<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-14336) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. /X/
POST-EFFECTIVE AMENDMENT NO. 87 /X/
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 90
VANGUARD/WINDSOR FUNDS, INC.
(FORMERLY, THE WINDSOR FUNDS, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
IT IS PROPOSED THAT THIS REGISTRATION STATEMENT BECOME EFFECTIVE:
on February 28, 1996 pursuant to paragraph (b) of Rule 485.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24(F)(2) NOTICE FOR THE YEAR ENDED OCTOBER 31, 1995, ON NOVEMBER 17, 1995.
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<PAGE> 2
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................. Cover Page
Item 2. Synopsis.................................... Not Applicable
Item 3. Condensed Financial Information............. Financial Highlights
Item 4. General Description of Registrant........... Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund...................... Directors and Officers of the Fund;
Management of the Fund
Item 6. Capital Stock and Other Securities.......... Opening an Account and Purchasing
Shares; Selling Your Shares; The
Fund's Share Price; Dividends,
Capital Gains and Taxes; General
Information
Item 7. Purchase of Securities Being Offered........ Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase.................... Selling Your Shares
Item 9. Legal Proceedings........................... Not Applicable
</TABLE>
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................. Cover Page
Item 11. Table of Contents........................... Cover Page
Item 12. General Information and History............. Investment Objectives and Policies;
Item 13. Investment Objective and Policies........... Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund...................... Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities...............................
Management of the Company
Item 16. Investment Advisory and Other Services...... Management of the Company
Item 17. Brokerage Allocation........................ Not Applicable
Item 18. Capital Stock and Other Securities.......... Financial Statements
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered.................
Purchase of Shares; Redemption of
Shares, Dividends, Capital Gains and Taxes
Item 20. Tax Status.................................. (Prospectus)
Item 21. Underwriters................................ Not Applicable
Item 22. Calculations of Performance Data............
Item 23. Financial Statements........................ Financial Statements
</TABLE>
<PAGE> 3
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[VANGUARD WINDSOR FUNDS LOGO] A Series of Vanguard/Windsor Funds
and A Member of The Vanguard Group
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PROSPECTUS -- FEBRUARY 28, 1996
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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
OBJECTIVE AND
POLICIES
Vanguard/Windsor Fund (the "Fund") is an open-end
diversified investment company that seeks to provide
long-term growth of capital and income by investing
primarily 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. Government, including the FDIC.
The Fund is an independent series of Vanguard/Windsor
Funds, Inc. (the "Company"). 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
ACCOUNT Currently, shares of the Fund are not being offered or
sold to new investors. Current shareholders of the Fund
may make additional investments of up to $25,000 during
calendar year 1996. See "Opening an Account and Purchasing
Shares" for additional 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
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated February 28, 1996, 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 Page Page
<S> <C> <C>
Fund Expenses ......................2 Investment Limitations ........... 8 SHAREHOLDER GUIDE
Financial Highlights ...............2 Management of the Fund ........... 9 Opening an Account and
Yield and Total Return .............3 Investment Adviser ............... 9 Purchasing Shares ................... 15
Performance Record ............... 11 When Your Account Will Be Credited .. 18
FUND INFORMATION Dividends, Capital Gains Selling Your Shares ................. 18
Investment Objectives ..............4 and Taxes ...................... 12 Exchanging Your Shares .............. 20
Investment Policies ................4 The Share Price of The Fund ...... 13 Important Information about
Investment Risks ...................4 General Information .............. 13 Telephone Transactions .............. 21
Who Should Invest ..................5 Transferring Registration .......... 22
Implementation of Policies .........6 Other Vanguard Services ............. 22
</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
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 4
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 1995 fiscal
year.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
---------------------------------------------------------------------------------
Sales Load Imposed on Purchases........................................ None
Sales Load Imposed on Reinvested Dividends............................. None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL FUND OPERATING EXPENSES
---------------------------------------------------------------------------------
Management & Administrative Expenses................................... 0.20%
Investment Advisory Fees............................................... 0.22
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
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of
the five years in the period ended October 31, 1995, 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, together
with the remaining portions of the Fund's 1995 Annual
Report to Shareholders, are incorporated by reference in
the Statement of Additional Information and this
Prospectus, and which appear, along with the report of
Price Waterhouse LLP, in the Fund's 1995 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1995 Annual Report to
Shareholders, which may be obtained without charge by
writing to the Fund or by calling our Investor Information
Department at 1-800-662-7447.
2
<PAGE> 5
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING
OF YEAR............... $14.55 $14.95 $12.37 $12.79 $9.72 $15.17 $14.13 $14.22 $13.85 $13.39
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment
Income.............. .44 .44 .37 .49 .58 .74 .71 .66 .78 .85
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 1.86 .42 2.98 .50 3.55 (4.59) 1.51 2.33 (.11) 3.05
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM
INVESTMENT
OPERATIONS........ 2.30 .86 3.35 .99 4.13 (3.85) 2.22 2.99 .67 3.90
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income... (.44) (.37) (.39) (.57) (.74) (.75) (.63) (.87) (.30) (.85)
Distributions from
Realized
Capital Gains....... (.86) (.89) (.38) (.84) (.32) (.85) (.55) (2.21) -- (2.59)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL
DISTRIBUTIONS..... (1.30) (1.26) (.77) (1.41) (1.06) (1.60) (1.18) (3.08) (.30) (3.44)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR.................. $15.55 $14.55 $14.95 $12.37 $12.79 $9.72 $15.17 $14.13 $14.22 $13.85
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN............ 17.80% 6.35% 28.29% 9.30% 44.69% (27.93)% 17.05% 27.01% 4.62% 29.31%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)............ $13,008 $11,406 $10,537 $8,250 $7,859 $5,841 $8,313 $5,920 $4,848 $4,862
Ratio of Expenses to
Average
Net Assets............ .45%* .45% .40% .26% .30% .37% .41% .46% .43% .52%
Ratio of Net Investment
Income to Average Net
Assets................ 3.01% 3.11% 2.68% 3.89% 4.84% 5.82% 5.07% 5.08% 4.86% 5.28%
Portfolio Turnover
Rate.................. 32% 34% 25% 32% 36% 21% 34% 24% 46% 51%
</TABLE>
* Effective in fiscal 1995, does not include expense reductions from directed
brokerage arrangements. The 1995 Ratio of Expenses to Average Net Assets is
.43% after including these reductions.
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YIELD AND
TOTAL RETURN From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Fund refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Fund (as stated in the advertisement) that
would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Fund is calculated daily by dividing the net
investment 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 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
reflect the income paid to an investor's account or the
yield reported in the Fund's reports to shareholders.
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3
<PAGE> 6
INVESTMENT
OBJECTIVES
THE FUND SEEKS TO
PROVIDE LONG-TERM
GROWTH OF CAPITAL
AND INCOME The objective of the Fund is to provide long-term growth
of capital and income. The Fund's secondary objective is
to provide current income. There can be no assurance that
the Fund will achieve these objectives.
These investment objectives are fundamental and so cannot
be changed without the approval of a majority of the
Fund's shareholders.
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INVESTMENT
POLICIES
THE FUND INVESTS
PRIMARILY IN
COMMON STOCKS The Fund invests primarily in common stocks, which are
selected principally on the basis of fundamental
investment value. Crucial to the valuation process is the
relationship of a company's underlying earning power and
dividend payout to the market price of its stock. The
Fund's holdings usually are characterized by relatively
low price-earnings ratios and 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 defensive purposes. The Fund may
also invest in stock futures contracts and options and in
foreign securities to a limited extent. See
"Implementation of Policies" for a description of these
investment practices of the Fund.
The Fund is responsible for voting the shares of all
securities it holds.
The investment policies of the Fund are not fundamental
and so may be changed by the Board of Directors without
shareholder approval.
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INVESTMENT RISKS
THE FUND IS SUBJECT
TO MARKET RISK As a mutual fund investing primarily in common stocks, the
Fund is subject to MARKET RISK -- i.e., the possibility
that common stock prices will decline over short or even
extended periods. The U.S. stock market has tended to be
cyclical, with periods when common stock prices generally
rise and periods 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 1995, as measured by the Standard & Poor's 500
Composite Stock Price Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
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 +12.5 +10.3 +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 1995.
4
<PAGE> 7
While this average return can be used as a guide for
setting reasonable expectations 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 historical investment performance, which may be
a poor guide to future returns. Also, stock market indexes
such as the S&P 500 are based on unmanaged portfolios of
securities before transaction costs and other expenses.
Such costs will reduce the relative investment performance
of the Fund and other "real world" portfolios. Finally,
the Fund is likely to differ in portfolio composition from
broad stock market averages, and so the Fund's performance
should not be expected to mirror the returns provided by a
specific index.
THE FUND IS ALSO
SUBJECT TO
MANAGER RISK The investment adviser manages the Fund according to the
traditional methods of "active" investment management,
which involve the buying and selling of securities based
upon economic, financial and market analysis and
investment judgment. MANAGER RISK refers to the
possibility that the Fund's investment 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
INVEST
LONG-TERM INVESTORS
SEEKING GROWTH OF
CAPITAL AND INCOME The Fund is intended for investors who are seeking growth
of capital and income. Although the Fund's secondary
objective is to provide current income, investors should
not consider the Fund a substitute for fixed-income
investments. The Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term market
movements. Investors who engage in excessive account
activity generate additional costs which are borne by all
of the Fund's shareholders. In order to minimize such
costs, the Fund has adopted the following policies. The
Fund reserves the right to reject any purchase request
(including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the
timing of the investment or previous excessive trading by
the investor. Additionally, the Fund has adopted exchange
privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Fund
reserves the right to suspend the offering of its shares.
No assurance can be given that the Fund will attain its
objectives 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.
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5
<PAGE> 8
IMPLEMENTATION
OF POLICIES
THE FUND MAY INVEST
IN SHORT-TERM FIXED
INCOME SECURITIES In addition to investing primarily in equity securities,
the Fund follows a number of additional investment
practices to achieve its objectives.
Although it normally seeks to remain substantially fully
invested in equity securities, the Fund may invest in
certain short-term fixed income securities. Such
securities may be used temporarily to invest uncommitted
cash balances, to 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' acceptances; and
repurchase agreements collateralized by these securities.
In addition, the Fund may, on occasion, invest a small
portion of its assets in bonds with ratings below
investment 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 securities at the Fund's cost plus interest
within a specified period (normally one day). In these
transactions, the securities purchased by the Fund will
have a total value equal to or in excess of the value of
the repurchase agreement, and will be held by the Fund's
Custodian Bank until repurchased.
THE FUND MAY INVEST
IN SECURITIES OF
FOREIGN ISSUERS The Fund may invest up to 20% of its assets in foreign
securities and may engage in currency transactions with
respect to such investments. Securities of foreign issuers
may trade in U.S. or foreign securities markets.
Securities of foreign issuers may involve investment risks
that are different from those of domestic issuers. Such
risks include the effect of foreign economic policies and
conditions, future political and economic developments,
and the possible imposition of exchange controls or other
foreign governmental restrictions on foreign debt issuers.
There may also be less publicly available information
about a foreign issuer than a domestic issuer of
securities. Foreign issuers are generally not subject to
the uniform accounting, auditing and financial reporting
standards that apply to domestic issuers. Foreign debt
markets may be characterized by lower liquidity, greater
price volatility, and higher transactions costs.
Additionally, it may be difficult to obtain or enforce a
legal judgment in a foreign court.
THE FUND MAY LEND
ITS SECURITIES The Fund may lend its investment securities to qualified
institutional investors for either short-term or long-term
periods for the purpose 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.
6
<PAGE> 9
BORROWING The Fund may borrow money, subject to the restrictions
described on page 8 in Investment Limitations, for
temporary or emergency purposes, including the meeting of
redemption requests which might otherwise require the
untimely disposition of securities.
PORTFOLIO TURNOVER IS
NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Fund retains the right to sell securities irrespective
of how long they have been held. It is anticipated that
the annual portfolio turnover of the Fund will not exceed
100%. A turnover rate of 100% would occur, for example, if
all of the securities of the Fund were replaced within one
year.
DERIVATIVE
INVESTING
Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
THE FUND MAY INVEST
IN DERIVATIVE
SECURITIES
The Fund may invest in futures contracts and options, but
only to a limited extent. Specifically, the Fund may enter
into futures contracts provided that not more than 5% of
its assets are required as a futures contract deposit; in
addition, the Fund may enter into futures contracts and
options transactions only to the extent that obligations
under such contracts or transactions represent not more
than 20% of the Fund's assets.
Futures contracts and options may be used for several
common fund management strategies: to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index. While futures contracts
and options can be used as leveraged investments, the Fund
may not use futures 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
redemptions, the Fund may invest a portion of its assets
in a stock futures contract. Because futures contracts
only require 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, 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.
The Fund may use futures contracts for bona fide "hedging"
purposes. In executing a hedge, a manager sells, for
example, stock index futures to protect against a decline
in the stock market. As such, if the market drops, the
value of the futures position will rise, thereby
offsetting the decline in value of the Fund's stock
holdings.
7
<PAGE> 10
FUTURES CONTRACTS
AND OPTIONS POSE
CERTAIN RISKS
The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks held by
the Fund and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing in
those contracts whose price fluctuations are expected to
resemble those of the Fund's underlying securities. The
risk that the Fund will be unable to close out a futures
position will be minimized by entering into such
transactions on a national exchange with an active and
liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (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.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS The Fund has adopted certain limitations on its investment
practices. Specifically, the Fund will not:
(a) with respect to 75% of the value of its total assets,
purchase the securities of any issuer (except
obligations of the United States government and its
instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of
the issuer, or more than 5% of the value of the 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 require 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
investment securities are purchased. The investment
limitations described here and in the Statement of
Additional Information may be changed only with the
approval of a majority of the Fund's shareholders.
- --------------------------------------------------------------------------------
8
<PAGE> 11
MANAGEMENT OF
THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct investment portfolios and total
assets in excess of $180 billion. Through their
jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other funds in the Group
obtain at cost virtually all of their corporate
management, administrative and distribution services.
Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard funds
have costs substantially lower than those of most
competing mutual funds. In 1995, the average expense ratio
(annual costs including advisory fees divided by total net
assets) for the Vanguard funds amounted to approximately
.31% compared to an average of 1.11% for the mutual fund
industry (data provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays 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.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER
WELLINGTON
MANAGEMENT
COMPANY SERVES AS
ADVISER TO THE FUND The Fund has entered into an investment advisory agreement
with Wellington Management Company ("WMC"), 75 State
Street, Boston, MA 02109, under which WMC manages the
investment and reinvestment of Vanguard/Windsor Fund's
assets and continuously reviews, supervises and
administers the Fund's investment program. WMC discharges
its responsibilities subject to the control of the
Officers and Directors of the Fund.
WMC is a professional investment counseling firm which
globally 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, 1995, WMC held
investment management authority with respect to more than
$108 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.
