<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-14336) UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 94
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 97
VANGUARD WINDSOR FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON FEBRUARY 18, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SECURITIES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF
1940. REGISTRANT FILED ITS RULE 24F-2 NOTICE FOR ITS FISCAL YEAR ENDED OCTOBER
31, 1999 WITH THE COMMISSION ON JANUARY 27, 2000.
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<PAGE>
VANGUARD WINDSOR FUNDS
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
<S> <C> <C>
FORM N-1A
ITEM NUMBER
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FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
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Item 1. Front and Back Cover Pages .................Front and Back Cover Pages
Item 2. Risk/Return: Investments, Risk, and
Performance ................................Fund Profile
Item 3. Risk/Return Summary: Fee Table .............Fee Table
Item 4. Investment Objectives, Principal Investment
Strategies, and Related Risks ..............A Word About Risk; Who Should Invest;
Primary Investment Strategies
Item 5. Management's Discussion of Fund
Performance ................................Herein incorporated by reference to
Registrant's Annual Report to Shareholders
dated October 31, 1999 filed with the
Securities & Exchange Commission's EDGAR
system December 16, 1999.
Item 6. Management, Organization, and Capital
Structure ..................................The Portfolios and Vanguard; Investment
Advisers
Item 7. Shareholder Information ....................Share Price; Dividends, Capital Gains, and
Taxes; Investing with Vanguard
Item 8. Distribution Arrangements ..................Not Applicable
Item 9. Financial Highlights Information ...........Financial Highlights
FORM N-1A LOCATION IN STATEMENT OF ADDITIONAL
ITEM NUMBER INFORMATION
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Item 10. Cover Page and Table of Contents ...........Cover Page; Table of Contents
Item 11. Fund History ...............................Description of the Fund
Item 12. Description of the Fund and its Investments
and Risks ..................................Investment Policies; Description of the Trust;
Fundamental Investment Limitations
Item 13. Management of the Fund .....................Management of the Fund
Item 14. Control Persons and Principal Holders of
Securities .................................Management of the Fund
Item 15. Investment Advisory and Other Services .....Investment Advisory Services
Item 16. Brokerage Allocation and Other Practices ...Portfolio Transactions
Item 17. Capital Stock and Other Securities .........Description of the Fund
Item 18. Purchase, Redemption, and Pricing of Shares.Purchase of Shares; Redemption of Shares;
Share Price
Item 19. Taxation of the Fund .......................Description of the Fund
Item 20. Underwriters ...............................Not Applicable
Item 21. Calculation of Performance Data ............Yield and Total Return
Item 22. Financial Statements .......................Financial Statements
</TABLE>
<PAGE>
VANGUARD(R)
WINDSOR (TM) FUND
Prospectus
February 18, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
October 31, 1999.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD WINDSOR FUND
Prospectus
February 18, 2000
A Growth and Income Stock Mutual Fund
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CONTENTS
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1 FUND PROFILE 12 SHARE PRICE
3 ADDITIONAL INFORMATION 12 FINANCIAL HIGHLIGHTS
3 A WORD ABOUT RISK 14 INVESTING WITH VANGUARD
3 WHO SHOULD INVEST 14 SERVICES AND ACCOUNT FEATURES
15 TYPES OF ACCOUNTS
4 PRIMARY INVESTMENT STRATEGIES 16 BUYING SHARES
18 REDEEMING SHARES
8 THE FUND AND VANGUARD 21 TRANSFERRING REGISTRATION
22 FUND AND ACCOUNT UPDATES
9 INVESTMENT ADVISERS
10 DIVIDENDS, CAPITAL GAINS, AND TAXES GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Windsor Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk (R)" 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.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Windsor Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital. As a secondary objective,
the Fund seeks to provide some dividend income.
INVESTMENT STRATEGIES
The Fund invests primarily in large- and medium-size companies whose stocks are
considered by the Fund's adviser to be undervalued. 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.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
1990 -15.50%
1991 28.55%
1992 16.50%
1993 19.37%
1994 -0.15%
1995 30.15%
1996 26.36%
1997 21.97%
1998 0.81%
1999 11.57%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 18.25% (quarter ended March 31, 1991) and the lowest return for a
quarter was -20.34% (quarter ended September 30, 1990).
<PAGE>
2
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Windsor Fund 11.57% 17.67% 13.03%
Standard & Poor's 500 Index 21.04 28.56 18.21
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FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.26%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.28%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
----------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------
$29 $90 $157 $356
----------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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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 1999 was 0.28%,
or $2.80 per $1,000 of average net assets. The average multi-cap value mutual
fund had expenses in 1999 of 1.38%, or $13.80 per $1,000 of average net assets
(derived from data provided as of December 31, 1999 by Lipper Inc., which
reports on the mutual fund industry). Management expenses, which comprise one
part of operating expenses, include investment advisory fees as well as other
costs of managing a fund--such as account maintenance, reporting, accounting,
legal, and other administrative expenses.
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<PAGE>
3
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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 the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS SUITABLE FOR IRAS
Dividends are distributed semiannually Yes
in June and December; capital gains, if
any, are distributed in December MINIMUM INITIAL INVESTMENT
$3,000; $1,000 for IRAs and custodial
INVESTMENT ADVISERS accounts for minors
- - Wellington Management Company, LLP,
Boston, Mass., since inception NEWSPAPER ABBREVIATION
- - Sanford C. Bernstein & Co., Inc., New Wndsr
York, N.Y., since June 1, 1999
- - The Vanguard Group, Valley Forge, Pa. VANGUARD FUND NUMBER
022
INCEPTION DATE
October 23, 1958 CUSIP NUMBER
922018106
NET ASSETS AS OF OCTOBER 31, 1999
$16.8 billion TICKER SYMBOL
VWNDX
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================================================================================
A WORD ABOUT RISK
This prospectus describes risks you would 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. As you consider an investment in Vanguard Windsor Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You are seeking a value-oriented investment that seeks to provide long-term
growth as well as some dividend income.
- - You wish to add a value-oriented growth and income stock fund to your
existing holdings, which could include other stock investments as well as
bond, money market, and tax-exempt investments.
- - You are seeking growth of capital and income over the long term--at least
five years.
<PAGE>
4
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
- --------------------------------------------------------------------------------
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - 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. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and 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.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objectives of long-term growth of capital and some dividend
income. It also explains how the advisers implement these strategies. In
addition, this section discusses several important risks--market risk,
investment style risk, and manager risk--faced by investors in the Fund. The
Fund's Board of Trustees oversees the management of the Fund and may change the
investment strategies in the interest of shareholders.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
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<PAGE>
5
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PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book values. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category 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. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
- --------------------------------------------------------------------------------
MARKET EXPOSURE
The Fund is a value fund. Its primary strategy is to invest in large- and
mid-capitalization common stocks that have favorable prospects for growth of
earnings and dividend income, but whose prices do not reflect this potential for
positive returns. The Fund may also invest in securities that are convertible to
common stocks.
[FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) 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, that the gap between best and worst tends to narrow
over the long term.
--------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
1 YEAR 5 YEARS 10 YEARS 20 YEARS
--------------------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
--------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 11.0%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928
<PAGE>
6
through 1932) to 28.6% (from 1995 through 1999). These average returns reflect
past performance on common stocks; you should not regard them as an indication
of future returns from either the stock market as a whole or this Fund in
particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE POSSIBILITY
THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION VALUE STOCKS WILL TRAIL
RETURNS FROM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET. AS A GROUP,
VALUE STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN
COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS
LONG AS SEVERAL YEARS.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock holdings, the less likely it is
that a specific stock's poor performance will hurt the fund. One measure of a
fund's diversification is the percentage of its assets represented by its ten
largest holdings. The average U.S. equity mutual fund has about 30% of its
assets invested in its ten largest holdings, while some less-diversified mutual
funds have more than 50% of their assets invested in the stocks of just ten
companies.
- --------------------------------------------------------------------------------
SECURITY SELECTION
Vanguard Windsor Fund employs two primary investment advisers, each of whom
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These investment advisers employ active investment methods, which means
that securities are bought and sold according to the advisers' evaluations about
companies and their financial prospects, and about the stock market and the
economy in general. Each adviser will sell a security when it is no longer as
attractive as alternative investments.
While each adviser uses a different process to select securities, both are
committed to investing in large- and mid-cap stocks that, in their opinion, are
undervalued. 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.
Wellington Management Company, LLP (Wellington Management) managed about
75% of the Fund's assets as of October 31, 1999. A stock's value is the key
element in Wellington Management's selection process. Wellington Management
considers several fundamental factors, including the stock's projected growth
rate, earnings potential, dividend yield, and P/E ratio. To be a candidate for
purchase, a stock must have strong prospects for capital appreciation, but be
trading at a price/earnings (P/E) ratio that is lower than what is expected of a
stock with such potential.
Sanford C. Bernstein & Co., Inc. (Bernstein), which managed about 24% of
the Fund's assets as of October 31, 1999, also uses traditional methods of stock
selection--research and analysis--to identify undervalued stocks. In addition,
Bernstein employs quantitative valuation tools to identify attractive stocks and
the most opportune time to purchase them.
The Vanguard Group (Vanguard) typically will manage any Fund assets held in
cash reserves and may invest in stock index futures. This strategy is intended
to keep the Fund more fully invested in common stocks while retaining cash on
hand to meet liquidity
<PAGE>
7
needs. See "Other Investment Policies and Risks" for more details on the Fund's
policy on futures.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT THE
ADVISERS MAY DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 46%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect 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 turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of October 31, 1999, the average turnover rate for all
domestic stock funds was approximately 87%, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in undervalued common stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. These securities may be
traded in U.S. or foreign markets. To the extent that it owns foreign stocks,
the Fund is subject to (1) country risk, which 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; and (2) currency risk, which is
the possibility that Americans investing abroad could lose money because of a
rise in the value of the U.S. dollar versus foreign currencies.
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.
The Fund may also invest, to a limited extent, in 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 fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation under futures contracts will not
exceed 20% of its total assets.
<PAGE>
8
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 reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" 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 types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $530 billion.
All of 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 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most 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 own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
<PAGE>
9
INVESTMENT ADVISERS
The Fund employs two primary investment advisers for the bulk of its assets and
uses Vanguard's Core Management Group to manage its cash reserves. Each adviser
manages the Fund subject to the control of the Trustees and officers of the
Fund.
WELLINGTON MANAGEMENT COMPANY, LLP
Wellington Management Company, LLP (Wellington Management), 75 State
Street, Boston, MA 02109, served as the Fund's sole investment adviser from the
Fund's inception in 1958 until June of 1999.
Wellington Management's advisory fee is paid quarterly, and is based on
certain annual percentage rates applied to the Fund's average month-end assets
for each quarter. In addition, Wellington Management's advisory fee is increased
or decreased, based on the cumulative investment performance of its portion of
the Fund over a trailing 36-month period as compared with the cumulative total
return of the Standard and Poor's 500 Index over the same period.
SANFORD C. BERNSTEIN & CO., INC.
Sanford C. Bernstein & Co., Inc. (Bernstein), 767 Fifth Avenue, New York,
NY 10153, was added as an investment adviser to the Fund in June of 1999.
Bernstein's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, Bernstein's advisory fee is increased or decreased, based
on the cumulative investment performance of its portion of the Fund over a
trailing 36-month period as compared with the cumulative total return of the
Russell 1000 Value Index over the same period.
THE VANGUARD GROUP
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
founded in 1974, is a wholly owned subsidiary of the Vanguard funds. As of
October 31, 1999, Vanguard served as adviser for about $345.6 billion in assets.
The Fund receives advisory services from Vanguard on an at-cost basis.
For the fiscal year ended October 31, 1999, the aggregate amount of
investment advisory fees paid by the Fund represented an effective annual rate
of 0.12% of the Fund's average net assets before a decrease of 0.08% based on
performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then the advisers are authorized to choose a broker who, in
addition to executing the transaction, will provide research services to the
advisers or the Fund. Also, the Fund may direct the advisers to use a particular
broker for certain transactions in exchange for commission rebates or research
services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's
<PAGE>
10
sponsor and overall manager, The Vanguard Group may provide investment advisory
services to the Fund, on an at-cost basis, at any time.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISERS
Wellington Management Company, LLP (Wellington Management) is an investment
advisory firm founded in 1928. As of October 31, 1999, Wellington Management
managed more than $224 billion in assets. The manager responsible for overseeing
Wellington Management's portion of the Fund is:
CHARLES T. FREEMAN, Senior Vice President and Partner of Wellington Management;
has worked in investment management since 1967; with Wellington Management since
1969; B.S., M.B.A., 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. Mr. Freeman had been Assistant Fund Manager since
1974.
