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[LOGO OF VANGUARD WINDSOR APPEARS HERE]
A Series of Vanguard/Windsor Funds
and A Member of The Vanguard Group
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PROSPECTUS--FEBRUARY 28, 1995
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT Vanguard/Windsor Fund (the "Fund"), formerly Windsor Fund, is
OBJECTIVE AND an open-end diversified investment company that seeks to pro-
POLICIES vide long-term growth of capital and income by investing pri-
marily in common stocks. The Fund's secondary objective is to
provide current income. There can be no assurance that the
Fund will achieve these objectives. Shares of the Fund are
neither insured nor guaranteed by any agency of the U.S. Gov-
ernment, including the FDIC.
Vanguard/Windsor Fund is an independent series of
Vanguard/Windsor Funds, Inc. (the "Company"), formerly The
Windsor Funds, Inc. The Company is currently offering shares
of two series. This Prospectus relates to the
Vanguard/Windsor Fund series only.
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OPENING AN Currently, shares of the Fund are not being offered or sold
ACCOUNT to new investors. Current shareholders of the Fund may make
additional investments of up to $25,000 during calendar year
1995. See "Opening an Account and Purchasing Shares" for ad-
ditional information.
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.
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ABOUT THIS This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation you should know about the Fund before you invest. It
should be retained for future reference. A "Statement of Ad-
ditional Information" containing additional information about
the Fund has been filed with the Securities and Exchange Com-
mission. This Statement is dated February 28, 1995, and has
been incorporated by reference into this Prospectus. A copy
may be obtained without charge by writing to the Fund or by
calling the Investor Information Department.
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TABLE OF
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses.......... 2
Financial Highlights... 2
Yield and Total
Return................. 3
FUND INFORMATION
Investment Objectives.. 4
Investment Policies.... 4
Investment Risks....... 4
Who Should Invest...... 5
<CAPTION>
Page
<S> <C>
Implementation of
Policies............. 6
Investment
Limitations.......... 7
Management of the
Fund................. 8
Investment Adviser.... 9
Performance Record.... 11
Dividends, Capital
Gains and Taxes...... 11
The Share Price of the
Fund ................ 13
General Information... 13
<CAPTION>
Page
<S> <C>
SHAREHOLDER GUIDE
Opening an Account and
Purchasing Shares.... 14
When Your Account Will
Be Credited.......... 16
Selling Your Shares... 17
Exchanging Your
Shares............... 19
Important Information
About Telephone
Transactions......... 20
Transferring
Registration......... 21
Other Vanguard
Services............. 21
</TABLE>
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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 AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
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<PAGE>
FUND EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for the 1994 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------
<S> <C>
Sales Load Imposed on Purchases......................... None
Sales Load Imposed on Reinvested Dividends.............. None
Redemption Fees......................................... None
Exchange Fees........................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------
<S> <C>
Management & Administrative Expenses.................... 0.18%
Investment Advisory Fees................................ 0.24
12b-1 Fees.............................................. None
Other Expenses
Distribution Costs................................ 0.02%
Miscellaneous Expenses............................ 0.01
----
Total Other Expenses.................................... 0.03
----
TOTAL OPERATING EXPENSES........................... 0.45%
====
</TABLE>
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 period. As noted in the table above, the Fund charges
no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$5 $14 $25 $57
</TABLE>
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.
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FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of the
five years in the period ended October 31, 1994, have 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 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 1994 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see the
Fund's 1994 Annual Report to Shareholders, which may be ob-
tained without charge by writing to the Fund or by calling
our Investor Information Department at 1-800-662-7447.
2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
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1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $14.95 $12.37 $12.79 $ 9.72 $15.17 $14.13 $14.22 $13.85 $13.39 $12.12
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .44 .37 .49 .58 .74 .71 .66 .78 .85 .79
Net Realized and
Unrealized Gain (Loss)
on Investments........ .42 2.98 .50 3.55 (4.59) 1.51 2.33 (.11) 3.05 2.01
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... .86 3.35 .99 4.13 (3.85) 2.22 2.99 .67 3.90 2.80
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DISTRIBUTIONS
Dividends from Net In-
vestment
Income................ (.37) (.39) (.57) (.74) (.75) (.63) (.87) (.30) (.85) (.79)
Distributions from
Realized
Capital Gains......... (.89) (.38) (.84) (.32) (.85) (.55) (2.21) -- (2.59) (.74)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (1.26) (.77) (1.41) (1.06) (1.60) (1.18) (3.08) (.30) (3.44) (1.53)
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NET ASSET VALUE, END OF
YEAR................... $14.55 $14.95 $12.37 $12.79 $ 9.72 $15.17 $14.13 $14.22 $13.85 $13.39
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TOTAL RETURN............ 6.35% 28.29% 9.30% 44.69% (27.93)% 17.05% 27.01% 4.62% 29.31% 23.30%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)............. $11,406 $10,537 $8,250 $7,859 $5,841 $8,313 $5,920 $4,848 $4,862 $3,813
Ratio of Expenses to Av-
erage Net
Assets................. .45% .40% .26% .30% .37% .41% .46% .43% .52% .53%
Ratio of Net Investment
Income to
Average Net Assets..... 3.11% 2.68% 3.89% 4.84% 5.82% 5.07% 5.08% 4.86% 5.28% 6.19%
Portfolio Turnover Rate. 34% 25% 32% 36% 21% 34% 24% 46% 51% 23%
</TABLE>
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YIELD AND From time to time the Fund may advertise its yield and total
TOTAL RETURN return. Both yield and total return figures are based on his-
torical earnings and are not intended to indicate future per-
formance. The "total return" of the Fund refers to the aver-
age annual compounded rates of return over one- , five- and
ten-year periods or for the life of the Fund (as stated in
the advertisement) that would equate an initial amount in-
vested at the beginning of a stated period to the ending re-
deemable 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 "30-day yield" of the
Fund is calculated daily by dividing the net investment in-
come per share earned during a 30-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
Fund's securities and is net of all expenses and all recur-
ring and nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes that the
net investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used to
calculate advertised yields are standardized for all stock
and bond mutual funds. However, these methods differ from the
accounting methods used by the Fund to maintain its books and
records, and so the advertised 30-day yield may not fully re-
flect the income paid to your own account or the yield re-
ported in the Fund's reports to shareholders.
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3
<PAGE>
INVESTMENT The objective of the Fund is to provide long-term growth of
OBJECTIVES capital and income. The Fund's secondary objective is to pro-
vide current income. There can be no assurance that the Fund
will achieve these objectives.
THE FUND SEEKS These investment objectives are fundamental and so cannot be
TO PROVIDE changed without the approval of a majority of the Fund's
LONG-TERM shareholders.
GROWTH OF
CAPITAL AND
INCOME
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INVESTMENT The Fund invests primarily in common stocks, which are se-
POLICIES lected principally on the basis of fundamental investment
value. Crucial to the valuation process is the relationship
THE FUND of a company's underlying earning power and dividend payout
INVESTS to the market price of its stock. The Fund's holdings usually
PRIMARILY IN are characterized by relatively low price-earnings ratios and
COMMON STOCKS meaningful income yields. At the time of purchase, many of
the Fund's securities are considered to be undervalued or
overlooked by the market. The Fund is managed without regard
to tax ramifications.
Although the Fund invests primarily in common stocks, it may
invest in money market instruments, fixed-income securities,
convertible securities and other equity securities, such as
preferred stock. The Fund reserves the right to hold money
market instruments and fixed-income securities in whatever
proportion the adviser deems appropriate for temporary defen-
sive purposes. The Fund may also invest in stock futures con-
tracts and options. See "Implementation of Policies" for a
description of these investment practices of the Fund.
The investment policies of the Fund are not fundamental and
so may be changed by the Board of Directors without share-
holder approval.
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INVESTMENT As a mutual fund investing primarily in common stocks, the
RISKS Fund is subject to MARKET RISK--i.e., the possibility that
common stock prices will decline over short or even extended
THE FUND IS periods. The U.S. stock market has tended to be cyclical,
SUBJECT TO with periods when common stock prices generally rise and pe-
MARKET RISK riods when prices generally decline.
To illustrate the volatility of stock prices, the following
table sets forth the extremes for stock market returns as
well as the average return for the period from 1926 to 1994,
as measured by the Standard & Poor's 500 Composite Stock
Price Index.
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994)
OVER VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9 +23.9 +20.1 +16.9
Worst -43.3 -12.5 - 0.9 - 3.1
Average +12.2 +10.2 +10.7 +10.7
</TABLE>
4
<PAGE>
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 1994. While this average
return can be used as a guide for setting reasonable expecta-
tions for future stock market returns, it 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 for the Fund or the
U.S. stock market. The illustrated returns represent histori-
cal investment performance, which may be a poor guide to fu-
ture returns. Also, stock market indexes such as the S&P 500
are based on unmanaged portfolios of securities before trans-
action 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.
THE FUND IS The investment adviser manages the Fund according to the tra-
ALSO SUBJECT ditional methods of "active" investment management, which in-
TO MANAGER volve the buying and selling of securities based upon econom-
RISK ic, financial and market analysis and investment judgement.
MANAGER RISK refers to the possibility that the Fund's in-
vestment adviser may fail to execute the Fund's investment
strategy effectively. As a result, the Fund may fail to
achieve its stated objective.
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WHO SHOULD The Fund is intended for investors who are seeking growth of
INVEST capital and income. Although the Fund's secondary objective
is to provide current income, investors should not consider
LONG-TERM the Fund a substitute for fixed-income investments. The Fund
INVESTORS is intended to be a long-term investment vehicle and is not
SEEKING GROWTH designed to provide investors with a means of speculating on
OF CAPITAL AND short-term market movements. Investors who engage in exces-
INCOME sive 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 (in-
cluding exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient port-
folio management, either because of the timing of the invest-
ment or previous excessive trading by the investor. Addition-
ally, 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.
No assurance can be given that the Fund will attain its ob-
jectives or that shareholders will be protected from the risk
of loss that is inherent in equity investing. 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.
Investors should not consider the Fund a complete investment
program. Most investors should maintain diversified holdings
of securities with different risk
5
<PAGE>
characteristics--including common stocks, bonds and money
market instruments. Investors may also wish to complement an
investment in the Fund with other types of common stock in-
vestments.
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IMPLEMENTATION In addition to investing primarily in equity securities, the
OF POLICIES Fund follows a number of additional investment practices to
achieve its objectives.
THE FUND MAY Although it normally seeks to remain substantially fully in-
INVEST IN vested in equity securities, the Fund may invest in certain
SHORT-TERM short-term fixed income securities. Such securities may be
FIXED INCOME used temporarily to invest uncommitted cash balances, to
SECURITIES maintain liquidity to meet shareholder redemptions, or to
take a temporarily defensive position against a potential
stock market decline. No more than 35% of the Fund's assets
will be committed to short-term fixed income securities for
purposes other than taking a temporary defensive position.
These securities include: obligations of the United States
government and its agencies or instrumentalities; commercial
paper, bank certificates of deposit, and bankers' accept-
ances; and repurchase agreements collateralized by these se-
curities. In addition, the Fund may, on occasion, invest a
small portion of its assets in bonds with ratings below in-
vestment grade when selected issues are believed to offer
prospective returns competitive with equity securities.
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 securi-
ties at the Fund's cost plus interest within a specified pe-
riod (normally one day). In these transactions, the securi-
ties 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 Fund's Custodian Bank until repurchased.
THE FUND MAY The Fund may utilize stock futures contracts and options to a
USE FUTURES limited extent. Specifically, the Fund may enter into futures
CONTRACTS AND contracts provided that not more than 5% of its assets are
OPTIONS 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 as-
sets.
Futures and options transactions may be used for several rea-
sons: to maintain cash reserves while simulating full invest-
ment, to facilitate trading, to reduce transaction costs, or
to seek higher investment returns when a futures contract is
priced more attractively than the underlying equity security
or index. While futures contracts and options can be used as
leveraged investments, the Fund may not use futures or op-
tions transactions to leverage its net assets.
For example, in order to remain fully invested in stocks
while maintaining liquidity to meet potential shareholder re-
demptions, the Fund may invest a portion of its assets in a
stock futures contract. Because futures contracts only re-
quire a small initial margin deposit, the Fund would then be
able to maintain a cash reserve for potential redemptions,
while at the same time remaining fully
6
<PAGE>
invested. Also, because the transaction costs of futures and
options may be lower than the costs of investing in stocks
directly, it is expected that the use of futures contracts
and options may reduce the Fund's total transaction costs.
FUTURES The primary risks associated with the use of futures con-
CONTRACTS AND tracts and options are: (i) imperfect correlation between the
OPTIONS POSE change in market value of the stocks held by the Fund and the
CERTAIN RISKS 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 only in those contracts whose behavior
is expected to resemble that of the Fund's underlying securi-
ties. 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 strate-
gies 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 (or gain) to the investor. When investing in
futures contracts, the Fund will segregate cash or cash
equivalents in the amount of the underlying obligation.
THE FUND MAY The Fund may lend its investment securities to qualified in-
LEND ITS stitutional investors for either short-term or long-term pur-
SECURITIES poses 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.
BORROWING The Fund may borrow money, subject to the restrictions de-
scribed below in Investment Limitations, for temporary or
emergency purposes, including the meeting of redemption re-
quests which might otherwise require the untimely disposition
of securities.
PORTFOLIO Although it generally seeks to invest for the long term, the
TURNOVER IS Fund retains the right to sell securities irrespective of how
NOT EXPECTED long they have been held. It is anticipated that the annual
TO EXCEED 100% portfolio turnover of the Fund will not exceed 100%. A turn-
over rate of 100% would occur, for example, if all of the se-
curities of the Fund were replaced within one year.
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INVESTMENT The Fund has adopted certain limitations on its investment
LIMITATIONS practices. Specifically, the Fund will not:
THE FUND HAS (a) with respect to 75% of the value of its total
ADOPTED assets, purchase the securities of any issuer
CERTAIN (except obligations of the United States govern-
FUNDAMENTAL ment and its instrumentalities) if as a result
LIMITATIONS the Fund would hold more than 10% of the out-
standing voting securities of the issuer, or
more than 5% of the value of the total assets of
the Fund would be invested in the securities of
such issuer;
(b) invest more than 25% of its assets in any one
industry; and
7
<PAGE>
(c) borrow money, except that the Fund may borrow
from banks (or through reverse repurchase agree-
ments), for temporary or emergency (not
leveraging) purposes, including the meeting of
redemption requests which might otherwise re-
quire the untimely disposition of securities, in
an amount not exceeding 10% of the value of the
net assets of the Fund (including the amount
borrowed and the value of any outstanding re-
verse repurchase agreements) at the time the
borrowing is made. Whenever borrowings exceed 5%
of the value of the net assets of the Fund, the
Fund will not make any additional investments.
These investment limitations are considered at the time in-
vestment 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.
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MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
VANGUARD in excess of $130 billion. Through their jointly-owned sub-
ADMINISTERS sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and
AND the other funds in the Group obtain at cost virtually all of
DISTRIBUTES their corporate management, administrative and distribution
THE FUND 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 1994, the average expense ratio (annual
costs including advisory fees divided by total net assets)
for the Vanguard funds amounted to approximately .30% com-
pared to an average of 1.05% 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 Direc-
tors set broad policies for the Fund and choose its Officers.
A list of the Directors and Officers of the Fund and a state-
ment 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 admin-
istrative personnel needed to provide the requisite services
to the funds and also furnishes the funds with necessary of-
fice space, furnishings and equipment. Each fund pays its
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 provides distribution and marketing services to the
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 its share of the Group's distribution costs.
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8
<PAGE>
The Fund has entered into an investment advisory agreement
INVESTMENT with Wellington Management Company ("WMC"), 75 State Street,
ADVISER Boston, MA 02109, under which WMC manages the investment and
reinvestment of Vanguard/Windsor Fund's assets and continu-
WELLINGTON ously reviews, supervises and administers the Fund's invest-
MANAGEMENT ment program. WMC discharges its responsibilities subject to
COMPANY SERVES the control of the Officers and Directors of the Fund.
AS ADVISER TO
THE FUND
WMC is a professional investment counseling firm which glob-
ally provides investment services to investment companies,
institutions, and individuals. Among the clients of WMC are
more than 10 investment companies of The Vanguard Group. As
of December 31, 1994, WMC held discretionary management au-
thority with respect to more than $80 billion of assets. WMC
and its predecessor organizations have provided investment
advisory services to investment companies since 1931 and to
investment counseling clients since 1960.
John B. Neff, Managing Partner of WMC, serves as portfolio
manager of the Fund, a position he has held since June of
1964. In managing the Fund's investments, Mr. Neff is as-
sisted by Charles T. Freeman, Senior Vice President of WMC
and assistant portfolio manager of the Fund, who joined WMC
in 1969. Messrs. Neff and Freeman are supported by research
and other investment services provided by the professional
staff of WMC.
Effective at year-end 1995, Mr. Neff will retire and Mr.
Freeman will assume the position of portfolio manager of the
Fund. Mr. Neff will remain as an adviser to WMC, and will
continue to work with the firm's investment professionals,
including the portfolio managers of all Vanguard funds for
which WMC serves as adviser.
WMC earns a basic advisory fee, calculated by applying the
following annual percentage rates to the average month-end
net assets of the Fund:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
---------- ------
<S> <C>
First $200 million .350%
Next $250 million .275%
Next $300 million .200%
Assets in excess of $750 million .150%
</TABLE>
9
<PAGE>
The Fund's payments to WMC under the above schedule are sub-
ject to an incentive/penalty fee arrangement which compares
the performance of the Fund's assets with the performance of
the Standard & Poor's 500 Composite Stock Price Index. This
arrangement provides for the following adjustments to WMC's
basic fee:
<TABLE>
<CAPTION>
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/PENALTY
DIFFERENTIAL VS. THE S&P 500 FEE ADJUSTMENT
--------------------------------- -----------------
<S> <C>
Less than or equal to -12% points 0.90 X Basic Fee
Equal to or less than -6% points but greater
than -9% points 0.95 X Basic Fee
Less than +6% points but greater than -6%
points Basic Fee
Equal to or greater than +6% points but less
than +9% points 1.05 X Basic Fee
Greater than or equal to 9% points 1.10 X Basic Fee
</TABLE>
During the fiscal year ended October 31, 1994, the total ad-
visory fees paid by the Fund to WMC represented an effective
annual rate of .16% of the Fund's average net assets before
an increase of .08% based upon the investment performance.
The investment advisory agreement authorizes WMC to select
brokers or dealers to execute purchases and sales of the
Fund's portfolio securities, and directs the adviser to use
its 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 WMC to pay higher commissions in rec-
ognition of brokerage services felt necessary for the
achievement of better execution, provided the adviser be-
lieves this to be in the best interest of the Fund. Although
the Fund does not market its shares through intermediary bro-
kers or dealers, the Fund may place orders with qualified
broker-dealers who recommend the Fund to clients if the Offi-
cers 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 in-
vestment 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 ad-
visory agreement; and (c) the continued employment of an ex-
isting 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 con-
cerning the adviser that would have normally been included in
a proxy statement.
- --------------------------------------------------------------------------------
10
<PAGE>
PERFORMANCE The table on table 11 provides investment results for the
RECORD Fund for several periods throughout the Fund's lifetime. The
results shown represent the Fund's "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 un-
managed Standard & Poor's 500 Composite Stock Price Index, a
widely used barometer of stock market activity, and the Con-
sumer Price Index, a statistical measure of changes in the
prices of goods and services. The table does not make any al-
lowance for federal, state or local income taxes which share-
holders must pay on a current basis.
The results shown should not be considered a representation
of the total return from an investment made in the Fund to-
day. This information is provided to help investors better
understand the Fund and may not provide a basis for compari-
son with other investments or mutual funds which use a dif-
ferent method to calculate performance.
AVERAGE ANNUAL RETURN FOR VANGUARD/WINDSOR FUND
<TABLE>
<CAPTION>
PERCENTAGE INCREASE
------------------------------------------------
FISCAL PERIODS VANGUARD/WINDSOR S&P 500 CONSUMER
ENDED 10/31/94 FUND INDEX PRICE INDEX
-------------- ---------------- ------- -----------
<S> <C> <C> <C>
3 Years +14.2% + 9.5% +2.9%
5 Years + 9.2 +10.1 +3.6
10 Years +14.5 +14.8 +3.6
20 Years +18.3 +14.3 +5.5
Lifetime* +12.8 +10.4 +4.7
</TABLE>
*October 23, 1958, to October 31, 1994. Data for the
Consumer Price Index begins October 31, 1958.
- --------------------------------------------------------------------------------
DIVIDENDS, The Fund expects to pay dividends from ordinary income semi-
CAPITAL GAINS annually. Capital gains distributions, if any, will be made
AND TAXES annually.
THE FUND PAYS In addition, in order to satisfy certain distribution re-
SEMI- ANNUAL quirements of the Tax Reform Act of 1986, the Fund may de-
DIVIDENDS AND clare special year-end dividend and capital gains distribu-
ANY CAPITAL tions during December. Such distributions, if received by
GAINS ANNUALLY 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 distributions 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 tax to the ex-
tent its income is distributed to shareholders. Dividends
paid by the Fund from net investment income, 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 will gen-
11
<PAGE>
erally qualify in part for the corporate 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 capi-
tal 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 consider-
ably from year to year; there will be no capital gains dis-
tributions in years when the Fund realizes net capital loss-
es.
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. Al-
so, 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 re-
turned 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 A sale of shares of the Fund is a taxable event and may re-
OR LOSS MAY BE sult in a capital gain or loss. A capital gain or loss may be
REALIZED UPON realized from an ordinary redemption of shares or an exchange
EXCHANGE OR of shares between two mutual funds (or two portfolios of a
REDEMPTION mutual fund).
Dividend distributions, capital gains distributions, and cap-
ital 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 share-
holders who have not complied with IRS taxpayer identifica-
tion regulations. You may avoid this withholding requirement
by certifying on your Account Registration Form your proper
Social Security or Employer Identification number and certi-
fying that you are not subject to backup withholding.
The Fund has obtained a Certificate of Authority to do busi-
ness as a foreign corporation in Pennsylvania and does busi-
ness 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 in-
vestment in the Fund. The Fund is managed without regard to
tax ramifications.
- --------------------------------------------------------------------------------
12
<PAGE>
THE SHARE The Fund's share price or "net asset value" per share is de-
PRICE OF THE termined by dividing the total market value of the Fund's in-
FUND vestments and other assets, less any liabilities, by the num-
ber of outstanding shares of the Fund. Net asset value per
share is calculated at the close of regular trading on the
New York Stock Exchange on each day the Exchange is open for
business.
Portfolio securities that are listed on a securities exchange
are valued at the latest quoted sales prices as of 4:00 p.m.
on the valuation date. Price information on listed securities
is taken from the exchange where the security is primarily
traded. Securities which are listed on an exchange and which
are not traded on the valuation date are valued at the mean
of the latest quoted bid and asked prices. Unlisted securi-
ties for which market quotations are readily available are
valued at the latest quoted bid price. Temporary cash invest-
ments are valued at amortized cost, which approximates market
value. Other assets and securities for which no quotations
are readily available are valued at fair value as determined
in good faith by the Directors. Securities 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 Fund's share price can be found daily in the mutual fund
listings of most major newspapers under the heading of The
Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL The Company is a Maryland corporation. The Articles of Incor-
INFORMATION poration permit the Directors to issue 1,600,000,000 shares
of common stock, with a one cent par value. The Board of Di-
rectors has the power to designate one or more classes ("se-
ries") of shares of common stock and to classify and reclas-
sify any unissued shares with respect to such series. Cur-
rently the Company is offering shares of two series.
