SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT (NO. 33-19446) UNDER THE
SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 11
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment
No. 13 VANGUARD EQUITY INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
P.O. Box 2600, Valley Forge, PA 19482
(Address of Principal Executive Office)
Registrant's Telephone Number (610) 669-1000
Raymond J. Klapinsky, Esquire
P.O. Box 876
Valley Forge, PA 19482
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
It is proposed that this registration statement become effective on January
12, 1996, pursuant to paragraph(b) of Rule 485.
Registrant elects to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. Registrant
filed its Rule 24f-2 Notice for the year ended September 30, 1995 on
November 17, 1995.
<PAGE>
PART B
VANGUARD EQUITY INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
January 12, 1996; Revised June 20, 1996
This Statement is not a Prospectus but should be read in conjunction
with the Fund's current Prospectus (January 12, 1996). To obtain the
Prospectus please call:
Investor Information Department 1-800-662-7447
TABLE OF CONTENTS Page
Investment Limitations....................................... 1
Purchase of Shares........................................... 2
Redemption of Shares......................................... 2
Management of the Fund....................................... 3
Yield and Total Returns...................................... 5
Comparative Indexes.......................................... 6
Investment Advisory Services................................. 7
Portfolio Transactions....................................... 11
Futures Contracts and Options................................ 12
Financial Statements......................................... 14
INVESTMENT LIMITATIONS
The following restrictions are fundamental policies and cannot be
changed without approval of the holders of a majority of the outstanding
shares of the Fund (as defined in the Investment Company Act of 1940). The
Fund may not under any circumstances:
1) Invest for the purpose of exercising control of management of any
company;
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 Fund
would hold more than 10% of the outstanding voting securities of
the issuer, or more than 5% of the value of the Fund's total
assets would be invested in the securities of such issuer;
3) Invest in securities of other investment companies, except as may
be acquired as a part of a merger, consolidation or acquisition of
assets approved by the Fund's shareholders or otherwise to the
extent permitted by Section 12 of the Investment Company Act of
1940. The Fund will invest only in investment companies which have
investment objectives and investment policies consistent with
those of the Fund;
4) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be
deemed to be an underwriter under the Securities Act of 1933, as
amended, in disposing of investment securities;
5) 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 (included in this limitation is the Fund's investment
in The Vanguard Group, Inc.);
6) Invest in commodities, except that the Fund may invest in stock
futures contracts or stock options to the extent that not more
than 5% of the Fund's assets are required as deposit to secure
obligations under futures contracts and not more than 20% of the
Fund's assets are invested in futures contracts and options at any
time or sell real estate although the Fund may purchase and sell
securities of companies which deal in real estate, or interests
therein;
7) Purchase securities on margin or sell any securities short except
as specified in investment limitation No. 6;
8) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the
limitation described in (5) above) which are either publicly
distributed or customarily purchased by institutional investors,
and (ii) by lending its securities to banks, brokers, dealers and
other financial institutions so long as such loans are not
inconsistent with the Investment Company Act or the Rules and
Regulations or interpretations of the Securities and Exchange
Commission thereunder;
9) Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 5% of its total assets; and
10) Invest more than 25% of the value of its total assets in any one
industry. Utility companies will be divided according to their
services; for example, gas, gas transmission, electric and gas,
electric, and telephone will each be considered a separate
industry.
Although not fundamental policies subject to shareholder vote, as long
as the Fund's shares are registered for sale in certain states, it will not
(i) invest in put, call, straddle or spread options except as permitted in
investment limitation No. 6, above, (ii) invest in interests in oil, gas or
other mineral exploration or development programs, (iii) invest more than
5% of the assets of the Fund, at the time of investment, in the securities
of any issuers which have (with predecessors) a record of less than three
years' continuous operation, and (iv) purchase or retain any security if
(i) one or more officers, trustees or partners of the Fund or its
investment adviser individually own or would own, directly or beneficially,
more than 1/2 of 1 per cent of the securities of such issuer, and (ii) in
the aggregate such persons own or would own more than 5% of such
securities.
