-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V7WkxzO6Kih35wQP9aT+hIy25fQHyrOSQsONXlmAVjwVdl6sFFJ/h+649+nyN/da +WqXH/SOJIhfWsWiE5+hTw== 0000932471-01-000175.txt : 20010212 0000932471-01-000175.hdr.sgml : 20010212 ACCESSION NUMBER: 0000932471-01-000175 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20010209 EFFECTIVENESS DATE: 20010209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD/WINDSOR FUNDS INC CENTRAL INDEX KEY: 0000107606 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510082711 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 002-14336 FILM NUMBER: 1531085 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-00834 FILM NUMBER: 1531086 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS DATE OF NAME CHANGE: 19851031 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUND INC DATE OF NAME CHANGE: 19850424 485BPOS 1 0001.txt VANGUARD WINDSOR FUNDS N-1A - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT (NO. 2-14336) UNDER THE SECURITIES ACT OF 1933 PRE-EFFECTIVE AMENDMENT NO. POST-EFFECTIVE AMENDMENT NO. 95 AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 AMENDMENT NO. 98 VANGUARD WINDSOR FUNDS (EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST) P.O. BOX 2600, VALLEY FORGE, PA 19482 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER (610) 669-1000 R. GREGORY BARTON, ESQUIRE P.O. BOX 876 VALLEY FORGE, PA 19482 APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE: ON FEBRUARY 26, 2001, PURSUANT TO PARAGRAPH (B) OF RULE 485. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- VANGUARD(R) WINDSOR(TM) FUND INVESTOR SHARES - FEBRUARY 26, 2001 This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2000. STOCK PROSPECTUS Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accurace or adequacy of this prospectus. Any representation to the contrary is a criminal offense. [A MEMBER OF THE VANGUARD GROUP(R) LOGO] VANGUARD WINDSOR FUND Prospectus February 26, 2001 A Growth and Income Stock Mutual Fund - -------------------------------------------------------------------------------- CONTENTS - -------------------------------------------------------------------------------- 1 FUND PROFILE 3 ADDITIONAL INFORMATION 3 MORE ON THE FUND 7 THE FUND AND VANGUARD 8 INVESTMENT ADVISERS 9 DIVIDENDS, CAPITAL GAINS, AND TAXES 11 SHARE PRICE 11 FINANCIAL HIGHLIGHTS 13 INVESTING WITH VANGUARD 13 Buying Shares 14 Redeeming Shares 16 Other Rules You Should Know 18 Fund and Account Updates 19 Contacting Vanguard GLOSSARY (inside back cover) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided "Plain Talk(R)" explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. - -------------------------------------------------------------------------------- 1 FUND PROFILE INVESTMENT OBJECTIVE The Fund seeks to provide long-term growth of capital. As a secondary objective, the Fund seeks to provide some dividend income. INVESTMENT STRATEGIES The Fund invests mainly in large- and medium-size companies whose stocks are considered by the Fund's advisers to be undervalued. Undervalued stocks are generally those that are out of favor with investors and currently trading at prices that, the adviser feels, are below what the stocks are worth in relation to their earnings. These stocks typically--but not always--have lower-than-average price/earnings (P/E) ratios and higher-than-average dividend yields. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the overall stock market. The Fund's performance could be hurt by: - - Investment style risk, which is the chance that returns from large- and mid-capitalization value stocks--which make up most of the Fund's holdings--will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. - - Manager risk, which is the chance that poor security selection will cause the Fund to underperform other funds with similar investment objectives. PERFORMANCE/RISK INFORMATION The following bar chart is intended to help you understand the risks of investing in the Fund. It shows how the Fund's performance has varied from one calendar year to another over the past ten years. In addition, there is a table that shows how the Fund's average annual total returns compare with those of relevant market indexes over set periods of time. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS [SCALE -10% TO 50%] 1991 28.55% 1992 16.50% 1993 19.37% 1994 -0.15% 1995 30.15% 1996 26.36% 1997 21.97% 1998 0.81% 1999 11.57% 2000 15.89% ---------------------------------------------------- During the period shown in the bar chart, the highest return for a calendar quarter was 18.25% (quarter ended March 31, 1991), and the lowest return for a quarter was -19.40% (quarter ended September 30, 1998). 2 -------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 2000 -------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS -------------------------------------------------------------------- Vanguard Windsor Fund 15.89% 14.97% 16.66% Standard & Poor's 500 Index -9.10 18.33 17.46 Russell 1000 Value Index 7.01 16.91 17.37 -------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2000. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None Exchange Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.29% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.31% The following example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $32 $100 $174 $393 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT FUND EXPENSES All mutual funds have operating expenses. These expenses, which are deducted from a fund's gross income, are expressed as a percentage of the net assets of the fund. Vanguard Windsor Fund's expense ratio in fiscal year 2000 was 0.31%, or $3.10 per $1,000 of average net assets. The average multi-cap value mutual fund had expenses in 1999 of 1.39%, or $13.90 per $1,000 of average net assets (derived from data provided by Lipper Inc., which reports on the mutual fund industry). Management expenses, which are one part of operating expenses, include investment advisory fees as well as other costs of managing a fund--such as account maintenance, reporting, accounting, legal, and other administrative expenses. - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs associated with the fund's buying and selling of securities. These costs can erode a substantial portion of the gross income or capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS SUITABLE FOR IRAS Dividends are distributed semiannually Yes in June and December; capital gains, if any, are distributed annually in MINIMUM INITIAL INVESTMENT December $3,000; $1,000 for IRAs and custodial accounts for minors INVESTMENT ADVISERS - - Wellington Management Company, LLP, NEWSPAPER ABBREVIATION Boston, Mass., since inception Wndsr - - Sanford C. Bernstein & Co., LLC., New York City, N.Y., since 1999 VANGUARD FUND NUMBER - - The Vanguard Group, Valley Forge, Pa., 022 since 1999 CUSIP NUMBER INCEPTION DATE 922018106 October 23, 1958 TICKER SYMBOL NET ASSETS AS OF OCTOBER 31, 2000 VWNDX $15.9 billion - -------------------------------------------------------------------------------- MORE ON THE FUND This prospectus describes risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about each type of risk that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote unless those strategies or policies are designated as fundamental. Finally, you'll find information on other important features of the Fund. MARKET EXPOSURE The Fund invests mainly in common stocks of large- and mid-capitalization companies that offer favorable prospects for growth of earnings and dividend income, but whose prices do not reflect these prospects. The Fund may also invest in securities that are convertible to common stocks. Because it invests mainly in stocks, the Fund is subject to certain risks. 4 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS Stocks of publicly traded companies--and mutual funds that hold these stocks--can be classified by the companies' market value, or capitalization. Market capitalization changes over time, and there is no "official" definition of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally defines large-cap funds as those holding stocks of companies whose outstanding shares have, on average, a market value exceeding $13 billion; mid-cap funds as those holding stocks of companies with a market value between $1.5 billion and $13 billion; and small-cap funds as those holding stocks of companies with a market value of less than $1.5 billion. Vanguard periodically reassesses these classifications. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VALUE FUNDS AND GROWTH FUNDS Value investing and growth investing are two styles employed by stock fund managers. Value funds generally emphasize stocks of companies from which the market does not expect strong growth. The prices of value stocks typically are below-average in comparison to such measures as earnings and book value, and these stocks typically have above-average dividend yields. Growth funds generally focus on companies believed to have above-average potential for growth in revenue and earnings. Reflecting the market's high expectations for superior growth, such stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. Value and growth stocks have, in the past, produced similar long-term returns, though each category has periods when it outperforms the other. In general, value funds are appropriate for investors who want some dividend income and the potential for capital gains, but are less tolerant of share-price fluctuations. Growth funds, by contrast, appeal to investors who will accept more volatility in hopes of a greater increase in share price. Growth funds also may appeal to investors with taxable accounts who want a higher proportion of returns to come as capital gains (which may be taxed at lower rates than dividend income). - -------------------------------------------------------------------------------- [FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the S&P 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. Note, also, that the gap between best and worst tends to narrow over the long term. 5 - ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2000) - ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS - ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.9 11.1 11.2 11.2 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2000. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 11.1%, returns for individual 5-year periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or this Fund in particular. [FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM OTHER MARKET SECTORS. AS A GROUP, LARGE- AND MID-CAPITALIZATION VALUE STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS. SECURITY SELECTION Vanguard Windsor Fund employs two primary investment advisers, each of which independently chooses and maintains a portfolio of common stocks for the Fund. Each adviser is responsible for a specific percentage of the Fund's assets. These investment advisers employ active investment management methods, which means that securities are bought and sold according to the advisers' evaluations about companies and their financial prospects, and the stock market and economy in general. Each adviser will sell a security when it is no longer as attractive as alternative investments. While each adviser uses a different process to select securities, both are committed to investing in large- and mid-cap stocks that, in their opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and currently trading at prices that, the adviser feels, are below what the stocks are worth in relation to their earnings. These stocks typically--but not always--have lower-than-average price/earnings (P/E) ratios and higher-than-average dividend yields. Wellington Management Company, LLP (Wellington Management), managed about 74% of the Fund's assets as of October 31, 2000. A stock's value is the key element in the adviser's selection process. Wellington Management considers several fundamental factors, including the stock's projected growth rate, earnings potential, dividend yield, and P/E ratio. To be a candidate for purchase, a stock must have strong prospects for capital appreciation, but be trading at a P/E ratio that is lower than what is expected of a stock with such potential. Sanford C. Bernstein & Co., LLC (Bernstein), which managed about 24% of the Fund's assets as of October 31, 2000, also uses traditional methods of stock selection--research and analysis--to identify undervalued stocks. The adviser also employs quantitative valuation tools to identify attractive stocks and the most opportune time to purchase them. The Vanguard Group (Vanguard), which managed about 2% of the Fund's assets as of October 31, 2000, may invest the Fund's cash investments in stock futures. This strategy is intended to keep the Fund more fully exposed to common stocks while retaining cash on 6 hand to meet liquidity needs. See "Other Investment Policies and Risks" for more details on the Fund's policy on futures. The Fund is generally managed without regard to tax ramifications. [FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS. OTHER INVESTMENT POLICIES AND RISKS Besides investing in undervalued common stocks, the Fund may make certain other kinds of investments to achieve its objective. Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 20% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to (1) country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or a natural disaster--will weaken a country's securities markets; and (2) currency risk, which is the chance that a foreign investment will decrease in value because of unfavorable changes in currency exchange rates. The Fund may invest in money market instruments, fixed income securities, convertible securities, and other equity securities, such as preferred stocks. The Fund may invest up to 15% of its assets in restricted securities with limited marketability or other illiquid securities. The Fund may also invest in stock futures and options contracts, which are traditional types of derivatives. Losses (or gains) involving futures can sometimes be substantial--in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. The Fund will not use futures for speculative purposes or as leveraged investments that magnify gains or losses. The Fund's obligation under futures contracts will not exceed 20% of its total assets. The reasons for which the Fund will invest in futures and options are: - - To keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in stocks. - - To reduce the Fund's transaction costs or add value when these instruments are favorably priced. The Fund may temporarily depart from its normal investment policies--for instance, by investing substantially in cash investments--in response to extraordinary market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses but otherwise fail to achieve its investment objective. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DERIVATIVES A derivative is a financial contract whose value is based on (or "derived" from) a traditional security (such as a stock or a bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indexes, have been trading on regulated exchanges for more than two decades. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Nonstandardized derivatives (such as swap agreements), on the other hand, tend to be more specialized or complex, and may be harder to value. If used for speculation or as leveraged investments, derivatives can carry considerable risks. - -------------------------------------------------------------------------------- 7 COSTS AND MARKET-TIMING Some investors try to profit from a strategy called market-timing--switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all Vanguard funds have adopted special policies to discourage short-term trading. Specifically: - - Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--that it regards as disruptive to efficient portfolio management. A purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor. - - Each Vanguard fund (except the money market funds) limits the number of times that an investor can exchange into and out of the fund. - - Each Vanguard fund reserves the right to stop offering shares at any time. - - Vanguard U.S. Stock Index Funds, International Stock Index Funds, REIT Index Fund, Balanced Index Fund, and Growth and Income Fund generally do NOT accept exchanges by telephone or fax, or online. (IRAs and other retirement accounts are not subject to this rule.) - - Certain Vanguard funds charge transaction fees on purchases and/or redemptions of their shares. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. TURNOVER RATE Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS section of this prospectus shows historic turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of October 31, 2000, the average turnover rate for all mid-cap value funds was approximately 106%, according to Morningstar, Inc. - -------------------------------------------------------------------------------- THE FUND AND VANGUARD The Fund is a member of The Vanguard Group, a family of more than 35 investment companies with more than 100 funds holding assets worth more than $570 billion. All of 8 the Vanguard funds share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. - -------------------------------------------------------------------------------- INVESTMENT ADVISERS The Fund uses a multimanager approach. It employs two primary investment advisers, each of which independently manages a separate portion of the Fund's assets, subject to the control of the trustees and officers of the Fund. - - Wellington Management Company, LLP (Wellington Management), 75 State Street,Boston, MA 02109, is an investment advisory firm founded in 1928. As of October 31, 2000, Wellington Management managed about $269 billion in assets. - - Sanford C. Bernstein & Co., LLC (Bernstein), 767 Fifth Avenue, New York City, NY 10153, is an investment advisory firm that continues the investment management business of Sanford C. Bernstein & Co., Inc., a registered investment adviser founded in 1967. As of October 31, 2000, Bernstein managed about $10.1 billion in assets. - - The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in 1975, is a wholly owned subsidiary of the Vanguard funds. As of October 31, 2000, Vanguard served as adviser for about $396.7 billion in assets. The Fund pays two of its investment advisers--Wellington Management and Bernstein--on a quarterly basis. For each adviser, the quarterly fee is based on certain annual percentage rates applied to average month-end net assets managed by the adviser over the quarterly period. In addition, the quarterly fees paid to each adviser are increased or decreased based upon the adviser's performance in comparison to a benchmark index. For these purposes, the cumulative total return of each adviser's portion of the Fund over a trailing 36-month period is compared to the cumulative total return of the S&P 500 Index (for Wellington Management) and the Russell 1000 Value Index (for Bernstein) over the same period. Please consult the Fund's Statement of Additional Information for a complete explanation of how advisory fees are calculated. The Fund pays no advisory fees to Vanguard, since it provides services to the Fund on an at-cost basis. For the fiscal year ended October 31, 2000, the advisory fees and expenses represented an effective annual rate of 0.13% of the Fund's average net assets before a decrease of 0.08% based on performance. The advisers are authorized to choose broker-dealers to handle the purchase and sale of the Fund's portfolio securities, and to obtain the best available price and most favorable 9 execution for all transactions. Also, the Fund may direct the advisers to use a particular broker for certain transactions in exchange for commission rebates or research services provided to the Fund. In the interest of obtaining better execution of a transaction, the advisers may at times choose brokers who charge higher commissions. If more than one broker can obtain the best available price and most favorable execution, then the advisers are authorized to choose a broker who, in addition to executing the transaction, will provide research services to the advisers or the Fund. The board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment adviser--either as a replacement for an existing adviser or as an additional adviser. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard Group may provide investment advisory services to the Fund, on an at-cost basis, at any time. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUND'S ADVISERS The managers primarily responsible for overseeing the Fund's investments are: CHARLES T. FREEMAN, Senior Vice President and Partner of Wellington Management. He has worked in investment management since 1967; has been with Wellington Management since 1969; had been Assistant Fund Manager since 1974; and has been Fund Manager since 1996. Education: B.S. and M.B.A., University of Pennsylvania. MARILYN G. FEDAK, Chief Investment Officer, U.S. Value Equities and Chairman of the Bernstein U.S. Equity Investment Policy Group. She has worked in investment management since 1972; has managed portfolio investments for Bernstein and its predecessor since 1984; and has managed the Fund since 1999. Education: B.A., Smith College; M.B.A., Harvard Business School. STEVEN PISARKIEWICZ, Senior Portfolio Manager at Bernstein. He has worked in investment management since 1983; has been with Bernstein and its predecessor since 1989; and has managed the Fund since 1999. Education: B.S., University of Missouri; M.B.A., University of California at Berkeley. GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Quantitative Equity Group. He has worked in investment management since 1985 and has had primary responsibility for Vanguard's stock indexing investments and strategy since joining the company in 1987. Education: A.B., Dartmouth College; M.B.A., University of Chicago. - -------------------------------------------------------------------------------- DIVIDENDS, CAPITAL GAINS, AND TAXES FUND DISTRIBUTIONS The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses), as well as any capital gains realized from the sale of its holdings. Income dividends generally are distributed in June and December; capital gains distributions generally occur in December. You can receive distributions of income dividends or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. 10 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends, and gains from the sale of investments. You receive such earnings as either an income dividend or a capital gains distribution. Income dividends come from both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less, or more than one year. - -------------------------------------------------------------------------------- BASIC TAX POINTS Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, taxable investors should be aware of the following basic tax points: - - Distributions are taxable to you for federal income tax purposes whether or not you reinvest these amounts in additional Fund shares. - - Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. - - Any dividends and short-term capital gains that you receive are taxable to you as ordinary income for federal income tax purposes. - - Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned shares in the Fund. - - Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows. - - A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. - - Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. GENERAL INFORMATION BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable distributions or redemptions from your account if you do not: - - provide us with your correct taxpayer identification number; - - certify that the taxpayer identification number is correct; and - - confirm that you are not subject to backup withholding. Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so. FOREIGN INVESTORS. This Fund generally does not offer its shares for sale outside of the United States. Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds. INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address. TAX CONSEQUENCES. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. 11 Please consult your tax adviser for detailed information about a fund's tax consequences for you. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT "BUYING A DIVIDEND" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should avoid buying shares of a fund shortly before it makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price would drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. - -------------------------------------------------------------------------------- SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day after the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. (The NAV is not calculated on holidays or other days when the Exchange is closed.) Net asset value per share is computed by dividing the net assets of the Fund by the number of Fund shares outstanding. Knowing the daily net asset value is useful to you as a shareholder because it indicates the current value of your investment. The Fund's NAV, multiplied by the number of shares you own, gives you the dollar amount you would have received had you sold all of your shares back to the Fund that day. A NOTE ON PRICING: The Fund's investments will be priced at their market value when market quotations are readily available. When these quotations are not readily available, investments will be priced at their fair value, calculated according to procedures adopted by the Fund's board of trustees. The Fund's share price can be found daily in the mutual fund listings of most major newspapers under the heading "Vanguard Funds." FINANCIAL HIGHLIGHTS The following financial highlights table is intended to help you understand the Fund's financial performance for the past five years, and certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost each year on an investment in the Fund (assuming reinvestment of all dividend and capital gains distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. You may have the annual report sent to you without charge by contacting Vanguard. 12
- ---------------------------------------------------------------------------------------- VANGUARD WINDSOR FUND YEAR ENDED OCTOBER 31, 2000 ---------------------------------------------------------------- 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $16.91 $16.34 $19.55 $16.99 $15.55 - ---------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .28 .27 .23 .36 .43 Net Realized and Unrealized Gain (Loss) on Investments 1.44 1.77 (.32) 3.94 2.85 ---------------------------------------------------------------- Total from Investment Operations 1.72 2.04 (.09) 4.30 3.28 ---------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.29) (.24) (.24) (.41) (.46) Distributions from Realized Capital Gains (1.90) (1.23) (2.88) (1.33) (1.38) ---------------------------------------------------------------- Total Distributions (2.19) (1.47) (3.12) (1.74) (1.84) - ---------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR $16.44 $16.91 $16.34 $19.55 $16.99 - ---------------------------------------------------------------------------------------- TOTAL RETURN 11.60% 13.74% -0.78% 27.04% 23.16% ======================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (Millions) $15,935 $16,824 $18,355 $20,678 $15,841 Ratio of Total Expenses to Average Net Assets 0.31% 0.28% 0.27% 0.27% 0.31% Ratio of Net Investment Income to Average Net Assets 1.75% 1.56% 1.31% 1.89% 2.75% Turnover Rate 41% 56% 48% 61% 34% ========================================================================================
- -------------------------------------------------------------------------------- PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE The Fund began fiscal 2000 with a net asset value (price) of $16.91 per share. During the year, the Fund earned $0.28 per share from investment income (interest and dividends) and $1.44 per share from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $2.19 per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The earnings ($1.72 per share) minus the distributions ($2.19 per share) resulted in a share price of $16.44 at the end of the year. This was a decrease of $0.47 per share (from $16.91 at the beginning of the year to $16.44 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return from the Fund was 11.60% for the year. As of October 31, 2000, the Fund had $15.9 billion in net assets. For the year, its expense ratio was 0.31% ($3.10 per $1,000 of net assets); and its net investment income amounted to 1.75% of its average net assets. It sold and replaced securities valued at 41% of its net assets. - -------------------------------------------------------------------------------- 13 - -------------------------------------------------------------------------------- INVESTING WITH VANGUARD This section of the prospectus explains the basics of doing business with Vanguard. A special booklet, The Vanguard Service Directory, provides details of our many shareholder services for individual investors. A separate booklet, The Compass, does the same for institutional investors. You can request either booklet by calling or writing Vanguard, using the Contacting Vanguard instructions found at the end of this section. BUYING SHARES REDEEMING SHARES OTHER RULES YOU SHOULD KNOW FUND AND ACCOUNT UPDATES CONTACTING VANGUARD - -------------------------------------------------------------------------------- BUYING SHARES ACCOUNT MINIMUMS TO OPEN AND MAINTAIN AN ACCOUNT: $3,000 for regular accounts; $1,000 for IRAs and custodial accounts for minors. TO ADD TO AN EXISTING ACCOUNT: $100 by mail or exchange; $1,000 by wire. HOW TO BUY SHARES BY CHECK: Mail your check and a completed account registration form to Vanguard. When adding to an existing account, send your check with an Invest-By-Mail form detached from your last account statement. Make your check payable to: The Vanguard Group--22. For addresses, see Contacting Vanguard. BY EXCHANGE PURCHASE: You can purchase shares with the proceeds of a redemption from another Vanguard fund. All open Vanguard funds permit exchange purchases requested in writing. MOST VANGUARD FUNDS--OTHER THAN THE STOCK AND BALANCED INDEX-ORIENTED FUNDS--ALSO ACCEPT EXCHANGE PURCHASES REQUESTED ONLINE OR BY TELEPHONE. See Other Rules You Should Know for specifics. BY WIRE: Call Vanguard to purchase shares by wire. See Contacting Vanguard. YOUR PURCHASE PRICE You buy shares at a fund's next-determined NAV after Vanguard receives your purchase request. As long as your request is received before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), you will buy your shares at that day's NAV. This is known as your TRADE DATE. PURCHASE RULES YOU SHOULD KNOW ^THIRD PARTY CHECKS. To protect the funds from check fraud, Vanguard will not accept checks made payable to third parties. ^U.S. CHECKS ONLY. All purchase checks must be written in U.S. dollars and drawn on a U.S. bank. 14 ^LARGE PURCHASES. Vanguard reserves the right to reject any purchase request that may disrupt a fund's operation or performance. Please call us before attempting to invest a large dollar amount. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). ^FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares at any time, or to reject specific purchase requests, including purchases by exchange from another Vanguard fund. REDEEMING SHARES HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before initiating your request. ONLINE: Request a redemption through our website at Vanguard.com. BY TELEPHONE: Contact Vanguard by telephone to request a redemption. For telephone numbers, see Contacting Vanguard. BY MAIL: Send your written redemption instructions to Vanguard. For addresses, see Contacting Vanguard. YOUR REDEMPTION PRICE You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request, including any special documentation required under the circumstances. As long as your request is received before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your shares are redeemed at that day's NAV. This is known as your TRADE DATE. TYPES OF REDEMPTIONS ^CHECK REDEMPTIONS. Unless instructed otherwise, Vanguard will mail you a check, normally within two business days of your trade date. ^EXCHANGE REDEMPTIONS. You may instruct Vanguard to apply the proceeds of your redemption to purchase shares of another Vanguard fund. All open Vanguard funds accept exchange redemptions requested in writing. Most Vanguard funds--other than the stock and balanced index-oriented funds--also accept exchange redemptions requested online or by telephone. See Other Rules You Should Know for specifics. ^WIRE REDEMPTIONS. When redeeming from a money market fund, bond fund, or Vanguard Preferred Stock Fund, you may instruct Vanguard to wire your redemption proceeds to a previously designated bank account. Wire redemptions are not available for Vanguard's other funds. The wire redemption option is not automatic; you must establish it by 15 completing a special form or the appropriate section of your account registration. Also, wire redemptions must be requested in writing or by telephone, not online. For these funds, a $5 fee applies to wire redemptions under $5,000. Money Market Funds: For telephone requests received at Vanguard by 10:45 a.m., Eastern time, the redemption proceeds will arrive at your bank by the close of business that same day. For other requests received before 4 p.m., Eastern time, the redemption proceeds will arrive at your bank by the close of business on the following business day. Bond Funds and Preferred Stock Fund: For requests received at Vanguard by 4 p.m., Eastern time, the redemption proceeds will arrive at your bank by the close of business on the following business day. REDEMPTION RULES YOU SHOULD KNOW ^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. ^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or part of your redemption in-kind--that is, in the form of securities--if we believe that a cash redemption would disrupt the fund's operation or performance. Under these circumstances, Vanguard also reserves the right to delay payment of your redemption proceeds for up to seven days. By calling us before you attempt to redeem a large dollar amount, you are more likely to avoid in-kind or delayed payment of your redemption. ^RECENTLY PURCHASED SHARES. While you can redeem shares at any time, proceeds will not be made available to you until the Fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or Vanguard Fund Express(R). ^SHARE CERTIFICATES. If share certificates have been issued for your account, those shares cannot be redeemed until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard. ^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make your redemption check payable to a different person or send it to a different address. However, this requires the written consent of all registered account owners, which must be provided under signature guarantees. You can obtain a signature guarantee from most commercial and savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has 16 been initiated and a confirmation number has been assigned (if applicable). ^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days at any time. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds at times when the New York Stock Exchange is closed or during emergency circumstances, as determined by the U.S. Securities and Exchange Commission. OTHER RULES YOU SHOULD KNOW TELEPHONE TRANSACTIONS ^AUTOMATIC. In setting up your account, we'll automatically enable you to do business with us by regular telephone, unless you instruct us otherwise in writing. ^TELE-ACCOUNT(TM). To conduct account transactions through Vanguard's automated telephone service, you must first obtain a personal identification number (PIN). Call Tele-Account to obtain a PIN, and allow seven days before using this service. ^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone request if the caller is unable to provide the following information exactly as registered on the account: - - Ten-digit account number. - - Complete owner name and address. - - Primary Social Security or employer identification number. - - Personal Identification Number (PIN), if applicable. ^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's telephone transaction service at any time, without notice. ^SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES. To discourage market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and Balanced Index Fund generally do not permit telephone exchanges (in or out), except for IRAs and certain other retirement accounts. VANGUARD.COM ^REGISTRATION. You can use your personal computer to review your account holdings, to sell or exchange shares of most Vanguard funds, and to perform other transactions. To establish this service, you can register online. ^SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES. To discourage market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and Balanced Index Fund do not permit online exchanges (in or out), except for IRAs and certain other retirement accounts. 17 WRITTEN INSTRUCTIONS ^"GOOD ORDER" REQUIRED. We reserve the right to reject any written transaction instructions that are not in "good order." This means that your instructions must include: - - The fund name and account number. - - The amount of the transaction (in dollars or shares). - - Signatures of all owners exactly as registered on the account. - - Signature guarantees, if required for the type of transaction.* * For instance, signature guarantees must be provided by all registered account shareholders when redemption proceeds are to be sent to a different person or address. RESPONSIBILITY FOR FRAUD Vanguard will not be responsible for any account losses due to fraud, so long as we reasonably believe that the person transacting on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private and immediately review any account statements that we send to you. Contact Vanguard immediately about any transactions you believe to be unauthorized. UNCASHED CHECKS Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. LIMITS ON ACCOUNT ACTIVITY Because excessive account transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard limits account activity as follows: - - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A NON-MONEY MARKET FUND during any 12-month period. - - Your round trips through a non-money market fund must be at least 30 days apart. - - All funds may refuse share purchases at any time, for any reason. - - Vanguard reserves the right to revise or terminate the exchange privilege, limit the amount of an exchange, or reject an exchange, at any time, for any reason. A "round trip" is a redemption from a fund followed by a purchase back into the same fund. Also, a "round trip" covers transactions accomplished by any combination of methods, including transactions conducted by check, wire, or exchange to/from another Vanguard fund. "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect the management of the fund. 18 UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard online, by telephone, or by Tele-Account, you can send us your transaction request by regular or express mail. See Contacting Vanguard for addresses. INVESTING WITH VANGUARD THROUGH OTHER FIRMS You may purchase or sell shares of most Vanguard funds through a financial intermediary, such as a bank, broker, or investment adviser. If you invest with Vanguard through an intermediary, please read that firm's program materials carefully to learn of any special rules that may apply. For example, special terms may apply to additional service features, fees, or other policies. LOW BALANCE ACCOUNTS All Vanguard funds reserve the right to close any investment-only retirement-plan account or any nonretirement account whose balance falls below the minimum initial investment. Vanguard deducts a $10 fee in June from each nonretirement account whose balance at that time is below $2,500 ($500 for Vanguard STAR(TM) Fund). The fee is waived if your total Vanguard account assets are $50,000 or more. FUND AND ACCOUNT UPDATES PORTFOLIO SUMMARIES We will send you quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, sales, and exchanges for the current calendar year. AVERAGE COST REVIEW STATEMENTS For most taxable accounts, average cost review statements will accompany the quarterly portfolio summaries. These statements show the average cost of shares that you redeemed during the current calendar year, using the average cost single category method. CONFIRMATION STATEMENTS Each time you buy, sell, or exchange shares, we will send you a statement confirming the trade date and amount of your transaction. TAX STATEMENTS We will send you annual tax statements to assist in preparing your income tax returns. These statements, which are generally mailed in January, will report the previous year's dividend and capital gains distributions, proceeds from the sale of shares, and distributions from IRAs or other retirement plans. 19 REPORTS Fund financial reports about Vanguard Windsor Fund will be mailed twice a year--in June and December. These comprehensive reports include an assessment of the fund's performance (and a comparison to its industry benchmark), an overview of the financial markets, the fund's adviser reports, and the fund's financial statements, which include a listing of the fund's holdings. To keep the fund's costs as low as possible (so that you and other shareholders can keep more of the fund's investment earnings), Vanguard attempts to eliminate duplicate mailings to the same address. When we find that two or more shareholders have the same last name and address, we send just one fund report to that address instead of mailing separate reports to each shareholder. If you want us to send separate reports, however, you may notify our Client Services Department. CONTACTING VANGUARD ONLINE VANGUARD.COM - - Your best source of Vanguard news - - For fund, account, and service information - - For most account transactions - - For literature requests - - 24 hours per day, 7 days per week VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) - - For automated fund and account information - - For redemptions by check, exchange, or wire - - Toll-free, 24 hours per day, 7 days per week INVESTOR INFORMATION 1-800-662-7447 (SHIP) (Text telephone at 1-800-952-3335) - - For fund and service information - - For literature requests - - Business hours only CLIENT SERVICES 1-800-662-2739 (CREW) (Text telephone at 1-800-749-7273) - - For account information - - For most account transactions - - Business hours only INSTITUTIONAL DIVISION 1-888-809-8102 - - For information and services for large institutional investors - - Business hours only 20 VANGUARD ADDRESSES REGULAR MAIL (INDIVIDUALS--CURRENT CLIENTS): The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 REGULAR MAIL (INSTITUTIONS): The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 REGULAR MAIL (GENERAL INQUIRIES): The Vanguard Group P.O. Box 2600 Valley Forge, PA 19482-2600 REGISTERED OR EXPRESS MAIL: The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 FUND NUMBER Always use this fund number when contacting us about Vanguard Windsor Fund--22. GLOSSARY OF INVESTMENT TERMS CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND INCOME Payment to shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. FUND DIVERSIFICATION Holding a variety of securities so that a fund's return is not badly hurt by the poor performance of a single security, industry, or country. GROWTH STOCK FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth. Reflecting market expectations for superior growth, these stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. MUTUAL FUND An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is called its share value or share price. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The amount of money you put into an investment. SECURITIES Stocks, bonds, money market instruments, and other investment vehicles. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE STOCK FUND A mutual fund that emphasizes stocks of companies whose growth prospects are generally regarded as subpar by the market. Reflecting these market expectations, the prices of value stocks typically are below-average in comparison with such measures as earnings and book value, and these stocks typically pay above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations between its high and low prices. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [SHIP] [THE VANGUARD GROUP(R) LOGO] Post Office Box 2600 Valley Forge, PA 19482-2600 FOR MORE INFORMATION If you'd like more information about Vanguard Windsor Fund, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. All market indexes referenced in this prospectus are the exclusive property of their respective owners. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP INVESTOR INFORMATION DEPARTMENT P.O. BOX 2600 VALLEY FORGE, PA 19482-2600 TELEPHONE: 1-800-662-7447 (SHIP) TEXT TELEPHONE: 1-800-952-3335 WORLD WIDE WEB: WWW.VANGUARD.COM If you are a current Fund shareholder and would like information about your account, account transactions, and/or account statements, please call: CLIENT SERVICES DEPARTMENT TELEPHONE: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273 INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Fund are also available on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Fund's Investment Company Act file number: 811-834 (C) 2001 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P022 022001 VANGUARD(R) WINDSOR(TM) FUND FOR PARTICIPANTS - FEBRUARY 26, 2001 This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2000. STOCK PROSPECTUS Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accurace or adequacy of this prospectus. Any representation to the contrary is a criminal offense. [A MEMBER OF THE VANGUARD GROUP(R) LOGO] VANGUARD WINDSOR FUND Participant Prospectus February 26, 2001 A Growth and Income Stock Mutual Fund - -------------------------------------------------------------------------------- CONTENTS - -------------------------------------------------------------------------------- 1 FUND PROFILE 3 ADDITIONAL INFORMATION 3 MORE ON THE FUND 7 THE FUND AND VANGUARD 8 INVESTMENT ADVISERS 9 DIVIDENDS, CAPITAL GAINS, AND TAXES 10 SHARE PRICE 10 FINANCIAL HIGHLIGHTS 11 INVESTING WITH VANGUARD 12 ACCESSING FUND INFORMATION BY COMPUTER GLOSSARY (inside back cover) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided "Plain Talk(R)" explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. This prospectus is intended for participants in employer-sponsored retirement or savings plans. Another version--for investors who would like to open a personal investment account--can be obtained by calling Vanguard at 1-800-662-7447. - -------------------------------------------------------------------------------- 1 FUND PROFILE INVESTMENT OBJECTIVE The Fund seeks to provide long-term growth of capital. As a secondary objective, the Fund seeks to provide some dividend income. INVESTMENT STRATEGIES The Fund invests mainly in large- and medium-size companies whose stocks are considered by the Fund's advisers to be undervalued. Undervalued stocks are generally those that are out of favor with investors and currently trading at prices that, the adviser feels, are below what the stocks are worth in relation to their earnings. These stocks typically--but not always--have lower-than-average price/earnings (P/E) ratios and higher-than-average dividend yields. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the overall stock market. The Fund's performance could be hurt by: - - Investment style risk, which is the chance that returns from large- and mid-capitalization value stocks--which make up most of the Fund's holdings--will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. - - Manager risk, which is the chance that poor security selection will cause the Fund to underperform other funds with similar investment objectives. PERFORMANCE/RISK INFORMATION The following bar chart is intended to help you understand the risks of investing in the Fund. It shows how the Fund's performance has varied from one calendar year to another over the past ten years. In addition, there is a table that shows how the Fund's average annual total returns compare with those of relevant market indexes over set periods of time. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS [SCALE -10% TO 50%] 1991 28.55% 1992 16.50% 1993 19.37% 1994 -0.15% 1995 30.15% 1996 26.36% 1997 21.97% 1998 0.81% 1999 11.57% 2000 15.89% ---------------------------------------------------- During the period shown in the bar chart, the highest return for a calendar quarter was 18.25% (quarter ended March 31, 1991), and the lowest return for a quarter was -19.40% (quarter ended September 30, 1998). 2 -------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 2000 -------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS -------------------------------------------------------------------- Vanguard Windsor Fund 15.89% 14.97% 16.66% Standard & Poor's 500 Index -9.10 18.33 17.46 Russell 1000 Value Index 7.01 16.91 17.37 -------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2000. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None Exchange Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.29% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.31% The following example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $32 $100 $174 $393 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT FUND EXPENSES All mutual funds have operating expenses. These expenses, which are deducted from a fund's gross income, are expressed as a percentage of the net assets of the fund. Vanguard Windsor Fund's expense ratio in fiscal year 2000 was 0.31%, or $3.10 per $1,000 of average net assets. The average multi-cap value mutual fund had expenses in 1999 of 1.39%, or $13.90 per $1,000 of average net assets (derived from data provided by Lipper Inc., which reports on the mutual fund industry). Management expenses, which are one part of operating expenses, include investment advisory fees as well as other costs of managing a fund--such as account maintenance, reporting, accounting, legal, and other administrative expenses. - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs associated with the fund's buying and selling of securities. These costs can erode a substantial portion of the gross income or capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF OCTOBER 31, Dividends are distributed semiannually 2000 in June and December; capital gains, $15.9 billion if any, are distributed annually in December NEWSPAPER ABBREVIATION INVESTMENT ADVISERS Wndsr - -Wellington Management Company, LLP, Boston, Mass., since inception VANGUARD FUND NUMBER - -Sanford C. Bernstein & Co., LLC., New York 022 City, N.Y., since 1999 - -The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER since 1999 922018106 INCEPTION DATE TICKER SYMBOL October 23, 1958 VWNDX - -------------------------------------------------------------------------------- MORE ON THE FUND This prospectus describes risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about each type of risk that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote unless those strategies or policies are designated as fundamental. Finally, you'll find information on other important features of the Fund. MARKET EXPOSURE The Fund invests mainly in common stocks of large- and mid-capitalization companies that offer favorable prospects for growth of earnings and dividend income, but whose prices do not reflect these prospects. The Fund may also invest in securities that are convertible to common stocks. Because it invests mainly in stocks, the Fund is subject to certain risks. 