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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-88373) UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 28
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 30
VANGUARD STAR 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 AMENDMENT BECOME EFFECTIVE ON APRIL 28, 2000, PURSUANT
TO PARAGRAPH (A) OF RULE 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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The Vanguard STAR and LifeStrategy Funds' prospectuses from the prior
filing are incorporated by reference.
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PART B
VANGUARD(R) STAR FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 28, 2000
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectuses (dated April 28, 2000). To obtain a Prospectus
or the most recent Annual Report to Shareholders, which contains the Funds'
Financial Statements as hereby incorporated by reference, please call the
Investor Information Department:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447(SHIP)
TABLE OF CONTENTS
PAGE
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DESCRIPTION OF THE FUNDS.....................................................B-1
FUNDAMENTAL INVESTMENT LIMITATIONS...........................................B-3
INVESTMENT POLICIES..........................................................B-4
MANAGEMENT OF THE FUNDS......................................................B-8
INVESTMENT ADVISORY SERVICES................................................B-10
PORTFOLIO TRANSACTIONS......................................................B-20
PURCHASE OF SHARES..........................................................B-20
REDEMPTION OF SHARES........................................................B-21
SHARE PRICE.................................................................B-21
YIELD AND TOTAL RETURN......................................................B-22
COMPARATIVE INDEXES.........................................................B-23
FINANCIAL STATEMENTS........................................................B-25
DESCRIPTION OF THE FUNDS
ORGANIZATION
The Trust was organized as a Pennsylvania business trust in 1983, and was
reorganized as a Delaware business trust in June 1998. 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. It currently offers the following Funds, each of
which has outstanding one class of shares:
Vanguard Developed Foreign Markets Stock Index Fund
Vanguard Institutional Developed Foreign Markets Stock Index Fund
Vanguard LifeStrategy(TM) Conservative Growth Fund
Vanguard LifeStrategy Growth Fund
Vanguard LifeStrategy Income Fund
Vanguard LifeStrategy Moderate Growth Fund
Vanguard STAR(TM) Fund
Vanguard Total International Stock Index Fund
(individually, a 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 a single fund
or class of shares may issue.
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SERVICE PROVIDERS
CUSTODIAN. First Union National Bank, PA4943, 530 Walnut Street,
Philadelphia, Pennsylvania 19106 and The Chase Manhattan Bank, N.A., 4 Chase
MetroTech Center, Brooklyn, New York 11245, serve as the Funds' custodians. The
custodians are 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 the Funds' financial statements and provide other related
services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer 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 each Fund's shares, other
than the possible future termination of a Fund. The Funds may be terminated by
reorganization into another mutual fund or by liquidation and distribution of
the assets of the affected Fund. Unless terminated by reorganization or
liquidation, the Funds will continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is 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 fund shareholder 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 of the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any Fund; 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 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 a 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 assets owned on the record date. However, only the
shares of a 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 Fund liquidation, shareholders will be
entitled to receive a pro rata share of the applicable Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares of
each Fund.
CONVERSION RIGHTS. There are no conversion rights associated with shares of
each Fund.
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 ASSESSMENTS. Each Fund's shares, when issued, are fully paid and
non-assessable.
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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, the 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.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund is subject to the following fundamental investment limitations,
which cannot be changed in any way without the approval of the holders of a
majority of the affected Fund's shares. For these purposes, a "majority" of a
Fund's 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 a Fund's net asset value.
BORROWING. A 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 or Vanguard's interfund lending program only, and
must comply with all applicable regulatory conditions.
COMMODITIES. A Fund may not purchase or sell commodities, except that the
Institutional Developed Markets Index, Developed Markets Index, LifeStrategy
Conservative Growth, LifeStrategy Growth, LifeStrategy Income, LifeStrategy
Moderate Growth, and Total International Stock Index Funds may invest in futures
contracts and options transactions. No more than 5% of a Fund's total assets may
be used as initial margin deposit for futures contracts, and no more than 20% of
a Fund's total assets may be invested in futures contracts or options at any
time.
ILLIQUID. A 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.
INVESTING FOR CONTROL. A Fund may not invest in a company for the purpose
of controlling its management.
LOANS. A Fund may not lend money to any person except by purchasing bonds
and other debt securities that are publicly distributed or customarily purchased
by institutional investors, by entering into repurchase agreements, or through
Vanguard's interfund lending program.
MARGIN. A Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
OIL, GAS, MINERALS. A Fund may not invest in interests in oil, gas, or
other mineral exploration or development programs.
PUTS, CALLS. A Fund may not purchase or sell puts or calls.
PLEDGING ASSETS. A Fund may not pledge, mortgage, or hypothecate more than
15% of its net assets.
REAL ESTATE. A Fund may not invest directly in real estate.
SENIOR SECURITIES. A Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. A Fund may not engage in the business of underwriting
securities issued by other persons. A Fund will not be considered an underwriter
when disposing of its investment securities.
The investment limitations set forth above are considered at the time that
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 restrictions.
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The investment limitations set forth above relate only to the Funds, and
may not necessarily apply to the underlying funds in which the Funds invest.
Thus, while a Fund may not invest directly in real estate, for example, it may
do so indirectly if one of the underlying funds does so.