These investment limitations are considered at the time that portfolio
securities are purchased. 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, distribution or related services to the Fund
and other investment companies. See "Management of the Fund."
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offerings 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 investment for or any other
restrictions on initial and subsequent investments for certain fiduciary
accounts or under circumstances where certain economies can be achieved in
sales of the Fund's shares.
REDEMPTION OF SHARES
The Fund 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 the Fund 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 Directors may deem advisable; however, payment will be made
wholly in cash unless the Directors 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
"Determining the Fund's share price" and a redeeming shareholder would
normally incur brokerage expenses if he converted these securities to cash.
No charge is made by the Fund 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 Fund.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad
policies for the Fund and choose its Officers. The following is a list of
Directors 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 Directors and Officers is Post Office Box 876, Valley
Forge, PA 19482.
JOHN C. BOGLE, Chairman and Director*
Chairman 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, Chief Executive Officer & Director*
President, Chief Executive Officer and Director of The Vanguard Group,
Inc., and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Director
Chairman and Chief Executive Officer, Rhone-Poulenc Rorer, Inc.;
Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director
Director of The Great Atlantic and Pacific Tea Company, ALCO Standard
Corp., Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual
Life Insurance Co. and Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, Director
President, The Brookings Institution; Director of American Express
Bank, Ltd., The St. Paul Companies, Inc., and Scott Paper Co.
ALFRED M. RANKIN, Jr., Director
Chairman, President and Chief Executive Officer of NACCO Industries,
Inc.; Director of The BFGoodrich Company, and The Standard Products
Company.
JOHN C. SAWHILL, Director
President and Chief Executive Officer, The Nature Conservancy;
formerly, Director and Senior Partner, McKinsey & Co.; and President,
New York University; Director of Pacific Gas and Electric Company and
NACCO Industries.
JAMES O. WELCH, Jr., Director
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc., and Director
of Kmart Corporation.
J. LAWRENCE WILSON, Director
Chairman and Chief Executive Officer of Rohm & Haas Company; Director
of Cummins Engine Company; and Trustee of Vanderbilt University.
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.
- -----------------------
*Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
Officers and Directors
The Fund's Officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Directors, who are
elected annually by shareholders, set broad policies for the Fund and
choose its Officers. A list of the Directors and Officers of the Fund and a
brief statement of their present positions and principal occupations during
the past 5 years is set forth in the Prospectus. As of September 30, 1995,
the Directors owned less than 1% of the Fund's outstanding shares.
The Vanguard Group
Vanguard Equity Income Fund, Inc. 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 certain 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 a share of Vanguard's total expenses which are allocated
among the Funds under methods approved by the Board of Directors (Trustees)
of each Fund. In addition, each Fund bears its own direct expenses such as
legal, auditing and custodian fees. In order to generate additional
revenues for Vanguard and thereby reduce the Funds' expenses, Vanguard also
provides certain administrative services to other organizations.
The Fund's Officers are also Officers and employees of Vanguard. No
Officer or employee owns, or is permitted to own, any securities of any
external adviser for the Funds.
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 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
September 30, 1995 the Fund had contributed $117,000 to Vanguard,
representing .6% of Vanguard's capitalization. The Fund's 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. For the year ended September 30, 1995 such costs allocated to the
Fund approximated $2,225,000.
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 the 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 relative net assets. The
remaining one half of those 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 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. The Group's
marketing and distribution expenses allocated to the Fund for the year
ended September 30, 1995 was $185,000 or approximately .02% of its average
month-end net assets.