Sanford C. Bernstein & Co., Inc. (Bernstein) is an investment advisory firm
founded in 1967. As of October 31, 1999, Bernstein managed about $85.6 billion
in assets. Two managers are responsible for overseeing Bernstein's portion of
the Fund. MARILYN G. FEDAK, Chief Investment Officer and Chairman of the U.S.
Equity Investment Policy Group at Bernstein since 1993; has worked in investment
management since 1972; has managed portfolio investments since 1976; joined
Bernstein in 1984; B.A., Smith College; M.B.A., Harvard Business School. STEVEN
PISARKIEWICZ, with Bernstein since 1989; Senior Portfolio Manager since 1997;
B.S., University of Missouri; M.B.A., University of California at Berkeley.
The manager responsible for Vanguard's portion of the Fund is GEORGE U. SAUTER,
Managing Director of Vanguard and head of Vanguard's Core Management Group; has
worked in investment management since 1985; primary responsibility for
Vanguard's stock indexing policy and strategy since joining the company in 1987;
A.B., Dartmouth College; M.B.A., University of Chicago.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December. You can
receive distributions of income dividends or capital gains in cash, or you can
have them automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you whether or not you reinvest these amounts
in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable as if received in December.
<PAGE>
11
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This 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.
- - State and local income taxes may apply to any dividend or capital gains
distributions that you receive, as well as your gains or losses from any
sale or exchange of Fund shares.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not provide us with
your correct taxpayer identification number and certify that it is correct.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through 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 doing so can cost you money in taxes. 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 still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
<PAGE>
12
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the 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 one year or less, or more than one
year.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of 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.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is WNDSR.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
13
<TABLE>
- ----------------------------------------------------------------------------------------------
VANGUARD WINDSOR FUND
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $16.34 $19.55 $16.99 $15.55 $14.55
- ----------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .27 .23 .36 .43 .44
Net Realized and
Unrealized Gain
(Loss) on Investments 1.77 (.32) 3.94 2.85 1.86
----------------------------------------------------------------------
Total from Investment
Operations 2.04 (.09) 4.30 3.28 2.30
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.24) (.24) (.41) (.46) (.44)
Distributions from
Realized Capital Gains (1.23) (2.88) (1.33) (1.38) (.86)
----------------------------------------------------------------------
Total Distributions (1.47) (3.12) (1.74) (1.84) (1.30)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $16.91 $16.34 $19.55 $16.99 $15.55
==============================================================================================
TOTAL RETURN 13.74% -0.78% 27.04% 23.16% 17.80%
==============================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $16,824 $18,355 $20,678 $15,841 $13,008
Ratio of Total
Expenses to Average
Net Assets 0.28% 0.27% 0.27% 0.31% 0.45%
Ratio of Net
Investment Income to
Average Net Assets 1.56% 1.31% 1.89% 2.75% 3.01%
Turnover Rate 56% 48% 61% 34% 32%
==============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $16.34 per share.
During the year, the Fund earned $0.27 per share from investment income
(interest and dividends) and $1.77 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $1.47 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($2.04 per share) minus the distributions ($1.47 per share)
resulted in a share price of $16.91 at the end of the year. This was an increase
of $0.57 per share (from $16.34 at the beginning of the year to $16.91 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 13.74% for the year.
As of October 31, 1999, the Fund had $16.8 billion in net assets. For the year,
its expense ratio was 0.28% ($2.80 per $1,000 of net assets); and net investment
income amounted to 1.56% of its average net assets. It sold and replaced
securities valued at 56% of its net assets.
- --------------------------------------------------------------------------------
"Standard & Poor's (R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of the trademarks and copyrights relating to the Russell Indexes.
<PAGE>
14
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOKLET]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD (R) DIRECT DEPOSIT SERVICE [BOOKLET]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOKLET]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOKLET]
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.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS (TM) [BOOKLET]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOKLET]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. 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 shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>
15
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOKLET]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOKLET]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOKLET]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
<PAGE>
16
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
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.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE]
open a new account
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 identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
<PAGE>
17
add to an existing account
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 identification number, and account type). (Note that
some restrictions apply to index fund accounts.) 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 available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Windsor Fund-22
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
<PAGE>
18
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 21.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours-- to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
<PAGE>
19
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number, if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
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 U.S. 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 this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
<PAGE>
20
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
<PAGE>
21
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
22
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your 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
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOKLET]
Mailed quarterly for most accounts; 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 December and June for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOKLET]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments, which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
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 management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison with such
factors as revenue, earnings, book value, and dividends.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort 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.
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.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
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 prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Windsor Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORT TO
SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders. In these
reports, you will find a discussion
of the market conditions and
investment strategies that
significantly affected the Fund's
performance during the most recent
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-6009.
Fund's Investment Company Act
file number: 811-834
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P022N-02/18/2000
<PAGE>
VANGUARD(R)
WINDSOR(TM) FUND
Participant Prospectus
February 18, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
October 31, 1999.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD WINDSOR FUND
Participant Prospectus
February 18, 2000
A Growth and Income Stock Mutual Fund
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 FUND PROFILE 10 DIVIDENDS, CAPITAL GAINS, AND TAXES
3 ADDITIONAL INFORMATION 11 SHARE PRICE
3 A WORD ABOUT RISK 11 FINANCIAL HIGHLIGHTS
3 WHO SHOULD INVEST 13 INVESTING WITH VANGUARD
4 PRIMARY INVESTMENT STRATEGIES 14 ACCESSING FUND INFORMATION BY
COMPUTER
8 THE FUND AND VANGUARD
GLOSSARY (inside back cover)
9 INVESTMENT ADVISERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Windsor Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Windsor Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital. As a secondary objective,
the Fund seeks to provide some dividend income.
INVESTMENT STRATEGIES
The Fund invests primarily in large- and medium-size companies whose stocks are
considered by the Fund's adviser to be undervalued. 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.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
1990 -15.50%
1991 28.55%
1992 16.50%
1993 19.37%
1994 -0.15%
1995 30.15%
1996 26.36%
1997 21.97%
1998 0.81%
1999 11.57%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 18.25% (quarter ended March 31, 1991) and the lowest return for a
quarter was -20.34% (quarter ended September 30, 1990).
<PAGE>
2
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Windsor Fund 11.57% 17.67% 13.03%
Standard & Poor's 500 Index 21.04 28.56 18.21
--------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.26%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.28%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
----------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------
$29 $90 $157 $356
----------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
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 1999 was 0.28%,
or $2.80 per $1,000 of average net assets. The average multi-cap value mutual
fund had expenses in 1999 of 1.38%, or $13.80 per $1,000 of average net assets
(derived from data provided as of December 31, 1999 by Lipper Inc., which
reports on the mutual fund industry). Management expenses, which comprise one
part of operating expenses, include investment advisory fees as well as other
costs of managing a fund--such as account maintenance, reporting, accounting,
legal, and other administrative expenses.
- --------------------------------------------------------------------------------
<PAGE>
3
- --------------------------------------------------------------------------------
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 the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF OCTOBER 31, 1999
Dividends are distributed semiannually $16.8 billion
in June and December; capital gains, if
any, are distributed in December NEWSPAPER ABBREVIATION
Wndsr
INVESTMENT ADVISERS
- - Wellington Management Company, LLP, VANGUARD FUND NUMBER
Boston, Mass., since inception 022
- - Sanford C. Bernstein & Co., Inc., New
York, N.Y., since June 1, 1999 CUSIP NUMBER
- - The Vanguard Group, Valley Forge, Pa. 922018106
INCEPTION DATE TICKER SYMBOL
October 23, 1958 VWNDX
- --------------------------------------------------------------------------------
================================================================================
A WORD ABOUT RISK
This prospectus describes risks you would 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. As you consider an investment in Vanguard Windsor Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You are seeking a value-oriented investment that seeks to provide long-term
growth as well as some dividend income.
- - You wish to add a value-oriented growth and income stock fund to your
existing holdings, which could include other stock investments as well as
bond, money market, and tax-exempt investments.
- - You are seeking growth of capital and income over the long term--at least
five years.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
<PAGE>
4
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
- --------------------------------------------------------------------------------
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - 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. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and 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.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objectives of long-term growth of capital and some dividend
income. It also explains how the advisers implement these strategies. In
addition, this section discusses several important risks--market risk,
investment style risk, and manager risk--faced by investors in the Fund. The
Fund's Board of Trustees oversees the management of the Fund and may change the
investment strategies in the interest of shareholders.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
- --------------------------------------------------------------------------------
<PAGE>
5
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book values. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category 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. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
- --------------------------------------------------------------------------------
MARKET EXPOSURE
The Fund is a value fund. Its primary strategy is to invest in large- and
mid-capitalization common stocks that have favorable prospects for growth of
earnings and dividend income, but whose prices do not reflect this potential for
positive returns. The Fund may also invest in securities that are convertible to
common stocks.
[FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) 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, that the gap between best and worst tends to narrow
over the long term.
--------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
1 YEAR 5 YEARS 10 YEARS 20 YEARS
--------------------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
--------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 11.0%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928
<PAGE>
6
through 1932) to 28.6% (from 1995 through 1999). These average returns reflect
past performance on common stocks; you should not regard them as an indication
of future returns from either the stock market as a whole or this Fund in
particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE POSSIBILITY
THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION VALUE STOCKS WILL TRAIL
RETURNS FROM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET. AS A GROUP,
VALUE STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN
COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS
LONG AS SEVERAL YEARS.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock holdings, the less likely it is
that a specific stock's poor performance will hurt the fund. One measure of a
fund's diversification is the percentage of its assets represented by its ten
largest holdings. The average U.S. equity mutual fund has about 30% of its
assets invested in its ten largest holdings, while some less-diversified mutual
funds have more than 50% of their assets invested in the stocks of just ten
companies.
- --------------------------------------------------------------------------------
SECURITY SELECTION
Vanguard Windsor Fund employs two primary investment advisers, each of whom
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These investment advisers employ active investment methods, which means
that securities are bought and sold according to the advisers' evaluations about
companies and their financial prospects, and about the stock market and the
economy in general. Each adviser will sell a security when it is no longer as
attractive as alternative investments.
While each adviser uses a different process to select securities, both are
committed to investing in large- and mid-cap stocks that, in their opinion, are
undervalued. 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.
Wellington Management Company, LLP (Wellington Management) managed about
75% of the Fund's assets as of October 31, 1999. A stock's value is the key
element in Wellington Management's selection process. Wellington Management
considers several fundamental factors, including the stock's projected growth
rate, earnings potential, dividend yield, and P/E ratio. To be a candidate for
purchase, a stock must have strong prospects for capital appreciation, but be
trading at a price/earnings (P/E) ratio that is lower than what is expected of a
stock with such potential.
Sanford C. Bernstein & Co., Inc. (Bernstein), which managed about 24% of
the Fund's assets as of October 31, 1999, also uses traditional methods of stock
selection--research and analysis--to identify undervalued stocks. In addition,
Bernstein employs quantitative valuation tools to identify attractive stocks and
the most opportune time to purchase them.
The Vanguard Group (Vanguard) typically will manage any Fund assets held in
cash reserves and may invest in stock index futures. This strategy is intended
to keep the Fund more fully invested in common stocks while retaining cash on
hand to meet liquidity
<PAGE>
7
needs. See "Other Investment Policies and Risks" for more details on the Fund's
policy on futures.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT THE
ADVISERS MAY DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 46%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect 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 turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of October 31, 1999, the average turnover rate for all
domestic stock funds was approximately 87%, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in undervalued common stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. These securities may be
traded in U.S. or foreign markets. To the extent that it owns foreign stocks,
the Fund is subject to (1) country risk, which 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; and (2) currency risk, which is
the possibility that Americans investing abroad could lose money because of a
rise in the value of the U.S. dollar versus foreign currencies.
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.
The Fund may also invest, to a limited extent, in 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 fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation under futures contracts will not
exceed 20% of its total assets.
<PAGE>
8
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 reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" 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 types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $530 billion.
All of 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 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most 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 own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
<PAGE>
9
INVESTMENT ADVISERS
The Fund employs two primary investment advisers for the bulk of its assets and
uses Vanguard's Core Management Group to manage its cash reserves. Each adviser
manages the Fund subject to the control of the Trustees and officers of the
Fund.
WELLINGTON MANAGEMENT COMPANY, LLP
Wellington Management Company, LLP (Wellington Management), 75 State
Street, Boston, MA 02109, served as the Fund's sole investment adviser from the
Fund's inception in 1958 until June of 1999.
Wellington Management's advisory fee is paid quarterly, and is based on
certain annual percentage rates applied to the Fund's average month-end assets
for each quarter. In addition, Wellington Management's advisory fee is increased
or decreased, based on the cumulative investment performance of its portion of
the Fund over a trailing 36-month period as compared with the cumulative total
return of the Standard and Poor's 500 Index over the same period.
