<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-32548) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 8
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 11
VANGUARD INTERNATIONAL EQUITY
INDEX FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE:
on April 10, 1996, pursuant to Rule 485(a) under the Securities Act of 1933.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1994 ON FEBRUARY 15, 1995.
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<PAGE> 2
VANGUARD INTERNATIONAL EQUITY INDEX FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<S> <C> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... N/A
Item 3. Condensed Financial Information............... Funds' Expenses; Financial Highlights
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Funds....................... Management of the Funds; General
Information
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of Each Portfolio;
Dividends, Capital Gains and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objective and Policies
Item 13. Investment Objective and Policies............. Investment Objective and Policies
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
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A Member of The Vanguard Group
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PROSPECTUS -- APRIL 10, 1996
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
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INVESTMENT
OBJECTIVE AND
POLICIES Vanguard International Equity Index Fund, Inc. and Vanguard
Total International Portfolio (the "Funds") are open-end
diversified investment companies designed as "index" funds.
Vanguard International Equity Index Fund consists of three
portfolios, European, Pacific, and Emerging Markets, each of
which invests in common stocks in order to match the
performance of a distinct international market index. Vanguard
STAR Fund consists of six portfolios, only the Total
International Portfolio is discussed in this prospectus.
Information on the other five portfolios offered by the STAR
Fund can be obtained by calling Vanguard. The European
Portfolio seeks to provide investment results, using
statistical procedures, that parallel the Morgan Stanley
Capital International -- Europe (Free) Index, a diversified
index consisting of companies located in fourteen European
countries. The Pacific Portfolio seeks to provide investment
results, using statistical procedures, that parallel the Morgan
Stanley Capital International -- Pacific (Free) Index, a
diversified index consisting of companies located in Japan,
Australia, New Zealand, Hong Kong, Singapore and Malaysia. The
Emerging Markets Portfolio seeks to provide investment results,
using statistical procedures, that parallel the Morgan Stanley
Capital International -- Select Emerging Markets Free Index, a
broadly diversified index consisting of companies in twelve
countries in Southeast Asia, Latin America, and Europe. The
Total International Portfolio seeks to provide investment
results that parallel the Morgan Stanley Capital International
Europe, Australia, and Far East + Emerging Markets Free Index
by investing in a combination of the European, Pacific, and
Emerging Markets Portfolios. The European, Pacific and Emerging
Markets Portfolios invest primarily in common stocks included
in their respective indexes. There is no assurance that each
Portfolio will achieve its stated objective. Shares of the
Funds are neither insured nor guaranteed by any agency of the
U.S. Government, including the FDIC.
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OPENING AN
ACCOUNT To open a regular (non-retirement) account, please complete and
return the Account Registration Form. If you need assistance in
completing this Form, please call our Investor Information
Department. To open an Individual Retirement Account (IRA),
please use a Vanguard IRA Adoption Agreement. To obtain a copy
of this form, call 1-800-662-7447, Monday through Friday, from
8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to 4:00
p.m. (Eastern time). The minimum initial investment is $3,000
for each Portfolio or $1,000 for Uniform Gifts/Transfers to
Minors Act accounts. The Fund is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees). However,
the Fund incurs expenses for investment advisory, management,
administrative and distribution services. A 2% portfolio
transaction fee is deducted from purchases of the Emerging
Markets Portfolio; a 1% portfolio transaction fee is deducted
from purchases of the European, Pacific and Total International
Portfolios. A 1% portfolio transaction fee is deducted from
redemptions of the Emerging Markets Portfolio. These fees are
paid to the Portfolios to offset transaction costs of buying
and selling securities of international companies. Shareholders
in each Portfolio will also incur a $10 annual account
maintenance fee.
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ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Portfolios before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Fund has been filed with the Securities
and Exchange Commission. This Statement is dated April 10, 1996
and has been incorporated by reference into this Prospectus. A
copy may be obtained without charge by writing to the Fund or
by calling the Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Portfolio Expenses................. 2 Management of the Fund............. 16 SHAREHOLDER GUIDE
Financial Highlights............... 5 Investment Adviser................. 17 Opening an Account and
Yield and Total Return............. 7 Dividends, Capital Gains Purchasing Shares................ 21
PORTFOLIO INFORMATION and Taxes........................ 17 When Your Account Will
Investment Objective............... 8 The Share Price of Each Be Credited...................... 24
Investment Policies................ 8 Portfolio........................ 19 Selling Your Shares................ 24
Investment Risks................... 10 General Information................ 20 Exchanging Your Shares............. 26
Who Should Invest.................. 12 Transferring Registration.......... 28
Implementation of Policies......... 12 Other Vanguard Services............ 29
Investment Limitations............. 16
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 4
PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of each Portfolio. The
expenses and fees set forth below are for the 1994 fiscal
year.
<TABLE>
<CAPTION>
EMERGING TOTAL
EUROPEAN PACIFIC MARKETS INTERNATIONAL
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases.... None * None * None * --
Sales Load Imposed on Reinvested
Dividends........................ None None None --
Redemption Fees.................... None None 1% --
Exchange Fees...................... None None None --
2% --
</TABLE>
* Shareholders are charged a portfolio transaction fee,
payable directly to the Portfolio on each purchase of
shares.
<TABLE>
<CAPTION>
EMERGING TOTAL
EUROPEAN PACIFIC MARKETS INTERNATIONAL
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management &
Administrative
Expenses**............ 0.22% 0.21% 0.18% --
Investment Advisory
Fees.................. 0.01 0.01 0.05 --
12b-1 Fees.............. None None None --
Other Expenses
Distribution Costs.... 0.02% 0.02% 0.01% --
Miscellaneous
Expenses............ 0.07 0.08 0.36 --
----- -------- ------- ------------
Total Other Expenses.... 0.09 0.10 0.37 --
------- -------- ------- ------------
TOTAL OPERATING
EXPENSES...... 0.32% 0.32% 0.60% --
======== ======== ======== ============
</TABLE>
** In addition to these costs, shareholders in each
Portfolio incur an annual account maintenance fee of
$10. This fee will be waived for shareholders with an
account balance of $10,000 or more.
+ The Total International Portfolio is a series of
Vanguard STAR Fund. To the extent that its assets
consist of shares of the other Portfolios, it will incur
no expenses.
Because it invests in a combination of the European,
Pacific, and Emerging Markets Portfolios, the Total
International Portfolio does not have operating expenses
of its own. However, Total International Portfolio
shareholders bear indirectly the expenses of the
underlying Portfolios. As of (date), the average weighted
expense ratio was --%. The purpose of this table is to
assist you in understanding the various costs and expenses
that you would bear directly or indirectly as an investor
in the Portfolios.
EACH PORTFOLIO
CHARGES A
TRANSACTION FEE The Emerging Markets Portfolio assesses a portfolio
transaction fee on purchases of Portfolio shares equal to
2% of the dollar amount invested; the European, Pacific
and Total International Portfolios assess a portfolio
transaction fee on purchases of Portfolio shares equal to
1% of the dollar amount invested. In all four Portfolios,
the Portfolio transaction fee is paid to the respective
Portfolio, not to Vanguard. It is not a sales charge. The
fee applies to an initial investment in the Portfolio and
all subsequent purchases (including purchases made by
exchange from another Vanguard Fund or from other
Portfolios of the Vanguard International Equity Index or
Vanguard STAR Funds), but not to reinvested dividend or
capital gains
2
<PAGE> 5
distributions. The Portfolio transaction fee is deducted
automatically from the amount invested; it cannot be paid
separately.
EMERGING MARKETS
PORTFOLIO CHARGES
A 1% REDEMPTION
TRANSACTION FEE The Emerging Markets Portfolio also assesses a 1%
redemption transaction fee. This 1% charge applies to
redemptions or exchanges from the Portfolio. The 1% fee is
deducted from redemption or exchange proceeds and is paid
directly to the Portfolio, not to Vanguard. It is not a
contingent deferred sales charge.
The purpose of the transaction fee is to allocate
transaction costs associated with purchases and
redemptions to investors making those transactions, thus
insulating existing shareholders from those transaction
costs. These costs include: (1) brokerage costs; (2)
market impact costs -- i.e., the increase in market prices
which may result when the Portfolios purchase or sell
thinly traded stocks; and (3) the effect of the "bid-ask"
spread in international markets.
The fees represent Vanguard's estimate of the brokerage
and other transaction costs incurred by the Portfolios in
purchasing and selling international stocks. Without the
fee, each Portfolio would incur these costs directly,
resulting in reduced investment performance for all
shareholders of the Portfolio. With the fee, the
transaction costs of purchasing and selling international
stocks are borne not by all existing shareholders, but
only by those investors making transactions. Because the
purchaser, not the Portfolio, bears these costs, the
Portfolio is expected to track its benchmark index more
closely.
Transaction costs incurred when purchasing or selling
stocks of companies in emerging market countries are
extremely high. There are three components of transaction
costs -- brokerage fees, the difference between the
bid/asked spread and market impact. Each one of these
factors is significantly more expensive in emerging market
countries than in the United States, because of less
competition among brokers, lower utilization of technology
on the part of the exchanges and brokers, the lack of
derivative instruments and generally less liquid markets.
Consequently, brokerage commissions are high, bid/asked
spreads are wide and market impact is significant. In
addition to these customary costs, many of the countries
have exchange fees or stamp taxes.
EACH PORTFOLIO WILL
CHARGE A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio assesses an annual account maintenance fee
of $10 for each shareholder account. The purpose of the
$10 fee is to allocate part of the costs of maintaining
shareholder accounts equally to all accounts. This fee,
which is paid directly by shareholders, is deducted from
the Portfolio's annual dividend. See "Dividends, Capital
Gains and Taxes" for more information on this fee. The $10
fee amounts to 1.00% on a $1,000 investment in a
Portfolio, and 0.33% on a $3,000 investment. This fee will
be waived for shareholders with an account balance of
$10,000 or more.
3
<PAGE> 6
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. The expenses include portfolio
transaction fees.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
European Portfolio.... $23 $50 $77 $148
Pacific Portfolio..... $23 $50 $77 $148
Emerging Markets
Portfolio........... $-- $-- $-- $ --
Total International
Portfolio........... $-- $-- $-- $ --
</TABLE>
Included in these estimates are account maintenance fees
of $10, $30, $50 and $100, respectively, for the periods
shown. Accordingly, for investments larger than $1,000,
your total expenses will be substantially lower in
percentage terms than this illustration implies.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
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4
<PAGE> 7
FINANCIAL
HIGHLIGHTS The following financial highlights of the Portfolios for a
share outstanding throughout each period have been audited
by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. This information should be
read in conjunction with the Fund's financial statements
and notes thereto, which, together with the remaining
portions of the Fund's 1994 Annual Report to Shareholders,
are incorporated by reference in the Statement of
Additional Information and in this Prospectus, and which
appear, along with the report of Price Waterhouse LLP, in
the Fund's 1994 Annual Report and Semi-Annual Report to
Shareholders. The information for the six months ended
June 30, 1995 is unaudited. For a more complete discussion
of the Fund's performance, please see the Fund's 1994
Annual Report and Semi-Annual Report to Shareholders which
may be obtained without charge by writing to the Fund or
by calling our Investor Information Department at
1-800-662-7447.
