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. 12
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 14
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 17, 1997 , 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, 1996 on
November 27, 1996 .
<PAGE>
VANGUARD EQUITY INCOME FUND, INC.
CROSS REFERENCE SHEET
Form N-1A
Item Number Location in Prospectus
- -----------------------------------------------------------------------------
Item 1. Cover Page............................... Cover Page
Item 2. Synopsis................................. Not Applicable
Item 3. Condensed Financial Information.......... Financial Highlights
Item 4. General Description of Registrant........ Investment Objective;
Investment
Limitations;
Investment Policies;
General Information
Item 5. Management of the Fund................... Management of the Fund
Item 6. Capital Stock and Other Securities....... Opening an Account and
Purchasing Shares;
Selling Your Shares;
The Fund's Share
Price; Dividends,
Capital Gains and
Taxes; General
Information
Item 7. Purchase of Securities Being Offered..... Cover Page, Opening an
Account and Purchasing
Shares
Item 8. Redemption or Repurchase................. Selling Your Shares
Item 9. Pending Legal Proceedings................ Not Applicable
Location in Statement
Form N-1A of Additional
Item Number Information
- -----------------------------------------------------------------------------
Item 10. Cover Page............................... Cover Page
Item 11. Table of Contents........................ Cover Page
Item 12. General Information and History.......... Management of the Fund
Item 13. Investment Objective and Policies........ Investment Limitations
Item 14. Management of the Fund................... Management of the
Fund; Investment
Advisory Services
Item 15. Control Persons and Principal Holders
of Securities............................ Management of the Fund
Item 16. Investment Advisory and Other............ Management of the
Services Fund; Investment
Advisory Services
Item 17. Brokerage Allocation..................... Portfolio Transactions
Item 18. Capital Stock and Other Securities....... See Prospectus--
General Information
Item 19. Purchase, Redemption and Pricing of...... Purchase of Shares;
Redemption of
Securities Being Offered................. Shares
Item 20. Tax Status............................... See Prospectus--
Dividends, Capital
Gains and Taxes
Item 21. Underwriters............................. Not Applicable
Item 22. Calculations of Yield Quotations of
Money Market Fund........................ Not Applicable
Item 23. Financial Statements..................... Financial Statements
<PAGE>
- -----------------------------------------------------------------------------
P R O S P E C T U S
- -----------------------------------------------------------------------------
Vanguard
Equity Income Fund
The Vanguard Group
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
Investor Information Department:
1-800-662-7447 (SHIP)
Client Services Department:
1-800-662-2739 (CREW)
Tele-Account for 24-Hour Access:
1-800-662-6273 (ON-BOARD)
Telecommunications Service for the Hearing-Impaired:
1-800-662-2738
Transfer Agent:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
<PAGE>
Vanguard
Equity Income
Fund A Member of The Vanguard Group
- -----------------------------------------------------------------------------
PROSPECTUS--January 17, 1997
- -----------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: Investor Information Department--
1-800-662-7447 (SHIP)
- -----------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: Client Services Department--
1-800-662-2739 (CREW)
- -----------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
Vanguard Equity Income Fund, Inc. (the "Fund") is an open-end
diversified investment company which seeks a high level of current
income by investing principally in dividend-paying equity
securities. In the selection of these securities, the Fund will
also consider the potential for capital appreciation.
The average income yield of the common stocks held by the Fund is
expected to be at least 50% greater than that of the Standard and
Poor's 500 Composite Stock Price Index ("S&P 500 Index"). It is
also anticipated that the Fund will have less price volatility than
the S&P 500 Index. There is no assurance that the Fund will achieve
its stated objective. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including the
FDIC.
- -----------------------------------------------------------------------------
OPENING AN ACCOUNT
To open a regular (non-retirement) account, please complete and
return the Account Registration Form. If you need assistance in
completing this Form, please call the Investor Information
Department. To open an Individual Retirement Account (IRA), please
use a Vanguard IRA Adoption Agreement. To obtain a copy of this
form, call 1-800-662-7447, Monday through Friday, from 8:00 a.m. to
9:00 p.m., and Saturday, from 9:00 a.m. to 4:00 p.m. (Eastern
time). The minimum initial investment is $3,000, or $1,000 for
Uniform Gifts/Transfers to Minors Act accounts. The Fund is offered
on a no-load basis (i.e., there are no sales commissions or 12b-1
fees). However, the Fund incurs expenses for investment advisory,
management, administrative and distribution services.
- -----------------------------------------------------------------------------
ABOUT THIS PROSPECTUS
This Prospectus is designed to set forth concisely the information
you should know about the Fund before you invest. It should be
retained for future reference. A "Statement of Additional
Information" containing additional information about the Fund has
been filed with the Securities and Exchange Commission. Such
Statement is dated January 17, 1997 and has been
incorporated by reference into this Prospectus. It may be obtained,
without charge, by writing to the Fund or by calling the Investor
Information Department.
- -----------------------------------------------------------------------------
TABLE OF CONTENTS
Page
Fund Expenses................................ 2
Financial Highlights......................... 2
Yield and Total Return....................... 3
FUND INFORMATION
Investment Objective......................... 4
Investment Policies.......................... 4
Investment Risks............................. 5
Who Should Invest............................ 6
Implementation of Policies................... 6
Investment Limitations....................... 8
Management of the Fund..................... 9
Investment Adviser........................... 9
Performance Record........................... 12
Dividends, Capital Gains and Taxes......... 13
The Share Price of the Fund.................. 14
General Information........................ 15
SHAREHOLDER GUIDE
Opening an Account and Purchasing Shares..... 16
When Your Account Will Be Credited........... 19
Selling Your Shares.......................... 19
Exchanging Your Shares....................... 22
Important Information About
Telephone Transactions..................... 23
Transferring Registration.................... 24
Other Vanguard Services...................... 24
- -----------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- -----------------------------------------------------------------------------
1
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that you
would incur as a shareholder of the Fund. The expenses set forth
below are for the 1996 fiscal year.
Shareholder Transaction Expenses
-------------------------------------------------------------------
Sales Load Imposed on Purchases........................ None
Sales Load Imposed on Reinvested Dividends............. None
Redemption Fees........................................ None
Exchange Fees.......................................... None
Annual Fund Operating Expenses
-------------------------------------------------------------------
Management & Administrative Expenses..................
0.21%
Investment Advisory Fees...............................
0.17
12b-1 Fees............................................. None
Other Expenses
Distribution Costs............................ 0.02%
Miscellaneous Expenses....................... 0.02
------
Total Other Expenses................................... 0.04%
Total Operating Expenses..................... 0.42%
=====
The purpose of this table is to assist you in understanding the
various costs and expenses that you would bear directly or
indirectly as an investor in the Fund.
The following example illustrates the expenses that you would incur
on a $1,000 investment over various periods, assuming (1) a 5%
annual rate of return and (2) redemption at the end of each time
period. As noted in the table above, the Fund charges no redemption
fees of any kind.
1 Year 3 Years 5 Years 10 Years
------- ------- ------- --------
$4 $13 $24 $53
This example should not be considered a representation of past or
future expenses or performance. Actual expenses may be higher or
lower than those shown.
- -----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following information on financial highlights for a share
outstanding throughout each period, insofar as it relates to each
of the five years in the period ended September 30, 1996 ,
has been audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information should be
read in conjunction with the Fund's financial statements and notes
thereto, which, together with the remaining portions of the Fund's
1996 Annual Report to Shareholders, are incorporated by
reference in the Statement of Additional Information and this
Prospectus, and which appear, along with the report of Price
Waterhouse LLP, in the Fund's 1996 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1996 Annual Report to
Shareholders which may be obtained without charge by writing to the
Fund or by calling our Investor Information Department at 1-800-
662-7447.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------- Mar. 21, 1988** to
1996 1995 1994 1993 1992 1991 1990 1989 Sept. 30, 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period............ $15.65 $13.16 $14.62 $12.81 $12.14 $10.36 $13.07 $10.58 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------
Investment Operations
Net Investment Income........ .63 .60 .59 .59 .59 .65 .73 .76 .33
Net Realized and
Unrealized Gain (Loss)
on Investments............. 2.18 2.56 (.92) 1.81 .83 1.99 (2.77) 2.23 .49
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations............... 2.81 3.16 (.33) 2.40 1.42 2.64 (2.04) 2.99 .82
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net
Investment Income.......... (.60) (.58) (.61) (.59) (.65) (.79) (.64) (.48) (.24)
Distributions from
Realized Capital Gains..... (.17) (.09) (.52) -- (.10) (.07) (.03) (.02) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions........ (.77) (.67) (1.13) (.59) (.75) (.86) (.67) (.50) (.24)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period................ $17.69 $15.65 $13.16 $14.62 $12.81 $12.14 $10.36 $13.07 $10.58
====================================================================================================================================
Total Return................... 18.22% 24.77% (2.19)% 19.17% 12.26% 26.46% (16.25)% 28.85% 8.26%
====================================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period
(Millions)................... $1,309 $967 $901 $1,106 $778 $518 $353 $267 $28
Ratio of Expenses to Average
Net Assets................... 0.42% 0.47% 0.43% 0.40% 0.44% 0.46% 0.48% 0.44% 0.72%*
Ratio of Net Investment Income
to Average Net Assets....... 3.69% 4.27% 4.41% 4.39% 4.74% 5.52% 5.67% 6.01% 4.82%*
Portfolio Turnover Rate........ 21% 31% 18% 15% 13% 9% 5% 8% 3%
Average Commission Rate Paid... $.0598 N/A N/A N/A N/A N/A N/A N/ A N/A
<FN>
*Annualized.
