-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LxG7OKzxD+bk8LoHSdCyEo9u+LIAqcd9DAYkIEIvBitm7owO2WqDW9MkugpfXXRa x6HH8HpdxmL+bbtGWdbIyA== 0000932471-04-000621.txt : 20040615 0000932471-04-000621.hdr.sgml : 20040615 20040615080045 ACCESSION NUMBER: 0000932471-04-000621 CONFORMED SUBMISSION TYPE: NSAR-A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20040430 FILED AS OF DATE: 20040615 EFFECTIVENESS DATE: 20040615 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD WINDSOR FUNDS/ CENTRAL INDEX KEY: 0000107606 IRS NUMBER: 510082711 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: NSAR-A SEC ACT: 1940 Act SEC FILE NUMBER: 811-00834 FILM NUMBER: 04862893 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD/WINDSOR FUNDS INC DATE OF NAME CHANGE: 19931203 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS DATE OF NAME CHANGE: 19851031 NSAR-A 1 answer.fil WINDSOR N-SAR 4-30-2004 PAGE 1 000 A000000 04/30/2004 000 C000000 0000107606 000 D000000 N 000 E000000 NF 000 F000000 Y 000 G000000 N 000 H000000 N 000 I000000 6.1 000 J000000 U 001 A000000 VANGUARD WINDSOR FUNDS 001 B000000 811-834 001 C000000 6106691000 002 A000000 100 VANGUARD BOULEVARD 002 B000000 MALVERN 002 C000000 PA 002 D010000 19355 003 000000 N 004 000000 N 005 000000 N 006 000000 N 007 A000000 Y 007 B000000 2 007 C010100 1 007 C020100 VANGUARD WINDSOR FUND 007 C030100 N 007 C010200 2 007 C020200 VANGUARD WINDSOR II FUND 007 C030200 N 007 C010300 3 007 C010400 4 007 C010500 5 007 C010600 6 007 C010700 7 007 C010800 8 007 C010900 9 007 C011000 10 010 A00AA01 THE VANGUARD GROUP, INC. 010 B00AA01 801-11953 010 C01AA01 MALVERN 010 C02AA01 PA 010 C03AA01 19355 011 A00AA01 VANGUARD MARKETING CORP. 011 B00AA01 8-21570 011 C01AA01 MALVERN 011 C02AA01 PA 011 C03AA01 19355 012 A00AA01 THE VANGUARD GROUP, INC. 012 B00AA01 84-772 012 C01AA01 MALVERN 012 C02AA01 PA 012 C03AA01 19355 PAGE 2 013 A00AA01 PRICEWATERHOUSECOOPERS LLP 013 B01AA01 PHILADELPHIA 013 B02AA01 PA 013 B03AA01 19103 014 A00AA01 VANGUARD MARKETING CORP. 014 B00AA01 8-21570 015 A00AA01 CITIBANK 015 B00AA01 C 015 C01AA01 NEW YORK 015 C02AA01 NY 015 C03AA01 10005 015 E01AA01 X 018 00AA00 Y 019 A00AA00 Y 019 B00AA00 125 019 C00AA00 VANGUARDGR 020 A000001 FRANK RUSSELL SECURITIES, INC. 020 B000001 91-0604934 020 C000001 2067 020 A000002 CITIGROUP GLOBAL MARKETS 020 B000002 13-2919773 020 C000002 1421 020 A000003 GOLDMAN, SACHS & CO. 020 B000003 13-5108880 020 C000003 1184 020 A000004 UBS WARBURG LLC 020 B000004 13-3340045 020 C000004 966 020 A000005 BANC OF AMERICA SECURITIES LLC 020 B000005 56-2058405 020 C000005 782 020 A000006 CREDIT SUISSE FIRST BOSTON CORP. 020 B000006 13-5659485 020 C000006 780 020 A000007 LEHMAN BROTHERS INC. 020 B000007 13-2518466 020 C000007 600 020 A000008 MORGAN STANLEY 020 B000008 13-2655998 020 C000008 549 020 A000009 ITG, INC. 020 B000009 95-4339369 020 C000009 503 020 A000010 MERRILL LYNCH, PIERCE FENNER & SMITH INC. 020 B000010 13-5674085 020 C000010 345 021 000000 15466 022 A000001 CHASE INVESTMENT SECURITIES CORP. 022 B000001 13-3112953 022 C000001 5277540 022 D000001 0 PAGE 3 022 A000002 THE VANGUARD GROUP/POOLED CASH ACCOUNT 022 B000002 23-1945930 022 C000002 4788479 022 D000002 0 022 A000003 J.P. 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W I T N E S S E T H WHEREAS, the Trust is an open-end, diversified management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Trust offers a series of shares known as Vanguard Windsor II Fund (the "Fund"); and WHEREAS, the Trust desires to retain the Advisor to render investment advisory services to the Fund, and the Advisor is willing to render such services. NOW THEREFORE, in consideration of the mutual promises and undertakings set forth in this "Agreement," the Trust and the Advisor hereby agree as follows: 1. APPOINTMENT OF ADVISOR. The Trust hereby employs the Advisor as investment advisor, on the terms and conditions set forth herein, for the portion of the assets of the Fund that the Trust's Board of Trustees (the "Board of Trustees") determines in its sole discretion to assign to the Advisor from time to time (referred to in this Agreement as the "H&W Portfolio"). As of the date of this Agreement, the H&W Portfolio will consist of the portion of the assets of the Fund that the Board of Trustees has determined to assign to the Advisor, as communicated to the Advisor on behalf of the Board of Trustees by The Vanguard Group, Inc. ("Vanguard"). The Board of Trustees may, from time to time, make additions to, and withdrawals from, the assets of the Fund assigned to the Advisor. The Advisor accepts such employment and agrees to render the services herein set forth, for the compensation herein provided. 