INVESTMENT POLICIES
The following policies supplement the Funds' investment policies set forth
in the Prospectuses:
REPURCHASE AGREEMENTS. Each Fund (and each of the underlying Vanguard
funds) may invest in repurchase agreements with commercial banks, brokers, or
dealers to generate income from its excess cash balances. A repurchase agreement
is an agreement under which a 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 commercial 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 a Fund and is
unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by a 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 Fund's custodian bank until repurchased. In
addition, the Funds' Board of Trustees will monitor each Fund's repurchase
agreement transactions generally and will establish guidelines and standards for
review of the creditworthiness of any bank, broker or dealer party to a
repurchase agreement with a Fund.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, a
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by a Fund not within the control of
the Fund and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that a Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Funds'
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
FUTURES CONTRACTS. Institutional Developed Foreign Markets Stock Index,
Developed Foreign Markets Stock Index, LifeStrategy Conservative Growth,
LifeStrategy Growth, LifeStrategy Income, LifeStrategy Moderate Growth, and
Total International Stock Index Funds (as well as most of their underlying
funds) may enter into futures contracts, options, and options on futures
contracts for several reasons: to maintain cash reserves while remaining fully
invested, to facilitate trading, to reduce transaction costs, or to seek higher
investment returns when a futures contract is priced more attractively than the
underlying equity security or index. 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, or 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.
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Futures contracts are customarily purchased and sold on margin which may range
upward from less than 5% of the value of the contract being traded. After a
futures contract position is opened, the value of the contract is marked to
market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Funds expect to earn
interest income on their margin deposits.
Trades 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
the prices of underlying securities. The Funds intend to use futures contracts
only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Funds require that all of their
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of a Fund's
portfolio. The Funds 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, the Funds expect that approximately 75% of all futures contract
purchases will be "completed;" that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Funds upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Funds 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 the underlying securities.
Restrictions on the Use of Futures Contracts. 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, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
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 the 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, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge. The Funds will minimize the
risk that they will be unable to close out a futures contract by only entering
into futures which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Funds are engaged in only for hedging purposes, the
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Advisers do not believe that the Funds are subject to the risks of loss
frequently associated with futures transactions. The Funds would presumably have
sustained comparable losses if, instead of the futures contract, they had
invested in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by a Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a 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.
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.
Each 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 Funds' other investments and shareholders will be advised
on the nature of the transactions.
ILLIQUID SECURITIES. Each underlying fund may invest up to 15% (10% for
Prime Money Market Fund) 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.
The underlying funds 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 funds to convert to cash if needed.
If a substantial market develops for a restricted security held by a fund,
it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the funds' 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. While each
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.
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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.
LENDING OF SECURITIES. The Funds (or any underlying fund) may lend its
investment securities 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 securities, a Fund will be attempting to increase its net investment
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 and the
aggregate amount 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 the United States Government having a value
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the fund at any time and (d) the fund receive
reasonable interest on the loan which may include the fund's investing any cash
collateral in interest bearing short-term investments, any distribution on the
loaned securities and any increase in their market value. Loan arrangements made
by a fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which rules presently
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 credit-worthiness of the broker, dealer, or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Funds' Board of Trustees.
FOREIGN INVESTMENTS. Each underlying fund in which the Funds invest may
invest 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.
Currency Risk. Since the stocks of foreign companies are frequently
dominated in foreign currencies, and since the funds may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the funds will be
affected favorable or unfavorable by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies.
Country Risk. As foreign countries are not generally subject to uniform
accounting, auditing, and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the funds will endeavor to achieve most favorable execution costs
in their portfolio transactions, 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
custodial arrangements 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 theses taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from foreign companies held by each fund. However, these
foreign withholding taxes are not expected to have a significant impact on the
funds.
Federal Tax Treatment of Non-U.S. Transactions. Special rules govern the
Federal income tax treatment of certain transactions denominated in foreign
currency or determined by reference to the value of one or more foreign
currencies. 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
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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 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 a 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.
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.
TEMPORARY INVESTMENTS. Each underlying fund in which the Funds invest 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
objective.
MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The officers of each Fund manage its day-to-day operations and are
responsible to the Fund's 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 Funds' 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 funds administered by Vanguard. 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.
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<PAGE>
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.
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 Funds are "interested persons" as defined in the 1940 Act.
The Trustees and officers of the Funds will receive no remuneration from
the Funds. However, the Trustees are also Trustees of The Vanguard Group, Inc.
(Vanguard) and of the Funds' underlying investment companies in The Vanguard
Group (the Vanguard funds). Each Vanguard fund pays its unaffiliated Trustees an
annual fee plus a proportionate share of travel and other expenses incurred in
attending Board meetings. The officers are paid by Vanguard which, in turn, is
reimbursed by each Vanguard fund for its proportionate share of officers'
salaries and benefits.
THE VANGUARD GROUP
GENERAL. Each Fund is part of the Vanguard family of mutual funds, which
consists of more than 35 investment companies with over 100 funds. Each of the
Vanguard funds receives at cost from The Vanguard Group, Inc. (Vanguard)
virtually all of its administrative and distribution services. Vanguard also
provides investment advisory services at cost to certain Vanguard funds; other
Vanguard funds are advised by independent advisers unaffiliated with Vanguard.
Vanguard is jointly owned by all of the Vanguard funds except the STAR
Funds and one other investment company (the Member funds). Each of the Member
funds contributes to Vanguard's capitalization, and pays its share of Vanguard's
expenses, pursuant to formulas determined by the Member funds' boards of
trustees. The STAR Funds are not Member funds because they contribute to
Vanguard's capitalization and expenses indirectly through ownership of certain
Vanguard funds. It is possible that, in the future, the Funds may become
B-9
<PAGE>
Member funds, but this will only happen on terms that assure that the Funds will
not bear any duplicative capital contribution or expense allocation costs.
SPECIAL SERVICING AGREEMENT. The Funds and Vanguard have entered into a
Special Servicing Agreement under which Vanguard provides the Funds with
administrative and distribution services, including dividend disbursing,
shareholder servicing, and transfer agency services. The Agreement provides that
the Funds pay Vanguard for the cost of providing these services, and bear the
cost of services provided by outside parties, such as auditors, custodians, and
outside legal counsel, as well as taxes and other direct expenses of the Funds.
