<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (333-23941)
Pre-Effective Amendment No. 1
Post-Effective Amendment No. ____
(Check appropriate box or boxes)
VANGUARD/WINDSOR FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
(610) 669-6000
(Area Code and Telephone Number)
100 Vanguard Boulevard, (PO Box 2600), Valley Forge, PA 19482
(Address of Principal Executive Offices: Number, Street, City, State, Zip Code)
Raymond J. Klapinsky, Senior Vice President and General Counsel
The Vanguard Group, Inc.
100 Vanguard Boulevard, (PO Box 2600), Valley Forge, PA 19482
(Name and Address of Agent for Service: Number, Street, City, State, Zip Code)
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective under the Securities Act of 1933.
Calculation of Registration Fee Under the Securities Act of 1933
------------------------------------------------------------------------
No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940.
A Rule 24f-2 Notice for the Registrant's fiscal year ended October 31, 1996, was
filed on December 30, 1996.
It is proposed that this filing will become effective on April 24, 1997,
pursuant to Rule 488 under the Securities Act of 1933.
<PAGE>
FORM N-14
VANGUARD/WINDSOR FUNDS, INC.
The following documents are incorporated by reference into this
Registration Statement on Form N-14 of Vanguard/Windsor Funds, Inc. (File No.
333-23941) and any amendments thereto.
o Prospectus and Statement of Additional Information, each dated February 28,
1997, of Vanguard/Windsor Funds, Inc. Filing: Post-Effective Amendment No.
88 to the Registration Statement of Vanguard/Windsor Funds, Inc. on Form
N-1A; File No. 811-834; Filing Date: 2/21/97.
o Registration Statement of Gemini II, Inc. on Form N-1A; File No. 811-4168;
Filing Date: 3/5/97.
o Annual Report of Vanguard/Windsor Funds, Inc. dated October 31, 1996; File
No. 811-834; Filing Date: 12/22/95.
o Annual Report of Gemini II, Inc. dated December 31, 1996; File No.
811-4168; Filing Date: 3/7/96.
<PAGE>
VANGUARD/WINDSOR FUNDS, INC.
WINDSOR FUND SERIES
CROSS REFERENCE SHEET
(Pursuant to Rule 481 (a) under the
Securities Act of 1933)
<TABLE>
<CAPTION>
N-14 Item No. and Caption Location in Prospectus
- ------------------------- ----------------------
<S> <C>
PART A
1. Beginning of Registration Statement and Cover Page of Registration Statement; Front Cover Page of
outside Front Cover Page of Prospectus Prospectus
2. Beginning and outside Back Cover Page of Table of Contents
Prospectus
3. Synopsis Information and Risk Factors Summary - Risk Factors; Comparisons of Investment
Policies and Risk
4. Information About the Transaction Summary; Reasons for the Transaction; Information About the
Transaction
5. Information About the Registrant Prospectus Cover Page; Summary; Information about the Transaction; Comparison
of Investment Policies and Risks; Information Filed with the Securities and
Exchange Commission
6. Information About the Company Being Acquired Prospectus Cover Page; Summary; Comparison of Investment Policies and Risks;
Information Filed with the Securities and Exchange Commission
7. Voting Information Summary; Notice of Special Meeting of Shareholders; Voting
Information; Voting Information and Principal Stockholders.
8. Interest of Certain Persons and Experts None
9. Additional Information Required for Not Applicable
Reoffering by Persons Deemed to be Underwriters
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-14 Item No. and Caption Location in Statement of Additional Information
- ------------------------- -----------------------------------------------
<S> <C>
PART B
10. Cover Page Cover Page of Statement of Additional Information
11. Table of Contents Not Applicable
12. Additional Information about the Registrant Incorporation of Documents by Reference in the Statement of
Additional Information
13. Additional Information about the Company Incorporation of Documents by Reference in the Statement of
being Acquired Additional Information
14. Financial Statements Incorporation of Documents by Reference in the Statement of
Additional Information
</TABLE>
PART C - OTHER INFORMATION
Part C contains the information required by Items 15-17 under the items set
forth in the form.
<PAGE>
GEMINI II LOGO
April , 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.
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 and the Windsor
Fund 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.
Sincerely,
John C. Bogle
Chairman of the Board
<PAGE>
GEMINI II LOGO
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To the Shareholders of Gemini II:
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
Thursday, June o, 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 , 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>
COMBINED PROXY STATEMENT/PROSPECTUS
Dated April , 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 23,
1997 (the "Record Date"), are entitled to vote at the meeting or any adjourned
session. Each share is entitled to one vote. As of the Record Date, there were
issued and outstanding o 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 instructions 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 transfer, 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
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
<PAGE>
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, telegraph and personal interviews. The
Fund has engaged Corporate Investor Communications to solicit proxies from
brokers, banks, other institutional holders and individual shareholders for an
approximate fee, including out-of-pocket expenses, of $ o .
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 is accompanied by the Prospectus of Windsor Fund dated
February 28, 1997, and an annual report for Windsor Fund for its fiscal year
ended October 31, 1996, which are incorporated by reference into this
Prospectus/Proxy Statement and included hereto as Exhibits B and C,
respectively. 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 April 30, 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 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.
<PAGE>
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 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 below under "Reasons for the Transaction,"
the Board of Directors of the Fund has unanimously concluded that the
Transaction is in the best interests of the shareholders of the Fund and,
therefore, recommends approval of the Agreement and 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 Record Date will be entitled to
vote at the Special Meeting.
<PAGE>
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 Consequences."
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 market-place. 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
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 in common stocks, which are selected on the basis
of fundamental investment value in the same manner as 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 stock. 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.
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 30 mutual funds with more than 90 distinct investment portfolios and
total assets in excess of $257 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
<PAGE>
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 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
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.
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,
<PAGE>
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.
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.
Expense Tables
On February 28, 1997, the Fund had total net assets of approximately
$336,832,000. On the same date, Windsor Fund had total net assets of
approximately $18,115,245,000. Primarily because of Windsor Fund's asset size,
its expense ratio is lower that 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.
<PAGE>
PRO FORMA FEE TABLE FOR THE FUND AND WINDSOR FUND
(Unaudited)
<TABLE>
<CAPTION>
Actual
-------------------------------
The Fund Windsor Fund Pro Forma
-------- ------------ After
(FY Ended 12/31/96) (FY Ended 10/31/96 Transaction
------------------- ------------------ -----------
<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
Management and
Administrative Expenses: 0.13 0.18% o
Investment Advisory
Expenses: 0.28% 0.10% o
12b-1 Marketing Fees: None None None
Other Expenses:
Marketing and Distri-
bution Costs: 0.00 0.02% o
Miscellaneous Expenses
(e.g. taxes, auditing): 0.04 0.01% o
Total Operating Expenses
(Expense Ratio): 0.45 0.31% o
</TABLE>
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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
<PAGE>
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.
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.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
For a Share Outstanding Throughout Each Year 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Shares
Net Asset Value, Beginning of Year..................... $ 9.33 $ 9.34 $ 9.33 $ 9.33 $ 9.34
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income.................................. 1.94 1.79 1.74 1.66 1.66
Distributions from Net Investment Income............... (1.93) (1.80) (1.73) (1.66) (1.67)
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year........................... $ 9.34 $ 9.33 $9.34 $ 9.33 $ 9.33
==================================================================================================================
Capital Shares
Net Asset Value, Beginning of Year..................... $26.35 $19.03 $22.10 $18.71 $16.28
- ------------------------------------------------------------------------------------------------------------------
Realized Net Gain on Investments....................... 3.27 4.01 1.73 2.69 1.77
Distributions from Realized Capital Gains.............. (.24) (.11) -- -- (.08)
Provision for Taxes on Capital Gains Retained.......... (1.06) (1.37) (.61) (.94) (.37)
Unrealized Appreciation (Depreciation)................. .43 4.79 (4.19) 1.64 1.71
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year............................... $28.75 $26.35 $19.03 $22.10 $18.71
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
For a Share Outstanding Throughout Each Year 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Shares
Net Asset Value, Beginning of Year..................... $ 9.34 $ 9.37 $ 9.38 $ 9.39 $ 9.73
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income.................................. 1.65 1.63 1.58 1.41 1.38
Distributions from Net Investment Income............... (1.65) (1.66) (1.59) (1.42) (1.72)
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year........................... $ 9.34 $ 9.34 $ 9.37 $ 9.38 $ 9.39
==================================================================================================================
Capital Shares
Net Asset Value, Beginning of Year..................... $11.51 $17.44 $16.56 $12.98 $13.87
- ------------------------------------------------------------------------------------------------------------------
Realized Net Gain on Investments....................... 1.17 .38 1.14 1.09 3.14
Distributions from Realized Net Gain................... (.22) (.11) (.19) (.22) (.04)
Provision for Taxes on Capital Gains Retained.......... (.53) (.09) (.33) (.29) (1.07)
Unrealized Appreciation (Depreciation)................. 3.75 (6.11) .26 3.00 (2.92)
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year............................... $16.28 $11.51 $17.44 $16.56 $12.98
==================================================================================================================
</TABLE>
<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
to 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.
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 Risk" below, and the accompanying Prospectus of
Windsor Fund for details.
<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. It is expected that the assets of the Fund will
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, on November 15, 1996, 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
following its conversion to an open-end investment company. 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
o 1985 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 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
<PAGE>
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. While Windsor Fund's past results have exceeded those achieved
by the Fund, 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.
Calendar Year The Fund Windsor Fund S&P 500
-------------- -------- ------------ -------
1987 6.36 1.23 5.26
1988 24.85 28.70 16.61
1989 11.48 15.02 31.67
1990 - 15.46 - 15.50 - 3.10
1991 34.86 28.55 30.47
1992 18.09 16.50 7.62
1993 21.63 19.37 10.08
1994 - 2.48 - 0.15 1.32
1995 38.20 30.15 37.58
1996 16.17 26.36 22.96
------- ------- -------
Cumulative 279.51 271.70 314.91
Average Annual Rate 14.27 14.03 15.29
<PAGE>
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 o, 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
assets in exchange for shares of Windsor Fund having an aggregate net asset
value equal to the aggregate value of net assets so transferred as of 4:00 p.m.
Eastern Time on the Closing Date. The stock transfer books of the Fund will be
permanently closed as of 4:00 p.m. Eastern Time on the Closing Date and only
requests for redemption of shares of the Fund received in proper form prior to
4:00 p.m. 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 the
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 p.m. Eastern Time on the Closing
Date.
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 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 on the
Closing Date and the obligations of the Fund under the Plan shall not be
effective.
<PAGE>
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 $*. 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 $*.
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.
Litigation
Neither the Fund nor Windsor Fund is involved in any litigation.
<PAGE>
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. Shares of Windsor Fund shall
be issued to shareholders of the Fund in a certificate form, which is the
standard procedure for Vanguard Funds.
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").
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 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.
<PAGE>
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 accompanying 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 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
<PAGE>
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 38% of
Windsor Fund's total net assets. On the same date, the Fund's top ten holding
represented o% 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.
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.
<PAGE>
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.
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;
(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 15% of total assets taken at the lower of their
value or cost of its total assets; and
(f) pledge, mortgage or hypothecate any of its assets to an
extent greater than 5% of its total assets.
*There is no provision for the Fund to borrow money.
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
<PAGE>
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 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 1, 1997 the following held more than 5% of the outstanding
shares of the Fund:
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
Raymond J. Klapinsky, Secretary
<PAGE>
GEMINI II
WINDSOR FUND
COMBINED PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Introduction...................................................................................................0
Notice of Special Meeting of Shareholders......................................................................o
Cover Page.....................................................................................................o
Summary........................................................................................................o
Proposed Transaction....................................................................................o
Voting Information......................................................................................o
Tax Consequences........................................................................................o
Investment Objectives and Policies......................................................................o
Management, Administrative and Distribution Services....................................................o
Investment Adviser and Advisory Fees....................................................................o
Expense Tables..........................................................................................o
Purchase Price, Redemption Price, Dividends and Distributions...........................................o
Risk Factors............................................................................................o
Reasons for the Transaction....................................................................................o
Performance Summary............................................................................................o
Financial Highlights ..........................................................................................o
Information About the Transaction..............................................................................o
Method of Carry Out Reorganization......................................................................o
Conditions Precedent to Closing.........................................................................o
Expenses of the Reorganization..........................................................................o
Tax Considerations......................................................................................o
Description of Shares of Windsor Fund...................................................................o
Capitalization.................................................................................................o
Comparison of Investment Policies and Risks....................................................................o
Investment Policies and Risk Factors....................................................................o
Information Filed with The Securities and Exchange Commission..................................................o
Voting Information and Principal Stockholders..................................................................o
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>
EXHIBITS TO COMBINED PROXY STATEMENT/PROSPECTUS
EXHIBITS
A. Agreement and Plan of Reorganization between the Fund and Vanguard/Windsor
Funds, Inc. on behalf of Windsor Fund.
B. Prospectus dated February 28, 1997 of Windsor Fund
C. Annual Report of Windsor Fund for the fiscal year ended October 31, 1996
<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
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 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 merger into the Windsor Fund. After the merger,
holders may request a certificate representing the number of whole shares of
Windsor Fund they own.
<PAGE>
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 determined shall 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.
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, 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 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:
<PAGE>
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 ($1.00 par value) of which approximately o
shares were issued and outstanding on the date hereof. All of its presently
outstanding shares are validly issued, fully paid and non-assessable by it.
c. Gemini II is duly registered as a diversified, open-end
management investment company under the Investment Company Act of 1940.
d. There has been mailed to each stockholder of record of
Gemini II entitled to vote at the meeting of stockholders, at which action on
this Agreement is to be considered, a Combined Proxy Statement/Prospectus which
complies in all material respects with the applicable provisions of the Federal
securities laws and the rules and regulations thereunder.
The financial statements appearing in the Gemini annual
report for the year ended December 31, 1996, audited by Price Waterhouse LLP, a
copy of which has been delivered to Windsor Fund, and similar unaudited
financial statements and other financial data for the quarter ended nearest to
the Closing Date will be delivered to Windsor Fund by the principal financial
officer of Gemini II prior to Closing, fairly present the financial position of
Gemini II as of the respective dates indicated and the results of its operations
and changes in net assets for the respective periods indicated, in conformity
with generally accepted accounting principles applied on a consistent basis.
5. Representations and Warranties by Vanguard/Windsor Funds, Inc.
Vanguard/Windsor Funds, Inc. represents and warrants that:
a. Vanguard/Windsor Funds, Inc. is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Maryland and has all corporate power and authority to conduct its business as
such business is presently being conducted.
b. Vanguard/Windsor Funds, Inc. has duly authorized capital
consisting of o shares of common stock ($.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 o shares of common stock of the Windsor Fund series
and approximately o 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
<PAGE>
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 herein 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, 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 whatever 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 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.
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.
<PAGE>
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.
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
<PAGE>
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 the 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 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 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 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).
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 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;
<PAGE>
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 Fund.
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.
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 further no
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
<PAGE>
judgment of the Board of Directors or Chairman of the Board taking such action,
such waiver will not have 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 acceptable 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 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 postpaid, addressed to Gemini
II or Vanguard/Windsor Funds, Inc., as the case may be, at 100 Vanguard
Boulevard (P.0. Box 2600), Valley Forge, Pennsylvania 19482.
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.
<PAGE>
Attest: GEMINI II, INC.
By:________________________
_______________________________ John J. Brennan, President
Raymond J. Klapinsky, Secretary
(Corporate Seal)
Attest: VANGUARD/WINDSOR FUNDS, INC.
_______________________________ By: _______________________
Raymond J. Klapinsky, Secretary John J. Brennan, President
(Corporate Seal)
<PAGE>
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 2
Financial Highlights 3
A Word About Risk 4
The Fund's Objectives 4
Who Should Invest 4
Investment Strategies 5
Investment Policies 7
Investment Limitations 8
Investment
Performance 9
Share Price 9
Dividends, Capital
Gains, and Taxes 10
The Fund and
Vanguard 10
Investment Adviser 11
General Information 12
Investing with
Vanguard 13
<PAGE>
Services and
Account Features 13
Types of Accounts 14
Distribution Options 15
Buying Shares 15
Redeeming Shares 16
Fund and Account
Updates 19
Glossary Inside Back Cover
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.
<PAGE>
Fund Profile Vanguard/Windsor Fund
Who Should Invest (page 4)
* Investors seeking a growth and income stock mutual fund as part of a balanced
and diversified investment program.
* Investors seeking growth of their capital over the long term--at least
five years.
* Investors seeking some dividend income.
Who Should Not Invest
* Investors unwilling to accept significant fluctuations in share price.
Risks of the Fund (pages 4-8)
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 10)
Dividends are paid in June and December. Capital gains, if any, are paid in
December.
<PAGE>
Investment Adviser (page 11)
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 13)
* Telephone Redemption
* Vanguard Direct Deposit Service(sm)
* Vanguard Automatic Exchange Service(sm)
* Vanguard Fund Express(R)
* Vanguard Dividend Express(sm)
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)
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.
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.
<PAGE>
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.
<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 1992 1991 1990 1989 1988 1987
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $15.55 $14.55 $14.95 $12.37 $12.79 $9.72 $15.17 $14.13 $14.22 $13.85
- ---------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .43 .44 .44 .37 .49 .58 .74 .71 .66 .78
Net Realized and
Unrealized Gain (Loss)
on Investments 2.85 1.86 .42 2.98 .50 3.55 (4.59) 1.51 2.33 (.11)
- ---------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations 3.28 2.30 .86 3.35 .99 4.13 (3.85) 2.22 2.99 .67
- ---------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net
Investment Income (.46) (.44) (.37) (.39) (.57) (.74) (.75) (.63) (.87 (.30)
Distributions from
Realized Capital Gains (1.38) (.86) (.89) (.38) (.84) (.32) (.85) (.55) (2.21) --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (1.84) (1.30) (1.26) (.77) (1.41) (1.06) (1.60) (1.18) (3.08) (.30)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $16.99 $15.55 $14.55 $14.95 $12.37 $12.79 $9.72 $15.17 $14.13 $14.22
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Total Return 23.16% 17.80% 6.35% 28.29% 9.30% 44.69% -27.93% 17.05% 27.01% 4.62%
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of
Period (Millions) $15,841 $13,008 $11,406 $10,537 $8,250 $7,859 $5,841 $8,313 $5,920 $4,848
Ratio of Expenses to
Average Net Assets 0.31% 0.45% 0.45% 0.40% 0.26% 0.30% 0.37% 0.41% 0.46% 0.43%
Ratio of Net Investment
Income to Average
Net Assets 2.75% 3.01% 3.11% 2.68% 3.89% 4.84% 5.82% 5.07% 5.08% 4.86%
Portfolio Turnover Rate 34% 32% 34% 25% 32% 36% 21% 34% 24% 46%
Average Commission
Rate Paid $.0579 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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PLAIN TALK ABOUT
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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.
<PAGE>
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.
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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.
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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.
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.
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.
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.
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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.
<PAGE>
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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.
* 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).
* The Fund reserves the right to stop offering shares at any time.
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
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
- --------------------------------------------------------------------------------
<PAGE>
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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.
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PLAIN TALK ABOUT
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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.
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.
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."
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.
<PAGE>
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.)
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.
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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%.
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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.
<PAGE>
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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" 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.
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PLAIN TALK ABOUT
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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:
* To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
* To make it easier to trade.
* 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.
Investment Limitations
To reduce risk and maintain diversification, the Fund has adopted limits on some
of its investment policies. Specifically, the Fund will not:
* Invest more than 25% of its assets in any one industry.
* Borrow money, except for the purpose of meeting shareholder requests to
redeem shares. With respect to 75% of its assets, the Fund will not:
* Invest more than 5% in the securities of any one company.
* 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.
<PAGE>
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
- --------------------------------------------------------------------------------
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.
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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.
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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.
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"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
<PAGE>
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. n 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. n 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. n 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.
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.
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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
- --------------------------------------------------------------------------------
<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.
<PAGE>
================================================================================
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.
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.
<PAGE>
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 . Please call us to
request copies.
Services and Account Features
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.
Telephone Redemptions Automatically set up for this Fund unless you
(Sales and Exchanges) notify us otherwise.
Vanguard Direct Deposit Automatic method for depositing your paycheck
Service or U.S. government payment (including Social
Security and government pension checks) into
your account.
Vanguard Automatic Exchange Automatic method for moving a fixed amount of
Service money from one 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 schedule or whenever you wish.*
<PAGE>
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 Vanguard fund account.
Vanguard Brokerage Services A cost-effective way to trade stocks, bonds,
(VBS) and options on major 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 information and
the appropriate forms.
*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.
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
Retirement Investments plan based on an existing corporate or
(Vanguard is not the institutional plan. These accounts are
custodian or trustee.) established by the custodian or trustee of the
existing plan.
For an Organization To open an account as a corporation,
partnership, or other entity. These accounts
may require a corporate resolution or
<PAGE>
other documents to name the individuals
authorized to act. $3,000 minimum initial
investment.
Retirement
For an Individual Retirement To open a retirement account in the name of an
Account (IRA) individual. IRAs can be established with a
(Vanguard Fiduciary Trust contribution, a direct roll-over from an
Company is the custodian.) employer's plan, such as a 401(k), or an asset
transfer or rollover 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
Pension Plan Account (SEP-IRA) employee. SEPs allow employers to make
(Vanguard Fiduciary Trust deductible contributions directly to IRAs
Company is the custodian.) established by their employees. A SEP can be
established by people who are self-employed,
small-business owners, partnerships, or
corporations.
For a Qualified Retirement To open a retirement account that allows
Program Account small-business owners or people who are
(Vanguard Fiduciary Trust self-employed to make tax-deductible retirement
Company can be the trustee.) contributions for themselves and their
employees into Profit-Sharing and Money
Purchase Pension (Keogh) plans.
Types of Accounts (continued)
For a 403(b)(7) Custodial To open a retirement account that allows
Account (Vanguard Fiduciary employees of tax-exempt institutions (for
Trust Company is the example, schools or hospitals) to make pre-tax
custodian.) retirement contributions.
Distribution Options
You can receive distributions of dividends and/or capital gains in a number of
ways:
<PAGE>
Reinvestment Dividends and capital gains are automatically
reinvested in additional shares of the Fund
unless you request a different distribution
method.
Dividends in 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
in Cash check and mailed to your account's address of
record.
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.
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.
<PAGE>
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.
- --------------------------------------------------------------------------------
Buying Shares (continued)
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.
- --------------------------------------------------------------------------------
---------
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.
<PAGE>
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:
[Check Mark] Fund name.
[Check Mark] 10-digit account number.
[Check Mark] Name and address exactly as registered on that account.
[Check Mark] Social Security or Employer Identification number as registered
on that account.
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:
[Check Mark] Fund name and account number.
[Check Mark] Amount of the transaction (in dollars or shares).
[Check Mark] Signatures of all owners exactly as registered on the account.
[Check Mark] Signature guarantees (if required).
[Check Mark] Any supporting legal documentation that may be required.
[Check Mark] Any certificates you are holding for the account.
<PAGE>
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.
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.
Selling or Exchanging Shares Account Type
By Telephone All Types Except Retirement:
1-800-662-6273 Call Vanguard Tele-Account* 24 hours a day--or
Vanguard Tele-Account Client Services during business hours--to sell
1-800-662-2739 or exchange shares. You can exchange shares
Client Services from this Fund to open an account in another
Vanguard fund or to add to an existing Vanguard
fund account with an identical registration.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
The Vanguard Group registered account holders. Include the fund
P.O. Box 2600 name and account number and (if you are
Valley Forge, PA 19482 selling) a dollar amount or number of shares OR
(if you are exchanging) the name of the fund
Express or Registered mail to: you want to exchange into and a dollar amount
The Vanguard Group or number 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.
Automatically All Types Except Retirement:
Vanguard offers several ways to sell or
exchange shares automatically (see "Services
and Account Features"). Call Investor
Information for the appropriate booklet and
application if you did not elect a feature when
you opened your account.
</TABLE>
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.
<PAGE>
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.
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.
<PAGE>
Vanguard Tele-Account Toll-free access to Vanguard fund and account
information--as well as some transactions--
through any TouchTone(TM) telephone.
Tele-Account provides total 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.
Automated Telephone Access
1-800-662-6273
Vanguard Tele-Account
1-800-662-2739
Client Services
Computer Access
Vanguard Online(sm) Use your personal computer to learn more about
Keyword: Vanguard 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 messages
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 Vanguard's
World Wide Web education-oriented website, which provides
http://www.vanguard.com 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 investment and retirement
strategies.
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.
<PAGE>
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.
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
<PAGE>
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 com-panies 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.
<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)
<PAGE>
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
P022N
<PAGE>
Vanguard/
Windsor Fund
Annual Report
October 31, 1996
Contents
A Message To Our Shareholders..............................1
The Markets In Perspective.................................3
Report From The Adviser....................................5
Portfolio Profile..........................................8
Performance Summary.......................................10
Financial Statements......................................11
Report Of Independent Accountants.........................19
Directors And Officers.....................Inside Back Cover
<PAGE>
Vanguard has always strived to be the standard-bearer
for mutual fund disclosure, going well beyond the
"letter of the law" in our shareholder communications.
During the past year, we raised the standard once again
by rewriting and reformatting our Fund prospectuses.
They are designed to ensure that prospective investors
fully understand, before they make an investment, each
Fund's investment strategies, risks, and costs. In that
spirit, we have redesigned our Annual Reports to
shareholders, which provide a comprehensive discussion
and analysis of the year's results in the context of
each Fund's investment objectives and policies. Since
Vanguard has long been recognized for the quality and
content of these Fund Reports, our overriding objective
was to maintain the character of the previous Reports,
while adding information to assist shareholders in
understanding the investment characteristics of their
Fund.
The new Fund Reports include a message to shareholders from Chairman John C.
Bogle and President John J. Brennan. This Message
continues to provide a candid assessment of the Fund's
performance relative to an appropriate unmanaged market
benchmark and a peer group of mutual funds with similar
investment policies. It also reviews the principal
factors contributing to--and detracting from--the
returns earned by the Fund. To help you evaluate your
Fund's current-year performance, the Message includes a
discussion of the Fund's long-term investment results,
as well as a look ahead to the prospects for the coming
year. A recap of the financial markets, which had been
included as part of the Chairman's letter, now appears
in The Markets In Perspective. This overview covers the
world's financial markets, putting the results of the
Fund's strategy in a global perspective.
The Portfolio Profile represents an addition to our Fund Reports. In this day
and age, many investors use detailed statistical
information to evaluate their mutual fund holdings, and
our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector
diversification, volatility, top-ten holdings, among
others--that ultimately define how a Fund is likely to
perform in various market environments. For this
information to be used effectively, we include a brief
description of the profiled characteristics. The Report
From The Adviser (for our traditionally managed Funds)
now covers specific topics that we have defined as
being the important ones for the adviser to
address--and we do our best to ensure that this Report
is written in the same simple and candid manner that
characterizes all Vanguard communications. Finally,
each Adviser's Report will include an inset reminder of
the adviser's basic investment philosophy.
We trust that this redesigned Fund Report will continue to meet your need for
a fair, candid, and clear presentation of your Fund's
investment results and a thorough portfolio review. We
welcome any comments that you might have at any time
regarding these Reports.
Directors And Officers
John C. Bogle, Chairman of the Board and Director of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group;
Director of Chris-Craft Industries, Inc.
John J. Brennan, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
Robert E. Cawthorn, Chairman Emeritus and Director of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Westinghouse Electric Corp.
Barbara Barnes Hauptfuhrer, Director of The Great Atlantic and Pacific Tea
Co., Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
<PAGE>
Bruce K. MacLaury, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
Burton G. Malkiel, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
Alfred M. Rankin, Jr., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
John C. Sawhill, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.
and President of New York University; Director of Pacific Gas and
Electric Co., Procter & Gamble Co., and NACCO Industries.
James O. Welch, Jr., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
and Kmart Corp.
J. Lawrence Wilson, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
Other Fund Officers
Raymond J. Klapinsky, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies
in The Vanguard Group.
Richard F. Hyland, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
Karen E. West, Controller; Principal of The Vanguard Group, Inc.; Controller
of each of the investment companies in The Vanguard Group.
Other Vanguard Officers
Robert A. DiStefano, Senior Vice President, Information Technology.
James H. Gately, Senior Vice President, Individual Investor Group.
Ian A. MacKinnon, Senior Vice President, Fixed Income Group.
F. William McNabb III, Senior Vice President, Institutional.
Ralph K. Packard, Senior Vice President and Chief Financial Officer.
<PAGE>
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
The Vanguard Family of Funds
EQUITY AND BALANCED FUNDS
Growth and Income Funds
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
Balanced Funds
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
Growth Funds
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
Aggressive Growth Funds
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
International Funds
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
<PAGE>
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
Money Market Funds
Vanguard Money Market Reserves
Vanguard Admiral Funds
Income Funds
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
Tax-Exempt Money Market Funds
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
Tax-Exempt Income Funds
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q220-10/96
<PAGE>
Fellow Shareholder,
Windsor Fund, participating fully and vigorously in a spirited bull market for
stocks, provided a total return of +23.2% in the twelve months ended October 31,
1996--our 38th fiscal year. We surpassed the return on the average competing
fund but fell just short of that provided by the unmanaged Standard & Poor's 500
Composite Stock Price Index.
