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PART B
VANGUARD/TRUSTEES' EQUITY FUND
(formerly known as "Trustees' Commingled Fund")
STATEMENT OF ADDITIONAL INFORMATION
April 22, 1994; Revised August 3, 1994
This Statement is not a prospectus but should be read in conjunction with
the Fund's Prospectus dated April 22, 1994. To obtain the Prospectus, please
call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
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Investment Objective and Policies...................................... 1
Purchase of Shares..................................................... 5
Redemption of Shares................................................... 6
Yield and Total Return................................................. 7
Investment Limitations................................................. 7
Management of the Fund................................................. 9
Investment Advisory Services........................................... 11
Portfolio Transactions................................................. 14
Performance Measures................................................... 14
General Information.................................................... 16
Financial Statements................................................... 17
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INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the investment objective and policies set
forth in the Fund's Prospectus:
Foreign Investments
Investors should recognize that investing in foreign companies involves
certain special considerations which are not typically associated with investing
in U.S. companies. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the International Portfolio may
temporarily hold uninvested reserves in bank deposits in foreign currencies, the
International Portfolio will be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies. The investment policies
of the International Portfolio permit it to enter into forward foreign currency
exchange contracts in order to hedge the Portfolio's holdings and commitments
against changes in the level of future currency rates. Such contracts involve an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contact.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
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Although the International Portfolio will endeavor to achieve most favorable
execution costs in its portfolio transactions, fixed commissions on many foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodian
arrangements of the Portfolio's foreign securities will be somewhat greater than
the expenses for the custodian arrangements for handling the U.S. Portfolio's
securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies comprising the Fund's International
Portfolio. However, these foreign withholding taxes are not expected to have a
significant impact on the International Growth Portfolio, since the Portfolio's
investment objective is to seek long-term capital appreciation and any income
should be considered incidental.
Futures Contracts
Each Portfolio may enter into futures contracts, options, options on futures
contracts and foreign currency futures contracts for several reasons: to
maintain cash reserves while remaining fully invested, to facilitate trading, to
reduce transaction costs, or to seek higher investment returns when a futures
contract is priced more attractively than the underlying equity security or
index. Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts which are standardized
as to maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a
U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin
deposits that may range upward from less than 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Portfolio
expects to earn interest income on its margin deposits.
The Portfolios will not use futures and options for speculative purposes. A
Portfolio will use futures and options to simulate full investment in underlying
securities while retaining a cash balance for fund management purposes.
Regulations of the CFTC applicable to the Company require that all of its
futures transactions constitute bona fide hedging transactions. Each Portfolio
will only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
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securities it intends to purchase. As evidence of this hedging interest, a
Portfolio expects that approximately 75% of its futures contract purchases will
be "completed"; that is, equivalent amounts of related securities will have been
purchased or are being purchased by the Portfolio upon sale of open futures
contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of the Portfolio income to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While the Portfolio will incur commission expenses in
both opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of U.S. Government
securities.
Restrictions on the Use of Futures Contracts
A Portfolio will not enter into futures contract transactions to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of the Portfolio's total assets. In
addition, a Portfolio will not enter into futures contracts to the extent that
its outstanding obligations to purchase securities under these contracts would
exceed 20% of the Portfolio's total assets.
Risk Factors in Futures Transactions
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, a Portfolio would continue to be required
to make daily cash payments to maintain its required margin. In such situations,
if a Portfolio has insufficient cash, it may have to sell portfolio securities
to meet daily margin requirements at a time when it may be disadvantageous to do
so. In addition, a Portfolio may be required to make delivery of the instruments
underlying interest rate futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the ability
to effectively hedge its portfolio. A Portfolio will minimize the risk that it
will be unable to close out a futures contract by only entering into futures
which are traded on national futures exchanges and for which there appears to be
a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as 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 contract. However, because the futures
strategies of the Portfolio are engaged in only for hedging purposes, the
Adviser does not believe that the Portfolio is subject to the risks of loss
frequently associated with futures transactions. The Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying security and sold it after the decline.
Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option. Additionally, investments in futures contracts and options
involve risk that the investment advisers will incorrectly predict stock market
and interest rate trends.
Most futures exchanges limit 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
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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 future positions and
subjecting some futures traders to substantial losses.