SANFORD C. BERNSTEIN & CO., INC.
Sanford C. Bernstein & Co., Inc. (Bernstein), 767 Fifth Avenue, New York,
NY 10153, was added as an investment adviser to the Fund in June of 1999. Like
Wellington Management, Bernstein's advisory fee is paid quarterly, and is based
on certain annual percentage rates applied to the Fund's average month-end
assets for each quarter. In addition, Bernstein's advisory fee is increased or
decreased, based on the cumulative investment performance of its portion of the
Fund over a trailing 36-month period as compared with the cumulative total
return of the Russell 1000 Value Index over the same period.
THE VANGUARD GROUP
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
founded in 1974, is a wholly owned subsidiary of the Vanguard funds. As of
October 31, 1999, Vanguard served as adviser for about $345.6 billion in assets.
The Fund receives advisory services from Vanguard on an at-cost basis.
For the fiscal year ended October 31, 1999, the aggregate amount of
investment advisory fees paid by the Fund represented an effective annual rate
of 0.12% of the Fund's average net assets before a decrease of 0.08% based on
performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then the advisers are authorized to choose a broker who, in
addition to executing the transaction, will provide research services to the
advisers or the Fund. Also, the Fund may direct the advisers to use a particular
broker for certain transactions in exchange for commission rebates or research
services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's
<PAGE>
10
sponsor and overall manager, The Vanguard Group may provide investment advisory
services to the Fund, on an at-cost basis, at any time.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISERS
Wellington Management Company, LLP (Wellington Management) is an investment
advisory firm founded in 1928. As of October 31, 1999, Wellington Management
managed more than $224 billion in assets. The manager responsible for overseeing
Wellington Management's portion of the Fund is:
CHARLES T. FREEMAN, Senior Vice President and Partner of Wellington Management;
has worked in investment management since 1967; with Wellington Management since
1969; B.S., M.B.A., 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. Mr. Freeman had been Assistant Fund Manager since
1974.
Sanford C. Bernstein & Co., Inc. (Bernstein) is an investment advisory firm
founded in 1967. As of October 31, 1999, Bernstein managed about $85.6 billion
in assets. Two managers are responsible for overseeing Bernstein's portion of
the Fund. MARILYN G. FEDAK, Chief Investment Officer and Chairman of the U.S.
Equity Investment Policy Group at Bernstein since 1993; has worked in investment
management since 1972; has managed portfolio investments since 1976; joined
Bernstein in 1984; B.A., Smith College; M.B.A., Harvard Business School. STEVEN
PISARKIEWICZ, with Bernstein since 1989; Senior Portfolio Manager since 1997;
B.S., University of Missouri; M.B.A., University of California at Berkeley.
The manager responsible for Vanguard's portion of the Fund is GEORGE U. SAUTER,
Managing Director of Vanguard and head of Vanguard's Core Management Group; has
worked in investment management since 1985; primary responsibility for
Vanguard's stock indexing policy and strategy since joining the company in 1987;
A.B., Dartmouth College; M.B.A., University of Chicago.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
<PAGE>
11
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the 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 one year or less, or more than one
year.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of 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.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is WNDSR.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
12
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
- ----------------------------------------------------------------------------------------------
VANGUARD WINDSOR FUND
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $16.34 $19.55 $16.99 $15.55 $14.55
- ----------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .27 .23 .36 .43 .44
Net Realized and
Unrealized Gain
(Loss) on Investments 1.77 (.32) 3.94 2.85 1.86
----------------------------------------------------------------------
Total from Investment
Operations 2.04 (.09) 4.30 3.28 2.30
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.24) (.24) (.41) (.46) (.44)
Distributions from
Realized Capital Gains (1.23) (2.88) (1.33) (1.38) (.86)
----------------------------------------------------------------------
Total Distributions (1.47) (3.12) (1.74) (1.84) (1.30)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $16.91 $16.34 $19.55 $16.99 $15.55
==============================================================================================
TOTAL RETURN 13.74% -0.78% 27.04% 23.16% 17.80%
==============================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $16,824 $18,355 $20,678 $15,841 $13,008
Ratio of Total
Expenses to Average
Net Assets 0.28% 0.27% 0.27% 0.31% 0.45%
Ratio of Net
Investment Income to
Average Net Assets 1.56% 1.31% 1.89% 2.75% 3.01%
Turnover Rate 56% 48% 61% 34% 32%
==============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $16.34 per share.
During the year, the Fund earned $0.27 per share from investment income
(interest and dividends) and $1.77 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $1.47 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($2.04 per share) minus the distributions ($1.47 per share)
resulted in a share price of $16.91 at the end of the year. This was an increase
of $0.57 per share (from $16.34 at the beginning of the year to $16.91 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 13.74% for the year.
As of October 31, 1999, the Fund had $16.8 billion in net assets. For the year,
its expense ratio was 0.28% ($2.80 per $1,000 of net assets); and net investment
income amounted to 1.56% of its average net assets. It sold and replaced
securities valued at 56% of its net assets.
- --------------------------------------------------------------------------------
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of the trademarks and copyrights relating to the Russell Indexes.
<PAGE>
13
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- - If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on a Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this 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 its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
14
ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "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.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments, which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
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 management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison with such
factors as revenue, earnings, book value, and dividends.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort 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.
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.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
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 prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Windsor Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORT TO
SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders. In these
reports, you will find a discussion
of the market conditions and
investment strategies that
significantly affected the Fund's
performance during the most recent
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT SERVICES CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-6009.
Fund's Investment Company Act
file number: 811-834
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I022N-02/18/2000
<PAGE>
VANGUARD(R)
WINDSOR II(TM) FUND
Prospectus
February 18, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
October 31, 1999.
[A MEMBER OF THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD WINDSOR II FUND
Prospectus
February 18, 2000
A Growth and Income Stock Mutual Fund
- --------------------------------------------------------------------------------
CONTENTS
1 FUND PROFILE 12 SHARE PRICE
3 ADDITIONAL INFORMATION 12 FINANCIAL HIGHLIGHTS
3 A WORD ABOUT RISK 14 INVESTING WITH VANGUARD
3 WHO SHOULD INVEST 14 SERVICES AND ACCOUNT FEATURES
4 PRIMARY INVESTMENT STRATEGIES 15 TYPES OF ACCOUNTS
8 THE FUND AND VANGUARD 16 BUYING SHARES
9 INVESTMENT ADVISER 18 REDEEMING SHARES
10 DIVIDENDS, CAPITAL GAINS, AND TAXES 21 TRANSFERRING REGISTRATION
22 FUND AND ACCOUNT UPDATES
GLOSSARY (inside back cover)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Windsor II Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk (R)" 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.
- -------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Windsor II Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital. As a secondary objective,
the Fund seeks to provide some dividend income.
INVESTMENT STRATEGIES
The Fund invests primarily in large and medium-size companies whose stocks are
considered by the Fund's advisers to be undervalued. 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.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how the Fund will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 -9.98%
1991 28.70%
1992 11.99%
1993 13.60%
1994 -1.16%
1995 38.83%
1996 24.18%
1997 32.37%
1998 16.36%
1999 -5.81%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.90% (quarter ended March 31, 1991) and the lowest return for a
quarter was -15.05% (quarter ended September 30, 1990).
<PAGE>
2
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Windsor II Fund -5.81% 20.13% 13.80%
Standard & Poor's 500 Index 21.04 28.56 18.21
--------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.35%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.37%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$38 $119 $208 $468
-------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
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 II Fund's expense ratio in fiscal year 1999 was
0.37%, or $3.70 per $1,000 of average net assets. The average large-cap value
mutual fund had expenses in 1999 of 1.26%, or $12.60 per $1,000 of average net
assets (derived from data provided as of December 31, 1999 by Lipper Inc., which
reports on the mutual fund industry). Management expenses, which comprise one
part of operating expenses, include investment advisory fees as well as other
costs of managing a fund--such as account maintenance, reporting, accounting,
legal, and other administrative expenses.
- --------------------------------------------------------------------------------
<PAGE>
3
- --------------------------------------------------------------------------------
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 the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF OCTOBER 31, 1999
Dividends are distributed $30.5 billion
semiannually in June and
December; capital gains, if any, SUITABLE FOR IRAS
are distributed in December Yes
INVESTMENT ADVISERS MINIMUM INITIAL INVESTMENT
Vanguard Windsor II Fund $3,000; $1,000 for IRAs and custodial accounts
uses four advisers: for minors
- -Barrow, Hanley, Mewhinney
& Strauss, Inc., Dallas, NEWSPAPER ABBREVIATION
Tex., since 1985 WndsrII
- -Equinox Capital Management LLC,
New York, N.Y., since 1991 VANGUARD FUND NUMBER
- -Tukman Capital Management, Inc., 073
Larkspur, Calif. since 1991
Mass., since 2000 CUSIP NUMBER
- -The Vanguard Group, Valley 922018205
Forge, Pa., since 1991
TICKER SYMBOL
INCEPTION DATE VWNFX
June 24, 1985
- --------------------------------------------------------------------------------
================================================================================
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Windsor II 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. As you consider an investment in Vanguard Windsor II Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a value-oriented growth and income stock fund to your
existing holdings, which could include other stock investments as well as
bond, money market, and tax-exempt investments.
- - You are seeking growth of capital over the long term--at least five
years--as well as some dividend income.
<PAGE>
4
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
- --------------------------------------------------------------------------------
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - 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. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit to the number of times you can exchange into and 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.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objectives of long-term growth of capital and some dividend
income. It also explains how the advisers implement these strategies. In
addition, this section discusses several important risks--market risk,
investment style risk, and manager risk--faced by investors in the Fund. The
Fund's Board of Trustees oversees the management of the Fund and may change the
investment strategies in the interest of shareholders.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
- --------------------------------------------------------------------------------
<PAGE>
5
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book values. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category 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. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
- --------------------------------------------------------------------------------
MARKET EXPOSURE
The Fund is a value fund. It employs four investment advisers to carry out its
primary strategy of investing in a broadly diversified group of large- and
mid-capitalization companies that have favorable prospects for growth of
earnings and dividend income but whose prices do not reflect these prospects.
[FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) 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, that the gap between best and worst tends to narrow
over the long term.
----------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
----------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 11.0%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928
<PAGE>
6
through 1932) to 28.6% (from 1995 through 1999). These average returns reflect
past performance on common stocks; you should not regard them as an indication
of future returns from either the stock market as a whole or this Fund in
particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE POSSIBILITY
THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION VALUE STOCKS WILL TRAIL
RETURNS FROM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET. AS A GROUP,
VALUE STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN
COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS
LONG AS SEVERAL YEARS.
SECURITY SELECTION
Vanguard Windsor II Fund employs four investment advisers, each of whom
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These investment advisers employ active investment methods, which means
that securities are bought and sold according to the advisers' evaluations about
companies and their financial prospects, and about the stock market and the
economy in general. Each adviser will sell a security when it is no longer as
attractive as an alternative investment.
While each adviser uses a different process to select securities, all four
are committed to investing in large- and mid-cap stocks that, in their opinion,
are undervalued. 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.
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow Hanley), which managed
about 64% of the Fund's assets as of October 31, 1999, uses traditional methods
of stock selection--research and analysis--to identify undervalued securities. A
security will be sold when, in Barrow Hanley's opinion, its share price
accurately reflects the security's overall worth. At that point, another
undervalued security will be chosen. No more than 15% of Barrow Hanley's
portfolio is devoted to a single industry.
Tukman Capital Management, Inc. (Tukman), which managed about 12% of the
Fund's assets as of October 31, 1999, also uses traditional research methods to
select undervalued securities. Tukman typically buys stocks of financially sound
companies in growing business sectors and holds them for three to five years, on
average.
Equinox Capital Management LLC (Equinox), which managed about 14% of the
Fund's assets as of October 31, 1999, uses its own fundamental research and
proprietary software to identify undervalued securities with attractive growth
and dividend prospects. Like Barrow Hanley, it avoids large concentrations in a
single industry.
The Vanguard Group (Vanguard), which managed about 6% of the Fund's assets
as of October 31, 1999, selects stocks from a "universe" of about 550 companies.