4 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS Stocks of publicly traded companies--and mutual funds that hold these stocks--can be classified by the companies' market value, or capitalization. Market capitalization changes over time, and there is no "official" definition of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally defines large-cap funds as those holding stocks of companies whose outstanding shares have, on average, a market value exceeding $13 billion; mid-cap funds as those holding stocks of companies with a market value between $1.5 billion and $13 billion; and small-cap funds as those holding stocks of companies with a market value of less than $1.5 billion. Vanguard periodically reassesses these classifications. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VALUE FUNDS AND GROWTH FUNDS Value investing and growth investing are two styles employed by stock fund managers. Value funds generally emphasize stocks of companies from which the market does not expect strong growth. The prices of value stocks typically are below-average in comparison to such measures as earnings and book value, and these stocks typically have above-average dividend yields. Growth funds generally focus on companies believed to have above-average potential for growth in revenue and earnings. Reflecting the market's high expectations for superior growth, such stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. Value and growth stocks have, in the past, produced similar long-term returns, though each category has periods when it outperforms the other. In general, value funds are appropriate for investors who want some dividend income and the potential for capital gains, but are less tolerant of share-price fluctuations. Growth funds, by contrast, appeal to investors who will accept more volatility in hopes of a greater increase in share price. Growth funds also may appeal to investors with taxable accounts who want a higher proportion of returns to come as capital gains (which may be taxed at lower rates than dividend income). - -------------------------------------------------------------------------------- [FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the S&P 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. Note, also, that the gap between best and worst tends to narrow over the long term. 5 - ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2000) - ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS - ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.9 11.1 11.2 11.2 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2000. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 11.1%, returns for individual 5-year periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or this Fund in particular. [FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM OTHER MARKET SECTORS. AS A GROUP, LARGE- AND MID-CAPITALIZATION VALUE STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS. SECURITY SELECTION Vanguard Windsor Fund employs two primary investment advisers, each of which independently chooses and maintains a portfolio of common stocks for the Fund. Each adviser is responsible for a specific percentage of the Fund's assets. These investment advisers employ active investment management methods, which means that securities are bought and sold according to the advisers' evaluations about companies and their financial prospects, and the stock market and economy in general. Each adviser will sell a security when it is no longer as attractive as alternative investments. While each adviser uses a different process to select securities, both are committed to investing in large- and mid-cap stocks that, in their opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and currently trading at prices that, the adviser feels, are below what the stocks are worth in relation to their earnings. These stocks typically--but not always--have lower-than-average price/earnings (P/E) ratios and higher-than-average dividend yields. Wellington Management Company, LLP (Wellington Management), managed about 74% of the Fund's assets as of October 31, 2000. A stock's value is the key element in the adviser's selection process. Wellington Management considers several fundamental factors, including the stock's projected growth rate, earnings potential, dividend yield, and P/E ratio. To be a candidate for purchase, a stock must have strong prospects for capital appreciation, but be trading at a P/E ratio that is lower than what is expected of a stock with such potential. Sanford C. Bernstein & Co., LLC (Bernstein), which managed about 24% of the Fund's assets as of October 31, 2000, also uses traditional methods of stock selection--research and analysis--to identify undervalued stocks. The adviser also employs quantitative valuation tools to identify attractive stocks and the most opportune time to purchase them. The Vanguard Group (Vanguard), which managed about 2% of the Fund's assets as of October 31, 2000, may invest the Fund's cash investments in stock futures. This strategy is intended to keep the Fund more fully exposed to common stocks while retaining cash on 6 hand to meet liquidity needs. See "Other Investment Policies and Risks" for more details on the Fund's policy on futures. The Fund is generally managed without regard to tax ramifications. [FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS. OTHER INVESTMENT POLICIES AND RISKS Besides investing in undervalued common stocks, the Fund may make certain other kinds of investments to achieve its objective. Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 20% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to (1) country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or a natural disaster--will weaken a country's securities markets; and (2) currency risk, which is the chance that a foreign investment will decrease in value because of unfavorable changes in currency exchange rates. The Fund may invest in money market instruments, fixed income securities, convertible securities, and other equity securities, such as preferred stocks. The Fund may invest up to 15% of its assets in restricted securities with limited marketability or other illiquid securities. The Fund may also invest in stock futures and options contracts, which are traditional types of derivatives. Losses (or gains) involving futures can sometimes be substantial--in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. The Fund will not use futures for speculative purposes or as leveraged investments that magnify gains or losses. The Fund's obligation under futures contracts will not exceed 20% of its total assets. The reasons for which the Fund will invest in futures and options are: - - To keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in stocks. - - To reduce the Fund's transaction costs or add value when these instruments are favorably priced. The Fund may temporarily depart from its normal investment policies--for instance, by investing substantially in cash investments--in response to extraordinary market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses but otherwise fail to achieve its investment objective. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DERIVATIVES A derivative is a financial contract whose value is based on (or "derived" from) a traditional security (such as a stock or a bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indexes, have been trading on regulated exchanges for more than two decades. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Nonstandardized derivatives (such as swap agreements), on the other hand, tend to be more specialized or complex, and may be harder to value. If used for speculation or as leveraged investments, derivatives can carry considerable risks. - -------------------------------------------------------------------------------- 7 COSTS AND MARKET-TIMING Some investors try to profit from a strategy called market-timing--switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all Vanguard funds have adopted special policies to discourage short-term trading. Specifically: - - Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--that it regards as disruptive to efficient portfolio management. A purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor. - - Each Vanguard fund (except the money market funds) limits the number of times that an investor can exchange into and out of the fund. - - Each Vanguard fund reserves the right to stop offering shares at any time. - - Certain Vanguard funds charge transaction fees on purchases and/or redemptions of their shares. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. TURNOVER RATE Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS section of this prospectus shows historic turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of October 31, 2000, the average turnover rate for all mid-cap value funds was approximately 106%, according to Morningstar, Inc. - -------------------------------------------------------------------------------- THE FUND AND VANGUARD The Fund is a member of The Vanguard Group, a family of more than 35 investment companies with more than 100 funds holding assets worth more than $570 billion. All of the Vanguard funds share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. 8 Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. - -------------------------------------------------------------------------------- INVESTMENT ADVISERS The Fund uses a multimanager approach. It employs two primary investment advisers, each of which independently manages a separate portion of the Fund's assets, subject to the control of the trustees and officers of the Fund. - - Wellington Management Company, LLP (Wellington Management), 75 State Street,Boston, MA 02109, is an investment advisory firm founded in 1928. As of October 31, 2000, Wellington Management managed about $269 billion in assets. - - Sanford C. Bernstein & Co., LLC (Bernstein), 767 Fifth Avenue, New York City, NY 10153, is an investment advisory firm that continues the investment management business of Sanford C. Bernstein & Co., Inc., a registered investment adviser founded in 1967. As of October 31, 2000, Bernstein managed about $10.1 billion in assets. - - The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in 1975, is a wholly owned subsidiary of the Vanguard funds. As of October 31, 2000, Vanguard served as adviser for about $396.7 billion in assets. The Fund pays two of its investment advisers--Wellington Management and Bernstein--on a quarterly basis. For each adviser, the quarterly fee is based on certain annual percentage rates applied to average month-end net assets managed by the adviser over the quarterly period. In addition, the quarterly fees paid to each adviser are increased or decreased based upon the adviser's performance in comparison to a benchmark index. For these purposes, the cumulative total return of each adviser's portion of the Fund over a trailing 36-month period is compared to the cumulative total return of the S&P 500 Index (for Wellington Management) and the Russell 1000 Value Index (for Bernstein) over the same period. Please consult the Fund's Statement of Additional Information for a complete explanation of how advisory fees are calculated. The Fund pays no advisory fees to Vanguard, since it provides services to the Fund on an at-cost basis. For the fiscal year ended October 31, 2000, the advisory fees and expenses represented an effective annual rate of 0.13% of the Fund's average net assets before a decrease of 0.08% based on performance. The advisers are authorized to choose broker-dealers to handle the purchase and sale of the Fund's portfolio securities, and to obtain the best available price and most favorable execution for all transactions. Also, the Fund may direct the advisers to use a particular 9 broker for certain transactions in exchange for commission rebates or research services provided to the Fund. In the interest of obtaining better execution of a transaction, the advisers may at times choose brokers who charge higher commissions. If more than one broker can obtain the best available price and most favorable execution, then the advisers are authorized to choose a broker who, in addition to executing the transaction, will provide research services to the advisers or the Fund. The board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment adviser--either as a replacement for an existing adviser or as an additional adviser. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard Group may provide investment advisory services to the Fund, on an at-cost basis, at any time. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUND'S ADVISERS The managers primarily responsible for overseeing the Fund's investments are: CHARLES T. FREEMAN, Senior Vice President and Partner of Wellington Management. He has worked in investment management since 1967; has been with Wellington Management since 1969; had been Assistant Fund Manager since 1974; and has been Fund Manager since 1996. Education: B.S. and M.B.A., University of Pennsylvania. MARILYN G. FEDAK, Chief Investment Officer, U.S. Value Equities and Chairman of the Bernstein U.S. Equity Investment Policy Group. She has worked in investment management since 1972; has managed portfolio investments for Bernstein and its predecessor since 1984; and has managed the Fund since 1999. Education: B.A., Smith College; M.B.A., Harvard Business School. STEVEN PISARKIEWICZ, Senior Portfolio Manager at Bernstein. He has worked in investment management since 1983; has been with Bernstein and its predecessor since 1989; and has managed the Fund since 1999. Education: B.S., University of Missouri; M.B.A., University of California at Berkeley. GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Quantitative Equity Group. He has worked in investment management since 1985 and has had primary responsibility for Vanguard's stock indexing investments and strategy since joining the company in 1987. Education: A.B., Dartmouth College; M.B.A., University of Chicago. - -------------------------------------------------------------------------------- DIVIDENDS, CAPITAL GAINS, AND TAXES The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses), as well as any capital gains realized from the sale of its holdings. Income dividends generally are distributed in June and December; capital gains distributions generally occur in December. Your dividend and capital gains distributions will be reinvested in additional Fund shares and accumulate on a tax-deferred basis if you are investing through an employer-sponsored retirement or savings plan. You will not owe taxes on these distributions until you begin 10 withdrawals from the plan. You should consult your plan administrator, your plan's Summary Plan Description, or your tax adviser about the tax consequences of plan withdrawals. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends, and gains from the sale of investments. You receive such earnings as either an income dividend or a capital gains distribution. Income dividends come from both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less, or more than one year. - -------------------------------------------------------------------------------- SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day after the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. (The NAV is not calculated on holidays or other days when the Exchange is closed.) Net asset value per share is computed by dividing the net assets of the Fund by the number of Fund shares outstanding. Knowing the daily net asset value is useful to you as a shareholder because it indicates the current value of your investment. The Fund's NAV, multiplied by the number of shares you own, gives you the dollar amount you would have received had you sold all of your shares back to the Fund that day. A NOTE ON PRICING: The Fund's investments will be priced at their market value when market quotations are readily available. When these quotations are not readily available, investments will be priced at their fair value, calculated according to procedures adopted by the Fund's board of trustees. The Fund's share price can be found daily in the mutual fund listings of most major newspapers under the heading "Vanguard Funds." FINANCIAL HIGHLIGHTS The following financial highlights table is intended to help you understand the Fund's financial performance for the past five years, and certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost each year on an investment in the Fund (assuming reinvestment of all dividend and capital gains distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. You may have the annual report sent to you without charge by contacting Vanguard. 11
- ---------------------------------------------------------------------------------------- VANGUARD WINDSOR FUND YEAR ENDED OCTOBER 31, 2000 ---------------------------------------------------------------- 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $16.91 $16.34 $19.55 $16.99 $15.55 - ---------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .28 .27 .23 .36 .43 Net Realized and Unrealized Gain (Loss) on Investments 1.44 1.77 (.32) 3.94 2.85 ---------------------------------------------------------------- Total from Investment Operations 1.72 2.04 (.09) 4.30 3.28 ---------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.29) (.24) (.24) (.41) (.46) Distributions from Realized Capital Gains (1.90) (1.23) (2.88) (1.33) (1.38) ---------------------------------------------------------------- Total Distributions (2.19) (1.47) (3.12) (1.74) (1.84) - ---------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR $16.44 $16.91 $16.34 $19.55 $16.99 - ---------------------------------------------------------------------------------------- TOTAL RETURN 11.60% 13.74% -0.78% 27.04% 23.16% ======================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (Millions) $15,935 $16,824 $18,355 $20,678 $15,841 Ratio of Total Expenses to Average Net Assets 0.31% 0.28% 0.27% 0.27% 0.31% Ratio of Net Investment Income to Average Net Assets 1.75% 1.56% 1.31% 1.89% 2.75% Turnover Rate 41% 56% 48% 61% 34% ========================================================================================
- -------------------------------------------------------------------------------- PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE The Fund began fiscal 2000 with a net asset value (price) of $16.91 per share. During the year, the Fund earned $0.28 per share from investment income (interest and dividends) and $1.44 per share from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $2.19 per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The earnings ($1.72 per share) minus the distributions ($2.19 per share) resulted in a share price of $16.44 at the end of the year. This was a decrease of $0.47 per share (from $16.91 at the beginning of the year to $16.44 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return from the Fund was 11.60% for the year. As of October 31, 2000, the Fund had $15.9 billion in net assets. For the year, its expense ratio was 0.31% ($3.10 per $1,000 of net assets); and its net investment income amounted to 1.75% of its average net assets. It sold and replaced securities valued at 41% of its net assets. - -------------------------------------------------------------------------------- INVESTING WITH VANGUARD The Fund is an investment option in your retirement or savings plan. Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect the Fund as an investment option. - - If you have any questions about the Fund or Vanguard, including those about the Fund's investment objective, strategies, or risks, contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188. 12 - - If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan. INVESTMENT OPTIONS AND ALLOCATIONS Your plan's specific provisions may allow you to change your investment selections, the amount of your contributions, or how your contributions are allocated among the investment choices available to you. Contact your plan administrator or employee benefits office for more details. TRANSACTIONS Contributions, exchanges, or redemptions of the Fund's shares are processed as soon as they have been received by Vanguard in good order. Good order means that your request includes complete information on your contribution, exchange, or redemption, and that Vanguard has received the appropriate assets. In all cases, your transaction will be based on the Fund's next-determined net asset value after Vanguard receives your request (or, in the case of new contributions, the next-determined net asset value after Vanguard receives the order from your plan administrator). As long as this request is received before the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern time, you will receive that day's net asset value. EXCHANGES The exchange privilege (your ability to redeem shares from one fund to purchase shares of another fund) may be available to you through your plan. Although we make every effort to maintain the exchange privilege, Vanguard reserves the right to revise or terminate this privilege, limit the amount of an exchange, or reject any exchange, at any time, without notice. Because excessive exchanges can potentially disrupt the management of the Fund and increase its transaction costs, Vanguard limits participant exchange activity to no more than FOUR SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any 12-month period. A "round trip" is a redemption from the Fund followed by a purchase back into the Fund. "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect the management of the Fund. Before making an exchange to or from another fund available in your plan, consider the following: - - Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions. - - Make sure to read that fund's prospectus. Contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188 for a copy. - - Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on the exchange policies that apply to your plan. ACCESSING FUND INFORMATION BY COMPUTER VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM Use your personal computer to visit Vanguard's education-oriented website, which provides timely news and information about Vanguard funds and services; the online Education Center that offers a variety of mutual fund classes; and easy-to-use, interactive tools to help you create your own investment and retirement strategies. GLOSSARY OF INVESTMENT TERMS CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND INCOME Payment to shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. FUND DIVERSIFICATION Holding a variety of securities so that a fund's return is not badly hurt by the poor performance of a single security, industry, or country. GROWTH STOCK FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth. Reflecting market expectations for superior growth, these stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. MUTUAL FUND An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is called its share value or share price. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The amount of money you put into an investment. SECURITIES Stocks, bonds, money market instruments, and other investment vehicles. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE STOCK FUND A mutual fund that emphasizes stocks of companies whose growth prospects are generally regarded as subpar by the market. Reflecting these market expectations, the prices of value stocks typically are below-average in comparison with such measures as earnings and book value, and these stocks typically pay above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations between its high and low prices. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [SHIP] [THE VANGUARD GROUP(R) LOGO] Institutional Division Post Office Box 2900 Valley Forge, PA 19482-2900 FOR MORE INFORMATION If you'd like more information about Vanguard Windsor Fund, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. All market indexes referenced in this prospectus are the exclusive property of their respective owners. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP PARTICIPANT ACCESS CENTER P.O. BOX 2900 VALLEY FORGE, PA 19482-2900 TELEPHONE: 1-800-523-1188 TEXT TELEPHONE: 1-800-523-8004 WORLD WIDE WEB: WWW.VANGUARD.COM INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Fund are also available on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Fund's Investment Company Act file number: 811-834 (C) 2001 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I022 022001 VANGUARD(R) WINDSOR(TM) II FUND INVESTOR SHARES - FEBRUARY 26, 2001 This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2000. STOCK PROSPECTUS Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accurace or adequacy of this prospectus. Any representation to the contrary is a criminal offense. [A MEMBER OF THE VANGUARD GROUP(R) LOGO] VANGUARD WINDSOR II FUND Prospectus February 26, 2001 A Growth and Income Stock Mutual Fund - -------------------------------------------------------------------------------- CONTENTS - -------------------------------------------------------------------------------- 1 FUND PROFILE 3 ADDITIONAL INFORMATION 3 MORE ON THE FUND 8 THE FUND AND VANGUARD 9 INVESTMENT ADVISERS 10 DIVIDENDS, CAPITAL GAINS, AND TAXES 12 SHARE PRICE 12 FINANCIAL HIGHLIGHTS 13 INVESTING WITH VANGUARD 13 Buying Shares 14 Redeeming Shares 16 Other Rules You Should Know 18 Fund and Account Updates 19 Contacting Vanguard GLOSSARY (inside back cover) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided "Plain Talk(R)" explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. - -------------------------------------------------------------------------------- 1 FUND PROFILE INVESTMENT OBJECTIVE The Fund seeks to provide long-term growth of capital. As a secondary objective, the Fund seeks to provide some dividend income. INVESTMENT STRATEGIES The Fund invests mainly in large- and medium-size companies whose stocks are considered by the Fund's advisers to be undervalued. Such stocks, called "value" stocks, often are out of favor in periods when investors are drawn to companies with strong prospects for growth. The prices of value stocks, therefore, may be below average in comparison with such fundamental factors as earnings, revenue, and book value. In addition, value stocks often provide an above-average dividend yield. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the overall stock market. The Fund's performance could be hurt by: - - Investment style risk, which is the chance that returns from large- and mid-capitalization value stocks--which comprise most of the fund's stock holdings--will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. - - Manager risk, which is the chance that poor security selection will cause the Fund to underperform other funds with similar investment objectives. PERFORMANCE/RISK INFORMATION The following bar chart is intended to help you understand the risks of investing in the Fund. It shows how the Fund's performance has varied from one calendar year to another over the past ten years. In addition, there is a table that shows how the Fund's average annual total returns compare with those of relevant market indexes over set periods of time. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS [SCALE -20% TO 50%] 1991 28.70% 1992 11.99% 1993 13.60% 1994 -1.16% 1995 38.83% 1996 24.18% 1997 32.37% 1998 16.36% 1999 -5.81% 2000 16.86% ---------------------------------------------------- During the period shown in the bar chart, the highest return for a calendar quarter was 17.90% (quarter ended March 31, 1991), and the lowest return for a quarter was -13.55% (quarter ended Septmber 30, 1999). 2 -------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 2000 -------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS -------------------------------------------------------------------- Vanguard Windsor II Fund 16.86% 16.06% 16.81% Standard & Poor's 500 Index -9.10 18.33 17.46 Standard & Poor's 500/BARRA Value Index 6.08 16.81 16.87 Russell 1000 Value Index 7.01 16.91 17.37 -------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2000. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None Exchange Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.35% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.37% The following example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $38 $119 $208 $468 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 3 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT FUND EXPENSES All mutual funds have operating expenses. These expenses, which are deducted from a fund's gross income, are expressed as a percentage of the net assets of the fund. Vanguard Windsor II Fund's expense ratio in fiscal year 2000 was 0.37%, or $3.70 per $1,000 of average net assets. The average large-cap value mutual fund had expenses in 1999 of 1.39%, or $13.90 per $1,000 of average net assets (derived from data provided by Lipper Inc., which reports on the mutual fund industry). Management expenses, which are one part of operating expenses, include investment advisory fees as well as other costs of managing a fund--such as account maintenance, reporting, accounting, legal, and other administrative expenses. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs associated with the fund's buying and selling of securities. These costs can erode a substantial portion of the gross income or capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF OCTOBER 31, 2000 Dividends are distributed semiannually $24.1 billion in June and December; capital gains, if any, are distributed annually in SUITABLE FOR IRAS December Yes INVESTMENT ADVISERS MINIMUM INITIAL INVESTMENT - - Barrow, Hanley, Mewhinney & Strauss, $3,000; $1,000 for IRAs and custodial Inc., Dallas, Tex., since inception accounts for minors - - Equinox Capital Management LLC, New York City, N.Y., since 1991 NEWSPAPER ABBREVIATION - - Tukman Capital Management, Inc., WndsrII Larkspur, Calif., since 1991 - - The Vanguard Group, Valley Forge, Pa., VANGUARD FUND NUMBER since 1991 073 INCEPTION DATE CUSIP NUMBER June 24, 1985 922018205 TICKER SYMBOL VWNFX - -------------------------------------------------------------------------------- MORE ON THE FUND This prospectus describes risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. 4 Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about each type of risk that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote unless those strategies or policies are designated as fundamental. Finally, you'll find information on other important features of the Fund. MARKET EXPOSURE The Fund invests mainly in common stocks of large- and mid-capitalization companies that offer favorable prospects for growth of earnings and dividend income, but whose prices do not reflect these prospects. Typically, the Fund spreads its assets over a broadly diversified group of companies. Because it invests mainly in stocks, the Fund is subject to certain risks. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS Stocks of publicly traded companies--and mutual funds that hold these stocks--can be classified by the companies' market value, or capitalization. Market capitalization changes over time, and there is no "official" definition of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally defines large-cap funds as those holding stocks of companies whose outstanding shares have, on average, a market value exceeding $13 billion; mid-cap funds as those holding stocks of companies with a market value between $1.5 billion and $13 billion; and small-cap funds as those holding stocks of companies with a market value of less than $1.5 billion. Vanguard periodically reassesses these classifications. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VALUE FUNDS AND GROWTH FUNDS Value investing and growth investing are two styles employed by stock fund managers. Value funds generally emphasize stocks of companies from which the market does not expect strong growth. The prices of value stocks typically are below-average in comparison to such measures as earnings and book value, and these stocks typically have above-average dividend yields. Growth funds generally focus on companies believed to have above-average potential for growth in revenue and earnings. Reflecting the market's high expectations for superior growth, such stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. Value and growth stocks have, in the past, produced similar long-term returns, though each category has periods when it outperforms the other. In general, value funds are appropriate for investors who want some dividend income and the potential for capital gains, but are less tolerant of share-price fluctuations. Growth funds, by contrast, appeal to investors who will accept more volatility in hopes of a greater increase in share price. Growth funds also may appeal to investors with taxable accounts who want a higher proportion of returns to come as capital gains (which may be taxed at lower rates than dividend income). - -------------------------------------------------------------------------------- 5 [FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. Note, also, that the gap between best and worst tends to narrow over the long term. - ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2000) - ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS - ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.9 11.1 11.2 11.2 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2000. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 11.1%, returns for individual 5-year periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or this Fund in particular. [FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM OTHER MARKET SECTORS. AS A GROUP, LARGE- AND MID- CAPITALIZATION VALUE STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS. SECURITY SELECTION Vanguard Windsor II Fund employs four investment advisers, each of which independently chooses and maintains a portfolio of common stocks for the Fund. Each adviser is responsible for a specific percentage of the Fund's assets. These investment advisers employ active investment management methods, which means that securities are bought and sold according to the advisers' evaluations about companies and their financial prospects, and the stock market and economy in general. Each adviser will sell a security when it is no longer as attractive as an alternative investment. While each adviser uses a different process to select securities, all four are committed to investing in large- and mid-cap stocks that, in their opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and currently trading at prices that, the adviser feels, are below what the stocks are worth in relation to their earnings. These stocks typically--but not always--have lower-than-average price/earnings (P/E) ratios and higher-than-average dividend yields. Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), which managed about 62% of the Fund's assets as of October 31, 2000, uses traditional methods of stock selection-- 6 research and analysis--to identify undervalued securities. A security will be sold when, in the adviser's opinion, its share price accurately reflects the security's overall worth. At that point, another undervalued security will be chosen. No more than 15% of their portfolio is devoted to a single industry. Equinox Capital Management, LLC (Equinox), which managed about 15% of the Fund's assets as of October 31, 2000, uses its own fundamental research and proprietary software to identify undervalued securities with attractive growth and dividend prospects. Like Barrow, Hanley, it avoids large concentrations in a single industry. Tukman Capital Management, Inc. (Tukman), which managed about 13% of the Fund's assets as of October 31, 2000, also uses traditional research methods to select undervalued securities. Tukman typically buys stocks of financially sound companies in growing business sectors and holds them for three to five years, on average. The Vanguard Group (Vanguard), which managed about 6% of the Fund's assets as of October 31, 2000, selects stocks from a "universe" of about 550 companies. Vanguard, using quantitative models, evaluates the stocks on the basis of several fundamental factors, such as a stock's price in relation to its projected growth rate. The stocks selected are expected, as a group, to outperform the Russell 1000 Value Index, a benchmark of large- and mid-cap value stocks. Vanguard, which also managed about 4% of the Fund's assets as of October 31, 2000, as cash investments, may invest the Fund's cash investments in stock futures. This strategy is intended to keep the Fund more fully exposed to common stocks while retaining cash on hand to meet liquidity needs. See "Other Investment Policies and Risks" for more details on the Fund's policy on futures. The Fund is generally managed without regard to tax ramifications. [FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS. OTHER INVESTMENT POLICIES AND RISKS Besides investing in undervalued common stocks, the Fund may make certain other kinds of investments to achieve its objective. Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 20% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to (1) country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or a natural disaster--will weaken a country's securities markets; and (2) currency risk, which is the chance that a foreign investment will decrease in value because of unfavorable changes in currency exchange rates. The Fund may invest in money market instruments, fixed income securities, convertible securities, and other equity securities, such as preferred stocks. The Fund may invest up to 15% of its assets in restricted securities with limited marketability or other illiquid securities. The Fund may also invest in stock futures and options contracts, which are traditional types of derivatives. Losses (or gains) involving futures can sometimes be substantial--in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. The Fund will not use futures for speculative purposes or as leveraged investments that magnify gains or losses. The Fund's obligation under futures contracts will not exceed 20% of its total assets. 7 The reasons for which the Fund will invest in futures and options are: - - To keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in stocks. - - To reduce the Fund's transaction costs or add value when these instruments are favorably priced. The Fund may temporarily depart from its normal investment policies--for instance, by investing substantially in cash investments--in response to extraordinary market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses but otherwise fail to achieve its investment objective. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DERIVATIVES A derivative is a financial contract whose value is based on (or "derived" from) a traditional security (such as a stock or a bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indexes, have been trading on regulated exchanges for more than two decades. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Nonstandardized derivatives (such as swap agreements), on the other hand, tend to be more specialized or complex, and may be harder to value. If used for speculation or as leveraged investments, derivatives can carry considerable risks. - -------------------------------------------------------------------------------- COSTS AND MARKET-TIMING Some investors try to profit from a strategy called market-timing--switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all Vanguard funds have adopted special policies to discourage short-term trading. Specifically: - - Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--that it regards as disruptive to efficient portfolio management. A purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor. - - Each Vanguard fund (except the money market funds) limits the number of times that an investor can exchange into and out of the fund. - - Each Vanguard fund reserves the right to stop offering shares at any time. - - Vanguard U.S. Stock Index Funds, International Stock Index Funds, REIT Index Fund, Balanced Index Fund, and Growth and Income Fund generally do NOT accept exchanges by telephone or fax, or online. (IRAs and other retirement accounts are not subject to this rule.) - - Certain Vanguard funds charge transaction fees on purchases and/or redemptions oftheir shares. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. 8 TURNOVER RATE Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS section of this prospectus shows historic turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of October 31, 2000, the average turnover rate for all large-cap value funds was approximately 106%, according to Morningstar, Inc. - -------------------------------------------------------------------------------- THE FUND AND VANGUARD The Fund is a member of The Vanguard Group, a family of more than 35 investment companies with more than 100 funds holding assets worth more than $570 billion. All of the Vanguard funds share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. - -------------------------------------------------------------------------------- 9 INVESTMENT ADVISERS The Fund uses a multimanager approach. It employs four investment advisers, each of which independently manages a separate portion of the Fund's assets, subject to the control of the trustees and officers of the Fund. - - Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), One McKinney Plaza, 3232 McKinney Avenue, 15th Floor, Dallas, TX 75204, is an investment advisory firm founded in 1979. As of October 31, 2000, the firm managed about $26.7 billion in assets. - - Equinox Capital Management, LLC (Equinox), 590 Madision Avenue, 41st Floor, New York, NY 10022, is an investment advisory firm founded in 1989. As of October 31, 2000, Equinox managed about $11 billion in assets. - - Tukman Capital Management, Inc. (Tukman), 60 East Sir Francis Drake Boulevard,Larkspur, CA 94939, is an investment advisory firm founded in 1980. As of October 31, 2000, Tukman managed about $8.2 billion in assets. - - The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in 1975, is a wholly owned subsidiary of the Vanguard funds. As of October 31, 2000, Vanguard served as adviser for about $396.7 billion in assets. The Fund pays three of its investment advisers--Barrow, Hanley, Equinox, and Tukman--on a quarterly basis. For each adviser, the quarterly fee is based on certain annual percentage rates applied to average month-end net assets managed by the adviser over the quarterly period. In addition, the quarterly fees paid to each adviser are increased or decreased based upon the adviser's performance in comparison to a benchmark index. For these purposes, the cumulative total return of each adviser's portion of the Fund over a trailing 36-month period is compared to the cumulative total return of the Standard & Poor's 500/BARRA Value Index (for Barrow, Hanley), the Russell 1000 Value Index (for Equinox), and the Standard & Poor's 500 Index (for Tukman) over the same period. Please consult the Fund's Statement of Additional Information for a complete explanation of how advisory fees are calculated. The Fund pays no advisory fees to Vanguard, since it provides services to the Fund on an at-cost basis. For the fiscal year ended October 31, 2000, the advisory fees and expenses represented an effective annual rate of 0.12% of the Fund's average net assets before a decrease of 0.03% based on performance. The advisers are authorized to choose broker-dealers to handle the purchase and sale of the Fund's portfolio securities, and to obtain the best available price and most favorable execution for all transactions. Also, the Fund may direct the advisers to use a particular broker for certain transactions in exchange for commission rebates or research services provided to the Fund. In the interest of obtaining better execution of a transaction, the advisers may at times choose brokers who charge higher commissions. If more than one broker can obtain the best available price and most favorable execution, then the advisers are authorized to choose a broker who, in addition to executing the transaction, will provide research services to the advisers or the Fund. The board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment adviser--either as a replacement for an existing adviser or as an additional adviser. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard Group may provide investment advisory services to the Fund, on an at-cost basis, at any time. 10 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUND'S ADVISERS The managers primarily responsible for overseeing the Fund's investments are: JAMES P. BARROW, Founding Partner of Barrow, Hanley. He has managed portfolio investments since 1963; has been with Barrow, Hanley since 1979; and has managed the Fund since 1985. Education: B.S., University of South Carolina. RONALD J. ULRICH, Chairman, Chief Investment Officer, and Founder of Equinox. He has worked in investment management since 1973; has been with Equinox since 1989; and has managed the Fund since 1991. Education: B.S., Lehigh University; M.B.A., New York University. MELVIN TUKMAN, President, Director, and Founder of Tukman. He has worked in investment management since 1971; has been with Tukman since 1980; and has managed the Fund since 1991. Education: A.B., Hunter College; M.B.A., Harvard Business School. DANIEL L. GROSSMAN, Vice President and Portfolio Manager of Tukman. He has worked in investment management since 1978; has been with Tukman since 1982; and has managed the Fund since 1991. Education: M.B.A., Stanford University. GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Quantitative Equity Group. He has worked in investment management since 1985 and has had primary responsibility for Vanguard's stock indexing investments and strategy since joining the company in 1987. Education: A.B., Dartmouth College; M.B.A., University of Chicago. - -------------------------------------------------------------------------------- DIVIDENDS, CAPITAL GAINS, AND TAXES FUND DISTRIBUTIONS The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses), as well as any capital gains realized from the sale of its holdings. Income dividends generally are distributed in June and December; capital gains distributions generally occur in December. You can receive distributions of income dividends or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends, and gains from the sale of investments. You receive such earnings as either an income dividend or a capital gains distribution. Income dividends come from both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less, or more than one year. - -------------------------------------------------------------------------------- BASIC TAX POINTS Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, taxable investors should be aware of the following basic tax points: 11 - - Distributions are taxable to you for federal income tax purposes whether or not you reinvest these amounts in additional Fund shares. - - Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. - - Any dividends and short-term capital gains that you receive are taxable to you as ordinary income for federal income tax purposes. - - Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned shares in the Fund. - - Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows. - - A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. - - Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT "BUYING A DIVIDEND" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should avoid buying shares of a fund shortly before it makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price would drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. - -------------------------------------------------------------------------------- GENERAL INFORMATION BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable distributions or redemptions from your account if you do not: n provide us with your correct taxpayer identification number; n certify that the taxpayer identification number is correct; and n confirm that you are not subject to backup withholding. Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so. FOREIGN INVESTORS. This Fund generally does not offer its shares for sale outside of the United States. Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds. INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address. TAX CONSEQUENCES. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax adviser for detailed information about a fund's tax consequences for you. 12 SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day after the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. (The NAV is not calculated on holidays or other days when the Exchange is closed.) Net asset value per share is computed by dividing the net assets of the Fund by the number of Fund shares outstanding. Knowing the daily net asset value is useful to you as a shareholder because it indicates the current value of your investment. The Fund's NAV, multiplied by the number of shares you own, gives you the dollar amount you would have received had you sold all of your shares back to the Fund that day. A NOTE ON PRICING: The Fund's investments will be priced at their market value when market quotations are readily available. When these quotations are not readily available, investments will be priced at their fair value, calculated according to procedures adopted by the Fund's board of trustees. The Fund's share price can be found daily in the mutual fund listings of most major newspapers under the heading "Vanguard Funds." FINANCIAL HIGHLIGHTS The following financial highlights table is intended to help you understand the Fund's financial performance for the past five years, and certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost each year on an investment in the Fund (assuming reinvestment of all dividend and capital gains distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. You may have the annual report sent to you without charge by contacting Vanguard.