The following table compares Windsor's total return (capital change
plus reinvested dividends) for the year with those of the S&P 500 Index, which
is dominated by blue-chip stocks, and the average value (growth and income)
mutual fund, the peer group that best reflects the investment philosophy Windsor
has maintained over the years.
- ----------------------------------------------------------------------------
Total Return
Fiscal Year Ended
October 31, 1996
- ----------------------------------------------------------------------------
Vanguard/Windsor Fund +23.2%
Average Value Fund +21.4%
- ----------------------------------------------------------------------------
S&P 500 Index +24.1%
- ----------------------------------------------------------------------------
The Fund's return is based on an increase in net asset value from
$15.55 per share on October 31, 1995, to $16.99 per share on October 31, 1996,
with the latter figure adjusted for dividends of $.46 per share paid from net
investment income and a distribution of $1.38 per share paid from net realized
capital gains.
Fiscal 1996 Performance Overview
In the twelve months ended October 31, the stock market flourished in an ideal
environment of moderate economic growth and rising corporate profits accompanied
by low inflation. Interest rates fluctuated considerably, first declining amid
expectations of an economic slowdown, then rising sharply as it became apparent
that the economy was accelerating. But after another course reversal in the
final two months of the fiscal year, interest rates and bond prices had nearly
returned to their levels of a year earlier.
In contrast, the stock market's advance in this banner year was
remarkably steady, with the S&P 500 Index providing positive returns in eleven
of the twelve months ended October 31, 1996. Both growth stocks and value stocks
performed well. Returns on these two groups, while very similar over longer
periods, often diverge over shorter periods. In fiscal 1996, value stocks, as
measured by the S&P/BARRA Value Index, held the edge with a return of +24.6%
versus +23.7% for the S&P/BARRA Growth Index.
As usual, however, not all sectors of the market marched to the same
drumbeat. The highest-performing sector of the market during the fiscal year
(with a return of +39.0%) was financial stocks, and Windsor's overweighting in
this group gave the Fund's performance a nice boost versus both the S&P 500
Index and the average value fund. So, too, the Fund benefited from its
underweighting in utilities stocks, the weakest sector (+1.3%), and from
excellent stock selections in the financial and technology sectors. Holdings in
the basic-materials sector performed poorly versus the S&P 500 Index, however.
It should be noted that the unmanaged S&P 500 Index is a 100% stock
portfolio and includes no cash whatsoever, which in a bull market gives it an
advantage over most equity mutual funds. Equity funds typically hold a small
portion (5% to 10%) of their assets in interest-bearing cash equivalents to
provide liquidity or to reflect recent cash inflows awaiting investment in
equities. Indeed, on its stock holdings alone, Windsor Fund earned a return of
+24.9% during the fiscal year, slightly ahead of the S&P 500 Index return of
+24.1%. However, the overall total return of the Fund was reduced by 1.7%
because of its cash holdings.
<PAGE>
Long-Term Performance Overview
Windsor Fund's fiscal 1996 results added to our significant long-term advantage
over the average value fund. However, over the past decade, neither the Fund nor
our average competitor has matched the S&P 500 Index. The returns for the past
ten years are summarized in the adjacent table.
- ------------------------------------------------------------------------------
Total Return
10 Years Ended October 31, 1996
- ------------------------------------------------------------------------------
Average Final Value of
Annual a $10,000
Rate Initial Investment
Vanguard/Windsor Fund +13.4% $35,091
- ------------------------------------------------------------------------------
Average Value Fund +12.6% $32,641
- ------------------------------------------------------------------------------
S&P 500 Index +14.7% $39,283
- ------------------------------------------------------------------------------
We should emphasize that future returns from the stock market may be
lower than those of the past decade, which were unusually high by historical
standards. Indeed, with stock prices at lofty levels by several measures,
investors have ample reason to expect lower returns in the coming decade.
With respect to Windsor Fund's return versus that of the S&P 500 Index,
we note that the Index is a tough standard to match, since it is a theoretical
construct that bears none of the "real-world" costs that all mutual funds incur.
Also, as discussed earlier, the Fund's cash position is a detriment to its
performance versus the S&P 500 Index when stock prices are rising, as during
most of the past decade. Charles T. Freeman, Windsor's portfolio manager since
December 31, 1995, has gradually decreased the Fund's cash position and
increased its exposure to equities to 89% of assets at fiscal year end. Mr.
Freeman intends to maintain the Fund's equity exposure at 90% or higher, up from
a previous "floor" of about 80%. This change, which brings Windsor's policy into
line with that of our other actively managed equity funds, has been endorsed by
the Board of Directors.
That said, the Fund's equity position remains highly concentrated, with
38% of its assets in its ten largest positions. (For the average value fund,
this figure is about 25%.) As a result, our returns may often diverge from those
of the market and our peers.
In Summary
The U.S. stock market has been on the rise--with only a few, relatively brief
setbacks--for more than 14 years. So now seems an appropriate time to state the
obvious, namely that the ever-present risks of investing in stocks may be higher
now than for some time. Certainly, the sailing will not always be smooth in the
future. However, we believe that investors who "stay the course," with a
balanced investment portfolio of stock funds, bond funds, and money market funds
consistent with their own financial objectives, have little to fear from rough
seas in the financial markets.
John C. Bogle John J. Brennan
Chairman of the Board President
November 11, 1996
The Markets In Perspective: Fiscal Year Ended October 31, 1996
<PAGE>
U.S. Equity Markets
The past twelve months were truly rewarding for common-stock investors in the
United States, particularly those who emphasized larger companies. As noted in
the table, the Standard & Poor's 500 Composite Stock Price Index gained 24.1%
for the fiscal year, while the Russell 2000 Small Stock Index posted a 16.6%
advance. The strong absolute returns can be attributed primarily to solid
earnings growth, continued low inflation, and the expectation on the part of
investors that this environment will prevail over the near term.
Among larger-capitalization issues, the best performing sector was
financial, with a 39.0% advance. Leading this group were banks and brokerage
firms. Banks benefited from the relative stability of economic growth--which
could be expected to result in both growing demand for loans and low default
rates; brokerage firms continued to reap the benefits of positive equity
markets. Energy issues also posted very strong results (33.1%), reflecting the
pronounced increase in oil prices from $17.98 per barrel to $23.35 during the
past twelve months.
Technology issues probably exhibited the greatest disparity of any
sector. The best performers were generally larger companies with dominant
positions in their industries; many of these firms rose 30% or more compared to
16.9%, in aggregate, for the technology holdings in the S&P 500 Index. By
contrast, technology was the worst-performing sector within the Russell 2000
Index, with a scant 2.9% return over the fiscal year.
- -----------------------------------------------------------------------------
Average Annualized Returns
Periods Ended October 31, 1996
1 Year 3 Years 5 Years
- -----------------------------------------------------------------------------
Equity
S&P 500 Index 24.1% 17.7% 15.5%
Russell 2000 Index 16.6 11.2 14.8
MSCI-EAFE Index 10.8 6.9 8.0
- -----------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 5.9% 5.6% 7.7%
Lehman 10-Year Municipal
Bond Index 5.0 5.2 7.7
Salomon 90-Day U.S. Treasury Bills 5.3 5.0 4.4
- -----------------------------------------------------------------------------
Other
Consumer Price Index 3.0% 2.8% 2.9%
- -----------------------------------------------------------------------------
In sum, investors displayed a strong preference for companies with
"predictable" earnings streams. One unusual note: the price/earnings ratio of
the S&P 500 Index rose 17% (from 15.8 to 18.5) during the last twelve months,
despite a rise in interest rates. In general, the P/E ratio moves inversely with
interest rates.
U.S. Fixed-Income Markets
While U.S. stock investors relished their solid gains, bond investors were not
so fortunate. Interest rates, as reflected in the 30-year U.S. Treasury yield,
fell from 6.33% on October 31, 1995, to 5.95% two months later. At that time,
analysts anticipated an environment of slow economic growth and harbored almost
no concern about potential increases in inflation. Underscoring that view, the
Federal Reserve Board's Open Market Committee cut both the discount rate and the
Federal funds rate by 0.25% in late January.
Economic data soon suggested a different scenario--one characterized by
accelerating economic activity. A range of indicators pointed toward more rapid
growth than anticipated, but none concerned the bond market as much as the
ongoing increases in employment. In many analysts' view, continued job growth
would probably lead to higher wage rates, which might not be offset by
improvements in productivity. The net result would be higher inflation, the bane
of bond investors. Such concerns caused the 30-year U.S. Treasury yield to
<PAGE>
climb to 7.19% in early July. From that point forward, interest rates declined,
although in an erratic pattern, leaving the long-term Treasury yield at 6.64% by
the end of October.
Three categories of bonds did benefit their investors, at least on a
relative basis, over the past year: short-maturity portfolios, low-quality
issues, and municipals. Short-maturity investors saw a small increase in rates
(0.18% for the 3-year U.S. Treasury bond). Owners of junk bonds earned positive
returns as lower-quality, higher-yielding issues generally fare well during
periods of steady growth; a modest increase in inflation can be beneficial to
junk-bond issuers (the Lehman High Yield Bond Index gained 11.1%). Municipal
bonds, freed from investor worries over the proposed "flat tax," performed
exceptionally well and, to some extent, seemed immune to the inflation concerns
of the taxable market. In fact, the yield on the benchmark 30-year municipal
fell -0.05% during the twelve months, while the yield on the comparable-maturity
U.S. Treasury issue rose 0.31%.
International Equity Markets
Investments in non-U.S. equity markets fared quite well over the fiscal year,
with one major exception: Japan. For the past twelve months, the Morgan Stanley
Capital International-Europe, Australasia, Far East Index (which covers all
major markets outside North America) posted a total return of 10.8% in dollars,
after a 5.1% increase in the value of the U.S. dollar over foreign currencies.
Nearly all of this return was generated in the European markets, where the
dollar return was 17.9% compared to 3.5% for the Pacific Basin. Aside from Japan
(-0.7% in dollars) and Singapore (-3.1%), markets in the Pacific Basin provided
very strong returns, as evidenced by Hong Kong (28.0%) and Australia (18.3%).
The variation in returns across and within regions can be attributed to
differing environments and expectations for growth and inflation. In Europe,
many governments focused on the deficit-spending guidelines mandated by the
Maastricht Treaty for the conversion to a common European currency unit (the
ECU). The Treaty stipulated that deficit spending not exceed defined
levels--with the idea that restraint would keep inflation to reasonable levels.
Over the past year, many governments reaffirmed their commitments to the ECU and
cut spending accordingly. Investors took this as an indication that inflation
would remain modest and economic growth tepid. The result was a strong boost to
high-quality growth stocks across Europe.
The Japanese market continues to suffer because the long-anticipated
economic recovery has yet to materialize in a meaningful way. Despite some
positive signs, such as improving corporate profits, the Japanese economy
continues to perform in a lack-luster fashion.
Report From The Adviser
Our total return for the twelve months ended October 31--our fiscal year--was
23.2%, slightly less than the Standard & Poor's 500 Composite Stock Price
Index's 24.1% and better than the 21.4% turned in by the average value (growth
and income) mutual fund. For the first ten months of calendar 1996, our total
return of 18.4% outdistanced both the S&P 500 Index (16.6%) and the competitive
group (14.7%). Our fiscal-year performance was boosted by our holdings in the
financial, energy, and technology sectors. At the same time, we were not helped
by the neutral performance of our auto holdings, the quite poor performance of
our basic-materials holdings, and--given the strong market--our significant cash
position. More detail can be found in our traditional report card on page 7.
<PAGE>
Our equity holdings on October 31 were 89% of net assets, up from 80% at
the beginning of 1996. We intend to increase the equity ratio to at least 90% by
the end of 1996 and at least 95% by mid-1997. We plan to keep it at
95%-100%--i.e., essentially fully invested--after that. Not that the market is
not on the high side--in fact, by our reckoning, it is about 15% above fair
value--but it's a big stock market, and the Fund can choose from among plenty of
stocks with low price/earnings ratios. Our goal is to deliver to you, the
shareholder, the full plate of equities that you expect, and if you want to keep
cash on the side--as a hedge against the stock market, say--that's up to you.
We gave ourselves 18 months to become fully invested, thinking that this
would give us a chance to put the cash to work opportunistically, buying into
any temporarily sagging sectors or into an overall market drop that might well
occur in such a length of time. That we have been able to do this is well
illustrated by our portfolio's P/E ratio, which is only 9.4 times estimated 1997
earnings (except for energy stocks, which we value on an asset basis). This is a
sharp 42% discount to the market, which, as represented by the S&P 500 Index,
has a P/E ratio of more than 16 times estimated 1997 earnings.
As part of our full-investment program, we wanted to diversify the Fund
beyond our very large concentrations in consumer cyclicals (especially autos),
energy, basic materials, and financial stocks. We have been able to do this,
most notably increasing our technology position from 3% of net assets at the
beginning of the year to about 11%. The largest holdings in this new position
are Compaq, Seagate, and Nokia--leaders in the PC, disk drive, and wireless
telecommunication fields, respectively. These are companies with 15% annual
growth rates that we bought in a big way earlier in 1996, at 7-to-9 times 1997
earnings--i.e., Windsor math--and that have contributed significantly to our
performance this year, advancing some 40% to 60% from our purchase price. Other
1996 additions to the portfolio include 3% positions in airlines and agriculture
(farm equipment and fertilizer companies) and 2% positions in AT&T and
Rhone-Poulenc.
Our energy holdings decreased during the fiscal year from 14% of net assets
to 12%. The group performed well, and we took some profits, particularly as we
do not think that a $23-a-barrel price for crude oil is sustainable. We also
fear that prices of well over $2 per thousand cubic feet for natural gas may not
last, particularly if the current pace of drilling in the United States
persists. Our financial-sector concentration--banks, savings and loans, and
insurance--fell from 25% to 19%, as we again have been selling into strength,
although we continue to be overweighted versus the market. Citicorp is the
largest single holding here; at 4.6%, it is still the second-largest holding in
the Fund. Its developing-country business, which distinguishes Citicorp from
other banks, produces 60% of the company's total earnings and is growing at an
annual clip of 12% to 15%. Also, Citicorp continues to use all of its excess
earnings to buy its own stock at the rate of 6% to 7% per year.
Autos still make up about 10% of the portfolio, with Chrysler, at 6%, the
largest holding in the Fund. On the core product development side, Chrysler
continues to crank out hit after hit. We are convinced that this is no fluke,
that Chrysler is the most nimble and entrepreneurial of the Big Three, that it
has institutionalized these strengths, and that it will continue to gain market
share over time. Finally, our basic-materials concentration--aluminum,
chemicals, paper, and steel--comprises 21% of the portfolio and, while
disappointing to date, is well placed directionally. We believe that, with low
inflation and easing interest rates around the world, 1997 should be a year of
synchronous economic growth, with global industrial production rising on the
order of 4.5%. This will chew up a lot of aluminum, chemicals, paper, and steel
at a rate outstripping the underlying capacity increases, and thus we should
enjoy a sustained rise in the commodity prices.
Our investing style is well established: low P/E, price-opportunistic on
the buy side, price-disciplined on the sell side, and a willingness to
concentrate where it makes sense. Importantly, the current Windsor team, which I
have the pleasure to lead, has more than 50 years of collective experience in
this investing style and is entirely focused on the task of providing unusual
returns for your investment in the Fund.
<PAGE>
Charles T. Freeman, Portfolio Manager
Wellington Management Company, LLP
November 14, 1996
Investment Philosophy
The adviser believes that superior long-term investment results can be
achieved by emphasizing common stocks that are generally misunderstood, out of
favor, or undervalued by fundamental measures such as price/earnings ratio or
dividend yield. The adviser will concentrate a large portion of the Fund's
assets in those securities it believes offer the best return potential.
Windsor 1996 Report Card
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year 1996*
10/31/96
Percent Weighted Relative to Meaningful
Significant of Net Average S&P 500 Windsor Positions
Concentrations Assets Appreciation Index (In Order of Size) Grade Critique
Autos 10% 21% 1% Chrysler, Ford C Chrysler good,
Ford not.
<S> <C> <C> <C> <C> <C>
Banks 8% 39% 21% Citicorp, A+Big outperform-
NationsBank, ance two years
First Union in a row makes a
coup of 1994's
buildup in this
area to 22%
of Fund.
Basic Materials 21% 0% -18% Georgia-Pacific, F Quite disap-
(aluminum, Reynolds Metals, pointing so far,
chemicals, Alcoa, Champion but improving
paper, and steel) International, supply/demand
Union Camp, should make these
Lyondell Petro- good 1997 stocks;
chemical, Stone aluminum our
Container, favorite.
Union Carbide,
Georgia Gulf
Energy 12% 26% 9% Burlington A Our long-stand-
Resources, USX- ing natural gas
Marathon Group, case finally
Atlantic Richfield, panned out;
Enserch plus a surprising
surge in crude
oil price.
Insurance 4% 25% 13% Allstate, CIGNA A Allstate terrific,
including some
purchases earlier
this year.
Savings & 6% 25% 5% Golden West B+ Finally some
Loans Financial, Great recognition here.
Western Financial,
<PAGE>
H.F. Ahmanson
Technology 11% 26% 15% Seagate, Compaq, A+ Home run--
Nokia, Advanced quick payoff on
Micro Devices early 1996
purchases.
</TABLE>
*Capital change only. For stocks purchased and sold during the year, absolute
appreciation is measured from the date of purchase or to the date of sale, and
then relative to the S&P 500 Index for the same period.
Portfolio Profile: Windsor Fund
October 31, 1996
This Profile provides a snapshot of the Fund's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on page 9.
Portfolio Characteristics
- -------------------------------------------------------------------------------
Windsor S&P 500
- -------------------------------------------------------------------------------
Number of Stocks 104 500
Median Market Cap $6.4B $24.2B
Price/Earnings Ratio 14.7x 18.5x
Price/Book Ratio 1.9x 3.3x
Yield 2.4% 2.1%
Return on Equity 10.3% 19.6%
Earnings Growth Rate 10.3% 13.7%
Foreign Holdings 6.7% 3.8%
Turnover Rate 34% --
Expense Ratio 0.31% --
Cash Reserves 9.7% --
Volatility Measures
- -------------------------------------------------------------------------------
Windsor S&P 500
- -------------------------------------------------------------------------------
R-Squared 0.65 1.00
Beta 0.94 1.00
Ten Largest Holdings (% of Total Net Assets)
- -------------------------------------------------------------------------------
Chrysler Corp. 6.3%
Citicorp 4.6
Seagate Technology 4.4
Ford Motor Co. 4.2
Burlington Resources, Inc. 4.0
Georgia-Pacific Corp. 3.9
USX-Marathon Group 3.3
Compaq Computer Corp. 3.1
Golden West Financial Corp. 2.3
Reynolds Metals Co. 2.3
- -------------------------------------------------------------------------------
Top Ten 38.4%
<PAGE>
Sector Diversification (% of Common Stock)
- -------------------------------------------------------------------------------
October 31, 1995 October 31, 1996
- -------------------------------------------------------------------------------
Windsor Windsor S&P 500
Basic Materials .................... 26.8% 26.3% 6.3%
Capital Goods & Construction ....... 2.2 4.3 8.6
Consumer Cyclical ................. 15.1 12.4 12.7
Consumer Staples ................... 0.0 0.0 12.3
Energy ............................. 17.5 13.4 9.6
Financial .......................... 31.3 21.5 14.8
Health Care ........................ 0.0 2.2 10.4
Technology ......................... 3.9 12.7 12.1
Transport & Services ............... 1.1 3.7 1.4
Utilities .......................... 1.5 2.8 9.7
Miscellaneous ...................... 0.6 0.7 2.1
- -------------------------------------------------------------------------------
Beta. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall market
rose or fell by 10%.
Earnings Growth Rate. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
Expense Ratio. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors. The average expense ratio for a stock mutual fund was
1.34% in 1995.
Foreign Holdings. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts (ADRs) of companies based outside the
United States.
Investment Focus. This grid indicates a portfolio's characteristics in terms of
market capitalization and relative valuation (growth, value, or a blend). For
instance, if the upper right box of the grid is shaded, it indicates that a
portfolio emphasizes large capitalization growth stocks.
Median Market Cap. The midpoint of market capitalization (market price x shares
outstanding) of stocks in the portfolio. Half the stocks in the portfolio have
higher market capitalizations and half lower.
Number of Stocks. An indicator of diversification. The more stocks a portfolio
holds, the more diversified, and the more likely it is to perform in line with
the overall stock market.
Price/Book Ratio. The share price of a stock, divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
Price/Earnings Ratio. The ratio of a stock's current price to its per-share
earnings over the past year. P/E is an indicator of market expectations about
corporate prospects; the higher the P/E, the greater the expectations for a
company's future growth. For a portfolio, the weighted average P/E of the stocks
it holds.
Return on Equity. The rate of return generated by a company during the past year
for each dollar of shareholder's equity (net income for the year / shareholder's
equity). For a portfolio, the weighted average return on equity for the
companies represented in the portfolio.
R-Squared. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
<PAGE>
Sector Diversification. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
Ten Largest Holdings. Indicates the percentage of a portfolio's total net assets
in its ten largest stocks (the average for stock mutual funds is about 25%). As
this percentage rises, a portfolio's returns are likely to be more volatile,
since its return is more dependent on a few companies.
Turnover Rate. Indicates trading activity during the past year. Portfolios with
high turnover rates incur higher transaction costs and are more likely to
realize and distribute capital gains (which are taxable to investors). The
average turnover rate for stock mutual funds is about 80%.
Yield. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of a portfolio's net asset value, is based on
income earned by the portfolio over the past 30 days and is annualized, or
projected forward for the coming year.
Total Investment Returns: 10/31/76-10/31/96
Windsor Fund S&P 500
Fiscal Capital Income Total Total
Year Return Return Return Return
1977 3.8% 4.3% 8.1% -6.1%
1978 6.2 5.0 11.2 6.3
1979 13.5 6.0 19.5 15.3
1980 17.2 7.0 24.2 32.1
1981 11.1 6.9 18.0 0.6
1982 14.2 7.0 21.2 16.3
1983 25.3 7.3 32.6 27.8
1984 9.6 6.9 16.5 6.3
1985 16.6 6.7 23.3 19.4
1986 22.8 6.5 29.3 33.2
1987 2.7% 1.9% 4.6% 6.4%
1988 18.9 8.1 27.0 14.8
1989 11.9 5.2 17.1 26.4
1990 -31.8 3.9 -27.9 -7.5
1991 35.7 9.0 44.7 33.5
1992 4.3 5.0 9.3 10.0
1993 24.6 3.7 28.3 14.9
1994 3.7 2.6 6.3 3.9
1995 14.2 3.6 17.8 26.4
1996 19.6 3.6 23.2 24.1
Cumulative Performance: 10/31/86-10/31/96
- -------------------------------------------------------------------------------
Average Annual Total Returns
Periods Ended October 31, 1996 Final Value of a
1 Year 5 Years 10 Years $10,000 Investment
- -------------------------------------------------------------------------------
Windsor Fund 23.16% 16.69% 13.38% $35,091
Average Value Fund 21.39 13.80 12.56 32,641
S&P 500 Index 24.10 15.55 14.66 39,283
- -------------------------------------------------------------------------------
<PAGE>
Average Annual Total Returns: Periods Ended 9/30/96*
- --------------------------------------------------------------------------------
Inception 10 Years
- --------------------------------------------------------------------------------
Date 1 Year 5 Years Capital Income Total
Windsor Fund 10/23/58 13.28% 15.95% 8.18% 4.93% 13.11%
- --------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Fund's fiscal year end.
Financial Statements
October 31, 1996
Statement of Net Assets
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund to
arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the Fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the Fund's investments and their cost, and reflects
the gains (losses) that would be realized if the Fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Market
Value*
Windsor Fund Shares (000)
COMMON STOCKS (88.9%)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Basic Materials (23.4%)
(1) AK Steel Holding Corp. 2,294,400 81,451
Akzo Nobel NV ADR 412,500 26,039
Alcan Aluminium Ltd. 3,891,900 127,946
o(1)Alumax, Inc. 2,352,600 75,577
Aluminum Co. of America 5,632,400 330,199
Arcadian Corp. 1,085,900 26,740
o(1)Bethlehem Steel Corp. 8,495,800 69,028
(1) Bowater Inc. 3,500,000 123,813
British Steel PLC ADR 5,344,400 146,971
(1) Century Aluminum Co. 2,000,000 27,000
(1) Champion International Corp. 6,300,000 274,050
<PAGE>
Freeport-McMoRan, Inc. 842,200 26,845
(1) Freeport-McMoRan Resource Partners, LP 6,549,100 113,791
o Geneva Steel Class A 1,309,500 4,911
(1) Geon Co. 2,480,000 48,670
(1) Georgia Gulf Corp. 3,705,300 100,043
(1) Georgia-Pacific Corp. 8,286,300 621,473
IMC Global, Inc. 1,617,000 60,637
Inland Steel Industries, Inc. 1,929,200 31,108
o Kemira Oy ADR 1,994,000 43,370
(1) LTV Corp. 7,302,600 74,852
(1) Lyondell Petrochemical Co. 7,410,600 157,475
(1) Mississippi Chemical Corp. 1,570,800 39,270
o(1)National Steel Corp. Class B 1,897,300 16,364
Norsk Hydro AS ADR 1,660,900 76,194
(1) Reynolds Metals Co. 6,225,800 350,201
Rouge Steel Co. Class A 1,395,300 28,429
o Ryerson Tull, Inc. Class A 1,450,500 18,494
(1) Stone Container Corp. 9,470,000 144,418
(1) Terra Industries, Inc. 4,170,000 61,508
(1) Union Camp Corp. 5,408,900 263,684
Union Carbide Corp. 2,542,600 108,378
o WHX Corp. 203,700 1,706
o(1)Weirton Steel 3,719,500 7,904
- ---------------------------------------------------------------------------------------------
3,708,539
Capital Goods & Construction (3.8%)
Case Corp. 3,129,000 145,498
(1) Continental Homes Holding Corp. 687,900 11,178
(1) LaFarge Corp. 5,471,500 101,907
Lone Star Industries, Inc. 202,600 7,446
MDC Holdings, Inc. 498,600 3,677
(1) Owens Corning 5,096,800 197,501
(1) Ryland Group, Inc. 925,200 11,912
Southdown, Inc. 366,600 10,036
(1) Standard Pacific Corp. 1,750,000 9,406
o(1)Toll Brothers, Inc. 1,787,300 30,608
o USG Corp. 1,669,100 49,238
o(1)U.S. Home Corp. 1,100,000 23,788
- ---------------------------------------------------------------------------------------------
602,195
Consumer Cyclical (11.0%)
o Burlington Coat Factory Warehouse Corp. 421,500 5,163
o(1)Burlington Industries, Inc. 6,700,000 76,213
Chrysler Corp. 29,570,400 994,305
Ford Motor Co. 21,215,800 662,994
- ---------------------------------------------------------------------------------------------
1,738,675
Energy (11.9%)
Amerada Hess Corp. 518,400 28,706
Atlantic Richfield Co. 2,177,000 288,453
(1) Burlington Resources, Inc. 12,531,000 631,249
(1) Cabot Oil & Gas Corp. Class A 2,255,200 34,956
(1) ENSERCH Corp. 4,753,500 102,200
o Enserch Exploration, Inc. 3,011,000 29,734
Murphy Oil Corp. 1,966,700 97,106
o Seagull Energy Corp. 1,450,000 31,356
(1) USX-Marathon Group 24,027,200 525,595
<PAGE>
Ultramar Corp. 1,875,700 53,692
(1) Valero Energy Corp. 2,688,100 63,842
- ---------------------------------------------------------------------------------------------
1,886,889
Financial (19.1%)
(1) H.F. Ahmanson & Co. 7,676,845 240,861
Allstate Corp. 6,113,100 343,098
Bancorp Hawaii, Inc. 123,200 4,882
Bear Stearns Co., Inc. 4,264,365 100,746
Chase Manhattan Corp. 559,700 47,994
CIGNA Corp. 1,705,200 222,528
Citicorp 7,349,200 727,571
o Coast Savings Financial, Inc. 431,600 14,189
(1) Equity Residential Properties Trust REIT 2,178,900 80,074
First Union Corp. 3,034,000 220,724
(1) Golden West Financial Corp. 5,652,100 366,680
(1) Great Western Financial Corp. 9,621,586 269,404
(1) IPC Holdings Ltd. 1,370,600 29,468
KeyCorp 1,072,923 50,025
Mid Ocean Ltd. 367,600 17,277
NationsBank Corp. 2,391,700 225,418
PartnerRe Ltd. 2,116,200 60,576
- ---------------------------------------------------------------------------------------------
3,021,515
Health Care (1.9%)
Rhone-Poulenc SA ADR 10,351,872 307,968
- ---------------------------------------------------------------------------------------------
Technology (11.3%)
o(1)Advanced Micro Devices, Inc. 12,879,500 228,611
o Arrow Electronics, Inc. 1,080,000 51,435
o Compaq Computer Corp. 6,994,000 486,957
o Komag, Inc. 446,300 12,274
Nokia Corp. Pfd. ADR 5,833,400 270,524
o Quantum Corp. 1,466,000 29,503
o(1)Seagate Technology 10,552,108 704,353
- ---------------------------------------------------------------------------------------------
1,783,657
Transport & Services (3.3%)
o America West Airlines, Inc. 1,454,200 16,723
o AMR Corp. 1,400,000 117,600
o(1)Continental Airlines-Class B 3,567,500 89,634
(1) Delta Air Lines, Inc. 4,072,000 288,603
(1) Maritrans Inc. 739,000 4,526
- ---------------------------------------------------------------------------------------------
517,086
Utilities (2.5%)
AT&T Corp. 9,606,000 335,009
Unicom Corp. 2,321,499 60,359
- ---------------------------------------------------------------------------------------------
395,368
Miscellaneous (0.7%) 115,463
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $11,292,728) 14,077,355
- ---------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.2%)
Atlantic Richfield Cvt. 9.00% (Convertible into Lyondell
Petrochemical Co.) 610,000 13,191
Bethlehem Steel Corp. $5.00 123,900 6,381
Reynolds Metals Co. $3.31 180,000 8,798
- ---------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $30,648) 28,370
- ---------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (1.3%)
- ---------------------------------------------------------------------------------------------
<PAGE>
U.S. Treasury Note
7.25%, 11/15/96
(Cost $204,654) $204,500 204,627
- ---------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.7%)
Commercial Paper (4.7%)
Abbott Laboratories
5.23%, 11/5/96 20,000 19,988
5.30%, 11/14/96 20,000 19,962
5.312%, 11/6/96 25,000 24,982
5.343%, 12/30/96 19,080 18,912
AIG Funding Inc.