Vanguard, using quantitative models, evaluates the stocks using several
fundamental factors, such as a stock's price in relation to its projected growth
rate. The stocks selected are expected, as a group, to outperform the Russell
1000 Value Index, a benchmark of large- and mid-cap value stocks.
Vanguard is responsible for the balance of the Fund's assets as cash
reserves (about 4% as of October 31, 1999). Vanguard invests in stock index
features so that the cash reserve portion of the Fund's portfolio may achieve
performance similar to that of common stocks. This strategy is intended to keep
the Fund more fully invested in common stocks while
<PAGE>
7
retaining cash on hand to meet liquidity needs. See "Other Investment Policies
and Risks" for more details on the Fund's policy on futures.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT THE
ADVISERS MAY DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 30%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect 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 turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of October 31, 1999, the average turnover rate for all
domestic stock funds was approximately 87%, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of value companies, the Fund may make certain
other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. These securities may be
traded in U.S. or foreign markets. To the extent that it owns foreign stocks,
the Fund is subject to (1) country risk, which 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; and (2) currency risk, which is
the possibility that Americans investing abroad could lose money because of a
rise in the value of the U.S. dollar versus foreign currencies.
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.
The Fund may also invest, to a limited extent, in 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 fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation under futures contracts will not
exceed 20% of its total assets.
<PAGE>
8
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 reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" 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 types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $530 billion.
All of 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 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most 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 own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
<PAGE>
9
INVESTMENT ADVISERS
The Fund employs four investment advisers. Each manages a portion of the Fund's
assets subject to the control of the Trustees and officers of the Fund.
BARROW, HANLEY, MEWHINNEY, & STRAUSS, INC.
Barrow, Hanley, Mewhinney, & Strauss, Inc.(Barrow Hanley), One McKinney
Plaza, 3232 McKinney Avenue, 15th Floor, Dallas, TX 75204, is an investment
advisory firm founded in 1979. Barrow Hanley is owned by United Asset
Management, 1 International Place, Boston, MA 02110. Barrow Hanley currently
manages more than $35 billion in stock and bond portfolios.
Barrow Hanley's advisory fee is paid quarterly, and is based on certain
annual percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, Barrow Hanley's advisory fee may be adjusted based on the
cumulative investment performance of its portion of the Fund as compared with
the cumulative return of the Standard & Poor's 500/BARRA Value Index, a
benchmark of stocks from the S&P 500 Index with lower than average price/book
ratios. Under the fee schedule, Barrow Hanley's basic fee may be increased or
decreased by as much as 25%.
EQUINOX CAPITAL MANAGEMENT LLC
Equinox Capital Management LLC (Equinox), 590 Madison Avenue, 41st Floor,
New York, NY 10022, is an investment advisory firm founded in 1989. It currently
manages more than $13 billion in assets.
Equinox's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, Equinox's advisory fee may be adjusted based on the
cumulative investment performance of its portion of the Fund as compared to that
of the Russell 1000 Value Index. Under the fee schedule, Equinox's basic fee may
be increased or decreased by as much as 50%.
TUKMAN CAPITAL MANAGEMENT, INC.
Tukman Capital Management, Inc.(Tukman), 60 East Sir Francis Drake
Boulevard, Larkspur, CA 94939, is an investment advisory firm founded in 1980.
It currently manages more than $3.7 billion in assets.
Tukman's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, Tukman's advisory fee may be adjusted based on the
cumulative investment performance of its portion of the Fund as compared to that
of the S&P 500 Index. Under the fee schedule, Tukman's basic fee may be
increased or decreased by as much as 50%.
THE VANGUARD GROUP
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
founded in 1974, is a wholly owned subsidiary of the Vanguard funds. As of
October 31, 1999, Vanguard served as adviser for about $345.6 billion in assets.
The Fund receives advisory services from Vanguard on an at-cost basis.
For the fiscal year ended October 31, 1999, the aggregate amount of
investment advisory fees paid by the Fund represented an effective annual rate
of 0.12% of the Fund's average net assets before a decrease of 0.01% based on
performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then the advisers are authorized to choose a broker who, in
addition to executing the transaction, will provide research ser-
<PAGE>
10
vices to the advisers or the Fund. Also, the Fund may direct the advisers to use
a particular broker for certain transactions in exchange for commission rebates
or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The manager responsible for Barrow Hanley's portion of Vanguard Windsor II Fund
since 1985 is JAMES P. BARROW, Partner of Barrow Hanley; has worked in
investment management since 1963; with Barrow Hanley since 1979; B.S. University
of South Carolina.
The manager responsible for Equinox's portion of the Fund since 1991 is RONALD
J. ULRICH, President, Director, and founder of Equinox; has worked in investment
management since 1973; B.S. Lehigh University; M.B.A., New York University.
The managers responsible for Tukman's portion of the Fund are MELVIN TUKMAN,
President, Director, and founder of Tukman; has worked in investment management
since 1971; A.B., Hunter College; M.B.A., Harvard Business School; and DANIEL L.
GROSSMAN, Vice President and Portfolio Manager of Tukman; has worked in
investment management since 1978; M.B.A., Stanford University.
The manager responsible for Vanguard's portion of the Fund is GEORGE U. SAUTER,
Managing Director of Vanguard and head of Vanguard's Core Management Group; has
worked in investment management since 1985; primary responsibility for
Vanguard's stock indexing policy and strategy since joining the company in 1987;
A.B., Dartmouth College; M.B.A., University of Chicago.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December. You can
receive distributions of income dividends or capital gains in cash, or you can
have them automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you whether or not you reinvest these amounts in
additional Fund shares.
- - Distributions declared in December--if paid to you by the end of January--are
taxable as if received in December.
<PAGE>
11
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This 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.
- - State and local income taxes may apply to any dividend or capital gains
distributions that you receive, as well as your gains or losses from any
sale or exchange of Fund shares.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not provide us with
your correct taxpayer identification number and certify that it is correct.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through 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 doing so can cost you money in taxes. 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 still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
<PAGE>
12
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the 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 one year or less, or more than one
year.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
NET ASSET VALUE = TOTAL ASSETS - LIABILITIES
-------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of 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.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is WNDSRII.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent
<PAGE>
13
annual report to shareholders. You may have the annual report sent to you
without charge by contacting Vanguard.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
VANGUARD WINDSOR II FUND
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,BEGINNING OF YEAR $31.07 $29.36 $24.04 $20.06 $17.33
- ------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .64 .65 .64 .62 .58
Net Realized and Unrealized Gain (Loss)
on Investments .73 3.91 6.47 4.63 3.17
----------------------------------------------------------------
Total from Investment Operations 1.37 4.56 7.11 5.25 3.75
----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.74) (.66) (.63) (.58) (.55)
Distributions from Realized Capital
Gains (2.67) (2.19) (1.16) (.69) (.47)
----------------------------------------------------------------
Total Distributions (3.41) (2.85) (1.79) (1.27) (1.02)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $29.03 $31.07 $29.36 $24.04 $20.06
======================================================================================================
TOTAL RETURN 4.57% 16.51% 31.27% 27.17% 23.08%
======================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $30,541 $29,639 $22,568 $14,758 $10,272
Ratio of Total Expenses to Average
Net Assets 0.37% 0.41% 0.37% 0.39% 0.40%
Ratio of Net Investment Income to
Average Net Assets 2.08% 2.16% 2.49% 2.92% 3.27%
Turnover Rate 26% 31% 30% 32% 30%
======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $31.07 per share.
During the year, the Fund earned $0.64 per share from investment income
(interest and dividends) and $0.73 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $3.41 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($1.37 per share) minus the distributions ($3.41 per share)
resulted in a share price of $29.03 at the end of the year. This was a decrease
of $2.04 per share (from $31.07 at the beginning of the year to $29.03 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 4.57% for the year.
As of October 31, 1999, the Fund had $30.5 billion in net assets. For the year,
its expense ratio was 0.37% ($3.70 per $1,000 of net assets); and net investment
income amounted to 2.08% of its average net assets. It sold and replaced
securities valued at 26% of its net assets.
- --------------------------------------------------------------------------------
"Standard & Poor's (R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of the trademarks and copyrights relating to the Russell Indexes.
<PAGE>
14
-------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOKLET]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD (R) DIRECT DEPOSIT SERVICE [BOOKLET]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD (R) AUTOMATIC EXCHANGE SERVICE [BOOKLET]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS (R) [BOOKLET]
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.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS (TM) [BOOKLET]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD)[BOOKLET]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. 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 shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>
15
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOKLET]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOKLET]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOKLET]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
<PAGE>
16
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-73
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . .[TELEPHONE]
open a new account
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 identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
<PAGE>
17
add to an existing account
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 identification number, and account type). (Note that
some restrictions apply to index fund accounts.) 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 available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Windsor II Fund-73
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
<PAGE>
18
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 21.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
<PAGE>
19
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number, if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
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 U.S. 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 this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
<PAGE>
20
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
<PAGE>
21
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
22
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your 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
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOKLET]
Mailed quarterly for most accounts; 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 December and June for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOKLET]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
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 management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison with such
factors as revenue, earnings, book value, and dividends.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort 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.
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.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
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 prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Windsor II Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORT
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders. In these
reports, you will find a discussion of
the market conditions and
investment strategies that
significantly affected the Fund's
performance during the most recent
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into (and
are thus legally a part of) this
prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements, please
call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-6009.
Fund's Investment Company Act
file number: 811-834
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation,
Distributor.
P073N-02/18/2000
<PAGE>
VANGUARD(R)
WINDSOR II (TM) FUND
Participant Prospectus
February 18, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
October 31, 1999.
[A MEMBER OF THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD WINDSOR II FUND
Participant Prospectus
February 18, 2000
A Growth and Income Stock Mutual Fund
- --------------------------------------------------------------------------------
CONTENTS
1 FUND PROFILE 10 DIVIDENDS, CAPITAL GAINS, AND TAXES
3 ADDITIONAL INFORMATION 11 SHARE PRICE
3 A WORD ABOUT RISK 11 FINANCIAL HIGHLIGHTS
3 WHO SHOULD INVEST 13 INVESTING WITH VANGUARD
4 PRIMARY INVESTMENT STRATEGIES 14 ACCESSING FUND INFORMATION BY
8 THE FUND AND VANGUARD COMPUTER
8 INVESTMENT ADVISER GLOSSARY (inside back cover)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Windsor II Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk (R)" 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.
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.
- -------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Windsor II Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital. As a secondary objective,
the Fund seeks to provide some dividend income.
INVESTMENT STRATEGIES
The Fund invests primarily in large and medium-size companies whose stocks are
considered by the Fund's advisers to be undervalued. 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.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how the Fund will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 -9.98%
1991 28.70%
1992 11.99%
1993 13.60%
1994 -1.16%
1995 38.83%
1996 24.18%
1997 32.37%
1998 16.36%
1999 -5.81%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.90% (quarter ended March 31, 1991) and the lowest return for a
quarter was -15.05% (quarter ended September 30, 1990).
<PAGE>
2
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Windsor II Fund -5.81% 20.13% 13.80%
Standard & Poor's 500 Index 21.04 28.56 18.21
--------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended October 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.35%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.37%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$38 $119 $208 $468
-------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
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 II Fund's expense ratio in fiscal year 1999 was
0.37%, or $3.70 per $1,000 of average net assets. The average large-cap value
mutual fund had expenses in 1999 of 1.26%, or $12.60 per $1,000 of average net
assets (derived from data provided as of December 31, 1999 by Lipper Inc., which
reports on the mutual fund industry). Management expenses, which comprise one
part of operating expenses, include investment advisory fees as well as other
costs of managing a fund--such as account maintenance, reporting, accounting,
legal, and other administrative expenses.
- --------------------------------------------------------------------------------
<PAGE>
3
- --------------------------------------------------------------------------------
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 the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION INCEPTION DATE
DIVIDENDS AND CAPITAL GAINS June 24, 1985
Dividends are distributed
semiannually in June and NET ASSETS AS OF OCTOBER 31, 1999
December; capital gains, if any, $30.5 billion
are distributed in December
INVESTMENT ADVISERS NEWSPAPER ABBREVIATION
Vanguard Windsor II Fund WndsrII
uses four advisers:
- -Barrow, Hanley, Mewhinney VANGUARD FUND NUMBER
& Strauss, Inc., Dallas, 073
Tex., since 1985
- -Equinox Capital Management LLC, CUSIP NUMBER
New York, N.Y., since 1991 922018205
- -Tukman Capital Management, Inc.,
Larkspur, Calif. since 1991 TICKER SYMBOL
Mass., since 2000 VWNFX
- -The Vanguard Group, Valley
Forge, Pa., since 1991
- --------------------------------------------------------------------------------
================================================================================
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Windsor II 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. As you consider an investment in Vanguard Windsor II Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a value-oriented growth and income stock fund to your
existing holdings, which could include other stock investments as well as
bond, money market, and tax-exempt investments.
- - You are seeking growth of capital over the long term--at least five
years--as well as some dividend income.