- ---------------------------------------------------------------------------------------- VANGUARD WINDSOR II FUND YEAR ENDED OCTOBER 31, ---------------------------------------------------------------- 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $29.03 $31.07 $29.36 $24.04 $20.06 - ---------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .64 .64 .65 .64 .62 Net Realized and Unrealized Gain (Loss) on Investments 1.08 .73 3.91 6.47 4.63 ---------------------------------------------------------------- Total from Investment Operations 1.72 1.37 4.56 7.11 5.25 ---------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.67) (.74) (.66) (.63) (.58) Distributions from Realized Capital Gains (2.50) (2.67) (2.19) (1.16) (.69) ---------------------------------------------------------------- Total Distributions (3.17) (3.41) (2.85) (1.79) (1.27) - ---------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR $27.58 $29.03 $31.07 $29.36 $24.04 ======================================================================================== TOTAL RETURN 7.22% 4.57% 16.51% 31.27% 27.17% ======================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (Millions) $24,070 $30,541 $29,639 $22,568 $14,758 Ratio of Total Expenses to Average Net Assets 0.37% 0.37% 0.41% 0.37% 0.39% Ratio of Net Investment Income to Average Net Assets 2.36% 2.08% 2.16% 2.49% 2.92% Turnover Rate 26% 26% 31% 30% 32% ========================================================================================
13 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE The Fund began fiscal 2000 with a net asset value (price) of $29.03 per share. During the year, the Fund earned $0.64 per share from investment income (interest and dividends) and $1.08 per share from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $3.17 per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The earnings ($1.72 per share) minus the distributions ($3.17 per share) resulted in a share price of $27.58 at the end of the year. This was a decrease of $1.45 per share (from $29.03 at the beginning of the year to $27.58 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return from the Fund was 7.22% for the year. As of October 31, 2000, the Fund had $24.1 billion in net assets. For the year, its expense ratio was 0.37% ($3.70 per $1,000 of net assets); and its net investment income amounted to 2.36% of its average net assets. It sold and replaced securities valued at 26% of its net assets. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INVESTING WITH VANGUARD This section of the prospectus explains the basics of doing business with Vanguard. A special booklet, The Vanguard Service Directory, provides details of our many shareholder services for individual investors. A separate booklet, The Compass, does the same for institutional investors. You can request either booklet by calling or writing Vanguard, using the Contacting Vanguard instructions found at the end of this section. BUYING SHARES REDEEMING SHARES OTHER RULES YOU SHOULD KNOW FUND AND ACCOUNT UPDATES CONTACTING VANGUARD - -------------------------------------------------------------------------------- BUYING SHARES ACCOUNT MINIMUMS TO OPEN AND MAINTAIN AN ACCOUNT: $3,000 for regular accounts; $1,000 for IRAs and custodial accounts for minors. TO ADD TO AN EXISTING ACCOUNT: $100 by mail or exchange; $1,000 by wire. HOW TO BUY SHARES BY CHECK: Mail your check and a completed account registration form to Vanguard. When adding to an existing account, send your check with an Invest-By-Mail form detached from your last account statement. Make your check payable to: The Vanguard Group--73. For addresses, see Contacting Vanguard. 14 BY EXCHANGE PURCHASE: You can purchase shares with the proceeds of a redemption from another Vanguard fund. All open Vanguard funds permit exchange purchases requested in writing. MOST VANGUARD FUNDS--OTHER THAN THE STOCK AND BALANCED INDEX-ORIENTED FUNDS--ALSO ACCEPT EXCHANGE PURCHASES REQUESTED ONLINE OR BY TELEPHONE. See Other Rules You Should Know for specifics. BY WIRE: Call Vanguard to purchase shares by wire. See Contacting Vanguard. YOUR PURCHASE PRICE You buy shares at a fund's next-determined NAV after Vanguard receives your purchase request. As long as your request is received before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), you will buy your shares at that day's NAV. This is known as your TRADE DATE. PURCHASE RULES YOU SHOULD KNOW ^THIRD PARTY CHECKS. To protect the funds from check fraud, Vanguard will not accept checks made payable to third parties. ^U.S. CHECKS ONLY. All purchase checks must be written in U.S. dollars and drawn on a U.S. bank. ^LARGE PURCHASES. Vanguard reserves the right to reject any purchase request that may disrupt a fund's operation or performance. Please call us before attempting to invest a large dollar amount. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). ^FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares at any time, or to reject specific purchase requests, including purchases by exchange from another Vanguard fund. REDEEMING SHARES HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before initiating your request. ONLINE: Request a redemption through our website at Vanguard.com. BY TELEPHONE: Contact Vanguard by telephone to request a redemption. For telephone numbers, see Contacting Vanguard. BY MAIL: Send your written redemption instructions to Vanguard. For addresses, see Contacting Vanguard. YOUR REDEMPTION PRICE You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request, including any special documentation required under the circumstances. As 15 long as your request is received before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your shares are redeemed at that day's NAV. This is known as your TRADE DATE. TYPES OF REDEMPTIONS ^CHECK REDEMPTIONS. Unless instructed otherwise, Vanguard will mail you a check, normally within two business days of your trade date. ^EXCHANGE REDEMPTIONS. You may instruct Vanguard to apply the proceeds of your redemption to purchase shares of another Vanguard fund. All open Vanguard funds accept exchange redemptions requested in writing. Most Vanguard funds--other than the stock and balanced index-oriented funds--also accept exchange redemptions requested online or by telephone. See Other Rules You Should Know for specifics. ^WIRE REDEMPTIONS. When redeeming from a money market fund, bond fund, or Vanguard Preferred Stock Fund, you may instruct Vanguard to wire your redemption proceeds to a previously designated bank account. Wire redemptions are not available for Vanguard's other funds. The wire redemption option is not automatic; you must establish it by completing a special form or the appropriate section of your account registration. Also, wire redemptions must be requested in writing or by telephone, not online. For these funds, a $5 fee applies to wire redemptions under $5,000. Money Market Funds: For telephone requests received at Vanguard by 10:45 a.m., Eastern time, the redemption proceeds will arrive at your bank by the close of business that same day. For other requests received before 4 p.m., Eastern time, the redemption proceeds will arrive at your bank by the close of business on the following business day. Bond Funds and Preferred Stock Fund: For requests received at Vanguard by 4 p.m., Eastern time, the redemption proceeds will arrive at your bank by the close of business on the following business day. REDEMPTION RULES YOU SHOULD KNOW ^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. ^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or part of your redemption in-kind--that is, in the form of securities--if we believe that a cash redemption would disrupt the fund's operation or performance. Under these circumstances, Vanguard also reserves the right to delay payment of your redemption proceeds for up to seven days. By calling us before you attempt to redeem a large dollar amount, you are more likely to avoid in-kind or delayed payment of your redemption. 16 ^RECENTLY PURCHASED SHARES. While you can redeem shares at any time, proceeds will not be made available to you until the Fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or Vanguard Fund Express(R). ^SHARE CERTIFICATES. If share certificates have been issued for your account, those shares cannot be redeemed until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard. ^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make your redemption check payable to a different person or send it to a different address. However, this requires the written consent of all registered account owners, which must be provided under signature guarantees. You can obtain a signature guarantee from most commercial and savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). ^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days at any time. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds at times when the New York Stock Exchange is closed or during emergency circumstances, as determined by the U.S. Securities and Exchange Commission. OTHER RULES YOU SHOULD KNOW TELEPHONE TRANSACTIONS ^AUTOMATIC. In setting up your account, we'll automatically enable you to do business with us by regular telephone, unless you instruct us otherwise in writing. ^TELE-ACCOUNT(TM). To conduct account transactions through Vanguard's automated telephone service, you must first obtain a personal identification number (PIN). Call Tele-Account to obtain a PIN, and allow seven days before using this service. ^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone request if the caller is unable to provide the following information exactly as registered on the account: - - Ten-digit account number. - - Complete owner name and address. - - Primary Social Security or employer identification number. - - Personal Identification Number (PIN), if applicable. 17 ^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's telephone transaction service at any time, without notice. ^SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES. To discourage market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and Balanced Index Fund generally do not permit telephone exchanges (in or out), except for IRAs and certain other retirement accounts. VANGUARD.COM ^REGISTRATION. You can use your personal computer to review your account holdings, to sell or exchange shares of most Vanguard funds, and to perform other transactions. To establish this service, you can register online. ^SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES. To discourage market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and Balanced Index Fund do not permit online exchanges (in or out), except for IRAs and certain other retirement accounts. WRITTEN INSTRUCTIONS ^"GOOD ORDER" REQUIRED. We reserve the right to reject any written transaction instructions that are not in "good order." This means that your instructions must include: - - The fund name and account number. - - The amount of the transaction (in dollars or shares). - - Signatures of all owners exactly as registered on the account. - - Signature guarantees, if required for the type of transaction.* * For instance, signature guarantees must be provided by all registered account shareholders when redemption proceeds are to be sent to a different person or address. RESPONSIBILITY FOR FRAUD Vanguard will not be responsible for any account losses due to fraud, so long as we reasonably believe that the person transacting on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private and immediately review any account statements that we send to you. Contact Vanguard immediately about any transactions you believe to be unauthorized. UNCASHED CHECKS Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. LIMITS ON ACCOUNT ACTIVITY Because excessive account transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard limits account activity as follows: - - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A NON-MONEY MARKET FUND during any 12-month period. 18 - - Your round trips through a non-money market fund must be at least 30 days apart. - - All funds may refuse share purchases at any time, for any reason. - - Vanguard reserves the right to revise or terminate the exchange privilege, limit the amount of an exchange, or reject an exchange, at any time, for any reason. A "round trip" is a redemption from a fund followed by a purchase back into the same fund. Also, a "round trip" covers transactions accomplished by any combination of methods, including transactions conducted by check, wire, or exchange to/from another Vanguard fund. "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect the management of the fund. UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard online, by telephone, or by Tele-Account, you can send us your transaction request by regular or express mail. See Contacting Vanguard for addresses. INVESTING WITH VANGUARD THROUGH OTHER FIRMS You may purchase or sell shares of most Vanguard funds through a financial intermediary, such as a bank, broker, or investment adviser. If you invest with Vanguard through an intermediary, please read that firm's program materials carefully to learn of any special rules that may apply. For example, special terms may apply to additional service features, fees, or other policies. LOW BALANCE ACCOUNTS All Vanguard funds reserve the right to close any investment-only retirement-plan account or any nonretirement account whose balance falls below the minimum initial investment. Vanguard deducts a $10 fee in June from each nonretirement account whose balance at that time is below $2,500 ($500 for Vanguard STAR(TM) Fund). The fee is waived if your total Vanguard account assets are $50,000 or more. FUND AND ACCOUNT UPDATES PORTFOLIO SUMMARIES We will send you quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, sales, and exchanges for the current calendar year. AVERAGE COST REVIEW STATEMENTS For most taxable accounts, average cost review statements will accompany the quarterly portfolio summaries. These statements show the average cost of shares that you 19 redeemed during the current calendar year, using the average cost single category method. CONFIRMATION STATEMENTS Each time you buy, sell, or exchange shares, we will send you a statement confirming the trade date and amount of your transaction. TAX STATEMENTS We will send you annual tax statements to assist in preparing your income tax returns. These statements, which are generally mailed in January, will report the previous year's dividend and capital gains distributions, proceeds from the sale of shares, and distributions from IRAs or other retirement plans. REPORTS Fund financial reports about Vanguard Windsor II Fund will be mailed twice a year--in June and December. These comprehensive reports include an assessment of the fund's performance (and a comparison to its industry benchmark), an overview of the financial markets, the fund's adviser reports, and the fund's financial statements, which include a listing of the fund's holdings. To keep the fund's costs as low as possible (so that you and other shareholders can keep more of the fund's investment earnings), Vanguard attempts to eliminate duplicate mailings to the same address. When we find that two or more shareholders have the same last name and address, we send just one fund report to that address instead of mailing separate reports to each shareholder. If you want us to send separate reports, however, you may notify our Client Services Department. CONTACTING VANGUARD ONLINE VANGUARD.COM - - Your best source of Vanguard news - - For fund, account, and service information - - For most account transactions - - For literature requests - - 24 hours per day, 7 days per week VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) - - For automated fund and account information - - For redemptions by check, exchange, or wire - - Toll-free, 24 hours per day, 7 days per week INVESTOR INFORMATION 1-800-662-7447 (SHIP) (Text telephone at 1-800-952-3335) - - For fund and service information - - For literature requests - - Business hours only 20 CLIENT SERVICES 1-800-662-2739 (CREW) (Text telephone at 1-800-749-7273) - - For account information - - For most account transactions - - Business hours only INSTITUTIONAL DIVISION 1-888-809-8102 - - For information and services for large institutional investors - - Business hours only VANGUARD ADDRESSES REGULAR MAIL (INDIVIDUALS--CURRENT CLIENTS): The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 REGULAR MAIL (INSTITUTIONS): The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 REGULAR MAIL (GENERAL INQUIRIES): The Vanguard Group P.O. Box 2600 Valley Forge, PA 19482-2600 REGISTERED OR EXPRESS MAIL: The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 FUND NUMBER Always use this fund number when contacting us about Vanguard Windsor II Fund--73. GLOSSARY OF INVESTMENT TERMS CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND INCOME Payment to shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. FUND DIVERSIFICATION Holding a variety of securities so that a fund's return is not badly hurt by the poor performance of a single security, industry, or country. GROWTH STOCK FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth. Reflecting market expectations for superior growth, these stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. MUTUAL FUND An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is called its share value or share price. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The amount of money you put into an investment. SECURITIES Stocks, bonds, money market instruments, and other investment vehicles. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE STOCK FUND A mutual fund that emphasizes stocks of companies whose growth prospects are generally regarded as subpar by the market. Reflecting these market expectations, the prices of value stocks typically are below-average in comparison with such measures as earnings and book value, and these stocks typically pay above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations between its high and low prices. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [SHIP] [THE VANGUARD GROUP(R) LOGO] Post Office Box 2600 Valley Forge, PA 19482-2600 FOR MORE INFORMATION If you'd like more information about Vanguard Windsor II Fund, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. All market indexes referenced in this prospectus are the exclusive property of their respective owners. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP INVESTOR INFORMATION DEPARTMENT P.O. BOX 2600 VALLEY FORGE, PA 19482-2600 TELEPHONE: 1-800-662-7447 (SHIP) TEXT TELEPHONE: 1-800-952-3335 WORLD WIDE WEB: WWW.VANGUARD.COM If you are a current Fund shareholder and would like information about your account, account transactions, and/or account statements, please call: CLIENT SERVICES DEPARTMENT TELEPHONE: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273 INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Fund are also available on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Fund's Investment Company Act file number: 811-834 (C) 2001 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P073 022001 VANGUARD(R) WINDSOR(TM) II FUND FOR PARTICIPANTS - FEBRUARY 26, 2001 This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2000. STOCK PROSPECTUS Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accurace or adequacy of this prospectus. Any representation to the contrary is a criminal offense. [A MEMBER OF THE VANGUARD GROUP(R) LOGO] VANGUARD WINDSOR II FUND Participant Prospectus February 26, 2001 A Growth and Income Stock Mutual Fund - -------------------------------------------------------------------------------- CONTENTS - -------------------------------------------------------------------------------- 1 FUND PROFILE 3 ADDITIONAL INFORMATION 3 MORE ON THE FUND 8 THE FUND AND VANGUARD 9 INVESTMENT ADVISERS 10 DIVIDENDS, CAPITAL GAINS, AND TAXES 11 SHARE PRICE 11 FINANCIAL HIGHLIGHTS 13 INVESTING WITH VANGUARD 14 ACCESSING FUND INFORMATION BY COMPUTER GLOSSARY (inside back cover) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided "Plain Talk(R)" explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. This prospectus is intended for participants in employer-sponsored retirement or savings plans. Another version--for investors who would like to open a personal investment account--can be obtained by calling Vanguard at 1-800-662-7447. - -------------------------------------------------------------------------------- 1 FUND PROFILE INVESTMENT OBJECTIVE The Fund seeks to provide long-term growth of capital. As a secondary objective, the Fund seeks to provide some dividend income. INVESTMENT STRATEGIES The Fund invests mainly in large- and medium-size companies whose stocks are considered by the Fund's advisers to be undervalued. Such stocks, called "value" stocks, often are out of favor in periods when investors are drawn to companies with strong prospects for growth. The prices of value stocks, therefore, may be below average in comparison with such fundamental factors as earnings, revenue, and book value. In addition, value stocks often provide an above-average dividend yield. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the overall stock market. The Fund's performance could be hurt by: - - Investment style risk, which is the chance that returns from large- and mid-capitalization value stocks--which comprise most of the fund's stock holdings--will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. - - Manager risk, which is the chance that poor security selection will cause the Fund to underperform other funds with similar investment objectives. PERFORMANCE/RISK INFORMATION The following bar chart is intended to help you understand the risks of investing in the Fund. It shows how the Fund's performance has varied from one calendar year to another over the past ten years. In addition, there is a table that shows how the Fund's average annual total returns compare with those of relevant market indexes over set periods of time. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS [SCALE -20% TO 50%] 1991 28.70% 1992 11.99% 1993 13.60% 1994 -1.16% 1995 38.83% 1996 24.18% 1997 32.37% 1998 16.36% 1999 -5.81% 2000 16.86% ---------------------------------------------------- During the period shown in the bar chart, the highest return for a calendar quarter was 17.90% (quarter ended March 31, 1991), and the lowest return for a quarter was -13.55% (quarter ended Septmber 30, 1999). 2 -------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 2000 -------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS -------------------------------------------------------------------- Vanguard Windsor II Fund 16.86% 16.06% 16.81% Standard & Poor's 500 Index -9.10 18.33 17.46 Standard & Poor's 500/BARRA Value Index 6.08 16.81 16.87 Russell 1000 Value Index 7.01 16.91 17.37 -------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2000. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None Exchange Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.35% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.37% The following example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $38 $119 $208 $468 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 3 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT FUND EXPENSES All mutual funds have operating expenses. These expenses, which are deducted from a fund's gross income, are expressed as a percentage of the net assets of the fund. Vanguard Windsor II Fund's expense ratio in fiscal year 2000 was 0.37%, or $3.70 per $1,000 of average net assets. The average large-cap value mutual fund had expenses in 1999 of 1.39%, or $13.90 per $1,000 of average net assets (derived from data provided by Lipper Inc., which reports on the mutual fund industry). Management expenses, which are one part of operating expenses, include investment advisory fees as well as other costs of managing a fund--such as account maintenance, reporting, accounting, legal, and other administrative expenses. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs associated with the fund's buying and selling of securities. These costs can erode a substantial portion of the gross income or capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS INCEPTION DATE Dividends are distributed semiannually in June June 24, 1985 and December; capital gains, if any, are distributed annually in December NET ASSETS AS OF OCTOBER 31, 2000 INVESTMENT ADVISERS $24.1 billion - - Barrow, Hanley, Mewhinney & Strauss, Inc., Dallas, Tex., since inception NEWSPAPER ABBREVIATION - - Equinox Capital Management LLC, New York WndsrII City, N.Y., since 1991 - - Tukman Capital Management, Inc., Larkspur, VANGUARD FUND NUMBER Calif., since 1991 073 - - The Vanguard Group, Valley Forge, Pa., since 1991 CUSIP NUMBER 922018205 TICKER SYMBOL VWNFX - -------------------------------------------------------------------------------- MORE ON THE FUND This prospectus describes risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about each type of risk that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the 4 Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote unless those strategies or policies are designated as fundamental. Finally, you'll find information on other important features of the Fund. MARKET EXPOSURE The Fund invests mainly in common stocks of large- and mid-capitalization companies that offer favorable prospects for growth of earnings and dividend income, but whose prices do not reflect these prospects. Typically, the Fund spreads its assets over a broadly diversified group of companies. Because it invests mainly in stocks, the Fund is subject to certain risks. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS Stocks of publicly traded companies--and mutual funds that hold these stocks--can be classified by the companies' market value, or capitalization. Market capitalization changes over time, and there is no "official" definition of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally defines large-cap funds as those holding stocks of companies whose outstanding shares have, on average, a market value exceeding $13 billion; mid-cap funds as those holding stocks of companies with a market value between $1.5 billion and $13 billion; and small-cap funds as those holding stocks of companies with a market value of less than $1.5 billion. Vanguard periodically reassesses these classifications. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VALUE FUNDS AND GROWTH FUNDS Value investing and growth investing are two styles employed by stock fund managers. Value funds generally emphasize stocks of companies from which the market does not expect strong growth. The prices of value stocks typically are below-average in comparison to such measures as earnings and book value, and these stocks typically have above-average dividend yields. Growth funds generally focus on companies believed to have above-average potential for growth in revenue and earnings. Reflecting the market's high expectations for superior growth, such stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. Value and growth stocks have, in the past, produced similar long-term returns, though each category has periods when it outperforms the other. In general, value funds are appropriate for investors who want some dividend income and the potential for capital gains, but are less tolerant of share-price fluctuations. Growth funds, by contrast, appeal to investors who will accept more volatility in hopes of a greater increase in share price. Growth funds also may appeal to investors with taxable accounts who want a higher proportion of returns to come as capital gains (which may be taxed at lower rates than dividend income). - -------------------------------------------------------------------------------- [FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. 5 To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. Note, also, that the gap between best and worst tends to narrow over the long term. - ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2000) - ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS - ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.9 11.1 11.2 11.2 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2000. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 11.1%, returns for individual 5-year periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or this Fund in particular. [FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM OTHER MARKET SECTORS. AS A GROUP, LARGE- AND MID- CAPITALIZATION VALUE STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS. SECURITY SELECTION Vanguard Windsor II Fund employs four investment advisers, each of which independently chooses and maintains a portfolio of common stocks for the Fund. Each adviser is responsible for a specific percentage of the Fund's assets. These investment advisers employ active investment management methods, which means that securities are bought and sold according to the advisers' evaluations about companies and their financial prospects, and the stock market and economy in general. Each adviser will sell a security when it is no longer as attractive as an alternative investment. While each adviser uses a different process to select securities, all four are committed to investing in large- and mid-cap stocks that, in their opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and currently trading at prices that, the adviser feels, are below what the stocks are worth in relation to their earnings. These stocks typically--but not always--have lower-than-average price/earnings (P/E) ratios and higher-than-average dividend yields. Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), which managed about 62% of the Fund's assets as of October 31, 2000, uses traditional methods of stock selection-- research and analysis--to identify undervalued securities. A security will be sold when, in the adviser's opinion, its share price accurately reflects the security's overall worth. At that point, another undervalued security will be chosen. No more than 15% of their portfolio is devoted to a single industry. Equinox Capital Management, LLC (Equinox), which managed about 15% of the Fund's assets as of October 31, 2000, uses its own fundamental research and proprietary software to identify undervalued securities with attractive growth and dividend prospects. Like Barrow, Hanley, it avoids large concentrations in a single industry. 6 Tukman Capital Management, Inc. (Tukman), which managed about 13% of the Fund's assets as of October 31, 2000, also uses traditional research methods to select undervalued securities. Tukman typically buys stocks of financially sound companies in growing business sectors and holds them for three to five years, on average. The Vanguard Group (Vanguard), which managed about 6% of the Fund's assets as of October 31, 2000, selects stocks from a "universe" of about 550 companies. Vanguard, using quantitative models, evaluates the stocks on the basis of several fundamental factors, such as a stock's price in relation to its projected growth rate. The stocks selected are expected, as a group, to outperform the Russell 1000 Value Index, a benchmark of large- and mid-cap value stocks. Vanguard, which also managed about 4% of the Fund's assets as of October 31, 2000, as cash investments, may invest the Fund's cash investments in stock futures. This strategy is intended to keep the Fund more fully exposed to common stocks while retaining cash on hand to meet liquidity needs. See "Other Investment Policies and Risks" for more details on the Fund's policy on futures. The Fund is generally managed without regard to tax ramifications. [FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISERS WILL DO A POOR JOB OF SELECTING STOCKS. OTHER INVESTMENT POLICIES AND RISKS Besides investing in undervalued common stocks, the Fund may make certain other kinds of investments to achieve its objective. Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 20% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to (1) country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or a natural disaster--will weaken a country's securities markets; and (2) currency risk, which is the chance that a foreign investment will decrease in value because of unfavorable changes in currency exchange rates. The Fund may invest in money market instruments, fixed income securities, convertible securities, and other equity securities, such as preferred stocks. The Fund may invest up to 15% of its assets in restricted securities with limited marketability or other illiquid securities. The Fund may also invest in stock futures and options contracts, which are traditional types of derivatives. Losses (or gains) involving futures can sometimes be substantial--in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. The Fund will not use futures for speculative purposes or as leveraged investments that magnify gains or losses. The Fund's obligation under futures contracts will not exceed 20% of its total assets. 7 The reasons for which the Fund will invest in futures and options are: - - To keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in stocks. - - To reduce the Fund's transaction costs or add value when these instruments are favorably priced. The Fund may temporarily depart from its normal investment policies--for instance, by investing substantially in cash investments--in response to extraordinary market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses but otherwise fail to achieve its investment objective. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DERIVATIVES A derivative is a financial contract whose value is based on (or "derived" from) a traditional security (such as a stock or a bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indexes, have been trading on regulated exchanges for more than two decades. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Nonstandardized derivatives (such as swap agreements), on the other hand, tend to be more specialized or complex, and may be harder to value. If used for speculation or as leveraged investments, derivatives can carry considerable risks. - -------------------------------------------------------------------------------- COSTS AND MARKET-TIMING Some investors try to profit from a strategy called market-timing--switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all Vanguard funds have adopted special policies to discourage short-term trading. Specifically: - - Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--that it regards as disruptive to efficient portfolio management. A purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor. - - Each Vanguard fund (except the money market funds) limits the number of times that an investor can exchange into and out of the fund. - - Each Vanguard fund reserves the right to stop offering shares at any time. - - Certain Vanguard funds charge transaction fees on purchases and/or redemptions oftheir shares. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. 8 TURNOVER RATE Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS section of this prospectus shows historic turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of October 31, 2000, the average turnover rate for all large-cap value funds was approximately 106%, according to Morningstar, Inc. - -------------------------------------------------------------------------------- THE FUND AND VANGUARD The Fund is a member of The Vanguard Group, a family of more than 35 investment companies with more than 100 funds holding assets worth more than $570 billion. All of the Vanguard funds share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. - -------------------------------------------------------------------------------- 9 INVESTMENT ADVISERS The Fund uses a multimanager approach. It employs four investment advisers, each of which independently manages a separate portion of the Fund's assets, subject to the control of the trustees and officers of the Fund. - - Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), One McKinney Plaza, 3232 McKinney Avenue, 15th Floor, Dallas, TX 75204, is an investment advisory firm founded in 1979. As of October 31, 2000, the firm managed about $26.7 billion in assets. - - Equinox Capital Management, LLC (Equinox), 590 Madision Avenue, 41st Floor, New York, NY 10022, is an investment advisory firm founded in 1989. As of October 31, 2000, Equinox managed about $11 billion in assets. - - Tukman Capital Management, Inc. (Tukman), 60 East Sir Francis Drake Boulevard,Larkspur, CA 94939, is an investment advisory firm founded in 1980. As of October 31, 2000, Tukman managed about $8.2 billion in assets. - - The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in 1975, is a wholly owned subsidiary of the Vanguard funds. As of October 31, 2000, Vanguard served as adviser for about $396.7 billion in assets. The Fund pays three of its investment advisers--Barrow, Hanley, Equinox, and Tukman--on a quarterly basis. For each adviser, the quarterly fee is based on certain annual percentage rates applied to average month-end net assets managed by the adviser over the quarterly period. In addition, the quarterly fees paid to each adviser are increased or decreased based upon the adviser's performance in comparison to a benchmark index. For these purposes, the cumulative total return of each adviser's portion of the Fund over a trailing 36-month period is compared to the cumulative total return of the Standard & Poor's 500/BARRA Value Index (for Barrow, Hanley), the Russell 1000 Value Index (for Equinox), and the Standard & Poor's 500 Index (for Tukman) over the same period. Please consult the Fund's Statement of Additional Information for a complete explanation of how advisory fees are calculated. The Fund pays no advisory fees to Vanguard, since it provides services to the Fund on an at-cost basis. For the fiscal year ended October 31, 2000, the advisory fees and expenses represented an effective annual rate of 0.12% of the Fund's average net assets before a decrease of 0.03% based on performance. The advisers are authorized to choose broker-dealers to handle the purchase and sale of the Fund's portfolio securities, and to obtain the best available price and most favorable execution for all transactions. Also, the Fund may direct the advisers to use a particular broker for certain transactions in exchange for commission rebates or research services provided to the Fund. In the interest of obtaining better execution of a transaction, the advisers may at times choose brokers who charge higher commissions. If more than one broker can obtain the best available price and most favorable execution, then the advisers are authorized to choose a broker who, in addition to executing the transaction, will provide research services to the advisers or the Fund. The board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment adviser--either as a replacement for an existing adviser or as an additional adviser. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard Group may provide investment advisory services to the Fund, on an at-cost basis, at any time. 10 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUND'S ADVISERS The managers primarily responsible for overseeing the Fund's investments are: JAMES P. BARROW, Founding Partner of Barrow, Hanley. He has managed portfolio investments since 1963; has been with Barrow, Hanley since 1979; and has managed the Fund since 1985. Education: B.S., University of South Carolina. RONALD J. ULRICH, Chairman, Chief Investment Officer, and Founder of Equinox. He has worked in investment management since 1973; has been with Equinox since 1989; and has managed the Fund since 1991. Education: B.S., Lehigh University; M.B.A., New York University. MELVIN TUKMAN, President, Director, and Founder of Tukman. He has worked in investment management since 1971; has been with Tukman since 1980; and has managed the Fund since 1991. Education: A.B., Hunter College; M.B.A., Harvard Business School. DANIEL L. GROSSMAN, Vice President and Portfolio Manager of Tukman. He has worked in investment management since 1978; has been with Tukman since 1982; and has managed the Fund since 1991. Education: M.B.A., Stanford University. GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Quantitative Equity Group. He has worked in investment management since 1985 and has had primary responsibility for Vanguard's stock indexing investments and strategy since joining the company in 1987. Education: A.B., Dartmouth College; M.B.A., University of Chicago. - -------------------------------------------------------------------------------- DIVIDENDS, CAPITAL GAINS, AND TAXES The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses), as well as any capital gains realized from the sale of its holdings. Income dividends generally are distributed in June and December; capital gains distributions generally occur in December. Your dividend and capital gains distributions will be reinvested in additional Fund shares and accumulate on a tax-deferred basis if you are investing through an employer-sponsored retirement or savings plan. You will not owe taxes on these distributions until you begin withdrawals from the plan. You should consult your plan administrator, your plan's Summary Plan Description, or your tax adviser about the tax consequences of plan withdrawals. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends, and gains from the sale of investments. You receive such earnings as either an income dividend or a capital gains distribution. Income dividends come from both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less, or more than one year. - -------------------------------------------------------------------------------- 11 SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day after the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. (The NAV is not calculated on holidays or other days when the Exchange is closed.) Net asset value per share is computed by dividing the net assets of the Fund by the number of Fund shares outstanding. Knowing the daily net asset value is useful to you as a shareholder because it indicates the current value of your investment. The Fund's NAV, multiplied by the number of shares you own, gives you the dollar amount you would have received had you sold all of your shares back to the Fund that day. A NOTE ON PRICING: The Fund's investments will be priced at their market value when market quotations are readily available. When these quotations are not readily available, investments will be priced at their fair value, calculated according to procedures adopted by the Fund's board of trustees. The Fund's share price can be found daily in the mutual fund listings of most major newspapers under the heading "Vanguard Funds." FINANCIAL HIGHLIGHTS The following financial highlights table is intended to help you understand the Fund's financial performance for the past five years, and certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost each year on an investment in the Fund (assuming reinvestment of all dividend and capital gains distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. You may have the annual report sent to you without charge by contacting Vanguard. 12