Investment Advisory Services
Vanguard provides investment advisory services to Vanguard Money
Market Reserves; Vanguard Institutional Money Market Portfolio; Vanguard
Admiral Funds; Vanguard Municipal Bond Fund; several Portfolios of Vanguard
Fixed Income Securities Fund; Vanguard Institutional Index Fund; several
Portfolios of Vanguard Variable Insurance Fund; Vanguard Bond Index Fund;
Vanguard California Tax-Free Fund; Vanguard Florida Insured Tax-Free Fund;
Vanguard New Jersey Tax-Free Fund; Vanguard New York Insured Tax-Free Fund;
Vanguard Ohio Tax-Free Fund; Vanguard Pennsylvania Tax-Free Fund; Vanguard
Balanced Index Fund; Vanguard Index Trust; Vanguard International Equity
Index Fund; Vanguard Tax-Managed Fund; Aggressive Growth Portfolio of
Vanguard Horizon Fund; a portion of Vanguard/Windsor II; a portion of
Vanguard/Morgan Growth Fund 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 Directors and Officers
The Fund pays each Director (Trustee), who is not also an Officer, an
annual fee plus a proportionate share of travel and other expenses incurred
in attending Board meetings. Directors who are also Officers receive no
remuneration for their services as Directors. 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 year
ended September 30, 1995, the remuneration paid by Vanguard to all Officers
as a group and allocated to the Fund, was approximately $32,200.
Directors who are not Officers are paid an annual fee based on the
number of years of service on the Board upon retirement. The fee is equal
to $1,000 for each year of service (up to fifteen years) and each
investment company member of the Vanguard Group contributes a proportionate
amount to this fee based on its relative net assets. Under its retirement
plan, Vanguard contributes annually an amount equal to 10% of each eligible
Officer's annual compensation plus 5.7% of that part of an 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
up to 4% of total compensation, subject to federal tax limitations, 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 Officers of the Fund, as a group, during the 1994
fiscal year was approximately $900.
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors for the fiscal year ended
September 30, 1995.
<TABLE>
<CAPTION>
VANGUARD EQUITY INCOME FUND
COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued As Annual Benefits From All Vanguard Funds
Names of Directors From Fund Part of Fund Expenses Upon Retirement Paid to Directors (2)
- -----------------------------------------------------------------------------------------------------------------------
<C> <S> <S> <S> <S>
John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $411 $69 $15,000 $60,000
Robert E. Cawthorn $411 $58 $13,000 $60,000
Bruce K. MacLaury $445 $68 $12,000 $55,000
Burton G. Malkiel $411 $46 $15,000 $60,000
Alfred M. Rankin, Jr. $411 $36 $15,000 $60,000
John C. Sawhill $411 $43 $15,000 $60,000
James O. Welch, Jr. $411 $53 $15,000 $60,000
J. Lawrence Wilson $411 $38 $15,000 $60,000
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to each Director for their service as
Director or Trustee of 34 Vanguard Funds (27 in the case of Mr. MacLaury).
</TABLE>
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended September 30, 1995
was 3.99%. The yield of the Fund is calculated daily. The average annual
total return of the Fund for one and five years ended September 30, 1995,
and since its inception on March 21, 1988, was +24.77%, +15.60% and
+12.41%, respectively.
Total return is computed by determining the average compounded rates
of return over the periods set forth above that would equate an initial
amount invested at the beginning of the period to the ending redeemable
value of the investment.
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group,
Inc. or any of the member funds of The Vanguard Group of Investment
Companies.
Each of the investment company members of The Vanguard Group,
including Vanguard Equity Income Fund, Inc., may from time to time, 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 listing
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 all the
smallest stocks contained in the Russell 3000; a widely used benchmark
for small capitalization common stocks.
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.
Salomon Brothers Broad Investment-Grade Bond--is a market-weighted index
that contains over 4,800 individually priced investment-grade
corporate bonds rated BBB or better, U.S. Treasury/agency issues and
mortgages pass-through securities.
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.
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.
Lehman Brothers Long-term Corporate Bond Index--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-
rate, nonconvertible U.S. debt issues rated at least Baa, with at
least $50 million principal outstanding and maturity greater than 10
years.