9
<PAGE> 12
Charles T. Freeman, Senior Vice President of WMC serves as
portfolio manager of the Fund. Mr. Freeman joined WMC in
1969 and served as assistant portfolio manager of the Fund
until his appointment as portfolio manager in January of
1996. Mr. Freeman is supported by research and other
investment services provided by the professional staff of
WMC.
John B. Neff, the Fund's previous portfolio manager,
retired from WMC effective December 31, 1995, after 31
years of service as the Fund's portfolio manager. Mr. Neff
serves as an adviser to WMC and continues 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 basic fee paid to the Adviser may be increased or
decreased by applying an adjustment based on the Fund's
investment performance. Such formula provides for an
increase or decrease of the basic fee in an amount equal
to .10% per annum (.025% per quarter) of the average
month-end net assets of the Fund if the Fund's investment
performance for the thirty-six months preceding the end of
the quarter is twelve percentage points or more above or
below, respectively, the investment record of the Standard
& Poor's 500 Composite Stock Price Index (the "S&P Index")
for the same period; or by an amount equal to .05% per
annum (.0125% per quarter) if the Fund's investment
performance for such thirty-six months is six or more but
less than twelve percentage points above or below,
respectively, the investment record of the S&P Index for
the same period.
During the fiscal year ended October 31, 1995, the total
advisory 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 .06% 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
recognition of brokerage services felt necessary for the
achievement of better execution, provided the adviser
believes 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
10
<PAGE> 13
Officers of the Fund believe that the quality of the
transaction and the commission are comparable to what they
would be with other qualified brokerage firms.
The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement, either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser. Any such change will only be made
upon not less than 30 days' prior written notice to
shareholders of the Fund, which shall include
substantially the information concerning the adviser that
would have normally been included in a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE
RECORD The table below provides investment results for the Fund
for 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, annualized for the
indicated periods. Also included is comparative
information with respect to the unmanaged Standard &
Poor's 500 Composite Stock Price Index, a widely used
barometer of stock market activity, and the Consumer Price
Index, a statistical measure of changes in the prices of
goods and services. The 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 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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN FOR VANGUARD/WINDSOR FUND
PERCENTAGE INCREASE
--------------------------------------------
FISCAL PERIODS VANGUARD/WINDSOR S&P 500 CONSUMER
ENDED 10/31/95 FUND INDEX PRICE INDEX
-------------- ---------------- ------- -----------
<S> <C> <C> <C>
3 Years +17.1% +14.7% +2.7%
5 Years +20.5 +17.2 +2.8
10 Years +13.9 +15.4 +3.5
20 Years +17.3 +14.3 +5.3
Lifetime* +13.0 +10.8 +4.6
* October 23, 1958 to October 31, 1995. Data for the Consumer
Price Index begins October 31, 1958.
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE> 14
DIVIDENDS, CAPITAL
GAINS AND TAXES
THE FUND PAYS
SEMI-ANNUAL
DIVIDENDS AND
AND CAPITAL GAINS
ANNUALLY The Fund expects to pay dividends from ordinary income
semi-annually. Capital gains distributions, if any, will
be made annually.
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the Fund may
declare special year-end dividend and capital gains
distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on
December 31 of the prior year.
Dividend and capital gains distributions may be
automatically reinvested or received in cash. See
"Choosing a Distribution Option" for a description of
these 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
extent 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 generally 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 capital gains on sales of portfolio
securities during the year. The Fund does not seek to
realize any particular amount of capital gains during a
year; rather, realized gains are a by-product of portfolio
management activities. Consequently, capital gains
distributions may be expected to vary considerably from
year to year; there will be no capital gains distributions
in years when the Fund realizes net capital losses.
Note that if you accept capital gains distributions in
cash instead of reinvesting them in additional shares, you
are in effect reducing the capital at work for you in the
Fund. Also, keep in mind that if you purchase shares in
the Fund shortly before the record date for a dividend or
capital gains distribution, a portion of your investment
will be returned to you as a taxable distribution,
regardless of whether you are reinvesting your
distributions or receiving them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
A CAPITAL GAIN OR
LOSS MAY BE REALIZED
UPON EXCHANGE
OR REDEMPTION A sale of shares of the Fund is a taxable event and may
result in a capital gain or loss. A capital gain or loss
may be realized from an ordinary redemption of shares or
an exchange of shares between two mutual funds (or two
portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
12
<PAGE> 15
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration
Form your proper Social Security or Employer
Identification number and certifying that you are not
subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund are exempt from
Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Fund. The Fund is managed without
regard to tax ramifications.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF THE FUND The Fund's share price or "net asset value" per share is
determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities,
by the number of outstanding shares of the Fund. Net asset
value is determined as of the regular close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the exchange is open for trading.
Portfolio securities that are listed on a securities
exchange are valued at the latest quoted sales prices.
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
securities for which market quotations are readily
available are valued at the latest quoted bid price.
Short-term instruments (those with remaining maturities of
60 days or less) are valued at cost, plus or minus any
amortized discount or premium, which approximates market.
Other assets and securities for which market quotations
are not readily available or which are restricted as to
sale are valued by such methods as the Board of Directors
deems in good faith to reflect fair value. 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 prices provided by a
pricing service may be determined without regard to bid or
last sale prices of each security but take into account
institutional-size transactions in similar groups of
securities as well as any developments related to specific
securities.
The Fund's share price can be found daily in the mutual
fund listings of most major newspapers under the heading
of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Company is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 2,200,000,000
shares of common stock, with a one cent par value. The
Board of Directors has the power to designate one or more
classes ("series") of shares of common stock and to
classify and reclassify any unissued shares with respect
to such series. Currently the Company is offering shares
of two series.
13
<PAGE> 16
The shares of each series of the Company are fully paid
and non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Company if
requested 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 Disbursing Agent. Price Waterhouse LLP, serves as
independent accountants for the Fund and will audit its
financial statements annually. The Fund is not involved in
any litigation.
- --------------------------------------------------------------------------------
14
<PAGE> 17
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES Currently, shares of the Fund are not being offered or
sold to new investors. Current shareholders of the Fund
may make additional investments, but the aggregate amount
of such investments 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
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term stock
market movements. Consequently the Fund reserves the right
to reject any specific purchase (or exchange purchase)
request. The Fund also reserves the right to suspend the
offering of shares for a period of time.
Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check is
made payable to The Vanguard Group-22.
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received. The
Fund is offered on a no-load basis (i.e., there are no
sales commissions or 12b-1 fees).
ADDITIONAL
INVESTMENTS Subsequent investments by current shareholders may be made
only by mail ($100 minimum), wire ($1,000 minimum),
exchange from another Vanguard Fund account, or Vanguard
Fund Express.
- --------------------------------------------------------------------------------
PURCHASING BY MAIL Additional investments should include the Invest-by-Mail
remittance 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 Invest-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
request to VANGUARD FINANCIAL CENTER, VANGUARD/WINDSOR
FUND, P.O. BOX 2600, VALLEY FORGE, PA 19482. For express
or registered mail, send your request to Vanguard
Financial Center, Vanguard/Windsor Fund, 455 Devon Park
Drive, Wayne, PA 19087.
- --------------------------------------------------------------------------------
15
<PAGE> 18
PURCHASING BY WIRE
Money should be
wired to:
BEFORE WIRING
Please contact
Client Services
(1-800-662-2739) CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO 0101 9897
ATTN VANGUARD
VANGUARD/WINDSOR FUND
ACCOUNT NUMBER
ACCOUNT REGISTRATION
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
EXCHANGE (from a
Vanguard account) Current shareholders may purchase additional shares of the
Fund by exchange from an existing Vanguard account. (As
explained on page 5, however, the Fund reserves the right
to refuse any exchange purchase request.) Please call our
Client Services Department at 1-800-662-2739.
- --------------------------------------------------------------------------------
PURCHASING BY
FUND EXPRESS
Special Purchase and
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account at
your request. Or, if you choose the Automatic Investment
option, money will be moved from your bank account to your
Vanguard account on the schedule (monthly, bimonthly
[every other month], quarterly or yearly) you select. To
establish these 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
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
16
<PAGE> 19
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund
shareholders. These distributions are made to all
shareholders who own Fund shares as of the distribution's
record date, regardless of how long the shares have been
owned. Purchasing shares just prior to the record date
could have a significant impact on your tax liability for
the year. For example, if you purchase shares immediately
prior to the record date of a sizable capital gain or
income dividend distribution, you will be assessed taxes
on the amount of the capital gain and/or dividend
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 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
potential distributions before investing. The Fund's
annual capital gains distribution normally occurs in
December, while income 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 ACCOUNT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO
ADD SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE
VANGUARD WITH ADDITIONAL INFORMATION AND A SIGNATURE
GUARANTEE. PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers 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
certificate is lost, you may incur an expense to replace
it.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or investment adviser may charge a service
fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.
ELECTRONIC PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
17
<PAGE> 20
WHEN YOUR
ACCOUNT WILL
BE CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire or exchange, and is received 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 received after the close of the Exchange, your
trade date is the next business day. Your shares are
purchased at the net asset value determined on your trade
date.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. You generally may
initiate a request by writing or by telephoning. Your
redemption proceeds are normally mailed within two
business days after the receipt of the request in Good
Order.
- --------------------------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD/WINDSOR FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request
to Vanguard 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 required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners exactly as they are registered
on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in 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
PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT AT 1-800-662-2739.
- --------------------------------------------------------------------------------
SELLING BY TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
PLEASE NOTE: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 10
calendar days following any expedited address change to
your account. An expedited address change is one that is
made by telephone, by Vanguard Online or, in writing,
without the signatures of all account owners. Please see
also "Important Information About Telephone Transactions."
- --------------------------------------------------------------------------------
18
<PAGE> 21
SELLING BY
FUND EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express AUTOMATIC WITHDRAWAL
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The SPECIAL REDEMPTION
option lets you move money from your Vanguard account to
your bank account on your request. To establish Fund
Express, call our Investor Information Department at
1-800-662-7447 for a Fund Express application.
- --------------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares of the Fund by making an exchange into
another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
- --------------------------------------------------------------------------------
IMPORTANT REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
- --------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION PROCEEDS If you choose to close your Vanguard/Windsor account
through a redemption, you will not be able to open another
account at 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
regular close of the New York Stock Exchange (generally
4:00 p.m. Eastern time) are processed on the day of
receipt and the redemption 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 receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as
described above in Important Redemption Information.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution
in kind of readily marketable securities.
- --------------------------------------------------------------------------------
19
<PAGE> 22
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
- --------------------------------------------------------------------------------
LOW BALANCE
FEE AND MINIMUM
ACCOUNT BALANCE
REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund will automatically deduct a $10 annual
fee from non-retirement accounts with balances falling
below $2,500 ($1,000 for Uniform Gifts/Transfers to Minors
Act accounts). This fee deduction will occur mid-year,
beginning in 1996. The fee generally will be waived for
investors whose aggregate Vanguard assets exceed $50,000.
In addition, the Fund reserves the right to liquidate any
non-retirement account that is below the minimum initial
investment amount. 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 below the Fund's minimum
account balance requirement. You would then be allowed 60
days to make an additional investment before the account
is liquidated. Proceeds would be promptly paid to the
registered shareholder.
Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets
(i.e., a decline in a Fund's net asset value).
- --------------------------------------------------------------------------------
EXCHANGING
YOUR SHARES Should your investment goals change, you may exchange your
shares of Vanguard/Windsor Fund for those of other
available Vanguard Funds.
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) When exchanging shares by telephone, please have ready the
Fund name, account number, Social Security number or
Employer Identification number listed on the account, and
the exact name and address in which the account is
registered. Only the registered shareholder, or his or her
pre-authorized representative, may complete such an
exchange. Requests for telephone exchanges received prior
to the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after
4:00 p.m. are processed the next business day. TELEPHONE
EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD BALANCED
INDEX, VANGUARD INDEX TRUST, VANGUARD INTERNATIONAL EQUITY
INDEX FUND, AND VANGUARD QUANTITATIVE PORTFOLIOS. If you
experience difficulty in making a telephone exchange, your
exchange request may be made by regular or express mail,
and it will be implemented at the closing net asset value
on the date received by Vanguard provided the request is
received in Good Order.
Please see "Important Information About Telephone
Transactions" for additional important details.
- --------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, and the name
of the Fund you wish to exchange into, the amount you wish
to exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD/WINDSOR FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard/Windsor Fund, 455
Devon Park Drive, Wayne, PA 19087.)
- --------------------------------------------------------------------------------
20
<PAGE> 23
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase;
therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- New accounts are not currently accepted in the Fund or
Vanguard/PRIMECAP Fund.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- 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. 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 exchange, as deemed necessary, at any time.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive
exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Fund during any twelve month
period. Notwithstanding these limitations, the Fund
reserves the right to reject any purchase request
(including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the 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.
21
<PAGE> 24
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
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account. If Vanguard fails
to follow reasonable security procedures, it may be liable
for any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person, 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: 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
Department (1-800-662-2739) for full instructions.
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time
you initiate a transaction in your account, except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement along with their Portfolio Summary
Statements. Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund,
or to
22
<PAGE> 25
contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
VANGUARD
FUND EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD
DIVIDEND EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form, or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any 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 offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
23
<PAGE> 26
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<PAGE> 27
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 28
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 29
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 30
<TABLE>
<S> <C> <C>
[VANGUARD WINDSOR FUND LOGO] [VANGUARD WINDSOR FUND LOGO]
--------------------------- P R O S P E C T U S
THE VANGUARD GROUP FEBRUARY 28, 1996
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482 [THE VANGUARD GROUP LOGO]
</TABLE>
P022
- --------------------------------------------------------------------------------
<PAGE> 31
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[VANGUARD WINDSOR FUND LOGO]
A Series of Vanguard/Windsor Funds
and A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- FEBRUARY 28, 1996
- --------------------------------------------------------------------------------
FUND INFORMATION: INSTITUTIONAL PARTICIPANT SERVICES -- 1-800-523-1188
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES AND
POLICIES
Vanguard/Windsor Fund (the "Fund") is an open-end
diversified investment company that seeks to provide
long-term growth of capital and income by investing
primarily 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. Government, including the FDIC.
The Fund is an independent series of Vanguard/Windsor
Funds, Inc. (the "Company"). The Company is currently
offering shares of two series. This Prospectus relates to
the Vanguard/Windsor Fund 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 personal investment account with the Fund
is available for individual investors. To obtain a copy of
that version of the Prospectus, please call
1-800-662-7447.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT The Fund is an investment option under a retirement or
savings 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 option.