- ---------------------------------------------------------------------------------------- VANGUARD WINDSOR II FUND YEAR ENDED OCTOBER 31, ---------------------------------------------------------------- 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $29.03 $31.07 $29.36 $24.04 $20.06 - ---------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .64 .64 .65 .64 .62 Net Realized and Unrealized Gain (Loss) on Investments 1.08 .73 3.91 6.47 4.63 ---------------------------------------------------------------- Total from Investment Operations 1.72 1.37 4.56 7.11 5.25 ---------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.67) (.74) (.66) (.63) (.58) Distributions from Realized Capital Gains (2.50) (2.67) (2.19) (1.16) (.69) ---------------------------------------------------------------- Total Distributions (3.17) (3.41) (2.85) (1.79) (1.27) - ---------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR $27.58 $29.03 $31.07 $29.36 $24.04 ======================================================================================== TOTAL RETURN 7.22% 4.57% 16.51% 31.27% 27.17% ======================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (Millions) $24,070 $30,541 $29,639 $22,568 $14,758 Ratio of Total Expenses to Average Net Assets 0.37% 0.37% 0.41% 0.37% 0.39% Ratio of Net Investment Income to Average Net Assets 2.36% 2.08% 2.16% 2.49% 2.92% Turnover Rate 26% 26% 31% 30% 32% ========================================================================================
- -------------------------------------------------------------------------------- PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE The Fund began fiscal 2000 with a net asset value (price) of $29.03 per share. During the year, the Fund earned $0.64 per share from investment income (interest and dividends) and $1.08 per share from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $3.17 per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The earnings ($1.72 per share) minus the distributions ($3.17 per share) resulted in a share price of $27.58 at the end of the year. This was a decrease of $1.45 per share (from $29.03 at the beginning of the year to $27.58 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return from the Fund was 7.22% for the year. As of October 31, 2000, the Fund had $24.1 billion in net assets. For the year, its expense ratio was 0.37% ($3.70 per $1,000 of net assets); and its net investment income amounted to 2.36% of its average net assets. It sold and replaced securities valued at 26% of its net assets. - -------------------------------------------------------------------------------- 13 INVESTING WITH VANGUARD The Fund is an investment option in your retirement or savings plan. Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect the Fund as an investment option. - - If you have any questions about the Fund or Vanguard, including those about the Fund's investment objective, strategies, or risks, contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188. - - If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan. INVESTMENT OPTIONS AND ALLOCATIONS Your plan's specific provisions may allow you to change your investment selections, the amount of your contributions, or how your contributions are allocated among the investment choices available to you. Contact your plan administrator or employee benefits office for more details. TRANSACTIONS Contributions, exchanges, or redemptions of the Fund's shares are processed as soon as they have been received by Vanguard in good order. Good order means that your request includes complete information on your contribution, exchange, or redemption, and that Vanguard has received the appropriate assets. In all cases, your transaction will be based on the Fund's next-determined net asset value after Vanguard receives your request (or, in the case of new contributions, the next-determined net asset value after Vanguard receives the order from your plan administrator). As long as this request is received before the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern time, you will receive that day's net asset value. EXCHANGES The exchange privilege (your ability to redeem shares from one fund to purchase shares of another fund) may be available to you through your plan. Although we make every effort to maintain the exchange privilege, Vanguard reserves the right to revise or terminate this privilege, limit the amount of an exchange, or reject any exchange, at any time, without notice. Because excessive exchanges can potentially disrupt the management of the Fund and increase its transaction costs, Vanguard limits participant exchange activity to no more than FOUR SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any 12-month period. A "round trip" is a redemption from the Fund followed by a purchase back into the Fund. "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect the management of the Fund. Before making an exchange to or from another fund available in your plan, consider the following: - - Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions. - - Make sure to read that fund's prospectus. Contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188 for a copy. - - Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on the exchange policies that apply to your plan. 14 ACCESSING FUND INFORMATION BY COMPUTER VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM Use your personal computer to visit Vanguard's education-oriented website, which provides timely news and information about Vanguard funds and services; the online Education Center that offers a variety of mutual fund classes; and easy-to-use, interactive tools to help you create your own investment and retirement strategies. (THIS PAGE INTENTIONALLY LEFT BLANK.) (THIS PAGE INTENTIONALLY LEFT BLANK.) GLOSSARY OF INVESTMENT TERMS CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND INCOME Payment to shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. FUND DIVERSIFICATION Holding a variety of securities so that a fund's return is not badly hurt by the poor performance of a single security, industry, or country. GROWTH STOCK FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth. Reflecting market expectations for superior growth, these stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. MUTUAL FUND An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is called its share value or share price. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The amount of money you put into an investment. SECURITIES Stocks, bonds, money market instruments, and other investment vehicles. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE STOCK FUND A mutual fund that emphasizes stocks of companies whose growth prospects are generally regarded as subpar by the market. Reflecting these market expectations, the prices of value stocks typically are below-average in comparison with such measures as earnings and book value, and these stocks typically pay above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations between its high and low prices. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [SHIP] [THE VANGUARD GROUP(R) LOGO] Institutional Division Post Office Box 2900 Valley Forge, PA 19482-2900 FOR MORE INFORMATION If you'd like more information about Vanguard Windsor II Fund, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. All market indexes referenced in this prospectus are the exclusive property of their respective owners. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP PARTICIPANT ACCESS CENTER P.O. BOX 2900 VALLEY FORGE, PA 19482-2900 TELEPHONE: 1-800-523-1188 TEXT TELEPHONE: 1-800-523-8004 WORLD WIDE WEB: WWW.VANGUARD.COM INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Fund are also available on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Fund's Investment Company Act file number: 811-834 (C) 2001 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I073 022001 PART B VANGUARD(R) WINDSOR FUNDS (THE TRUST) STATEMENT OF ADDITIONAL INFORMATION FEBRUARY 26, 2001 This Statement is not a prospectus, but should be read in conjunction with the Trust's current Prospectuses (dated February 26, 2001). To obtain without charge, a Prospectus or the most recent Annual Report to Shareholders, which contains the Trust's Financial Statements as hereby incorporated by reference, please call: INVESTOR INFORMATION DEPARTMENT 1-800-662-7447 TABLE OF CONTENTS PAGE ---- DESCRIPTION OF THE TRUST.........................................B-1 INVESTMENT POLICIES..............................................B-3 FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-8 YIELD AND TOTAL RETURN...........................................B-10 SHARE PRICE......................................................B-11 PURCHASE OF SHARES...............................................B-12 REDEMPTION OF SHARES.............................................B-12 MANAGEMENT OF THE FUNDS..........................................B-13 INVESTMENT ADVISORY SERVICES.....................................B-16 PORTFOLIO TRANSACTIONS...........................................B-24 FINANCIAL STATEMENTS.............................................B-25 COMPARATIVE INDEXES..............................................B-25 DESCRIPTION OF THE TRUST ORGANIZATION The Trust was organized as Wellington Equity Fund, a Delaware corporation, in 1958. It then merged into a Maryland corporation in 1973, and subsequently reorganized into a Pennsylvania business trust in 1985. The Trust then reorganized as a Maryland corporation later in 1985. It was reorganized again as a Delaware business trust in May 1998. Prior to its reorganization as a Delaware business trust, the Trust was known as Vanguard/Windsor Funds, Inc. The Trust is registered with the United States Securities and Exchange Commission (the Commission) under the Investment Company Act of 1940 (the 1940 Act) as an open-end, diversified management investment company. The Trust currently offers the following Funds: VANGUARD WINDSOR(TM) FUND VANGUARD WINDSOR(TM) II FUND (INDIVIDUALLY, THE FUND; COLLECTIVELY, THE FUNDS) The Trust has the ability to offer additional funds or classes of shares. There is no limit on the number of full and fractional shares that the Trust may issue for a single fund or class of shares. B-1 SERVICE PROVIDERS CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110, serves as the Funds' custodian. The custodian is responsible for maintaining the Funds' assets and keeping all necessary accounts and records of each Fund's assets. INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, PA 19103-7042, serves as the Funds' independent accountants. The accountants audit each Fund's financial statements and provide other related services. TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, PA 19355. CHARACTERISTICS OF THE FUNDS' SHARES RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions on the right of shareholders to retain or dispose of the Funds' shares, other than the possible future termination of the Funds. The Funds may be terminated by reorganization into another mutual fund or by liquidation and distribution of the assets of the affected funds. Unless terminated by reorganization or liquidation, the Funds will continue indefinitely. SHAREHOLDER LIABILITY. The Funds were organized under Delaware law, which provides that shareholders of a business trust are entitled to the same limitations of personal liability as shareholders of a corporation organized under Delaware law. Effectively, this means that a shareholder of the Fund will not be personally liable for payment of the Fund's debts except by reason of his or her own conduct or acts. In addition, a shareholder could incur a financial loss on account of a Fund obligation only if the Fund itself had no remaining assets with which to meet such obligation. We believe that the possibility of such a situation arising is extremely remote. DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any dividends or other distributions declared for such fund. No shares have priority or preference over any other shares of the same fund with respect to distributions. Distributions will be made from the assets of a fund, and will be paid ratably to all shareholders of the fund (or class) according to the number of shares of such fund (or class) held by shareholders on the record date. The amount of income dividends per share may vary between separate share classes of the same fund based upon differences in the way that expenses are allocated between share classes pursuant to a multiple class plan. VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a shareholder vote is required under the 1940 Act; (ii) the matter concerns an amendment to the Declaration of Trust that would adversely affect to a material degree the rights and preferences of the shares of any class or series; or (iii) the trustees determine that it is necessary or desirable to obtain a shareholder vote. The 1940 Act requires a shareholder vote under various circumstances, including to elect or remove trustees upon the written request of shareholders representing 10% or more of a Fund's net assets, and to change any fundamental policy of a Fund. Unless otherwise required by applicable law, shareholders of a Fund receive one vote for each dollar of net asset value owned on the record date, and a fractional vote for each fractional dollar of net asset value owned on the record date. However, only the shares of the fund affected by a particular matter are entitled to vote on that matter. Voting rights are non-cumulative and cannot be modified without a majority vote. LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be entitled to receive a pro rata share of a Fund's net assets. PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Funds' shares. CONVERSION RIGHTS. There are no conversion rights associated with the Funds' shares. REDEMPTION PROVISIONS. The Funds' redemption provisions are described in their current prospectuses and elsewhere in this Statement of Additional Information. SINKING FUND PROVISIONS. The Funds have no sinking fund provisions. B-2 CALLS OR ASSESSMENT. The Funds' shares, when issued, are fully paid and non-assessable. TAX STATUS OF THE FUNDS Each Fund intends to continue to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code. This special tax status means that a Fund will not be liable for federal tax on income and capital gains distributed to shareholders. In order to preserve its tax status, a Fund must comply with certain requirements. If a Fund fails to meet these requirements in any taxable year, it will be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, will be taxable to shareholders as ordinary income. In addition, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before regaining its tax status as a regulated investment company. INVESTMENT POLICIES The following policies supplement the investment objectives and policies set forth in each Fund's Prospectus. REPURCHASE AGREEMENTS Each Fund may invest in repurchase agreements with domestic banks, or brokers or dealers, either for temporary defensive purposes due to market conditions, or to generate income from its excess cash balances. A repurchase agreement is an agreement under which the Fund acquires a fixed-income security (generally a security issued by the U.S. Government or an agency thereof, a banker's acceptance or a certificate of deposit) from a domestic bank, broker or dealer, subject to resale to the seller at an agreed upon price and date (normally the next business day). A repurchase agreement may be considered a loan collateralized by securities. The resale price reflects an agreed upon interest rate effective for the period the instrument is held by the series and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by the Fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and are held by a custodian bank until repurchased. In addition, the board of trustees will monitor the repurchase agreement transactions for each Fund generally and will establish guidelines and standards for review by the investment adviser of the creditworthiness of any bank, broker or dealer party to a repurchase agreement relating to any of the Funds. The use of repurchase agreements involves certain risks. For example, if the seller of the securities under an agreement defaults on its obligation to repurchase the underlying securities at a time when the value of these securities has declined, the Fund may incur a loss upon disposition of the securities. If the seller becomes insolvent and subject to liquidation or reorganization under bankruptcy or other laws, a bankruptcy court may determine that the underlying securities are collateral for a loan by the Fund not within the control of the Fund and therefore subject to sale by the trustee in bankruptcy. Finally, it is possible that the Fund may not be able to substantiate its interest in the underlying securities. While the Funds' management acknowledges these risks, it is expected that they can be controlled through careful monitoring procedures. LENDING OF SECURITIES Each Fund may lend its portfolio securities for either short or long-term periods to qualified institutional investors (typically brokers, dealers, banks or other financial institutions) who need to borrow securities in order to complete certain transactions, such as covering short sales, avoiding failures to deliver securities or completing arbitrage operations. By lending its portfolio securities, each Fund attempts to increase its income through the receipt of interest on the loan. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund. The terms and the structure of such loans must be consistent with the 1940 Act, and the Rules and Regulations or interpretations of the Commission thereunder. These provisions limit the amount of securities a fund may lend to 33 1/3% of the Fund's total assets, and B-3 require that (a) the borrower pledge and maintain with the Fund collateral consisting of cash, an irrevocable letter of credit or securities issued or guaranteed by a domestic bank or the United States Government having a value at all times not less than 100% of the value of the securities loaned, (b) the borrower add to such collateral whenever the price of the securities loaned rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan be made subject to termination by the Fund at any time, and (d) the Fund receives reasonable interest on the loan (which may include the Fund investing any cash collateral in interest bearing short-term investments), any distributions on the loaned securities and any increase in their market value. Loan arrangements made will comply with all other applicable regulatory requirements, including the rules of the New York Stock Exchange, which rules require the borrower, after notice, to redeliver the securities within the normal settlement time of three business days. All relevant facts and circumstances, including the creditworthiness of the broker, dealer or institution, will be considered in making decisions with respect to the lending of securities, subject to review by the board of trustees. At the present time, the Staff of the Commission does not object if an investment company pays reasonable negotiated fees in connection with loaned securities, so long as such fees are set forth in a written contract and approved by the investment company's trustees. In addition, voting rights pass with the loaned securities, but if a material event occurs affecting an investment on loan, the loan must be called and the securities voted. VANGUARD INTERFUND LENDING PROGRAM The Commission has issued an exemptive order permitting the Funds to participate in Vanguard's interfund lending program. This program allows the Vanguard funds to borrow money from and loan money to each other for temporary or emergency purposes. The program is subject to a number of conditions, including the requirement that no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is available from a typical bank for a comparable transaction. In addition, a fund may participate in the program only if and to the extent that such participation is consistent with the fund's investment objective and other investment policies. The boards of trustees of the Vanguard funds are responsible for ensuring that the interfund lending program operates in compliance with all conditions of the Commission's exemptive order. TEMPORARY INVESTMENTS Each Fund may take temporary defensive measures that are inconsistent with the Funds' normal fundamental or non-fundamental investment policies and strategies in response to adverse market, economic, political or other conditions. Such measures could include investments in (a) highly liquid short-term fixed income securities issued by or on behalf of municipal or corporate issuers, obligations of the U.S. Government and its agencies, commercial paper, and bank certificates of deposit; (b) shares of other investment companies which have investment objectives consistent with those of the Fund; (c) repurchase agreements involving any such securities; and (d) other money market instruments. There is no limit on the extent to which the Funds may take temporary defensive measures. In taking such measures, the Funds may fail to achieve their investment objectives. FOREIGN INVESTMENTS Each Fund may invest up to 20% of its assets in securities of foreign companies. Investors should recognize that investing in foreign companies involves certain special considerations which are not typically associated with investing in U.S. companies. Currency Risk. Since the stocks of foreign companies are frequently denominated in foreign currencies, and since the Funds may temporarily hold uninvested reserves in bank deposits in foreign currencies, a Fund will be affected favorably or unfavorably by changes in currency rates and in exchange control regulations, and may incur costs in connection with conversions between various currencies. The investment policies of the Funds permit them to enter into forward foreign B-4 currency exchange contracts in order to hedge holdings and commitments against changes in the level of future currency rates. Such contracts involve an obligation to purchase or sell a specific currency at a future date at a price set at the time of the contract. Country Risk. As foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards and practices comparable to those applicable to domestic companies, there may be less publicly available information about certain foreign companies than about domestic companies. Securities of some foreign companies are generally less liquid and more volatile than securities of comparable domestic companies. There is generally less government supervision and regulation of stock exchanges, brokers and listed companies than in the U.S. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments which could affect U.S. investments in companies in those countries. Although the Funds will endeavor to achieve the most favorable execution costs in their portfolio transactions, commissions on many foreign stock exchanges are generally higher than commissions on U.S. exchanges. In addition, it is expected that the expenses for custodial arrangements of the Funds' foreign securities will be somewhat greater than the expenses for the custodial arrangement for handling U.S. securities of equal value. Certain foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes is recoverable, the non-recovered portion of foreign withholding taxes will reduce the income the Funds receive from their foreign investments. Federal Tax Treatment of Non-U.S. Transactions. Special rules govern the Federal income tax treatment of certain transactions denominated in terms of a currency other than the U.S. dollar or determined by reference to the value of one or more currencies other than the U.S. dollar. The types of transactions covered by the special rules include the following: (i) the acquisition of, or becoming the obligor under, a bond or other debt instrument (including, to the extent provided in Treasury regulations, preferred stock); (ii) the accruing of certain trade receivables and payables; and (iii) the entering into or acquisition of any forward contract, futures contract, option or similar financial instrument if such instrument is not marked to market. The disposition of a currency other than the U.S. dollar by a taxpayer whose functional currency is the U.S. dollar is also treated as a transaction subject to the special currency rules. However, foreign currency-related regulated futures contracts and nonequity options are generally not subject to the special currency rules if they are or would be treated as sold for their fair market value at year-end under the marking-to-market rules applicable to other futures contracts unless an election is made to have such currency rules apply. With respect to transactions covered by the special rules, foreign currency gain or loss is calculated separately from any gain or loss on the underlying transaction and is normally taxable as ordinary income or loss. A taxpayer may elect to treat as capital gain or loss foreign currency gain or loss arising from certain identified forward contracts, futures contracts and options that are capital assets in the hands of the taxpayer and which are not part of a straddle. The Treasury Department issued regulations under which certain transactions subject to the special currency rules that are part of a "section 988 hedging transaction" (as defined in the Internal Revenue Code of 1986, as amended, and the Treasury regulations) will be integrated and treated as a single transaction or otherwise treated consistently for purposes of the Code. Any gain or loss attributable to the foreign currency component of a transaction engaged in by the Fund which is not subject to the special currency rules (such as foreign equity investments other than certain preferred stock) will be treated as capital gain or loss and will not be segregated from the gain or loss on the underlying transaction. It is anticipated that some of the non-U.S. dollar-denominated investments and foreign currency contracts the Funds may make or enter into will be subject to the special currency rules described above. B-5 ILLIQUID SECURITIES Each Fund may invest up to 15% of its net assets in illiquid securities. Illiquid securities are securities that may not be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on the Fund's books. Each Fund may invest in restricted, privately placed securities that, under securities laws, may be sold only to qualified institutional buyers. Because these securities can be resold only to qualified institutional buyers, they may be considered illiquid securities--meaning that they could be difficult for the Fund to convert to cash if needed. If a substantial market develops for a restricted security held by a Fund, it will be treated as a liquid security, in accordance with procedures and guidelines approved by the Fund's board of trustees. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933. While the Fund's investment adviser determines the liquidity of restricted securities on a daily basis, the board oversees and retains ultimate responsibility for the adviser's decisions. Several factors that the board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, and the availability of information about the security's issuer. FUTURES CONTRACTS AND OPTIONS Each Fund may enter into stock futures contracts, options, and options on futures contracts only for the purpose of remaining fully invested and reducing transaction costs. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. Futures contracts which are standardized as to maturity date and underlying financial instrument are traded on national futures exchanges. Futures exchanges and trading are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a U.S. Government agency. Assets committed to futures contracts will be segregated to the extent required by law. Although futures contracts by their terms call for actual delivery or acceptance of the underlying securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. Closing out an open futures position is done by taking an opposite position (buying a contract which has previously been sold, selling a contract previously purchased) in an identical contract to terminate the position. Brokerage commissions are incurred when a futures contract is bought or sold. Futures traders are required to make a good faith margin deposit in cash or government securities with a broker or custodian to initiate and maintain open positions in futures contracts. A margin deposit is intended to assure completion of the contract (delivery or acceptance of the underlying security) if it is not terminated prior to the specified delivery date. Minimal initial margin requirements are established by the futures exchange and may be changed. Brokers may establish deposit requirements which are higher than the exchange minimums. Futures contracts are customarily purchased and sold on margin that may range upward from less than 5% of the value of the contract being traded. After a futures contract position is opened, the value of the contract is marked to market daily. If the futures contract price changes to the extent that the margin on deposit does not satisfy margin requirements, payment of additional "variation" margin will be required. Conversely, a change in the contract value may reduce the required margin, resulting in a repayment of excess margin to the contract holder. Variation margin payments are made to and from the futures broker for as long as the contract remains open. Each Fund expects to earn interest income on its margin deposits. Traders in futures contracts may be broadly classified as either "hedgers" or "speculators." Hedgers use the futures markets primarily to offset unfavorable changes in the value of securities otherwise held for investment purposes or expected to be acquired by them. Speculators are less inclined to own the securities underlying the futures contracts which they trade, and use futures B-6 contracts with the expectation of realizing profits from fluctuations in interest rates. Each Fund intends to use futures contracts only for bona fide hedging purposes. Regulations of the CFTC applicable to the Funds require that all of each of the Fund's futures transactions constitute bona fide hedging transactions except to the extent that the aggregate initial margins and premiums required to establish any non-hedging positions do not exceed five percent of the value of the Funds. Each Fund will only sell futures contracts to protect securities it owns against price declines or purchase contracts to protect against an increase in the price of securities it intends to purchase. As evidence of this hedging interest, each Fund expects that approximately 75% of its futures contract purchases will be "completed"; that is, equivalent amounts of related securities will have been purchased or are being purchased by the Fund upon sale of open futures contracts. Although techniques other than the sale and purchase of futures contracts could be used to control the exposure of the Funds' income to market fluctuations, the use of futures contracts may be a more effective means of hedging this exposure. While each Fund will incur commission expenses in both opening and closing out futures positions, these costs are lower than transaction costs incurred in the purchase and sale of portfolio securities. Restrictions on the Use of Futures Contracts and Options. A Fund will not enter into futures contract transactions to the extent that, immediately thereafter, the sum of its initial margin deposits on open contracts exceeds 5% of the market value of the Fund's total assets. In addition, a Fund will not enter into futures contracts to the extent that its outstanding obligations to purchase securities under these contracts and its investments in options would exceed 20% of the Fund's total assets. Assets committed to futures contracts or options will be held in a segregated account. Risk Factors in Futures Transactions. Positions in futures contracts may be closed out only on an exchange which provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close a futures position. In the event of adverse price movements, a Fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if a Fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements at a time when it may be disadvantageous to do so. In addition, a Fund may be required to make delivery of the instruments underlying interest rate futures contracts it holds. The inability to close options and futures positions also could have an adverse impact on the ability to effectively hedge its portfolio. A Fund will minimize the risk that it will be unable to close out a futures contract by only entering into futures contracts which are traded on national futures exchanges and for which there appears to be a liquid secondary market. The risk of loss in trading futures contracts in some strategies can be substantial, due to the extremely high degree of leverage involved in futures pricing. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss (as well as gain) to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount invested in the contract. However, because the futures strategies of each Fund are engaged in only for hedging purposes, the advisers do not believe that the Funds are subject to the risks of loss frequently associated with futures transactions. Either Fund would presumably have sustained comparable losses if, instead of the futures contract, it had invested in the underlying security and sold it after the decline. Risk Factors in Options Transactions. When a Fund invests in an option, it purchases the right to buy (call options) or sell (put options) specified securities, at a specified price, on a specified date or within a specified period of time. In consideration of the right to buy or sell underlying securities, the Fund pays a premium, which represents the maximum amount of the Fund's B-7 potential loss on the transaction if it chooses not to exercise the option or enter into a closing transaction before the option's expiration. Of course, securities purchased pursuant to a call option may subsequently decline in value, to the Fund's detriment. Similarly, securities sold pursuant to a put option may subsequently rise in value, with the Fund missing out on these gains. In both cases, the Fund would have incurred transaction costs to exercise the option, in addition to the option premium. There is the risk of loss by a Fund of margin deposits in the event of bankruptcy of a broker with whom the Fund has an open position in a futures contract or related option. Additionally, investments in futures and options involve the risk that the investment adviser will incorrectly predict stock market and interest rate trends. Most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. Federal Tax Treatment of Futures Contracts. Each Fund is required for Federal income tax purposes to recognize as income for each taxable year its net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. In these cases, any gain or loss recognized with respect to a futures contract is considered to be 60% long-term capital gain or loss and 40% short-term capital gain or loss, without regard to the holding period of the contract. Gains and losses on certain other futures contracts (primarily non-U.S. futures contracts) are not recognized until the contracts are closed and are treated as long-term or short-term depending on the holding period of the contract. Sales of futures contracts which are intended to hedge against a change in the value of securities held by a Fund may affect the holding period of such securities and, consequently, the nature of the gain or loss on such securities upon disposition. A Fund may be required to defer the recognition of losses on futures contracts to the extent of any unrecognized gains on related positions held by the Fund. In order for a Fund to continue to qualify for Federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income; i.e., dividends, interest, income derived from loans of securities, gains from the sale of securities or foreign currencies, or other income derived with respect to the Fund's business of investing in securities or currencies. It is anticipated that any net gain recognized on futures contracts will be considered qualifying income for purposes of the 90% requirement. A Fund will distribute to shareholders annually any net capital gains which have been recognized for Federal income tax purposes on futures transactions. Such distributions will be combined with distributions of capital gains realized on the Fund's other investments and shareholders will be advised on the nature of the transactions. FUNDAMENTAL INVESTMENT LIMITATIONS Each Fund is subject to the following fundamental investment limitations, which cannot be changed in any material way without the approval of the holders of a majority of the affected Fund's shares. For these purposes, a "majority" of shares means the lesser of: (i) 67% or more of the shares voted, so long as more than 50% of the Fund's outstanding shares are present or represented by proxy; or (ii) more than 50% of the Fund's outstanding shares. B-8 BORROWING. Each Fund may not borrow money, except for temporary or emergency purposes in an amount not exceeding 15% of the Fund's net assets. A Fund may borrow money through banks, reverse repurchase agreements, or Vanguard's interfund lending program only, and must comply with all applicable regulatory conditions. A Fund may not make any additional investments whenever its outstanding borrowings exceed 5% of net assets. COMMODITIES. Each Fund may not invest in commodities, except that it may invest in stock futures contracts, stock options and options on stock futures contracts. No more than 5% of the Fund's total assets may be used as initial margin deposit for futures contracts, and no more than 20% of the Fund's total assets may be invested in futures contracts or options at any time. DIVERSIFICATION. With respect to 75% of its total assets, each Fund may not: (i) purchase more than 10% of the outstanding voting securities of any one issuer; or (ii) purchase securities of any issuer if, as a result, more than 5% of the Fund's total assets would be invested in that issuer's securities. This limitation does not apply to obligations of the United States Government, its agencies, or instrumentalities. ILLIQUID SECURITIES. Each Fund may not acquire any security if, as a result, more than 15% of its net assets would be invested in securities that are illiquid. INDUSTRY CONCENTRATION. Each Fund may not invest more than 25% of its total assets in any one industry. INVESTING FOR CONTROL. Each Fund may not invest in a company for purposes of controlling its management. INVESTMENT COMPANIES. Each Fund may not invest in any other investment company, except through a merger, consolidation or acquisition of assets, or to the extent permitted by Section 12 of the 1940 Act. Investment companies whose shares each Fund acquires pursuant to Section 12 must have investment objectives and investment policies consistent with those of the Fund. LOANS. Each Fund may not lend money to any person except by purchasing fixed-income securities that are publicly distributed; by entering into repurchase agreements, provided, however, that repurchase agreements maturing in more than seven days, together with securities which do not have readily available market quotations, will not exceed 15% of the Fund's total assets; by lending its portfolio securities; or through Vanguard's interfund lending program. MARGIN. Each Fund may not purchase securities on margin or sell securities short, except as permitted by the Fund's investment policies relating to commodities. REAL ESTATE. Each Fund may not invest directly in real estate, although it may invest in securities of companies that deal in real estate. SENIOR SECURITIES. Each Fund may not issue senior securities, except in compliance with the 1940 Act. The investment limitations set forth above are considered at the time investment securities are purchased. If a percentage restriction is adhered to at the time the investment is made, a later increase in percentage resulting from a change in the market value of assets will not constitute a violation of such restriction. None of these limitations prevents a Fund from participating in The Vanguard Group (Vanguard). Because each Fund is a member of the Group, it may own securities issued by Vanguard, make loans to Vanguard, and contribute to Vanguard's costs or other financial requirements. See "Management of the Funds" for more information. B-9 YIELD AND TOTAL RETURN The yield of Vanguard Windsor Fund for the thirty-day period ended October 31, 2000 was 1.6%, and the yield for Vanguard Windsor II Fund for the same period was 2.1%. The average annual total returns for Vanguard Windsor Fund for the one-, five-, and ten-year periods ended October 31, 2000, were 11.60%, 14.53%, and 17.48%, respectively. The average annual total returns for the one-, five-, and ten-year periods for Vanguard Windsor II Fund were 7.22%, 16.88%, and 17.55%, respectively. AVERAGE ANNUAL TOTAL RETURN Average annual total return is the average annual compounded rate of return for the periods of one year, five years, ten years or the life of a fund, all ended on the last day of a recent month. Average annual total return quotations will reflect changes in the price of the fund's shares and assume that all dividends and capital gains distributions during the respective periods were reinvested in fund shares. Average annual total return is calculated by finding the average annual compounded rates of return of a hypothetical investment over such periods according to the following formula (average annual total return is then expressed as a percentage): T = (ERV/P)1/N - 1 Where: T =average annual total return P =a hypothetical initial investment of $1,000 n =number of years ERV =ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION We calculate the Fund's average annual after-tax total return by finding the average annual compounded rate of return over the 1-, 5-, and 10-year periods that would equate the initial amount invested to the after-tax value, according to the following formulas: After-tax return: P (1+T)N = ATV Where: P =a hypothetical initial payment of $1,000 T =average annual after-tax total return n =number of years ATV =after-tax value at the end of the 1-,5-, or 10-year periods of a hypothetical $1,000 payment made at the beginning of the time period, assuming no liquidation of the investment at the end of the measurement periods Instructions: 1. Assume all distributions by the fund are reinvested--less the taxes due on such distributions--at the price on the reinvestment dates during the period. Adjustments may be made for subsequent re-characterizations of distributions. 