5.333%, 11/26/96 20,000 19,927
The Coca Cola Co.
5.33%, 11/7/96 22,900 22,880
Duke Power Co.
5.317%, 11/12/96 35,000 34,944
E.I. du Pont de Nemours & Co.
5.282%, 11/7/96 25,000 24,978
5.306%, 11/19/96 50,000 49,870
5.316%, 11/22/96 50,000 49,848
Emerson Electric
5.279%, 11/4/96 30,000 29,987
5.286%, 11/12/96 30,000 29,952
General Electric Co.
5.25%, 12/10/96 50,000 49,709
5.371%, 12/11/96 50,000 49,702
General Re Corp.
5.366%, 12/24/96 100,000 99,227
Harvard University
5.318%, 11/19/96 25,000 24,935
5.328%, 11/5/96 35,000 34,980
5.329%, 11/21/96 30,000 29,913
Hewlett-Packard Co.
5.287%, 11/6/96 50,000 49,964
Metlife Funding Inc.
5.317%, 11/13/96 41,260 41,188
Private Export Fund Corp.
5.549%, 12/18/96 25,000 24,825
- ---------------------------------------------------------------------------------------------
750,673
Federal Home Loan Bank (0.5%)
5.389%, 11/20/96 80,000 79,769
- ---------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. (1.8%)
- ---------------------------------------------------------------------------------------------
5.20%, 12/9/96 23,700 23,570
5.284%, 11/20/96 50,000 49,863
5.288%, 11/15/96 50,000 49,899
5.289%, 11/19/96 90,000 89,767
5.294%, 11/14/96 68,000 67,872
- ---------------------------------------------------------------------------------------------
280,971
- ---------------------------------------------------------------------------------------------
Federal National Mortgage Assn. (0.9%)
5.279%, 11/26/96 40,000 39,856
5.284%, 11/29/96 100,000 99,597
- ---------------------------------------------------------------------------------------------
139,453
- ---------------------------------------------------------------------------------------------
Student Loan Marketing Assn. (0.2%)
5.337%, 12/13/96 40,000 39,754
- ---------------------------------------------------------------------------------------------
Repurchase Agreement (1.6%)
- ---------------------------------------------------------------------------------------------
<PAGE>
Collateralized by U.S. Government Obligations in a Pooled
Cash Account
5.58%, 11/1/96 247,923 247,923
- ---------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $1,538,572) 1,538,543
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(Cost $13,066,602) 15,848,895
OTHER ASSETS AND LIABILITIES (-0.1%)
- ---------------------------------------------------------------------------------------------
Other Assets--Notes C and F 582,092
Liabilities--Note F (589,937)
- ---------------------------------------------------------------------------------------------
(7,845)
- ---------------------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 932,473,612 outstanding
$.01 par value shares
(authorized 1,300,000,000 shares) $15,841,050
=============================================================================================
NET ASSET VALUE PER SHARE $16.99
</TABLE>
*See Note A in Notes to Financial Statements.
o Non-Income Producing Security.
(1)Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of such company.
ADR--American Depository Receipt.
AT OCTOBER 31, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------
Paid in Capital $11,707,454 $12.56
Undistributed Net Investment Income 114,649 .12
Accumulated Net Realized Gains 1,236,654 1.33
Unrealized Appreciation--Note E 2,782,293 2.98
===========================================================================
NET ASSETS $15,841,050 $16.99
Statement of Operations
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
- --------------------------------------------------------------------------------
Windsor Fund
Year Ended
October 31, 1996
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
- --------------------------------------------------------------------------------
Income
Dividends $ 319,222
Interest 118,745
- --------------------------------------------------------------------------------
Total Income 437,967
- --------------------------------------------------------------------------------
Expenses
Investment Advisory Fees--Note B
Basic Fee 18,816
Performance Adjustment (4,417)
The Vanguard Group--Note C
Management and Administrative 26,107
Marketing and Distribution 2,505
Taxes (other than income taxes) 962
<PAGE>
Custodian Fees 19
Auditing Fees 21
Shareholders' Reports 398
Annual Meeting and Proxy Costs 153
Directors' Fees and Expenses 43
- --------------------------------------------------------------------------------
Total Expenses 44,607
Expenses Paid Indirectly--Note C (2,716)
- --------------------------------------------------------------------------------
Net Expenses 41,891
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 396,076
- --------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 1,243,836
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENT SECURITIES 1,366,247
================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,006,159
================================================================================
Statement of Changes in Net Assets
This Statement shows how the Fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information that is
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the Fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
Fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
- ----------------------------------------------------------------------------
Windsor Fund
Year Ended October 31,
- ----------------------------------------------------------------------------
1996 1995
(000) (000)
- ----------------------------------------------------------------------------
INCREASE IN NET ASSETS
Operations
Net Investment Income $ 396,076 $ 360,056
Realized Net Gain 1,243,836 1,167,670
Change in Unrealized Appreciation
(Depreciation) 1,366,247 425,123
- ----------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 3,006,159 1,952,849
- ----------------------------------------------------------------------------
Distributions
Net Investment Income (406,918) (352,640)
Realized Capital Gain (1,165,890) (673,435)
- ----------------------------------------------------------------------------
Total Distributions (1,572,808) (1,026,075)
- ----------------------------------------------------------------------------
Capital Share Transactions(1)
Issued 1,866,840 1,283,038
Issued in Lieu of Cash Distributions 1,499,031 976,040
Redeemed (1,965,937) (1,584,392)
- ----------------------------------------------------------------------------
Net Increase from Capital Share
Transactions 1,399,934 674,686
- ----------------------------------------------------------------------------
Total Increase 2,833,285 1,601,460
- ----------------------------------------------------------------------------
Net Assets
Beginning of Year 13,007,765 11,406,305
============================================================================
End of Year $15,841,050 $13,007,765
<PAGE>
(1)Shares Issued (Redeemed)
Issued 121,079 89,000
Issued in Lieu of Cash Distributions 102,408 75,852
Redeemed (127,266) (112,335)
============================================================================
Net Increase in Shares Outstanding 96,221 52,517
============================================================================
Financial Highlights
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the Fund;
and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in the
Fund for one year. Finally, the table lists the Fund's Average Commission Rate
Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Windsor Fund
Year Ended October 31,
- ----------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding
Throughout Each Year 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $15.55 $14.55 $14.95 $12.37 $12.79
- ----------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .43 .44 .44 .37 .49
Net Realized and Unrealized Gain
(Loss) on Investments 2.85 1.86 .42 2.98 .50
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.28 2.30 .86 3.35 .99
- ----------------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net
Investment Income (.46) (.44) (.37) (.39) (.57)
Distributions from Realized
Capital Gains (1.38) (.86) (.89) (.38) (.84)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.84) (1.30) (1.26) (.77) (1.41)
Net Asset Value, End of Year $16.99 $15.55 $14.55 $14.95 $12.37
Total Return 23.16% 17.80% 6.35% 28.29% 9.30%
============================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year
(Millions) $15,841 $13,008 $11,406 $10,537 $8,250
Ratio of Total Expenses to
Average Net Assets--Note C 0.31% 0.45% 0.45% 0.40% 0.26%
Ratio of Net Investment
Income to Average Net Assets 2.75% 3.01% 3.11% 2.68% 3.89%
Portfolio Turnover Rate 34% 32% 34% 25% 32%
Average Commission Rate Paid $.0579 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Financial Statements
<PAGE>
Vanguard/Windsor Fund is registered under the Investment Company Act of 1940 as
a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform with generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. Security Valuation: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities not listed on an exchange are valued at
the latest quoted bid prices. Bonds, and temporary cash investments acquired
over 60 days to maturity, are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by independent
pricing services. Other temporary cash investments are valued at amortized cost,
which approximates market value.
2. Federal Income Taxes: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
3. Repurchase Agreements: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. Government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. Distributions: Distributions to shareholders are recorded on the
ex-dividend date.
5. Other: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Under a contract that expires July 31, 1998, the Fund pays Wellington
Management Company, LLP an investment advisory fee calculated at an annual
percentage rate of average net assets. The basic fee is subject to quarterly
adjustments based on performance relative to the S&P 500 Index. For the year
ended October 31, 1996, the advisory fee represented an effective annual basic
rate of 0.13% of the Fund's average net assets before a decrease of $4,417,000
(0.03%) based on performance. The basic fee reflects a fee waiver of $2,616,000
(0.02%) during the period January 1, 1996, to July 31, 1996.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At October 31,
1996, the Fund had contributed capital of $1,450,000 to Vanguard (included in
Other Assets), representing 7.2% of Vanguard's capitalization. The Fund's
directors and officers are also directors and officers of Vanguard.
Vanguard has asked the Fund's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended October 31, 1996, these arrangements reduced the Fund's expenses by
$2,716,000 (0.02% of average net assets).
D. During the year ended October 31, 1996, the Fund purchased $5,268,883,000 of
investment securities and sold $4,290,314,000 of investment securities, not
counting U.S. Government securities and temporary cash investments.
E. At October 31, 1996, net unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes was $2,782,293,000,
consisting of unrealized gains of $3,327,206,000 on securities that
<PAGE>
had risen in value since their purchase and $544,913,000 in unrealized losses on
securities that had fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at October 31, 1996,
was $438,709,000, for which the Fund held cash collateral of $456,161,000.
Report Of Independent Accountants
To the Shareholders and
Board of Directors of
Vanguard/Windsor Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Windsor Fund (the "Fund") at October 31, 1996, and the results of its
operations, the changes in its net assets and the financial highlights for each
of the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 2, 1996
Special 1996 Tax Information (unaudited)
Vanguard/Windsor Fund
This information for the fiscal year ended October 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $1,038,544,000 as capital gain dividends (from net
long-term capital gains), which will be distributed in December 1996.
For corporate shareholders, 49.9% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received
deduction.
<PAGE>
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
<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 PROPOSAL:
---
Please vote by filling in the appropriate box below, as shown, using blue or
black ink or dark pencil. Do not use red ink. [ ]
<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>
<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>
STATEMENT OF ADDITIONAL INFORMATION
FOR
WINDSOR FUND SERIES OF
VANGUARD/WINDSOR FUND, INC.
This Statement of Additional Information relates specifically to the
proposed delivery of substantially all of the assets of Gemini II, Inc. (the
"Fund") to and in exchange for shares of the Windsor Fund series (the "Windsor
Fund") of Vanguard/Windsor Funds, Inc.
This Statement of Additional Information consists of this Cover Page, a
Statement of Additional Information dated February 28, 1997 relating to the
prospectus of Windsor Fund, which prospectus is included as Exhibit B to the
Prospectus/Proxy Statement dated , 1997, and a copy of Windsor Fund's
annual report which includes audited financial statements for the fiscal year
ended October 31, 1996. Also included is a copy of the Fund's annual report
which includes audited financial statements for the fiscal year ended December
31, 1996.
This Statement of Additional Information is not a Prospectus; a
Prospectus/Proxy Statement dated , 1997, relating to the above-referenced
transaction may be obtained from the Fund or Windsor Fund, 100 Vanguard
Boulevard (P.O. Box 2600), Valley Forge, PA 19482, Telephone Number
1-800-523-8066. This document should be read in conjunction with such
Prospectus/Proxy Statement. The date of this Statement of Additional Information
is , 1997.
<PAGE>
PART B
VANGUARD/WINDSOR FUNDS, INC.
(formerly The Windsor Funds, Inc.)
STATEMENT OF ADDITIONAL INFORMATION
February 28, 1997
This Statement is not a prospectus, but should be read in conjunction
with: (1) the current Prospectus (dated February 28, 1997) relating to the
Windsor Fund series or the Windsor II series, as appropriate. To obtain either
Prospectus please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
Page
----
The Company .............................................................. B-1
Investment Objectives and Policies ....................................... B-1
Purchase of Shares ....................................................... B-6
Redemption of Shares ..................................................... B-6
Yield and Total Return ................................................... B-6
Investment Limitations ................................................... B-7
Management of the Company ................................................ B-9
Investment Advisory Services ............................................. B-12
Portfolio Transactions ................................................... B-20
Performance Measures ..................................................... B-21
Description of Shares and Voting Rights .................................. B-22
Financial Statements ..................................................... B-23
THE COMPANY
Vanguard/Windsor Funds, Inc. (the "Company") is an open-end,
diversified, management investment company whose shares are currently offered in
two separate series - the Vanguard/Windsor Fund series and the Vanguard/
Windsor II series. Each series in effect represents a separate mutual fund.
Vanguard/Windsor Fund series has been offered under the name "Windsor Fund"
since 1958. Shares of Vanguard/Windsor II were initially offered on June 24,
1985. Wellington Management Company, LLP has served as investment adviser to the
Vanguard/Windsor Fund series since its inception. Barrow, Hanley, Mewhinney &
Strauss, Inc. ("BHM&S"), Equinox Capital Management, Inc. ("Equinox") and Tukman
Capital Management, Inc. ("Tukman"), three separate and distinct investment
counseling firms that have no affiliation with Wellington Management Company,
nor with each other, serve as investment advisers to the Vanguard/Windsor II
series. Additionally, The Vanguard Group, Inc., ("Vanguard") provides investment
advisory services on an at-cost basis with respect to a portion of
Vanguard/Windsor II's assets.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives and
policies set forth in each of the Company's Prospectuses.
Repurchase Agreements. Each series may invest in repurchase agreements
with domestic banks, or brokers or dealers, either for temporary defensive
purposes due to market conditions, or to generate income from its excess cash
balances. A repurchase agreement is an agreement under which the series acquires
a money market instrument (generally a security issued by the U.S. Government or
an agency thereof, a banker's acceptance or a certificate of deposit) from a
domestic bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally the next business day). A repurchase agreement may
be
B-1
<PAGE>
considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by the
series and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the series (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by the Company's (custodian bank until
repurchased. In addition, the Board of Directors will monitor the repurchase
agreement transactions for each series generally and will establish guidelines
and standards for review by the investment adviser of the creditworthiness of
any bank, broker or dealer party to a repurchase agreement with the Company. No
more than an aggregate of 15% of a series assets, at the time of investment,
will be invested in repurchase agreements having maturities longer than seven
days and in securities subject to legal or contractual restrictions on resale
for which there are no readily available market quotations. See "Illiquid
Securities" on page B-3.
The use of repurchase agreements involves certain risks. For example,
if the seller of the securities under an agreement defaults on its obligation to
repurchase the underlying securities at a time when the value of these
securities has declined, the series may incur a loss upon disposition of them.
If the seller becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a bankruptcy court may determine that the
underlying securities are collateral for a loan by the series not within the
control of the series and therefore subject to sale by the trustee in
bankruptcy. Finally, it is possible that the series may not be able to
substantiate its interest in the underlying securities. While the Company's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
Lending of Securities. Each series may lend its portfolio securities
for either short or long-term periods to qualified institutional investors who
need to borrow securities in order to complete certain transactions, such as
covering short sales, avoiding failures to deliver securities or completing
arbitrage operations. By lending its portfolio securities each series attempts
to increase its income through the receipt of interest on the loan. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the series. Each series may lend
its portfolio securities to qualified brokers, dealers, domestic banks or other
domestic financial institutions, so long as the terms, and the structure of such
loans are not inconsistent with the investment Company Act of 1940, or the Rules
and Regulations or interpretations of the Securities and Exchange Commission
(the "Commission") thereunder, which currently require that (a) the borrower
pledge and maintain with the series collateral consisting of cash, an
irrevocable letter of credit or securities issued or guaranteed by a domestic
bank or the United States Government having a value at all times not less than
100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to the market" on a daily basis), (c) the loan be made subject
to termination by the series at any time and (d) the series receive reasonable
interest on the loan (which may include the series investing any cash collateral
in interest bearing short-term investments), any distributions on the loaned
securities and any increase in their market value. A series will not lend
portfolio securities if, as a result, the aggregate of such loans exceeds
33 1/3% of the value of the series' net assets. Loan arrangements made will
comply with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange, which rules require the borrower, after notice, to
redeliver the securities within the normal settlement time of three business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Board of
Directors,
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors (Trustees). In addition, voting
rights pass with the loaned securities, but if a material event occurs affecting
an investment on loan, the loan must be called and the securities voted.
Foreign Investments. As indicated in the Prospectus, Vanguard/Windsor
Fund may include foreign securities to a certain extent. Investors should
recognize that investing in foreign companies involves certain special
considerations which are not typically associated with investing in U.S.
companies.
B-2
<PAGE>
Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in companies in those countries.
Although Vanguard/Windsor Fund will endeavor to achieve most favorable
execution costs in its portfolio transactions in foreign securities, fixed
commissions on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. In addition, it is expected that the expenses for
custodial arrangements of the Portfolios foreign securities will be somewhat
greater than the expenses for the custodial arrangement for handling U.S.
securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income Vanguard/Windsor Fund receives from its foreign investments.
Currency Risk. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since Vanguard/Windsor Fund may
temporarily hold uninvested reserves in bank deposits in foreign currencies, the
Fund will be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations, and may incur costs in connection with
conversions between various currencies. The investment policies of
Vanguard/Windsor Fund permit it to enter into forward foreign currency exchange
contracts in order to hedge holdings and commitments against changes in the
level of future currency rates. Such contracts involve an obligation to purchase
or sell a specific currency at a future date at a price set at the time of the
contract
Illiquid Securities. Illiquid securities are securities that may not be
sold or disposed of in the ordinary course of business within seven business
days at approximately the value at which they are being carried on a Fund's
books. An illiquid security includes repurchase agreements which have a maturity
of longer than seven days, securities which are illiquid by virtue of the
absence of a readily available market, and demand instruments with a demand
notice exceeding seven days. Illiquid securities may include securities that are
not registered under the Securities Act of 1933 (the "1933 Act"); however,
unregistered securities that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act will not be considered illiquid so
long as it is determined by the Fund's advisor that an adequate trading market
exists for the security.
Futures Contracts. Each series may enter into stock futures contracts,
options, and options on futures contracts only for the purpose of remaining
fully invested and reducing transactions costs. Futures contracts provide for
the future sale by one party and purchase by another party of a specified amount
of a specific security at a specified future time and at a specified price.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. Government agency. Assets committed
to Futures contracts will be segregated at the Fund's custodian bank to the
extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders a re required to make a good faith margin deposit in
cash or government securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is intended to
assure completion of the contract (delivery or acceptance of the underlying
security) if it is not terminated
B-3
<PAGE>
prior to the specified delivery date. Minimal initial margin requirements are
established by the futures exchange and may be changed. Brokers may establish
deposit requirements which are higher than the exchange minimums. Futures
contracts are customarily purchased and sold on margin that may range upward
from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract
is marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. Each series
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either
"hedgers" or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
interest rates. Each series intends to use futures contracts only for bona fide
hedging purposes.
Regulations of the CFTC applicable to the Company require that all of
its futures transactions constitute bona fide hedging transactions. Each series
will only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, each
series expects that approximately 75% of its futures contract purchases will be
"completed;" that is, equivalent amounts of related securities will have been
purchased or are being purchased by the series upon sale of open futures
contracts.
Although techniques other than the sale and purchase of futures
contracts could be used to control the exposure of the series' income to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While each series will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of portfolio securities
Restrictions on the Use of Futures Contracts. A series will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of the series' total assets. In addition, a series will not enter
into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts would exceed 20% of the series' total
assets. Assets committed to futures contracts or options will be held in a
segregated account at the Fund's custodian bank.
Risk Factors in Futures Transactions. Positions in futures contracts
may be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a series would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a series has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a series may be
required to make delivery of the instruments underlying interest rate futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge its
portfolio. A series will minimize the risk that it will be unable to close out
a futures contract by only entering into futures contracts which are traded on
national futures exchanges and for which there appears to be a liquid secondary
market.
The risk of loss in trading futures contracts in some strategies can
be substantial, due to the extremely high degree of leverage involved in futures
pricing. As a result, a relatively small price movement in a futures contract
may result in immediate and substantial loss (as well as gain) to the investor.
For example, if at the time of purchase, 10% of the value of the futures
contract is deposited as margin, a subsequent 10% decrease in the value of the
futures contract would result in a total loss of the margin deposit, before any
deduction for
B-4
<PAGE>
the transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies of the series are engaged in only for hedging purposes, the
advisers do not believe that the series are subject to the risks of loss
frequently associated with futures transactions. The series would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying security and sold it after the decline.
There is the risk of loss by a series of margin deposits in the event
of bankruptcy of a broker with whom the series has an open position in a
futures contract or related option. Additionally, investments in futures and
options involve the risk that the investment adviser will incorrectly predict
stock market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses.
Federal Tax Treatment of Futures Contracts. Each series is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of the year as
well as those actually realized during the year. In most cases, any gain or loss
recognized with respect to a futures contract is considered to be 60% long-term
capital gain or loss and 40% short-term capital gain or loss, without regard to
the holding period of the contract. Furthermore, sales of futures contracts
which are intended to hedge against a change in the value of securities held
by a series may affect the holding period of such securities and, consequently,
the nature of the gain or loss on such securities upon disposition. The series
may be required to defer the recognition of losses on futures contracts to the
extent of any unrecognized gains on related positions held by the series.
In order for a series to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income derived from the fund's
business of investing in securities or currencies. In addition, gains realized
on the sale or other disposition of securities held for less than three months
must be limited to less than 30% of the series' annual gross income. It is
anticipated that any net gain realized from the closing of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, the series may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on futures contracts, which have been open for less than three months as
of the end of the series' fiscal year and which are recognized for tax
purposes, will not be considered gains on securities held less than three
months for the purpose of the 30% test.
Each series will distribute to shareholders annually any net capital
gains which have been recognized for Federal income tax purposes, including
unrealized gains at the end of the series' fiscal year on futures transactions.
Such distributions will be combined with distributions of capital gains realized
on the series' other investments and shareholders will be advised on the
nature of the payments.
B-5
<PAGE>
PURCHASE OF SHARES
The purchase price of shares of each series of the Company is the net
asset value next determined after the order is received in Good Order, as
defined in the Prospectus. The net asset value is calculated as of the close of
the New York Stock Exchange on each day the Exchange is open for business. An
order received prior to the close of the Exchange will be executed at the price
computed on the date of receipt; and an order received after the close of the
Exchange will be executed at the price computed on the next day the Exchange is
open.
Each series reserves the right in its sole discretion (i) to suspend
the offering of its shares, (ii) to reject purchase orders when in the judgment
of management such rejection is in the best interest of the series, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of the series' shares. Vanguard/Windsor Fund is currently closed to new
investors Existing shareholders may purchase additional shares, but may not
invest more than $25,000 each year.
REDEMPTION OF SHARES
Each series may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"); (ii) during any period when an emergency
exists, as defined by the rules of the Commission, as a result of which it is
not reasonably practicable for the series to dispose of securities owned by it,
or to determine fairly the value of its assets; and (iii) for such other periods
as the Commission may permit.
The Company has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a series at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in readily marketable investment securities or in
cash, as the Directors may deem advisable; however, payment will be made wholly
in cash unless the Directors believe that economic or market conditions exist
which would make such a practice detrimental to the best interests of the
Company. If redemptions are paid in investment securities, such securities will
be valued as set forth in the Prospectus for the appropriate series, and a
redeeming shareholder would normally incur brokerage expenses if he converted
these securities to cash.
No charge is made by the Company for redemptions. Any redemption may be
more or less than the shareholder's cost, depending on the market value of the
series' portfolio securities.
Signature Guarantees. To protect your account, the Company and Vanguard
from fraud, signature guarantees are required for certain redemptions. A
signature guarantee verifies the authenticity of your signature. Examples of
situations in which signature guarantees are required are: (1) all redemptions,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered account owner(s) and/or to an address other than the
address of record; and (2) share transfer requests. These requirements are not
applicable to redemptions in Vanguard's prototype retirement plans, except in
connection with: (1) distributions made when the proceeds are to be paid to
someone other than the plan participant, (2) certain authorizations to effect
exchanges by telephone; and (3) when proceeds are to be wired. These
requirements may be waived by the Company in certain instances.
Signature guarantees can be obtained from a bank, broker or any other
guarantor that Vanguard deems acceptable. Notaries public are not acceptable
guarantors.
YIELD AND TOTAL RETURN
The yield of Vanguard/Windsor Fund for the thirty-day period ended
October 31, 1996 was +2.41%, and the yield for Vanguard/Windsor II for the same
period was +2.78%.
B-6
<PAGE>
The average annual total returns for Vanguard/Windsor Fund for the
one-, five- and ten-year periods ending October 31, 1996 were +23.16%, +16.69%
and +13.38%, respectively. The average annual total returns for the one-, five-
and ten-year periods for Vanguard/Windsor II were +27.17%, +16.56% and +13.91%,
respectively. Total return is computed by determining the average compounded
rates of return over the one-, five- and ten-year periods set forth above that
would equate an initial amount invested at the beginning of the periods to the
ending redeemable value of the investment.
INVESTMENT LIMITATIONS
Each series of the Company is subject to the following restrictions
which may not be changed without the approval of at least a majority of the
outstanding voting securities of that series. A series will not:
1) with respect to 75% of the value of its total assets, purchase
the securities of any issuer (except obligations of the United
States government and its instrumentalities) if as a result
the series would hold more than 10% of the outstanding voting
securities of the issuer, or more than 5% of the value of the
total assets of the series would be invested in the securities
of such issuer;
2) invest in securities of other investment companies, except as
may be acquired as a part of a merger, consolidation or
acquisition of assets approved by the shareholders of the
series or otherwise to the extent permitted by Section 12 of
the Investment Company Act of 1940. A series will invest only
in investment companies which have investment objectives and
investment policies consistent with those of that series;
3) borrow money, except that a series may borrow from banks (or
through reverse repurchase agreements), for temporary or
emergency (not leveraging) purposes, including the meeting of
redemption requests which might otherwise require the untimely
disposition of securities, in an amount not exceeding 10% of
the value of the net assets of the series (including the
amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the net assets
of the series, the series will not make any additional
investments;
4) purchase securities on margin, or sell securities short except
that each series may invest in stock futures contracts, stock
options and options on stock futures contracts to the extent
that not more than 5% of a series' assets are required as
deposit on a futures contract and not more than 20% of a
series' assets are invested in futures contracts and options
transactions at any time;
5) purchase or otherwise acquire any security if, as a result,
more than 15% of its net assets would be invested in
securities that are illiquid (including any investment in The
Vanguard Group, Inc.);
6) invest for the purpose of exercising control over management
of any company;
7) purchase or retain securities of any company in which those
Officers and Directors of the Company and/or its investment
advisers owning more than 1/2 of 1% of such securities, own in
the aggregate more than 5% of such securities;
8) make loans, except (i) by purchasing bonds, debentures or
similar obligations (including repurchase agreements) which
are either publicly distributed or customarily purchased by
institutional investors, and (ii) as provided under "Lending
of Securities" (See page B-2);
9) purchase assessable securities;
10) engage in the business of underwriting securities issued by
other persons, except to the extent that the series may
technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, in disposing of investment
securities;
11) purchase real estate, commodities or commodity contracts
except as described above in "(4)"; or
12) invest more than 25% of the value of its total assets in any
one industry.