2. DUTIES OF ADVISOR. The Trust employs the Advisor to manage the investment and reinvestment of the assets of the H&W Portfolio; to continuously review, supervise, and administer an investment program for the H&W Portfolio; to determine in its discretion the securities to be purchased or sold and the portion of such assets to be held uninvested; to provide the Fund with all records concerning the activities of the Advisor that the Fund is required to maintain; and to render regular reports to the Trust's officers and Board of Trustees concerning the discharge of the foregoing responsibilities. The Advisor will discharge the foregoing responsibilities subject to the supervision and oversight of the Trust's officers and the Board of Trustees, and in compliance with the objectives, policies and limitations set forth in the Fund's prospectus and Statement of Additional Information, any additional operating policies or procedures that the Fund communicates to the Advisor in writing, and applicable laws and regulations. The Advisor agrees to provide, at its own expense, the office space, furnishings and equipment, and personnel required by it to perform the services on the terms and for the compensation provided herein. 3. SECURITIES TRANSACTIONS. The Advisor is authorized to select the brokers or dealers that will execute purchases and sales of securities for the H&W Portfolio, and is directed to use its best efforts to obtain the best available price and most favorable execution for such transactions. To the extent expressly permitted by the written policies and procedures established by the Board of Trustees, and subject to Section 28(e) of the Securities Exchange Act of 1934, as amended, any interpretations thereof by the Securities and Exchange Commission (the "SEC") or its staff, and other applicable law, the Advisor is permitted to pay a broker or dealer an amount of commission for effecting a securities transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Advisor determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Advisor's overall responsibilities to the accounts as to which it exercises investment discretion. The execution of such transactions in conformity with the authority expressly referenced in the immediately preceding sentence shall not be deemed to represent an unlawful act or breach of any duty created by this Agreement or otherwise. The Advisor agrees to use its best efforts to comply with any directed brokerage or other brokerage arrangements that the Fund communicates to the Advisor in writing. The Advisor will promptly communicate to the Trust's officers and the Board of Trustees any information relating to the portfolio transactions the Advisor has directed on behalf of the H&W Portfolio as such officers or the Board may reasonably request. 4. COMPENSATION OF ADVISOR. For services to be provided by the Advisor pursuant to this Agreement, the Fund will pay to the Advisor, and the Advisor agrees to accept as full compensation therefore, an investment advisory fee at the rate specified in Schedule A to this Agreement. The fee will be calculated based on annual percentage rates applied to the average month-end net assets of the H&W Portfolio and will be paid to the Advisor quarterly. 5. REPORTS. The Fund and the Advisor agree to furnish to each other current prospectuses, proxy statements, reports to shareholders, certified copies of their financial statements, and such other information with regard to their affairs as each may reasonably request, including, but not limited to, information about changes in partners of the Advisor. 6. COMPLIANCE. The Advisor agrees to comply with all policies, procedures or reporting requirements that the Board of Trustees of the Trust reasonably adopts and communicates to the Advisor in writing, including, without limitation, any such policies, procedures or reporting requirements relating to soft dollar or directed brokerage arrangements. 7. STATUS OF ADVISOR. The services of the Advisor to the Fund are not to be deemed exclusive, and the Advisor will be free to render similar services to others so long as its services to the Fund are not impaired thereby. The Advisor will be deemed to be an independent contractor and will, unless otherwise expressly provided or authorized, have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund or the Trust. 