If you have any questions about the Fund, please contact
Participant Services at 1-800-523-1188. If you have any
questions about your plan account, contact your plan
administrator or the organization that provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated February 28, 1996 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 Page Page
<S> <C> <C>
Fund Expenses ......................2 Who Should Invest ................. 5 Dividends, Capital Gains
Financial Highlights ...............2 Implementation of Policies ........ 6 and Taxes ........................ 11
Yield and Total Return .............3 Investment Limitations ............ 8 The Share Price of The Fund ........ 12
Investment Objectives ..............4 Management of the Fund ............ 8 General Information ................ 12
Investment Policies ................4 Investment Adviser ................ 9 SERVICE GUIDE
Investment Risks ...................4 Performance Record ................11 Participating in Your Plan ......... 14
</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> 32
FUND EXPENSES The following table illustrates ALL expenses and fees that
a shareholder of the Fund would incur. The expenses and
fees set forth in the table are for the 1995 fiscal year.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------------------------
Sales Load Imposed on Purchases........................................ None
Sales Load Imposed on Reinvested Dividends............................. None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------------------------------
Management & Administrative Expenses................................... 0.20%
Investment Advisory Fees............................................... 0.22
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
shareholder 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.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each year, insofar as they relate to each of
the five years in the period ended October 31, 1995, 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, together
with the remaining portions of the Fund's 1995 Annual
Report to Shareholders, are incorporated by reference in
the Statement of Additional Information and this
Prospectus, and which appear, along with the report of
Price Waterhouse LLP, in the Fund's 1995 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1995 Annual Report to
Shareholders, which may be obtained without charge by
writing to the Fund or by calling Participant Services at
1-800-523-1188.
2
<PAGE> 33
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING
OF YEAR................ $14.55 $14.95 $12.37 $12.79 $9.72 $15.17 $14.13 $14.22 $13.85 $13.39
------- ------- ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment
Income............... .44 .44 .37 .49 .58 .74 .71 .66 .78 .85
Net Realized and
Unrealized Gain
(Loss) on
Investments.......... 1.86 .42 2.98 .50 3.55 (4.59) 1.51 2.33 (.11) 3.05
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS......... 2.30 .86 3.35 .99 4.13 (3.85) 2.22 2.99 .67 3.90
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income.... (.44) (.37) (.39) (.57) (.74) (.75) (.63) (.87) (.30) (.85)
Distributions from
Realized Capital
Gains................ (.86) (.89) (.38) (.84) (.32) (.85) (.55) (2.21) -- (2.59)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL
DISTRIBUTIONS...... (1.30) (1.26) (.77) (1.41) (1.06) (1.60) (1.18) (3.08) (.30) (3.44)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR................... $15.55 $14.55 $14.95 $12.37 $12.79 $9.72 $15.17 $14.13 $14.22 $13.85
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN............. 17.80% 6.35% 28.29% 9.30% 44.69% (27.93)% 17.05% 27.01% 4.62% 29.31%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)............. $13,008 $11,406 $10,537 $8,250 $7,859 $5,841 $8,313 $5,920 $4,848 $4,862
Ratio of Expenses to
Average
Net Assets............. .45%* .45% .40% .26% .30% .37% .41% .46% .43% .52%
Ratio of Net Investment
Income to Average Net
Assets................. 3.01% 3.11% 2.68% 3.89% 4.84% 5.82% 5.07% 5.08% 4.86% 5.28%
Portfolio Turnover
Rate................... 32% 34% 25% 32% 36% 21% 34% 24% 46% 51%
</TABLE>
* Effective in fiscal 1995, does not include expense reductions from directed
brokerage arrangements. The 1995 Ratio of Expenses to Average Net Assets is
.43% after including these reductions.
- --------------------------------------------------------------------------------
YIELD AND
TOTAL RETURN From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Fund refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Fund (as stated in the advertisement) that
would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Fund is calculated daily by dividing the net
investment 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 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 reflect the income paid to an investor's account or
the yield reported in the Fund's reports to shareholders.
- --------------------------------------------------------------------------------
3
<PAGE> 34
INVESTMENT
OBJECTIVES
THE FUND SEEKS TO
PROVIDE LONG-TERM
GROWTH OF CAPITAL
AND INCOME The objective of the Fund is to provide long-term growth
of capital and income. The Fund's secondary objective is
to provide current income. There can be no assurance that
the Fund will achieve these objectives.
These investment objectives are fundamental and so cannot
be changed without the approval of a majority of the
Fund's shareholders.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE FUND INVESTS
PRIMARILY IN
COMMON STOCKS The Fund invests primarily in common stocks, which are
selected principally on the basis of fundamental
investment value. Crucial to the valuation process is the
relationship of a company's underlying earning power and
dividend payout to the market price of its stock. The
Fund's holdings usually are characterized by relatively
low price-earnings ratios and 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 defensive purposes. The Fund may
also invest in stock futures contracts and options and in
foreign securities to a limited extent.
See "Implementation of Policies" for a description of
these investment practices
of the Fund.
The Fund is responsible for voting the shares of all
securities it holds.
The investment policies of the Fund are not fundamental
and so may be changed by the Board of Directors without
shareholder approval.
- --------------------------------------------------------------------------------
INVESTMENT RISKS
THE FUND IS SUBJECT
TO MARKET RISK
As a mutual fund investing primarily in common stocks, the
Fund is subject to MARKET RISK -- i.e., the possibility
that common stock prices will decline over short or even
extended periods. The U.S. stock market has tended to be
cyclical, with periods when common stock prices generally
rise and periods 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 1995, as measured by the Standard & Poor's 500
Composite Stock Price Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
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 +12.5 +10.3 +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 1995.
4
<PAGE> 35
While this average return can be used as a guide for
setting reasonable expectations 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 historical investment performance, which may be
a poor guide to future returns. Also, stock market indexes
such as the S&P 500 are based on unmanaged portfolios of
securities before transaction costs and other expenses.
Such costs will reduce the relative investment performance
of the Fund and other "real world" portfolios. Finally,
the Fund is likely to differ in portfolio composition from
broad stock market averages, and so the Fund's performance
should not be expected to mirror the returns provided by a
specific index.
THE FUND IS ALSO
SUBJECT TO
MANAGER RISK The investment adviser manages the Fund according to the
traditional methods of "active" investment management,
which involve the buying and selling of securities based
upon economic, financial and market analysis and
investment judgment. MANAGER RISK refers to the
possibility that the Fund's investment 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
INVEST
LONG-TERM INVESTORS
SEEKING GROWTH OF
CAPITAL AND INCOME The Fund is intended for investors who are seeking growth
of capital and income. Although the Fund's secondary
objective is to provide current income, investors should
not consider the Fund a substitute for fixed-income
investments. The Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term market
movements. Investors who engage in excessive account
activity generate additional costs which are borne by all
of the Fund's shareholders. In order to minimize such
costs the Fund has adopted 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
objectives 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.
- --------------------------------------------------------------------------------
5
<PAGE> 36
IMPLEMENTATION
OF POLICIES
THE FUND MAY INVEST
IN SHORT-TERM FIXED
INCOME SECURITIES In addition to investing primarily in equity securities,
the Fund follows a number of additional investment
practices to achieve its objectives.
Although it normally seeks to remain substantially fully
invested in equity securities, the Fund may invest in
certain short-term fixed income securities. Such
securities may be used temporarily to invest uncommitted
cash balances, to 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' acceptances; and
repurchase agreements collateralized by these securities.
In addition, the Fund may, on occasion, invest a small
portion of its assets in bonds with ratings below
investment 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 securities at the Fund's cost plus interest
within a specified period (normally one day). In these
transactions, the securities purchased by the Fund will
have a total value equal to or in excess of the value of
the repurchase agreement, and will be held by the Fund's
Custodian Bank until repurchased.
THE FUND MAY INVEST
IN SECURITIES OF
FOREIGN ISSUERS
The Fund may invest up to 20% of its assets in foreign
securities and may engage in currency transactions with
respect to such investments. Securities of foreign issuers
may trade in U.S. or foreign securities markets.
Securities of foreign issuers may involve investment risks
that are different from those of domestic issuers. Such
risks include the effect of foreign economic policies and
conditions, future political and economic developments,
and the possible imposition of exchange controls or other
foreign governmental restrictions on foreign debt issuers.
There may also be less publicly available information
about a foreign issuer than a domestic issuer of
securities. Foreign issuers are generally not subject to
the uniform accounting, auditing and financial reporting
standards that apply to domestic issuers. Foreign debt
markets may be characterized by lower liquidity, greater
price volatility, and higher transactions costs.
Additionally, it may be difficult to obtain or enforce a
legal judgment in a foreign court.
THE FUND MAY LEND
ITS SECURITIES The Fund may lend its investment securities to qualified
institutional investors for either short-term or long-term
periods for the purpose 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
described on page 8 in Investment Limitations, for
temporary or emergency purposes, including the
6
<PAGE> 37
meeting of redemption requests which might otherwise
require the untimely disposition of securities.
PORTFOLIO TURNOVER IS
NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Fund retains the right to sell securities irrespective
of how long they have been held. It is anticipated that
the annual portfolio turnover of the Fund will not exceed
100%. A turnover rate of 100% would occur, for example, if
all of the securities of the Fund were replaced within one
year.
DERIVATIVE
INVESTING Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
THE FUND MAY INVEST
IN DERIVATIVE
SECURITIES The Fund may invest in futures contracts and options, but
only to a limited extent. Specifically, the Fund may enter
into futures contracts provided that not more than 5% of
its assets are required as a futures contract deposit; in
addition, the Fund may enter into futures contracts and
options transactions only to the extent that obligations
under such contracts or transactions represent not more
than 20% of the Fund's assets.
Futures contracts and options may be used for several
common fund management strategies: to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index. While futures contracts
and options can be used as leveraged investments, the Fund
may not use futures 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
redemptions, the Fund may invest a portion of its assets
in a stock futures contract. Because futures contracts
only require 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, 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.
The Fund may use futures contracts for bona fide "hedging"
purposes. In executing a hedge, a manager sells, for
example, stock index futures to protect against a decline
in the stock market. As such, if the market drops, the
value of the futures position will rise, thereby
offsetting the decline in value of the Fund's stock
holdings.
FUTURES CONTRACTS
AND OPTIONS POSE
CERTAIN RISKS The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks held by
the Fund and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing in
those contracts whose price fluctuations are expected to
resemble those of the Fund's underlying securities. The
risk that the Fund will be
7
<PAGE> 38
unable to close out a futures position will be minimized
by entering into such transactions on a national exchange
with an active and liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (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.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS The Fund has adopted certain limitations on its investment
practices. Specifically, the Fund will not:
(a) with respect to 75% of the value of its total assets,
purchase the securities of any issuer (except
obligations of the United States government and its
instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of
the issuer, or more than 5% of the value of the 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 require 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
investment securities are purchased. The investment
limitations described here and in the Statement of
Additional Information are fundamental and may be changed
only with the approval of a majority of the Fund's
shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct investment portfolios and total
assets in excess of $180 billion. Through their
jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other funds in the Group
obtain at cost virtually all of their corporate
management, administrative and distribution services.
Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard funds
have costs substantially lower than those of most
competing mutual funds. In 1995, the average expense ratio
(annual costs including advisory fees divided by total net
assets) for the Vanguard funds amounted to approximately
.31% compared to an average of 1.11% for the mutual fund
industry (data provided by Lipper Analytical Services).
8
<PAGE> 39
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays 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.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER
WELLINGTON
MANAGEMENT
COMPANY SERVES AS
ADVISER TO THE FUND The Fund has entered into an investment advisory agreement
with Wellington Management Company ("WMC"), 75 State
Street, Boston, MA 02109, under which WMC manages the
investment and reinvestment of Vanguard/Windsor Fund's
assets and continuously reviews, supervises and
administers the Fund's investment program. WMC discharges
its responsibilities subject to the control of the
Officers and Directors of the Fund.
WMC is a professional investment counseling firm which
globally 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, 1995 WMC held
investment management authority with respect to more than
$108 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.
Charles T. Freeman, Senior Vice President of WMC serves as
portfolio manager of the Fund. Mr. Freeman joined WMC in
1969 and served as assistant portfolio manager of the Fund
until his appointment as portfolio manager in January of
1996. Mr. Freeman is supported by research and other
investment services provided by the professional staff of
WMC.
John B. Neff, the Fund's previous portfolio manager,
retired from WMC effective December 31, 1995, after 31
years of service as the Fund's portfolio manager. Mr. Neff
serves as an adviser to WMC and continues to work with the
firm's investment professionals, including the portfolio
managers of all Vanguard funds for which WMC serves as
adviser.
9
<PAGE> 40
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 basic fee paid to the Adviser may be increased or
decreased by applying an adjustment based on the Fund's
investment performance. Such formula provides for an
increase or decrease of the basic fee in an amount equal
to .10% per annum (.025% per quarter) of the average
month-end net assets of the Fund if the Fund's investment
performance for the thirty-six months preceding the end of
the quarter is twelve percentage points or more above or
below, respectively, the investment record of the Standard
& Poor's 500 Composite Stock Price Index (the "S&P Index")
for the same period; or by an amount equal to .05% per
annum (.0125% per quarter) if the Fund's investment
performance for such thirty-six months is six or more but
less than twelve percentage points above or below,
respectively, the investment record of the S&P Index for
the same period.
During the fiscal year ended October 31, 1995, the total
advisory 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 .06% 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
recognition of brokerage services felt necessary for the
achievement of better execution, provided the adviser
believes 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
investment adviser pursuant to the terms of a new advisory
agreement, either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser.
10
<PAGE> 41
Any such change will only be made upon not less than 30
days' prior written notice to shareholders of the Fund,
which shall include substantially the information
concerning the adviser that would have normally been
included in a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE
RECORD The table below provides investment results for the Fund
for 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, annualized for the
indicated periods. Also included is comparative
information with respect to the unmanaged Standard &
Poor's 500 Composite Stock Price Index, a widely used
barometer of stock market activity, and the Consumer Price
Index, a statistical measure of changes in the prices of
goods and services. The 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 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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN FOR VANGUARD/WINDSOR FUND
PERCENTAGE INCREASE
--------------------------------------------
FISCAL PERIODS VANGUARD/WINDSOR S&P 500 CONSUMER
ENDED 10/31/95 FUND INDEX PRICE INDEX
-------------- ---------------- ------- -----------
<S> <C> <C> <C>
3 Years +17.1% +14.7% +2.7%
5 Years +20.5 +17.2 +2.8
10 Years +13.9 +15.4 +3.5
20 Years +17.3 +14.3 +5.3
Lifetime* +13.0 +10.8 +4.6
* October 23, 1958 to October 31, 1995. Data for the Consumer
Price Index begins October 31, 1958.
</TABLE>
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL
GAINS AND TAXES
THE FUND PAYS
SEMI-ANNUAL
DIVIDENDS AND
ANY CAPITAL GAINS
ANNUALLY
The Fund expects to pay dividends from ordinary income
semi-annually. Capital gains distributions, if any, will
be made annually. All dividend and capital gains
distributions are automatically reinvested in additional
shares of the Fund. In order to satisfy certain
distribution requirements of the IRS, the Fund may also
declare special year-end distributions during December.