<PAGE>
4
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
- --------------------------------------------------------------------------------
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - 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. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit to the number of times you can exchange into and out of
the Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment advisers use in pursuit
of the Fund's objectives of long-term growth of capital and some dividend
income. It also explains how the advisers implement these strategies. In
addition, this section discusses several important risks--market risk,
investment style risk, and manager risk--faced by investors in the Fund. The
Fund's Board of Trustees oversees the management of the Fund and may change the
investment strategies in the interest of shareholders.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
- --------------------------------------------------------------------------------
<PAGE>
5
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book values. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category 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. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
- --------------------------------------------------------------------------------
MARKET EXPOSURE
The Fund is a value fund. It employs four investment advisers to carry out its
primary strategy of investing in a broadly diversified group of large- and
mid-capitalization companies that have favorable prospects for growth of
earnings and dividend income but whose prices do not reflect these prospects.
[FLAG] THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) 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, that the gap between best and worst tends to narrow
over the long term.
----------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
----------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 11.0%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928
<PAGE>
6
through 1932) to 28.6% (from 1995 through 1999). These average returns reflect
past performance on common stocks; you should not regard them as an indication
of future returns from either the stock market as a whole or this Fund in
particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE POSSIBILITY
THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION VALUE STOCKS WILL TRAIL
RETURNS FROM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET. AS A GROUP,
VALUE STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN
COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS
LONG AS SEVERAL YEARS.
SECURITY SELECTION
Vanguard Windsor II Fund employs four investment advisers, each of whom
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These investment advisers employ active investment methods, which means
that securities are bought and sold according to the advisers' evaluations about
companies and their financial prospects, and about the stock market and the
economy in general. Each adviser will sell a security when it is no longer as
attractive as an alternative investment.
While each adviser uses a different process to select securities, all four
are committed to investing in large- and mid-cap stocks that, in their opinion,
are undervalued. 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.
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow Hanley), which managed
about 64% of the Fund's assets as of October 31, 1999, uses traditional methods
of stock selection--research and analysis--to identify undervalued securities. A
security will be sold when, in Barrow Hanley's opinion, its share price
accurately reflects the security's overall worth. At that point, another
undervalued security will be chosen. No more than 15% of Barrow Hanley's
portfolio is devoted to a single industry.
Tukman Capital Management, Inc. (Tukman), which managed about 12% of the
Fund's assets as of October 31, 1999, also uses traditional research methods to
select undervalued securities. Tukman typically buys stocks of financially sound
companies in growing business sectors and holds them for three to five years, on
average.
Equinox Capital Management LLC (Equinox), which managed about 14% of the
Fund's assets as of October 31, 1999, uses its own fundamental research and
proprietary software to identify undervalued securities with attractive growth
and dividend prospects. Like Barrow Hanley, it avoids large concentrations in a
single industry.
The Vanguard Group (Vanguard), which managed about 6% of the Fund's assets
as of October 31, 1999, selects stocks from a "universe" of about 550 companies.
Vanguard, using quantitative models, evaluates the stocks using several
fundamental factors, such as a stock's price in relation to its projected growth
rate. The stocks selected are expected, as a group, to outperform the Russell
1000 Value Index, a benchmark of large- and mid-cap value stocks.
Vanguard is responsible for the balance of the Fund's assets as cash
reserves (about 4% as of October 31, 1999). Vanguard invests in stock index
features so that the cash reserve portion of the Fund's portfolio may achieve
performance similar to that of common stocks. This strategy is intended to keep
the Fund more fully invested in common stocks while
<PAGE>
7
retaining cash on hand to meet liquidity needs. See "Other Investment Policies
and Risks" for more details on the Fund's policy on futures.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY THAT THE
ADVISERS MAY DO A POOR JOB OF SELECTING STOCKS.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 30%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect 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 turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of October 31, 1999, the average turnover rate for all
domestic stock funds was approximately 87%, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of value companies, the Fund may make certain
other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. These securities may be
traded in U.S. or foreign markets. To the extent that it owns foreign stocks,
the Fund is subject to (1) country risk, which 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; and (2) currency risk, which is
the possibility that Americans investing abroad could lose money because of a
rise in the value of the U.S. dollar versus foreign currencies.
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.
The Fund may also invest, to a limited extent, in 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 fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation under futures contracts will not
exceed 20% of its total assets.
<PAGE>
8
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 reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" 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 types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $530 billion.
All of 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 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most 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 own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS
The Fund employs four investment advisers. Each manages a portion of the Fund's
assets subject to the control of the Trustees and officers of the Fund.
<PAGE>
9
BARROW, HANLEY, MEWHINNEY, & STRAUSS, INC.
Barrow, Hanley, Mewhinney, & Strauss, Inc.(Barrow Hanley), One McKinney
Plaza, 3232 McKinney Avenue, 15th Floor, Dallas, TX 75204, is an investment
advisory firm founded in 1979. Barrow Hanley is owned by United Asset
Management, 1 International Place, Boston, MA 02110. Barrow Hanley currently
manages more than $35 billion in stock and bond portfolios.
Barrow Hanley's advisory fee is paid quarterly, and is based on certain
annual percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, Barrow Hanley's advisory fee may be adjusted based on the
cumulative investment performance of its portion of the Fund as compared with
the cumulative return of the Standard & Poor's 500/BARRA Value Index, a
benchmark of stocks from the S&P 500 Index with lower than average price/book
ratios. Under the fee schedule, Barrow Hanley's basic fee may be increased or
decreased by as much as 25%.
EQUINOX CAPITAL MANAGEMENT LLC
Equinox Capital Management LLC (Equinox), 590 Madison Avenue, 41st Floor,
New York, NY 10022, is an investment advisory firm founded in 1989. It currently
manages more than $13 billion in assets.
Equinox's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, Equinox's advisory fee may be adjusted based on the
cumulative investment performance of its portion of the Fund as compared to that
of the Russell 1000 Value Index. Under the fee schedule, Equinox's basic fee may
be increased or decreased by as much as 50%.
TUKMAN CAPITAL MANAGEMENT, INC.
Tukman Capital Management, Inc.(Tukman), 60 East Sir Francis Drake
Boulevard, Larkspur, CA 94939, is an investment advisory firm founded in 1980.
It currently manages more than $3.7 billion in assets.
Tukman's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, Tukman's advisory fee may be adjusted based on the
cumulative investment performance of its portion of the Fund as compared to that
of the S&P 500 Index. Under the fee schedule, Tukman's basic fee may be
increased or decreased by as much as 50%.
THE VANGUARD GROUP
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
founded in 1974, is a wholly owned subsidiary of the Vanguard funds. As of
October 31, 1999, Vanguard served as adviser for about $345.6 billion in assets.
The Fund receives advisory services from Vanguard on an at-cost basis.
For the fiscal year ended October 31, 1999, the aggregate amount of
investment advisory fees paid by the Fund represented an effective annual rate
of 0.12% of the Fund's average net assets before a decrease of 0.01% based on
performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, the
advisers may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then the advisers are authorized to choose a broker who, in
addition to executing the transaction, will provide research ser-
<PAGE>
10
vices to the advisers or the Fund. Also, the Fund may direct the advisers to use
a particular broker for certain transactions in exchange for commission rebates
or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The manager responsible for Barrow Hanley's portion of Vanguard Windsor II Fund
since 1985 is JAMES P. BARROW, Partner of Barrow Hanley; has worked in
investment management since 1963; with Barrow Hanley since 1979; B.S. University
of South Carolina.
The manager responsible for Equinox's portion of the Fund since 1991 is RONALD
J. ULRICH, President, Director, and founder of Equinox; has worked in investment
management since 1973; B.S. Lehigh University; M.B.A., New York University.
The managers responsible for Tukman's portion of the Fund are MELVIN TUKMAN,
President, Director, and founder of Tukman; has worked in investment management
since 1971; A.B., Hunter College; M.B.A., Harvard Business School; and DANIEL L.
GROSSMAN, Vice President and Portfolio Manager of Tukman; has worked in
investment management since 1978; M.B.A., Stanford University.
The manager responsible for Vanguard's portion of the Fund is GEORGE U. SAUTER,
Managing Director of Vanguard and head of Vanguard's Core Management Group; has
worked in investment management since 1985; primary responsibility for
Vanguard's stock indexing policy and strategy since joining the company in 1987;
A.B., Dartmouth College; M.B.A., University of Chicago.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
<PAGE>
11
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the 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 one year or less, or more than one
year.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:
NET ASSET VALUE = TOTAL ASSETS - LIABILITIES
-------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of 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.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is WNDSRII.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
12
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
VANGUARD WINDSOR II FUND
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,BEGINNING OF YEAR $31.07 $29.36 $24.04 $20.06 $17.33
- ------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .64 .65 .64 .62 .58
Net Realized and Unrealized Gain (Loss)
on Investments .73 3.91 6.47 4.63 3.17
----------------------------------------------------------------
Total from Investment Operations 1.37 4.56 7.11 5.25 3.75
----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.74) (.66) (.63) (.58) (.55)
Distributions from Realized Capital
Gains (2.67) (2.19) (1.16) (.69) (.47)
----------------------------------------------------------------
Total Distributions (3.41) (2.85) (1.79) (1.27) (1.02)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $29.03 $31.07 $29.36 $24.04 $20.06
======================================================================================================
TOTAL RETURN 4.57% 16.51% 31.27% 27.17% 23.08%
======================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $30,541 $29,639 $22,568 $14,758 $10,272
Ratio of Total Expenses to Average
Net Assets 0.37% 0.41% 0.37% 0.39% 0.40%
Ratio of Net Investment Income to
Average Net Assets 2.08% 2.16% 2.49% 2.92% 3.27%
Turnover Rate 26% 31% 30% 32% 30%
======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $31.07 per share.
During the year, the Fund earned $0.64 per share from investment income
(interest and dividends) and $0.73 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $3.41 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($1.37 per share) minus the distributions ($3.41 per share)
resulted in a share price of $29.03 at the end of the year. This was a decrease
of $2.04 per share (from $31.07 at the beginning of the year to $29.03 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 4.57% for the year.
As of October 31, 1999, the Fund had $30.5 billion in net assets. For the year,
its expense ratio was 0.37% ($3.70 per $1,000 of net assets); and net investment
income amounted to 2.08% of its average net assets. It sold and replaced
securities valued at 26% of its net assets.
- --------------------------------------------------------------------------------
"Standard & Poor's (R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of the trademarks and copyrights relating to the Russell Indexes.
<PAGE>
13
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- - If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on a Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this 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 its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
14
ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "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.
- --------------------------------------------------------------------------------
<PAGE>
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<PAGE>
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<PAGE>
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
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 management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison with such
factors as revenue, earnings, book value, and dividends.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort 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.
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.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as revenue, earnings, book value, and dividends.
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 prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Windsor II Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORT
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders. In these
reports, you will find a discussion of
the market conditions and
investment strategies that
significantly affected the Fund's
performance during the most recent
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into (and
are thus legally a part of) this
prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT SERVICES CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-6009.
Fund's Investment Company Act
file number: 811-834
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation,
Distributor.
IO73N-02/18/2000
<PAGE>
PART B
VANGUARD(R) WINDSOR FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 18, 2000
This Statement is not a prospectus, but should be read in conjunction with the
current Prospectuses (dated February 18, 2000) relating to the Windsor Fund or
the Windsor II Fund, as appropriate. To obtain either Prospectus or the most
recent Annual Report to Shareholders, which contains the Trust's financial
statements as hereby incorporated by reference, please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
PAGE
----
DESCRIPTION OF THE TRUST.........................................B-1
INVESTMENT POLICIES..............................................B-3
SHARE PRICE......................................................B-8
PURCHASE OF SHARES...............................................B-9
REDEMPTION OF SHARES.............................................B-9
YIELD AND TOTAL RETURN...........................................B-10
FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-12
MANAGEMENT OF THE FUNDS ........................................ B-13
INVESTMENT ADVISORY SERVICES.....................................B-16
PORTFOLIO TRANSACTIONS...........................................B-24
COMPARATIVE INDEXES .............................................B-25
FINANCIAL STATEMENTS.............................................B-27
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as Wellington Equity Fund, a Delaware corporation, in
1958. It then merged into a Maryland corporation in 1973, and subsequently
reorganized into a Pennsylvania business trust in 1985. The Trust then
reorganized as a Maryland corporation later in 1985. It was reorganized again as
a Delaware business trust in May 1998. Prior to its reorganization as a Delaware
business trust, the Trust was known as Vanguard/Windsor Funds, Inc. The Trust is
registered with the United States Securities and Exchange Commission (the
Commission) under the Investment Company Act of 1940 (the 1940 Act) as an
open-end, diversified management investment company. The Trust currently offers
the following Funds:
VANGUARD WINDSOR FUND
VANGUARD WINDSOR II FUND
(INDIVIDUALLY, THE FUND;COLLECTIVELY, THE FUNDS)
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that the Trust may
issue for a single fund or class of shares.