Federal Tax Treatment of Futures Contracts
Except for transactions a Portfolio has identified as hedging transactions,
the Portfolio 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. In
most cases, any gain or loss recognized with respect to a futures contract is
considered to be 60% long-term capital gain or loss and 40% short-term capital
gain or loss, without regard to the holding period of the contract. Furthermore,
sales of futures contracts which are intended to hedge against a change in the
value of securities held by the Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
In order for a Portfolio 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 foreign currencies or other income derived with respect to the
fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, the Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise 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 of the Portfolio's fiscal year and which are recognized for tax
purposes, will not be considered gains on sales of securities held less than
three months for the purpose of the 30% test.
The Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Portfolio's fiscal year) on futures transaction. Such
distributions will be combined with distributions of capital gains realized on
the Portfolio's other investments and shareholders will be advised on the nature
of the payments.
Repurchase Agreements
Each Portfolio may invest in repurchase agreements with commercial banks,
brokers or dealers either for defensive purposes due to market conditions or to
generate income from its excess cash balances. A repurchase agreement is an
agreement under which the Portfolio acquires a money market instrument
(generally a security issued by the U.S. Government or an agency thereof, a
banker's acceptance or a certificate of deposit) from a commercial bank, broker
or dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan collateralized by securities. The resale price reflects an agreed upon
interest rate effective for the period the instrument is held by the Portfolio
and is unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Portfolio (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by the Fund's custodian bank until
repurchased. In addition, the Fund's Board of Trustees will monitor a
Portfolio's repurchase agreement transactions generally and will establish
guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker or dealer party to a repurchase agreement
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with the Portfolio. No more than an aggregate of 15% of a Portfolio's assets, at
the time of investment, will be invested in repurchase agreements having
maturities longer than seven days and in securities subject to legal or
contractual restrictions on resale, or for which there are no readily available
market quotations.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the realization by the Portfolio on such
collateral may be automatically stayed. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other party to the
agreement. While the Fund's management acknowledges these risks, it is expected
that they can be controlled through careful monitoring procedures.
Lending of Securities
Each Portfolio may lend its investment securities on a short-term or
long-term basis to qualified institutional investors who need to borrow
securities in order to complete certain transactions, such as covering short
sales, avoiding failures to deliver securities or completing arbitrage
operations. By lending its investment securities, a Portfolio attempts to
increase its net investment income through the receipt of interest on the loan.
Any gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Portfolio. Each
Portfolio may lend its investment securities to qualified brokers, dealers,
banks or other financial institutions, so long as the terms, the structure and
the aggregate amount of such loans are not inconsistent with the Investment
Company Act of 1940, or the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder, which
currently require that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, an irrevocable letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the United States
Government having a value at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e., the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Portfolio at any
time, and (d) the Portfolio receive reasonable interest on the loan (which may
include the Portfolio's investing any cash collateral in interest bearing
short-term investments), any distribution on the loaned securities and any
increase in their market value. Loan arrangements made by a Portfolio will
comply with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange, which rules presently require the borrower, after
notice, to redeliver the securities within the normal settlement time of five
business days. All relevant facts and circumstances, including the
creditworthiness of the broker, dealer or institution, will be considered in
making decisions with respect to the lending of securities, subject to review by
the Fund's Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors (Trustees). In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
PURCHASE OF SHARES
The purchase price of shares of each Portfolio of the Fund is the net asset
value next determined after the order is received. The net asset value is
calculated as of the close of regular trading on the New York Stock Exchange on
each day the Exchange is open for business, and on any other day on which there
is sufficient trading in a Portfolio's investment securities to materially
affect the Portfolio's net asset value
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per share. An order received prior to the close of the Exchange will be executed
at the price computed on the date of receipt; and an order received after the
close of the Exchange will be executed at the price computed on the next day the
Exchange is open.
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of a Portfolio's shares.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is not
reasonably practicable for a Portfolio to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Trustees
may deem advisable; however, payment will be made wholly in cash unless the
Trustees believe that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "The Share Price of Each Portfolio" and a redeeming
shareholder would normally incur brokerage expenses if he converted these
securities to cash.
No charge is made by a Portfolio for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
Signature Guarantees. To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Fund to verify the identity of the person who has
authorized a redemption from your account. Signature guarantees are required in
connection with: (1) redemptions involving more than $25,000 on the date of
receipt by Vanguard of all necessary documents; (2) all redemptions, regardless
of the amount involved, when the proceeds are to be paid to someone other than
the registered owner(s) and/or to an address other than the address of record;
and (3) share transfer requests. These requirements are not applicable to
redemptions in the Fund's Keogh, IRA, and 403(b) plans except in connection
with: (1) distributions made when the proceeds are to be paid to someone other
than the plan participant; (2) certain authorizations to effect exchanges by
telephone; and (3) when proceeds are to be wired. These requirements may be
waived by the Fund in certain instances.