The Agreement further provides that the Funds' expenses will be offset, in whole
or in part, by reimbursement from Vanguard for (a) contributions made by the
Funds to the cost of operating the Vanguard funds in which the Funds invest, and
(b) certain savings in administrative and marketing costs that Vanguard is
expected to derive from the operation of the Funds. The Funds' Board of Trustees
believe that the reimbursements to be made by Vanguard to the Funds should be
sufficient to offset most or all of the expenses incurred by each Fund.
Therefore, the Funds are expected to operate at a very low--or zero--expense
ratio. For the fiscal year ended December 31, 1999, all of the Funds in fact had
expense ratios of zero. Of course, there is no guarantee that this will always
be the case.
Although the Funds are expected to operate at a zero expense ratio after
reimbursement, they will bear indirectly, as shareholders of the underlying
Vanguard funds, the costs associated with operating those funds. As of December
31, 1999, it is estimated that the indirect expense ratio of the Funds was as
follows: STAR Fund--[0.37%]; LifeStrategy Income Fund--[0.29%]; LifeStrategy
Conservative Growth Fund--[0.29%]; LifeStrategy Moderate Growth Fund--[0.29%];
LifeStrategy Growth Fund--[0.29%]; Total International Stock Index
Fund--[0.34%]. Vanguard Institutional Developed Foreign Markets and Vanguard
Developed Foreign Markets Stock Index Funds did not commence operations until
May xx, 2000.
CODE OF ETHICS. Vanguard has adopted a Code of Ethics designed to prevent
certain officers and employees of Vanguard who may have access to nonpublic
information about the trading activities of Vanguard funds from profiting from
that information. The Code places substantive and procedural restrictions on
securities trades by Vanguard access persons and their immediate family members.
For example, the Code requires that access persons receive advance approval for
every securities trade to ensure that there is no conflict with the trading
activities of Vanguard funds. The provisions of Vanguard's Code of Ethics are
similar to, and in many cases more restrictive than, those recommended by a blue
ribbon panel of mutual fund industry executives.
INVESTMENT ADVISORY SERVICES
The Funds do not employ an investment adviser. The allocation of each
Fund's assets among the underlying Vanguard funds is made by officers of the
Funds pursuant to instructions of the Funds' Board of Trustees and in conformity
with each Fund's investment objective, strategies, and policies. The Declaration
of Trust authorizes the Trustees to retain an investment adviser if they
determine that such action is in the best interests of the shareholders of each
Fund. The Trustees have no present intention to retain an investment adviser for
any of the Funds. A Fund could not retain an investment adviser without first
obtaining shareholder approval.
The Funds benefit from the investment advisory services provided to the
underlying Vanguard funds and, as shareholders of those funds, indirectly bear a
proportionate share of those funds' advisory fees. The following is a
description of the investment advisory agreements for each underlying Vanguard
fund.
VANGUARD WINDSOR FUND
Vanguard Windsor Fund employs a multimanager 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. Windsor Fund pays Wellington
Management a basic fee, calculated by applying a quarterly rate, based on the
following annual percentage rates, to Windsor Fund's average month-end net
assets managed by Wellington Management for the quarter:
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<PAGE>
NET ASSETS RATE
---------- ----
First $17.5 billion ................... 125%
Assets in excess of $17.5 billion ..... 100%
The basic fee may be increased or decreased by applying an adjustment
formula based on the investment performance of the assets of the fund managed by
Wellington Management 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 S&P 500) for the same period.
During the fiscal years ended October 31, 1997, 1998, and 1999, 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/(Decrease) for (11,821,000) (15,501,000) (14,040,175)
Performance Adjustment ----------------------------------------
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. 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 managed by Bernstein for the quarter:
NET ASSETS RATE
---------- ----
First $1 billion ..................... .15%
Next $2 billion ...................... .14%
Next $2 billion ...................... .12%
Assets in excess of $5 billion ....... .10%
The basic fee may be increased or decreased by applying an adjustment
formula based on the investment performance of the assets of the fund managed by
Bernstein for the thirty-six months preceding the end of the quarter relative to
the investment record of the Russell 1000 Value Index for the same period.
During the fiscal years ended October 31, 1999, Windsor Fund incurred the
following advisory fees owed to Bernstein:
1999
----
Basic Fee ....................................... $2,309,256
Increase/(Decrease) for Performance Adjustment .. 0
----------
Total ........................................... $2,309,256
----------
----------
VANGUARD MORGAN GROWTH FUND
Vanguard Morgan Growth Fund employs three separate investment advisers,
each of whom manages the investment and reinvestment of a portion of the fund's
assets.
WELLINGTON MANAGEMENT COMPANY, LLP
Morgan Fund employs Wellington Management Company, LLP (Wellington
Management) under an investment advisory agreement to manage the investment and
reinvestment of approximately xx% (as of December 31, 1999) of the fund's assets
and to continuously review, supervise, and administer the fund's
B-11
<PAGE>
investment program. Wellington Management discharges its responsibilities
subject to the control of Morgan's officers and Trustees.
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.
Morgan 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 the fund's average month-end net assets for the
quarter:
NET ASSETS RATE
---------- ----
First $500 million .................. .175%
Next $500 million ................... .100%
Assets in excess of $1 billion ...... .075%
The basic fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the fund's assets
managed by Wellington Management, over a 36-month period, relative to the
investment record of a benchmark index composed of the stocks held in the
country's 50 largest growth stock mutual funds (the Growth Fund Stock Index).
