Wire Address below.
Wire Address
(to give to
your bank): Crestar Bank
Richmond, VA
ABA #051000020
CREDIT: 201648180
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
NEW ACCOUNT must have your correct social security or
FORM corporate tax identification number and a
signed New Account Form or W-9 Form.
Otherwise, federal law requires the Fund
to withhold 31% of your dividends, capital
You must provide your gain distributions, and upon redemption or
Fax ID number and sign exchange of your shares and may subject
New Account Form you to a fine. You also will be prohibited
from opening another account. If this
information is not received within 60 the
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 20).
17
<PAGE>
NET ASSET VALUE, Net Asset Value Per Share (NAV).
PRICING AND The NAV per share, or share price, for the
EFFECTIVE DATE Fund is determined at the 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 received before Purchased shares are priced at
4:00 p.m. E.S.T., you will receive that day's NAV plus sales charge if your
that day's NAV. request is received before 4:00 p.m.
E.S.T. in good order. If received later
than 4:00 p.m., shares will be priced at
the next business day's 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 Richmond,
Virginia 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 Stockholders
SHARES Services at 1-800-628-4077. 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 $10.00 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 Stockholder
Services -- Exchange Privileges-page 22).
The signature of all owners exactly as
registered, and possibly a signature
guarantee (See Conditions of Your Purchase
- Signature Guarantees, page 20).
18
<PAGE>
Note: Distributions from
retirement accounts, including IRAs, must
be in writing. For employer-sponsored
retirement accounts, call Stockholder
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 stockholder'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
stockholders and does not involve a charge
by the Fund; however, securities dealers
may impose a charge on the stockholder 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
stockholders seeking redemption through
the repurchase procedure; however, such
stockholders 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
stockholder, provided the member firm
indemnifies the Fund and Valley Forge
Distributors from any liability resulting
from the absence of the stockholder's
signature. Forms for such indemnity
agreement can be obtained from Valley
Forge Distributors.
Stock Certificates. To facilitate
redemptions and transfers, stockholders
will not receive stock certificates. Call
Stockholder Services for further
information.
Systematic Withdrawal Plan.
Stockholders 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 25th 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 stockholder 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.
19
<PAGE>
RECEIVING YOUR Generally, redemption proceeds
PROCEEDS will be mailed to 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
DISTRIBUTIONS net income and capital gains to
stockholders. 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 YOUR Account Balance. If, as a result
PURCHASE of redemptions, 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 Stockholder,
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.
Signature Guarantees. A signature
guarantee is designed to protect you and
20
<PAGE>
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 notary 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.
STOCKHOLDER The following is a brief summary
SERVICES of our services, some of which may be
restricted or unavailable to retirement
plan accounts. Services may be modified at
any time without notice.
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<PAGE>
Be sure to sign up for all Exchange Privileges. Shares of
telephone services on the one Fund may be exchanged for shares of
New Account Form. other Valley Forge Funds, if any.
Exchanges of shares will be made at their
relative net asset values. Shares may only
be exchanged if the amount being exchanged
satisfies the minimum investment required
and the stockholder 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 stockholders.
Telephone Exchange and Redemption
Services. All telephone calls to
Stockholder Services, including
transaction-related calls to Stockholder
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 $10.00 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.
22
<PAGE>
TAXES
Form 1099-DIV Taxes on Dividends and
will be mailed to Distributions. In January, the Fund will
you in January mail you Form 1099-DIV indicating the
federal tax status of your dividends and
capital gain distributions. Generally,
dividends and distributions 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
THE FUND Advisors, a wholly 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
23
<PAGE>
decisions made by Valley Forge Advisors
are made primarily by Fritz Bensler,
President and Frederick A. Wolf, portfolio
manager. Mr. Bensler has 2 years of
experience as an equity portfolio manager
to individuals and institutions. Mr. Wolf
has over 20 years experience as an equity
portfolio manager to individuals,
governments, corporations, and pension and
profit sharing plans.
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. Fund Services Inc. ("FSI") serves
the Fund as transfer agent and dividend
disbursing agent. FSI's main office is in
Richmond, Virginia and may be contacted at
FSI, P.O. Box 26305, Richmond, Virginia
23260-6305.
FSI will perform the transfer and
dividend disbursing agent functions as
well as: (i) certain stockholder services
for all accounts, for which FSI may be
paid fees totaling approximately $1,000
per month; (ii) and calculation of daily
share price and maintenance of portfolio
and general accounting records of the
Fund, for which Commonwealth Fund
Accounting, Inc. may be paid fees totaling
approximately $1,250 per month.
FUND EXPENSES AND Fund Expenses. Fund expenses
MANAGEMENT FEES include: the management fee; stockholder
servicing fees and expenses; custodian and
accounting fees and expenses; legal and
auditing fees; expenses of preparing and
printing prospectuses and stockholder
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").
24
<PAGE>
Distribution Plan and Agreement.
The Fund has adopted a Distribution Plan
and Agreement (the "Plan") 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 stockholders by
Valley Forge Distributors or dealers. The
Plan provides for payments by the Fund to
Valley Forge Distributors at the annual
rate of 0.35% 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
stockholder 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 stockholder approval.
Dealers whose stockholder
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 stockholder 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 stockholder
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 stockholders to:
(i) obtain professional management of
investments, including the Investment
Advisor's 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.
25
<PAGE>
Stockholder 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. Stockholders have 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
stockholders. However, if stockholders
representing at least 10% of all votes of
the Fund entitled to vote so desire, they
may call a special meeting of stockholders
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 31, 1997,
Valley Forge Capital owned 8,014 shares of
the Fund which represented approximately
two percent of the Fund's outstanding
shares.
26
<PAGE>
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 28, 1997, which
may be obtained from Valley Forge Distributors, Inc., 595 Market Street, Suite
1980, San Francisco, CA 94105 or by calling 1-800-628-4077.
The date of this Statement of Additional Information is April 28, 1997.
[The Balance of This Page
Intentionally Left Blank]
<PAGE>
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES............................................1
Investment Objective................................................1
Investment Program..................................................1
Fixed Income Securities....................................2
U.S. Government Obligations.......................2
U.S. Government Agency Securities.................2
Bank Obligations..................................2
Savings and Loan Obligations......................2
Asset-Backed Securities...........................3
Mortgage Obligations..............................5
Options. 6
Futures Contracts.........................................10
Lending of Portfolio Securities...........................16
Foreign Securities........................................17
Foreign Currency Transactions.............................17
Hybrid Commodity and Security Investments.................19
Private Placements (Restricted Securities)................19
Repurchase Agreements.....................................20
When-Issued Securities....................................21
RISK FACTORS................................................................21
General 21
Debt Obligations...................................................21
Foreign Investing..................................................21
Possible Investment of Certain Assets in Specific Industry.........22
INVESTMENT RESTRICTIONS.....................................................22
Fundamental Policies...............................................22
Operating Policies.................................................24
Redemption in Kind.................................................24
MANAGEMENT OF FUND..........................................................24
Compensation of Executive Officers and Directors...................27
PRINCIPAL HOLDERS OF SECURITIES.............................................28
INVESTMENT MANAGEMENT SERVICES..............................................29
Management Fees....................................................29
Limitation on Fund Expenses........................................29
DISTRIBUTOR FOR FUND........................................................30
Sales Commission...................................................30
Distribution Plan and Agreement....................................32
CUSTODIAN...................................................................32
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...........................................................36
Investment Performance.............................................36
THE FUND'S CAPITAL STOCK....................................................38
FEDERAL AND STATE REGISTRATION OF SHARES....................................39
LEGAL COUNSEL...............................................................39
INDEPENDENT AUDITORS........................................................40
RATINGS OF CORPORATE DEBT SECURITIES........................................40
<PAGE>
INVESTMENT OBJECTIVE AND POLICIESINVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies discussed on pages 1 and 2 and 7 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 stockholder approval. However,
stockholders 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 stockholders, 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 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.
The Fund's common stock investments will be concentrated primarily in
established companies which are believed to exhibit good prospects for growth.
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. (the "Investment Advisor"). 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 ObligationsU.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 SecuritiesU.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 ObligationsBank 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.
D. Savings and Loan ObligationsSavings 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 beginning on page 22.)
E. Asset-Backed SecuritiesAsset-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
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
"over-collateralized" (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 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 ObligationsMortgage 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. 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 the Investment 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 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 Investment
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.
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 the Investment 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 the Investment 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.
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 as it 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 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 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 the Investment 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 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.
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 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 the Investment 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 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 the Investment Advisor 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 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 stockholders 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. Stockholders 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 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 the Investment Advisor to be of good standing and will not be made unless, in
the judgment of the Investment 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
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.
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
the Investment Advisor. 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.
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
transactions in futures contracts 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 as amended (the "1933
Act"). 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
1933 Act. This rule 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 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 Investment 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 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. The Investment
Advisor has not previously managed and does not currently manage the assets of
another 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 IndustryPossible
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 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
Stockholders 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 stockholder 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. (See also "Fundamental and
Other Investment Policies" in the Prospectus beginning at Page 11).
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. 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);
(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 1933 Act 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 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 investment companies if, as a
result: (a) the Fund owns, in the aggregate, more than 3% of the total
outstanding voting stock in such investment companies; (b) securities issued by
such investment companies are in excess of 5% of the value of the Fund's total
assets; or (c) more than 10% of the value of the Fund's assets would be invested
in such investment companies; (iv) purchase interests in oil, gas or other
mineral exploration or development programs; (v) 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 the Nasdaq
National Market; and (vi) 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 stockholder were to receive
an in kind redemption of portfolio securities of the Fund, brokerage fees
generally would be incurred by the stockholder 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 Messrs. Bensler, Wolf, Mao and Holman is c/o Valley Forge
Capital Holdings Inc., 595 Market Street, Suite 1980, San Francisco, CA 94105
("Valley Forge Capital"). The addresses of Messrs. Greenfield, MacDonald and
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
- ---- --------
Fritz Bensler President
Frederick A. Wolf* Treasurer and Director
Larry S. Mao Senior Vice President - Operations and Secretary
Dixon Holman Vice President
Ronald N. Greenfield Director
Dougal C. MacDonald Director
Yves Ghiai Director
Fritz Bensler (age 40) is President of the Fund and President and
Portfolio Manager for Valley Forge Advisors, a subsidiary of Valley Forge
Capital. From November 1995 until joining Valley Forge Advisors in January 1997,
Mr. Bensler was an equity security analyst and portfolio manager for JPJ
Investment Management, Inc. Mr. Bensler was a self-employed consultant from 1993
until joining JPJ Investment Management, Inc. Prior to joining JPJ, Mr. Bensler
was a financial analyst with Martin Marietta Corp. from 1984 to 1991 where he
analyzed sales and expense data for a division of the company. Mr. Bensler was a
senior accountant for Pryor & Associates, P.C., C.P.A., a public accounting
firm, from 1980 to 1984. Mr. Bensler received a CPA certificate from the state
of Colorado in 1983. Mr. Bensler received a Masters of Business Administration
degree from Texas Christian University in 1993 and a Bachelor of Science degree
in accounting from the University of Northern Colorado in 1980.
Frederick A. Wolf (age 44) 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 52) 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.
Dixon R. Holman (age 36) is Vice President of the Fund and Vice
President, Chief Operating Officer and Director of Valley Forge Capital. Mr.
Holman has served as Vice President of JPJ Investment Management and its
wholly-owned subsidiary, JPJ Asset Group, the majority stockholder of Valley
Forge Capital. Since May of 1996. Since 1983, and prior to joining JPJ, Mr.
Holman served as a principal and senior officer of three investment management
firms. He has also been active in the real estate investment and development
industries. Mr. Holman's civic activities include services as a Director of the
Arlington, Texas Chamber of Commerce and as an at-large Member of the Arlington
City Council (population approx. 300,000). He also serves as acting President of
the Tarrant County Junior College Foundation board.
Ronald N. Greenfield, (age 58) 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 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 56) 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 39) 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 & Erickson, 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
Amendment and Restatement or By-Laws or under applicable law.
<PAGE>
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, 1996 to the executive officers and directors of the Fund.
<TABLE>
COMPENSATION TABLE
<CAPTION>
- ------------------------ ------------------- ---------------------- ---------------------- -------------------------
(1) (2) (3) (4) (5)
Name of Person, Aggregate Pension or Estimated Annual Total Compensation From
Position Compensation From Retirement Benefits Benefits Upon Fund and Fund Complex
Fund Accrued As Part of Retirement Paid to Directors
Fund Expenses
- ------------------------ ------------------- ---------------------- ---------------------- -------------------------
<S> <C>
Fritz Bensler, President * N/A N/A *
Frederick A. Wolf,
Treasurer, Director * N/A N/A *
Larry S. Mao, Senior
Vice President-Operations,
Secretary * N/A N/A *
Dixon Holman,
Vice President * N/A N/A *
Ronald N. Greenfield,
Director ** N/A N/A **
Dougal C. MacDonald,
Director ** N/A N/A **
Yves Ghiai,
Director ** N/A N/A **
</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.
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth certain information regarding the
beneficial ownership of the outstanding shares of the Fund as of March 31, 1997
by each person known by the Fund to own beneficially more than five percent of
the outstanding shares of the Fund and all directors and executive officers of
the Fund as a group.
<TABLE>
<CAPTION>
Shares Beneficially Owned
--------------------------------------------------------------------------
Name and Address Percentage
of Beneficial Owner Number Ownership
------------------- ------ ---------
<S> <C>
Star Bank C/F
Joseph M. Beals IRA
22151 Moross G-03
Detroit, MI 48236 26,869.283 6.711
Anchor Bay Dental Assoc. PSP
Donald J. Burkhardt TTEE
dtd. 12-30-89
35050 - 23 Mile Rd. Suite A
New Baltimore, MI 48047 53,360.706 13.327
Mary Beth Hardwicke
919 Barrington
Gross Point Park, MI 48230 21,215.702 5.299
St. Clair Physicians PC PS Trust
Joseph M. Beals TTEE
Attn: John Hastings, VP Investments
400 Renaissance Center, Suite 1600
Detroit, MI 48243 26,626.562 6.650
City of Warren Gers
Cust. Mutual Funds MC 3446
c/o Comerica Bank
P. O. Box 75000
Detroit, MI 48275-3446 213,442.829 53.309
All Directors and executive
officers of the Fund, as a group
(7 persons) -- *
</TABLE>
- ----------
* Represents beneficial ownership of less than 1%
<PAGE>
INVESTMENT MANAGEMENT SERVICES
The Fund's investment portfolio is managed by the Investment Advisor.
See "Management of Fund."