<TABLE>
<CAPTION>
---------------------------------------------------------------
EUROPEAN PORTFOLIO
---------------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 1+ TO
SIX MONTHS ENDED --------------------------------- DEC. 31,
JUNE 30, 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............ $11.76 $11.88 $9.33 $9.92 $9.06 $10.00
------------ ------ ----- ----- ----- ---------
INVESTMENT OPERATIONS
Net Investment Income......................... .23 .28 .17 .25 .26 .16
Net Realized and Unrealized Gain (Loss) on
Investments................................. 1.41 (.06) 2.55 (.58) .86 (.94)
----------- ------ ----- ----- ----- --------
TOTAL FROM INVESTMENT OPERATIONS.......... 1.64 .22 2.72 (.33) 1.12 (.78)
- ----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.......... -- (.28) (.17) (.26) (.26) (.16)
Distributions from Realized Capital Gains..... -- (.06) -- -- -- --
----------- ------ ----- ----- ----- --------
TOTAL DISTRIBUTIONS....................... -- (.34) (.17) (.26) (.26) (.16)
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................. $13.40 $11.76 $11.88 $9.33 $9.92 $9.06
================================================================================================================
TOTAL RETURN(1)................................. 13.95% 1.88% 29.13% (3.32)% 12.40% (7.23)%
================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............ $842 $715 $601 $256 $161 $96
Ratio of Expenses to Average Net Assets......... .32%* .32% .32% .32% .33% .40%*
Ratio of Net Investment Income to Average Net
Assets........................................ 3.70%* 2.41% 2.05% 3.05% 3.06% 3.68%*
Portfolio Turnover Rate......................... 3%* 6% 4% 1% 15%** 3%
</TABLE>
* Annualized.
** Portfolio turnover rate for 1991 excluding in-kind redemptions was
3% for the European Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases
or the annual account maintenance fee of $10. Subscription period for
Portfolio was May 1, 1990, to June 17, 1990, during which time all
assets were held in money market instruments. Performance measurement
begins on June 18, 1990.
5
<PAGE> 8
<TABLE>
<CAPTION>
------------------------------------------------------------------
PACIFIC PORTFOLIO
------------------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 1+ TO
SIX MONTHS ENDED ------------------------------------ DEC. 31,
JUNE 30, 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD......... $11.31 $10.13 $7.56 $9.42 $8.56 $10.00
------------ ------ ----- ----- ----- ---------
INVESTMENT OPERATIONS
Net Investment Income...................... .06 .08 .06 .05 .05 .05
Net Realized and Unrealized Gain (Loss)
on Investments........................... (.71) 1.24 2.62 (1.76) .86 (1.44)
----------- ------ ----- ----- ----- ------
TOTAL FROM INVESTMENT OPERATIONS....... (.65) 1.32 2.68 (1.71) .91 (1.39)
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income....... (.01) (.08) (.06) (.05) (.05) (.05)
Distributions from Realized Capital
Gains.................................... -- (.06) (.05) (.10) -- --
----------- ------ ----- ----- ----- ---------
TOTAL DISTRIBUTIONS.................... (.01) (.14) (.11) (.15) (.05) (.05)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............... $10.65 $11.31 $10.13 $7.56 $9.42 $8.56
=================================================================================================================
TOTAL RETURN(1).............................. (5.75)% 13.04% 35.46% (18.17)% 10.65% (14.01)%
=================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)......... $700 $697 $493 $207 $84 $31
Ratio of Expenses to Average Net Assets...... .32%* .32% .32% .32% .32% .35%*
Ratio of Net Investment Income to Average
Net Assets................................. 1.12%* .71% .75% .92% .70% 1.02%*
Portfolio Turnover Rate...................... 1%* 4% 7% 3% 21%** 2%
</TABLE>
* Annualized.
** Portfolio turnover rate for 1991 excluding in-kind redemptions was
1% for the Pacific Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases
or the annual account maintenance fee of $10. Subscription period for
Portfolio was May 1, 1990, to June 17, 1990, during which time all
assets were held in money market instruments. Performance measurement
begins on June 18, 1990.
6
<PAGE> 9
<TABLE>
<CAPTION>
---------------------------------
EMERGING MARKETS PORTFOLIO
---------------------------------
SIX MONTHS ENDED MAY 4, 1994+,
JUNE 30, 1995 TO DEC. 31, 1994
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD....................................... $10.87 $10.00
INVESTMENT OPERATIONS
Net Investment Income.................................................... .14 .06
Net Realized and Unrealized Gain (Loss) on Investments................... (.14) .92
----------- -----------
TOTAL FROM INVESTMENT OPERATIONS..................................... -- .98
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..................................... -- (.07)
Distributions from Realized Capital Gains................................ -- (.04)
----------- -----------
TOTAL DISTRIBUTIONS.................................................. -- (.11)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................................. $10.87 $10.87
===============================================================================================================
TOTAL RETURN**............................................................. 0.00% 9.81%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)....................................... $157 $83
Ratio of Expenses to Average Net Assets.................................... .60%* .60%*
Ratio of Net Investment Income to Average Net Assets....................... 3.36%* 1.32%*
Portfolio Turnover Rate.................................................... 2%* 6%
* Annualized.
** Total return does not reflect the 2% transaction fee on purchases, the 1% transaction fee on
redemptions, or the annual account maintenance fee of $10. Subscription period for Portfolio was April
18, 1994, to May 3, 1994, during which time all assets were held in money market instruments.
Performance measurement begins on May 4, 1994.
+ Commencement of operations.
</TABLE>
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YIELD AND TOTAL
RETURN From time to time each Portfolio may advertise its yield
and total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of a
Portfolio refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Portfolio (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all
dividend and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on a Portfolio's securities; it is
net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that the net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by the Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to your
own account.
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7
<PAGE> 10
INVESTMENT
OBJECTIVE
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The European Portfolio attempts to match the performance
of the Morgan Stanley Capital International
(MSCI) -- Europe (Free) Index, which is made up of common
stocks of companies located in 14 European countries (the
United Kingdom, Germany, France, Switzerland, Netherlands,
Italy, Sweden, Spain, Belgium, Denmark, Finland, Austria,
Ireland, and Norway).
The Pacific Portfolio tries to parallel the performance of
the Morgan Stanley Capital International (MSCI) -- Pacific
(Free) Index, which consists of common stocks of companies
located in Australia, Hong Kong, Japan, Malaysia, New
Zealand, and Singapore.
By combining the European and Pacific Portfolios in the
right proportions, you can create a portfolio that seeks
to match the performance of another international stock
market index. The Morgan Stanley Capital International
(MSCI) Europe, Australia, and Far East (Free) Index, also
known as the "EAFE" Index, is a broadly diversified
benchmark made up of more 1,000 companies located outside
the United States. As of December 31, 1995, the
MSCI -- Pacific Index represented some XX% of the EAFE,
while the MSCI -- Europe Index represented the remaining
XX%.
The Emerging Markets Portfolio seeks to track the
performance of the Morgan Stanley Capital International
(MSCI) -- Select Emerging Markets (Free) Index, which is
made up of common stocks of companies located in 12
emerging markets of Europe, Asia, and Latin America
(Malaysia, Brazil, Hong Kong, Thailand, Mexico, Indonesia,
Singapore, Argentina, Philippines, Greece, Turkey,
Portugal).
The Total International Portfolio seeks to match the
performance of the Morgan Stanley Capital International
(MSCI) -- Europe, Australia, and Far East + Emerging
Markets (Free) Index (also known as the MSCI -- EAFE + EMF
Index) -- by investing the Portfolio's assets in a
combination of Vanguard European, Pacific, and Emerging
Markets Portfolios.
The Portfolios are neither sponsored by nor affiliated
with Morgan Stanley Capital International.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THREE PORTFOLIOS USE A
"PASSIVE" APPROACH TO
INVEST IN INTERNATIONAL
STOCKS
The European, Pacific, and Emerging Markets Portfolios are
not managed according to traditional methods of "active"
investment management, which involve the buying and
selling of securities based upon economic, financial and
market analysis and investment judgment. Instead, the
Portfolios, utilizing a "passive" or indexing investment
approach, attempt to approximate the investment
performance of their respective indexes through
statistical procedures. The Fund is managed without regard
to tax ramifications.
The European Portfolio invests in a statistically selected
sample of approximately 545 stocks included in the
MSCI -- Europe (Free) Index, an index of equity securities
of companies located in fourteen European countries. Three
countries, the United Kingdom, Germany and France,
dominate MSCI -- Europe (Free), with 35%, 14%, and 13% of
the market capitalization of the Index, respectively, as
of December 31, 1994. The 11 other countries are
individually much less significant to
8
<PAGE> 11
the Index and, consequently, the Portfolio. The "Free"
Index includes only shares that U.S. investors are "free"
to purchase.
The Pacific Portfolio invests in a statistically selected
sample of the more than 440 stocks included in the
MSCI -- Pacific (Free) Index, an index of equity
securities of Pacific Basin companies. The MSCI -- Pacific
(Free) Index is dominated by the Japanese stock market,
which represented 83% of the market capitalization of the
Index as of December 31, 1994.
The Emerging Markets Portfolio invests in a statistically
selected sample of approximately 300 stocks included in
the MSCI -- Select Emerging Markets Free Index, an index
of equity securities of companies located in the countries
of 12 emerging markets. Three countries, Malaysia, Brazil
and Hong Kong, represent a majority of the MSCI -- Select
Emerging Markets Free Index, with 19%, 18% and 13% of the
market capitalization of the index, respectively, as of
December 31, 1994. The twelve countries of the Index and
their percentage weightings as of December 31, 1994 were:
<TABLE>
<S> <C> <C> <C>
Greece....................1.4% Hong Kong.....................13.3%
Portugal..................1.6% Indonesia......................5.2%
Turkey....................1.6% Malaysia......................19.4%
EUROPE....................4.6% Philippines (Free).............4.1%
Singapore......................6.7%
Argentina.................4.3% Thailand......................13.0%
Brazil...................17.6% ASIA..........................61.7%
Mexico (Free)............11.8%
LATIN AMERICA............33.7%
</TABLE>
The Index includes only shares that U.S. investors are
"free" or allowed by law, to purchase and sell and that
have sufficient trading liquidity.
The three Portfolios are each expected to invest in
approximately 250 stocks or more. Stocks are selected for
inclusion in each Portfolio based on country, market
capitalization, industry weightings, and fundamental
characteristics such as return variability, earnings
valuation, and yield. Each Portfolio is constructed to
have aggregate investment characteristics similar to those
of its respective index. In order to parallel the
performance of its respective index, each Portfolio will
invest in each country in approximately the same
percentage as the country's weight in the index.
The Total International Portfolio allocates its assets
among the European, Pacific and Emerging Markets
Portfolios in proportions that reflect the composition of
the MSCI -- EAFE + EMF Index. If the Portfolio had been
in operation as of December 31, 1995, the Portfolio would
have invested approximately 45% of its assets in the
European Portfolio, 45% in the Pacific Portfolio and 10%
in the Emerging Markets Portfolio.