The shares of each series of the Company are fully paid and
non-assessable; have no preference as to conversion, ex-
change, 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.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other ap-
plicable law. An annual meeting will be held to vote on the
removal of a Director or Directors of the Company if re-
quested in writing by the holders of not less than 10% of the
outstanding shares of the Company.
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 Dis-
bursing Agent. Price Waterhouse LLP, serves as independent
accountants for the Fund and will audit its financial state-
ments annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
13
<PAGE>
SHAREHOLDER GUIDE
OPENING AN Currently, shares of the Fund are not being offered or sold
ACCOUNT AND to new investors. Current shareholders of the Fund may make
PURCHASING additional investments, but the aggregate amount of such in-
SHARES vestments made during the calendar year may not exceed
$25,000.
Regular annual contributions to existing Vanguard/Windsor
Fund retirement accounts are being accepted. For IRAs, you
may make annual contributions up to the applicable tax law
limit ($2,000), as well as asset transfers and rollovers, but
the total of such purchases may not exceed $25,000. For other
retirement plans, total purchases generally may not exceed
$25,000. However, annual contributions to retirement plans
sponsored by Vanguard may be higher if permitted under the
tax laws.
Because of the risks associated with common stock invest-
ments, the Fund is intended to be a long-term investment ve-
hicle and is not designed to provide investors with a means
of speculating on short-term stock market movements. Conse-
quently the Fund reserves the right to reject any specific
purchase (or exchange purchase) request. The Fund also re-
serves the right to suspend the offering of shares for a pe-
riod of time.
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 com-
missions or 12b-1 fees).
ADDITIONAL Subsequent investments by current shareholders may be made
INVESTMENTS only by mail ($100 minimum), wire ($1,000 minimum), exchange
from another Vanguard Fund account, or Vanguard Fund Express.
--------------------------------------------------------------
PURCHASING BY Additional investments should include the Invest-by-Mail re-
MAIL mittance form attached to your Fund confirmation statement.
Please make your check payable to The Vanguard Group-22,
write your account number on your check and, using the return
envelope provided, mail to the address indicated on the In-
vest-by-Mail form. Do not send registered or express mail to
the post office box address.
If you do not have a business reply envelope, mail your re-
quest to VANGUARD FINANCIAL CENTER, VANGUARD/WINDSOR FUND,
P.O. BOX 2600, VALLEY FORGE, PA 19482. For express or regis-
tered mail, send your request to Vanguard Financial Center,
Vanguard/Windsor Fund, 455 Devon Park Drive, Wayne, PA 19087.
--------------------------------------------------------------
PURCHASING BY CORESTATES BANK, N.A.
WIRE Money ABA 031000011
should be CORESTATES NO. 0101 9897
wired to: ATTN VANGUARD
VANGUARD/WINDSOR FUND
BEFORE WIRING ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client Services
(1-800-662-2739)
14
<PAGE>
To assure proper receipt, please be sure your bank includes
the Fund name, the account number Vanguard has assigned to
you and the eight-digit CoreStates number. NOTE: Federal
Funds wire purchase orders will be accepted only when the
Fund and Custodian Bank are open for business.
--------------------------------------------------------------
PURCHASING BY Current shareholders may purchase additional shares of the
EXCHANGE (from Fund by exchange from an existing Vanguard account. (As ex-
a Vanguard plained on page 5, however, the Fund reserves the right to
account) refuse any exchange purchase request.) Please call our Client
Services Department at 1-800-662-2739.
--------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move money
FUND EXPRESS from your bank account to your Vanguard account at your re-
quest. Or, if you choose the Automatic Investment option,
Special money will be moved from your bank account to your Vanguard
Purchase and account on the schedule (monthly, bimonthly [every other
Automatic month], quarterly or yearly) you select. To establish these
Investment Fund Express options, please call 1-800-662-7447 for a Fund
Express application. We will send you a confirmation of your
Fund Express service: please wait three weeks before using
the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be se-
lected 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 De-
partment (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 divi-
dends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund shareholders.
INVESTORS These distributions are made to all shareholders who own Fund
SHOULD ASK shares as of the distribution's record date, regardless of
ABOUT THE how long the shares have been owned. Purchasing shares just
TIMING OF prior to the record date could have a significant impact on
CAPITAL GAINS your tax liability for the year. For example, if you purchase
AND DIVIDEND shares immediately prior to the record date of a sizable cap-
DISTRIBUTIONS ital gain or income dividend distribution, you will be as-
BEFORE sessed taxes
INVESTING
15
<PAGE>
on the amount of the capital gain and/or dividend distribu-
tion later paid even though you owned the Fund shares for
just a short period of time. (Taxes are due on the distribu-
tions even if the dividend or gain is reinvested in addi-
tional Fund shares.) While the total value of your investment
will be the same after the distribution--the amount of the
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 poten-
tial distributions before investing. The Fund's annual capi-
tal gains distribution normally occurs in December, while in-
come dividends are generally paid semi-annually in June and
December. For additional information on distributions and
taxes, see the section titled "Dividends, Capital Gains, and
Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
ACCOUNT your account is to select the options you desire when you
INFORMATION complete your Account Registration Form. IF YOU WISH TO ADD
SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
ESTABLISHING WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
OPTIONAL CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FUR-
SERVICES THER ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature guaran-
GUARANTEES tee on certain written transaction requests. A signature
guarantee verifies the authenticity of your signature and may
be obtained from banks, brokers and any other guarantors that
Vanguard deems acceptable. A SIGNATURE GUARANTEE CANNOT BE
PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request. If a certifi-
cate is lost, you may incur an expense to replace it.
BROKER/DEALER If you purchase shares in Vanguard funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or ad-
viser may charge a service fee.
CANCELLING The Fund will not cancel any trade (e.g., purchase, exchange
TRADES or redemption) believed to be authentic, received in writing
or by telephone, once the trade request has been received.
- --------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is credit-
ACCOUNT WILL ed. If your purchase is made by check, Federal Funds wire or
BE CREDITED exchange, and is received by the regular close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time), your
trade date is the date of receipt. If your purchase is re-
ceived 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 for-
eign check which has been drawn in U.S. dollars and has been
issued by a foreign bank with a U.S. correspondent bank.
16
<PAGE>
The name of the U.S. correspondent bank must be printed on
the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are nor-
mally mailed within two business days after the receipt of
the request in Good Order.
--------------------------------------------------------------
SELLING BY Requests should be mailed to VANGUARD FINANCIAL CENTER,
MAIL VANGUARD/WINDSOR FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to Van-
guard Financial Center, Vanguard/Windsor 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 re-
quired documents in Good Order.
--------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. 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 re-
quired, in the case of estates, corporations, trusts, and
certain other accounts.
6. Any certificates that you hold for the account.
IF YOU HAVE ANY QUESTIONS ABOUT THIS DEFINITION AS IT PER-
TAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DE-
PARTMENT AT 1-800-662-2739.
--------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized rep-
TELEPHONE resentative may call our Client Services Department at 1-800-
662-2739. The proceeds will be sent to you by mail. Please
see also "Important Information About Telephone
Transactions."
--------------------------------------------------------------
SELLING BY If you select the Fund Express Automatic Withdrawal option,
FUND EXPRESS money will be automatically moved from your Vanguard Fund ac-
count to your bank account according to the schedule you have
Automatic selected. The Special Redemption option lets you move money
Withdrawal & from your Vanguard account to your bank account on your re-
Special quest. To establish Fund Express, call our Investor Informa-
Redemption tion Department at 1-800-662-7447 for a Fund Express
application.
--------------------------------------------------------------
SELLING BY You may sell shares of the Fund by making an exchange into
EXCHANGE another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
--------------------------------------------------------------
17
<PAGE>
IMPORTANT Shares purchased by check or Fund Express may be redeemed at
REDEMPTION any time. However, your redemption proceeds will not be paid
INFORMATION until payment for the purchase is collected, which may take
up to ten calendar days.
--------------------------------------------------------------
DELIVERY OF If you choose to close your Vanguard/Windsor account through
REDEMPTION a redemption, you will not be able to open another account at
PROCEEDS a later date, since Windsor Fund is currently closed to new
investors. But, if you choose to close your account through
an exchange to another Vanguard portfolio, your account can
be reopened for UP TO ONE YEAR.
Redemption requests received by telephone prior to the regu-
lar close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time) are processed on the day of receipt and the re-
demption proceeds are normally sent on the following business
day.
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following re-
ceipt and the proceeds are normally sent on the second busi-
ness day following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
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 Or-
der. 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 detri-
mental to the best interests of the Fund's remaining share-
holders to make payment in cash, the Fund may pay redemption
proceeds in whole or in part by a distribution in kind of
readily marketable securities.
--------------------------------------------------------------
VANGUARD'S If you make a redemption from a qualifying account, Vanguard
AVERAGE COST will send you an Average Cost Statement which provides you
STATEMENT with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
--------------------------------------------------------------
MINIMUM Due to the relatively high cost of maintaining smaller ac-
ACCOUNT counts, the Fund reserves the right to redeem shares in any
BALANCE account that is below the minimum initial investment amount.
REQUIREMENT If at any time your total investment does not have a value of
at least $3,000, you may be notified that your account is be-
low the Fund's minimum account balance requirement. You would
then be allowed 60 days to make an additional investment be-
fore the account is liquidated. Pro-
18
<PAGE>
ceeds would be promptly paid to the registered shareholder.
(This minimum does not apply to IRAs, certain other retire-
ment accounts, and Uniform Gifts/Transfers to Minors Act ac-
counts.)
The Fund's minimum account balance requirement will not apply
if your account falls below $3,000 solely as a result of de-
clining markets (i.e., a decline in a Fund's net asset val-
ue).
- --------------------------------------------------------------------------------
EXCHANGING Should your investment goals change, you may ex-
YOUR SHARES change your shares of Vanguard/Windsor Fund for
those of other available Vanguard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Fund name, account number, Social Security number or Employer
Identification number listed on the account, and the exact
Call Client name and address in which the account is registered. Only the
Services (1- registered shareholder, or his or her pre-authorized repre-
800-662-2739) sentative, may complete such an exchange. Requests for tele-
phone 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. Re-
quests received after 4:00 p.m. are processed the next busi-
ness day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM
VANGUARD BALANCED INDEX, VANGUARD INDEX TRUST, VANGUARD IN-
TERNATIONAL EQUITY INDEX FUND, AND VANGUARD QUANTITATIVE
PORTFOLIOS. If you experience difficulty in making a tele-
phone 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.
Please see "Important Information About Telephone Transac-
tions" for additional important details.
--------------------------------------------------------------
EXCHANGING BY Please be sure to include on your exchange request the name
MAIL and account number of your current Fund, and the name of the
Fund you wish to exchange into, the amount you wish to ex-
change, and the signatures of all registered account holders.
Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD/WINDSOR FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to Van-
guard Financial Center, Vanguard/Windsor Fund, 455 Devon Park
Drive, Wayne, PA 19087.)
--------------------------------------------------------------
IMPORTANT Before you make an exchange, you should consider the follow-
EXCHANGE ing:
INFORMATION
. Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any ques-
tions you may have, call our Investor Information
Department (1-800-662-7447).
. An exchange is treated as a redemption and a pur-
chase; 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.
19
<PAGE>
. The shares to be exchanged must be on deposit and
not held in certificate form.
. The redemption price of shares redeemed by ex-
change is the net asset value next determined af-
ter Vanguard has received any required documents
in Good Order.
. When opening a new account by exchange, you must
meet the minimum investment requirement of the new
Fund. You cannot open a new account in the Fund by
exchange.
Every effort will be made to maintain the exchange privilege.
However, the Fund reserves the right to revise or terminate
its provisions, or to limit the amount of or reject any ex-
change, as deemed necessary, at any time.
- --------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the man-
agement of the Fund and increase transaction costs, the Fund
has established a policy of limiting excessive exchange ac-
tivity.
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.
Notwithstanding these limitations, the Fund reserves the
right to reject any purchase request (including exchange pur-
chases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions)
INFORMATION and exchanges by telephone is automatically established on
ABOUT your account unless you request in writing that telephone
TELEPHONE transactions on your account not be permitted.
TRANSACTIONS
To protect your account from losses resulting from unautho-
rized 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 Portfolio; (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 shareowners
and mailed to the address of record, only.
Neither the Fund nor Vanguard will be responsible for the au-
thenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been fol-
lowed. Vanguard believes that the security procedures de-
scribed above are reasonable, and that if such procedures are
followed, you will bear the risk of any losses resulting from
unauthorized or fraudulent telephone transactions on your ac-
count.
- --------------------------------------------------------------------------------
20
<PAGE>
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person, provided that the amount of each transfer
equals at least $3,000 for non-retirement and $2,000 for
IRAs, by completing a transfer form and sending it to: VAN-
GUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY FORGE, PA
19482. The request must be in Good Order. Before mailing your
request, please call our Client Services Department (1-800-
662-2739) for full instructions.
- --------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time you
REPORTS 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 state-
ment will be a year-end statement, listing all transaction
activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the aver-
age cost of shares redeemed from your account, using the av-
erage 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 Van-
guard account may expect to receive their Average Cost State-
ment in February of the following year. Please call our Cli-
ent Services Department (1-800- 662-2739) for information.
Financial reports on the Fund will be mailed to you semi-an-
nually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services,
SERVICES please call our Investor Information Department at
1-800-662-7447.
VANGUARD With Vanguard's Direct Deposit Service, most U.S. Government
DIRECT DEPOSIT checks (including Social Security and military pension
SERVICE checks) and private payroll checks may be automatically de-
posited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
VANGUARD Vanguard's Automatic Exchange Service allows you to move
AUTOMATIC money automatically among your Vanguard fund accounts. For
EXCHANGE instance, the service can be used to "dollar cost average"
SERVICE from a money market portfolio into a stock or bond fund, or
to contribute to an IRA or other retirement plan. Please con-
tact our Client Services Department at 1-800-662-2739 for ad-
ditional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS 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.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
21
<PAGE>
Special rules govern how your Fund Express purchases or re-
demptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific Van-
guard funds. For more information, please refer to the Van-
guard Fund Express brochure.
VANGUARD Vanguard's Dividend Express allows you to transfer your divi-
DIVIDEND dends and/or capital gains distributions automatically from
EXPRESS your Fund account, one business day after the Fund's payable
date, to your account at a bank, savings and loan associa-
tion, 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 Informa-
tion Department (1-800-662-7447) for a Vanguard Dividend Ex-
press application.
VANGUARD TELE- Vanguard's Tele-Account is a convenient, automated service
ACCOUNT that provides share price, price change and yield quotations
on Vanguard Funds through any TouchToneTM telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent dividend
or capital gains payment. To contact Vanguard's Tele-Account
service, dial 1-800-ON-BOARD (1-800-662-6273). A brochure of-
fering detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
22
<PAGE>
[LOGO OF VANGUARD
WINDSOR FUND
APPEARS HERE] [LOGO OF VANGUARD
- --------------- WINDSOR FUND
APPEARS HERE]
THE VANGUARD GROUP
OF INVESTMENT P R O S P E C T U S
COMPANIES
Vanguard Financial Center FEBRUARY 28, 1995
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)
TELECOMMUNICATION SERVICE FOR
THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[LOGO OF THE VANGUARD GROUP APPEARS HERE]
P022
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO OF VANGUARD
WINDSOR FUND
APPEARS HERE] A Series of Vanguard/Windsor Funds
and A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS--FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
FUND INFORMATION: INSTITUTIONAL PARTICIPANT SERVICES--1-800-523-1188
- --------------------------------------------------------------------------------
INVESTMENT Vanguard/Windsor Fund (the "Fund"), formerly Windsor Fund, is
OBJECTIVES an open-end diversified investment company that seeks to pro-
AND POLICIES vide long-term growth of capital and income by investing pri-
marily in common stocks. The Fund's secondary objective is to
provide current income. There can be no assurance that the
Fund will achieve these objectives. Shares of the Fund are
neither insured nor guaranteed by any agency of the U.S. Gov-
ernment, including the FDIC.
Vanguard/Windsor Fund is an independent series of
Vanguard/Windsor Funds, Inc. (the "Company"), formerly The
Windsor Funds, Inc. The Company is currently offering shares
of two series. This Prospectus relates to the
Vanguard/Windsor Fund series only.
- --------------------------------------------------------------------------------
IMPORTANT This Prospectus is intended exclusively for participants in
NOTE employer-sponsored retirement or savings plans, such as tax-
qualified pension and profit-sharing plans and 401(k) thrift
plans, as well as 403(b)(7) custodial accounts for non-profit
educational and charitable organizations.
- --------------------------------------------------------------------------------
OPENING AN The Fund is an investment option under a retirement or sav-
ACCOUNT ings program sponsored by your employer. The administrator of
your retirement plan or your employee benefits office can
provide you with detailed information on how to participate
in your plan and how to elect the Fund as an investment op-
tion.
If you have any questions about the Fund, please contact Par-
ticipant Services at 1-800-523-1188. If you have any ques-
tions about your plan account, contact your plan administra-
tor or the organization that provides recordkeeping services
for your plan.
- --------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation you should know about the Fund before you invest. It
should be retained for future reference. A "Statement of Ad-
ditional Information" containing additional information about
the Fund has been filed with the Securities and Exchange Com-
mission. This Statement is dated February 28, 1995, and has
been incorporated by reference into this Prospectus. A copy
may be obtained without charge by writing to the Fund or by
calling Participant Services.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses......... 2
Financial Highlights.. 2
Yield and Total
Return............... 3
Investment Objectives. 4
Investment Policies... 4
Investment Risks...... 4
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Who Should Invest..... 5
Implementation of
Policies............. 6
Investment
Limitations.......... 7
Management of the
Fund................. 8
Investment Adviser.... 9
Performance Record.... 10
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Dividends, Capital
Gains and Taxes..... 11
The Share Price of
the Fund ........... 11
General Information.. 12
SERVICE GUIDE
Participating in Your
Plan................ 13
</TABLE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE>
FUND The following table illustrates all expenses and fees that a
EXPENSES shareholder of the Fund would incur. The expenses and fees
set forth in the table are for the 1994 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
---------------------------------------------------------------
<S> <C>
Sales Load Imposed on Purchases......................... None
Sales Load Imposed on Reinvested Dividends.............. None
Redemption Fees......................................... None
Exchange Fees........................................... None
<CAPTION>
ANNUAL/FUND OPERATING EXPENSES
---------------------------------------------------------------
<S> <C> <C>
Management & Administrative Expenses.................... 0.18%
Investment Advisory Fees................................ 0.24
12b-1 Fees.............................................. None
Other Expenses
Distribution Costs................................ 0.02%
Miscellaneous Expenses............................ 0.01
----
Total Other Expenses.................................... 0.03
----
TOTAL OPERATING EXPENSES.............................. 0.45%
====
</TABLE>
The purpose of this table is to assist you in understanding
the various costs and expenses that an investor would bear
directly or indirectly as a shareholder in the Fund.
The following example illustrates the expenses that a share-
holder would incur on a $1,000 investment over various peri-
ods, assuming (1) a 5% annual rate of return and (2) redemp-
tion at the end of each period. As noted in the table above,
the Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$5 $14 $25 $57
</TABLE>
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 The following financial highlights for a share outstanding
HIGHLIGHTS throughout each year, insofar as they relate to each of the
five years in the period ended October 31, 1994, have 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 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 1994 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see the
Fund's 1994 Annual Report to Shareholders, which may be ob-
tained without charge by writing to the Fund or by calling
Participant Services at 1-800-523-1188.
2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $14.95 $12.37 $12.79 $9.72 $15.17 $14.13 $14.22 $13.85 $13.39 $12.12
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .44 .37 .49 .58 .74 .71 .66 .78 .85 .79
Net Realized and
Unrealized Gain (Loss)
on Investments........ .42 2.98 .50 3.55 (4.59) 1.51 2.33 (.11) 3.05 2.01
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... .86 3.35 .99 4.13 (3.85) 2.22 2.99 .67 3.90 2.80
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (.37) (.39) (.57) (.74) (.75) (.63) (.87) (.30) (.85) (.79)
Distributions from
Realized Capital
Gains................. (.89) (.38) (.84) (.32) (.85) (.55) (2.21) -- (2.59) (.74)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (1.26) (.77) (1.41) (1.06) (1.60) (1.18) (3.08) (.30) (3.44) (1.53)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR................... $14.55 $14.95 $12.37 $12.79 $ 9.72 $15.17 $14.13 $14.22 $13.85 $13.39
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN............ 6.35% 28.29% 9.30% 44.69% (27.93)% 17.05% 27.01% 4.62% 29.31% 23.30%
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)............. $11,406 $10,537 $8,250 $7,859 $5,841 $8,313 $5,920 $4,848 $4,862 $3,813
Ratio of Expenses to
Average Net Assets..... .45% .40% .26% .30% .37% .41% .46% .43% .52% .53%
Ratio of Net Investment
Income to Average Net
Assets................. 3.11% 2.68% 3.89% 4.84% 5.82% 5.07% 5.08% 4.86% 5.28% 6.19%
Portfolio Turnover Rate. 34% 25% 32% 36% 21% 34% 24% 46% 51% 23%
</TABLE>
- --------------------------------------------------------------------------------
YIELD AND From time to time the Fund may advertise its yield and total
TOTAL RETURN return. Both yield and total return figures are based on his-
torical earnings and are not intended to indicate future per-
formance. The "total return" of the Fund refers to the aver-
age annual compounded rates of return over one-, five-and
ten-year periods or for the life of the Fund (as stated in
the advertisement) that would equate an initial amount in-
vested at the beginning of a stated period to the ending re-
deemable 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 "30-day yield" of the
Fund is calculated daily by dividing the net investment in-
come per share earned during a 30-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
Fund's securities and is net of all expenses and all recur-
ring 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 annualized. Methods used to
calculate advertised yields are standardized for all stock
and bond mutual funds. However, these methods differ from the
accounting methods used by the Fund to maintain its books and
records, and so the advertised 30-day yield may not fully re-
flect the income paid to your own account or the yield re-
ported in the Fund's reports to shareholders.
- --------------------------------------------------------------------------------
3
<PAGE>
INVESTMENT The objective of the Fund is to provide long-term growth of
OBJECTIVES capital and income. The Fund's secondary objective is to pro-
vide current income. There can be no assurance that the Fund
THE FUND SEEKS will achieve these objectives.
TO PROVIDE
LONG-TERM These investment objectives are fundamental and so cannot be
GROWTH OF changed without the approval of a majority of the Fund's
CAPITAL AND shareholders.
INCOME
- --------------------------------------------------------------------------------
INVESTMENT The Fund invests primarily in common stocks, which are se-
POLICIES lected principally on the basis of fundamental investment
value. Crucial to the valuation process is the relationship
THE FUND of a company's underlying earning power and dividend payout
INVESTS to the market price of its stock. The Fund's holdings usually
PRIMARILY IN are characterized by relatively low price-earnings ratios and
COMMON STOCKS meaningful income yields. At the time of purchase, many of
the Fund's securities are considered to be undervalued or
overlooked by the market. The Fund is managed without regard
to tax ramifications.
Although the Fund invests primarily in common stocks, it may
invest in money market instruments, fixed-income securities,
convertible securities and other equity securities, such as
preferred stock. The Fund reserves the right to hold money
market instruments and fixed-income securities in whatever
proportion the adviser deems appropriate for temporary defen-
sive purposes. The Fund may also invest in stock futures con-
tracts and options. See "Implementation of Policies" for a
description of these investment practices of the Fund.
The investment policies of the Fund are not fundamental and
so may be changed by the Board of Directors without share-
holder approval.