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 that its income is distributed to its
shareholders.
If you utilize the Fund as an investment option in an
employer-sponsored retirement or savings plan, dividend
and capital gains distributions from the Fund generally
will not be subject to current taxation, but will
accumulate on a tax-
11
<PAGE> 42
deferred 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 PRICE
OF THE FUND The Fund's share price or "net asset value" per share is
determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities,
by the number of outstanding shares of the Fund. Net asset
value is determined as of the regular close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the exchange is open for trading.
Portfolio securities that are listed on a securities
exchange are valued at the latest quoted sales prices.
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
securities for which market quotations are readily
available are valued at the latest quoted bid price.
Short-term instruments (those with remaining maturities of
60 days or less) are valued at cost, plus or minus any
amortized discount or premium, which approximates market.
Other assets and securities for which market quotations
are not readily available or which are restricted as to
sale are valued by such methods as the Board of Directors
deems in good faith to reflect fair value. 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 prices provided by a
pricing service may be determined without regard to bid or
last sale prices of each security but take into account
institutional-size transactions in similar groups of
securities as well as any developments related to specific
securities.
The Fund's share price can be found daily in the mutual
fund listings of most major newspapers under the heading
of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Company is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 2,200,000,000
shares of common stock, with a one cent par value. The
Board of Directors has the power to designate one or more
classes ("series") of shares of common stock and to
classify and reclassify any unissued shares with respect
to such series. Currently 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,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose.
12
<PAGE> 43
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Company if
requested 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 Disbursing Agent. Price Waterhouse LLP, serves as
independent accountants for the Fund and will audit its
financial statements annually. The Fund is not involved in
any litigation.
- --------------------------------------------------------------------------------
13
<PAGE> 44
SERVICE GUIDE
PARTICIPATING
IN YOUR PLAN The Fund is available as an investment option in your
retirement or savings plan. The administrator of your 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 option.
If you have any questions about the Fund, including the
Fund's investment objective, policies, risk
characteristics or historical performance, please contact
Participant Services at 1-800-523-1188.
If you have questions about your account, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS
AND ALLOCATIONS You may be permitted to elect different investment
options, alter the amounts contributed to your plan, or
change how 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 details.
- --------------------------------------------------------------------------------
TRANSACTIONS IN
FUND SHARES Contributions, exchanges or distributions of the Fund's
shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on
the purchase, exchange, or redemption and the appropriate
signatures and monies have been received by Vanguard.
- --------------------------------------------------------------------------------
MAKING EXCHANGES Your plan may allow you to exchange all or part of your
existing plan balance from one investment 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
option, please read the Fund's prospectus. Contact
Participant 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
frequently exchanges are allowed.
- As explained on page 5, the Fund reserves the right to
refuse any exchange purchase request.
- --------------------------------------------------------------------------------
14
<PAGE> 45
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 46
<TABLE>
<S> <C> <C>
[VANGUARD WINDSOR FUND LOGO] [VANGUARD WINDSOR FUND LOGO]
--------------------------- INSTITUTIONAL
THE VANGUARD GROUP PROSPECTUS
OF INVESTMENT FEBRUARY 28, 1996
COMPANIES
Vanguard Financial Center [THE VANGUARD GROUP LOGO]
P.O. Box 2900
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
</TABLE>
I022
- --------------------------------------------------------------------------------
<PAGE> 47
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A Series of Vanguard/Windsor Funds
[VANGUARD WINDSOR II LOGO] and A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- FEBRUARY 28, 1996
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE AND
POLICIES Vanguard/Windsor II (the "Fund") is an open-end
diversified investment company that seeks to provide
long-term growth of capital and income by investing
primarily 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. Government, including the FDIC.
The Fund is an independent series of Vanguard/Windsor
Funds, Inc. (the "Company"). The Company is currently
offering shares of two series. This Prospectus relates to
the Vanguard/Windsor II series only.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT To open a regular (non-retirement) account, please
complete and return the Account Registration Form. If you
need assistance in completing this Form, please call the
Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA
Adoption Agreement. To obtain a copy of this form, call
1-800-662-7447, Monday through Friday, from 8:00 a.m. to
9:00 p.m. and Saturday, from 9:00 a.m. to 4:00 p.m.
(Eastern time). The minimum initial investment is $3,000,
or $1,000 for Uniform Gift/Transfers to Minors Act
accounts. The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees). However,
the Fund incurs expenses for investment advisory,
management, administrative, and distribution services.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated February 28, 1996, 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 Page Page
<S> <C> <C>
Fund Expenses ..................... 2 Investment Limitations ............. 8 SHAREHOLDER GUIDE
Financial Highlights .............. 2 Management of the Fund ............. 8 Opening an Account and
Yield and Total Return ............ 3 Investment Advisers ................ 9 Purchasing Shares ............... 17
Performance Record .................13 When Your Account Will Be
FUND INFORMATION Dividends, Capital Gains Credited ........................ 20
Investment Objectives ............. 4 and Taxes ........................14 Selling Your Shares ............... 20
Investment Policies ............... 4 The Share Price of The Exchanging Your Shares ............ 22
Investment Risks .................. 4 Fund .............................15 Important Information about
Who Should Invest ................. 5 General Information ................15 Telephone Transactions .......... 24
Implementation of Policies ........ 6 Transferring Registration ......... 24
Other Vanguard Services ........... 25
</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> 48
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 1995 fiscal
year.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
---------------------------------------------------------------------------------
Sales Load Imposed on Purchases........................................ None
Sales Load Imposed on Reinvested Dividends............................. None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL FUND OPERATING EXPENSES
---------------------------------------------------------------------------------
Management & Administrative Expenses................................... 0.23%
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...................................... 0.40%
-----
-----
</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 $ 51
</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
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of
the five years in the period ended October 31, 1995, 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, together
with the remaining portions of the Fund's 1995 Annual
Report to Shareholders, are incorporated by reference in
the Statement of Additional Information and this
Prospectus, and which appear, along with the report of
Price Waterhouse LLP, in the Fund's 1995 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1995 Annual Report to
Shareholders which may be obtained without charge by
writing to the Fund or by calling our Investor Information
Department at 1-800-662-7447.
2
<PAGE> 49
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD................... $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48 $9.91
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
INVESTMENT OPERATIONS
Net Investment Income....... .58 .55 .50 .56 .62 .67 .73 .60 .52 .43
Net Realized and Unrealized
Gain (Loss) on
Investments............... 3.17 (.19) 2.47 1.17 3.55 (3.22) 2.42 1.63 (.39) 3.09
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS.............. 3.75 .36 2.97 1.73 4.17 (2.55) 3.15 2.23 .13 3.52
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income......... (.55) (.51) (.52) (.61) (.73) (.74) (.57) (.61) (.20) (.43)
Distributions from Realized
Capital Gains............. (.47) (.50) (.22) (.44) (.28) (.61) -- (.80) -- (.52)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS....... (1.02) (1.01) (.74) (1.05) (1.01) (1.35) (.57) (1.41) (.20) (.95)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD...................... $20.06 $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................. 23.08% 2.22% 19.51% 12.50% 36.61% (17.48)% 24.68% 20.54% .90% 35.62%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions).................. $10,272 $8,246 $7,486 $4,878 $3,298 $2,087 $2,162 $1,485 $1,323 $814
Ratio of Expenses to Average
Net Assets.................. .40%* .39% .39% .41% .48% .52% .53% .58% .49% .65%
Ratio of Net Investment Income
to Average Net Assets....... 3.27% 3.26% 3.11% 3.72% 4.51% 4.93% 5.29% 4.94% 4.11% 4.33%
Portfolio Turnover Rate....... 30% 24% 26% 23% 41% 20% 22% 25% 46% 50%
</TABLE>
* Effective in fiscal 1995; does not include expense reductions from directed
brokerage arrangements. The 1995 Ratio of Expenses to Average Net Assets is
.39% after including these reductions.
- --------------------------------------------------------------------------------
YIELD AND
TOTAL RETURN From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Fund refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Fund (as stated in the advertisement) that
would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Fund is calculated daily by dividing the net
investment 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 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 reflect the income paid to an investor's
account or the yield reported in the Fund's reports to
shareholders. Additionally, the Fund may
3
<PAGE> 50
compare its performance to that of the Standard & Poor's
500 Composite Stock Price Index ("S&P 500").
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES
THE FUND SEEKS TO
PROVIDE LONG-TERM
GROWTH OF CAPITAL
AND INCOME The objective of the Fund is to provide long-term growth
of capital and income. The Fund's secondary objective is
to provide current income. There can be no assurance that
the Fund will achieve these objectives.
These investment objectives are fundamental and so cannot
be changed without the approval of a majority of the
Fund's shareholders.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE FUND INVESTS
PRIMARILY IN
COMMON STOCKS The Fund follows a flexible investment strategy,
emphasizing income-producing stocks which the investment
advisers believe to be undervalued by the market at the
time of purchase. Generally, these securities are
characterized by below-average price-earnings ratios
relative to the stock market, as measured by the Standard
& Poor's Composite Stock Price Index. 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 statistical 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 substantially 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 Fund is responsible for voting the shares of all
securities it holds.
The investment policies of the Fund are not fundamental
and so may be changed by the Board of Directors without
shareholder approval.
- --------------------------------------------------------------------------------
INVESTMENT RISKS
THE FUND IS SUBJECT
TO MARKET RISK As a mutual fund investing primarily in common stocks, the
Fund is subject to MARKET RISK -- i.e., the possibility
that common stock prices will decline over short or even
extended periods. The U.S. stock market has tended to be
cyclical, with periods when stock prices generally rise
and periods 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
4
<PAGE> 51
1926 to 1995, as measured by the Standard & Poor's 500
Composite Stock Price Index:
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
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 +12.5 +10.3 +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 1995. While
this average return can be used as a guide for setting
reasonable expectations 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 historical investment performance, which may be
a poor guide to future returns. Also, stock market indexes
such as the S&P 500 are based on unmanaged portfolios of
securities before transaction costs and other expenses.
Such costs will reduce the relative investment performance
of the Fund and other "real world" portfolios. Finally,
the Fund is likely to differ in portfolio composition from
broad stock market averages, and so the Fund's performance
should not be expected to mirror the returns provided by a
specific index.
THE FUND IS ALSO
SUBJECT TO
MANAGER RISK The investment adviser manages the Fund according to the
traditional methods of "active" investment management,
which involve the buying and selling of securities based
upon economic, financial and market analysis and
investment judgment. MANAGER RISK refers to the
possibility that the Fund's investment advisers may fail
to execute the Fund's investment strategy effectively. As
a result, the Fund may fail to achieve its stated
objective.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST
LONG-TERM INVESTORS
SEEKING GROWTH OF
CAPITAL AND INCOME The Fund is intended for investors who are seeking growth
of capital and income. Although the Fund's secondary
objective is to provide current income, investors should
not consider the Fund a substitute for fixed-income
investments. The Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term market
movements. Investors who engage in excessive account
activity generate additional costs which are borne by all
of the Fund's shareholders. In order to minimize such
costs, the Fund has adopted the following policies. The
Fund reserves the right to reject any purchase request
(including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the
timing of the investment or previous excessive trading by
the investor. Additionally the Fund has adopted exchange
privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Fund
reserves the right to suspend the offering of its shares.
5
<PAGE> 52
No assurance can be given that the Fund will attain its
objectives 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
OF POLICIES In addition to investing primarily in equity securities,
the Fund follows a number of additional investment
practices to achieve its objectives.
THE FUND MAY INVEST
IN SHORT-TERM FIXED
INCOME SECURITIES Although it normally seeks to remain substantially fully
invested in equity securities, the Fund may invest
temporarily in certain short-term fixed income securities.
Such securities may be used to invest uncommitted cash
balances, to 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' acceptances; and
repurchase 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 securities at the Fund's cost plus interest
within a specified period (normally one day). In these
transactions, the securities purchased by the Fund will
have a total value equal to or in excess of the value of
the repurchase agreement, and will be held by the Fund's
Custodian Bank until repurchased.
THE FUND MAY LEND
ITS SECURITIES The Fund may lend its investment securities to qualified
institutional investors for either short-term or long-term
periods for the purpose 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
described on page 8 in Investment Limitations, for
temporary or emergency purposes, including the meeting of
redemption requests which might otherwise require the
untimely disposition of securities.
6
<PAGE> 53
PORTFOLIO TURNOVER IS
NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Fund retains the right to sell securities irrespective
of how long they have been held. It is anticipated that
the annual portfolio turnover of the Fund will not exceed
100%. A turnover rate of 100% would occur, for example, if
all of the securities of the Fund were replaced within one
year.
DERIVATIVE
INVESTING Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
THE FUND MAY
INVEST IN DERIVATIVE
SECURITIES The Fund may invest in futures contracts and options, but
only to a limited extent. Specifically, the Fund may enter
into futures contracts provided that not more than 5% of
its assets are required as a futures contract deposit; in
addition, the Fund may enter into futures contracts and
options transactions only to the extent that obligations
under such contracts or transactions represent not more
than 20% of the Fund's assets.
Futures contracts and options may be used for several
common fund management strategies: to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index. While futures contracts
and options can be used as leveraged investments, the Fund
may not use futures 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
redemptions, the Fund may invest a portion of its assets
in a stock futures contract. Because futures contracts
only require 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, 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.
The Fund may use futures contracts for bona fide "hedging"
purposes. In executing a hedge, a manager sells, for
example, stock index futures to protect against a decline
in the stock market. As such, if the market drops, the
value of the futures position will rise, thereby
offsetting the decline in value of the Fund's stock
holdings.
FUTURES CONTRACTS
AND OPTIONS POSE
CERTAIN RISKS The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks held by
the Fund and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing in
those contracts whose price fluctuations are expected to
resemble those of the Fund's underlying securities. The
risk that the Fund will be unable to close out a futures
position will be minimized by entering into such
transactions on a national exchange with an active and
liquid secondary market.
7
<PAGE> 54
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (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.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS The Fund has adopted certain limitations on its investment
practices. Specifically, the Fund will not:
(a) with respect to 75% of the value of its total assets,
purchase the securities of any issuer (except
obligations of the United States government and its
instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of
the issuer, or more than 5% of the value of the 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 require 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
investment securities are purchased. The investment
limitations described here and in the Statement of
Additional Information may be changed only with the
approval of a majority of the Fund's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct investment portfolios and total
assets in excess of $180 billion. Through their jointly
owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Fund and the other funds in the Group obtain at cost
virtually all of their corporate management,
administrative and distribution 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 corporate structure, the
Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1995, the average
expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard funds
amounted to approximately .31% compared to an average of
1.11% for the mutual fund industry (data provided by
Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of
8
<PAGE> 55
their present positions and principal occupations during
the past five years can be found in the Statement of
Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays 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,
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.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS
FOUR ADVISERS
OVERSEE THE FUND'S
INVESTMENTS Vanguard/Windsor II employs a "multi-manager" approach
utilizing four investment advisers to manage the Fund's
assets. The Fund has investment advisory contracts with
Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S"), One
McKinney Plaza, 3232 McKinney Avenue, 15th Floor, Dallas,
TX 75204-2429; Equinox Capital Management, Inc.