The Investment Advisor has entered into a Management Agreement with the
Fund. Under the Management Agreement, the Investment Advisor provides
discretionary investment services to the Fund. The Investment Advisor 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. The Investment Advisor 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, the Investment
Advisor 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 the Investment Advisor's employees
to serve as officers, directors, and committee members of the Fund without cost
to the Fund. The Management Agreement also provides that the Investment Advisor,
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 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. Management Fees
which have accrued but not yet been paid to the Investment Advisor for the
fiscal years ended December 31, 1995 and 1996 were $2,171 and $26,828,
respectively.
Limitation on Fund Expenses. The Management Agreement between the Fund
and the Investment Advisor provides that the Fund will bear all expenses of its
operations not specifically assumed by the Investment Advisor. 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 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. An expense reimbursement of
$154,464 was required for the fiscal year ended December 31, 1996.
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
stockholders, 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' 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' expenses are paid by Valley Forge
Capital to the extent they exceed revenues.
Sales CommissionSales 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:
<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>
Less than $50,000. 5.75% 6.10% 5.00%
but less than $100,000 5.00% 5.26% 4.40%
but less than $250,000 4.00% 4.17% 3.50%
but less than $500,000 3.00% 3.09% 2.50%
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.
In connection with sales made on behalf of the Fund, Valley Forge
Distributors received sales commissions for the fiscal years ended
December 31, 1995 and 1996 of $3,888 and $3,450, respectively.
The following table sets forth the amount of commission and other
compensation received by Valley Forge Distributors for the fiscal year
ended December 31, 1996:
<TABLE>
<CAPTION>
- ------------------------- --------------------------- ------------------------ -------------------- -----------------
(1) (2) (3) (4) (5)
Compensation on
Name of Principal Net Underwriting Redemption and Brokerage Other
Underwriter Discounts and Commissions Repurchases Commissions Compensation
- ------------------------- --------------------------- ------------------------ -------------------- -----------------
<S> <C>
Valley Forge
Distributors $3,450 $ 0 $672 $10,038*
</TABLE>
(*) Fees paid under the Fund's Distribution Plan and Agreement pursuant to
Rule 12b-1 of the Investment Company Act of 1940.
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 stockholders 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 stockholder 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.
CUSTODIAN
Star Bank, N.A. ("Star 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.
Star Bank's mailing address is as follows: Star Bank, N.A., Mutual Fund Custody,
P.O. Box 1118, Cincinnati, Ohio 45218.
PORTFOLIO TRANSACTIONS
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Fund are made by the Investment Advisor. The Investment Advisor
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.
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 the
Investment Advisor, the Investment Advisor 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.
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 National Market. If no sales price is
available for a listed or Nasdaq National Market security, or if the security is
not listed on the Nasdaq National Market, 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 net asset value 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.
TAX STATUS
The Fund intends to operate in a manner to continue 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 stockholders. 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 stockholders; 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 stockholders 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 stockholders 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
stockholder 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
totaled for all 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 stockholder 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.
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) 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.
Year Taxable Tax Deferred (IRA)
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
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 (the
"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 stockholder approval.
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.
Stockholders 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 stockholders. There will normally be no meetings of
stockholders 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
stockholders, at which time the directors then in office will call a
stockholders' 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 stockholders of the Fund shall be
called by the Secretary of the Fund on the written request of stockholders
entitled to cast at least 10% of all votes of the Fund entitled to be cast at
such meeting. Stockholders 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 stockholders seeking to hold the
special meeting in communicating to the other stockholders 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
Sachnoff & Weaver, Ltd., whose address is 30 South Wacker Drive, 29th
Floor, Chicago, Illinois, 60606-7484, is legal counsel to the Fund.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, whose address is 707 East Main Street, Richmond,
Virginia 23219, are independent auditors to the Fund.
The financial statements of the Fund for the year ended December 31,
1996, and the report of independent accountants are included in the Fund's
Annual Report for the year ended December 31, 1996 and are incorporated into
this Statement of Additional Information by reference. A copy of the Annual
Report which contains additional unaudited performance information and, when
available, a copy of the Fund's most recent Semi-Annual Report succeeding the
Annual Report, accompanies this Statement of Additional Information.
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.
<PAGE>
PART C
Other Information
Item 24. Financial Statements and Exhibits
<TABLE>
<S> <C>
(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 Stockholders, 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)*
(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
(8)(a) Custodian Services Agreement between Registrant and PNC Bank, N.A.***
(b) Custody Agreement between the Registrant and Star Bank, N.A. (filed herewith)
(9)(a) Transfer Agency Services Agreement, between Registrant and PFPC, Inc.***
(b) Administration and Accounting Services Agreement***
(c) Expense Limitation Agreement between Registrant and Valley Forge Capital
Holding 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)*
(d) Transfer Agent Agreement between the Registrant and Fund Services Inc. (filed
herewith)
(e) Administrative Services Agreement between the Registrant and Commonwealth
Shareholder Services, Inc. (filed herewith)
(f) Accounting Services Agreement between the Registrant and Commonwealth Fund
Accounting, Inc. (filed herewith)
(10) Opinion and Sachnoff & Weaver, Ltd. (filed herewith)
(11) Consent of Deloitte & Touche LLP (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
(17) Financial Data Schedule
(18) Inapplicable
</TABLE>
- --------------------------
* 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.
*** This Agreement was terminated effective October 31, 1996.
Item 25. Persons Controlled by or Under Common Control With Registrant.
None.
Item 26. Number of Holders of Securities
As of March 31, 1997, there were 66 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:
(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, 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. (the" Investment Advisor"), a
wholly owned subsidiary of Valley Forge Capital, 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
Fritz Bensler is President and Portfolio Manager for Valley Forge Advisors and
President of the Fund. From November 1995 until joining Valley Forge Advisors in
January 1997, Mr. Bensler was an equity security analyst and portfolio manager
for JPJ Investment Management, Inc. Mr. Bensler was a self-employed consultant
from 1993 until joining JPJ Investment Management, Inc. Prior to joining JPJ,
Mr. Bensler was a financial analyst with Martin Marietta Corp. from 1984 to 1991
where he analyzed sales and expense data for a division of the company. Mr.
Bensler was a senior accountant for Pryor & Associates, P.C., C.P.A., a public
accounting firm from 1980 to 1984. Mr. Bensler received a CPA certificate from
the state of Colorado in 1983. Mr. Bensler received a Masters of Business
Administration degree from Texas Christian University in 1993 and a Bachelor of
Science degree in accounting from the University of Northern Colorado in 1980.
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.
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.
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
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
stockholder service activities are performed by Fund Services Inc., P.O. Box
26305, Richmond, Virginia 23260-6305. Custodian activities for the Fund are
performed at Star Bank, N.A., Mutual Fund Custody, P.O. Box 1118, Cincinnati,
Ohio 45201. 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.
Item 32. Undertakings.
(a) Upon request, the Fund will furnish, without charge,
a copy of the Fund's latest annual report to
stockholders and the most recent semi-annual report
succeeding the annual report, when available, to each
person to whom a prospectus is delivered.
<PAGE>
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 13th day of April, 1997.
VALLEY FORGE CAPITAL HOLDINGS TOTAL
RETURN FUND, INC.
By: /s/ Fritz Bensler
-------------------
Fritz Bensler, President
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 date indicated.
Signature Title Date
- --------- ----- ----
/s/ Fritz Bensler President (Principal April 13, 1997
- ----------------- Executive Officer) and
Fritz Bensler Director
/s/ Frederick A. Wolf Treasurer (Chief Financial April 13, 1997
- --------------------- Officer) and Director
Frederick A. Wolf
/s/ Dougal C. MacDonald Director April 13, 1997
- -----------------------
Dougal C. MacDonald
/s/ Yves Ghiai Director April 13, 1997
- --------------
Yves Ghiai
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit
No. Description
- ------- -----------
24(b)(8) (b) Custody Agreement Between the Registrant and Star Bank, N.A.
24(b)(9)(d) Transfer Agent Agreement Between the Registrant and Fund Services, Inc.
24(b)(9)(e) Administrative Services Agreement Between the Registrant and Commonwealth
Shareholder Services, Inc.
24(b)(9)(f) Accounting Services Agreement Between the Registrant and Commonwealth
Fund Accounting, Inc.
24(b)(10) Opinion and Consent of Sachnoff and Weaver, Ltd.
24(b)(11) Consent of Deloitte & Touche, L.L.P.
24(b)(17) Financial Data Schedule
</TABLE>
CUSTODY AGREEMENT
This agreement (the "Agreement") is entered into as of the 1st day of
October, 1996, by and between Valley Forge Capital Holding Total Return Fund,
Inc. (the "Corporation"), a corporation organized under the laws of the State of
Maryland and having its office at 595 Market Street, Suite 1980, San Francisco,
CA 94105 acting for and on behalf of Valley Forge Capital Holdings Total Return
Fund, Inc. (the "Fund"), which is operated and maintained by the Corporation for
the benefit of the holders of shares of each Fund, and Star Bank, N.A. (the
"Custodian"), a national banking association having its principal office and
place of business at Star Bank Center, 425 Walnut Street, Cincinnati, Ohio
45202.
WHEREAS, the Fund and the Custodian desire to enter into this Agreement
to provide for the custody and safekeeping of the assets of the Fund as required
by the Investment Company Act of 1940, as amended (the "Act").
WHEREAS, the Fund hereby appoints the Custodian as custodian of all the
Fund's Securities and moneys at any time owned by the Fund during the term of
this Agreement (the "Fund Assets").
WHEREAS, the Custodian hereby accepts such appointment as Custodian and
agrees to perform the duties thereof as hereinafter set forth.
THEREFORE, in consideration of the mutual promises hereinafter set
forth, the Fund and the Custodian agree as follows:
ARTICLE I
Definitions
The following words and phrases, when used in this Agreement, unless
the context otherwise requires, shall have the following meanings:
Authorized Person - the Chairman, President, Secretary, Treasurer,
Controller, or Senior Vice President of the Fund, or any other person, whether
or not any such person is an officer or employee of the Fund, duly authorized by
the Board Of Directors of the Fund to give Oral Instructions and Written
Instructions on behalf of the Fund, and listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
Book-Entry System - the Federal Reserve Bank book-entry system for
United States Treasury securities and federal agency securities.
Depository - The Depository Trust Company ("DTC"), a limited purpose
trust company its successor(s) and its nominee(s) or any other person or
clearing agent
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<PAGE>
Dividend and Transfer Agent - the dividend and transfer agent
appointed, from time to time, pursuant to a written agreement between the
dividend and transfer agent and the Fund
Foreign Securities - a) securities issued and sold primarily outside of
the United States by a foreign government, a national of any foreign country, or
a trust or other organization incorporated or organized under the laws of any
foreign country or; b) securities issued or guaranteed by the government of the
United States, by any state, by any political subdivision or agency thereof, or
by any entity organized under the laws of the United States or of any state
thereof, which have been issued and sold primarily outside of the United States.
Money Market Security - debt obligations issued or guaranteed as to
principal and/or interest by the government of the United States or agencies or
instrumentalities thereof, commercial paper, obligations (including certificates
of deposit, bankers' acceptances, repurchase agreements and reverse repurchase
agreements with respect to the same), and time deposits of domestic banks and
thrift institutions whose deposits are insured by the Federal Deposit Insurance
Corporation, and short-term corporate obligations where the purchase and sale of
such securities normally require settlement in federal funds or their equivalent
on the same day as such purchase and sale, all of which mature in not more than
thirteen (13) months.
Officers - the Chairman, President, Secretary, Treasurer, Controller,
and Senior Vice President of the Fund listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
Oral Instructions - verbal instructions received by the Custodian from
an Authorized Person (or from a person that the Custodian reasonably believes in
good faith to be an Authorized Person) and confirmed by Written Instructions in
such a manner that such Written Instructions are received by the Custodian on
the business day immediately following receipt of such Oral Instructions.
Prospectus - the Fund's then currently effective prospectus and
Statement of Additional Information, as filed with and declared effective from
time to time by the Securities and Exchange Commission.
Security or Securities - Money Market Securities, common stock,
preferred stock, options, financial futures, bonds, notes, debentures, corporate
debt securities, mortgages, and any certificates, receipts, warrants, or other
instruments representing rights to receive, purchase, or subscribe for the same
or evidencing or representing any other rights or interest therein, or any
property or assets.
Written Instructions - communication received in writing by the
Custodian from an Authorized Person.
2
<PAGE>
ARTICLE II
Documents and Notices to be Furnished by the Fund
A The following documents, including any amendments thereto, will be
provided contemporaneously with the execution of the Agreement, to the Custodian
by the Fund:
1. A copy of the Articles of Incorporation of the Fund certified by the
Secretary.
2. A copy of the By-Laws of the Fund certified by the Secretary.
3. A copy of the resolution of the Board Of Directors of the Fund
appointing the Custodian, certified by the Secretary.
4. A copy of the then current Prospectus.
5. A Certificate of the President and Secretary of the Fund setting
forth the names and signatures of the Officers of the Fund.
B. The Fund agrees to notify the Custodian in writing of the
appointment of any Dividend and Transfer Agent.
ARTICLE III
Receipt of Fund Assets
A. During the term of this Agreement, the Fund will deliver or cause to
be delivered to the Custodian all moneys constituting Fund Assets. The Custodian
shall be entitled to reverse any deposits made on the Fund's behalf where such
deposits have been entered and moneys are not finally collected within 30 days
of the making of such entry.
B. During the term of this Agreement, the Fund will deliver or cause to
be delivered to the Custodian all Securities constituting Fund Assets. The
Custodian will not have any duties or responsibilities with respect to such
Securities until actually received by the Custodian.
C. As and when received, the Custodian shall deposit to the account(s)
of the Fund any and all payments for shares of the Fund issued or sold from time
to time as they are received from the Fund's distributor or Dividend and
Transfer Agent or from the Fund itself.
ARTICLE IV
Disbursement of Fund Assets
A. The Fund shall furnish to the Custodian a copy of the resolution of
the Board Of Directors of the Fund, certified by the Fund's Secretary, either
(i) setting forth the date of the declaration of any dividend or distribution in
respect of shares of the Fund, the date of payment thereof, the record date as
of which Fund shareholders entitled to payment shall be determined, the amount
payable per share to Fund shareholders of record as of that date, and the total
amount to be paid by the Dividend and Transfer Agent on the payment date, or
(ii) authorizing the declaration of dividends and distributions in respect of
shares of the Fund on a daily basis and authorizing the Custodian to rely on a
Certificate setting forth the date of the declaration of any such dividend or
distribution, the date of payment thereof, the record date as of
3
<PAGE>
which Fund shareholders entitled to payment shall be determined, the amount
payable per share to Fund shareholders of record as of that date, and the total
amount to be paid by the Dividend and Transfer Agent on the payment date.