- --------------------------------------------------------------------------------
INVESTMENT As a mutual fund investing primarily in common stocks, the
RISKS Fund is subject to MARKET RISK--i.e., the possibility that
common stock prices will decline over short or even extended
THE FUND IS periods. The U.S. stock market has tended to be cyclical,
SUBJECT TO with periods when common stock prices generally rise and pe-
MARKET RISK riods when prices generally decline.
To illustrate the volatility of stock prices, the following
table sets forth the extremes for stock market returns as
well as the average return for the period from 1926 to 1994,
as measured by the Standard & Poor's 500 Composite Stock
Price Index.
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994) OVER
VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.2 +10.2 +10.7 +10.7
</TABLE>
4
<PAGE>
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 1994. While this average
return can be used as a guide for setting reasonable expecta-
tions for future stock market returns, it 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 for the Fund or the
U.S. stock market. The illustrated returns represent histori-
cal investment performance, which may be a poor guide to fu-
ture returns. Also, stock market indexes such as the S&P 500
are based on unmanaged portfolios of securities before trans-
action 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.
THE FUND IS The investment adviser manages the Fund according to the tra-
ALSO SUBJECT ditional methods of "active" investment management, which in-
TO MANAGER volve the buying and selling of securities based upon econom-
RISK ic, financial and market analysis and investment judgement.
MANAGER RISK refers to the possibility that the Fund's in-
vestment adviser may fail to execute the Fund's investment
strategy effectively. As a result, the Fund may fail to
achieve its stated objective.
- --------------------------------------------------------------------------------
WHO SHOULD The Fund is intended for investors who are seeking growth of
INVEST capital and income. Although the Fund's secondary objective
is to provide current income, investors should not consider
LONG-TERM the Fund a substitute for fixed-income investments. The Fund
INVESTORS is intended to be a long-term investment vehicle and is not
SEEKING GROWTH designed to provide investors with a means of speculating on
OF CAPITAL AND short-term market movements. Investors who engage in exces-
INCOME sive 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 certain 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 reserves the right to suspend the offering of its
shares.
No assurance can be given that the Fund will attain its ob-
jectives or that shareholders will be protected from the risk
of loss that is inherent in equity investing. 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.
Investors should not consider the Fund a complete investment
program. Most investors should maintain diversified holdings
of securities with different risk characteristics--including
common stocks, bonds and money market instru-
5
<PAGE>
ments. Investors may also wish to complement an investment in
the Fund with other types of common stock investments.
- --------------------------------------------------------------------------------
IMPLEMENTATION In addition to investing primarily in equity securities, the
OF POLICIES Fund follows a number of additional investment practices to
achieve its objectives.
THE FUND MAY Although it normally seeks to remain substantially fully in-
INVEST IN vested in equity securities, the Fund may invest in certain
SHORT-TERM short-term fixed income securities. Such securities may be
FIXED INCOME used temporarily to invest uncommitted cash balances, to
SECURITIES maintain liquidity to meet shareholder redemptions, or to
take a temporarily defensive position against a potential
stock market decline. No more than 35% of the Fund's assets
will be committed to short-term fixed income securities for
purposes other than taking a temporary defensive position.
These securities include: obligations of the United States
government and its agencies or instrumentalities; commercial
paper, bank certificates of deposit, and bankers' accept-
ances; and repurchase agreements collateralized by these se-
curities. In addition, the Fund may, on occasion, invest a
small portion of its assets in bonds with ratings below in-
vestment grade when selected issues are believed to offer
prospective returns competitive with equity securities.
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 securi-
ties at the Fund's cost plus interest within a specified pe-
riod (normally one day). In these transactions, the securi-
ties 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 Fund's Custodian Bank until repurchased.
THE FUND MAY The Fund may utilize stock futures contracts and options to a
USE FUTURES limited extent. Specifically, the Fund may enter into futures
CONTRACTS AND contracts provided that not more than 5% of its assets are
OPTIONS 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 as-
sets.
Futures and options transactions may be used for several rea-
sons: to maintain cash reserves while simulating full invest-
ment, to facilitate trading, to reduce transaction costs, or
to seek higher investment returns when a futures contract is
priced more attractively than the underlying equity security
or index. While futures contracts and options can be used as
leveraged investments, the Fund may not use futures or op-
tions transactions to leverage its net assets.
For example, in order to remain fully invested in stocks
while maintaining liquidity to meet potential shareholder re-
demptions, the Fund may invest a portion of its assets in a
stock futures contract. Because futures contracts only re-
quire a small initial margin deposit, the Fund would than be
able to maintain a cash reserve for potential redemptions,
while at the same time remaining fully invested. Also, be-
cause the transaction costs of futures and options may be
6
<PAGE>
lower than the costs of investing in stocks directly, it is
expected that the use of futures contracts and options may
reduce the Fund's total transaction costs.
FUTURES The primary risks associated with the use of futures con-
CONTRACTS AND tracts and options are: (i) imperfect correlation between the
OPTIONS POSE change in market value of the stocks held by the Fund and the
CERTAIN RISKS 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 only in those contracts whose behavior
is expected to resemble that of the Fund's underlying securi-
ties. 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 strate-
gies 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 (or gain) to the investor. When investing in
futures contracts, the Fund will segregate cash or cash
equivalents in the amount of the underlying obligation.
THE FUND MAY The Fund may lend its investment securities to qualified in-
LEND ITS stitutional investors for either short-term or long-term pur-
SECURITIES poses 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.
BORROWING The Fund may borrow money, subject to the restrictions de-
scribed below in Investment Limitations, for temporary or
emergency purposes, including the meeting of redemption re-
quests which might otherwise require the untimely disposition
of securities.
PORTFOLIO Although it generally seeks to invest for the long term, the
TURNOVER IS Fund retains the right to sell securities irrespective of how
NOT EXPECTED long they have been held. It is anticipated that the annual
TO EXCEED 100% portfolio turnover of the Fund will not exceed 100%. A turn-
over rate of 100% would occur, for example, if all of the se-
curities of the Fund were replaced within one year.
- --------------------------------------------------------------------------------
INVESTMENT The Fund has adopted certain limitations on its investment
LIMITATIONS practices. Specifically, the Fund will not:
THE FUND HAS (a) with respect to 75% of the value of its total assets,
ADOPTED purchase the securities of any issuer (except obligations
CERTAIN of the United States government and its instrumentali-
FUNDAMENTAL ties) if as a result the Fund would hold more than 10% of
LIMITATIONS the outstanding voting securities of the issuer, or more
than 5% of the value of the total assets of the Fund
would be invested in the securities of such issuer;
(b) invest more than 25% of its assets in any one industry;
and
7
<PAGE>
(c) borrow money, except that the Fund may borrow from banks
(or through reverse repurchase agreements), for temporary
or emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise re-
quire the untimely disposition of securities, in an
amount not exceeding 10% of the value of the net assets
of the Fund (including the amount borrowed and the value
of any outstanding reverse repurchase agreements) at the
time the borrowing is made. Whenever borrowings exceed 5%
of the value of the net assets of the Fund, the Fund will
not make any additional investments.
These investment limitations are considered at the time in-
vestment 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.
- --------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
VANGUARD in excess of $130 billion. Through their jointly-owned sub-
ADMINISTERS sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and
AND the other funds in the Group obtain at cost virtually all of
DISTRIBUTES their corporate management, administrative and distribution
THE FUND 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 1994, the average expense ratio (annual
costs including advisory fees divided by total net assets)
for the Vanguard funds amounted to approximately .30% com-
pared to an average of 1.05% 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 Direc-
tors set broad policies for the Fund and choose its Officers.
A list of the Directors and Officers of the Fund and a state-
ment 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 admin-
istrative personnel needed to provide the requisite services
to the funds and also furnishes the funds with necessary of-
fice space, furnishings and equipment. Each fund pays its
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 provides distribution and marketing services to the
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 its share of the Group's distribution costs.
- --------------------------------------------------------------------------------
8
<PAGE>
The Fund has entered into an investment advisory agreement
INVESTMENT with Wellington Management Company ("WMC"), 75 State Street,
ADVISER Boston, MA 02109, under which WMC manages the investment and
reinvestment of Vanguard/Windsor Fund's assets and continu-
WELLINGTON ously reviews, supervises and administers the Fund's invest-
MANAGEMENT ment program. WMC discharges its responsibilities subject to
COMPANY SERVES the control of the Officers and Directors of the Fund.
AS ADVISER TO
THE FUND WMC is a professional investment counseling firm which glob-
ally provides investment services to investment companies,
institutions, and individuals. Among the clients of WMC are
more than 10 investment companies of The Vanguard Group. As
of December 31, 1994 WMC held discretionary management au-
thority with respect to more than $80 billion of assets. WMC
and its predecessor organizations have provided investment
advisory services to investment companies since 1931 and to
investment counseling clients since 1960.
John B. Neff, Managing Partner of WMC, serves as portfolio
manager of the Fund, a position he has held since June of
1964. In managing the Fund's investments, Mr. Neff is as-
sisted by Charles T. Freemen, Senior Vice President of WMC
and assistant portfolio manager of the Fund, who joined WMC
in 1969. Messrs. Neff and Freemen are supported by research
and other investment services provided by the professional
staff of WMC.
Effective at year-end 1995, Mr. Neff will retire and Mr.
Freeman will assume the position of portfolio manager of the
Fund. Mr. Neff will remain as an adviser to WMC, and will
continue to work with the firm's investment professionals,
including the portfolio managers of all Vanguard funds for
which WMC serves as adviser.
WMC earns a basic advisory fee, calculated by applying the
following annual percentage rates to the average month-end
net assets of the Fund:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
-------------------------------- ------
<S> <C>
First $200 million .350%
Next $250 million .275%
Next $300 million .200%
Assets in excess of $750 million .150%
</TABLE>
The Fund's payments to WMC under the above schedule are sub-
ject to an incentive/penalty fee arrangement which compares
the performance of the Fund's assets with the performance of
the Standard & Poor's 500 Composite Stock Price Index. This
arrangement provides for the following adjustments to WMC's
basic fee:
9
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/PENALTY
DIFFERENTIAL VS. THE S&P 500 FEE ADJUSTMENT
----------------------------------------------------- -----------------
<S> <C>
Less than or equal to -12% points 0.90 X Basic Fee
Equal to or less than -6% points but greater than
-9% points 0.95 X Basic Fee
Less than +6% points but greater than -6% points Basic Fee
Equal to or greater than +6% points but less than +9%
points 1.05 X Basic Fee
Greater than or equal to 9% points 1.10 X Basic Fee
</TABLE>
During the fiscal year ended October 31, 1994, the total ad-
visory fees paid by the Fund to WMC represented an effective
annual rate of .16% of the Fund's average net assets before
an increase of .08% based upon investment performance.
The investment advisory agreement authorized WMC to select
brokers or dealers to execute purchases and sales of the
Fund's portfolio securities, and directs the adviser to use
its 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 WMC to pay higher commissions in rec-
ognition of brokerage services felt necessary for the
achievement of better execution, provided the adviser be-
lieves this to be in the best interest of the Fund. Although
the Fund does not market its shares through intermediary bro-
kers or dealers, the Fund may place orders with qualified
broker-dealers who recommend the Fund to clients if the Offi-
cers 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 in-
vestment 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 ad-
visory agreement; and (c) the continued employment of an ex-
isting 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 con-
cerning the adviser that would have normally been included in
a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE The table on page 11 provides investment results for the Fund
RECORD for several periods throughout the Fund's lifetime. The re-
sults shown represent the Fund's "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 un-
managed Standard & Poor's 500 Composite Stock Price Index, a
widely used barometer of stock market activity, and the Con-
sumer Price Index, a statistical measure of changes in the
prices of
10
<PAGE>
goods and services. The table does not make any allowance for
federal, state, or local income taxes which shareholders must
pay on a current basis.
The results shown should not be considered a representation
of the total return from an investment made in the Fund to-
day. This information is provided to help investors better
understand the Fund and may not provide a basis for compari-
son with other investments or mutual funds which use a dif-
ferent method to calculate performance.
AVERAGE ANNUAL RETURN FOR VANGUARD/WINDSOR FUND
<TABLE>
<CAPTION>
PERCENTAGE INCREASE
------------------------------------------------
FISCAL PERIODS VANGUARD/WINDSOR S&P 500 CONSUMER
ENDED 10/31/94 FUND INDEX PRICE INDEX
-------------- ---------------- ------- -----------
<S> <C> <C> <C>
3 Years +14.2% + 9.5% +2.9%
5 Years + 9.2 +10.1 +3.6
10 Years +14.5 +14.8 +3.6
20 Years +18.3 +14.3 +5.5
Lifetime* +12.8 +10.4 +4.7
</TABLE>
*October 23, 1958 to October 31, 1994. Data for the Consumer
Price Index begins October 31, 1958.
- --------------------------------------------------------------------------------
The Fund expects to pay dividends from ordinary income semi-
DIVIDENDS, annually. Capital gains distributions, if any, will be made
CAPITAL GAINS annually. All dividend and capital gains distributions are
AND TAXES automatically reinvested in additional shares of the Fund. In
order to satisfy certain distribution requirements of the
THE FUND PAYS IRS, the Fund may also declare special year-end distributions
SEMI-ANNUAL during December. The Fund intends to continue to qualify for
DIVIDENDS AND taxation as a "regulated investment company" under the Inter-
ANY CAPITAL nal Revenue Code so that it will not be subject to federal
GAINS ANNUALLY income tax to the extent that its income is distributed to
its shareholders.
If you utilize the Fund as an investment option in an employ-
er-sponsored retirement or savings plan, dividend and capital
gains distributions from the Fund generally will not be sub-
ject to current taxation, but will accumulate on a tax-de-
ferred basis. In general, employer-sponsored retirement and
savings plans are governed by a complex set of tax rules. You
should consult your plan administrator, the plan's "Summary
Plan Description," or a professional tax adviser regarding
the tax consequences of your participation in the plan and of
any plan contributions or withdrawals.
- --------------------------------------------------------------------------------
THE SHARE The Fund's share price or "net asset value" per share is de-
PRICE OF THE termined by dividing the total market value of the Fund's in-
FUND vestments and other assets, less any liabilities, by the num-
ber of outstanding shares of the Fund. Net asset value per
share is calculated at the close of regular trading on the
New York Stock Exchange on each day the Exchange is open for
business.
11
<PAGE>
Portfolio securities that are listed on a securities exchange
are valued at the latest quoted sales prices as of 4:00 p.m.
on the valuation date. Price information on listed securities
is taken from the exchange where the security is primarily
traded. Securities which are listed on an exchange and which
are not traded on the valuation date are valued at the mean
of the latest quoted bid and asked prices. Unlisted securi-
ties for which market quotations are readily available are
valued at the latest quoted bid price. Temporary cash invest-
ments are valued at amortized cost, which approximates market
value. Other assets and securities for which no quotations
are readily available are valued at fair value as determined
in good faith by the Directors. Securities 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 Fund's share price can be found daily in the mutual fund
listings of most major newspapers under the heading of The
Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL The Company is a Maryland corporation. The Articles of Incor-
INFORMATION poration permit the Directors to issue 1,600,000,000 shares
of common stock, with a one cent par value. The Board of Di-
rectors has the power to designate one or more classes ("se-
ries") of shares of common stock and to classify and reclas-
sify any unissued shares with respect to such series. Cur-
rently the Company is offering shares of two series.
The shares of each series of the Company are fully paid and
non-assessable; have no preference as to conversion, ex-
change, 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.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other ap-
plicable law. An annual meeting will be held to vote on the
removal of a Director or Directors of the Company if re-
quested in writing by the holders of not less than 10% of the
outstanding shares of the Company.
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 Dis-
bursing Agent. Price Waterhouse LLP, serves as independent
accountants for the Fund and will audit its financial state-
ments annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
12
<PAGE>
SERVICE GUIDE
PARTICIPATING The Fund is available as an investment option in your retire-
IN YOUR PLAN ment or savings plan. The administrator of your plan or your
employee benefits office can provide you with detailed infor-
mation on how to participate in your plan and how to elect
the Fund as an investment option.
If you have any questions about the Fund, including the
Fund's investment objective, policies, risk characteristics
or historical performance, please contact Participant Serv-
ices at 1-800-523-1188.
If you have questions about your account, contact your plan
administrator or the organization which provides recordkeep-
ing services for your plan.
--------------------------------------------------------------
INVESTMENT You may be permitted to elect different investment options,
OPTIONS AND alter the amounts contributed to your plan, or change how
ALLOCATIONS contributions are allocated among your investment options in
accordance with your plan's specific provisions. See your
plan administrator or employee benefits office for more de-
tails.
--------------------------------------------------------------
TRANSACTIONS Contributions, exchanges or distributions of the Fund's
INFUND SHARES shares are effective when received in "good order" by Van-
guard. "Good order" means that complete information on the
purchase, exchange, or redemption and the appropriate monies
have been received by Vanguard.
--------------------------------------------------------------
MAKING Your plan may allow you to exchange monies from one invest-
EXCHANGES ment option to another. Check with your plan administrator
for details on the rules governing exchanges in your plan.
Certain investment options, particularly company stock or
guaranteed investment contracts (GICs), may be subject to
unique restrictions.
Before making an exchange, you should consider the following:
. If you are making an exchange to another Vanguard Fund op-
tion, please read the Fund's prospectus. Contact Partici-
pant Services at 1-800-523-1188 for a copy.
. Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how fre-
quently exchanges are allowed.
. As explained on page 5, the Fund reserves the right to ref-
use any exchange purchase request.
- --------------------------------------------------------------------------------
13
<PAGE>
[LOGO OF VANGUARD
WINDSOR FUND
APPEARS HERE]
- --------------- [LOGO OF VANGUARD
THE VANGUARD GROUP WINDSOR FUND
OF INVESTMENT APPEARS HERE]
COMPANIES
Vanguard Financial Center I N S T I T U T I O N A L
P.O. Box 2900 P R O S P E C T U S
Valley Forge, PA 19482
FEBRUARY 28, 1995
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[LOGO OF THE VANGUARD GROUP APPEARS HERE]
IO22
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO OF VANGUARD WINDSOR II A Series of Vanguard/Windsor Funds
APPEARS HERE] and A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS--FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
- --------------------------------------------------------------------------------
INVESTMENT Vanguard/Windsor II (the "Fund"), formerly Windsor II, is an
OBJECTIVES open-end diversified investment company that seeks to provide
AND POLICIES long-term growth of capital and income by investing primarily
in common stocks. The Fund's secondary objective is to pro-
vide current income. There can be no assurance that the Fund
will achieve these objectives. Shares of the Fund are neither
insured nor guaranteed by any agency of the U.S. Government,
including the FDIC.
Vanguard/Windsor II is an independent series of
Vanguard/Windsor Funds, Inc. (the "Company"), formerly The
Windsor Funds, Inc. The Company is currently offering shares
of two series. This Prospectus relates to the
Vanguard/Windsor II series only.
- --------------------------------------------------------------------------------
OPENING AN To open a regular (non-retirement) account, please complete
ACCOUNT and return the Account Registration Form. If you need assis-
tance in completing this Form, please call the Investor In-
formation Department. To open an Individual Retirement Ac-
count (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 ini-
tial investment is $3,000, or $500 for Uniform Gift/Transfers
to Minors Act accounts. The Fund is offered on a no-load ba-
sis (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 This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation you should know about the Fund before you invest. It
should be retained for future reference. A "Statement of Ad-
ditional Information" containing additional information about
the Fund has been filed with the Securities and Exchange Com-
mission. This Statement is dated February 28, 1995, and has
been incorporated by reference into this Prospectus. A copy
may be obtained without charge by writing to the Fund or by
calling the Investor Information Department.
- --------------------------------------------------------------------------------
TABLE OF
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses.......... 2
Financial Highlights... 2
Yield and Total Return. 3
FUND INFORMATION
Investment Objectives.. 4
Investment Policies.... 4
Investment Risks....... 4
Who Should Invest...... 5
Implementation of
Policies.............. 6
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Investment
Limitations.......... 8
Management of the
Fund................. 8
Investment Advisers... 9
Performance Record.... 13
Dividends, Capital
Gains
and Taxes............ 14
The Share Price of the
Fund ................ 15
General Information... 16
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
SHAREHOLDER GUIDE
Opening an Account and
Purchasing Shares.... 17
When Your Account Will
Be Credited.......... 20
Selling Your Shares... 20
Exchanging Your
Shares............... 22
Important Information
About Telephone
Transactions......... 23
Transferring
Registration......... 24
Other Vanguard
Services............. 24
</TABLE>
- --------------------------------------------------------------------------------
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 AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
- --------------------------------------------------------------------------------
<PAGE>
The following table illustrates all expenses and fees that
FUND EXPENSES you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for the 1994 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
---------------------------------------------------------------
<S> <C> <C>
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Redemption Fees............................................. None
Exchange Fees............................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
---------------------------------------------------------------
<S> <C> <C>
Management & Administrative Expenses........................ 0.22%
Investment Advisory Fees.................................... 0.14
12b-1 Fees.................................................. None
Other Expenses
Distribution Costs.................................... 0.02%
Miscellaneous Expenses................................ 0.01
----
Total Other Expenses........................................ 0.03
----
TOTAL OPERATING EXPENSES.................................. 0.39%
====
</TABLE>
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 period. As noted in the table above, the fund charges
no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$4 $13 $22 $49
</TABLE>
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 The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of the
five years in the period ended October 31, 1994, have 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 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 1994 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see the
Fund's 1994 Annual Report to Shareholders which may be ob-
tained without charge by writing to the Fund or by calling
our Investor Information Department at 1-800-662-7447.
2
<PAGE>
<TABLE>
<CAPTION>
JUNE 24,
YEAR ENDED OCTOBER 31, 1985, TO
----------------------------------------------------------------------- OCT. 31,
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48 $ 9.91 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .55 .50 .56 .62 .67 .73 .60 .52 .43 .11
Net Realized and
Unrealized Gain (Loss)
on Investments........ (.19) 2.47 1.17 3.55 (3.22) 2.42 1.63 (.39) 3.09 (.09)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... .36 2.97 1.73 4.17 (2.55) 3.15 2.23 .13 3.52 .02
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (.51) (.52) (.61) (.73) (.74) (.57) (.61) (.20) (.43) (.11)
Distributions from
Realized Capital
Gains................. (.50) (.22) (.44) (.28) (.61) -- (.80) -- (.52) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (1.01) (.74) (1.05) (1.01) (1.35) (.57) (1.41) (.20) (.95) (.11)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48 $ 9.91
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN............ 2.22% 19.51% 12.50% 36.61% (17.48)% 24.68% 20.54% .90% 35.62% .20%
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $8,246 $7,486 $4,878 $3,298 $2,087 $2,162 $1,485 $1,323 $ 814 $ 133
Ratio of Expenses to
Average Net Assets..... .39% .39% .41% .48% .52% .53% .58% .49% .65% .80%*
Ratio of Net Investment
Income to Average Net
Assets................. 3.26% 3.11% 3.72% 4.51% 4.93% 5.29% 4.94% 4.11% 4.33% 4.56%*
Portfolio Turnover Rate. 24% 26% 23% 41% 20% 22% 25% 46% 50% 1%
</TABLE>
*Annualized.
- --------------------------------------------------------------------------------
YIELD AND From time to time the Fund may advertise its yield and total
TOTAL RETURN return. Both yield and total return figures are based on his-
torical earnings and are not intended to indicate future per-
formance. The "total return" of the Fund refers to the aver-
age annual compounded rates of return over one- , five- and
ten-year periods or for the life of the Fund (as stated in
the advertisement) that would equate an initial amount in-
vested at the beginning of a stated period to the ending re-
deemable 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 "30-day yield" of the
Fund is calculated daily by dividing the net investment in-
come per share earned during a 30-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
Fund's securities, and is net of all expenses and all recur-
ring and nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes that the
net investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used to
calculate advertised yields are standard
3
<PAGE>
ized for all stock and bond mutual funds. However, these
methods differ from the accounting methods used by the Fund
to maintain its books and records, and so the advertised 30-
day yield may not fully reflect the income paid to your own
account or the yield reported in the Fund's reports to share-
holders. Additionally, the Fund may compare its performance
to that of the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500").