B-7
<PAGE>
Notwithstanding these limitations, each series of the Company may own
all or any portion of the securities of, or make loans to, or contribute to the
costs or other financial requirements of any company which will be wholly owned
by the Company and one or more other investment companies and is primarily
engaged in the business of providing, at-cost, management, administrative or
related services to the Company and other investment companies. See "Management
of the Company".
These investment limitations are considered at the time investment
securities are purchased.
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<PAGE>
MANAGEMENT OF THE COMPANY
Officers and Directors
The Officers of the Funds manage their day-to-day operations and are
responsible to the Funds' Boards of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of the Directors
and Officers of the Funds and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Funds is Post Office Box 876, Valley Forge, PA
19482.
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman and Director* JOHN C. SAWHILL, Director
Chairman and Director of The Vanguard President and Chief Executive Officer, The
Group, Inc. and each of the investment Nature Conservancy; formerly, Director and
companies in The Vanguard Group; Director Senior Partner, McKinsey & Co. and
of The Mead Corporation, General Accident President, New York University; Director of
Insurance and Chris-Craft Industries, Inc. Pacific Gas and Electric Company, Proctor &
Gamble Company and NACCO Industries.
JOHN J. BRENNAN, President, Chief Executive
Officer & Director* JAMES O. WELCH, Jr., Director
President, Chief Executive Officer and Retired Chairman of Nabisco Brands, Inc.
Director of The Vanguard Group, Inc. and and retired Vice Chairman and Director of
each of the investment companies in The RJR Nabisco; Director of TECO Energy, Inc.
Vanguard Group and Kmart Corporation.
BARBARA BARNES HAUPTFUHRER, Director J. LAWRENCE WILSON, Director
Director of The Great Atlantic and Pacific Tea Chairman and Chief Executive Officer, Rohm
Company, Raytheon Company, Knight- & Haas Company; Director of Cummins
Ridder, Inc., Massachusetts Mutual Life Engine Company; and Trustee of Vanderbilt
Insurance Co., and ALCO Standard, Corp.; University.
Trustee Emerita of Wellesley College.
RAYMOND J. KLAPINSKY, Secretary*
ROBERT E. CAWTHORN, Director Senior Vice President and Secretary of The
Chairman Emeritus and Director of Rhone- Vanguard Group, Inc.; Secretary of each of
Poulenc Rorer, Inc, Sun Company, Inc. and the investment companies in The Vanguard
Westinghouse Electric Corporation. Group.
BRUCE K. MACLAURY, Director RICHARD F. HYLAND, Treasurer*
President Emeritus of The Brookings Treasurer of The Vanguard Group, Inc. and
Institution; Director of American Express of each of the investment companies in The
Bank, Ltd., The St. Paul Companies, Inc. and Vanguard Group,
National Steel Corporation.
KAREN E. WEST, Controller*
BURTON G. MALKIEL, Director Principal of The Vanguard Group, Inc.;
Chemical Bank Chairman's Professor of Controller of each of the investment
Economics, Princeton University; Director of companies in The Vanguard Group.
Prudential Insurance Co. of America, Amdahl -------------------------------------------------------------
Corporation, Baker Fentress & Co., The *Officers of the Funds are "interested persons" as defined in
Jeffrey Co., and Southern New England the Investment Company Act of 1940.
Communications Company.
ALFRED M. RANKIN, JR., Director,
Chairman, President and Chief Executive
Officer of NACCO Industries, Inc.; Director of
The BFGoodrich Company, and The Standard
Products Company.
</TABLE>
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<PAGE>
The Vanguard Group
The Company is a member of The Vanguard Group of Investment Companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Company and the other Funds in the Group obtain at cost virtually all of
their corporate management, administrative and distribution services. Vanguard
also provides investment advisory services on an at-cost basis to certain of the
Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's total expenses which are allocated among the
Funds under methods approved by the Board of Directors (Trustees) of each Fund.
In addition, each Fund bears its own direct expenses, such as legal, auditing
and custodian fees.
The Funds' Officers are also Officers and employees of Vanguard. No
Officer or employee owns, or is permitted to own, any securities of any external
adviser for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to
Rule 17 j-1 under the Investment Company Act of 1940. The Code is designed to
prevent unlawful practices in connection with the purchase or sale of securities
by persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds has invested in Vanguard are adjusted from time
to time in order to maintain the proportionate relationship between each Fund's
relative net assets and its contribution to Vanguard's capital. At October 31,
1996, Vanguard/Windsor Fund had contributed capital of $1,450,000 to Vanguard,
representing 7.2% of Vanguard's capitalization and, at that time.
Vanguard/Windsor II had contributed capital of $1,344,000 to Vanguard,
representing 6.7% of Vanguard's capitalization. The Funds' Service Agreement
provides for the following arrangement: (a) each Vanguard Fund may invest up to
0.40% of its current net assets in Vanguard and (b) there is no other limitation
on the amount that each Vanguard Fund may contribute to Vanguard's
capitalization.
Management. Corporate management and administrative services include:
(1) executive staff; (2) accounting and financial; (3) legal and regulatory;
(4) shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended October 31, 1996, Vanguard/Windsor Fund's share of Vanguard's
actual net costs of operation relating to management and administrative services
(including transfer agency) totaled approximately $26,107,000 and Vanguard/
Windsor II's share of such costs of operation totaled approximately $27,243,000.
Distribution. Vanguard provides all distribution and marketing
activities for the Funds in the Group. Vanguard, Marketing Corporation, a
wholly-owned subsidiary of The Vanguard Group, Inc., acts as Sales Agent for
shares of the Funds in connection with any sales made directly to investors in
the states of Florida, Missouri, New York, Ohio, Texas and such other states as
may be required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional
nature is allocated among the Funds based upon their relative net assets. The
remaining one half of these expenses is allocated among the Funds based upon
each Fund's sales for the preceding 24 months relative to the total sales of the
Funds as a Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of
B-10
<PAGE>
a marketing and promotional nature shall exceed 125% of the average distribution
expense rate for the Group, and no Fund shall incur annual distribution expenses
in excess of .02 of 1% of its average month-end net assets. During the fiscal
year ended October 31, 1996, Vanguard/Windsor Fund paid approximately $2,505,000
of the Group's distribution and marketing expenses, which represented an
effective annual rate of .02 of 1% of Vanguard/Windsor Fund's average net assets
and Vanguard/Windsor II paid approximately $2,254,000 of such expenses which
represented an effective annual rate of .02 of 1% of Vanguard/Windsor II's net
assets.
Investment Advisory Services. Vanguard also provides investment
advisory services to Vanguard Windsor II, Vanguard Money Market Reserves,
Vanguard Municipal Bond Fund, several Portfolios of Vanguard Fixed Income
Securities Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard California
Tax-Free Fund, Vanguard New York Insured Tax-Free Fund, Vanguard New Jersey
Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard Florida Insured Tax-Free
Fund, Vanguard Index Trust, Vanguard Bond Index Fund, Vanguard International
Equity Index Fund, Vanguard Balanced Index Fund, Vanguard Admiral Funds, the
Total International Portfolio of Vanguard STAR Fund, Vanguard Tax-Managed Fund,
Aggressive Growth Portfolio of Vanguard Horizon Fund, Vanguard Institutional
Index Fund, several Portfolios of Vanguard Variable Insurance Fund, a portion
of Vanguard/Morgan Growth Fund as well as several indexed separate accounts.
These services are provided on an at-cost basis by an investment management
staff employed directly by Vanguard. The compensation and, other expenses of
this staff are paid by the Funds utilizing these services.
Remuneration of Directors and Officers
The Company pays each Director who is not also an Officer an annual fee
plus travel and other expenses incurred in attending Board meetings. The
Company's Officers and employees are paid by Vanguard which, in turn, is
reimbursed by the Company, and each other Fund in the Group, for its
proportionate share of Officers' and employees' salaries and retirement
benefits. For the fiscal year ended October 31, 1996, the Fund's proportionate
share of remuneration for all Officers as a group was approximately $806,648 and
its proportionate share of the amounts contributed to the retirement plans of
all Officers as a group was approximately $20,850.
Under its Retirement Plan, Vanguard contributes annually an amount
equal to 10% of each Officer's annual compensation plus 5.7% of that part of the
Officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under the Thrift Plan, all Officers are
permitted to make pre-tax basic contributions in a maximum amount equal to 4% of
total compensation. Vanguard matches the basic contributions on a 100% basis.
Upon retirement, Directors who are not Officers are paid an annual fee based on
the number of years of service on the Board, up to fifteen years of service. The
fee is equal to $1,000 for each year of service and each investment company
member of The Vanguard Group contributes a proportionate amount of this fee
based on its relative net assets. This fee is paid, subsequent to a Director's
retirement, for a period of ten years or until the death of a retired Director.
B-11
<PAGE>
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors and the Officers of the Company for
whom the Company's proportionate share of remuneration exceeded $60,000, for the
fiscal year ended October 31, 1996 and for all Directors and Officers as a
group:
VANGUARD/WINDSOR FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or Retirement
Aggregate Benefits Accrued Estimated Total Compensation
Compensation As Part of Annual Benefits From All Vanguard Funds
Names of Directors From the Company Company Expenses Upon Retirement Paid to Directors (2)
- ------------------ ---------------- ---------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) $436,808 $4,170 - -
John J. Brennan(1) $232,990 $4,170 - -
Barbara Barnes Hauptfuhrer $ 9,030 $1,402 $15,000 $65,000
Robert E. Cawthorn $ 9,030 $1,168 $13,000 $65,000
Bruce K. MacClaury $ 9,785 $1,372 $12,000 $60,000
Burton G. Malkiel $ 9,030 $ 935 $15,000 $65,000
Alfred M. Rankin, Jr. $ 9,030 $ 738 $15,000 $65,000
John C. Sawhill $ 9,030 $ 876 $15,000 $65,000
James O. Welch, Jr $ 9,030 $1,078 $15,000 $65,000
J. Lawrence Wilson $ 9,030 $ 779 $15,000 $65,000
Names of other officers
- ------------------------
Raymond J. Klapinsky
Secretary $ 67,649 $4,170 - -
</TABLE>
(1) As "Interested Directors", Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard
funds (33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).
INVESTMENT ADVISORY SERVICES
Vanguard/Windsor Fund
The Company employs Wellington Management Company, LLP ("WMC") under an
investment advisory agreement dated August 1, 1996 to manage the investment and
reinvestment of the assets of Vanguard/Windsor Fund and to continuously review,
supervise and administer Vanguard/Windsor Fund's investment program. WMC
discharges its responsibilities subject to the control of the Officers and
Directors of the Company. WMC is a Massachusetts limited liability partnership
controlled by the following general partners: Robert W. Doran, Duncan M.
McFarland and John R. Ryan. WMC and its predecessor organizations have provided
investment advisory services to investment companies since 1933 and to
investment counseling clients since 1960. Charles T. Freeman, Senior Vice
President of WMC, has served as portfolio manager of the Fund since January,
1996.
Vanguard/Windsor Fund pays WMC a basic fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to Vanguard/Windsor Fund's average month-end net assets for
the quarter.
Net Assets Annual Rate
---------- -----------
First $17.5 billion ................... 0.125%
Assets in excess of $17.5 billion ..... 0.100%
The basic fee paid to WMC may be increased or decreased by applying an
adjustment formula based on Vanguard/Windsor Fund's investment performance. Such
formula provides for an increase or decrease in the basic fee paid to WMC each
quarter, depending upon Vanguard/Windsor Fund's investment performance for the
thirty-six months preceding the end of the quarter relative to the investment
record of the Standard and Poor's 500 Composite Stock Price Index (the "Index")
for the same period.
B-12
<PAGE>
The Basic Fee, as provided above, shall be increased or decreased by
applying an incentive/penalty fee adjustment based on the investment performance
of Vanguard/Windsor Fund relative to the investment performance of the Index.
The following table sets forth the adjustment factors to the base
advisory fee payable by the Company to WMC under this investment advisory
agreement:
For the first $17.5 billion of assets;
Cumulative 36-Month Performance Fee
Performance versus the Index Adjustment*
---------------------------- ---------------
Less than -12% -0.67 x Basic Fee
Between -12% and -6% -0.33 x Basic Fee
Between -6% and 6% 0.00 x Basic Fee
Between 6% and 12% +0.33 x Basic Fee
More than 12% +0.67 x Basic Fee
For assets over $17.5 billion;
Less than -12% -0.90 x Basic Fee
Between -12% and -6% -0.45 x Basic Fee
Between -6% and 6% 0.00 x Basic Fee
Between 6% and 12% +0.45 x Basic Fee
More than 12% +0.90 x Basic Fee
- ----------
* For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period
The above incentive/penalty fee will not be fully operable until the
quarter ending July 31, 1999. Until that date, a "blended" fee rate consisting
of varying percentages of (i) the performance adjustment based on the schedule
set forth above (the "new rate"), and (ii) the performance adjustment based on
the schedule set forth in Vanguard/Windsor Fund's previous investment advisory
agreement with WMC(l) (the "previous rate") shall be used as follows:
1) Quarter Ending January 31, 1997. The incentive/penalty fee was
calculated as the sum of 16.7% of the fee payable under the
new rate plus 83.3% of the fee payable under the previous
rate.
2) Quarter Ending April 30, 1997. The incentive/penalty fee shall
be calculated as the sum of 25% of the fee payable under the
new rate plus 75% of the fee payable under the previous rate.
3) Quarter Ending July 31, 1997. The incentive/penalty fee shall
be calculated as the sum of 33% of the fee payable under the
new rate plus 67% of the fee payable under the previous rate.
4) Quarter Ending October 31, 1997. The incentive/penalty fee
shall be calculated as the sum of 41.6% of the fee payable
under the new rate plus 58.4% of the fee payable under the
previous rate.
5) Quarter Ending January 31, 1998. The incentive/penalty fee
shall be calculated as the sum of 50% of the fee payable under
the new rate plus 50% of the fee payable under the previous
rate.
6) Quarter Ending April 30, 1998. The incentive/penalty fee shall
be calculated as the sum of 58.4% of the fee payable under the
new rate plus 41.6% of the fee payable under the previous
rate.
7) Quarter Ending July 31, 1998. The incentive/penalty fee shall
be calculated as the sum of 67% of the fee payable under the
new rate plus 33% of the fee payable under the previous rate.
- ----------
(1) The previous incentive/penalty fee structure provided that the Basic
Fee be increased or decreased by an amount equal to .05% per annum
(.0125 per quarter) of the average month-end assets if the Fund's
investment performance for the 36 months preceding the end of the
quarter was between 6 and 12 percentage points above or below,
respectively, the investment record of the Standard & Poor's 500
Composite Stock Index (the "Index") and .10% per annum (.025 per
quarter) of the average month-end assets of the Fund if the Fund's
investment performance for the 36 months preceding the end of the
quarter was twelve percentage points or more above or below,
respectively, the investment record of the Index.
B-13
<PAGE>
8) Quarter Ending October 31, 1998. The incentive/penalty fee
shall be calculated as the sum of 75% of the fee payable under
the new rate and 25% of the fee payable under the previous
rate.
9) Quarter Ending January 31, 1999. The incentive/penalty fee
shall be calculated as the sum of 83.3% of the fee payable
under the new rate plus 16.7% of the fee payable under the
previous rate.
10) Quarter Ending April 30, 1999. The incentive/penalty fee shall
be calculated as the sum of 91.7% of the fee payable under the
new rate plus 8.3% of the fee payable under the previous
rate.
11) Quarter Ending July 31, 1999. New rate fully operable.
For purposes of incentive/penalty adjustments, the investment
performance of Vanguard/Windsor Fund for any period is expressed as a percentage
of Vanguard/Windsor Fund's net asset value per share at the beginning of the
period. This percentage is equal to the sum of: (i) the change in
Vanguard/Windsor Fund's net asset value per share during the period; (ii) the
value of Vanguard/Windsor Fund's cash distributions per share having an
ex-dividend date occurring within the period; and (iii) the per share amount of
capital gains taxes paid or accrued during the period by Vanguard/Windsor Fund
for undistributed realized long-term capital gains. The investment record of the
S&P Index for any period is expressed as a percentage of the S&P Index level at
the beginning of the period. This percentage is equal to the sum of (i) the
change in the level of the S&P Index, during the period and (ii) the value,
computed consistently with the S&P Index, of cash distributions having an
ex-dividend date occurring within the period made by companies whose securities
comprise the S&P Index.
During the fiscal years ended October 31, 1994, 1995 and 1996
Vanguard/Windsor Fund paid the following advisory fees:
1994 1995 1996
---- ---- ----
Basic Fee ............................ $17,236,000 $19,022,000 $18,816,000
Increase or Decrease for Performance
Adjustment ...................... 9,213,000 7,752,000 (4,417,000)
----------- ----------- -----------
Total ...................... $26,449,000 $26,774,000 $14,399,000
=========== =========== ===========
These fees were paid under a previous fee schedule that provides for a
higher rate of fees.
Vanguard/Windsor II
Vanguard/Windsor II employs a "multi-manager" approach utilizing four
investment advisors.
Barrow, Hanley, Mewhinney & Strauss
Vanguard/Windsor II has entered into an investment advisory agreement
dated May 1, 1993 with Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S") to
manage a portion of the equity allocation of Vanguard/Windsor II (currently
approximately 72%). Under this agreement, BHM&S manages the investment and
reinvestment of the designated assets and continuously reviews, supervises and
administers the investment program of Vanguard/Windsor II with respect to those
assets. BHM&S discharges its responsibilities subject to the control of the
Officers and Directors of the Company.
BHM&S is a Texas corporation controlled by the following officers of
BHM&S: James Purdy Barrow, Principal; Bryant Miller Hanley, Jr., President,
Secretary and Treasurer; Michael Christopher Mewhinney, Principal; and John Luke
Strauss, Principal.
B-14
<PAGE>
Vanguard/Windsor II pays BHM&S a basic fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of Vanguard/Windsor II
managed by BHM&S for the quarter:
Net Assets Annual Rate
---------- -----------
First $200 million 0.300%
Next $300 million 0.200%
Next $500 million 0.150%
Over $1 billion 0.125%
The Fund's payments to BHM&S under the above schedule are subject to an
incentive/penalty fee arrangement which compares the performance of the Fund's
assets managed by BHM&S with the performance of the Standard & Poor's/BARRA
Value Index. This arrangement provides for the following adjustments to BHM&S's
basic fee:
Cumulative 36-Month Performance Fee
Performance versus the Index Adjustment
---------------------------- ---------------
Less than or equal to -9% -0.25 x Basic Fee
Between -9% and -6% -0.15 Basic Fee
Between -6% and 6% 0 x Basic Fee
Between 6% and 9% +0.15 x Basic Fee
More than 9% +0.25 x Basic Fee
- ----------
* For purposes of the calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period,
The BARRA Value Index includes stocks in the Standard and Poor's 500
Composite Stock Price Index with lower than average ratios of market price to
book value. These types of stocks are often referred to as "value" stocks.
The investment performance of the BHM&S Portfolio for any period is
expressed as a percentage of the "BHM&S Portfolio Unit Value" at the beginning
of such period. This percentage is equal to the sum of: (i) the change in the
BHM&S Portfolio Unit Value during such period; (ii) the unit value of the Fund's
cash distributions from the BHM&S Portfolio's net investment income and realized
net capital gains (whether long-term or short-term) having an ex-dividend date
occurring within such period; and (iii) the unit value of capital gains taxes
paid or accrued during such period by Vanguard/Windsor II for undistributed
realized long-term capital gains realized from the BHM&S Portfolio.
The "BHM&S Portfolio Unit Value" will be determined by dividing the
total net assets of the BHM&S Portfolio by a given number of units. On the
initial date of the agreement, the number of units in the BHM&S Portfolio was
equal to the total shares outstanding of Vanguard/Windsor II. After such initial
date, as assets are added to or withdrawn from the BHM&S Portfolio, the number
of units of the BHM&S Portfolio will be adjusted based on the unit value of the
BHM&S Portfolio on the day such changes are executed.
The investment record of the BARRA Value Index is calculated quarterly
by (i) multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the BARRA Value Index by its weighting in
the BARRA Value Index at the beginning of the quarter, and (ii) adding the
values discussed in (i). For any period therefore, the investment record of the
BARRA Value Index will be the compounded quarterly returns of the BARRA Value
Index.
During the fiscal years ended October 31, 1994, 1995 and 1996,
Vanguard/Windsor II paid advisory fees to BHM&S of approximately $7,518,000,
$8,514,842, and $11,475,528, respectively.
Other Advisers
On November 1 1991, Vanguard/Windsor II added Equinox Capital
Management ("Equinox") and Tukman Capital Management ("Tukman") to manage the
investment and reinvestment of a portion of its equity allocation (approximately
10% each). Additionally, Vanguard's Core Management Group was added to
B-15
<PAGE>
manage approximately 8% of the Vanguard/Windsor II's equity allocation. Equinox,
Tukman and Vanguard's Core Management Group discharge their respective
responsibilities subject to the control of the Directors and Officers of the
Fund.
Equinox
Equinox is a Delaware corporation controlled by the following officers
of Equinox: Ronald J. Ulrich, President and Director; Wendy D. Lee, Managing
Director; David E. Walker, Principal; Laura Starr, Vice President; Jacqueline A.
Williams, Vice President; Mark W. Watson, Vice President; and Kenneth J. Doerr,
Vice President.
Under the terms of an investment advisory agreement dated August 1,
1996, Vanguard/Windsor II pays Equinox a basic fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the portion of Vanguard/Windsor II's average month-end net
assets managed by Equinox for the quarter.
Net Assets Annual Rate
----------- -----------
First $400 million .200%
Next $600 million .150%
Next $1 billion .125%
Assets in excess of $2 billion .100%
The basic fee paid to Equinox may be increased or decreased by applying
an adjustment formula based on the investment performance of the portion of
Vanguard/Windsor II's assets managed by Equinox (the "Equinox Portfolio")
relative to the investment of the Russell 1000 Value Index. Such formula
provides for an increase or decrease in the basic fee paid to Equinox each
quarter, depending upon the Equinox Portfolio's investment performance for the
thirty-six months preceding the end of the quarter.
The following table sets forth the adjustment factors to the base
advisory fee payable by the Equinox Portfolio to Equinox under this investment
advisory agreement:
Cumulative 36-Month Performance Fee
versus the Index Adjustment*
---------------- ---------------
Less than -9% -0.50 x Basic Fee
Between -9% and -4.5% -0.25 x Basic Fee
Between -4.5% and 4.5% 0 x Basic Fee
Between 4.5% and 9% +0.25 x Basic Fee
More than 9% +0.50 x Basic Fee
- ----------
* For purposes this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
The above incentive/penalty fee will not be fully operable until the
quarter ending July 31, 1999. Until that date, a "blended fee rate consisting of
varying percentages of (i) the performance adjustment based on the schedule set
forth above (the "new rate"), and (ii) the performance adjustment based on the
schedule set forth in Vanguard/Windsor II Fund's previous investment advisory
agreement with Equinox (the "previous rate") shall be used as follows:
1) Quarter Ending October 31, 1996. The incentive/penalty fee was
calculated as the sum of 8.3% of the fee payable under the new rate plus 91.7%
of the fee payable under the previous rate.
2) Quarter Ending January 31, 1997. The incentive/penalty fee was
calculated as the sum of 16.7% of the fee payable under the new rate plus 83.3%
of the fee payable under the previous rate.
3) Quarter Ending April 30, 1997. The incentive/penalty fee shall be
calculated as the sum of 25% of the fee payable under the new rate plus 75% of
the fee payable under the previous rate.
B-16
<PAGE>
4) Quarter Ending July 31, 1997. The incentive/penalty fee shall be
calculated as the sum of 33% of the fee payable under the new rate plus 67% of
the fee payable under the previous rate.
5) Quarter Ending October 31, 1997. The incentive/penalty fee shall be
calculated as the sum of 41.6% of the fee payable under the new rate plus 58.4%
of the fee payable under the previous rate.
6) Quarter Ending January 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 50% of the fee payable under the new rate plus 50% of
the fee payable under the previous rate.
7) Quarter Ending April 30, 1998. The incentive/penalty fee shall be
calculated as the sum of 58.4% of the fee payable under the new rate plus 41.6%
of the fee payable under the previous rate.
8) Quarter Ending July 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 67% of the fee payable under the new rate plus 33% of
the fee payable under the previous rate.
9) Quarter Ending October 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 75% of the fee payable under the new rate plus 25% of
the fee payable under the previous rate.
10) Quarter Ending January 31, 1999. The incentive/penalty fee shall be
calculated as the sum of 83.3% of the fee payable under the new rate plus 16.7%
of the fee payable under the previous rate.
11) Quarter Ending April 30, 1999. The incentive/penalty fee shall be
calculated as the sum of 91.7% of the fee payable under the new rate plus 8.3%
of the fee payable under the previous rate.
12) Quarter Ending July 31, 1999. New rate fully operable.
- ----------
The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to .05% per annum (.0125 per quarter)
of the average month-end assets of the Fund's investment performance for the 36
months preceding the end of the quarter was between 6 and 12 percentage points
above or below, respectively, the investment record of the Standard & Poor's 500
Composite Stock Index (the "Index") and .10% per annum (.025 per quarter) of the
average month-end assets of the Fund if the Fund's investment performance for
the 36 months preceding the end of the quarter was twelve percentage points or
more above or below, respectively, the investment record of the Index.
The investment performance of the Equinox Portfolio for any period is
expressed as a percentage of the "Equinox Portfolio Unit Value" at the beginning
of such period. This percentage is equal to the sum of: (i) the change in the
Equinox Portfolio Unit Value during such period; (ii) the unit value of
Vanguard/Windsor II's cash distributions from the Equinox Portfolio net
investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and (iii)
the unit value of capital gains taxes paid or accrued during such period by
Vanguard/Windsor II for undistributed realized long-term capital gains realized
from the Equinox Portfolio.
The "Equinox Portfolio Unit Value" will be determined by dividing the
total net assets of the Equinox Portfolio by a given number of units. On the
initial date of the agreement, the number of units in the Equinox Portfolio was
equal to the total shares outstanding of Vanguard/Windsor II. After such initial
date, as assets are added to or withdrawn from the Equinox Portfolio, the number
of units of the Equinox Portfolio will be adjusted based on the unit value of
the Equinox Portfolio on the day such changes are executed.
The investment record of the Russell 1000 Value Index will be
calculated quarterly by (i) multiplying the total return for the quarter (change
in the market price plus dividends) of each stock included in the Russell 1000
Value Index by its weighting in the Russell 1000 Value Index at the beginning of
the quarter, and (ii) adding the values discussed in (i). For any period,
therefore, the investment record of the Russell 1000 Value Index will be the
compounded quarterly returns of the Russell 1000 Value Index.
During the fiscal years ended October 31, 1994, 1995 and 1996,
Vanguard/Windsor II paid advisory fees to Equinox of approximately $1,424,000,
$1,681,435, and 1,980,458 before a performance adjustment of $4,747,
respectively. These fees were paid under a previous fee schedule that provided
for a higher rate of fees.
Tukman
Tukman is a Delaware corporation controlled by the following officers
of Tukman: Melvin T. Tukman, President and Director, and Daniel L. Grossman,
Vice President.
B-17
<PAGE>
Under the terms of an investment advisory agreement dated November 1,
1,991, the Fund pays Tukman a basic fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end assets of the portion of
Vanguard/Windsor II's assets managed by Tukman:
Net Assets Annual Rate
---------- -----------
First $25 million 0.400%
Next $125 million 0.350%
Next $350 million 0.250%
Next $500 million 0.200%
Over $1 billion 0.150%
The Fund's payments to Tukman under the above schedule are subject to
an incentive/penalty fee arrangement which compares the performance of the
Fund's assets managed by Tukman with the performance of the Standard & Poor's
500 Composite Stock Price Index. This arrangement provides for the following
adjustments to Tukman's basic fee:
Cumulative 36-Month Performance Fee
Performance versus the Index Adjustment
---------------------------- ---------------
Less than or equal to -12% -0.50 x Basic Fee
Between - 12% and -6% -0.25 x Basic Fee
Between -6% and 6% 0 x Basic Fee
Between 6% and 12% +0.25 x Basic Fee
More than 12% +0.50 x Basic Fee
- ----------
*For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period
The investment performance of the Tukman Portfolio for any period is
expressed as a percentage of the "Tukman Portfolio Unit Value" at the beginning
of such period. The percentage is equal to the sum of: (i) the change in the
Tukman Portfolio Unit Value during such period; (ii) the unit value of
Vanguard/Windsor II's cash distributions from the Tukman Portfolio net
investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and (iii)
the unit value of capital gains taxes paid or accrued during such period by
Vanguard/Windsor II for undistributed realized long-term capital gains realized
from the Tukman Portfolio.