B-1
<PAGE>
SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, serves as the Funds' custodian. The custodian is
responsible for maintaining the Funds' assets and keeping all necessary accounts
and records of Fund assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Funds' independent accountants.
The accountants audit financial statements and provide other related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
CHARACTERISTICS OF THE FUNDS' SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Funds' shares, other
than the possible future termination of the Funds. The Funds may be terminated
by reorganization into another mutual fund or by liquidation and distribution of
the assets of the affected funds. Unless terminated by reorganization or
liquidation, the Funds will continue indefinitely.
SHAREHOLDER LIABILITY. The Funds were organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or series; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Fund's net assets, and to change any fundamental
policy of the Fund. Shareholders of the Fund receive one vote for each dollar of
net asset value owned on the record date, and a fractional vote for each
fractional dollar of net asset value owned on the record date. However, only the
shares of the fund affected by a particular matter are entitled to vote on that
matter. Voting rights are non-cumulative and cannot be modified without a
majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of the applicable Fund.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares of
the Funds.
CONVERSION RIGHTS. There are no conversion rights associated with shares of
the Funds.
REDEMPTION PROVISIONS. The Funds' redemption provisions are described in
their current prospectuses and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.
CALLS OR ASSESSMENT. The Funds' shares, when issued, are fully paid and
non-assessable.
B-2
<PAGE>
TAX STATUS OF THE FUNDS
Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. This special tax status means that a
Fund will not be liable for federal tax on income and capital gains distributed
to shareholders. In order to preserve its tax status, a Fund must comply with
certain requirements. If a Fund fails to meet these requirements in any taxable
year, it will be subject to tax on its taxable income at corporate rates, and
all distributions from earnings and profits, including any distributions of net
tax-exempt income and net long-term capital gains, will be taxable to
shareholders as ordinary income. In addition, a Fund could be required to
recognize unrealized gains, pay substantial taxes and interest, and make
substantial distributions before regaining its tax status as a regulated
investment company.
INVESTMENT POLICIES
The following policies supplement the investment objectives and policies set
forth in each Fund's Prospectus.
REPURCHASE AGREEMENTS
Each Fund 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 Fund acquires a fixed-income security (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 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 Fund (including accrued interest
earned thereon) must have a total value in excess of the value of the repurchase
agreement and are held by a custodian bank until repurchased. In addition, the
Board of Trustees will monitor the repurchase agreement transactions for each
Fund 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 relating to any of the Funds.
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 Fund may incur a loss upon disposition of the
securities. 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 Fund not within
the control of the Fund and therefore subject to sale by the trustee in
bankruptcy. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying securities. While the Funds'
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES
Each Fund may lend its portfolio securities for either short or long-term
periods to qualified institutional investors (typically brokers, dealers, banks
or other financial institutions) 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 Fund 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 Fund. The terms and the structure of such loans must be
consistent with the 1940 Act, and the Rules and Regulations or interpretations
of the Commission thereunder. These provisions limit the amount of securities a
fund may lend to 33 1/3% of the Fund's total assets, and require that (a) the
borrower pledge and maintain with the Fund collateral consisting of cash, an
irrevocable letter of credit or securities issued or guaranteed by a domestic
bank or the United
B-3
<PAGE>
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 Fund at
any time, and (d) the Fund receives reasonable interest on the loan (which may
include the Fund investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned securities and any increase in
their market value. 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 Trustees.
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 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.
VANGUARD INTERFUND LENDING PROGRAM
The Commission has issued an exemptive order permitting the Funds to participate
in Vanguard's interfund lending program. This program allows the Vanguard funds
to borrow money from and loan money to each other for temporary or emergency
purposes. The program is subject to a number of conditions, including the
requirement that no fund may borrow or lend money through the program unless it
receives a more favorable interest rate than is available from a typical bank
for a comparable transaction. In addition, a fund may participate in the program
only if and to the extent that such participation is consistent with the fund's
investment objective and other investment policies. The Boards of Trustees of
the Vanguard funds are responsible for ensuring that the interfund lending
program operates in compliance with all conditions of the Commission's exemptive
order.
TEMPORARY INVESTMENTS
The Funds may take temporary defensive measures that are inconsistent with the
Funds' normal fundamental or non-fundamental investment policies and strategies
in response to adverse market, economic, political or other conditions. Such
measures could include investments in (a) highly liquid short-term fixed income
securities issued by or on behalf of municipal or corporate issuers, obligations
of the U.S. Government and its agencies, commercial paper, and bank certificates
of deposit; (b) shares of other investment companies which have investment
objectives consistent with those of the Fund; (c) repurchase agreements
involving any such securities; and (d) other money market instruments. There is
no limit on the extent to which the Funds may take temporary defensive measures.
In taking such measures, the Funds may fail to achieve their investment
objectives.
FOREIGN INVESTMENTS
As indicated in the Prospectuses, each of the Funds may invest up to 20% of its
assets in securities of foreign companies. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies.
COUNTRY RISK. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of
B-4
<PAGE>
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in companies in
those countries.
Although the Funds will endeavor to achieve the most favorable execution
costs in their 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 Funds' 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 the Funds receive from their foreign investments.
CURRENCY RISK. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Funds may temporarily hold
uninvested reserves in bank deposits in foreign currencies, a Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Funds permit them 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.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option or similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a taxpayer whose functional currency
is the U.S. dollar is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules applicable to other futures contracts unless
an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary income or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. The
Treasury Department issued regulations under which certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by
the Fund which is not subject to the special currency rules (such as foreign
equity investments other than certain preferred stock) will be treated as
capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction. It is anticipated that some of the non-U.S.
dollar-denominated investments and foreign currency contracts the Funds may make
or enter into will be subject to the special currency rules described above.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in 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 the Fund's books.
B-5
<PAGE>
Each Fund may invest in restricted, privately placed securities that, under
the Commission's rules, may be sold only to qualified institutional buyers.
Because these securities can be resold only to qualified institutional buyers,
they may be considered illiquid securities--meaning that they could be difficult
for the Fund to convert to cash if needed.
If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933 (the 1933
Act). While the Fund's investment adviser determines the liquidity of restricted
securities on a daily basis, the Board oversees and retains ultimate
responsibility for the adviser's decisions. Several factors that the Board
considers in monitoring these decisions include the valuation of a security, the
availability of qualified institutional buyers, and the availability of
information about the security's issuer.
FUTURES CONTRACTS
Each Fund may enter into stock futures contracts, options, and options on
futures contracts only for the purpose of remaining fully invested and reducing
transaction 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
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 are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, 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 Fund
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 Fund intends to use futures contracts only for bona fide
hedging purposes.
Regulations of the CFTC applicable to the Funds require that all of each of
the Fund's futures transactions constitute bona fide hedging transactions except
to the extent that the aggregate initial
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margins and premiums required to establish any non-hedging positions do not
exceed five percent of the value of the Funds. Each Fund 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 Fund 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 Fund 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 Fund's income to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While each Fund 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 AND OPTIONS. A Fund 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 Fund's total assets. In addition, a Fund will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts and its investments in options would
exceed 20% of the Fund's total assets. Assets committed to futures contracts or
options will be held in a segregated account.
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 Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Fund 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 Fund 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 Fund 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 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 each Fund are engaged in only for hedging
purposes, the advisers do not believe that the Funds are subject to the risks of
loss frequently associated with futures transactions. Either Fund 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.
RISK FACTORS IN OPTIONS TRANSACTIONS. When a Fund invests in an option, it
purchases the right to buy (call options) or sell (put options) specified
securities, at a specified price, on a specified date or within a specified
period of time. In consideration of the right to buy or sell underlying
securities, the Fund pays a premium, which represents the maximum amount of the
Fund's potential loss on the transaction if it chooses not to exercise the
option or enter into a closing transaction before the option's expiration. Of
course, securities purchased pursuant to a call option may subsequently decline
in value, to the Fund's detriment. Similarly, securities sold pursuant to a put
option may subsequently rise in value, with the Fund missing out on these gains.
In both cases,
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the Fund would have incurred transaction costs to exercise the option, in
addition to the option premium.
There is the risk of loss by a Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund 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 Fund is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In these 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. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term depending on the holding period of the contract. Sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Fund may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities upon
disposition. A Fund 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 Fund.
In order for a Fund 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, gains from the sale of securities or
foreign currencies, or other income derived with respect to the Fund's business
of investing in securities or currencies. It is anticipated that any net gain
recognized on futures contracts will be considered qualifying income for
purposes of the 90% requirement.
A Fund will distribute to shareholders annually any net capital gains which
have been recognized for Federal income tax purposes on futures transactions.
Such distributions will be combined with distributions of capital gains realized
on the Fund's other investments and shareholders will be advised on the nature
of the transactions.
SHARE PRICE
Each Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the close of the
New York Stock Exchange (generally 4:00 p.m. Eastern time) on each day that the
Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.
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Short-term instruments (those acquired with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.
Bonds and other fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Fund is
valued. If events which materially affect the value of a Fund's investments
occur after the close of the securities markets on which such securities are
primarily traded, those investments may be valued by such methods as the Board
of Trustees deems in good faith to reflect fair value.
In determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating their various benchmarking indexes.
This officially quoted exchange rate may be determined prior to or after the
close of a particular securities market. If such quotations are not available,
the rate of exchange will be determined in accordance with policies established
in good faith by the Board of Trustees.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
The share price for each Fund can be found daily in the mutual fund
listings of most major newspapers under the heading of Vanguard Funds.
PURCHASE OF SHARES
The purchase price of shares of each Fund 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 Fund 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 Fund, 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 each Fund's shares.
REDEMPTION OF SHARES
Each Fund 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 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 Fund 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.
Each Fund 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 the Fund at
the beginning of such period.
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No charge is made by either Fund for redemptions. Shares redeemed may be
worth more or less than what was paid for them, depending on the market value of
the Fund's portfolio securities.
SIGNATURE GUARANTEES. To protect your account, the Funds 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 Funds 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,
1999 was 1.56%, and the yield for Vanguard Windsor II Fund for the same period
was 2.35%.
The average annual total returns for Vanguard Windsor Fund for the one-,
five- and ten-year periods ending October 31, 1999 were 13.74%, 15.77%, and
12.46%, respectively. The average annual total returns for the one-, five- and
ten-year periods for Vanguard Windsor II Fund were 4.57%, 20.15%, and 14.52%,
respectively.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compounded rates of return of a hypothetical investment over
such periods according to the following formula (average annual total return is
then expressed as a percentage):
T = (ERV/P)(1/N)-1
Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value:ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
that would equate the initial amount invested to the after-tax value, according
to the following formulas:
After-tax return:
P (1+T)(N) = ATV
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Where:
P = a hypothetical initial payment of $1,000
T = average annual after-tax total return
n = number of years
ATV = after-tax value at the end of the 1-, 5-, or 10-year
periods of a hypothetical $1,000 payment made at the
beginning of the time period, assuming no liquidation
of the investment at the end of the measurement periods
Instructions.
1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e., return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P)-1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)(6)-1]
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Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the affected Fund's shares. For these purposes, a "majority" of
shares means shares representing the lesser of: (i) 67% or more of the votes
cast to approve a change, so long as shares representing more than 50% of the
Fund's net asset value are present or represented by proxy; or (ii) more than
50% of the Fund's net asset value.
BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. The Fund may not make any additional investments whenever its
outstanding borrowings exceed 5% of net assets.
COMMODITIES. The Fund may not invest in commodities, except that it may
invest in stock futures contracts, stock options and options on stock futures
contracts. No more than 5% of the Fund's total assets may be used as initial
margin deposit for futures contracts, and no more than 20% of the Fund's total
assets may be invested in futures contracts or options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for purposes of
controlling its management.
INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not lend money to any person except by purchasing
fixed-income securities that are publicly distributed; by entering into
repurchase agreements, provided, however, that repurchase agreements maturing in
more than seven days, together with securities which do not have readily
available market quotations, will not exceed 15% of the Fund's total assets; by
lending its portfolio securities, or through Vanguard's interfund lending
program.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate.
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SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.
None of these limitations prevents a Fund from participating in The
Vanguard Group (Vanguard). Because each Fund is a member of the Group, it may
own securities issued by Vanguard, make loans to Vanguard, and contribute to
Vanguard's costs or other financial requirement. See "Management of the Funds"
for more information.
MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The Officers of the Funds manage its day-to-day operations and are responsible
to the Funds' Board of Trustees. The Trustees set broad policies for the Funds
and choose its Officers. The following is a list of the Trustees and Officers of
the Funds and a statement of their present positions and principal occupations
during the past five years. As a group, the Fund's Trustees and Officers own
less than 1% of the outstanding shares of each Fund. Each Trustee also serves as
a Director of The Vanguard Group, Inc., and as a Trustee of each of the 103
funds administered by Vanguard (102 in the case of Mr. Malkiel, and 93 in the
case of Mr. MacLaury). The mailing address of the Trustees and Officers of the
Funds is Post Office Box 876, Valley Forge, PA 19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson & Johnson (Pharmaceuticals/Consumer Products), Director of Johnson &
Johnson*MERCK Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Select
Sector SPDR Trust (Exchange-Traded Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries,
Inc. (Machinery/ Coal/Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/ Chemicals).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries (Machinery/Coal/ Appliances), and Newfield Exploration Co.
(Energy); formerly, Director and Senior Partner of McKinsey & Co., and President
of New York University.
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JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired Chairman of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co.
(Diesel Engine Company), and The Mead Corp. (Paper Products); and Trustee of
Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
* Officers of the Fund are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
Each Fund is a member of The Vanguard Group of Investment Companies, which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Funds and the other funds in The Vanguard
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 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.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the 1940 Act. 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 similar to, and in many cases more restrictive than, those
recommended by a blue ribbon panel of mutual fund industry executives.
Vanguard was established and operates under an Amended and Restated 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, 1999, Vanguard Windsor Fund had contributed capital of $3,551,000 to
Vanguard, representing 0.02% of the Fund's net assets and 3.5% of Vanguard's
capitalization; at that time, Vanguard Windsor II Fund had contributed capital
of $6,582,000 to Vanguard, representing 0.02% of the Fund's net assets and 6.6%
of Vanguard's capitalization. The Amended and Restated Funds' Service Agreement
provides for the following arrangement: (a) each Vanguard fund may be called
upon to invest up to 0.40% of its current net assets in Vanguard and
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(b) there is no other limitation on the dollar 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.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc. provides all distribution and marketing activities for
the funds in the Group. 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
Trustees 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 a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for The Vanguard
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 years ended October
31, 1997, 1998, and 1999, the Funds incurred the following approximate amounts
of The Vanguard Group's management (including transfer agency), distribution and
marketing expenses.
FUND 1997 1998 1999
- ---- ---- ---- ----
Vanguard Windsor Fund $37,527,000 $44,738,000 $41,316,000
Vanguard Windsor Fund II $40,231,000 $68,805,000 $81,702,000
INVESTMENT ADVISORY SERVICES. An experienced investment management staff
employed directly by Vanguard provides investment advisory services to the
Funds, and many other Vanguard funds. These services are provided on an
internalized, at-cost basis. The compensation and other expenses of this staff
are paid by the funds utilizing these services.
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted below), and each fund pays a proportionate share of
the Trustees' compensation. The funds employ their officers on a shared basis,
as well. However, officers are compensated by The Vanguard Group, Inc., not the
funds.
INDEPENDENT TRUSTEES. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the fund--in three ways:
. The independent Trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled Board
meetings.
. The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
. Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
B-15
<PAGE>
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the fund for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds.
VANGUARD WINDSOR FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED FROM ALL
COMPENSATION PART OF THESE ANNUAL VANGUARD
FROM THESE FUNDS' BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUNDS(1) EXPENSES(1) RETIREMENT TRUSTEES(2)
- ---------------------------------------------------------------------------------------------------------------
John C. Bogle (3). . . . None None None None
John J. Brennan . . . None None None None
Barbara Barnes Hauptfuhrer(4). . . $1,616 $205 $15,000 $0
JoAnn Heffernan Heisen $9,696 $534 $15,000 $80,000
Bruce K. MacLaury . . $10,048 $905 $12,000 $75,000
Burton G. Malkiel . . $9,767 $883 $15,000 $80,000
Alfred M. Rankin, Jr. $9,696 $646 $15,000 $80,000
John C. Sawhill . . . $9,696 $819 $15,000 $80,000
James O. Welch, Jr. . $9,696 $945 $15,000 $80,000
J. Lawrence Wilson. . $9,696 $682 $15,000 $80,000
</TABLE>
(1) The amounts shown in this column are based on the Funds' fiscal year ended
October 31, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999
calendar year.
(3) Mr. Bogle has retired from the Funds' Board, effective December 31, 1999.
(4) Mrs. Hauptfuhrer has retired from the Funds' Board, effective December 31,
1998.
INVESTMENT ADVISORY SERVICES
VANGUARD WINDSOR FUND
The Fund employs a multi-manager approach, using two primary investment advisers
for the bulk of its assets and Vanguard's Core Management Group to manage its
cash reserves.
WELLINGTON MANAGEMENT COMPANY, LLP
Wellington Management Company, LLP (Wellington Management) manages a portion of
the assets of Vanguard Windsor Fund. Wellington Management discharges its
responsibilities pursuant to an investment advisory agreement and is subject to
the control of the Officers and Trustees of the Fund. Wellington Management is a
Massachusetts limited liability partnership, and the following persons serve as
managing partners of Wellington Management: Laurie A. Gabriel, Duncan M.
McFarland, and John R. Ryan. Wellington Management and its predecessor
organizations have provided investment advisory services to investment companies
since 1928 and to investment counseling clients since 1960. Charles T. Freeman,
Senior Vice President and Partner of Wellington Management, has served as
portfolio manager of the Fund since January, 1996.
B-16
<PAGE>
Vanguard Windsor Fund pays Wellington Management 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 managed by Wellington Management (the Wellington Management
Portfolio) for the quarter:
NET ASSETS ANNUAL RATE
- ---------- -----------
First $17.5 billion 0.125%
Assets in excess of $17.5 billion of the
Wellington Management Portfolio 0.100%
The basic fee paid to Wellington Management may be increased or decreased
by applying an adjustment formula based on investment performance of the
Wellington Management Portfolio. Such formula provides for an increase or
decrease in the basic fee paid to Wellington Management each quarter, depending
upon the Wellington Management Portfolio'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.
The Basic Fee, as provided above, shall be increased or decreased by applying an
incentive/penalty fee adjustment based on the investment performance of the
Wellington Management Portfolio relative to the investment performance of the
Index.
The following table sets forth the adjustment factors to the base advisory
fee payable by the Fund to Wellington Management 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:
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT*
---------------------------- ------------------
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; provided,
however, that certain adjustments to the Wellington Management Portfolio's
average assets may be made as necessary to reflect Windsor Fund's conversion to
a multi-manager structure on June 1, 1999.
For purposes of incentive/penalty adjustments, the investment performance
of the Wellington Management Portfolio for any period is expressed as a
percentage of "Wellington Management Portfolio Unit Value" at the beginning of
the period. This percentage is equal to the sum of: (i) the change in the
"Wellington Management Portfolio Unit Value" during the period; (ii) the value
of Vanguard Windsor Fund's cash distributions from the Wellington Management
Portfolio's net investment income and realized net capital gains (whether
long-term or short-term) having an ex-
B-17
<PAGE>
dividend date occurring within the period; and (iii) the unit value of capital
gains taxes paid or accrued during the period by Vanguard Windsor Fund for
undistributed realized long-term capital gains realized from the Wellington
Management Portfolio. 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.
In addition, certain adjustments to the investment performance of the
Wellington Management Portfolio may be made as necessary to reflect Windsor
Fund's conversion to a multi-manager structure on June 1, 1999.
During the fiscal years ended October 31, 1997, 1998, and 1999, Vanguard
Windsor Fund incurred the following advisory fees owed to Wellington Management:
1997 1998 1999
---- ---- ----
Basic Fee................... $23,502,000 $24,971,000 $19,713,650
Increase or Decrease for Performance
Adjustment (11,821,000) (15,501,000) (14,040,175)
------------ ------------ ------------
Total....................... $11,681,000 $9,470,000 $5,673,475
=========== ========== ==========
SANFORD C. BERNSTEIN & CO., INC.
Sanford C. Bernstein & Co., Inc. (Bernstein) manages a portion of the assets of
Vanguard Windsor Fund. Bernstein discharges its responsibilities pursuant to an
investment advisory agreement and is subject to the control of the Officers and
Trustees of the Fund.
The Fund pays Bernstein a basic fee at the end of each of the Fund's fiscal
quarters, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of the Bernstein Portfolio
for the quarter:
NET ASSETS ANNUAL RATE
---------- -----------
First $1 billion........ 0.15%
Next $2 billion......... 0.14%
Next $2 billion......... 0.12%
Assets in excess of $5 billion 0.10%
Subject to a transition rule described in the Agreement, the Basic Fee, as
provided above, will be increased or decreased by the amount of a Performance
Fee Adjustment (Adjustment). The Adjustment will be calculated as a percentage
of the Basic Fee and will change proportionately with the investment performance
of the Fund relative to the investment performance of the Russell 1000 Value
Index (the Index) for the thirty-six month period ending with the applicable
quarter. The Adjustment applies as follows:
CUMULATIVE 36-MONTH PERFORMANCE FEE ADJUSTMENT
PERFORMANCE VERSUS THE INDEX AS A PERCENTAGE OF BASIC FEE*
- ---------------------------- -----------------------------
Trails by more than 9%...... -50%
Trails by 0 to 9%........... Linear decrease from 0 to -50%
Exceeds by 0 to 9%.......... Linear increase from 0 to +50%
Exceeds by more than 9%..... +50%
* For purposes of this calculation, the Basic Fee is calculated by applying the
quarterly rate against the average assets over the same time period which the
performance is measured.
B-18
<PAGE>
TRANSITION RULE FOR CALCULATING ADVISER'S COMPENSATION. The Performance Fee
Adjustment will not be fully operable until June 1, 2002. Until that time, the
following transition rules will apply:
(A) JUNE 1, 1999 THROUGH MAY 31, 2000. The Adviser's compensation will be
the Basic Fee. No Performance Fee Adjustment will apply during this period.
(B) JUNE 1, 2000 THROUGH JUNE 30, 2002. Beginning June 1, 2000, the
Performance Fee Adjustment will take effect on a progressive basis with regards
to the number of months elapsed between July 1, 1999 and the quarter for which
the Adviser's fee is being computed. During this period, the Performance Fee
Adjustment will be multiplied by a fraction. The fraction will equal the number
of months elapsed since July 1, 1999 divided by thirty-six.
(C) ON AND AFTER JULY 1, 2002. Beginning July 1, 2002, the Performance Fee
Adjustment will be fully operable.
OTHER SPECIAL RULES RELATING TO ADVISER'S COMPENSATION. The following
special rules will also apply to the Adviser's compensation:
BERNSTEIN PORTFOLIO PERFORMANCE. The investment performance of the
Bernstein Portfolio for any period, expressed as a percentage of the "Bernstein
Portfolio unit value" at the beginning of such period, will be the sum of: (i)
the change in the Bernstein Portfolio unit value during such period; (ii) the
unit value of the Fund's cash distributions from the Bernstein 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 the
Fund for undistributed realized long-term capital gains realized from the
Bernstein Portfolio. For this purpose, the unit value of distributions per share
of realized capital gains, of dividends per share paid from investment income
and of capital gains taxes per share reinvested in the Bernstein Portfolio at
the unit value in effect at the close of business on the record date for the
payment of such distributions and dividends and the date on which provision is
made for such taxes, after giving effect to such distributions, dividends, and
taxes.
"BERNSTEIN PORTFOLIO UNIT VALUE." The "Bernstein Portfolio unit value" will be
determined by dividing the total net assets of the Bernstein Portfolio by a
given number of units. The number of units in the Bernstein Portfolio initially
will equal to the total shares outstanding of the Fund on June 1, 1999.
Subsequently, as assets are added to or withdrawn from the Bernstein Portfolio,
the number of units of the Bernstein Portfolio will be adjusted based on the
unit value of the Bernstein Portfolio on the day such changes are executed.
INDEX PERFORMANCE. The investment record of the Index for any period,
expressed as a percentage of the Index at the beginning of such period, will be
the sum of: (i) the change in the level of the Index during such period, and
(ii) the value, computed consistently with the Index of cash distributions
having an ex-dividend date occurring within such period made by companies whose
securities comprise the Index. For this purpose, cash distributions on the
securities which comprise the Index will be treated as reinvested in the Index
at least as frequently as the end of each calendar quarter following the payment
of the dividend.
During the fiscal year ended October 31, 1999, Vanguard Windsor Fund
incurred the following advisory fees owed to Bernstein:
1999
----
Basic Fee................... $2,309,256
Increase or Decrease for Performance
Adjustment.................. 0
Total....................... $2,309,256
==========
VANGUARD WINDSOR II FUND
Vanguard Windsor II Fund employs a multi-manager approach utilizing four
investment advisers.
B-19
<PAGE>
BARROW, HANLEY, MEWHINNEY & STRAUSS
Vanguard Windsor II Fund has entered into an investment advisory agreement with
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow Hanley) to manage a portion of
the equity allocation of Vanguard Windsor II Fund (approximately 64%, as of
October 31, 1999). Under this agreement, Barrow Hanley manages the investment
and reinvestment of the designated assets and continuously reviews, supervises
and administers the investment program of Vanguard Windsor II Fund with respect
to those assets. Barrow Hanley discharges its responsibilities subject to the
control of the Officers and Trustees of the Fund.