**Commencement of operations.
</TABLE>
- -----------------------------------------------------------------------------
YIELD AND TOTAL RETURN
From time to time the Fund may advertise its yield and total
return. Both yield and total return figures are based on historical
earnings and are not intended to indicate future performance. The
"total return" of the Fund refers to the average annual compounded
rates of return over one-, five-, and ten-year periods or the life
of the Fund (as stated in the advertisement) that would equate an
initial amount invested at the beginning of a stated period to the
ending redeemable value of the investment, assuming the
reinvestment of all dividend and capital gains distributions.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "thirty-day yield" of the
Fund is calculated by dividing the net investment income per share
earned during a thirty-day period by the net asset value per share
on the last day of the period. Net investment income includes
interest and dividend income earned on the Portfolio's securities;
it is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder accounts. The
yield calculation assumes that the net investment income earned
over thirty days is compounded monthly for six months and then
3
<PAGE>
annualized. Accounting methods used to calculate advertised yields
are standardized for all stock and bond mutual funds. However,
yield accounting methods differ from other accounting standards,
and so the advertised thirty-day yield may not fully reflect the
income paid to an investor's account.
- -----------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of income
The objective of the Fund is to provide a high level of current
income by investing principally in dividend-paying equity
securities. In the selection of these securities, the Fund will
also consider the potential for capital appreciation. The average
income yield of the Fund's common stocks is expected to be at least
50% greater than that of the S&P 500 Index. It is also anticipated
that the Fund will have less price volatility than the S&P 500
Index. There is no assurance that the Fund will achieve its
objective.
The investment objective of the Fund is fundamental and so cannot
be changed without the approval of a majority of the Fund's
shareholders.
- -----------------------------------------------------------------------------
INVESTMENT POLICIES
The Fund invests in income-producing equity securities
Under normal circumstances, the Fund will invest at least 80% of
its assets in income-producing equity securities, including
dividend-paying common stocks and securities which are convertible
into common stocks. The Fund intends to invest in securities which
generate relatively high levels of dividend income and have the
potential for capital appreciation. These generally include common
stocks of established, high-quality U.S. corporations. In addition,
the Fund will seek to diversify its investments over a carefully
selected list of securities in order to moderate the risks inherent
in equity investments. The Fund is managed without regard to tax
ramifications.
The Fund will invest in a company's securities following a
fundamental analysis of the issuing company. An important part of
this analysis will be the examination of the company's ability to
maintain its dividend. Over time, dividend income has proved to be
an important component of total return. For example, during the
ten-year period ended September 30, 1996 , reinvested
dividend income accounted for approximately 23% of the total return
of the S&P 500 Index. Also, dividend income tends to be a more
stable source of total return than capital appreciation. While the
price of a company's common stock can be significantly affected by
market fluctuations and other short-term factors, its dividend
level usually has greater stability. For this reason, securities
which pay a high level of dividend income are generally less
volatile in price than securities which pay a low level of dividend
income.
Although the Fund intends to invest primarily in equity securities,
it may invest up to 20% of its assets in certain cash investments
and certain short-term fixed income securities. See "Implementation
of Policies" for a description of these and other investment
practices of the Fund.
The Fund is responsible for voting the shares of all securities it
holds.
4
<PAGE>
These policies are not fundamental and so may be changed by the
Board of Directors without shareholder approval. However,
shareholders would be notified before any material change is made
in the Fund's policies.
- -----------------------------------------------------------------------------
INVESTMENT RISKS
Investors are exposed to the market risk of common stocks
As a mutual fund investing primarily in common stocks, the Fund is
subject to market risk --i.e., the possibility that stock
prices in general will decline over short or even extended periods.
The stock market tends to be cyclical, with periods when stock
prices generally rise and periods when stock prices generally
decline.
To illustrate the volatility of stock prices, the following table
sets forth the extremes for U.S. stock market returns as well as
the average return for the period from 1926 to 1995 , as
measured by the Standard & Poor's 500 Composite Stock Price Index:
Average Annual U.S. Stock Market Returns (1926-1995)
Over Various Time Horizons
1 Year 5 Years 10 Years 20 Years
---------------------------------------------
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 - 3.1
Average +12.5 +10.3 +10.7 +10.7
As shown, common stocks have provided annual total returns (capital
appreciation plus dividend income) averaging +10.7 % for all
10-year periods from 1926 to 1995 . The return in individual
years has varied from a low of -43.3% to a high of +53.9%,
reflecting the short-term volatility of stock prices. Average
return may not be useful for forecasting future returns in any
particular period, as stock returns are quite volatile from year to
year.
This table of U.S. stock market returns should not be viewed as a
representation of future returns from the Fund or the U.S. stock
market. The illustrated returns represent historical investment
performance, which may be a poor guide to future returns. Also,
stock market indexes such as the S&P 500 are based on unmanaged
portfolios of securities before transaction costs and other
expenses. Such costs will reduce the relative investment
performance of the Fund and other "real world" portfolios. Finally,
the Fund is likely to differ in portfolio composition from broad
stock market averages, and so the Fund's performance should not be
expected to mirror the returns provided by a specific index.
Investors are also exposed to manager risk
The Fund's investment advisers manage the Fund according to
the traditional methods of "active" investment management, which
involve the buying and selling of securities based upon economic,
financial and market analysis and investment judgment.
Manager risk refers to the possibility that the Fund's
investment advisers may fail to execute the Fund's
investment strategy effectively. As a result, the Fund may fail to
achieve its stated objective.
5
<PAGE>
- -----------------------------------------------------------------------------
WHO SHOULD INVEST
Investors seeking current income and capital growth
The Fund is designed for investors who are seeking a high level of
current income and the potential for long-term capital appreciation
with lower investment risk and volatility than is normally
available from common stock funds. Because of the risk associated
with common stock investments, the Fund is intended to be a long-
term investment vehicle and is not designed to provide investors
with a means of speculating on short-term market movements.
Investors who engage in excessive account activity generate
additional costs which are borne by all of the Fund's shareholders.
In order to minimize such costs, the Fund has adopted the following
policies. The Fund reserves the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to efficient
portfolio management, either because of the timing of the
investment or previous excessive trading by the investor.
Additionally, the Fund has adopted exchange privilege limitations
as described in the section "Exchange Privilege Limitations."
Finally, the Fund reserves the right to suspend the offering of its
shares. While the Fund is intended to provide current income and
above average stability for an equity fund, it should be considered
part of a well rounded investment portfolio and not its sole
component.
Although the Fund may exhibit somewhat less volatility than most
other equity funds, the Fund should not be used as a short-term
investment vehicle. All equity portfolios, no matter how they are
structured, are influenced by price movements in the broad equity
market. Over the long term, however, it is anticipated that the
volatility of the Fund's total return (dividend income plus capital
appreciation) will be lower than that of most other equity funds
and the S&P 500 Index due to the emphasis on equities with above-
average dividend yields. Investors may wish to reduce the potential
risk of investing in the Fund by purchasing shares on a regular,
periodic basis (dollar-cost averaging) rather than making an
investment in one lump sum.
No assurance can be given that the Fund will attain its objective
or that shareholders will be protected from the risk of loss that
is inherent in equity investing. Investors should not consider the
Fund a complete investment program, but should also maintain
holdings in investments with different risk characteristics, such
as bonds and money market instruments. Investors may also wish to
complement an investment in the Fund with other types of common
stock investments.
- -----------------------------------------------------------------------------
IMPLEMENTATION OF POLICIES
In addition to investing primarily in equity securities, the Fund
uses a number of other investment vehicles to achieve its
objective.
The Fund may invest in short-term fixed income securities
Although it normally seeks to remain fully invested in equity
securities, the Fund may invest in certain short-term fixed income
securities. Such securities may be used without limitation
to invest uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to take a temporary defensive position
against potential stock market declines. These securities include:
obligations of the United States Government and its agencies or
instrumentalities; commercial paper, bank certificates of deposit,
and bankers' acceptances; and repurchase agreements collateralized
by these securities.