The "Tukman Portfolio Unit Value" will be determined by dividing the
total net assets of the Tukman Portfolio by a given number of units. On the
initial date of the agreement, the number of units in the Tukman Portfolio was
equal to the total shares outstanding of Vanguard/Windsor II. After such initial
date, as assets are added to or withdrawn from the Tukman Portfolio, the number
of units of the Tukman Portfolio will be adjusted based on the unit value of the
Tukman Portfolio on the day such changes are executed.
The investment record of the S&P 500 will be calculated quarterly by
(i) multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the S&P 500 by its weighting in the S&P 500
at the beginning of the quarter, and (ii) adding the values discussed in (i).
For any period, therefore, the investment record of the S&P 500 will be the
compounded quarterly returns of the S&P 500.
During the fiscal years ended October 31, 1994, 1995 and 1996,
Vanguard/Windsor II paid advisory fees to Tukman of approximately $1,825,000,
$2,184,838, and 2,699,458 before a performance adjustment of $930,724,
respectively.
Vanguard's Core Management Group
Since November 1, 1991, Vanguard's Core Management Group has provided
investment advisory services on an at-cost basis with respect to a portion of
Vanguard/Windsor II's equity allocation (currently approximately 7%). The Core
Management Group also provides investment advisory services to several Vanguard
Funds, including, Vanguard Index Trust, Vanguard Balanced Index Fund, Vanguard
Horizon Fund, Vanguard
B-18
<PAGE>
International Equity Index Fund, Vanguard REIT Index Portfolio, Vanguard
Institutional Index Fund, Total International Portfolio of Vanguard STAR Fund,
several indexed separate accounts as well as a portion of Vanguard/Morgan Growth
Fund's assets. The quantitative approach used by Vanguard's Core Management
Department is designed to generate highly predictable results relative to a
benchmark of large and medium capitalization "value" stocks. A portfolio is
constructed from attractively priced "value" stocks using an optimizer to
assure that the characteristics of the portfolio are similar to that of the
benchmark. The Core Management Group is supervised by the Officers of the Fund.
Duration and Termination of Investment Advisory Agreements
Vanguard/Windsor Fund's present agreement with WMC continues in effect
until July 31, 1998. Vanguard/ Windsor II's present agreements with BHM&S,
Equinox and Tukman continue in effect until April 30, 1997, July 31, 1998 and
October 31, 1997, respectively. Each agreement is renewable for successive
one-year periods if specifically approved by a vote of the Company's Board of
Directors at a meeting called for the purpose of considering such approval. The
Board's approval must include the affirmative votes of a majority of the
Directors who are neither parties to the contract or "interested persons" of
such parties (as defined in the Investment Company Act of 1940). In addition,
the question of continuing an investment advisory agreement may be presented to
shareholders. In such an event, the agreement would be continued only if
approved by the affirmative vote of a majority of the outstanding shares of the
Fund to which the agreement related.
Each investment advisory agreement is automatically terminated if
assigned, and may be terminated without penalty at any time (1) by majority vote
of either the Board of Directors or the Fund's outstanding shares upon 60 days'
written notice to the adviser, or (2) by the adviser upon 90 days' written
notice to the Fund.
The Company's Board of Directors may, without the approval of
shareholders, provide for:
(A) The employment of a new investment adviser pursuant to the
terms of a new advisory agreement, either as a replacement for
an existing adviser or as an additional adviser;
(B) A change in the terms of an advisory agreement; or
(C) The continued employment of an existing adviser, on the same
advisory contract terms, where a contract has been assigned
because of a change in control of the adviser.
Any such change will be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the
adviser that would have normally been included in a proxy statement.
More Information on Advisers' Incentive/Penalty Fees
In April 1972, the Securities and Exchange Commission ("SEC") issued
Release No. 7113 under the Investment Company Act of 1940 to call the attention
of directors and investment advisers to certain factors which must be considered
in connection with investment company incentive fee arrangements. One of these
factors is to "avoid basing significant fee adjustments upon random or
insignificant differences" between the investment performance of a fund and that
of the particular index with which it is being compared. The Release provides
that "preliminary studies (of the SEC staff) indicate that as a 'rule of thumb'
the performance difference should be at least plus or minus 10 percentage
points" annually before the maximum performance adjustment may be made. However,
the Release also states that "because of the preliminary nature of these
studies, the Commission is not recommending, at this time, that any particular
performance difference exist before the maximum fee adjustment may be made." The
Release concludes that the directors of a fund "should satisfy themselves that
the maximum performance adjustment will be made only for performance differences
that can reasonably be considered significant." The Board of Directors has fully
considered the SEC Release and believes that the performance adjustments as
included in the agreements with WMC, BHM&S, Equinox and Tukman are entirely
appropriate although not within the plus or minus 10 percentage points per year
range suggested in the Release. Under the Funds' investment advisory agreements,
the maximum performance adjustments are made at a difference of plus or minus 12
and plus or minus 9 percentage points from the performance of the
B-19
<PAGE>
respective index over a thirty-six month period, which would effectively be the
equivalent of approximately plus or minus 4 and plus or minus 3 percentage
points difference per year.
PORTFOLIO TRANSACTIONS
WMC, BHM&S, Equinox, Tukman and Vanguard are authorized to (with the
approval of the Board of Directors) select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the respective
series of the Company. The investment advisory agreements direct the advisers to
use their best efforts to obtain the best available price and most favorable
execution as to all transactions. Each investment adviser has undertaken to
execute each investment transaction at a price and commission which provides the
most favorable total cost or proceeds reasonably obtainable under the
circumstances.
In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable execution.
The full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information and provide other services in addition to execution services to the
series and/or the investment adviser. Each investment adviser considers such
information useful in the performance of its obligations under the agreement,
but is unable to determine the amount by which such services may reduce its
expenses.
The investment advisory agreements also incorporate the concepts of
Section 28(e) of the Securities Exchange Act of 1934 by providing that, subject
to the approval of the Board of Directors, each investment adviser may cause the
series to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the adviser to the Company and the other Funds in the Group.
Currently, it is the Company's policy that each investment adviser may
at times pay higher commissions in recognition of brokerage services felt
necessary for the achievement of better execution of certain securities
transactions that otherwise might not be available. An investment adviser will
only pay such higher commissions if it believes this to be in the best interest
of the series. Some brokers or dealers who may receive such higher commissions
in recognition of brokerage services related to execution of securities
transactions are also providers of research information to an investment adviser
and/or the Company. However, the investment advisers have informed the Company
that they will not pay higher Commission rates specifically for the purpose of
obtaining research services.
Since the Company does not market its shares through intermediary
brokers or dealers, it is not the Company's practice to, allocate brokerage or
principal business on the basis of sales of its shares which may be through such
firms. However, the Company may place portfolio orders with qualified
broker-dealers who recommend shares of the Company to other clients, or who act
as agent in the purchase of the Company's shares for their clients and may, when
a number of brokers and dealers can provide comparable best price and execution
on a particular transaction, consider the sale of the Company's shares by a
broker or dealer in selecting among qualified broker-dealers.
During the fiscal years ended October 31, 1994, 1995 and 1996 the
Company paid $14,906,748, $17,775,400 and $25,321,530 in brokerage commissions,
respectively.
Some securities considered for investment by a series of the Company
may also be appropriate for the other series and for other Funds and/or clients
served by the investment adviser. If purchase or sale of securities consistent
with the investment policies of the series and one or more of these other Funds
or clients served by the investment adviser are considered at or about the same
time, transactions in such securities will be allocated among the several Funds
and clients in a manner deemed equitable by the investment adviser.
B-20
<PAGE>
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc.
or any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of the Vanguard Group, including
Vanguard/Windsor Fund and Vanguard/Windsor II, may from time to time use one or
more of the following unmanaged indices for comparative performance purposes.
Standard and Poor's 500 Composite Stock Price Index - is a well diversified list
of 500 companies representing the U.S. Stock Market.
Standard and Poor's/BARRA Value Index - consists of the stocks in the Standard
and Poor's 500 Composite Stock Price Index ("S&P 500") with the lowest
price-to-book ratios, comprising 50% of the market capitalization of the S&P
500.
Russell 1000 Value Index - consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
Wilshire 5000 Equity Index - consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
Wilshire 4500 Equity Index - consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
Morgan Stanley Capital International EAFE Index - is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australasia and the Far East.
Goldman Sachs 100 Convertible Bond Index - currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
Salomon Brothers GNMA Index - includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
Salomon Brothers High-Grade Corporate Bond Index - consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
Lehman Long-Term Treasury Bond Index - is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
Merrill Lynch Corporate & Government Bond Index - consists of over 4,500 U.S.
Treasury Agency and investment grade corporate bonds.
Lehman Corporate (Baa) Bond Index - all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
Lehman Brothers Long-Term Corporate Bond Index - is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
Bond Buyer Municipal Bond Index - is a yield index on current coupon high-grade
general obligation municipal bonds.
Standard & Poor's Preferred Index - is a yield index based upon the average
yield for four high-grade, noncallable preferred stock issues.
NASDAQ industrial Index - is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
B-21
<PAGE>
Composite Index - 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
Composite Index - 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
Composite Index - 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 25% Standard & Poor's Utilities Index).
Lehman Long-Term Corporate AA or Better Bond Index - consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
Lehman Brothers Aggregate Bond Index - is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index - is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate investment grade bonds rated BBB or better with maturities between 1
and 5 years. The index has a market value of over $1.3 trillion.
Lehman Brothers Mutual Fund Intermediate (5-10) Government/Corporate Index - is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
Lehman Brothers Mutual Fund Long (10+) Government/Corporate Index - is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
Lipper Balanced Fund Average - an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
Lipper Non-Government Money Market Fund Average - an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
Lipper Government Money Market Fund Average - an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
Lipper General Equity Fund Average - an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
Lipper Fixed Income Fund Average - an industry benchmark of average fixed income
funds with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Company was originally organized as a corporation in 1959. On
January 2, 1985, the Company was reorganized into a Pennsylvania business trust
which was created solely for that purpose. The Company was reorganized as a
Maryland corporation on December 30, 1985. The Amended and Restated Articles of
Incorporation permit the Directors to issue 2,200,000,000 shares of common
stock, with one cent par value. The Board of Directors has the power to
designate one or more classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect to such series.
Currently the Company is offering shares of two series
The shares of each series are fully paid and non-assessable, and have
no preference as to conversion, exchange, dividends, retirement or other
features. The shares of each series have no pre-emptive rights. Such shares have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. A shareholder is entitled to one vote for each full
share held (and a fractional vote for each fractional share held), then
B-22
<PAGE>
standing in his name on the books of the Company. On any matter submitted to a
vote of shareholders, all shares of the Company then issued and outstanding and
entitled to vote, irrespective of the series, shall be voted in the aggregate
and not by series except (i) when required by the Investment Company Act of
1940, shares shall be voted by individual series; and (ii) when the matter does
not affect any interest of a particular series, then only shareholders of the
affected series shall be entitled to vote thereon.
FINANCIAL STATEMENTS
The Funds' Financial Statements for the year ended October 31, 1996,
including the financial highlights for each of the five fiscal years in the
period ended October 31, 1996, appearing in the Vanguard/Windsor Fund and
Vanguard/Windsor II 1996 Annual Reports to Shareholders, and the reports
thereon of Price Waterhouse LLP, independent accountants, also appearing
therein, are incorporated by reference in this Statement of Additional
Information. The Funds' 1996 Annual Reports to Shareholders are enclosed with
this Statement of Additional Information. For a more complete discussion of a
Fund's performance, please see the Fund's 1996 Annual Report to Shareholders,
which may be obtained without charge.
B-23
<PAGE>
Vanguard/
Windsor Fund
Annual Report
October 31, 1996
Contents
A Message To Our Shareholders..............................1
The Markets In Perspective.................................3
Report From The Adviser....................................5
Portfolio Profile..........................................8
Performance Summary.......................................10
Financial Statements......................................11
Report Of Independent Accountants.........................19
Directors And Officers.....................Inside Back Cover
<PAGE>
Vanguard has always strived to be the standard-bearer
for mutual fund disclosure, going well beyond the
"letter of the law" in our shareholder communications.
During the past year, we raised the standard once again
by rewriting and reformatting our Fund prospectuses.
They are designed to ensure that prospective investors
fully understand, before they make an investment, each
Fund's investment strategies, risks, and costs. In that
spirit, we have redesigned our Annual Reports to
shareholders, which provide a comprehensive discussion
and analysis of the year's results in the context of
each Fund's investment objectives and policies. Since
Vanguard has long been recognized for the quality and
content of these Fund Reports, our overriding objective
was to maintain the character of the previous Reports,
while adding information to assist shareholders in
understanding the investment characteristics of their
Fund.
The new Fund Reports include a message to shareholders from Chairman John C.
Bogle and President John J. Brennan. This Message
continues to provide a candid assessment of the Fund's
performance relative to an appropriate unmanaged market
benchmark and a peer group of mutual funds with similar
investment policies. It also reviews the principal
factors contributing to--and detracting from--the
returns earned by the Fund. To help you evaluate your
Fund's current-year performance, the Message includes a
discussion of the Fund's long-term investment results,
as well as a look ahead to the prospects for the coming
year. A recap of the financial markets, which had been
included as part of the Chairman's letter, now appears
in The Markets In Perspective. This overview covers the
world's financial markets, putting the results of the
Fund's strategy in a global perspective.
The Portfolio Profile represents an addition to our Fund Reports. In this day
and age, many investors use detailed statistical
information to evaluate their mutual fund holdings, and
our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector
diversification, volatility, top-ten holdings, among
others--that ultimately define how a Fund is likely to
perform in various market environments. For this
information to be used effectively, we include a brief
description of the profiled characteristics. The Report
From The Adviser (for our traditionally managed Funds)
now covers specific topics that we have defined as
being the important ones for the adviser to
address--and we do our best to ensure that this Report
is written in the same simple and candid manner that
characterizes all Vanguard communications. Finally,
each Adviser's Report will include an inset reminder of
the adviser's basic investment philosophy.
We trust that this redesigned Fund Report will continue to meet your need for
a fair, candid, and clear presentation of your Fund's
investment results and a thorough portfolio review. We
welcome any comments that you might have at any time
regarding these Reports.
Directors And Officers
John C. Bogle, Chairman of the Board and Director of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group;
Director of Chris-Craft Industries, Inc.
John J. Brennan, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
Robert E. Cawthorn, Chairman Emeritus and Director of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Westinghouse Electric Corp.
Barbara Barnes Hauptfuhrer, Director of The Great Atlantic and Pacific Tea
Co., Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
<PAGE>
Bruce K. MacLaury, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
Burton G. Malkiel, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
Alfred M. Rankin, Jr., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
John C. Sawhill, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.
and President of New York University; Director of Pacific Gas and
Electric Co., Procter & Gamble Co., and NACCO Industries.
James O. Welch, Jr., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
and Kmart Corp.
J. Lawrence Wilson, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
Other Fund Officers
Raymond J. Klapinsky, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies
in The Vanguard Group.
Richard F. Hyland, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
Karen E. West, Controller; Principal of The Vanguard Group, Inc.; Controller
of each of the investment companies in The Vanguard Group.
Other Vanguard Officers
Robert A. DiStefano, Senior Vice President, Information Technology.
James H. Gately, Senior Vice President, Individual Investor Group.
Ian A. MacKinnon, Senior Vice President, Fixed Income Group.
F. William McNabb III, Senior Vice President, Institutional.
Ralph K. Packard, Senior Vice President and Chief Financial Officer.
<PAGE>
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
The Vanguard Family of Funds
EQUITY AND BALANCED FUNDS
Growth and Income Funds
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
Balanced Funds
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
Growth Funds
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
Aggressive Growth Funds
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
International Funds
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
<PAGE>
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
Money Market Funds
Vanguard Money Market Reserves
Vanguard Admiral Funds
Income Funds
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
Tax-Exempt Money Market Funds
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
Tax-Exempt Income Funds
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q220-10/96
<PAGE>
Fellow Shareholder,
Windsor Fund, participating fully and vigorously in a spirited bull market for
stocks, provided a total return of +23.2% in the twelve months ended October 31,
1996--our 38th fiscal year. We surpassed the return on the average competing
fund but fell just short of that provided by the unmanaged Standard & Poor's 500
Composite Stock Price Index.
The following table compares Windsor's total return (capital change
plus reinvested dividends) for the year with those of the S&P 500 Index, which
is dominated by blue-chip stocks, and the average value (growth and income)
mutual fund, the peer group that best reflects the investment philosophy Windsor
has maintained over the years.
- ----------------------------------------------------------------------------
Total Return
Fiscal Year Ended
October 31, 1996
- ----------------------------------------------------------------------------
Vanguard/Windsor Fund +23.2%
Average Value Fund +21.4%
- ----------------------------------------------------------------------------
S&P 500 Index +24.1%
- ----------------------------------------------------------------------------
The Fund's return is based on an increase in net asset value from
$15.55 per share on October 31, 1995, to $16.99 per share on October 31, 1996,
with the latter figure adjusted for dividends of $.46 per share paid from net
investment income and a distribution of $1.38 per share paid from net realized
capital gains.
Fiscal 1996 Performance Overview
In the twelve months ended October 31, the stock market flourished in an ideal
environment of moderate economic growth and rising corporate profits accompanied
by low inflation. Interest rates fluctuated considerably, first declining amid
expectations of an economic slowdown, then rising sharply as it became apparent
that the economy was accelerating. But after another course reversal in the
final two months of the fiscal year, interest rates and bond prices had nearly
returned to their levels of a year earlier.
In contrast, the stock market's advance in this banner year was
remarkably steady, with the S&P 500 Index providing positive returns in eleven
of the twelve months ended October 31, 1996. Both growth stocks and value stocks
performed well. Returns on these two groups, while very similar over longer
periods, often diverge over shorter periods. In fiscal 1996, value stocks, as
measured by the S&P/BARRA Value Index, held the edge with a return of +24.6%
versus +23.7% for the S&P/BARRA Growth Index.
As usual, however, not all sectors of the market marched to the same
drumbeat. The highest-performing sector of the market during the fiscal year
(with a return of +39.0%) was financial stocks, and Windsor's overweighting in
this group gave the Fund's performance a nice boost versus both the S&P 500
Index and the average value fund. So, too, the Fund benefited from its
underweighting in utilities stocks, the weakest sector (+1.3%), and from
excellent stock selections in the financial and technology sectors. Holdings in
the basic-materials sector performed poorly versus the S&P 500 Index, however.
It should be noted that the unmanaged S&P 500 Index is a 100% stock
portfolio and includes no cash whatsoever, which in a bull market gives it an
advantage over most equity mutual funds. Equity funds typically hold a small
portion (5% to 10%) of their assets in interest-bearing cash equivalents to
provide liquidity or to reflect recent cash inflows awaiting investment in
equities. Indeed, on its stock holdings alone, Windsor Fund earned a return of
+24.9% during the fiscal year, slightly ahead of the S&P 500 Index return of
+24.1%. However, the overall total return of the Fund was reduced by 1.7%
because of its cash holdings.
<PAGE>
Long-Term Performance Overview
Windsor Fund's fiscal 1996 results added to our significant long-term advantage
over the average value fund. However, over the past decade, neither the Fund nor
our average competitor has matched the S&P 500 Index. The returns for the past
ten years are summarized in the adjacent table.
- ------------------------------------------------------------------------------
Total Return
10 Years Ended October 31, 1996
- ------------------------------------------------------------------------------
Average Final Value of
Annual a $10,000
Rate Initial Investment
Vanguard/Windsor Fund +13.4% $35,091
- ------------------------------------------------------------------------------
Average Value Fund +12.6% $32,641
- ------------------------------------------------------------------------------
S&P 500 Index +14.7% $39,283
- ------------------------------------------------------------------------------
We should emphasize that future returns from the stock market may be
lower than those of the past decade, which were unusually high by historical
standards. Indeed, with stock prices at lofty levels by several measures,
investors have ample reason to expect lower returns in the coming decade.
With respect to Windsor Fund's return versus that of the S&P 500 Index,
we note that the Index is a tough standard to match, since it is a theoretical
construct that bears none of the "real-world" costs that all mutual funds incur.
Also, as discussed earlier, the Fund's cash position is a detriment to its
performance versus the S&P 500 Index when stock prices are rising, as during
most of the past decade. Charles T. Freeman, Windsor's portfolio manager since
December 31, 1995, has gradually decreased the Fund's cash position and
increased its exposure to equities to 89% of assets at fiscal year end. Mr.
Freeman intends to maintain the Fund's equity exposure at 90% or higher, up from
a previous "floor" of about 80%. This change, which brings Windsor's policy into
line with that of our other actively managed equity funds, has been endorsed by
the Board of Directors.
That said, the Fund's equity position remains highly concentrated, with
38% of its assets in its ten largest positions. (For the average value fund,
this figure is about 25%.) As a result, our returns may often diverge from those
of the market and our peers.
In Summary
The U.S. stock market has been on the rise--with only a few, relatively brief
setbacks--for more than 14 years. So now seems an appropriate time to state the
obvious, namely that the ever-present risks of investing in stocks may be higher
now than for some time. Certainly, the sailing will not always be smooth in the
future. However, we believe that investors who "stay the course," with a
balanced investment portfolio of stock funds, bond funds, and money market funds
consistent with their own financial objectives, have little to fear from rough
seas in the financial markets.
John C. Bogle John J. Brennan
Chairman of the Board President
November 11, 1996
The Markets In Perspective: Fiscal Year Ended October 31, 1996
<PAGE>
U.S. Equity Markets
The past twelve months were truly rewarding for common-stock investors in the
United States, particularly those who emphasized larger companies. As noted in
the table, the Standard & Poor's 500 Composite Stock Price Index gained 24.1%
for the fiscal year, while the Russell 2000 Small Stock Index posted a 16.6%
advance. The strong absolute returns can be attributed primarily to solid
earnings growth, continued low inflation, and the expectation on the part of
investors that this environment will prevail over the near term.
Among larger-capitalization issues, the best performing sector was
financial, with a 39.0% advance. Leading this group were banks and brokerage
firms. Banks benefited from the relative stability of economic growth--which
could be expected to result in both growing demand for loans and low default
rates; brokerage firms continued to reap the benefits of positive equity
markets. Energy issues also posted very strong results (33.1%), reflecting the
pronounced increase in oil prices from $17.98 per barrel to $23.35 during the
past twelve months.
Technology issues probably exhibited the greatest disparity of any
sector. The best performers were generally larger companies with dominant
positions in their industries; many of these firms rose 30% or more compared to
16.9%, in aggregate, for the technology holdings in the S&P 500 Index. By
contrast, technology was the worst-performing sector within the Russell 2000
Index, with a scant 2.9% return over the fiscal year.
- -----------------------------------------------------------------------------
Average Annualized Returns
Periods Ended October 31, 1996
1 Year 3 Years 5 Years
- -----------------------------------------------------------------------------
Equity
S&P 500 Index 24.1% 17.7% 15.5%
Russell 2000 Index 16.6 11.2 14.8
MSCI-EAFE Index 10.8 6.9 8.0
- -----------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 5.9% 5.6% 7.7%
Lehman 10-Year Municipal
Bond Index 5.0 5.2 7.7
Salomon 90-Day U.S. Treasury Bills 5.3 5.0 4.4
- -----------------------------------------------------------------------------
Other
Consumer Price Index 3.0% 2.8% 2.9%
- -----------------------------------------------------------------------------
In sum, investors displayed a strong preference for companies with
"predictable" earnings streams. One unusual note: the price/earnings ratio of
the S&P 500 Index rose 17% (from 15.8 to 18.5) during the last twelve months,
despite a rise in interest rates. In general, the P/E ratio moves inversely with
interest rates.
U.S. Fixed-Income Markets
While U.S. stock investors relished their solid gains, bond investors were not
so fortunate. Interest rates, as reflected in the 30-year U.S. Treasury yield,
fell from 6.33% on October 31, 1995, to 5.95% two months later. At that time,
analysts anticipated an environment of slow economic growth and harbored almost
no concern about potential increases in inflation. Underscoring that view, the
Federal Reserve Board's Open Market Committee cut both the discount rate and the
Federal funds rate by 0.25% in late January.
Economic data soon suggested a different scenario--one characterized by
accelerating economic activity. A range of indicators pointed toward more rapid
growth than anticipated, but none concerned the bond market as much as the
ongoing increases in employment. In many analysts' view, continued job growth
would probably lead to higher wage rates, which might not be offset by
improvements in productivity. The net result would be higher inflation, the bane
of bond investors. Such concerns caused the 30-year U.S. Treasury yield to
<PAGE>
climb to 7.19% in early July. From that point forward, interest rates declined,
although in an erratic pattern, leaving the long-term Treasury yield at 6.64% by
the end of October.
Three categories of bonds did benefit their investors, at least on a
relative basis, over the past year: short-maturity portfolios, low-quality
issues, and municipals. Short-maturity investors saw a small increase in rates
(0.18% for the 3-year U.S. Treasury bond). Owners of junk bonds earned positive
returns as lower-quality, higher-yielding issues generally fare well during
periods of steady growth; a modest increase in inflation can be beneficial to
junk-bond issuers (the Lehman High Yield Bond Index gained 11.1%). Municipal
bonds, freed from investor worries over the proposed "flat tax," performed
exceptionally well and, to some extent, seemed immune to the inflation concerns
of the taxable market. In fact, the yield on the benchmark 30-year municipal
fell -0.05% during the twelve months, while the yield on the comparable-maturity
U.S. Treasury issue rose 0.31%.
International Equity Markets
Investments in non-U.S. equity markets fared quite well over the fiscal year,
with one major exception: Japan. For the past twelve months, the Morgan Stanley
Capital International-Europe, Australasia, Far East Index (which covers all
major markets outside North America) posted a total return of 10.8% in dollars,
after a 5.1% increase in the value of the U.S. dollar over foreign currencies.
Nearly all of this return was generated in the European markets, where the
dollar return was 17.9% compared to 3.5% for the Pacific Basin. Aside from Japan
(-0.7% in dollars) and Singapore (-3.1%), markets in the Pacific Basin provided
very strong returns, as evidenced by Hong Kong (28.0%) and Australia (18.3%).
The variation in returns across and within regions can be attributed to
differing environments and expectations for growth and inflation. In Europe,
many governments focused on the deficit-spending guidelines mandated by the
Maastricht Treaty for the conversion to a common European currency unit (the
ECU). The Treaty stipulated that deficit spending not exceed defined
levels--with the idea that restraint would keep inflation to reasonable levels.
Over the past year, many governments reaffirmed their commitments to the ECU and
cut spending accordingly. Investors took this as an indication that inflation
would remain modest and economic growth tepid. The result was a strong boost to
high-quality growth stocks across Europe.
The Japanese market continues to suffer because the long-anticipated
economic recovery has yet to materialize in a meaningful way. Despite some
positive signs, such as improving corporate profits, the Japanese economy
continues to perform in a lack-luster fashion.
Report From The Adviser
Our total return for the twelve months ended October 31--our fiscal year--was
23.2%, slightly less than the Standard & Poor's 500 Composite Stock Price
Index's 24.1% and better than the 21.4% turned in by the average value (growth
and income) mutual fund. For the first ten months of calendar 1996, our total
return of 18.4% outdistanced both the S&P 500 Index (16.6%) and the competitive
group (14.7%). Our fiscal-year performance was boosted by our holdings in the
financial, energy, and technology sectors. At the same time, we were not helped
by the neutral performance of our auto holdings, the quite poor performance of
our basic-materials holdings, and--given the strong market--our significant cash
position. More detail can be found in our traditional report card on page 7.
<PAGE>
Our equity holdings on October 31 were 89% of net assets, up from 80% at
the beginning of 1996. We intend to increase the equity ratio to at least 90% by
the end of 1996 and at least 95% by mid-1997. We plan to keep it at
95%-100%--i.e., essentially fully invested--after that. Not that the market is
not on the high side--in fact, by our reckoning, it is about 15% above fair
value--but it's a big stock market, and the Fund can choose from among plenty of
stocks with low price/earnings ratios. Our goal is to deliver to you, the
shareholder, the full plate of equities that you expect, and if you want to keep
cash on the side--as a hedge against the stock market, say--that's up to you.
We gave ourselves 18 months to become fully invested, thinking that this
would give us a chance to put the cash to work opportunistically, buying into
any temporarily sagging sectors or into an overall market drop that might well
occur in such a length of time. That we have been able to do this is well
illustrated by our portfolio's P/E ratio, which is only 9.4 times estimated 1997
earnings (except for energy stocks, which we value on an asset basis). This is a
sharp 42% discount to the market, which, as represented by the S&P 500 Index,
has a P/E ratio of more than 16 times estimated 1997 earnings.
As part of our full-investment program, we wanted to diversify the Fund
beyond our very large concentrations in consumer cyclicals (especially autos),
energy, basic materials, and financial stocks. We have been able to do this,
most notably increasing our technology position from 3% of net assets at the
beginning of the year to about 11%. The largest holdings in this new position
are Compaq, Seagate, and Nokia--leaders in the PC, disk drive, and wireless
telecommunication fields, respectively. These are companies with 15% annual
growth rates that we bought in a big way earlier in 1996, at 7-to-9 times 1997
earnings--i.e., Windsor math--and that have contributed significantly to our
performance this year, advancing some 40% to 60% from our purchase price. Other
1996 additions to the portfolio include 3% positions in airlines and agriculture
(farm equipment and fertilizer companies) and 2% positions in AT&T and
Rhone-Poulenc.