During the fiscal years ended December 31, 1997, 1998, and 1999, Morgan
Fund incurred the following advisory fees owed to Wellington Management:
1997 1998 1999
---- ---- ----
Basic Fee ............................ $1,292,417 $1,541,922 $x,xxx,xxx
Increase/(Decrease) for Performance
Adjustment ......................... (63,493) 76,371 xx,xxx
----------------------------------
Total ................................ $1,228,924 $1,618,293 $x,xxx,xxx
----------------------------------
----------------------------------
FRANKLIN PORTFOLIO ASSOCIATES LLC
Morgan Fund employs Franklin Portfolio Associates LLC under an investment
advisory agreement to manages the investment and reinvestment of approximately
xx% (as of December 31, 1999) of the fund's assets. Franklin Portfolio
Associates discharges its responsibilities subject to the control of the
officers and Trustees of the fund.
Franklin Portfolio Associates is a Massachusetts limited liability company.
The shares of Franklin Portfolio Associates are owned by MBC Investments
Corporation, a holding company of Mellon Bank Corporation.
Morgan Fund pays Franklin Portfolio Associates a basic fee by applying
various percentage rates to the average net assets of the fund managed by
Franklin Portfolio Associates. The fee schedule is as follows:
NET ASSETS RATE
- ---------- ----
First $100 million ........................ .25%
Next $200 million ......................... .20%
Next $200 million ......................... .15%
Next $500 million ......................... .10%
Next $4 billion ........................... .08%
Assets in excess of $5 billion ............ .06%
The basic fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the assets of the
fund managed by Franklin Portfolio Associates, over a 36-month period, relative
to the investment record of the Growth Fund Stock Index.
B-12
<PAGE>
During the fiscal years ended October 31, 1997, 1998, and 1999, Morgan Fund
incurred the following advisory fees owed to Franklin Portfolio Associates:
1997 1998 1999
---- ---- ----
Basic Fee ............................ $1,310,220 $1,701,152 $x,xxx,xxx
Increase/(Decrease) for Performance
Adjustment ......................... 571,862 383,794 xxx,xxx
----------------------------------
Total ................................ $1,882,082 $2,084,946 $x,xxx,xxx
----------------------------------
----------------------------------
VANGUARD'S CORE MANAGEMENT GROUP
Vanguard's Core Management Group provides investment advisory services on
an at-cost basis with respect to approximately xx% of Morgan Fund's assets as of
December 31, 1999.
During the fiscal years ended December 31, 1997, 1998, and 1999, Morgan
Fund incurred expenses for investment advisory services provided by Vanguard in
the following approximate amounts: $219,000, $317,000, and $xxx,xxx,
respectively.
VANGUARD GNMA AND LONG-TERM CORPORATE FUNDS
Wellington Management Company, LLP (Wellington Management) serves as
investment adviser to GNMA and Long-Term Corporate Funds. Each of the funds pays
Wellington Management an investment advisory fee at the end of each fiscal
quarter, calculated by applying a quarterly rate to the average month-end net
assets of each fund.
VANGUARD GNMA FUND
NET ASSETS RATE
---------- ----
First $3 billion .................... .020%
Next $3 billion ..................... .010%
Assets in excess of $6 billion ...... .008%
VANGUARD LONG-TERM CORPORATE FUND
NET ASSETS RATE
---------- ----
First $1 billion .................... .040%
Next $1 billion ..................... .030%
Next $1 billion ..................... .020%
Assets in excess of $3 billion ...... .015%
During the fiscal years ended January 31, 1998, 1999, and 2000, GNMA and
Long-Term Corporate Funds paid Wellington Management the following advisory
fees:
FUND 1998 1999 2000
---- ---- ---- ----
GNMA ................................ $1,067,000 $1,229,000 $x,xxx,000
-----------------------------------
-----------------------------------
Long-Term Corporate ................. $963,000 $1,048,000 $x,xxx,000
-----------------------------------
-----------------------------------
VANGUARD SHORT-TERM CORPORATE FUND
Vanguard Short-Term Corporate Fund receives its investment advisory
services on an "internalized," at-cost basis from an investment management staff
employed directly by Vanguard. This staff, Vanguard's Fixed Income
B-13
<PAGE>
Group, is supervised by the officers of the fund. During the fiscal years ended
January 31, 1998, 1999, and 2000, the fund incurred expenses for investment
advisory services provided by Vanguard in the following approximate amounts:
$698,000, $671,000, and $xxx,000, respectively.
VANGUARD WINDSOR II
Vanguard Windsor II Fund employs a multimanager approach utilizing four
investment advisers, each of whom manages the investment and reinvestment of a
portion of the fund's assets.
BARROW, HANLEY, MEWHINNEY & STRAUSS
Windsor II Fund has entered into an investment advisory agreement with
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley) to manage a portion
of the fund's equity assets (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 the 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.
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 the fund managed by
Barrow, Hanley for the quarter:
NET ASSETS RATE
---------- ----
First $200 million .................. .300%
Next $300 million ................... .200%
Next $500 million ................... .150%
Assets in excess of $1 billion ...... .125%
The basic fee paid to Barrow, Hanley, as provided above, will be increased
or decreased by applying an incentive/penalty fee adjustment based on the
investment performance of the assets of the fund managed by Barrow, Hanley over
a trailing 36-month period relative to that of the Standard & Poor's 500/BARRA
Value Index (the BARRA Value Index). 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.
During the fiscal years ended October 31, 1997, 1998, and 1999, 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/(Decrease) for
Performance Adjustment .......... 2,495,021 3,887,915 (1,429,591)
--------------------------------------
Total ............................. $19,420,974 $28,113,688 $26,089,031
--------------------------------------
--------------------------------------
EQUINOX CAPITAL MANAGEMENT, INC.