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% Lehman Long-Term
Corporate 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 over 4,000 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 over 1,500 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 over 1,500
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 over 1,900 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 expense
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.
Lipper General Equity Fund Average--an industry benchmark of average
general equity funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
Lipper Fixed Income Fund Average--an industry benchmark of average fixed
income funds with similar investment objectives and policies, as
measured by Lipper Analytical Services, Inc.
INVESTMENT ADVISORY SERVICES
The Fund currently has three investment advisers: Newell Associates
("Newell"), 525 University Avenue, Palo Alto, California 94301; Spare,
Kaplan, Bischel & Associates ("Spare/Kaplan"), 44 Montgomery Street, Suite
3500, San Francisco, California 94104; and John A. Levin & Co., Inc.
("Levin"), One Rockefeller Plaza, 25th Floor, New York, NY 10020. Prior to
January 1, 1995, Newell was the sole investment adviser to the Fund.
Spare/Kaplan and Levin were added as investment advisers effective January
1, 1995. The Fund has entered into investment advisory agreements with
Newell, Spare/Kaplan and Levin which provide that the advisers manage the
investment and reinvestment of the Fund's assets and continuously review,
supervise and administer the Fund's investment program. The advisers
discharge their responsibilities subject to the control of the Officers and
Directors of the Fund.
The proportion of the net assets of the Fund managed by each adviser
is established by the Board of Directors, and may be changed in the future
as circumstances warrant. Presently, Newell is responsible for
approximately 75% of the Fund's investment; Spare/Kaplan and Levin are
responsible for approximately 12.5% each.
Newell Associates. The Fund pays Newell an advisory fee at the end of
each fiscal quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the average month-end net assets
managed by Newell for the quarter:
Net Assets Annual Rate
-------------------------------------------------------
First $250 million.............................. .200%
Next $500 million............................... .150%
Next $250 million............................... .100%
Over $1 billion................................. .080%
The agreement will continue until April 30, 1996, and will be
renewable thereafter for successive one-year periods, only if each renewal
is specifically approved by a vote of the Fund's Board of Directors,
including the affirmative votes of a majority of the Directors who are not
parties to the contract or "interested persons" (as defined in the
Investment Company Act of 1940) of any such party, cast in person at a
meeting called for the purpose of considering such approval. In addition,
the question of continuance shall be effected only if approved by the
affirmative vote of a majority of the outstanding voting securities of the
Fund. The agreement is automatically terminated if assigned, and may be
terminated without penalty at any time (1) by vote of the Board of
Directors of the Fund on 60 days' written notice to Newell, or (2) by
Newell upon 90 days' written notice to the Fund.
Spare, Kaplan, Bischel & Associates. The Fund pays Spare/Kaplan a
basic advisory fee at the end of each quarter, calculated by applying a
quarterly rate, based on the following annual percentage rates, to the
average month-end assets of the Fund managed by Spare/Kaplan ("Spare/Kaplan
Portfolio") for the quarter:
Net Assets Annual Rate
-------------------------------------------------------
First $500 million............................. 0.175%
Next $500 million.............................. 0.125%
Over $1 billion................................ 0.10%
The basic fee may be increased or decreased by applying an
incentive/penalty adjustment to the basic fee reflecting the investment
performance of the assets managed by Spare/Kaplan relative to the return of
the Standard and Poor's/BARRA Value Index ("Value Index"), an index which
includes stocks in the S&P 500 Index with lower than average ratios of
market price to book value.
The following table sets forth the incentive/penalty fee rates payable
by the Fund to Spare/Kaplan under the new investment advisory agreement:
Three Year Performance Performance Fee
Differential vs. the Value Index Adjustment*
-----------------------------------------------------------------
Less than 3%................................... -.20 X Basic Fee
Between 3% and 6%.............................. 0 X Basic Fee
More than 6%................................... 0.20 X Basic Fee
* For purposes of this calculation, the Basic Fee is calculated by applying
a quarterly rate based on the Annual Basic Fee Rate using average assets
over the same period over which the performance is measured.