("Equinox"), 399 Park Avenue, 28th floor, New York, NY
10022 and Tukman Capital Management, Inc. ("Tukman"), 60
East Sir Francis Drake Boulevard, Larkspur, CA 94939.
Additionally, a portion 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 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 equity
allocation of the Fund, Equinox and Tukman manage
approximately 10% each, and Vanguard's Core Management
Group manages approximately 8% of the Fund's equity
allocation. Investors will be advised of any substantive
change in the proportions managed by each adviser. Each
adviser discharges their responsibilities subject to the
control of the Directors and Officers.
BARROW, HANLEY,
MEWHINNEY & STRAUSS
(BHM&S) BHM&S manages the investment and reinvestment of a portion
of the Fund's assets, and continuously reviews,
supervises, and administers the Fund's investment program
with respect to those assets.
BHM&S, founded in 1979, is a professional investment
counseling firm which provides investment services to
investment companies, institutions, and individuals. As of
December 31, 1995, BHM&S held discretionary management
authority with respect to approximately $16.3 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
9
<PAGE> 56
Vice President of BHM&S, is the portfolio manager for the
assets of the Fund managed by BHM&S, a position he has
held since the Fund's inception in 1985. He contributes to
the development of the common portfolio management
strategy used at BHM&S and is also responsible 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
compares the performance of the Fund's assets managed by
BHM&S with the performance of the Standard & Poor's/BARRA
Value Index. 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% 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 CAPITAL
MANAGEMENT
(EQUINOX) Equinox manages the investment and reinvestment of a
portion of the Fund's assets, and continuously reviews,
supervises and administers the Fund's investment program
with respect to those assets.
Equinox is a professional investment counseling firm
founded in 1989. As of December 31, 1995, Equinox provided
investment advisory services with respect to approximately
$5.1 billion 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> 57
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
compares 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 following 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
MANAGEMENT
(TUKMAN) Tukman manages the investment and reinvestment of a
portion of the Fund's assets, and continuously reviews,
supervises and administers the Fund's investment program
with respect to those assets.
Tukman is a professional investment counseling firm
founded in 1980. As of December 31, 1995, Tukman provided
investment advisory services with respect to assets of
approximately $2.9 billion. Melvin T. Tukman, President,
Director and founder 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>
The Fund's payments to Tukman under the above schedule are
subject to an incentive/penalty fee arrangement which
compares 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 following adjustments to Tukman's basic fee.
11
<PAGE> 58
<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
MANAGEMENT GROUP advisory services on an at-cost basis with respect to a
portion of the Fund's assets. The Core Management Group
also provides investment advisory services to several
Vanguard funds, including Vanguard Index Trust, Vanguard
Balanced Index Fund, Vanguard Horizon Fund, Vanguard
International Equity Index Fund, Vanguard Institutional
Index Fund, several indexed separate accounts, as well as
a portion of Vanguard/Morgan Growth Fund's assets. Total
assets under management by the Core Management Group were
approximately $33 billion as of December 31, 1995. The
portion of the Fund allocated to the Core Management Group
is managed using computerized, quantitative techniques
based on a value index constructed to approximate the
aggregate fundamental characteristics of a typical large
capitalization value fund, such as Vanguard/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 ADVISORY For the fiscal year ended October 31, 1995, the aggregate
FEES PAID BY THE FUND investment advisory fees paid by the Fund to BHM&S,
Equinox and Tukman, represented an effective annual rate
of .14 of 1% of average net assets before an increase of
$86,000 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 .20 of 1% and .24
of 1% of the average net assets managed by Equinox and
Tukman, respectively.
OTHER ADVISORY BHM&S, Equinox, Tukman and Vanguard's Core Management
INFORMATION Group are authorized to select brokers or dealers to
execute purchases and sales of the Fund's portfolio
securities, and directed to use their best efforts to
obtain the best available price and most favorable
execution with respect to all transactions. The full range
and quality of brokerage services available are considered
in making these determinations.
The Fund has authorized BHM&S, Equinox, Tukman and
Vanguard's Core Management Group to pay higher commissions
in recognition of brokerage services deemed necessary for
the achievement of better execution, provided the advisers
believe this to be in the best interest of the Fund.
Although the Fund does not market its shares through
intermediary brokers or dealers, the Fund may place orders
with qualified broker-dealers who recommend the Fund to
clients if the Officers of the Fund believe
12
<PAGE> 59
that the quality of the transaction and the commission are
comparable to what they would be with other qualified
brokerage firms.
The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement, either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser. Any such change will only be made
upon not less than 30 days' prior written notice to
shareholders of the Fund, which shall include
substantially the information concerning the adviser that
would have normally been included in a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE
RECORD The table below provides investment results for the Fund
for several periods throughout the Fund's lifetime. The
results shown represent "total return" investment
performance, which assumes the reinvestment of all capital
gains and income dividends, annualized for the indicated
periods. Also included is comparative information with
respect to the unmanaged Standard & Poor's 500 Composite
Stock Price Index, a widely used barometer of stock market
activity, and the Consumer Price Index, a statistical
measure of changes in the prices of goods and services.
The 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 today. 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 10/31/95 WINDSOR II INDEX PRICE INDEX
--------------- ---------- ------- -----------
<S> <C> <C> <C>
1 Year +23.1% +26.4 % +2.7%
5 Years +18.2 +17.2 +2.8
10 Years +14.6 +15.4 +3.5
Lifetime* +14.1 +15.1 +3.5
</TABLE>
* June 24, 1985, to October 31, 1995. Data for the
Consumer Price Index begins June 30, 1985.
- --------------------------------------------------------------------------------
13
<PAGE> 60
DIVIDENDS, CAPITAL
GAINS AND TAXES The Fund expects to pay dividends from ordinary income
semi-annually. Capital gains distributions, if any, will
be made annually.
THE FUND PAYS
SEMI-ANNUAL
DIVIDENDS AND
ANY CAPITAL GAINS
ANNUALLY
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the Fund may
declare special year-end dividend and capital gains
distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on
December 31 of the prior year.
Dividend and capital gains distributions may be
automatically reinvested or received in cash. See
"Choosing a Distribution Option" for a description of
these 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.
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 generally 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 capital gains on sales of portfolio
securities during the year. The Fund does not seek to
realize any particular amount of capital gains during a
year; rather, realized gains are a by-product of portfolio
management activities. Consequently, capital gains
distributions may be expected to vary considerably from
year to year; there will be no capital gains distributions
in years when the Fund realizes net capital losses.
Note that if you accept capital gains distributions in
cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in
the Fund. Also, keep in mind that if you purchase shares
in the Fund shortly before the record date for a dividend
or capital gains distribution, a portion of your
investment will be returned to you as a taxable
distribution, regardless of whether you are reinvesting
your distributions or receiving them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
A CAPITAL GAIN OR
LOSS MAY BE REALIZED
UPON EXCHANGE
OR REDEMPTION A sale of shares of the Fund is a taxable event, and may
result in a capital gain or loss. A capital gain or loss
may be realized from an ordinary redemption of shares or
an exchange of shares between two mutual funds (or two
portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
14
<PAGE> 61
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration
Form your proper Social Security or Employer
Identification number and certifying that you are not
subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund are exempt from
Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Fund. The Fund is managed without
regard to tax ramifications.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF THE FUND The Fund's share price or "net asset value" per share is
determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities,
by the number of outstanding shares of the Fund. Net asset
value is determined as of the regular close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the exchange is open for trading.
Portfolio securities that are listed on a securities
exchange are valued at the latest quoted sales prices.
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
securities for which market quotations are readily
available are valued at the latest quoted bid price.
Short-term instruments (those with remaining maturities of
60 days or less) are valued at cost, plus or minus any
amortized discount or premium, which approximates market.
Other assets and securities for which market quotations
are not readily available or which are restricted as to
sale are valued by such methods as the Board of Directors
deems in good faith to reflect fair value. 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 prices provided by a
pricing service may be determined without regard to bid or
last sale prices of each security but take into account
institutional-size transactions in similar groups of
securities as well as any developments related to specific
securities.
The Fund's share price can be found daily in the mutual
fund listings of most major newspapers under the heading
of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Company is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 2,200,000,000
shares of common stock, with a one cent par value. The
Board of Directors has the power to designate one or more
classes ("series") of shares 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.
15
<PAGE> 62
The shares of each series of the Company are fully paid
and non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Company if
requested 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 Disbursing Agent. Price Waterhouse LLP, serves as
independent accountants for the Fund and will audit its
financial statements annually. The Fund is not involved in
any litigation.
- --------------------------------------------------------------------------------
16
<PAGE> 63
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
PURCHASING Registration Form and any required legal documentation,
SHARES indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement ($1,000 for Uniform
Gifts/Transfer to Minors Act accounts). 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 $1,000
minimum initial investment requirement, but no more than
$2,000 if you are making a regular IRA contribution.
Rollover contributions are generally limited to the amount
withdrawn within the past 60 days from an IRA or other
qualified retirement plan. If you need assistance with the
forms or have any questions about the Fund, please call
our Investor Information Department at 1-800-662-7447.
NOTE: For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts or
powers of attorney), please call us to determine which
additional forms you may need.
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received. The
Fund is offered on a no-load basis (i.e., there are no
sales commissions or 12b-1 fees).
PURCHASE 1) Because of the risks associated with common stock
RESTRICTIONS investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term
stock market movements. Consequently the Fund reserves
the right to reject any specific purchase (or exchange
purchase) request. The Fund also reserves the right to
suspend the offering of shares for a period of time.
2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable to The Vanguard Group-73.
ADDITIONAL Subsequent investments to regular accounts may be made by
INVESTMENTS mail ($100 minimum), wire ($1,000 minimum), exchange from
another Vanguard Fund account, or Vanguard Fund Express.
Subsequent investments to Individual Retirement Accounts
may be made by mail ($100 minimum) or exchange from
another Vanguard Fund account. In some instances,
contributions may be made by wire or Vanguard Fund
Express. Please call us for more information on these
options.
- --------------------------------------------------------------------------------
17
<PAGE> 64
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
Complete and sign the your initial investment on the include the Invest-by-Mail
enclosed Account registration form, make your remittance form attached to your
Registration Form check payable to The Vanguard Fund confirmation statements.
Group-73, and mail to: Please make your check payable
to The Vanguard Group-73, write
VANGUARD FINANCIAL CENTER your account number on your
P.O. BOX 2600 check and, using the return
VALLEY FORGE, PA 19482 envelope provided, mail to the
address indicated on the Invest-
by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All purchase requests should be
registered mail, 455 DEVON PARK DRIVE mailed to the address indicated
send to: WAYNE, PA 19087 for new accounts. Do not send
registered or express mail to
the post office box address.
--------------------------------
</TABLE>
PURCHASING BY WIRE
Money should be
wired to: CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 01019897
ATTN VANGUARD
BEFORE WIRING
Please contact
Client Services
(1-800-662-2739) VANGUARD/WINDSOR II
ACCOUNT NUMBER
ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank
includes the name of the Fund, the account number Vanguard
has assigned to you and the eight-digit CoreStates number.
If you are opening a new account, please complete the
Account Registration Form and mail it to the "New Account"
address above after completing your wire arrangement.
NOTE: Federal Funds wire purchase orders will be accepted
only when the Fund and Custodian Bank are open for
business.
- --------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares by
making an exchange from an existing Vanguard Fund account.
(As explained on page 5, however, the Fund reserves the
right to 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
FUND EXPRESS
Special Purchase and
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account at
your request. Or if you choose the Automatic Investment
option, money will be moved from your bank account to your
Vanguard account on the schedule (monthly, bimonthly
[every other month], quarterly or yearly) you select. To
establish these Fund Express options, please provide the
appropriate information on the Account Registration Form.
We will send you a confirmation of your Fund Express
service; please wait three weeks before using the service.
- --------------------------------------------------------------------------------
18
<PAGE> 65
CHOOSING A
DISTRIBUTION
OPTION
You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash 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 dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING
Under federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund
shareholders. These distributions are made to all
shareholders who own Fund shares as of the distribution's
record date, regardless of how long the shares have been
owned. Purchasing shares just prior to the record date
could have a significant impact on your tax liability for
the year. For example, if you purchase shares immediately
prior to the record date of a sizable capital gain or
income dividend distribution, you will be assessed taxes
on the amount of the capital gain and/or dividend
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 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
potential distributions before investing. The Fund's
annual capital gains distribution normally occurs in
December, while income 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."
- --------------------------------------------------------------------------------
19
<PAGE> 66
IMPORTANT ACCOUNT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES
The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO
ADD SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE
VANGUARD WITH ADDITIONAL INFORMATION AND A SIGNATURE
GUARANTEE. PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, 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
certificate is lost, you may incur an expense to replace
it.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.
ELECTRONIC PROSPECTUS
DELIVERY
If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire, or exchange, and is received 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 determined on your trade date.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. You generally may
initiate a request by writing or by telephoning. Your
redemption proceeds are normally mailed within two
business days after the receipt of the request in Good
Order.
- --------------------------------------------------------------------------------
SELLING BY MAIL
Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD/WINDSOR II, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard/Windsor II, 455
Devon Park Drive, Wayne, PA 19087.)
20
<PAGE> 67
The redemption price of shares will be the Fund's net
asset value next determined after Vanguard has received
all required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER
GOOD ORDER means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners exactly as they are registered
on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in 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.
- --------------------------------------------------------------------------------
SELLING BY TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. PLEASE NOTE: As a protection against
fraud, your telephone mail redemption privilege will be
suspended for 10 calendar days following any expedited
address change to your account. An expedited address
change is one that is made by telephone, by Vanguard
Online or, in writing, without the signatures of all
account owners. The proceeds will be sent to you by mail.
Please see also "Important Information About Telephone
Transactions."
- --------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express AUTOMATIC WITHDRAWAL
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The SPECIAL REDEMPTION
option lets you move money from your Vanguard account to
your bank account on your request. You may elect Fund
Express on the Account Registration Form or call our
Investor Information Department at 1-800-662-7447 for a
Fund Express application.
- --------------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares of the Fund by making an exchange into
another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
- --------------------------------------------------------------------------------
IMPORTANT REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
- --------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange are processed on the
day of receipt and the redemption proceeds are normally
sent on the following business day.