- --------------------------------------------------------------------------------
INVESTMENT The objective of the Fund is to provide long-term growth of
OBJECTIVES capital and income. The Fund's secondary objective is to pro-
vide current income. There can be no assurance that the Fund
THE FUND SEEKS will achieve these objectives.
TO PROVIDE
LONG-TERM These investment objectives are fundamental and so cannot be
GROWTH OF changed without the approval of a majority of the Fund's
CAPITAL AND shareholders.
INCOME
- --------------------------------------------------------------------------------
INVESTMENT The Fund follows a flexible investment strategy, emphasizing
POLICIES income-producing stocks which the investment advisers believe
to be undervalued by the market at the time of purchase. Gen-
THE FUND erally, these securities are characterized by below-average
INVESTS price-earnings ratios relative to the stock market, as mea-
PRIMARILY IN sured by the Standard & Poor's Composite Stock Price Index.
COMMON STOCKS The Fund is managed without regard to tax ramifications.
Stocks will be selected based upon assessments of statistical
measures of current value (such as low price-earnings and low
price-to-book value ratios) and future earnings prospects.
Returns on such stocks can be influenced by the recognition
of their undervaluation by other investors based on statisti-
cal measures or changes in expectations regarding potential
earnings and dividend growth. If a stock has reached a fully-
valued position as determined by one of the Fund's investment
advisers, the stock will ordinarily be sold regardless of the
time it has been held and replaced by one or more securities
that are considered to be undervalued.
Although the Fund invests primarily in common stocks, it may
invest in money market instruments, fixed-income securities,
and other equity securities, such as preferred stock. The
Fund is expected, under normal circumstances, to be substan-
tially fully invested in common stocks. In addition, the Fund
may invest in stock futures and options to a limited extent.
See "Implementation of Policies" for a description of these
and other investment practices of the Fund.
The investment policies of the Fund are not fundamental and
so may be changed by the Board of Directors without share-
holder approval.
- --------------------------------------------------------------------------------
INVESTMENT As a mutual fund investing primarily in common stocks, the
RISKS Fund is subject to MARKET RISK--i.e., the possibility that
common stock prices will decline over short or even extended
THE FUND IS periods. The U.S. stock market has tended to be cyclical,
SUBJECT TO with periods when stock prices generally rise and periods
MARKET RISK when prices generally decline.
4
<PAGE>
To illustrate the volatility of stock prices, the following
table sets forth the extremes for stock market returns as
well as the average return for the period from 1926 to 1994,
as measured by the Standard & Poor's 500 Composite Stock
Price Index:
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994) OVER
VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------- ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9 +23.9 +20.1 +16.9
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.2 +10.2 +10.7 +10.7
</TABLE>
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 1994. While this average
return can be used as a guide for setting reasonable expecta-
tions for future stock market returns, it 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 for the Fund or the
U.S. stock market. The illustrated returns represent histori-
cal investment performance, which may be a poor guide to fu-
ture returns. Also, stock market indexes such as the S&P 500
are based on unmanaged portfolios of securities before trans-
action 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.
THE FUND IS The investment adviser manages the Fund according to the tra-
ALSO SUBJECT ditional methods of "active" investment management, which in-
TO MANAGER volve the buying and selling of securities based upon econom-
RISK ic, financial and market analysis and investment judgement.
MANAGER RISK refers to the possibility that the Fund's in-
vestment advisers may fail to execute the Fund's investment
strategy effectively. As a result, the Fund may fail to
achieve its stated objective.
- --------------------------------------------------------------------------------
WHO SHOULD The Fund is intended for investors who are seeking growth of
INVEST capital and income. Although the Fund's secondary objective
is to provide current income, investors should not consider
LONG-TERM the Fund a substitute for fixed-income investments. The Fund
INVESTORS is intended to be a long-term investment vehicle and is not
SEEKING GROWTH designed to provide investors with a means of speculating on
OF CAPITAL AND short-term market movements. Investors who engage in exces-
INCOME sive 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 (in-
cluding exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient
5
<PAGE>
portfolio management, either because of the timing of the in-
vestment or previous excessive trading by the investor. Addi-
tionally 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.
No assurance can be given that the Fund will attain its ob-
jectives or that shareholders will be protected from the risk
of loss that is inherent in equity investing. 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.
Investors should not consider the Fund a complete investment
program. Most investors should maintain diversified holdings
of securities with different risk characteristics--including
common stocks, bonds and money market instruments. Investors
may also wish to complement an investment in the Fund with
other types of common stock investments.
- --------------------------------------------------------------------------------
IMPLEMENTATION In addition to investing primarily in equity securities, the
OF POLICIES Fund follows a number of additional investment practices to
achieve its objectives.
THE FUND MAY Although it normally seeks to remain substantially fully in-
INVEST IN vested in equity securities, the Fund may invest temporarily
SHORT-TERM in certain short-term fixed income securities. Such securi-
FIXED INCOME ties may be used to invest uncommitted cash balances, to
SECURITIES maintain liquidity to meet shareholder redemptions, or to
take a temporarily defensive position against a potential
stock market decline. No more than 35% of the Fund's assets
will be committed to short-term fixed income securities for
purposes other than taking a temporary defensive position.
These securities include: obligations of the United States
Government and its agencies or instrumentalities; commercial
paper, bank certificates of deposit, and bankers' accept-
ances; and repurchase agreements collateralized by these se-
curities.
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 securi-
ties at the Fund's cost plus interest within a specified pe-
riod (normally one day). In these transactions, the securi-
ties 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 Fund's Custodian Bank until repurchased.
THE FUND MAY The Fund may utilize stock futures contracts and options to a
USE FUTURES limited extent. Specifically, the Fund may enter into futures
CONTRACTS AND contracts provided that not more than 5% of its assets are
OPTIONS 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 as-
sets.
Futures and options transactions may be used for several rea-
sons: to maintain cash reserves while simulating full invest-
ment, to facilitate trading, to reduce
6
<PAGE>
transaction costs, or to seek higher investment returns when
a futures contract is priced more attractively than the un-
derlying equity security or index. While futures contracts
and options can be used as leveraged investments, the Fund
may not use futures contracts or options transactions to lev-
erage its net assets.
For example, in order to remain fully invested in stocks
while maintaining liquidity to meet potential shareholder re-
demptions, the Fund may invest a portion of its assets in a
stock futures contract. Because futures contracts only re-
quire a small initial margin deposit, the Fund would then be
able to maintain a cash reserve for potential redemptions,
while at the same time remaining fully invested. Also, be-
cause the transaction costs of futures and options may be
lower than the costs of investing in stocks directly, it is
expected that the use of futures contracts and options may
reduce the Fund's total transaction costs.
FUTURES The primary risks associated with the use of futures con-
CONTRACTS AND tracts and options are: (i) imperfect correlation between the
OPTIONS POSE change in market value of the stocks held by the Fund and the
CERTAIN RISKS 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 only in those contracts whose behavior
is expected to resemble that of the Fund's underlying securi-
ties. 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 strate-
gies 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 (or gain) to the investor. When investing in
futures contracts, the Fund will segregate cash or cash
equivalents in the amount of the underlying obligation.
THE FUND MAY The Fund may lend its investment securities to qualified in-
LEND ITS stitutional investors for either short-term or long-term pur-
SECURITIES poses 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.
BORROWING The Fund may borrow money, subject to the restrictions de-
scribed below in Investment Limitations, for temporary or
emergency purposes, including the meeting of redemption re-
quests which might otherwise require the untimely disposition
of securities.
PORTFOLIO Although it generally seeks to invest for the long term, the
TURNOVER IS Fund retains the right to sell securities irrespective of how
NOT EXPECTED long they have been held. It is anticipated that the annual
TO EXCEED 100% portfolio turnover of the Fund will not exceed 100%. A turn-
over rate of 100% would occur, for example, if all of the se-
curities of the Fund were replaced within one year.
- --------------------------------------------------------------------------------
7
<PAGE>
INVESTMENT The Fund has adopted certain limitations on its investment
LIMITATIONS practices. Specifically, the Fund will not:
THE FUND HAS (a) with respect to 75% of the value of its total assets,
ADOPTED purchase the securities of any issuer (except obligations
CERTAIN of the United States government and its instrumentali-
FUNDAMENTAL ties) if as a result the Fund would hold more than 10% of
LIMITATIONS the outstanding voting securities of the issuer, or more
than 5% of the value of the total assets of the Fund
would be invested in the securities of such issuer;
(b) invest more than 25% of its assets in any one industry;
and
(c) borrow money, except that the Fund may borrow from banks
(or through reverse repurchase agreements), for temporary
or emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise re-
quire the untimely disposition of securities, in an
amount not exceeding 10% of the value of the net assets
of the Fund (including the amount borrowed and the value
of any outstanding reverse repurchase agreements) at the
time the borrowing is made. Whenever borrowings exceed 5%
of the value of the net assets of the Fund, the Fund will
not make any additional investments.
These investment limitations are considered at the time in-
vestment 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.
- --------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
VANGUARD in excess of $130 billion. Through their jointly owned sub-
ADMINISTERS sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and
AND the other funds in the Group obtain at cost virtually all of
DISTRIBUTES their corporate management, administrative and distribution
THE FUND services. Vanguard also provides investment advisory services
on an at-cost basis to certain Vanguard funds, including
Vanguard/Windsor II. As a result of Vanguard's unique corpo-
rate structure, the Vanguard funds have costs substantially
lower than those of most competing mutual funds. In 1994, the
average expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard funds amounted
to approximately .30% compared to an average of 1.05% 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 Direc-
tors set broad policies for the Fund and choose its Officers.
A list of the Directors and Officers of the Fund and a state-
ment 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 admin-
istrative personnel needed to provide the requisite services
to the funds and also furnishes
8
<PAGE>
the funds with necessary office space, furnishings and equip-
ment. Each fund pays its share of Vanguard's net 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, au-
diting and custodian fees.
Vanguard provides distribution and marketing services to the
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 its share of the Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT Vanguard/Windsor II employs a "multi-manager" approach util-
ADVISERS izing four investment advisers to manage the Fund's assets.
The Fund has investment advisory contracts with Barrow, Han-
FOUR ADVISERS ley, Mewhinney & Strauss, Inc. ("BHM&S"), 200 Crescent Court,
OVERSEE THE Dallas, TX 75201; Equinox Capital Management, Inc. ("Equi-
FUND'S nox"), 399 Park Avenue, 28th floor, New York, NY 10022 and
INVESTMENTS Tukman Capital Management, Inc. ("Tukman"), 60 East Sir Fran-
cis Drake Boulevard, Larkspur, CA 94939. Additionally, a por-
tion of the Fund's assets are managed on an at-cost basis by
Vanguard's Core Management Group. BHM&S, Equinox and Tukman
are not affiliated in any way with Wellington Management Com-
pany, the investment adviser to Vanguard/Windsor 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. Currently,
BHM&S manages approximately 72% of the assets of the Fund,
Equinox and Tukman manage approximately 10% each, and Van-
guard's Core Management Group manages approximately 8% of the
Fund's assets. Investors will be advised of any substantive
change in the proportions managed by each adviser. Each ad-
viser discharges their responsibilities subject to the con-
trol of the Directors and Officers.
BARROW, The Fund has entered into an advisory agreement with BHM&S
HANLEY, under which BHM&S manages the investment and reinvestment of
MEWHINNEY & a portion (currently approximately 72%) of the Fund's assets
STRAUSS and continuously reviews, supervises, and administers the
(BHM&S) Fund's investment program with respect to those assets. BHM&S
discharges its responsibilities subject to the control of the
Officers and Directors of the Fund.
BHM&S, founded in 1979, is a professional investment counsel-
ing firm which provides investment services to investment
companies, institutions, and individuals. As of December 31,
1994, BHM&S held discretionary management authority with re-
spect to approximately $13.7 billion of assets.
The investment principals at BHM&S develop a common, firm-
wide investment strategy that is employed in managing client
investment portfolios and selecting individual securities for
those portfolios. James P. Barrow, a founding principal and
Vice President of BHM&S, has been designated as portfolio
manager for the assets of the Fund managed by BHM&S, a posi-
tion he has held since the Fund's inception in 1985. He con-
tributes to the development of the common
9
<PAGE>
portfolio management strategy used at BHM&S and is also re-
sponsible for seeing that the Fund's assets are managed in a
way consistent with the firm's overall approach.
BHM&S earns a basic advisory fee calculated by applying the
following annual percentage rates to the average month-end
net assets of the Fund managed by BHM&S:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
---------- ------
<S> <C>
First $200 million 0.300%
Next $300 million 0.200%
Next $500 million 0.150%
Over $1 billion 0.125%
</TABLE>
The Fund's payments to BHM&S under the above schedule are
subject to an incentive/penalty fee arrangement which com-
pares the performance of the Fund's assets managed by BHM&S
with the performance of the Standard & Poor's/BARRA Value In-
dex. This arrangement provides for the following adjustments
to BHM&S's basic fee:
<TABLE>
<CAPTION>
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/PENALTY
DIFFERENTIAL VS. THE S&P/BARRA VALUE INDEX FEE ADJUSTMENT
-------------------------------------------- -----------------
<S> <C>
Less than or equal to -9% points 0.75 X Basic Fee
Equal to or less than -6% points but greater
than
-9% points 0.85 X Basic Fee
Less than +6% points but greater than -6% Basic Fee
points
Equal to or greater than +6% points but less
than
+9% points 1.15 X Basic Fee
Greater than or equal to +9% points 1.25 X Basic Fee
</TABLE>
Under rules of the Securities and Exchange Commission, the
incentive/penalty fee structure will not be fully operable
until the quarter ending April 30, 1996, and, until that
date, will be calculated according to certain transition
rules. A detailed description of the incentive/penalty fee
schedule for BHM&S and the applicable transition rules is
contained in the Statement of Additional Information.
EQUINOX Equinox is a professional investment counseling firm founded
CAPITAL in 1989. As of December 31, 1994, Equinox provided investment
MANAGEMENT advisory services with respect to approximately $3.2 billion
(EQUINOX) of assets. Ronald J. Ulrich, Director and President, is the
principal investment officer and founder of Equinox. Mr.
Ulrich has served as portfolio manager for the assets of the
Fund managed by Equinox since 1991, when the Fund first hired
Equinox.
10
<PAGE>
Equinox earns a basic advisory fee, calculated by applying
the following annual percentage rates to the average month-
end net assets of the Fund managed by Equinox.
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
---------- ------
<S> <C>
First $100 million 0.300%
Next $300 million 0.200%
Over $400 million 0.150%
</TABLE>
The Fund's payments to Equinox under the above schedule are
subject to an incentive/penalty fee arrangement which com-
pares the performance of the Fund's assets managed by Equinox
with the performance of the Standard & Poor's 500 Composite
Stock Price Index. This arrangement provides for the follow-
ing adjustments to Equinox's basic fee:
<TABLE>
<CAPTION>
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/PENALTY
DIFFERENTIAL VS. THE S&P 500 FEE ADJUSTMENT
--------------------------------- -----------------
<S> <C>
Less than or equal to -9% points 0.50 X Basic Fee
Equal to or less than -4.5% points but
greater than -9% points 0.75 X Basic Fee
Less than +4.5% points but greater than
-4.5% points Basic Fee
Equal to or greater than +4.5% points but
less than +9% points 1.25 X Basic Fee
Greater than or equal to +9% points 1.50 X Basic Fee
</TABLE>
TUKMAN CAPITAL Tukman is a professional investment counseling firm founded
MANAGEMENT in 1980. As of December 31, 1994, Tukman provided investment
(TUKMAN) advisory services with respect to assets of approximately
$2.1 billion. Melvin T. Tukman, President, Director and foun-
der of Tukman, has served as portfolio manager for the assets
of the Fund managed by the firm since 1991, when the Fund
first hired Tukman.
Tukman earns a basic advisory fee, calculated by applying the
following annual percentage rates to the average month-end
net assets of the Fund managed by Tukman:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
---------- ------
<S> <C>
First $25 million .400%
Next $125 million .350%
Next $350 million .250%
Next $500 million .200%
Over $1 billion .150%
</TABLE>
11
<PAGE>
The Fund's payments to Tukman under the above schedule are
subject to an incentive/penalty fee arrangement which com-
pares the performance of the Fund's assets managed by Tukman
with the performance of the Standard & Poor's 500 Composite
Stock Price Index. This arrangement provides for the follow-
ing adjustments to Tukman's basic fee.
<TABLE>
<CAPTION>
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/
DIFFERENTIAL VS. THE S&P 500 PENALTY FEE ADJUSTMENT
--------------------------------- ----------------------
<S> <C>
Less than or equal to -12% points 0.50 X Basic Fee
Equal to or less than -6% points but
greater than -12% points 0.75 X Basic Fee
Less than +6% points but greater than -6%
points Basic Fee
Equal to or greater than +6% points but
less than +12% points 1.25 X Basic Fee
Greater than or equal to +12% points 1.50 X Basic Fee
</TABLE>
VANGUARD'S Vanguard's Core Management Group provides investment advisory
CORE services on an at-cost basis with respect to a portion of the
MANAGEMENT Fund's assets (currently approximately 8%). The Core Manage-
GROUP ment Group also provides investment advisory services to sev-
eral Vanguard funds, including Vanguard Index Trust, Vanguard
Balanced Index Fund, Vanguard International Equity Index
Fund, Vanguard Institutional Index Fund, several indexed sep-
arate accounts, as well as a portion of Vanguard/Morgan
Growth Fund's assets. Total assets under management by the
Core Management Group were approximately $18 billion as of
December 31, 1994. The portion of the Fund allocated to the
Core Management Group is managed using computerized, quanti-
tative techniques based on a value index constructed to ap-
proximate the aggregate fundamental characteristics of a typ-
ical large capitalization value fund, such as
Vanguard/Windsor II. For further information concerning the
index, please refer to the Statement of Additional Informa-
tion. The Core Management Group is supervised by the Officers
of the Fund.
AGGREGATE For the fiscal year ended October 31, 1994, the aggregate in-
ADVISORY FEES vestment advisory fees paid by the Fund to BHM&S, Equinox and
PAID BY THE Tukman, represented an effective annual rate of .14 of 1% of
FUND average net assets before a decrease of $145,000 based on
performance. The investment advisory fees paid by the Fund
for this period to BHM&S represented an effective annual rate
of .14 of 1% of the average net assets managed by BHM&S. The
investment advisory fees paid by the Fund for this period to
Equinox and Tukman represented an effective annual rate of
.19 of 1% and .25 of 1% of the average net assets managed by
Equinox and Tukman, respectively.
OTHER ADVISORY BHM&S, Equinox, Tukman and Vanguard's Core Management Group
INFORMATION are authorized to select brokers or dealers to execute pur-
chases and sales of the Fund's portfolio securities, and di-
rected to use their best efforts to obtain the best available
price and most favorable execution with respect to all trans-
actions.
12
<PAGE>
The full range and quality of brokerage services available
are considered in making these determinations.
The Fund has authorized BHM&S, Equinox, Tukman and Vanguard's
Core Management Group to pay higher commissions in recogni-
tion of brokerage services deemed necessary for the achieve-
ment 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 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 in-
vestment 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 ad-
visory agreement; and (c) the continued employment of an ex-
isting 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 con-
cerning the adviser that would have normally been included in
a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE The table on page 14 provides investment results for the Fund
RECORD for several periods throughout the Fund's lifetime. The re-
sults shown represent "total return" investment performance,
which assumes the reinvestment of all capital gains and in-
come dividends for the indicated periods. Also included is
comparative information with respect to the unmanaged Stan-
dard & 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 table does not make any allowance for
federal, state or local income taxes which shareholders must
pay on a current basis.
13
<PAGE>
The results shown should not be considered a representation
of the total return from an investment made in the Fund to-
day. This information is provided to help investors better
understand the Fund and may not provide a basis of comparison
with other investments or mutual funds which use a different
method to calculate performance.
AVERAGE ANNUAL RETURN FOR VANGUARD/WINDSOR II
<TABLE>
<CAPTION>
PERCENTAGE INCREASE
--------------------------------------------------
FISCAL PERIODS VANGUARD/ S&P 500 CONSUMER
ENDED 10/31/94 WINDSOR II INDEX PRICE INDEX
-------------- ---------- ------- -----------
<S> <C> <C> <C>
1 Year + 2.2% + 3.9% +2.6%
3 Years +11.2 + 9.5 +2.9
5 Years + 9.2 +10.1 +3.6
Lifetime* +13.2 +13.9 +3.6
</TABLE>
*June 24, 1985, to October 31, 1994. Data for the Consumer
Price Index begins June 30, 1985.
- --------------------------------------------------------------------------------
DIVIDENDS, The Fund expects to pay dividends from ordinary income semi-
CAPITAL GAINS annually. Capital gains distributions, if any, will be made
AND TAXES annually.
THE FUND PAYS In addition, in order to satisfy certain distribution re-
SEMI-ANNUAL quirements of the Tax Reform Act of 1986, the Fund may de-
DIVIDENDS AND clare special year-end dividend and capital gains distribu-
ANY CAPITAL tions during December. Such distributions, if received by
GAINS ANNUALLY 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 distributions 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. Divi-
dends paid by the Fund from net investment income, whether
received in cash or reinvested in additional shares, will be
taxable to shareholders as ordinary income. For corporate in-
vestors, dividends from net investment income will generally
qualify in part for the corporate dividends received deduc-
tion. However, the portion of the dividends so qualified de-
pends on the aggregate taxable qualifying dividend income re-
ceived 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 capi-
tal 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
14
<PAGE>
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. Al-
so, 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 re-
turned 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 A sale of shares of the Fund is a taxable event, and may re-
OR LOSS MAY BE sult in a capital gain or loss. A capital gain or loss may be
REALIZED UPON realized from an ordinary redemption of shares or an exchange
EXCHANGE OR of shares between two mutual funds (or two portfolios of a
REDEMPTION mutual fund).
Dividend distributions, capital gains distributions, and cap-
ital 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 share-
holders who have not complied with IRS taxpayer identifica-
tion regulations. You may avoid this withholding requirement
by certifying on your Account Registration Form your proper
Social Security or Employer Identification number and certi-
fying that you are not subject to backup withholding.
The Fund has obtained a Certificate of Authority to do busi-
ness as a foreign corporation in Pennsylvania and does busi-
ness 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 in-
vestment in the Fund. The Fund is managed without regard to
tax ramifications.
- --------------------------------------------------------------------------------
THE SHARE The Fund's share price or "net asset value" per share is de-
PRICE OF THE termined by dividing the total market value of the Fund's in-
FUND vestments and other assets, less any liabilities, by the num-
ber of outstanding shares of the Fund. Net asset value per
share is calculated at the close of regular trading on the
New York Stock Exchange on each day the Exchange is open for
business.