Each Portfolio's policy is to remain fully invested in
common stocks. Under normal circumstances at least 80% of
the assets of each Portfolio will be invested in stocks
that are represented in its respective index. Each
Portfolio may invest in certain short-term fixed income
securities such as cash reserves, although cash or cash
equivalents are normally expected to represent less than
1% of each Portfolio's
9
<PAGE> 12
assets. Each Portfolio may also invest up to 50% of its
assets in stock futures contracts, options, and warrants
in order to invest uncommitted cash balances, maintain
liquidity to meet shareholder redemptions, or minimize
trading costs. Any investment in futures contracts,
options, warrants, convertible securities or swap
agreements over 20% of each Portfolio's assets would be
made in emergency situations, for short-term purposes.
The Portfolios will not invest in cash reserves, futures
contracts, options or warrants as part of a temporary
defensive strategy, such as lowering a Portfolio's
investment in common stocks, to protect against potential
stock market declines. The Portfolios intend to remain
fully invested, to the extent practicable, in a pool of
securities which will approximate the investment
characteristics of their respective indexes. The
Portfolios may also enter into forward foreign currency
exchange contracts in order to maintain the same currency
exposure as their respective indexes, but not as part of a
defensive strategy to protect against fluctuations in
exchange rates. See "Implementation of Policies" for a
description of these and other investment practices of the
Portfolios.
The investment objective and policies of the Funds are not
fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material change
in either.
- --------------------------------------------------------------------------------
INVESTMENT
RISKS As mutual funds investing in common stocks, the Portfolios
are subject to market risk -- i.e., the possibility that
stock prices will decline over short or even extended
periods. Both U.S. and foreign stock markets tend to be
cyclical, with periods when stock prices generally rise
and periods when stock prices generally decline.
INTERNATIONAL STOCKS
MAY EXHIBIT GREATER
VOLATILITY THAN
U.S. STOCKS Investments in foreign stock markets can be as volatile,
if not more volatile, than investments in U.S. markets. To
illustrate the volatility of foreign stock market returns
for the U.S. dollar-based investor, the table below sets
forth the extremes of foreign stock market returns, as
well as average annual returns, for the period from 1970
to 1995, as measured by the MSCI -- Europe, Australia, and
Far East Index and as calculated for a U.S. dollar
investor.
<TABLE>
<CAPTION>
AVERAGE INTERNATIONAL STOCK MARKET RETURNS
(1970-1995)
------------------------------------------
MSCI --
EAFE 1 YEAR 5 YEARS 10 YEARS
------- ------ ------- --------
<S> <C> <C> <C>
Best +--% +--% +--%
Worst -- -- +--
Average +-- +-- +--
</TABLE>
As shown, the MSCI -- EAFE Index has provided annual total
returns, averaging +--% for all 10-year periods from
1970-1995. Note, however, that the period from 1970 to
1995 was a very favorable one for foreign stock market
investing. The figures on total return and stock market
volatility are provided here only as a guide
10
<PAGE> 13
to potential market risk, and may not be useful for
forecasting future returns in any particular period.
This table on international stock market returns should
not be viewed as a representation of future returns for
international stocks or the Portfolios, as historical
performance may be a poor guide to future returns, and the
Indexes shown do not reflect "real world" transaction
costs and other expenses.
THE JAPANESE STOCK
MARKET IS A MAJOR
COMPONENT OF THE
PACIFIC INDEX Investors should realize that Japanese securities
comprised --% of the MSCI -- Pacific (Free) Index as of
December 31, 1995, and that therefore stocks of Japanese
companies will represent a correspondingly large component
of the Pacific Portfolio's investment assets. Such a large
investment in the Japanese stock market may entail a
higher degree of risk than with more diversified
international portfolios, especially considering that by
fundamental measures of corporate valuation, such as its
high price-earnings ratios and low dividend yields, the
Japanese market as a whole may appear expensive relative
to other world stock markets.
STOCKS FROM THREE
COUNTRIES DOMINATE
THE EUROPE (FREE)
INDEX Stocks from the United Kingdom, Germany and France
comprised --%, --% and --% of the MSCI -- Europe (Free)
Index, respectively, as of December 31, 1995. The
remaining 11 countries in the MSCI -- Europe (Free) Index
have much less significant capitalization weightings in
the Index and will therefore have much less impact on the
total return of the Index and the European Portfolio.
EMERGING MARKETS
MAY EXHIBIT GREATER
VOLATILITY THAN
DEVELOPED MARKETS Investors should be aware that emerging markets can be
substantially more volatile than both U.S. and more
developed foreign markets. For example, from 1989-1995,
the average positive monthly return for the Wilshire 5000
Index, a broad measure of the US equity market was +--%.
The average negative monthly return for the Wilshire 5000
Index was ---%. In contrast, from 1989-1995, the average
positive monthly return of the Morgan Stanley Capital
International Emerging Markets Free Index, a widely quoted
emerging market benchmark, was +--%; while the average
negative monthly return was ---%.
INVESTMENT ILLIQUIDITY
RISK Volatility in emerging markets may be exacerbated by
illiquidity. Average daily trading volume in all of the
emerging markets combined is a small fraction of the
average daily volume of the US market. Small trading
volumes may result in investors being forced to purchase
securities at substantially higher prices than the current
market, or sell securities at much lower prices than the
current market.
INTERNATIONAL STOCKS
ALSO EXPOSE INVESTORS
TO CURRENCY AND
OTHER RISKS For U.S. investors, the returns of foreign investments,
such as those held by the Portfolios, are influenced by
not only the returns on foreign common stocks themselves,
but also by the returns on the currencies in which the
stocks are denominated. Currency risk is the risk that
changes in foreign exchange rates will affect, favorably
or unfavorably, the value of foreign securities held by a
Portfolio. In a period when the U.S. dollar generally
rises against foreign currencies, the returns on foreign
stocks for a U.S. investor will be diminished. By
contrast, in a period when the U.S. dollar generally
declines, the returns on foreign stocks will be enhanced.
Other risks and considerations of international investing
include: differences in accounting, auditing and financial
reporting standards; generally higher transac-
11
<PAGE> 14
tion costs on foreign portfolio transactions; small
trading volumes and generally lower liquidity of foreign
stock markets, which may result in greater price
volatility; foreign withholding taxes payable on a
Portfolio's foreign securities, which may reduce dividend
income payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse change in
investment or exchange control regulations; difficulty in
obtaining a judgement from a foreign court; political
instability which could affect U.S. investment in foreign
countries; and potential restriction on the flow of
international capital.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST
LONG-TERM INVESTORS
SEEKING TO INVEST
IN INTERNATIONAL
COMMON STOCKS The Portfolios are designed for investors who seek a
low-cost "passive" approach for investing in a broadly
diversified portfolio of international common stocks.
Unlike other equity mutual funds, which generally seek to
"beat" market averages with often unpredictable results,
the Portfolios of the Fund seek to "match" their
respective indexes and thus are expected to provide a
predictable return relative to their respective
benchmarks.
The share prices of the Portfolios are expected to be
volatile, and investors should be able to tolerate sudden,
sometimes substantial fluctuations in the value of their
investment. No assurance can be given that a Portfolio
will achieve its stated objective or that shareholders
will be protected from the risks inherent in equity
investing. Investors may wish to minimize the timing risk
of investing in a Portfolio by purchasing shares on a
periodic basis (dollar-cost averaging) rather than
investing in one lump sum.
Because of the risks associated with international common
stock investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term market
movements. Investors who engage in excessive account
activity generate additional costs which are borne by all
of the Portfolio's shareholders. In order to minimize such
costs the Portfolios have adopted the following policies.
The Portfolios reserve the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the
timing of the investment or previous excessive trading by
the investor. Additionally, the Portfolios have adopted
exchange privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Portfolios
reserve the right to suspend the offering of its shares.
Investors should not consider the Portfolios a complete
investment program, but should maintain holdings of
securities with different risk characteristics --
including U.S. common stocks, bonds and money market
instruments.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES
THE PORTFOLIOS INVEST
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES The Portfolios utilize a number of investment practices in
an effort to parallel the investment performance of their
respective indexes.
The MSCI -- Europe (Free) Index consists of approximately
590 equity securities from Europe, the MSCI -- Pacific
(Free) Index consists of more than 520 equity securities
from Australia and the Far East, and the MSCI -- Select
Emerging Markets (Free) Index consists of some 500 stocks
from Southeast Asia, Latin
12
<PAGE> 15
America, and Europe. The stocks included in each index are
chosen by Morgan Stanley Capital International on a
statistical basis. Each stock in MSCI -- Europe (Free),
MSCI -- Pacific (Free), and MSCI Select Emerging Markets
is weighted according to its market value as a percentage
of the total market value of all stocks in the index. (A
stock's market value equals the number of shares
outstanding times the most recent price of the security.)
The inclusion of a stock in the index in no way implies
that Morgan Stanley Capital International believes the
stock to be an attractive investment.
The European, Pacific, and Emerging Markets Portfolios
will be unable to hold all of the issues that comprise
their respective indexes because of the costs involved and
the illiquidity of many of the securities. Instead, each
Portfolio will attempt to hold a representative sample of
approximately 250 or more of the securities in its
respective Index, which will be selected utilizing a
statistical technique known as "portfolio optimization."
Under this technique, each stock is considered for
inclusion in the Portfolio based on its contribution to
certain country, capitalization, industry, and fundamental
investment characteristics. Each Portfolio is constructed
so that, in the aggregate, each Portfolio's country,
capitalization, industry, and fundamental investment
characteristics resemble those of its respective Index.
Over time, portfolio composition is altered (or
"rebalanced") to reflect changes in the characteristics of
the Indexes.
In addition, because the Pacific and Emerging Markets
Portfolios both contain stocks from Malaysia, Singapore,
and Hong Kong, the Total International Portfolio will have
more stocks from those countries, relative to its
benchmark, the MSCI -- EAFE + EMF Index.
Due to the use of this sampling or "portfolio
optimization" technique, the Portfolios are not expected
to track their benchmark indexes with the same degree of
accuracy as large capitalization domestic index funds.
Over time, the correlation between the performance of each
Portfolio and its respective index is expected to be
greater than 0.95. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net
asset value of each Portfolio, including the value of its
dividend and capital gains distributions, increases or
decreases in exact proportion to changes in its respective
index.
EACH PORTFOLIO MAY
INVEST IN SHORT-TERM
FIXED INCOME
SECURITIES Although each Portfolio's policy is to remain
substantially fully invested in common stocks, the
Portfolios may invest temporarily in certain short-term
fixed income securities. Such securities may be used to
invest uncommitted cash balances or to maintain liquidity
to meet shareholder redemptions. These securities include:
obligations of the United States Government and its
agencies or instrumentalities; commercial paper (rated
Prime-1 by Moody's Investors Services, Inc. or A-1 by
Standard & Poor's Corporation), bank certificates of
deposit and bankers' acceptances; and repurchase
agreements collateralized by these securities.