Redemption requests received by telephone after the close
of the Exchange (generally 4:00 p.m., Eastern time) are
processed on the business day following receipt and the
proceeds are normally sent on the second business day
following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as
described above in Important Redemption Information.
21
<PAGE> 68
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution
in kind of readily marketable securities.
- --------------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
- --------------------------------------------------------------------------------
LOW BALANCE
FEE AND
MINIMUM ACCOUNT
BALANCE
REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund will automatically deduct a $10 annual
fee from non-retirement accounts with balances falling
below $2,500 ($1,000 for Uniform Gifts/Transfers to Minors
Act accounts). This fee deduction will occur mid-year,
beginning in 1996. The fee generally will be waived for
investors whose aggregate Vanguard assets exceed $50,000.
In addition, the Fund reserves the right to liquidate any
non-retirement account that is below the minimum initial
investment amount of $3,000. If at any time your total
investment does not have a value of at least $3,000, you
may be notified that your account is below the Fund's
minimum account balance requirement. You would then be
allowed 60 days to make an additional investment before
the account is liquidated. Proceeds would be promptly paid
to the registered shareholder.
Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets
(i.e., a decline in a Fund's net asset value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange your
shares of Vanguard/ Windsor II for those of other
available Vanguard Funds.
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) When exchanging shares by telephone, please have ready the
Fund name, account number, Social Security number or
Employer Identification number listed on the account, and
the exact name and address in which the account is
registered. Only the registered shareholder, or his or her
pre-authorized representative, may complete such an
exchange. Requests for telephone exchanges received prior
to the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after
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
22
<PAGE> 69
PORTFOLIOS. If you experience difficulty in making a
telephone exchange, your exchange request may be made by
regular or express mail, and it will be implemented at the
closing net asset value on the date received by Vanguard
provided the request is received in Good Order.
Please see "Important Information About Telephone
Transactions" for additional important details.
- --------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, and the name
of the Fund you wish to exchange into, the amount you wish
to exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD/WINDSOR II, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard/Windsor II, 455
Devon Park Drive, Wayne, PA 19087.)
- --------------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase;
therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard PRIMECAP 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 exchange, 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 registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive
exchange activity.
23
<PAGE> 70
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 purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the 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
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account. If Vanguard fails
to follow reasonable security procedures, it may be liable
for any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482. 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
REPORTS Vanguard will send you a confirmation statement each time
you initiate a transaction in your account, except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement along with their Portfolio
24
<PAGE> 71
Summary Statements. Please call our Client Services
Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund,
or to contribute to an IRA or other retirement plan.
Please contact our Client Services Department at
1-800-662-2739 for additional information.
VANGUARD
FUND EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD
DIVIDEND EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form, or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any 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 offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
25
<PAGE> 72
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 73
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 74
<TABLE>
<S> <C> <C>
[VANGUARD WINDSOR II LOGO] [VANGUARD WINDSOR II LOGO]
--------------------------- P R O S P E C T U S
THE VANGUARD GROUP FEBRUARY 28, 1996
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482 [VANGUARD GROUP LOGO]
</TABLE>
P073
- --------------------------------------------------------------------------------
<PAGE> 75
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A Series of Vanguard/Windsor Funds
[VANGUARD WINDSOR II LOGO] and A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- FEBRUARY 28, 1996
- --------------------------------------------------------------------------------
FUND INFORMATION: INSTITUTIONAL PARTICIPANT SERVICES -- 1-800-523-1188
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVE AND
POLICIES
Vanguard/Windsor II (the "Fund") is an open-end
diversified investment company that seeks to provide
long-term growth of capital and income by investing
primarily 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. Government, including the FDIC.
The Fund is an independent series of Vanguard/Windsor
Funds, Inc. (the "Company"). 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 personal investment account with the
Fund, is available for individual investors. To obtain a
copy of that version of the Prospectus, please call
1-800-662-7447.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT The Fund is an investment option under a retirement or
savings 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 option.
If you have any questions about the Fund, please contact
Participant Services at 1-800-523-1188. If you have any
questions about your plan account, contact your plan
administrator or the organization that provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated February 28, 1996, 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 Page Page
<S> <C> <C>
Fund Expenses ..................... 2 Who Should Invest ................ 5 Dividends, Capital Gains
Financial Highlights ............. 2 Implementation of Policies ....... 6 and Taxes ....................... 14
Yield and Total Return ........... 3 Investment Limitations ........... 8 The Share Price of The Fund ....... 14
Investment Objectives ............. 4 Management of the Fund ........... 8 General Information ............... 15
Investment Policies ............... 4 Investment Advisers .............. 9 Service Guide ..................... 16
Investment Risks .................. 4 Performance Record ............... 13 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
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 76
FUND EXPENSES The following table illustrates ALL expenses and fees that
a shareholder of the Fund would incur. The expenses and
fees set forth in the table are for the 1995 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
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------------------------------
Management & Administrative Expenses................................... 0.23%
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...................................... 0.40%
=====
</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 $ 51
</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
HIGHLIGHTS The following financial highlights for a share outstanding
through each period, insofar as they relate to each of the
five years in the period ended October 31, 1995, 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, together with the
remaining portions of the Fund's 1995 Annual Report to
Shareholders, are incorporated by reference in the
Statement of Additional Information and this Prospectus,
and which appear, along with the report of Price
Waterhouse LLP, in the Fund's 1995 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1995 Annual Report to
Shareholders which may be obtained without charge by
writing to the Fund or by calling Participant Services at
1-800-523-1188.
2
<PAGE> 77
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD...................... $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48 $9.91
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.......... .58 .55 .50 .56 .62 .67 .73 .60 .52 .43
Net Realized and Unrealized
Gain (Loss) on Investments... 3.17 (.19) 2.47 1.17 3.55 (3.22) 2.42 1.63 (.39) 3.09
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................. 3.75 .36 2.97 1.73 4.17 (2.55) 3.15 2.23 .13 3.52
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income....................... (.55) (.51) (.52) (.61) (.73) (.74) (.57) (.61) (.20) (.43)
Distributions from Realized
Capital Gains................ (.47) (.50) (.22) (.44) (.28) (.61) -- (.80) -- (.52)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS.......... (1.02) (1.01) (.74) (1.05) (1.01) (1.35) (.57) (1.41) (.20) (.95)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD... $20.06 $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48
=============================================================================================================================
TOTAL RETURN..................... 23.08% 2.22% 19.51% 12.50% 36.61% (17.48)% 24.68% 20.54% .90% 35.62%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)..................... $10,272 $8,246 $7,486 $4,878 $3,298 $2,087 $2,162 $1,485 $1,323 $814
Ratio of Expenses to Average
Net Assets..................... .40%* .39% .39% .41% .48% .52% .53% .58% .49% .65%
Ratio of Net Investment Income to
Average Net Assets............. 3.27% 3.26% 3.11% 3.72% 4.51% 4.93% 5.29% 4.94% 4.11% 4.33%
Portfolio Turnover Rate.......... 30% 24% 26% 23% 41% 20% 22% 25% 46% 50%
</TABLE>
* Effective in fiscal 1995; does not include expense reductions from directed
brokerage arrangements. The 1995 Ratio of Expenses to Average Net Assets is
.39% after including these reductions.
- --------------------------------------------------------------------------------
YIELD AND
TOTAL RETURN From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Fund refers to the average annual compounded rates of
return over one- , five- and ten-year periods or for the
life of the Fund (as stated in the advertisement) that
would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with 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
investment 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 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 reflect the income paid to an investor's
account or the yield reported in the Fund's reports to
shareholders. Additionally, the Fund may
3
<PAGE> 78
compare its performance to that of the Standard & Poor's
500 Composite Stock Price Index ("S&P 500").
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES
THE FUND SEEKS TO
PROVIDE LONG-TERM
GROWTH OF CAPITAL
AND INCOME The objective of the Fund is to provide long-term growth
of capital and income. The Fund's secondary objective is
to provide current income. There can be no assurance that
the Fund will achieve these objectives.
These investment objectives are fundamental and so cannot
be changed without the approval of a majority of the
Fund's shareholders.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE FUND INVESTS
PRIMARILY IN
COMMON STOCKS The Fund follows a flexible investment strategy,
emphasizing income-producing stocks which the investment
advisers believe to be undervalued by the market at the
time of purchase. Generally, these securities are
characterized by below-average price-earnings ratios
relative to the stock market, as measured by the Standard
& Poor's 500 Composite Stock Price Index. 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 statistical 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 substantially 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 Fund is responsible for voting the shares of all
securities it holds.
The investment policies of the Fund are not fundamental
and so may be changed by the Board of Directors without
shareholder approval.
- --------------------------------------------------------------------------------
INVESTMENT RISKS
THE FUND IS SUBJECT
TO MARKET RISK
As a mutual fund investing primarily in common stocks, the
Fund is subject to MARKET RISK -- i.e., the possibility
that common stock prices will decline over short or even
extended periods. The U.S. stock market has tended to be
cyclical, with periods when stock prices generally rise
and periods when prices generally decline.
To illustrate the volatility of domestic stock prices, the
following table sets forth the extremes for U.S. stock
market returns as well as the average return for the
period
4
<PAGE> 79
from 1926 to 1995, as measured by the Standard & Poor's
500 Composite Stock Price Index:
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
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 +12.5 +10.3 +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 1995. While
this average return can be used as a guide for setting
reasonable expectations 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 historical investment performance, which may be
a poor guide to future returns. Also, stock market indexes
such as the S&P 500 are based on unmanaged portfolios of
securities before transaction costs and other expenses.
Such costs will reduce the relative investment performance
of the Fund and other "real world" portfolios. Finally,
the Fund is likely to differ in portfolio composition from
broad stock market averages, and so the Fund's performance
should not be expected to mirror the returns provided by a
specific index.
THE FUND IS ALSO
SUBJECT TO
MANAGER RISK The investment adviser manages the Fund according to the
traditional methods of "active" investment management,
which involve the buying and selling of securities based
upon economic, financial and market analysis and
investment judgment. MANAGER RISK refers to the
possibility that the Fund's investment 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
INVEST
LONG-TERM INVESTORS
SEEKING GROWTH OF
CAPITAL AND INCOME The Fund is intended for investors who are seeking growth
of capital and income. Although the Fund's secondary
objective is to provide current income, investors should
not consider the Fund a substitute for fixed-income
investments. The Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term stock
market movements. Investors who engage in excessive
account activity generate additional costs which are borne
by all of the Fund's shareholders. In order to minimize
such costs, the Fund has adopted 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.
5
<PAGE> 80
No assurance can be given that the Fund will attain its
objectives 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
OF POLICIES In addition to investing primarily in equity securities,
the Fund follows a number of additional investment
practices to achieve its objectives.
THE FUND MAY INVEST
IN SHORT-TERM FIXED
INCOME SECURITIES Although it normally seeks to remain substantially fully
invested in equity securities, the Fund may invest
temporarily in certain short-term fixed income securities.
Such securities may be used to invest uncommitted cash
balances, to 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 repurchase
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 securities at the Fund's cost plus interest
within a specified period (normally one day). In these
transactions, the securities purchased by the Fund will
have a total value equal to or in excess of the value of
the repurchase agreement, and will be held by the Fund's
Custodian Bank until repurchased.
THE FUND MAY LEND
ITS SECURITIES The Fund may lend its investment securities to qualified
institutional investors for either short-term or long-term
periods for the purpose 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
described on page 8 in Investment Limitations, for
temporary or emergency purposes, including the meeting of
redemption requests which might otherwise require the
untimely disposition of securities.
PORTFOLIO TURNOVER
IS NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Fund retains the right to sell securities irrespective
of how long they have been held. It is anticipated that
the annual portfolio turnover of the Fund will not exceed
100%. A turnover rate of 100%
6
<PAGE> 81
would occur, for example, if all of the securities of the
Fund were replaced within one year.
DERIVATIVE
INVESTING Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
THE FUND MAY INVEST
IN DERIVATIVE
SECURITIES The Fund may invest in futures contracts and options, but
only to a limited extent. Specifically, the Fund may enter
into futures contracts provided that not more than 5% of
its assets are required as a futures contract deposit; in
addition, the Fund may enter into futures contracts and
options transactions only to the extent that obligations
under such contracts or transactions represent not more
than 20% of the Fund's assets.
Futures contracts and options may be used for several
common fund management strategies: to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index. While futures contracts
and options can be used as leveraged investments, the Fund
may not use futures 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
redemptions, the Fund may invest a portion of its assets
in a stock futures contract. Because futures contracts
only require 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, 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.
The Fund may use futures contracts for bona fide "hedging"
purposes. In executing a hedge, a manager sells, for
example, stock index futures to protect against a decline
in the stock market. As such, if the market drops, the
value of the futures position will rise, thereby
offsetting the decline in value of the Fund's stock
holdings.
FUTURES CONTRACTS
AND OPTIONS POSE
CERTAIN RISKS The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks held by
the Fund and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing in
those contracts whose price fluctuations are expected to
resemble those of the Fund's underlying securities. The
risk that the Fund will be unable to close out a futures
position will be minimized by entering into such
transactions on a national exchange with an active and
liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement
7
<PAGE> 82
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.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED The Fund has adopted certain limitations on its investment
CERTAIN FUNDAMENTAL practices. Specifically, the Fund will not:
LIMITATIONS
(a) with respect to 75% of the value of its total assets,
purchase the securities of any issuer (except
obligations of the United States government and its
instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of
the issuer, or more than 5% of the value of the 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 require 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
investment securities are purchased. The investment
limitations described here and in the Statement of
Additional Information are fundamental and may be changed
only with the approval of a majority of the Fund's
shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUND
VANGUARD ADMINISTERS The Fund is a member of The Vanguard Group of Investment
AND DISTRIBUTES Companies, a family of more than 30 investment companies
THE FUND with more than 90 distinct investment portfolios and total
assets in excess of $180 billion. Through their
jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other funds in the Group
obtain at cost virtually all of their corporate
management, administrative and distribution 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
corporate structure, the Vanguard funds have costs
substantially lower than those of most competing mutual
funds. In 1995, the average expense ratio (annual costs
including advisory fees divided by total net assets) for
the Vanguard funds amounted to approximately .31% compared
to an average of 1.11% for the mutual fund industry (data
provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
8
<PAGE> 83
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of 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.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS
FOUR ADVISERS
OVERSEE THE FUND'S
INVESTMENTS: Vanguard/Windsor II employs a multi-manager approach
utilizing four investment advisers to manage the Fund's
assets. The Fund has investment advisory contracts with:
Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S"), One
McKinney Plaza, 3232 McKinney Avenue, 15th Floor, Dallas,
TX 75204-2429; Equinox Capital Management, Inc.
("Equinox"), 399 Park Ave., 28th floor, New York, NY
10022; and Tukman 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 equity
allocation of the Fund, Equinox and Tukman manage
approximately 10% each, and Vanguard's Core Management
Group manages approximately 8% of the Fund's equity
allocation. Investors
will be advised of any substantive changes in the
proportions managed by each
adviser. Each adviser discharges their responsibilities
subject to the control of the
Directors and Officers.