Our energy holdings decreased during the fiscal year from 14% of net assets
to 12%. The group performed well, and we took some profits, particularly as we
do not think that a $23-a-barrel price for crude oil is sustainable. We also
fear that prices of well over $2 per thousand cubic feet for natural gas may not
last, particularly if the current pace of drilling in the United States
persists. Our financial-sector concentration--banks, savings and loans, and
insurance--fell from 25% to 19%, as we again have been selling into strength,
although we continue to be overweighted versus the market. Citicorp is the
largest single holding here; at 4.6%, it is still the second-largest holding in
the Fund. Its developing-country business, which distinguishes Citicorp from
other banks, produces 60% of the company's total earnings and is growing at an
annual clip of 12% to 15%. Also, Citicorp continues to use all of its excess
earnings to buy its own stock at the rate of 6% to 7% per year.
Autos still make up about 10% of the portfolio, with Chrysler, at 6%, the
largest holding in the Fund. On the core product development side, Chrysler
continues to crank out hit after hit. We are convinced that this is no fluke,
that Chrysler is the most nimble and entrepreneurial of the Big Three, that it
has institutionalized these strengths, and that it will continue to gain market
share over time. Finally, our basic-materials concentration--aluminum,
chemicals, paper, and steel--comprises 21% of the portfolio and, while
disappointing to date, is well placed directionally. We believe that, with low
inflation and easing interest rates around the world, 1997 should be a year of
synchronous economic growth, with global industrial production rising on the
order of 4.5%. This will chew up a lot of aluminum, chemicals, paper, and steel
at a rate outstripping the underlying capacity increases, and thus we should
enjoy a sustained rise in the commodity prices.
Our investing style is well established: low P/E, price-opportunistic on
the buy side, price-disciplined on the sell side, and a willingness to
concentrate where it makes sense. Importantly, the current Windsor team, which I
have the pleasure to lead, has more than 50 years of collective experience in
this investing style and is entirely focused on the task of providing unusual
returns for your investment in the Fund.
<PAGE>
Charles T. Freeman, Portfolio Manager
Wellington Management Company, LLP
November 14, 1996
Investment Philosophy
The adviser believes that superior long-term investment results can be
achieved by emphasizing common stocks that are generally misunderstood, out of
favor, or undervalued by fundamental measures such as price/earnings ratio or
dividend yield. The adviser will concentrate a large portion of the Fund's
assets in those securities it believes offer the best return potential.
Windsor 1996 Report Card
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year 1996*
10/31/96
Percent Weighted Relative to Meaningful
Significant of Net Average S&P 500 Windsor Positions
Concentrations Assets Appreciation Index (In Order of Size) Grade Critique
Autos 10% 21% 1% Chrysler, Ford C Chrysler good,
Ford not.
<S> <C> <C> <C> <C> <C>
Banks 8% 39% 21% Citicorp, A+Big outperform-
NationsBank, ance two years
First Union in a row makes a
coup of 1994's
buildup in this
area to 22%
of Fund.
Basic Materials 21% 0% -18% Georgia-Pacific, F Quite disap-
(aluminum, Reynolds Metals, pointing so far,
chemicals, Alcoa, Champion but improving
paper, and steel) International, supply/demand
Union Camp, should make these
Lyondell Petro- good 1997 stocks;
chemical, Stone aluminum our
Container, favorite.
Union Carbide,
Georgia Gulf
Energy 12% 26% 9% Burlington A Our long-stand-
Resources, USX- ing natural gas
Marathon Group, case finally
Atlantic Richfield, panned out;
Enserch plus a surprising
surge in crude
oil price.
Insurance 4% 25% 13% Allstate, CIGNA A Allstate terrific,
including some
purchases earlier
this year.
Savings & 6% 25% 5% Golden West B+ Finally some
Loans Financial, Great recognition here.
Western Financial,
<PAGE>
H.F. Ahmanson
Technology 11% 26% 15% Seagate, Compaq, A+ Home run--
Nokia, Advanced quick payoff on
Micro Devices early 1996
purchases.
</TABLE>
*Capital change only. For stocks purchased and sold during the year, absolute
appreciation is measured from the date of purchase or to the date of sale, and
then relative to the S&P 500 Index for the same period.
Portfolio Profile: Windsor Fund
October 31, 1996
This Profile provides a snapshot of the Fund's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on page 9.
Portfolio Characteristics
- -------------------------------------------------------------------------------
Windsor S&P 500
- -------------------------------------------------------------------------------
Number of Stocks 104 500
Median Market Cap $6.4B $24.2B
Price/Earnings Ratio 14.7x 18.5x
Price/Book Ratio 1.9x 3.3x
Yield 2.4% 2.1%
Return on Equity 10.3% 19.6%
Earnings Growth Rate 10.3% 13.7%
Foreign Holdings 6.7% 3.8%
Turnover Rate 34% --
Expense Ratio 0.31% --
Cash Reserves 9.7% --
Volatility Measures
- -------------------------------------------------------------------------------
Windsor S&P 500
- -------------------------------------------------------------------------------
R-Squared 0.65 1.00
Beta 0.94 1.00
Ten Largest Holdings (% of Total Net Assets)
- -------------------------------------------------------------------------------
Chrysler Corp. 6.3%
Citicorp 4.6
Seagate Technology 4.4
Ford Motor Co. 4.2
Burlington Resources, Inc. 4.0
Georgia-Pacific Corp. 3.9
USX-Marathon Group 3.3
Compaq Computer Corp. 3.1
Golden West Financial Corp. 2.3
Reynolds Metals Co. 2.3
- -------------------------------------------------------------------------------
Top Ten 38.4%
<PAGE>
Sector Diversification (% of Common Stock)
- -------------------------------------------------------------------------------
October 31, 1995 October 31, 1996
- -------------------------------------------------------------------------------
Windsor Windsor S&P 500
Basic Materials .................... 26.8% 26.3% 6.3%
Capital Goods & Construction ....... 2.2 4.3 8.6
Consumer Cyclical ................. 15.1 12.4 12.7
Consumer Staples ................... 0.0 0.0 12.3
Energy ............................. 17.5 13.4 9.6
Financial .......................... 31.3 21.5 14.8
Health Care ........................ 0.0 2.2 10.4
Technology ......................... 3.9 12.7 12.1
Transport & Services ............... 1.1 3.7 1.4
Utilities .......................... 1.5 2.8 9.7
Miscellaneous ...................... 0.6 0.7 2.1
- -------------------------------------------------------------------------------
Beta. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall market
rose or fell by 10%.
Earnings Growth Rate. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
Expense Ratio. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors. The average expense ratio for a stock mutual fund was
1.34% in 1995.
Foreign Holdings. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts (ADRs) of companies based outside the
United States.
Investment Focus. This grid indicates a portfolio's characteristics in terms of
market capitalization and relative valuation (growth, value, or a blend). For
instance, if the upper right box of the grid is shaded, it indicates that a
portfolio emphasizes large capitalization growth stocks.
Median Market Cap. The midpoint of market capitalization (market price x shares
outstanding) of stocks in the portfolio. Half the stocks in the portfolio have
higher market capitalizations and half lower.
Number of Stocks. An indicator of diversification. The more stocks a portfolio
holds, the more diversified, and the more likely it is to perform in line with
the overall stock market.
Price/Book Ratio. The share price of a stock, divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
Price/Earnings Ratio. The ratio of a stock's current price to its per-share
earnings over the past year. P/E is an indicator of market expectations about
corporate prospects; the higher the P/E, the greater the expectations for a
company's future growth. For a portfolio, the weighted average P/E of the stocks
it holds.
Return on Equity. The rate of return generated by a company during the past year
for each dollar of shareholder's equity (net income for the year / shareholder's
equity). For a portfolio, the weighted average return on equity for the
companies represented in the portfolio.
R-Squared. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
<PAGE>
Sector Diversification. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
Ten Largest Holdings. Indicates the percentage of a portfolio's total net assets
in its ten largest stocks (the average for stock mutual funds is about 25%). As
this percentage rises, a portfolio's returns are likely to be more volatile,
since its return is more dependent on a few companies.
Turnover Rate. Indicates trading activity during the past year. Portfolios with
high turnover rates incur higher transaction costs and are more likely to
realize and distribute capital gains (which are taxable to investors). The
average turnover rate for stock mutual funds is about 80%.
Yield. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of a portfolio's net asset value, is based on
income earned by the portfolio over the past 30 days and is annualized, or
projected forward for the coming year.
Total Investment Returns: 10/31/76-10/31/96
Windsor Fund S&P 500
Fiscal Capital Income Total Total
Year Return Return Return Return
1977 3.8% 4.3% 8.1% -6.1%
1978 6.2 5.0 11.2 6.3
1979 13.5 6.0 19.5 15.3
1980 17.2 7.0 24.2 32.1
1981 11.1 6.9 18.0 0.6
1982 14.2 7.0 21.2 16.3
1983 25.3 7.3 32.6 27.8
1984 9.6 6.9 16.5 6.3
1985 16.6 6.7 23.3 19.4
1986 22.8 6.5 29.3 33.2
1987 2.7% 1.9% 4.6% 6.4%
1988 18.9 8.1 27.0 14.8
1989 11.9 5.2 17.1 26.4
1990 -31.8 3.9 -27.9 -7.5
1991 35.7 9.0 44.7 33.5
1992 4.3 5.0 9.3 10.0
1993 24.6 3.7 28.3 14.9
1994 3.7 2.6 6.3 3.9
1995 14.2 3.6 17.8 26.4
1996 19.6 3.6 23.2 24.1
Cumulative Performance: 10/31/86-10/31/96
- -------------------------------------------------------------------------------
Average Annual Total Returns
Periods Ended October 31, 1996 Final Value of a
1 Year 5 Years 10 Years $10,000 Investment
- -------------------------------------------------------------------------------
Windsor Fund 23.16% 16.69% 13.38% $35,091
Average Value Fund 21.39 13.80 12.56 32,641
S&P 500 Index 24.10 15.55 14.66 39,283
- -------------------------------------------------------------------------------
<PAGE>
Average Annual Total Returns: Periods Ended 9/30/96*
- --------------------------------------------------------------------------------
Inception 10 Years
- --------------------------------------------------------------------------------
Date 1 Year 5 Years Capital Income Total
Windsor Fund 10/23/58 13.28% 15.95% 8.18% 4.93% 13.11%
- --------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Fund's fiscal year end.
Financial Statements
October 31, 1996
Statement of Net Assets
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund to
arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the Fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the Fund's investments and their cost, and reflects
the gains (losses) that would be realized if the Fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Market
Value*
Windsor Fund Shares (000)
COMMON STOCKS (88.9%)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Basic Materials (23.4%)
(1) AK Steel Holding Corp. 2,294,400 81,451
Akzo Nobel NV ADR 412,500 26,039
Alcan Aluminium Ltd. 3,891,900 127,946
o(1)Alumax, Inc. 2,352,600 75,577
Aluminum Co. of America 5,632,400 330,199
Arcadian Corp. 1,085,900 26,740
o(1)Bethlehem Steel Corp. 8,495,800 69,028
(1) Bowater Inc. 3,500,000 123,813
British Steel PLC ADR 5,344,400 146,971
(1) Century Aluminum Co. 2,000,000 27,000
(1) Champion International Corp. 6,300,000 274,050
<PAGE>
Freeport-McMoRan, Inc. 842,200 26,845
(1) Freeport-McMoRan Resource Partners, LP 6,549,100 113,791
o Geneva Steel Class A 1,309,500 4,911
(1) Geon Co. 2,480,000 48,670
(1) Georgia Gulf Corp. 3,705,300 100,043
(1) Georgia-Pacific Corp. 8,286,300 621,473
IMC Global, Inc. 1,617,000 60,637
Inland Steel Industries, Inc. 1,929,200 31,108
o Kemira Oy ADR 1,994,000 43,370
(1) LTV Corp. 7,302,600 74,852
(1) Lyondell Petrochemical Co. 7,410,600 157,475
(1) Mississippi Chemical Corp. 1,570,800 39,270
o(1)National Steel Corp. Class B 1,897,300 16,364
Norsk Hydro AS ADR 1,660,900 76,194
(1) Reynolds Metals Co. 6,225,800 350,201
Rouge Steel Co. Class A 1,395,300 28,429
o Ryerson Tull, Inc. Class A 1,450,500 18,494
(1) Stone Container Corp. 9,470,000 144,418
(1) Terra Industries, Inc. 4,170,000 61,508
(1) Union Camp Corp. 5,408,900 263,684
Union Carbide Corp. 2,542,600 108,378
o WHX Corp. 203,700 1,706
o(1)Weirton Steel 3,719,500 7,904
- ---------------------------------------------------------------------------------------------
3,708,539
Capital Goods & Construction (3.8%)
Case Corp. 3,129,000 145,498
(1) Continental Homes Holding Corp. 687,900 11,178
(1) LaFarge Corp. 5,471,500 101,907
Lone Star Industries, Inc. 202,600 7,446
MDC Holdings, Inc. 498,600 3,677
(1) Owens Corning 5,096,800 197,501
(1) Ryland Group, Inc. 925,200 11,912
Southdown, Inc. 366,600 10,036
(1) Standard Pacific Corp. 1,750,000 9,406
o(1)Toll Brothers, Inc. 1,787,300 30,608
o USG Corp. 1,669,100 49,238
o(1)U.S. Home Corp. 1,100,000 23,788
- ---------------------------------------------------------------------------------------------
602,195
Consumer Cyclical (11.0%)
o Burlington Coat Factory Warehouse Corp. 421,500 5,163
o(1)Burlington Industries, Inc. 6,700,000 76,213
Chrysler Corp. 29,570,400 994,305
Ford Motor Co. 21,215,800 662,994
- ---------------------------------------------------------------------------------------------
1,738,675
Energy (11.9%)
Amerada Hess Corp. 518,400 28,706
Atlantic Richfield Co. 2,177,000 288,453
(1) Burlington Resources, Inc. 12,531,000 631,249
(1) Cabot Oil & Gas Corp. Class A 2,255,200 34,956
(1) ENSERCH Corp. 4,753,500 102,200
o Enserch Exploration, Inc. 3,011,000 29,734
Murphy Oil Corp. 1,966,700 97,106
o Seagull Energy Corp. 1,450,000 31,356
(1) USX-Marathon Group 24,027,200 525,595
<PAGE>
Ultramar Corp. 1,875,700 53,692
(1) Valero Energy Corp. 2,688,100 63,842
- ---------------------------------------------------------------------------------------------
1,886,889
Financial (19.1%)
(1) H.F. Ahmanson & Co. 7,676,845 240,861
Allstate Corp. 6,113,100 343,098
Bancorp Hawaii, Inc. 123,200 4,882
Bear Stearns Co., Inc. 4,264,365 100,746
Chase Manhattan Corp. 559,700 47,994
CIGNA Corp. 1,705,200 222,528
Citicorp 7,349,200 727,571
o Coast Savings Financial, Inc. 431,600 14,189
(1) Equity Residential Properties Trust REIT 2,178,900 80,074
First Union Corp. 3,034,000 220,724
(1) Golden West Financial Corp. 5,652,100 366,680
(1) Great Western Financial Corp. 9,621,586 269,404
(1) IPC Holdings Ltd. 1,370,600 29,468
KeyCorp 1,072,923 50,025
Mid Ocean Ltd. 367,600 17,277
NationsBank Corp. 2,391,700 225,418
PartnerRe Ltd. 2,116,200 60,576
- ---------------------------------------------------------------------------------------------
3,021,515
Health Care (1.9%)
Rhone-Poulenc SA ADR 10,351,872 307,968
- ---------------------------------------------------------------------------------------------
Technology (11.3%)
o(1)Advanced Micro Devices, Inc. 12,879,500 228,611
o Arrow Electronics, Inc. 1,080,000 51,435
o Compaq Computer Corp. 6,994,000 486,957
o Komag, Inc. 446,300 12,274
Nokia Corp. Pfd. ADR 5,833,400 270,524
o Quantum Corp. 1,466,000 29,503
o(1)Seagate Technology 10,552,108 704,353
- ---------------------------------------------------------------------------------------------
1,783,657
Transport & Services (3.3%)
o America West Airlines, Inc. 1,454,200 16,723
o AMR Corp. 1,400,000 117,600
o(1)Continental Airlines-Class B 3,567,500 89,634
(1) Delta Air Lines, Inc. 4,072,000 288,603
(1) Maritrans Inc. 739,000 4,526
- ---------------------------------------------------------------------------------------------
517,086
Utilities (2.5%)
AT&T Corp. 9,606,000 335,009
Unicom Corp. 2,321,499 60,359
- ---------------------------------------------------------------------------------------------
395,368
Miscellaneous (0.7%) 115,463
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $11,292,728) 14,077,355
- ---------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.2%)
Atlantic Richfield Cvt. 9.00% (Convertible into Lyondell
Petrochemical Co.) 610,000 13,191
Bethlehem Steel Corp. $5.00 123,900 6,381
Reynolds Metals Co. $3.31 180,000 8,798
- ---------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $30,648) 28,370
- ---------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (1.3%)
- ---------------------------------------------------------------------------------------------
<PAGE>
U.S. Treasury Note
7.25%, 11/15/96
(Cost $204,654) $204,500 204,627
- ---------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.7%)
Commercial Paper (4.7%)
Abbott Laboratories
5.23%, 11/5/96 20,000 19,988
5.30%, 11/14/96 20,000 19,962
5.312%, 11/6/96 25,000 24,982
5.343%, 12/30/96 19,080 18,912
AIG Funding Inc.
5.333%, 11/26/96 20,000 19,927
The Coca Cola Co.
5.33%, 11/7/96 22,900 22,880
Duke Power Co.
5.317%, 11/12/96 35,000 34,944
E.I. du Pont de Nemours & Co.
5.282%, 11/7/96 25,000 24,978
5.306%, 11/19/96 50,000 49,870
5.316%, 11/22/96 50,000 49,848
Emerson Electric
5.279%, 11/4/96 30,000 29,987
5.286%, 11/12/96 30,000 29,952
General Electric Co.
5.25%, 12/10/96 50,000 49,709
5.371%, 12/11/96 50,000 49,702
General Re Corp.
5.366%, 12/24/96 100,000 99,227
Harvard University
5.318%, 11/19/96 25,000 24,935
5.328%, 11/5/96 35,000 34,980
5.329%, 11/21/96 30,000 29,913
Hewlett-Packard Co.
5.287%, 11/6/96 50,000 49,964
Metlife Funding Inc.
5.317%, 11/13/96 41,260 41,188
Private Export Fund Corp.
5.549%, 12/18/96 25,000 24,825
- ---------------------------------------------------------------------------------------------
750,673
Federal Home Loan Bank (0.5%)
5.389%, 11/20/96 80,000 79,769
- ---------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. (1.8%)
- ---------------------------------------------------------------------------------------------
5.20%, 12/9/96 23,700 23,570
5.284%, 11/20/96 50,000 49,863
5.288%, 11/15/96 50,000 49,899
5.289%, 11/19/96 90,000 89,767
5.294%, 11/14/96 68,000 67,872
- ---------------------------------------------------------------------------------------------
280,971
- ---------------------------------------------------------------------------------------------
Federal National Mortgage Assn. (0.9%)
5.279%, 11/26/96 40,000 39,856
5.284%, 11/29/96 100,000 99,597
- ---------------------------------------------------------------------------------------------
139,453
- ---------------------------------------------------------------------------------------------
Student Loan Marketing Assn. (0.2%)
5.337%, 12/13/96 40,000 39,754
- ---------------------------------------------------------------------------------------------
Repurchase Agreement (1.6%)
- ---------------------------------------------------------------------------------------------
<PAGE>
Collateralized by U.S. Government Obligations in a Pooled
Cash Account
5.58%, 11/1/96 247,923 247,923
- ---------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $1,538,572) 1,538,543
- ---------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(Cost $13,066,602) 15,848,895
OTHER ASSETS AND LIABILITIES (-0.1%)
- ---------------------------------------------------------------------------------------------
Other Assets--Notes C and F 582,092
Liabilities--Note F (589,937)
- ---------------------------------------------------------------------------------------------
(7,845)
- ---------------------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 932,473,612 outstanding
$.01 par value shares
(authorized 1,300,000,000 shares) $15,841,050
=============================================================================================
NET ASSET VALUE PER SHARE $16.99
</TABLE>
*See Note A in Notes to Financial Statements.
o Non-Income Producing Security.
(1)Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of such company.
ADR--American Depository Receipt.
AT OCTOBER 31, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------
Paid in Capital $11,707,454 $12.56
Undistributed Net Investment Income 114,649 .12
Accumulated Net Realized Gains 1,236,654 1.33
Unrealized Appreciation--Note E 2,782,293 2.98
===========================================================================
NET ASSETS $15,841,050 $16.99
Statement of Operations
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
- --------------------------------------------------------------------------------
Windsor Fund
Year Ended
October 31, 1996
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
- --------------------------------------------------------------------------------
Income
Dividends $ 319,222
Interest 118,745
- --------------------------------------------------------------------------------
Total Income 437,967
- --------------------------------------------------------------------------------
Expenses
Investment Advisory Fees--Note B
Basic Fee 18,816
Performance Adjustment (4,417)
The Vanguard Group--Note C
Management and Administrative 26,107
Marketing and Distribution 2,505
Taxes (other than income taxes) 962
<PAGE>
Custodian Fees 19
Auditing Fees 21
Shareholders' Reports 398
Annual Meeting and Proxy Costs 153
Directors' Fees and Expenses 43
- --------------------------------------------------------------------------------
Total Expenses 44,607
Expenses Paid Indirectly--Note C (2,716)
- --------------------------------------------------------------------------------
Net Expenses 41,891
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 396,076
- --------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 1,243,836
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENT SECURITIES 1,366,247
================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,006,159
================================================================================
Statement of Changes in Net Assets
This Statement shows how the Fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information that is
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the Fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
Fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
- ----------------------------------------------------------------------------
Windsor Fund
Year Ended October 31,
- ----------------------------------------------------------------------------
1996 1995
(000) (000)
- ----------------------------------------------------------------------------
INCREASE IN NET ASSETS
Operations
Net Investment Income $ 396,076 $ 360,056
Realized Net Gain 1,243,836 1,167,670
Change in Unrealized Appreciation
(Depreciation) 1,366,247 425,123
- ----------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 3,006,159 1,952,849
- ----------------------------------------------------------------------------
Distributions
Net Investment Income (406,918) (352,640)
Realized Capital Gain (1,165,890) (673,435)
- ----------------------------------------------------------------------------
Total Distributions (1,572,808) (1,026,075)
- ----------------------------------------------------------------------------
Capital Share Transactions(1)
Issued 1,866,840 1,283,038
Issued in Lieu of Cash Distributions 1,499,031 976,040
Redeemed (1,965,937) (1,584,392)
- ----------------------------------------------------------------------------
Net Increase from Capital Share
Transactions 1,399,934 674,686
- ----------------------------------------------------------------------------
Total Increase 2,833,285 1,601,460
- ----------------------------------------------------------------------------
Net Assets
Beginning of Year 13,007,765 11,406,305
============================================================================
End of Year $15,841,050 $13,007,765
<PAGE>
(1)Shares Issued (Redeemed)
Issued 121,079 89,000
Issued in Lieu of Cash Distributions 102,408 75,852
Redeemed (127,266) (112,335)
============================================================================
Net Increase in Shares Outstanding 96,221 52,517
============================================================================
Financial Highlights
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the Fund;
and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in the
Fund for one year. Finally, the table lists the Fund's Average Commission Rate
Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Windsor Fund
Year Ended October 31,
- ----------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding
Throughout Each Year 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $15.55 $14.55 $14.95 $12.37 $12.79
- ----------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .43 .44 .44 .37 .49
Net Realized and Unrealized Gain
(Loss) on Investments 2.85 1.86 .42 2.98 .50
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.28 2.30 .86 3.35 .99
- ----------------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net
Investment Income (.46) (.44) (.37) (.39) (.57)
Distributions from Realized
Capital Gains (1.38) (.86) (.89) (.38) (.84)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.84) (1.30) (1.26) (.77) (1.41)
Net Asset Value, End of Year $16.99 $15.55 $14.55 $14.95 $12.37
Total Return 23.16% 17.80% 6.35% 28.29% 9.30%
============================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year
(Millions) $15,841 $13,008 $11,406 $10,537 $8,250
Ratio of Total Expenses to
Average Net Assets--Note C 0.31% 0.45% 0.45% 0.40% 0.26%
Ratio of Net Investment
Income to Average Net Assets 2.75% 3.01% 3.11% 2.68% 3.89%
Portfolio Turnover Rate 34% 32% 34% 25% 32%
Average Commission Rate Paid $.0579 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Financial Statements
<PAGE>
Vanguard/Windsor Fund is registered under the Investment Company Act of 1940 as
a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform with generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. Security Valuation: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities not listed on an exchange are valued at
the latest quoted bid prices. Bonds, and temporary cash investments acquired
over 60 days to maturity, are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by independent
pricing services. Other temporary cash investments are valued at amortized cost,
which approximates market value.
2. Federal Income Taxes: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
3. Repurchase Agreements: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. Government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. Distributions: Distributions to shareholders are recorded on the
ex-dividend date.
5. Other: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Under a contract that expires July 31, 1998, the Fund pays Wellington
Management Company, LLP an investment advisory fee calculated at an annual
percentage rate of average net assets. The basic fee is subject to quarterly
adjustments based on performance relative to the S&P 500 Index. For the year
ended October 31, 1996, the advisory fee represented an effective annual basic
rate of 0.13% of the Fund's average net assets before a decrease of $4,417,000
(0.03%) based on performance. The basic fee reflects a fee waiver of $2,616,000
(0.02%) during the period January 1, 1996, to July 31, 1996.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At October 31,
1996, the Fund had contributed capital of $1,450,000 to Vanguard (included in
Other Assets), representing 7.2% of Vanguard's capitalization. The Fund's
directors and officers are also directors and officers of Vanguard.
Vanguard has asked the Fund's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended October 31, 1996, these arrangements reduced the Fund's expenses by
$2,716,000 (0.02% of average net assets).
D. During the year ended October 31, 1996, the Fund purchased $5,268,883,000 of
investment securities and sold $4,290,314,000 of investment securities, not
counting U.S. Government securities and temporary cash investments.
E. At October 31, 1996, net unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes was $2,782,293,000,
consisting of unrealized gains of $3,327,206,000 on securities that
<PAGE>
had risen in value since their purchase and $544,913,000 in unrealized losses on
securities that had fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at October 31, 1996,
was $438,709,000, for which the Fund held cash collateral of $456,161,000.
Report Of Independent Accountants
To the Shareholders and
Board of Directors of
Vanguard/Windsor Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Windsor Fund (the "Fund") at October 31, 1996, and the results of its
operations, the changes in its net assets and the financial highlights for each
of the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 2, 1996
Special 1996 Tax Information (unaudited)
Vanguard/Windsor Fund
This information for the fiscal year ended October 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $1,038,544,000 as capital gain dividends (from net
long-term capital gains), which will be distributed in December 1996.
For corporate shareholders, 49.9% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received
deduction.
<PAGE>
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
<PAGE>
GEMINI II
Annual Report
December 31, 1996
[PHOTO]
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our course
toward the twenty-first century. Our Report cover reflects that blending of
tradition and innovation, of past, present, and future. The montage includes a
bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings named
after Nelsons warships (Victory, Majestic, and Goliath are three shown), to our
artwork and ornamental compass rose.
<PAGE>
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged market
benchmark and a peer group of mutual funds with similar investment policies. It
also reviews the principal factors contributing to--and detracting from--the
returns earned by the Fund. To help you evaluate your Fund's current-year
performance, the Message includes a discussion of the Fund's long-term
investment results, as well as a look ahead to the prospects for the coming
year. A recap of the financial markets, which had been included as part of the
Chairman's letter, now appears in The Markets In Perspective. This overview
covers the world's financial markets, putting the results of the Fund's strategy
in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics. The
Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the adviser
to address--and we do our best to ensure that this Report is written in the same
simple and candid manner that characterizes all Vanguard communications.
Finally, each Adviser's Report will include an inset reminder of the adviser's
basic investment philosophy.
<PAGE>
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
Contents
A Message To Our Shareholders......................................1
The Markets In Perspective.........................................5
Report From The Adviser............................................7
Portfolio Profile..................................................8
Performance Summary...............................................10
Financial Statements..............................................11
Report Of Independent Accountants.................................18
Directors And Officers.............................Inside Back Cover
<PAGE>
FELLOW SHAREHOLDER,
Gemini II provided a total return of +16.2% in 1996, our final full year of
operations. As planned at our inception in February 1985, Gemini II's existence
as a dual-purpose, closed-end fund is drawing to a close, a process discussed in
more detail later in this letter.