On the payment date specified in such resolution or
Certificate described above, the Custodian shall segregate such amounts from
moneys held for the account of the Fund so that they are available for such
payment.
B. Upon receipt of Written Instructions so directing it, the Custodian
shall segregate amounts necessary for the payment of redemption proceeds to be
made by the Dividend and Transfer Agent from moneys held for the account of the
Fund so that they are available for such payment.
C. Upon receipt of a Certificate directing payment and setting forth
the name and address of the person to whom such payment is to be made, the
amount of such payment, and the purpose for which payment is to be made, the
Custodian shall disburse amounts as and when directed from the Fund Assets. The
Custodian is authorized to rely on such directions and shall be under no
obligation to inquire as to the propriety of such directions.
D. Upon receipt of a Certificate directing payment, the Custodian shall
disburse moneys from the Fund Assets in payment of the Custodian's fees and
expenses as provided in Article VIII hereof.
ARTICLE V
Custody of Fund Assets
A. The Custodian shall open and maintain a separate bank account or
accounts in the United States in the name of the Fund, subject only to draft or
order by the Custodian acting pursuant to the terms of this Agreement, and shall
hold all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund in a bank account established and used by the Fund
in accordance with Rule 17f-3 under the Act. Moneys held by the Custodian on
behalf of the Fund may be deposited by the Custodian to its credit as Custodian
in the banking department of the Custodian. Such moneys shall be deposited by
the Custodian in its capacity as such, and shall be withdrawable by the
Custodian only in such capacity.
B. The Custodian shall hold all Securities delivered to it in
safekeeping in a separate account or accounts maintained at Star Bank, N.A. for
the benefit of the Fund.
C. All Securities held which are issued or issuable only in bearer
form, shall be held by the Custodian in that form; all other Securities held for
the Fund shall be registered in the name of the Custodian or its nominee. The
Fund agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold, or deliver in proper form for transfer, any Securities that
it may hold for the account of the Fund and which may, from time to time, be
registered in the name of the Fund.
D. With respect to all Securities held for the Fund , the Custodian
shall on a timely basis (concerning items 1 and 2 below,
4
<PAGE>
as defined in the Custodian's Standards of Service Guide, as amended from time
to time, annexed hereto as Appendix C):
1.) Collect all income due and payable with respect to
such Securities;
2.) Present for payment and collect amounts payable upon
all Securities
3.) Surrender Securities in temporary form for definitive
Securities; and
4.) Execute, as agent, any necessary declarations or
certificates of ownership under the Federal income
tax laws or the laws or
E. Upon receipt of a Certificate and not otherwise, the Custodian
shall:
1.) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents,
authorizations, and any other
2.) Deliver any Securities in exchange for other
Securities or cash issued
3.) Deliver any Securities to any protective committee,
reorganization receive and hold under the terms of
this Agreement such certificates of deposit, interim
receipts of other instruments or documents as may be
issued to it to evidence such delivery;
4.) Make such transfers or exchanges of the assets of the
Fund and take merger, consolidation or
recapitalization of the Fund; and
5.) Deliver any Securities held for the Fund to the
depository agent for
F. The Custodian shall promptly deliver to the Fund all notices, proxy
material and executed but unvoted proxies pertaining to shareholder meetings of
Securities held by the Fund. The Custodian shall not vote or authorize the
voting of any Securities or give any consent, waiver or approval with respect
thereto unless so directed by a Certificate or Written Instruction.
G. The Custodian shall promptly deliver to the Fund all information
received by the Custodian and pertaining to Securities held by the Fund with
respect to tender or exchange offers, calls for redemption or purchase, or
expiration of rights.
ARTICLE VI
Purchase and Sale of Securities
A. Promptly after each purchase of Securities by the Fund, the Fund
shall deliver to the Custodian (i) with respect to each purchase of Securities
which are not Money Market Securities, Written Instructions, and (ii) with
respect to each purchase of Money Market Securities, Written Instructions or
Oral Instructions, specifying with respect to each such purchase the;
1.) name of the issuer and the title of the Securities,
2.) principal amount purchased and accrued interest, if
any,
3.) date of purchase and settlement,
4.) purchase price per unit,
5.) total amount payable, and
6.) name of the person from whom, or the broker through
5
<PAGE>
which, the purchase was made. The Custodian shall, against receipt of Securities
purchased by or for the Fund, pay out of the Fund Assets, the total amount
payable to the person from whom or the broker through which the purchase was
made, provided that the same conforms to the total amount payable as set forth
in such Written Instructions or Oral Instructions, as the case may be.
B. Promptly after each sale of Securities by the Fund, the Fund shall
deliver to the Custodian (i) with respect to each sale of Securities which are
not Money Market Securities, Written Instructions, and (ii) with respect to each
sale of Money Market Securities, Written Instructions or Oral Instructions,
specifying
with respect to each such sale the;
1.) name of the issuer and the title of the Securities,
2.) principal amount sold and accrued interest, if any,
3.) date of sale and settlement,
4.) sale price per unit,
5.) total amount receivable, and
6.) name of the person to whom, or the broker through
which, the sale was made.
The Custodian shall deliver the Securities against receipt of the total
amount receivable, provided that the same conforms to the total amount
receivable as set forth in such Written Instructions or Oral Instructions, as
the case may be.
C. On contractual settlement date, the account of the Fund will be
charged for all purchased Securities settling on that day, regardless of whether
or not delivery is made. Likewise, on contractual settlement date, proceeds from
the sale of Securities settling that day will be credited to the account of the
Fund, irrespective of delivery.
D. Purchases and sales of Securities effected by the Custodian will be
made on a delivery versus payment basis. The Custodian may, in its sole
discretion, upon receipt of a Certificate, elect to settle a purchase or sale
transaction in some other manner, but only upon receipt of acceptable
indemnification from the Fund.
E. The Custodian shall, upon receipt of a Written Instructions so
directing it, establish and maintain a segregated account or accounts for and on
behalf of the Fund. Cash and/or Securities may be transferred into such account
or accounts for specific purposes, to-wit:
1.) in accordance with the provision of any agreement among
the Fund, the Custodian, and a broker- dealer registered under the Securities
and Exchange Act of 1934, as amended, and also a member of the National
Association of Securities Dealers (NASD) (or any futures commission merchant
registered under the Commodity Exchange Act), relating to compliance with the
rules of the Options Clearing Corporation and of any registered national
securities exchange, the Commodity Futures Trading Commission, any registered
contract market, or any similar organization or organizations requiring escrow
or other similar arrangements in connection with transactions by the Fund;
6
<PAGE>
2.) for purposes of segregating cash or government securities
in connection with options purchased, sold, or written by the Fund or commodity
futures contracts or options thereon purchased or sold by the Fund;
3.) for the purpose of compliance by the fund with the
procedures required for reverse repurchase agreements, firm commitment
agreements, standby commitment agreements, and short sales by Act Release No.
10666, or any subsequent release or releases or rule of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies;
and
4.) for other corporate purposes, only in the case of this
clause 4 upon receipt of a copy of a resolution of the Board Of Directors of the
Fund, certified by the Secretary of the Fund, setting forth the purposes of such
segregated account.
F. Except as otherwise may be agreed upon by the parties hereto, the
Custodian shall not be required to comply with any Written Instructions to
settle the purchase of any Securities on behalf of the Fund unless there is
sufficient cash in the account(s) at the time or to settle the sale of any
Securities from an account(s) unless such Securities are in deliverable form.
Notwithstanding the foregoing, if the purchase price of such Securities exceeds
the amount of cash in the account(s) at the time of such purchase, the Custodian
may, in its sole discretion, advance the amount of the difference in order to
settle the purchase of such Securities. The amount of any such advance shall be
deemed a loan from the Custodian to the Fund payable on demand and bearing
interest accruing from the date such loan is made up to but not including the
date such loan is repaid at a rate per annum customarily charged by the
Custodian on similar loans.
ARTICLE VII
Fund Indebtedness
In connection with any borrowings by the Fund, the Fund will cause to
be delivered to the Custodian by a bank or broker requiring Securities as
collateral for such borrowings (including the Custodian if the borrowing is from
the Custodian), a notice or undertaking in the form currently employed by such
bank or broker setting forth the amount of collateral. The Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to each such
borrowing: (a) the name of the bank or broker, (b) the amount and terms of the
borrowing, which may be set forth by incorporating by reference an attached
promissory note duly endorsed by the Fund, or a loan agreement, (c) the date,
and time if known, on which the loan is to be entered into, (d) the date on
which the loan becomes due and payable, (e) the total amount payable to the Fund
on the borrowing date, and (f) the description of the Securities securing the
loan, including the name of the issuer, the title and the number of shares or
the principal amount.
7
<PAGE>
The Custodian shall deliver on the borrowing date specified in the Certificate
the required collateral against the lender's delivery of the total loan amount
then payable, provided that the same conforms to that which is described in the
Certificate. The Custodian shall deliver, in the manner directed by the Fund,
such Securities as additional collateral, as may be specified in a Certificate,
to secure further any transaction described in this Article VII. The Fund shall
cause all Securities released from collateral status to be returned directly to
the Custodian and the Custodian shall receive from time to time such return of
collateral as may be tendered to it.
The Custodian may, at the option of the lender, keep such collateral in
its possession, subject to all rights therein given to the lender because of the
loan. The Custodian may require such reasonable conditions regarding such
collateral and its dealings with third-party lenders as it may deem appropriate.
ARTICLE VIII
Concerning the Custodian
A. Except as otherwise provided herein, the Custodian shall not be
liable for any loss or damage resulting from its action or omission to act or
otherwise, except for any such loss or damage arising out of its own gross
negligence or willful misconduct. The Fund shall defend, indemnify and hold
harmless the Custodian and its directors, officers, employees and agents with
respect to any loss, claim, liability or cost (including reasonable attorneys'
fees) arising or alleged to arise from or relating to the Fund's duties
hereunder or any other action or inaction of the Fund or its Directors,
officers, employees or agents, except such as may arise from the negligent
action, omission, willful misconduct or breach of this Agreement by the
Custodian. The Custodian may, with respect to questions of law, apply for and
obtain the advice and opinion of counsel, at the expense of the Fund, and shall
be fully protected with respect to anything done or omitted by it in good faith
in conformity with the advice or opinion of counsel. The provisions under this
paragraph shall survive the termination of this Agreement.
B. Without limiting the generality of the foregoing, the
Custodian, acting in the capacity of Custodian hereunder, shall be
under no obligation to inquire into, and shall not be liable for:
1.) The validity of the issue of any Securities purchased by
or for the account of the Fund, the legality of the purchase thereof, or the
propriety of the amount paid therefor;
2.) The legality of the sale of any Securities by or for the
account of the Fund, or the propriety of the amount for which the same are sold;
8
<PAGE>
3.) The legality of the issue or sale of any shares of the
Fund, or the sufficiency of the amount to be received therefor;
4.) The legality of the redemption of any shares of the Fund,
or the propriety of the amount to be paid therefor;
5.) The legality of the declaration or payment of any dividend
by the Fund in respect of shares of the Fund;
6.) The legality of any borrowing by the Fund on behalf of the
Fund, using Securities as collateral;
C. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount due to the Fund from any Dividend and
Transfer Agent of the Fund nor to take any action to effect payment or
distribution by any Dividend and Transfer Agent of the Fund of any amount paid
by the Custodian to any Dividend and Transfer Agent of the Fund in accordance
with this Agreement.
D. Notwithstanding Section D of Article V, the Custodian shall not be
under any duty or obligation to take action to effect collection of any amount,
if the Securities upon which such amount is payable are in default, or if
payment is refused after due demand or presentation, unless and until (i) it
shall be directed to take such action by a Certificate and (ii) it shall be
assured to its satisfaction (including prepayment thereof) of reimbursement of
its costs and expenses in connection with any such action.
E. The Fund acknowledges and hereby authorizes the Custodian to hold
Securities through its various agents described in Appendix B annexed hereto.
The Fund hereby represents that such authorization has been duly approved by the
Board Of Directors of the Fund as required by the Act. The Custodian
acknowledges that although certain Fund Assets are held by its agents, the
Custodian remains primarily liable for the safekeeping of the Fund Assets.
In addition, the Fund acknowledges that the Custodian may appoint one
or more financial institutions, as agent or agents or as sub-custodian or
sub-custodians, including, but not limited to, banking institutions located in
foreign countries, for the purpose of holding Securities and moneys at any time
owned by the Fund. The Custodian shall not be relieved of any obligation or
liability under this Agreement in connection with the appointment or activities
of such agents or sub-custodians. Any such agent or sub-custodian shall be
qualified to serve as such for assets of investment companies registered under
the Act. Upon request, the Custodian shall promptly forward to the Fund any
documents it receives from any agent or sub-custodian appointed hereunder which
may assist trustees of registered investment companies fulfill their
responsibilities under Rule 17f-5 of the Act.
F. The Custodian shall not be under any duty or obligation to ascertain
whether any Securities at any time delivered to or held by it for the account of
the Fund are such as properly may be held by the Fund under the provisions of
the Articles of Incorporation and the Fund's By-Laws.
G. The Custodian shall treat all records and other information relating
to the Fund and the Fund Assets as confidential and shall not disclose any such
records or information to any other person unless (i) the Fund shall have
consented thereto in writing or (ii) such disclosure is required by law.
9
<PAGE>
H. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian such compensation as shall be determined pursuant to
Appendix D attached hereto, or as shall be determined pursuant to amendments to
such Appendix D. The Custodian shall be entitled to charge against any money
held by it for the account of the Fund, the amount of any of its fees, any loss,
damage, liability or expense, including counsel fees. The expenses which the
Custodian may charge against the account of the Fund include, but are not
limited to, the expenses of agents or sub-custodians incurred in settling
transactions involving the purchase and sale of Securities of the Fund.
I. The Custodian shall be entitled to rely upon any Oral Instructions
and any Written Instructions. The Fund agrees to forward to the Custodian
Written Instructions confirming Oral Instructions in such a manner so that such
Written Instructions are received by the Custodian, whether by hand delivery,
facsimile or otherwise, on the same business day on which such Oral Instructions
were given. The Fund agrees that the failure of the Custodian to receive such
confirming instructions shall in no way affect the validity of the transactions
or enforceability of the transactions hereby authorized by the Fund. The Fund
agrees that the Custodian shall incur no liability to the Fund for acting upon
Oral Instructions given to the Custodian hereunder concerning such transactions.
J. The Custodian will (i) set up and maintain proper books of account
and complete records of all transactions in the accounts maintained by the
Custodian hereunder in such manner as will meet the obligations of the Fund
under the Act, with particular attention to Section 31 thereof and Rules 31a-1
and 31a-2 thereunder and those records are the property of the Fund, and (ii)
preserve for the periods prescribed by applicable Federal statute or regulation
all records required to be so preserved. All such books and records shall be the
property of the Fund, and shall be open to inspection and audit at reasonable
times and with prior notice by Officers and auditors employed by the Fund.