BARROW, HANLEY,
MEWHINNEY & STRAUSS
(BHM&S) BHM&S manages the investment and reinvestment of a portion
of the Fund's assets and continuously reviews, supervises,
and administers the Fund's investment program with respect
to those assets.
BHM&S, founded in 1979, is a professional investment
counseling firm which provides investment services to
investment companies, institutions, and individuals. As of
December 31, 1995, BHM&S held discretionary management
authority with respect to approximately $16.3 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, is the
portfolio manager for the assets of the Fund managed by
BHM&S, a position he has held since the Fund's inception
in 1985. He contributes to the development of the common
portfolio management strategy used
9
<PAGE> 84
at BHM&S, and is also responsible 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
compares the performance of the Fund's assets managed by
BHM&S with the performance of the Standard & Poor's/BARRA
Value Index. 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% 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 CAPITAL Equinox manages the investment and reinvestment of a
MANAGEMENT portion of the Fund's assets, and continuously reviews,
(EQUINOX) supervises and administers the Fund's investment program
with respect to those assets.
Equinox is a professional investment counseling firm
founded in 1989. As of December 31, 1995, Equinox provided
investment advisory services with respect to approximately
$5.1 billion 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> 85
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
compares 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 following adjustments to Equinox's basic fee:
<TABLE>
<CAPTION>
CUMULATIVE THREE-YEAR PERFORMANCE
DIFFERENTIAL VS. THE S&P 500
----------------------------------------------- INCENTIVE/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 manages the investment and reinvestment of a
MANAGEMENT portion of the Fund's assets, and continuously reviews,
(TUKMAN) supervises and administers the Fund's investment program
with respect to those assets.
Tukman is a professional investment counseling firm
founded in 1980. As of December 31, 1995, Tukman provided
investment advisory services with respect to assets of
approximately $2.9 billion. Melvin T. Tukman, President,
Director and founder 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>
The Fund's payments to Tukman under the above schedule are
subject to an incentive/penalty fee arrangement which
compares the performance of the Fund's
11
<PAGE> 86
assets managed by Tukman with the performance of the
Standard & Poor's 500 Composite Stock Price Index. This
arrangement provides for the following adjustments to
Tukman's basic fee:
<TABLE>
<CAPTION>
CUMULATIVE THREE-YEAR PERFORMANCE
DIFFERENTIAL VS. THE S&P 500
--------------------------------------------- INCENTIVE/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 CORE Vanguard's Core Management Group provides investment
MANAGEMENT GROUP advisory services on an at-cost basis with respect to a
portion of the Fund's assets. The Core Management Group
also provides investment advisory services to several
Vanguard funds, including Vanguard Index Trust, Vanguard
Balanced Index Fund, Vanguard Horizon Fund, Vanguard
International Equity Index Fund, Vanguard Institutional
Index Fund, several indexed separate accounts, as well as
a portion of Vanguard/ Morgan Growth Fund's assets. Total
assets under management by the Core Management Group were
approximately $33 billion as of December 31, 1995. The
portion of the Fund allocated to the Core Management Group
is managed using computerized, quantitative techniques
based on a value index constructed to approximate the
aggregate fundamental characteristics of a typical 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 ADVISORY For the fiscal year ended October 31, 1995, the investment
FEES PAID BY THE FUND advisory fees paid by the Fund to BHM&S, Equinox and
Tukman represented an effective annual rate of .14 of 1%
of average net assets before an increase of $86,000 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 the period to Equinox and Tukman represented an
effective annual rate of .20 of 1% and .24 of 1% of the
average net assets managed by Equinox and Tukman,
respectively.
OTHER ADVISORY BHM&S, Equinox, Tukman and Vanguard's Core Management
INFORMATION Group are authorized to select brokers or dealers to
execute purchases and sales of the Fund's portfolio
securities, and directed to use their best efforts to
obtain the best available price and most favorable
execution with respect to all transactions. The full range
and quality of brokerage services available are considered
in making these determinations.
The Fund has authorized BHM&S, Equinox, Tukman and
Vanguard's Core Management Group to pay higher commissions
in recognition of brokerage services deemed necessary for
the achievement of better execution, provided the advisers
believe this to be in the best interest of the Fund.
Although the Fund does not market its shares
12
<PAGE> 87
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
investment adviser pursuant to the terms of a new advisory
agreement, either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser. Any such change will only be made
upon not less than 30 days' prior written notice to
shareholders of the Fund, which shall include
substantially the information concerning the adviser that
would have normally been included in a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE
RECORD The table below provides investment results for the Fund
for several periods throughout the Fund's lifetime. The
results shown represent "total return" investment
performance which assumes the reinvestment of all capital
gains and income dividends, annualized for the indicated
periods. Also included is comparative information with
respect to the unmanaged Standard & Poor's 500 Composite
Stock Price Index, a widely-used barometer of stock market
activity, and the Consumer Price Index, a statistical
measure of changes in the prices of goods and services.
The 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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN FOR VANGUARD/WINDSOR II
PERCENTAGE INCREASE
--------------------------------------
FISCAL PERIODS VANGUARD S&P 500 CONSUMER
ENDED 10/31/95 WINDSOR II INDEX PRICE INDEX
--------------- ---------- ------- -----------
<S> <C> <C> <C>
1 Year +23.1% +26.4 % +2.7%
5 Years +18.2 +17.2 +2.8
10 Years +14.6 +15.4 +3.5
Lifetime* +14.1 +15.1 +3.5
</TABLE>
* June 24, 1985, to October 31, 1995. Data for the
Consumer Price Index begins June 30, 1985.
- --------------------------------------------------------------------------------
13
<PAGE> 88
DIVIDENDS, CAPITAL
GAINS AND TAXES
THE FUND PAYS
SEMI-ANNUAL
DIVIDENDS AND
ANY CAPITAL GAINS
ANNUALLY The Fund expects to pay dividends from ordinary income
semi-annually. Capital gains distributions, if any, will
be made annually. All dividend and capital gains
distributions are automatically reinvested in additional
shares of the Fund. In order to satisfy certain
distribution requirements of the IRS, the Fund may also
declare special year-end distributions during December.
The Fund intends to continue to qualify as a "regulated
investment company" under the Internal Revenue Code so
that it will not be subject to federal income tax to the
extent that its income is distributed to its shareholders.
If you utilize the Fund as an investment option in an
employer-sponsored retirement savings plan, dividend and
capital gains distributions from the Fund generally will
not be subject to current taxation, but will accumulate on
a tax-deferred 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 PRICE
OF THE FUND The Fund's share price or "net asset value" per share is
determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities,
by the number of outstanding shares of the Fund. Net asset
value in determined as of the regular close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the exchange is open for trading.
Portfolio securities that are listed on a securities
exchange are valued at the latest quoted sales prices.
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
securities for which market quotations are readily
available are valued at the latest quoted bid price.
Short-term instruments (those with remaining maturities of
60 days or less) are valued at cost, plus or minus any
amortized discount or premium, which approximates market.
Other assets and securities for which market quotations
are not readily available or which are restricted as to
sale are valued by such methods as the Board of Directors
deems in good faith to reflect fair value. 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 prices provided by a
pricing service may be determined without regard to bid or
last sale prices of each security but take into account
institutional-size transactions in similar groups of
securities as well as any developments related to specific
securities.
The Fund's share price can be found daily in the mutual
fund listings of most major newspapers under the heading
of Vanguard.
- --------------------------------------------------------------------------------
14
<PAGE> 89
GENERAL
INFORMATION The Company is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 2,200,000,000
shares of common stock, with a one cent par value. The
Board of Directors has the power to designate one or more
classes ("series") of shares 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 of the Company are fully paid
and non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features, and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Company if
requested 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 Disbursing Agent. Price Waterhouse LLP, serves as
independent accountants for the Fund and will audit its
financial statements annually. The Fund is not involved in
any litigation.
- --------------------------------------------------------------------------------
15
<PAGE> 90
SERVICE GUIDE
PARTICIPATING The Fund is available as an investment option in your
IN YOUR PLAN retirement or savings plan. The administrator of your 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 option.
If you have any questions about the Fund, including the
Fund's investment objective, policies, risk
characteristics or historical performance, please contact
Participant Services at 1-800-523-1188.
If you have questions about your account, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS You may be permitted to elect different investment
AND ALLOCATIONS options, alter the amounts contributed to your plan, or
change how 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 IN Contributions, exchanges or distributions of the Fund's
FUND SHARES shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on
the purchase, exchange or redemption and the appropriate
signatures and monies have been received by Vanguard.
- --------------------------------------------------------------------------------
MAKING EXCHANGES Your plan may allow you to exchange all or part of your
existing plan balance from one investment 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
option, please read the Fund's prospectus. Contact
Participant 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
frequently exchanges are allowed.
- As explained on page 5, the Fund reserves the right to
refuse any exchange purchase request.
- --------------------------------------------------------------------------------
16
<PAGE> 91
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<PAGE> 92
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 93
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 94
<TABLE>
<S> <C> <C>
[VANGUARD WINDSOR II LOGO]
--------------------------- [VANGUARD WINDSOR II LOGO]
THE VANGUARD GROUP I N S T I T U T I O N A L
OF INVESTMENT P R O S P E C T U S
COMPANIES
Vanguard Financial Center FEBRUARY 28, 1996
P.O. Box 2900
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[VANGUARD GROUP LOGO]
</TABLE>
I073
- --------------------------------------------------------------------------------
<PAGE> 95
PART B
VANGUARD/WINDSOR FUNDS, INC.
(FORMERLY THE WINDSOR FUNDS, INC.)
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 28, 1996
This Statement is not a prospectus, but should be read in conjunction with:
(1) the current Prospectus (dated February 28, 1996) relating to the Windsor
Fund series or the Windsor II series, as appropriate. To obtain either
Prospectus 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-6
Redemption of Shares...................................................................... B-6
Yield and Total Return.................................................................... B-7
Investment Limitations.................................................................... B-7
Management of the Company................................................................. B-9
Investment Advisory Services.............................................................. B-12
Portfolio Transactions.................................................................... B-17
Performance Measures...................................................................... B-18
Description of Shares and Voting Rights................................................... B-20
Financial Statements...................................................................... B-20
</TABLE>
THE COMPANY
Vanguard/Windsor Funds, Inc. (the "Company") is an open-end, diversified,
management investment company whose shares are currently offered in two separate
series -- the Vanguard/Windsor Fund series and the Vanguard/Windsor II series.
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 investment 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., ("Vanguard") 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 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 and the
Vanguard/Windsor II series are set forth under "Financial Highlights," in
Vanguard/Windsor Fund's and Vanguard/Windsor II's Prospectuses, respectively.
B-1
<PAGE> 96
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
for which there are no readily available market quotations. See "Illiquid
Securities" on page B-3.
The use of repurchase agreements involves certain risks. For example, if
the seller of the securities under an agreement defaults on its obligation to
repurchase the underlying securities at a time when the value of these
securities has declined, the series may incur a loss upon disposition of them.
If the seller becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a bankruptcy court may determine that the
underlying securities are collateral for a loan by the series not within the
control 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 acknowledges 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 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 three 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
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors (Trustees). In addition, voting
rights pass with
B-2
<PAGE> 97
the loaned securities, but if a material event occurs affecting an investment on
loan, the loan must be called and the securities voted.
FOREIGN INVESTMENTS. As indicated in the Prospectus, the Fund may include
foreign securities to a certain extent. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies.
Country Risk As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Portfolios' foreign securities will be somewhat greater than
the expenses for the custodian arrangement for handling U.S. securities of equal
value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments.
Currency Risk Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Fund permit it to enter into
forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
ILLIQUID SECURITIES. Illiquid securities are securities that may not be
sold or disposed of in the ordinary course of business within seven business
days at approximately the value at which they are being carried on a Fund's
books. An illiquid security includes repurchase agreements which have a maturity
of longer than seven days, securities which are illiquid by virtue of the
absence of a readily available market, and demand instruments with a demand
notice exceeding seven days. Illiquid securities may include securities that are
not registered under the Securities Act of 1933 (the "1933 Act"); however,
unregistered securities that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act will not be considered illiquid so
long as it is determined by the Fund's advisor that an adequate trading market
exists for the security.
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
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
B-3
<PAGE> 98
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. Each series
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
interest rates. Each series intends to use futures contracts only for bona fide
hedging purposes.
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 series 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 contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of the series' income to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While each series will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of 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.
B-4
<PAGE> 99
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Portfolio are engaged in only for hedging purposes, the
Adviser does not believe that the series is subject to the risks of loss
frequently associated with futures transactions. The series would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying security and sold it after the decline.
Utilization of futures transactions by the 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 position in a futures contract or
related option. Additionally, investments in futures and options involve the
risk that the investment adviser will incorrectly predict stock market and
interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. 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
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income derived 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
anticipated 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 otherwise be advantageous to do so. It is anticipated that unrealized
gains on futures contracts, which have been open for less than three months as
of the end of the series' fiscal year and which are recognized for tax purposes,
will not be considered gains on securities held less than three months for the
purpose of the 30% test.
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<PAGE> 100
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 transactions). Such
distributions will be combined with distributions of capital gains realized on
the series' other investments and shareholders will be advised 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
computed on the date of receipt; and an order received after the close of the
Exchange will be executed at the price computed on the next day the Exchange is
open.
Each series reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the series, and (iii) to
reduce or waive the minimum investment for or any other restrictions on 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
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"); (ii) during any period when an emergency
exists, as defined by the rules of the Commission, as a result of which it is
not reasonably practicable for the 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
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of 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 converted
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
series' portfolio securities.
SIGNATURE 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) 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 (2) 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
guarantor that Vanguard deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE
GUARANTORS.
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<PAGE> 101
YIELD AND TOTAL RETURN
The yield of Vanguard/Windsor Fund for the thirty-day period ended October
31, 1995 was +3.09%, and the yield for Vanguard/Windsor II for the same period
was +3.16%.
The average annual total returns for Vanguard/Windsor Fund for the one-,
five- and ten-year periods ending October 31, 1995 were +17.80%, +20.51% and
+13.93%, respectively. The average annual total returns for the one-, five- and
ten-year periods for Vanguard/Windsor II were +23.08%, +18.24% and +14.64%,
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 investment.
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
outstanding 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
government 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
approved by the shareholders of the series or otherwise to the extent
permitted by Section 12 of the Investment Company Act of 1940. A series
will invest only in investment companies which have investment
objectives and investment 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 otherwise require the untimely disposition of securities, in an
amount not exceeding 10% of the value of the net assets of the series
(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 series, the
series will not make any additional investments;
4) purchase securities on margin, or sell securities short except that each
series may invest in stock futures contracts, stock options and options
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
obligations (including repurchase agreements) which are either publicly
distributed or customarily purchased by institutional investors, and
(ii) as provided under "Lending of Securities" (See page B-2);
9) purchase assessable securities;
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
disposing of investment securities;
B-7
<PAGE> 102
11) purchase real estate, commodities or commodity contracts except as
described above in "(4)"; or
12) invest more than 25% of the value of its total assets in any one
industry.