[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
Our total return (capital change plus reinvested dividends) of +16.2% in
1996, however respectable in absolute terms, fell short of competitive
standards. We lagged by 6.8 percentage points the exceptionally strong +23.0%
total return on the unmanaged Standard & Poor's 500 Composite Stock Price Index;
we were 4.7 percentage points behind the +20.9% return on the average value
(growth and income) mutual fund. The table at right presents the return of the
Fund as a whole and the returns of our two comparative benchmarks.
- ---------------------------------------------
TOTAL RETURN
YEAR ENDED
DECEMBER 31, 1996
- ---------------------------------------------
Gemini II +16.2%
- ---------------------------------------------
Average Value Fund +20.9%
- ---------------------------------------------
S&P 500 Index +23.0%
- ---------------------------------------------
The Fund's total return takes into account the increase in our net asset
value, distributions from net investment income and realized short-term capital
gains, and federal taxes accrued on net long-term capital gains.
CAPITAL SHARE RESULTS
The return on our Capital Shares was +9.1% for the year, compared with a price
return of +20.3% for the S&P 500 Index. This return was based on a change in net
asset value from $26.35 on December 31, 1995, to $28.75 on December 31, 1996,
net of our accrual of $1.06 per share for federal taxes on long-term capital
gains realized during the year and a distribution of $0.24 from short-term
gains. The dramatic shortfall in our return versus the S&P 500 Index was due to
the fact that we held, on average, less than half the Fund's assets in common
stocks during the year, a significant handicap in a sharply rising stock market.
We also held a sizable position (34% of assets) in convertible securities, which
were hurt by rising interest rates in 1996.
This handicap was only partially offset by the Capital Shares' leverage of
1.3 times, which magnified by roughly 30% the increase in the net asset value of
Gemini II's total portfolio. In our initial public offering of shares, on
February 15, 1985, the leverage factor of the Capital Shares was 2.0, since the
Capital Shares provided only 50% of the Fund's total initial assets but received
100% of any appreciation or depreciation. This leverage ratio has declined over
time because of the substantial growth in the market value of our assets.
INCOME SHARE RESULTS
Gemini II's Income Shares earned dividends of $1.93 per share for 1996, compared
with $1.80 per share in 1995. The 1996 income distributions consisted of regular
quarterly dividends at the rate of $0.35 per share and an extra dividend of
$0.53 per share declared in December. This year-end dividend was simply the
amount by which our net investment income for the full year exceeded the
quarterly dividend payments.
1
<PAGE>
The 7% increase in annual net investment income was achieved despite the
"drag" of federal income taxes. As you know, each year these taxes are charged
directly against the Fund's assets, giving the Income Shares a commensurately
lower asset base on which to earn income. For 1996, our total portfolio provided
an annual yield, net of operating expenses, of 5.1%, 21/2 times the year-end
yield of 2.0% on the S&P 500 Index. Based on their year-end net asset value of
$9.34, our Income Shares provided a yield of 20.7%.
1996 OVERVIEW
In a nearly ideal environment of moderate economic growth, rising corporate
profits, and continued low inflation, the U.S. stock market flourished in 1996.
Interest rates fluctuated substantially, rising early in the year along with
estimates of the economy's strength, then declining in the autumn as estimates
of economic growth abated--and with them, inflation anxieties. However, interest
rates closed the year with a sharp upward spike in December. The yield on the
benchmark 30-year U.S. Treasury bond finished 1996 at 6.6%, up about six-tenths
of a percentage point from 6.0% at the end of 1995, driving the price of the
long bond down by nearly -8%.
In contrast, the price trend for common stocks was virtually one-way: up.
The S&P 500 Index provided positive returns in all but two months (July and
December), as both growth stocks and value stocks performed well. While returns
on these two groups are quite similar over long periods, they often diverge over
shorter periods. In 1996, the S&P/BARRA Growth Index earned a return of +24.0%,
not far ahead of the +22.0% earned by the S&P/BARRA Value Index.
As noted earlier, with such an ebullient stock market during 1996, we were
distinctly disadvantaged relative to our performance benchmarks by holding less
than half of our assets in common stocks. Our cash reserves were built up to 22%
of assets at year-end 1996 (as the Fund prepared for redemption of the Income
Shares in January 1997) and were a significant drag on our performance in such a
strong year for equities. Most equity mutual funds carry much smaller cash
reserve positions, and the S&P 500 Index, which exists only "on paper," is 100%
invested in stocks.
We also note that our 34% (average for the year) position in convertible
securities, which gave us a better-than-stock-market return in 1995, did just
the opposite in 1996. By way of comparison, the average growth and income fund
holds less than 5% of its assets in these securities.
- -------------------------------------------------------
PERCENTAGE OF NET ASSETS
DECEMBER 31,
-------------------------
1995 1996
- -------------------------------------------------------
EQUITY EQUIVALENTS
Common Stocks 48% 43%
Convertible Securities 36 33
Lower-Grade Bonds 3 2
- -------------------------------------------------------
SUBTOTAL EQUITY EQUIVALENTS 87% 78%
- -------------------------------------------------------
TEMPORARY CASH INVESTMENTS 13% 22%
- -------------------------------------------------------
TOTAL PORTFOLIO 100% 100%
- -------------------------------------------------------
That said, our stocks performed well on balance during 1996, earning a
return about one-half percentage point higher than the +23.0% return on the S&P
500 Index. This small edge was due in part to our concentration in
financial-sector stocks (roughly half of our equities versus 14% for the Index),
the second-best sector in 1996, and from a significant underweighting (roughly
2% versus 11% in the Index) in utilities, the worst-performing sector. Our
charter, which requires that the equities we hold must pay dividends, rendered
most technology stocks--the year's best performers--off limits to Gemini II.
2
<PAGE>
The table at the bottom of the previous page shows the composition of the
Fund at year-end 1996, along with its makeup one year earlier.
OUR LIFETIME RECORD
With the redemption of its Income Shares on January 31, 1997, Gemini II will
soon end its operations as a dual-purpose closed-end fund. In February, we hope
to obtain shareholder approval to convert the remaining Capital Shares into an
open-end fund. If shareholders approve the proposal, they will have the option
of redeeming their shares at the prevailing net asset value or maintaining their
investment in the restructured fund. Thereafter, the Board of Directors expects
to seek a shareholder vote on merging the restructured fund into
Vanguard/Windsor Fund, an open-end, growth and income fund advised by Wellington
Management Company, LLP. Windsor's portfolio manager is Charles T. Freeman, who
has been involved in managing the Fund for more than 25 years.
The record established in the nearly twelve years since Gemini II's
inception is a fine one. The adjacent table compares the cumulative and average
annual returns of Gemini II with those of the S&P 500 Index and the average
value mutual fund. As you can see, Gemini II's average annual return of +15.4%
is a full 1.5 percentage points ahead of the average competing fund, amounting
to a cumulative advantage of more than 75 percentage points (+445% versus +369%)
over the full period.
- -------------------------------------------------------------
TOTAL RETURN
FEB. 15, 1985, TO DEC. 31, 1996
--------------------------------
CUMULATIVE ANNUAL RATE
- -------------------------------------------------------------
Gemini II +445.2% +15.4%
- -------------------------------------------------------------
Average Value Fund +369.0% +13.9%
- -------------------------------------------------------------
S&P 500 Index +494.1% +16.2%
- -------------------------------------------------------------
Our shortfall of -0.8% annually versus the Index is due largely to the fact
that Gemini II, as an actual operating portfolio, incurs advisory fees,
operating expenses, and transaction costs, burdens that are not borne by the
Index, a theoretical construct. Also, during the bull market prevailing since
the Fund's inception, our portfolio has been more conservatively positioned
(holding sizable portions of its assets in bonds and cash) than the Index, which
is always fully invested in stocks.
When Gemini II matures on January 31, its Income Shares will be redeemed at
their net asset value on that date, at each shareholder's election either in
cash or in the form of shares in the Prime Portfolio of Vanguard Money Market
Reserves or Vanguard/Windsor Fund. The Capital Shares will continue to trade on
the New York Stock Exchange until shareholders approve conversion to an open-end
mutual fund. Shareholders are scheduled to vote on February 19. For the record,
we present above the net asset value of each share class, its market price based
on trading on the New York Stock Exchange, and the premium the market price
represented over net asset value at year-end 1996. You will note that now that
the redemption date and open-ending date are near, the large discount on the
Capital Shares and large premium on the Income Shares that have prevailed over
the years have been replaced by nominal premiums.
- --------------------------------------------------------
DECEMBER 31, 1996
-----------------------------
NET ASSET MARKET
VALUE PRICE PREMIUM
- --------------------------------------------------------
Capital Shares $28.75 $29.00 +0.9%
Income Shares 9.34 9.50 +1.7
- --------------------------------------------------------
TOTAL $38.09 $38.50 +1.1%
- --------------------------------------------------------
3
<PAGE>
IN SUMMARY
Gemini II has had the good fortune to exist during one of the most remarkable
periods in history for the U.S. stock market. Stock prices have been
rising--with only a few brief setbacks--for our near-twelve-year history. This
means that many equity fund investors today have experienced only "upside
volatility," and not the "downside volatility" that is also part and parcel of
investing in common stocks.
Now, as Gemini II shareholders decide how to redeploy the assets they have
invested in the Fund, it is appropriate to step back and assess the outlook for
the financial markets. While no one can accurately predict what will happen over
the next decade--or even the next year--it seems unlikely that stocks will enjoy
a repeat of the exceptional returns of this remarkable era. Indeed, there are
sure to be some rough seas ahead. Nonetheless, we believe that investors who
maintain a balanced portfolio of stock funds, bond funds, and money market funds
will overcome the volatility of the financial markets and be rewarded. This has
been our consistent message: "Stay the course." It has proved wise counsel in
the past, and we see no reason why it should not continue to be in the future.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENAN
Chairman of the Board President
January 24, 1997
4
<PAGE>
THE MARKETS IN PERSPECTIVE: YEAR ENDED DECEMBER 31, 1996
U.S. EQUITY MARKETS
The stock market in 1996 could not match its astonishing 37.6% return of the
previous year--but it made a good run, with the Standard & Poor's 500 Composite
Stock Price Index up by 23.0%. When the two years are considered cumulatively,
the S&P 500 Index has risen 69.2%. Not surprisingly, many of the factors that
drove the market higher in 1995 were still at work: Once again, steady economic
growth, low inflation, and solid earnings growth were powerful motivators.
The market's gains, however, were far from evenly distributed. Investors
strongly favored larger companies, such as those that dominate the S&P 500
Index. In fact, even within the Index, it was the largest companies that
prevailed: The 50 biggest (which account for roughly half the Index's market
value) gained 26.7% in 1996, compared with an increase of 23.0% for the entire
Index. Looking at the S&P 500 Index's performance by sector, technology stocks
were strongest, closing the year with a 42.5% gain. Financial stocks were a
close second, gaining 35.5%. Utilities, plagued early in the year by higher
interest rates and a rapidly changing competitive landscape, eked out a meager
1.8% return, the lowest within the Index.
With the largest companies performing so well, most smaller issues could
not keep pace. This was evidenced in the considerable difference between the
23.0% return of the S&P 500 Index and the 16.5% return of the Russell 2000 Index
of small stocks. Even for the smaller companies, there was a significant range
of performance among sectors. Energy stocks led the Russell 2000 Index with a
62.0% gain for the year. Here, rising prices, limited exposure to the cyclical
refining business, and a reduced number of competitors created a favorable
environment for the stocks. At the other end of the spectrum were health-care
stocks, which showed a loss of -3.3%.
- -------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1996
-----------------------------------
1 YEAR 3 YEARS 5 YEARS
- -------------------------------------------------------------------------
Equity
S&P 500 Index 23.0% 19.7% 15.2%
Russell 2000 Index 16.5 13.7 15.6
MSCI-EAFE Index 6.4 8.6 8.5
- -------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.6% 6.0% 7.0%
Lehman 10-Year Municipal
Bond Index 4.5 5.3 7.5
Salomon 90-Day U.S. Treasury Bills 5.3 5.1 4.4
- -------------------------------------------------------------------------
Other
Consumer Price Index 3.3% 2.8% 2.8%
- -------------------------------------------------------------------------
<PAGE>
U.S. FIXED-INCOME MARKETS
At year-end, the yield on the 30-year U.S. Treasury bond was 6.64%, noticeably
higher than its 5.95% level on December 31, 1995. The change in rates during
1996 reflects increased concern about the prospects for rising inflation, due to
indications of greater than expected strength in the economy.
When the year began, the general expectation was that modest economic
growth and benign inflation would continue, giving the Federal Reserve no reason
to boost inter-
5
<PAGE>
est rates. That complacency was shattered by an exceptionally strong February
jobs report, the first of what turned out to be a succession of signs that in
fact the economy was growing at a much faster--and potentially
inflation-inducing--pace. The bond market reacted swiftly to meet the perceived
risk: The 30-year Treasury bond's yield jumped from just below 6.0% at the end
of 1995 to 6.7% in late March. The next several months saw a consistent pattern
in which bond yields rose on the Friday of the jobs-report release only to fall
back by the middle of the month. Hindsight shows that most of the worry was
wasted: Inflation, as measured by the Consumer Price Index, remained near an
annualized rate of 3.3%. But increasing signs of growth in late November and
December reignited inflation concerns and caused bonds to finish the year on a
sour note.
Despite the numerous setbacks suffered by the bond market in 1996, indexes
were able to finish the year with positive total returns. Although the specter
of the Federal Reserve Board loomed large during the year, in fact the Board
acted only once, lowering the federal funds rate by a total of 0.25% in January.
Corporate bonds, mortgage-backed issues, and municipals were three
relatively bright spots in 1996. The strength in earnings that benefited stock
prices extended to the corporate bond sector as well. These bonds, especially
those of lower credit quality, performed well relative to Treasuries, supported
by general confidence in companies' ability to meet payments. The
stable-to-rising interest-rate environment throughout most of the year benefited
another large segment of the bond market--mortgage-backed securities--as the
threat of refinancings receded. Finally, municipal bonds outpaced their U.S.
Treasury counterparts. The sector was shielded to a certain extent from the
inflation wars of the Treasury market, as demand outstripped supply for much of
the year.
INTERNATIONAL EQUITY MARKETS
Investors who assess international markets by the often-cited EAFE
benchmark--the Morgan Stanley Capital International-Europe, Australasia, Far
East Index, with its 1996 return of 6.4%--could have overlooked a striking
regional disparity between the European and Pacific markets. Europe's markets
gained 21.4% during the year, while their Pacific counterparts posted a decline
of -8.2%. Clearly, the outlook and environments that characterized the European
and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing concern
about the health of the Japanese economy. Growth in Japan has remained modest at
best for several years despite government efforts to stimulate the economy
<PAGE>
through public works programs and tax incentives. In Europe, the picture was
dramatically different, with the region benefiting from a variety of factors.
Among the most important were (1) ongoing efforts to lower government deficits
consistent with the Maastricht Treaty guidelines, (2) improving economic growth,
and (3) a greater commitment by corporate executives to increasing "shareholder
value."
6
<PAGE>
REPORT FROM THE ADVISER
[PHOTO]
Gemini II's total return in 1996 was 16.2%, well behind the 23.0% return on
the unmanaged Standard & Poor's 500 Composite Stock Price Index.
Our financial-sector holdings--banks, insurance companies, savings and
loans, and real estate investment trusts, about 29% of the Fund going into
1996--were outstanding performers, but this was not enough to carry the day. Our
other very large concentration, basic materials--aluminum, steel, chemicals, and
paper, more than 34% of the Fund going in--generally performed poorly and in
some cases actually had negative returns. Our 11% position in automotive stocks
was a mild negative. Finally, our cash position, which ranged from about 15% to
22% during the year, turned out to be a significant drag given the market's
heady advance.
We were mild net sellers of stocks during the year. The sales were largely
a trimming of our financial and energy holdings as their prices reached our
target zones. An additional motive for the energy sales was our belief that the
current $25-per-barrel price of crude oil is unsustainably high, given an
underlying excess of supply over demand.
Our purchases were a mixed bag--building and construction companies,
airlines, and a couple of Bermuda-based reinsurers with good dividend yields.
Gemini II shareholders who also hold shares of Vanguard/Windsor Fund are aware
that Windsor's technology position was greatly increased, and successfully, in
1996. We did not have the opportunity to duplicate this in Gemini II because the
technology stocks Windsor bought are largely non-dividend-payers, which are a
no-no in Gemini II by charter, and there were no companion convertibles that we
could use in place of common stock. The exception was Quantum Corporation, which
does have a convertible that we built into a 2.2% position before selling it at
a profit of nearly 60%.
The largest concentrations in the portfolio at the end of 1996 were basic
materials, constituting a little under 29% of Gemini II's assets; financials,
21%; and autos, 11%. While our basic-materials holdings were disappointing
performers in 1996, we continue to feel that these holdings are well-placed. We
believe that, with inflation low and interest rates easing around the world,
1997 should be a year of synchronous economic growth, with global industrial
production rising on the order of 4.5%. This will chew up a lot of aluminum,
paper, chemicals, and steel, in quantities outstripping the underlying increases
in capacity, and thus we should enjoy a sustained rise in the commodity prices
and, concomitantly, in the share prices of these stocks.
In last year's Annual Report, we said we would strive in 1996 to garner an
increase in per-share income at least as great as the 4% increase in 1995. We
are pleased that the income growth turned out to be 7%.
Charles T. Freeman, Portfolio Manager
Wellington Management Company, LLP
January 14, 1997
7
<PAGE>
PORTFOLIO PROFILE: GEMINI II
DECEMBER 31, 1996
This Profile provides a snapshot of the Fund's characteristics, compared where
appropriate to an unmanaged index. Key elements of this Profile are defined on
page 9.
PORTFOLIO CHARACTERISTICS
- --------------------------------------------
GEMINI II S&P 500
- --------------------------------------------
Number of Stocks 34 500
Median Market Cap $5.6B $24.5B
Price/Earnings Ratio 12.5x 19.6x
Price/Book Ratio 1.7x 3.4x
Yield 5.1% 2.0%
Return on Equity 10.5% 19.6%
Earnings Growth Rate 7.2% 13.5%
Foreign Holdings 4.9% 3.7%
Turnover Rate 20% --
Expense Ratio 0.45% --
Cash Reserves 21.7% --
INVESTMENT FOCUS
- --------------------------------------------
[CHART]
VOLATILITY MEASURES
- --------------------------------------------
GEMINI II S&P 500
- --------------------------------------------
R-Squared 0.66 1.00
Beta 0.85 1.00
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
Chrysler Corp. 6.6%
Atlantic Richfield Co. 5.0
AK Steel Holding 4.8
Reynolds Metals Co. 4.5
Continental Airlines, Inc. 4.4
Ford Motor Co. 4.0
Bowater, Inc. 3.9
Great Western Financial Corp. 3.4
First Union Corp. 3.0
Owens Corning Capital 2.7
- --------------------------------------------
Top Ten 42.3%
SECTOR DIVERSIFICATION (% OF STOCK)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------------------------------------
GEMINI II GEMINI II S&P 500
-------------------------------------------------
<S> <C> <C> <C>
Basic Materials ............................ 38.0% 36.6% 6.2%
Capital Goods & Construction ............... 0.0 7.2 8.4
Consumer Cyclical ......................... 13.3 14.5 12.1
Consumer Staples ........................... 0.0 0.0 12.4
Energy ..................................... 7.3 4.0 9.7
Financial .................................. 35.5 28.7 15.0
Health Care ................................ 0.0 0.0 10.4
Technology ................................. 0.3 0.0 12.1
Transport & Services ....................... 2.4 8.2 1.5
Utilities .................................. 1.4 0.8 9.9
Miscellaneous .............................. 1.8 0.0 2.3
- ---------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
[PHOTO]
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall market
rose or fell by 10%.
EARNINGS GROWTH RATE. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors. The average expense ratio for a stock mutual fund was
1.34% in 1995.
FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts of companies based outside of the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio have
higher market capitalizations and half lower.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies represented in the portfolio.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
SECTOR DIVERSIFICATION. The percentage of a portfolio's stocks invested in each
of the major industry classifications that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of a portfolio's total net assets in its
ten largest investments (the average for stock mutual funds is about 25%). As
this percentage rises, a portfolio's returns are likely to be more volatile
since they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to realize and distribute capital gains (which are taxable to investors).
The average turnover rate for stock mutual funds is about 80%.
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of Gemini II's total net asset value, is based
on income earned over the past 12 months.
9
<PAGE>
PERFORMANCE SUMMARY: GEMINI II
INCOME SHARES: 2/15/85-12/31/96
- --------------------------------------------------------------------------------
1985 $1.13
1986 $1.23
1987 $1.38
1988 $1.41
1989 $1.58
1990 $1.63
1991 $1.65
1992 $1.66
1993 $1.66
1994 $1.73
1995 $1.80
1996 1.99
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET INCOME EARNED $1.13* $1.23 $1.38 $1.41 $1.58 $1.63 $1.65 $1.66 $1.66 $1.74 $1.79 $1.94
YEAR-END NET
ASSET VALUE 9.83 9.73 9.39 9.38 9.37 9.34 9.34 9.33 9.33 9.34 9.33 9.34
YEAR-END MARKET PRICE 11 5/8 13 5/8 11 7/8 12 1/2 13 11 1/4 13 3/8 12 11 3/4 10 1/2 10 1/8 9 1/2
PREMIUM 18.3% 40.0% 26.5% 33.3% 38.7% 20.4% 43.2% 28.6% 25.9% 12.4% 8.5% 1.7%
</TABLE>
*Represents net investment income earned from February 15, 1985.
CAPITAL SHARES: 2/15/85-12/31/96
- --------------------------------------------------------------------------------
2/85 10.00
1985 11.47
1986 13.87
1987 12.98
1988 16.56
1989 17.44
1990 11.51
1991 16.28
1992 18.71
1993 22.10
1994 19.03
1995 26.35
1996 28.75
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ADJUSTED
NET ASSET
VALUE* $10.00 $11.53 $14.67 $14.89 $18.98 $20.38 $14.65 $20.17 $23.05 $27.38 $24.92 $33.72 $37.42
ACTUAL NET
ASSET VALUE 10.00 11.47 13.87 12.98 16.56 17.44 11.51 16.28 18.71 22.10 19.03 26.35 28.75
YEAR-END
MARKET PRICE -- 11 12 1/8 10 5/8 12 7/8 15 5/8 9 1/2 13 1/4 14 7/8 19 7/8 17 5/8 25 3/4 29
PREMIUM/
DISCOUNT -- -4.1% -12.6% -18.1% -22.3% -10.4% -17.5% -18.6% -20.5% -10.1% -7.4% -2.3% 0.9%
COMBINED
PREMIUM/
DISCOUNT -- 6.2% 9.1% 0.6% -2.2% 6.8% -0.5% 3.9% -4.2% 0.6% -0.9% 0.5% 1.1%
</TABLE>
*Net asset value plus cumulative short-term capital gains and capital gains
taxes paid by the Fund.
10
<PAGE>
FINANCIAL STATEMENTS
DECEMBER 31, 1996
STATEMENT OF NET ASSETS
- -----------------------------------------------------------------------
MARKET
VALUE*
GEMINI II SHARES (000)
- -----------------------------------------------------------------------
COMMON STOCKS (42.8%)
- -----------------------------------------------------------------------
BASIC MATERIALS (6.2%)
British Steel PLC ADR 265,700 $ 7,307
Reynolds Metals Co. 329,148 18,556
----------
25,863
----------
CONSUMER CYCLICAL (10.6%)
Chrysler Corp. 830,622 27,410
Ford Motor Co. 522,653 16,660
----------
44,070
----------
ENERGY (2.7%)
Atlantic Richfield Co. 31,000 4,107
USX-Marathon Group 307,100 7,332
----------
11,439
----------
FINANCIAL (21.1%)
BANKS (5.0%)
Chase Manhattan Corp. 26,600 2,374
First Union Corp. 166,300 12,306
KeyCorp 6,089 307
NationsBank Corp. 59,700 5,836
INSURANCE (4.9%)
CIGNA Corp. 46,600 6,367
GCR Holdings, Ltd. 435,000 9,624
IPC Holdings, Ltd. 200,000 4,475
REAL ESTATE INVESTMENT TRUSTS (6.0%)
Camden Property Trust REIT 125,000 3,578
Colonial Properties Trust REIT 74,600 2,266
Equity Residential Properties
Trust REIT 207,100 8,543
Evans Withycombe Residential,
Inc. REIT 195,000 4,095
Oasis Residential, Inc. REIT 180,000 4,095
Urban Shopping Centers,
Inc. REIT 82,800 2,401
SAVINGS & LOAN (5.2%)
H.F. Ahmanson & Co. 229,000 7,443
Great Western Financial Corp. 481,040 13,950
----------
87,660
----------
UTILITIES (0.6%)
Unicom Corp. 87,937 2,385
----------
TRANSPORT & SERVICES (1.6%)
Delta Air Lines, Inc. 93,161 6,603
----------
- -----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $130,375) 178,020
- -----------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (30.5%)
- -----------------------------------------------------------------------
BASIC MATERIALS (20.6%)
CHEMICALS (4.1%)
Atlantic Richfield Co. 9.00%
(Convertible into Lyondell
Petrochemical Co.) 785,500 16,888
METALS & MINING (2.6%)
Kaiser Aluminum 8.255% 979,400 $ 11,018
PAPER (6.7%)
Boise Cascade Corp. $1.58 35,800 931
Bowater, Inc. 7.00% 534,000 16,287
International Paper Co. 2.625% 238,000 10,889
STEEL (7.2%)
AK Steel Holding 7.00% 574,500 20,107
Bethlehem Steel Corp. $3.50 258,400 9,722
----------
85,842
----------
<PAGE>
CAPITAL GOODS & CONSTRUCTION (5.3%)
Beazer Homes 8.00% 370,000 10,545
Owens Corning Capital 6.50% 200,000 11,400
----------
21,945
----------
ENERGY (0.2%)
Valero Energy $3.125 15,000 859
----------
TRANSPORT & SERVICES (4.4%)
Continental Airlines, Inc. 8.50% 275,000 18,288
----------
- -----------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $124,988) 126,934
- -----------------------------------------------------------------------
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------
CONVERTIBLE BONDS (2.5%)
- -----------------------------------------------------------------------
Quantum Corp.
6.375%, 4/1/02 $ 5,700 8,906
Toll Corp.
4.75%, 1/15/04 58 59
U.S. Home
4.875%, 11/1/05 1,750 1,593
- -----------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(COST $7,094) 10,558
- -----------------------------------------------------------------------
BONDS (2.5%)
- -----------------------------------------------------------------------
Geneva Steel
11.125%, 3/15/01 7,000 6,440
Ryland Group
9.625%, 6/1/04 2,500 2,478
Weirton Steel Corp.
10.875%, 10/15/99 1,180 1,227
- -----------------------------------------------------------------------
TOTAL BONDS
(COST $10,653) 10,145
- -----------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (25.9%)
- -----------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS
Federal Farm Credit Bank
5.547%, 1/15/97 15,000 14,968
Federal Home Loan Mortgage Corp.
5.354%, 1/14/97 7,000 6,987
5.533%, 1/10/97 15,000 14,980
5.545%, 1/15/97 15,000 14,968
11
<PAGE>
FACE MARKET
AMOUNT VALUE*
GEMINI II (000) (000)
- -----------------------------------------------------------------------
COMMERCIAL PAPER
A1 Credit Corp.
5.404%, 1/24/97 $ 5,000 $ 4,980
Abbott Laboratories, Inc.
5.642%, 1/9/97 5,000 4,994
Coca-Cola Co.
5.397%, 2/4/97 5,000 4,971
E.I. du Pont de Nemours & Co.
5.397%, 1/29/97 5,000 4,976
MetLife Funding, Inc.
5.438%, 2/4/97 5,373 5,346
Private Exporting Funding
5.403%, 2/10/97 5,000 4,967
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.39%, 1/2/97 25,577 25,577
- -----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $107,728) 107,714
- -----------------------------------------------------------------------
TOTAL INVESTMENTS (104.2%)
(COST $380,838) 433,371
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-4.2%)
- -----------------------------------------------------------------------
Other Assets--Notes D and F 10,388
Federal Income Tax Payable (11,622)
Distribution Payable (8,409)
Other Liabilities--Note F (7,791)
----------
(17,434)
- -----------------------------------------------------------------------
NET ASSETS (100%) $415,937
- -----------------------------------------------------------------------
*See Note A in Notes to Financial Statements.