13
<PAGE> 16
EACH PORTFOLIO MAY
USE FUTURES CONTRACTS,
OPTIONS AND WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS The Portfolios may utilize stock futures contracts,
options, warrants, convertible securities and swap
agreements to a limited extent. Specifically, each
Portfolio may enter into futures contracts and options
provided that not more than 5% of its assets are required
as a margin deposit for futures contracts or options.
Additionally, the Fund's investment in warrants will not
exceed more than 5% of its assets (2% with respect to
warrants not listed on the New York or American Stock
Exchanges). Futures contracts, options, warrants,
convertible securities and swap agreements may be used for
several reasons: to simulate full investment in the
underlying Index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce
transaction costs or to seek higher investment returns
when a futures contract, option, warrant, convertible
security or swap agreement is priced more attractively
than the underlying equity security or index. While each
of these securities can be used as leveraged investments,
the Portfolios may not use them to leverage its net
assets.
FUTURES CONTRACTS,
OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS
POSE CERTAIN RISKS The risk of loss associated with 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 an immediate and substantial loss or gain.
However, the Portfolios will not use futures contracts,
options, warrants, convertible securities and swap
agreements for speculative purposes or to leverage their
net assets. Accordingly, the primary risks associated with
the use of futures contracts, options, warrants,
convertible securities and swap agreements by the
Portfolios are: (i) imperfect correlation between the
change in market value of the stocks held by a Portfolio
and the prices of futures contracts, options, warrants,
convertible securities and swap agreements; and (ii)
possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those
contracts whose behavior is expected to resemble that of a
Portfolio's underlying securities. The risk that a
Portfolio will be unable to close out a futures position
will be minimized by entering into such transactions on an
exchange with an active and liquid secondary market.
However options, warrants, convertible securities and swap
agreements purchased or sold over-the-counter may be less
liquid than exchange traded securities. Illiquid
securities, in general, including swap agreements, may not
represent more than 15% of the net assets of a Portfolio
of the Fund.
Since there are no futures traded on the MSCI indexes, it
will be necessary for the Portfolios to utilize a
composite of other futures contracts to simulate the
performance of the Indexes. This process may magnify the
"tracking error" of a Portfolio's performance compared to
that of its Index, due to lower correlation of the
selected futures with its Index. The investment adviser
will attempt to reduce this tracking error by investing in
futures contracts whose behavior is expected to resemble
that of the underlying securities, although there can be
no assurance that these selected futures will perfectly
correlate with the performance of any Index.
14
<PAGE> 17
Swap agreements are contracts between parties in which one
party agrees to make payments to the other party based on
the change in market value of a specified index or asset.
In return, the other party agrees to make payments to the
first party based on the return of a different specified
index or asset. Although swap agreements entail the risk
that a party will default on its payment obligations
thereunder, the Portfolios will minimize this risk by
entering into agreements that mark to market no less
frequently than quarterly. Swap agreements also bear the
risk that the Portfolios will not be able to meet its
obligation to the counterparty. This risk will be
mitigated by investing the Portfolios in the specific
asset for which it is obligated to pay a return.
EACH PORTFOLIO MAY
ENTER INTO FORWARD
CURRENCY CONTRACTS Each Portfolio may enter into foreign currency forward and
foreign currency futures contracts in order to maintain
the same currency exposure as their respective indexes. A
Portfolio may not enter into such contracts for
speculative purposes, or as a way of protecting against
anticipated adverse changes in exchange rates between
foreign currencies and the U.S. dollar. A foreign currency
forward contract is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the
contract.
EACH PORTFOLIO MAY
LEND ITS SECURITIES Each Portfolio may lend its investment securities to
qualified institutional investors for either short-term or
long-term purposes of realizing additional income. Loans
of securities by the Portfolios will be collateralized by
cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market
value of the loaned securities.
PORTFOLIO TURNOVER IS
EXPECTED TO BE LOW Although the Portfolios generally seek to invest for the
long term, the Portfolios retain the right to sell
securities irrespective of how long they have been held.
However, because of the "passive" investment management
approach of the Fund, the portfolio turnover rate for each
Portfolio is expected to be under 50%, a generally lower
turnover rate than for most other investment companies. A
portfolio turnover rate of 50% would occur if one half of
a Portfolio's securities were sold within one year.
Ordinarily, securities will be sold from a Portfolio only
to reflect certain administrative changes in an index
(including mergers or changes in the composition of an
index) or to accommodate cash flows out of the Portfolio
while maintaining the similarity of the Portfolio to its
benchmark index.
EACH PORTFOLIO MAY
BORROW MONEY Each Portfolio may borrow money from a bank up to a limit
of 15% of the market value of its assets, but only for
temporary or emergency purposes. A Portfolio may borrow
money only to meet redemption requests prior to the
settlement of securities already sold or in the process of
being sold by the Portfolio. To the extent that a
Portfolio borrows money prior to selling securities, the
Portfolio may be leveraged; at such times, the Portfolio
may appreciate or depreciate in value more rapidly than
its benchmark index. Each Portfolio will repay any money
borrowed in excess of 5% of the market value of its total
assets prior to purchasing additional portfolio
securities.
- --------------------------------------------------------------------------------
15
<PAGE> 18
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS Each Portfolio has adopted certain limitations on its
investment practices. Specifically, each Portfolio will
not:
(a) with respect to 75% of its assets, purchase securities
of any issuer (except obligations of the U.S.
Government and its instrumentalities) if, as a result,
more than 5% of the value of the Portfolio's assets
would be invested in the securities of such issuer;
(b) purchase more than 10% of the voting securities of any
issuer;
(c) invest more than 25% of its assets in any one
industry; and
(d) borrow money except from banks for temporary or
emergency purposes and in no event in excess of 15% of
the market value of its total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information for each Fund may be changed only with the
approval of a majority of a Fund's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUNDS Vanguard International Equity Index Fund is a member of
The Vanguard Group of Investment Companies, a family of
more than 30 investment companies with more than 90
distinct investment portfolios and total assets in excess
of $170 billion. Through their jointly-owned subsidiary,
The Vanguard Group, Inc. ("Vanguard"), the Fund and the
other funds in the Group obtain at cost virtually all of
their corporate management, administrative and
distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard
funds. As a result of Vanguard's unique corporate
structure, the Vanguard funds have costs substantially
lower than those of most competing mutual funds. In 1995,
the average expense ratio (annual costs including advisory
fees divided by total net assets) for the Vanguard funds
amounted to approximately --% compared to an average of
--% for the mutual fund industry (data provided by Lipper
Analytical Services).
Vanguard Total International Portfolio is an independent
series of Vanguard STAR Fund. The Portfolio operates under
a separate service agreement and, to the extent that its
assets are composed of shares of other Vanguard Funds, it
will bear no expenses.
The Officers of the Funds manage their day-to-day
operations and are responsible to the Funds' Board of
Directors (Trustees). The Directors (Trustees) set broad
policies for the Funds and choose the Officers. A list of
the Directors (Trustees) and Officers of the Funds and a
statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel to provide the requisite services
to the funds and also furnishes the funds with necessary
office space, furnishings and equipment. Each fund pays
its share of Vanguard's net expenses, which are allocated
among the funds under methods approved by the Board of
Directors (Trustees) of each fund. In addition, each fund
bears its own direct expenses, such as legal, auditing and
custodian fees.
16
<PAGE> 19
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its own share of the Group's
distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER
VANGUARD MANAGES
THE FUNDS ON AN
AT-COST BASIS The Funds receive all investment advisory services on an
at-cost basis from Vanguard Core Management Group, which
also provides investment advisory services to Vanguard
Index Trust, Vanguard Balanced Index Fund, Vanguard
Institutional Index Fund, a portion of the assets of
Vanguard/Windsor II and Vanguard Morgan Growth Fund, the
Equity Index Portfolio of Vanguard Variable Insurance
Fund, Vanguard Tax-Managed Fund, the Aggressive Growth
Portfolio of Vanguard Horizon Fund, and several indexed
separate accounts. Total indexed assets under management
as of December 31, 1995, were $-- billion. The Portfolios
of the Fund are not actively managed, but are instead
administered by the Core Management Group using
computerized, quantitative techniques. The Group is
supervised by the Officers of the Funds.
In placing portfolio transactions, Vanguard Core
Management Group uses its best judgment to choose the
broker most capable of providing the brokerage services
necessary to obtain the best available price and most
favorable execution at the lowest commission rate. The
full range and quality of brokerage services available are
considered in making these determinations. In those
instances where it is reasonably determined that more than
one broker can offer the services needed to obtain the
best available price and most favorable execution,
consideration may be given to those brokers which supply
statistical information and provide other services in
addition to execution services to the Fund.
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
DIVIDENDS AND ANY
CAPITAL GAINS WILL BE
PAID ANNUALLY Each Portfolio intends to distribute substantially all of
its ordinary income in the form of dividends. The
Portfolios pay annual dividends. Capital gains
distributions, if any, are also made annually.
Each Portfolio's dividend and capital gains distributions
may be reinvested in additional shares or received in
cash. See "Choosing a Distribution Option" for a
description of these distribution methods.
In order to satisfy certain distribution requirements of
the Tax Reform Act of 1986, each Portfolio may declare
special year-end dividend and capital gain distributions
during December. Such distributions, if received by
shareholders by January 31, are deemed to have been paid
by each Portfolio and received by shareholders on December
31 of the prior year.
EACH PORTFOLIO WILL
CHARGE A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio will automatically deduct a $10 annual
account maintenance fee from the dividend income of each
Portfolio account on an annual basis. If the dividend to
be paid to an account is less than the fee to be deducted,
sufficient shares will be redeemed from an account to make
up the difference. The Board of Directors reserves the
right to change the annual account maintenance fee to
reflect the actual cost of maintaining smaller shareholder
accounts. For federal tax purposes, the account
maintenance fee does not reduce dividend income and is
treated as an investment expense by each shareholder
(deductible as a miscellane-
17
<PAGE> 20
ous itemized deduction in the case of individual
investors). This fee will be waived for shareholders with
an account balance of $10,000 or more.
Each Portfolio intends to continue to qualify for taxation
as a "regulated investment company" under the Internal
Revenue Code so that it will not be subject to federal
income tax to the extent its income is distributed to
shareholders. Dividends paid by each Portfolio from net
investment income and net short-term capital gains,
whether received in cash or reinvested in additional
shares, will be taxable to shareholders as ordinary
income. For corporate investors, dividends from net
investment income will not generally qualify for the
intercorporate dividends-received deduction.
Distributions paid by a Portfolio from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital gains,
regardless of the length of time you have owned shares in
a Portfolio. Capital gains distributions are made when a
Portfolio realizes net capital gains on sales of portfolio
securities during the year. A Portfolio does not seek to
realize any particular amount of capital gains during a
year; rather, realized gains are a by-product of portfolio
management activities. Consequently, capital gains
distributions may be expected to vary considerably from
year to year; there will be no capital gains distributions
in years when a Portfolio realizes net capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the capital
at work for you in a Portfolio. Also, keep in mind that if
you purchase shares in a Portfolio shortly before the
record date for a dividend or capital gains distribution,
a portion of your investment will be returned to you as a
taxable distribution, regardless of whether you are
reinvesting your distributions or receiving them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by each
Portfolio.