8. LIABILITY OF ADVISOR. No provision of this Agreement will be deemed to protect the Advisor against any liability to the Fund or its shareholders to which it might otherwise be subject by reason of any willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its obligations under this Agreement. 2 9. DURATION; TERMINATION; NOTICES; AMENDMENT. This Agreement will become effective on the date hereof and will continue in effect for a period of three years thereafter, and shall continue in effect for successive twelve-month periods thereafter, only so long as this Agreement is approved at least annually by votes of the Trust's Board of Trustees who are not parties to such Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. In addition, the question of continuance of the Agreement may be presented to the shareholders of the Fund; in such event, such continuance will be effected only if approved by the affirmative vote of a majority of the outstanding voting securities of the Fund. Notwithstanding the foregoing, however, (i) this Agreement may at any time be terminated without payment of any penalty either by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund, on thirty days' written notice to the Advisor, (ii) this Agreement will automatically terminate in the event of its assignment, and (iii) this Agreement may be terminated by the Advisor on ninety days' written notice to the Fund. Any notice under this Agreement will be given in writing, addressed and delivered, or mailed postpaid, to the other party as follows: If to the Fund, at: Vanguard Windsor Funds - Vanguard Windsor II Fund P.O. Box 2600 Valley Forge, PA 19482 Attention: Jeffrey S. Molitor Telephone: 610-669-6303 Facsimile: 610-503-5855 If to the Advisor, at: Hotchkis and Wiley Capital Management, LLC Attention: Compliance Department 725 South Figueroa St, 39th Flr. Los Angeles, CA 90017-5439 Telephone: 213-430-1000 Facsimile: 213-430-1026 This Agreement may be amended by mutual consent, but the consent of the Trust must be approved (i) by a majority of those members of the Board of Trustees who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such amendment, and (ii) to the extent required by the 1940 Act, by a vote of a majority of the outstanding voting securities of the Fund of the Trust. As used in this Section 9, the terms "assignment," "interested persons," and "vote of a majority of the outstanding voting securities" will have the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section 2(a)(42) of the 1940 Act. 3 10. SEVERABILITY. If any provision of this Agreement will be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement will not be affected thereby. 11. CONFIDENTIALITY. The Advisor shall keep confidential any and all information obtained in connection with the services rendered hereunder and relating directly or indirectly to the Fund, the Trust, or Vanguard and shall not disclose any such information to any person other than the Trust, the Board of Directors of the Trust, Vanguard), and any director, officer, or employee of the Trust or Vanguard, except (i) with the prior written consent of the Trust, (ii) as required by law, regulation, court order or the rules or regulations of any self-regulatory organization, governmental body or official having jurisdiction over the Advisor, or (iii) for information that is publicly available other than due to disclosure by the Advisor or its affiliates or becomes known to the Advisor from a source other than the Trust, the Board of Directors of the Trust, or Vanguard. 12. PROXY POLICY. The Advisor acknowledges that Vanguard will vote the shares of all securities that are held by the Fund unless other mutually acceptable arrangements are made with the Advisor with respect to the H&W Portfolio. 13. GOVERNING LAW. All questions concerning the validity, meaning, and effect of this Agreement shall be determined in accordance with the laws (without giving effect to the conflict-of-law principles thereof) of the State of Delaware applicable to contracts made and to be performed in that state. 