K. The Custodian shall send to the Fund any report received on the
systems of internal accounting control of the Custodian, or its agents or
sub-custodians, as the Fund may reasonably request from time to time.
L. The Custodian performs only the services of a custodian and shall
have no responsibility for the management, investment or reinvestment of the
Securities from time to time owned by the Fund. The Custodian is not a selling
agent for shares of the Fund and performance of its duties as custodian shall
not be deemed to be a recommendation to the Fund's depositors or others of
shares of the Fund as an investment.
M. The Custodian shall take all reasonable action, that the Fund may
from time to time request, to assist the Fund in obtaining favorable opinions
from the Fund's independent accountants, with respect to the Custodian's
activities hereunder, in connection with the preparation of the Fund's Form
N-1A, Form N-SAR, or other annual reports to the Securities and Exchange
Commission.
N. The Fund hereby pledges to and grants the Custodian a security
interest in any Fund Assets to secure the payment of any
10
<PAGE>
liabilities of the Fund to the Custodian, whether acting in its capacity as
Custodian or otherwise, or on account of money borrowed from the Custodian. This
pledge is in addition to any other pledge of collateral by the Fund to the
Custodian.
ARTICLE X
Termination
A. Either of the parties hereto may terminate this Agreement for any
reason by giving to the other party a notice in writing specifying the date of
such termination, which shall be not less than ninety (90) days after the date
of giving of such notice. If such notice is given by the Fund, it shall be
accompanied by a copy of a resolution of the Board Of Directors of the Fund,
certified by the Secretary of the Fund, electing to terminate this Agreement and
designating a successor custodian or custodians. In the event such notice is
given by the Custodian, the Fund shall, on or before the termination date,
deliver to the Custodian a copy of a resolution of the Board Of Directors of the
Fund, certified by the Secretary, designating a successor custodian or
custodians to act on behalf of the Fund. In the absence of such designation by
the Fund, the Custodian may designate a successor custodian which shall be a
bank or trust company having not less than $100,000,000 aggregate capital,
surplus, and undivided profits. Upon the date set forth in such notice this
Agreement shall terminate, and the Custodian, provided that it has received a
notice of acceptance by the successor custodian, shall deliver, on that date,
directly to the successor custodian all Securities and moneys then owned by the
Fund and held by it as Custodian. Upon termination of this
11
<PAGE>
Agreement, the Fund shall pay to the Custodian on behalf of the Fund such
compensation as may be due as of the date of such termination. The Fund agrees
on behalf of the Fund that the Custodian shall be reimbursed for its reasonable
costs in connection with the termination of this Agreement.
B. If a successor custodian is not designated by the Fund, or by the
Custodian in accordance with the preceding paragraph, or the designated
successor cannot or will not serve, the Fund shall, upon the delivery by the
Custodian to the Fund of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund, be deemed to be the custodian for the Fund, and the Custodian shall
thereby be relieved of all duties and responsibilities pursuant to this
Agreement, other than the duty with respect to Securities held in the Book-Entry
System, which cannot be delivered to the Fund, which shall be held by the
Custodian in accordance with this Agreement.
ARTICLE XI
Miscellaneous
A. Appendix A sets forth the names and the signatures of all Authorized
Persons, as certified by the Secretary of the Fund. The Fund agrees to furnish
to the Custodian a new Appendix A in form similar to the attached Appendix A, if
any present Authorized Person ceases to be an Authorized Person or if any other
or
12
<PAGE>
additional Authorized Persons are elected or appointed. Until such new Appendix
A shall be received, the Custodian shall be fully protected in acting under the
provisions of this Agreement upon Oral Instructions or signatures of the then
current Authorized Persons as set forth in the last delivered Appendix A.
B. No recourse under any obligation of this Agreement or for any claim
based thereon shall be had against any organizer, shareholder, Officer,
Director, past, present or future as such, of the Fund or of any predecessor or
successor, either directly or through the Fund or any such predecessor or
successor, whether by virtue of any constitution, statute or rule of law or
equity, or be the enforcement of any assessment or penalty or otherwise; it
being expressly agreed and understood that this Agreement and the obligations
thereunder are enforceable solely against the Fund, and that no such personal
liability whatever shall attach to, or is or shall be incurred by, the
organizers, shareholders, Officers, Directors of the Fund or of any predecessor
or successor, or any of them as such. To the extent that any such liability
exists, it is hereby expressly waived and released by the Custodian as a
condition of, and as a consideration for, the execution of this Agreement.
C. The obligations set forth in this Agreement as having been made by the
Fund have been made by the Board Of Directors, acting as such Directors for and
on behalf of the Fund, pursuant to the authority vested in them under the laws
of the State of ___________, the Articles of Incorporation and the By-Laws of
the Fund. This Agreement has been executed by Officers of the Fund as
13
<PAGE>
officers, and not individually, and the obligations contained herein are not
binding upon any of the Directors, Officers, agents or holders of shares,
personally, but bind only the Fund.
D. Provisions of the Prospectus and any other documents (including
advertising material) specifically mentioning the Custodian (other than merely
by name and address) shall be reviewed with the Custodian by the Fund prior to
publication and/or dissemination or distribution, and shall be subject to the
consent of the Custodian.
E. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at Star
Bank Center, 425 Walnut Street, M. L. 6118, Cincinnati, Ohio 45202, attention
Mutual Fund Custody Department, or at such other place as the Custodian may from
time to time designate in writing.
F. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given when
delivered to the Fund or on the second business day following the time such
notice is deposited in the U.S. mail postage prepaid and addressed to the Fund
at its office at 595 Market Street Suite 1980 San Francisco, CA. 94104 or at
such other place as the Fund may from time to time designate in writing.
G. This Agreement, with the exception of the Appendices, may not be
amended or modified in any manner except by a written agreement executed by both
parties with the same formality as this
14
<PAGE>
Agreement, and authorized and approved by a resolution of the Board Of Directors
of the Fund.
H. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund or by the Custodian, and no
attempted assignment by the Fund or the Custodian shall be effective without the
written consent of the other party hereto.
I. This Agreement shall be construed in accordance with the laws of the
State of Ohio.
J. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective Officers, thereunto duly authorized
as of the day and year first above written.
ATTEST: Valley Forge Capital Holdings
Total Return Fund Inc.
By:
Title:
15
<PAGE>
ATTEST: Star Bank, N.A.
By:
Title:
16
<PAGE>
APPENDIX A
Authorized Persons Specimen Signatures
Chairman:
-------------------- ---------------------
President: Victoria S. Gong /s/ Victoria S. Gong
-------------------- ---------------------
Secretary: Larry S. Mao /s/ Larry S. Mao
-------------------- ---------------------
Treasurer: Frederick A. Wolf /s/ Frederick A. Wolf
-------------------- ---------------------
Controller:
-------------------- ---------------------
Adviser Employees: Steve Drobot /s/ Steve Drobot
-------------------- ---------------------
17
<PAGE>
Transfer Agent/Fund Accountant
-------------------- ---------------------
Employees:
-------------------- ---------------------
-------------------- ---------------------
-------------------- ---------------------
-------------------- ---------------------
18
<PAGE>
APPENDIX B
The following agents are employed currently by Star Bank, N.A.
for securities processing and control . . .
The Depository Trust Company (New York)
7 Hanover Square
New York, NY 10004
The Federal Reserve Bank
Cincinnati and Cleveland Branches
Bankers Trust Company
16 Wall Street
New York, NY 10005
(For Foreign Securities and certain non-DTC eligible Securities)
19
<PAGE>
APPENDIX C
Standards of Service Guide
Star Bank, N.A. is committed to providing superior quality service to
all customers and their agents at all times. We have compiled this guide as a
tool for our clients to determine our standards for the processing of security
settlements, payment collection, and capital change transactions. Deadlines
recited in this guide represent the times required for Star Bank to guarantee
processing. Failure to meet these deadlines will result in settlement at our
client's risk. In all cases, Star Bank will make every effort to complete all
processing on a timely basis.
Star Bank is a direct participant of the Depository Trust Company, a
direct member of the Federal Reserve Bank of Cleveland, and utilizes the Bankers
Trust Company as its agent for ineligible and foreign securities.
For corporate reorganizations, Star Bank utilizes SEI's Reorg Source,
Financial Information, Inc. XCITEK, DTC Important Notices, and the Wall Street
Journal.
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<PAGE>
For bond calls and mandatory puts, Star Bank utilizes SEI's Bond
Source, Kenny Information Systems, Standard & Poor's Corporation, and DTC
Important Notices. Star Bank will not notify clients of optional put
opportunities.
Any securities delivered free to Star Bank or its agents must be
received three (3) business days prior to any payment or settlement in order for
the Star Bank standards of service to apply.
Should you have any questions regarding the information contained in
this guide, please feel free to contact your account representative.
The information contained in this Standards of Service Guide
is subject to change. Should any changes be made Star Bank
will provide you with an updated copy of its Standards of
Service Guide.
21
<PAGE>
STAR BANK PAYMENT STANDARDS
<TABLE>
<S> <C>
Security Type Income Principal
- ------------- ------ ---------
Equities Payable Date
Municipal Bonds* Payable Date Payable Date
Corporate Bonds* Payable Date Payable Date
Federal Reserve Bank
Book Entry* Payable Date Payable Date
PTC GNMA (P&I) Payable Date+1 Payable Date+1
CMO*
DTC Payable Date+1 Payable Date+1
Bankers Trust Payable Date+1 Payable Date+1
22
<PAGE>
SBA Loan Certificates When Received When Received
- --------------------- ------------- -------------
Unit Investment Trust
Certificates* Payable Date Payable Date
Certificates of Deposit* Payable Date+1 Payable Date+1
Limited Partnerships When Received When Received
Foreign Securities When Received When Received
*Variable Rate Securities
Federal Reserve Bank
Book Entry Payable Date Payable Date
DTC Payable Date+1 Payable Date+1
Bankers Trust Payable Date+1 Payable Date+1
NOTE: If a payable date falls on a weekend or bank holiday, payment
will be made on the immediately following business day.
23
<PAGE>
Star Bank Corporate Reorganization Standards
Type of Action Notification to Client Deadline for Client Transaction
Instructions to Star Bank Posting
Rights, Warrants Later of 10 business days 5 business days prior Upon Receipt
and Optional Mergers prior to expiration or to expiration
receipt of notice
Mandatory Puts with Later of 10 business days 5 business days prior Upon Receipt
Option to Retain prior to expiration or to expiration
receipt of notice
Class Actions 10 business days prior to 5 business days prior Upon Receipt
expiration date to expiration
Voluntary Tenders, Later of 10 business days 5 business days prior Upon Receipt
Exchanges, and prior to expiration or to expiration
Conversions receipt of notice
24
<PAGE>
Mandatory Puts, At posting of funds or None Upon Receipt
Defaults, Liquidations,
Bankruptcies, Stock
Splits, Mandatory
Exchanges
Full and Partial Calls Later of 10 business days None Upon Receipt
prior to expiration or
receipt of notice
NOTE: Fractional shares/par amounts resulting from any of the above will be sold.
25
<PAGE>
Star Bank Security Settlement Standards
Transaction Type Instructions Deadlines* Delivery Instructions
- ---------------- ----------------------- ---------------------
DTC 1:30 p.m. on Settlement Date DTC Participant #2219
Agent Bank ID 27895
Institutional # _____
For Account # _______
Federal reserve Book Entry 12:30 p.m. on Settlement Date Federal Reserve bank of
Clint/Trust for Star
Bank N.A. ABA # 042000013
For Account # ________
Federal Reserve Book Entry 1:00 p.m. on Settlement Date Federal Reserve Bank of
(Repurcahse Agreement Clint/Spec for Star Bank
Collateral Only) N.A. ABA # 042000013
For Account # _______
26
<PAGE>
PTC Securities 12:00 p.m. on Settlement Date PTC For Account BTRST/CUST
(GNMA Book Entry) Sub Account: Star Bank N.A.
Physical Securities #090334 Bankers Trust Company
16 Wall Street 4th Floor
Window 43
for Star Bank Account
#090334
CEDEL/EURO-CLEAR 11:00 a.m. on Settlement Date Euroclear Via Cedel Bridge
minus 2 in favor of Bankers Trust Comp
Cedel 53355
For Star Bank Account
#501526354
Cash Wire transfer 3:00 p.m. Star Bank N.A. Clint/Trust
ABA
#
042000013
Credit
Account
#9901877
Further
Credit
to
_______
Account
#
_______________
*All times listed are Eastern Standard Time.
27
</TABLE>
<PAGE>
APPENDIX D
Schedule of Compensation
Proposed Custody Fee Schedule for Valley Forge Capital Holding
Total Return Fund
Star Bank, N.A., as Custodian, will receive monthly compensation for services
according to the terms of the following schedule:
1. Portfolio Transaction Fee:
(a) For each repurchase agreement transaction $ 7.00
(b) For each portfolio transaction processed
through DTC or Federal Reserve $ 9.00
(c) For each portfolio transaction processed
through New York custodian $25.00
(d) For each GNMA/Amortized Security Purchase $16.00
(e) For each GNMA Prin/Int Paydown GNMA Sales $ 8.00
(f) For each option/future contract written,
exercised or expired $40.00
28
<PAGE>
(g) For each Cedel/Euro clear transaction $80.00
(h) For each Disbursement (Fund expenses only) $ 5.00
A transaction is a purchase/sale of a security, free receipt/free delivery
(excludes initial conversion), maturity tender or exchange:
II. Market Value Fee
Based upon an annual rate : Million
.0003 (3 Basis Points) on first $20
.0002 (2 Basis Points) on Next $20
.00015 (1.5 Basis Points) on Balance
30
<PAGE>
III. Monthly Minimum Fee-Per Fund $400.00
IV. Out-of-Pocket Expenses
The only out-of-pocket expenses charged to your account will be
shipping fees or transfer fees.
V. IRA Documents
Per Shareholder/year to hold each IRA Document $ 8.00
VI. Earnings Credits
On a monthly basis any earnings credits generated from uninvested
custody balances will be applied against any cash management service
fees generated. Earnings credits are based on a cost of funds tiered
earnings credit rate.
31
FUND SERVICES, INC.