Until the quarter ending December 31, 1997, the incentive/penalty fee
for Spare/Kaplan will be calculated according to the following transition
rules:
(a) October 1, 1995 through December 31, 1997. Beginning with the
quarter ending December 31, 1995, and until the quarter ending December 31,
1997, the incentive/penalty fee will be computed based upon a comparison of
the investment performance of the Spare/Kaplan Portfolio and that of the
Value Index over the number of months that have elapsed between January 1,
1995 and the end of the quarter for which the fee is computed. The number
of percentage points by which the investment performance of the
Spare/Kaplan Portfolio must exceed or fall below the investment record of
the Value Index shall increase proportionately from two and one,
respectively, for the twelve months ending December 31, 1995, to six and
three, respectively, for the thirty-six months ending December 31, 1997.
(b) On and After December 31, 1997. For the quarter ending December
31, 1997 and thereafter, the period used to calculate the incentive/penalty
fee shall be the 36 months preceding the end of the quarter for which the
fee is being computed and the number of percentage points used shall be six
and three.
The investment performance of the Spare/Kaplan Portfolio, for any
period, expressed as a percentage of the "Spare/Kaplan Portfolio Unit
Value" at the beginning of such period, will be the sum of: (i) the change
in the Spare/Kaplan Portfolio Unit Value during such period; (ii) the unit
value of the Fund's cash distributions from the Spare/Kaplan Portfolio's
net investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and
(iii) the unit value of capital gains taxes paid or accrued during such
period by the Fund for undistributed realized long-term capital gains
realized from the Spare/Kaplan Portfolio.
The "Spare/Kaplan Portfolio Unit Value" will be determined by dividing
the total net assets of the Spare/Kaplan Portfolio by a given number of
units. On the initial date of the agreement, the number of units in the
Spare/Kaplan Portfolio will equal the total shares outstanding of the Fund.
After such initial date, as assets are added to or withdrawn from the
Spare/Kaplan Portfolio, the number of units of the Spare/Kaplan Portfolio
will be adjusted based on the unit value of the Spare/Kaplan Portfolio on
the day such changes are executed.
The investment record of the Value Index will be calculated monthly by
(i) multiplying the total return for the month (change in market price plus
dividends) of each stock included in the Value Index by its weighings in
the Value Index at the beginning of the month, and (ii) adding the values
discussed in (i). For any period, therefore, the investment record of the
Value Index will be the compounded monthly returns of the Value Index.
For the purposes of determining the incentive/penalty fee adjustment,
the net assets managed by Spare/Kaplan will be averaged over the same
period as the investment performance of those assets and the investment
record of the Value Index are computed.
In the event of termination of this Agreement, the fee provided in
this Section shall be computed on the basis of the period ending on the
last business day on which this Agreement is in effect subject to a pro
rata adjustment based on the number of days elapsed in the current fiscal
quarter as a percentage of the total number of days in such quarter.
In April 1972, the Securities and Exchange Commission ("Commission")
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 Commission staff) indicate that as a `rule of thumb' the
performance difference should be at least plus or minus 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 Directors of the Fund has fully considered the
Release and believes that the performance adjustments as included in the
proposed agreement are entirely appropriate although not within the plus or
minus 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 plus or minus 6 percentage points
from the performance of the index over a thirty-six month period, which
would effectively be the equivalent of approximately plus or minus 2
percentage points difference per year.