A guarantor must be a bank, a trust company, a member firm of a domestic
stock exchange, or a foreign branch of any of the foregoing. Notaries public are
not acceptable guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by Vanguard are also
being redeemed, on the letter or stock power.
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YIELD AND TOTAL RETURN
The yield of the U.S. Portfolio of the Fund for the 30 day period ended
December 31, 1993 was 1.03%.
The average annual total return of each Portfolio of the Fund for the
following periods ending December 31, 1993 is set forth below:
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1 year ended 5 years ended 10 years ended
12/31/93 12/31/93 12/31/93
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U.S. Portfolio.................. +17.24% +11.16% +11.24%
International Portfolio......... +30.49% + 7.68% +16.16%
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Total return is computed by finding the average compounded rates of return
over the periods set forth above that would equate an initial amount invested at
the beginning of the periods to the ending redeemable value of the investment.
INVESTMENT LIMITATIONS
Each Portfolio of the Fund is subject to the following limitations which
(except as indicated otherwise below) may not be changed without the approval of
at least a majority of the outstanding voting securities (as defined in the
Investment Company Act of 1940) of the Fund. A Portfolio will not:
(1) Borrow money except that the Portfolio may borrow from banks (or
through reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests which
might otherwise require the untimely disposition of securities, in an
amount not exceeding 10% of the value of the Portfolio's net assets
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Portfolio's net assets, the
Portfolio will not make any additional investments;
(2) With respect to 75% of the value of its total assets, purchase
the securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Portfolio would
hold more than 10% of the outstanding voting securities of the issuer, or
more than 5% of the value of the Portfolio's total assets would be
invested in the securities of such issuer;
(3) Invest in companies for the purpose of exercising control;
(4) Invest in securities of other investment companies, except as may
be acquired as a part of a merger, consolidation or acquisition of assets
or otherwise to the extent permitted by Section 12 of the Investment
Company Act of 1940. The Portfolio will invest only in investment
companies which have investment objectives and investment policies
consistent with those of the Portfolio;
(5) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Portfolio may technically be
deemed to be an underwriter under the Securities Act of 1933, as amended,
in disposing of portfolio securities;
(6) Purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that are
illiquid (including the Fund's investment in The Vanguard Group, Inc., as
discussed on page 8);
(7) Purchase or sell real estate although it may purchase and sell
securities of companies which deal in real estate or interests therein;
(8) Purchase securities on margin or sell any securities short except
that each Portfolio may invest in stock futures contracts, stock options,
options on stock futures contracts and foreign currency futures contracts
to the extent that not more than five percent of its total assets are
required as margin deposit to secure obligations under futures contracts
and not more than twenty percent of its total assets are committed to
such transactions at any time;
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(9) Invest more than 5% of the value of the total assets of the
Portfolio at the time of investment in the securities of any issuers
which have records of less than three years' continuous operation,
including the operation of any predecessor, but this limitation does not
apply to securities issued or guaranteed as to interest and principal by
the United States Government or its agencies or instrumentalities;*
(10) Purchase or retain any security if any officer, director,
security holder of the issuer of such security is at the same time an
officer, director, or investment adviser of the Fund, or a partner or
officer or director of such investment adviser and owns beneficially more
than 1/2 of 1 percent of the securities of such issuer provided that the
aggregate holdings of such securities of all such persons so owning more
than 1/2 of 1 percent of the outstanding stock or securities of such
issuer exceed 5% of the outstanding stock or securities of such issuer;*
(11) Make loans except by (i) purchasing a portion of an issue of
bonds, debentures or similar obligations which are either publicly
distributed or customarily purchased by institutional investors, (ii)
entering into repurchase agreements, provided, however, that repurchase
agreements maturing in more than seven days, together with securities
which do not have readily available market quotations, will not exceed
10% of a Portfolio's total assets, and (iii) lending its securities as
provided under "Investment Objective and Policies";
(12) Purchase or write put or call options except as specified in
"(8)" above;
(13) Invest in interests in oil, gas, or other mineral exploration or
development programs;
(14) Purchase or sell commodities on commodity contracts except as
specified in "(8)" above; and
(15) Concentrate its investments in a particular industry, although it
may invest up to 25% of the value of the Portfolio's total assets taken
at market in securities of issuers all of which conduct their principal
business activities in the same industry.
* These limitations are not fundamental and therefore may be changed by
the Fund's Trustees without a shareholder vote.