THREE PORTFOLIOS MAY
"PASS THROUGH"
FOREIGN TAXES The European, Pacific, and Emerging Markets Portfolios may
elect to "pass through" to its shareholders the amount of
foreign income taxes paid by a Portfolio. The Portfolios
will make such an election only if it is deemed to be in
the best interests of the shareholders. If this election
is made, shareholders of a Portfolio will be required to
include in their gross income their pro rata share of
foreign taxes paid by the Portfolio. However, shareholders
will be able to treat their pro rata share of foreign
taxes as either an itemized deduction or a foreign tax
credit against U.S. income taxes (but not both) on their
federal income tax return.
Total International Portfolio shareholders should be aware
that any foreign tax credit would not pass through to
investors because this Portfolio holds shares of the
European, Pacific and Emerging Markets Portfolios which
are U.S. companies. Because the Total International
Portfolio does not hold shares of foreign securities it
cannot pass through the foreign tax credit to its
investors.
18
<PAGE> 21
A CAPITAL GAIN OR LOSS
MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio is a taxable event, and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of shares
or an exchange of shares between two mutual funds (or two
portfolios of a mutual fund). You are responsible for
calculating any capital gains or losses realized upon
redemption or exchange of a Portfolio's shares.
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
Each Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or Employer
Identification number and by certifying that you are not
subject to backup withholding.
Vanguard International Equity Index Fund has obtained a
certificate of authority to do business as a foreign
corporation in Pennsylvania and does business and
maintains an office in that state. In the opinion of
counsel, shares of the Fund will be exempt from
Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE OF
EACH PORTFOLIO The share price or "net asset value per share" of each
Portfolio is determined by dividing the total market value
of the Portfolio's investments and other assets, less any
liabilities, by the number of outstanding shares of the
Portfolio. Portfolio securities are valued at the last
quoted sales price on the day the valuation is made. Price
information on listed securities is taken from the
exchange where the security is primarily traded.
Securities regularly traded in the over-the-counter market
are valued at the latest quoted bid price. Other assets
and securities for which no quotations are readily
available are valued at fair value as determined in good
faith by the Directors. Securities may be valued on the
basis of prices provided by a pricing service when such
prices are believed to reflect the fair market value of
such securities. All assets and liabilities initially
expressed in foreign currencies will be translated into
U.S. dollars using the officially quoted daily exchange
rates determined by Morgan Stanley Capital International
in the calculation of their Europe, Australia and Far East
Index. This officially quoted daily exchange rate may be
determined by Morgan Stanley Capital International prior
to or after the close of a particular foreign securities
market. If such quotations are not available, the rate of
exchange will be determined in accordance with policies
established by the Board of Directors.
Generally, trading in foreign securities is completed each
day prior to the close of regular trading on the New York
Stock Exchange (generally 4:00 p.m. Eastern time). The
values of foreign securities held by each Portfolio are
typically determined as of the close of trading of foreign
securities in their respective markets. If events which
materially affect the value of a Portfolio's investments
occur after the close of the
19
<PAGE> 22
securities markets on which such securities are primarily
traded, those investments will be priced at "fair value"
as described above.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund is organized as a Maryland corporation. The
Articles of Incorporation permit the Directors to issue
1,500,000,000 shares of common stock with a $.001 par
value. The Board of Directors has the power to designate
one or more classes ("series") of shares of common stock
and to classify or reclassify any unissued shares with
respect to such series. Currently the Fund is offering
shares of three series.
The shares of each series are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose. Annual meetings of shareholders will not be held
except as required by the Investment Company Act of 1940
and other applicable law. An annual meeting will be held
to vote on the removal of a Director or Directors of the
Fund if requested in writing by the holders of not less
than 10% of the outstanding shares of the Fund.
The Total International Portfolio is an independent
series of Vanguard STAR Fund, a Pennsylvania business
trust.
All securities and cash for the European, Pacific and
Emerging Markets Portfolios are held by Morgan Stanley
Trust Company. Securities and cash for the Total
International Portfolio are held by CoreStates. The
Vanguard Group, Inc., Valley Forge, PA, serves as the
Funds Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountant for the
Funds and will audit their financial statements annually.
The Funds are not involved in any litigation.
- --------------------------------------------------------------------------------
20
<PAGE> 23
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement for each Portfolio ($1,000
for Uniform Gifts/Transfers to Minors Act accounts). You
must open a new Individual Retirement Account by mail
(IRAs may not be opened by wire) using a Vanguard IRA
Adoption Agreement. Your purchase must be equal to or
greater than the $1,000 minimum initial investment
requirement, but no more than $2,000 if you are making a
regular IRA contribution. Rollover contributions are
generally limited to the amount withdrawn within the past
60 days from an IRA or other qualified Retirement Plan. If
you need assistance with the forms or have any questions
about the Fund, please call our Investor Information
Department (1-800-662-7447). NOTE: For other types of
account registrations (e.g., corporations, associations,
other organizations, trusts or powers of attorney), please
call us to determine which additional forms you may need.
The shares of each Portfolio are purchased at the
next-determined net asset value after your investment has
been received. The Fund is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
PURCHASE
RESTRICTIONS 1) Because of the risks associated with common stock
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term
market movements. Consequently, the Fund reserves the
right to reject any specific purchase (and exchange
purchase) request. The Fund also reserves the right to
suspend the offering of shares for a period of time.
2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable to The Vanguard Group.
IMPORTANT NOTE
ON EXPENSES The Emerging Markets Portfolio assesses a 1% transaction
fee on redemptions. Each Portfolio assesses a transaction
fee (2% for the Emerging Markets Portfolio, and 1% for the
European, Pacific and Total International Portfolios) as
well as a $10 annual account maintenance fee. The $10
annual account maintenance fee will be waived for
shareholders with an account balance of $10,000 or more.
See "Portfolio Expenses."
ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made by
mail ($100 minimum), wire ($1,000 minimum), written
exchange from another Vanguard Fund account ($100
minimum), or Vanguard Fund Express. Subsequent investments
to Individual Retirement Accounts may be made by mail
($100 minimum) or exchange from another Vanguard Fund
account. In some instances, contributions may be made by
wire or Vanguard Fund Express. Please call us for more
information on these options.
- --------------------------------------------------------------------------------
21
<PAGE> 24
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment on the include the Invest-by-Mail
Complete and sign the registration form, make your remittance form attached to your
enclosed Account check payable to The Vanguard Fund confirmation statements.
Registration Form Group-(Portfolio Number), see Please make your check payable
below for appropriate Portfolio to The Vanguard Group-(Portfolio
number, and mail to: Number), see below for the
appropriate Portfolio number,
VANGUARD FINANCIAL CENTER write your account number on
P.O. BOX 2600 your check and, using the return
VALLEY FORGE, PA 19482 envelope provided, mail to the
address indicated on the Invest-
by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
VANGUARD INTERNATIONAL EQUITY INDEX FUND PORTFOLIOS:
European Portfolio -- 79 Emerging Markets Portfolio -- 533
Pacific Portfolio -- 72 Total International Portfolio -- --
</TABLE>
----------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES NO 01019897
wired to: ATTN VANGUARD
VANGUARD INTERNATIONAL EQUITY
BEFORE Wiring INDEX FUND
NAME OF PORTFOLIO
Please contact ACCOUNT NUMBER
Client Services ACCOUNT REGISTRATION
(1-800-662-2739)
You should notify our Client Services Department of your
intended wire purchase by 12:00 noon (Eastern time). To
assure proper receipt, please be sure your bank includes
the Portfolio name, the account number Vanguard has
assigned to you and the eight-digit CoreStates number. If
you are opening a new account, please complete the Account
Registration Form and mail it to the "New Account" address
above after completing your wire arrangement. Note:
Federal Funds wire purchase orders will be accepted only
when the Fund and Custodian Bank are open for business.
----------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) Telephone exchanges are not accepted for the Fund. You
may, however, open an account by exchange by providing the
appropriate information on the Account Registration Form.
The new account will have the same registration as the
existing account. The Fund reserves the right to refuse
any exchange purchase request.
----------------------------------------------------------
22
<PAGE> 25
PURCHASING BY
FUND EXPRESS
Automatic Investment The Fund Express Automatic Investment option lets you move
money automatically from your bank account to your
Vanguard account on the schedule (monthly, bimonthly
[every other month], quarterly or yearly) you select. To
establish this option, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express enrollment; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional shares. This option will be selected for you
automatically unless you specify one of the other
options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING
Under Federal tax laws, each Portfolio is required to
distribute net capital gains and dividend income to
Portfolio shareholders. These distributions are made to
all shareholders who own Portfolio shares as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain or income dividend distribution, you will be
assessed taxes on the amount of the capital gain and/or
dividend distribution later paid even though you owned the
Portfolio shares for just a short period of time. (Taxes
are due on the distributions even if the dividend or gain
is reinvested in additional Portfolio shares.) While the
total value of your investment will be the same after the
distribution -- the amount of the distribution will offset
the drop in the net asset value of the shares -- you
should be aware of the tax implications the timing of your
purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Portfolio's
annual dividend and capital gains distributions normally
occur in December. For additional information on
distributions and taxes, see the section titled
"Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
23
<PAGE> 26
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO
ADD OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD WITH
ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR
FURTHER ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request. If a
certificate is lost, you may incur an expense to replace
it.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Portfolios will not cancel any trade (e.g., purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.
ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
----------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire or exchange, and is received by the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time),
your trade date is the day of receipt. If your purchase is
received after the close of the Exchange, your trade date
is the next business day. All four Portfolios charge a
transaction fee on purchases (2% for the Emerging Markets
Portfolio, 1.1% for the Total International Portfolio, and
1% for the European and Pacific Portfolios). See
"Portfolio Expenses."
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. You generally may
initiate a request by writing or by telephoning. Your
redemption proceeds are normally mailed within two
business days after the receipt of the request in Good
Order.
----------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD INTERNATIONAL EQUITY INDEX FUND, P.O. BOX 1120,
VALLEY FORGE, PA 19482. (For express or registered mail,
send your request to Vanguard Financial Center, Vanguard
International Equity Index Fund, 455 Devon Park Drive,
Wayne, PA 19087.)
24
<PAGE> 27
The Emerging Markets Portfolio charges a 1% transaction
fee on all redemptions (including the sale of shares).
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received
all required documents in Good Order.
----------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required in the case of estates, corporations, trusts
and certain other accounts.
6. Any certificates that you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739).
----------------------------------------------------------
SELLING BY TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
PLEASE NOTE: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 10
calendar days following any expedited address change to
your account. An expedited address change is one that is
made by telephone, by Vanguard Online or, in writing,
without the signatures of all account owners. Please see
"Important Information About Telephone Transactions."