Barrow Hanley is a Nevada corporation controlled by the following officers
of Barrow Hanley: James Purdy Barrow, Principal; Bryant Miller Hanley, Jr.,
President, Secretary and Treasurer; Richard Albert Englander, Principal; and
Joseph Ray Nixon, Principal.
Vanguard Windsor II Fund pays Barrow Hanley 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 Fund managed by Barrow Hanley 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 Barrow Hanley under the above schedule are subject
to an incentive/ penalty fee arrangement which compares the performance of the
Fund's assets managed by Barrow Hanley with the performance of the Standard &
Poor's/BARRA Value Index. This arrangement provides for the following
adjustments to Barrow Hanley'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 x Basic Fee
Between -6% and 6%............ 0.00 x Basic Fee
Between 6% and 9%............. +0.15 x Basic Fee
More than 9%.................. +0.25 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 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 portion of Vanguard Windsor II Fund's
assets managed by Barrow Hanley (the Barrow Hanley Portfolio) for any period is
expressed as a percentage of the "Barrow Hanley Portfolio Unit Value" at the
beginning of such period. This percentage is equal to the sum of: (i) the change
in the Barrow Hanley Portfolio Unit Value during such period; (ii) the unit
value of the Fund's cash distributions from the Barrow Hanley 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 Fund for undistributed realized long-term capital gains
realized from the Barrow Hanley Portfolio.
The "Barrow Hanley Portfolio Unit Value" will be determined by dividing the
total net assets of the Barrow Hanley Portfolio by a given number of units. On
the initial date of the agreement, the
B-20
<PAGE>
number of units in the Barrow Hanley Portfolio was equal to the total shares
outstanding of Vanguard Windsor II Fund. After such initial date, as assets are
added to or withdrawn from the Barrow Hanley Portfolio, the number of units of
the Barrow Hanley Portfolio will be adjusted based on the unit value of the
Barrow Hanley 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, 1997, 1998, and 1999, Vanguard
Windsor II Fund incurred the following advisory fees owed to Barrow Hanley:
1997 1998 1999
---- ---- ----
Basic Fee................... $16,925,953 $24,225,773 $27,518,622
Increase or Decrease for Performance
Adjustment 2,495,021 3,887,915 (1,429,591)
--------- --------- -----------
Total....................... $19,420,974 $28,113,688 $26,089,031
=========== =========== ===========
OTHER ADVISERS
On November 1, 1991, Vanguard Windsor II Fund added Equinox Capital Management
(Equinox) and Tukman Capital Management (Tukman) to manage the investment and
reinvestment of a portion of its equity allocation (approximately 14% and 12%,
respectively, as of October 31, 1999). Additionally, Vanguard's Core Management
Group was added to manage a portion of Vanguard Windsor II Fund's equity
allocation (approximately 6%, as of October 31, 1999). Equinox, Tukman and
Vanguard's Core Management Group discharge their respective responsibilities
subject to the control of the Trustees and Officers of the Fund.
EQUINOX
Equinox is a Delaware Limited Liability Company controlled by the following
officers of Equinox: Ronald J. Ulrich, President and Director; and Wendy D. Lee,
Managing Director.
Under the terms of an investment advisory agreement, Vanguard Windsor II
Fund 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 Fund'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 Fund'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.
B-21
<PAGE>
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
PERFORMANCE 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%........ 0.00 x Basic Fee
Between 4.5% and 9%........... +0.25 x Basic Fee
More than 9%.................. +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 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 Fund'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
Fund 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 Fund. 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, 1997, 1998, and 1999, Vanguard
Windsor II Fund incurred the following advisory fees owed to Equinox:
1997 1998 1999
---- ---- ----
Basic Fee................... $2,791,342 $3,945,052 $4,992,060
Increase or Decrease for Performance
Adjustment 408,295 868,234 1,788,014
------- ------- ---------
Total....................... $3,199,637 $4,813,286 $6,780,074
========== ========== ==========
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.
Under the terms of an investment advisory agreement, 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
B-22
<PAGE>
percentage rates, to the average month-end assets of the portion of Vanguard
Windsor II Fund'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
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%............ 0.00 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 portion of Vanguard Windsor II Fund's
assets managed by Tukman (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 Fund'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 Fund 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 Fund. 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, 1997, 1998, and 1999, Vanguard
Windsor II Fund incurred the following advisory fees owed to Tukman:
1997 1998 1999
---- ---- ----
Basic Fee................... $3,622,904 $5,126,168 $6,192,444
Increase or Decrease for Performance
Adjustment 785,658 992,760 (2,000,847)
------- ------- -----------
Total....................... $4,408,562 $6,118,928 $4,191,597
========== ========== ==========
B-23
<PAGE>
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 Fund's equity allocation (approximately 6%, as of October 31, 1999).
The Core Management Group also provides investment advisory services to several
other Vanguard funds. The Core Management Group is supervised by the Officers of
the Fund.
During the fiscal years ended October 31, 1997, 1998, and 1999, Vanguard
Windsor II Fund incurred the following expenses for investment advisory
services: $196,000, $287,000, and $511,000, respectively.
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
The Funds' present agreements with their advisers are renewable for successive
one-year periods if specifically approved by a vote of the Board of Trustees at
a meeting called for the purpose of considering such approval. (The one
exception is that Windsor Fund's agreement with Bernstein is effective through
June 1, 2001 and thereafter renewable at one-year intervals.) The Board's
approval must include the affirmative votes of a majority of the Trustees who
are neither parties to the contract or "interested persons" of such parties (as
defined in the 1940 Act).
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 Trustees 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 Fund's Board of Trustees may, without the approval of shareholders,
provide for:
. 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;
. A change in the terms of an advisory agreement; or
. 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 communicated to shareholders in writing.
PORTFOLIO TRANSACTIONS
Wellington Management, Bernstein, Barrow Hanley, Equinox, Tukman and Vanguard's
Core Management Group are authorized to (with the approval of the Board of
Trustees) select the brokers or dealers that will execute the purchases and
sales of portfolio securities for the respective Fund . 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 the 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 Fund 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.
B-24
<PAGE>
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 Trustees, each investment adviser may cause the Fund 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 Funds and the other funds in the Group.
Currently, it is each Fund'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 Fund.
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 Fund.
However, the investment advisers have informed the Fund that they generally will
not pay higher commission rates specifically for the purpose of obtaining
research services.
Some securities considered for investment by a Fund may also be appropriate
for the other Fund 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 Fund 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. Although there may be no
specified formula for allocating such transactions, the allocation methods used,
and the results of such allocations, will be subject to periodic review by the
Funds' Board of Trustees.
During the fiscal years ended October 31, 1997, 1998, and 1999, the Funds
paid the following in brokerage commissions.
FUND 1997 1998 1999
- ---- ---- ---- ----
Vanguard Windsor Fund $28,780,109 $27,915,402 $25,355,164
Vanguard Windsor Fund II $15,272,207 $21,836,954 $15,327,874
COMPARATIVE INDEXES
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 Fund, may from time to time use
one or more of the following unmanaged indexes for comparative performance
purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD AND POOR'S 500/BARRA VALUE INDEX--consists of the stocks in the
Standard and Poor's 500 Composite Stock Price Index (S&P 500) with the lowest
price-to-book ratios, comprising 50% of the market capitalization of the S&P
500.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
B-25
<PAGE>
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, Australia, Asia, 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 a market weighted index that contains
individually priced U.S. Treasury securities 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,
non-convertible domestic corporate bonds rated Baa by Moody's with a maturity
longer than 1 year and with more than $100 million outstanding. This index
includes over 1,500 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
non-convertible U.S. debt issues rated at least Baa, with at least $100 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.
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, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all publicly
issued, fixed rate, non-convertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
B-26
<PAGE>
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
$5 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 $1.6 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 $800 billion.
LEHMAN BROTHERS 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 $1.1 trillion.
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper 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 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 Inc.
LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
LIPPER FIXED INCOME FUND AVERAGE--an industry benchmark of average fixed income
funds with similar investment objectives and policies, as measured by Lipper
Inc.
FINANCIAL STATEMENTS
Each Fund's Financial Statements for the year ended October 31, 1999, including
the financial highlights for each of the five fiscal years in the period ended
October 31, 1999, appearing in the Vanguard Windsor Fund and Vanguard Windsor II
Fund 1999 Annual Reports to Shareholders, and the reports thereon of
PricewaterhouseCoopers LLP, independent accountants, also appearing therein, are
incorporated by reference in this Statement of Additional Information. For a
more complete discussion of the performance, please see each Fund's Annual
Report to Shareholders, which may be obtained without charge.
B-27
<PAGE>
SAI022-02/18/2000
B-28
<PAGE>
PART C
VANGUARD WINDSOR FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust**
(b) By-Laws**
(c) Reference is made to Articles III and V of the Registrant's Declaration
of Trust
(d) Investment Advisory Contracts**
(e) Not applicable
(f) Reference is made to the section entitled "Management of the Funds" in
the Registrant's Statement of Additional Information
(g) Custodian Agreement**
(h) Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants*
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
* Filed herewith
** Filed previously
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability to
which a Trustee or officer 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. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Wellington Management Company, LLP, (Wellington Management) is an investment
adviser registered under the Investment Advisers Act of 1940, as amended (the
Advisers Act). The list required by this Item 26 of officers and partners of
Wellington Management, together with any information as to any business
profession, vocation or employment of a substantial nature engaged in by such
officers and partners during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by Wellington Management
pursuant to the Advisers Act (SEC File No. 801-15908).
C-1
<PAGE>
Sanford C. Bernstein & Co., Inc. (Bernstein) is an investment adviser
registered under the Advisers Act. The list required by this Item 26 of officers
and partners of Bernstein, together with any information as to any business
profession, vocation, or employment of a substantial nature engaged in by such
officers and partners during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by Bernstein pursuant to the
Advisers Act (SEC File No. 801-10488).
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow Hanley) is an investment
adviser registered under the Advisers Act. The list required by this Item 26 of
officers and directors of Barrow Hanley, together with any information as to any
business profession, vocation, or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated herein
by reference from Schedules B and D of Form ADV filed by Barrow Hanley pursuant
to the Advisers Act (SEC File No. 801-14861).
Tukman Capital Management (Tukman) is an investment adviser registered
under the Advisers Act. The list required by this Item 26 of officers and
directors of Tukman, together with any information as to any business
profession, vocation, or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by Tukman pursuant to the
Advisers Act (SEC File No. 801-15279).
Equinox Capital Management (Equinox) is an investment adviser registered
under the Advisers Act. The list required by this Item 26 of officers and
directors of Equinox, together with any information as to any business
profession, vocation, or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by Equinox pursuant to the
Advisers Act (SEC File No. 801-34524).
The Vanguard Group, Inc. (Vanguard) is an investment adviser registered
under the Advisers Act. The list required by this Item 26 of officers and
directors of Vanguard, together with any information as to any business
profession, vocation, or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by Vanguard pursuant to the
Advisers Act (SEC File No. 801-11953).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts, and other documents required to be maintained by Section
31(a) of the Investment Company Act and the rules promulgated thereunder will be
maintained in the physical possession of Registrant; Registrant's Transfer
Agent, The Vanguard Group, Inc., Valley Forge, Pennsylvania 19482; and the
Registrant's Custodian, State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02105.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part B of
this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it meets all
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on
the 28th day of January, 2000.
VANGUARD WINDSOR FUNDS
BY: _____________(signature)________________
(HEIDI STAM) JOHN J. BRENNAN* CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
By:/S/ JOHN J. BRENNAN President, Chairman, Chief January 28, 2000
---------------------------Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ JOANN HEFFERNAN HEISEN Trustee January 28, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee January 28, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee January 28, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee January 28, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JOHN C. SAWHILL Trustee January 28, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*
By:/S/ JAMES O. WELCH, JR. Trustee January 28, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee January 28, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal January 28, 2000
---------------------------
(Heidi Stam) Financial Officer and Principal
Thomas J. Higgins* Accounting Officer
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
INDEX TO EXHIBITS
Consent of Independent Accountants . . . . . . . . . . .Ex-99.BJ
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 94 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated November 30, 1999, relating to the financial
statements and financial highlights appearing in the October 31, 1999 Annual
Reports to Shareholders of Vanguard Windsor Funds, which are also incorporated
by reference into the Registration Statement. We also consent to the references
to us under the heading "Financial Highlights" in the Prospectuses and under the
headings "Financial Statements" and "Service Providers - Independent
Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
January 27, 2000