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, or make loans to, or contribute to the costs or other
financial requirements of any company which will be wholly owned by the Fund and
one or more other investment companies and is primarily engaged in the business
of providing, at-cost, management, administrative or related services to the
Fund and other investment companies. See "MANAGEMENT OF THE FUND" on page 9.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
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MANAGEMENT OF THE FUND
Trustees and Officers
The Officers of the Fund manage its day to day operations and are
responsible to the Fund's Board of Trustees. The Trustees set broad policies for
the Fund and choose its Officers. Following is a list of Trustees and Officers
of the Fund and a statement of their present positions and principal occupations
during the past five years. The mailing address of the Fund's Trustees and
Officers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND TRUSTEE*
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group. Director of The
Mead Corporation and General Accident Insurance.
JOHN J. BRENNAN, PRESIDENT & TRUSTEE*
President and Director of The Vanguard Group, Inc., and of each of the other
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, TRUSTEE
Chairman and Chief Executive Officer, Rhone-Poulenc Rorer, Inc.; Director of
Immune Response Corp. and Sun Company, Inc.; Trustee, Universal Health Realty
Income Trust.
BARBARA BARNES HAUPTFUHRER, TRUSTEE
Director of The Great Atlantic and Pacific Tea Company, Alco Standard Corp.,
Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual Life Insurance
Co.
BRUCE K. MACLAURY, TRUSTEE
President, The Brookings Institution; Director of Dayton Hudson Corporation.
American Express Bank Ltd., and St. Paul Companies, Inc.
BURTON G. MALKIEL, TRUSTEE
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., Jeffrey Co., and The Southern New England Telephone Company.
ALFRED M. RANKIN, JR., TRUSTEE
President, Chief Executive Officer and Director of NACCO Industries Inc.;
Director of The BFGoodrich Company, The Standard Products Company and The
Reliance Electric Company.
JOHN C. SAWHILL, TRUSTEE
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York University;
Director of Pacific Gas and Electric Company and NACCO Industries.
JAMES O. WELCH, Jr., TRUSTEE
Retired Chairman of Nabisco Brands Inc., retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, TRUSTEE
Chairman and Director of Rohm & Haas Company; Director of Cummins Engine
Company and Vanderbilt University; Trustee of the Culver Educational
Foundation.
RAYMOND J. KLAPINSKY, SECRETARY*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, TREASURER*
Treasurer of The Vanguard Group, Inc. and of each of the investment companies
in The Vanguard Group.
KAREN E. WEST, CONTROLLER*
Vice President of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
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* Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
The Vanguard Group
Vanguard/Trustees' Equity Fund is a member of The Vanguard Group of
Investment Companies. Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group obtain at
cost virtually all of their corporate management, administrative and
distribution services. Vanguard also provides investment advisory services on an
at-cost basis to several of the Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's net expenses which are allocated among the
Funds under methods approved by the Board of Trustees (Directors) of each Fund.
In addition, each Fund bears its own direct expenses, such as legal, auditing
and custodian fees.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested
B-9
<PAGE>
are adjusted from time to time in order to maintain the proportionate
relationship between each Fund's relative net assets and its contribution to
Vanguard's capital. At December 31, 1993, the Fund had contributed capital of
$168,000 to Vanguard, representing .8% of Vanguard's capitalization. The Funds'
Service Agreement provides as follows: (a) each Vanguard Fund may invest up to
.40% of its current assets in Vanguard, and (b) there is no other limitation on
the amount that each Vanguard Fund may contribute to Vanguard's capitalization.
Management. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended December 31, 1993, the Fund's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $1,314,000.
Distribution. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of Vanguard, acts as Sales Agent for shares of the Funds in
connection with any sales made directly to investors in the states of Florida,
Missouri, New York, Ohio, Texas and such other states as it may be required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for the Group, and
that no Fund shall incur annual distribution expenses in excess of 20/100 of 1%
of its average month-end net assets. During the fiscal year ended December 31,
1993, the Fund paid approximately $202,000 of the Group's distribution and
marketing expenses.
Investment Advisory Services. Vanguard also provides investment advisory
services to Vanguard Money Market Reserves, Vanguard Institutional Money Market
Portfolio, Vanguard Municipal Bond Fund, Vanguard Admiral Funds, several
Portfolios of Vanguard Fixed Income Securities Fund, Vanguard's State Tax-Free
Funds, Vanguard Index Trust, Vanguard International Equity Index Fund, Vanguard
Balanced Index Fund, Vanguard Bond Index Fund, Vanguard Institutional Index
Fund, several Portfolios of Vanguard Variable Insurance Fund and a portion of
Vanguard/Windsor II, as well as several indexed separate accounts. These
services are provided on an at-cost basis from a money management staff employed
directly by Vanguard. The compensation and other expenses of this staff are paid
by the Funds utilizing these services.
