<PAGE>
GEMINI II LOGO
April 30, 1997
Fellow Shareholder:
The accompanying Combined Proxy Statement/Prospectus presents an important
proposal for your consideration as a shareholder of Gemini II, Inc. (the
"Fund"). In substance, your Board of Directors has proposed that all of the
assets of the Fund be acquired--in a tax-free reorganization--in exchange for
shares of the Windsor Fund series of Vanguard/Windsor Funds, Inc. ("Windsor
Fund") and that the Fund be dissolved.
As you are aware, the Fund was converted to an open-end investment company
on March 3, 1997, thereby giving shareholders the right to redeem their shares
at the Fund's net asset value per share. However, the Board of Directors does
not believe that it is in the best interests of the Fund to continue operations
as a separate open-end investment company over the long term. Since the Fund
does not expect to offer additional shares to new investors, the assets of the
Fund will necessarily decrease because of redemptions by existing shareholders.
As assets decline, it is expected that the Fund's expense ratio will increase,
since certain of its expenses are relatively fixed. Through the reorganization,
shareholders would own shares of a larger fund with similar investment
objectives, that offers more economies of scale to shareholders. See "Expense
Tables," page 5.
If this proposal is approved by shareholders, your Fund shares will be
exchanged for Windsor Fund shares with an equivalent fair market value. The Fund
and Windsor Fund have similar investment objectives and policies, and are
managed by the same Wellington Management Company, LLP investment team. In fact,
many of the Fund's portfolio securities are also held by Windsor Fund.
Please take the time to review this document and vote now by signing and
returning the enclosed proxy card. If you determine at a later date that you
wish to attend this meeting, you may revoke your proxy and vote in person.
We hope that this Combined Proxy Statement/Prospectus will answer all of
your questions, but if you have further questions at any time, please do not
hesitate to call Vanguard's Investor Information Department at 1-800-420-8574.
/s/ John C. Bogle /s/ John J. Brennan
- ----------------------- -----------------------
John C. Bogle John J. Brennan
Chairman President
<PAGE>
GEMINI II
WINDSOR FUND
COMBINED PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Notice of Special Meeting of Shareholders ........................... 1
Expense Tables ...................................................... 5
Summary ............................................................ 6
Proposed Transaction ................................................ 6
Voting Information ................................................ 7
Tax Consequences ................................................... 7
Investment Objectives and Policies ................................. 7
Management, Administrative and Distribution Services ............... 8
Investment Adviser and Advisory Fees .............................. 9
Risk Factors ...................................................... 10
Purchase Price, Redemption Price, Dividends and Distributions ...... 11
Financial Highlights ................................................ 12
Reasons for the Transaction .......................................... 13
Performance Summary ................................................ 14
Information About the Transaction .................................... 15
Method of Carry Out Reorganization ................................. 15
Conditions Precedent to Closing .................................... 16
Expenses of the Reorganization .................................... 16
Tax Considerations ................................................ 17
Litigation ......................................................... 17
Description of Shares of Windsor Fund .............................. 17
Capitalization ...................................................... 18
Comparison of Investment Policies and Risks ........................ 18
Investment Policies and Risk Factors .............................. 18
Information Filed with the Securities and Exchange Commission ...... 21
Voting Information and Principal Stockholders ........................ 21
Agreement and Plan of Reorganization .............................. Exhibit A
Windsor Fund Prospectus Dated February 28, 1997 .................. Exhibit B
Annual Report of Windsor Fund for the Fiscal Year
Ended October 31, 1996 ........................................... Accompanies
this Combined
Proxy
Statement/Prospectus
</TABLE>
<PAGE>
GEMINI II LOGO
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF GEMINI II, INC.
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Gemini II,
Inc. (the "Fund") will be held in the Majestic Building, Room 118A, Vanguard
Financial Center, 100 Vanguard Boulevard, Malvern, Pennsylvania 19355 on
Wednesday, June 18, 1997 at 9:30 AM, Eastern Time, for the following reasons:
1. To approve or disapprove an Agreement and Plan of Reorganization
between the Fund and Vanguard/Windsor Funds, Inc. on behalf of the
Windsor Fund series ("Windsor Fund") that provides for the acquisition
of substantially all the assets of the Fund in exchange for shares of
Windsor Fund, the distribution of such shares to the shareholders of
the Fund, and the liquidation and dissolution of the Fund.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The transaction contemplated by the Agreement and Plan of Reorganization is
described in the attached Combined Proxy Statement/Prospectus. A copy of the
Agreement and Plan of Reorganization is attached as Exhibit A thereto.
By Order of the Board of Directors
RAYMOND J. KLAPINSKY, Secretary
April 30, 1997
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
Please indicate your voting instructions on the enclosed Proxy Card, date and
sign it, and return it in the envelope provided, which is addressed for your
convenience and needs no postage if mailed in the United States. In order to
avoid the additional expense to the Fund of further solicitation, we ask you to
cooperate in mailing your Proxy promptly.
- --------------------------------------------------------------------------------
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
COMBINED PROXY STATEMENT/PROSPECTUS
Dated April 30, 1997
Acquisition of the Assets of Gemini II
By and in Exchange for Shares of Windsor Fund
This Combined Proxy Statement/Prospectus is being furnished to you in
connection with the solicitation of proxies by the Board of Directors of Gemini
II, Inc. (the "Fund"). Holders of record at the close of business on April 30,
1997 (the "Record Date"), are entitled to vote at the meeting or any adjourned
session. Each share is entitled to one vote. As of April 28, 1997, there were
issued and outstanding 8,488,242 shares of common stock of the Fund.
Shares represented by a properly executed proxy will be voted in accordance
with the instructions thereon, or if no specification is made, the persons named
as proxies will vote in favor of the proposal set forth in the Notice of Special
Meeting of Shareholders. Proxies may be revoked at any time before they are
exercised by the subsequent execution and submission of a revised proxy, by
written notice of revocation to the Secretary of the Fund, or by voting in
person at the meeting. The mailing address of the Fund is c/o Vanguard Financial
Center, 100 Vanguard Boulevard, (PO Box 2600), Valley Forge, PA 19482.
Shareholders who need directions to the location of the Special Meeting
should call 1-800-420-8574, between the hours of 8:00 A.M. and 9:00 P.M. Eastern
Time, on any business day.
Proxies solicited will be voted at the Special Meeting of Shareholders to
approve or disapprove an Agreement and Plan of Reorganization (the "Agreement
and Plan"). The Agreement and Plan provides for the acquisition of substantially
all the assets of the Fund in exchange for shares of Windsor Fund. The Fund and
Windsor Fund employ the same investment adviser (Wellington Management Company,
LLP) and have substantially similar investment objectives and policies. The
principal executive offices of the Fund and Vanguard/Windsor Funds, Inc. are
located at 100 Vanguard Boulevard, (P.O. Box 2600), Valley Forge, PA 19482,
Telephone No. 1-800-420-8574.
Following such transaction, shares of Windsor Fund will be distributed to
shareholders of the Fund in complete liquidation of the Fund. Individual
shareholders of the Fund will receive that number of shares of Windsor Fund
having an aggregate net asset value equal to the aggregate net asset value of
such shareholder's shares of the Fund.
Windsor Fund is a diversified series of Vanguard/Windsor Funds, Inc.
Vanguard/Windsor Funds, Inc. is a no-load, diversified management investment
company and, like the Fund, is a member fund of The Vanguard Group of Investment
Companies. Windsor Fund is one of two series of Vanguard/Windsor Funds, Inc.
Windsor Fund's investment objective is to seek to provide long-term growth of
capital and income by investing primarily in common stocks. Windsor Fund's
3
<PAGE>
secondary objective is to provide current income. Windsor Fund seeks to achieve
these objectives by investing primarily in common stocks, which are selected
principally on the basis of fundamental value. Although Windsor 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 stocks. The investment policies and restrictions and, consequently,
the risks of investing in Windsor Fund are similar to those of the Fund. There
can be no assurance that Windsor Fund will achieve its objectives. Shares of
Windsor Fund are neither insured nor guaranteed by any agency of the U.S.
Government, including the FDIC.
The Fund will request broker-dealer firms, custodians, nominees and
fiduciaries to forward proxy material to the beneficial owner of the shares
owned of record by such persons. The Fund may reimburse such broker-dealer
firms, custodians, nominees and fiduciaries for their reasonable expenses
incurred in connection with such proxy solicitation. In addition to
solicitations by mail, some of the officers and employees of the Fund and The
Vanguard Group, Inc. ("Vanguard"), without extra remuneration, may conduct
additional solicitations by telephone and personal interviews. The Fund has
engaged Management Information Systems to solicit proxies from brokers, banks,
other institutional holders and individual shareholders for a fee, including
out-of-pocket expenses, of approximately $5,000.
This Combined Proxy Statement/Prospectus, which should be retained for
future reference, sets forth concisely the information about Windsor Fund that a
prospective investor should know before investing. This Combined Proxy
Statement/Prospectus includes as Exhibit B the Prospectus of Windsor Fund dated
February 28, 1997, and is accompanied by an annual report for Windsor Fund for
its fiscal year ended October 31, 1996, each of which is incorporated by
reference into this Combined Proxy Statement/Prospectus. A Statement of
Additional Information dated February 28, 1997, relating to this Combined Proxy
Statement/Prospectus, the transactions described herein and the parties thereto,
has been filed with the Securities and Exchange Commission and is incorporated
by reference into this Combined Proxy Statement/Prospectus. A copy of that
Statement of Additional Information may be obtained without charge by writing to
the address noted above or by calling 1-800-420-8574. A Registration Statement
for the Fund, filed with the Securities and Exchange Commission on March 5,
1997, as well as an Annual Report for the Fund for its fiscal year ended
December 31, 1996, are also on file with the Securities and Exchange Commission;
each of these documents is incorporated herein by reference and is available
without charge upon request to the Fund. This Combined Proxy
Statement/Prospectus will first be sent to shareholders on or about May 5, 1997.
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
4
<PAGE>
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS COMBINED PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROXY
STATEMENT/PROSPECTUS AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY
REFERENCE AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR WINDSOR FUND.
EXPENSE TABLES
On February 28, 1997, the Fund had total net assets of $336,832,000. On the
same date, Windsor Fund had total net assets of $18,115,245,000. Primarily
because of Windsor Fund's asset size, its expense ratio is lower than that of
the Fund and most other mutual funds. The next table compares the operating
expenses that shareholders would incur as a shareholder of the Fund and Windsor
Fund. These expenses are based upon each Fund's most recently completed fiscal
year and are deducted from each fund's income before it is paid to shareholders.
Expenses include investment advisory fees as well as the costs of administering
each fund, maintaining shareholder accounts, providing shareholder services, and
other activities. It is not expected that the transaction will have a material
effect on Windsor Fund's expenses.
PRO FORMA FEE TABLE FOR THE FUND AND WINDSOR FUND
(Unaudited)
<TABLE>
<CAPTION>
Actual
------------------------------
The Fund Windsor Fund
------------ --------------- Pro Forma
After
(FY Ended (FY Ended Transaction (As of
12/31/96) 10/31/96) February 28, 1997)
------------ --------------- --------------------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Sales Load Imposed on
Purchases: ..................... None None None
Sales Load Imposed on
Reinvested Dividends: ......... None None None
Redemption Fees: ............... None None None
Exchange Fees: ............... None None None
Annual Fund Operating Expenses
(as a percentage of average net
assets)
Management and Administrative
Expenses: ..................... 0.13% 0.18% 0.18%
Investment Advisory Expenses: ... 0.28% 0.10% 0.10%
12b-1 Marketing Fees: ......... None None None
Other Expenses:
Marketing and Distribution
Costs: ........................ 0.00% 0.02% 0.02%
Miscellaneous Expenses (e.g.
taxes, auditing): ............ 0.04% 0.01% 0.01%
Total Operating Expenses
(Expense Ratio): ............... 0.45% 0.31% 0.31%
</TABLE>
5
<PAGE>
Example:
Based on the level of expenses listed above, an investor would pay the
following expenses on a $1,000 investment, assuming a 5% annual return and
redemption at the end of each time period:
1 Year 3 Years 5 Years 10 Years
--------- ---------- ---------- ----------
The Fund $5 $14 $25 $57
Windsor Fund
(After Transaction) $3 $10 $17 $39
The foregoing tables are designed to assist the investor in understanding
the various costs and expenses that a shareholder will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses and actual expenses and returns may be greater or lesser than
those shown.
SUMMARY
This summary of certain information contained in this Combined Proxy
Statement/Prospectus is qualified by reference to the more complete information
contained elsewhere in this Combined Proxy Statement/Prospectus, the Agreement
and Plan and the Windsor Fund prospectus, included herein as Exhibits A and B,
respectively.
Proposed Transaction
At a meeting held on November 15, 1996, the Board of Directors of the Fund
unanimously approved the Agreement and Plan providing for the acquisition of
substantially all of the assets of the Fund by Windsor Fund, in exchange for
shares issued by Windsor Fund and the distribution of such Windsor Fund shares
received, in complete liquidation of the Fund. (The proposed transaction is
referred to in this Combined Proxy Statement/Prospectus as the "Transaction" or
the "Reorganization"). The value of the shares issued by Windsor Fund in
connection with the Transaction will equal the value of the assets of the Fund
acquired by Windsor Fund.
Pursuant to the Agreement and Plan, shares issued by Windsor Fund to the
Fund will be distributed to the shareholders of the Fund in complete liquidation
of the Fund. As a result, shareholders of the Fund will cease to be shareholders
of such Fund and will instead be the owners of that number of full and
fractional shares of Windsor Fund having an aggregate net asset value equal to
the aggregate net asset value of the shares of the Fund on the closing date of
the Transaction.
For the reasons set forth on page 13 under "Reasons for the Transaction,"
the Boards of Directors of the Fund and Vanguard/Windsor Funds, Inc. have
unanimously concluded that the Transaction is in the best interests of the
shareholders of the respective funds and, therefore, recommend approval of the
Agreement and
6
<PAGE>
Plan. The Board of Directors of the Fund and the Board of Directors of
Vanguard/Windsor Funds, Inc, respectively, also concluded that no dilution would
result to the shareholders of the Fund or Windsor Fund, respectively, as a
result of the Transaction.
Voting Information
The affirmative vote of the holders of a majority of the outstanding shares
of the Fund on the Record Date is necessary to approve the Agreement and Plan.
Under relevant state law and the Fund's corporate documents, abstentions and
broker non-votes will be counted for purposes of determining whether a quorum is
present at the Special Meeting, but will not be counted for purposes of
determining whether the matter to be voted upon has been approved.
Each shareholder will be entitled to one vote for each share of the Fund
held on the Record Date. If you give no voting instructions on your proxy, your
shares will be voted in favor of the Agreement and Plan. Shareholders of record
of the Fund at the close of business on the Record Date will be entitled to vote
at the Special Meeting.
Tax Consequences
The Fund and Windsor Fund have received a private letter ruling from the
Internal Revenue Service substantially to the effect that the Transaction will
not result in material adverse federal income tax consequences to the Fund or
Windsor Fund, and that the holders of shares of the Fund will not recognize any
gain or loss. For further information about the tax consequences of the
Transaction, see "Information About The Transaction-Tax Considerations."
Investment Objectives and Policies
The Fund's investment objectives are to seek (a) long-term capital
appreciation, and (b) current and long-term growth of income, by investing at
least 80% of its assets in common stocks. The Fund may also invest in other
equity securities, bonds, notes and money market instruments, although it will
not invest more than 20% of its assets in such securities except for temporary
defensive purposes. The Fund's stocks are selected principally on the basis of
fundamental investment value and, at the time of purchase, may be deemed by the
investment adviser to be overlooked or undervalued in the marketplace. The key
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
are usually characterized by relatively low price-earnings ratios and above
average yields, in each case as compared to the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500 Index").