6
<PAGE>
The Fund, along with other Vanguard Funds, may deposit its daily
cash reserves into a joint account which invests such reserves in
repurchase agreements and other short-term instruments. CoreStates
Bank, N.A. is the custodian for the joint account. A repurchase
agreement is a means of investing monies for a short period. In a
repurchase agreement, a seller--a U.S. commercial bank or
recognized U.S. securities dealer--sells securities to the Fund and
agrees to repurchase the securities at the Fund's cost plus
interest within a specified period (normally one day). In these
transactions, the securities purchased by the Fund will have a
total value equal to, or in excess of, the value of the repurchase
agreement, and will be held by the Custodian Bank for the joint
account until repurchased.
Derivative Investing
Derivatives are instruments whose values are linked to or derived
from an underlying security or index. The most common and
conventional types of derivative securities are futures and
options.
The Fund may invest in derivative securities
The Fund may invest in futures contracts and options, but only to a
limited extent. Specifically, the Fund may enter into futures
contracts provided that not more than 5% of its assets are required
as a futures contract deposit; in addition, the Fund may enter into
futures contracts and options transactions only to the extent that
obligations under such contracts or transactions represent not more
than 20% of the Fund's assets.
Futures contracts and options may be used for several common fund
management strategies: to maintain cash reserves while simulating
full investment, to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a specific futures
contract is priced more attractively than other futures contracts
or the underlying security or index.
The Fund will use futures contracts for bona fide "hedging"
purposes. In executing a hedge, a manager sells, for example, stock
index futures to protect against a decline in the stock market. As
such, if the market drops, the value of the futures position will
rise, thereby offsetting the decline in value of the Fund's stock
holdings.
Futures contracts and options pose certain risks
The primary risks associated with the use of futures contracts and
options are: (i) imperfect correlation between the change in market
value of the stocks held by the Fund and the prices of futures
contracts and options; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability to close
a futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing in those
contracts whose price fluctuations are expected to resemble those
of the Fund's underlying securities. The risk that the Fund will be
unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an
active and 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
7
<PAGE>
well as gain) to the investor. When investing in futures contracts,
the Fund will segregate cash or other liquid portfolio
securities in the amount of the underlying obligation.
The Fund may lend its securities
The Fund may lend its investment securities to qualified
institutional investors for either short-term or long-term purposes
of realizing additional income. Loans of securities by the Fund
will be collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market value of
the loaned securities. The Fund may borrow money, subject to the
limits set forth below, for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities.
Portfolio turnover is not expected to exceed 100%
Although it generally seeks to invest for the long term, the Fund
retains the right to sell securities irrespective of how long they
have been held. It is anticipated that the annual portfolio
turnover of the Fund will not exceed 100%, exclusive of securities
with maturities less than one year. A turnover rate of 100% would
occur, for example, if all the securities of the Fund were replaced
within one year.
- -----------------------------------------------------------------------------
INVESTMENT LIMITATIONS
The Fund has adopted certain fundamental limitations
The Fund has adopted certain limitations in an attempt to reduce
its exposure to specific situations. Some of these limitations are
that the Fund will not:
(a) invest more than 25% of its assets in any one industry;
(b) 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;
(c) 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;
(d) 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;
(e) borrow money except from banks for temporary or emergency
purposes, and then only in an amount not in excess of 15% of
total assets taken at the lower of their value or cost of its
total assets; and
(f) pledge, mortgage or hypothecate any of its assets to an extent
greater than 5% of its total assets.
The investment limitations are considered at the time investment
securities are purchased. The investment limitations described here
and in the Statement of Additional Information may be changed only
with the approval of a majority of the Fund's shareholders.
8
<PAGE>
- -----------------------------------------------------------------------------
MANAGEMENT OF THE FUND
Vanguard administers and distributes the Fund
The Fund is a member of The Vanguard Group of Investment Companies,
a family of more than 30 investment companies with more than 90
distinct investment portfolios and total assets in excess of
$230 billion. 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, shareholder accounting and distribution
services. Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of Vanguard's
unique corporate structure, the Vanguard funds have costs
substantially lower than those of most competing mutual funds. In
1995 , the average expense ratio (annual costs including
advisory fees divided by total net assets) for the Vanguard funds
amounted to approximately .31% compared to an average of
1.11% for the mutual fund industry (data provided by Lipper
Analytical Services).
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. A list of the
Directors and Officers of the Fund and a statement of their present
positions and principal occupations during the past five years can
be found in the Statement of Additional Information.
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.
Vanguard also provides distribution and marketing services to the
Vanguard funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees). However, each
fund bears a share of the Group's distribution costs.
- -----------------------------------------------------------------------------
INVESTMENT ADVISER
The Fund employs three investment advisers
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 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 70% of the Fund's
investments; Spare/Kaplan and Levin are responsible for
approximately 15% each.
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.
9
<PAGE>
For the fiscal year ended September 30, 1996, the Fund paid
advisory fees to Newell, Spare/Kaplan, and Levin of $2,151,000
before a decrease of $191,000 based on performance.
Newell Associates
The principal investment officer of Newell, Roger D. Newell, has
managed equity-income portfolios for more than thirty years, and
relative yield strategy portfolios since 1975. The relative yield
approach is based upon an analysis of how a stock's yield, relative
to the market, varies over time. This strategy asserts that
relative yield is an excellent guide to relative value. Mr. Newell
has implemented the firm's strategy for the Fund since the Fund's
inception in 1988.
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 Rate
------------------ -----
First $250 million .200%
Next $500 million .150%
Next $250 million .100%
Over $1 billion .080%
Spare, Kaplan, Bischel & Associates
Spare, Kaplan, Bischel & Associates, 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, has had responsibility for the portion of the Fund
managed by Spare/Kaplan since Spare/Kaplan was added as an
investment adviser to the Fund in 1995. Mr. Spare has been
associated with Spare/Kaplan since 1989.
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 for the quarter:
Net Assets Annual Rate
------------------- ------
First $500 million 0.175%
Next $500 million 0.125%
Over $1 billion 0.100%
The basic fee paid to Spare/Kaplan, as provided above, 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"). Under the
incentive/penalty fee schedule, the fee payable to Spare/Kaplan may
represent as much as 120% or as little as 80% of the basic fee,
depending on the net investment performance of the portfolio
managed by Spare/Kaplan.
Under the rules of the Securities and Exchange Commission, the
incentive/penalty fee will not be fully operable until the quarter
ending December 31, 1997, and until that date, will be
calculated according to certain transition rules. The Fund's
10
<PAGE>
Statement of Additional Information, which is available on request,
provides a detailed description of the incentive/penalty fee
schedules for the Fund's investment advisers and the applicable
transition rules.
John A. Levin & Co., Inc.
John A. Levin & Co. Inc., an indirect wholly-owned subsidiary of
Baker Fentress, founded in 1982, provides investment advisory
services primarily to institutions and several partnerships. The
investment process at Levin emphasizes identifying investment value
through fundamental research. John A. Levin, Melody P. Sarnell and
Jeffrey A. Kigner have had responsibility for the portion of
the Fund managed by Levin since inception of the firm's
relationship with the Fund. Mr. Levin founded Levin in 1982,
and Mr. Kigner and Ms. Sarnell have been associated with Levin
since 1984.
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 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 assets managed by
Levin relative to the return of the Standard and Poor's 500
Composite Stock Price Index ("S&P 500 Index"). Under the
incentive/penalty fee schedule, the basic fee payable to Levin may
represent as much as 140% or as little as 60% of the basic fee
depending on the investment performance of the equity investments
managed by Levin.
Under the rules of the Securities and Exchange Commission, the
incentive/penalty fee will not be fully operable until the quarter
ending December 31, 1997, and until that date, will be calculated
according to certain transition rules. The Fund's Statement of
Additional Information, which is available on request, provides a
detailed description of the incentive/penalty fee schedules for the
Fund's investment advisers and the applicable transition rules.
The investment advisory agreements with Newell, Spare, Kaplan and
Levin authorize each adviser to select brokers or dealers to
execute purchases and sales of the Fund's portfolio securities, and
directs the advisers to use their best efforts to obtain the best
available price and most favorable execution with respect to all
transactions. The full range and quality of brokerage services
available are considered in making these determinations.
The Fund has authorized the advisers to pay higher
commissions in recognition of brokerage services felt necessary
for the achievement of better execution, provided the advisers
believe this to be in the best interest of the Fund. Although
the Fund does not market its shares through intermediary
brokers or dealers, the Fund may
11
<PAGE>
place orders with qualified broker-dealers who recommend the Fund
to clients if the Officers of the Fund believe that the quality of
the transaction and the commission are comparable to what they
would be with other qualified brokerage firms.
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; and (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 Fund which shall include substantially the information
concerning the adviser that would have normally been included in a
proxy statement.