Portfolio securities that are listed on a securities exchange
are valued at the latest quoted sales prices as of 4:00 p.m.
on the valuation date. Price information on listed securities
is taken from the exchange where the security is primarily
traded. Securities which are listed on an exchange and which
are not traded on
15
<PAGE>
the valuation date are valued at the mean of the latest
quoted bid and asked prices. Unlisted securities for which
market quotations are readily available are valued at the
latest quoted bid price. Temporary cash investments are val-
ued at amortized cost, which approximates market value. Other
assets and securities for which no quotations are readily
available are valued at fair value as determined in good
faith by the Directors. Securities 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 Fund's share price can be found daily in the mutual fund
listings of most major newspapers under the heading of The
Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL The Company is a Maryland corporation. The Articles of Incor-
INFORMATION poration permit the Directors to issue 1,600,000,000 shares
of common stock, with a one cent par value. The Board of Di-
rectors has the power to designate one or more classes ("se-
ries') of shares of common stock and to classify or reclas-
sify any unissued shares with respect to such series. Cur-
rently the Company is offering shares of two series.
The shares of each series of the Company are fully paid and
non-assessable; have no preference as to conversion, ex-
change, 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.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other ap-
plicable law. An annual meeting will be held to vote on the
removal of a Director or Directors of the Company if re-
quested in writing by the holders of not less than 10% of the
outstanding shares of the Company.
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 Dis-
bursing Agent. Price Waterhouse LLP, serves as independent
accountants for the Fund and will audit its financial state-
ments annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
16
<PAGE>
SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either by
ACCOUNT AND mail or wire. Simply complete and return an Account Registra-
PURCHASING tion Form and any required legal documentation, indicating
SHARES the amount you wish to invest. Your purchase must be equal to
or greater than the $3,000 minimum initial investment re-
quirement ($500 for Uniform Gifts/Transfer to Minors Act ac-
counts). You must 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 $500 minimum initial investment requirement, but no
more than $2,000 if you are making a regular IRA contribu-
tion. 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, as-
sociations, other organizations, trusts or powers of attor-
ney), please call us to determine which additional forms you
may need.
Because of the risks associated with common stock invest-
ments, the Fund is intended to be a long-term investment ve-
hicle and is not designed to provide investors with a means
of speculating on short-term stock market movements. Conse-
quently the Fund reserves the right to reject any specific
purchase (or exchange purchase) request. The Fund also re-
serves the right to suspend the offering of shares for a pe-
riod of time.
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 com-
missions or 12b-1 fees).
ADDITIONAL Subsequent investments to regular accounts may be made by
INVESTMENTS mail ($100 minimum), wire ($1,000 minimum), exchange from an-
other Vanguard Fund account, or Vanguard Fund Express. Subse-
quent 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 infor-
mation on these options.
--------------------------------------------------------------
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY Please include the Additional investments
MAIL Complete amount of your initial should include the In-
and sign the investment on the reg- vest-by-Mail remit-
enclosed istration form, make tance form attached to
Account your check payable to your Fund confirmation
Registration The Vanguard Group-73, statements. Please
Form and mail to: make your check pay-
able to The Vanguard
VANGUARD FINANCIAL Group-73, write your
CENTER P.O. BOX 2600 account number on your
VALLEY FORGE, PA 19482 check and, using the
return envelope pro-
vided, mail to the ad-
dress indicated on the
Invest-by-Mail Form.
17
<PAGE>
For express or VANGUARD FINANCIAL CENTER All purchase requests
registered 455 DEVON PARK DRIVE should be mailed to
mail,send to: WAYNE, PA 19087 the address indicated
for new accounts. Do
not send registered or
express mail to the
post office box ad-
dress.
--------------------------------------------------------------
PURCHASING BY CORESTATES BANK, N.A.
WIRE Money ABA 031000011
should be CORESTATES NO. 0101 9897
wired to: ATTN VANGUARD
VANGUARD/WINDSOR II
BEFORE WIRING ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client
Services (1-
800-662-2739)
To assure proper receipt, please be sure your bank includes
the name of the Fund, the account number Vanguard has as-
signed to you and the eight-digit CoreStates number. If you
are opening a new account, please complete the Account Regis-
tration 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 You may open an account or purchase additional shares by mak-
EXCHANGE (from ing an exchange from an existing Vanguard Fund account. (As
a Vanguard explained on page 5, however, the Fund reserves the right to
account) refuse any exchange purchase request.) Please call our Client
Services Department at 1-800-662-2739. The new account will
have the same registration as the existing account.
--------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move money
FUND EXPRESS from your bank account to your Vanguard account at your re-
quest. Or if you choose the Automatic Investment option,
Special money will be moved from your bank account to your Vanguard
Purchase and account on the schedule (monthly, bimonthly [every other
Automatic month], quarterly or yearly) you select. To establish these
Investment Fund Express options, please provide the appropriate informa-
tion on the Account Registration Form. We will send you a
confirmation of your Fund Express service, please wait three
weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 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 distribu-
tions will be paid in cash.
18
<PAGE>
You may change your option by calling our Client Services De-
partment (1-800-662-2739).
In addition, an option to invest your cash dividend 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 divi-
dends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund shareholders.
INVESTORS These distributions are made to all shareholders who own Fund
SHOULD ASK shares as of the distribution's record date, regardless of
ABOUT THE how long the shares have been owned. Purchasing shares just
TIMING OF prior to the record date could have a significant impact on
CAPITAL GAINS your tax liability for the year. For example, if you purchase
AND DIVIDEND shares immediately prior to the record date of a sizable cap-
DISTRIBUTIONS ital gain or income dividend distribution, you will be as-
BEFORE sessed taxes on the amount of the capital gain and/or divi-
INVESTING dend distribution later paid 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 in-
vestment will be the same after the distribution--the amount
of the distribution will offset the drop in the net asset
value of the shares--you should be aware of the tax implica-
tions the timing of your purchase may have.
Prospective investors should, therefore, inquire about poten-
tial distributions before investing. The Fund's annual capi-
tal gains distribution normally occurs in December, while in-
come dividends are generally paid semi-annually in June and
December. For additional information on distributions and
taxes, see the section titled "Dividends, Capital Gains, and
Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
ACCOUNT your account is to select the options you desire when you
INFORMATION complete your Account Registration Form. IF YOU WISH TO ADD
SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
ESTABLISHING WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
OPTIONAL CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FUR-
SERVICES THER ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature guaran-
GUARANTEES tee on certain written transaction requests. A signature
guarantee verifies the authenticity of your signature and may
be obtained from banks, bankers and any other guarantors that
Vanguard deems acceptable. A SIGNATURE GUARANTEE CANNOT BE
PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request. If a certifi-
cate is lost, you may incur an expense to replace it.
19
<PAGE>
BROKER/DEALER If you purchase shares in Vanguard funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or ad-
viser may charge a service fee.
CANCELLING The Fund will not cancel any trade (e.g., a purchase, ex-
TRADES change or redemption) believed to be authentic, received in
writing or by telephone, once the trade request has been re-
ceived.
- --------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is credit-
ACCOUNT WILL BE ed. If your purchase is made by check, Federal Funds wire, or
CREDITED exchange, and is received by the close of 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 deter-
mined on your trade date. Vanguard will not accept third-
party checks to open an account. Please be sure your purchase
check is made payable to The Vanguard Group-73.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a for-
eign check which has been drawn in U.S. dollars and has been
issued by a foreign bank with a U.S. correspondent bank. The
name of the U.S. correspondent bank must be printed on the
face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are nor-
mally mailed within two business days after the receipt of
the request in Good Order.
--------------------------------------------------------------
SELLING BY Requests should be mailed to VANGUARD FINANCIAL CENTER,
MAIL VANGUARD/WINDSOR II, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to Van-
guard Financial Center, Vanguard/Windsor II, 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 re-
quired documents in Good Order.
--------------------------------------------------------------
GOOD ORDER means that the request includes the following:
DEFINITION
OF GOOD ORDER 1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. 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 re-
quired, in the case of estates, corporations, trusts, and
certain other accounts.
6. Any certificates that 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.
--------------------------------------------------------------
20
<PAGE>
SELLING BY To sell shares by telephone, you or your pre-authorized rep-
TELEPHONE resentative may call our Client Services Department at 1-800-
662-2739. The proceeds will be sent to you by mail. Please
see also "Important Information About Telephone Transac-
tions."
--------------------------------------------------------------
SELLING BY If you select the Fund Express Automatic Withdrawal option,
FUND EXPRESS money will be automatically moved from your Vanguard Fund ac-
count to your bank account according to the schedule you have
Automatic selected. The Special Redemption option lets you move money
Withdrawal & from your Vanguard account to your bank account on your re-
Special quest. You may elect Fund Express on the Account Registration
Redemption Form or call our Investor Information Department at 1-800-
662-7447 for a Fund Express application.
--------------------------------------------------------------
SELLING BY You may sell shares of the Fund by making an exchange into
EXCHANGE another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
--------------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may be redeemed at
REDEMPTION any time. However, your redemption proceeds will not be paid
INFORMATION until payment for the purchase is collected, which will take
ten calendar days.
--------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the close
REDEMPTION of the New York Stock Exchange are processed on the day of
PROCEEDS receipt and the redemption proceeds are normally sent on the
following business day.
Redemption requests received by telephone after the close of
the Exchange (generally 4:00 p.m., Eastern time) are proc-
essed on the business day following receipt and the proceeds
are normally sent on the second business day following re-
ceipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
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 Or-
der. 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 detri-
mental to the best interests of the Fund's remaining share-
holders to make payment in cash, the Fund may pay redemption
proceeds in excess of $250,000 in whole or in part by a dis-
tribution in kind of readily marketable securities.
--------------------------------------------------------------
21
<PAGE>
VANGUARD'S If you make a redemption from a qualifying account, Vanguard
AVERAGE COST will send you an Average Cost Statement which provides you
STATEMENT with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
--------------------------------------------------------------
MINIMUM Due to the relatively high cost of maintaining smaller ac-
ACCOUNT counts, the Fund reserves the right to redeem shares in any
BALANCE account that is below the minimum initial investment amount
REQUIREMENT 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 your ac-
count is below the Fund's minimum account balance require-
ment. 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. (This minimum
does not apply to IRAs, certain other retirement accounts,
and Uniform Gifts/Transfers to Minors Act accounts.)
The Fund's minimum account balance requirement will not apply
if your account falls below $3,000 solely as a result of de-
clining markets (i.e., a decline in a Fund's net asset val-
ue).
- --------------------------------------------------------------------------------
EXCHANGING Should your investment goals change, you may exchange your
YOUR SHARES shares of Vanguard/Windsor II for those of other available
Vanguard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Fund name, account number, Social Security number or Employer
Identification number listed on the account, and the exact
Call Client name and address in which the account is registered. Only the
Services registered shareholder, or his or her pre-authorized repre-
(1-800-662- sentative, may complete such an exchange. Requests for tele-
2739) phone 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. Re-
quests received after the close of the Exchange 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 mak-
ing 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 pro-
vided the request is received in Good Order.
Please see "Important Information About Telephone Transac-
tions" for additional important details.
--------------------------------------------------------------
EXCHANGING BY Please be sure to include on your exchange request the name
MAIL and account number of your current Fund, and the name of the
Fund you wish to exchange into, the amount you wish to ex-
change, and the signatures of all registered account holders.
Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD/WINDSOR II, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to Van-
guard Financial Center, Vanguard/Windsor II, 455 Devon Park
Drive, Wayne, PA 19087.)
--------------------------------------------------------------
22
<PAGE>
IMPORTANT Before you make an exchange, you should consider the follow-
EXCHANGE ing:
INFORMATION
. Please read the Fund's prospectus before making an ex-
change. 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.
. The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
any required documents 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, or to limit the amount of or reject any ex-
change, as deemed necessary, at any time.
The Fund's exchange purchase privilege is available only 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 registra-
tion.
- --------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the man-
agement of the Fund and increase transaction costs, the Fund
has established a policy of limiting excessive exchange ac-
tivity.
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.
Notwithstanding these limitations, the Fund reserves the
right to reject any purchase request (including exchange pur-
chases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions)
INFORMATION and exchanges by telephone is automatically established on
ABOUT your account unless you request in writing that telephone
TELEPHONE transactions on your account not be permitted.
TRANSACTIONS
To protect your account from losses resulting from unautho-
rized or fraudulent telephone instructions, Vanguard adheres
to the following security procedures:
23
<PAGE>
1.SECURITY CHECK. To request a transaction by telephone, the
caller must know (i) the name of the Portfolio; (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 shareowners and
mailed to the address of record, only.
Neither the Fund nor Vanguard will be responsible for the au-
thenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been fol-
lowed. Vanguard believes that the security procedures de-
scribed above are reasonable, and that if such procedures are
followed, you will bear the risk of any losses resulting from
unauthorized or fraudulent telephone transactions on your ac-
count.
- --------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY
FORGE, PA 19482. The request must be in Good Order. Before
mailing your request, please call our Client Services Depart-
ment (1-800-662-2739) for full instructions.
- --------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time you
REPORTS 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 state-
ment will be a year-end statement, listing all transaction
activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the aver-
age cost of shares redeemed from your account, using the av-
erage 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 Van-
guard account may expect to receive their Average Cost State-
ment in February of the following year. Please call our Cli-
ent Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-an-
nually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call
SERVICES our Investor Information Department at 1-800-662-7447.
VANGUARD With Vanguard's Direct Deposit Service, most U.S. Government
DIRECT DEPOSIT checks (including Social Security and military pension
SERVICE checks) and private payroll checks may be automatically de-
posited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
24
<PAGE>
VANGUARD Vanguard's Automatic Exchange Service allows you to move
AUTOMATIC money automatically among your Vanguard fund accounts. For
EXCHANGE instance, the service can be used to "dollar cost average"
SERVICE from a money market portfolio into a stock or bond fund, or
to contribute to an IRA or other retirement plan. Please con-
tact our Client Services Department at 1-800-662-2739 for ad-
ditional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS 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.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or re-
demptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific Van-
guard funds. For more information, please refer to the Van-
guard Fund Express brochure.
VANGUARD Vanguard's Dividend Express allows you to transfer your divi-
DIVIDEND dends and/or capital gains distributions automatically from
EXPRESS your Fund account, one business day after the Fund's payable
date, to your account at a bank, savings and loan associa-
tion, 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 Informa-
tion Department (1-800-662-7447) for a Vanguard Dividend Ex-
press application.
VANGUARD TELE- Vanguard's Tele-Account is a convenient, automated service
ACCOUNT that provides share price, price change and yield quotations
on Vanguard Funds through any TouchToneTM telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent dividend
or capital gains payment. To contact Vanguard's Tele-Account
service, dial 1-800-ON-BOARD (1-800-662-6273). A brochure of-
fering detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
25
<PAGE>
[LOGO OF VANGUARD
WINDSOR II
APPEARS HERE]
- ---------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center [LOGO OF VANGUARD WINDSOR II APPEARS HERE]
P.O. Box 2600
Valley Forge, PA 19482 P R O S P E C T U S
FEBRUARY 28, 1995
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
[LOGO OF VANGUARD GROUP APPEARS HERE]
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE FOR
THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P073
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO OF VANGUARD
WINDSOR II A Series of Vanguard/Windsor Funds
APPEARS HERE] and A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS--FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FUND INFORMATION: INSTITUTIONAL PARTICIPANT SERVICES--1-800-523-1188
- --------------------------------------------------------------------------------
INVESTMENT Vanguard/Windsor II (the "Fund"), formerly Windsor II, is an
OBJECTIVES AND open-end diversified investment company that seeks to provide
POLICIES long-term growth of capital and income by investing primarily
in common stocks. The Fund's secondary objective is to pro-
vide current income. There can be no assurance that the Fund
will achieve these objectives. Shares of the Fund are neither
insured nor guaranteed by any agency of the U.S. Government,
including the FDIC.
Vanguard/Windsor II is an independent series of
Vanguard/Windsor Funds, Inc. (the "Company"), formerly The
Windsor Funds, Inc. The Company is currently offering shares
of two series. This Prospectus relates to the
Vanguard/Windsor II series only.
- --------------------------------------------------------------------------------
IMPORTANT NOTE This Prospectus is intended exclusively for participants in
employer-sponsored retirement or savings plans, such as tax-
qualified pension and profit-sharing plans and 401(k) thrift
plans, as well as 403(b)(7) custodial accounts for non-profit
educational and charitable organizations. Another version of
this Prospectus, containing information on how to open a per-
sonal investment account with the Fund, is available for in-
dividual investors. To obtain a copy of that version of the
Prospectus, please call 1-800-662-7447.
- --------------------------------------------------------------------------------
OPENING AN The Fund is an investment option under a retirement or sav-
ACCOUNT ings program sponsored by your employer. The administrator of
your retirement plan or your employee benefits office can
provide you with detailed information on how to participate
in your plan and how to elect the Fund as an investment op-
tion.
If you have any questions about the Fund, please contact Par-
ticipant Services at 1-800-523-1188. If you have any ques-
tions about your plan account, contact your plan administra-
tor or the organization that provides recordkeeping services
for your plan.
- --------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation you should know about the Fund before you invest. It
should be retained for future reference. A "Statement of Ad-
ditional Information" containing additional information about
the Fund has been filed with the Securities and Exchange Com-
mission. This Statement is dated February 28, 1995, and has
been incorporated by reference into this Prospectus. A copy
may be obtained without charge by writing to the Fund or by
calling Participant Services.
- --------------------------------------------------------------------------------
TABLE OF
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses......... 2
Financial Highlights.. 2
Yield and Total
Return............... 3
Investment Objectives. 4
Investment Policies... 4
Investment Risks...... 4
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Who Should Invest..... 5
Implementation of
Policies............. 6
Investment
Limitations.......... 8
Management of the
Fund................. 8
Investment Advisers... 9
Performance Record ... 13
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Dividends, Capital
Gains and Taxes..... 14
The Share Price of
the Fund ........... 14
General Information.. 15
SERVICE GUIDE
Participating in Your
Plan................ 16
</TABLE>
- --------------------------------------------------------------------------------
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 AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
- --------------------------------------------------------------------------------
<PAGE>
FUND The following table illustrates all expenses and fees that a
EXPENSES shareholder of the Fund would incur. The expenses and fees
set forth in the table are for the 1994 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------
<S> <C>
Sales Load Imposed on Purchases............................ None
Sales Load Imposed on Reinvested Dividends................. None
Redemption Fees............................................ None
Exchange Fees.............................................. None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------------
<S> <C> <C>
Management & Administrative Expenses....................... 0.22%
Investment Advisory Fees................................... 0.14
12b-1 Fees................................................. None
Other Expenses
Distribution Costs.................................. 0.02%
Miscellaneous Expenses.............................. 0.01
-----
Total Other Expenses....................................... 0.03
-----
TOTAL OPERATING EXPENSE.................................. 0.39%
=====
</TABLE>
The purpose of this table is to assist you in understanding
the various costs and expenses that an investor would bear
directly or indirectly as a shareholder 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 period. As noted in the table above, the Fund charges
no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$4 $13 $22 $49
</TABLE>
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 The following financial highlights for a share outstanding
HIGHLIGHTS through each period, insofar as they relate to each of the
five years in the period ended October 31, 1994, have 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 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 1994 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see the
Fund's 1994 Annual Report to Shareholders which may be ob-
tained without charge by writing to the Fund or by calling
Participant Services at 1-800-523-1188.
2
<PAGE>
<TABLE>
<CAPTION>
JUNE 24,
YEAR ENDED OCTOBER 31, 1985 TO
----------------------------------------------------------------------- OCT. 31,
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48 $ 9.91 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .55 .50 .56 .62 .67 .73 .60 .52 .43 .11
Net Realized and
Unrealized Gain (Loss)
on Investments ....... (.19) 2.47 1.17 3.55 (3.22) 2.42 1.63 (.39) 3.09 (.09)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... .36 2.97 1.73 4.17 (2.55) 3.15 2.23 .13 3.52 .02
- -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (.51) (.52) (.61) (.73) (.74) (.57) (.61) (.20) (.43) (.11)
Distributions from
Realized Capital
Gains................. (.50) (.22) (.44) (.28) (.61) -- (.80) -- (.52) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (1.01) (.74) (1.05) (1.01) (1.35) (.57) (1.41) (.20) (.95) (.11)
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48 $ 9.91
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
TOTAL RETURN............ 2.22% 19.51% 12.50% 36.61% (17.48)% 24.68% 20.54% .90% 35.62% .20%
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $8,246 $7,486 $4,878 $3,298 $2,087 $2,162 $1,485 $1,323 $ 814 $ 133
Ratio of Expenses to
Average Net Assets..... .39% .39% .41% .48% .52% .53% .58% .49% .65% .80%*
Ratio of Net Investment
Income to Average Net
Assets................. 3.26% 3.11% 3.72% 4.51% 4.93% 5.29% 4.94% 4.11% 4.33% 4.56%*
Portfolio Turnover Rate. 24% 26% 23% 41% 20% 22% 25% 46% 50% 1%
</TABLE>
*Annualized.
- --------------------------------------------------------------------------------
YIELD AND From time to time the Fund may advertise its yield and total
TOTAL RETURN return. Both yield and total return figures are based on his-
torical earnings and are not intended to indicate future per-
formance. The "total return" of the Fund refers to the aver-
age annual compounded rates of return over one- , five- and
ten-year periods or for the life of the Fund (as stated in
the advertisement) that would equate an initial amount in-
vested at the beginning of a stated period to the ending re-
deemable value of the investment, assuming the reinvestment
of all dividend and capital gains distributions.
In accordance with the industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day yield"
of the Fund is calculated daily by dividing the net invest-
ment income per share earned during a 30-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 Fund's securities, and is net of all expenses
and all recurring and nonrecurring charges that have been ap-
plied to all shareholder accounts. The yield calculation as-
sumes that the net investment income earned over thirty days
is compounded monthly for six months and then annualized.
Methods used to calculate advertised yields are standardized
for all stock and bond mutual funds. However, these methods
differ from the accounting methods used by the Fund to main-
tain its books and
3
<PAGE>
records, and so the advertised 30-day yield may not fully re-
flect the income paid to your own account or the yield re-
ported in the Fund's reports to shareholders. Additionally,
the Fund may compare its performance to that of the Standard
& Poor's 500 Composite Stock Price Index ("S&P 500").
- --------------------------------------------------------------------------------
INVESTMENT The objective of the Fund is to provide long-term growth of
OBJECTIVES capital and income. The Fund's secondary objective is to pro-
vide current income. There can be no assurance that the Fund
THE FUND SEEKS will achieve these objectives.
TO PROVIDE
LONG-TERM These investment objectives are fundamental and so cannot be
GROWTH OF changed without the approval of a majority of the Fund's
CAPITAL AND shareholders.
INCOME
- --------------------------------------------------------------------------------
INVESTMENT The Fund follows a flexible investment strategy, emphasizing
POLICIES income-producing stocks which the investment advisers believe
to be undervalued by the market at the time of purchase. Gen-
THE FUND erally, these securities are characterized by below-average
INVESTS price-earnings ratios relative to the stock market, as mea-
PRIMARILY IN sured by the Standard & Poor's 500 Composite Stock Price In-
COMMON STOCKS dex. The Fund is managed without regard to tax ramifications.
Stocks will be selected based upon assessments of statistical
measures of current value (such as low price-earnings and low
price-to-book value ratios) and future earnings prospects.
Returns on such stocks can be influenced by the recognition
of their undervaluation by other investors based on statisti-
cal measures or changes in expectations regarding potential
earnings and dividend growth. If a stock has reached a fully-
valued position as determined by one of the Fund's investment
advisers, the stock will ordinarily be sold regardless of the
time it has been held and replaced by one or more securities
that are considered to be undervalued.
Although the Fund invests primarily in common stocks, it may
invest in money market instruments, fixed-income securities,
and other equity securities, such as preferred stock. The
Fund is expected, under normal circumstances, to be substan-
tially fully invested in common stocks. In addition, the Fund
may invest in stock futures and options to a limited extent.
See "Implementation of Policies" for a description of these
and other investment practices of the Fund.