----------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic
Withdrawal With the Fund Express Automatic Withdrawal option, money
will be automatically moved from your Vanguard Fund
account to your bank account according to the schedule you
have selected. You may elect Fund Express on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Fund Express
Application.
----------------------------------------------------------
SELLING BY EXCHANGE You may sell shares by making an exchange to another
Vanguard Fund account. Exchanges to or from Vanguard
International Equity Index Fund may be made only by mail.
Please see "Exchanging Your Shares" for details.
----------------------------------------------------------
IMPORTANT
REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
----------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time) are processed on the day of receipt and the
redemption proceeds are normally sent on the following
business day.
Redemption requests received by telephone after the close
of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
25
<PAGE> 28
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
Each Portfolio may suspend the redemption right or
postpone payment at times when the New York Stock Exchange
is closed or under any emergency circumstances as
determined by the United States Securities and Exchange
Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of a Portfolio's
remaining shareholders to make payment in cash, a
Portfolio may pay redemption proceeds in whole or in part
by a distribution in kind of readily marketable
securities.
----------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Other Vanguard Services" for
additional information.
----------------------------------------------------------
LOW BALANCE FEE AND
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, each Portfolio will automatically deduct a $10
annual fee from non-retirement accounts with balances
falling below $2,500 ($1,000 for Uniform Gifts/Transfers
to Minors Act accounts). This fee deduction will occur
mid-year, beginning in 1996. The fee generally will be
waived for investors whose aggregate Vanguard assets
exceed $50,000.
In addition, each Portfolio reserves the right to
liquidate any non-retirement account that is below the
minimum initial investment amount of $3,000. If at any
time your total investment does not have a value of at
least $3,000, you may be notified that your account is
below the Fund's minimum account balance requirement. You
would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds
would be promptly paid to the registered shareholder.
Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets
(i.e., a decline in a Portfolio's net asset value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange your
shares of a Portfolio for those of other available
Vanguard Funds. Exchanges to or from a Portfolio may be
made only by mail. TELEPHONE EXCHANGES BETWEEN
NON-RETIREMENT ACCOUNTS ARE NOT ACCEPTED FOR THE FUND.
Note, too, that the Emerging Markets Portfolio charges a
1% transaction fee on all redemptions (including the
exchange of shares).
----------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Portfolio, the
name of the Fund you wish to exchange into, the amount you
wish to exchange, and the signatures of all registered
account holders. Send
26
<PAGE> 29
your request to VANGUARD FINANCIAL CENTER, VANGUARD
INTERNATIONAL EQUITY INDEX FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send
your request to Vanguard Financial Center, Vanguard
International Equity Index Fund, 455 Devon Park Drive,
Wayne, PA 19087.)
----------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For an additional copy and for answers to any
questions you may have, call our Investor Information
Department (1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received all required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise
or terminate its provisions, limit the amount of or reject
any exchange as deemed necessary, at any time.
The exchange privilege is only available in states in
which the shares of the Fund are registered for sale. The
Fund's shares are currently registered for sale in all 50
states and the Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive
exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from a Portfolio during any
twelve-month period. Notwithstanding these limitations,
the Fund reserves the right to reject any purchase request
(including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management.
- --------------------------------------------------------------------------------
27
<PAGE> 30
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) by telephone is automatically established on
your account unless you request in writing that telephone
transactions on your account not be permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio;
(ii) the 10-digit account number; (iii) the exact name
and address used in the registration; and (iv) the
Social Security or Employer Identification number
listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account. If Vanguard fails
to follow reasonable security procedures, it may be liable
for any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482 ATTENTION: TRANSFER DEPARTMENT. The
request must be in Good Order. To obtain a transfer form
and full instructions, please call our Client Services
Department (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time
you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement in February of the following year.
Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semiannually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
28
<PAGE> 31
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any TouchToneTM
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. To
contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
29
<PAGE> 32
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<PAGE> 33
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<PAGE> 34
[VANGUARD INTERNATIONAL EQUITY LOGO]
---------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[FLAG LOGO]
[VANGUARD INTERNATIONAL EQUITY LOGO]
P R O S P E C T U S
APRIL 10, 1996
[THE VANGUARD GROUP LOGO]
P072
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<PAGE> 35
PART B
VANGUARD INTERNATIONAL EQUITY INDEX FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
APRIL 10, 1996
This Statement is not a prospectus, but should be read in conjunction with
the Fund's current Prospectus (dated April 10, 1996). To obtain the Prospectus
please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................................... B-1
Investment Limitations.................................................................... B-5
Purchase of Shares........................................................................ B-6
Redemption of Shares...................................................................... B-6
The Vanguard Group........................................................................ B-6
Directors and Officers.................................................................... B-9
Portfolio Transactions.................................................................... B-9
Performance Measures...................................................................... B-10
Foreign Investments....................................................................... B-11
Total Return.............................................................................. B-12
Financial Statements...................................................................... B-12
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
REPURCHASE AGREEMENTS Each Portfolio along with the other members of The
Vanguard Group, 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 Portfolio acquires a money
market instrument (generally a security issued by the U.S. Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
seller, 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 Portfolio and
is unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by a Portfolio (including accrued interest
earned thereon) must have a total value in excess of the value of the repurchase
agreement and are held by the Fund's custodian bank until repurchased. In
addition, the Fund's Board of Directors will monitor the 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 Portfolio. No more than an aggregate of 15% of the
Portfolio's assets, at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale, or for which there are no readily
available market quotations. A Portfolio will enter into repurchase agreements
only with Federal Reserve member banks with minimum assets of at least $2
billion or registered securities dealers.
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, the
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 Portfolio not within the
control of the Portfolio and therefore the Portfolio may not be able to
substantiate its interest in the underlying security
B-1
<PAGE> 36
and may be deemed an unsecured creditor of the other party to the agreement.
While the Fund's management acknowledges these risks, it is expected that they
can be controlled through careful monitoring procedures.
LENDING OF SECURITIES Each Portfolio may lend its securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its portfolio
securities, a Portfolio attempts 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 Portfolio. A Portfolio may lend its portfolio securities to
qualified brokers, dealers, banks or other financial institutions, so long as
the terms, the structure and the aggregate amount of such loans are not
inconsistent with the Investment Company Act of 1940, or the Rules and
Regulations or interpretations of the Securities and Exchange Commission (the
"Commission") thereunder, which currently required that (a) the borrower pledge
and maintain with the Fund collateral consisting of cash, a letter of credit
issued by a domestic U.S. bank, or securities issued or guaranteed by the United
States Government having 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 a Portfolio at any time
and (d) the Portfolio receive reasonable interest on the loan (which may include
the Portfolio'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 Portfolio 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 five business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board of
Directors.
FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, WARRANTS, CONVERTIBLE
SECURITIES AND SWAP AGREEMENTS Each Portfolio may enter into futures contracts,
warrants, options on futures contracts, convertible securities and swap
agreements for the purpose of remaining fully invested and reducing transactions
costs. Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts which are standardized
as to maturity date and underlying financial instrument are traded on national
futures exchanges. The Fund's trading of futures contracts and options is
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. Government Agency.
The Fund will "under normal circumstances" invest at least 80% of each
Portfolio's assets in stocks represented in its respective index. However, the
Fund has given itself the flexibility to invest up to 50% in futures and options
under other than normal circumstances. Any investment in futures and options
over 20% of a Portfolio's assets would be made in emergency situations, for
short-term purposes. Each Portfolio would normally remain 80% invested in stocks
that represent its respective index.
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 closed.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin
deposits 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,
B-2
<PAGE> 37
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 Fund
expects to earn interest income on its margin deposits.
Each Portfolio will use futures contracts and options to simulate full
investment in the underlying index while retaining a cash balance for Fund
management purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. Each Portfolio
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
Fund expects that approximately 75% of its futures contract purchases will be
"completed," that is, equivalent amounts of related securities will have been
purchased or are being purchased by a Portfolio upon sale of open futures
contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Portfolio's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While each Portfolio will incur commission expenses in 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 Portfolio 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 a Portfolio's total assets. Assets committed to futures or
options will be held in a segregated account at the Fund's custodial bank.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if a Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, a
Portfolio 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 Portfolio.
A Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
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 each Portfolio are engaged in only for hedging purposes, the
adviser does not believe that a Portfolio is subject to the risks of loss
frequently associated with futures transactions. A Portfolio would presumably
have sustained comparable losses if, instead of the futures contacts, it had
invested in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by each Portfolio 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 Portfolio 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 the fund of margin deposits in the event of bankruptcy of a
broker with whom a Portfolio has an open position in a futures contract or
related
B-3
<PAGE> 38
option. Additionally, investments in futures and options involve the risk that
the investment adviser will incorrectly predict stock market and interest rate
trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
SWAP AGREEMENTS Swap agreements are contracts between parties in which one
party agrees to make payments to the other party based on the change in market
value of a specified index or asset. In return, the other party agrees to make
payments to the first party based on the return of a different specified index
or asset. Although swap agreements entail the risk that a party will default on
its payment obligations thereunder, the Portfolio will minimize this risk by
entering into agreements that mark to market no less frequently than quarterly.
Swap agreements also bear the risk that the Portfolio will not be able to meet
its obligation to the counterparty. This risk will be mitigated by investing the
Portfolio in the specific asset for which it is obligated to pay a return.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Each Portfolio 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 most cases, any gain
or loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Portfolio may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. A Portfolio 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 Portfolio.
In order for a Portfolio 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 of foreign currencies or other income derived with respect to the
Portfolio's business of investing in securities. In addition, gains realized on
the sale or other disposition of securities held for less than three months must
be limited to less than 30% of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, a Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on futures contracts, which have been open for less than three months as
of the end of the Portfolio's fiscal year and which are recognized for tax
purposes, will not be considered gains on sales of securities held less than
three months for the purpose of the 30% test.
Each Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the distributions.
B-4
<PAGE> 39
INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of each
Portfolio (as defined in the Investment Company Act of 1940). A Portfolio may
not:
1) invest in commodities or purchase real estate, although it may purchase
securities of companies which deal in real estate or interest therein,
and it may invest in stock index futures contracts, stock futures
contracts, foreign currency futures contracts and options and warrants
thereon to the extent that not more than 5% of its assets are required
as deposit to secure obligations under such futures contracts;
2) purchase securities on margin or sell securities short (the deposit or
payment by the Fund of initial or variation margin in order to engage
in an interest-rate futures contract is not considered the purchase of
a security on margin);
3) purchase more than 10% of the outstanding voting securities of any
issuer, except to the extent that the Total International Equity
Portfolio may purchase more than 10% of any underlying Vanguard
Portfolio as described in the prospectus.
4) with respect to 75% of its assets invest more than 5% of the value of
its total assets in the securities of any single issuer except
obligations of the U.S. Government and its instrumentalities;
5) borrow money, except from a bank and only as a temporary or emergency
measure and in no event in excess of 15% of total assets taken at the
lower of their value or cost;
6) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of the value of its total assets;
7) issue senior securities (collateral arrangements with regard to initial
and variation margin on futures contracts shall not be considered
issuance of a senior security);
8) engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed
to be an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;
9) purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including any investment in the Vanguard Group, Inc.);
10) invest for the purpose of controlling management of any company;
11) invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
approved by the Fund's shareholders or otherwise to the extent
permitted by Section 12 of the Investment Company Act of 1940. The
Portfolios will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Fund. Additionally the Total International Equity Portfolio is
expected to invest 100% of its assets in other investment company
members of The Vanguard Group as described in the prospectus.