Remuneration of Trustees and Officers. The Fund pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's Officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund, and each other Fund in the Group, for
its proportionate share of Officers' and employees' salaries and retirement
benefits.
During the fiscal year ended December 31, 1993, the Fund paid approximately
$3,000 in fees and expenses to its "non-interested" Trustees. The Fund's
proportionate share of remuneration paid by Vanguard (and reimbursed by the
Fund) during the fiscal year to all Officers of the Fund, as a group, was
approximately $40,631.
Trustees who are not Officers are paid an annual fee upon retirement equal
to $1,000 for each year of service on the Board up to a maximum of $15,000.
Under its retirement plan, Vanguard contributes
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<PAGE>
annually an amount equal to 10% of each Officer's annual compensation plus 5.7%
of that part of the eligible Officer's compensation during the year, if any,
that exceeds the Social Security Taxable Wage Base then in effect. Under its
thrift plan, all eligible officers are permitted to make pre-tax contributions
in an amount equal to 4% of total compensation which are matched by Vanguard on
a 100% basis. The Fund's proportionate share of retirement contributions made by
Vanguard under its retirement and thrift plans on behalf of all eligible
Officers of the Fund, as a group, during the 1993 fiscal year was approximately
$4,910.
INVESTMENT ADVISORY SERVICES
The investment adviser to the Fund's International Portfolio is a sole
proprietorship doing business under the name "Batterymarch Financial Management"
("Batterymarch"), 600 Atlantic Avenue, Boston, Massachusetts 02210. Batterymarch
provides investment management services to numerous institutional accounts, such
as corporate pension plans, endowment funds and individual investors. Under an
Investment Advisory Agreement ("Agreement") with the Fund, dated May 1, 1993,
Batterymarch, subject to the control and supervision of the Fund's Board of
Trustees and in conformance with the stated investment objective and policies of
the International Portfolio, manages the investment and reinvestment of the
assets of the International Portfolio. In this regard, it is the responsibility
of Batterymarch to make investment decisions for the International Portfolio and
to place the Portfolio's purchase and sale orders for investment securities.
As compensation for the services rendered by Batterymarch under the
Agreement and the assumption by Batterymarch of the expenses related thereto
(other than the cost of securities purchased for the International Portfolio and
the taxes and brokerage commissions, if any, payable in connection with the
purchase and/or sale of such securities), the International Portfolio pays
Batterymarch an advisory fee calculated by applying various percentage rates to
the aggregate average net assets of the International Portfolio, and then
apportioning that fee to the International Portfolio, according to its net
assets. The fee schedule is as follows:
<TABLE>
<CAPTION>
Net Assets Rate
- ----------------------------------------------------------------------- -----
<S> <C>
First $10 million...................................................... 0.85%
Next $10 million....................................................... 0.45%
Next $30 million....................................................... 0.35%
Next $450 million...................................................... 0.15%
Over $500 million...................................................... 0.12%
</TABLE>
Although the base advisory fee rate on the first $10 million of the
International Portfolio's net assets is in excess of the fee rate paid by many
other mutual funds, it is substantially reduced as the value of the Portfolio's
assets increases. For example, it will result in an effective fee rate of .59%
at $25 million of assets, .47% at $50 million of assets, and .31% at $100
million of assets. During the years ended December 31, 1991, 1992 and 1993, the
International Portfolio paid Batterymarch advisory fees totaling $1,252,000 (.14
of 1% of average net assets), $1,246,000 (.15 of 1% of average net assets) and
$1,326,000 (.16 of 1% of average net assets), respectively.
Until April 1, 1992 Batterymarch served as investment adviser to the U.S.
Portfolio according to the terms of the fee schedule set forth above. For the
fiscal years ended December 31, 1991 and 1992 the U.S. Portfolio paid
Batterymarch advisory fees totaling $245,000 (.22 of 1% of average net assets)
and $325,000 (.35 of 1% of average net assets), respectively.
On April 1, 1992, the U.S. Portfolio entered into an Investment Advisory
Agreement with Geewax, Terker & Co. ("Geewax Terker"), 99 Starr Street,
Phoenixville, Pa. 19460. Under the terms of the Agreement Geewax Terker, subject
to the control and supervision of the Fund's Board of Trustees and in
conformance with the Fund's investment objective and policies, manages the
investment and reinvestment of the assets of the Fund's U.S. Portfolio. In this
regard it is the responsibility of Geewax Terker to make investment
B-11
<PAGE>
decisions for the U.S. Portfolio and to place the Portfolio's purchase and sale
orders for investment securities. For the fiscal year ended December 31, 1993,
U.S. Portfolio paid Geewax advisory fees totaling $507,000 .59 of 1% of average
net assets.