TRANSFER AGENT AGREEMENT
THIS AGREEMENT, between Valley Forge Capital Holdings Total Return
Fund, INc. (the "Fund"), a corporation operating as an open-end investment
company under the Investment Company Act of 1940, duly organized and existing
under the laws of the State of Maryland, and FUND SERVICES, INC., a corporation
organized under the laws of the State of Virginia ("FSI"), provides as follows:
WHEREAS, FSI has agreed to act as transfer agent for the purpose of
recording the transfer, issuance and redemption of Shares of the Fund,
transferring the Shares of the Fund, disbursing dividends and other
distributions to Shareholders, filing various tax forms, mailing shareholder
information and receiving and responding to various shareholder inquiries;
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein, the parties do hereby agree as follows:
SECTION 1. The Fund hereby appoints FSI as its transfer agent and FSI
agrees to act in such capacity upon the terms set forth in this Agreement.
SECTION 2. The Fund shall furnish to FSI a supply of blank Share
Certificates and, from time to time, will renew such supply upon FSI's request.
Blank Share Certificates shall be signed manually or by facsimile signatures of
officers of the Fund and, if required by FSI, shall bear the Fund's seal or a
facsimile thereof.
SECTION 3. FSI shall make original issues of Shares of the Fund in
accordance with SECTIONS 13 and 14 below and the Fund's then current prospectus,
upon receipt of (i) Written Instructions requesting the issuance, (ii) a
certified copy of a resolution of the Fund's Board of Directors authorizing the
issuance, (iii) necessary funds for the payment of any original issue tax
applicable to such additional Shares, (iv) an opinion of the Fund's counsel as
to the legality and validity of the issuance, which opinion may provide that it
is contingent upon the filing by the Fund of an appropriate notice with the
Securities and Exchange Commission, as required by Rule 24f-2 of the Investment
Company Act of 1940, as amended from time to time. If the opinion described in
(iv) above is contingent upon a filing under such rule, the Fund shall fully
<PAGE>
indemnify FSI for any liability arising from the failure of the Fund to comply
with such rule.
SECTION 4. Transfers of Shares of the Fund shall be registered and,
subject to the provisions of SECTION 10, new Share Certificates shall be issued
by FSI upon surrender of outstanding Share Certificates in the form deemed by
FSI to be properly endorsed for transfer, which form shall include (i) all
necessary endorsers' signatures guaranteed by a member firm of a national
securities exchange or a domestic commercial bank, (ii) such assurances as FSI
may deem necessary to evidence the genuineness and effectiveness of each
endorsement and (iii) satisfactory evidence of compliance with all applicable
laws relating to the payment or collection of taxes. FSI shall take reasonable
measures as instructed by the Fund and agreed upon by FSI to enable the Fund to
identify proposed transfers that, if effected, will likely cause the Fund to
fall within the Internal Revenue Code definitions of a personal holding company
and shall not make such transfers contrary to the Fund's instructions without
the prior written approval of the Fund and its counsel.
SECTION 5. FSI shall forward Share Certificates in "non-negotiable"
form by first-class or registered mail, or by whatever means FSI deems equally
reliable and expeditious. While in transit to the addressee, all deliveries of
Share Certificates shall be insured by FSI as it deems appropriate. FSI shall
not mail Share Certificates in "negotiable" form, unless requested in writing by
the Fund and fully indemnified by the Fund to FSI's satisfaction.
SECTION 6. In registering transfers of Shares the Fund, FSI may rely
upon the Uniform Commercial Code or any other statutes that, in the opinion of
FSI's counsel, protect FSI and the Fund from liability arising from (i) not
requiring complete documentation, (ii) registering a transfer without an adverse
claim inquiry, (iii) delaying registration for purposes of such inquiry, or (iv)
refusing registration whenever an adverse claim requires such refusal.
SECTION 7. FSI may issue new Share Certificates in place of those lost,
destroyed or stolen, upon receiving indemnity satisfactory to FSI and may issue
new Share Certificates in exchange for, and upon surrender of, mutilated Share
Certificates as FSI deems appropriate.
2
<PAGE>
SECTION 8. Unless otherwise directed by the Fund, FSI may issue or
register Share Certificates reflecting the signature, or facsimile thereof, of
an officer who has died, resigned or been removed by the Fund. The Fund shall
file promptly with FSI any approvals, adoptions, or ratifications of such
actions as may be required by law or FSI.
SECTION 9. FSI shall maintain customary stock registry records for the
Fund, noting the issuance, transfer or redemption of Shares and the issuance and
transfer of Share Certificates. FSI may also maintain for the Fund an account
entitled "Unissued Certificate Account," in which it will record the Shares, and
fractions thereof, issued and outstanding from time to time for which issuance
of Share Certificates has not been requested. FSI is authorized to keep records
for the Fund, containing the names and last known addresses of Shareholders and
Planholders, and the number of Shares, and fractions thereof, from time to time
owned by them for which no Share Certificates are outstanding. Each Shareholder
or Planholder will be assigned a single account number for the Fund, even though
Shares held under each Plan and Shares for which Certificates have been issued
will be accounted for separately. Whenever a Shareholder deposits Shares
represented by Share Certificates in a Plan that permits the deposit of Shares
thereunder, FSI upon receipt of the Share Certificates registered in the name of
the Shareholder (or if not registered, in proper form for transfer), shall
cancel such Share Certificates, debit the Shareholder's individual account,
credit the Shares to the Unissued Share Certificate Account pursuant to SECTION
10 below and credit the deposited Shares to the proper Plan account.
SECTION 10. FSI shall issue Share Certificates for Shares of the Fund
only upon receipt of a written request from a Shareholder. If Shares are
purchased without such request, FSI shall merely note on its stock registry
records the issuance of the Shares and fractions thereof and credit the Unissued
Certificate Account and the respective Shareholders' accounts with the Shares.
Whenever Shares, and fractions thereof, owned by Shareholders are surrendered
for redemption, FSI may process the transactions by making appropriate entries
in the
3
<PAGE>
stock transfer records, and debiting the Unissued Certificate Account and the
record of issued Shares outstanding; it shall be unnecessary for FSI to reissue
Share Certificates in the name of the Fund.
SECTION 11. FSI shall also perform the usual duties and functions
required of a stock transfer agent for a corporation, including but not limited
to (i) issuing Share Certificates as Treasury Shares, as directed by Written
Instructions, and (ii) transferring Share Certificates from one Shareholder to
another in the usual manner. FSI may rely conclusively and act without further
investigation upon any list, instruction, certification, authorization, Share
Certificate or other instrument or paper reasonably believed by it in good faith
to be genuine and unaltered, and to have been signed, countersigned or executed
or authorized by a duly-authorized person or persons, or by the Fund, upon the
advice of counsel for the Fund or for FSI, or upon the net asset value quotation
of the Service Agent, as hereinafter defined. FSI may record any transfer of
Share Certificates which it reasonably believes in good faith to have been
duly-authorized, or may refuse to record any transfer of Share Certificates if,
in good faith, it deems such refusal necessary in order to avoid any liability
on the part of either the Fund or FSI. The Fund agrees to indemnify and hold
harmless FSI from and against any and all losses, costs, claims, and liability
that it may suffer or incur by reason of such good faith reliance, action or
failure to act.
SECTION 12. FSI shall notify the Fund of any request or demand for the
inspection of the Fund's share records. FSI shall abide by the Fund's
instructions for granting or denying the inspection; provided, however, FSI may
grant the inspection without such instructions if it is advised by its counsel
that failure to do so will result in liability to FSI.
SECTION 13. For purposes of this Section, the Fund hereby instructs FSI
to consider Shareholder and Planholder payments as federal funds on the day
indicated below:
(a) for a wire received prior to 12:00 noon Eastern time, on the same
day;
4
<PAGE>
(b) for a wire received on or after 12:00 noon Eastern time, on the
next business day;
(c) for a check received prior to 12:00 noon Eastern time, on the
second business day following receipt; and
(d) for a check received on or after 12:00 noon Eastern time, on the
third business day following receipt.
Immediately after 4:00 p.m. Eastern time or such other time as the Fund may
reasonably specify (the "Valuation Time") on each day that the Fund and FSI are
open for business, FSI shall obtain from the Fund's service agent, as specified
by the Fund in writing to FSI, a quotation (on which it may conclusively rely)
of the net asset value, determined as of the Valuation Time on that day. On each
day FSI is open for business, it shall use the net asset value determined by the
Service Agent to compute the number of Shares and fractional Shares to be
purchased and the aggregate purchase proceeds to be deposited with the
Custodian. As necessary but no more frequently than daily (unless a more
frequent basis is agreed to by FSI), FSI shall place a purchase order with the
Custodian for the proper number of Shares and fractional Shares to be purchased
and promptly thereafter shall send written confirmation of such purchase to the
Custodian and the Fund.
SECTION 14. Having made the calculations required by SECTION 13, FSI
shall thereupon pay the Custodian the aggregate net asset value of Shares of the
Fund purchased. The aggregate number of Shares and fractional Shares purchased
shall then be issued daily and credited by FSI to the Unissued Certificate
Account. FSI shall also credit each Shareholder's separate account with the
number of shares purchased by such Shareholder. FSI shall promptly thereafter
mail written confirmation of the purchase to each Shareholder or Planholder, and
if requested, to a specified broker-dealer and the Fund. Each confirmation shall
indicate the prior Share balance, the new Share balance, the Shares held under a
Plan (if any), the Shares for which Share Certificates are outstanding (if any),
the amount invested and the price paid for the newly-purchased Shares.
5
<PAGE>
SECTION 15. Prior to the Valuation Time on each business day, as
specified in accordance with SECTION 13 above, FSI shall process all requests to
redeem Shares of the Fund and advise the Custodian of (i) the total number of
Shares of the Fund available for redemption and (ii) the number of Shares and
fractional Shares of the Fund requested to be redeemed. Upon confirmation of the
net asset value, FSI shall notify the Fund and the Custodian of the redemption,
apply the redemption proceeds in accordance with SECTION 16 and the Fund's
prospectus, record the redemption in the stock registry books, and debit the
redeemed Shares from the Unissued Certificate Account and the individual account
of the Shareholder or Planholder.
In lieu of carrying out the redemption procedures described in the
preceding paragraph, FSI may, at the request of the Fund, sell Shares of the
Fund to the Fund as repurchases from Shareholders and/or Planholders, provided
that the sales price is not less than the applicable redemption price. The
redemption procedures shall then be appropriately modified.
SECTION 16. The proceeds of redemption shall be remitted by FSI in
accordance with the Fund's then current prospectus as follows:
(a) By check mailed to the Shareholder or Planholder at his last known
address. The request and stock certificates, if any, for Shares being redeemed
must reflect a guarantee of the owner's signature by a domestic commercial bank
or trust company or a member firm of a national securities exchange. If Share
Certificates have not been issued to the redeeming Shareholder or Planholder,
the signature of the Shareholder or Planholder on the redemption request must be
similarly guaranteed. The Fund may authorize FSI in writing to waive the
signature guarantee for any specific transaction or classes of transactions;
(b) By wire to a designated bank or broker upon telephone request,
without signature guarantee, if such redemption procedure has been elected on
the Shareholder's or Planholder's account information form. Any change in the
designated bank or broker account will be acted upon by FSI only if made in
writing by the Planholder or Shareholder, with signature guaranteed as required
by paragraph (a) above;
6
<PAGE>
(c) In case of an expedited telephone redemption, by check payable to
the Shareholder or Planholder of record and mailed for deposit to the bank
account designated in the Shareholder account information form;
(d) By other procedures commonly followed by mutual funds, as set forth
in Written Instructions from the Fund and mutually agreed upon by the Fund and
FSI.
For purposes of redemption of shares of the Fund that have been
purchased by check within fifteen (15) days prior to receipt of the redemption
request, the Fund shall provide FSI with Written Instructions concerning the
time within which such requests may be honored.
The authority of FSI to perform its responsibilities under SECTIONS 15
and 16 shall be suspended if FSI receives notice of the suspension of the
determination of the Fund's net asset value.
SECTION 17. Upon the declaration of each dividend and each capital
gains distribution by the Fund's Board of Directors, the Fund shall notify FSI
of the date of such declaration, the amount payable per share, the record date
for determining the Shareholders entitled to payment, the payment and the
reinvestment date price.
SECTION 18. On or before each payment date the Fund will transfer, or
cause the Custodian to transfer, to FSI the total amount of the dividend or
distribution currently payable. FSI will, on the designated payment date,
reinvest all dividends in additional shares and shall thereupon pay the
Custodian the aggregate net asset value of the additional shares and shall
promptly mail to each Shareholder or Planholder at his last known address, a
statement showing the number of full and fractional shares (rounded to three
decimal places) then owned by the Shareholder or Planholder and the net asset
value of such shares; provided, however, that if a Shareholder or Planholder
elects to receive dividends in cash, FSI shall prepare a check in the
appropriate amount and mail it to him at his last known address within five (5)
business days after the designated payment date.
SECTION 19. FSI shall maintain records regarding the issuance and
redemption of Shares of the Fund and dividend reinvestments. Such records will
list the transactions effected for each Shareholder and Planholder and the
number
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<PAGE>
of Shares and fractional Shares owned by each for which no Share Certificates
are outstanding. FSI agrees to make available upon request and to preserve for
the periods prescribed in Rule 31a-2 of the Investment Company Act of 1940 any
records related to services provided under this Agreement and required to be
maintained by Rule 31a-1 of such Act.
SECTION 20. FSI shall maintain those records necessary to enable the
Fund to file, in a timely manner, Form N-SAR (Semi-annual report) or any
successor monthly, quarterly or annual report required by the Investment Company
Act of 1940, or rules and regulations thereunder.
SECTION 21. FSI shall cooperate with the Fund's independent public
accountants and shall take reasonable action to make all necessary information
available to such accountants for the performance of their duties.
SECTION 22. In addition to the services described above, FSI will
perform other services for the Fund as mutually agreed upon in writing from time
to time, including but not limited to preparing and filing federal tax forms
with the Internal Revenue Service, mailing federal tax information to
Shareholders, mailing semi-annual Shareholder reports, preparing the annual list
of Shareholders and mailing notices of Shareholders' meetings, proxies and proxy
statements. FSI shall answer Shareholder inquiries related to their share
accounts and other correspondence requiring an answer from the Fund. FSI shall
maintain dated copies of written communications from Shareholders, and replies
thereto.
SECTION 23. Nothing contained in this Agreement is intended to or shall
require FSI, in any capacity hereunder, to perform any functions or duties on
any holiday, weekend or weekday on which day FSI or the New York Stock Exchange
is closed. Functions or duties normally scheduled to be performed on such days
shall be performed on, and as of, the next business day on which both the New
York Stock Exchange and FSI are open, unless otherwise required by law;
provided, however, that all purchase or redemption requests received by the Fund
for a date on which the Exchange is open but FSI is not shall be priced and
executed "as of" such date on the next business day FSI is open, unless
otherwise required by law.