The investment objective of Windsor Fund is to provide growth of capital
and income. Its secondary objective is to provide current income. Windsor Fund
invests primarily (at least 80% under normal circumstances) in common stocks,
which are selected on the basis of fundamental investment value in the same
manner as
7
<PAGE>
described above for the Fund. Although Windsor 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 stocks. No
more than 35% of Windsor Fund's assets will be committed to short-term fixed
income securities for purposes other than taking a temporary defensive position.
Windsor Fund may also invest up to 20% of its assets in foreign securities and
may engage in foreign currency transactions with respect to such investments.
Each fund may invest up to 100% of its assets in short-term, investment
grade, fixed income securities for temporary defensive purposes. Additionally,
each fund may invest in futures contracts or options transactions to the same
extent as described on page 20.
Management, Administrative and Distribution Services
The Fund and Windsor Fund (through Vanguard/Windsor Funds, Inc.) are
members of The Vanguard Group of Investment Companies ("The Vanguard Group"), a
family of more than 30 mutual funds with more than 90 distinct investment
portfolios and total assets in excess of $250 billion. Through their
jointly-owned subsidiary, Vanguard, the member funds of 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 member funds.
The officers of each member fund manage its day-to-day operations and are
responsible to each fund's Board of Directors. The Directors set broad policies
for each fund and choose its officers. Vanguard employs a supporting staff of
management and administrative personnel needed to provide the requisite services
to the member funds and also furnishes the funds with necessary office space,
furnishings and equipment. Each member fund pays its share of Vanguard's total
expenses relating to these services, which are allocated among the funds under
methods approved by the Board of Directors (Trustees) of each fund. In addition,
each member fund bears its own direct expenses, such as legal, auditing and
custodian fees.
Vanguard provides all distribution and marketing services for the member
funds, except for the Fund, because the Fund does not offer additional shares
for sale. 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 Vanguard Group. The
Directors and officers of Vanguard determine the amount to be spent on each
member fund, and whether to organize new investment companies.
One-half of the distribution expenses of a marketing and promotional nature
is allocated among the member funds (including the Fund) based upon their
relative net assets. The remaining one-half of these expenses is allocated among
the member funds (except the Fund) based on each fund's share sales for the
8
<PAGE>
preceding 24 months relative to the total share sales of all member funds as a
group, provided, however, that no fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for the group, and
that no fund shall incur annual distribution expenses in excess of 20/100 of 1%
of its average month-end net assets.
Windsor Fund does not accept new accounts and existing Windsor Fund
shareholders may purchase no more than $25,000 in additional Windsor Fund shares
on an annual basis. A shareholder's Windsor Fund shares acquired as a result of
the proposed transaction will not be counted towards this limitation. Exchange
privileges for Windsor Fund are described in the accompanying Windsor Fund
prospectus.
Investment Adviser and Advisory Fees
Wellington Management Company, LLP ("WMC"), 75 State Street, Boston, MA
02109, has served as investment adviser to the Fund since the Fund's inception
in 1985 and to Windsor Fund since Windsor Fund's inception in 1958. Charles T.
Freeman, Senior Vice President of WMC, serves as portfolio manager of the Fund
and Windsor Fund. Mr. Freeman joined WMC in 1969 and served as assistant
portfolio manager of the Fund (since 1985) and Windsor Fund (since 1969) until
his appointment as portfolio manager of the Fund and Windsor Fund in January,
1996.
Pursuant to an investment advisory agreement dated March 3, 1997, WMC
manages the investment and reinvestment of the assets of the Fund 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. The Fund pays WMC a fee (the "Basic Fee") at the end of
each fiscal quarter, calculated by applying a quarterly rate, based on the
following percentage rates, to the Fund's average month-end net assets for the
quarter:
Net Assets Annual Rate
--------------------- -------------
First $300 million 0.350%
Over $300 million 0.275%
The Basic Fee, as provided above, may be increased or decreased by an
amount equal to 0.10% per annum (0.025% per quarter) of the average month-end
net assets of the Fund if the Fund's investment performance for the 36 months
preceding the end of the quarter is 12 percentage points or more above or below,
respectively, the investment record of the S&P 500 Index for the same period; or
by an amount equal to 0.05% per annum (0.0125% per quarter) if the Fund's
investment performance for such 36 months is 6 but less than 12 percentage
points above or below, respectively, the investment record of the S&P 500 Index.
During the fiscal year ended December 31, 1996, the Fund paid WMC a base
advisory fee of approximately $1,356,000 (0.33% of average net assets), before a
decrease of approximately $185,000 (0.05% of average net assets) based on the
Fund's investment performance.
9
<PAGE>
Pursuant to an investment advisory agreement dated August 1, 1996, WMC
manages the investment and reinvestment of the assets of Windsor Fund and
continuously reviews, supervises and administers Windsor Fund's investment
program. 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 Windsor Fund's average month-end net assets for the
quarter:
Net Assets Annual Rate
---------------------- -------------
First $17.5 billion 0.125%
Over $17.5 billion 0.100%
Beginning with the quarter ending July 31, 1999, the Basic Fee, as provided
above, may be adjusted based on the investment performance of Windsor Fund as
compared to the investment record of the S&P 500 Index over a rolling 36-month
period. Under this incentive/penalty fee arrangement, the Basic Fee may be
increased or decreased by as much as 67% of the Basic Fee on the first $17.5
billion of Windsor Fund's average net assets and by as much as 90% of the Basic
Fee on the average net assets of Windsor Fund in excess of $17.5 billion. Until
July 31, 1999, a "blended" incentive/penalty fee rate will be used for each of
the 12 quarters then ending. This blended rate is calculated by applying varying
percentages based on (i) the incentive/penalty fee applicable to the August 1,
1996 agreement described above, and (ii) the incentive/penalty fee applicable to
a prior agreement, which is substantially identical to the incentive/penalty fee
arrangement described for the Fund.
During the fiscal year ended October 31, 1996, Windsor Fund paid WMC a base
advisory fee of approximately $18,816,000 (0.13% of average net assets) before a
decrease of approximately $4,417,000 (0.03% of average net assets) based on the
Fund's investment performance. This fee was paid under a previous investment
advisory agreement providing for a higher Basic Fee rate.
Risk Factors
Because of the similarities of the investment objectives and policies of
the Fund and Windsor Fund, the investment risks associated with an investment in
the Fund are generally the same as those of Windsor Fund. See "Comparison of
Investment Policies and Risks" on page 18, and the attached Prospectus of
Windsor Fund for details.
10
<PAGE>
Purchase Price, Redemption Price, Dividends and Distributions
Shares of the Fund are not offered or sold to new investors. Currently,
shares of Windsor Fund are not being offered or sold to new investors, except
for certain qualified retirement plans. Current shareholders of Windsor Fund
(including shareholders of the Fund following consummation of the Transaction)
may make additional investments, but the aggregate amount of such investments
made during any calendar year may not exceed $25,000. Regular annual purchases
by existing Windsor Fund retirement accounts are also accepted, but the total of
such purchases may not exceed $25,000. Subsequent investments by current
shareholders may be made only by mail ($100 minimum), wire ($1,000 minimum) or
exchanges from other Vanguard fund accounts. The purchase price for shares of
Windsor Fund is the net asset value per share following receipt of the purchase
request.
Shares of both the Fund and Windsor Fund may be redeemed at their
respective net asset value per share next determined after Vanguard receives all
required documents in good order. Shares of both the Fund and Windsor Fund may
be exchanged for shares of other Vanguard member funds subject to certain
limitations, as set forth in the Prospectus of the respective fund.
The Fund and Windsor Fund each have policies of distributing substantially
all of their net investment income and net capital gains to their respective
shareholders. If the Transaction is approved by shareholders of the Fund, the
Fund will pay a final distribution consisting of all accumulated net investment
income and realized capital gains a few days before the Closing Date. If the
Transaction is not approved by shareholders of the Fund, the Fund will
distribute all its net investment income and realized capital gains on an annual
basis.
Each June and December, Windsor Fund distributes to shareholders virtually
all of its income from interest and dividends. Any capital gains realized from
the sale of securities are distributed by Windsor Fund in December of each year.
Distributions of income dividends and capital gains will be automatically
invested in additional shares of Windsor Fund, unless the shareholder elects to
receive these distributions in cash.
11
<PAGE>
FINANCIAL HIGHLIGHTS
Gemini II
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended December 31, 1996. The
financial highlights, insofar as they relate to each of the five years ended
December 31, 1996, were audited by Price Waterhouse LLP, independent
accountants. You should read this information in conjunction with the Fund's
financial statements and accompanying notes, which appear, along with the
unqualified audit report from Price Waterhouse, in the Fund's most recent Annual
Report to shareholders. The Annual Report is incorporated by reference in this
Combined Proxy Statement/Prospectus and the Statement of Additional Information
relating thereto, and contains a more complete discussion of the Fund's
performance. The Financial Highlights for Windsor Fund are included in the
accompanying Windsor Fund prospectus.
<TABLE>
<CAPTION>
For a Share Year Ended December 31,
Outstanding Throughout ------------------------------------------------------
Each Year 1996 1995 1994 1993
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Shares
Net Asset Value,
Beginning of Year ...... $ 9.33 $ 9.34 $ 9.33 $ 9.33
- -------------------------------------------------------------------------------
Net Investment Income .... 1.94 1.79 1.74 1.66
Distributions from Net
Investment Income ...... (1.93) (1.80) (1.73) (1.66)
- -------------------------------------------------------------------------------
Net Asset Value, End of
Year .................. $ 9.34 $ 9.33 $ 9.34 $ 9.33
===============================================================================
Capital Shares
Net Asset Value,
Beginning of Year ...... $26.35 $19.03 $22.10 $18.71
- -------------------------------------------------------------------------------
Realized Net Gain on
Investments ............ 3.27 4.01 1.73 2.69
Distributions from
Realized Capital
Gains .................. (.24) (.11) -- --
Provision for Taxes on
Capital Gains
Retained ............... (1.06) (1.37) (.61) (.94)
Unrealized Appreciation
(Depreciation) ......... .43 4.79 (4.19) 1.64
- -------------------------------------------------------------------------------
Net Asset Value, End of
Year .................. $28.75 $26.35 $19.03 $22.10
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
For a Share Year Ended December 31,
Outstanding Throughout -----------------------------------------------------------------------------
Each Year 1992 1991 1990 1989 1988 1987
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Shares
Net Asset Value,
Beginning of Year ...... $ 9.34 $ 9.34 $ 9.37 $ 9.38 $ 9.39 $ 9.73
- ----------------------------------------------------------------------------------------------------
Net Investment Income .... 1.66 1.65 1.63 1.58 1.41 1.38
Distributions from Net
Investment Income ...... (1.67) (1.65) (1.66) (1.59) (1.42) (1.72)
- ----------------------------------------------------------------------------------------------------
Net Asset Value, End of
Year .................. $ 9.33 $ 9.34 $ 9.34 $ 9.37 $ 9.38 $ 9.39
====================================================================================================
Capital Shares
Net Asset Value,
Beginning of Year ...... $16.28 $11.51 $17.44 $16.56 $12.98 $13.87
- ----------------------------------------------------------------------------------------------------
Realized Net Gain on
Investments ............ 1.17 1.77 .38 1.14 1.09 3.14
Distributions from
Realized Capital
Gains .................. (.08) (.22) (.11) (.19) (.22) (.04)
Provision for Taxes on
Capital Gains
Retained ............... (.37) (.53) (.09) (.33) (.29) (1.07)
Unrealized Appreciation
(Depreciation) ......... 1.71 3.75 (6.11) .26 3.00 (2.92)
- ----------------------------------------------------------------------------------------------------
Net Asset Value, End of
Year .................. $18.71 $16.28 $11.51 $17.44 $16.56 $12.98
====================================================================================================
</TABLE>
12
<PAGE>
REASONS FOR THE TRANSACTION
The Fund was founded in 1985 as a closed-end investment company, with two
classes of capital stock outstanding (referred to as Income Shares and Capital
Shares, respectively). As required by the charter of the Fund, all of the issued
and outstanding Income Shares were redeemed by the Fund on January 31, 1997.
Following approval by the shareholders of the Capital Shares on February 19,
1997, the Fund was converted to an open-end investment company on March 3, 1997,
with one class of common stock outstanding. As an open-end investment company,
shareholders of the Fund may redeem their shares at any time at the Fund's net
asset value per share next determined after receipt by the Fund of a proper
request for redemption.
The Fund has not offered or sold additional shares since its conversion to
an open-end investment company, and thus it has had no cash inflow from new
share purchases by investors. Over this period the assets of the Fund have
declined from approximately $337 million to approximately $250 million. It is
expected that the assets of the Fund will continue to decline because there is
no cash inflow to offset share redemptions. The Fund's Board of Directors does
not believe that it is in the best interests of the Fund and its shareholders to
continue its operations under these circumstances. As the Fund's assets decline,
it is likely that the Fund's expense ratio will increase, since certain of the
Fund's costs are relatively fixed. Accordingly, the Board of Directors of the
Fund has unanimously approved a proposal to transfer substantially all of the
assets of the Fund to Windsor Fund in exchange for shares of Windsor Fund and to
liquidate and dissolve the Fund. The members of the Board of Directors of the
Fund also serve as Directors of Vanguard/Windsor Funds, Inc.
In considering its decision, the Fund's Board of Directors reviewed the
potential benefits to be gained by shareholders of the Fund as well as any
additional costs to be borne by it. In determining whether to recommend approval
of the Transaction to shareholders, the Board of Directors considered, among
other factors: the original purpose of the Fund; the expense ratios of the Fund
and Windsor Fund, as well as similar funds; the comparative investment
performance of the Fund and Windsor Fund with the performance of similar funds;
the compatibility of the investment objectives, policies and restrictions of the
Fund and Windsor Fund; the tax consequences of the Transaction; and the
experience of the WMC investment management team responsible for managing the
assets of the Fund and Windsor Fund. The principal factors upon which this
decision was based were the following:
1. The Fund was organized as a Maryland corporation on December 6, 1984 for
the specific purpose of operating as a "dual-purpose" closed-end investment
company, with two classes of stock outstanding. Equal numbers of each class of
shares were authorized and issued. The holders of the Income Shares were
entitled to all investment income, and the holders of the Capital Shares were
entitled to all realized capital gains. The "dual-purpose" structure of the Fund
had a limited life
13
<PAGE>
with the Fund's charter requiring that all the Fund's Income Shares be redeemed
on January 31, 1997. Following the redemption of the Income Shares, there were
no compelling reasons to continue the Fund as an open-end investment company.
2. The investment objectives and policies of the Fund and Windsor Fund are
similar. Each fund seeks long-term growth of capital and income and, as a
secondary objective, current income, by investing primarily in common stocks.
The funds are managed by the same WMC investment advisory team using the same
investment techniques and applying the same investment philosophies. The
securities held by the Fund and Windsor Fund have similar investment
characteristics. In fact, on February 28, 1997, 25 of the 35 securities issuers
represented in the Fund's portfolio were also held by Windsor Fund.
3. Although future results cannot be predicted, the investment performance
of the Fund has generally paralleled that of Windsor Fund over the Fund's
history. Since 1987 the Fund has outperformed Windsor Fund. However, both funds
have demonstrated records of performance that have, with reasonable consistency,
surpassed that of other mutual funds with similar investment objectives and
policies. See "Performance Summary."