2. Calculate the taxes due on distributions by the fund by applying the highest federal marginal tax rates to each component of the distributions on the reinvestment date (e.g., ordinary income, short-term capital gain, long-term capital gain, etc.). For periods after December 31, 1997, the federal marginal tax rates used for the calculations are 39.6% for ordinary income and short-term capital gains and 20% for long-term capital gains. Note that the applicable tax rates may vary over the measurement period. Assume no taxes are due on the portions of any distributions classified as B-10 exempt interest or non-taxable (i.e., return of capital). Ignore any potential tax liabilities other than federal tax liabilities (e.g., state and local taxes). 3. Include all recurring fees that are charged to all shareholder accounts. For any account fees that vary with the size of the account, assume an account size equal to the fund's mean (or median) account size. Assume that no additional taxes or tax credits result from any redemption of shares required to pay such fees. 4. State the total return quotation to the nearest hundredth of one percent. CUMULATIVE TOTAL RETURN Cumulative total return is the cumulative rate of return on a hypothetical initial investment of $1,000 for a specified period. Cumulative total return quotations reflect changes in the price of the Fund's shares and assume that all dividends and capital gains distributions during the period were reinvested in Fund shares. Cumulative total return is calculated by finding the cumulative rates of a return of a hypothetical investment over such periods, according to the following formula (cumulative total return is then expressed as a percentage): C = (ERV/P) - 1 Where: C =cumulative total return P =a hypothetical initial investment of $1,000 ERV =ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period SEC YIELD Yield is the net annualized yield based on a specified 30-day (or one month) period assuming semiannual compounding of income. Yield is calculated by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula: YIELD = 2[((A-B)/CD+1)6 - 1] Where: a =dividends and interest earned during the period. b =expenses accrued for the period (net of reimbursements). c =the average daily number of shares outstanding during the period that were entitled to receive dividends. d =the maximum offering price per share on the last day of the period SHARE PRICE Each Fund's share price, or "net asset value" per share, is calculated by dividing the total assets of the Fund, less all liabilities, by the total number of shares outstanding. The net asset value is determined as of the regular close of the New York Stock Exchange (generally 4 p.m. Eastern time) on each day that the Exchange is open for trading. Portfolio securities for which market quotations are readily available (includes those securities listed on national securities exchanges, as well as those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales price or the official closing price on the day the valuation is made. Such securities which are not traded on the valuation date are valued at the mean of the bid and ask prices. Price information on exchange-listed securities is taken from the exchange where the B-11 security is primarily traded. Securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. Short-term instruments (those with remaining maturities of 60 days or less) may be valued at cost, plus or minus any amortized discount or premium, which approximates market value. Bonds and other fixed-income securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The prices provided by a pricing service may be determined without regard to bid or last sale prices of each security, but take into account institutional-size transactions in similar groups of securities as well as any developments related to specific securities. Foreign securities are valued at the last quoted sales price, according to the broadest and most representative market, available at the time the Fund is valued. If events which materially affect the value of a Fund's investments occur after the close of the securities markets on which such securities are primarily traded, those investments may be valued by such methods as the board of trustees deems in good faith to reflect fair value. In determining the Fund's net asset value per share, all assets and liabilities initially expressed in foreign currencies will be converted into U.S. dollars using the officially quoted daily exchange rates used by Morgan Stanley Capital International in calculating their various benchmarking indexes. This officially quoted exchange rate may be determined prior to or after the close of a particular securities market. If such quotations are not available or do not reflect market conditions at the time the Fund is valued, the rate of exchange will be determined in accordance with policies established in good faith by the board of trustees. Other assets and securities for which no quotations are readily available or which are restricted as to sale (or resale) are valued by such methods as the board of trustees deems in good faith to reflect fair value. The share price for each Fund can be found daily in the mutual fund listings of most major newspapers under the heading of Vanguard Funds. PURCHASE OF SHARES The purchase price of shares of each Fund is the net asset value next determined after the order is received in good order, as defined in the Prospectus. The net asset value is calculated as of the regular close of the New York Stock Exchange on each day the Exchange is open for business. An order received prior to the close of the Exchange will be executed at the price computed on the date of receipt; and an order received after the close of the Exchange will be executed at the price computed on the next day the Exchange is open. Each Fund reserves the right in its sole discretion (i) to suspend the offering of its shares, (ii) to reject purchase orders when in the judgment of management such rejection is in the best interest of the Fund, and (iii) to reduce or waive the minimum investment for or any other restrictions on initial and subsequent investments for certain fiduciary accounts such as employee benefit plans or under circumstances where certain economies can be achieved in sales of each Fund's shares. REDEMPTION OF SHARES Each Fund may suspend redemption privileges or postpone the date of payment (i) during any period that the New York Stock Exchange is closed, or trading on the Exchange is restricted as determined by the Commission; (ii) during any period when an emergency exists as defined by the Commission as a result of which it is not reasonably practicable for the Fund to dispose of securities owned by it, or to determine fairly the value of its assets; and (iii) for such other periods as the Commission may permit. B-12 Each Fund has made an election with the Commission to pay in cash all redemptions requested by any shareholder of record limited in amount during any 90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of such period. No charge is made by either Fund for redemptions. Shares redeemed may be worth more or less than what was paid for them, depending on the market value of the Fund's portfolio securities. SIGNATURE GUARANTEES. To protect your account, the Funds and Vanguard from fraud, signature guarantees are required for certain redemptions. A signature guarantee verifies the authenticity of your signature. Examples of situations in which signature guarantees are required are: (1) ALL REDEMPTIONS, REGARDLESS OF THE AMOUNT INVOLVED, WHEN THE PROCEEDS ARE TO BE PAID TO SOMEONE OTHER THAN THE REGISTERED ACCOUNT OWNER(S) AND/OR TO AN ADDRESS OTHER THAN THE ADDRESS OF RECORD; AND (2) SHARE TRANSFER REQUESTS. These requirements are not applicable to redemptions in Vanguard's prototype retirement plans, except in connection with: (1) distributions made when the proceeds are to be paid to someone other than the plan participant; (2) certain authorizations to effect exchanges by telephone; and (3) when proceeds are to be wired. These requirements may be waived by the Funds in certain instances. Signature guarantees can be obtained from a bank, broker or any other guarantor that Vanguard deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE GUARANTORS. MANAGEMENT OF THE FUNDS THE VANGUARD GROUP Each Fund is a member of The Vanguard Group of Investment Companies, which consists of more than 100 funds. Through their jointly-owned subsidiary, The Vanguard Group, Inc. (Vanguard), the Funds and the other funds in The Vanguard Group obtain at cost virtually all of their corporate management, administrative and distribution services. Vanguard also provides investment advisory services on an at-cost basis to certain of the Vanguard funds. Vanguard employs a supporting staff of management and administrative personnel needed to provide the requisite services to the funds and also furnishes the funds with necessary office space, furnishings and equipment. Each fund pays its share of Vanguard's total expenses which are allocated among the funds under methods approved by the board of trustees of each fund. In addition, each fund bears its own direct expenses, such as legal, auditing and custodian fees. The funds' officers are also officers and employees of Vanguard. No officer or employee owns, or is permitted to own, any securities of any external adviser for the funds. Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1 under the 1940 Act. The Code is designed to prevent unlawful practices in connection with the purchase or sale of securities by persons associated with Vanguard. Under Vanguard's Code of Ethics, certain officers and employees of Vanguard who are considered access persons are permitted to engage in personal securities transactions. However, such transactions are subject to procedures and guidelines similar to, and in many cases more restrictive than, those recommended by a blue ribbon panel of mutual fund industry executives. Vanguard was established and operates under an Amended and Restated Funds' Service Agreement which was approved by the shareholders of each of the funds. The amounts which each of the funds has invested in Vanguard are adjusted from time to time in order to maintain the proportionate relationship between each fund's relative net assets and its contribution to Vanguard's capital. At October 31, 2000, Vanguard Windsor Fund had contributed capital of $2,914,000 to Vanguard, representing 0.02% of the Fund's net assets and 2.9% of Vanguard's capitalization; at that time, Vanguard Windsor II Fund had contributed capital of $4,415,000 to Vanguard, representing 0.02% of the Fund's net assets and 4.4% of Vanguard's capitalization. The Amended and Restated Funds' Service Agreement provides for the following arrangement: (a) each Vanguard fund may be called upon to invest up to 0.40% of its current net assets in Vanguard and B-13 (b) there is no other limitation on the dollar amount that each Vanguard fund may contribute to Vanguard's capitalization. MANAGEMENT. Corporate management and administrative services include: (1) executive staff; (2) accounting and financial; (3) legal and regulatory; (4) shareholder account maintenance; (5) monitoring and control of custodian relationships; (6) shareholder reporting; and (7) review and evaluation of advisory and other services provided to the funds by third parties. DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of The Vanguard Group, Inc. provides all distribution and marketing activities for the funds in the Group. The principal distribution expenses are for advertising, promotional materials and marketing personnel. Distribution services may also include organizing and offering to the public, from time to time, one or more new investment companies which will become members of The Vanguard Group. The trustees and officers of Vanguard determine the amount to be spent annually on distribution activities, the manner and amount to be spent on each fund, and whether to organize new investment companies. One half of the distribution expenses of a marketing and promotional nature is allocated among the funds based upon their relative net assets. The remaining one half of these expenses is allocated among the funds based upon each fund's sales for the preceding 24 months relative to the total sales of the funds as a Group, provided, however, that no fund's aggregate quarterly rate of contribution for distribution expenses of a marketing and promotional nature shall exceed 125% of the average distribution expense rate for The Vanguard Group, and that no Fund shall incur annual distribution expenses in excess of 0.20 of 1% of its average month-end net assets. During the fiscal years ended October 31, 1998, 1999, and 2000, the Funds incurred the following approximate amounts of The Vanguard Group's management (including transfer agency), distribution, and marketing expenses. FUND 1998 1999 2000 - ---- ---- ---- ---- Vanguard Windsor Fund $44,738,000 $41,316,000 $36,720,000 Vanguard Windsor Fund II 68,805,000 81,702,000 61,687,000 INVESTMENT ADVISORY SERVICES. An experienced investment management staff employed directly by Vanguard provides investment advisory services to the Funds, and many other Vanguard funds. These services are provided on an internalized, at-cost basis. The compensation and other expenses of this staff are paid by the funds utilizing these services. OFFICERS AND TRUSTEES The officers of the Funds manage its day-to-day operations and are responsible to the Funds' board of trustees. The trustees set broad policies for the Funds and choose its officers. The following is a list of the trustees and officers of the Funds and a statement of their present positions and principal occupations during the past five years. As a group, the Fund's trustees and officers own less than 1% of the outstanding shares of each Fund. Each trustee (except Mr. MacLaury) serves as a director of The Vanguard Group, Inc. In addition, each trustee serves as a trustee of each of the 109 funds administered by Vanguard (107 in the case of Mr. Malkiel and 99 in the case of Mr. MacLaury). The mailing address of the trustees and officers of the Funds is Post Office Box 876, Valley Forge, PA 19482. JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee* Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and Trustee of each of the investment companies in The Vanguard Group. CHARLES D. ELLIS, (DOB): 10/23/37) Trustee Retired Managing Partner of Greenwich Associates (International Business Strategy Consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. B-14 JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee Vice President, Chief Information Officer, and member of the Executive Committee of Johnson & Johnson (Pharmaceuticals/Consumer Products), Director of Johnson & Johnson*MERCK Consumer Pharmaceuticals Co., The Medical Center at Princeton, and Women's Research and Education Institute. BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee President Emeritus of The Brookings Institution (Independent Non-Partisan Research Organization); Director of American Express Bank, Ltd., The St. Paul Companies, Inc. (Insurance and Financial Services), and National Steel Corp. BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Prudential Insurance Co. of America, Banco Bilbao, Argentaria, Gestion, BKF Capital (Investment Management), The Jeffrey Co. (Holding Company), NeuVis, Inc. (Software Company), and Select Sector SPDR Trust (Exchange-Traded Mutual Fund). ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee Chairman, President, Chief Executive Officer, and Director of NACCO Industries, Inc. (Machinery/ Coal/Appliances); and Director of The BFGoodrich Co. (Aircraft Systems/Manufacturing/Chemicals). JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO Energy, Inc., and Kmart Corp. J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee Retired Chairman and CEO of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co. (Diesel Engines), The Mead Corp. (Paper Products), and AmeriSource Health Corp.; and Trustee of Vanderbilt University. RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary* Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group, Inc. and of each of the investment companies in The Vanguard Group. THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer* Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies in The Vanguard Group. * Officers of the Funds are "interested persons" as defined in the 1940 Act. TRUSTEE COMPENSATION The same individuals serve as trustees of all Vanguard funds (with two exceptions, which are noted in the table on page B-16), and each fund pays a proportionate share of the trustees' compensation. The funds employ their officers on a shared basis, as well. However, officers are compensated by The Vanguard Group, Inc., not the funds. INDEPENDENT TRUSTEES. The funds compensate their independent trustees--that is, the ones who are not also officers of the fund--in three ways: . The independent trustees receive an annual fee for their service to the funds, which is subject to reduction based on absences from scheduled board meetings. . The independent trustees are reimbursed for the travel and other expenses that they incur in attending board meetings. . Upon retirement, the independent trustees receive an aggregate annual fee of $1,000 for each year served on the board, up to fifteen years of service. This annual fee is paid for ten years following retirement, or until each trustee's death. B-15 "INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in this capacity. He is, however, paid in his role as officer of The Vanguard Group, Inc. COMPENSATION TABLE. The following table provides compensation details for each of the trustees. We list the amounts paid as compensation and accrued as retirement benefits by the fund for each trustee. In addition, the table shows the total amount of benefits that we expect each trustee to receive from all Vanguard funds upon retirement, and the total amount of compensation paid to each trustee by all Vanguard funds. VANGUARD WINDSOR FUNDS COMPENSATION TABLE
PENSION OR RETIREMENT TOTAL BENEFITS COMPENSATION AGGREGATE ACCRUED AS FROM ALL COMPENSATION PART OF THESE ESTIMATED VANGUARD FROM THESE FUNDS' ANNUAL FUNDS PAID TO FUNDS EXPENSES BENEFITS UPON TRUSTEES NAMES OF TRUSTEES (1) (1) RETIREMENT (2) - ------------------------------------------------------------------------------------------ John J. Brennan None None None None Charles D. Ellis(3) N/A N/A N/A N/A JoAnn Heffernan Heisen $7,879 $347 $15,000 $100,000 Bruce K. MacLaury 8,152 579 12,000 95,000 Burton G. Malkiel 7,924 574 15,000 100,000 Alfred M. Rankin, Jr. 7,721 420 15,000 98,000 John C. Sawhill(4) James O. Welch, Jr. 7,721 614 15,000 98,000 J. Lawrence Wilson 7,879 444 15,000 100,000
(1) The amounts shown in this column are based on the Funds' fiscal year ended October 31, 2000. (2) The amounts reported in this column reflect the total compensation paid to each trustee for his or her service as trustee of 109 Vanguard funds (107 in the case of Mr. Malkiel; 99 in the case of Mr. MacLaury) for the 2000 calendar year. (3) Mr. Ellis joined the Funds' board effective January 1, 2001. (4) Mr. Sawhill died in May 2000. INVESTMENT ADVISORY SERVICES VANGUARD WINDSOR FUND The Fund employs a multi-manager approach, using two primary investment advisers for the bulk of its assets and Vanguard's Quantitative Equity Group to manage its cash investments. WELLINGTON MANAGEMENT COMPANY, LLP Wellington Management Company, LLP (Wellington Management) manages a portion of the assets of Vanguard Windsor Fund. Wellington Management discharges its responsibilities pursuant to an investment advisory agreement and is subject to the control of the officers and trustees of the Fund. Wellington Management is a Massachusetts limited liability partnership, and the following persons serve as managing partners of Wellington Management: Laurie A. Gabriel, Duncan M. McFarland, and John R. Ryan. Wellington Management and its predecessor organizations have provided investment advisory services to investment companies since 1928 and to investment counseling clients since 1960. Charles T. Freeman, Senior Vice President and Partner of Wellington Management, has served as portfolio manager of the Fund since January, 1996. B-16 Vanguard Windsor Fund pays Wellington Management a basic fee at the end of each fiscal quarter, calculated by applying a quarterly rate, based on the following annual percentage rates, to Vanguard Windsor Fund's average month-end net assets managed by Wellington Management (the Wellington Management Portfolio) for the quarter: NET ASSETS ANNUAL RATE - ---------- ----------- First $17.5 billion........................ 0.125% Assets in excess of $17.5 billion.......... 0.100% The basic fee paid to Wellington Management may be increased or decreased by applying an adjustment formula based on investment performance of the Wellington Management Portfolio. Such formula provides for an increase or decrease in the basic fee paid to Wellington Management each quarter, depending upon the Wellington Management Portfolio's investment performance for the thirty-six months preceding the end of the quarter relative to the investment record of the Standard and Poor's 500 Composite Stock Price Index (the Index) for the same period. The basic fee, as provided above, shall be increased or decreased by applying a performance fee adjustment based on the investment performance of the Wellington Management Portfolio relative to the investment performance of the Index. The following table sets forth the adjustment factors to the base advisory fee payable by the Fund to Wellington Management under this investment advisory agreement. For the first $17.5 billion of assets: CUMULATIVE 36-MONTH PERFORMANCE FEE PERFORMANCE VERSUS THE INDEX ADJUSTMENT* - ---------------------------- ----------- Less than -12%................ -0.67 x Basic Fee Between -12% and -6%.......... -0.33 x Basic Fee Between -6% and +6%........... 0.00 x Basic Fee Between +6% and +12%.......... +0.33 x Basic Fee More than +12%................ +0.67 x Basic Fee For assets over $17.5 billion: CUMULATIVE 36-MONTH PERFORMANCE FEE PERFORMANCE VERSUS THE INDEX ADJUSTMENT* - ---------------------------- ----------- Less than -12%................ -0.90 x Basic Fee Between -12% and -6%.......... -0.45 x Basic Fee Between -6% and +6%........... 0.00 x Basic Fee Between +6% and +12%.......... +0.45 x Basic Fee More than +12%................ +0.90 x Basic Fee *For purposes of this calculation, the basic fee is calculated by applying the quarterly rate against average assets over the 36-month period. For purposes of performance adjustments, the investment performance of the Wellington Management Portfolio for any period is expressed as a percentage of "Wellington Management Portfolio Unit Value" at the beginning of the period. This percentage is equal to the sum of: (i) the change in the Wellington Management Portfolio Unit Value during the period; (ii) the value of Vanguard Windsor Fund's cash distributions from the Wellington Management Portfolio's net investment income and realized net capital gains (whether long-term or short-term) having an ex-dividend date occurring within the period; and (iii) the unit value of capital gains taxes paid or accrued during the period by Vanguard Windsor Fund for undistributed realized long-term capital gains realized from the Wellington Management Portfolio. The investment record of the Index for any period is expressed as a percentage of the Index level at the beginning of the period. This B-17 percentage is equal to the sum of (i) the change in the level of the Index during the period, and (ii) the value, computed consistently with the Index, of cash distributions having an ex-dividend date occurring within the period made by companies whose securities comprise the Index. During the fiscal years ended October 31, 1998, 1999, and 2000, Vanguard Windsor Fund incurred the following advisory fees owed to Wellington Management: 1998 1999 2000 ---- ---- ---- Basic Fee................... $24,971,000 $19,714,000 $15,541,000 Increase or Decrease for Performance Adjustment..... (15,501,000) (14,040,000) (12,247,000) ---------- ---------- ---------- Total....................... $9,470,000 $5,674,000 $3,294,000 ========== ========== ========== SANFORD C. BERNSTEIN & CO., LLC Sanford C. Bernstein & Co., LLC (Bernstein), a unit of Alliance Capital management, L.P., manages a portion of the assets of Vanguard Windsor Fund. Bernstein discharges its responsibilities pursuant to an investment advisory agreement and is subject to the control of the officers and trustees of the Fund. The Fund pays Bernstein a basic fee at the end of each of the Fund's fiscal quarters, calculated by applying a quarterly rate, based on the following annual percentage rates, to the average month-end net assets of the Bernstein Portfolio for the quarter: NET ASSETS ANNUAL RATE - ---------- ----------- First $1 billion............... 0.15% Next $2 billion................ 0.14% Next $2 billion................ 0.12% Assets in excess of $5 billion. 0.10% Subject to a transition rule described in the Agreement, the Basic Fee, as provided above will be increased or decreased by the amount of a performance fee adjustment. The adjustment will be calculated as a percentage of the basic fee and will change proportionately with the investment performance of the Fund relative to the investment performance of the Russell 1000 Value Index (the Index) for the thirty-six month period ending with the applicable quarter. The Adjustment applies as follows: CUMULATIVE 36-MONTH PERFORMANCE FEE ADJUSTMENT PERFORMANCE VERSUS THE INDEX AS A PERCENTAGE OF BASIC FEE* - ---------------------------- ---------------------------- Trails by more than 9%...... -50% Trails by 0 to 9%........... Linear decrease from 0 to -50% Exceeds by 0 to 9%.......... Linear increase from 0 to +50% Exceeds by more than 9%..... +50% *For purposes of this calculation, the basic fee is calculated by applying the quarterly rate against the average net assets over the same time period which the performance is measured. TRANSITION RULE FOR CALCULATING BERNSTEIN'S COMPENSATION. The performance fee adjustment will not be fully operable until August 1, 2002. Until that time, the following transition rules will apply: (A) JUNE 1, 1999 THROUGH MAY 31, 2000. Bernstein's compensation was the basic fee. No performance fee adjustment was applied during this period. (B) JUNE 1, 2000 THROUGH JULY 31, 2002. Beginning June 1, 2000, the performance fee adjustment will take effect on a progressive basis with regard to the number of months elapsed between August 1, 1999 and the quarter for which the adviser's fee is being computed. During this B-18 period, the performance fee adjustment will be multiplied by a fraction. The fraction will equal the number of months elapsed since August 1, 1999 divided by thirty-six. (C) ON AND AFTER AUGUST 1, 2002. Beginning August 1, 2002, the performance fee adjustment will be fully operable. OTHER SPECIAL RULES RELATING TO BERNSTEIN'S COMPENSATION. The following special rules will also apply to the adviser's compensation: BERNSTEIN PORTFOLIO PERFORMANCE. The investment performance of the Bernstein Portfolio for any period, expressed as a percentage of the "Bernstein Portfolio unit value" at the beginning of such period, will be the sum of: (i) the change in the Bernstein Portfolio unit value during such period; (ii) the unit value of the Fund's cash distributions from the Bernstein Portfolio's net investment income and realized net capital gains (whether long-term or short-term) having an ex-dividend date occurring within such period; and (iii) the unit value of capital gains taxes paid or accrued during such period by the Fund for undistributed long-term capital gains realized by the Bernstein Portfolio. For this purpose, the unit value of distributions per share of realized capital gains, of dividends per share paid from investment income and of capital gains taxes per share paid or payable on undistributed realized long-term gains shall be treated as reinvested in the Bernstein Portfolio at the unit value in effect at the close of business on the record date for the payment of such distributions and dividends and the date on which provision is made for such taxes, after giving effect to such distributions, dividends, and taxes. "BERNSTEIN PORTFOLIO UNIT VALUE." The "Bernstein Portfolio unit value" will be determined by dividing the total net assets of the Bernstein Portfolio by a given number of units. The number of units in the Bernstein Portfolio initially will equal to the total shares outstanding of the Fund on August 1, 1999. Subsequently, as assets are added to or withdrawn from the Bernstein Portfolio, the number of units of the Bernstein Portfolio will be adjusted based on the unit value of the Bernstein Portfolio on the day such changes are executed. INDEX PERFORMANCE. The investment record of the Index for any period, expressed as a percentage of the Index at the beginning of such period, will be the sum of: (i) the change in the level of the Index during such period, and (ii) the value, computed consistently with the Index, of cash distributions having accumulated to the end of such period made by companies whose securities comprise the Index. For this purpose, cash distributions on the securities which comprise the Index will be treated as reinvested in the Index at least as frequently as the end of each calendar quarter following the payment of the dividend. The calculation will be gross of applicable costs and expenses. During the period June 1, 1999, through October 31, 1999, and the fiscal year ended October 31, 2000, Vanguard Windsor Fund incurred the following advisory fees owed to Bernstein: 1999 2000 ---- ---- Basic Fee............................ $2,309,000 $5,240,000 Increase or Decrease for Performance Adjustment.......................... 0 (580,000) --------- --------- Total................................ $2,309,000 $4,660,000 ========== ========== B-19 VANGUARD WINDSOR II FUND Vanguard Windsor II Fund employs a multi-manager approach utilizing four investment advisers. BARROW, HANLEY, MEWHINNEY & STRAUSS Vanguard Windsor II Fund has entered into an investment advisory agreement with Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley) to manage a portion of the equity allocation of Vanguard Windsor II Fund (approximately 62%, as of October 31, 2000). Under this agreement, Barrow, Hanley manages the investment and reinvestment of the designated assets and continuously reviews, supervises and administers the investment program of Vanguard Windsor II Fund with respect to those assets. Barrow, Hanley discharges its responsibilities subject to the control of the officers and trustees of the Fund. Barrow, Hanley, a Nevada Corporation owned by United Asset Management Corporation, which is now owned by Old Mutual plc, is controlled by the following partners of Barrow, Hanley: James P. Barrow, President, Secretary, and Treasurer; Richard A. Englander; J. Ray Nixon; Robert J. Chambers; Robert D. Barkley; H. Monroe Helm; Mary Jane Gilday; and Timothy J. Culler. Vanguard Windsor II Fund pays Barrow, Hanley a basic fee at the end of each fiscal quarter, calculated by applying a quarterly rate, based on the following annual percentage rates, to the average month-end net assets of Vanguard Windsor II Fund managed by Barrow, Hanley for the quarter: NET ASSETS ANNUAL RATE - ---------- ----------- First $200 million...... 0.300% Next $300 million....... 0.200% Next $500 million....... 0.150% Over $1 billion......... 0.125% The Fund's payments to Barrow, Hanley under the above schedule are subject to an performance fee arrangement which compares the performance of the Fund's assets managed by Barrow, Hanley with the performance of the Standard & Poor's/BARRA Value Index. This arrangement provides for the following adjustments to Barrow, Hanley's basic fee: CUMULATIVE 36-MONTH PERFORMANCE FEE PERFORMANCE VERSUS THE INDEX ADJUSTMENT* - ---------------------------- ---------- Trails by -9% or more -0.25 x Basic Fee Trails by more than -6% but less than -9% -0.15 x Basic Fee Trails/exceeds from -6% through +6% 0.00 x Basic Fee Exceeds by more than +6% but less than +9% +0.15 x Basic Fee Exceeds by +9% or more +0.25 x Basic Fee *For purposes of the performance fee calculation, the basic fee is calculated by applying the quarterly rate against average net assets managed by Barrow, Hanley over the same period for which performance is measured. The BARRA Value Index includes stocks in the Standard and Poor's 500 Composite Stock Price Index with lower than average ratios of market price to book value. These types of stocks are often referred to as "value" stocks. The investment performance of the portion of Vanguard Windsor II Fund's assets managed by Barrow, Hanley (the Barrow, Hanley Portfolio) for any period is expressed as a percentage of the "Barrow, Hanley Portfolio Unit Value" at the beginning of such period. This percentage is equal to the sum of: (i) the change in the Barrow, Hanley Portfolio Unit Value during such period; (ii) the unit value of the Fund's cash distributions from the Barrow, Hanley Portfolio's net investment income and realized net capital gains (whether long-term or short-term) having an ex-dividend date occurring within such period; and (iii) the unit value of capital gains taxes per share paid or accrued B-20 on undistributed realized long-term capital gains accumulated to the end of the period by the Barrow, Hanley Portfolio, expressed as a percentage of the Barrow, Hanley Portfolio Unit Value at the beginning of such period. The Barrow, Hanley Portfolio Unit Value will be determined by dividing the total net assets of the Barrow, Hanley Portfolio by a given number of units. On the initial date of the agreement, the number of units in the Barrow, Hanley Portfolio was equal to the total shares outstanding of Vanguard Windsor II Fund. After such initial date, as assets are added to or withdrawn from the Barrow, Hanley Portfolio, the number of units of the Barrow, Hanley Portfolio will be adjusted based on the unit value of the Barrow, Hanley Portfolio on the day such changes are executed. The investment record of the Standard & Poor's/BARRA Value Index for any period, expressed as a percentage of the Index level at the beginning of such period, will be the sum of (i) the change in the level of the Index during such period, and (ii) the value, computed consistently with the Index, of cash distributions having an ex-dividend date occurring within such period made by companies whose securities make up the Index. During the fiscal years ended October 31, 1998, 1999, and 2000, Vanguard Windsor II Fund incurred the following advisory fees owed to Barrow, Hanley: 1998 1999 2000 ---- ---- ---- Basic Fee................... $24,226,000 $27,519,000 $19,325,000 Increase or Decrease for Performance Adjustment..... 3,888,000 (1,430,000) (6,374,000) ---------- ---------- ---------- Total....................... $28,114,000 $26,089,000 $12,951,000 OTHER ADVISERS On November 1, 1991, Vanguard Windsor II Fund added Equinox Capital Management (Equinox), Tukman Capital Management (Tukman), and Vanguard's Quantitative Equity Group to manage the investment and reinvestment of a portion of its equity allocation (approximately 15%, 13%, and 6%, respectively, as of October 31, 2000). Additionally, Vanguard's Quantitative Equity Group was added to manage the Fund's cash investments (approximately 4%, as of October 31, 2000). Equinox, Tukman, and Vanguard's Quantitative Equity Group discharge their respective responsibilities subject to the control of the trustees and officers of the Fund. EQUINOX CAPITAL MANAGEMENT LLC Equinox is a Delaware Limited Liability Company controlled by the following officers of Equinox: Ronald J. Ulrich, Chairman and Chief Investment Officer; and Wendy D. Lee, Chief Executive Officer. Under the terms of an investment advisory agreement, Vanguard Windsor II Fund pays Equinox a basic fee at the end of each fiscal quarter, calculated by applying a quarterly rate, based on the following annual percentage rates, to the portion of Vanguard Windsor II Fund's average month-end net assets managed by Equinox for the quarter: NET ASSETS ANNUAL RATE - ---------- ----------- First $400 million............. 