John A. Levin & Co., Inc. The Fund pays Levin a basic advisory fee at
the end of each quarter, calculated by applying a quarterly rate, based on
the following annual percentage rates, to the average month-end assets of
the Fund managed by Levin ("Levin Portfolio") for the quarter:
Net Assets Annual Rate
-------------------------------------------------------
First $100 million.............................. 0.40%
Next $200 million............................... 0.25%
Over $300 million............................... 0.30%
The basic fee paid to Levin, as provided above, may be increased or
decreased by applying an incentive/penalty adjustment to the basic fee
reflecting the investment performance of the Levin Portfolio relative to
the return of the Standard and Poor's 500 Composite Stock Price Index ("S&P
500 Index"), an index which emphasizes large capitalization companies.
The following table sets forth the incentive/penalty fee rates payable
by the Fund to Levin under the new investment advisory agreement:
Three Year Performance Performance Fee
Differential vs. the S&P 500 Index Adjustment*
-----------------------------------------------------------------
Less than 0%................................... -.4 x Basic Fee
Between 0% and 3%.............................. -.2 x Basic Fee
Between 3% and 6%.............................. 0 x Basic Fee
Between 6% and 9%.............................. .2 x Basic Fee
More than 9%................................... .4 x Basic Fee
* For purposes of this calculation, the Basic Fee is calculated by applying
a quarterly rate based on the Annual Basic Fee Rate using average assets
over the same period over which the performance is measured.
Until the quarter ending December 31, 1997, the incentive/penalty fee
for Levin will be calculated according to the following transition rules:
(a) October 1, 1995 through December 31, 1997. Beginning with the
quarter ending December 31, 1995, and until the quarter ending December 31,
1997, the incentive/penalty fee will be computed based upon a comparison of
the investment performance of the assets managed by Levin and that of the
S&P 500 Index over the number of months that have elapsed between January
1, 1995 and the end of the quarter for which the fee is computed. The
number of percentage points by which the investment performance of the
Levin Portfolio must exceed or fall below the investment record of the S&P
500 Index shall increase proportionately from three, two, one, and zero,
respectively, for the twelve months ending December 31, 1995, to nine, six,
three, and zero for the thirty-six months ending December 31, 1997.
(b) On and After December 31, 1997. For the quarter ending December
31, 1997 and thereafter, the period used to calculate the incentive/penalty
fee shall be the 36 months preceding the end of the quarter for which the
fee is being computed and the number of percentage points used shall be
nine, six, three, and zero.
The investment performance of the Levin Portfolio, for any period,
expressed as a percentage of the "Levin Portfolio Unit Value" at the
beginning of such period, will be the sum of: (i) the change in the Levin
Portfolio Unit Value during such period; (ii) the unit value of the Fund's
cash distributions from the Levin Portfolio's net investment income and
realized net capital gains (whether long-term or short-term) having an ex-
dividend date occurring within such period; and (iii) the unit value of
capital gains taxes paid or accrued during such period by the Fund for
undistributed realized long-term capital gains realized from the Levin
Portfolio.
The "Levin Portfolio Unit Value" will be determined by dividing the
total net assets of the Levin Portfolio by a given number of units. On the
initial date of the agreement, the number of units in the Levin Portfolio
will equal the total shares outstanding of the Fund. After such initial
date, as assets are added to or withdrawn from the Levin Portfolio, the
number of units of the Levin Portfolio will be adjusted based on the unit
value of the Levin Portfolio on the day such changes are executed.
The investment record of the S&P 500 Index will be calculated monthly
by (i) multiplying the total return for the month (change in market price
plus dividends) of each stock included in the S&P 500 Index by its
weighings in the S&P 500 Index at the beginning of the month, and (ii)
adding the values discussed in (i). For any period, therefore, the
investment record of the S&P 500 Index will be the compounded monthly
returns of the S&P 500 Index.
For the purposes of determining the incentive/penalty fee adjustment,
the net assets managed by Levin will be averaged over the same period as
the investment performance of those assets and the investment record of the
S&P 500 Index are computed.