- -----------------------------------------------------------------------------
PERFORMANCE RECORD
The table below provides investment results for the Fund for one
and five years and since inception. The results shown represent
"total return" investment performance, which assumes the
reinvestment of all capital gains and income dividends for the
indicated periods. Also included is comparative information with
respect to the unmanaged Standard & Poor's 500 Composite Stock
Price Index, a widely-used barometer of stock market activity, and
the Consumer Price Index, a statistical measure of changes in the
prices of goods and services. The tables do not make any allowance
for federal, state or local income taxes, which shareholders must
pay on a current basis.
The results should not be considered a representation of the total
return from an investment made in the Fund today. This information
is provided to help investors better understand the Fund and may
not provide a basis for comparison with other investments or mutual
funds which use a different method to calculate performance. Prior
to January 1, 1995, Newell Associates served as the Fund's sole
investment adviser.
Average Annual Return for Vanguard Equity Income Fund
Percentage Change
---------------------------------------------
Fiscal Periods Vanguard Equity S&P 500 Consumer
Ended 9/30/96 Income Fund Index Price Index
--------------- ---------------- ---------- -----------
1 Year 118.2% 120.3% 13.0%
5 Year 114.1 115.2 12.8
Lifetime* 113.1 115.1 --
*March 21, 1988, to September 30, 1996.
12
<PAGE>
- -----------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund pays quarterly dividends and any capital gains annually
The Fund expects to pay quarterly dividends from ordinary income.
Capital gains distributions, if any, will be made annually.
In addition, in order to satisfy certain distribution requirements
of the Tax Reform Act of 1986, the Fund may declare special year-
end dividend and capital gains distributions during December. Such
distributions, if received by shareholders by January 31, are
deemed to have been paid by the Fund and received by shareholders
on December 31 of the prior year.
Dividend and capital gains distributions may be automatically
reinvested or received in cash. See "Choosing a Distribution
Option" for a description of these distribution methods.
The Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue Code so
that it will not be subject to federal income tax to the extent its
income is distributed to shareholders. Dividends paid by the Fund
from net investment income and net short-term capital gains,
whether received in cash or reinvested in additional shares, will
be taxable to shareholders as ordinary income. For corporate
investors, dividends from net investment income and net short-term
capital gains will generally qualify in part for the intercorporate
dividends-received deduction. However, the portion of the dividends
so qualified depends on the aggregate taxable qualifying dividend
income received by the Fund from domestic (U.S.) sources.
Distributions paid by the Fund from long-term capital gains,
whether received in cash or reinvested in additional shares, are
taxable as long-term capital gains, regardless of the length of
time you have owned shares in the Fund. Capital gains distributions
are made when the Fund realizes net capital gains on sales of
portfolio securities during the year. The Fund does not seek to
realize any particular amount of capital gains during a year;
rather, realized gains are a by-product of portfolio management
activities. Consequently, capital gains distributions may be
expected to vary considerably from year to year; there will be no
capital gains distributions in years when the Fund realizes net
capital losses.
Note that if you accept capital gains distributions in cash,
instead of reinvesting them in additional shares, you are in effect
reducing the capital at work for you in the Fund. Also, keep in
mind that if you purchase shares in the Fund shortly before the
record date for a dividend or capital gains distribution, a portion
of your investment will be returned to you as a taxable
distribution, regardless of whether you are reinvesting your
distributions or receiving them in cash.
The Fund will notify you annually as to the tax status of dividend
and capital gains distributions paid by the Fund.
A capital gain or loss may be realized upon exchange or redemption
A sale of shares of the Fund is a taxable event and may result in a
capital gain or loss. A capital gain or loss may be realized from
an ordinary redemption of shares or an exchange of shares between
two mutual funds (or two portfolios of a mutual fund).
13
<PAGE>
Dividend distributions, capital gains distributions, and capital
gains or losses from redemptions and exchanges may be subject to
state and local taxes.
The Fund is required to withhold 31% of taxable dividends, capital
gains distributions, and redemptions paid to shareholders who have
not complied with IRS taxpayer identification regulations. You may
avoid this withholding requirement by certifying on your Account
Registration Form your proper Social Security or Employer
Identification number and by certifying that you are not subject to
backup withholding.
The Fund has obtained a Certificate of Authority to do business as
a foreign corporation in Pennsylvania and does business and
maintains an office in that state. In the opinion of counsel, the
shares of the Fund are exempt from Pennsylvania personal property
taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their own
tax advisers concerning the tax consequences of an investment in
the Fund. The Fund is managed without regard to tax ramifications.
- -----------------------------------------------------------------------------
THE SHARE PRICE OF THE FUND
The Fund's share price or "net asset value" per share is
calculated by dividing the total assets of the Fund, less
all liabilities, by the total number of shares outstanding. The net
asset value is determined as of the close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time), each day
that the Exchange is open for trading.
Market values for securities listed on an exchange are based upon
the latest quoted sales prices for such securities. Securities not
traded on the valuation date are valued at the mean of the latest
quoted bid and ask prices. Securities not listed are valued at the
latest quoted bid price. Any foreign securities are valued at the
latest quoted sales price available before the time when assets are
valued. Short-term instruments (those with remaining maturities of
60 days or less) may be valued at cost, plus or minus any
amortized discount or premium, which approximates market value.
All prices of listed securities are taken from the exchange where
the security is primarily traded. Convertible bonds and other debt
instruments may be valued on the basis of prices provided by a
pricing service when such prices are believed to reflect the fair
market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices
but take into account institutional size trading in similar groups
of securities and any developments related to specific securities.
Securities for which market quotations are not readily available or
which are restricted as to sale and other assets are valued by such
methods as the Board of Directors deems in good faith to reflect
fair value.
The Fund's price per share can be found daily in the mutual fund
section of most major newspapers under the heading of Vanguard
Group.
14
<PAGE>
- -----------------------------------------------------------------------------
GENERAL INFORMATION
The Fund is a Maryland corporation. The Fund's Articles of
Incorporation permit the Directors to issue 1,000,000,000 shares of
common stock, with a $.001 par value. The Board of Directors has
the power to designate one or more classes ("Portfolios") of shares
of common stock and to classify or reclassify any unissued shares
with respect to such Portfolios. Currently the Fund is offering
one class of shares.
Annual meetings of shareholders will not be held except as required
by the Investment Company Act of 1940 and other applicable law. An
annual meeting will be held to vote on the removal of a Director or
Directors of the Fund if requested in writing by the holders of not
less than 10% of the outstanding shares of the Fund.
The shares of the Fund are fully paid and nonassessable; have no
preferences as to conversion, exchange, dividends, retirement or
other features; and have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of more than
50% of the shares voting for the election of Directors can elect
100% of the Directors if they so choose. A shareholder is entitled
to one vote for each full share held (and a fractional vote for
each fractional share held).
All securities and cash are held by State Street Bank and Trust
Company, Boston, MA. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountants for the Fund and
will audit its financial statements annually. The Fund is not
involved in any litigation.
15
<PAGE>
- -----------------------------------------------------------------------------
SHAREHOLDER GUIDE
OPENING AN ACCOUNT AND PURCHASING SHARES
You may open a regular (non-retirement) account, either by mail or
wire. Simply complete and return an Account Registration Form and
any required legal documentation, indicating the amount you wish to
invest. Your purchase must be equal to or greater than the $3,000
minimum initial investment ($1,000 for Uniform
Gifts/Transfers to Minors Act accounts). You may open a new
Individual Retirement Account by mail (IRAs may not be opened by
wire) using a Vanguard IRA Adoption Agreement. Your purchase must
be equal to or greater than the $1,000 minimum initial investment
requirement, but no more than $2,000 if you are making a regular
IRA contribution. Rollover contributions are generally limited to
the amount withdrawn within the past 60 days from an IRA or other
qualified retirement plan. If you need assistance with the forms or
have any questions about the Fund, please call our Investor
Information Department at 1-800-662-7447. Note: For other types of
account registrations (e.g., corporations, associations, other
organizations, trusts or powers of attorney), please call us to
determine which additional forms you may need.
The Fund's shares are purchased at the next-determined net asset
value after your investment has been received. The Fund is offered
on a no-load basis (i.e., there are no sales commissions or 12b-1
fees).
PurchaseRestrictions
1) Because of the risks associated with common stock investments,
the Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating on
short-term market movements. Consequently, the Fund reserves the
right to reject any specific purchase (or exchange purchase)
request. The Fund also reserves the right to suspend the
offering of shares for a period of time.
2) Vanguard will not accept third-party checks to purchase shares
of the Fund. Please be sure your purchase check is made payable
to The Vanguard Group.
Additional Investments
Subsequent investments may be made by mail ($100 minimum), wire
($1,000 minimum), exchange from another Vanguard Fund account, or
Vanguard Fund Express. Subsequent investments to Individual
Retirement Accounts may be made by mail ($100 minimum) or exchange
from another Vanguard Fund account. In some instances,
contributions may be made by wire or Vanguard Fund Express. Please
call us for more information on these options.