0.200% Next $600 million.............. 0.150% Next $1 billion................ 0.125% Assets in excess of $2 billion. 0.100% The basic fee paid to Equinox may be increased or decreased by applying an adjustment formula based on the investment performance of the portion of Vanguard Windsor II Fund's assets managed by Equinox (the Equinox Portfolio) relative to the investment performance of the Russell 1000 Value Index. Such formula provides for an increase or decrease in the basic fee paid to B-21 Equinox each quarter, depending upon the Equinox Portfolio's investment performance for the thirty-six months preceding the end of the quarter. The following table sets forth the adjustment factors to the basic fee payable by the Equinox Portfolio to Equinox under this investment advisory agreement: CUMULATIVE 36-MONTH PERFORMANCE FEE PERFORMANCE VERSUS THE INDEX ADJUSTMENT* - ---------------------------- ---------- Less than -9%................. -0.50 x Basic Fee Between -9% and -4.5%......... -0.25 x Basic Fee Between -4.5% and +4.5%....... 0.00 x Basic Fee Between +4.5% and +9%......... +0.25 x Basic Fee More than +9%................. +0.50 x Basic Fee *For purposes of this calculation, the basic fee is calculated by applying the quarterly rate against average assets over the 36-month period. The investment performance of the Equinox Portfolio for such period, expressed as a percentage of the Equinox Portfolio's net asset value per share at the beginning of such period, shall be the sum of: (i) the change in the Equinox Portfolio's net asset value per share during such period; (ii) the value of Equinox Portfolio's cash distributions per share having an ex-dividend date occurring within such period; and (iii) the per share amount of capital gains taxes paid or accrued during such period by the Equinox Portfolio for undistributed realized long-term capital gains. The investment record of the Russell 1000 Value Index for any period, expressed as a percentage of the Index at the beginning of such period, shall be the sum of (i) the change in the level of the Index during such period and (ii) the value, computed consistently with the Index, of cash distributions having an ex-dividend date occurring within such period made by companies whose securities make up the Index. During the fiscal years ended October 31, 1998, 1999, and 2000, Vanguard Windsor II Fund incurred the following advisory fees owed to Equinox: 1998 1999 2000 ---- ---- ---- Basic Fee................... $3,945,000 $4,992,000 $4,632,000 Increase or Decrease for Performance Adjustment..... 868,000 1,788,000 2,358,000 --------- --------- --------- Total....................... $4,813,000 $6,780,000 $6,990,000 ========= ========= ========= TUKMAN CAPITAL MANAGEMENT, INC. Tukman is a Delaware corporation controlled by the following officers of Tukman: Melvin T. Tukman, President and Director; and Daniel L. Grossman, Vice President. Under the terms of an investment advisory agreement, the Fund pays Tukman a basic fee at the end of each fiscal quarter, calculated by applying a quarterly rate, based on the following annual percentage rates, to the average month-end assets of the portion of Vanguard Windsor II Fund's assets managed by Tukman: NET ASSETS ANNUAL RATE - ---------- ----------- First $25 million...... 0.400% Next $125 million...... 0.350% Next $350 million...... 0.250% Next $500 million...... 0.200% Over $1 billion........ 0.150% B-22 The Fund's payments to Tukman under the above schedule are subject to a performance fee arrangement which compares the performance of the Fund assets managed by Tukman with the performance of the Standard & Poor's 500 Composite Stock Price Index. This arrangement provides for the following adjustments to Tukman's basic fee: CUMULATIVE 36-MONTH PERFORMANCE FEE PERFORMANCE VERSUS THE INDEX ADJUSTMENT* - ---------------------------- ---------- Less than or equal to -12%.... -0.50 x Basic Fee Between -12% and -6%.......... -0.25 x Basic Fee Between -6% and +6%........... 0.00 x Basic Fee Between +6% and +12%.......... +0.25 x Basic Fee More than +12%................ +0.50 x Basic Fee *For purposes of this calculation, the basic fee is calculated by applying the quarterly rate against average assets over the 36-month period. The investment performance of the portion of Vanguard Windsor II Fund's assets managed by Tukman (the Tukman Portfolio) for any period is expressed as a percentage of the "Tukman Portfolio Unit Value" at the beginning of such period. The percentage is equal to the sum of: (i) the change in the Tukman Portfolio Unit Value during such period; (ii) the unit value of Vanguard Windsor II Fund's cash distributions from the Tukman Portfolio net investment income and realized net capital gains (whether long-term or short-term) having an ex-dividend date occurring within such period; and (iii) the unit value of capital gains taxes paid or accrued during such period by Vanguard Windsor II Fund for undistributed realized long-term capital gains realized from the Tukman Portfolio. The Tukman Portfolio Unit Value will be determined by dividing the total net assets of the Tukman Portfolio by a given number of units. On the initial date of the agreement, the number of units in the Tukman Portfolio was equal to the total shares outstanding of Vanguard Windsor II Fund. After such initial date, as assets are added to or withdrawn from the Tukman Portfolio, the number of units of the Tukman Portfolio will be adjusted based on the unit value of the Tukman Portfolio on the day such changes are executed. The investment record of the S&P 500 Index will be calculated quarterly by (i) multiplying the total return for the quarter (change in market price plus dividends) of each stock included in the S&P 500 by its weighting in the S&P Index 500 at the beginning of the quarter, and (ii) adding the values discussed in (i). For any period, therefore, the investment record of the S&P 500 Index will be the compounded quarterly returns of the S&P 500. During the fiscal years ended October 31, 1998, 1999, and 2000, Vanguard Windsor II Fund incurred the following advisory fees owed to Tukman: 1998 1999 2000 ---- ---- ---- Basic Fee................... $5,126,000 $6,193,000 $5,983,000 Increase or Decrease for Performance Adjustment..... 993,000 (2,001,000) (2,265,000) ------- ---------- ---------- Total....................... $6,119,000 $4,192,000 $3,718,000 ========== ========== ========== VANGUARD'S QUANTITATIVE EQUITY GROUP Vanguard Quantitative Equity Group is supervised by the officers of the Fund. During the fiscal years ended October 31, 1998, 1999, and 2000, Vanguard Windsor II Fund incurred the following expenses for investment advisory services: $287,000, $511,000, and $414,000 respectively. B-23 DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS Each Fund's current agreement with its advisers is renewable for successive one-year periods, only if (1) each renewal is specifically approved by a vote of the Fund's board of trustees, including the affirmative votes of a majority of the trustees who are not parties to the agreement or "interested persons" (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of considering such approval, or (2) each renewal is specifically approved by a vote of a majority of the Fund's outstanding voting securities. An agreement is automatically terminated if assigned, and may be terminated without penalty at any time (1) by vote of the board of trustees of the Fund on sixty (60) days' written notice to the adviser, (2) by a vote of a majority of the Fund's outstanding voting securities, or (3) by the adviser upon ninety (90) days' written notice to the Fund. PORTFOLIO TRANSACTIONS Wellington Management, Bernstein, Barrow, Hanley, Equinox, Tukman and Vanguard's Quantitative Equity Group are authorized to (with the approval of the board of trustees) select the brokers or dealers that will execute the purchases and sales of portfolio securities for the respective Fund. The investment advisory agreements direct the advisers to use their best efforts to obtain the best available price and most favorable execution as to all transactions. Each investment adviser has undertaken to execute each investment transaction at a price and commission which provides the most favorable total cost or proceeds reasonably obtainable under the circumstances. In placing portfolio transactions, each investment adviser will use its best judgment to choose the broker most capable of providing the brokerage services necessary to obtain the best available price and most favorable execution. The full range and quality of brokerage services available will be considered in making these determinations. In those instances where it is reasonably determined that more than one broker can offer the brokerage services needed to obtain the best available price and most favorable execution, consideration may be given to those brokers which supply investment research and statistical information and provide other services in addition to execution services to the Fund and/or the investment adviser. Each investment adviser considers such information useful in the performance of its obligations under the agreement, but is unable to determine the amount by which such services may reduce its expenses. The investment advisory agreements also incorporate the concepts of Section 28(e) of the Securities Exchange Act of 1934 by providing that, subject to the approval of the board of trustees, each investment adviser may cause the Fund to pay a broker-dealer which furnishes brokerage and research services a higher commission than that which might be charged by another broker-dealer for effecting the same transaction; provided that such commission is deemed reasonable in terms of either that particular transaction or the overall responsibilities of the adviser to the Funds and the other funds in the Group. Currently, it is each Fund's policy that each investment adviser may at times pay higher commissions in recognition of brokerage services felt necessary for the achievement of better execution of certain securities transactions that otherwise might not be available. An investment adviser will only pay such higher commissions if it believes this to be in the best interest of the Fund. Some brokers or dealers who may receive such higher commissions in recognition of brokerage services related to execution of securities transactions are also providers of research information to an investment adviser and/or the Fund. However, the investment advisers have informed the Fund that they generally will not pay higher commission rates specifically for the purpose of obtaining research services. Some securities considered for investment by a Fund may also be appropriate for the other Fund and for other funds and/or clients served by the investment adviser. If purchase or sale of securities consistent with the investment policies of the Fund and one or more of these other funds or clients served by the investment adviser are considered at or about the same time, transactions in such securities will be allocated among the several funds and clients in a manner deemed equitable by the investment adviser. Although there may be no specified formula for allocating B-24 such transactions, the allocation methods used, and the results of such allocations, will be subject to periodic review by the Funds' board of trustees. During the fiscal years ended October 31, 1998, 1999, and 2000, the Funds paid the following in brokerage commissions. FUND 1998 1999 2000 - ---- ---- ---- ---- Vanguard Windsor Fund $27,915,402 $25,355,164 $19,844,549 Vanguard Windsor Fund II 21,836,954 15,327,874 22,968,801 FINANCIAL STATEMENTS Each Fund's Financial Statements for the year ended October 31, 2000, including the financial highlights for each of the five fiscal years in the period ended October 31, 2000, appearing in the Vanguard Windsor Fund and Vanguard Windsor II Fund 2000 Annual Reports to Shareholders, and the reports thereon of PricewaterhouseCoopers LLP, independent accountants, also appearing therein, are incorporated by reference in this Statement of Additional Information. For a more complete discussion of the performance, please see each Fund's Annual Report to Shareholders, which may be obtained without charge. COMPARATIVE INDEXES Vanguard may use reprinted material discussing The Vanguard Group, Inc. or any of the member funds of The Vanguard Group of Investment Companies. Each of the investment company members of The Vanguard Group, including Vanguard Windsor Fund and Vanguard Windsor II Fund, may from time to time use one or more of the following unmanaged indexes for comparative performance purposes. STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by Standard & Poor's Index Committee to include leading companies in leading industries and to reflect the U.S. stock market. STANDARD AND POOR'S 500/BARRA VALUE INDEX--consists of the stocks in the Standard and Poor's 500 Composite Stock Price Index (S&P 500) with the lowest price-to-book ratios, comprising 50% of the market capitalization of the S&P 500. STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic stocks. STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P SmallCap 600 Index which have a lower than average price-to-book ratio. STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P SmallCap 600 Index which have a higher than average price-to-book ratio. RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index (comprising the 1,000 largest U.S.-based companies measured by total market capitalization) with the lowest price-to-book ratios, comprising 50% of the market capitalization of the Russell 1000. WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 7,000 common equity securities, covering all stocks in the U.S. for which daily pricing is available. WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000 except for the 500 stocks in the Standard and Poor's 500 Index. MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market value-weighted average of the performance of over 900 securities listed on the stock exchanges of countries in Europe, Australia, Asia, and the Far East. B-25 GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29 preferreds. The original list of names was generated by screening for convertible issues of $100 million or greater in market capitalization. The index is priced monthly. SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private lenders and guaranteed by the mortgage pools of the Government National Mortgage Association. SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total return index, including approximately 800 issues with maturities of 12 years or greater. LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index that contains individually priced U.S. Treasury securities with maturities of 10 years or greater. MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S. Treasury Agency and investment grade corporate bonds. LEHMAN BROTHERS CREDIT (BAA) BOND INDEX--all publicly offered fixed-rate, non-convertible domestic corporate bonds rated Baa by Moody's with a maturity longer than 1 year and with more than $100 million outstanding. This index includes over 1,500 issues. LEHMAN BROTHERS CREDIT BOND INDEX--is a subset of the Lehman Corporate Bond Index covering all corporate, publicly issued, fixed-rate, non-convertible U.S. debt issues rated at least Baa, with at least $100 million principal outstanding and maturity greater than 10 years. BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade general obligation municipal bonds. STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield for four high-grade, noncallable preferred stock issues. NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is a value-weighted index calculated on price change only and does not include income. LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CREDIT INDEX--is a market weighted index that contains individually priced U.S. Treasury, agency, and corporate investment grade bonds rated BBB or better with maturities between 1 and 5 years. The index has a market value of over $1.6 trillion. LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CREDIT INDEX--is a market weighted index that contains individually priced U.S. Treasury, agency, and corporate securities rated BBB- or better with maturities between 5 and 10 years. The index has a market value of over $800 billion. LEHMAN BROTHERS LONG (10+) GOVERNMENT/CREDIT INDEX--is a market weighted index that contains individually priced U.S. Treasury, agency, and corporate securities rated BBB- or better with maturities greater than 10 years. The index has a market value of over $1.1 trillion. LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds with similar investment objectives and policies, as measured by Lipper Inc. LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general equity funds with similar investment objectives and policies, as measured by Lipper Inc. LIPPER FIXED INCOME FUND AVERAGE--an industry benchmark of average fixed income funds with similar investment objectives and policies, as measured by Lipper Inc. LIPPER SMALL-CAP GROWTH FUND AVERAGE--A fund that by prospectus or portfolio practice invests primarily in growth companies with market capitalizations less than $1 billion at the time of purchase. SAI022 022001 B-26 PART C VANGUARD WINDSOR FUNDS OTHER INFORMATION ITEM 23. EXHIBITS EXHIBIT DESCRIPTION (a) Declaration of Trust** (b) By-Laws** (c) Reference is made to Articles III and V of the Registrant's Declaration of Trust (d) Investment Advisory Contracts+ (e) Not applicable (f) Reference is made to the section entitled "Management of the Funds" in the Registrant's Statement of Additional Information (g) Custodian Agreement** (h) Amended and Restated Funds' Service Agreement** (i) Legal Opinion** (j) Consent of Independent Accountants* (k) Not Applicable (l) Not Applicable (m) Not Applicable (n) Not Applicable (o) Rule 18f-3 Plan* (p) Codes of Ethics* ---------------- *Filed herewith. **Filed previously. +Filed herewith for Sanford C. Bernstein & Co., LLC and Barrow, Hanley, Mewhinney & Strauss, Inc.; filed previously for all other investment advisory contracts. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Registrant is not controlled by or under common control with any person. ITEM 25. INDEMNIFICATION The Registrant's organizational documents contain provisions indemnifying Trustees and officers against liability incurred in their official capacity. Article VII, Section 2 of the Declaration of Trust provides that the Registrant may indemnify and hold harmless each and every Trustee and officer from and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or related to the performance of his or her duties as a Trustee or officer. However, this provision does not cover any liability to which a Trustee or officer would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. Article VI of the By-Laws generally provides that the Registrant shall indemnify its Trustees and officers from any liability arising out of their past or present service in that capacity. Among other things, this provision excludes any liability arising by reason of willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the Trustee's or officer's office with the Registrant. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Barrow, Hanley, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Barrow, Hanley pursuant to the Advisers Act (SEC File No. 801-31237). Equinox Capital Management LLC (Equinox) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Equinox, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Equinox pursuant to the Advisers Act (SEC File No. 801-34524). Sanford C. Bernstein & Co., LLC (Bernstein) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Bernstein, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Bernstein pursuant to the Advisers Act (SEC File No. 801-10488). Tukman Capital Management, Inc. (Tukman) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Tukman, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Tukman pursuant to the Advisers Act (SEC File No. 801-15279). Wellington Management Company (Wellington Management) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Wellington Management, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Wellington Management pursuant to the Advisers Act (SEC File No. 801-15908). The Vanguard Group, Inc. (Vanguard) is an investment adviser registered under the Advisers Act. The list required by this Item 26 of officers and directors of Vanguard, together with any information as to any business profession, vocation, or employment of a substantial nature engaged in by such officers and directors during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No. 801-11953). ITEM 27. PRINCIPAL UNDERWRITERS (a) Not Applicable (b) Not Applicable (c) Not Applicable ITEM 28. LOCATION OF ACCOUNTS AND RECORDS The books, accounts, and other documents required to be maintained by Section 31(a) under the 1940 Act and the rules promulgated thereunder will be maintained at the offices of Registrant; Registrant's Transfer Agent, The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, PA 19355; and the Registrant's Custodian, State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110. ITEM 29. MANAGEMENT SERVICES Other than as set forth under the description of The Vanguard Group in Part B of this Registration Statement, the Registrant is not a party to any management-related service contract. ITEM 30. UNDERTAKINGS Not Applicable SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant hereby certifies that it meets all requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on the 9th day of February 2001. VANGUARD WINDSOR FUNDS BY:_________________________________ (signature) (HEIDI STAM) JOHN J. BRENNAN* CHAIRMAN AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the date indicated: SIGNATURE TITLE DATE - -------------------------------------------------------------------------------- By:/S/ JOHN J. BRENNAN President, Chairman, Chief February 9, 2001 ---------------------------Executive Officer, and Trustee (Heidi Stam) John J. Brennan* By:/S/ CHARLES D. ELLIS Trustee February 9, 2001 --------------------------- (Heidi Stam) Charles D. Ellis* By:/S/ JOANN HEFFERNAN HEISEN Trustee February 9, 2001 --------------------------- (Heidi Stam) JoAnn Heffernan Heisen* By:/S/ BRUCE K. MACLAURY Trustee February 9, 2001 --------------------------- (Heidi Stam) Bruce K. MacLaury* By:/S/ BURTON G. MALKIEL Trustee February 9, 2001 --------------------------- (Heidi Stam) Burton G. Malkiel* By:/S/ ALFRED M. RANKIN, JR. Trustee February 9, 2001 --------------------------- (Heidi Stam) Alfred M. Rankin, Jr.* By:/S/ JAMES O. WELCH, JR. Trustee February 9, 2001 --------------------------- (Heidi Stam) James O. Welch, Jr.* By:/S/ J. LAWRENCE WILSON Trustee February 9, 2001 --------------------------- (Heidi Stam) J. Lawrence Wilson* By:/S/ THOMAS J. HIGGINS Treasurer and Principal February 9, 2001 ---------------------------Financial Officer and Principal (Heidi Stam) Accounting Officer Thomas J. Higgins* *By Power of Attorney. See File Number 33-4424, filed on January 25, 1999. Incorporated by Reference. INDEX TO EXHIBITS Investment Advisory Agreements . . . . . . . . . . . . Ex-99.BD Consent of Independent Accountants . . . . . . . . . . Ex-99.BJ Rule 18f-3 Plan. . . . . . . . . . . . . . . . . . . . Ex-99.BO Codes of Ethics. . . . . . . . . . . . . . . . . . . . Ex-99.BP EX-99.BD 2 0002.txt INVESTMENT ADVISORY AGREEMENTS INVESTMENT ADVISORY AGREEMENT AGREEMENT, made as of this 2nd day of October, 2000, between VANGUARD WINDSOR FUNDS, a Delaware business trust (the "Company"), and Sanford C. Bernstein & Co., LLC, a Delaware Limited Liability Company (the "Adviser"). WHEREAS, the Fund is an open-end, diversified management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Company offers a series of shares known as Vanguard Windsor Fund (the "Fund"); and WHEREAS, the Company desires to retain the Adviser to render investment advisory services to certain assets of the Fund which the Board of Trustees of the Company determines to assign to the Advisor (referred to in this agreement as the "Bernstein Portfolio"), and the Adviser is willing to render such services; NOW, THEREFORE, this Agreement W I T N E S S E T H that in consideration of the premises and mutual promises hereinafter set forth, the parties hereto agree as follows: 1. APPOINTMENT OF ADVISER. The Company hereby employs the Adviser as investment adviser, on the terms and conditions set forth herein, for the assets of the Fund that the Board of Trustees determines to assign to the Adviser. The Board of Trustees may, from time to time, make additions to, and withdrawals from, the assets of the Fund assigned to the Adviser. The Adviser accepts such employment and agrees to render the services herein set forth, for the compensation herein provided. 2. DUTIES OF ADVISER. The Company employs the Adviser to manage the investment and reinvestment of the assets of the Bernstein Portfolio; to continuously review, supervise and administer an investment program for such assets of the Fund; to determine in its discretion the securities to be purchased or sold and the portion of such assets to be held uninvested; to provide the Fund with records concerning the activities of the Adviser that the Fund is required to maintain; and to render regular reports to the Fund's officers and Board of Trustees concerning the discharge of the foregoing responsibilities. The Adviser will discharge the foregoing responsibilities subject to the control of the officers and the Board of Trustees of the Fund, and in compliance with the objectives, policies and limitations set forth in the Fund's prospectus, any additional operating policies or procedures that the Fund communicates to the Adviser in writing, and applicable laws and regulations. The Adviser agrees to provide, at its own expense, the office space, furnishings and equipment, and the personnel required by it to perform the services on the terms and for the compensation provided herein. 2.1 DELEGATION OF RESPONSIBILITIES. The Adviser may delegate its investment advisory and other responsibilities and duties hereunder to Alliance Capital Management, subject to the Adviser retaining overall responsibility for such powers and functions and any and all obligations and liabilities in connection therewith. 3. SECURITIES TRANSACTIONS. The Adviser is authorized to select the brokers or dealers that will execute purchases and sales of securities for the Bernstein Portfolio, and is directed to use its best efforts to obtain the best available price and most favorable execution for such transactions, except as otherwise permitted by the Board of Trustees of the Fund pursuant to written policies and procedures provided to the Adviser. The Adviser will promptly communicate to the Fund's officers and Board of Trustees such information relating to portfolio transactions as they may reasonably request. 4. Compensation of Adviser. For services to be rendered by the Adviser as provided in this Agreement, the Fund will pay to the Adviser, at the end of each of the Fund's fiscal quarters, a Basic Fee calculated by applying a quarterly rate, based on the following annual percentage rates, to the average month-end net assets of the Bernstein Portfolio for the quarter: .15% on the first $1 billion of net assets; .14% on the next $2 billion of net assets; .12% on the next $2 billion of net assets; .10% on net assets in excess of $5 billion. The Basic Fee, as provided above, will be increased or decreased by applying a Performance Fee Adjustment (the "Adjustment") based on the investment performance of the Bernstein Portfolio relative to the investment performance of the Russell 1000 Value Index (the "Index"). The investment performance of the Bernstein Portfolio will be based on its cumulative return over a trailing 36-month period ending with the applicable quarter, compared with the cumulative total return of the Index for the same time period. The Adjustment applies as follows: CUMULATIVE 36-MONTH PERFORMANCE OF THE PERFORMANCE FEE ADJUSTMENT AS A FUND PORTFOLIO VS. INDEX PERCENTAGE OF BASIC FEE* ------------------------ ------------------------ Trails by -9% or more -0.50 x Basic Fee Trails by less than -9% up to and including 0% Linear decrease from 0 to -0.50 Exceeds by more than 0% but less than 9% Linear increase from 0 to 0.50 Exceeds by 9% or more +0.50 x Basic Fee - --------------------------- * For purposes of the Adjustment calculation, the Basic Fee is calculated by applying the above rate schedule against the average net assets of the Bernstein Portfolio over the same period for which the performance is measured. Linear application of the adjustment provides for an infinite number of results within the stated range. 4.1. Transition Rule for Calculating Adviser's Compensation. The Index will not be fully operable as the sole performance index used to determine the Adviser's Adjustment until August 1, 2002. Until that date, the following transition rules will apply: (a) JUNE 1, 2000 THROUGH JULY 31, 2002. Beginning June 1, 2000, the Adjustment will take effect on a progressive basis, with regard to the number of months elapsed between August 1, 1999, and the quarter for which the Adviser's fee is computed. During this period, the Adjustment that has been determined will be multiplied by a fraction, which will equal the number of months elapsed since August 1, 1999, divided by 36. (b) ON AND AFTER AUGUST 1, 2002. The Adjustment will be fully operable at this time. 4.2. OTHER SPECIAL RULES RELATING TO ADVISER'S COMPENSATION. The following special rules will also apply to the Adviser's compensation: (a) BERNSTEIN PORTFOLIO PERFORMANCE. The investment performance of the Bernstein Portfolio for any period, expressed as a percentage of the "Bernstein Portfolio unit value" at the beginning of the period, will be the sum of: (i) the change in the Bernstein Portfolio's unit value during the period; (ii) the unit value of the Fund's cash distributions from the Bernstein Portfolio's net investment income and realized net capital gains (whether short or long term) having an ex-dividend date occurring within the period; (iii) the unit value of capital gains taxes paid or accrued during such period by the Fund for undistributed long-term capital gains realized by the Bernstein Portfolio. For this purpose, the unit value of distributions per share of realized capital gains, of dividends per share paid from investment income, and of capital gains taxes per share paid or payable on undistributed realized long-term capital gains shall be treated as reinvested in the Bernstein Portfolio at the unit value in effect at the close of business on the record date for the payment of such distributions and dividends and the date on which provision is made for such taxes, after giving effect to such distributions, dividends and taxes. (b) "BERNSTEIN PORTFOLIO UNIT VALUE". The "Bernstein Portfolio unit value" will be determined by dividing the total net assets of the Bernstein Portfolio by a given number of units. Initially, the number of units in the Bernstein Portfolio will equal the total Fund shares outstanding on August 1, 1999. Subsequently, as assets are added to or withdrawn from the Bernstein Portfolio, the number of units of the Bernstein Portfolio will be adjusted based on the unit value of the Bernstein Portfolio on the day such changes are executed. Any cash buffer maintained by the Fund outside of the Bernstein Portfolio shall neither be included in the total net assets of the Bernstein Portfolio nor included in the computation of the Bernstein Portfolio Unit Value. (c) INDEX PERFORMANCE. The investment record of the Index for any period, expressed as a percentage of the Index level at the beginning of such period, will be the sum of (i) the change in the level of the Index during such period, and (ii) the value, computed consistently with the Index, of cash distributions made by companies whose securities make up the Index accumulated to the end of such period. For this purpose, cash distributions on the securities that make up the Index will be treated as reinvested in the Index, at least as frequently as the end of each calendar quarter following the payment of the dividend. The calculation will be gross of applicable costs and expenses. (d) EFFECT OF TERMINATION. In the event of termination of this Agreement, the fees provided in this Agreement will be computed on the basis of the period ending on the last business day on which this Agreement is in effect, subject to a pro rata adjustment based on the number of days elapsed in the current fiscal quarter as a percentage of the total number of days in such quarter. 5. REPORTS. The Company and the Adviser agree to furnish to each other current prospectuses, proxy statements, reports to shareholders, certified copies of their financial statements, and such other information with regard to their affairs as each may reasonably request, including information about changes in partners of the Adviser. 6. COMPLIANCE. The Adviser agrees to comply with all policies, procedures, or reporting requirements that the Fund's Board of Trustees reasonably adopts and communicates to the Adviser in writing, including any such policies, procedures, or reporting requirements relating to soft dollar or directed brokerage arrangements. 7. STATUS OF ADVISER. The services of the Adviser to the Fund are not to be deemed exclusive, and the Adviser will be free to render similar services to others so long as its services to the Fund are not impaired thereby. The Adviser will be deemed to be an independent contractor and will, unless otherwise expressly provided or authorized, have no authority to act for or represent the Company or the Fund in any way or otherwise be deemed an agent of the Company or the Fund. 8. LIABILITY OF ADVISER. No provision of this Agreement will be deemed to protect the Adviser against any liability to the Company, the Fund, or its shareholders, to which it might otherwise be subject by reason of any willful misfeasance, bad faith, or gross negligence in the performance of its duties or the reckless disregard of its obligations under this Agreement. 9. DURATION AND TERMINATION. This Agreement will become effective on October 2, 2000, and will continue in effect thereafter, only so long as such continuance is approved at least annually by votes of the Fund's Board of Trustees who are not parties to such Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. In addition, the question of continuance of the Agreement may be presented to the shareholders of the Fund; in such event, a continuance will be effected only if approved by the affirmative vote of a majority of the outstanding voting securities of the Fund. However this Agreement (i) may at any time be terminated without payment of any penalty either by vote of the Fund's Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund, on sixty days' written notice to Adviser; (ii) will automatically terminate in the event of its assignment; and (iii) may be terminated by the Adviser on ninety days' written notice to the Fund. Any notice under this Agreement will be given in writing, addressed and delivered, or mailed postpaid, to the other party at any office of such party. As used in this Section 9, the terms "assignment," "interested persons," and a "vote of a majority of the outstanding voting securities" will have the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section 2(a)(42) of the 1940 Act. 10. SEVERABILITY. If any provision of this Agreement is held to be or made invalid by a court decision, statute, rule, or otherwise, the remainder of this Agreement will not be affected thereby. 11. PROXY POLICY. With regard to the solicitation of shareholder votes, the Fund will vote the shares of all securities held by the Fund. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed this 28th day of September, 2000. ATTEST: VANGUARD WINDSOR FUNDS By /S/ Melissa Nassar By /S/ John J. Brennan Chairman, CEO and President ATTEST: SANFORD C. BERNSTEIN & CO., LLC By /S/ Sharon M. Glym By /S/ Jean Margo Reid Secretary INVESTMENT ADVISORY AGREEMENT AGREEMENT, made as of this 1st day of November, 2000, between the VANGUARD WINDSOR FUNDS, a Delaware business trust (the "Trust"), and BARROW, HANLEY, MEWHINNEY & STRAUSS, INC., which is wholly owned by United Asset Management Corporation, a Delaware corporation, which is a wholly owned subsidiary of Old Mutual plc, an international financial services group based in London (the "Adviser"). WHEREAS, the Trust is an open-end, diversified management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Trust has retained the Adviser to render investment advisory services to its series of shares known as Vanguard Windsor II Fund (the "Fund") under prior investment advisory agreement dated May 1, 1993 (the "Prior Agreement"); WHEREAS, the Adviser's Parent was acquired on October 5, 2000 by Old Mutual plc, an international financial services group based in London, England and such acquisition resulted in an "assignment" of the Prior Agreement within the meaning of Section 2(a)(4) of the 1940 Act; and WHEREAS, the Trust and Adviser wish to continue the advisory relationship without interruption by entering into a new investment advisory agreement that is substantially identical to the Prior Agreement; NOW, THEREFORE, this Agreement W I T N E S S E T H that in consideration of the premises and mutual promises hereinafter set forth, the parties hereto agree as follows: 1. APPOINTMENT OF ADVISER. The Trust hereby employs Adviser as investment adviser, on the terms and conditions set forth herein, for the assets of the Fund that the Board of Trustees determines to assign to Adviser (referred to in this Agreement as the "BHMS Portfolio"). The Board of Trustees may, from time to time, make additions to, and withdrawals from, the assets of the Fund assigned to Adviser. Adviser accepts such employment and agrees to render the services herein set forth, for the compensation herein provided. 2. DUTIES OF ADVISER. The Trust employs Adviser to manage the investment and reinvestment of the assets of the BHMS Portfolio; to continuously review, supervise, and administer an investment program for the Fund; to determine in its discretion the securities to be purchased or sold and the portion of such assets to be held uninvested; to provide the Fund with all records concerning the activities of Adviser that the Fund is required to maintain; and to render regular reports to the Fund's officers and Board of Trustees concerning the discharge of the foregoing responsibilities. Adviser will discharge the foregoing responsibilities subject to the control of the officers and the Board of Trustees of the Fund, and in compliance with the objectives, policies and limitations set forth in the Fund's prospectus, any additional operating policies or procedures that the Fund communicates to Adviser in writing, and applicable laws and regulations. Adviser agrees to provide, at its own expense, the office space, furnishings and equipment, and the personnel required by it to perform the services on the terms and for the compensation provided herein. 3. SECURITIES TRANSACTIONS. Adviser is authorized to select the brokers or dealers that will execute purchases and sales of securities for the BHMS Portfolio, and is directed to use its best efforts to obtain the best available price and most favorable execution for such transactions, except as otherwise permitted by the Board of Trustees pursuant to written policies and procedures provided to Adviser. Subject to policies established by the Board of Trustees, Adviser may also be authorized to effect individual securities transactions at commission rates in excess of the minimum commission rates available, if Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage or research services provided by such broker or dealer, viewed in terms of either that particular transaction or Adviser's overall responsibilities with respect to the accounts as to which Adviser exercises investment discretion. The execution of such transactions shall not be deemed to represent an unlawful act or breach of any duty created by this Agreement or otherwise. Adviser will promptly communicate to the Fund's officers and Board of Trustees such information relating to portfolio transactions as they may reasonably request. 