Windsor II Fund has entered into an investment advisory agreement with
Equinox Capital Management, Inc. (Equinox) to manage a portion of the fund's
equity assets (approximately 14%, as of October 31, 1999). Under this agreement,
Equinox manages the investment and reinvestment of the designated assets and
continuously reviews, supervises, and administers the investment program of the
fund with respect to those assets. Equinox discharges its responsibilities
subject to the control of the officers and Trustees of the fund.
B-14
<PAGE>
Equinox is a Delaware Limited Liability Company controlled by the following
officers of Equinox: Ronald J. Ulrich, Director and President; and Wendy D. Lee,
Managing Director.
Windsor II Fund pays Equinox a basic fee by applying a quarterly rate,
based on the following annual percentage rates, to the portion of the fund's
average month-end net assets managed by Equinox. The fee schedule is as follows:
NET ASSETS 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 36-month investment performance of the fund's
assets managed by Equinox relative to the investment record of the Russell 1000
Value Index.
During the fiscal years ended October 31, 1997, 1998, and 1999, 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/(Decrease) for Performance
Adjustment ........................ 408,295 868,234 1,788,014
----------------------------------
Total ............................... $3,199,637 $4,813,286 $6,780,074
----------------------------------
----------------------------------
TUKMAN
Windsor II Fund has entered into an investment advisory agreement with
Tukman Capital Management, Inc. (Tukman) to manage a portion of the fund's
equity assets (approximately 12%, as of October 31, 1999). Under this agreement,
Tukman manages the investment and reinvestment of the designated assets and
continuously reviews, supervises, and administers the investment program of the
fund with respect to those assets. Tukman discharges its responsibilities
subject to the control of the officers and Trustees of the fund.
Tukman is a Delaware corporation controlled by the following Officers of
Tukman: Melvin T. Tukman, President and Director, and Daniel L. Grossman, Vice
President.
Windsor II Fund pays Tukman a basic fee by applying a quarterly rate, based
on the following annual percentage rates, to the portion of Windsor II's average
month-end assets managed by Tukman:
NET ASSETS RATE
---------- ----
First $25 million .................... .40%
Next $125 million .................... .35%
Next $350 million .................... .25%
Next $500 million .................... .20%
Assets in excess of $1 billion ....... .15%
The basic fee paid to Tukman may be increased or decreased by applying an
incentive/penalty fee adjustment based on the 36-month investment performance of
the fund's assets managed by Tukman relative to the investment record of the
Standard & Poor's 500 Composite Stock Price Index.
During the fiscal years ended October 31, 1997, 1998, and 1999, Windsor II
Fund incurred the following advisory fees owed to Tukman:
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<PAGE>
1997 1998 1999
---- ---- ----
Basic Fee ........................... $3,622,904 $5,126,168 $6,192,444
Increase/(Decrease) for
Performance Adjustment ............ 785,658 992,760 (2,000,847)
-----------------------------------
Total ............................... $4,408,562 $6,118,928 $4,191,597
-----------------------------------
-----------------------------------
VANGUARD'S CORE MANAGEMENT GROUP
Vanguard's Core Management Group provides investment advisory services on
an at-cost basis with respect to a portion of Windsor II Fund's assets
(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, Windsor II
Fund incurred expenses for investment advisory services in the following
approximate amounts: $196,000, $287,000, and $511,000, respectively.
VANGUARD EXPLORER FUND
Vanguard Explorer Fund employs four investment advisers: Wellington
Management Company, LLP (Wellington Management), 75 State Street, Boston, MA
02109; Granahan Investment Management, Inc. (Granahan), 275 Wyman Street,
Waltham, MA 02154; Chartwell Investment Partners (Chartwell), 1235 Westlakes
Drive, Suite 330, Berwyn, PA 19312; and Vanguard's Core Management Group. Until
February 28, 1990, when Explorer acquired the assets of Explorer II, Wellington
Management was sole investment adviser to Explorer (then known simply as
Explorer Fund), and Granahan served as sole investment adviser to Explorer II,
the acquired fund.
The proportion of the net assets of Explorer managed by each adviser is
established by the Board of Trustees of Explorer, and may be changed in the
future by the Board of Trustees as circumstances warrant.
WELLINGTON MANAGEMENT COMPANY, LLP
Explorer has entered into an advisory agreement with Wellington Management
under which Wellington Management manages the investment and reinvestment of a
portion of Explorer's assets and continuously reviews, supervises, and
administers Explorer's investment program with respect to those assets. As of
October 31, 1999, Wellington Management managed approximately 29% of Explorer's
equity investments. Wellington Management discharges its responsibilities
subject to the control of the officers and Trustees of Explorer.
Explorer 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 the portion of Explorer's average month-end net assets
managed by Wellington Management for the quarter:
NET ASSETS RATE
---------- ----
First $500 million .................. .250%
Next $250 million ................... .200%
Next $250 million ................... .150%
Assets in excess of $1 billion ...... .100%
The basic fee paid to Wellington Management may be increased or decreased
by applying an incentive/ penalty fee adjustment based on the 36-month
investment performance of the fund's assets managed by Wellington Management
relative to the investment performance of the Small Company Growth Fund Stock
Index.
During the fiscal years ended October 31, 1997, 1998, and 1999, Explorer
Fund paid Wellington Management the following advisory fees:
B-16
<PAGE>
1997 1998 1999
---- ---- ----
Basic Fee ........................... $1,950,387 $1,647,928 $1,588,542
Increase/(Decrease) for Performance
Adjustment ........................ (89,408) (288,253) 659,915
----------------------------------
Total ............................... $1,860,979 $1,359,675 $2,248,457
----------------------------------
----------------------------------
GRANAHAN INVESTMENT MANAGEMENT, INC.