4. As shareholders of a substantially larger fund, the Fund's shareholders
will obtain the benefits of a potentially lower expense ratio because the fixed
and variable costs of fund operations are spread over a larger asset base.
5. No dilution will result to the shareholders of the Fund or Windsor Fund
from the Transaction.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF DIRECTORS RECOMMENDS THAT YOU
VOTE FOR THE AGREEMENT AND PLAN. If the Agreement and Plan is not approved, the
Board of Directors will consider other possible courses of action with respect
to the Fund, including dissolution and liquidation.
PERFORMANCE SUMMARY
The following table shows the investment results of the Fund and Windsor
Fund as compared to changes in the S&P 500 Index (an unmanaged market indicator
of the 500 common stocks included in the Index, weighted by market value). This
comparison is designed to provide a historical basis for evaluation of the
proposed Reorganization by covering the relative investment performance of the
Fund, Windsor Fund and the S&P 500 Index over the last ten years. The results
shown represent "total return" investment performance which assumes the
reinvestment of all capital gains and income dividends for the indicated
periods. The investment performance should be considered in light of each fund's
investment objectives and policies, the characteristics and quality of each
fund's investments, and the period selected. Please note that future investment
results cannot be predicted; past performance is not necessarily indicative of
future results.
14
<PAGE>
Percentage Returns
-----------------------------------------
Calendar Year The Fund Windsor Fund S&P 500
- ---------------------- ----------- --------------- ---------
1987 6.4% 1.2% 5.2%
1988 24.9 28.7 16.6
1989 11.5 15.0 31.7
1990 -15.5 -15.5 -3.1
1991 34.9 28.6 30.5
1992 18.1 16.5 7.6
1993 21.6 19.4 10.1
1994 -2.5 -0.1 1.3
1995 38.2 30.1 37.6
1996 16.2 26.4 23.0
------- ------- -------
Cumulative 279.5% 271.7% 314.9%
Average Annual Rate 14.3% 14.0% 15.3%
INFORMATION ABOUT THE TRANSACTION
The following summary of the Agreement and Plan does not purport to be
complete, and is subject in all respects to the provisions of, and is qualified
in its entirety by reference to, the Agreement and Plan, a copy of which is
attached hereto as Exhibit A.
Method of Carrying Out Reorganization
If the shareholders of the Fund approve the Agreement and Plan, the
Reorganization will be consummated promptly after the various conditions to the
obligations of each of the parties are satisfied. (See "Conditions Precedent to
Closing.") Consummation of the Reorganization (the "Closing Date") will be on
June 19, 1997, or such other date as is agreed to by the Fund and
Vanguard/Windsor Funds, Inc., provided that the Agreement and Plan may be
terminated by either party if the Closing Date does not occur on or before
December 31, 1997.
On the Closing Date, the Fund will transfer substantially all of its net
assets to Windsor Fund in exchange for shares of Windsor Fund having an
aggregate asset value equal to the aggregate value of net assets so transferred
as of 4:00 PM Eastern Time on the Closing Date. The stock transfer books of the
Fund will be permanently closed as of 4:00 PM Eastern Time on the Closing Date
and only requests for redemption of shares of the Fund received in proper form
prior to 4:00 PM Eastern Time on the Closing Date will be accepted by the Fund.
Redemption requests relating to the Fund received by the Fund thereafter shall
be deemed to be redemption requests for shares of Windsor Fund to be distributed
to the former shareholders of the Fund.
The Fund will distribute as of the Closing Date such shares of Windsor Fund
pro rata to its shareholders of record on the Record Date. The total number of
shares to be distributed shall be determined by dividing the aggregate net
assets of the Fund to be transferred (computed in accordance with the policies
and procedures set forth in the current prospectus of Windsor Fund and using
market quotations determined by Vanguard) by the net asset value per share of
the shares of Windsor Fund as of 4:00 PM Eastern Time on the Closing Date.
15
<PAGE>
Since the relative asset values of the Fund and Windsor Fund have not yet
been ascertained for the purposes of the Closing, it is not possible to
determine the exact exchange ratio until the Closing Date. Fluctuations and
relative performances of the Fund and Windsor Fund, among other matters, will
affect this ratio. As of the close of business on February 28, 1997, each share
of the Fund would have been valued at $30.84 and each share of Windsor Fund
would have been valued at $17.70 for purposes of computing the exchange ratio.
Using this value, a total of approximately 19,030,056 shares of Windsor Fund
would have been issuable to the Fund pursuant to the Agreement and Plan,
representing an exchange ratio of 1.7424 shares of Windsor Fund for each share
of the Fund then outstanding.
To the extent permitted by law, the Agreement and Plan may be terminated
and the Reorganization abandoned at any time before or, to the extent permitted
by law, after the approval of shareholders of the Fund by mutual consent of the
parties to the Agreement.
In the event that the shareholders of the Fund do not approve the Agreement
and Plan, the net assets of the Fund will not be transferred to Windsor Fund on
the Closing Date and the obligations of the Fund under the Plan shall not be
effective.
Conditions Precedent to Closing
The obligation of the Fund to transfer its assets to Windsor Fund pursuant
to the Agreement and Plan is subject to the satisfaction of certain conditions
precedent, including performance by the Fund, in all material respects, of its
agreements and undertakings under the Agreement and Plan, the receipt of certain
documents from the Fund, the receipt of an opinion of counsel to the Fund, and
requisite approval of the Agreement and Plan by the shareholders of the Fund, as
described above. The obligations of Windsor Fund to consummate the Transaction
are subject to the satisfaction of certain conditions precedent, including the
performance by Windsor Fund of its agreements and undertakings under the
Agreement and Plan, the receipt of certain documents and financial statements
from Windsor Fund, and the receipt of an opinion of counsel to Windsor Fund.
Expenses of the Reorganization
The Fund and Windsor Fund will each bear such expenses of entering into and
carrying out the provisions of the Agreement and Plan as will be separately
incurred by it. The expenses of Windsor Fund will include legal and accounting
fees estimated at $14,000. The Fund's expenses will include: the costs of the
special meeting; proxy costs (including the costs of solicitation, printing and
mailing of this Combined Proxy Statement/Prospectus); the expenses of its
proposed liquidation after dissolution; and legal and accounting fees. It is
estimated that these expenses will not exceed $19,000. Any costs incurred
following the Closing will be borne by Windsor Fund. Such costs are not expected
to be material.
16
<PAGE>
Tax Considerations
The Fund has received a private letter ruling from the Internal Revenue
Service to the effect that the Reorganization will qualify for federal income
tax purposes as a tax-free reorganization under section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended (the "Code"), with no gain or loss
recognized as a consequence of the Reorganization by each of the funds, or the
shareholders of the Fund or Windsor Fund.
A shareholder's basis in the Windsor Fund shares received in the
Reorganization will equal the basis of the shareholder's fund shares surrendered
in the exchange.
Shareholders of the Fund should consult their tax advisers regarding the
effect, if any, of the Reorganization in light of their individual
circumstances. Since the foregoing discussion only relates to the federal income
tax consequences of the Reorganization, shareholders of the Fund should also
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
Windsor Fund shareholders will receive capital gains distributions, if any,
on an annual basis.
Litigation
Neither the Fund nor Windsor Fund is involved in any litigation.
Description of Shares of Windsor Fund
Immediately following the Closing Date, the Fund will dissolve and
distribute pro rata to its shareholders of record as of the close of business on
the Closing Date the shares of Windsor Fund received by the Fund. Such
liquidation and distribution will be accomplished by the establishment of open
accounts on the share records of Windsor Fund in the names of such Fund
shareholders and representing the respective pro rata number of shares of
Windsor Fund due such shareholders. Fractional shares of Windsor Fund will be
carried to the third decimal place. As of the Closing Date all certificates
representing shares of the Fund shall be cancelled. Windsor Fund will issue
certificates to shareholders of the Fund only upon written request. However, no
fractional share certificates of Windsor Fund will be issued.
There are no material differences between the rights of Fund shareholders
and the rights of Windsor Fund shareholders. Vanguard/Windsor Funds, Inc. and
the Fund are each Maryland corporations. Shares of both funds are fully paid and
nonassessable. Holders thereof have noncumulative voting rights and equal rights
with respect to dividends, assets and liquidations, but no preemptive rights.
Shareholders of the Fund will not be entitled to any "dissenters rights" under
Maryland law since the Reorganization is between two open-end investment
companies registered under the Investment Company Act of 1940 (the "1940 Act").
17
<PAGE>
However, shareholders of the Fund who find that the proposed Reorganization
does not meet their particular investment needs and objectives, may consider two
additional options: (1) exchanging their holdings without sales commissions into
another mutual fund in The Vanguard Group currently offering its shares to new
investors which is better suited to their goals; or (2) redeeming shares of the
Fund for cash. These options are available to a Fund shareholder both before
and, as a Windsor Fund shareholder, after the Reorganization. Exchanges and
redemptions are both taxable events so either action will result in the
realization of a capital gain or capital loss to the shareholder, depending upon
the original cost basis of the shareholder's investment.
Windsor Fund intends to comply with the provisions of the Maryland General
Corporation Law which eliminate the necessity of holding an annual meeting for
all corporations registered under the 1940 Act in any year in which the election
of Directors is not required to be acted upon by shareholders under the 1940
Act.
Vanguard/Windsor Funds, Inc. is a multi-series investment company that
currently issues shares representing interests in two series, and shareholders
of each series currently vote in the aggregate with the shareholders of the
other series on certain matters (for example, the election of directors and
ratification of independent accountants). The Fund presently issues only one
class of shares and, therefore, its shareholders do not vote in the aggregate
with any other shareholder class.
CAPITALIZATION
The following table shows the capitalization of the Fund and Windsor Fund
as of February 28, 1997, and on a pro forma basis as of that date giving effect
to the proposed acquisition of assets at net asset value.
<TABLE>
<CAPTION>
The Fund Windsor Fund Pro Forma Combined
--------------- ------------------ --------------------
<S> <C> <C> <C>
Net Assets ............... $336,832,000 $18,115,245,000 $18,452,077,000
Net Asset Value Per Share $ 30.84 $ 17.70 $ 17.70
Shares Outstanding ...... 10,920,550 1,023,832,038 1,042,862,094
</TABLE>
COMPARISON OF INVESTMENT POLICIES AND RISKS
In seeking to achieve their respective investment objectives, the Fund and
Windsor Fund are guided by substantially similar policies and restrictions that
should be considered by the shareholders of the Fund. These policies and
restrictions are summarized below. The investment objectives, investment
policies, investment restrictions and risk factors relating to Windsor Fund are
set forth in more detail in the Windsor Fund Prospectus attached to this
Combined Proxy Statement/Prospectus.
Investment Policies and Risk Factors
The Fund and Windsor Fund each seek to provide long-term growth of capital
and as a secondary objective, some dividend income, by investing primarily in
18
<PAGE>
large- and mid-capitalization common stocks that offer prospects for capital
growth and dividend income. As with any investment in common stocks, investors
in the Fund or Windsor Fund could lose money.
In this respect, the Fund and Windsor Fund are subject to the following
risk factors:
1. Market Risk. This refers to the possibility that stock prices overall
will decline over short or even extended periods of time.
2. Objective Risk. This refers to the possibility that returns from the
type of stocks that the fund invests in will trail returns from the overall
stock market.
3. Security Selection and Manager Risk. This refers to the possibility that
the fund's investment adviser may do a poor job of selecting stocks. In general,
the more diversified a fund's portfolio of stocks, the less likely that a
specific stock's poor performance will hurt the fund. The Fund and Windsor Fund
are both diversified investment companies in that neither will, with respect to
75% of its assets, purchase more than 10% of the outstanding securities of any
issuer or invest more than 5% of the value of its net assets in the securities
of any one issuer. One measurement of a fund's level of diversification is the
percentage of total net assets of the fund represented by its 10 largest
holdings. The average U.S. equity mutual fund has about 25% of its assets
invested in its 10 largest holdings. In this respect, Windsor Fund may be
considered to be less diversified than the average equity mutual fund because on
February 28, 1997, Windsor Fund's top ten holdings represented about 35% of
Windsor Fund's total net assets. On the same date, the Fund's top ten holdings
represented 54% of its total net assets.
4. Foreign Securities. The Fund and Windsor Fund each have the flexibility
to invest in foreign securities. On December 31, 1996 (the end of the Fund's
fiscal year), the Fund had about 4.9% of its total net assets invested in
foreign securities. On October 31, 1996 (the end of Windsor Fund's fiscal year),
Windsor Fund had about 6.7% of its total net assets invested in foreign
securities. Although the Fund has never had a written policy concerning
investment in foreign securities, it has adhered to a general guideline that it
would not invest more than 10% of its total net assets in foreign securities.
Windsor Fund has a written policy allowing it to invest up to 20% of its assets
in foreign securities.
By investing in foreign securities, a fund is subject to "country risk,"
and "currency risk." "Country risk" is the possibility that political events
(such as war) financial problems (such as government default) or natural
disasters (such as an earthquake) will weaken a country's economy and cause
investments in that country to lose money. "Currency risk" is the possibility
that a "stronger" U.S. dollar will reduce returns for Americans investing
overseas. Generally, when the dollar rises in value against a foreign currency,
an American's investment in that country loses value because that country's
currency is worth fewer U.S. dollars. On the other hand, a "weaker" dollar
generally leads to higher returns for Americans holding foreign investments.
19
<PAGE>
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than in the U.S. These
factors, among others, could negatively impact the returns Americans receive
from a foreign investment.
5. Stock Futures and Options Contracts. Windsor Fund and the Fund reserve
the right to invest, to a limited extent, in stock futures and options
contracts. Losses (or gains) involving futures can sometimes be substantial --
in part because a relatively small price movement in a futures contract may
result in an immediate and substantial loss (or gain) for a portfolio. Windsor
Fund does not use futures and options for speculative purposes or as leveraged
investments that magnify the gains or losses of an investment. Rather, Windsor
Fund keeps separate cash reserves or other liquid portfolio securities in the
amount of the obligation underlying the futures or options contract.
The reasons for which Windsor Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
o To make it easier to trade.
o To reduce costs by buying futures instead of actual stocks when futures
are cheaper.
Only a limited percentage of Windsor Fund's assets -- 5% -- may be applied
to futures contract deposits, and no more than 20% of Windsor Fund's assets may
be invested in futures and options. The Fund has an identical policy with
respect to futures contracts and options, although it has never utilized such
instruments.
6. Lending of Securities. The Fund and Windsor Fund each may lend its
investment securities to qualified institutional investors for either short-term
or long-term purposes of realizing additional income. Loans of securities by
each fund must be collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its agencies. The collateral must
equal at least 100% of the current market value of the loaned securities.
7. Investment Restrictions. The fundamental investment restrictions of the
Fund and Windsor Fund are substantially similar and are designed to reduce
exposure to certain situations. These investment restrictions may not be changed
without shareholder approval. Some of these limitations are that each fund will
not:
(a) invest more than 25% of its assets in any one industry;
20
<PAGE>
(b) with respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States government
and its instrumentalities) if, as a result, the Fund would hold more than
10% of the outstanding voting securities of the issuer, or more than 5% of
the value of the Fund's total assets would be invested in the securities of
such issuer;
(c) engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in disposing of
investment securities;
(d) purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that are
illiquid;
(e) borrow money, except from banks for temporary or emergency purposes
(not leveraging) and then only in an amount not in excess of 10% of the
value of its net assets, at the time the borrowing is made; and
(f) pledge, mortgage or hypothecate any of its assets to an extent
greater than 5% of its total assets.
INFORMATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
The Fund and Windsor Fund are subject to the informational requirements of
the Securities and Exchange Act of 1934 and the 1940 Act, and in accordance
therewith file reports, proxy material and other information with the Securities
and Exchange Commission (the "Commission"). Such reports, proxy material and
other information can be inspected and copied at the Public Reference Room
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at its Northeast Regional Office located at 7 World Trade Center, Suite
1300, New York, NY 10048. Copies of such material can be obtained from the
Public Reference Branch, Office of Consumer Affairs and Informational Services,
Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates.
VOTING INFORMATION AND PRINCIPAL STOCKHOLDERS
In the event that sufficient votes in favor of the proposal set forth in
the Notice of Special Meeting of Shareholders and Proxy Statement are not
received by the scheduled time of the Meeting, the persons named as proxies may
propose one or more adjournments of the Meeting to permit further solicitation
of proxies, even though a quorum is present. Any such adjournment will require
the affirmative vote of a majority of the votes cast on the question in person
or by proxy at the session of the Meeting to be adjourned. The persons named as
proxies will be voted in the
21
<PAGE>
best interests of management and all shareholders in proposing adjournment or in
voting on an adjournment proposed by a shareholder. The costs of any such
additional solicitation and of any adjourned session will be borne by the Fund.
On April 25, 1997 the following held of record more than 5% of the
outstanding shares of the Fund:
Merrill Lynch 1,041,046.000
4800 Deer Lake Drive E
Jacksonville, FL
National Financial Services Corp. 958,622.941
Church Street Station
New York, NY
Charles Schwab & Co. 865,275.225
101 Montgomery Street
San Francisco, CA
Hare & Co. 464,188.000
67 Broad Street
New York, NY
As of the record date, all of the respective Directors and officers of the
Fund, as a group, owned less than 1% of the outstanding voting securities of
the Fund and Windsor Fund, respectively.
By Order of the Board of Directors
/s/ Raymond J. Klapinsky, Secretary
-----------------------------------
Raymond J. Klapinsky, Secretary
22
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, made as of this 3rd day of March,
1997, by and between Gemini II, Inc. (hereinafter called "Gemini II"), a
Maryland corporation, with its principal place of business at 100 Vanguard
Boulevard, Malvern, Pennsylvania and Vanguard/Windsor Funds, Inc., a Maryland
corporation with its principal place of business at 100 Vanguard Boulevard,
Malvern, Pennsylvania.
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by the Windsor Fund series
of the Vanguard/Windsor Funds, Inc. (hereinafter called "Windsor Fund") of
substantially all of the property, assets and goodwill of Gemini II in exchange
solely for shares of common stock, $.01 par value per share, of Windsor Fund,
(ii) the distribution of such shares of Windsor Fund common stock to the
stockholders of Gemini II according to their respective interests, and (iii) the
dissolution of Gemini II as soon as practicable after the closing (as defined in
Section 3, hereinafter called the "Closing"), all upon and subject to the terms
and conditions of the Agreement hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration of
the premises and of the covenants and agreements hereinafter set forth, the
parties hereto covenant and agree as follows:
1. Sale and Transfer of Assets, Liquidation and Dissolution of Gemini II
a. Gemini II agrees that it will convey, transfer and deliver to Windsor
Fund at the Closing all of its then existing assets free and clear of all liens,
encumbrances and claims whatsoever (other than shareholders' rights of
redemption), except for cash, bank deposits or cash equivalent securities in an
estimated amount necessary (1) to pay its costs and expenses of carrying out
this Agreement (including, but not limited to, fees of counsel and accountants,
and expenses of its liquidation and dissolution contemplated hereunder), which
costs and expenses shall be established on the books of Gemini II as liability
reserves, (2) to discharge its unpaid liabilities on its books at the Closing
Date, including, but not limited to, its income dividends and capital gains
distributions, if any, payable for any period prior to, and through, the Closing
Date, and (3) to pay such contingent liabilities as the directors shall
reasonably deem to exist against Gemini II, if any, at the Closing Date, for
which contingent and other appropriate liability reserves shall be established
on the books of Gemini II (hereinafter "Net Assets"). Gemini II shall
A-1
<PAGE>
also retain any and all rights which it may have over and against any person
which may have accrued up to and including the close of business on the Closing
Date. Any unspent portion of such funds retained shall be delivered to Windsor
Fund upon dissolution of Gemini II.
b. Subject to the terms and conditions of this Agreement and in reliance on
the representations and warranties of Gemini II herein contained, and in
consideration of such sale, conveyance, transfer and delivery, Vanguard/Windsor
Funds, Inc. agrees at the Closing to deliver the number of shares of common
stock of Windsor Fund ($.01 par value) determined as set forth in Section 2
hereof.
c. Immediately following the Closing Date, Gemini II will liquidate and
distribute pro rata to its stockholders of record as of the close of business on
the Closing Date the shares of Windsor Fund common stock received by Gemini II
pursuant to this Section 1. Such liquidation and distribution will be
accompanied by the establishment of open accounts on the stock records of
Vanguard/Windsor Funds, Inc. in the names of such Gemini II stockholders and
representing the respective pro rata number of Windsor Fund shares due such
stockholders. Fractional shares of common stock of Windsor Fund will be carried
to the third decimal place. At the time of merger, all outstanding certificated
shares of the Fund will be deemed canceled. Holders in possession of
certificated shares of the Fund will not be required to surrender their
certificates to complete the acquisition by Windsor Fund. After the acquisition,
holders may request a certificate representing the number of whole shares of
Windsor Fund they own. Certificates for fractional shares of Windsor Fund will
not be issued, however, but shall continue to be carried for the open account of
such shareholder.
d. As promptly as practicable after the liquidation of Gemini II as
aforesaid, Gemini II shall be dissolved pursuant to the provisions of the
General Laws of the State of Maryland and its legal existence shall be
terminated as provided therein.
2. Exchange Ratio
a. The value of Gemini II's Net Assets to be acquired by Vanguard/Windsor
Funds, Inc. shall be the net asset value computed as of the close of business
(close of the New York Stock Exchange) on the Closing Date, using the valuation
procedures set forth in the registration statement relating to Windsor Fund
under the Securities Act of 1933.
b. The total Net Assets of Gemini II as determined in (a) shall then be
divided by the number of shares of its outstanding common stock, excluding
treasury shares, to determine Gemini II's net asset value per share as of the
close of business on the Closing Date.
c. The net asset value of a share of common stock of Windsor Fund shall be
determined to the nearest full cent as of the close of business on the Closing
Date, using the valuation as set forth in the registration statement relating to
Windsor Fund under the Securities Act of 1933.
A-2
<PAGE>
d. The net asset value per share for Gemini II as determined in (b) shall
then be divided by the Windsor Fund net asset value per share as determined in
(c) to determine the exchange ratio. See Appendix A to this Agreement for an
example of how to determine the exchange ratio.
3. Closing and Closing Date
The Closing shall be June 19, 1997, or such later date as the parties may
mutually agree. The Closing shall take place at the principal office of
Vanguard/Windsor Funds, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania,
19355 at 4:30 PM, E.D.T. Gemini II shall have provided for delivery at the
Closing of its assets to State Street Bank and Trust Company, Boston,
Massachusetts, as Custodian for Windsor Fund. Gemini II shall deliver at the
Closing a list of names and addresses of the stockholders of Gemini II and the
number of shares owned by each such stockholder, indicating thereon which such
shares are represented by outstanding certificates and which by open accounts,
all as of the close of business on the Closing Date, certified by its Transfer
Agent. Windsor Fund shall issue and deliver a certificate or certificates
evidencing the shares of Windsor Fund's common stock to be delivered at the
Closing to said Transfer Agent registered in such manner as Gemini II may
request, or provide evidence satisfactory to Gemini II that such shares of
Windsor Fund common stock have been registered in an open account on the books
of Windsor Fund in such manner as Gemini II may request. Simultaneous with the
Closing, the parties shall cause the filing of Articles of Transfer with respect
to the sale and transfer of assets contemplated hereunder with the Department of
Assessments and Taxation of the State of Maryland.
4. Representations and Warranties by Gemini II
Gemini II represents and warrants that:
a. Gemini II is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland and has all corporate power and
authority to conduct its business as such business is now being conducted.
b. Gemini II has duly authorized capital consisting of 15,000,000 shares of
common stock ($1.00 par value) of which approximately 10,920,550 shares were
issued and outstanding on the date hereof. All of its presently outstanding
shares are validly issued, fully paid and non-assessable by it.
c. Gemini II is duly registered as a diversified, open-end management
investment company under the Investment Company Act of 1940.
d. There will be mailed to each stockholder of record of Gemini II entitled
to vote at the meeting of stockholders, at which action on this Agreement is to
be considered, a Combined Proxy Statement/Prospectus which complies in all
material respects with the applicable provisions of the Federal securities laws
and the rules and regulations thereunder.
A-3
<PAGE>
The financial statements appearing in the Gemini II annual report for the
year ended December 31, 1996, audited by Price Waterhouse LLP, a copy of which
has been delivered to Windsor Fund, and similar unaudited financial statements
and other financial data for the quarter ended nearest to the Closing Date will
be delivered to Windsor Fund by the principal financial officer of Gemini II
prior to Closing, fairly present the financial position of Gemini II as of the
respective dates indicated and the results of its operations and changes in net
assets for the respective periods indicated, in conformity with generally
accepted accounting principles applied on a consistent basis.
5. Representations and Warranties by Vanguard/Windsor Funds, Inc.
Vanguard/Windsor Funds, Inc. represents and warrants that:
a. Vanguard/Windsor Funds, Inc. is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland and has
all corporate power and authority to conduct its business as such business is
presently being conducted.
b. Vanguard/Windsor Funds, Inc. has duly authorized capital consisting of
2,200,000,000 shares of common stock ($.01 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. On the date of this Agreement, Vanguard/Windsor Funds, Inc. had issued
an outstanding approximately 1,023,832,037 shares of common stock of the Windsor
Fund series and approximately 687,721,226 shares of common stock of its
Vanguard/Windsor II series. All of its presently outstanding shares are validly
issued, fully paid and non-assessable by it.
c. Vanguard/Windsor Funds, Inc. is duly registered as a diversified,
open-end management investment company under the Investment Company Act of 1940.
d. Vanguard/Windsor Funds, Inc. will file with the United States Securities
and Exchange Commission a Registration Statement on Form N-14 under the
Securities Act of 1933 relating to the shares of the Windsor Fund common stock
issuable hereunder. Appropriate portions of such Registration Statement after
effectiveness will be delivered to stockholders of Gemini II as proxy materials
in connection with the solicitation of proxies approving the proposed
transaction, and other portions will be available upon request by stockholders.
The Registration Statement will note, on its facing page, that the securities
proposed to be distributed thereunder have previously been registered in
accordance with Investment Company Act of 1940 Rule 24f-2. At the time such
Registration Statement becomes effective, it (i) will comply in all material
respects with the provisions of the Securities Act of 1933 and the rules and
regulations promulgated thereunder, and (ii) will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading; and
at the time the Registration Statement becomes effective, at the time of the
Gemini II stockholders' meeting and at the Closing Dates,
A-4
<PAGE>
the prospectus included therein, will not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
e. The common stock of Windsor Fund is duly qualified for offering to the
public in all states of the United States, and there are a sufficient number or
value of shares of such stock so qualified and a sufficient number of shares
registered under the Securities Act of 1933 pursuant to Investment Company Act
of 1940 Rule 24f-2 to permit the transfers contemplated by this Agreement to be
consummated.
f. The financial statements appearing in the Statement of Additional
Information relating to Windsor Fund dated February 28, 1997 for the year ended
October 31, 1996, audited by Price Waterhouse LLP, copies of which have been
delivered to Gemini II, and similar unaudited financial statements and other
financial data for the most recent quarter ending closest to the Closing Date
will be delivered to Gemini II prior to the Closing by the principal financial
officer of Vanguard/Windsor Funds, Inc., fairly present the financial position
of Windsor Fund, as of the respective dates indicated and the results of its
operations and changes in its net assets for the respective periods indicated,
in conformity with generally accepted accounting principles applied on a
consistent basis.
6. Representations and Warranties by Gemini II and Vanguard/Windsor Funds, Inc.
Gemini II and Vanguard/Windsor Funds, Inc. each represents and warrants to
the other that:
a. The statement of assets and liabilities to be furnished by it as of the
close of business on the Closing Date for the purpose of determining the number
of shares of Windsor Fund common stock to be issued pursuant to Section 1 of
this Agreement will accurately reflect its Net Assets in the case of Gemini II
and its net assets in the case of Windsor Fund, and outstanding shares of common
stock as of such date in conformity with generally accepted accounting
principles applied on a consistent basis.
b. On the Closing Date it will have good and marketable title to all of the
securities and other assets shown on the statement of assets and liabilities
referred to in (a) above free and clear of all liens or encumbrances of any
nature whatsoever except such imperfections of title or encumbrances as do not
materially detract from the value or use of the assets subject thereto, or
materially affect title thereto.
c. There is no material suit, action or legal or administrative proceeding
pending or threatened against it, other than as disclosed in the Combined Proxy
Statement/Prospectus prepared in connection with the meeting at which action on
this Agreement will be taken.
d. By the Closing Date, all of its Federal and other tax returns and
reports required by law to be filed shall have been filed, and all Federal and
other taxes shown due on said returns shall have been paid.
A-5
<PAGE>
e. The execution, delivery and performance of this Agreement will have been
duly authorized prior to the Closing Date by all necessary corporate action on
the part of each Corporation and this Agreement constitutes the valid and
binding obligation of each corporation enforceable in accordance with its terms.
f. It anticipates that consummation of this Agreement will not cause it to
fail to conform to the requirements of Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), for Federal income taxation as a regulated
investment company at the end of its fiscal year.
7. Covenants of Gemini II and Vanguard/Windsor Funds, Inc.
a. Gemini II and Vanguard/Windsor Funds, Inc. each covenant to operate
their business in the ordinary course between the date hereof and the Closing
Date.
b. Gemini II undertakes that it will not acquire the shares of Windsor Fund
for the purpose of making any distribution thereof other than to its own
stockholders.
c. Gemini II undertakes that it will at its own expense prepare and file
with the Securities and Exchange Commission a Report on Form N-SAR pursuant to
the requirements of the Investment Company Act of 1940 for the period January 1,
1997 through the Closing Date.
d. Gemini II undertakes that if this Agreement is consummated it will at
its own expense file an application pursuant to Section 8(f) of the Investment
Company Act of 1940 for an order declaring that it has ceased to be an
investment company.
8. Conditions Precedent to be Fulfilled by Gemini II and Vanguard/Windsor Funds,
Inc.
The obligations of each of the corporations to effectuate the Plan of
Reorganization hereunder shall be subject to the following conditions:
a. The representations and warranties of each Corporation contained herein
shall be true and correct as of and at the Closing Date with the same effect as
though made at such date; each Corporation shall have performed all obligations
required by this Agreement to be performed by it prior to the Closing Date; and
each Corporation shall have delivered to it a certificate dated the Closing Date
signed by its Chairman of the Board or President and by its Secretary or
Treasurer to the foregoing effect.
b. Each Corporation shall have delivered a certified copy of the resolution
approving this Agreement adopted by at least a majority vote of its directors,
including a majority of its directors who are not "interested persons" as
defined in the Investment Company Act of 1940.