4 IN WITNESS WHEREOF, the parties hereto have caused this Investment Advisory Agreement to be executed as of the date first set forth herein. HOTCHKIS AND WILEY CAPTIAL MANAGEMENT, LLC VANGUARD WINDSOR FUNDS /S/ NANCY D. CELICK 12/1/2003 /S/ R. GREGORY BARTON 11/24/2003 Signature Date Signature Date Nancy D. Celick 12/1/2003 R. Gregory Barton 11/24/2003 - ------------------------------ -------- --------------------- ---------- Print Name Date Print Name Date 5 SCHEDULE A Pursuant to Section 4 of the Agreement, the Fund shall pay the Advisor compensation as follows: 13.1.CALCULATION OF THE BASE FEE. The Base Fee for each fiscal quarter of the Fund is calculated by multiplying an Annual Percentage Rate (shown below) to the average month-end net assets of the H&W Portfolio during such fiscal quarter, and dividing the result by 4. -------------------------------------------------------------------- ANNUAL PERCENTAGE RATE SCHEDULE -------------------------------------------------------------------- AVERAGE MONTH-END ANNUAL PERCENTAGE NET ASSETS RATE -------------------------------------------------------------------- On the first $1.5 billion 0.150% -------------------------------------------------------------------- On the next $3.5 billion 0.125% -------------------------------------------------------------------- On assets over $5.0 billion 0.100% -------------------------------------------------------------------- 13.2.CALCULATION OF THE PERFORMANCE ADJUSTMENT. The Performance Adjustment for each fiscal quarter of the Fund shall be calculated by multiplying the appropriate Adjustment Percentage (shown below) to the Annual Percentage Rate applied to the average of the month-end net assets of the H&W Portfolio over the previous 60 months, and dividing the result by four. The Adjustment Percentage for each fiscal quarter of the H&W Portfolio shall be determined by applying the following Performance Adjustment Schedule to the cumulative performance of the H&W Portfolio relative to the MSCI Investable Market 2500 Index (the "Index") over the rolling 60-month period applicable to such fiscal quarter. (See Fee Example #1.) - -------------------------------------------------------------------------------- PERFORMANCE ADJUSTMENT SCHEDULE - -------------------------------------------------------------------------------- CUMULATIVE PERFORMANCE OF H&W PORTFOLIO VS. ADJUSTMENT PERCENTAGE INDEX OVER APPLICABLE 60-MONTH PERIOD - -------------------------------------------------------------------------------- More than +15% +50% - -------------------------------------------------------------------------------- Greater than 0% up to and including +15% Linear increase between 0% to +50% - -------------------------------------------------------------------------------- From -15% up to and including 0% Linear decrease between -50% to 0% - -------------------------------------------------------------------------------- Less than -15% -50% - -------------------------------------------------------------------------------- 13.3.TRANSITION RULES FOR CALCULATING ADVISOR'S COMPENSATION. The Performance Adjustment will not be fully incorporated into the determination of the Adjusted Fee until the fiscal quarter ended January 31, 2009. Until that date, the following transition rules will apply: (a) DECEMBER 1, 2003 THROUGH OCTOBER 31, 2004. The Adjusted Fee will be deemed to equal the Base Fee. No Performance Adjustment will apply to the calculation of the Adjusted Fee during this period. A-1 (b) NOVEMBER 1, 2004 THROUGH JANUARY 31, 2009. Beginning November 1, 2004, the Performance Adjustment will take effect on a progressive basis with regard to the number of months elapsed between January 31, 2004, and the end of the quarter for which the Adjusted Fee is being computed. During this period, the Base Fee for purposes of calculating the Performance Adjustment will be computed using the average month-end net assets of the H&W Portfolio, as determined for a period commencing February 1, 2004, and ending as of the end of the applicable fiscal quarter of the Fund. During this period, the Performance Adjustment will be calculated using the cumulative performance of the H&W Portfolio and the Index for a period commencing February 1, 2004 and ending as of the end of the applicable fiscal quarter of the Fund. For these purposes, the endpoints and the size of the range over which a positive or negative adjustment percentage applies and the corresponding maximum adjusted percentage will be multiplied by a time-elapsed fraction. The fraction will equal the number of months elapsed since January 31, 2004, divided by 60. (See Fee Example #2.) (c) ON AND AFTER JANUARY 31, 2009. The Adjusted Fee will be equal to the Base Fee plus the Performance Adjustment. 