12
<PAGE>
STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------
GEMINI II
YEAR ENDED DECEMBER 31, 1996
(000)
- ---------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $17,196
Interest 5,814
-----------
Total Income 23,010
-----------
EXPENSES
Investment Advisory Fee--Note C
Basic Fee 1,356
Performance Adjustment (185)
The Vanguard Group--Note D 495
Custodian Fees 18
Taxes (other than income taxes) 31
Auditing Fees 8
Shareholders' Reports 46
Annual Meeting and Proxy Costs 58
Directors' Fees and Expenses 1
-----------
Total Expenses 1,828
- ---------------------------------------------------------------------------
NET INVESTMENT INCOME $21,182
- ---------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized Net Gain on Investment Securities Sold $35,808
Change in Unrealized Appreciation (Depreciation) 4,679
- ---------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS $40,487
===========================================================================
13
<PAGE>
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GEMINI II
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
(000) (000)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCOME AVAILABLE FOR DISTRIBUTION
Balance, Beginning of Year $ 280 $ 445
Net Investment Income 21,182 19,491
Distributions to Income Shareholders
($1.93 and $1.80 per share, respectively) (21,077) (19,656)
------------------------
Balance, End of Year $ 385 $ 280
- ----------------------------------------------------------------------------------------------------
UNDISTRIBUTED CAPITAL GAINS
Balance, Beginning of Year $138,332 $110,693
Realized Net Gain on Investment Securities Sold 35,808 43,748
Distributions to Capital Shareholders ($.24 and
$.11 per share, respectively) (2,621) (1,201)
Provision for Taxes on Capital Gains Retained (11,622) (14,908)
------------------------
Balance, End of Year $159,897 $138,332
- ----------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES
Beginning of Year $47,854 $(4,435)
End of Year--Note F 52,533 47,854
------------------------
Change in Unrealized Appreciation (Depreciation) $ 4,679 $52,289
====================================================================================================
</TABLE>
STATEMENT OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GEMINI II
DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Shares, $1.00 Par Value--Redeemable at $9.30 per Share on January 31,
1997: Authorized 15,000,000 Shares; Issued and Outstanding 10,920,550 Shares $ 10,920*
Capital Surplus 90,641*
Income Available for Distribution 385
-----------
101,946
-----------
Capital Shares, $1.00 Par Value; Authorized 15,000,000 Shares;
Issued and Outstanding 10,920,550 Shares 10,920*
Capital Surplus 90,641*
Undistributed Capital Gains 159,897
Unrealized Appreciation of Investment Securities 52,533
-----------
313,991
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $415,937
====================================================================================================
</TABLE>
*No change during period.
14
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GEMINI II
YEAR ENDED DECEMBER 31,
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
INCOME SHARES
NET ASSET VALUE, BEGINNING OF YEAR $9.33 $9.34 $9.33 $9.33 $9.34
- -----------------------------------------------------------------------------------------------------
Net Investment Income 1.94 1.79 1.74 1.66 1.66
Distributions from Net Investment Income (1.93) (1.80) (1.73) (1.66) (1.67)
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.34 $9.33 $9.34 $9.33 $9.33
=====================================================================================================
CAPITAL SHARES
NET ASSET VALUE, BEGINNING OF YEAR $26.35 $19.03 $22.10 $18.71 $16.28
- -----------------------------------------------------------------------------------------------------
Realized Net Gain on Investments 3.27 4.01 1.73 2.69 1.17
Distributions from Realized Capital Gains (.24) (.11) -- -- (.08)
Provision for Taxes on Capital Gains Retained (1.06) (1.37) (.61) (.94) (.37)
Unrealized Appreciation (Depreciation) .43 4.79 (4.19) 1.64 1.71
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $28.75 $26.35 $19.03 $22.10 $18.71
=====================================================================================================
</TABLE>
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GEMINI II
AMOUNTS IN THOUSANDS AND PER SHARE
THREE MONTHS ENDED
- -------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Investment Income $ 5,098 $ .46 $ 5,451 $ .50 $5,352 $.49 $ 5,281 $ .49
Net Realized Gain (Loss) and Change in
Unrealized Appreciation (Depreciation) 23,364 2.14 (8,489) (.78) 5,130 .47 20,482 1.87
MARCH 31, 1995 JUNE 30, 1995 SEPTEMBER 30, 1995 DECEMBER 31, 1995
----------------- ----------------- ------------------ -----------------
Net Investment Income $ 4,785 $ .44 $ 4,320 $ .39 $ 5,181 $ .48 $ 5,205 $.48
Net Realized Gain (Loss) and Change in
Unrealized Appreciation (Depreciation) 22,699 2.08 32,699 2.99 31,715 2.9 18,924 .82
=========================================================================================================================
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Gemini II is registered under the Investment Company Act of 1940 as a
diversified closed-end investment company. Certain of the Fund's investments are
in corporate debt instruments; the issuers' abilities to meet these obligations
may be affected by economic developments in their respective industries.
A. The following significant accounting policies conform to generally accepted
accounting principles for investment companies. The Fund consistently follows
such policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities not listed on an exchange are valued at
the latest quoted bid prices. Bonds, and temporary cash investments acquired
more than 60 days to maturity, are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and credit ratings), both as furnished by
independent pricing services. Other temporary cash investments are valued at
amortized cost, which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements. Realized net long-term gains, if any, on security transactions are
retained and applicable taxes thereon are accrued at the end of the Fund's
fiscal year (see Note B).
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group, transfers uninvested cash balances to a Pooled Cash Account, which is
invested in repurchase agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Income Shareholders are entitled to receive as distributions the higher of
$.80 per share (annually) or all of the net investment income available for
distribution. Income distributions to Capital Shareholders are prohibited as
long as any Income Shares remain outstanding. Capital Shareholders are entitled
to receive annual distributions of any net realized short-term gains on sales of
investment securities.
C. Under a contract that expires January 31, 1998, the Fund pays Wellington
Management Company, LLP an investment advisory fee calculated at an annual
percentage rate of average net assets. The basic fee is subject to quarterly
adjustments based on performance relative to the S&P 500 Index. For the year
ended December 31, 1996, the advisory fee represented an effective annual basic
rate of 0.33% of the Fund's average net assets before a decrease of $185,000
(0.05%) based on performance.
D. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At December 31,
1996, the Fund had contributed capital of $38,000 to Vanguard (included in Other
Assets), representing 0.2% of Vanguard's capitalization. The Fund's directors
and officers are also directors and officers of Vanguard.
16
<PAGE>
E. During the year ended December 31, 1996, the Fund purchased $66,267,000 of
investment securities and sold $118,618,000 of investment securities, other
than U.S. government securities and temporary cash investments. There were no
purchases or sales of U.S. government securities.
F. At December 31, 1996, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $52,533,000,
consisting of unrealized gains of $61,265,000 on securities that had risen in
value since their purchase and $8,732,000 in unrealized losses on securities
that had fallen in value since their purchase.
G. The market value of securities on loan to broker/dealers at December 31,
1996, was $7,145,000, for which the Fund held cash collateral of $7,331,000.
H. On January 31, 1997, the Income Shares were redeemed at $9.30 per share plus
accumulated net income of $.115 per share. On January 21, 1997, the Capital
shareholders voted to approve modifications of the Fund's investment objectives
as a result of the redemption of the Income Shares. A shareholder vote on a
proposal to approve the Fund's conversion into an open-end investment company
has been scheduled for February 19, 1997. Thereafter, the Board of Directors
expects to seek shareholder approval to merge the Fund into Vanguard/Windsor
Fund.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Gemini II
In our opinion, the accompanying statements of net assets and of shareholders'
equity and the related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects, the financial
position of Gemini II (the "Fund") at December 31, 1996, and the results of its
operations, the changes in its shareholders' equity and the financial highlights
for each of the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1996 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
As more fully described in Note H, the Income Shares were redeemed on
January 31, 1997, and the form under which the Fund will continue is being
considered.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1997
18
<PAGE>
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
GEMINI II
CAPITAL SHAREHOLDERS
Gemini II Capital Shares receive all capital appreciation (or depreciation) from
the Fund's investments, including any net capital gains that are realized from
the sale of portfolio securities. The net realized long-term capital gains are
retained in the value of the Capital Shares rather than being distributed to
shareholders. According to provisions of the Internal Revenue Code, the Fund
pays federal income tax on these net realized long-term capital gains at the
corporate capital gains tax rate, and the amount of this tax is deducted from
the net asset value of the Capital Shares at year-end.
As a result of this procedure, there are three important tax steps which
you, as a Capital Shareholder, should take:
1. You should report on your 1996 personal income tax return the net
long-term capital gains realized by your Fund during the year.
2. You should take credit for the federal taxes paid by the Fund on these
realized gains. Since the effective personal capital gains tax rate cannot
exceed 28%, no inequity is created since you receive full credit for the tax
paid by the Fund.
3. You should increase the tax cost basis of your Capital Shares by the
amount of the after-tax gains. This is the difference between the amount of net
capital gains realized and the tax paid on these gains by the Fund (see the
table below).
Federal Tax Form 2439, which you should receive by March 1, 1997, provides
for your account the specific amounts of realized capital gains and
corresponding taxes paid as discussed in 1 and 2 above. Enclosed with this form
are specific instructions on how to record this information for tax purposes,
but please feel free to contact us if you have any questions regarding taxes and
your Gemini II Capital Shares. IF YOUR SHARES ARE HELD FOR YOU IN A NOMINEE
REGISTRATION AND YOU HAVE NOT AS YET RECEIVED TAX FORM 2439, YOU SHOULD CONTACT
YOUR BANK OR BROKER TO OBTAIN THE FORM. A copy must be filed with your federal
income tax return.The table below shows: the amount of net realized capital
gains per Capital Share; the federal taxes paid on your behalf; the Fund's
capital gains tax rate; and the amount by which your cost per share should be
increased for fiscal years 1985 through 1996.
INCOME SHAREHOLDERS
Additional Tax Information--For your state income tax return, 0.29% of your 1996
income was derived from direct U.S. government obligations.
Corporate shareholders should note that 75.2% of the 1996 income qualifies
for the intercorporate dividends-received deduction.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
REALIZED LONG-TERM CAPITAL GAINS PER CAPITAL SHARE
- ----------------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Realized long-term
capital gains $.21 $2.66 $3.14 $.86 $.97 $.27 $1.56 $1.08 $2.69 $1.73 $3.90 $3.04
Federal capital gains
taxes paid .06 .74 1.07 .29 .33 .09 .53 .37 .94 .61 1.37 1.06
(Tax rate in effect) (28%) (28%) (34%) (34%) (34%) (34%) (34%) (34%) (35%) (35%) (35%) (35%)
Net amount by which
your cost should be
increased .15 1.92 2.07 .57 .64 .18 1.03 .71 1.75 1.12 2.53 1.98
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
19
<PAGE>
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director
of The Vanguard Group, Inc. and of
each of the investment companies in
The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer,
and Director of The Vanguard Group,
Inc. and of each of the investment
companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and
Director of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc.
and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great
Atlantic and Pacific Tea Co., Alco
Standard Corp., Raytheon Co.,
Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The
Brookings Institution; Director of
American Express Bank Ltd., The St.
Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's
Professor of Economics, Princeton
University; Director of Prudential
Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern
New England Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and
Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO
Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive
<PAGE>
Officer of The Nature Conservancy;
formerly, Director and Senior Partner of
McKinsey & Co. and President of New
York University; Director of Pacific Gas
and Electric Co., Procter & Gamble
Co., and NACCO Industries.
J. LAWRENCE WILSON, Chairman and Chief Executive
Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.;
Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice
President and Secretary of The
Vanguard Group, Inc.; Secretary of
each of the investment companies in
The Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The
Vanguard Group, Inc.; Treasurer of
each of the investment companies in
The Vanguard Group.
KAREN E. WEST, Controller; Principal of The
Vanguard Group, Inc.; Controller of
each of the investment companies in
The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional.
<PAGE>
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses may
be obtained directly from The Vanguard Group.
(C) 1996 Vanguard Marketing Corporation, Distributor
<PAGE>
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees Equity--U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity--International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
<PAGE>
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q340 12/96
<PAGE>
VANGUARD/WINDSOR FUNDS, INC.
WINDSOR FUND SERIES
REGISTRATION STATEMENT ON FORM N-14
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Article TENTH of the Registrant's Amended and Restated Articles of
Incorporation provides as follows:
"TENTH: (a) The Corporation shall indemnify its directors and officers
to the fullest extent allowed, and in the manner provided, by Maryland Law,
including the advancing of expenses incurred in connection therewith. Such
indemnification shall be in addition to any other right or claim to which any
director or officer may otherwise be entitled. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation, or who, while a director, officer,
partner, trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, other enterprise, or employee benefit plan
against any liability asserted against and incurred by such person in any such
capacity or arising out of such person's position, whether or not the
corporation would have had the power to indemnify such liability.
(b) Nothing in this Article protects or purports to protect, or may be
interpreted or construed to protect, any director or officer against any
liability to the corporation or its security holders to which he or she 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 or
her office.
(c) Each section or portion thereof of this Article shall be deemed
serverable from the remainder, and the invalidity of any such section or portion
shall not affect the validity of the remainder of this Article"
ITEM 16. EXHIBITS
(1) Copies of charter (Articles of Incorporation) of registrant as now
in effect:
Previously Filed on December 11, 1984, File No. 811-4168
<PAGE>
(2) Copies of existing by-laws:
Previously Filed on December 11, 1984, File No. 811-4168
(3) Copies of any voting trust agreement affecting more than five
percent of any class of equity securities of the registrant.
Not Applicable
(4) Copies of the Agreement and Plan of Reorganization:
Included in the Registration Statement as Exhibit A to the
Combined Proxy Statement/Prospectus
(5) Copies of all instruments defining the rights of holders of
securities being registered:
Previously Filed (see 1 and 2 above) Article 5, Section A of
Articles of Incorporation and Article 2 of the By-Laws.
(6) Copies of all investment advisory contracts relating to the
management of the assets of the Registrant:
Agreement between Registrant and Wellington Management Company
LLP dated August 1, 1996, is filed herewith as Exhibit 6.
(7) Copies of each underwriting or distribution Contract:
Not Applicable
(8) Copies of all bonus profit sharing pension or other similar
arrangements wholly or partly for the benefit of Directors and Officers:
Not Applicable
(9) Copies of all custodian agreements and depository contracts:
Previously filed on December 11, 1984, File No. 811-4168
(10) Copies of any 12b-1 Plans
Not Applicable
<PAGE>
(11) An opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will, when sold, be legally
issued, fully-paid and non-assessable:
Filed Herewith as Exhibit No. ________
(12) A copy of the private letter ruling from the Internal Revenue
Service supporting the tax matters discussed in the Combined Proxy
Statement/Prospectus:
Filed Herewith as Exhibit No. ________
(13) Copies of other material contracts:
Not Applicable
(14) Copies of any other opinions, appraisals or rulings and consents
to their use relied on in preparing the Registrant Statement and required by
Section 7 of the 1933 Act are included by Section 7 of the 1933 Act are included
as Exhibit 14 to the Registration Statement.
Filed herewith as Exhibit No. 14
(15) All financial statements omitted pursuant to item 14(a)(1):
Not Applicable
(16) Manually signed copies of any power of attorney pursuant to which
the name of any person has been signed to the Registration Statement.
Previously Filed on ________, 199_
(17) Any other Exhibits:
A copy of the Registrant's Rule 24F-2 declaration in included as
Exhibit ____ to the Registration Statement
ITEM 17. UNDERTAKINGS
(i) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus which is
a part of this registration statement by any person or party who is deemed to be
an underwriter within the meaning of this Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
<PAGE>
(ii) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
SIGNATURES
As required by the Securities Act of 1933 this Pre-Effective Amendment
No. 1 to the Registration Statement has been signed on behalf of the Registrant,
thereunto duly authorized, in the Town of Malvern and the Commonwealth of
Pennsylvania, on the 2nd day of April, 1997.
Vanguard/Windsor Funds, Inc.
BY: (Raymond J. Klapinsky) John J. Brennan, President and Chief Executive
Officer
As required by the Securities Act of 1933, this Pre-Effective Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
BY: (Raymond J. Klapinsky)
John C. Bogle*, Chairman of the Board and Director
April 2, 1997
BY: (Raymond J. Klapinsky)
John J. Brennan*, President and Chief Executive Officer
April 2, 1997
BY: (Raymond J. Klapinsky)
(Robert E. Cawthorn*, Director
April 2, 1997
BY: (Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*, Director
* Power of Attorney, April 2, 1997
<PAGE>
April 2, 1997
BY: (Raymond J. Klapinsky)
Bruce K. MacLaury*, Director
April 2, 1997
BY: (Raymond J. Klapinsky)
Burton G. Malkiel*, Director
April 2, 1997
BY: (Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*, Director
April 2, 1997
BY: (Raymond J. Klapinsky)
John C. Sawhill*, Director
April 2, 1997
BY: (Raymond J. Klapinsky)
James O. Welch, Jr.*, Director
April 2, 1997
BY: (Raymond J. Klapinsky)
J. Lawrence Wilson*, Director
April 2, 1997
BY: (Raymond J. Klapinsky)
Richard F. Hyland*, Treasurer and Principal Financial Officer and
Accounting Officer
April 2, 1997
<PAGE>
BY: Raymond J. Klapinsky
Raymond J. Klapinsky, Secretary
April 2, 1997
* By Power of Attorney. See File Number 2-14336, January 23, 1990.
Incorporated by Reference.
<PAGE>
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of this 1st day of August, 1996, between VANGUARD
WINDSOR FUNDS, INC., a Maryland corporation (the "Company"), and WELLINGTON
MANAGEMENT COMPANY, a Massachusetts Corporation ("WMC").
WHEREAS, the Company is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Company desires to retain WMC to render investment
advisory services to that series of the Company known as "Windsor Fund", and
WMC is willing to render such Services;
N0W, THEREFORE, this Agreement
W I T N E S S E T H :
that in consideration of the premises and mutual promises hereinafter set forth,
the parties hereto agree as follows:
1. Appointment of WMC. The Company hereby employs WMC as investment
adviser, on the terms and conditions set forth herein. WMC accepts such
employment and agrees to render the services herein set forth, for the
compensation herein provided.
2. Duties of WMC. The Company employs WMC to manage the investment and
reinvestment of the assets of the Windsor Fund, to continuously review,
supervise and administer an investment program of Windsor Fund, to determine in
its discretion the securities to be purchased or sold and the portion of such
assets to be held uninvested, to provide the Company with records concerning the
activities of WMC which the Company is required to maintain, and to render
regular reports to the Company's officers and Board of Directors concerning the
discharge of the foregoing responsibilities. WMC shall discharge the foregoing
responsibilities subect to the control of the officers and the Board of
Directors of the Company, and in compliance with the objectives, policies and
limitations set forth in Windsor Fund's prospectus and appicable laws and
regulations. WMC agrees to provide, at its own expense, the office space,
furnishings and equipment and the personnel required by it to perform the
services on the terms and for the compensation provided herein:
3. Securities Transactions. WMC authorized to select the brokers or
dealers that will execute the purchases and sales of securities for Windsor
Fund, and is directed to use its best efforts to obtain the best available price
and most favorable execution, except as prescribed herein. Subject to policies
established by the Board of Directors of the Company, WMC may also be authorized
to effect individual securities transactions at commission rates in excess of
the minimum commission rates available, if WMC determines in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage or research services provided by such broker or dealer, viewed in
terms of either that particular transaction or overall responsibilities of WMC
with respect to the Company and other Funds in the same Fund Group.
<PAGE>
The execution of such transactions shall not be deemed to represent an
unlawful act or breach of any duty created by this Agreement or otherwise.
WMC will promptly communicate to the officers and Directors of the Company such
information relating to portfolio transactions as they may reasonably
request.
4. Compensation of WMC. For the services to be rendered by WMC as
provided in this Agreement, the Company shall pay to WMC at the end of each of
the Company's fiscal quarters, a Basic Fee calculated by applying a quarterly
rate, based on the following annual percentage rates, to the average month-end
net assets of Windsor Fund for the quarter:
.125% on the first $17.5 billion of net assets;
.100% on the net assets in excess of $17.5 billion.
The Basic Fee, as provided above, shall be increased or decreased by
applying all incentive/penalty fee adjustment based on the investment
performance of Windsor Fund relative to the investment performance of the
Standard & Poor's 500 Composite Stock Price Index (the "Index").
The following table sets forth the adjustment factors to the base
advisory fee payable by the Company to WMC under this investment advisory
agreement:
For the first $17.5 billion of assets;
Cumulative 36-Month Performance Fee
Performance versus the Index Adjustment*
---------------------------- -----------
Less than -12% -0.67 x Basic Fee
Between -12% and -6% -0.33 x Basic Fee
Between -6% and 6% 0.00 x Basic Fee
Between 6% and 12% +0.33 x Basic Fee
More than 12% +0.67 x Basic Fee
For assets over $17.5 billion;
Less than -12% -0.90 x Basic Fee
Between -12% and -6% -0.45 x Basic Fee
Between -6% and 6% 0.00 x Basic Fee
Between 6% and 12% +0.45 x Basic Fee
More than 12% +0.90 x Basic Fee
- ----------
*For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
Under the rules of the Securities and Exchange Commission, the new
incentive/penalty fee will not be fully operable until the quarter ending July
31, 1999. Until that date, a "blended" fee rate consisting of varying
percentages of (i) the performance adjustment based on the schedule set forth
above (the "new rate"), and (ii) the performance adjustment based on the
<PAGE>
schedule set forth in Windsor Fund's previous investment advisory agreement with
the WMC(1) (the "previous rate") shall be used as follows:
1. Quarter Ending October 31, 1996. The incentive/penalty fee shall be
calculated as the sum of 8.3% (e.g., one of 12 quarters) of the fee payable
under the new rate plus 91.7% (e.g., 11 of 12 quarters) of the fee payable under
the previous rate.
2. Quarter Ending January 31, 1997. The incentive/penalty fee shall be
calculated as the sum of 16.7% of the fee payable under the new rate plus 83.3%
of the fee payable under the previous rate.
3. Quarter Ending April 30, 1997. The incentive/penalty fee shall be
calculated as the sum of 25% of the fee payable under the new rate plus 75% of
the fee payable under the previous rate.
4. Quarter Ending July 31, 1997. The incentive/penalty fee shall be
calculated as the sum of 33% of the fee payable under the new rate plus 67% of
the fee payable under the previous rate.
5. Quarter Ending October 31, 1997. The incentive/penalty fee shall be
calculated as the sum of 41.6% of the fee payable under the new rate plus 58.4%
of the fee payable under the previous rate.
6. Quarter Ending January 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 50% of the fee payable under the new rate plus 50% of
the fee payable under the previous rate.
7. Quarter Ending April 30, 1998. The incentive/penalty fee shall be
calculated as the sum of 58.4% of the fee payable under the new rate plus 41.6%
of the fee payable under the previous rate.
8. Quarter Ending July 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 67% of the fee payable under the new rate plus 33% of
the fee payable under the previous rate.
9. Quarter Ending October 31, 1998. The incentive/penalty fee shall be
calculated as the sum of 75% of the fee payable under the new rate and 25% of
the fee payable under the previous rate.
10. Quarter Ending January 31, 1999. The incentive/penalty fee shall be
calculated as the sum of 83.3% of the fee payable under the new rate plus 16.7%
of the fee payable under the previous rate.
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(1) The previous incentive/penalty fee structure provided that the Basic Fee be
increased or decreased by an amount equal to .05% per annum (.0125 per quarter)
of the average month-end assets if the Fund's investment performance for the 36
months preceding the end of the quarter was between 6 and 12 percentage points
above or below, respectively, the investment record of the Standard & Poor's 500
Composite Stock Index (the "Index") and .10% per annum (.025 per quarter) of the
average month-end assets of the Fund if the Fund's investment performance for
the 36 months preceding the end of the quarter was twelve percentage points or
more above or below, respectively, the investment record of the Index.
<PAGE>
11. Quarter Ending April 30, 1999. The incentive/penalty fee shall be
calculated as the sum of 91.7% of the fee payable under the new rate plus 8.3%
of the fee payable under the previous rate.
12. Quarter Ending July 31, 1999. New rate fully operable.
The Investment performance of Windsor Fund for such period, expressed
as a percentage of the Fund's net assct value per share at the beginning of such
period, shall be the sum of: (i) the change in Windsor Fund's net asset value
per share during such period; (ii) the value of Widsor Fund's cash distributions
per share having an ex-dividen date occurring within such period; and (iii) the
per share amount of capital gains taxes paid or accrued during such period by
Windsor Fund for undistributed realized long-term capital gains. The foregoing
notwithstanding, any computation of the investment performance of Windsor Fund
and the investment record of the Index shall be in accordance with any then
applicable rules of the Securities and Exchange Commission.
The investment record of the Index for any period, expressed as a
percentage of the Index at the beginning of such period, shall be the sum of
(i) the change in the level of the Index during such period and (ii) the
value, computed consistently with the Index, of cash distributions having an
ex-dividend date occurring within such period made by companies whose securities
comprise the Index. For this purpose cash distributions on the securities
which comprise the Index shall be treated as reinvested in the Index at least
as frequently as the end of each calendar quarter following the payment of the
dividend.
For the purpose of determining the fee adjustment for investment
performance, as described above, the net assets of Windsor Fund shall be
averaged over the same period as the investment performance of Windsor Fund and
the investment record of the Index are computed.
In the event of termination of this Agreement, the fee provided in this
Section shall be computed on the basis of the period ending on the last business
day on which this Agreement is in effect subject to a pro rata adjustment based
on the number of days elapsed in the current fiscal quarter as a percentage of
the total number of days in such quarter.
5. Reports. The Company and WMC agree to furnish to each other current
prospectuses, proxy statements, reports to shareholders, certified copies of
their financial statements, and such other information with regard to their
affairs as each may reasonably request.
6. Status of WMC. The services of WMC to Windsor Fund are not to be
deemed exclusive, and WMC shall be free to render similar services to others so
long as its services to Windsor Fund are not impaired thereby. WMC shall be
deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Company or
Windsor Fund in any way or otherwise be deemed an agent of the Company or
Windsor Fund.
7. Liability of WMC. No provision of this Agreement shall be deemed to
protect WMC against any liability to the Company or its shareholders to which it
might otherwise be subject by reason of any willful misfeasance, bad faith or
gross negligence in the performance of its duties or the reckless disregard of
its obligations under this Agreement.
<PAGE>
8. Duration and Termination. This Agreement shall become effective on
August 1, 1996, and shall continue in effect until July 31, 1998, and
thereafter, only so long as such continuance is approved at least annually by
votes of the Company's Board of Directors, including the votes of a majority of
the Directors who are not parties to such Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting such
approval. In addition, the question of continuance of the Agreement may be
presented to the shareholders of Windsor Fund; in such event, such continuance
shall be effected only if approvcd by the affirmative vote of a majority of the
outstanding voting securities of Windsor Fund.
Provided, however, that (i) this Agreement may at any time be
terminated without payment of any penalty either by vote of the Board of
Directors of the Company or by vote of a majority of the outstanding voting
securities of Windsor Fund, on sixty days' written notice to WMC, (ii) this
Agreement shall automatically terminate in the event of its assignment, and
(iii) this Agreement may be terminated by WMC on ninety days' written notice to
the Company. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office of
such party.
As used in this Section 8, the terms "assignment", "interested
persons", a "vote of a majority of the outstanding voting securities" shall have
the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and
Section 2(a)(42) of the Investment Company Act of 1940.
9. Severability. If any provision of this Agreement shall he held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
10. Proxy Policy. With regard to the solicitation of shareholder votes,
Windsor Fund shall vote the shares of all Portfolio securities held by Windsor
Fund.
In Witness Whereof, the parties hereto have caused this Agreement to
be executed this 1st day of August, 1996.
ATTEST: VANGUARD WINDSOR FUNDS, INC.
By XXXXXXXXXX By XXXXXXXXX
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Secretary President
ATTEST: WELLINGTON MANAGEMENT COMPANY
By XXXXXXXXXX By XXXXXXXXX
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<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Combined Proxy Statement/Prospectus on Form N-14 (the
"Registration Statment") of our report dated December 2, 1996, relating to the
financial statements and financial highlights appearing in the October 31, 1996
Annual Report to Shareholders of the Vanguard/Windsor Fund, which appears in
such Statement of Additional Information, and to the incorporation by reference
of our report into the Combined Proxy Statement/Prospectus which constitutes
part of this Registration Statement. We also consent to the incorporation by
reference into the Registration Statement of our report dated January 31, 1997
relating to the financial statements and financial highlights appearing in the
December 31, 1996 Annual Report to Shareholders of Gemini II, Inc. We also
consent to the incorporation by reference in the Prospectus and Statement of
Additional Information of Vanguard/Windsor Fund dated February 28, 1997 of our
report dated December 2, 1996, relating to the financial statements and
financial highlights appearing in the October 31, 1996 Annual Report to
Shareholders of Vanguard/Windsor Fund, which Prospectus constitutes part of this
Registration Statement and which Statement of Additional Information is
incorporated by reference into the Registration Statement. We also consent to
the references to us under the headings "Financial Highlights" and "General
Information" in the Prospectus and under the heading "Financial Statements" in
the Statement of Additional Information dated February 28, 1997 for the
Vanguard/Windsor Fund. We also consent to the reference to us under the heading
"Financial Highlights" in the Combined Proxy Statement/Prospectus.
Price Waterhouse LLP
Philadelphia, Pennsylvania
March 20, 1997