A-6
<PAGE>
c. The Securities and Exchange Commission shall not have issued an
unfavorable advisory report under Section 25(b) of the Investment Company Act of
1940 nor instituted any proceeding seeking to enjoin consummation of the
reorganization under Section 25(c) of the Investment Company Act of 1940.
d. The holders of at least a majority of the outstanding shares of common
stock of Gemini II shall have voted in favor of the adoption of this Agreement
and the reorganization contemplated hereby at an annual or special meeting.
e. That Gemini II shall have declared a distribution or distributions prior
to the Closing Date which, together with all previous distributions, shall have
the effect of distributing to its shareholders (i) all of its ordinary income
and all of its capital gain net income, if any, for the period from the close of
its last fiscal year to the close of business on the Closing Date, and (ii) any
undistributed ordinary income and capital gain net income from any prior period.
Capital gain net income has the meaning given such term by Section 1222(9) of
the Code.
f. There shall have been received a private letter ruling issued by the
Internal Revenue Service to the effect that:
Provided the acquisition is carried out in accordance with the applicable
laws of Maryland, the acquisition by Vanguard/Windsor Funds, Inc. of
substantially all the assets of Gemini II in exchange for shares of Windsor Fund
will qualify as a reorganization within the meaning of Section 368(a)(1)(C) of
the Code. Vanguard/Windsor Funds, Inc. and Gemini II will each be a party to the
respective reorganization within the meaning of Section 368(b) of the Code.
No gain or loss will be recognized to Gemini II upon the transfer of
substantially all of its assets to Vanguard/Windsor Funds, Inc. in exchange for
Windsor Fund voting shares (Section 361(a) of the Code).
No gain or loss will be recognized to Vanguard/Windsor Funds, Inc. upon the
receipt of all of the assets of Gemini II in exchange for Windsor Fund voting
stock, as described above (Section 1032(a) of the Code).
The basis of the assets of Gemini II received by Windsor Fund will be the
same as the basis of such assets in the hands of Gemini II immediately prior to
the exchange (Section 362(b) of the Code).
The holding period of the assets of Gemini II received by Windsor Fund will
include the period during which such assets were held by Gemini II (Section
1223(2) of the Code).
No gain or loss will be recognized to the shareholders of Gemini II upon
the exchange of their shares of stock in Gemini II for Windsor Fund voting
shares (Section 354(a)(1) of the Code).
The basis of the shares of Windsor Fund stock received by the Gemini II
shareholders (including fractional shares to which they may be entitled) will be
the same as the basis of the shares of Gemini II surrendered in exchange
therefore (Section 358(a)(1) of the Code).
A-7
<PAGE>
The holding period of Windsor Fund stock received by Gemini II shareholders
(including fractional shares to which they may be entitled) will include the
holding period of the Gemini II stock surrendered in exchange therefore,
provided that the stock of Gemini II was held as a capital asset on the date of
the exchange (Section 1223(l) of the Code).
Windsor Fund will succeed to and take into account items of Gemini II
described in Section 381(c) of the Code, including the earnings and profits of
the Fund as of the date of the transaction pursuant to Section 381(a) of the
Code and Treasury Regulations Section 1.381-1(a). Any deficit in earnings and
profits of Gemini II will be used only to offset earnings and profits
accumulated after the effective date of the proposed transaction. Windsor Fund
will take these items into account subject to the conditions and limitations
specified in Sections 381, 382, 383, and 384 of the Code and the Regulations
thereunder.
Each of the Corporations shall have also received an opinion in form and
substance satisfactory to it from Stradley, Ronon, Stevens & Young, LLP to the
effect that, subject in all respects to the effects of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other laws now or
hereafter affecting generally the enforcement of creditors' rights (as to all
matters relating to Maryland law, Messrs. Stradley, Ronon, Stevens & Young shall
be entitled to rely on the opinion of Messrs. Venable, Baetjer and Howard,
Baltimore, Maryland);
The corporate existence, good standing and authorized capital stock of each
of the Corporations are as stated or referred to in this Agreement;
The shares of common stock of Windsor Fund to be issued pursuant to the
terms of this Agreement have been duly authorized and, when issued and delivered
as provided in this Agreement, will have been validly issued, fully paid and
non-assessable by Vanguard/Windsor Funds, Inc.
Such counsel does not know of any material suit, action or legal or
administrative proceeding pending or threatened against either of the
Corporations which would adversely affect either of them other than as disclosed
in the Combined Proxy Statement/Prospectus prepared in connection with the
meeting at which action on this Agreement will be taken; and
This Agreement has been duly authorized, executed and delivered by each
Corporation and constitutes a legal, valid and binding agreement of each
Corporation in accordance with its terms.
In giving the opinions set forth above, this counsel may state that it is
relying on certificates of the officers of each Corporation with regard to
matters of fact and certain certificates and written statements of governmental
officials with respect to the good standing of the Corporations.
9. Brokerage Fees and Expenses
Gemini II and Vanguard/Windsor Funds, Inc. each represent and warrant to
the other that there are no broker's or finder's fees payable in connection with
the transactions provided for herein.
A-8
<PAGE>
Gemini II and Vanguard/Windsor Funds, Inc. shall each bear such expenses of
entering into and carrying out the provisions of this Agreement as have been
separately incurred by it. Neither Corporation shall pay any expenses, if any,
of its stockholders arising out of the reorganization.
10. Termination; Waiver; Order
a. Anything contained in this Agreement to the contrary notwithstanding,
this Agreement may be terminated and the reorganization abandoned at any time
(whether before or after adoption hereof by the stockholders of Gemini II) prior
to the Closing Date:
(1) by mutual consent of the Corporations;
(2) by either of the Corporations if any condition set forth in Section
8 hereof has not been fulfilled or waived by it; or
b. If an election by a Corporation to terminate this Agreement and abandon
the reorganization shall be exercised by its Board of Directors.
c. In the event of termination of this Agreement pursuant to the provisions
hereof the same shall become void and have no further effect, without any
liability on the part of either of the Corporations or persons who are its
directors, officers or stockholders in respect of this Agreement, provided that
this provision shall not protect any director or officer of either of the
Corporations against any liability to such Corporation or its stockholders to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
d. At any time prior to the filing of the Articles of Transfer with the
State of Maryland any of the terms or conditions of this Agreement may be waived
by the Corporation entitled to the benefit thereof by action taken by its Board
of Directors, or its Chairman of the Board, if, in the judgment of the Board of
Directors or Chairman of the Board taking such action, such waiver will not have
a material adverse effect on the benefits intended under this Agreement to the
stockholders of the Corporation on behalf of which such action is taken.
e. The respective representations and warranties of the Corporations
contained in Sections 4-7 hereof shall expire with, and be terminated by, the
reorganization contemplated by this Agreement, and neither the respective
Corporations nor any of their directors shall be under any liability with
respect to any such representations or warranties after the Closing Date. This
provision shall not protect any director or officer of a Corporation against any
liability to such Corporation or to its stockholders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
f. If any order or orders of the Securities and Exchange Commission with
respect to this Agreement shall impose any terms or conditions which are accept-
A-9
<PAGE>
able to both Gemini II and Vanguard/Windsor Funds, Inc., such terms and
conditions shall be binding as if a part of this Agreement without further vote
or approval of the stockholders of Gemini II, unless such terms and conditions
shall result in a change in the method of computing the number of shares of
Windsor Fund to be issued to Gemini II, in which event, unless such terms and
conditions shall have been included in the Combined Proxy Statement/Prospectus
solicitation material furnished to the stockholders of Gemini II prior to the
meeting at which the transactions contemplated by this Agreement shall have been
approved, this Agreement shall not be consummated and shall terminate unless
Gemini II shall promptly call a special meeting of stockholders at which such
conditions so imposed shall be submitted for approval.
g. If the transactions contemplated by this Agreement have not been
consummated by December 31, 1997, this Agreement shall automatically terminate
on that date, unless a later date is agreed upon by both Corporations.
11. Entire Agreement and Amendments
This Agreement embodies the entire agreement between the parties and there
are no agreements, understandings, restrictions or warranties among the parties
other than those set forth herein or herein provided for. This Agreement may be
amended only by mutual consent of the parties in writing. Neither this Agreement
nor any interest herein may be assigned without the prior written consent of the
other party.
12. Counterparts
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original but all such counterparts together shall
constitute but one instrument.
13. Notices
Any notice, report or demand required or permitted by any provision of this
Agreement shall be in writing and shall be deemed to have been given if
delivered or mailed, first class postage prepaid, addressed to Gemini II or
Vanguard/Windsor Funds, Inc., as the case may be, at 100 Vanguard Boulevard
(P.O. Box 2600), Valley Forge, Pennsylvania 19482.
A-10
<PAGE>
IN WITNESS WHEREOF, each of the Corporations has caused this Agreement and
Plan of Reorganization to be executed on its behalf by its President and its
corporate seal to be affixed hereto and attested by its Secretary or Assistant
Secretary, all as of the day and year first above written.
Attest: GEMINI II, INC.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
/s/ Raymond J. Klapinsky By: /s/ John J. Brennan
- ------------------------------------- --------------------------------------
Raymond J. Klapinsky, Secretary John J. Brennan, President
(Corporate Seal)
Attest: VANGUARD/WINDSOR FUNDS, INC.
/s/ Raymond J. Klapinsky By: /s/ John J. Brennan
- ------------------------------------- --------------------------------------
Raymond J. Klapinsky, Secretary John J. Brennan, President
(Corporate Seal)
A-11
<PAGE>
APPENDIX A
GEMINI II AND WINDSOR FUND
PRO FORMA COMPUTATION OF EXCHANGE RATIO
As of February 28, 1997
<TABLE>
<CAPTION>
Winsdor Fund Gemini II Pro Forma
------------------ --------------- -----------------
<S> <C> <C> <C>
Net Assets ........................ $ 18,115,245,000 $336,832,000 $18,452,077,000
================ ============= ================
Percent of combined assets ......... 98.2% 1.8% 100%
================ ============= ================
Issued and outstanding shares ...... 1,023,832,038 10,920,550 1,042,862,094
================ ============= ================
Net asset value per share ......... $ 17.70 $ 30.84 $ 17.70
================ ============= ================
Windsor Fund shares to be issued
for each Gemini II share
($30.84 divided by $17.70).......... 1.7424
================
</TABLE>
A-12
<PAGE>
EXHIBIT B
Vanguard/Windsor Fund
Prospectus
February 28, 1997
This prospectus contains financial data for the Fund through the fiscal
year ended October 31, 1996.
Vanguard/Windsor Fund A Growth and Income Stock Mutual Fund
Contents
Fund Expenses ........................... B-5
Financial Highlights ..................... B-6
A Word About Risk ........................ B-8
The Fund's Objectives ..................... B-8
Who Should Invest ........................ B-8
Investment Strategies ..................... B-9
Investment Policies ..................... B-13
Investment Limitations .................. B-15
Investment Performance .................. B-15
Share Price .............................. B-16
Dividends, Capital Gains, and Taxes ...... B-17
The Fund and Vanguard ..................... B-18
Investment Adviser ........................ B-18
General Information ..................... B-20
Investing with Vanguard .................. B-20
Services and Account Features ............ B-20
Types of Accounts ........................ B-21
Distribution Options ..................... B-22
Buying Shares ........................... B-22
Redeeming Shares ........................ B-24
Fund and Account Updates .................. B-27
Glossary ................................. Inside Back Cover
B-1
<PAGE>
Investment Objectives and Policies
Vanguard/Windsor Fund (the "Fund") is a diversified mutual fund, a part of
Vanguard/Windsor Funds, Inc., an open-end investment company.
The Fund seeks to provide long-term growth of capital by investing mainly
in the equity securities of large and medium-size companies whose stocks are
considered to be undervalued by the Fund's adviser and out of favor with
investors. The Fund's secondary objective is to provide some dividend income.
The Fund is currently closed to new investors. Existing shareholders may
purchase additional Fund shares, but may not invest more than $25,000 each year.
It is important to note that the Fund's shares are not guaranteed or
insured by the FDIC or any other agency of the U.S. government. As with any
investment in common stocks, which are subject to wide fluctuations in market
value, you could lose money by investing in the Fund.
Fees and Expenses
Vanguard/Windsor Fund is offered on a no-load basis, which means that you
pay no sales commissions or 12b-1 marketing fees. You will, however, incur
expenses for investment advisory, management, administrative, and distribution
services, which are included in the expense ratio.
Additional Information About the Fund
A Statement of Additional Information (dated February 28, 1997) containing
more information about the Fund is, by reference, part of this prospectus and
may be obtained without charge by writing to Vanguard or by calling our Investor
Information Department at 1-800-662-7447.
Why Reading This Prospectus Is Important
This prospectus explains the objectives, risks, and strategies of
Vanguard/Windsor Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk" explanations along the way. Reading the
prospectus will help you to decide whether the Fund is the right investment for
you. We suggest that you keep it for future reference.
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.
B-2
<PAGE>
Fund Profile Vanguard/Windsor Fund
Who Should Invest (page B-8)
o Investors seeking a growth and income stock mutual fund as part of a balanced
and diversified investment program.
o Investors seeking growth of their capital over the long term--at least five
years.
o Investors seeking some dividend income.
Who Should Not Invest
o Investors unwilling to accept significant fluctuations in share price.
Risks of the Fund (pages B-8)
The Fund's total return will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. The Fund is subject to
manager risk (the chance that poor security selection will cause it to lag the
stock market as a whole) and objective risk (the chance that returns from the
types of stocks that the Fund invests in--attractively priced or "value"
stocks--will trail returns from the overall stock market). Because the Fund can
invest a portion of its assets in companies based outside the United States, it
is exposed to several risks unique to foreign securities; see page 7 for
details.
Dividends and Capital Gains (page B-17)
Dividends are paid in June and December. Capital gains, if any, are paid in
December.
Investment Adviser (page B-18)
Wellington Management Company, LLP,
Boston, MA.
Minimum Initial Investment: The Fund is not open to new investors.
Inception Date: October 23, 1958
Net Assets as of 10/31/96: $15.8 billion
Fund's Expense Ratio for the Year Ended 10/31/96: 0.31%
Loads, 12b-1 Marketing Fees: None
Suitable for IRAs: Yes
Newspaper Abbreviation: Wndsr
Vanguard Fund Number: 022
Account Features (page B-20)
o Telephone Redemption
o Vanguard Direct Deposit ServiceSM
o Vanguard Automatic Exchange ServiceSM
o Vanguard Fund Express(R)
o Vanguard Dividend ExpressSM
B-3
<PAGE>
Average Annual Total Returns -- Periods Ended October 31, 1996
1 Year 5 Years 10 Years
--------- ---------- ----------
Vanguard/Windsor Fund ...... 23.2% 16.7% 13.4%
S&P 500 Index ............ 24.1 15.5 14.7
Quarterly Returns (%) 1987-1996 (intended to show volatility of returns)
Year Windsor S&P 500
1Q87 16.3 21.3
2Q87 6.2 5.0
3Q87 0.8 6.6
4Q87 -18.6 -22.5
1Q88 10.2 5.7
2Q88 13.2 6.6
3Q88 1.9 0.3
4Q88 1.3 3.0
1Q89 6.9 7.1
2Q89 7.0 8.8
3Q89 8.6 10.7
4Q89 -7.4 2.0
1Q90 -2.9 -3.0
2Q90 1.4 -0.2
3Q90 -20.3 -13.7
4Q90 7.8 8.9
1Q91 18.3 14.5
2Q91 0.7 -0.2
3Q91 5.6 5.3
4Q91 2.2 8.4
1Q92 4.3 -2.5
2Q92 5.6 1.9
3Q92 -2.6 3.2
4Q92 8.7 5.0
1Q93 8.9 4.4
2Q93 1.4 0.5
3Q93 7.4 2.6
4Q93 0.7 2.3
1Q94 -1.8 -3.8
2Q94 3.8 0.4
3Q94 1.1 4.9
4Q94 -3.2 0.0
1Q95 8.5 9.7
2Q95 11.4 9.5
3Q95 7.9 7.9
4Q95 -0.2 6.0
1Q96 6.2 5.4
2Q96 1.5 4.5
3Q96 5.3 3.1
10-Year Average
Total Return 13.1% 15.0%
<PAGE>
In evaluating past performance, remember that it is not indicative of
future performance and that returns from stocks were high during the periods
shown relative to longer-term historical averages. Performance figures include
the reinvestment of any dividends and capital gains distributions. The returns
are net of expenses, but they do not reflect income taxes a taxable investor
would have incurred. Note, too, that both the return and principal value of an
investment will fluctuate so that investors' shares, when redeemed, may be worth
more or less than their original cost.
PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's
because you, as a shareholder, pay the costs of operating a fund, plus any
transaction costs associated with buying, selling, or exchanging shares. These
costs can erode a substantial portion of the gross income or capital
appreciation a fund achieves. Even seemingly small differences in fund expenses
can, over time, have a dramatic impact on a fund's performance.
PLAIN TALK ABOUT
Fund Expenses
All mutual funds have operating expenses. These expenses, which are
deducted from a fund's gross income, are expressed as a percentage of the net
assets of the fund. Vanguard/Windsor Fund's expense ratio in fiscal year 1996
was 0.31%, or $3.10 per $1,000 of average net assets. The average growth and
income equity fund had expenses in 1996 of 1.23%, or $12.30 per $1,000 of
average net assets, according to Lipper Analytical Services, Inc., which reports
on the mutual fund industry.
B-4
<PAGE>
Fund Expenses
The examples below are designed to help you understand the various costs
you would bear, directly or indirectly, as an investor in the Fund.
As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Fund:
Shareholder Transaction Expenses
- --------------------------------
Sales Load Imposed on Purchases: .................. None
Sales Load Imposed on Reinvested Dividends: ...... None
Redemption Fees: ................................. None
Exchange Fees: .................................... None
The next table illustrates the operating expenses that you would incur as a
shareholder of the Fund. These expenses are deducted from the Fund's income
before it is paid to you. Expenses include investment advisory fees as well as
the costs of administering the Fund, maintaining accounts, providing shareholder
services, and other activities. The expenses shown in the table are for the
fiscal year ended October 31, 1996.
Annual Fund Operating Expenses
- ------------------------------
Management and Administrative Expenses: ............... 0.18%
Investment Advisory Expenses: ........................ 0.10%
12b-1 Marketing Fees: ................................. None
Other Expenses
Marketing and Distribution Costs: .................. 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): ...... 0.01%
-------
Total Other Expenses: ................................. 0.03%
-------
Total Operating Expenses (Expense Ratio): ............ 0.31%
=======
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Fund provides a return of 5% a year and (2) that you redeem your investment
at the end of each period.
1 Year 3 Years 5 Years 10 Years
--------- ---------- ---------- ----------
$3 $10 $17 $39
This example should not be considered a representation of actual expenses or
performance from the past or for the future, which may be higher or lower than
those shown.
B-5
<PAGE>
Financial Highlights
The following financial highlights table shows the results for a share
outstanding for each of the last ten years ended October 31, 1996. The financial
highlights, insofar as they relate to each of the five years in the period ended
December 31, 1996 were audited by Price Waterhouse LLP, independent accountants.
You should read this information in conjunction with the Fund's financial
statements and accompanying notes, which appear, along with the unqualified
audit report from Price Waterhouse, in the Fund's most recent Annual Report to
shareholders. The Annual Report is incorporated by reference in the Statement of
Additional Information and in this prospectus, and contains a more complete
discussion of the Fund's performance. You may have the report sent to you
without charge by writing to Vanguard or by calling our Investor Information
Department.
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------------------------
1996 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ... $ 15.55 $ 14.55 $ 14.95 $ 12.37
Investment Operations
Net Investment Income .43 .44 .44 .37
Net Realized and
Unrealized Gain
(Loss) on Investments 2.85 1.86 .42 2.98
------- ------- ------- -------
Total from
Investment
Operations ............ 3.28 2.30 .86 3.35
------- ------- ------- -------
Distributions
Dividends from Net
Investment Income ...... (.46) (.44) (.37) (.39)
Distributions from
Realized Capital
Gains .................. (1.38) (.86) (.89) (.38)
------- ------- ------- -------
Total Distributions..... (1.84) (1.30) (1.26) (.77)
Net Asset Value, End of
Period .................. $ 16.99 $ 15.55 $ 14.55 $ 14.95
======= ======= ======= =======
Total Return ............ 23.16% 17.80% 6.35% 28.29%
======= ======= ======= =======
Ratios/Supplemental Data
Net Assets, End of Period
(Millions) ............ $15,841 $13,008 $11,406 $10,537
Ratio of Expenses to
Average Net Assets ...... 0.31% 0.45% 0.45% 0.40%
Ratio of Net Investment
Income to Average Net
Assets .................. 2.75% 3.01% 3.11% 2.68%
Portfolio Turnover Rate 34% 32% 34% 25%
Average Commission
Rate Paid ............... $ .0579 N/A N/A N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------------------------------------
1992 1991 1990 1989 1988 1987
------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ... $ 12.79 $ 9.72 $ 15.17 $ 14.13 $ 14.22 $ 13.85
Investment Operations
Net Investment Income .49 .58 .74 .71 .66 .78
Net Realized and
Unrealized Gain
(Loss) on Investments .50 3.55 (4.59) 1.51 2.33 (.11)
--------- -------- --------- --------- --------- ---------
Total from
Investment
Operations ............ .99 4.13 (3.85) 2.22 2.99 .67
--------- -------- --------- --------- --------- ---------
Distributions
Dividends from Net
Investment Income ...... (.57) (.74) (.75) (.63) (.87) (.30)
Distributions from
Realized Capital
Gains .................. (.84) (.32) (.85) (.55) (2.21) --
--------- -------- --------- --------- --------- ---------
Total Distributions...... (1.41) (1.06) (1.60) (1.18) (3.08) (.30)
Net Asset Value, End of
Period .................. $ 12.37 $ 12.79 $ 9.72 $ 15.17 $ 14.13 $ 14.22
========= ======== ========= ========= ========= =========
Total Return ............ 9.30% 44.69% -27.93% 17.05% 27.01% 4.62%
========= ======== ========= ========= ========= =========
Ratios/Supplemental Data
Net Assets, End of Period
(Millions) ............ $ 8,250 $ 7,859 $ 5,841 $ 8,313 $ 5,920 $ 4,848
Ratio of Expenses to
Average Net Assets ...... 0.26% 0.30% 0.37% 0.41% 0.46% 0.43%
Ratio of Net Investment
Income to Average Net
Assets .................. 3.89% 4.84% 5.82% 5.07% 5.08% 4.86%
Portfolio Turnover Rate 32% 36% 21% 34% 24% 46%
Average Commission
Rate Paid ............... N/A N/A N/A N/A N/A N/A
</TABLE>
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) and
capital appreciation. Neither yield nor total return should be used to predict
the future performance of a fund.
B-6
<PAGE>
PLAIN TALK ABOUT
How to Read the Financial Highlights Table
The Fund began fiscal 1996 with a net asset value (price) of $15.55
per share. During the year, the Fund earned $.43 per share from investment
income (interest and dividends) and $2.85 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them. Of those total earnings of $3.28 per share, $1.84 was returned to
shareholders in the form of distributions ($.46 in dividends, $1.38 in capital
gains). The earnings ($3.28 per share) less total distributions ($1.84 per
share) resulted in a share price of $16.99 at the end of the fiscal year, an
increase of $1.44 per share (from $15.55 at the beginning of the period to
$16.99 at the end of the period). Assuming that the shareholder had reinvested
the distributions in the purchase of more shares, the total return from the Fund
was 23.16% for the year.
As of October 31, 1996, the Fund had $15.8 billion in net assets; an
expense ratio of 0.31% ($3.10 per $1,000 of net assets); and net investment
income amounting to 2.75% of its average net assets. It sold and replaced
securities valued at 34% of its total net assets.
PLAIN TALK ABOUT
Value Funds and Growth Funds
Value investing and growth investing are two styles employed by stock
fund managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often pay
regular dividend income to shareholders. Growth funds focus on companies that,
due to their strong earnings and revenue potential, offer above-average
prospects for capital growth, with less emphasis on dividend income. Value and
growth stocks have, in the past, produced similar long-term returns, though each
has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains but are less tolerant of share-price fluctuations, while growth
funds appeal to investors who will accept more volatility in hope of a greater
increase in share price or who prefer a higher portion of the fund's returns to
come as capital gains, which may be taxed at lower rates than dividend income.
B-7
<PAGE>
A Word About Risk
This prospectus describes the risks that you will face as an investor in
Vanguard/Windsor Fund. It is important to keep in mind one of the main axioms of
investing: the higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: the lower the risk, the lower the
potential reward. However, as you consider an investment in Windsor Fund, you
should also take into account your own tolerance for the daily fluctuations of
the stock market.
Look for this "warning flag" symbol throughout the prospectus. It is used
to mark detailed information about each type of risk that you, as a shareholder
of the Fund, will confront.
The Fund's Objectives
Vanguard/Windsor Fund seeks to provide long-term growth of capital and, as
a secondary objective, some dividend income. These objectives are fundamental,
which means that they cannot be changed unless a majority of shareholders vote
to do so.
Because of the several types of risk described on the following pages, your
investment in the Fund, as with any investment in common stocks, could lose
money.
PLAIN TALK ABOUT
Investing for the Long Term
Vanguard/Windsor 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 fluctuations in the stock market.
Who Should Invest
Vanguard/Windsor Fund may be suitable for you if:
o You wish to add a growth and income mutual fund to your existing
holdings, which could include other stock--as well as bond, money market,
and tax-exempt--investments.
o You want a value-oriented investment that seeks to provide long-term
growth as well as some dividend income.
B-8
<PAGE>
This Fund is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Fund's shareholders. To minimize
such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Fund has adopted the following policies:
o The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of
the investment or because of a history of excessive trading by the
investor.
o There is a limit on the number of times you can exchange into or out of
the Fund (see "Redeeming Shares" in the Investing with Vanguard section).
o The Fund reserves the right to stop offering shares at any time.
PLAIN TALK ABOUT
Costs and Market Timing
Some investors try to profit from "market timing"--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who did not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
closely monitoring daily transactions.
PLAIN TALK ABOUT
Large-Cap, Mid-Cap, and Small-Cap Stocks
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Vanguard defines large-capitalization, or large-cap, funds as those holding
stocks of companies with a median market value of their outstanding shares
exceeding $5 billion. Mid-cap funds hold stocks of companies with a median
market value between $1 billion and $5 billion. Small-cap funds hold stocks of
companies with a median market value of up to $1 billion. Historically,
large-cap funds have exhibited lower volatility than mid-cap and small-cap
funds.
Investment Strategies
This section explains how Vanguard/Windsor Fund's adviser pursues the
objectives of long-term capital growth and some dividend income. It also
explains several important risks--market risk, objective risk, manager risk,
country risk, and currency risk--faced by investors in the Fund. Unlike the
Fund's investment
B-9
<PAGE>
objectives, these investment strategies are not fundamental and can be changed
by the Fund's board of directors without shareholder approval. However, before
making any important change in its strategies, the Fund will give shareholders
30-days notice, in writing.
Market Exposure
The Fund is a value-oriented growth and income fund that invests mainly in
large- and mid-capitalization common stocks that offer favorable prospects for
capital growth and dividend income. At times, the Fund may also invest in
preferred stock and in securities that are convertible into common stock.
The Fund is subject to market risk, which is the possibility that stock
prices overall will decline over short or even extended periods. Stock
markets tend to move in cycles, with periods of rising stock prices and
periods of falling stock prices.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the
Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of
stock market activity. Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, how the gap between the best and worst
returns tends to narrow over the long term.
U.S. Stock Market Returns (1926 -1996)
-------------------------------------------------
1 Year 5 Years 10 Years 20 Years
--------- ---------- ----------- ----------
Best ......... 53.9% 23.9% 20.1% 16.9%
Worst ......... -43.3 -12.5 -0.9 3.1
Average ...... 12.7 10.4 10.8 10.8
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1996. For example, while the average return on stocks for all of the
5-year periods was 10.4%, returns for these 5-year periods ranged from a -12.5%
average (from 1928 through 1932), to 23.9% (from 1950 through 1954). These
average returns reflect past performance and should not be regarded as an
indication of future returns from either the stock market as a whole or this
Fund in particular.
Finally, because Vanguard/Windsor Fund does not hold the same securities
held in the S&P 500 Index or any other market index, the performance of the Fund
will not mirror the returns of any particular index.
The Fund is subject to objective risk, which is the possibility that returns
from the type of stocks that the Fund invests in--attractively priced or
"value" stocks--will trail returns from the overall stock market. Different
types of stocks tend to go through cycles of outperformance and
underperformance in comparison to common stocks in general. These cycles
have, in the past, lasted for as long as several years.
B-10
<PAGE>
PLAIN TALK ABOUT
Price/Earnings Ratios
A widely used measure of common-stock valuation is the price/earnings
(P/E) ratio. The P/E ratio is simply a stock's current price divided by its
earnings per share from the past year (or sometimes its projected earnings for
the coming year). In general, a lower P/E ratio indicates that a stock is out of
favor with investors and is expected to have slow future growth in profits. A
higher P/E ratio indicates that investors expect rapid growth in a company's
profits. Keep in mind, however, that these expectations can sometimes prove
incorrect, and that there is no "ideal" P/E ratio.
PLAIN TALK ABOUT
Portfolio Diversification
In general, the more diversified a fund's portfolio of stocks, the
less likely that a specific stock's poor performance will hurt the fund. One
measure of a fund's level of diversification is the percentage of total net
assets represented by its ten largest holdings. The average U.S. equity mutual
fund has about 25% of its assets invested in its ten largest holdings, while
some less diversified mutual funds have 40% or more of their assets invested in
the stocks of just ten companies.
Security Selection
Wellington Management Company, llp (WMC), adviser to the Fund, selects what
it considers to be undervalued securities of large- and mid-capitalization
companies. Undervalued stocks are generally those that are out of favor with
investors and currently trading at prices that, the adviser feels, are below
what the stocks are worth in relation to their earnings. These stocks
typically--but not always--have lower-than-average price/earnings (P/E) ratios
and higher-than-average dividend yields.
A stock's value is the key element in WMC's selection process. WMC
considers several fundamental factors, including the stock's projected growth
rate, earnings potential, dividend yield, and P/E ratio. WMC then selects the
stock if it has strong prospects for capital appreciation, but is currently
trading at a price that is lower than what is expected of a stock with such
potential. WMC sets a price that it feels more accurately reflects the stock's
overall worth and, when the stock reaches that predetermined price, it will be
sold. This strategy is known as "buying into weakness and selling into
strength."
B-11
<PAGE>
The Fund's top ten holdings (which amounted to 38% of the Fund's total net
assets) as of October 31, 1996, follow.