Granahan Investment Management, Inc. (Granahan) serves as a second
investment adviser to Explorer. Under its advisory agreement, Granahan manages
the investment and reinvestment of a portion of Explorer's assets and
continuously reviews, supervises, and administers Explorer's investment program
with respect to those assets. As of October 31, 1999, Granahan managed
approximately 46% of Explorer's equity investments. Granahan discharges its
responsibilities subject to the control of the officers and Trustees of
Explorer.
Granahan is an investment advisory firm specializing in small company stock
investments. Mr. John Granahan is the President and major stockholder of
Granahan Investment Management, Inc.
Explorer pays Granahan 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 Explorer's average month-end net assets
managed by Granahan for the quarter:
NET ASSETS RATE
---------- ----
First $500 million .300%
Next $250 million .200%
Next $250 million .150%
Assets in excess of $1 billion .100%
The basic fee paid to Granahan may be increased or decreased by applying an
incentive/penalty fee adjustment based on the investment performance of the
fund's assets managed by Granahan over a trailing thirty-six month period
relative to that of the Small Company Growth Fund Stock Index for the same
period.
During the fiscal years ended October 31, 1997, 1998, and 1999, Explorer
Fund paid Granahan the following advisory fees:
1997 1998 1999
---- ---- ----
Basic Fee ............................ $2,532,966 $2,508,538 $2,476,006
Increase/(Decrease) for Performance
Adjustment ......................... (242,952) (479,000) 0
-----------------------------------
Total ................................ $2,290,014 $2,029,538 $2,476,006
-----------------------------------
-----------------------------------
CHARTWELL INVESTMENT PARTNERS
Explorer has entered into an advisory agreement with Chartwell Investment
Partners (Chartwell) under which Chartwell manages the investment and
reinvestment of a portion of Explorer's assets and continuously reviews,
supervises, and administers Explorer's investment program with respect to those
assets. As of October 31, 1999, Chartwell managed approximately 11% of
Explorer's equity investments. Chartwell discharges its responsibilities subject
to the control of the officers and Trustees of the fund.
Chartwell is an employee-owned investment partnership providing equity and
fixed income management. Edward N. Antoian, one of the firm's partners, is the
portfolio manager for their small-capitalization growth products.
For the services provided by Chartwell under the advisory agreement,
Explorer will pay Chartwell 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 Explorer managed by
Chartwell for the quarter:
B-17
<PAGE>
NET ASSETS RATE
---------- ----
First $250 million .................. 0.40%
Next $250 million ................... 0.30%
Assets in excess of $500 million .... 0.20%
Effective with the quarter ended July 31, 1998, the basic fee, as provided
above, shall be increased or decreased by applying an incentive/penalty fee
adjustment based on the 36-month investment performance of the assets of
Explorer managed by Chartwell relative to the investment performance of the
Small Company Growth Fund Stock Index, which is made up of stocks held by the
nation's 25 largest small company funds.
For the period August 1, 1997 to October 31, 1997, and the fiscal years
ended October 31, 1998 and 1999, Explorer paid Chartwell the following advisory
fees:
AUG. 1-OCT. 31
1997 1998 1999
---- ---- ----
Basic Fee ........................ $202,329 $952,259 $1,042,721
Increase/(Decrease) for
Performance Adjustment ......... 0 (71,146) 70,879
--------------------------------------
Total ............................ $202,329 $881,113 $1,113,600
--------------------------------------
--------------------------------------
THE VANGUARD GROUP, INC.
Vanguard's Core Management Group provides investment advisory services on
an at-cost basis with respect to approximately 10% (as of October 31, 1999) of
Vanguard Explorer Fund's assets, and any cash reserves held by the fund
(approximately 4%, as of October 31, 1999). Vanguard's Core Management Group is
supervised by the officers of the funds.
For the period August 1, 1997 to October 31, 1997, and the fiscal years
ended October 31, 1998 and 1999, the fund incurred expenses for investment
advisory services provided by Vanguard in the following approximate amounts:
$2,000, $38,000, and $170,000, respectively.
VANGUARD U.S. GROWTH PORTFOLIO
Vanguard World Fund entered into an investment advisory agreement with
Lincoln Capital Management Company (Lincoln) under which Lincoln manages the
investment and reinvestment of the fund's assets and continuously reviews,
supervises, and administers the fund. Lincoln discharges its responsibilities
subject to the control of the officers and Trustees of the fund. Under this
agreement the fund pays Lincoln an advisory fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the fund's average month-end net assets for the quarter:
NET ASSETS RATE
---------- ----
First $25 million ................... 0.40%
Next $125 million ................... 0.35%
Next $350 million ................... 0.25%
Next $500 million ................... 0.20%
Next $1.5 billion ................... 0.15%
Next $12.5 billion .................. 0.10%
Assets in excess of $15 billion ..... 0.08%
Lincoln is an Illinois corporation in which a controlling interest is held
by the following persons: Timothy H. Ubben, Chairman; J. Parker Hall III, Chief
Executive Officer; Kenneth R. Meyer, President; Ray B. Zemon, Executive Vice
President; David M. Fowler, Executive Vice President; Richard W. Knee, Executive
Vice President; and Jay H. Freedman, Executive Vice President.
B-18
<PAGE>
For the fiscal years ended August 31, 1997, 1998, and 1999, the fund
incurred advisory fees of $8,475,000, $11,377,000, and $16,307,000,
respectively.
VANGUARD PRIMECAP FUND
Vanguard PRIMECAP Fund employs PRIMECAP Management Company (PRIMECAP) under
an investment advisory agreement to manage the investment and reinvestment of
the assets of the fund and to continuously review, supervise, and administer the
fund's investment program. PRIMECAP discharges its responsibilities subject to
the control of the officers and Trustees of the fund.