8
<PAGE>
SECTION 24. The Fund agrees to pay FSI compensation for its services as
set forth in Schedule A attached hereto, or as shall be set forth in written
amendments to such Schedule approved by the Fund and FSI from time to time.
SECTION 25. FSI shall not be liable for any taxes, assessments or
governmental charges that my be levied or assessed on any basis whatsoever in
connection with the Fund, or any Plan thereof, Shareholder or Planholder,
excluding taxes assessed against FSI for compensation received by it hereunder.
SECTION 26. FSI shall not be liable for any non-negligent action taken
in good faith and reasonably believed by FSI to be within the powers conferred
upon it by this Agreement. The Fund shall indemnify FSI and hold it harmless
from and against any and all losses, claims, damages, liabilities or expenses
(including reasonable expenses for legal counsel) arising directly or indirectly
out of or in connection with this Agreement; provided such loss, claim, damage,
liability or expense is not the direct result of FSI's negligence or willful
misconduct, and provided further that FSI shall give the Fund notice and
reasonable opportunity to defend any such loss, claim, etc. in the name of the
Fund or FSI, or both. Without limiting the foregoing:
(a) FSI may rely upon the advice of the Fund or counsel to the Fund or
FSI, and upon statements of accountants, brokers and other persons believed by
FSI in good faith to be experts in the matters upon which they are consulted.
FSI shall not be liable for any action taken in good faith reliance upon such
advice or statements;
(b) FSI shall not be liable for any action reasonably taken in good
faith reliance upon any Written Instructions, Oral Instructions, including the
Service Agent's net asset value quotation, or certified copy of any resolution
of the Fund's Board of Directors; provided, however, that upon receipt of a
Written Instruction countermanding a prior Written or Oral Instruction that has
not been fully executed by FSI, FSI shall verify the content of the second
Written Instruction and honor it, to the extent possible. FSI may rely upon the
genuineness of any such document, or copy thereof, reasonably believed by FSI in
good faith to have been validly executed; and
9
<PAGE>
(c) FSI may rely, and shall be protected by the Fund in acting upon any
signature, instruction, request, letter of transmittal, certificate, opinion of
counsel, statement, instrument, report, notice, consent, order, or other paper
or document reasonably believed by it in good faith to be genuine and to have
been signed or presented by the purchaser, Fund or other proper party or
parties.
(d) The Fund shall, as soon as possible, amend its prospectus to
conform with the provisions of this Agreement and make all necessary filings of
the amended prospectus, and shall indemnify FSI for any loss, claim or expense
resulting from FSI's reliance upon the Fund's representations in this Agreement,
notwithstanding a contrary representation in its prospectus.
SECTION 27. Upon receipt of Written Instructions, FSI is authorized to
make payment upon redemption of Shares without a signature guarantee. The Fund
hereby agrees to indemnify and hold FSI harmless from any and all expenses,
damages, claims, suits, liabilities, action, demands or losses whatsoever
arising out of or in connection with a payment by FSI for redemption of Shares
without a signature guarantee. Upon the request of FSI, the Fund shall assume
the entire defense of any such action, suit or claim. FSI shall notify the Fund
in a timely manner of any such action, suit or claim.
SECTION 28. The Fund shall deliver or cause to be delivered over to FSI
(i) an accurate list of Shareholders of the Fund, showing each Shareholder's
last known address, number of Shares owned and whether such shares are
represented by outstanding Share Certificates or by non-certificated share
accounts, (ii) all records relating to Plans of the Fund, including original
applications signed by the Planholders and original plan accounts recording
payment, deductions, reinvestments, withdrawals and liquidations and (iii) all
shareholder records, files, and other materials necessary or appropriate for
proper performance of the functions assumed by FSI under this Agreement
(collectively referred to as the "Materials"). The Fund shall indemnify and hold
FSI harmless from any and all expenses, damages, claims, suits, liabilities,
actions, demands and losses arising out of or in connection with any error,
omission, inaccuracy or other deficiency of such Materials, or out of the
failure of the Fund to provide any portion of the Materials or to provide any
information needed by FSI to knowledgeably perform its functions.
10
<PAGE>
SECTION 29. FSI shall, at all times, act in good faith and shall use
whatever methods it deems appropriate to ensure the accuracy of all services
performed under this Agreement. FSI shall be liable only for loss or damage due
to errors caused by FSI's negligence, bad faith or willful misconduct or that of
its employees.
SECTION 30. This Agreement may be amended from time to time by a
written supplemental agreement executed by the Fund and FSI and without notice
to or approval of the Shareholders or Planholders; provided the intent and
purposes of any Plan, as stated from time to time in the Fund's prospectus, are
observed. The parties hereto may adopt procedures as may be appropriate or
practical under the circumstances, and FSI may conclusively rely on the
determination of the Fund that any procedure that has been approved by the Fund
does not conflict with or violate any requirement of its Articles of
Incorporation, By-Laws or prospectus, or any rule, regulation or requirement of
any regulatory body.
SECTION 31. The Fund shall file with FSI a certified copy of the
operative resolution of its Board of Directors authorizing the execution of
Written Instructions or the transmittal of Oral Instructions.
SECTION 32. The terms, as defined in this Section, whenever used in
this Agreement or in any amendment or supplement hereto, shall have the meanings
specified below, insofar as the context will allow:
(a) The Fund: The term Fund shall mean Valley Forge Capital Holdings
Total Return Fund.
(b) Custodian: The term Custodian shall mean Star Bank, NA.
(c) Series: The term Series shall mean The Total Return Fund Series or
other Series subsequently formed.
(d) Securities: The term Securities shall mean bonds, debentures,
notes, stocks, shares, evidences of indebtedness, and other securities and
investments from time to time owned by the Fund.
11
<PAGE>
(e) Share Certificates: The term Share Certificates shall mean the
stock certificates for the Shares of the Fund.
(f) Shareholders: The term Shareholders shall mean the registered
owners from time to time of the Shares of the Fund, as reflected on the stock
registry records of the Fund.
(g) Shares: The term Shares shall mean the issued and outstanding
shares of common stock of the Fund.
(h) Oral Instructions: The term Oral Instructions shall mean an
authorization, instruction, approval, item or set of data, or information of any
kind transmitted to FSI in person or by telephone, vocal telegram or other
electronic means, by a person or person reasonably believed in good faith by FSI
to be a person or person authorized by a resolution of the Board of Directors of
the Fund to give Oral Instructions on behalf of the Fund.
(i) Written Instructions: The term Written Instructions shall mean an
authorization, instruction, approval, item or set of data, or information of any
kind transmitted to FSI in original writing containing original signatures, or a
copy of such document transmitted by telecopy, including transmission of such
signature, or other mechanical or documentary means, at the request of a person
or persons reasonably believed in good faith by FSI to be a person or persons
authorized by a resolution of the Board of Directors of the Fund to give Written
Instructions on behalf of the Fund.
(j) Plan: The term Plan shall include such investment plan, dividends
or capital gains reinvestment plans, systematic withdrawal plans or other types
of plans set forth in the then current prospectus of the Fund (excluding any
qualified retirement plan that is a Shareholder of the Fund) in form acceptable
to FSI, adopted by the Fund from time to time and made available to its
Shareholders, including plans or accounts by self-employed individuals or
partnerships.
(k) Planholder: The term Planholder shall mean a Shareholder who, at
the time of reference, is participating in a Plan, including any underwriter,
representative or broker-dealer.
12
<PAGE>
SECTION 33. In the event that any check or other order for the payment
of money is returned unpaid for any reason, FSI shall promptly notify the Fund
of the non-payment.
SECTION 34. Either party may give sixty (60) days written notice to the
other of the termination of this Agreement, such termination to take effect at
the time specified in the notice.
SECTION 35. Any notice or other communication required by or permitted
to be given in connection with this Agreement shall be in writing, and shall be
delivered in person or sent by first-class mail, postage prepaid, to the
respective parties.
Notice to the Fund shall be given as follows until further notice:
Valley Forge Capital Holdings Total Return Fund, Inc.
595 Market Street, Suite 1980
San Francisco, CA 94105
Attention: Larry S. Mao, SVP
Notice to FSI shall be given as follows until further notice:
FUND SERVICES, INC.
1500 Forest Avenue, Suite 111
Richmond, Virginia 23229
Attention: Mr. William R. Carmichael, Jr., President
SECTION 36. The Fund represents and warrants to FSI that the execution
and delivery of this Transfer Agent Agreement by the undersigned officer of the
Fund has been duly and validly authorized by resolution of the Fund's Board of
Directors. FSI represents and warrants to the Fund that the execution and
delivery of this Agreement by the undersigned officer of FSI has also been duly
and validly authorized.
SECTION 37. This Agreement may be executed in more than one
counterpart, each of which shall be deemed to be an original.
SECTION 38. This Agreement shall extend to and shall bind the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable by the Fund without the written consent of FSI
or by FSI without the written consent of the Fund, authorized or approved by a
resolution of the Fund's Board of Directors.
13
<PAGE>
SECTION 39. This Agreement shall be governed by the laws of the State
of Virginia.
WITNESS the following signatures:
Valley Forge Capital Holdings
By: Victoria S. Gong
Title: President
Date: Oct 1, 1996
FUND SERVICES, INC.
By: William R. Carmichael, Jr.
Title: President
Date: Oct. 16, 1996
14
ADMINISTRATIVE SERVICES AGREEMENT
Administrative Services Agreement (the "Agreement") dated November 1,
1996, by and between VALLEY FORGE CAPITAL HOLDINGS TOTAL RETURN FUND, INC. (the
"Fund"), a diversified, open-end management investment company, duly organized
as a corporation in accordance with the laws of the State of Maryland, and
COMMONWEALTH SHAREHOLDER SERVICES, INC. ("CSS"), a corporation duly organized as
a corporation in accordance with the laws of the Commonwealth of Virginia.
WITNESSETH THAT:
WHEREAS, the Fund desires to appoint CSS as its Administrator to
perform certain recordkeeping and shareholder servicing functions required of a
duly registered investment company to comply with certain provisions of federal,
state and local law, rules and regulations, and to assist the Fund in preparing
and filing certain financial reports (including quarterly, semi-annual and
annual reports to shareholders, Form N-SAR reports, and post-effective
amendments to the Fund's registration statement).
WHEREAS, CSS may, if requested, perform certain daily functions in
connection with the on-going operations of the Fund, as mutually agreed upon,
and provide ministerial services to implement the investment decisions of the
Fund and its investment advisor; and
WHEREAS, CSS is willing to perform such functions upon the
terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto, intending to be legally bound,
agree as follows:
Section 1. CSS shall examine and review all records and documents of
the Fund pertaining to its duties under this Agreement in order to determine
and/or recommend how such records and documents shall be maintained.
Section 2. CSS shall, as necessary for such purposes, advise the Fund
and its agents of the information which is deemed to be "necessary" for the
performance of its duties under this Agreement, and upon receipt of necessary
information and Written or Oral Instructions from the Fund, shall maintain and
keep current such shareholder relations records.
Unless the information necessary to perform the above functions is
furnished in writing to CSS by the Fund or its agents (such as Custodians,
Transfer Agents, etc.), CSS shall incur no liability and the Fund shall
indemnify and hold harmless CSS from and against any liability arising from any
discrepancy in the information received by CSS and used in the performance by
CSS of its duties.
<PAGE>
It shall be the responsibility of the Fund to furnish CSS with the net
asset value per share, declaration, record and payment dates and amounts of any
dividends or distributions of income or gains (including the status of same) and
any other special actions required concerning each of its securities.
CSS shall maintain such shareholder records above mentioned as required
by regulation and as agreed upon between the Fund and CSS.
Section 3. CSS shall provide assistance to the Fund in the servicing of
shareholder accounts, which may include telephone and written conversations,
assistance in redemptions, exchanges, transfers and opening accounts as may be
required from time to time. CSS shall, at the direction of the Fund, also
prepare and maintain the Fund's Blue Sky registrations. CSS shall, in addition,
provide such additional administrative non-advisory management services as it
and the Fund may from time to time agree.
Section 4. The accounts and records maintained by CSS shall be the
property of the Fund, and shall be made available to the Fund, within a
reasonable period of time, upon demand. CSS shall assist the Fund's independent
auditors, or any other person authorized by the Fund or, upon demand, any
regulatory body as authorized by law or regulation, in any requested review of
the Fund's accounts and records but shall be reimbursed for all reasonable and
documented expenses and employee time invested in any such review outside of
routine and normal periodic reviews. Upon receipt from the Fund of any necessary
information, CSS shall assist the Fund in organizing necessary data for the
Fund's completion of any necessary tax returns, questionnaires, periodic reports
to shareholders and such other reports and information requests as the Fund and
CSS shall agree upon from time to time.
Section 5. CSS and the Fund may from time to time adopt procedures they
agree upon, and, absent knowledge to the contrary, CSS may conclusively assume
that any procedure approved by the Fund or directed by the Fund, does not
conflict with or violate any requirements of Fund's Prospectus, Articles of
Incorporation, By-Laws, registration statement, orders, or any rule or
regulation of any regulatory body or governmental agency. The Fund (acting
through its officers or other agents) shall be responsible for notifying CSS of
any changes in regulations or rules which might necessitate changes in the
Fund's procedures.
Section 6. CSS may rely upon the advice of the Fund and upon statements
of the Fund's lawyers, accountants and other persons believed by it in good
faith to be expert in matters upon which they are consulted, and CSS shall not
be liable for any actions taken in good faith upon such statements.
<PAGE>
Section 7. CSS shall not be liable for any actions taken in good faith
reliance upon any authorized Oral Instructions, any Written Instructions, and
certified copy of any resolution of the Board of Directors of the Fund or any
other document reasonably believed by CSS to be genuine and to have been
executed or signed by the proper person or persons.
CSS shall not be held to have notice of any change of authority of any
officer, employee or agent of the Fund until receipt of notification thereof
from the Fund.
The Fund shall indemnify and hold CSS harmless from any and all
expenses, damages, claims, suits, liabilities, actions, demands and losses
whatsoever arising out of or in connection with any error, omission, inaccuracy
or other deficiency of any information provided to CSS by the Fund or any agent
of the Fund acting within the scope of its duties (except information provided
by agents of the Fund who are acting in a capacity arising from his or her
position with CSS, or when such agent is acting through individuals who are
employed by and subject to the supervisory control of CSS), or the failure of
the Fund to provide any information needed by CSS knowledgeably to perform its
functions hereunder (excluding any such failure by an agent of the Fund acting
in a capacity arising from his or her position with CSS, or when such agent is
acting through individuals who are employed by and subject to the supervisory
control of CSS). Also, the Fund shall indemnify and hold harmless CSS from all
claims and liabilities (including reasonable documented expenses for legal
counsel) incurred by or assessed against CSS in connection with the performance
of this Agreement, except such as may arise from CSS's own grossly negligent
action, omission or willful misconduct; provided, however, that before
confessing any claim against it, CSS shall give the Fund reasonable opportunity
to defend against such claim in the name of the Fund or CSS or both.