1. Chrysler Corp.
2. Citicorp
3. Seagate Technology
4. Ford Motor Co.
5. Burlington Resources, Inc.
6. Georgia-Pacific Corp.
7. USX-Marathon Group
8. Compaq Computer Corp.
9. Golden West Financial Corp.
10. Reynolds Metals Co.
Keep in mind that, because the makeup of the Fund changes daily, this
listing is only a "snapshot" at one point in time. Note, too, that the Fund's
relatively low level of diversification means that there is a greater chance
that the poor performance of a single stock could hurt the Fund.
The Fund is run by WMC according to traditional methods of active
investment management, which means securities are bought and sold according to
WMC's judgments about companies and their financial prospects, and about the
stock market and the economy in general.
The Fund is subject to manager risk, which is the possibility that WMC may
do a poor job of selecting stocks.
Portfolio Turnover
Although the Fund generally seeks to invest for the long term, it retains
the right to sell securities regardless of how long they have been held. The
Fund's average turnover rate for the past ten years has been about 32%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its total net assets within a one-year period.)
PLAIN TALK ABOUT
Portfolio Turnover
Before investing in a mutual fund, you should review its portfolio
turnover rate for an indication of the potential effect of transaction costs on
the fund's future returns. In general, the greater the volume of buying and
selling by the fund, the greater the impact that brokerage commissions and other
transaction costs will have on its return. Also, funds with high portfolio
turnover rates may be more likely than low-turnover funds to generate capital
gains that must be distributed to shareholders as taxable income. The average
turnover rate for actively managed funds investing in common stocks is 78%.
B-12
<PAGE>
Investment Policies
Besides investing in undervalued common stocks, the Fund may follow a
number of investment policies to achieve its objectives.
The Fund may invest as much as 20% of its assets in securities of companies
based outside the United States and may engage in currency transactions. These
securities can be traded in either U.S. or foreign markets.
The Fund is subject to country risk and currency risk. Country risk is the
possibility that political events (such as a war), financial problems (such
as government default), or natural disasters (such as an earthquake) will
weaken a country's economy and cause investments in that country to lose
money. Currency risk is the possibility that a "stronger" U.S. dollar will
reduce returns for Americans investing overseas. Generally, when the dollar
rises in value against a foreign currency, your investment in that country
loses value because its currency is worth fewer U.S. dollars. On the other
hand, a "weaker" dollar generally leads to higher returns for Americans
holding foreign investments.
The Fund may invest in money market instruments, fixed-income securities,
convertible securities and other equity securities, such as preferred stock. The
Fund may invest up to 15% of its assets in restricted securities with limited
marketability or other illiquid securities.
PLAIN TALK ABOUT
The Risks of International Investing
Because foreign stock markets operate differently from the U.S.
market, Americans investing abroad will encounter risks not typically associated
with U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than in the U.S. These
factors, among others, could negatively impact the returns Americans receive
from a foreign investment. For more information, see the Statement of Additional
Information.
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or
"derived" from) a traditional security (such as a stock or a bond), an asset
(such as a commodity like gold), or a market index (such as the S&P 500 Index).
Futures and options are derivatives that have been trading on regulated
exchanges for more than two decades. These "traditional"
B-13
<PAGE>
derivatives are standardized contracts that can easily be bought and sold, and
whose market values are determined and published daily. It is these
characteristics that differentiate futures and options from the relatively new,
exotic types of derivatives--some of which can carry considerable risks.
PLAIN TALK ABOUT
Cash Reserves
With mutual funds, holding cash reserves--or "cash"--does not mean
literally that the fund holds a stack of currency. Rather, cash reserves refer
to short-term, interest-bearing securities that can easily and quickly be
converted to cash, such as those described in the prospectus glossary. (Most
mutual funds keep at least a small percentage of assets in cash to accommodate
shareholder redemptions.) While some funds strive to keep cash levels at a
minimum and to always remain fully invested in stocks, other funds allow
investment advisers to hold up to 20% of a fund's assets in cash reserves.
The Fund may also invest in derivatives.
The Fund reserves the right to invest, to a limited extent, in stock futures
and options contracts, which are traditional types of derivatives.
Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a portfolio. The Fund will not use
futures and options for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment. Rather, the Fund will keep
separate cash reserves or other liquid portfolio securities in the amount of the
obligation underlying the futures or options contract. Only a limited percentage
of the Fund's assets--5%--may be applied to futures contract deposits, and no
more than 20% of total assets may be committed to such contracts.
The reasons for which the Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
o To make it easier to trade.
o To reduce costs by buying futures instead of actual stocks when futures
are cheaper.
The Fund will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Fund may hold cash reserves without
limit. No more than 35% of the Fund's assets may be invested in short-term
fixed-income securities for purposes other than taking a temporary defensive
position.
B-14
<PAGE>
Investment Limitations
To reduce risk and maintain diversification, the Fund has adopted limits on
some of its investment policies. Specifically, the Fund will not:
o Invest more than 25% of its assets in any one industry.
o Borrow money, except for the purpose of meeting shareholder requests to
redeem shares. With respect to 75% of its assets, the Fund will not:
o Invest more than 5% in the securities of any one company.
o Buy more than 10% of the outstanding voting shares of any company.
The limitations listed in this prospectus and in the Statement of
Additional Information are fundamental and may be changed only by approval of a
majority of the Fund's shareholders.
Investment Performance
Vanguard/Windsor Fund invests primarily in common stocks, so its
performance is closely correlated to the performance of the overall stock
market. Historically, stock market performance, both domestic and foreign, has
been characterized by sharp up-and-down swings in the short term and by more
stable growth over the long term.
Average Annual Total Returns
For Periods Ended October 31, 1996
Vanguard/Windsor Fund S&P 500 Index
1 Year 23.2% 24.1%
3 Years 15.6% 17.7%
5 Years 16.7% 15.5%
10 Years 13.4% 14.7%
20 Years 16.7% 14.5%
25 Years 15.0% 12.7%
The results shown above represent the Fund's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on the unmanaged Standard & Poor's 500 Composite Stock Price Index.
The chart does not make any allowances for federal, state, or local income taxes
that shareholders must pay on a current basis.
B-15
<PAGE>
PLAIN TALK ABOUT
Past Performance
Whenever you see information on a fund's performance, do not consider
the figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
Share Price
The Fund's share price, also called its net asset value, is calculated each
business day after the close of trading (generally 4 p.m. Eastern time) of the
New York Stock Exchange. The net asset value per share is calculated by adding
up the total assets of the Fund, subtracting all of its liabilities, or debts,
and then dividing by the total number of Fund shares outstanding:
Total Assets - Liabilities
----------------------------------
Net Asset Value =
Number of Shares Outstanding
The daily net asset value, or NAV, is useful to you as a shareholder
because the NAV, multiplied by the number of Fund shares you own, gives you the
dollar amount you would have received had you sold all of your shares back to
the Fund that day.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading Vanguard Group. Different newspapers use
different abbreviations of the Fund's name, but the most common is Wndsr.
PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income
from interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that a fund earns from its holdings as well as
interest it receives from its money market and bond investments. Capital gains
are realized whenever the fund sells securities for higher prices than it paid
for them. These capital gains are either short-term or long-term depending on
whether the fund held the securities for less than or more than one year.
B-16
<PAGE>
PLAIN TALK ABOUT
"Buying a Dividend"
Unless you are investing in a tax-deferred retirement account (such
as an IRA), it is not to your advantage to buy shares of a fund shortly before
it makes a distribution, because part of your investment will come back to you
as a taxable distribution. This is known as "buying a dividend." For example: on
December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays
a distribution of $1 per share on December 16, its share price would drop to $19
(not counting market change). You would still have only $5,000 (250 shares x $19
= $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
would owe tax on the $250 distribution you received, even if you had reinvested
the dividends in more shares. To avoid "buying a dividend," check a fund's
distribution schedule before you invest.
Dividends, Capital Gains, and Taxes
Each June and December, the Fund distributes to its shareholders virtually
all of its income from interest and dividends. Any capital gains realized from
the sale of securities are distributed in December. Your distributions of income
and capital gains will be automatically invested in more shares of the Fund,
unless you elect to receive these distributions in cash. In either case,
distributions of dividends and capital gains that are declared in December--even
if paid to you in January--are taxed as if they had been paid to you in
December. Vanguard will process your dividend distribution and send you a
statement each year showing the tax status of all your distributions.
/// The dividends and short-term capital gains that you receive are taxable to
you as ordinary dividend income. Any distributions of net long-term capital
gains by the Fund are taxable to you as long-term capital gains, no matter
how long you've owned shares in the Fund. Both dividends and capital gains
distributions are taxable to you whether received in cash or reinvested in
additional shares. Although the Fund does not seek to realize any particular
amount of capital gains during a year, such gains are realized from time to
time as byproducts of the ordinary investment activities of the Fund.
Consequently, distributions may vary considerably from year to year.
/// If you sell or exchange your shares, any gain or loss you have is a taxable
event, which means that you may have a capital gain to report as income, or
a capital loss to report as a deduction, when you complete your federal
income tax return.
/// Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and local
income taxes as well.
B-17
<PAGE>
The tax information in this prospectus is provided as general information
and will not apply to you if you are investing in a tax-deferred retirement
account, such as an IRA. You should consult your own tax adviser about the tax
consequences of an investment in the Fund.
The Fund and Vanguard
Vanguard/Windsor Fund is a member of The Vanguard Group, a family of more
than 30 investment companies with more than 90 distinct investment portfolios
and total net assets of more than $240 billion. All the Vanguard funds share in
the expenses associated with business operations, such as personnel, office
space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 marketing fees, each fund
pays its allocated share of The Vanguard Group's costs.
A list of the Fund's directors and officers, and their present positions
and principal occupations during the past five years, can be found in the
Statement of Additional Information.
PLAIN TALK ABOUT
Vanguard's Unique Corporate Structure
The Vanguard Group, Inc. is the only mutual mutual fund company. It is
owned jointly by the funds it oversees and by the shareholders in those funds.
Other mutual funds are operated by for-profit management companies that may be
owned by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
Investment Adviser
The Fund employs Wellington Management Company, llp (WMC), 75 State Street,
Boston, MA 02109, as its investment adviser. WMC manages the Fund subject to the
control of the officers and directors of the Fund.
WMC is paid a quarterly advisory fee based on an average of the Fund's
month-end net assets during that quarter:
Average Assets Managed Basic Fee
----------------------- -----------
First $17.5 billion ...... 0.125%
Over $17.5 billion ...... 0.100
B-18
<PAGE>
Beginning April 30, 1999, WMC's basic advisory fee may be adjusted based on
the total return performance of the Fund as compared to that of the Standard &
Poor's 500 Index. Under the fee schedule, WMC's basic fee may be increased or
decreased by as much as 67% for the first $17.5 billion of average net assets
managed during the period and by 90% for average net assets over $17.5 billion.
Until this new schedule goes into effect, WMC's basic fee will follow transition
rules set forth by the Securities and Exchange Commission and described in the
Fund's Statement of Additional Information.
For the fiscal year ended October 31, 1996, the total fee paid by
Vanguard/Windsor Fund to its adviser was approximately $14 million, which
included a base fee of more than $18 million and a decrease, based on adviser
performance, of $4.42 million. (These fees were calculated under WMC's former
advisory agreement with Vanguard/Windsor Fund, which was replaced on June 1,
1996.)
The current fee agreement with WMC authorizes it to choose brokers and
dealers to handle the purchase and sale of the Fund's securities, and directs
WMC to get the best available price and most favorable execution from these
brokers with respect to all transactions. At times, WMC may choose brokers who
charge higher commissions in the interest of obtaining better execution of a
transaction. If more than one broker can obtain the best available price and
favorable execution of a transaction, then WMC is authorized to choose a broker
who, in addition to executing the transaction, will provide research services to
WMC or the Fund. However, WMC will not pay higher commissions specifically for
the purpose of obtaining research services. The Fund may direct WMC to use a
particular broker for certain transactions in exchange for commission rebates or
research services provided to the Fund.
The board of directors may, without prior approval from shareholders,
change the terms of the advisory agreement or hire a new investment adviser as
either a replacement for WMC or as an additional adviser. However, no such
change would be made before giving shareholders 30-days notice, in writing.
PLAIN TALK ABOUT
The Fund's Adviser
Wellington Management Company, LLP, is an investment counseling firm
that was founded in 1931; it currently manages more than $130 billion in assets.
The manager responsible for WMC's strategy for Vanguard/Windsor Fund is:
Charles T. Freeman, Senior Vice President and Partner of WMC; 30 years
investment experience, 28 years with WMC and Vanguard/Windsor Fund; B.S. and
M.B.A. from the University of Pennsylvania.
Mr. Freeman was appointed Fund manager in January 1996, following the
retirement of John B. Neff, who had managed the Fund since 1964.
B-19
<PAGE>
General Information
Vanguard/Windsor Fund is one of two Funds of Vanguard/Windsor Funds, Inc.,
which is organized under the laws of the state of Maryland. The other Fund is
Vanguard/Windsor II (which is open to all investors). The two Funds are combined
under one corporation for administrative purposes, but for investment management
purposes operate like separate companies.
Shareholders of Vanguard/Windsor Fund have rights and privileges similar to
those enjoyed by other corporate shareholders. For example, shareholders will
not be responsible for any liabilities of the corporation. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of directors), each share outstanding at that point
would be entitled to one vote. Annual meetings will not be held by the Fund
except as required by the Investment Company Act of 1940. A meeting will be
scheduled (for example, to vote on the removal of a director) if the holders of
at least 10% of the Fund's shares request a meeting in writing.
Investing with Vanguard
At this time, shares of Vanguard/Windsor Fund are not being offered or sold
to new investors. As a result, many of the services described on the following
pages are for current shareholders only. Current shareholders may make
additional investments, but the total amount invested during a calendar year may
not exceed $25,000.
The following sections of the prospectus briefly explain the many services
we offer you as a Vanguard/Windsor Fund shareholder. Booklets providing detailed
information are available on the services marked with a (Booklet). Please call
us to request copies.
Services and Account Features
Vanguard offers many services that make it convenient to buy, sell, or
exchange shares.
<TABLE>
<S> <C>
Telephone Redemptions Automatically set up for this Fund unless you notify us otherwise.
(Sales and Exchanges)
Vanguard Direct Deposit Automatic method for depositing your paycheck or U.S. govern-
(Sales and Exchanges) ment payment (including Social Security and government pension
checks) into your account.
Vanguard Automatic Automatic method for moving a fixed amount of money from one
Exchange Service Vanguard fund account to another.*
Vanguard Fund Express Electronic method for buying or selling shares You can transfer
money between your Vanguard fund account and an account at
your bank, savings and loan, or credit union on a systematic sched-
ule or whenever you wish.*
</TABLE>
B-20
<PAGE>
<TABLE>
<S> <C>
Vanguard Dividend Express Electronic method for transferring dividends and/or capital gains
distributions directly from your Vanguard fund account to your
bank, savings and loan, or credit union account or to another Van-
guard fund account.
Vanguard Brokerage Services A cost-effective way to trade stocks, bonds, and options on major
(VBS) exchanges, Nasdaq, and other domestic over-the-counter markets
at reduced rates, and to buy and sell shares of non-Vanguard
mutual funds. Call VBS (1-800-992-8327) for additional informa-
tion and the appropriate forms.
</TABLE>
*Can be used to "dollar-cost average" or to contribute to an IRA or other
retirement plan.
Types of Accounts
Individual or Other Entity
Currently, shares of Vanguard/Windsor Fund are not being offered or sold to
new investors; however, the following accounts may be established through a
transfer of Windsor Fund shares. Call Client Services for more information.