4. COMPENSATION OF ADVISER. For services to be rendered by Adviser as provided in this Agreement, the Fund will pay to Adviser, at the end of each of the Fund's fiscal quarters, a Basic Fee calculated by applying a quarterly rate, based on the following annual percentage rates, to the average month-end net assets of the BHMS Portfolio for the quarter. NET ASSETS BASIC FEE - ---------- --------- First $200 million . . . . . . . . . . 0.300% Next $300 million. . . . . . . . . . . 0.200% Next $500 million. . . . . . . . . . . 0.150% Over $1 billion. . . . . . . . . . . . 0.125% The Basic Fee, as provided above, will be increased or decreased by applying a Performance Fee Adjustment (the "Adjustment") based on the investment performance of the BHMS Portfolio relative to the investment performance of Standard & Poor's/BARRA Value Index (the "Index"). The investment performance of the BHMS Portfolio will be based on its cumulative return over a trailing 36-month period ending with the applicable quarter, compared with the cumulative total return of the Index for the same period. The Adjustment applies as follows: Cumulative 36-Month Performance of the Performance Fee Adjustment as a BHMS Portfolio vs. Index Percentage of Basic Fee* - ------------------------ ------------------------ Exceeds by +9% or more +25% Exceeds by more than +6% but less than +9% +15% Trails/exceeds from -6% through +6% 0% Trails by more than -6% but less than -9% -15% Trails by -9% or more -25% - --------------------------- * For purposes of the Adjustment calculation, the Basic Fee is calculated by applying the above rate schedule against the average net assets of the BHMS Portfolio over the same period for which the performance is measured. 4.1. TRANSITION RULES FOR CALCULATING ADVISER'S COMPENSATION. The Adjustment set forth in Section 4 of this Agreement became fully operable after the quarter ending April 30, 1996. 2 4.2. OTHER SPECIAL RULES RELATING TO ADVISER'S COMPENSATION. The following special rules will also apply to Adviser's compensation: (a) BHMS PORTFOLIO UNIT VALUE. The "BHMS Portfolio unit value" shall be determined by dividing the total net assets of the BHMS Portfolio by a given number of units. At the inception of this Agreement, the number of units in the BHMS Portfolio shall be equal to the number of such units in existence as determined under the Prior Agreement; provided, however, that as assets are added to or withdrawn from the BHMS Portfolio thereafter, the number of units of the BHMS Portfolio shall be adjusted based on the unit value of the BHMS Portfolio on the day such changes are executed. (b) BHMS PORTFOLIO PERFORMANCE. The investment performance of the BHMS Portfolio for any period, expressed as a percentage of the "BHMS Portfolio unit value" at the beginning of the period, will be the sum of: (i) the change in the BHMS Portfolio unit value during such period; (ii) the unit value of the Fund's cash distributions from the BHMS Portfolio's net investment income and realized net capital gains (whether short or long term) having an ex-dividend date occurring within the period; and (iii) the unit value of capital gains taxes per share paid or payable on undistributed realized long-term capital gains accumulated to the end of such period; expressed as a percentage of its net asset value per share at the beginning of such period. For this purpose, the value of distributions per share of realized capital gains, of dividends per share paid from investment income, and of capital gains taxes per share paid or payable on undistributed realized long-term capital gains shall be treated as reinvested in shares of the investment company at the net asset value per share in effect at the close of business on the record date for the payment of such distributions and dividends and the date on which provision is made for such taxes, after giving effect to such distributions, dividends, and taxes. (c) INDEX PERFORMANCE. The investment record of the Index for any period, expressed as a percentage of the Index level at the beginning of such period, will be the sum of (i) the change in the level of the Index during such period, and (ii) the value, computed consistently with the Index, of cash distributions having an ex-dividend date occurring within such period made by companies whose securities make up the Index. For this purpose, cash distributions on the securities that make up the Index will be treated as reinvested in the Index, at least as frequently as the end of each calendar quarter following the payment of the dividend. The calculation will be gross of applicable costs and expenses, and consistent with the methodology used by Standard and Poor's. (d) PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any computation of the investment performance of the BHMS Portfolio and the investment record of the Index shall be in accordance with any then applicable rules of the U.S. Securities and Exchange Commission. (e) EFFECT OF TERMINATION. In the event of termination of this Agreement, the fees provided in this Agreement will be computed on the basis of the period ending on the last business day on which this Agreement is in effect, subject to a pro rata adjustment based on the number of days elapsed in the current fiscal quarter as a percentage of the total number of days in such quarter. 3 5. REPORTS. The Fund and Adviser agree to furnish to each other with current prospectuses, proxy statements, reports to shareholders, certified copies of their financial statements, and such other information with regard to their affairs as each may reasonably request, including information about changes in ownership of Adviser. 6. COMPLIANCE. Adviser agrees to comply with all policies, procedures, or reporting requirements that the Board of Trustees reasonably adopts and communicates to Adviser in writing, including any such policies, procedures, or reporting requirements relating to soft dollar or directed brokerage arrangements. 7. STATUS OF ADVISER. The services of Adviser to the Fund are not to be deemed exclusive, and Adviser will be free to render similar services to others so long as its services to the Fund are not impaired thereby. Adviser will be deemed to be an independent contractor and will, unless otherwise expressly provided or authorized, have no authority to act for or represent the Trust or the Fund in any way or otherwise be deemed an agent of the Trust or the Fund. 8. LIABILITY OF ADVISER. In the absence of (i) willful misfeasance, bad faith, or gross negligence on the part of Adviser in performance of its obligations and duties hereunder; (ii) reckless disregard by Adviser of its obligations and duties hereunder; or (iii) a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services (in which case any award of damages shall be limited to the period and the amount set forth in Section 36(b)(3) of the 1940 Act), Adviser shall not be subject to any liability whatsoever to the Fund, or to any shareholder of the Fund, for any error or judgment, mistake of law, or any other act or omission in the course of, or connected with, rendering services hereunder, including, without limitation, for any losses that may be sustained in connection with the purchase, holding, redemption, or sales of any security on behalf of the Fund. 9. DURATION AND TERMINATION. This Agreement will become effective on November 1, 2000, and will continue in effect thereafter, only so long as such continuance is approved at least annually by votes of the Fund's Board of Trustees who are not parties to such Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. In addition, the question of continuance of the Agreement may be presented to the shareholders of the Fund; in such event, a continuance will be effected only if approved by the affirmative vote of a majority of the outstanding voting securities of the Fund. However this Agreement (i) may at any time be terminated without payment of any penalty either by vote of the Fund's Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund, on sixty days' written notice to Adviser; (ii) will automatically terminate in the event of its assignment; and (iii) may be terminated by Adviser on ninety days' written notice to the Fund. Any notice under this Agreement will be given in writing, addressed and delivered, or mailed postpaid, to the other party at any office of such party. As used in this Section 9, the terms "assignment," "interested persons," and a "vote of a majority of the outstanding voting securities" will have the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section 2(a)(42) of the 1940 Act. 4 10. SEVERABILITY. If any provision of this Agreement is held to be or made invalid by a court decision, statute, rule, or otherwise, the remainder of this Agreement will not be affected thereby. 11. PROXY POLICY. With regard to the solicitation of shareholder votes, the Fund will vote the shares of all securities held by the Fund. 12. GOVERNING LAW. All questions concerning the validity, meaning, and effect of this Agreement shall be determined in accordance with the laws (without giving effect to the conflict-of-law principles thereof) of the State of Delaware applicable to contracts made and to be performed in that state. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed this 1st day of November, 2000. ATTEST: VANGUARD WINDSOR FUNDS By /S/ Melissa Nassar By /S/ John J. Brennan Chairman, CEO and President ATTEST: BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. By _________________________ By /S/ James P. Barrow Founding Partner 5 EX-99.BJ 3 0003.txt CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses and Statement of Additional Information constituting parts of this Post-Effective Amendment No. 95 to the registration statement on Form N-1A (the "Registration Statement") of our reports dated November 29, 2000, relating to the financial statements and financial highlights appearing in the September 30, 2000 Annual Reports to Shareholders of Vanguard Windsor Fund and Vanguard Windsor II Fund, which are also incorporated by reference into the Registration Statement. We also consent to the references to us under the heading "Financial Highlights" in the Prospectuses and under the headings "Financial Statements" and "Service Providers--Independent Accountants" in the Statement of Additional Information. PricewaterhouseCoopers LLP Philadelphia, PA February 8, 2001 EX-99.BO 4 0004.txt RULE 18F-3 PLAN 11-17-2000 VANGUARD FUNDS MULTIPLE CLASS PLAN I. INTRODUCTION ------------ This Multiple Class Plan (the "Plan") describes four separate classes of shares that may be offered by investment company members of The Vanguard Group (collectively the "Funds," individually a "Fund"). The Plan explains the separate arrangements for each class, how expenses are allocated to each class, and the conversion features of each class. Each Fund may offer any one or more of the specified classes. The Plan has been approved by the Board of Directors of The Vanguard Group ("Vanguard"). In addition, the Plan has been adopted by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of each Fund. The classes of shares offered by each Fund are designated in Schedule A hereto, as such Schedule may be amended from time to time. II. SHARE CLASSES ------------- A Fund may offer any one or more of the following share classes: Investor Shares Admiral Shares Institutional Shares VIPER Shares If a Fund has not previously issued separate classes of shares, all of its currently outstanding shares will be designated as Investor Shares, except as otherwise provided in Schedule A hereto. Currently outstanding shares of other Funds will continue to be designated as Investor Shares or Institutional Shares, as appropriate. III. DISTRIBUTION AND ELIGIBILITY ---------------------------- Distribution arrangements will be the same for all classes, although eligibility requirements for purchasing shares of each class will differ, as follows: A. INVESTOR SHARES Investor Shares will be available to investors who are not permitted to purchase other classes of shares, subject to the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Investor Shares will be substantially lower than the amount required for any other class of the Fund's shares. B. ADMIRAL SHARES Admiral Shares will be available to investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. These eligibility requirements may take into account: (i) the amount of an investment in the Fund; (ii) the length of time that a Fund account has been maintained; and (iii) whether the investor has registered for on-line access to the Fund account through Vanguard's web site. C. INSTITUTIONAL SHARES Institutional Shares will be available to investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Institutional Shares will be substantially higher than the amount required for any other class of the Fund's shares. D. VIPER SHARES VIPER Shares will be available to investors that are (or who purchase through) Authorized DTC Participants, and who pay for their VIPER shares by depositing a prescribed basket of securities rather than paying cash. An Authorized DTC Participant is an institution, usually a broker-dealer, that is a participant in the Depository Trust Company (DTC) and that has executed a Participant Agreement with the Fund's distributor. IV. SERVICE ARRANGEMENTS -------------------- All share classes will receive a range of services provided by Vanguard on a per account basis. These "account-based" services may include transaction processing and shareholder recordkeeping, as well as the mailing of updated prospectuses, shareholder reports, tax statements, confirmation statements, quarterly portfolio summaries, and other items. It is expected that the aggregate amount of account-based services provided to Investor Shares will materially exceed the amount of such services provided to any other class, due to the existence of many more accounts holding Investor Shares. In addition to this difference in the volume of services provided, arrangements will differ among the classes as follows: A. INVESTOR SHARES Investor Shares will receive the most basic level of service from Vanguard. In general, Investor Shares will be serviced through a pool of Vanguard client service representatives. Investor Shares held through an employee benefit plan may receive VISTA recordkeeping and participant education services from Vanguard. B. ADMIRAL SHARES Admiral Shares will receive a higher level of service from Vanguard as compared to Investor Shares. Special client service representatives will be assigned 2 to service Admiral Shares, and holders of such shares from time to time may receive special mailings from Vanguard and unique additional services, as well as discounts on certain financial services provided by Vanguard and its affiliates. Admiral Shares are not eligible to receive VISTA recordkeeping or participant education services. C. INSTITUTIONAL SHARES Institutional Shares will receive the highest level of service from Vanguard as compared to any other share classes. Special client service representatives will be assigned to service Institutional Shares, and most holders of such shares periodically will receive special updates from Vanguard's investment staff. Holders of Institutional Shares may receive unique additional services from Vanguard, and generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation's FundSERV system and other special servicing platforms for institutional investors. Institutional Shares generally are not eligible to receive VISTA recordkeeping or participant education services. D. VIPER SHARES The Fund will maintain only one shareholder of record for VIPER Shares--DTC or its nominee. Special client service representatives will be assigned to the DTC account, and all transactions on this account will be handled electronically. Due to the nature and purpose of the DTC account, VIPER Shares will not receive any special updates from Vanguard's investment staff. VIPER Shares are not eligible to receive VISTA recordkeeping or participant education services. V. CONVERSION FEATURES ------------------- A. VOLUNTARY CONVERSIONS 1. CONVERSION INTO INVESTOR SHARES. An investor may convert Admiral Shares or Institutional Shares into Investor Shares, provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Investor Shares; and (ii) receives services consistent with Investor Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 2. CONVERSION INTO ADMIRAL SHARES. An investor may convert Investor Shares or Institutional Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives 3 services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 3. CONVERSION INTO INSTITUTIONAL SHARES. An investor may convert Investor Shares or Admiral Shares into Institutional Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Institutional Shares; and (ii) receives services consistent with Institutional Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 4. CONVERSION INTO VIPER SHARES. An investor may convert Investor Shares, Admiral Shares, or Institutional Shares into VIPER Shares (if available), provided that: (i) the shares to be converted are not held through an employee benefit plan; and (ii) following the conversion, the investor will hold VIPER Shares through a brokerage account. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. Vanguard or the Fund may charge an administrative fee to process conversion transactions. B. INVOLUNTARY CONVERSIONS AND CASH OUTS 1. CASH OUTS. If an investor in any class of shares no longer meets the eligibility requirements for such shares, the Fund may cash out the investor's remaining account balance. Any such cash out will be preceded by written notice to the investor and will be subject to the Fund's normal redemption fees, if any. 2. CONVERSION OF ADMIRAL SHARES. If an investor no longer meets the eligibility requirements for Admiral Shares, the Fund may convert the investor's Admiral Shares into Investor Shares. Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge. 3. CONVERSION OF INSTITUTIONAL SHARES. If an investor no longer meets the eligibility requirements for Institutional Shares, the Fund may convert the investor's Institutional Shares into Admiral Shares (or into Investor Shares if the investor does not meet the eligibility requirements for Admiral Shares). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge. 4 VI. EXPENSE ALLOCATION AMONG CLASSES -------------------------------- A. BACKGROUND Vanguard is a jointly-owned subsidiary of the Funds. Vanguard provides the Funds, on an at-cost basis, virtually all of their corporate management, administrative and distribution services. Vanguard also may provide investment advisory services on an at-cost basis to the Funds. Vanguard was established and operates pursuant to a Funds' Service Agreement between itself and the Funds (the "Agreement"), and pursuant to certain exemptive orders granted by the U.S. Securities and Exchange Commission ("Exemptive Orders"). Vanguard's direct and indirect expenses of providing corporate management, administrative and distribution services to the Funds are allocated among such funds in accordance with methods specified in the Agreement. B. CLASS SPECIFIC EXPENSES 1. Expenses for Account-Based Services. Expenses associated with Vanguard's provision of account-based services to the Fund will be allocated among the share classes on the basis of the amount incurred by each such class as follows: (a) ACCOUNT MAINTENANCE EXPENSES. Expenses associated with the maintenance of investor accounts will be proportionately allocated among the Fund's share classes based upon a monthly determination of the costs to service each class of shares. Factors considered in this determination are (i) the percentage of total shareholder accounts represented by each class; (ii) the percentage of total account transactions performed by Vanguard for each class; and (iii) the percentage of new accounts opened for each class. (b) EXPENSES OF SPECIAL SERVICING ARRANGEMENTS. Expenses relating to any special servicing arrangements for a specific class will be allocated entirely to that class. (c) LITERATURE PRODUCTION AND MAILING EXPENSES. Expenses associated with shareholder reports, proxy materials and other literature will be allocated among the Fund's share classes based upon the number of such items produced and mailed for each class. 2. OTHER CLASS SPECIFIC EXPENSES. Expenses for the primary benefit of a particular share class will be allocated to that share class. Such expenses would include any legal fees attributable to a particular class. C. FUND-WIDE EXPENSES 1. MARKETING AND DISTRIBUTION EXPENSES. Expenses associated with Vanguard's marketing and distribution activities will be allocated among 5 the Funds and their separate share classes according to the "Vanguard Modified Formula," with each share class treated as if it were a separate Fund. The Vanguard Modified Formula, which is set forth in the Agreement and in certain of the SEC Exemptive Orders, has been deemed an appropriate allocation methodology by each Fund's Board of Trustees under paragraph (c)(1)(v) of Rule 18f-3 under the Investment Company Act of 1940. 2. ASSET MANAGEMENT EXPENSES. Expenses associated with management of a Fund's assets (including all advisory, tax preparation and custody fees) will be allocated among the Fund's share classes on the basis of their relative net assets. 3. OTHER FUND EXPENSES. Any other Fund expenses not described above will be allocated among the share classes on the basis of their relative net assets. VII. ALLOCATION OF INCOME, GAINS AND LOSSES -------------------------------------- Income, gains and losses will be allocated among the Fund's share classes on the basis of their relative net assets. As a result of differences in allocated expenses, it is expected that the net income of, and dividends payable to, each class of shares will vary. Dividends and distributions paid to each class of shares will be calculated in the same manner, on the same day and at the same time. VIII. VOTING AND OTHER RIGHTS ----------------------- Each share class will have: (i) exclusive voting rights on any matter submitted to shareholders that relates solely to its service or distribution arrangements; and (ii) separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of the other class; and (iii) in all other respects the same rights, obligations and privileges as each other, except as described in the Plan. IX. AMENDMENTS ---------- All material amendments to the Plan must be approved by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of the Fund. In addition, any material amendment to the Plan must be approved by the Board of Directors of Vanguard. 6 Updated: 11-17-2000 SCHEDULE A TO VANGUARD FUNDS MULTIPLE CLASS PLAN Note: This Schedule reflects multiple class arrangements approved by the Boards of Directors/Trustees of Vanguard and the Vanguard Funds on July 21, 2000, as further amended on November 17, 2000. Classes not yet in existence will be implemented in the normal course of business. - -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES OFFERED - -------------------------------------------------------------------------------- Vanguard Admiral Funds o Short-Term Treasury Fund Investor o Intermediate-Term Treasury Fund Investor o Long-Term Treasury Fund Investor o Treasury Money Market Fund Investor Vanguard Balanced Index Fund Investor, Admiral, Institutional Vanguard Bond Index Funds o Short-Term Bond Index Fund Investor, Admiral o Intermediate-Term Bond Index Fund Investor, Admiral o Long-Term Bond Index Fund Investor o Total Bond Market Index Fund Investor, Admiral, Institutional Vanguard California Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Insured Intermediate-Term Tax-Exempt Fund Investor, Admiral o Insured Long-Term Tax-Exempt Fund Investor, Admiral Vanguard Convertible Securities Fund Investor Vanguard Explorer Fund Investor, Admiral Vanguard Fenway Funds o Equity Income Fund Investor, Admiral o Growth Equity Fund Investor, Admiral Vanguard Fixed Income Securities Funds o Short-Term Treasury Fund Investor, Admiral o Short-Term Federal Fund Investor, Admiral o Short-Term Corporate Fund Investor, Admiral, Institutional o Intermediate-Term Treasury Fund Investor, Admiral o Intermediate-Term Corporate Fund Investor, Admiral o GNMA Fund Investor, Admiral o Long-Term Treasury Fund Investor, Admiral o Long-Term Corporate Fund Investor, Admiral o High Yield Corporate Fund Investor, Admiral o Inflation-Protected Securities Fund Investor Vanguard Florida Insured Tax-Exempt Fund Investor
- -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES OFFERED - -------------------------------------------------------------------------------- Vanguard Horizon Funds o Aggressive Growth Fund Investor o Capital Opportunity Fund Investor, Admiral o Global Asset Allocation Fund Investor o Global Equity Fund Investor Vanguard Index Trust o 500 Index Fund Investor, Admiral, VIPER o Extended Market Index Fund Investor, Admiral, Institutional, VIPER o Growth Index Fund Investor, Admiral, Institutional, VIPER o Mid-Cap Index Fund Investor, Institutional, VIPER o Small-Cap Growth Index Fund Investor, Institutional, VIPER o Small-Cap Index Fund Investor, Admiral, Institutional, VIPER o Small-Cap Value Index Fund Investor, Institutional, VIPER o Total Stock Market Index Fund Investor, Admiral, Institutional, VIPER o Value Index Fund Investor, Admiral, Institutional, VIPER Vanguard International Equity Index Funds o Emerging Markets Stock Index Fund Investor, Admiral, Institutional o European Stock Index Fund Investor, Admiral, Institutional o Pacific Stock Index Fund Investor, Admiral, Institutional Vanguard Malvern Funds o Asset Allocation Fund Investor, Admiral o U.S. Value Fund Investor Vanguard Massachusetts Tax-Exempt Fund Investor Vanguard Money Market Reserves o Prime Money Market Fund Investor, Institutional o Federal Money Market Fund Investor Vanguard Morgan Growth Fund Investor, Admiral Vanguard Municipal Bond Funds o Tax-Exempt Money Market Fund Investor o Short-Term Tax-Exempt Fund Investor, Admiral o Limited-Term Tax-Exempt Fund Investor, Admiral o Intermediate-Term Tax-Exempt Fund Investor, Admiral o Insured Long-Term Tax-Exempt Fund Investor, Admiral o Long-Term Tax-Exempt Fund Investor, Admiral o High Yield Tax-Exempt Fund Investor, Admiral
- -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES OFFERED - -------------------------------------------------------------------------------- Vanguard New Jersey Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Insured Long-Term Tax-Exempt Fund Investor, Admiral Vanguard New York Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Insured Long-Term Tax-Exempt Fund Investor, Admiral Vanguard Ohio Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Insured Long-Term Tax-Exempt Fund Investor Vanguard Pennsylvania Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Insured Long-Term Tax-Exempt Fund Investor, Admiral Vanguard Preferred Stock Fund Investor Vanguard PRIMECAP Fund Investor, Admiral Vanguard Quantitative Funds o Growth and Income Fund Investor, Admiral Vanguard Specialized Funds o Energy Fund Investor, Admiral o Gold and Precious Metals Fund Investor o Health Care Fund Investor, Admiral o Utilities Income Fund Investor o REIT Index Fund Investor, Admiral Vanguard Tax-Managed Funds o Tax-Managed Balanced Fund Investor o Tax-Managed Capital Appreciation Fund Investor, Admiral, Institutional o Tax-Managed Growth and Income Fund Investor, Admiral, Institutional o Tax-Managed International Fund Investor, Institutional o Tax-Managed Small-Cap Fund Investor, Institutional - -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES OFFERED - -------------------------------------------------------------------------------- Vanguard Treasury Funds o Treasury Money Market Fund Investor Vanguard Trustees' Equity Fund o International Value Fund Investor, Admiral Vanguard Wellesley Income Fund Investor, Admiral Vanguard Wellington Fund Investor, Admiral Vanguard Whitehall Funds o Selected Value Fund Investor Vanguard Windsor Funds o Windsor Fund Investor, Admiral o Windsor II Investor, Admiral Vanguard World Funds o U.S. Growth Fund Investor, Admiral o International Growth Fund Investor, Admiral o Calvert Social Index Fund Investor, Institutional Vanguard Variable Insurance Funds o Balanced Portfolio Investor o Diversified Value Portfolio Investor o Equity Income Portfolio Investor o Equity Index Portfolio Investor o Growth Portfolio Investor o High-Grade Bond Portfolio Investor o High Yield Bond Portfolio Investor o International Portfolio Investor o Mid-Cap Index Portfolio Investor o Money Market Portfolio Investor o REIT Index Portfolio Investor o Short-Term Corporate Portfolio Investor o Small Company Growth Portfolio Investor Updated 12/4/2000 SCHEDULE B TO VANGUARD FUNDS MULTIPLE CLASS PLAN Note: This Schedule reflects class eligibility requirements approved by the Boards of Directors/Trustees of Vanguard and the Vanguard Funds on July 21, 2000 as further amended on November 17, 2000. Classes not yet in existence will be implemented in the normal course of business. INVESTOR SHARES - ELIGIBILITY REQUIREMENTS - ------------------------------------------ Investor Shares require a minimum initial investment and ongoing account balance of $3,000 ($1,000 for IRAs and UGMA accounts), subject to the following exceptions: o Vanguard Admiral Funds-$50,000 minimum amount for Investor Shares o Vanguard Capital Opportunity Fund-$10,000 minimum amount for Investor Shares o Vanguard Health Care Fund-$25,000 minimum amount for Investor Shares o Vanguard STAR Fund-$1,000 minimum amount for Investor Shares o Vanguard Tax-Managed Funds-$10,000 minimum amount for Investor Shares ADMIRAL SHARES - ELIGIBILITY REQUIREMENTS - ----------------------------------------- Admiral Shares require a minimum initial investment and ongoing account balance of $250,000, subject to the following exceptions: o Tenure exception - The minimum amount for Admiral Shares is $150,000 if the investor has maintained an account in the applicable Fund for 3 years and $50,000 if the investor has maintained an account in the applicable Fund for 10 years, subject to administrative policies developed by Vanguard to exclude costly accounts. To take advantage of the tenure exception, an investor must be registered for on-line access to their Fund account through vanguard.com or transact with Vanguard on a similarly cost-effective basis. o Financial intermediary exception -Admiral Shares are not available to financial intermediaries who would meet the eligibility requirements by aggregating the holdings of underlying investors. However, financial intermediaries may purchase Admiral Shares on behalf of any underlying investor whose investment individually meets the $250,000 minimum amount if they comply with Vanguard's procedures for identifying such accounts. o VISTA exception - Admiral Shares are not available to participants in employee benefit plans that utilize Vanguard's VISTA system for plan recordkeeping. o Retirement plans exception - Admiral Shares are not available to 403(b)(7) custodial accounts, SIMPLE IRAs, and other Vanguard Retirement Plans receiving special administrative services from Vanguard. INSTITUTIONAL SHARES - ELIGIBILITY REQUIREMENTS - ------------------------------------------------ Institutional Shares require a minimum initial investment and ongoing account balance of $10,000,000, subject to the following exceptions: o Vanguard Short-Term Corporate Fund - $50,000,000 minimum amount for Institutional Shares o Financial intermediary exception - Institutional Shares are not available to financial intermediaries who would meet the eligibility requirements by aggregating the holdings of underlying investors. o VISTA exception - Institutional Shares are not available to participants in employee benefit plans that utilize Vanguard's VISTA system for plan recordkeeping. However, Vanguard may determine to waive this rule for investors whose aggregate assets with the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. VIPER SHARES - ELIGIBILITY REQUIREMENTS - --------------------------------------- The eligibility requirements for VIPER Shares will be set forth in the Fund's Registration Statement. To be eligible to purchase VIPER Shares directly from a Fund, an investor must be (or must purchase through) an Authorized DTC Participant, as defined in Paragraph III.D of the Multiple Class Plan. Investors purchasing VIPER Shares from a Fund must purchase a minimum number of shares, known as a Creation Unit. The number of VIPER Shares in a Creation Unit will vary from Fund to Fund, and will be set forth in the relevant prospectus. The value of a Fund's Creation Unit will vary with the net asset value of the Fund's VIPER Shares, but is expected to be several million dollars. An eligible investor generally must purchase a Creation Unit by depositing a prescribed basket of securities with the Fund, rather than paying cash. 2 EX-99.BP 5 0005.txt CODES OF ETHICS CODE OF ETHICS OF BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. PREAMBLE This Code of Ethics ("Code") is being adopted in compliance with the requirements of Sections 204A and 206 of the Investment Advisers Act of 1940 (the "Advisers Act") and Rule 204-2 thereunder and Section 17j of the Investment Company Act of 1940 (the "40 Act") and Rule 17j-1 thereunder, to effectuate the purposes and objectives of those provisions. Section 204A of the Advisers Act requires the establishment and enforcement of policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by investment advisers. Rule 204-2 imposes recordkeeping requirements with respect to personal securities transactions of access persons (defined below). Section 206 of the Advisers Act and Rule 17j-1 of the 40 Act make it unlawful for certain persons, including BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. (the "Firm"): - ----------------------------------------- (1) To employ a device, scheme or artifice to defraud any client or prospective client, or any mutual fund portfolio managed by the Firm (the "Fund"); (2) To engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit upon any client or prospective client, or the Fund; (3) Acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph (3) shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction; (4) To engage in any act, practice, or course of business which is fraudulent, deceptive or manipulative; or (5) To make to the Fund any untrue statement of a material fact or omit to state to the Fund a material fact necessary in order to make the statements made, in light of the circumstances in which they are made, not misleading. This Code contains provisions reasonably necessary to prevent persons from engaging in acts in violation of the above standard and procedures reasonably necessary to prevent violations of the Code. This Code of Ethics is adopted by the Board of Directors of the Firm. This Code is based upon the principle that the directors and officers of the Firm, and certain affiliated persons of the Firm, owe a fiduciary duty to, among others, the clients of the Firm and shareholders of the Fund to conduct their affairs, including their personal securities transactions, in such manner to avoid (i) serving their own personal interests ahead of clients or shareholders; (ii) taking inappropriate advantage of their position with the Firm or the Fund; and (iii) any actual or potential conflicts of interest or any abuse of their position of trust and responsibility. This fiduciary duty includes the duty of the Compliance Officer of the Firm to report violations of this Code of Ethics to the Firm's Board of Directors and to the Fund's Compliance Officer. POLICY STATEMENT ON INSIDER TRADING The Firm forbids any officer, director or employee from trading, either personally or on behalf of others, including accounts managed by the Firm, on material nonpublic information or communicating material nonpublic information to others in violation of the law. This conduct is frequently referred to as "insider trading." The Firm's policy applies to every officer, director and employee and extends to activities within and outside their duties at the Firm. Any questions regarding the Firm's policy and procedures should be referred to the Firm's Compliance Officer. The term "insider trading" is not defined in the federal securities laws, but generally is used to refer to the use of material nonpublic information to trade in securities (whether or not one is an "insider") or to communications of material nonpublic information to others. While the law concerning insider trading is not static, it is generally understood that the law prohibits: 1) trading by an insider, while in possession of material nonpublic information, or 2) trading by a non-insider, while in possession of material nonpublic information, where the information either was disclosed to the non-insider in violation of an insider's duty to keep it confidential or was misappropriated, or 3) communicating material nonpublic information to others. The concept of "insider" is broad. It includes officers, directors and employees of a company. In addition, a person can be a "temporary insider" if he or she enters into a special confidential relationship in the conduct of a company's affairs and as a result is given access to information solely for the company's purposes. A temporary insider can include, among others, a company's attorneys, accountants, consultants, bank lending officers, and the employees of such organizations. In addition, the Firm may become a temporary insider of a company it advises or for which it performs other services. For that to occur, the company must expect the Firm to keep the disclosed nonpublic information confidential and the relationship must at least imply such a duty before the Firm will be considered an insider. Trading on inside information is not a basis for liability unless the information is material. "Material information" generally is defined as information for which there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions, or information that is reasonably certain to have a substantial effect on the price of a company's securities. Information that officers, directors and employees should consider material includes, but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments. Information is nonpublic until it has been effectively communicated to the market place. One must be able to point to some fact to show that the information is generally public. For example, information found in a report filed with the SEC, or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal or other publications of general circulation would be considered public. You should be particularly careful with information received from client contacts at public companies. Before trading for yourself or others in the securities of a company about which you may have potential inside information, ask yourself the following questions: i. Is the information material? Is this information that an investor would consider important in making his or her investment decisions? Is this information that would substantially effect the market price of the securities if generally disclosed? ii. Is the information nonpublic? To whom has this information been provided? Has the information been effectively communicated to the marketplace? If, after consideration of the above, you believe that the information is material and nonpublic, or if you have questions as to whether the information is material and nonpublic, you should take the following steps. i. Report the matter immediately to the Firm's Compliance Officer. ii. Do not purchase or sell the securities on behalf of yourself or others. iii. Do not communicate the information inside or outside the Firm, other than to the Firm's Compliance Officer. iv. After the Firm's Compliance Officer has reviewed the issue, you will be instructed to continue the prohibitions against trading and communication, or you will be allowed to trade and communicate the information. Information in your possession that you identify as material and nonpublic may not be communicated to anyone, including persons within the Firm, except as provided above. In addition, care should be taken so