The investment policies of the Fund are not fundamental and
so may be changed by the Board of Directors without share-
holder approval.
- --------------------------------------------------------------------------------
INVESTMENT As a mutual fund investing primarily in common stocks, the
RISKS Fund is subject to MARKET RISK--i.e., the possibility that
common stock prices will decline over short or even extended
THE FUND IS periods. The U.S. stock market has tended to by cyclical,
SUBJECT TO with periods when stock prices generally rise and periods
MARKET RISK when prices generally decline.
4
<PAGE>
To illustrate the volatility of stock prices, the following
table sets forth the extremes for stock market returns as
well as the average return for the period from 1926 to 1994,
as measured by the Standard & Poor's 500 Composite Stock
Price Index:
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994) OVER
VARIOUS TIME HORIZONS
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.2 +10.2 +10.7 +10.7
</TABLE>
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 1994. While this average
return can be used as a guide for setting reasonable expecta-
tions for future stock market returns, it 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 for the Fund or the
U.S. stock market. The illustrated returns represent histori-
cal investment performance, which may be a poor guide to fu-
ture returns. Also, stock market indexes such as the S&P 500
are based on unmanaged portfolios of securities before trans-
action 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.
THE FUND IS The investment adviser manages the Fund according to the tra-
ALSO SUBJECT ditional methods of "active" investment management, which in-
TO MANAGER volve the buying and selling of securities based upon econom-
RISK ic, financial and market analysis and investment judgement.
MANAGER RISK refers to the possibility that the Fund's in-
vestment adviser may fail to execute the Fund's investment
strategy effectively. As a result, the Fund may fail to
achieve its stated objective.
- --------------------------------------------------------------------------------
WHO SHOULD The Fund is intended for investors who are seeking growth of
INVEST capital and income. Although the Fund's secondary objective
is to provide current income, investors should not consider
LONG-TERM the Fund a substitute for fixed-income investments. The Fund
INVESTORS is intended to be a long-term investment vehicle and is not
SEEKING GROWTH designed to provide investors with a means of speculating on
OF CAPITAL AND short-term stock market movements. Investors who engage in
INCOME excessive account activity generate additional costs which
are borne by all of the Fund's shareholders. In order to min-
imize such costs, the Fund has adopted certain policies. The
Fund reserves the right to reject any purchase request (in-
cluding exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient port-
folio management, either because of the timing of the invest-
ment or
5
<PAGE>
previous excessive trading by the investor. Additionally, the
Fund reserves the right to suspend the offering of its
shares.
No assurance can be given that the Fund will attain its ob-
jectives or that shareholders will be protected from the risk
of loss that is inherent in equity investing. 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.
Investors should not consider the Fund a complete investment
program. Most investors should maintain diversified holdings
of securities with different risk characteristics--including
common stocks, bonds and money market instruments. Investors
may also wish to complement an investment in the Fund with
other types of common stock investments.
- --------------------------------------------------------------------------------
IMPLEMENTATION In addition to investing primarily in equity securities, the
OF POLICIES Fund follows a number of additional investment practices to
achieve its objectives.
THE FUND MAY Although it normally seeks to remain substantially fully in-
INVEST IN vested in equity securities, the Fund may invest temporarily
SHORT-TERM in certain short-term fixed income securities. Such securi-
FIXED INCOME ties may be used to invest uncommitted cash balances, to
SECURITIES maintain liquidity to meet shareholder redemptions, or to
take a temporarily defensive position against a potential
stock market decline. No more than 35% of the Fund's assets
will be committed to short-term fixed income securities for
purposes other than taking a temporary defensive position.
These securities include: obligations of the U.S. Government
and its agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and repur-
chase agreements collateralized by these securities.
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 securi-
ties at the Fund's cost plus interest within a specified pe-
riod (normally one day). In these transactions, the securi-
ties 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 Fund's Custodian Bank until repurchased.
THE FUND MAY The Fund may utilize stock futures contracts and options to a
USE FUTURES limited extent. Specifically, the Fund may enter into futures
CONTRACTS AND contracts provided that not more than 5% of its assets are
OPTIONS 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 as-
sets.
Futures and options transactions may be used for several rea-
sons: to maintain cash reserves while simulating full invest-
ment, to facilitate trading, to reduce transaction costs, or
to seek higher investment returns when a futures contract is
priced more attractively than the underlying equity security
or index. While
6
<PAGE>
futures contracts and options can be used as leveraged in-
vestments, the Fund may not use futures contracts or options
transactions to leverage its net assets.
For example, in order to remain fully invested in stocks
while maintaining liquidity to meet potential shareholder re-
demptions, the Fund may invest a portion of its assets in a
stock futures contract. Because futures contracts only re-
quire a small initial margin deposit, the Fund would then be
able to maintain a cash reserve for potential redemptions,
while at the same time remaining fully invested. Also, be-
cause the transaction costs of futures and options may be
lower than the costs of investing in stocks directly, it is
expected that the use of futures contracts and options may
reduce the Fund's total transaction costs.
FUTURES The primary risks associated with the use of futures con-
CONTRACTS AND tracts and options are: (i) imperfect correlation between the
OPTIONS POSE change in market value of the stocks held by the Fund and the
CERTAIN RISKS 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 only in those contracts whose behavior
is expected to resemble that the Fund's underlying securi-
ties. 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 strate-
gies 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 (or gain) to the investor. When investing in
futures contracts, the Fund will segregate cash or cash
equivalents in the amount of the underlying obligation.
THE FUND MAY The Fund may lend its investment securities to qualified in-
LEND ITS stitutional investors for either short-term or long-term pur-
SECURITIES poses 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.
BORROWING The Fund may borrow money, subject to the restrictions de-
scribed on page 8 in Investment Limitations, for temporary or
emergency purposes, including the meeting of redemption re-
quests which might otherwise require the untimely disposition
of securities.
PORTFOLIO Although it generally seeks to invest for the long term, the
TURNOVER IS Fund retains the right to sell securities irrespective of how
NOT EXPECTED long they have been held. It is anticipated that the annual
TO EXCEED 100% portfolio turnover of the Fund will not exceed 100%. A turn-
over rate of 100% would occur, for example, if all of the se-
curities of the Fund were replaced within one year.
- --------------------------------------------------------------------------------
7
<PAGE>
INVESTMENT The Fund has adopted certain limitations on its investment
LIMITATIONS practices. Specifically, the Fund will not:
THE FUND HAS (a) with respect to 75% of the value of its total assets,
ADOPTED purchase the securities of any issuer (except obligations
CERTAIN of the United States government and its instrumentali-
FUNDAMENTAL ties) if as a result the Fund would hold more than 10% of
LIMITATIONS the outstanding voting securities of the issuer, or more
than 5% of the value of the total assets of the Fund
would be invested in the securities of such issuer;
(b) invest more than 25% of its assets in any one industry;
and
(c) borrow money, except that the Fund may borrow from banks
(or through reverse repurchase agreements), for temporary
or emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise re-
quire the untimely disposition of securities, in an
amount not exceeding 10% of the value of the net assets
of the Fund (including the amount borrowed and the value
of any outstanding reverse repurchase agreements) at the
time the borrowing is made. Whenever borrowings exceed 5%
of the value of the net assets of the Fund, the Fund will
not make any additional investments.
These investment limitations are considered at the time in-
vestment 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.
- --------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
VANGUARD in excess of $130 billion. Through their jointly-owned sub-
ADMINISTERS sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and
AND the other funds in the Group obtain at cost virtually all of
DISTRIBUTES their corporate management, administrative and distribution
THE FUND services. Vanguard also provides investment advisory services
on an at-cost basis to certain Vanguard funds, including
Vanguard/Windsor II. As a result of Vanguard's unique corpo-
rate structure, the Vanguard funds have costs substantially
lower than those of most competing mutual funds. In 1994, the
average expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard funds amounted
to approximately .30% compared to an average of 1.05% 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 Direc-
tors set broad policies for the Fund and choose its Officers.
A list of the Directors and Officers of the Fund and a state-
ment 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 admin-
istrative personnel needed to provide the requisite services
to the funds and also furnishes
8
<PAGE>
the funds with necessary office space, furnishings and equip-
ment. Each fund pays its share of Vanguard's net 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, au-
diting and custodian fees.
Vanguard provides distribution and marketing services to the
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 its share of the Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT Vanguard/Windsor II employs a multi-manager approach utiliz-
ADVISERS ing four investment advisers to manage the Fund's assets. The
Fund has investment advisory contracts with: Barrow, Hanley,
FOUR ADVISERS Mewhinney & Strauss, Inc. ("BHM&S"), 200 Crescent Court, Dal-
OVERSEE THE las, TX 75201; Equinox Capital Management, Inc. ("Equinox"),
FUND'S 399 Park Ave., 28th floor, New York, NY 10022; and Tukman
INVESTMENTS: Capital Management, Inc. ("Tukman"), 60 East Sir Francis
Drake Boulevard, Larkspur, CA 94939. Additionally, a portion
of the Fund's assets will be managed on an at cost basis by
Vanguard's Core Management Group. Neither BHM&S, Equinox nor
Tukman is affiliated in any way with Wellington Management
Company, the investment adviser to Vanguard/Windsor 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. Currently,
BHM&S manages approximately 72% of the assets of the Fund,
Equinox and Tukman manage approximately 10% each and Van-
guard's Core Management Group manages approximately 8% of the
Fund's assets. Investors will be advised of any substantive
changes in the proportions managed by each adviser. Each ad-
viser discharges their responsibilities subject to the con-
trol of the Directors and Officers.
BARROW, The Fund has entered into an advisory agreement with BHM&S
HANLEY, under which BHM&S manages the investment and reinvestment of
MEWHINNEY & a portion (currently approximately 72%) of the Fund's assets
STRAUSS and continuously reviews, supervises, and administers the
(BHM&S) Fund's investment program with respect to those assets. BHM&S
discharges its responsibilities subject to the control of the
Officers and Directors of the Fund.
BHM&S, founded in 1979, is a professional investment counsel-
ing firm which provides investment services to investment
companies, institutions, and individuals. As of December 31,
1994, BHM&S held discretionary management authority with re-
spect to approximately $13.7 billion of assets.
The investment principals at BHM&S develop a common, firm-
wide investment strategy that is employed in managing client
investment portfolios and selecting individual securities for
those portfolios. James P. Barrow, a founding principal and
Vice President of BHM&S, has been designated as portfolio
manager for the assets of the Fund managed by BHM&S, a posi-
tion he has held since the Fund's inception in 1985. He con-
tributes to the development of the common
9
<PAGE>
portfolio management strategy used at BHM&S, and is also re-
sponsible for seeing that the Fund's assets are managed in a
way consistent with the firm's overall approach.
BHM&S earns a basic advisory fee, calculated by applying the
following annual percentage rates to the average month-end
net assets of the Fund managed by BHM&S:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
------------------ ------
<S> <C>
First $200 million 0.300%
Next $300 million 0.200%
Next $500 million 0.150%
Over $1 billion 0.125%
</TABLE>
The Fund's payments to BHM&S under the above schedule are
subject to an incentive/penalty fee arrangement which com-
pares the performance of the Fund's assets managed by BHM&S
with the performance of the Standard & Poor's/BARRA Value In-
dex. This arrangement provides for the following adjustments
to BHM&S's basic fee:
<TABLE>
<CAPTION>
CUMULATIVE THREE-YEAR PERFORMANCE
DIFFERENTIAL VS. THE S&P/BARRA VALUE INCENTIVE/
INDEX PENALTY FEE ADJUSTMENT
------------------------------------ ----------------------
<S> <C>
Less than or equal to -9% points 0.75 X Basic Fee
Equal to or less than -6% points but greater
than -9% points 0.85 X Basic Fee
Less than +6% points but greater than
-6% points Basic Fee
Equal to or greater than +6% points but less
than +9% points 1.15 X Basic Fee
Greater than or equal to +9% points 1.25 X Basic Fee
</TABLE>
Under rules of the Securities and Exchange Commission, the
incentive/penalty fee structure will not be fully operable
until the quarter ending April 30, 1996 and, until that date,
will be calculated according to certain transition rules. A
detailed description of the incentive/penalty fee schedule
for BHM&S and the applicable transition rules is contained in
the Statement of Additional Information.
EQUINOX Equinox is a professional investment counseling firm founded
CAPITAL in 1989. As of December 31, 1994, Equinox provided investment
MANAGEMENT advisory services with respect to approximately $3.2 billion
(EQUINOX) of assets. Ronald J. Ulrich, Director and President, is the
principal investment officer and founder of Equinox. Mr.
Ulrich has served as portfolio manager for the assets of the
Fund managed by Equinox since 1991, when the Fund first hired
Equinox.
10
<PAGE>
Equinox earns a basic advisory fee, calculated by applying
the following annual percentage rates to the average month-
end net assets of the Fund managed by Equinox:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
------------------ ------
<S> <C>
First $100 million .300%
Next $300 million .200%
Over $400 million .150%
</TABLE>
The Fund's payments to Equinox under the above schedule are
subject to an incentive/penalty fee arrangement which com-
pares the performance of the Fund's assets managed by Equinox
with the performance of the Standard & Poor's 500 Composite
Stock Price Index. This arrangement provides for the follow-
ing adjustments to Equinox's basic fee:
<TABLE>
<CAPTION>
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/
DIFFERENTIAL VS. THE S&P 500 PENALTY FEE ADJUSTMENT
--------------------------------- ----------------------
<S> <C>
Less than or equal to -9% points 0.50 X Basic Fee
Equal to or less than -4.5% points but
greater than -9% points 0.75 X Basic Fee
Less than +4.5% points but greater than
-4.5% points Basic Fee
Equal to or greater than +4.5% points but
less than +9% points 1.25 X Basic Fee
Greater than or equal to +9% points 1.50 X Basic Fee
</TABLE>
TUKMAN CAPITAL Tukman is a professional investment counseling firm founded
MANAGEMENT in 1980. As of December 31, 1994, Tukman provided investment
(TUKMAN) advisory services with respect to assets of approximately
$2.1 billion. Melvin T. Tukman, President, Director and foun-
der of Tukman, has served as portfolio manager for the assets
of the Fund managed by the firm since 1991, when the Fund
first hired Tukman.
Tukman earns a basic advisory fee, calculated by applying the
following annual percentage rates to the average month-end
net assets of the Fund managed by Tukman.
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
----------------- ------
<S> <C>
First $25 million .400%
Next $125 million .350%
Next $350 million .250%
Next $500 million .200%
Over $1 billion .150%
</TABLE>
11
<PAGE>
The Fund's payments to Tukman under the above schedule are
subject to an incentive/penalty fee arrangement which com-
pares the performance of the Fund's assets managed by Tukman
with the performance of the Standard & Poor's 500 Composite
Stock Price Index. This arrangement provides for the follow-
ing adjustments to Tukman's basic fee:
<TABLE>
<CAPTION>
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/PENALTY
DIFFERENTIAL VS. THE S&P 500 FEE ADJUSTMENT
--------------------------------- -----------------
<S> <C>
Less than or equal to -12% points 0.50 X Basic Fee
Equal to or less than -6% points but
greater than -12% points 0.75 X Basic Fee
Less than +6% points but greater than
-6% points Basic Fee
Equal to or greater than +6% points but
less than +12% points 1.25 X Basic Fee
Greater than or equal to +12% points 1.50 X Basic Fee
</TABLE>
VANGUARD'S CORE Vanguard's Core Management Group provides investment advisory
MANAGEMENT services on an at-cost basis with respect to a portion of the
GROUP Fund's assets (currently approximately 8%). The Core Manage-
ment Group also provides investment advisory services to sev-
eral Vanguard funds, including Vanguard Index Trust, Vanguard
Balanced Index Fund, Vanguard International Equity Index
Fund, Vanguard Institutional Index Fund, several indexed sep-
arate accounts, as well as a portion of Vanguard/Morgan
Growth Fund's assets. Total assets under management by the
Core Management Group were approximately $18 billion as of
December 31, 1994. The portion of the Fund allocated to the
Core Management Group is managed using computerized, quanti-
tative techniques based on a value index constructed to ap-
proximate the aggregate fundamental characteristics of a typ-
ical large capitalization-value fund such as Windsor II. For
further information concerning the index, please refer to the
Statement of Additional Information. The Core Management
Group is supervised by the Officers of the Fund.
AGGREGATE For the fiscal year ended October 31, 1994, the investment
ADVISORY FEES advisory fees paid by the Fund to BHM&S, Equinox and Tukman
PAID BY THE represented an effective annual rate of .14 of 1% of average
FUND net assets before a decrease of $145,000 based on perfor-
mance. The investment advisory fees paid by the Fund for this
period to BHM&S represented an effective annual rate of .14
of 1% of the average net assets managed by BHM&S. The invest-
ment advisory fees paid by the Fund for the period to Equinox
and Tukman represented an effective annual rate of .19 of 1%
and .25 of 1% of the average net assets managed by Equinox
and Tukman, respectively.
OTHER ADVISORY BHM&S, Equinox, Tukman and Vanguard's Core Management Group
INFORMATION are authorized to select brokers or dealers to execute pur-
chases and sales of the Fund's portfolio securities, and di-
rected to use their best efforts to obtain the best available
price and most favorable execution with respect to all trans-
actions. The full
12
<PAGE>
range and quality of brokerage services available are consid-
ered in making these determinations.
The Fund has authorized BHM&S, Equinox, Tukman and Vanguard's
Core Management Group to pay higher commissions in recogni-
tion of brokerage services deemed necessary for the achieve-
ment 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 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 in-
vestment 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 ad-
visory agreement; and (c) the continued employment of an ex-
isting 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 con-
cerning the adviser that would have normally been included in
a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE The table on page 14 provides investment results for the Fund
RECORD for several periods throughout the Fund's lifetime. The re-
sults shown represent "total return" investment performance
which assumes the reinvestment of all capital gains and in-
come dividends for the indicated periods. Also included is
comparative information with respect to the unmanaged Stan-
dard & 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 table does 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.
13
<PAGE>
AVERAGE ANNUAL RETURN FOR VANGUARD/WINDSOR II
<TABLE>
<CAPTION>
PERCENTAGE INCREASE
----------------------------------------------
FISCAL PERIODS VANGUARD/ S&P 500 CONSUMER
ENDED 10/31/94 WINDSOR II INDEX PRICE INDEX
-------------- ---------- ------- -----------
<S> <C> <C> <C>
1 Year + 2.2% + 3.9% +2.6%
3 Years +11.2 + 9.5 +2.9
5 Years + 9.2 +10.1 +3.6
Lifetime* +13.2 +13.9 +3.6
</TABLE>
* June 24, 1985 to October 31, 1994. Data for the Consumer
Price Index begins June 30, 1985.
- --------------------------------------------------------------------------------
The Fund expects to pay dividends from ordinary income semi-
DIVIDENDS, annually. Capital gains distributions, if any, will be made
CAPITAL GAINS annually. All dividend and capital gains distributions are
AND TAXES automatically reinvested in additional shares of the Fund. In
order to satisfy certain distribution requirements of the
THE FUND PAYS IRS, the Fund may also declare special year-end distributions
SEMI-ANNUAL during December. The Fund intends to continue to qualify as a
DIVIDENDS AND "regulated investment company" under the Internal Revenue
ANY CAPITAL Code so that it will not be subject to federal income tax to
GAINS ANNUALLY the extent that its income is distributed to its sharehold-
ers.
If you utilize the Fund as an investment option in an employ-
er-sponsored retirement savings plan, dividend and capital
gains distributions from the Fund generally will not be sub-
ject to current taxation, but will accumulate on a tax-de-
ferred basis. In general, employer-sponsored retirement and
savings plans are governed by a complex set of tax rules. You
should consult your plan administrator, the plan's "Summary
Plan Description," or a professional tax adviser regarding
the tax consequences of your participation in the plan and of
any plan contributions or withdrawals.
- --------------------------------------------------------------------------------
THE SHARE The Fund's share price or "net asset value" per share is de-
PRICE OF THE termined by dividing the total market value of the Fund's in-
FUND vestments and other assets, less any liabilities, by the num-
ber of outstanding shares of the Fund. Net asset value per
share is calculated at the close of regular trading on the
New York Stock Exchange on each date the Exchange is open for
business.
Portfolio securities that are listed on a securities exchange
are valued at the latest quoted sales prices as of 4:00 p.m.
on the valuation date. Price information on listed securities
is taken from the exchange where the security is primarily
traded. Securities which are listed on an exchange and which
are not traded on the valuation date are valued at the mean
of the latest quoted bid and asked prices. Unlisted securi-
ties for which market quotations are readily available are
valued at the latest quoted bid price. Temporary cash invest-
ments are valued at amortized cost, which approximates market
value. Other assets and securities for which no quotations
are readily available are valued at fair value as determined
in good faith by the Directors. Securities may be valued on
the basis of
14
<PAGE>
prices provided by a pricing service when such prices are be-
lieved to reflect the fair market value of such securities.
The Fund's share price can be found daily in the mutual fund
listings of most major newspapers under the heading of The
Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL The Company is a Maryland corporation. The Articles of Incor-
INFORMATION poration permit the Directors to issue 1,600,000,000 shares
of common stock, with a one cent par value. The Board of Di-
rectors has the power to designate one or more classes ("se-
ries") of shares of common stock and to classify or reclas-
sify any unissued shares with respect to such series. Cur-
rently the Company is offering shares of two series.
The shares of each series of the Company are fully paid and
non-assessable; have no preference as to conversion, ex-
change, 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.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other ap-
plicable law. An annual meeting will be held to vote on the
removal of a Director or Directors of the Company if re-
quested in writing, by the holders of not less than 10% of
the outstanding shares of the Company.
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 Dis-
bursing Agent. Price Waterhouse LLP, serves as independent
accountants for the Fund and will audit its financial state-
ments annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
15
<PAGE>
SERVICE GUIDE
PARTICIPATING The Fund is available as an investment option in your retire-
IN YOUR PLAN ment or savings plan. The administrator of your plan or your
employee benefits office can provide you with detailed infor-
mation on how to participate in your plan and how to elect
the Fund as an investment option.
If you have any questions about the Fund, including the
Fund's investment objective, policies, risk characteristics
or historical performance, please contact Participant Serv-
ices at 1-800-523-1188.
If you have questions about your account, contact your plan
administrator or the organization which provides recordkeep-
ing services for your plan.
--------------------------------------------------------------
INVESTMENT You may be permitted to elect different investment options,
OPTIONS AND alter the amounts contributed to your plan, or change how
ALLOCATIONS contributions are allocated among your investment options in
accordance with your plan's specific provision. See your plan
administrator or employee benefits office for more details.
--------------------------------------------------------------
TRANSACTIONS Contributions, exchanges or distributions of the Fund's
IN FUND SHARES shares are effective when received in "good order" by Van-
guard. "Good order" means that complete information on the
purchase, exchange or redemption and the appropriate monies
have been received by Vanguard.
--------------------------------------------------------------
MAKING Your plan may allow you to exchange monies from one invest-
EXCHANGES ment option to another. Check with your plan administrator
for details on the rules governing exchanges in your plan.
Certain investment options, particularly company stock or
guaranteed investment contracts (GICs), may be subject to
unique restrictions.
Before making an exchange, you should consider the following:
. If you are making an exchange to another Vanguard Fund op-
tion, please read the Fund's prospectus. Contact Partici-
pant Services at 1-800-523-1188 for a copy.
. Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how fre-
quently exchanges are allowed.
. As explained on page 5, the Fund reserves the right to ref-
use any exchange purchase request.