As compensation for the services rendered by Geewax Terker under the
Agreement and the assumption by Geewax Terker of the expenses related thereto
(other than the cost of securities purchased for the U.S. Portfolio) and the
taxes and brokerage commissions, if any, payable in connection with such
transactions), the U.S. Portfolio pays Geewax Terker an investment advisory fee
which represents a percentage of the Portfolio's average net assets adjusted for
the investment performance of the Portfolio relative to that of the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500") over the preceding 36-month
period as follows:
<TABLE>
<CAPTION>
Three Year Performance
Differential vs. The S&P 500 Annual Fee Rate
- ---------------------------------------------------------------------- ---------------
<S> <C>
+4.5% points or more above............................................ 0.60%
+2.25% points but less than
+4.5% points above.................................................... 0.40%
Less than +2.25% points above......................................... 0.20%
</TABLE>
Until the quarter ending March 31, 1993, the investment advisory fee was
calculated according to the following transition rules:
(a) April 1, 1992 through December 31, 1992. For the quarters ending
on or prior to December 31, 1992, the incentive/penalty fee was not
operable. The advisory fee was payable at the annual rate of .40% of the
U.S. Portfolio's net assets.
(b) For the calendar quarter ended March 31, 1993 if the investment
performance of the Portfolio for the 12 consecutive months then ended
exceeded the investment performance of the S&P 500 by:
(i) less than .75%, the fee rate payable to Geewax Terker was
.05% (annual rate of .20%); or
(ii) not less than .75% but not more than 1.5%, the fee rate
payable to Geewax Terker was .10% (annual rate of .40%); or
(iii) more than 1.5%, the fee rate payable to Geewax Terker was
.15% (annual rate of .60%).
(c) For each calendar quarter ended after March 31, 1993, the fee
payable to Geewax Terker shall be paid on the same basis as provided in
the previous paragraph except that each of the investment performance
percentages set forth in (i), (ii) and (iii) above (the "original
percentages") shall be replaced by a new percentage that is equal to the
product obtained by multiplying each such original percentage by a
fraction whose numerator is the number of calendar quarters, not
exceeding 12, that have elapsed since April 1, 1992 and whose denominator
is 4. For example, for the quarter ended March 31, 1994 (the eighth
quarter), the fee rate will be calculated based on the performance of the
Portfolio relative to that of the S&P 500 as follows:
(i) .05% (.20% annual rate) if the return of the Portfolio for
the preceding 24 months does not exceed that of the S&P 500 by more
than 1.5%;
(ii) .10% (.40% annual rate) if the return of the Portfolio for
the preceding 24 months exceeds that of the S&P 500 by more than 1.5%
but not more than 3.0%;
(iii) .15% (.60% annual rate) if the return of the Portfolio for
the preceding 24 months exceeds that of the S&P 500 by more than
3.0%.
The period of time which shall be used to compare the investment performance
of the Portfolio with the investment performance of the S&P 500 shall be the
number of consecutive months that this Agreement has been in effect as of the
end of the quarter for which such fee is being calculated, but not longer than
the most recent 36 months.
B-12
<PAGE>
The investment performance of the Portfolio and the S&P 500 shall be
calculated (i) as of the end of each calendar quarter on a total return basis
and (ii) for the same period of time. In calculating the investment performance
of the Portfolio for any period, the value of the Portfolio's cash distributions
from net investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period and the
value of capital gains taxes paid or accrued during such period by the Portfolio
for undistributed realized long-term capital gains realized from the Portfolio,
shall be included.
In April 1972, the Securities and Exchange Commission ("SEC") issued Release
No. 7113 under the Investment Company Act of 1940 to call attention of directors
and investment advisers to certain factors which must be considered in
connection with investment company incentive fee arrangements. One of these
factors is to "avoid basing significant fee adjustments upon random or
insignificant differences" between the investment performance of a fund and that
of the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a 'rule of thumb'
the performance difference should be at least +10 percentage points" annually
before the maximum performance adjustment may be made. However, the Release also
states that "because of the preliminary nature of these studies, the Commission
is not recommending, at this time, that any particular performance difference
exist before the maximum fee adjustment may be made". The Release concludes that
the directors of a fund "should satisfy themselves that the maximum performance
adjustment will be made only for performance differences that can reasonably be
considered significant." The Board of Trustees of the Fund has fully considered
the SEC Release and believes that the performance adjustments as included in the
proposed agreement are entirely appropriate although not within the +10
percentage points per year range suggested in the Release. Under the Fund's
investment advisory agreement, the maximum performance adjustment is made at a
difference of +4.5 percentage points from the performance of the index over a
thirty-six month period, which would effectively be the equivalent of
approximately +1.125 percentage points difference per year. The Fund's
investment advisory agreements provide for no performance adjustment at a
difference of less than +2.25 percentage points from the performance of the
index over a thiry-six month period, which would be the equivalent of
approximately +.56 percentage points per year.