PRIMECAP is a California corporation whose outstanding shares are owned by
its directors and officers. The directors of the corporation and the offices
they currently hold are: Howard Bernard Schow, Chairman; Mitchell John Milias,
Vice Chairman and Treasurer; Theofanis Anastasios Kolokotrones, President and
Secretary; and Joel P. Fried, Executive Vice President.
The fund pays PRIMECAP an advisory fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the fund's average month-end net assets for the quarter:
NET ASSETS RATE
---------- ----
First $50 million ................... 0.500%
Next $200 million ................... 0.450%
Next $250 million ................... 0.375%
Next $1,750 million ................. 0.250%
Next $2,750 million ................. 0.200%
Next $5 billion ..................... 0.175%
Assets in excess of $10 billion ..... 0.150%
During the fiscal years ended December 31, 1997, 1998, and 1999, the fund
incurred investment advisory fees of approximately $14,455,000, $20,669,000, and
$xx,xxx,xxx, respectively.
VANGUARD PRIME MONEY MARKET FUND
Vanguard's Fixed Income Group provides investment advisory services on an
at-cost basis to Vanguard Prime Money Market Fund.
During the fiscal years ended November 30, 1997, 1998, and 1999, Vanguard
Prime Money Market Fund's share of Vanguard's investment advisory expenses
totaled approximately $3,782,000, $3,811,000, and $x,xxx,xxx, respectively.
VANGUARD ASSET ALLOCATION FUND
Vanguard Asset Allocation Fund employs Mellon Capital Management
Corporation (Mellon), 595 Market St., 30th Floor, San Francisco, California,
94105, under an investment advisory agreement to manage the investment and
reinvestment of the assets of the fund and to continuously review, supervise,
and administer the fund's investment program. Mellon discharges its
responsibilities subject to the control of the officers and Trustees of the
fund.
Mellon is an investment management firm which manages well diversified
stock and bond portfolios for institutional clients. The Adviser is a
wholly-owned subsidiary of MBC Investment Corporation, which itself is a
wholly-owned subsidiary of Mellon Financial Corporation.
Asset Allocation Fund pays Mellon 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 fund's average month-end net assets for the quarter:
B-19
<PAGE>
NET ASSETS RATE
---------- ----
First $100 million .................. 0.200%
Next $900 million ................... 0.150%
Next $500 million ................... 0.125%
Assets in excess of $1.5 billion .... 0.100%
This fee may be increased or decreased by applying an adjustment formula
based on the cumulative investment performance of the fund's portfolio for the
thirty-six months preceding the end of the quarter relative to the investment
record of a Combined Index for the same period. The Combined Index is comprised
of the Standard & Poor's 500 Composite Price Index (65% of the Combined Index)
and the Lehman Brothers Long-Term U.S. Treasury Index (35% of the Combined
Index).
During the fiscal years ended September 30, 1997, 1998, and 1999, the fund
incurred investment advisory fees as follows:
1997 1998 1999
---- ---- ----
Basic Fee $3,723,000 $5,466,000 $8,336,000
Increase/(Decrease) for
Performance Adjustment. . . (921,000) (1,404,000) (1,564,000)
-------------------------------------
Total $2,802,000 $4,062,000 $6,772,000
-------------------------------------
-------------------------------------
VANGUARD TOTAL STOCK MARKET INDEX FUND, VANGUARD EUROPEAN STOCK
INDEX FUND, VANGUARD PACIFIC STOCK INDEX FUND,
AND VANGUARD TOTAL INTERNATIONAL STOCK INDEX FUND
Vanguard Total Stock Market, European Stock, and Pacific Stock Index Funds
receive their investment advisory services on an at-cost basis from Vanguard's
Core Management Group. Vanguard Total International Fund invests solely in other
Vanguard funds and therefore does not employ an investment adviser or pay
advisory fees. However, Total International Stock Index Fund benefits from the
investment advisory services provided by Vanguard to the underlying funds in
which it invests.
During the fiscal years ended December 31, 1997, 1998, and 1999, the Funds
incurred expenses for investment advisory services of approximately the
following amounts:
FUND 1997 1998 1999
---- ---- ---- ----
European Stock Index Fund ............ $23,000 $47,000 $xx,000
Pacific Stock Index Fund ............. 23,000 47,000 xx,000
Total Stock Market Index Fund ........ 56,000 82,000 xx,000
PORTFOLIO TRANSACTIONS
Each Fund will purchase and sell the principal portion of its Fund
securities (i.e., shares of the underlying Vanguard funds) by dealing directly
with the issuer--the underlying funds. As such, the Funds incur no brokerage
commissions.
PURCHASE OF SHARES
The purchase price of shares of the Funds is the net asset value next
determined after the order is received. The net asset value is calculated as of
the close of the New York Stock Exchange (generally 4 p.m. Eastern time) on each
day the Exchange is open for business and on any other day on which there is
sufficient trading in each Fund's underlying securities to materially affect its
net asset value per share. 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.
B-20
<PAGE>
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 Fund's shares.
To assure that each Fund continues to operate in the manner set forth in
its Prospectus, including the desired composition of shareholder investments in
the Fund, the officers of the Funds will monitor and report to the Trustees the
composition of the Funds' shareholder base. The Funds' shares will be marketed
to tax-advantaged and other retirement accounts. The officers will recommend to
the Trustees any action they deem necessary to assure that investments in the
Funds do not become inconsistent with the policies applicable to the Funds. This
could include recommendations to limit sales to specific categories of investors
or to revise the suitability standards for investors.