- --------------------------------------------------------------------------------
16
<PAGE>
[LOGO OF VANGUARD
WINDSOR II
APPEARS HERE]
- ---------------
THE VANGUARD GROUP [LOGO OF VANGUARD
OF INVESTMENT WINDSOR II
COMPANIES APPEARS HERE]
Vanguard Financial Center
P.O. Box 2900 I N S T I T U T I O N A L
Valley Forge, PA 19482 P R O S P E C T U S
INSTITUTIONAL PARTICIPANT FEBRUARY 28, 1995
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[LOGO OF THE VANGUARD GROUP APPEARS HERE]
IO73
<PAGE>
PART B
VANGUARD/WINDSOR FUNDS, INC. (FORMERLY THE WINDSOR FUNDS, INC.)
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 28, 1995
This Statement is not a prospectus, but should be read in conjunction with:
(1) the current Prospectus (dated February 28, 1995) relating to the Windsor
Fund series or the Windsor II series, as appropriate. To obtain either Pro-
spectus please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company................................................................ B-1
Investment Objectives and Policies......................................... B-1
Purchase of Shares......................................................... B-5
Redemption of Shares....................................................... B-6
Yield and Total Return..................................................... B-6
Investment Limitations..................................................... B-7
Management of the Company.................................................. B-9
Investment Advisory Services............................................... B-12
Portfolio Transactions..................................................... B-18
Performance Measures....................................................... B-19
Description of Shares and Voting Rights.................................... B-20
Financial Statements....................................................... B-21
</TABLE>
THE COMPANY
Vanguard/Windsor Funds, Inc. (the "Company") is an open-end, diversified,
management investment company whose shares are currently offered in two sepa-
rate series--the Vanguard/Windsor Fund series and the Vanguard/Windsor II se-
ries. Each series in effect represents a separate mutual fund.
Vanguard/Windsor Fund series has been offered under the name "Windsor Fund"
since 1958. Shares of Vanguard/Windsor II were initially offered on June 24,
1985. Wellington Management Company has served as investment adviser to the
Vanguard/Windsor Fund series since its inception. Barrow, Hanley, Mewhinney &
Strauss, Inc. ("BHM&S"), Equinox Capital Management, Inc. ("'Equinox"); and
Tukman Capital Management, Inc. ("Tukman"), three separate and distinct in-
vestment counseling firms that have no affiliation with Wellington Management
Company, nor with each other, serve as investment advisers to the
Vanguard/Windsor II series. Additionally, The Vanguard Group, Inc., ("Van-
guard") provides investment advisory services on an at-cost basis with respect
to a portion of Vanguard/Windsor II's assets.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives and policies set
forth in each of the Company's Prospectuses.
PORTFOLIO TURNOVER. While the rate of portfolio turnover is not a limiting
factor when the investment adviser deems changes appropriate, it is
anticipated that the annual portfolio turnover
B-1
<PAGE>
rate for each series will not normally exceed 100%. A rate of turnover of 100%
could occur, for example, if all of the securities in a series' portfolio are
replaced within a period of one year. The portfolio turnover rates for the
Vanguard/Windsor Fund series for each of its last ten fiscal years and the
Vanguard/Windsor II series for the period June 24, 1985 to October 31, 1985
and each of the fiscal years in the period ended October 31, 1994 are set
forth under "Financial Highlights," in Vanguard/Windsor Fund's and
Vanguard/Windsor II's Prospectuses, respectively.
REPURCHASE AGREEMENTS. Each series may invest in repurchase agreements with
domestic banks, brokers or dealers, either for temporary defensive purposes
due to market conditions, or to generate income from its excess cash balances.
A repurchase agreement is an agreement under which the series acquires a money
market instrument (generally security issued by the U.S. Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
domestic bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price
reflects an agreed upon interest rate effective for the period the instrument
is held by the series and is unrelated to the interest rate on the underlying
instrument. In these transactions, the securities acquired by the series
(including accrued interest earned thereon) must have a total value in excess
of the value of the repurchase agreement and are held by the Company's
custodian bank until repurchased. In addition, the Board of Directors will
monitor the repurchase agreement transactions for each series generally and
will establish guidelines and standards for review by the investment adviser
of the creditworthiness of any bank, broker or dealer party to a repurchase
agreement with the Company. No more than an aggregate of 15% of a series
assets, at the time of investment, will be invested in repurchase agreements
having maturities longer than seven days and in securities subject to legal or
contractual restrictions on resale, or for which there are no readily
available market quotations.
The use of repurchase agreements involves certain risks. For example, if the
seller of the securities under an agreement defaults on its obligation to re-
purchase the underlying securities at a time when the value of these securi-
ties has declined, the series may incur a loss upon disposition of them. If
the seller becomes insolvent and subject to liquidation or reorganization un-
der bankruptcy or other laws, a bankruptcy court may determine that the under-
lying securities are collateral for a loan by the series not within the con-
trol of the series and therefore subject to sale by the trustee in bankruptcy.
Finally, it is possible that the series may not be able to substantiate its
interest in the underlying securities. While the Company's management acknowl-
edges these risks, it is expected that they can be controlled through careful
monitoring procedures.
LENDING OF SECURITIES. Each series may lend its portfolio securities to
qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
portfolio securities, each series attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for
the account of the series. Each series may lend its portfolio securities to
qualified brokers, dealers, domestic banks or other domestic financial
institutions, so long as the terms, and the structure of such loans are not
inconsistent with the Investment Company Act of 1940, or the Rules and
Regulations or interpretations of the Securities and Exchange Commission (the
"Commission") thereunder, which currently require that (a) the borrower pledge
and maintain with the series collateral consisting of cash, an irrevocable
letter of credit or securities issued or guaranteed by a domestic bank or the
United States Government having a value at all times not less than 100% of the
value of the securities loaned, (b) the borrower add to such collateral
whenever the price of the securities loaned rises (i.e., the borrower "marks
to the market" on a daily basis), (c) the loan be made subject to termination
by the series at any time and (d) the series receive reasonable interest on
the loan (which many include the series' investing any cash collateral in
interest bearing
B-2
<PAGE>
short-term investments), any distributions on the loaned securities and any
increase in their market value. A series will not lend portfolio securities
if, as a result, the aggregate of such loans exceeds 33 1/3% of the value of
the series' total assets. Loan arrangements made will comply with all other
applicable regulatory requirements, including the rules of the New York Stock
Exchange, which rules require the borrower, after notice, to redeliver the
securities within the normal settlement time of five business days. All
relevant facts and circumstances, including the creditworthiness of the
broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Board of
Directors.
At the present time, the Staff of the Commission does not object if an in-
vestment company pays reasonable negotiated fees in connection with loaned se-
curities, so long as such fees are set forth in a written contract and ap-
proved by the investment company's Directors (Trustees). In addition, voting
rights may pass with the loaned securities, but if a material event occurs af-
fecting an investment on loan, the loan must be called and the securities vot-
ed.
FUTURES CONTRACTS. Each series may enter into stock futures contracts,
options, and options on futures contracts only for the purpose of remaining
fully invested and reducing transactions costs. Futures contracts provide for
the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. Futures contracts which are standardized as to maturity date and
underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act
by the Commodity Futures Trading Commission ("CFTC"), a U.S. Government
Agency.
Although futures contracts by their terms call for actual delivery or ac-
ceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Clos-
ing out an open futures position is done by taking an opposite position ("buy-
ing" a contract which has previously been "sold," "selling" a contract previ-
ously 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 comple-
tion 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. Bro-
kers 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 con-
tract 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. Each series ex-
pects 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 unfavor-
able 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 in-
terest rates. Each series intends to use futures contracts only for bona fide
hedging purposes.
B-3
<PAGE>
Regulations of the CFTC applicable to the Company require that all of its
futures transactions constitute bona fide hedging transactions. Each series
will only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, a se-
ries expects that approximately 75% of its futures contract purchases will be
"completed;" that is, equivalent amounts of related securities will have been
purchased or are being purchased by the series upon sale of open futures con-
tracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of the series' income to market fluctua-
tions, the use of futures contracts may be a more effective means of hedging
this exposure. While each series will incur commission expenses in both open-
ing and closing out futures positions, these costs are lower than transaction
costs incurred in the purchase and sale of portfolio securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A series 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 series' total assets. In addition, a series will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the series' total assets.
Assets committed to futures contracts or options will be held in a segregated
account at the Fund's custodian bank.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market
will exist for any particular futures contract at any specific time. Thus, it
may not be possible to close a futures position. In the event of adverse price
movements, a series would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if a series has
insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, a series may be required to make delivery of the instruments
underlying interest rate futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the ability
to effectively hedge its portfolio. A series 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 sub-
stantial, 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 sub-
stantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin,
a subsequent 10% decrease in the value of the futures contract would result in
a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Portfolio are engaged in only for hedging purposes, the Ad-
viser does not believe that the series is subject to the risks of loss fre-
quently associated with futures transactions. The series would presumably have
sustained comparable losses if, instead of the futures contract, it had in-
vested in the underlying security and sold it after the decline.
Utilization of futures transactions by the series does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is
also possible that a series could both lose money on futures contracts and
also experience a decline in value of its portfolio securities. There is also
the risk of loss by a series of margin deposits in the event of bankruptcy of
a broker with whom the series has an open
B-4
<PAGE>
position in a futures contract or related option. Additionally, investments in
futures and options involve the risk that the investment adviser will incor-
rectly predict stock market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract 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 unfa-
vorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Each series is required for
Federal income tax purposes to recognize as income for each taxable year its
net unrealized gains and losses on futures contracts as of the end of the year
as well as those actually realized during the year. In most cases, any gain or
loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Furthermore, sales of
futures contracts which are intended to hedge against a change in the value of
securities held by a series may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. The series 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 series.
In order for a series to continue to qualify for Federal income tax treat-
ment 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, inter-
est, income derived from loans of securities, and gains from the sale of secu-
rities or foreign currencies, or other income derived from the fund's business
of investing in 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 series annual gross income. It is antici-
pated that any net gain realized from the closing 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 series may be required to
defer the closing out of futures contracts beyond the time when it would oth-
erwise be advantageous to do so. It is anticipated that unrealized gains on
futures contracts, which have been open for less than three months as of the
end of the series' fiscal year and which are recognized for tax purposes, will
not be considered gains on securities held less than three months for the pur-
pose of the 30% test.
The series 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 series' fiscal year on futures transac-
tions). Such distributions will be combined with distributions of capital
gains realized on the series' other investments and shareholders will be ad-
vised on the nature of the payments.
PURCHASE OF SHARES
The purchase price of shares of each series of the Company is the net asset
value next determined after the order is received in Good Order, as defined in
the Prospectus. The net asset value is calculated as of the close of the New
York Stock Exchange on each day the Exchange is open for business. An order
received prior to the close of the Exchange will be executed at the price com-
puted on the date
B-5
<PAGE>
of receipt; and an order received after the close of the Exchange will be exe-
cuted at the price computed on the next day the Exchange is open.
Each series reserves the right in its sole discretion (i) to suspend the of-
fering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the series, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of the series' shares.
REDEMPTION OF SHARES
Each series may suspend redemption privileges or postpone the date of pay-
ment (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 Ex-
change 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 series to dispose of securities owned by
it, or to determine fairly the value of its assets; and (iii) for such other
periods as the Commission may permit.
The Company has made an election with the Commission to pay in cash all re-
demptions 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 a series 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 readily marketable 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 Company. If redemptions are paid in investment securities, such securities
will be valued as set forth in the Prospectus for the appropriate series, and
a redeeming shareholder would normally incur brokerage expenses if he con-
verted these securities to cash.
No charge is made by the Company for redemptions. Any redemption may be more
or less than the shareholder's cost, depending on the market value of the se-
ries' portfolio securities.
SIGNATURES GUARANTEES. To protect your account, the Company and Vanguard
from fraud, signature guarantees are required for certain redemptions. A
signature guarantee verifies the authenticity of your signature. Examples of
situations in which signature guarantees are required are: (1) REDEMPTIONS
INVOLVING MORE THAN $25,000 ON THE DATE OF RECEIPT BY VANGUARD OF ALL
NECESSARY DOCUMENTS; (2) ALL REDEMPTIONS, REGARDLESS OF THE AMOUNT INVOLVED,
WHEN THE PROCEEDS ARE TO BE PAID TO SOMEONE OTHER THAN THE REGISTERED ACCOUNT
OWNER(S) AND/OR TO AN ADDRESS OTHER THAN THE ADDRESS OF RECORD; AND (3) SHARE
TRANSFER REQUESTS. These requirements are not applicable to redemptions in
Vanguard's prototype retirement plans, except in connection with: (1)
distributions made when the proceeds are to be paid to someone other than the
plan participant; (2) certain authorizations to effect exchanges by telephone;
and (3) when proceeds are to be wired. These requirements may be waived by the
Company in certain instances.
Signature guarantees can be obtained from a bank, broker or any other guar-
antor that Vanguard deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE GUAR-
ANTORS.
YIELD AND TOTAL RETURN
The yield of Vanguard/Windsor Fund for the thirty-day period ended October
31, 1994 was +3.27%, and the yield for Vanguard/Windsor II for the same period
was +3.35%.
B-6
<PAGE>
The average annual total returns for Vanguard/Windsor Fund for the one-,
five- and ten-year periods ending October 31, 1994 were +6.35%, +9.23% and
+14.45%, respectively. The average annual total returns for the one- and five-
year periods, and the period since inception (6/24/85), for Vanguard/Windsor
II were +2.22%, +9.15% and +13.21%, respectively. Total return is computed by
determining the average compounded rates of return over the one-, five- and-
ten year periods set forth above that would equate an initial amount invested
at the beginning of the periods to the ending redeemable value of the invest-
ment.
INVESTMENT LIMITATIONS
Each series of the Company is subject to the following restrictions which
may not be changed without the approval of at least a majority of the out-
standing voting securities of that series. A series will not:
(1) with respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States govern-
ment and its instrumentalities) if as a result the series would hold more
than 10% of the outstanding voting securities of the issuer, or more than
5% of the value of the total assets of the series would be invested in the
securities of such issuer;
(2) invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets ap-
proved by the shareholders of the series or otherwise to the extent permit-
ted by Section 12 of the Investment Company Act of 1940. A series will in-
vest only in investment companies which have investment objectives and in-
vestment policies consistent with those of that series;
(3) borrow money, except that a series may borrow from banks (or through
reverse repurchase agreements), for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests which might other-
wise require the untimely disposition of securities, in an amount not ex-
ceeding 10% of the value of the net assets of the series (including the
amount borrowed and the value of any outstanding reverse repurchase agree-
ments) at the time the borrowing is made. Whenever borrowings exceed 5% of
the value of the net assets of the series, the series will not make any ad-
ditional investments;
(4) purchase securities on margin, or sell securities short except that
each series may invest in stock futures contracts, stock options and op-
tions on stock futures contracts to the extent that not more than 5% of a
series' assets are required as deposit on a futures contract and not more
than 20% of a series' assets are invested in futures contracts and options
transactions at any time;
(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
(including any investment in The Vanguard Group, Inc.);
(6) invest for the purpose of exercising control over management of any
company;
(7) purchase or retain securities of any company in which those Officers
and Directors of the Company and/or its investment advisers owning more
than 1/2 of 1% of such securities, own in the aggregate more than 5% of
such securities;
(8) make loans, except (i) by purchasing bonds, debentures or similar ob-
ligations (including repurchase agreements) which are either publicly dis-
tributed or customarily purchased by institutional investors, and (ii) as
provided under "Lending of Securities" (See page B-2);
(9) purchase assessable securities;
B-7
<PAGE>
(10) engage in the business of underwriting securities issued by other
persons, except to the extent that the series may technically be deemed to
be an underwriter under the Securities Act of 1933, as amended, in dispos-
ing of investment securities;
(11) purchase real estate, commodities or commodity contracts except as
described above in "(5)"; or
(12) invest more than 25% of the value of its total assets in any one in-
dustry.
Notwithstanding these limitations, each series of the Company 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 Company and one or more other investment companies and is primarily en-
gaged in the business of providing, at-cost, management, administrative or re-
lated services to the Company and other investment companies. See "Management
of the Company".
These investment limitations are considered at the time investment securi-
ties are purchased.
Although not fundamental policies subject to shareholder vote, as long as
the Company's shares are registered for sale in certain states, each series
may not invest in put, call, straddle or spread options (except as described
above in "(5)") or in interests in oil, gas or other mineral exploration or
development programs. In addition, each series of the Company will not invest
more than 10% of its assets, in the aggregate, determined at the time of in-
vestment, in securities subject to legal or contractual restrictions on resale
or for which there are no readily available market quotations, including re-
purchase agreements having maturities of more than 7 days.
B-8
<PAGE>
MANAGEMENT OF THE COMPANY
OFFICERS AND DIRECTORS
The Officers of the Fund manage its day-to-day operations and are responsi-
ble to the Fund's Board of Directors. The Directors set broad policies for
each Fund and choose its Officers. The following is a list of the Directors
and Officers of the Funds and a statement of their present positions and prin-
cipal occupations during the past five years. The mailing address of the Di-
rectors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
JOHN C. BOGLE, Chairman, Chief ALFRED M. RANKIN, JR., Director
Executive Officer and Director*
Chairman, President and Chief Exec-
Chairman, Chief Executive Officer, utive Officer of NACCO Industries,
and Director of The Vanguard Group, Inc.; Director of The BFGoodrich
Inc., and each of the investment Company, The Standard Products Com-
companies in The Vanguard Group; pany and The Reliance Electric Com-
Director of The Mead Corporation pany.
and General Accident Insurance.
JOHN C. SAWHILL, Director
JOHN J. BRENNAN, President &
Director* President and Chief Executive Offi-
cer, The Nature Conservancy; for-
President and Director of The Van- merly, Director and Senior Partner,
guard Group, Inc. and each of the McKinsey & Co.; President, New York
investment companies in The Van- University; Director of Pacific Gas
guard Group. and Electric Company and NACCO In-
dustries.
BARBARA BARNES HAUPTFUHRER, Director
J. LAWRENCE WILSON, Director
Director of The Great Atlantic and
Pacific Tea Company, Raytheon Com- Chairman and Chief Executive Offi-
pany, Knight-Ridder, Inc., Massa- cer, Rohm & Haas Company; Director
chusetts Mutual Life Insurance Co., of Cummins Engine Company; Trustee
and ALCO Standard, Corp.; Trustee of Vanderbilt University and the
Emerita of Wellesley College. Culver Educational Foundation.
ROBERT E. CAWTHORN, Director RAYMOND J. KLAPINSKY, Secretary*
Chairman of Rhone-Poulenc Rorer, Senior Vice President and Secretary
Inc.; Director of Sun Company, Inc. of The Vanguard Group, Inc.; Secre-
tary of each of the investment com-
BRUCE K. MACLAURY, Director panies in The Vanguard Group.
President. The Brookings Institu- RICHARD F. HYLAND, Treasurer*
tion; Director of American Express
Bank, Ltd., The St. Paul Companies, Treasurer of The Vanguard Group,
Inc. and Scott Paper Co. Inc. and of each of the investment
companies in The Vanguard Group.
BURTON G. MALKIEL, Director
KAREN E. WEST, Controller*
Chemical Bank Chairman's Professor
of Economics, Princeton University; Vice President of The Vanguard
Director of Prudential Insurance Group, Inc.; Controller of each of
Co. of America, Amdahl Corporation, the investment companies in The
Baker Fentress & Co., The Jeffrey Vanguard Group.
Co., and Southern New England Com-
munications Company.
--------
* Officers of the Fund are
"interested persons" as defined in
the Investment Company Act of
1940.
THE VANGUARD GROUP
The Company is a member of The Vanguard Group of Investment Companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Company 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.
B-9
<PAGE>
Vanguard employs a supporting staff of management and administrative person-
nel needed to provide the requisite services to the Funds and also furnishes
the Funds with necessary office space, furnishings and equipment. Each Fund
pays its share of Vanguard's 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, au-
diting and custodian fees.
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 ad-
viser for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to pre-
vent unlawful practices in connection with the purchase or sale of securities
by persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are per-
mitted to engage in personal securities transactions. However, such transac-
tions are subject to procedures and guidelines substantially similar to those
recommended by the mutual fund industry and approved by the U.S. Securities
and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time
in order to maintain the proportionate relationship between each Fund's rela-
tive net assets and its contribution to Vanguard's capital. At October 31,
1994, Vanguard/Windsor Fund had contributed capital of $1,720,000 to Vanguard,
representing 8.6% of Vanguard's capitalization and, at that time,
Vanguard/Windsor II had contributed capital of $1,253,000 to Vanguard, repre-
senting 6.3% of Vanguard's capitalization. The Funds' Service Agreement was
amended on May 15, 1993, to provide as follows: (a) each Vanguard Fund may in-
vest up to 0.40% of its current net assets in Vanguard and (b) there is no
other limitation on the amount that each Vanguard Fund may contribute to Van-
guard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended October 31, 1994, Vanguard/Windsor Fund's share of
Vanguard's actual net costs of operation relating to management and
administrative services (including transfer agency) totaled approximately
$19,582,000 and Vanguard/Windsor II's share of such costs of operation totaled
approximately $17,200,000.
DISTRIBUTION. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for shares of the
Funds, in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as may be
required.
The principal distribution expenses are for advertising, promotional materi-
als and marketing personnel. Distribution services may also include organizing
and offering to the public, from time to time, one or more new investment com-
panies which will become members of the Group. The Directors and Officers of
Vanguard determine the amount to be spent annually on distribution activities,
the manner and amount to be spent on each Fund, and whether to organize new
investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remain-
ing one half of these expenses is allocated among the Funds based upon each
Fund's sales for the preceding 24 months relative to the total sales of the
Funds as a Group, provided, however, that no Fund's aggregate quarterly rate
of contribution for distribution expenses of a marketing and promotional na-
ture shall exceed 125% of the average
B-10
<PAGE>
distribution expense rate for the Group, and that no Fund shall incur annual
distribution expenses in excess of 2/100 of 1% of its average month-end net
assets. During the fiscal year ended October 31, 1994, Vanguard/Windsor Fund
paid approximately $1,662,000 of the Group's distribution and marketing ex-
penses, which represented an effective annual rate of .02 of 1% of
Vanguard/Windsor Fund's average net assets and Vanguard/Windsor II paid ap-
proximately $1,481,000 of such expenses which represented an effective annual
rate of .02 of 1% of Vanguard/Windsor II's net assets.
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to Vanguard Windsor II, Vanguard Money Market Reserves, Vanguard
Municipal Bond Fund, several Portfolios of Vanguard Fixed Income Securities
Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard California Tax-Free Fund,
Vanguard New York Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund,
Vanguard Ohio Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard
Index Trust, Vanguard Bond Index Fund, Vanguard International Equity Index
Fund, Vanguard Balanced Index Fund, Vanguard Institutional Portfolios.
Vanguard Admiral Funds, Vanguard Tax-Managed Fund, Vanguard Institutional
Index Fund, several Portfolios of Vanguard Variable Insurance Fund, a portion
of Vanguard/Morgan Growth Fund as well as several indexed separate accounts.
These services are provided on an at-cost basis by an investment 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 Company pays each Director who is not also an Officer an annual fee plus
travel and other expenses incurred in attending Board meetings. The Company's
Officers and employees are paid by Vanguard which, in turn, is reimbursed by
the Company, and each other Fund in the Group, for its proportionate share of
Officers' and employees' salaries and retirement benefits.
Under its Retirement Plan, Vanguard contributes annually an amount equal to
10% of each Officer's annual compensation plus 5.7% of that part of the Offi-
cer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under the Thrift Plan, all Officers are per-
mitted to make pre-tax basic contributions in a maximum amount equal to 4% of
total compensation. Vanguard matches the basic contributions on a 100% basis.