The formula used to determine the performance adjustments differs from
the view taken by the staff of the Commission. For a more detailed
discussion, see page 9. The Board of Directors of the Fund believes that
the performance adjustments, as included in the proposed agreement with
Levin are appropriate although not within the plus or minus 10 percentage
point per year range suggested in Release No. 7113. Under the proposed
agreement, the maximum performance adjustment is made at a difference of
approximately plus or minus 3 percentage points per year.
In the event of termination of this Agreement, the fee provided in
this Section shall be computed on the basis of the period ending on the
last business day on which this Agreement is in effect subject to a pro
rata adjustment based on the number of days elapsed in the current fiscal
quarter as a percentage of the total number of days in such quarter.
The Fund's Board of Directors 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, which shall include the information
concerning the adviser that would have normally been included in a proxy
statement.
For the years ended September 30, 1993, 1994 and 1995, the Fund paid
advisory fees to Newell, its sole investment adviser prior to January 1,
1995, of $1,445,000, $1,470,000 and $1,181,085, respectively.
Description of the Advisers
Newell Associates. Newell is a California corporation of which 90% of
its outstanding shares are owned by its directors and officers. The
directors of the corporation and the offices they currently hold are: Roger
D. Newell, Chairman & President, Robert A. Huret, Vice Chairman and Alan E.
Rothenberg, Director. Newell Associates is a General Partner of Relative
Yield Associates, a California Limited Partnership.
Spare, Kaplan, Bischel & Associates. Spare, Kaplan, Bischel &
Associates is a California corporation founded in 1989, provides investment
advisory services primarily to institutions. The investment approach
utilized by Spare/Kaplan is a relative yield approach. Anthony E. Spare,
Chief Investment Officer, is responsible for the portion of the Fund's
assets managed by Spare/Kaplan.
John A. Levin & Co. Inc. John A. Levin & Co. Inc. is a Delaware
corporation founded in 1982, provides investment advisory services
primarily to institutions and several partnerships. The investment process
at Levin emphasizes indentifying investment value through fundamental
research. John A. Levin, a founding principal and President of Levin,
Melody P. Sarnell, and Jeffrey A. Kigner, portfolio managers, are
responsible for managing the portion of the Fund's assets managed by Levin.
PORTFOLIO TRANSACTIONS
The investment advisory agreements authorize the Advisers (with the
approval of the Fund's Board of Directors) to select the brokers or dealers
that will execute the purchases and sales of portfolio securities for the
Fund and direct the Advisers to use their best efforts to obtain the best
available price and most favorable execution as to all transactions for the
Fund. The Advisers have undertaken to execute each investment transaction
at a price and commission which provides the most favorable total cost or
proceeds reasonably obtainable under the circumstances.
In placing portfolio transactions, each Adviser will use its best
judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable
execution. The full range and quality of brokerage services available will
be considered in making these determinations. In those instances where it
is reasonably determined that more than one broker can offer the brokerage
services needed to obtain the best available price and most favorable
execution, consideration may be given to those brokers which supply
investment research and statistical information and provide other services
in addition to execution services to the Fund and/or the Adviser. The
Adviser considers such information useful in the performance of its
obligations under the agreement, but is unable to determine the amount by
which such services may reduce its expenses.
The investment advisory agreements also incorporate the concepts of
Section 28(e) of the Securities Exchange Act of 1934 by providing that,
subject to the approval of the Fund's Board of Directors, each Adviser may
cause the Fund to pay a broker-dealer which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker-dealer for effecting the same transaction; provided that
such commission is deemed reasonable in terms of either that particular
transaction or the overall responsibilities of the Adviser to the Fund.
Currently, it is the Fund's policy that each Adviser may at times pay
higher commissions in recognition of brokerage services felt necessary for
the achievement of better execution of certain securities transactions that
otherwise might not be available. The Adviser will only pay such higher
commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in
recognition of brokerage services related to execution of securities
transactions are also providers of research information to the Adviser
and/or the Fund. However, each Adviser has informed the Fund that it will
not pay higher commission rates specifically for the purpose of obtaining
research services.