The agreement with Geewax Terker continues until March 31, 1994 and the
agreement with Batterymarch continues until May 1, 1994. Each agreement may be
terminated sooner, as provided herein.
The Agreements are renewable thereafter, for successive one year periods, so
long as such renewal is specifically approved at least annually by vote of a
majority of those members of the Board of Trustees of the Fund who are not
parties to the Agreements or interested persons of any such party, cast in
person at a meeting called for the purpose of voting such approval. In addition,
the question of continuance of the agreements may be presented to shareholders
of either of the Portfolios; in such event, continuance shall be effected only
if approved by vote of a majority of the outstanding shares of the respective
Portfolio. If the holders of the Portfolio fail to approve the agreement, the
adviser of the Portfolio may continue to serve as investment adviser until new
arrangements have been made. The Agreements may be terminated at any time,
without penalty, by vote of the Board of Trustees of the Fund or by vote of a
majority of the outstanding shares of the Portfolio on 60 days' written notice
to the investment advisers, or by the investment advisers on 90 days' written
notice to the Fund. The Agreements will automatically terminate in the event of
its assignment.
Control of the Advisers
John J. Geewax and Bruce E. Terker, Partners, are the "controlling persons"
(as that term is defined in the rules and regulations of the Securities and
Exchange Commission) of Geewax Terker.
Dean LeBaron, President and owner of Batterymarch, is the "controlling
person" (as that term is defined in the rules and regulations of the Securities
and Exchange Commission) of Batterymarch.
B-13
<PAGE>
The Fund's Board of Trustees may, without the approval of shareholders,
provide for:
A. The employment of a new investment adviser pursuant to the terms
of a new advisory agreement, either as a replacement for an existing
adviser or as an additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned because of a
change in control of the adviser.
Any such change will only be made upon not less than 30 days' prior written
notice to shareholders of the affected Portfolio, which shall include the
information concerning the adviser that would have normally been included in a
proxy statement.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the investment adviser to
select the brokers or dealers that will execute the purchases and sales of
investment securities for the Portfolios and directs the investment adviser to
use its best efforts to obtain the best available price and most favorable
execution with respect to all transactions for the Portfolios.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the Fund to clients, and may, when a number of
brokers and dealers can provide comparable best price and execution on a
particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified broker-dealers.
Some securities considered for investment by one of the Portfolios may also
be appropriate for other clients served by the investment advisers. If purchase
or sale of securities consistent with the investment policies of the Portfolio
and one or more of these other clients served by the investment adviser is
considered at or about the same time, transactions in such securities will be
allocated among the Portfolio and clients in a manner deemed fair and reasonable
by the investment adviser. Although there is no specified formula for allocating
such transactions, the various allocation methods used by the investment
advisers, and the results of such allocations, are subject to periodic review by
the Fund's Board of Trustees.
During the years ended December 31, 1991, 1992 and 1993 the Fund paid
$184,013, $879,366 and $753,881, respectively, in brokerage commissions.
PERFORMANCE MEASURES
Vanguard/Trustees' Equity Fund may use one or more, of the following
unmanaged indexes for comparative performance purposes:
Standard & Poor's 500 Composite Stock Price Index--is a well diversified list of
500 companies representing the U.S. Stock Market.
Wilshire 5000 Equity Indexes--consists of nearly 5,000 common equity securities,
covering all stocks in the U.S. for which daily pricing is available.
Wilshire 4500 Equity Index--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
Russell 3000 Stock Index--a diversified portfolio of over 3,000 common stocks
accounting for over 90% of the market value of publicly traded stocks in the
U.S.
Russell 2000 Stock Index--a subset of approximately 2,000 of the smallest stocks
contained in the Russell 3000; a widely used benchmark for small capitalization
common stocks.