13.4.OTHER SPECIAL RULES RELATING TO ADVISOR'S COMPENSATION. The following special rules will also apply to the Advisor's compensation: (a) H&W PORTFOLIO UNIT VALUE. The "H&W Portfolio unit value" shall be determined by dividing the total net assets of the H&W Portfolio by a given number of units. The number of units in the H&W Portfolio shall be equal to the total shares outstanding of the Fund on the effective date of this Agreement; provided, however, that as assets are added to or withdrawn from the H&W Portfolio, the number of units in the H&W Portfolio shall be adjusted based on the unit value of the H&W Portfolio on the day such changes are executed. (b) H&W PORTFOLIO PERFORMANCE. The investment performance of the H&W Portfolio for any period, expressed as a percentage of the H&W Portfolio unit value at the beginning of the period, will be the sum of: (i) the change in the H&W Portfolio unit value during such period; (ii) the unit value of the Fund's cash distributions from the H&W Portfolio's net investment income and realized net capital gains (whether short or long term) having an ex-dividend date occurring within the period; and (iii) the unit value of capital gains taxes per share paid or payable on undistributed realized long-term capital gains accumulated to the end of such period by the H&W Portfolio, expressed as a percentage of the H&W Portfolio unit value at the beginning of such period. For this purpose, the value of distributions of realized capital gains per unit of the H&W Portfolio, of dividends per unit of the H&W Portfolio paid from investment income, and of A-2 capital gains taxes per unit of the H&W Portfolio paid or payable on undistributed realized long-term capital gains shall be treated as reinvested in units of the H&W Portfolio at the unit value in effect at the close of business on the record date for the payment of such distributions and dividends and the date on which provision is made for such taxes, after giving effect to such distributions, dividends, and taxes. For purposes of calculating investment performance, the H&W Portfolio unit value will be determined net of all fees and expenses of the Fund attributable to the H&W Portfolio. Thus, the performance of the H&W Portfolio will be net of all fees and expenses of the Fund attributable to the H&W Portfolio when compared to the Index. (c) INDEX PERFORMANCE. The investment record of the Index for any period, expressed as a percentage of the Index level at the beginning of such period, will be the sum of (i) the change in the level of the Index during such period, and (ii) the value, computed consistently with the Index, of cash distributions having an ex-dividend date occurring within such period made by companies whose securities make up the Index. For this purpose, cash distributions on the securities that make up the Index will be treated as reinvested in the Index, at least as frequently as the end of each calendar quarter following the payment of the dividend. The calculation will be gross of applicable costs and expenses, and consistent with the methodology used by Morgan Stanley Capital International Inc. (d) PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any computation of the investment performance of the H&W Portfolio and the investment record of the Index shall be in accordance with any then applicable rules of the U.S. Securities and Exchange Commission. (e) EFFECT OF TERMINATION. In the event of termination of this Agreement, the fees provided in this Agreement will 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 the Advisor performed services hereunder during the fiscal quarter in which such termination becomes effective as a percentage of the total number of days in such quarter. A-3 1. FEE EXAMPLE #1 - ADJUSTED FEE CALCULATION: The following example serves as a guide for the calculation of the Adjusted Fee. Assume the Adjusted Fee for the fiscal quarter ending January 31, 2009 is being calculated, the transition rules described in Schedule A, section 13.3 are not in effect, and the month-end net assets of the H&W Portfolio over the rolling 60-month period applicable to such fiscal quarter are as follows:
- --------------------------------------------------------------------------------------------------------- MONTH-END NET ASSETS OF H&W PORTFOLIO ($MILLION) - --------------------------------------------------------------------------------------------------------- JAN FEB MAR APRIL MAY JUNE JULY AUG SEP OCT NOV DEC - --------------------------------------------------------------------------------------------------------- 2004 1001 1002 1003 1004 1005 1006 1007 1008 1009 1010 1011 - --------------------------------------------------------------------------------------------------------- 2005 1012 1013 1014 1015 1016 1017 1018 1019 1020 1021 1022 1023 - --------------------------------------------------------------------------------------------------------- 2006 1024 1025 1026 1027 1028 1029 1030 1031 1032 1033 1034 1035 - --------------------------------------------------------------------------------------------------------- 2007 1036 1037 1038 1039 1040 1041 1042 1043 1044 1045 1046 1047 - --------------------------------------------------------------------------------------------------------- 2008 1048 1049 1050 1051 1052 1053 1054 1055 1056 1057 1058 1059 - --------------------------------------------------------------------------------------------------------- 2009 1060 - ---------------------------------------------------------------------------------------------------------
Also, assume the cumulative performance of the H&W Portfolio over the rolling 60-month period applicable to such fiscal quarter is +17.5%, and the cumulative performance of the Index over such period is +10.0%. Thus, the excess return of the H&W Portfolio over the applicable period is +7.5%. The Adjusted Fee payable by the Fund to the Advisor for the fiscal quarter ending January 31, 2009 would be $493,734.38 and is calculated as follows: a. BASE FEE OF $397,125.00, WHICH IS CALCULATED AS FOLLOWS. The average month-end net assets of the H&W Portfolio over the fiscal quarter ending January 31, 2009 ($1,059,000,000), with an Annual Percentage Rate of (0.15%) applied. Therefore, the Base Fee is equal to: Base Fee = (a X b) /4, where; a = Average month-end net assets over the fiscal quarter ending January 31, 2009, calculated as follows: ($1,058,000,000 + $1,059,000,000 + $1,060,000,000) / 3 = $1,059,000,000 b = Annual Percentage Rate applied to average month end net assets, ( = 0.15%) Base Fee = ($1,059,000,000 X 0.15%) / 4 = $397,125.00 b. PERFORMANCE ADJUSTMENT OF +$96,609.38, WHICH IS CALCULATED AS FOLLOWS. The average month-end net assets of the H&W Portfolio over the rolling 60-month period applicable to the fiscal quarter ending January 31, 2009 is $1,030,500,000. The excess return of the H&W Portfolio (+17.5%) over the Index (+10.0%) over such period is +7.5%. An excess return of +7.5%, when applied to the Performance Adjustment Schedule, corresponds to an excess return of 0% up to and including +15%, which corresponds to an Adjustment Percentage of +25%. The performance adjustment percentage is calculated as follows: A-4 The Performance Adjustment = ([c / d] X e) / 4, where; c = Excess return over the performance period, (= +7.5%) d = Maximum excess return for appropriate performance range, ( = +15.0%) e = Maximum Adjustment Percentage for appropriate performance range, (=+50%) Adjustment Percentage = (7.5%/15.0%) X +50% = +25% Therefore, the Performance Adjustment = ([f X g] X h) / 4 f = Adjustment Percentage, (= +25%) g = Annual Percentage Rate applied to average month end net assets, (= 0.15%) h = Average month-end net assets for the 60-months ended January 31, 2009, (= $1,030,500,000) Performance Adjustment = ([+25% X 0.15%] X $1,030,500,000) / 4 = +$96,609.38 c. AN ADJUSTED FEE OF $493,734.38, WHICH IS CALCULATED AS FOLLOWS: Adjusted Fee = i + j, where; i = Base Fee, ( = $397,125.00) j = Performance Adjustment, ( = $96,609.38) Adjusted Fee = $397,125.00 + $96,609.38 = $493,734.38 d. CERTAIN CONVENTIONS. In practice, calculations will be extended to the eighth decimal point. Performance differences between the H&W Portfolio and the Index are treated in a symmetric manner, such as in the example. A-5 2. FEE EXAMPLE #2 - ADJUSTED FEE CALCULATION UNDER TRANSITION RULES: The following example serves as a guide for the calculation of the Adjusted Fee during the transition period. Assume that the Advisor's compensation is being calculated for the fiscal quarter ended July 31, 2006 and the month-end net assets of the H&W Portfolio over the 30-month period applicable to such fiscal quarter are as follows:
- --------------------------------------------------------------------------------------------------------- MONTH-END NET ASSETS OF H&W PORTFOLIO ($MILLION) - --------------------------------------------------------------------------------------------------------- JAN FEB MAR APRIL MAY JUNE JULY AUG SEP OCT NOV DEC - --------------------------------------------------------------------------------------------------------- 2004 1001 1002 1003 1004 1005 1006 1007 1008 1009 1010 1011 - --------------------------------------------------------------------------------------------------------- 2005 1012 1013 1014 1015 1016 1017 1018 1019 1020 1021 1022 1023 - --------------------------------------------------------------------------------------------------------- 2006 1024 1025 1026 1027 1028 1029 1030 - ---------------------------------------------------------------------------------------------------------
Also, assume the cumulative performance of the H&W Portfolio over the 30-month period applicable to the July 31, 2006 fiscal quarter is +10.75%, and the cumulative performance of the Index over such period is +7.0%. Thus, the excess return of the H&W Portfolio over the applicable period is +3.75%. The Adjusted Fee payable by the Fund to the Advisor for the fiscal quarter ending July 31, 2006 would be $433,476.56 and is calculated as follows: a. BASE FEE OF $385,875.00, WHICH IS CALCULATED AS FOLLOWS. The average month-end net assets of the H&W Portfolio over the fiscal quarter ending July 31, 2006 ($1,029,000,000), when applied to the Annual Percentage Rate of (0.15%). Therefore, the Base Fee is equal to: Base Fee = (a X b) / 4, where; a = Average month-end net assets over the fiscal quarter ending July 31, 2006, calculated as follows: ($1,028,000,000 + $1,029,000,000 + $1,030,000,000) / 3 = $1,029,000,000 b = Annual Percentage Rate applied to average month end net assets, ( = 0.15%) Base Fee = ($1,029,000,000 X 0.15%) / 4 = $385,875.00 b. PERFORMANCE ADJUSTMENT OF +$47,601.56, WHICH IS CALCULATED AS FOLLOWS. The average month-end net assets of the H&W Portfolio over the performance period (January 31, 2004 to July 31, 2006) are $1,015,500,000. The excess return of the H&W Portfolio (+10.75%) over the Benchmark (+7.0%) over such period is +3.75%. An excess return of +3.75%, when applied to the Performance Adjustment Schedule, corresponds to a relative performance of 0% and up to and including +15%, which corresponds to an Adjustment Percentage of +12.5%, calculated as follows: A-6 c = Percentage amount by which the performance of the Portfolio has exceeded the Benchmark, ( = +3.75%) d = Size of the adjusted range, determined as follows: adjusted range = [(e / f) X g] to [(e / f) X h] = d e = Number of months elapsed from January 31, 2004 to July 31, 2006 (= 30) f = Number of months in full rolling performance period (= 60) g = Maximum excess return for appropriate performance range (= +15.0%) h = Minimum excess return for appropriate performance range (= 0.0%) d = [(30/60) X +15.0%] to [(30/60) X +0.0%] = (+7.5% to +0.0%), therefore, the excess return of the portfolio falls within the adjustment range = (+7.5% - 0.0%) k = The Maximum Transition Period Adjustment Percentage, which is determined as follows: Maximum Transition Period Adjustment Percentage = [(e / f) X j] = k e = Number of months elapsed from January 31, 2004 to July 31, 2006 (= 30) f = Number of months in full rolling performance period (= 60) j = Maximum Adjustment Percentage for the appropriate performance range (= +50%) Maximum Adjustment Percentage for transition period = [(30/60) X +50%) = +25% = k Adjustment Percentage = ([c / d]) X k) = l, therefore, ([3.75%/7.50%] X 25%) = +12.5% = l Therefore, the Performance Adjustment is equal to ([l X m] X n) / 4, where; l = Adjustment Percentage, ( = +12.5%) m = Annual Percentage Rate applied to average month-end net assets, ( = 0.15%) n = Average month-end net assets for the transition period ended July 31, 2006, (= $1,015,500,000) Performance Adjustment = ([+12.5% X 0.15%] X $1,015,500,000) / 4 = +$47,601.56 A-7 c. AN ADJUSTED FEE OF $433,476.56, WHICH IS CALCULATED AS FOLLOWS: o + p = Adjusted Fee, where; o = Base Fee, ( = $385,875.00) p = Performance Adjustment, ( = $47,601.56) Adjusted Fee = $385,875.00 + $47,601.56 = $433,476.56 d. CERTAIN CONVENTIONS. In practice, calculations will be extended to the eighth decimal point. Performance differences between the H&W Portfolio and the Index are treated in a symmetric manner, such as in the example. A-8 -----END PRIVACY-ENHANCED MESSAGE-----