16
<PAGE>
Purchasing By Mail
Complete and sign the enclosed Account Registration Form
NEW ACCOUNT
Please include the amount of your initial investment, make your
check payable to The Vanguard Group-65, and mail to:
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
For express or registered mail, send to:
Vanguard Financial Center 455 Devon Park Drive Wayne, PA 19087
ADDITIONAL INVESTMENTS TO EXISTING ACCOUNTS
Additional investments should include the Invest-by-Mail remittance
form attached to your Fund confirmation statements. Please make
your check payable to The Vanguard Group-65, write your account
number on your check and, using the return envelope provided, mail
to the address indicated on the Invest-by-Mail Form.
All written requests should be mailed to one of the addresses
indicated for new accounts. Do not send registered or express mail
to the post office box address.
-------------------------------------------------------------------
Purchasing By Wire Money should be wired to:
CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 0101 9897
ATTN VANGUARD
Before Wiring Please contact Client Services (1-800-662-2739)
VANGUARD EQUITY INCOME FUND
ACCOUNT NUMBER
ACCOUNT REGISTRATION
To ensure proper receipt, please be sure your bank includes
the name of the Fund, the account number Vanguard has assigned to
you and the eight digit CoreStates number. If you are opening a new
account, you must contact our Client Services Department (1-800-
662-2739) before wiring funds. Also, please complete the Account
Registration Form and mail it to the "New Account" address above
after completing your wire arrangement. Note: Federal Funds wire
purchase orders will be accepted only when the Fund and Custodian
Bank are open for business.
-------------------------------------------------------------------
Purchasing By Exchange (from a Vanguard account)
You may open a new account or purchase additional shares by making
an exchange from an existing Vanguard account. However, the Fund
reserves the right to refuse any exchange purchase request. Please
call our Client Services Department at 1-800-662-2739 for
assistance. The new account will have the same registration as the
existing account.
-------------------------------------------------------------------
Purchasing By Fund Express
Special Purchase and Automatic Investment
The Fund Express Special Purchase option lets you move money from
your bank account to your Vanguard account at your request. Or if
you choose the Automatic Investment option, money will be moved
from your bank account to your Vanguard account on the schedule
(monthly, bimonthly [every other month], quarterly , semi-
annually or yearly) you select. To establish these Fund Express
options,
17
<PAGE>
please provide the appropriate information on the Account
Registration Form. We will send you a confirmation of your Fund
Express service; please wait two weeks before using the
service.
- -----------------------------------------------------------------------------
CHOOSING A DISTRIBUTION OPTION
You must select one of three distribution options:
1. Automatic Reinvestment Option--Both dividends and capital gains
distributions will be reinvested in additional Fund shares. This
option will be selected for you automatically unless you specify
one of the other options.
2. Cash Dividend Option--Your dividends will be paid in cash and
your capital gains will be reinvested in additional Fund shares.
3. All Cash Option--Both dividend and capital gains distributions
will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends and/or capital
gains distributions in another Vanguard Fund account is available.
Please call our Client Services Department (1-800-662-2739) for
information. You may also elect Vanguard Dividend Express which
allows you to transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please see "Other
Vanguard Services" for more information.
- -----------------------------------------------------------------------------
TAX CAUTION
Investors should ask about the timing of capital gains and
dividend distributions before investing
Under Federal tax laws, the Fund is required to distribute net
capital gains and dividend income to Fund shareholders. These
distributions are made to all shareholders who own Fund shares as
of the distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to the record
date could have a significant impact on your tax liability for the
year. For example, if you purchase shares immediately prior to the
record date of a sizable capital gain, you will be assessed taxes
on the amount of the capital gain distribution, even though you
owned the Fund shares for just a short period of time. (Taxes are
due on the distributions even if the dividend or gain is reinvested
in additional Fund shares.) While the total value of your
investment will be the same after the capital gain distribution--
the amount of the capital gain distribution will offset the drop in
the net asset value of the shares--you should be aware of the tax
implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about potential
distributions before investing. The Fund's annual capital gains
distributions normally occur in December, while income dividends
are generally paid quarterly in March, June, September and
December. For additional information on distributions and taxes,
see the section titled "Dividends, Capital Gains, and Taxes."
18
<PAGE>
- -----------------------------------------------------------------------------
IMPORTANT ACCOUNT INFORMATION
Establishing Optional Services
The easiest way to establish optional Vanguard services on your
account is to select the options you desire when you complete your
Account Registration Form. If you wish to add shareholder options
later, you may need to provide Vanguard with additional information
and a signature guarantee. Please call our Client Services
Department (1-800-662-2739) for further assistance.
Signature Guarantees
For our mutual protection, we may require a signature guarantee on
certain written transaction requests. A signature guarantee
verifies the authenticity of your signature, and may be obtained
from banks, brokers or any other guarantor that Vanguard deems
acceptable. A signature guarantee cannot be provided by a notary
public.
Certificates
Share certificates will be issued upon request. If a certificate is
lost, you may incur an expense to replace it.
Broker-Dealer Purchases
If you purchase shares in Vanguard Funds through a registered
broker-dealer or investment adviser, the broker-dealer or adviser
may charge a service fee.
Cancelling Trades
The Fund will not cancel any trade (e.g., a purchase, exchange or
redemption) believed to be authentic, received in writing or by
telephone, once the trade request has been received.
Electronic Prospectus Delivery
You may receive a prospectus for the Fund or any of the
Vanguard Funds in an electronic format. Please call 1-800-
231-7870 for additional information or see "Other Vanguard
Services--Computer Access." You may also receive a paper copy
of the prospectus, by calling 1-800-662-7447.
- -----------------------------------------------------------------------------
WHEN YOUR ACCOUNT WILL BE CREDITED
Your trade date is the date on which your account is credited. If
your purchase is made by check, Federal Funds wire or exchange and
is received before the close of regular trading on the New York
Stock Exchange (generally 4:00 p.m. Eastern time), your trade date
is the day of receipt. If your purchase is received after the close
of the Exchange, your trade date is the next business day. Your
shares are purchased at the net asset value determined on your
trade date.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a foreign
check which has been drawn in U.S. dollars and has been issued by a
foreign bank with a United States correspondent bank. The name of
the U.S. correspondent bank must be printed on the face of the
foreign check.
- -----------------------------------------------------------------------------
SELLING YOUR SHARES
You may withdraw any portion of the funds in your account by
redeeming shares at any time. (Please see "Important
Redemption Information". ) You generally may initiate a
request by writing or by telephoning. Your redemption proceeds are
normally mailed within two business days after the receipt of the
request in Good Order.
19
<PAGE>
Selling By Mail
Requests should be mailed to Vanguard Financial Center, Vanguard
Equity Income Fund, P.O. Box 1120, Valley Forge, PA 19482. (For
express or registered mail, send your request to Vanguard Financial
Center, Vanguard Equity Income Fund, 455 Devon Park Drive, Wayne,
PA 19087.)
The redemption price of shares will be the Fund's net asset value
next determined after Vanguard has received all required documents
in Good Order.
-------------------------------------------------------------------
Definition of Good Order
Good Order means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or shares).
3. The signatures of all owners exactly as they are registered on
the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be required in
cases of estates, corporations, trusts and certain other
accounts.
6. Any certificates you hold for the account.
If you have questions about this definition as it pertains to your
request, please call our Client Services Department at
1-800-662-2739.
-------------------------------------------------------------------
Selling By Telephone
To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at 1-800-
662-2739. The proceeds will be sent to you by mail. Please Note: As
a protection against fraud, your telephone mail redemption
privilege will be suspended for 15 calendar days following
any expedited address change to your account. An expedited address
change is one that is made by telephone, by Vanguard Online or, in
writing, without the signatures of all account owners. Please see
"Important Information About Telephone Transactions."
-------------------------------------------------------------------
Selling By Fund Express
Automatic Withdrawal & Special Redemption
If you select the Fund Express Automatic Withdrawal option, money
will be automatically moved from your Vanguard Fund account to your
bank account according to the schedule you have selected. The
Special Redemption option lets you move money from your Vanguard
account to your bank account on your request. You may elect Fund
Express on the Account Registration Form, or call our Investor
Information Department at 1-800-662-7447 for a Fund Express
application.
-------------------------------------------------------------------
Selling By Exchange
You may sell shares by making an exchange into another Vanguard
Fund account. Please see "Exchanging Your Shares" for details.
-------------------------------------------------------------------
Important Redemption Information
Shares purchased by check or Fund Express may be redeemed at any
time. However, your redemption proceeds will not be paid until
payment for the purchase is collected, which may take up to ten
calendar days.
-------------------------------------------------------------------
Delivery of Redemption Proceeds
Redemption requests received by telephone prior to the regular
close of the New York Stock Exchange are processed on the day of
receipt and the redemption proceeds are normally sent on the
following business day.