A 0.50% portfolio transaction fee is deducted from purchases of Total
International, Institutional Developed Foreign Markets, and Developed Foreign
Markets Stock Index Funds, including any purchases made by the Vanguard
LifeStrategy Funds. Portfolio transaction fees are retained by the Funds in
order to offset transaction costs of buying international securities in the
Vanguard European, Pacific, and Emerging Markets Stock Index Funds. The fee is
not a sales charge.
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 fairly to determine 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.
Each Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on
its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on the Funds' behalf subject to those terms and
conditions. Under this arrangement, a Fund will be deemed to have received a
purchase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with the Fund's instructions. Customer
orders that are properly transmitted to the Fund by Schwab, or if applicable,
Schwab's authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Fund's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on the Fund's net
asset value calculated at the close of trading that day.
No charge is made by the Funds for redemptions. Shares redeemed may be
worth more or less than what was paid for them, depending on the market value of
the securities held by the Funds.
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 regular close
of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on each day
that the Exchange is open for trading. This determination is made by appraising
each Fund's underlying investment (i.e., the underlying Vanguard funds) at the
price of each such fund determined at the regular close of the Exchange.
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.
B-21
<PAGE>
YIELD AND TOTAL RETURN
The yield of each Fund for the 30-day period ended December 31, 1999 was as
follows:
LifeStrategy Conservative Growth ............ x.xx%
LifeStrategy Growth ......................... x.xx%
LifeStrategy Income ......................... x.xx%
LifeStrategy Moderate Growth ................ x.xx%
STAR ........................................ x.xx%
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:
P (1+T)N = ATV
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
B-22
<PAGE>
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]
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
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 may from time
to time use one or more of the following unmanaged indexes for comparative
performance purposes.
GROWTH FUND STOCK INDEX--The Index is composed of the various common stocks that
are held in the 50 largest growth stock mutual funds, using year-end assets,
monitored by Morningstar, Inc. Under an agreement with Vanguard Morgan Growth
Fund, Morningstar, Inc. determines the composition of the Index and Vestek
Systems calculates the monthly total return. Neither The Vanguard Group, Inc.,
nor its advisers are affiliated with Morningstar or Vestek Systems in any way.
SMALL COMPANY GROWTH FUND STOCK INDEX--The Index is composed of the various
domestic common stocks that are held in the 25 largest small company stock
mutual funds, using year-end assets, monitored by Morningstar, Inc. Under an
agreement with Vanguard Explorer Fund, Morningstar, Inc. determines the
composition of the Index and Vestek Systems calculates the monthly total return.
Neither The Vanguard Group, Inc., nor its advisers are affiliated with
Morningstar or Vestek Systems in any way.
B-23
<PAGE>
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.
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 EUROPE, AUSTRALASIA, FAR EAST 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.
MORGAN STANLEY CAPITAL INTERNATIONAL EMERGING MARKETS FREE INDEX--an arithmetic,
market value-weighted average of the performance of securities listed on the
stock exchanges of twenty-two developing countries.
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALASIA, FAR EAST + SELECT
EMERGING MARKETS FREE INDEX--an arithmetic, market value-weighted average of the
performance of securities listed on the stock markets of Europe, Australia, the
Far East and fifteen developing countries.
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 ten years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, agency, and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX--all publicly offered, fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than one year and with more than $100 million outstanding. This index
includes over 1,500 issues.
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
of four high-grade, non-callable 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.
B-24
<PAGE>
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, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The index has a market value of over
$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
one and five 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 five and
ten 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 ten years. The
index has a market value of over $1.1 trillion.
RUSSELL 2000 STOCK INDEX--consists of the smallest 2,000 stocks within the
Russell 3000; a widely-used benchmark for small capitalization common stocks.
IBBOTSON ASSOCIATES YEARBOOK--various mutual fund performance data.
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 SMALL CAP FUND AVERAGE--the average performance of small company growth
funds as defined by Lipper Inc. Lipper defines a small company growth fund as a
fund that by prospectus or portfolio practice, limits its investments to
companies on the basis of the size of the company. From time to time, Vanguard
may advertise using the average performance and/or the average expense ratio of
the small company growth funds. (This fund category was first established in
1982. For years prior to 1982, the results of the Lipper Small Company Growth
category were estimated using the returns of the Funds that constituted the
Group at its inception.)
RUSSELL 3000 INDEX--consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Exchanges
or the NASDAQ over-the-counter market, accounting for over 90% of the market
value of publicly traded stocks in the U.S.
FINANCIAL STATEMENTS
The Funds' financial statements for the year ended December 31, 1999,
appearing in the Funds' 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 the
Funds' Annual Reports to Shareholders, which may be obtained without charge.
B-25
<PAGE>
SAI056-04/28/2000
<PAGE>
PART C
VANGUARD STAR 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) Not Applicable
(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 Agreements**
(h) Special Servicing Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants*
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
--------------------------
* To be Filed by Amendment
** 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
The Funds have no Investment Adviser.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
C-1
<PAGE>
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 at the offices of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., Valley Forge, Pennsylvania 19482; and the Registrant's
Custodians, First Union National Bank, Philadelphia, Pennsylvania 19106, and The
Chase Manhattan Bank, Brooklyn, New York 11245.
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 has duly caused this Post-Effective
Amendment to 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 15th day of February, 2000.
VANGUARD STAR 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 February 15, 2000
--------------------------- Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ JOANN HEFFERNAN HEISEN Trustee February 15, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee February 15, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee February 15, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee February 15, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JOHN C. SAWHILL Trustee February 15, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*
By:/S/ JAMES O. WELCH, JR. Trustee February 15, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee February 15, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal February 15, 2000
--------------------------- Financial Officer and
(Heidi Stam) Principal Accounting Officer
Thomas J. Higgins*
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
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