12) have dealings on behalf of the Fund with Officers and Directors of the
Fund, except for the purchase or sale of securities on an agency or
commission basis;
13) make loans to any officers, directors or employees of the Fund;
14) invest in assessable securities or securities involving unlimited
liability on the part of the holders thereof;
15) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, which are either publicly
distributed or customarily purchased by institutional investors) and
(ii) by lending its securities to banks, brokers, or dealers and other
financial institutions so long as such loans are not inconsistent with
the Investment Company Act or the Rules and Regulations or
interpretations of the Securities and Exchange Commission thereunder;
B-5
<PAGE> 40
16) invest directly in oil, gas or other mineral exploration or development
programs.
These limitations are considered at the time investment securities are
purchased.
Although not fundamental policies subject to shareholder vote, as long as a
Portfolio's shares are registered for sale in certain states, it will not (i)
invest more than 5% of the assets of a Portfolio, at the time of investment, in
the securities of any issuers which have (with predecessors) a record of less
than three years' continuous operation, and (ii) purchase or retain any security
if one or more officers, trustees or partners of a Portfolio or its investment
adviser individually own or would own, directly or beneficially, more than 1/2
of 1 per cent of the securities of such issuer, and in the aggregate such
persons own or would own more than 5% of such securities. Notwithstanding these
limitations, a Portfolio may own all or any portion of the securities of, or
make loans to, or contribute to the costs or other financial requirements of any
company which will be wholly owned by the Fund and one or more other investment
companies and is primarily engaged in the business of providing, at-cost,
management, administrative, distribution or related services to the Fund and
other investment companies. See "The Vanguard Group."
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interests of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments as well as
redemption fees for certain fiduciary accounts or under circumstances where
certain economies can be achieved in sales of the Fund's shares.
REDEMPTION OF SHARES
The 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 Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the 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.
The 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. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid, in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "The Share Price of Each Portfolio" and a redeeming
shareholder would normally incur brokerage expenses if he converted these
securities to cash.
No charge is made by the Fund for redemptions from the European and Pacific
Portfolios. There is a 1% redemption transaction fee charged for redemptions
from the Emerging Market Portfolio. The redemption transaction fee is paid to
the Portfolio to reimburse the Portfolio for transaction costs it incurs while
liquidating securities in order to fund redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by a Portfolio of the Fund.
THE VANGUARD GROUP
The Fund is a member of The Vanguard Group of Investment Companies, which
consists of over 30 investment companies.
B-6
<PAGE> 41
Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the Group obtain at cost virtually
all of their corporate management, administrative and distribution services.
Vanguard also provides investment advisory services on an at-cost basis to
certain Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's net expenses, which are allocated among the
Funds under methods approved by the Board of Directors (Trustees) of each Fund.
In addition, each Fund bears its own direct expenses, such as legal, auditing
and custodian fees.
The Fund's Officers are also Officers and employees of Vanguard. No Officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. The Fund's Service
Agreement provides as follows: (a) each Vanguard Fund may invest up to 0.40% of
its current net assets in Vanguard and (b) there is no other limitation on the
amount that each Vanguard Fund may contribute to Vanguard's Capitalization. At
December 31, 1994, the Fund had contributed capital of $231,000 to Vanguard,
representing 1.2% of Vanguard's Capitalization.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. The Fund's
share of Vanguard's actual net costs of operation relating to management and
administrative services (including transfer agency) for the year ended December
31, 1994 totaled approximately $2,891,000.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's sales
for the preceding 24 months relative to the total sales of the Funds as a Group;
provided, however, that no Fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for the Group, and that no Fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets. During the fiscal year ended December 31, 1994, the Fund paid
approximately $270,000 of the Group's distribution and marketing expenses, which
represented an effective annual rate of .01 of 1% of its average month-end net
assets.
B-7
<PAGE> 42
INVESTMENT ADVISORY SERVICES Vanguard's Core Management Group provides
investment advising services to the Fund and also to the following Funds:
Vanguard Index Trust, Vanguard Balanced Index Fund, the Growth and Income and
Capital Appreciation Portfolios and the equity portion of the Balanced Portfolio
of the Vanguard Tax-Managed Fund, Vanguard Institutional Index Fund, a portion
of the assets of Vanguard/Windsor II, the Equity Index Portfolio of the Vanguard
Variable Insurance Fund, a portion of Vanguard/Morgan Growth Fund and several
indexed separate accounts.
Vanguard's Fixed Income Group also provides investment advisory services to
the following Funds: Vanguard Municipal Bond Fund; Vanguard Money Market
Reserves; several Portfolios of Vanguard Fixed Income Securities Fund; Vanguard
California Tax-Free Fund; Vanguard Ohio Tax-Free Fund; Vanguard New York Insured
Tax-Free Fund; Vanguard New Jersey Tax-Free Fund; Vanguard Pennsylvania Tax-Free
Fund; Vanguard Florida Insured Tax-Free Fund; Vanguard Balanced Index Fund;
Vanguard Bond Index Fund; Vanguard Admiral Funds; the Money Market and
High-Grade Bond Portfolios of the Vanguard Variable Insurance Fund; the
municipal securities portion of the Balanced Portfolio of Vanguard Tax-Managed
Fund; and Vanguard Institutional Money Market Portfolio. These services are
provided on an at-cost basis by the Fixed Income Group. The compensation and
other expenses of this staff are paid by the Funds utilizing these services.
During the fiscal year ended December 31, 1994, the Fund paid approximately
$161,000 of Vanguard's expenses relating to investment advisory services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's Officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund and each other Fund in the Group, for
its proportionate share of Officers' and employees' salaries and retirement
benefits. The Fund's proportionate share of remuneration paid to Officers for
the year ended December 31, 1994 was $53,809. Under its retirement plan,
Vanguard contributes annually an amount equal to 10% of each Officer's annual
compensation plus 5.7% of that part of the Officer's compensation during the
year, if any, that exceeds the Social Security Taxable Wage Base then in effect.
Directors who are not officers are paid an annual fee upon retirement equal to
$1,000 for each year of service on the Board up to a maximum of 15 years. The
Fund's proportionate share of retirement contributions for its Officers for the
year ended December 31, 1994 was approximately $7,200.
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors for the fiscal year ended December 31,
1994.
VANGUARD INTERNATIONAL EQUITY INDEX FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- --------------------------- ------------ ---------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $481 $125 $15,000 $50,000
Robert E. Cawthorn $481 $ 91 $13,000 $50,000
Bruce K. MacLaury $545 $129 $12,000 $45,000
Burton G. Malkiel $481 $ 58 $15,000 $50,000
Alfred M. Rankin, Jr. $481 $ 29 $15,000 $50,000
John C. Sawhill $481 $ 49 $15,000 $50,000
James O. Welch, Jr. $462 $ 81 $15,000 $48,000
J. Lawrence Wilson $472 $ 37 $15,000 $49,000
</TABLE>
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 33 Vanguard Funds
(26 in the case of Mr. MacLaury).
B-8
<PAGE> 43
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for the Fund and choose its Officers. The following is a list of the Directors
and Officers of the Fund and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is: Post Office Box 876, Valley Forge, PA
19482.
JOHN C. BOGLE, Chairman and Director*
Chairman, Chief Executive Officer, and Director of The Vanguard Group,
Inc., and of each of the investment companies in The Vanguard Group;
Director of The Mead Corporation and General Accident Insurance.
JOHN J. BRENNAN, President, Chief Executive
Officer & Director*(1)
President and Director of The Vanguard Group, Inc., and of each of the
other investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Director
Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director
Director of The Great Atlantic and Pacific Tea Company, ALCO Standard
Corp., Raytheon Company, Knight-Ridder, Inc. and Massachusetts Mutual Life
Insurance Co. and Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, Director
President, The Brookings Institution; Director of American Express Bank,
Ltd., The St. Paul Companies, Inc., and Scott Paper Co.
BURTON G. MALKIEL, Director
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications
Company.
ALFRED M. RANKIN, JR., Director
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company, The Standard Products Company and The
Reliance Electric Company.
JOHN C. SAWHILL, Director
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York
University; Director of Pacific Gas and Electric Company and NACCO
Industries.
JAMES O. WELCH, JR., Director
Retired Chairman of Nabisco Brands, Inc. and retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Director
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary
of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
- ---------------
* Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
(1) Effective February 1, 1996, Mr. Brennan will succeed Mr. Bogle as Chief
Executive Officer of the Fund, The Vanguard Group, Inc. and each of the
investment companies in The Vanguard Group. Mr. Bogle will remain Chairman
and Director of the Fund, The Vanguard Group, Inc. and each of the
investment companies in The Vanguard Group.
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, the Fund uses its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain best available price and most favorable execution. The full range and
quality of brokerage services available are considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed
B-9
<PAGE> 44
to obtain the best available price and most favorable execution, consideration
will be given to those brokers which supply statistical information and provide
other services in addition to execution services to the Fund.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the Fund to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider the sale of Fund shares by a broker or dealer in selecting
among broker-dealers. For the years ended December 31, 1992, 1993 and 1994 the
Fund paid approximately $875,337, $1,781,395 and $1,559,349 in brokerage
commissions, respectively.
PERFORMANCE MEASURES
The Fund may use one or more of the following unmanaged indexes for
comparative performance purposes:
MORGAN STANLEY CAPITAL INTERNATIONAL -- SELECT EMERGING MARKETS INDEX -- is an
unpublished index which includes common stocks of companies located in the
countries 12 emerging markets.
MORGAN STANLEY CAPITAL INTERNATIONAL -- EAFE (FREE) INDEX -- is an arithmetic,
market value-weighted average of the performance of over 1,000 securities listed
on the stock exchanges of countries in Europe, Australia and the Far East.
FT-ACTUARIES WORLD INDEX -- includes approximately 2,400 securities from 24
countries including the U.S.
FT-ACTUARIES EURO-PACIFIC INDEX -- a subset of the FT Actuaries World Index,
which excludes companies in the U.S., Canada, Mexico and South Africa.
SALOMON-RUSSELL PRIMARY MARKET INDEX -- consists of the approximately 700
largest stocks within 23 countries.
SALOMON-RUSSELL EXTENDED MARKET INDEX -- consists of approximately 1,000 medium
and small capitalization stocks from 23 countries.
SALOMON-RUSSELL BROAD MARKET INDEX -- consists of all of the stocks within the
Primary Market Index and the Extended Market Index.
RUSSELL UNIVERSE OF NON-U.S. EQUITY PORTFOLIOS -- a universe of separate
accounts and pooled funds available to U.S. investors, which invest in
international equities.
RUSSELL UNIVERSE OF WORLD EQUITY PORTFOLIOS -- a universe of equity-oriented
global portfolios.