20
<PAGE>
Redemption requests received by telephone after the close of
regular trading on the New York Stock Exchange (generally 4:00 p.m.
Eastern time) are processed on the business day following receipt
and the proceeds are normally sent on the second business day
following receipt.
All unpaid dividends credited to your account up to the date of
redemption will be included in the redemption check. Redemption
proceeds must be sent to you within seven days of receipt of your
request in Good Order , except as described on page 20 in
"Important Redemption Information."
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It will
be implemented at the net asset value next determined after your
request has been received by Vanguard in Good Order. The Fund
reserves the right to revise or terminate the telephone redemption
privilege at any time.
The Fund may suspend the redemption right or postpone payment at
times when the New York Stock Exchange is closed, or under any
emergency circumstances as determined by the United States
Securities and Exchange Commission.
If the Board of Directors determines that it would be detrimental
to the best interests of the Fund's remaining shareholders to make
payment in cash, the Fund may pay the redemption proceeds in whole
or in part by a distribution in kind of readily marketable
securities.
-------------------------------------------------------------------
Vanguard's Average Cost Statement
If you make a redemption from a qualifying account, Vanguard will
send you an Average Cost Statement which provides you with the
cost and tax basis of the shares you redeemed. Please see
"Statements and Reports" for additional information.
-------------------------------------------------------------------
Low Balance Fee and Minimum Account Balance Requirement
Due to the relatively high cost of maintaining smaller accounts,
the Fund will automatically deduct a $10 annual fee from non-
retirement accounts with balances falling below $2,500
( $500 for Uniform Gifts/Transfers to Minors Act accounts).
This fee deduction will occur mid-year, beginning in 1996. The fee
generally will be waived for investors whose aggregate Vanguard
assets exceed $50,000. In addition, the Fund reserves the right to
liquidate any non-retirement account that is below the minimum
initial investment amount of $3,000. If at any time your total
investment does not have a value of at least $3,000, you may be
notified that the value of your account is below the Fund's minimum
account balance requirement. You would then be allowed 60 days to
make an additional investment before the account is liquidated.
Proceeds would be promptly paid to the registered shareholder.
Vanguard will not liquidate your account if it has fallen below
$3,000 solely as a result of declining markets (i.e., a decline in
a Fund's net asset value).
21
<PAGE>
- -----------------------------------------------------------------------------
EXCHANGING YOUR SHARES
Should your investment goals change, you may exchange your shares
of Vanguard Equity Income Fund for those of other available
Vanguard Funds.
Exchanging By Telephone
Call Client Services at 1-800-662-2739
In addition to the details below, please see "Important
Information About Telephone Transactions."
When exchanging shares by telephone, please have ready the Fund
name, account number, Social Security number or Employer
Identification number listed on the account, and the exact name and
address in which the account is registered. Only the registered
shareowner (or his or her pre-authorized representative) may
complete such an exchange. Requests for telephone exchanges
received prior to the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) are processed at the
close of business that same day.
Requests received after 4:00 p.m. are processed the next
business day. Telephone exchanges are not accepted into or from
Vanguard Balanced Index Fund, Vanguard Index Trust, Vanguard
International Equity Index Fund and Vanguard Quantitative
Portfolios. If you experience difficulty in making a telephone
exchange, your exchange request may be made by regular or express
mail, and it will be implemented at the closing net asset value on
the date received by Vanguard provided the request is received in
Good Order.
Neither the Fund nor Vanguard is responsible for the authenticity
of exchange instructions received by telephone. Investors bear the
full risk of any loss arising from unauthorized telephone
exchanges. To prohibit telephone exchanges on your account, please
notify the Fund in writing. Otherwise, the telephone exchange
privilege will be automatically established for your account.
-------------------------------------------------------------------
Exchanging By Mail
Please be sure to include on your exchange request the name and
account number of your current Fund, the name of the Fund you wish
to exchange into, the amount you wish to exchange, and the
signatures of all registered account holders. Send your request to
Vanguard Financial Center, Vanguard Equity Income Fund, P.O. Box
1120, Valley Forge, PA 19482. (For express or registered mail, send
your request to Vanguard Financial Center, Vanguard Equity Income
Fund, 455 Devon Park Drive, Wayne, PA 19087.)
-------------------------------------------------------------------
Important Exchange Information
Before you make an exchange, you should consider the following:
* Please read the Fund's prospectus before making an exchange. For
a copy and for answers to any questions you may have, call our
Investor Information Department (1-800-662-7447).
* An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
* Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
* The shares to be exchanged must be on deposit and not held in
certificate form.
* New accounts are not currently accepted in Vanguard/Windsor
Fund.
22
<PAGE>
* The redemption price of shares redeemed by exchange is the net
asset value next determined after Vanguard has received the
required documentation in Good Order.
* When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange privilege.
However, the Fund reserves the right to revise or terminate its
provisions, limit the amount of or reject any exchange, as deemed
necessary, at any time.
The exchange privilege is only available in states in which the
shares of the Fund are registered for sale. The Fund's shares are
currently registered for sale in all 50 states and the Fund intends
to maintain such registration.
- -----------------------------------------------------------------------------
EXCHANGE PRIVILEGE LIMITATIONS
The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in the
market. Accordingly, in order to prevent excessive use of the
exchange privilege that may potentially disrupt the management of
the Fund and increase transaction costs, the Fund has established a
policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed excessive if limited
to two substantive exchange redemptions (at least 30 days apart)
from the Fund during any twelve month period. "Substantive"
means either a dollar amount large enough to have a negative impact
on the Fund or a series of movements between Vanguard Funds.
Notwithstanding these limitations, the Fund reserves the right to
reject any purchase request (including exchange purchases from
other Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management.
- -----------------------------------------------------------------------------
IMPORTANT INFORMATION ABOUT TELEPHONE TRANSACTIONS
The ability to initiate redemptions (except wire redemptions) and
exchanges by telephone is automatically established on your account
unless you request in writing that telephone transactions on your
account not be permitted.
To protect your account from losses resulting from unauthorized or
fraudulent telephone instructions, Vanguard adheres to the
following security procedures:
1. Security Check. To request a transaction by telephone, the
caller must know (i) the name of the Fund; (ii) the 10-digit
account number; (iii) the exact name and address used in the
registration; and (iv) the Social Security or Employer
Identification number listed on the account.
2. Payment Policy. The proceeds of any telephone redemption by mail
will be made payable to the registered shareowner and mailed to
the address of record, only.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been followed.
Vanguard believes that the security procedures described above are
reasonable and that if such procedures are followed, you will
23
<PAGE>
bear the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account. If Vanguard
fails to follow reasonable security procedures, it may be liable
for any losses resulting from unauthorized or fraudulent telephone
transactions on your account.
- -----------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You may transfer the registration of any of your Fund shares to
another person by completing a transfer form and sending it to:
Vanguard Financial Center, P.O. Box 1110, Valley Forge, PA 19482,
Attention: Transfers Department. The request must be in Good Order.
To receive a transfer form and full instructions, please call our
Client Services Department (1-800-662-2739).
- -----------------------------------------------------------------------------
STATEMENTS AND REPORTS
Vanguard will send you a confirmation statement each time you
initiate a transaction in your account except for checkwriting
redemptions from Vanguard money market accounts. You will also
receive a comprehensive account statement at the end of each
calendar quarter. The fourth-quarter statement will be a year-end
statement, listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the average
cost of shares redeemed from your account during the calendar
year , using the average cost single category method. This
service is available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their Average
Cost Statement along with their Fund Summary Statement. Please call
our Client Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-annually,
according to the Fund's fiscal year-end.
- -----------------------------------------------------------------------------
OTHER VANGUARD SERVICES
For more information about any of these services, please call our
Investor Information Department at 1-800-662-7447.
Vanguard Direct Deposit Service
With Vanguard's Direct Deposit Service, most U.S. Government checks
(including Social Security and military pension checks) and private
payroll checks may be automatically deposited into your Vanguard
Fund account. Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
Vanguard Automatic Exchange Service
Vanguard's Automatic Exchange Service allows you to move money
automatically among your Vanguard Fund accounts. For instance, the
service can be used to "dollar cost average" from a money market
portfolio into a stock or bond fund or to contribute to an IRA or
other retirement plan.
Vanguard Fund Express
Vanguard's Fund Express allows you to transfer money between your
Fund account and your account at a bank, savings and loan
association, or a credit union that is a member of the Automated
Clearing House (ACH) system. You may elect this service on the
Account Registration Form or call our Investor Information
Department (1-800-662-7447) for a Fund Express application.
24
<PAGE>
Special rules govern how your Fund Express purchases or redemptions
are credited to your account. In addition, some services of Fund
Express cannot be used with specific Vanguard Funds. For more
information, please refer to the Vanguard Fund Express brochure.