Section 8. The Fund agrees to pay CSS compensation for its services and
to reimburse it for expenses, as set forth in the Schedule attached hereto, or
as shall be set forth in amendments to such schedule approved by the Fund's
Board of Directors and CSS.
Section 9. Except as required by laws and regulations governing
investment companies, nothing contained in this Agreement is intended to or
shall require CSS, in any capacity hereunder, to perform any functions or duties
on any holiday or other day of special observance on which CSS is closed.
Functions or duties normally scheduled to be performed on such days shall be
performed on, and as of, the next business day on which both the Fund and CSS
are open. CSS will be open for business on days when the Fund is
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<PAGE>
open for business and/or as otherwise set forth in the Fund's Prospectus and
Statement of Additional Information.
Section 10. Either the Fund or CSS may give written notice to the other
of the termination of this Agreement, such termination to take effect at the
time specified in the notice, which time shall be not less than 90 days from the
giving of such notice. Such termination shall be without penalty.
Section 11. Any notice or other communication required by or permitted
to be given in connection with this Agreement shall be in writing, and shall be
delivered in person or sent by first-class mail, postage prepaid, to the
respective parties at their last known address, except that Oral Instructions
may be given if authorized by the Board of the Fund and preceded by a
certificate from the Fund's secretary so attesting.
Notices to the Fund shall be directed to:
595 Market Street
Suite 1980
San Francisco, CA 94105
Notices to CSS shall be directed to:
1500 Forest Ave.
Suite 223
Richmond, VA 23229
Section 12. This Agreement may be executed in two or more counterparts,
each of which, when so executed, shall be deemed to be an original, but such
counterparts shall together constitute but one and the same instrument.
Section 13. This Agreement shall extend to and shall be binding upon
the parties hereto and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable by the Fund without the
written consent of CSS, or by CSS without the written consent of the Fund,
authorized or approved by a resolution of its Board of Directors.
Section 15. For purposes of this Agreement, the terms Oral Instructions
and Written Instructions shall mean:
Oral Instructions: The term Oral Instruction shall mean an
authorization, instruction, approval, item or set of data, or information of any
kind transmitted to CSS in person or by telephone, telegram, telecopy, or other
mechanical or documentary
-5-
<PAGE>
means lacking a signature, by a person or persons believed in good faith by CSS
to be a person or persons authorized by a resolution of the Board of Directors
of the Fund, to give Oral Instructions on behalf of the Fund.
Written Instructions: The term Written Instruction shall mean an
authorization, instruction, approval, item or set of data, or information of any
kind transmitted to CSS in original writing containing original signatures or a
copy of such document transmitted by telecopy including transmission of such
signature believed in good faith by CSS to be the signature of a person
authorized by a resolution of the Board of Directors of the Fund to give Written
Instructions on behalf of the Fund.
The Fund shall file with CSS a certified copy of each resolution of its
Board of Directors authorizing execution of Written Instructions or the
transmittal of Oral Instructions as provided above.
Section 16. This Agreement shall be governed by the laws of the State
of Virginia.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized officers as of the day and year first above
written.
VALLEY FORGE CAPITAL HOLDINGS TOTAL RETURN FUND, INC.
By:
Victoria S. Gong
President
COMMONWEALTH SHAREHOLDER SERVICES, INC.
By:
John Pasco, III
Chief Executive Officer
-6-
<PAGE>
SCHEDULE A TO
ADMINISTRATIVE SERVICES AGREEMENT
BY AND BETWEEN
VALLEY FORGE CAPITAL HOLDINGS TOTAL RETURN FUND, INC.
AND
COMMONWEALTH SHAREHOLDER SERVICES, INC.
Pursuant to Section 8 of the Administrative Services Agreement, dated
November 1, 1996, by and between Valley Forge Capital Holdings Total Return
Fund, Inc. (the "Fund"), and Commonwealth Shareholder Services, Inc. ("CSS"),
the Fund shall pay CSS a fee calculated and paid monthly as follows:
A. For the performance of Blue Sky matters, CSS shall be paid at the rate of
$30 per hour of actual time used.
B. For shareholder servicing, CSS shall be paid at the rate of $30 per hour of
actual time used.
C. For all other administration, CSS shall be paid a fee at the rate of 0.2%
per annum of the average daily net assets of the Fund, payable monthly,
with a minimum fee of $30,000.
D. In addition to the foregoing, the Fund shall reimburse CSS for all expenses
incurred by it on behalf of the Fund. Such out- of-pocket expenses shall
include, but not be limited to: documented fees and costs of obtaining
advice of counsel or accountants in connection with its services to the
Fund; postage; long distance telephone; special forms required by the Fund;
any travel which may be required in the performance of its duties to the
Fund; and any other extraordinary expenses it may incur in connection with
its services to the Fund.
ACCOUNTING SERVICES AGREEMENT
AGREEMENT dated October 1, 1996 (the "Agreement") between Valley Forge
Capital Holdings Total Return fund, Inc. (the "Fund") a corporation operating as
an open-end management investment company, duly organized and existing under the
laws of the State of Maryland, and Commonwealth Fund Accounting, Inc. (the
"Company") a corporation duly organized and existing under the laws of the State
of Virginia.
WITNESSETH THAT:
WHEREAS, the Fund desires to appoint the Company as its Accounting
Services Agent to maintain and keep current the books, accounts,
records, journals or other records of original entry relating to the
business of the Fund as set forth in Section 2 of this Agreement (the
"Accounts and Records") and to perform certain other functions in
connection with such Accounts and Records; and
WHEREAS, the Company is willing to perform such functions upon
the terms and conditions set forth below; and
WHEREAS, the Fund will cause to be provided certain
information to the Company as set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto, intending to be legally bound, do
hereby agree as follows:
Section 1. Scope of the Engagement.
(a) The Fund shall promptly turn over to the Company:
(i) originals or copies of any Accounts and Records previously
maintained by or for it or,
(ii) if such records have not been previously created or
maintained, any data required to establish and bring current
such Accounts and Records.
(b) Thereafter, the Fund shall promptly transmit to the Company, and instruct
any other agents for the Fund to promptly transmit to the Company, all
information required for the maintenance of correct and accurate Accounts and
Records for the Fund.
(c) The Fund acknowledges that such Accounts and Records, and information
related thereto, are necessary for the Company to perform its functions under
this Agreement.
<PAGE>
2
(d) The Fund authorizes the Company to rely on Accounts and Records turned over
to it, and information provided to it, by the Fund or its agents. The Fund
hereby indemnifies and holds the Company, its successors and assigns harmless of
and from any and all expenses, damages, claims, suits, liabilities, actions,
demands and losses whatsoever arising out of or in connection with any error,
omission, inaccuracy or other deficiency of such Accounts and Records, or such
information, or due to the failure of the Fund to provide any portion of such
Accounts and Records, or to provide any additional information needed by the
Company to knowledgeably perform its functions, within a reasonable time after
requested by the Company.
(e) The Company shall make reasonable efforts to isolate and correct any
inaccuracies, omissions, discrepancies, or other deficiencies in the Accounts
and Records delivered to the Company, to the extent such matters are disclosed
to the Company or are discovered by it and are relevant to its performance of
its functions under this Agreement. The Fund shall provide the Company with such
assistance as it may reasonably request in connection with its efforts to
correct such matters.
(f) The Fund agrees to pay Company on a current and ongoing basis for the
Company's reasonable time and costs required for the correction of any errors or
omissions in the Accounts and Records delivered, or the information provided, to
Company by the Fund. Any such payment shall be in addition to the fees and
charges payable to the Company under this Agreement as set forth in Schedule A
attached hereto (which provides for services normally contemplated to be
rendered under this Agreement), provided that approval of the amount of such
payments shall be obtained in advance by the Company from the Fund if and when
such additional charges would exceed five percent of the usual charges payable
for a period under this Agreement.
Section 2. Identification of Services.
(a) Upon receipt of the necessary information from the Fund or its agents by
Written or Oral Instructions, the Company shall maintain and keep current the
following Accounts and Records relating to the business of the Fund, in such
form as may be mutually agreed to between the Fund and the Company, and as may
be required by the Investment Company Act of 1940 (the "Act"):
(1) Cash Receipts Journal
(2) Cash Disbursements Journal
(3) Dividends Paid and Payable Schedule
(4) Purchase and Sales Journals - Portfolio Securities
(5) Subscription and Redemption Journals
(6) Security Ledgers - Transaction Report and Tax Lot Report
<PAGE>
3
(7) Broker Ledger - Commission Report
(8) Daily Expense Accruals
(9) Daily Interest Accruals
(10) Daily Trial Balance
(11) Portfolio Interest Receivable and Income Journal
(12) Listing of Portfolio Holdings showing cost, market value and
percentage of portfolio comprised of each security.
(b) Unless necessary information to perform the above functions is furnished by
Written or Oral Instructions to the Company to enable the daily calculation of
the Fund's net asset value at the time set by the Fund pursuant to Rule 22c-1
under the Act, (presently set at the close of trading on the New York Stock
Exchange), as provided below in accordance with the time frame identified in
Section 7, the Company shall incur no liability, and the Fund shall indemnify
and hold harmless the Company from and against any liability arising from any
failure to provide complete information or from any discrepancy between the
information received by the Company and used in such calculations and any
subsequent information received from the Fund or any of its designated Agents.
(c) The scope and quality of the services to be provided under this Agreement
are based upon, and specifically incorporate, the assumptions (the "Basic
Assumptions") appended to this Agreement as Schedule B. The Fund agrees that
material deviations from the Basic Assumptions will be made only by mutual
agreement of the Fund and the Company, and deviations from such Basic
Assumptions may affect the ability of the Company to provide the services called
for under this Agreement.
Section 3. Pricing.
(a) The Company shall perform ministerial calculations necessary to calculate
the Fund's net asset value daily, in accordance with the Fund's current
prospectus and utilizing the information described in this Section.
(b) Portfolio investments for which market quotations are available to the
Company by use of an automated financial service (a "Pricing Service") shall be
valued based on the closing prices of the portfolio investment reported by such
Pricing Service except where the Fund has given or caused to be given specific
Written or Oral Instructions to utilize a different value. Notwithstanding any
information obtained from a Pricing Service, all portfolio securities shall be
given such values as the Fund shall direct by Written or Oral Instructions,
including all restricted securities and other securities requiring valuation not
readily ascertainable solely by the use of such a Pricing Service.
<PAGE>
4
(c) The Company shall have no responsibility or liability for the accuracy of
prices quoted by any recognized Pricing Service used by it pursuant to the
preceding paragraph; for the accuracy of the information supplied by the Fund;
or for any loss, liability, damage, or cost arising out of any inaccuracy of
such data, unless the Company is itself negligent with respect thereto. The
Company shall have no responsibility or duty to include information or
valuations to be provided by the Fund in any computation unless and until it is
timely supplied to the Company in usable form. Unless the necessary information
to calculate the net asset value daily is furnished by Written or Oral
Instructions from the Fund, the Company shall incur no liability, and the Fund
shall indemnify and hold harmless the Company from and against any liability
arising from any failure to provide complete information or from any discrepancy
between the information received by the Company and used in such calculation and
any subsequent information received from the Fund or any of its designated
agents, provided the Company notifies the Fund promptly of its need for
additional information with which to calculate net asset value.
Section 4. Reliance Upon Instructions.
(a) For all purposes under this Agreement, the Company is authorized to act upon
receipt of the first of any Written or Oral Instructions it receives from the
Fund or authorized agents of the Fund. In cases where the first instruction is
an Oral Instruction that is not in the form of a document or written record, a
confirmatory Written Instruction or Oral Instruction in the form of a document
or written record shall be delivered, and in cases where the Company receives an
Instruction, whether Written or Oral, to enter a portfolio transaction on the
records, the Fund shall cause the Broker-Dealer to send a written confirmation
to the Company.
(b) The Company shall be entitled to rely on the first Instruction received by
it, and for any act or omission undertaken in compliance therewith shall be free
of liability and fully indemnified and held harmless by the Fund, provided
however, that in the event a Written or Oral Instruction received by the Company
is countermanded by a timely later Written or Oral Instruction received by the
Company prior to acting upon such countermanded Instruction, the Company shall
act upon such later Written or Oral Instruction. The sole obligation of the
Company with respect to any follow-up or confirmatory Written Instruction, Oral
Instruction in documentary or written form, or Broker-Dealer written
confirmation shall be to make reasonable efforts to detect any such discrepancy
between the original Instruction and such confirmation and to report such
discrepancy to the Fund. The Fund shall be responsible, at the Fund's expense,
for taking any action, including any reprocessing, necessary to correct any
discrepancy or error, and
<PAGE>
5
to the extent such action requires the Company to act the Fund shall give the
Company to act the Fund shall give the Company specific Written Instruction as
to the action required.
Section 5. Reconciliation with Fund's Custodian.
At the end of each month, the Fund shall cause its Custodian Bank to
forward to the Company a monthly statement of cash and portfolio transactions,
which will be reconciled with the Company's Accounts and Records maintained for
the Fund. The Company will report any discrepancies to the Custodian, and shall
report any unreconciled items to the Fund.
Section 6. Reports to Fund.
The Company shall promptly supply daily and periodic reports to the
Fund as requested by the Fund and agreed upon by the Company.
Section 7. Information from Fund.
(a) The Fund, directly or by instructions to its agents (including without
limitations its Transfer Agent and its Custodian), shall provide to the Company
as of the close of each Business Day (or on such other schedule as the Fund
determines is necessary), confirmed by Written or Oral Instructions delivered to
the Company by 10:00 a.m. on the next business day) all data and information
necessary for the Company to maintain the Fund's Accounts and Records.
(b) The Company may conclusively assume that information it receives by Written
or Oral Instructions pursuant to the preceding paragraph is complete and
accurate. It is agreed that the information provided by the Fund or its agents
shall include reports of share purchases, redemptions or repurchases, and total
shares outstanding at the end of each business day after the determination of
the net asset value.
Section 8. Ownership of and Access to Fund Records.
(a) It is agreed that the Accounts and Records maintained by the Company for the
Fund are the property of the Fund, and shall be made available to the Fund
promptly upon request and shall be for the periods prescribed in Rule 31(a)-2
under the Act.
(b) The Company shall assist the Fund's independent auditors or, upon lawful
demand, any authorized regulatory body, in any authorized inspection or review
of the Fund's Accounts and Records.