<TABLE>
<S> <C>
For One or More People To open an account in the name of one (individual) or more
(joint tenants) people. $3,000 minimum initial investment.
For a Minor Child To open an account as an UGMA/UTMA (Uniform
Gifts/Transfers to Minors Act). Age of majority and other
requirements are set by state law. $1,000 minimum initial
investment.
For Holding Trust Assets To invest assets held in an existing trust. $3,000 minimum initial
investment.
For Third-Party Trustee To open an account as a retirement trust or plan based on an
Retirement Investments existing corporate or institutional plan. These accounts are
(Vanguard is not the custodian established by the custodian or trustee of the existing plan.
or trustee.)
For an Organization To open an account as a corporation, partnership, or other entity.
These accounts may require a corporate resolution or other
documents to name the individuals authorized to act. $3,000
minimum initial investment.
</TABLE>
Retirement
<TABLE>
<S> <C>
For an Individual Retirement To open a retirement account in the name of an individual. IRAs
Account (IRA) (Vanguard can be established with a contribution, a direct roll-over from an
Fiduciary Trust Company is the employer's plan, such as a 401(k), or an asset transfer or rollover
custodian.) from another financial institution, such as a bank or mutual fund
company. $1,000 minimum initial investment.
For a Simplified Employee To open a retirement account in the name of an employee. SEPs
Pension Plan Account allow employers to make deductible contributions directly to
(SEP-IRA) (Vanguard Fiduciary IRAs established by their employees. A SEP can be established
Trust Company is the by people who are self-employed, small-business owners,
custodian.) partnerships, or corporations.
</TABLE>
B-21
<PAGE>
<TABLE>
<S> <C>
For a Qualified Retirement To open a retirement account that allows Program Account
(Vanguard Fiduciary Trust small-business owners or people who are self-employed to make
Company can be the trustee.) tax-deductible retirement contributions for themselves and their
employees into Profit-Sharing and Money Purchase Pension
(Keogh) plans.
For a 403(b)(7) Custodial To open a retirement account that allows employees of
Account (Vanguard Fiduciary tax-exempt institutions (for example, schools or hospitals) to
Trust Company is the make pre-tax retirement contributions.
custodian.)
</TABLE>
Distribution Options
You can receive distributions of dividends and/or capital gains in a number
of ways:
<TABLE>
<S> <C>
Reinvestment Dividends and capital gains are automatically reinvested in
additional shares of the Fund unless you request a different
distribution method.
Dividends Cash Dividends are paid by check and mailed to your account's
address of record, and capital gains are reinvested in additional
shares of the Fund.
Dividends and Capital Gains Both dividends and capital gains are paid by check and mailed to
in Cash your account's address of record.
</TABLE>
- --------------------------------------------------------------------------------
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard fund account,
see Vanguard Dividend Express under "Services and Account Features."
- --------------------------------------------------------------------------------
Buying Shares
At this time, shares of Vanguard/Windsor Fund are not being offered or sold
to new investors. Current shareholders may make additional investments, but the
total amount invested during a calendar year may not exceed $25,000.
You buy your shares at the Fund's next-determined net asset value after
Vanguard receives your request, provided we receive your request before 4 p.m.
Eastern time (the close of trading on the New York Stock Exchange). The Fund is
offered on a no-load basis, meaning that you do not pay sales commissions or
12b-1 marketing fees.
B-22
<PAGE>
Add To An Existing Account
Minimum Investment
By Mail
First-class mail to:
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482
Express or Registered mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087
$100 by mail or exchange; $1,000 by wire.
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
Make your check payable to: The Vanguard Group-22
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
- --------------------------------------------------------------------------------
Important Note: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
Add To An Existing Account
By Telephone
1-800-662-6273
Vanguard Tele-Account(R)
1-800-662-2739
Client Services
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer I.D., and account type).
Use Vanguard Fund Express (see "Services and Account Features") to transfer
assets from your bank account. Call Client Services before your first use to
verify that this option is in place.
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
Important Note: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.
- --------------------------------------------------------------------------------
B-23
<PAGE>
By Wire
Wire to:
CoreStates Bank, N.A.
ABA 031000011
CoreStates No 01019897
[Temporary Account Number]
Vanguard/Windsor Fund
[Account Registration]
Attention: Vanguard
Call Client Services to arrange your wire transaction.
Wire transactions are not available for retirement accounts.
Automatically
Vanguard offers a variety of ways that you can add to your account
automatically. See "Services and Account Features."
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, your redemption proceeds will not
be paid to you until payment for your purchase is collected, which may take up
to ten calendar days.
Note: If you buy Fund shares through a registered broker-dealer or investment
adviser, the broker-dealer or adviser may charge you a service fee.
- --------------------------------------------------------------------------------
Redeeming Shares
- --------------------------------------------------------------------------------
Important Tax Note: Any sale or exchange of shares in a non-retirement
account could result in a taxable gain or a loss.
- --------------------------------------------------------------------------------
The ability to redeem (that is, sell or exchange) Fund shares by telephone
is automatically established for your account unless you tell us in writing that
you do not want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
- Fund name.
- 10-digit account number.
- Name and address exactly as registered on that account.
- Social Security or Employer Identification number as registered on that
account.
B-24
<PAGE>
If you call to sell shares, the sale proceeds will be made payable to you,
as the registered shareholder, and mailed to your account's address of record.
If we follow reasonable security procedures, neither the Fund nor Vanguard
will be responsible for the authenticity of transaction instructions received by
telephone. We believe that these procedures are reasonable and that, if we
follow them, you bear the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
How to Sell Shares
You may withdraw any part of your account, at any time, by selling shares.
Sale proceeds are normally mailed within two business days after Vanguard
receives your request. The sale price of your shares will be the Fund's next-
determined net asset value after Vanguard receives all required documents in
good order.
Good order means that the request includes:
- Fund name and account number.
- Amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account.
- Signature guarantees (if required).
- Any supporting legal documentation that may be required.
- Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4 p.m. Eastern time) are processed at the next
business day's net asset value.
The Fund reserves the right to close any non-retirement or UGMA/UTMA
account whose balance falls below the minimum initial investment. The Fund will
deduct a $10 annual fee if your non-retirement account balance falls below
$2,500 or if your UGMA/UTMA account balance falls below $500. The fee is waived
if your total Vanguard account assets are $50,000 or more.
- --------------------------------------------------------------------------------
Some written requests require a signature guarantee from a bank, broker, or
other acceptable institution. A notary public cannot provide a signature
guarantee.
- --------------------------------------------------------------------------------
How to Exchange Shares
An exchange is the selling of shares of one Vanguard fund to purchase
shares of another.
Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate the exchange privilege, limit the
amount of an exchange, or reject any exchange, at any time, without notice.
B-25
<PAGE>
Because excessive exchanges can potentially disrupt the management of the
Fund and increase transaction costs, Vanguard limits exchange activity to two
substantive exchange redemptions (at least 30 days apart) from the Fund during
any 12-month period. "Substantive" means either a dollar amount large enough to
have a negative impact on the Fund or a series of movements between Vanguard
funds.
Before you exchange into a new Vanguard fund, be sure to read its
prospectus. For a copy and for answers to questions you might have, call
Investor Information.
<TABLE>
<CAPTION>
Selling or Exchanging Shares Account Type
<S> <C>
By Telephone All Types Except Retirement:
1-800-662-6273 Call Vanguard Tele-Account* 24 hours a
Vanguard Tele-Account day--or Client Services during business
1-800-662-2739 hours--to sell or exchange shares. You can
Client Services exchange shares from this Fund to open an
account in another Vanguard fund or to add to
an existing Vanguard fund account with an
identical registration.
Retirement:
You can exchange--but not sell--shares by
calling Tele-Account or Client Services. *You
must obtain a Personal Identification Number
through Tele-Account at least seven days
before you request your first redemption.
By Mail All Types Except Retirement:
First-class mail to: Send a letter of instruction signed by all regis-
The Vanguard Group tered account holders. Include the fund name
P.O. Box 2600 and account number and (if you are selling) a
Valley Forge, PA 19482 dollar amount or number of shares OR (if you
are exchanging) the name of the fund you want
Express or Registered mail to: to exchange into and a dollar amount or num-
The Vanguard Group ber of shares.
455 Devon Park Drive
Wayne, PA 19087 Retirement:
For information on how to request distributions
from.
o IRAs, call Client Services.
o SEP-IRAs, 403(b)(7) custodial accounts, and
Profit-Sharing and Money Purchase Pension
(Keogh) Plans, call Individual Retirement
Services at 1-800-662-2003.
Depending on your account registration type,
additional documentation may be required.
</TABLE>
B-26
<PAGE>
Automatically All Types Except Retirement:
Vanguard offers several ways to sell or
exchange shares automatically (see "Ser-
vices and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect a feature
when you opened your account.
It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Fund shareholders and so reserve
the right to delay your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------
A Note on Unusual Circumstances
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares 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 you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions on
selling or exchanging shares by mail in the "Redeeming Shares" section.
- --------------------------------------------------------------------------------
Fund and Account Updates
Statements and Reports
We will send you clear, concise account and tax statements to help you keep
track of your Vanguard/Windsor Fund account throughout the year, as well as when
you are preparing your income tax returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
markets, a report from the adviser, as well as a listing of its holdings and
other financial statements.
Confirmation Statement Sent each time you buy, sell, or exchange
shares; confirms the date and the amount of
your transaction.
Portfolio Summary Mailed quarterly; shows the market value of
your account at the close of the statement
period, as well as distributions, purchases,
sales, and exchanges for the current calendar
year.
Fund Financial Reports Mailed in June and December for this Fund.
B-27
<PAGE>
<TABLE>
<S> <C>
Tax Statements Generally mailed in January; report previous
year's dividend distributions, proceeds from
the sale of shares, and distributions from
IRAs or other retirement accounts.
Average Cost Statement Issued quarterly for taxable accounts
(accompanies your Portfolio Summary);
shows the average cost of shares that you
redeemed during the previous quarter, using
the average cost single category method.
Automated Telephone Access
Vanguard Tele-Account Toll-free access to Vanguard fund and
1-800-662-6273 account information--as well as some
Vanguard Tele-Account transactions--through any TouchTone(TM)
1-800-662-2739 telephone. Tele-Account provides total
Client Services return, share price, price change, and yield
quotations for all Vanguard funds; gives
your account balances and history (e.g., last
transaction, latest dividend distribution); and
allows you to sell or exchange fund shares.
Computer Access
Vanguard Online(SM) Use your personal computer to learn more
Keyword: Vanguard about Vanguard funds and services; keep in
touch with your Vanguard accounts; map out
a long-term investment strategy; and ask
questions, make suggestions, and send mes-
sages to Vanguard. Vanguard Online is
offered through America Online(R) (AOL). To
establish an AOL account, call 1-800-238-6336.
Vanguard on the Use your personal computer to visit Van-
World Wide Web guard's education-oriented website, which
http://www.vanguard.com provides timely news and information about
Vanguard funds and services; an on-line
"university" that offers a variety of mutual
fund classes; and easy-to-use, interactive
tools to help you create your own invest-
ment and retirement strategies.
</TABLE>
B-28
<PAGE>
Glossary of Investment Terms
Capital Gains Distribution
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
Cash Reserves
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank CDs, repurchase agreements, commercial paper, and
bankers acceptances.
Common Stock
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
Country Risk
The possibility that events within a country such as changes in regulation,
political or financial troubles, or natural disasters will adversely affect the
market value of securities issued by companies or governments in that country.
Currency Risk
The possibility that an American's foreign investment will lose money because of
unfavorable exchange rate movements.
Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.
Fixed-Income Securities
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
Growth and Income Stock Fund
A mutual fund that seeks moderate capital appreciation and some dividend income
by investing primarily in stocks.
Investment Adviser
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
B-29
<PAGE>
Mutual Fund
An investment company that pools the money of many people and invests it in a
variety of securities in an attempt to achieve a specific objective over time.
Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
Portfolio Diversification
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security, industry, or country.
Price/Earnings (P/E) Ratio
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
Value Stock Fund
A mutual fund that focuses on stocks of companies that, considering their
earnings and dividends, are attractively priced; these companies often pay
regular dividend income to shareholders.
Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low share
prices.
Yield
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
B-30
<PAGE>
Investor Information
Department
1-800-662-7447 (SHIP)
Text Telephone:
1-800-952-3335
For information on our funds, fund services, and retirement accounts; requests
for literature
Client Services Department
1-800-662-2739 (CREW)
Text Telephone:
1-800-662-2738
For information on your account, account transactions, account statements
Vanguard Brokerage Services
1-800-992-8327
For information on trading stocks, bonds, and options at reduced commissions
Vanguard Tele-Account(R)
1-800-662-6273 (ON-BOARD)
For 24-hour automated access
to price and yield, information
on your account, certain
transactions
Electronic Access to the Vanguard Mutual Fund Education and Information Center
On America Online(R)
Keyword: Vanguard
On the World Wide Web http://www.vanguard.com
To send e-mail to Vanguard
[email protected]
(C) 1997 Vanguard Marketing
Corporation, Distributor
B-31
<PAGE>
[LOGO] 100% Recycled
Paper
X34-4/97
<PAGE>
VOTE THIS PROXY CARD TODAY!
------
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
+ Please fold and detach card at perforation before mailing +
GEMINI II, INC. ("FUND")
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned, revoking previous proxies, hereby appoints John C. Bogle, J.
Lawrence Wilson and Raymond J. Klapinsky, or any one or more of them, attorneys,
with full power of substitution, to vote all shares of the Fund which the
undersigned is entitled to vote at the Special Meeting of Shareholders to be
held in the Majestic Building, Room 118A, Vanguard Financial Center, 100
Vanguard Boulevard, Malvern, PA on June 18, 1997 at 9:30 A.M., E.T., and at any
adjournments thereof. All powers may be exercised by a majority of said proxy
holders or substitutes voting or acting or, if only one votes and acts, then by
that one. This Proxy shall be voted on the proposal described in the Proxy
Statement as specified on the reverse side. Receipt of the Notice of the Meeting
and the accompanying Proxy Statement is hereby acknowledged.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN ENCLOSED ENVELOPE.
Date _________________
NOTE: Please sign exactly as your name
appears on this Proxy. When signing in a
fiduciary capacity, such as executor,
administrator, trustee, attorney,
guardian, etc., please so indicate.
Corporate and partnership proxies should
be signed by an authorized person
indicating the person's title.
_________________________________________
| |
| |
| |
| |
| |
|________________________________________|
Signature(s) (and Title(s), if applicable)
<PAGE>
VOTE THIS PROXY CARD TODAY!
------
YOUR PROMPT RESPONSE WILL SAVE YOUR FUND
THE EXPENSE OF ADDITIONAL MAILINGS
+ Please fold and detach card at perforation before mailing +
Please refer to the Proxy Statement discussion of this matter.
IF NO SPECIFICATION IS MADE, THE PROXY SHALL BE VOTED FOR THE PROPOSAL.
---
As to any other matter, said attorneys shall vote in accordance with their best
judgment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING:
---
Please vote by filling in the appropriate box below.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C>
1. To approve an Agreement and Plan of [ ] [ ] [ ]
Reorganization providing for the acquisition of
substantially all the assets of Gemini II, Inc. (the "Fund") by the
Windsor Fund series of Vanguard/ Windsor Funds, Inc. ("Windsor
Fund") in exchange for shares of Windsor Fund, and the liquidation
and dissolution of the Fund.
</TABLE>