Vanguard Dividend Express
Vanguard's Dividend Express allows you to transfer your dividends
and/or capital gains distributions automatically from your Fund
account, one business day after the Fund's payable date, to your
account at a bank, savings and loan association, or a credit union
that is a member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a Vanguard
Dividend Express application.
Vanguard Tele-Account
Vanguard's Tele-Account is a convenient, automated service that
provides share price, price change and yield quotations on Vanguard
Funds through any TouchTone[TM] telephone. This service also lets
you obtain information about your account balance, your last
transaction, and your most recent dividend or capital gains
payment. In addition, you may perform investment exchanges of
Vanguard Fund shares and redemptions by check using Tele-
Account. To contact Vanguard's Tele-Account service, dial 1-
800-ON-BOARD (1-800-662-6273). A brochure offering detailed
operating instructions is available from our Investor Information
Department (1-800-662-7447).
Computer Access
Vanguard Online Keyword: vanguard
Vanguard Online allows you to obtain information via your personal
computer on Fund share price, yield, and total return. Vanguard
Online is offered through America Online (AOL). To establish an AOL
account, call 1-800-238-6336.
Vanguard on the World Wide Web http://www.vanguard.com
Vanguard sponsors an education-oriented website offering news and
information about Vanguard Funds and services, as well as
interactive, easy-to-use investment planning tools.
25
<PAGE>
PART B
VANGUARD EQUITY INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
January 17, 1997
This Statement is not a Prospectus but should be read in conjunction
with the Fund's current Prospectus (January 17, 1997 ). 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;
1
<PAGE>
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.
2
<PAGE>
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, General Accident Insurance, and Chris-Craft
Industries, Inc.
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 Emeritus and Director of Rhone-Poulenc Rorer, Inc.;
Director of Sun Company, Inc., and Director of Westinghouse
Electric Corporation.
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 Emeritus of The Brookings Institution; Director of
American Express Bank, Ltd., The St. Paul Companies, Inc., and
National Steel Corporation.
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 ,
Procter & Gamble 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 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*
Principal 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.
3
<PAGE>
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, 1996 ,
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.
Vanguard 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, 1996, the Fund had contributed $124,000 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, 1996, such costs allocated to the Fund
approximated $2,472,000.
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,
1996, was $215,000 or approximately .02% of its average month-
end net assets.
Investment Advisory Services
Vanguard provides investment advisory services to Vanguard Money Market
Reserves; Vanguard Admiral Funds; Vanguard Municipal Bond Fund;
several Portfolios of Vanguard Fixed Income Securities Fund; Vanguard
Institutional
4
<PAGE>
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; Total International Portfolio of
Vanguard STAR 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, 1996 , the remuneration paid by Vanguard to all Officers as a group
and allocated to the Fund, was approximately $35,814 .
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 1996 fiscal
year was approximately $900 .
The following table provides detailed information with respect to the
amounts paid to or accrued for the Directors for the fiscal year ended
September 30, 1996 .
<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)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $423 $66 $15,000 $65,000
Robert E. Cawthorn $423 $55 $13,000 $65,000
Bruce K. MacLaury $458 $64 $12,000 $60,000
Burton G. Malkiel $423 $44 $15,000 $65,000
Alfred M. Rankin, Jr. $423 $35 $15,000 $65,000
John C. Sawhill $423 $41 $15,000 $65,000
James O. Welch, Jr. $423 $50 $15,000 $65,000
J. Lawrence Wilson $423 $36 $15,000 $65,000
<FN>
(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 (33 in the case of Mr. Malkiel; 27 in the case of Mr.
MacLaury).
</TABLE>
YIELD AND TOTAL RETURNS
The yield of the Fund for the 30-day period ended September 30,
1996 was 3.63% . The yield of the Fund is calculated daily. The
average annual total return of the Fund for one and five years ended
September 30, 1996 , and since its inception on March 21, 1988, was
+18.22% , +14.06% and +13.07% , 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.
5
<PAGE>
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 Index --consists of more than 7 ,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--composed of the 2,000 smallest securities in the
Russell 3000, representing approximately 7% of the Russell 3000 total
market capitalization.
Russell 2000[R] Value Index--contains stocks from the Russell 2000 Index
with a less-than-average growth orientation.
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, Australasia and
the Far East.
Goldman Sachs 100 Convertible Bond Index--currently includes 71 bonds
and 29 preferreds. The original list of names was generated by
screening for convertible issues of $10 0 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.
6
<PAGE>
Composite Index--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
Composite Index--65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
Composite Index--65% Lehman Long-Term Corporate AA or Better Bond Index
and a 35% weighting in a blended equity composite (75% Standard &
Poor's/BARRA Value Index and 25% Standard & Poor's Utilities Index).
Lehman Long-Term Corporate AA or Better Bond Index--consists of all
publicly issued, fixed rate, nonconvertible investment grade, dollar-
denominated, SEC-registered corporate debt rated AA or AAA.
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
70 % of the Fund's investment; Spare/Kaplan and Levin are responsible
for approximately 15 % each.
7
<PAGE>
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, 1997 , 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 0.100%
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.
8
<PAGE>
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/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/minus] 10 percentage points per year range suggested in the
Release. Under the Fund's investment advisory agreement with Spare/Kaplan,
the maximum performance adjustment for an incentive fee is made at a
difference of +6 percentage points from the performance of the index over a
thirty-six month period. The maximum performance adjustment for a penalty fee
is made at a difference of less than +3 percentage points from the
performance of the index over a thirty-six month period. On a per year basis,
these maximum adjustments effectively would occur at differences from the
index of +2 percentage points and less than +1 percentage point,
respectively.
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.
9
<PAGE>
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%.............................. 2.4 3 Basic Fee
Between 0% and 3%......................... 2.2 3 Basic Fee
Between 3% and 6%......................... 0 3 Basic Fee
Between 6% and 9%......................... .2 3 Basic Fee
More than 9%.............................. .4 3 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 10 percentage point per year range
suggested in Release No. 7113. Under the Fund's investment advisory
agreement with Levin, the maximum performance adjustment for an incentive fee
is made at a difference of +9 percentage points from the performance of the
index over a thirty-six month period. The maximum performance adjustment for
a penalty fee is made at a difference of less than +0 percentage points from
the performance of the index over a thirty-six month period. On a per year
basis, these maximum adjustments effectively would occur at differences from
the index of +3 percentage points and less than +0 percentage point,
respectively.
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.
10
<PAGE>
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, 1994 and 1995 , the Fund paid
advisory fees to Newell, its sole investment adviser prior to January 1,
1995, of $1,470,000 and $1,181,085, respectively.
For the fiscal year ended September 30, 1996, the Fund paid to
Newell, Spare/Kaplan, and Levin an advisory fee of $2,151,000 before a
decrease of $191,000 based on performance.
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, 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, which commenced operations in
1982, provides investment advisory services to institutional and private
clients, including registered investment funds and several private investment
partnerships. The investment process at Levin emphasizes identifying
investment value through fundamental research. John A. Levin, the founding
principal and President of Levin, and Melody P. Sarnell and Jeffrey A.
Kigner, Executive Vice Presidents of Levin, are responsible for managing the
portion of the Fund's assets managed by Levin. Levin is an indirect
subsidiary of Baker, Fentress & Company, a registered closed-end investment
fund listed on the New York Stock Exchange.
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 solely for the purpose of obtaining research services.
11
<PAGE>
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, 1994, 1995 and
1996, the Fund paid $517,200, $987,000 and $777,606 , 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. Assets
committed to futures contracts will be segregated at the Fund's custodian
bank to the extent required by law.
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 bona fide hedging purposes.
Regulations of the CFTC applicable to the Portfolio require that all of its
futures transactions constitute bona fide 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.
12
<PAGE>
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
futures 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
13
<PAGE>
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, 1996 , including the financial highlights for each of the
five fiscal years in the period ended September 30, 1996 , appearing in
the Vanguard Equity Income Fund, Inc. 1996 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 1996 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
1996 Annual Report to Shareholders, which can be obtained without
charge.
14
<PAGE>
PART C
VANGUARD EQUITY INCOME FUND, INC.
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
The Registrant's audited financial statements for the year ended
September 30, 1996 , including Price Waterhouse LLP's report thereon,
are incorporated by reference, in the Statement of Additional Information,
from the Registrant's 1996 Annual Report which has been filed with the
Commission as an Exhibit to this Registration Statement. The financial
statements included in the Annual Report are:
1. Statement of Net Assets as of September 30, 1996 .
2. Statement of Operations for the year ended September 30, 1996 .
3. Statement of Changes in Net Assets for the years ended September 30,
1995 , and September 30, 1996 .
4. Financial Highlights for each of the five years in the period ended
September 30, 1996 .