(c) If the Company receives any request or order of a court or regulatory body
of competent jurisdiction, seeking access to the books and records of the Fund
in the possession of the Company, the
<PAGE>
6
Company shall seek to notify the Fund of such request or order to the extent it
may lawfully do so. The Company shall not be required to oppose or defend
against any such request or order. In connection with any such request or order
the Company may consult with counsel (whether its counsel or counsel for the
Fund) regarding same, and shall be reimbursed by the Fund for any costs incurred
thereby.
(d) The Company shall be reimbursed for all expenses and employee time required
to assist with any review of the Fund's Accounts and Records outside of routine
and normal periodic reviews and audits. Upon receipt from the Fund, or its
agents, of the necessary information, the Company shall supply data to the
Fund's accountants to allow them to complete any necessary tax returns,
questionnaires, periodic reports to shareholders and such other reports and
information requests as the Fund and the Company shall agree upon from time to
time.
Section 9. Procedures and Compliance.
The Company and the Fund may from time to time adopt such procedures as
they agree upon in writing, and the Company may conclusively assume that any
procedure approved or directed by the Fund does not conflict with or violate any
requirements of its Prospectus, Articles of Incorporation, By-Laws, or any rule
or regulation of any regulatory body or governmental agency. The Fund shall be
responsible for notifying the Company of any changes in regulations or rules
which might necessitate changes in the Company's procedures, and for working out
such changes with the Company.
Section 10. Indemnification.
(a) The Company, its directors, officers, employees, shareholders and agents
shall not be liable for any error or judgement or mistake of law or for any loss
suffered by the Fund in connection with the performance of this Agreement,
except losses resulting from willful malfeasance, bad faith, or gross negligence
on the part of the Company, or gross neglect by the Company in the performance
of its obligations and duties under this Agreement.
(b) Any person, even though also a director, officer, employee, shareholder or
agent of the Company, who may be or become an officer, trustee, employee or
agent of the Fund, shall be deemed, when rendering services to the Fund or
acting on any business of the Fund (other than services or business in
connection with the Company's duties hereunder), to be rendering such services
to or acting solely for the Fund and not as a director, officer, employee,
shareholder or agent of, or one under the control or direction of the Company
even though paid by it.
<PAGE>
7
(c) Notwithstanding any other provision of this Agreement, the Fund shall
indemnify and hold harmless the Company, its directors, officers, employees,
shareholders and agents from and against any and all claims, demands, expenses
and liabilities (whether with or without basis in fact or law) of any and every
nature which the Company may sustain or incur, or which may be asserted against
the Company by any person by reason of, or as a result of: (i) any action taken
or omitted to be taken by the Company in good faith hereunder; (ii) in reliance
upon any certificate, instrument, order or stock certificate or other document
reasonably believed by it to be genuine and to be signed, countersigned or
executed by any duly authorized person, upon the Oral instructions or Written
Instructions of an authorized person of the Fund or upon the opinion of legal
counsel for the Fund or its own counsel; or (iii) any action taken or omitted to
be taken by the Company in connection with its appointment in good faith in
reliance upon any law, fact, regulation or interpretation of the same even
though the same may thereafter have been altered, changed, amended or repealed.
However, indemnification under this subparagraph shall not apply to actions or
omissions of the Company or its directors, officers, employees, shareholders or
agents in cases of its or their own negligence, willful misconduct, bad faith,
or reckless disregard of its or their own duties hereunder.
(d) The Company shall give written notice to the Fund within ten (10) business
days of receipt by the Company of a written assertion or claim of any threatened
or pending legal proceeding which may be subject to this indemnification.
However, the failure to notify the Fund of such written assertion or claim shall
not operate in any manner whatsoever to relieve the Fund of any liability
arising from this Section or otherwise.
(e) In connection with any legal proceeding giving rise to a request for
indemnification by the Company pursuant to this provision, the Fund shall be
entitled to defend or prosecute any claim in the name of the Company at its own
expense and through counsel of its own choosing if it gives written notice to
the Company within ten (10) business days of receiving notice of such claim.
Notwithstanding the foregoing, the Company may participate in the litigation at
its own expense through counsel of its choosing. If the Fund does choose to
defend or prosecute such claim, then the parties shall cooperate in the defense
or prosecution thereof and shall furnish such records and other information as
are reasonably necessary for such purpose.
(f) The Fund shall not settle any claim without the Company's express written
consent, which consent shall not be unreasonably withheld. The Company shall not
settle any claim without the Fund's express written consent, which consent shall
not be unreasonably withheld.
<PAGE>
8
Section 11. Foreign currencies.
All financial data provided to, processed by, and reported by the
Company under this Agreement shall be stated in United States dollars or
currency. The Company shall have no obligation to convert to, equate, or deal in
foreign currencies or values, and expressly assumes no liability for any
currency conversion or equation computations relating to the affairs of the
Fund.
Section 12. Compensation of the Company.
The Fund agrees to pay the Company compensation for its services and to
reimburse it for expenses, as set forth in Schedule A attached hereto, or as
shall be set forth in amendments to such Schedule approved by the Fund and
Company from time to time. The Fund hereby instructs its Custodian Bank to debit
the Fund's custody account for invoices which are rendered by the Company for
the services performed for the Accounting agent function and to make payment on
such invoices in accordance with normal practices. Invoices for services
supplied or costs incurred by the Company will be sent to the Fund on or about
the first business day of each month, and payment thereon shall be made within
ten (10) days thereafter. The Fund agrees that the compensation payable
hereunder is predicated on the Basic Assumptions, and agrees that any
incremental work required to be provided by the Company due to deviation from
the Basic Assumptions by the Fund or its agents shall be payable to, or on
behalf of, the Company by the Fund.
Section 13. Holidays.
Nothing contained in this Agreement is intended to or shall require the
Company, in any capacity hereunder, to perform any functions or duties on any
holiday, day of special observance or any other day on which the Custodian or
the New York Stock Exchange is closed. Functions or duties normally scheduled to
be performed on such days shall be performed, and as of, the next succeeding
business day on which both the New York Stock Exchange and the Custodian are
open. Not withstanding the foregoing, the Company shall compute the net asset
value of the Fund on each day required pursuant to Rule 22c-1 promulgated under
the Act.
Section 14. Counterparts.
This Agreement may be executed in two or more counterparts, each of
which, when so executed shall be deemed to be an original, but such counterparts
shall together constitute but one and the same instrument.
<PAGE>
9
Section 15.Definitions.
For purposes of this Agreement, the terms Oral Instructions and Written
Instructions shall mean:
(a) Oral Instructions: The term Oral Instructions shall mean an authorization,
instruction, approval, item or set of data, or information of any kind
transmitted to the Company in person or by telephone, telegram, telecopy or
other mechanical or documentary means lacking an original signature, by a person
or persons believed in good faith by the Company to be a person or persons
authorized by a resolution of the Board of Directors of the Fund, to give Oral
Instructions on behalf of the Fund.
(b) Written Instructions: The term Written Instruction shall mean an
authorization, instruction, approval, item or set of data or information of any
kind transmitted to the Company bearing an original signature of an authorized
person, or a copy of such document transmitted by telecopy including
transmission of such a signature believed in good faith by the Company to be the
signature of a person authorized by a resolution of the Board of Directors of
the Fund to given Written Instructions on behalf of the Fund.
(c) The Fund shall file with the Company a certified copy of each resolution of
its Board of Directors authorizing execution of Written Instructions or the
transmittal of Oral Instructions as provided above.
Section 16.Termination.
(a) Either Party hereto may give written notice to the other party (the
"Termination Notice") of the termination of this Agreement. Such Termination
Notice shall state a date upon which the termination is effective (the
"Termination Date"), which shall be not less than sixty (60) days after the date
of the giving of the notice unless otherwise agreed by the parties hereto in
writing.
(b) Prior to the Termination Date, the Company shall provide to the Fund an
estimate of any anticipated fees, charges or expenses additional to the normal
fees, charges and expenses which would be payable under this Agreement for the
period from that time until the Termination Date, and the Company may require a
deposit on account of such estimate to be paid by the Fund.
(c) Upon the Termination Date, subject to payment to the Company by the Fund of
all amounts due to the Company as of said date, the Company shall make available
to the Fund or its designated recordkeeping successor, all of the records of the
Fund maintained under this Agreement which are then in the Company's possession.
<PAGE>
10
Section 17.Notice.
Any notice or other communication required by or permitted to be given
in connection with this Agreement shall be in writing, and shall be delivered in
person or sent by first class mail, postage prepaid to the respective parties as
follows:
If to the Fund:
Valley Forge Capital Holdings Total Return Fund, Inc.
595 Market Street, Suite 1980
San Francisco, Ca 94105
Attn: Larry S. Mao
If to the Company:
Commonwealth Fund Accounting, Inc.
1500 Forest Avenue, Suite 111
Richmond, Virginia 23229
Attention: J. Michael Tuohey
Section 18. Amendments to be in Writing.
This Agreement may be amended from time to time by a writing executed
by the Fund and the Company. The compensation stated in Schedule A attached
hereto may be adjusted from time to time by the execution of a new schedule
signed by both of the parties.
Section 19. Controlling law.
This Agreement shall be governed by the laws of the Commonwealth of
Virginia.
Section 20. Entire Agreement.
This Agreement sets forth the entire understanding of the parties with
respect to the provisions contemplated hereby, and supersedes any and all prior
agreements, arrangements and understandings relating to such services.
Section 21. Separability of Provisions.
Any provision of this Agreement which may be determined by competent
authority to be prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
<PAGE>
11
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their duly authorized officers and their corporate seals hereunto duly
affixed and attested, as of the day and year first above written.
Valley Forge Capital Holdings
Total Return Fund, Inc.
Attest By:__________________________
NAME Victoria S. Gong
TITLE President
- ----------------------
Larry S. Mao
Attest COMMONWEALTH FUND ACCOUNTING, INC.
By:____________________________
J. Michael Tuohey
President
- ----------------------
<PAGE>
A-1
SCHEDULE A
COMMONWEALTH FUND ACCOUNTING, INC.
ACCOUNTING SERVICES FEES
1. Domestic and ADR Securities Annual Basic Fee per portfolio
(1/12 payable monthly)
$12,000 Minimum up to $5 Million Average Net Assets
$18,000 Minimum up to $10 Million Average Net Assets
$24,000 Minimum up to $25 Million Average Net Assets
.0002 on Next $75 Million of Average Net Assets
Should total assets exceed $100 Million/Fund the fee schedule
will be renegotiated.
2. Should the Fund's security trading activity exceed an average
of 100 trades per month per portfolio, an additional fee of
$2.50 will be charged per trade.
3. As a special waiver that the Company has agreed to hold the
Annual Basic Fee to $15,000 Minimum regardless of the size of
the Average Net Assets for the initial six months of
operation.
<PAGE>
B-1
SCHEDULE B
ACCOUNTING SERVICES AGREEMENT
COMMONWEALTH FUND ACCOUNTING, INC.
BASIC ASSUMPTIONS
1. The Fund will complete all necessary prospectus and compliance reports, as
well as monitoring the various limitations and restrictions.
2. Daily Transfer Agent information will be supplied to the Company in the
required format, and within the necessary time constraints(i.e., by 11:00
a.m. EST on trade date plus one)
3. The Transfer Agent is responsible for reconciliation of Fund share balances
between the Transfer Agent reports and the Accounting share reports.
4. The Company will supply the Transfer Agent with daily NAV's for each
portfolio by 6:00 p.m. EST
5. The Fund's security trading activity will remain on average less than 100
trades per month, per portfolio.
6. The Company can, upon request, supply daily Portfolio Valuation Reports to
the Fund's investment advisor identifying current security positions,
original/amortized cost, security market values and changes in unrealized
appreciation and/or depreciation.
It will be the responsibility of the Fund's investment advisor to review
these reports upon receipt and to promptly notify the Company of any
possible "problems", incorrect security prices or capital change
information that could result in an incorrect Fund NAV.
7. Specific deadlines and complete information will be identified for all
security trades in order to minimize any settlement problems or NAV errors.
Details of non-money market trades will be called or faxed to the Company
on trade date plus one, no later than 11:00 a.m. Trade Authorization Forms,
with the appropriate officer signature, should be faxed to the Company on
all security trades placed by the Fund as soon as available but no later
trade date for money market instruments, and trade plus one for non-money
market securities.
<PAGE>
B-2
There is no assurance that security trades called in after the above stated
deadline can be included in that day's work.
8. Should the Fund participate in Security Lending additional fees may apply.
9. Fund management will monitor the expense accrual procedures for accuracy
and adequacy based on outstanding liabilities monthly, and promptly
communicate to the Company any adjustment needed.
Sachnoff & Weaver, Ltd.
Attorneys at Law
30 South Wacker Drive o 29th Floor o Chicago, Illinois 60606-7484
Telephone (312) 207-1000
Writer's Direct Dial Number acsimile (312)207-6400
(312) 207-6463
April 21, 1997
Board of Directors
Valley Forge Capital Holdings
Total Return Fund, Inc.
595 Market Street, Suite 1980
San Francisco, CA 94105
Re: Valley Forge Capital Holdings Total Return Fund, Inc.
Post-Effective Amendment No. 2 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 Amendment and
Restatement of the Fund, 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 the 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.
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,
SACHNOFF & WEAVER, LTD.
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
Valley Forge Capital Holdings Total Return Fund, Inc.
We consent to the use in Post-Effective Amendment No. 2 to Registration
Statement No. 33-79068 of our report dated March 13, 1997 appearing in the
Annual Report, dated December 31, 1996, 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
Richmond, Virginia
April 14, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 4,508,356
<INVESTMENTS-AT-VALUE> 4,357,501
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,008,091
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 82,355
<TOTAL-LIABILITIES> 82,350
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,011,472
<SHARES-COMMON-STOCK> 506,691
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 61,886
<NET-ASSETS> 4,925,736
<DIVIDEND-INCOME> 81,427
<INTEREST-INCOME> 61,322
<OTHER-INCOME> 0
<EXPENSES-NET> 69,346
<NET-INVESTMENT-INCOME> 73,403
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> (119,465)
<NET-CHANGE-FROM-OPS> 207,523
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (59,802)
<DISTRIBUTIONS-OF-GAINS> (191,699)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 457,840
<NUMBER-OF-SHARES-REDEEMED> 93,385
<SHARES-REINVESTED> 25,764
<NET-CHANGE-IN-ASSETS> 3,799,325
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 26,828
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 223,810
<AVERAGE-NET-ASSETS> 3,556,204
<PER-SHARE-NAV-BEGIN> 9.67
<PER-SHARE-NII> .13
<PER-SHARE-GAIN-APPREC> .44
<PER-SHARE-DIVIDEND> (.12)
<PER-SHARE-DISTRIBUTIONS> (.40)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.72
<EXPENSE-RATIO> 6.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