LIPPER INTERNATIONAL UNIVERSE -- a universe of mutual funds that invest in
international equities.
LIPPER DIVERSIFIED INTERNATIONAL UNIVERSE -- a universe of mutual funds that
invest in international equities from more than one country.
LIPPER INTERNATIONAL AVERAGE -- the average return of the portfolios included in
the Lipper International Universe.
LIPPER DIVERSIFIED INTERNATIONAL AVERAGE -- the average return of the portfolios
included in the Lipper Diversified International Universe.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. stock market.
WILSHIRE 5000 EQUITY INDEXES -- consists of more than 6,000 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.
B-10
<PAGE> 45
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.
BARING EMERGING MARKETS INDEX -- a diversified index of approximately 250
relatively liquid stocks from 13 emerging market countries.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND -- is a market-weighted index that
contains approximately 4,700 individually priced investment-grade corporate
bonds rated BBB or better, U.S. Treasury and agency issues and mortgage
pass-through securities.
SHEARSON LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
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 -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers High
Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index, 35% Salomon Brothers High
Grade Bond Index.
FOREIGN INVESTMENTS
FOREIGN INVESTMENTS Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. Since the stocks of foreign
companies are frequently denominated in foreign currencies, and since the Fund
may temporarily hold uninvested reserves in bank deposits in foreign currencies,
it will be affected favorably or unfavorably by changes in currency rates and in
exchange control regulations, and may incur costs in connection with conversions
between various currencies. The investment policies of the Fund permit it to
enter into forward foreign currency exchange contracts in order to hedge its
holdings and commitments against changes in the level of future currency rates.
Such contracts involve an obligation to purchase or sell a specific currency at
a future date at a price set at the time of the contract.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions, 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 custodian arrangements of the Fund's
foreign securities will be somewhat greater than the expenses for a Fund that
invests primarily in domestic securities.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies comprising the Fund's Portfolio.
Over the last decade the growth in the international stock markets has
considerably outpriced that of the U.S. Stock Market. Almost two-thirds of the
worlds equity market capitalization now lies outside the United States.
B-11
<PAGE> 46
As of December 31, 1994, the total market capitalization of the Morgan
Stanley Capital International World Stock Market Index was $7.7 trillion. The
major countries and regions comprising the Index are as follows:
<TABLE>
<CAPTION>
PERCENT OF WORLD
INDEX
CAPITALIZATION
-------------------
<S> <C> <C>
United States.......................................................... 36%
Canada................................................................. 2
Japan.................................................................. 28
Other Pacific Basin.................................................. 6
--
Total Pacific Basin.................................................... 34
Europe................................................................. 28
======
100%
</TABLE>
TOTAL RETURN
The average annual total return for the European Portfolio* for one- and
three-year periods ended December 31, 1994 and since its inception on June 18,
1990 was +0.80%, +7.92% and +6.10%, respectively. The average annual return for
the Pacific Portfolio* for the same periods was +11.86%, +7.38% and +3.65%,
respectively. The average annual total return for the Emerging Markets** since
its inception on May 4, 1994 was +8.66%.
*Performance figures are adjusted for a 1% transaction fee on purchases and
the annual account maintenance fee of $10.
**Performance figures are adjusted for the 2% portfolio transaction fee on
purchases, the 1% portfolio transaction fee on redemptions, and the annual
account maintenance fee of $10.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended December 31, 1994,
including the financial highlights, appearing in the Fund's 1994 Annual Report
to Shareholders, and the report thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Fund's 1994 Annual Report to
Shareholders is enclosed with this Statement of Additional Information.
B-12
<PAGE> 47
PART C
VANGUARD INTERNATIONAL EQUITY INDEX FUND, INC.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Registrant's Financial Statements for the year ended December 31, 1994,
including Price Waterhouse LLP's report thereon, are incorporated by reference,
in the Statement of Additional Information, from the Registrant's 1994 Annual
Report to Shareholders which has been filed with the Commission. The Financial
Statements included in the Annual Report are:
1. Statement of Net Assets as of December 31, 1994.
2. Statement of Operations for the year ended December 31, 1994.
3. Statement of Changes of Net Assets for the years ended December 31,
1993 and 1994.
4. Financial Highlights for each of the respective periods presented in
the period ended December 31, 1994.
5. Notes to Financial Statements.
6. Report of Independent Accountants.
(B) EXHIBITS
1. Articles of Incorporation
2. By-Laws of Registrant
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Not Applicable
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
8. Form of Custody Agreement
9. Form of Vanguard Service Agreement
10. Opinion of Counsel
11. Consent of Independent Accountants*
12. Financial Statements -- reference is made to (a) above
13. Not Applicable
14. Not Applicable
15. Not Applicable
16. Schedule for Computation of Performance Quotations*
27. Financial Data Schedule*
- ---------------
* Filed herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Reference is made to the caption "The Vanguard Group" in the Prospectus
constituting Part A and "Management of the Fund" in the Statement of Additional
Information constituting Part B of this Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 31, 1994 there were 39,037 shareholders of the Pacific
Portfolio, and 38,272 shareholders of the European Portfolio and 7,579
shareholders of the Emerging Markets Portfolio.
ITEM 27. INDEMNIFICATION
Reference is made to Article VII of Registrant's Articles of Incorporation.
C-1
<PAGE> 48
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Investment advisory services are provided to the Registrant on an at-cost
basis by The Vanguard Group, Inc., a jointly-owned subsidiary of the Registrant
and the other Funds in the Group. See the information concerning the Vanguard
Group, Inc. set forth in Parts A and B.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent. The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodians, State Street Bank and Trust
Company, Boston, Mass., and Morgan Stanley Trust Company, NY.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which is filed herewith as Exhibit 9 and described in Part
B hereof under "Management of the Fund;" the Registrant is not a party of any
management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to comply with the provisions of section 16(c)
of the 1940 Act in regard to shareholders' rights to call a meeting of
shareholders for the purpose of voting on the removal of directors and to assist
in shareholder communications in such matters, to the extent required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge upon request.
C-2
<PAGE> 49
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 and Rule 485(a) under the Securities Act of 1933
and 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 26th day of
January, 1996.
VANGUARD INTERNATIONAL EQUITY INDEX FUND, INC.
BY: (Raymond J. Klapinsky) John C. Bogle*, 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:
BY: (Raymond J. Klapinsky)
John C. Bogle*, Chairman of the Board, Director
and Chief Executive Officer
January 26, 1996
BY: (Raymond J. Klapinsky)
John J. Brennan*, President and Director
January 26, 1996
BY: (Raymond J. Klapinsky)
Robert E. Cawthorn*, Director
January 26, 1996
BY: (Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*, Director
January 26, 1996
BY: (Raymond J. Klapinsky)
Bruce K. MacLaury*, Director
January 26, 1996
BY: (Raymond J. Klapinsky)
Burton G. Malkiel*, Director
January 26, 1996
BY: (Raymond J. Klapinsky)
Alfred M. Rankin*, Director
January 26, 1996
BY: (Raymond J. Klapinsky)
John C. Sawhill*, Director
January 26, 1996
BY: (Raymond J. Klapinsky)
James O. Welch, Jr.*, Director
January 26, 1996
BY: (Raymond J. Klapinsky)
J. Lawrence Wilson*, Director
January 26, 1996
BY: (Raymond J. Klapinsky)
Richard F. Hyland*, Treasurer and Principal
Financial Officer and Accounting Officer
January 26, 1996
*By Power of Attorney. See File Number 2-14336, January 23, 1990. Incorporated
by Reference.
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants.................................................... EX-99.B11
Schedule of Computation of Performance Quotations..................................... EX-99.B16
Financial Data Schedule............................................................... EX-27
</TABLE>
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information, constituting parts of this amended
Registration Statement on Form N-1A, of our reports dated February 7, 1995,
relating to the financial statements and financial highlights appearing in the
December 31, 1994 Annual Report to Shareholders of Vanguard International Equity
Index Fund, Inc. (comprised of the Pacific Portfolio, the European Portfolio and
the Emerging Markets Portfolio). We also consent to the references to us under
the headings "Financial Highlights" and "General Information" in the Prospectus
and "Financial Statements" in the Statement of Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
January 25, 1996
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD INTERNATIONAL EQUITY INDEX FUND -- EUROPEAN PORTFOLIO
1. Average Annual Total Return (As of December 31, 1994)
n
P (1 + T) = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
-------
One Year
--------
P = $1,000
T = +0.80%*
N = 1
ERV = $1,008.04
Since inception May 1, 1990
---------------------------
P = $1,000
T = +6.10%*
N = Since inception (June 18, 1990)
ERV = $1,308.41
</TABLE>
* Adjusted for $10 Account Maintenance Fee and 1% Portfolio Transaction Fee.
<PAGE> 2
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD INTERNATIONAL EQUITY INDEX FUND -- PACIFIC PORTFOLIO
1. Average Annual Total Return (As of December 31, 1994)
n
P (1 + T) = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
-------
One Year
--------
P = $1,000
T = +11.86%*
N = 1
ERV = $1,118.58
Since inception May 1, 1990
---------------------------
P = $1,000
T = +3.65%*
N = Since inception (June 18, 1990)
ERV = $1,176.55
</TABLE>
* Adjusted for $10 Account Maintenance Fee and 1% Portfolio Transaction Fee.
<PAGE> 3
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD INTERNATIONAL EQUITY INDEX FUND -- EMERGING MARKETS PORTFOLIO
1. Average Annual Total Return (As of December 31, 1994)
n
P (1 + T) = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
------- P = $1,000
T = +8.66%**
N = *
ERV = $1,098.11*
</TABLE>
* Since inception on April 18, 1994
---------------------------------
- -----------------------------
** Adjusted for $10 account maintenance fee and 2% portfolio transaction fee
on purchases, and 1% portfolio transaction fee on redemptions.
<TABLE> <S> <C>
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<DISTRIBUTIONS-OF-INCOME> 525
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<NAME> VANGUARD INTERNATIONAL EQUITY INDEX FUND, INC.
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<PERIOD-START> JAN-01-1994
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<INVESTMENTS-AT-COST> 646273
<INVESTMENTS-AT-VALUE> 714822
<RECEIVABLES> 114223
<ASSETS-OTHER> 133
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 829181
<PAYABLE-FOR-SECURITIES> 1241
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<OTHER-ITEMS-LIABILITIES> 112907
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<OVERDISTRIBUTION-GAINS> 672
<ACCUM-APPREC-OR-DEPREC> 68831
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<DIVIDEND-INCOME> 18247
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<EXPENSES-NET> 2201
<NET-INVESTMENT-INCOME> 16595
<REALIZED-GAINS-CURRENT> 2659
<APPREC-INCREASE-CURRENT> (10000)
<NET-CHANGE-FROM-OPS> 9254
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 16520
<DISTRIBUTIONS-OF-GAINS> 3560
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20475
<NUMBER-OF-SHARES-REDEEMED> 11707
<SHARES-REINVESTED> 1443
<NET-CHANGE-IN-ASSETS> 114188
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