5. Notes to Financial Statements.
6. Report of Independent Accountants.
(b) Exhibits
Exhibit Number Description
1 ............... Articles of Incorporation
2 ............... By-Laws of Registrant
3 ............... Not Applicable
4 ............... Not Applicable
5 ............... Not Applicable
6 ............... Not Applicable
7 ............... Reference is made to the section entitled "Management
of the Fund" in the Registrant's Statement of
Additional Information
8 ............... Form of Custody Agreement
9 ............... Form of Vanguard Service Agreement
10 ............... Opinion of Counsel
11 ............... Consent of Independent Accountants*
12 ............... Financial Statements--See (a) above
16 ............... Schedule for computation of performance quotations*
27 ............... Financial Data Schedule*
------------------
* Filed herewith.
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant is not controlled by or under common control with any person.
The Officers of the Registrant, the investment companies in The Vanguard
Group of Investment Companies and The Vanguard Group, Inc. are identical.
Reference is made to the caption "Management of The Fund" in the Prospectus
constituting Part A and "Management of the Fund" in the Statement of
Additional Information constituting Part B of this Registration Statement.
Item 26. Number of Holders of Securities
On September 30, 1996 , there were 61,898 shareholders of
the Fund.
Item 27. Indemnification
Reference is made to Article XI of Registrant's Articles of
Incorporation.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to Directors, Officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
<PAGE>
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a Director, Officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such Director, Officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Adviser
Listed below are the names of the officers and directors of
Newell Associates. The business address of Newell Associates is 525
University Avenue, Palo Alto, California, 94301. No partner has any other
affiliation with the Registrant.
Roger D. Newell, Chairman and President
Robert A. Huret, Vice Chairman
Alan E. Rothenberg, Director
Listed below are the names of each of the partners of Spare, Kaplan,
Bischel & Associates. The business address of each officer is 44 Montgomery
Street, Suite 3500, San Francisco, California 94104. No partner has any other
affiliation with the Registrant.
Anthony E. Spare, Chief Investment Officer
Kenneth J. Kaplan, Director of Portfolio Management
Andrew J. Bischel, Chief Financial Officer
Mark L. McKee, Chief Operating Officer
Listed below are the names of the officers and directors of John A.
Levin & Co., Inc. The business address of Levin is One Rockefeller Plaza,
25th Floor, New York, New York 10020. None of the persons listed below has
any other affiliation with the Registrant.
John A. Levin, Director and President
Melody P. Sarnell, Director and Executive Vice President
Jeffrey A. Kigner, Director and Executive Vice President
James P. Gorter, Director
Carol L. Novak, Secretary and Vice President
Glenn A. Aigen, Chief Financial Officer
Each of Messrs. Gorter, Levin and Kigner and Ms. Sarnell is also a
director of Baker, Fentress & Company ("BKF"), a closed-end registered
investment fund and the parent of Levin whose business address is 200 West
Madison Street, Chicago, Illinois 60606. Mr. Gorter is Chairman of the Board
of BKF, and Mr. Levin is the President and Chief Executive Officer of BKF.
Mr. Gorter also serves as a director of Caterpillar, Inc., 100 NE Adams
Street, Peoria, Illinois 61629-0001, and Consolidated Tomoka Land Co., Inc.,
149 South Ridgewood Avenue, Daytona Beach, Florida 32114, the latter of which
is a subsidiary of BKF.
Item 29. Principal Underwriters
(a) None
(b) Not Applicable
Item 30. Location of Accounts and Records
The books, accounts and other documents required by Section 31(a) under
the Investment Company Act and the rules promulgated thereunder will be
maintained in the physical possession of Registrant; Registrant's Transfer
Agent, The Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley
Forge, Pennsylvania 19482; and the Registrant's Custodian, State Street Bank
and Trust Company, Boston, Massachusetts 02105.
<PAGE>
Item 31. Management Services
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as an exhibit to the
Fund's registration statement and described in Part B hereof under
"Management of the Fund," the Registrant is not a party to any
management-related service contract.
Item 32. Undertakings
Registrant hereby undertakes to comply with the provisions of Section
16(c) of the Investment Company Act of 1940 in regard to shareholders'
rights to call a meeting of shareholders for the purpose of voting on the
removal of Directors, and to assist in shareholder communications in such
matters, to the extent required by law.
Registrant hereby undertakes to provide an Annual Report to shareholders
or prospective investors, free of charge, upon request.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the town of Valley Forge and the Commonwealth
of Pennsylvania, on the 10th day of January 1997 .
Vanguard Equity Income Fund, Inc.
BY: (Raymond J. Klapinsky)
John J. Brennan*, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
BY: (Raymond J. Klapinsky)
John C. Bogle*, Chairman and Director
January 10, 1997
BY: (Raymond J. Klapinsky)
John J. Brennan*, President, Chief Executive Officer and
Director
January 10, 1997
BY: (Raymond J. Klapinsky)
Robert E. Cawthorn*, Director
January 10, 1997
BY: (Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*, Director
January 10, 1997
BY: (Raymond J. Klapinsky)
Bruce K. MacLaury*, Director
January 10, 1997
BY: (Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*, Director
January 10, 1997
BY: (Raymond J. Klapinsky)
John C. Sawhill*, Director
January 10, 1997
BY: (Raymond J. Klapinsky)
James O. Welch, Jr.*, Director
January 10, 1997
BY: (Raymond J. Klapinsky)
J. Lawrence Wilson*, Director
January 10, 1997
BY: (Raymond J. Klapinsky)
Richard F. Hyland*, Treasurer and Principal Financial Officer and
Accounting Officer
January 10, 1997
*By Power of Attorney. See 1933 Act File No. 2-14336; January 23, 1990.
Incorporated by Reference.
INDEX TO EXHIBITS
Consent of Independent Accountants...................... EX-99.B11
Schedule for Computation of Performance Quotations........ EX-99.B16
Financial Data Schedule................................... EX-27
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
and Statement of Additional Information constituting parts of this Post-
Effective Amendment No. 12 to the registration statement on Form N-1A (the
"Registration Statement") of our report dated October 31 ,
1996, relating to the financial statements and financial highlights
appearing in the 1996 Annual Report to Shareholders of Vanguard Equity
Income Fund, which are incorporated by reference into the Registration
Statement. We also consent to the references to us under the headings
"Financial Highlights" and "General Information" in the Prospectus and
under the heading "Financial Statements" in the Statement of
Additional Information.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, PA
January 9, 1997
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS*
1. Average Annual Total Return (as of September 30, 1996 )
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = 1,000
T = +18.22%
N = 1
ERV = $1,182.21
Five Year
P = 1,000
T = +14.06%
N = 5
ERV = $1,930.08
Ten Year
P = 1,000
T = +13.07%
N = *
ERV = $2,851.33*
- -----------
*Since inception, March 21, 1988.
2. YIELD
a - b 6
Yield = 2 [(----- + 1) - 1]
c x d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the
period
Example a = $4,237,928.72
b = $352,840.72
c = 73,149,575.72
d = $17.69
Yield = 3.63%
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000826473
<NAME> VANGUARD EQUITY INCOME FUND, INC.
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 985004
<INVESTMENTS-AT-VALUE> 1306423
<RECEIVABLES> 11294
<ASSETS-OTHER> 124
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1317841
<PAYABLE-FOR-SECURITIES> 5416
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3044
<TOTAL-LIABILITIES> 8460
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 939483
<SHARES-COMMON-STOCK> 74022
<SHARES-COMMON-PRIOR> 61798
<ACCUMULATED-NII-CURRENT> 12932
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 35547
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 321419
<NET-ASSETS> 1309381
<DIVIDEND-INCOME> 42929
<INTEREST-INCOME> 4869
<OTHER-INCOME> 0
<EXPENSES-NET> 4738
<NET-INVESTMENT-INCOME> 43060
<REALIZED-GAINS-CURRENT> 37039
<APPREC-INCREASE-CURRENT> 107851
<NET-CHANGE-FROM-OPS> 187950
<EQUALIZATION> 2104
<DISTRIBUTIONS-OF-INCOME> 41545
<DISTRIBUTIONS-OF-GAINS> 10870
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23377
<NUMBER-OF-SHARES-REDEEMED> 13877
<SHARES-REINVESTED> 2725
<NET-CHANGE-IN-ASSETS> 341986
<ACCUMULATED-NII-PRIOR> 9313
<ACCUMULATED-GAINS-PRIOR> 9378
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1960
<INTEREST-EXPENSE> 4869
<GROSS-EXPENSE> 4889
<AVERAGE-NET-ASSETS> 1165384
<PER-SHARE-NAV-BEGIN> 15.65
<PER-SHARE-NII> 0.63
<PER-SHARE-GAIN-APPREC> 2.18
<PER-SHARE-DIVIDEND> 0.60
<PER-SHARE-DISTRIBUTIONS> 0.17
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.69
<EXPENSE-RATIO> 0.42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