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 through
such firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the Fund to other clients, or who act as agent
in the purchase of the Fund's shares for their 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 the Fund may also be
appropriate for other clients served by each Adviser. If purchase or sale
of securities consistent with the investment policies of the Fund and one
or more of these other clients serviced by the Adviser are considered at or
about the same time, transactions in such securities will be allocated
among the Fund and such other clients in a manner deemed equitable by the
Adviser. During the fiscal years ended September 30, 1993, 1994 and 1995
the Fund paid $623,642, $517,200 and $987,000, respectively, in brokerage
commissions.
FUTURES CONTRACTS AND OPTIONS
The Fund may enter into futures contracts, options, and options on
futures contracts for the purpose of remaining fully invested and reducing
transactions costs. 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 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 Fund expects to earn interest income on its
margin deposits.
Traders in futures contracts may be broadly classified as either
"hedgers" or "speculators." Hedgers use the futures markets primarily to
offset unfavorable changes in the value of securities otherwise held for
investment purposes or expected to be acquired by them. Speculators are
less inclined to own the securities underlying the futures contracts which
they trade, and use futures contracts with the expectation of realizing
profits from fluctuations in the value of the underlying securities. The
Fund intends to use futures contracts only for bonafide hedging purposes.
Regulations of the CFTC applicable to the Portfolio require that all of its
futures transactions constitute bonafide hedging transactions.
Although techniques other than the sale and purchase of futures
contracts could be used to control the exposure of the Fund to fluctuations
in the market value of its securities, the use of futures contracts may be
a more effective means of hedging this exposure. While the Fund 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 the underlying securities.
Restrictions on the Use of Futures Contracts
The Fund 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, the Fund 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 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, the Fund
would continue to be required to make daily cash payments to maintain its
required margin. In such situations, if the Fund 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, the Fund may
be required to make delivery of the instruments underlying the futures
contracts it holds. The inability to close options and futures positions
also could have an adverse impact on the ability to effectively hedge.
A Fund 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. Additionally, the Fund incurs the risk that the
adviser may incorrectly predict stock market and interest rate trends.
However, because the futures strategies of the Portfolio are engaged in
only for hedging purposes, the Adviser does not believe that the Fund is
subject to the risks of loss frequently associated with futures
transactions. 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.
Utilization of futures transactions by the Fund 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 the Fund 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 the Fund of margin deposits
in the event of bankruptcy of a broker with whom the Fund has an open
position in a futures contract or related option.
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 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
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 held 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
Fund may affect the holding period of such securities and, consequently,
the nature of the gain or loss on such securities upon disposition. The
Fund may be required to defer the recognition of losses on futures
contracts to the extent of any unrecognized gains on related positions held
by the Fund.
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 foreign currencies, or other income derived
with respect to its business of investing in such securities or currencies.
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
Fund'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 Fund 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 Fund's fiscal year and which are recognized for tax purposes, will not
be considered gains on securities held less than three months for the
purpose of the 30% test.
The Fund 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 Fund's fiscal year on futures
transactions. Such distributions will be combined with distributions of
capital gains realized on the Fund's other investments and shareholders
will be advised on the nature of the payments.
FINANCIAL STATEMENTS
Vanguard Equity Income Fund's financial statements for the year ended
September 30, 1995, including the financial highlights for each of the five
fiscal years in the period ended September 30, 1995, appearing in the
Vanguard Equity Income Fund, Inc. 1995 Annual Report to Shareholders, and
the report thereon of Price Waterhouse LLP, independent accountants, also
appearing therein, are incorporated by reference in this Statement of
Additional Information. The Fund's 1995 Annual Report to Shareholders is
enclosed with this Statement of Additional Information. For a more complete
discussion of the Fund's performance, please see the Fund's 1995 Annual
Report to Shareholders, which can be obtained without charge.