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
engaged in the business of providing, at-cost, management, administrative or
related services to the Company and other investment companies. See "Management
of the Company".
These investment limitations are considered at the time investment
securities 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 "(4)") 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 15% of its assets, in the aggregate, determined at the time of
investment, in securities subject to legal or contractual restrictions on resale
or for which there are no readily available market quotations, including
repurchase agreements having maturities of more than 7 days.
B-8
<PAGE> 103
MANAGEMENT OF THE COMPANY
OFFICERS AND DIRECTORS
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for 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
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman and Director JOHN C. SAWHILL, Director
Chairman and Director of The Vanguard President and Chief Executive Officer, The
Group, Inc., and each of the investment Nature Conservancy; formerly, Director
companies in The Vanguard Group; and Senior Partner, McKinsey & Co.;
Director of The Mead Corporation and President, New York University; Director
General Accident Insurance. of Pacific Gas and Electric Company and
NACCO Industries.
JOHN J. BRENNAN, President, Chief Executive
Officer & Director* JAMES O. WELCH, JR., Director
President, Chief Executive Officer and Retired Chairman of Nabisco Brands, Inc. and
Director of The Vanguard Group, Inc. and retired Vice Chairman and Director of
each of the investment companies in The RJR Nabisco; Director of TECO Energy,
Vanguard Group. Inc.; and Director of Kmart Corporation.
BARBARA BARNES HAUPTFUHRER, Director J. LAWRENCE WILSON, Director
Director of The Great Atlantic and Chairman and Chief Executive Officer, Rohm &
Pacific Tea Company, Raytheon Company, Haas Company; Director of Cummins Engine
Knight- Ridder, Inc., Massachusetts Company; and Trustee of Vanderbilt
Mutual Life Insurance Co., and ALCO University.
Standard, Corp.; Trustee Emerita of
Wellesley College. RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The
ROBERT E. CAWTHORN, Director Vanguard Group, Inc.; Secretary of each
Chairman of Rhone-Poulenc Rorer, Inc.; of the investment companies in The
Director of Sun Company, Inc. Vanguard Group.
BRUCE K. MACLAURY, Director RICHARD F. HYLAND, Treasurer*
President. The Brookings Institution; Treasurer of The Vanguard Group, Inc. and of
Director of American Express Bank, Ltd., each of the investment companies in The
The St. Paul Companies, Inc. and Scott Vanguard Group.
Paper Co.
KAREN E. WEST, Controller*
BURTON G. MALKIEL, Director Vice President of The Vanguard Group, Inc.;
Chemical Bank Chairman's Professor of Controller of each of the investment
Economics, Princeton University; companies in The Vanguard Group.
Director of Prudential Insurance Co. of ---------------------------------------------
America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and *Officers of the Fund are "interested
Southern New England Communications persons" as defined in the Investment Company
Company. Act of 1940.
ALFRED M. RANKIN, JR., Director
Chairman, President and Chief Executive
Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company, and
The Standard Products Company.
</TABLE>
B-9
<PAGE> 104
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.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's 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.
The Fund's Officers are also Officers and employees of Vanguard. No Officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17 j-1 under the Investment Company Act of 1940. The Code is designed to prevent
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
permitted to engage in personal securities transactions. However, such
transactions 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 has invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At October 31, 1995,
Vanguard/Windsor Fund had contributed capital of $1,662,000 to Vanguard,
representing 8.3% of Vanguard's capitalization and, at that time,
Vanguard/Windsor II had contributed capital of $1,273,000 to Vanguard,
representing 6.4% of Vanguard's capitalization. The Funds' Service Agreement
provides for the following arrangement: (a) each Vanguard Fund may invest 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 Vanguard's
capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended October 31, 1995, Vanguard/Windsor Fund's share of Vanguard's
actual net costs of operation relating to management and administrative services
(including transfer agency) totaled approximately $23,760,000 and Vanguard/
Windsor II's share of such costs of operation totaled approximately $20,622,000.
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
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of
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<PAGE> 105
a marketing and promotional nature shall exceed 125% of the average distribution
expense rate for the Group, and that no Fund shall incur annual distribution
expenses in excess of 2/100 of 1% of its average month-end net assets. During
the fiscal year ended October 31, 1995, Vanguard/Windsor Fund paid approximately
$1,875,000 of the Group's distribution and marketing expenses, which represented
an effective annual rate of .02 of 1% of Vanguard/Windsor Fund's average net
assets and Vanguard/Windsor II paid approximately $1,622,000 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, Aggressive Growth Portfolio of
Vanguard Horizon 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
Officer'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
permitted 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 service. 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 retired Director.
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<PAGE> 106
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, 1995 and for all Directors and Officers as a
group:
VANGUARD/WINDSOR FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR RETIREMENT
AGGREGATE BENEFITS ACCRUED ESTIMATED TOTAL COMPENSATION
COMPENSATION AS PART OF ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM THE COMPANY COMPANY EXPENSES UPON RETIREMENT PAID TO DIRECTORS(3)
- --------------------------- ---------------- --------------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1),(2) $400,794 $ 4,410 -- --
John J. Brennan(2) $201,022 $ 4,410 -- --
Barbara Barnes Hauptfuhrer $ 8,538 $ 1,436 $ 15,000 $60,000
Robert E. Cawthorn $ 8,538 $ 1,196 $ 13,000 $60,000
Bruce K. MacClaury $ 9,257 $ 1,415 $ 12,000 $55,000
Burton G. Malkiel $ 8,538 $ 957 $ 15,000 $60,000
Alfred M. Rankin, Jr. $ 8,538 $ 756 $ 15,000 $60,000
John C. Sawhill $ 8,538 $ 897 $ 15,000 $60,000
James O. Welch, Jr $ 8,538 $ 1,104 $ 15,000 $60,000
J. Lawrence Wilson $ 8,538 $ 798 $ 15,000 $60,000
</TABLE>
<TABLE>
<CAPTION>
NAMES OF OTHER OFFICERS
- ---------------------------
<S> <C> <C> <C> <C>
Raymond J. Klapinsky $ 62,676 $ 4,410 -- --
</TABLE>
(1) For the period reported in this table, Mr. Bogle was the Company's Chief
Executive Officer and therefore an "Interested Director."
(2) As "Interested Directors", Messrs. Bogle and Brennan receive no compensation
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.
(3) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard funds
(27 in the case of Mr. MacClaury).
For the fiscal year ended October 31, 1995, the aggregate remuneration paid
by the Company to all Directors and Officers as a group was $730,682.
INVESTMENT ADVISORY SERVICES
VANGUARD/WINDSOR FUND
The Company employs Wellington Management Company ("WMC") under an
investment advisory agreement dated June 19, 1985 to manage the investment and
reinvestment of the assets of Vanguard/Windsor Fund and to continuously review,
supervise and administer Vanguard/Windsor Fund's investment program. WMC
discharges its responsibilities subject to the control of the Officers and
Directors of the Company. WMC is a Massachusetts general partnership controlled
by the following general partners: Robert W. Doran, Duncan M. McFarland and John
R. Ryan.
Vanguard/Windsor Fund pays WMC a basic fee at the end of each fiscal
quarter, 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>
NET ASSETS ANNUAL 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
adjustment formula based on Vanguard/Windsor Fund's investment performance. Such
formula provides for an increase or decrease in the basic fee paid to WMC each
quarter, depending upon Vanguard/Windsor Fund's investment performance for
B-12
<PAGE> 107
the thirty-six months preceding the end of the quarter relative to the
investment record of the Standard and Poor's Composite Stock Price Index (the
"S&P 500") for the same period. 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
period. 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 securities
comprise the S&P Index.
During the fiscal years ended October 31, 1993, 1994 and 1995
Vanguard/Windsor Fund paid the following advisory fees:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Basic Fee......................................... $15,547,000 $17,236,000 $19,022,000
Increase or Decrease for Performance
Adjustment...................................... 4,136,000 9,213,000 7,792,000
----------- ----------- -----------
Total........................................ $19,683,000 $26,449,000 $26,774,000
=========== =========== ===========
</TABLE>
VANGUARD/WINDSOR II
Vanguard/Windsor II employs a "multi-manager" approach utilizing four
investment 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 equity allocation 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
investment program of Vanguard/Windsor II with respect to those assets. BHM&S
discharges its responsibilities subject to the control of the Officers and
Directors 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
quarter, 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>
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 decrease in
the basic fee paid to BHM&S each quarter, depending upon the BHM&S Portfolio's
investment
B-13
<PAGE> 108
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 Prospectus.
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 investment
performance of the BHM&S Portfolio and that of the BARRA Value Index
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 exceed or fall below that of the BARRA Value Index will
increase proportionately from 3 percentage points and 2 percentage
points, respectively, for the twelve months ended April 30, 1994 to 9
percentage points and 6 percentage points, respectively for the
thirty-six months ended April 30, 1996.
The BARRA Value Index includes stocks in the Standard and Poor's 500
Composite 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
expressed 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-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 realized from the BHM&S Portfolio.
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, 1993, 1994 and 1995,
Vanguard/Windsor II paid advisory fees to BHM&S of approximately $6,488,000,
$7,518,000 and $8,514,842, respectively.
OTHER ADVISERS
On November 1, 1991, Vanguard/Windsor II added Equinox Capital Management
("Equinox") and Tukman Capital Management ("Tukman") to manage the investment
and reinvestment of a portion of its equity allocation (approximately 10% each).
Additionally, Vanguard's Core Management Group was added to manage approximately
8% of the Vanguard/Windsor II's equity allocation. Equinox, Tukman and
Vanguard's Core Management Group discharge their respective responsibilities
subject to the control of the Directors 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
(Principal), Wendy D. Lee (Managing Director), David E. Walker (Vice President)
and Laura Starr (Vice President).
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<PAGE> 109
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 quarter,
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>
NET ASSETS ANNUAL 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")
relative 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
Portfolio'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
expressed 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
investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and (iii)
the unit value of capital gains taxes paid or accrued during such period by
Vanguard/Windsor II for undistributed realized long-term capital gains realized
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 number 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, 1993, 1994 and 1995,
Vanguard/Windsor II paid advisory fees to Equinox of approximately $1,171,000,
$1,424,000 and $1,681,435, respectively.
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>
NET ASSETS ANNUAL 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>
B-15
<PAGE> 110
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") relative
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 Portfolio'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
expressed 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
investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and (iii)
the unit value of capital gains taxes paid or accrued during such period by
Vanguard/Windsor II for undistributed realized long-term capital gains realized
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 number 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
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 500.
During the fiscal years ended October 31, 1993, 1994 and 1995,
Vanguard/Windsor II paid advisory fees to Tukman of approximately $1,503,000,
$1,825,000 and $2,184,838, respectively.
VANGUARD'S CORE MANAGEMENT GROUP
Since November 1, 1991, Vanguard's Core Management Group has provided
investment advisory services on an at-cost basis with respect to a portion of
the Vanguard/Windsor II's equity allocation (currently approximately 8%). The
Core Management Group also provides investment advisory services to several
Vanguard Funds, including Vanguard Index Trust, Vanguard Balanced Index Fund,
Vanguard Horizon Fund, Vanguard International Equity Index Fund, Vanguard
Institutional Index Fund, several indexed separate accounts as well as a portion
of Vanguard/Morgan Growth Fund's assets. The quantitative approach used by
Vanguard'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 using
an optimizer to assure that the characteristics of the portfolio are similar 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, 1996. Vanguard/Windsor II's present agreements with BHM&S, Equinox
and Tukman continue in effect until April 30, 1996, October 31, 1996 and October
31, 1996, 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 shareholders. 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.
B-16
<PAGE> 111
Each investment advisory agreement is automatically terminated if assigned,
and may be terminated without penalty at any time (1) by majority vote of either
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 notice 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 adviser
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 advisory
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
notice to shareholders, which shall include the information concerning the
adviser 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 directors and investment advisers to certain factors which must be considered
in connection with investment company incentive fee arrangements. One of these
factors is to "avoid basing significant fee adjustments upon random or
insignificant differences" between the investment performance of a fund and that
of the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a 'rule of thumb'
the performance difference should be at least 10 percentage points" annually
before the maximum performance adjustment may be made. However, the Release also
states that "because of the preliminary nature of these studies, the Commission
is not recommending, at this time, that any particular performance difference
exist before the maximum fee adjustment may be made." The Release concludes that
the directors of a fund "should satisfy themselves that the maximum performance
adjustment will be made only for performance differences that can reasonably be
considered significant." The Board of Directors has fully considered the SEC
Release and believes that the performance adjustments as included in the
agreements with WMC, BHM&S, Equinox and Tukman are entirely appropriate although
not within the 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 12 and 9 percentage points from the
performance of the respective index over a thirty-six month period, which would
effectively be the equivalent of approximately 4 and 3 percentage points
difference per year.
PORTFOLIO TRANSACTIONS
WMC, BHM&S, Equinox, Tukman and Vanguard are authorized to (with the
approval of the Board of Directors) select the brokers or dealers that will
execute 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
execution as to all transactions. Each investment adviser has undertaken to
execute each investment transaction at a price and commission which provides the
most favorable total cost or proceeds reasonably obtainable under the
circumstances.
In placing portfolio transactions, each 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
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information and provide other services in addition to execution services to the
series and/or the investment adviser. Each investment adviser
B-17
<PAGE> 112
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 series
to pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the adviser to the 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 necessary
for the achievement of better execution of certain securities transactions 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 transactions 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 obtaining 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
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
particular 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, 1993, 1994 and 1995 the Company
paid $14,909,648, $14,906,748 and $17,775,409 in brokerage commissions,
respectively.
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 adviser.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of the Vanguard Group, including
Vanguard/Windsor Fund and Vanguard/Windsor II, may from time to time use one or
more of the following unmanaged indices for comparative performance purposes.
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.
STANDARD AND POOR'S/BARRA GROWTH INDEX --
WILSHIRE 5000 EQUITY INDEX -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
B-18
<PAGE> 113
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.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield 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% Lehman Long-Term
Corporate 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.
B-19
<PAGE> 114
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
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
Incorporation permit the Directors to issue 2,200,000,000 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 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 features.
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 Directors
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 aggregate 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, 1995,
including the financial highlights for each of the five fiscal years in the
period ended October 31, 1995, appearing in the Vanguard/Windsor Fund and
Vanguard/Windsor II 1995 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 Information. The
Funds' 1995 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 1995 Annual Report to Shareholders, which may be obtained
without charge.
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