B-14
<PAGE>
Morgan Stanley Capital International EAFE Index--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
Goldman Sachs 100 Convertible Bond Index--currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
Salomon Brothers GNMA Index--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
Salomon Brothers High-Grade Corporate Bond Index--consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
Shearson Lehman Long-Term Treasury Bond--is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
Merrill Lynch Corporate & Government Bond--consists of over 4,500 U.S. Treasury,
Agency and investment grade corporate bonds.
Shearson Lehman Corporate (Baa) Bond Index--all publicly offered fixed rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
Bond Buyer Municipal Index (20 Year) Bond--is a yield index on current coupon
high grade general obligation municipal bonds.
Standard & Poor's Preferred Index--is a yield index based upon the average yield
of four high grade, non-callable preferred stock issues.
NASDAQ Industrial Index--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
Composite Index--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
Composite Index--35% Standard & Poor's 500 Index and 65% Salomon Brothers
High-Grade Bond Index.
Composite Index--65% Standard & Poor's 500 Index and 35% Salomon Brothers
High-Grade Bond Index.
Lehman Brothers Aggregate Bond Index--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate investment grade bonds rated BBB- or better with maturities between 1
and 5 years. The index has a market value of over $1.3 trillion.
Lehman Brothers Mutual Fund Intermediate (5-10) Government/Corporate Index--is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
Lehman Brothers Mutual Fund Long (10+) Government/Corporate Index--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
Lipper Small Company Growth Fund Average--the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average
B-15
<PAGE>
expenses ratio of the small company growth funds. (This fund category was first
established in 1982. For years prior to 1982, the results of the Lipper Small
Company Growth category were estimated using the returns of the Funds that
constituted the Group at its inception.)
Lipper Balanced Fund Average--An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
Lipper Non-Government Money Market Fund Average--An industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
Lipper Government Money Market Fund Average--An industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc
GENERAL INFORMATION
Description of Shares and Voting Rights
The Fund was established as a "business trust" under Pennsylvania law under
a Declaration of Trust dated May 16, 1984. The Declaration of Trust permits the
Trustees to issue an unlimited number of shares of beneficial interest, without
par value, from an unlimited number of separate classes ("Portfolios") of
shares. Currently the Fund is offering shares of two Portfolios.
The shares of each Portfolio are fully paid and non-assessable, except as
set forth under "Shareholder and Trustee Liability," and have no preference as
to conversion, exchange, dividends, retirement or other features. The shares
have no preemptive rights. The shares have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees if they choose to do so. A shareholder
is entitled to one vote for each full share held (and a fractional vote for each
fractional share held), then standing in his name on the books of the Fund. On
any matter submitted to a vote of shareholders, all shares of the Fund then
issued and outstanding and entitled to vote, irrespective of the class, shall be
voted in the aggregate and not by class: except (i) when required by the
Investment Company Act of 1940, shares shall be voted by individual class; and
(ii) when the matter does not affect any interest of a particular class, then
only shareholders of the affected class or classes shall be entitled to vote
thereon.
The Fund will continue without limitation of time, provided however that:
1) Subject to the majority vote of the holders of shares of any
Portfolio of the Fund outstanding, the Trustees may sell or convert
the assets of such Portfolio to another investment company in
exchange for shares of such investment company, and distribute such
shares, ratably among the shareholders of such Portfolio; and
2) Subject to the majority vote of shares of any Portfolio of the Fund
outstanding, the Trustees may sell and convert into money the assets
of such Portfolio and distribute such assets ratably among the
shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the
remaining assets of any Portfolio as provided in paragraphs 1) and 2) above, the
Fund shall terminate as to that Portfolio and the Trustees shall be discharged
of any and all further liabilities and duties hereunder and the right, title and
interest of all parties shall be cancelled and discharged.
Shareholder and Trustee Liability
Under Pennsylvania law, shareholders of a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Trust. Therefore, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and requires that
notice of such disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Fund or
B-16
<PAGE>
the Trustees. The Declaration of Trust provides for indemnification out of the
Fund property of any shareholder held personally liable for the obligations of
the Fund. The Declaration of Trust also provides that the Fund shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Fund and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. The Trustees and officers of the Fund believe that, in view of the
above, the risk of personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee 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.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended December 31, 1993,
including the financial highlights for each of the five years in the year ended
December 31, 1993, appearing in the Fund's 1993 Annual Report to Shareholders,
and the report thereon of Price Waterhouse, independent accountants, also
appearing therein, are incorporated by reference in this Statement of Additional
Information. The Fund's 1993 Annual Report to Shareholders is enclosed with this
Statement of Additional Information.
B-17