Upon retirement, Directors who are not Officers are paid an annual fee based
on the number of years of service on the Board, up to fifteen years of serv-
ice. The fee is equal to $1,000 for each year of service and each investment
company member of The Vanguard Group contributes a proportionate amount of
this fee based on its relative net assets. This fee is paid, subsequent to a
Director's retirement, for a period of ten years or until the death of a re-
tired Director.
B-11
<PAGE>
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors, and the Officers of the Company for
whom the Company's proportionate share of remuneration exceeded $60,000, for
the fiscal year ended October 31, 1994.
VANGUARD/WINDSOR FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED FROM ALL
COMPENSATION AS PART OF ANNUAL BENEFITS VANGUARD FUNDS
NAMES OF DIRECTORS FROM THE COMPANY COMPANY EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- ------------------ ---------------- ---------------- --------------- --------------------
<S> <C> <C> <C> <C>
John C. Bogle(1)........ $425,292 $44,827 -- --
John J. Brennan(1)...... $191,238 $24,970 -- --
Barbara Barnes
Hauptfuhrer............ $9,647 $1,956 $15,000 $50,000
Robert E. Cawthorn...... $9,647 $1,630 $13,000 $50,000
Bruce K. MacClaury...... $8,683 $1,630 $12,000 $45,000
Burton G. Malkiel....... $9,647 $1,304 $15,000 $50,000
Alfred M. Rankin........ $9,647 $1,030 $15,000 $50,000
John C. Sawhill......... $9,647 $1,223 $15,000 $50,000
James O. Welch, Jr...... $9,262 $1,505 $15,000 $48,000
J. Lawrence Wilson...... $9,455 $1,087 $15,000 $49,000
</TABLE>
- --------
(1) As "Interested Directors", Messrs. Bogle and Brennan receive no compensa-
tion for their service as Directors. Compensation amounts reported for
Messrs. Bogle and Brennan relate to their respective positions as Chief
Executive Officer and President of the Company.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 33 Vanguard
funds (32 in the case of Mr. MacClaury).
INVESTMENT ADVISORY SERVICES
VANGUARD/WINDSOR FUND
The Company employs Wellington Management Company ("WMC") under an invest-
ment advisory agreement dated June 19, 1985 to manage the investment and rein-
vestment of the assets of Vanguard/Windsor Fund and to continuously review,
supervise and administer Vanguard/Windsor Fund's investment program. WMC dis-
charges its responsibilities subject to the control of the Officers and Direc-
tors of the Company. WMC is a Massachusetts general partnership controlled by
the following general partners: Robert W. Doran, Duncan M. McFarland and John
B. Neff.
Vanguard/Windsor Fund pays WMC a basic fee at the end of each fiscal quar-
ter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to Vanguard/Windsor Fund's average month-end net assets for
the quarter.
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
---------- ------
<S> <C>
First $200 million................................................. 0.350%
Next $250 million.................................................. 0.275%
Next $300 million.................................................. 0.200%
Over $750 million.................................................. 0.150%
</TABLE>
The basic fee paid to WMC may be increased or decreased by applying an ad-
justment formula based on Vanguard/Windsor Fund's investment performance. Such
formula provides for an increase
B-12
<PAGE>
or decrease in the basic fee paid to WMC each quarter, depending upon
Vanguard/Windsor Fund's investment performance for the thirty-six months pre-
ceding the end of the quarter relative to the investment record of the Stan-
dard and Poor's Composite Stock Price Index (the "S&P 500") for the same peri-
od. The schedule of incentive/penalty adjustments is set forth in the
Vanguard/Windsor Fund Prospectus.
For purposes of incentive/penalty adjustments, the investment performance of
Vanguard/Windsor Fund for any period is expressed as a percentage of
Vanguard/Windsor Fund's net asset value per share at the beginning of the pe-
riod. This percentage is equal to the sum of: (i) the change in
Vanguard/Windsor Fund's net asset value per share during the period; (ii) the
value of Vanguard/Windsor Fund's cash distributions per share having an ex-
dividend date occurring within the period; and (iii) the per share amount of
capital gains taxes paid or accrued during the period by Vanguard/Windsor Fund
for undistributed realized long-term capital gains. The investment record of
the S&P Index for any period is expressed as a percentage of the S&P Index
level at the beginning of the period. This percentage is equal to the sum of
(i) the change in the level of the S&P Index, during the period and (ii) the
value, computed consistently with the S&P Index, of cash distributions having
an ex-dividend date occurring within the period made by companies whose secu-
rities comprise the S&P Index.
During the fiscal years ended October 31, 1992, 1993 and 1994
Vanguard/Windsor Fund paid the following advisory fees:
<TABLE>
<CAPTION>
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Basic Fee.............................. $13,156,000 $15,547,000 $17,236,000
Increase or Decrease for Performance
Adjustment............................ (7,680,000) 4,136,000 9,213,000
----------- ----------- -----------
Total................................ $ 5,476,000 $19,683,000 $26,449,000
=========== =========== ===========
</TABLE>
VANGUARD/WINDSOR II
Vanguard/Windsor II employs a "multi-manager" approach utilizing four in-
vestment advisors.
BARROW, HANLEY, MEWHINNEY & STRAUSS
Vanguard/Windsor II has entered into an investment advisory agreement dated
May 1, 1993 with Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S") to manage
a portion of the assets of Vanguard/Windsor II (currently approximately 72%).
Under this agreement, BHM&S manages the investment and reinvestment of the
designated assets and continuously reviews, supervises and administers the in-
vestment program of Vanguard/Windsor II with respect to those assets. BHM&S
discharges its responsibilities subject to the control of the Officers and Di-
rectors of the Company.
BHM&S is a Texas corporation controlled by the following officers of BHM&S:
James Pindy Barrow, Vice President; Bryant Miller Hanley, Jr., President;
Michael Christopher Mewhinney, Vice President and John Luke Strauss, Vice
President, Secretary and Treasurer.
Vanguard/Windsor II pays BHM&S a basic fee at the end of each fiscal quar-
ter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of Vanguard/Windsor II
managed by BHM&S for the quarter:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------- -----------
<S> <C>
First $200 million............................................ 0.300%
Next $300 million............................................. 0.200%
Next $500 million............................................. 0.150%
Over $1 billion............................................... 0.125%
</TABLE>
B-13
<PAGE>
Effective with the quarter ending April 30, 1996, the basic fee paid to
BHM&S will be increased or decreased by applying an adjustment formula based
on the investment performance of the assets of Vanguard/Windsor II managed by
BHM&S (the "BHM&S Portfolio"). Such formula provides for an increase or de-
crease in the basic fee paid to BHM&S each quarter, depending upon the BHM&S
Portfolio's investment performance for the thirty-six months preceding the end
of the quarter relative to the investment record of the Standard &
Poor's/BARRA Value Index (the "BARRA Value Index"). The schedule of
incentive/penalty adjustments is set forth on the Vanguard/Windsor II Prospec-
tus.
Until the quarter ending April 30, 1996, the incentive/penalty fee will be
calculated according to the following transition rules:
(a) For the period May 1, 1993 to January 31, 1994 the incentive/penalty
fee was not operable. During this period, Vanguard/Windsor II paid BHM&S
the basic advisory fee set forth above.
(b) Beginning with the quarter ending April 30, 1994, the
incentive/penalty fee has been calculated based on a comparison of the in-
vestment performance of the BHM&S Portfolio and that of the BARRA Value In-
dex over the number of months elapsed between May 1, 1993 and the end of
the quarter for which the fee is being computed. The number of percentage
points by which the investment performance of the BHM&S Portfolio must ex-
ceed or fall below that of the BARRA Value Index will increase proportion-
ately from 3 percentage points and 2 percentage points, respectively, for
the twelve months ended April 30, 1994 to 9 percentage points and 6 per-
centage points, respectively for the thirty-six months ended April 30,
1996.
The BARRA Value Index includes stocks in the Standard and Poor's 500 Compos-
ite Stock Price Index with lower than average ratios of market price to book
value. These types of stocks are often referred to as "value" stocks.
The investment performance of the BHM&S Portfolio for any period is ex-
pressed as a percentage of the "BHM&S Portfolio Unit Value" at the beginning
of such period. This percentage is equal to the sum of: (i) the change in the
BHM&S Portfolio Unit Value during such period; (ii) the unit value of the
Fund's cash distributions from the BHM&S Portfolio's net investment income and
realized net capital gains (whether long-term or short-term) having an ex-div-
idend date occurring within such period; and (iii) the unit value of capital
gains taxes paid or accrued during such period by Vanguard/Windsor II for un-
distributed realized long-term capital gains realized from the BHM&S Portfo-
lio.
The "BHM&S Portfolio Unit Value" will be determined by dividing the total
net assets of the BHM&S Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the BHM&S Portfolio was equal to
the total shares outstanding of Vanguard/Windsor II. After such initial date,
as assets are added to or withdrawn from the BHM&S Portfolio, the number of
units of the BHM&S Portfolio will be adjusted based on the unit value of the
BHM&S Portfolio on the day such changes are executed.
The investment record of the BARRA Value Index is calculated quarterly by
(i) multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the BARRA Value Index by its weighting in
the BARRA Value Index at the beginning of the quarter, and (ii) adding the
values discussed in (i). For any period, therefore, the investment record of
the BARRA Value Index will be the compounded quarterly returns of the BARRA
Value Index.
During the fiscal years ended October 31, 1992, 1993 and 1994,
Vanguard/Windsor II paid advisory fees to BHM&S of approximately $4,572,000,
$6,488,000 and $7,518,000, respectively.
OTHER ADVISERS. On November 1, 1991, Vanguard/Windsor II added Equinox Capi-
tal Management ("Equinox") and Tukman Capital Management ("Tukman") to manage
the investment and reinvestment of a portion of its assets (approximately 10%
each). Additionally, Vanguard's Core Manage-
B-14
<PAGE>
ment Group was added to manage approximately 8% of the Vanguard/Windsor II's
assets as of that date. Equinox, Tukman and Vanguard's Core Management Group
discharge their respective responsibilities subject to the control of the Di-
rectors and Officers of the Fund.
EQUINOX
Equinox is a Delaware corporation controlled by the following officers of
Equinox: Ronald J. Ulrich (Director and President), Edward E. Murphy (Princi-
pal), Wendy D. Lee (Managing Director), David E. Walker (Vice President) and
Laura Starr (Vice President).
Under the terms of an investment advisory agreement dated November 1, 1991,
Vanguard/Windsor II pays Equinox a basic fee at the end of each fiscal quar-
ter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the portion of Vanguard/Windsor II's average month-end
net assets managed by Equinox for the quarter.
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
---------- ------
<S> <C>
First $100 million................................................. 0.300%
Next $300 million.................................................. 0.200%
Over $400 million.................................................. 0.150%
</TABLE>
The basic fee paid to Equinox may be increased or decreased by applying an
adjustment formula based on the investment performance of the portion of
Vanguard/Windsor II's assets managed by Equinox (the "Equinox Portfolio") rel-
ative to the investment record of the Standard & Poor's 500 Composite Stock
Price Index ("S&P 500"). Such formula provides for an increase or decrease in
the basic fee paid to Equinox each quarter, depending upon the Equinox Portfo-
lio's investment performance for the thirty-six months preceding the end of
the quarter. The schedule of incentive/penalty fee adjustments is set forth in
the Vanguard/Windsor II Prospectus.
The investment performance of the Equinox Portfolio for any period is ex-
pressed as a percentage of the "Equinox Portfolio Unit Value" at the beginning
of such period. This percentage is equal to the sum of: (i) the change in the
Equinox Portfolio unit value during such period; (ii) the unit value of the
Vanguard/Windsor II's cash distributions from the Equinox Portfolio net in-
vestment 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
Vanguard/Windsor II for undistributed realized long-term capital gains real-
ized from the Equinox Portfolio.
The "Equinox Portfolio Unit Value" will be determined by dividing the total
net assets of the Equinox Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Equinox Portfolio was equal
to the total shares outstanding of Vanguard/Windsor II. After such initial
date, as assets are added to or withdrawn from the Equinox Portfolio, the num-
ber of units of the Equinox Portfolio will be adjusted based on the unit value
of the Equinox Portfolio on the day such changes are executed.
The investment record of the S&P 500 will be calculated quarterly by (i)
multiplying the total return for the quarter (change in the market price plus
dividends) of each stock included in the S&P 500 by its weighting in the S&P
500 at the beginning of the quarter, and (ii) adding the values discussed in
(i). For any period, therefore, the investment record of the S&P 500 will be
the compounded quarterly returns of the S&P too.
During the fiscal years ended October 31, 1992, 1993 and 1994,
Vanguard/Windsor II paid advisory fees to Equinox of approximately $781,000,
$1,171,000 and $1,424,000, respectively.
B-15
<PAGE>
TUKMAN
Tukman is a Maryland corporation controlled by the following officers of
Tukman: Melvin T. Tukman, President and Director, and Daniel L. Grossman, Vice
President.
Under the terms of an investment advisory agreement dated November 1, 1991,
the Fund pays Tukman a basic 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 assets of the portion of the Vanguard/Windsor II's
assets managed by Tukman:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
---------- ------
<S> <C>
First $25 million.................................................. 0.400%
Next $125 million.................................................. 0.350%
Next $350 million.................................................. 0.250%
Next $500 million.................................................. 0.200%
Over $1 billion.................................................... 0.150%
</TABLE>
The basic fee paid to Tukman may be increased or decreased by applying an
adjustment formula based on the investment performance of the portion of
Vanguard/Windsor II's assets managed by Tukman (the "Tukman Portfolio") rela-
tive to the investment record of the Standard & Poor's 500 Composite Stock
Price Index ("S&P 500"). Such formula provides for an increase or decrease in
the basic fee paid to Tukman each quarter, depending upon the Tukman Portfo-
lio's investment performance for the thirty-six months preceding the end of
the quarter. The schedule of incentive/penalty fee adjustments is set forth in
the Vanguard/Windsor II Prospectus.
The investment performance of the Tukman Portfolio for any period is ex-
pressed as a percentage of the "Tukman Portfolio Unit Value" at the beginning
of such period. The percentage is equal to the sum of: (i) the change in the
Tukman Portfolio unit value during such period; (ii) the unit value of
Vanguard/Windsor II's cash distributions from the Tukman Portfolio net invest-
ment 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
Vanguard/Windsor II for undistributed realized long-term capital gains real-
ized from the Tukman Portfolio.
The "Tukman Portfolio Unit Value" will be determined by dividing the total
net assets of the Tukman Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Tukman Portfolio was equal
to the total shares outstanding of Vanguard/Windsor II. After such initial
date, as assets are added to or withdrawn from the Tukman Portfolio, the num-
ber of units of the Tukman Portfolio will be adjusted based on the unit value
of the Tukman Portfolio on the day such changes are executed.
The investment record of the S&P 500 will be calculated quarterly by (i)
multiplying the total return for the quarter (change in market price plus div-
idends) of each stock included in the S&P 500 by its weighting in the S&P 500
at the beginning of the quarter, and (ii) adding the values discussed in (i).
For any period, therefore, the investment record of the S&P 500 will be the
compounded quarterly returns of the S&P 500.
During the fiscal years ended October 31, 1992, 1993 and 1994,
Vanguard/Windsor II paid advisory fees to Tukman of approximately $1,028,000,
$1,503,000 and $1,825,000, respectively.
VANGUARD'S CORE MANAGEMENT GROUP
Since November 1, 1991, Vanguard's Core Management Group has provided in-
vestment advisory services on an at-cost basis with respect to a portion of
the Vanguard/Windsor II's assets (currently
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<PAGE>
approximately 8%). The Core Management Group also provides investment advisory
services to several Vanguard Funds, including Vanguard Index Trust, Vanguard
Balanced Index Fund, Vanguard International Equity Index Fund, Vanguard Insti-
tutional Index Fund, several indexed separate accounts as well as a portion of
Vanguard/Morgan Growth Fund's assets. The quantitative approach used by Van-
guard's Core Management Department is designed to generate highly predictable
results relative to a benchmark of large and medium capitalization "value"
stocks. A portfolio is constructed from attractively priced "value" stocks us-
ing an optimizer to assure that the characteristics of the portfolio are simi-
lar to that of the benchmark. The Core Management Group is supervised by the
Officers of the Fund.
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
Vanguard/Windsor Fund's present agreement with WMC continues in effect until
May 31, 1995. Vanguard/Windsor II's present agreements with BHM&S, Equinox and
Tukman continue in effect until April 30, 1995, October 31,1995 and October
31, 1995, respectively. Each agreement is renewable for successive one-year
periods if specifically approved by a vote of the Company's Board of Directors
at a meeting called for the purpose of considering such approval. The Board's
approval must include the affirmative votes of a majority of the Directors who
are neither parties to the contract or "interested persons" of such parties
(as defined in the Investment Company Act of 1940). In addition, the question
of continuing an investment advisory agreement may be presented to sharehold-
ers. In such an event, the agreement would be continued only if approved by
the affirmative vote of a majority of the outstanding shares of the Fund to
which the agreement related.
Each investment advisory agreement is automatically terminated if assigned,
and may be terminated without penalty at any time (1) by majority vote of ei-
ther the Board of Directors or the Fund's outstanding shares upon 60 days'
written notice to the adviser, or (2) by the adviser upon 90 days' written no-
tice to the Fund.
The Company'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 ad-
viser or as an additional adviser;
(B) A change in the terms of an advisory agreement; or
(C) The continued employment of an existing adviser, on the same advi-
sory contract terms, where a contract has been assigned because of a
change in control of the adviser.
Any such change will be made upon not less than 30 days' prior written no-
tice to shareholders, which shall include the information concerning the ad-
viser that would have normally been included in a proxy statement.
MORE INFORMATION ON ADVISERS' INCENTIVE/PENALTY FEES
In April 1972, the Securities and Exchange Commission ("SEC") issued Release
No. 7113 under the Investment Company Act of 1940 to call the attention of di-
rectors 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 insig-
nificant differences" between the investment performance of a fund and that of
the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a "rule of
thumb' the performance difference should be at least ^ 10 percentage points"
annually before the maximum performance adjustment may be made. However, the
Release also states that "because of the preliminary nature of these studies,
the Commission is not recommending, at this time, that any particular perfor-
mance difference exist before the maximum fee
B-17
<PAGE>
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 sig-
nificant." The Board of Directors has fully considered the SEC Release and be-
lieves that the performance adjustments as included in the agreements with WMC,
BHM&S, Equinox and Tukman are entirely appropriate although not within the plus
or minus 10 percentage points per year range suggested in the Release. Under
the Funds investment advisory agreements, the maximum performance adjustments
are made at a difference of plus or minus 12 and plus or minus 9 percentage
points from the performance of the respective index over a thirty-six month
period, which would effectively be the equivalent of approximately plus or
minus 4 and plus or minus 3 percentage points difference per year.
PORTFOLIO TRANSACTIONS
WMC, BHM&S, Equinox, Tukman and Vanguard are authorized to (with the ap-
proval of the Board of Directors) select the brokers or dealers that will exe-
cute the purchases and sales of portfolio securities for the respective series
of the Company. The investment advisory agreements direct the advisers to use
their best efforts to obtain the best available price and most favorable exe-
cution as to all transactions. Each investment adviser has undertaken to exe-
cute each investment transaction at a price and commission which provides the
most favorable total cost or proceeds reasonably obtainable under the circum-
stances.
In placing portfolio transactions, each investment 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 deter-
mined that more than one broker can offer the brokerage services needed to ob-
tain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical in-
formation and provide other services in addition to execution services to the
series and/or the investment adviser. Each investment 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 Board of Directors, each investment adviser may cause the se-
ries 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 re-
sponsibilities of the adviser to the Company and the other Funds in the Group.
Currently, it is the Company's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt neces-
sary for the achievement of better execution of certain securities transac-
tions that otherwise might not be available. An investment adviser will only
pay such higher commissions if it believes this to be in the best interest of
the series. Some brokers or dealers who may receive such higher commissions in
recognition of brokerage services related to execution of securities transac-
tions are also providers of research information to investment adviser and/or
the Company. However, the investment advisers have informed the Company that
they will not pay higher commission rates specifically for the purpose of ob-
taining research services.
Since the Company does not market its shares through intermediary brokers or
dealers, it is not the Company's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, the Company may place portfolio orders with qualified broker-dealers
who recommend shares of the Company to other clients, or who act as agent in
the
B-18
<PAGE>
purchase of the Company's shares for their clients, and may, when a number of
brokers and dealers can provide comparable best price and execution on a par-
ticular transaction, consider the sale of the Company's shares by a broker or
dealer in selecting among qualified broker-dealers.
During the fiscal years ended October 31, 1992, 1993 and 1994 the Company
paid $11,073,668, $14,909,648 and $14,906,748 in brokerage commissions, re-
spectively.
Some securities considered for investment by a series of the Company may
also be appropriate for the other series and for other Funds and/or clients
served by the investment adviser. If purchase or sale of securities consistent
with the investment policies of the series and one or more of these other
Funds or clients served by the investment adviser are considered at or about
the same time, transactions in such securities will be allocated among the
several Funds and clients in a manner deemed equitable by the investment ad-
viser.
PERFORMANCE MEASURES
Each of the investment company members of the Vanguard Group, including
Vanguard/Windsor Fund and Vanguard/Windsor II, may from time to time use one
or more of the following unmanaged indices for comparative performance purpos-
es.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
STANDARD AND POOR'S/BARRA VALUE INDEX -- consists of the stocks in the
Standard and Poor's 500 Composite Stock Price Index ("S&P 500") with the
lowest price-to-book ratios, comprising 50% of the market capitalization of
the S&P 500.
WILSHIRE 5000 EQUITY INDEXES -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government
National Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-
weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.
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.
B-19
<PAGE>
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current
coupon high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, noncallable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers
High Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index, 35% Salomon Brothers High
Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The Index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX --
is a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between
5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LIPPER 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.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Company was originally organized as a corporation in 1959. On January 2,
1985, the Company was reorganized into a Pennsylvania business trust which was
created solely for that purpose. The Company was reorganized as a Maryland
corporation on December 30, 1985. The Amended and Restated Articles of Incor-
poration permit the Directors to issue 1,600,000,000 shares of common stock,
with one cent par value. The Board of Directors has the power to designate one
or more classes ("series") of shares
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<PAGE>
of common stock and to classify or reclassify any unissued shares with respect
to such series. Currently the Company is offering shares of two series.
The shares of each series are fully paid and non-assessable, and have no
preference as to conversion, exchange, dividends, retirement or other fea-
tures. The shares of each series have no pre-emptive rights. Such shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Direc-
tors if they choose to do so. A shareholder is entitled to one vote for each
full share held (and a fractional vote for each fractional share held), then
standing in his name on the books of the Company. On any matter submitted to a
vote of shareholders, all shares of the Company then issued and outstanding
and entitled to vote, irrespective of the series, shall be voted in the aggre-
gate and not by series except; (i) when required by the Investment Company Act
of 1940, shares shall be voted by individual series; and (ii) when the matter
does not affect any interest of a particular series, then only shareholders of
the affected series shall be entitled to vote thereon.
FINANCIAL STATEMENTS
The Funds' Financial Statements for the year ended October 31, 1994, includ-
ing the financial highlights for each of the five fiscal years in the period
ended October 31, 1994, appearing in the Vanguard/Windsor Fund and
Vanguard/Windsor II 1994 Annual Reports to Shareholders, and the reports
thereon of Price Waterhouse LLP, independent accountants, also appearing
therein, are incorporated by reference in this Statement of Additional Infor-
mation. The Funds' 1994 Annual Reports to Shareholders are enclosed with this
Statement of Additional Information. For a more complete discussion of a
Fund's performance, please see the Fund's 1994 Annual Report to Shareholders,
which may be obtained without charge.
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