that such information is secure. For example, files containing material nonpublic information should be sealed; access to computer files containing material nonpublic information should be restricted. The role of the Firm's Compliance Officer is critical to the implementation and maintenance of the Firm's policy and procedures against insider trading. The Firm's Supervisory Procedures can be divided into two classifications - prevention of insider trading and detection of insider trading. To prevent insider trading, the Firm will: i. provide, on a regular basis, an educational program to familiarize officers, directors and employees with the Firm's policy and procedures, and ii. when it has been determined that an officer, director or employee of the Firm has material nonpublic information, 1. implement measures to prevent dissemination of such information, and 2. if necessary, restrict officers, directors and employees from trading the securities. To detect insider trading, the Firm's Compliance Officer will: i. review the trading activity reports filed by each officer, director and employee, and ii. review the trading activity of accounts managed by the Firm. A. DEFINITIONS (1) "ACCESS PERSON" means any director, officer, general partner, advisory person, investment personnel, portfolio manager, or employee of the firm. (2) "ADVISORY PERSON" means any natural person in a control relationship to the Firm who obtains information concerning recommendations made to the Firm or the Fund with regard to the purchase or sale of a security by the Firm or the Fund. (3) "AFFILIATED COMPANY" means a company which is an affiliated person. (4) "AFFILIATED PERSON" of another person means (a) any person directly or indirectly owning, controlling, or holding with power to vote, 5 per centum or more of the outstanding voting securities or such other person; (b) and person 5 per centum or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote, by such other person; (c) any person directly or indirectly controlling, controlled by, or under common control with, such other person; (d) any officer, director, partner, copartner, or employee of such other person; (e) if such other person is an investment company, any investment adviser thereof or any member of an advisor board thereof; and (f) if such other person is an unincorporated investment company not having a board of directors, the depositor thereof. (5) A security is "BEING CONSIDERED FOR PURCHASE OR SALE" or is "BEING PURCHASED OR SOLD" when a recommendation to purchase or sell the security has been made and communicated, which includes when the Firm or the Fund has a pending "buy" or "sell" order with respect to a security, and, with respect to the person making the recommendation, when such person seriously considers making such a recommendation. "PURCHASE OR SALE OF A SECURITY" includes the writing of an option to purchase or sell a security. (6) "BENEFICIAL OWNERSHIP" shall be as defined in, and interpreted in the same manner as it would be in determining whether a person is subject to the provisions of, Section 16 of the Securities Exchange Act of 1934 and the rules and regulations thereunder which, generally speaking, encompasses those situations where the beneficial owner has the right to enjoy some economic benefit from the ownership of the security. A person is normally regarded as the beneficial owner of securities held in the name of his or her spouse or minor children living in his or her household. (7) "CONTROL" means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. Any person who owns beneficially, either directly or through one or more controlled companies, more than 25 per centum of the voting securities of a company shall be presumed to control such company. Any person who does not so own more than 25 per centum of the voting securities of any company shall be presumed not to control such company. A natural person shall be presumed not to be a controlled person. (8) "INVESTMENT PERSONNEL" means (a) any portfolio manager of the Firm or the Fund as defined in (10) below; and (b) securities analysts, traders and other personnel who provide information and advice to the portfolio manager or who help execute the portfolio manager's decisions. (9) "PERSON" means any natural person or a company. (10) "PORTFOLIO MANAGER" means an employee of the Firm entrusted with the direct responsibility and authority to make investment decisions. (11) "SECURITY" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Security shall not include securities issued by the government of the United States or by federal agencies and which are direct obligations of the United States, bankers' acceptances, bank certificates of deposit, commercial paper and shares of unaffiliated registered open-end investment companies (mutual funds). B. TRADING RESTRICTIONS FOR ACCESS PERSONS (1) GENERAL RESTRICTIONS FOR ACCESS PERSONS. Access persons are subject to the following restrictions with respect to their securities transactions: (a) PROHIBITION ON ACCEPTING GIFTS OF MORE THAN DE MINIMIS VALUE. Access persons are prohibited from accepting any gift or other thing of more than de minimis value from any person or entity that does business with or on behalf of the Firm or the Fund; for the purpose of this Code de minimis shall be considered to be the annual receipt of gifts from the same source valued at $250 or less per individual recipient, when the gifts are in relation to the conduct of the Firm's business; (b) PROHIBITION ON SERVICE AS A DIRECTOR OR PUBLIC OFFICIAL. Investment Personnel are prohibited from serving on the board of directors of any publicly traded company without prior authorization of the President or other duly authorized officer of the Firm or the Fund. Any such authorization shall be based upon a determination that the board service would be consistent with the interests of the Firm's clients and the Fund's shareholders. Authorization of board service shall be subject to the implementation by the Firm of a "Chinese Wall" or other procedures to isolate such investment personnel from making decisions about trading in that company's securities. (c) PROHIBITION ON INITIAL PUBLIC OFFERINGS. Access persons are prohibited from acquiring securities in an initial public offering. (d) PROHIBITION ON PRIVATE PLACEMENTS. Access persons are prohibited from acquiring securities in a private placement without prior approval from the Firm's Compliance Officer. In the event an access person receives approval to purchase securities in a private placement, the access person must disclose that investment if he or she plays any part in the Firm's later consideration of an investment in the issuer. (e) PROHIBITION ON OPTIONS. Access persons are prohibited from acquiring or selling any option on any security. (f) PROHIBITION ON SHORT-SELLING. Access persons are prohibited from selling any security that the access person does not own or otherwise engaging in "short-selling" activities. (g) PROHIBITION ON SHORT-TERM TRADING PROFITS. Access persons are prohibited from profiting in the purchase and sale, or sale and purchase, of the same (or equivalent) securities within sixty (60) calendar days. Trades made in violation of this prohibition should be unwound, if possible. Otherwise, any profits realized on such short-term trades shall be subject to disgorgement. (2) BLACKOUT RESTRICTIONS FOR ACCESS PERSONS. All access persons are subject to the following restrictions when their purchases and sales of securities coincide with trades by any client of the Firm or by the Fund: (a) PURCHASES AND SALES WITHIN THREE DAYS FOLLOWING A TRADE BY A CLIENT OR THE FUND. Access persons are prohibited from purchasing or selling any security within three calendar days after any client or the Fund has traded in the same (or a related) security. In the event that an access person makes a prohibited purchase or sale within the three-day period, the access person must unwind the transaction and relinquish any gain from the transaction to the appropriate client portfolio(s) or the Fund. (b) PURCHASES WITHIN SEVEN DAYS BEFORE A PURCHASE BY A CLIENT OR THE FUND. Any access person who purchases a security within seven calendar days before any client or the Fund purchases the same (or a related) security is prohibited from selling the security for a period of six months following the client or the Fund's trade. In the event that an access person makes a prohibited sale within the six-month period, the access person must relinquish to the appropriate client portfolio(s) or the Fund any gain from the transaction. (c) SALES WITHIN SEVEN DAYS BEFORE A SALE BY A CLIENT OR THE FUND. Any access person who sells a security within seven days before any client or the Fund sells the same (or a related) security must relinquish to the appropriate client portfolio(s) or the Fund the difference between the access person's sale price and the client portfolio(s) or the Fund's sale price (assuming the access person's sale price is higher). C. EXEMPTED TRANSACTIONS The prohibitions of Sections B (1)(f)(g) and B (2)(a)(b)(c) shall not apply to: (1) purchases or sales effected in any account over which the access person has no direct or indirect influence or control; (2) purchases or sales which are non-volitional on the part of either the access person or the Firm; (3) purchases which are part of an automatic dividend reinvestment plan; and (4) purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. D. COMPLIANCE PROCEDURES (1) RECORDS OF SECURITIES TRANSACTIONS. All access persons must notify the Firm's Compliance Officer if they have opened or intend to open a brokerage account. Access persons must direct their brokers to supply the Firm's Compliance officer with duplicate confirmation statements of their securities transactions and copies of all periodic statements for their brokerage accounts. (2) PRE-CLEARANCE OF SECURITIES TRANSACTIONS. All access persons shall receive prior written approval from the Firm's Compliance Officer, or other officer designated by the Board of Directors, before purchasing or selling securities. The personal securities transactions pre-clearance form is attached as Exhibit D. (3) DISCLOSURE OF PERSONAL HOLDINGS. All access persons shall disclose to the Firm's Compliance Officer all personal securities holdings upon the later of commencement of employment or adoption of this Code of Ethics and thereafter on an annual basis as of December 31. This initial report shall be made on the form attached as Exhibit A and shall be delivered to the Firm's Compliance Officer. (4) CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS. Every access person shall certify annually that: (a) they have read and understand the Code of Ethics and recognize that they are subject thereto; (b) they have complied with the requirements of the Code of Ethics; and (c) they have reported all personal securities transactions required to be reported pursuant to the requirements of the Code of Ethics. The annual report shall be made on the form attached as Exhibit B and delivered to the Firm's Compliance Officer. (5) REPORTING REQUIREMENTS (a) Every access person shall report to the Compliance Officer of the Firm the information described in, Sub-paragraph (5)(b) of this Section with respect to transactions in any security in which such person has, or by reason of such transaction acquires, any direct or indirect beneficial ownership in the security; provided, however, that an access person shall not be required to make a report with respect to transactions effected for any account over which such person does not have any direct or indirect influence. (b) Reports required to be made under this Paragraph (5) shall be made not later than 10 days after the end of the calendar quarter in which the transaction to which the report relates was effected. Every access person shall be required to submit a report for all periods, including those periods in which no securities transactions were effected. A report shall be made on the form attached hereto as Exhibit C or on any other form containing the following information: (i) the date of the transaction, the title and the number of shares, and the principal amount of each security involved; (ii) the nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); (iii) the price at which the transaction was effected; and (iv) the name of the broker, dealer or bank with or through whom the transaction was effected. Duplicate copies of the broker confirmation of all personal transactions and copies of periodic statements for all securities accounts may be appended to Exhibit C to fulfill the reporting requirement. (c) Any such report may contain a statement that the report shall not be construed as an admission by the person making such report that he or she has any direct or indirect beneficial ownership in the security to which the report relates. (d) The Compliance Officer of the Firm shall notify each access person that he or she is subject to these reporting requirements, and shall deliver a copy of this Code of Ethics to each such person upon request. (e) Reports submitted to the Compliance Officer of the Firm pursuant to this Code of Ethics shall be confidential and shall be provided only to the officers and directors of the Firm, Firm counsel or regulatory authorities upon appropriate request. (6) CONFLICT OF INTEREST Every access person shall notify the Compliance Officer of the Firm of any personal conflict of interest relationship which may involve the Firm's clients (including the Fund), such as the existence of any economic relationship between their transactions and securities held or to be acquired by any portfolio of the Firm. Such notification shall occur in the pre-clearance process. E. REPORTING OF VIOLATIONS TO THE BOARD OF DIRECTORS (1) The Firm's Compliance Officer shall promptly report to the Board of Directors and to the Fund's Compliance Officer all apparent violations of this Code of Ethics and the reporting requirements thereunder. (2) When the Firm's Compliance Officer finds that a transaction otherwise reportable to the Board of Directors under Paragraph (1) of this Section could not reasonably be found to have resulted in a fraud, deceit or manipulative practice in violation of Section 206 of the Advisers Act or Rule 17j-1 of the 40 Act, he may, in his discretion, lodge a written memorandum of such finding and the reasons therefor with the reports made pursuant to this Code of Ethics, in lieu of reporting the transaction to the Board of Directors. (3) The Board of Directors, or a Committee of Directors created by the Board of Directors for that purpose, shall consider reports made to the Board of Directors hereunder and shall determine whether or not this Code of Ethics has been violated and what sanctions, if any, should be imposed. F. ANNUAL REPORTING TO THE BOARD OF DIRECTORS (1) The Firm's Compliance Officer shall prepare an annual report relating to this Code of Ethics to the Board of Directors. Such annual report shall: (a) Summarize existing procedures concerning personal investing and any changes in the procedures made during the past year; (b) identify any violations requiring significant remedial action during the past year; and (c) identify any recommended changes in the existing restrictions or procedures based upon the Firm's experience under its Code of Ethics, evolving industry practices or developments in applicable laws or regulations. The Fund's Compliance Officer will prepare a similar report for the Fund's Board of Directors. G. SANCTIONS Upon discovering a violation of this Code, the Board of Directors may impose such sanctions, as they deem appropriate, including, among other things, a letter of censure or suspension or termination of the employment of the violator. H. RETENTION OF RECORDS This Code of Ethics, a list of all persons required to make reports hereunder from time to time, as shall be updated by the Firm's Compliance Officer, a copy of each report made by an access person hereunder, each memorandum made by the Firm's Compliance Officer hereunder and a record of any violation hereof and any action taken as a result of such violation, shall be maintained by the Firm. Dated: January 3, 2000 Exhibit A BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. CODE OF ETHICS INITIAL REPORT OF ACCESS PERSONS To the Compliance Officer of Barrow, Hanley, Mewhinney & Strauss, Inc.: 1. I hereby acknowledge receipt of a copy of the Code of Ethics for Barrow, Hanley, Mewhinney & Strauss, Inc. (the "Firm"). 2. I have read and understand the Code and recognize that I am subject thereto in the capacity of "Access Persons." 3. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Firm or the Fund, such as any economic relationship between my transactions and securities held or to be acquired by the Firm or any of its portfolios, including the Fund. 4. As of the date below I had a direct or indirect beneficial ownership in the following securities:
======================================== ====================================== ====================================== NAME OF SECURITIES NUMBER OF SHARES (DIRECT OR INDIRECT) - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- ======================================== ====================================== ======================================
NOTE: Do NOT report transactions in U.S. Government securities, bankers' acceptances, bank certificates of deposit, commercial paper and unaffiliated registered open-end investment companies (mutual funds).
Date: Signature: ------------------------------------------- ------------------------------------------------ (First date of investment personnel status) Print Name: ------------------------------------------------ Title: ------------------------------------------------ Employer: Barrow, Hanley, Mewhinney & Strauss, Inc. ------------------------------------------------ Date: Signature: ------------------------------------------- ------------------------------------------------ Firm's Compliance Officer
Exhibit B BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. CODE OF ETHICS ANNUAL REPORT OF ACCESS PERSONS To the Compliance Officer of Barrow, Hanley, Mewhinney & Strauss, Inc.: 1. I have read and understand the Code and recognize that I am subject thereto in the capacity of an "Access Person." 2. I hereby certify that, during the year ended December 31, 20 ___, I have complied with the requirements of the Code and I have reported all securities transactions required to be reported pursuant to the Code. 3. I hereby certify that I have not disclosed pending "buy" or "sell" orders for a portfolio of the Firm or the Fund to any employees of any other UAM affiliate, except where the disclosure occurred subsequent to the execution of withdrawal of an order. 4. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Firm or the Fund, such as any economic relationship between my transactions and securities held or to be acquired by the Firm or any of its portfolios, including the Fund. 5. As of December 31, 20___, I had a direct or indirect beneficial ownership in the following securities:
======================================== ====================================== ====================================== TYPE OF INTEREST NAME OF SECURITIES NUMBER OF SHARES (DIRECT OR INDIRECT) - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- - ---------------------------------------- -------------------------------------- -------------------------------------- ======================================== ====================================== ======================================
NOTE: Do NOT report transactions in U.S. Government securities, bankers' acceptances, bank certificates of deposit, commercial paper and unaffiliated registered open-end investment companies (mutual funds).
Date: Signature: ------------------------------------------- ------------------------------------------------ Print Name: ------------------------------------------------ Title: ------------------------------------------------ Employer: Barrow, Hanley, Mewhinney & Strauss, Inc. ------------------------------------------------ Date: Signature: ------------------------------------------- ------------------------------------------------ Firm's Compliance Officer
Exhibit C BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. ACCESS PERSONS Securities Transactions Report For the Calendar Quarter Ended: _______________ To the Compliance Officer of Barrow, Hanley, Mewhinney & Strauss, Inc.: During the quarter referred to above, the following transactions were effected in securities of which I had, or by reason of such transaction acquired, direct or indirect beneficial ownership, and which are required to be reported pursuant to the Code of Ethics adopted by the Firm.
=================== ================= ============ ================ ==================== ========== ====================== SECURITY DATE OF NO. OF DOLLAR AMOUNT NATURE OF PRICE BROKER/DEALER TRANSACTION SHARES OF TRANSACTION TRANSACTION OR BANK THROUGH (Purch., Sale, WHOM EFFECTED Other) - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- - ------------------- ----------------- ------------ ---------------- -------------------- ---------- ---------------------- =================== ================= ============ ================ ==================== ========== ======================
This report (i) excludes transactions with respect to which I had no direct or indirect influence or control, (ii) excludes other transactions not required to be reported, and (iii) is not an admission that I have or had any direct or indirect beneficial ownership in the securities listed above. Except as noted on the reverse side of this report, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve the Firm or the Fund, such as the existence of any economic relationship between my transactions and securities held or to be acquired by Firm clients or any related portfolios, including the Fund. NOTE: Do not report transactions in U.S. Government securities, bankers' acceptances, bank certificates of deposit, commercial paper and unaffiliated registered open-end investment companies (mutual funds).
Date: Signature: ------------------------------------------- ------------------------------------------------ (First date of investment personnel status) Print Name: ------------------------------------------------ Title: ------------------------------------------------ Employer: Barrow, Hanley, Mewhinney & Strauss, Inc. ------------------------------------------------ Date: Signature: --------------------------------------- ------------------------------------------------ Firm's Compliance Officer
Exhibit D BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. ACCESS PERSONS Personal Securities Transactions Pre-clearance Form (see Section D(2), Code of Ethics) To the Compliance Officer of Barrow, Hanley, Mewhinney & Strauss, Inc.: I hereby request pre-clearance of the following proposed transactions:
=================== =========== =================== ==================== ============= ====================== ==================== SECURITY NO. OF DOLLAR AMOUNT OF NATURE OF PRICE BROKER/DEALER AUTHORIZED SHARES TRANSACTION TRANSACTION (OR OR BANK THROUGH (Purch., Sale, PROPOSED WHOM EFFECTED YES NO Other) PRICE) - ------------------- ----------- ------------------- -------------------- ------------- ---------------------- -------------------- - ------------------- ----------- ------------------- -------------------- ------------- ---------------------- --------- ---------- - ------------------- ----------- ------------------- -------------------- ------------- ---------------------- --------- ---------- - ------------------- ----------- ------------------- -------------------- ------------- ---------------------- --------- ---------- - ------------------- ----------- ------------------- -------------------- ------------- ---------------------- --------- ---------- - ------------------- ----------- ------------------- -------------------- ------------- ---------------------- --------- ---------- - ------------------- ----------- ------------------- -------------------- ------------- ---------------------- --------- ---------- - ------------------- ----------- ------------------- -------------------- ------------- ---------------------- --------- ---------- - ------------------- ----------- ------------------- -------------------- ------------- ---------------------- --------- ---------- - ------------------- ----------- ------------------- -------------------- ------------- ---------------------- --------- ---------- =================== =========== =================== ==================== ============= ====================== ========= ========== Date: Signature: ------------------------------------------- ------------------------------------------------ (First date of investment personnel status) Print Name: ------------------------------------------------ Title: ------------------------------------------------ Employer: Barrow, Hanley, Mewhinney & Strauss, Inc. ------------------------------------------------ Date: Signature: ------------------------------------------- ------------------------------------------------ Firm's Compliance Officer
EQUINOX CAPITAL MANAGEMENT CODE OF ETHICS All employees, Directors and Officers will be required to follow the regulations stated below as they pertain to employee and employee-related trading. This type of trading should include ACTIVITY FOR YOURSELF, AS WELL AS FOR YOUR SPOUSE, MINOR CHILDREN, OR ANY PERSON WHO LIVES WITH YOU, AS WELL AS ANY OTHER ACCOUNT WHICH YOU HAVE ANY DIRECT OR INDIRECT BENEFICIAL OWNERSHIP: o All employees will be restricted from trading in any security traded for ECM clients for the time frame detailed below. Specifically, once a stock is recommended for purchase or sale, it will be restricted for trade by ECM employees. It will be restricted until the buy/sell program has been completed for all ECM clients. A seven-day black-out period between the completion of the trading program for ECM clients and the beginning of the employee program will be in effect. The same practice applies to a stock that is being reweighted in client portfolios, whether it is from a cash addition or withdrawal. If an employee has executed an order within the 7-day black-out period, in front of or behind the trade, prior to their knowledge of a client cash addition/withdrawal, the employee execution will stand as long as the client receives the better execution price. If the employee has received a better price, he will need to disgorge the difference to a charity. In short, with limited exceptions, employees may not trade in client names within seven days front and back of client activity in that name. o All employee trading must be approved prior to execution. Trades should be written up on a pre-printed trade ticket, then signed off by Wendy Lee. If Wendy is not available, Ron Ulrich should sign the ticket. If Ron or Wendy are not available, then Laurie Vicari should sign the ticket. The ticket will then be time-stamped and returned to you. You will not be able to execute your trade until you have received a time-stamped trade ticket signifying approval. The signed and time-stamped trade ticket completed with execution price should be given back to Laurie Vicari for inclusion in employee trading files. If trades have been entered at a limit and are not executed on the day you received approval, the above procedure will need to be repeated the following day. If the procedure is not repeated and the trade has not been approved, you should cancel the standing order. When seeking approval for a sell order, the corresponding buy documentation must be handed in at the same time for inclusion with the order memoranda. When trading while on the road, you will need to fax or email the individuals above, in the order above, with the details of your trade prior to execution. If doing a sell, you will need to fax the corresponding buy info in order to receive approval. You may not execute the trade until you have heard back via email or fax from the designated parties that your trade has been approved. You should then fax or email Laurie Vicari with the execution price that day. You will be responsible for writing up a formal trade ticket upon your arrival back to the office to which the fax or email will be attached to. You will not receive approval for new trades if "on the road" trade tickets have not been completed. Please note that again, if entering a limit order, the same rules as above apply with regard to re-entering trade information if the trade is not executed the same day. o ECM Compliance must receive copies of all security transaction confirmations and monthly brokerage statements for all employee and employee-related accounts on a timely basis. These documents will then be reviewed and approved by Ron Ulrich. Mutual fund activity need not be disclosed, but ANY self-directed trading activity in any other type of investment MUST be disclosed, including bond activity for both employee and related accounts. Annual brokerage statements must be received for accounts that have not had any activity during the year and therefore would not generate interim statements. Within 10 days of employment inception, each person shall provide the Compliance Department with a list of security holdings as of the most recent month end for the accounts that they are required to report. o Employees and related accounts are prohibited from profiting in the purchase and sale, or sale and purchase, of the same securities, options or any other product within 60 calendar days. Any profits realized on such short-term trades will be subject to disgorgement. o Employees and related accounts are prohibited from participating in private placement deals and IPO's. o Employees are restricted from serving on the Board of Directors of any company that is publicly traded. o Employees are prohibited from accepting gifts having a monetary value over $25, but are allowed to accept gifts such as tickets to sporting events and theater events on an occasional basis, and may accept food gifts as long as they are shared with staff. Please note that in addition to filling out quarterly 17-j-1 Forms, you will also be required to sign a yearly attestion letter affirming your knowledge and compliance with the Company's Code of Ethics. The above regulations will be strictly enforced, and failure to follow the Code will result in disciplinary action. SANFORD C. BERNSTEIN & CO., LLC CODE OF ETHICS JANUARY 2001 Sanford C. Bernstein & Co., LLC is a subsidiary of Alliance Capital Management L.P. SANFORD C. BERNSTEIN & CO., LLC CODE OF ETHICS Sanford C. Bernstein & Co., LLC is a wholly-owned indirect subsidiary of Alliance Capital Management L.P. The Code of Ethics of Sanford C. Bernstein & Co., LLC is currently comprised of the Code of Ethics of Alliance Capital Management L.P. and certain additional rules of conduct and trading restrictions that are specifically applicable to staff members of Sanford C. Bernstein & Co., LLC. i SANFORD C. BERNSTEIN & CO., LLC CODE OF ETHICS PART I CODE OF ETHICS OF ALLIANCE CAPITAL MANAGEMENT L.P. 1 January 2001 ALLIANCE CAPITAL MANAGEMENT L.P. CODE OF ETHICS AND STATEMENT OF POLICY AND PROCEDURES REGARDING PERSONAL SECURITIES TRANSACTIONS 1. PURPOSES (a) Alliance Capital Management L.P. ("Alliance", "we" or "us") is a registered investment adviser and acts as investment manager or adviser to investment companies and other Clients. In this capacity, we serve as fiduciaries and owe our Clients an undivided duty of loyalty. We must avoid even the appearance of a conflict that may compromise the trust Clients have placed in us and must insist on strict adherence to fiduciary standards and compliance with all applicable federal and state securities laws. Adherence to this Code of Ethics and Statement of Policy and Procedures Regarding Personal Securities Transactions (the "Code and Statement") is a fundamental condition of service with us, any of our subsidiaries or our general partner (the "Alliance Group"). (b) The Code and Statement is intended to comply with Rule 17j-1 under the Investment Company Act which applies to us because we serve as an investment adviser to registered investment companies. Rule 17j-1 specifically requires us to adopt a code of ethics that contains provisions reasonably necessary to prevent our "access persons" (defined in Rule 17j-1 to cover persons such as officers, directors, portfolio managers, traders, research analysts and others) from engaging in fraudulent conduct, including insider trading. Each investment company we advise has also adopted a code of ethics with respect to its access persons. As set forth in Section 3 below, our Code and Statement applies to all Employees and all other individuals who are Access Persons. The Code and Statement is also intended to comply with the provisions of Rule 204-2 under the Investment Advisers Act of 1940 (the "Advisers Act") which requires us to maintain records of securities transactions in which certain of our personnel have any Beneficial Ownership. (c) All Employees and all other individuals who are Access Persons (collectively, "you") also serve as fiduciaries with respect to our Clients and in this capacity you owe an undivided duty of loyalty to our Clients. As part of this duty and as expressed throughout the Code and Statement, you must at all times: (i) Place the interests of our Clients first; (ii) Conduct all personal securities transactions consistent with this Code and Statement and in such a manner that avoids any actual or potential conflict of interest or any abuse of your responsibility and position of trust; and (iii)Abide by the fundamental standard that you not take inappropriate advantage of your position. 2 (d) This Code and Statement does not attempt to identify all possible conflicts of interests and literal compliance with each of the specific procedures will not shield you from liability for personal trading or other conduct which violates your fiduciary duties to our Clients. In addition to the specific prohibitions contained in this Code and Statement, you are also subject to a general requirement not to engage in any act or practice that would defraud our Clients. This general prohibition includes, in connection with the purchase or sale of a Security held or to be acquired or sold (as this phrase is defined below in Section 2(k)) by a Client: (i) Making any untrue statement of a material fact; (ii) Creating materially misleading impressions by omitting to state or failing to provide any information necessary to make any statements made, in light of the circumstances in which they are made, not misleading; (iii)Making investment decisions, changes in research ratings and trading decisions other than exclusively for the benefit of and in the best interest of our Clients; (iv) Using information about investment or trading decisions or changes in research ratings (whether considered, proposed or made) to benefit or avoid economic injury to you or anyone other than our Clients; (v) Taking, delaying or omitting to take any action with respect to any research recommendation, report or rating or any investment or trading decision for a Client in order to avoid economic injury to you or anyone other than our Clients; (vi) Purchasing or selling a Security on the basis of knowledge of a possible trade by or for a Client; (vii)Revealing to any other person (except in the normal course of your duties on behalf of a Client) any information regarding Securities transactions by any Client or the consideration by any Client of Alliance of any such Securities transactions; or (viii) Engaging in any manipulative practice with respect to any Client. (e) The provisions contained in this Code and Statement must be followed when making a personal securities transaction. These policies and procedures, which must be followed, are considerably more restrictive and time-consuming than those applying to investments in the mutual funds and other Clients we advise. If you are not prepared to comply with these policies and procedures, you must forego personal trading. 3 2. Definitions The following definitions apply for purposes of the Code and Statement in addition to the definitions contained in the text itself. (a) "ACCESS PERSON" means any director or officer of the general partner of Alliance, as well as any of the following persons: (i) any Employee who, in connection with his or her regular functions or duties -- (A) makes, participates in, or obtains information regarding the purchase or sale of a Security by a Client, or whose functions relate to the making of any recommendations with respect to such purchases or sales; (B) obtains information from any source regarding any change, or consideration of any change in Alliance's internal research coverage, a research rating or an internally published view on a Security or issuer; or (C) obtains information from any source regarding the placing or execution of an order for a Client account; and (ii) any natural person having the power to exercise a controlling influence over the management or policies of Alliance (unless that power is solely the result of his or her position with Alliance) who: (A) obtains information concerning recommendations made to a Client with regard to the purchase or sale of a Security; (B) obtains information from any source regarding any change, or consideration of any change in research coverage, research rating or a published view on a Security or issuer; and (C) obtains information from any source regarding the placing or execution of an order for a Client account. (b) A Security is "being considered for purchase or sale" when: (i) an Alliance research analyst issues research information (including as part of the daily morning call) regarding initial coverage of, or changing a rating with respect to, a Security; (ii) a portfolio manager has indicated (during the daily morning call or otherwise) his or her intention to purchase or sell a Security; 4 (iii)a portfolio manager places an order for a Client; or (iv) a portfolio manager gives a trader discretion to execute an order for a Client over a specified period of time. (c) "BENEFICIAL OWNERSHIP" is interpreted in the same manner as in determining whether a person is subject to the provisions of Section 16 of the Securities Exchange Act of 1934 ("Exchange Act"), Rule 16a-1 and the other rules and regulations thereunder and includes ownership by any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in a Security. For example, an individual has an indirect pecuniary interest in any Security owned by the individual's spouse. Beneficial Ownership also includes, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, having or sharing "voting power" or "investment power," as those terms are used in Section 13(d) of the Exchange Act and Rule 13d-3 thereunder. (d) "CLIENT" means any person or entity, including an investment company, for which Alliance serves as investment manager or adviser. (e) "COMPLIANCE OFFICER" refers to Alliance's Compliance Officer. (f) "CONTROL" has the same meaning set forth in Section 2(a)(9) of the Investment Company Act. (g) "EMPLOYEE" refers to any person who is an employee of any member of the Alliance Group, including both part-time employees, as well as consultants (acting in the capacity of a portfolio manager, trader or research analyst) under the control of Alliance who, but for their status as consultants, would otherwise come within the definition of Access Person. (h) "INITIAL PUBLIC OFFERING" means an offering of securities registered under the Securities Act of 1933, the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934. (i) "INVESTMENT PERSONNEL" refers to: (i) any Employee who acts in the capacity of a portfolio manager, research analyst or trader; (ii) any Employee who assists someone acting in the capacity of a portfolio manager, research analyst or trader and as an assistant has access to information generated or used by portfolio managers, research analysts and traders (including, for example, assistants who have access to the Alliance Global Equity Review or the Alliance Fixed Income Review); 5 (iii)any Employee who receives the Alliance Global Equity Review or the Alliance Fixed Income Review; or (iv) any natural person who Controls Alliance and who obtains information concerning recommendations made to a Client regarding the purchase or sale of securities by the Client. (j) "LIMITED OFFERING" means an offering that is exempt from registration under the Securities Act of 1933 pursuant to Sections 4(2) or 4(6) thereof or pursuant to Rules 504, 505 or 506 under the Securities Act of 1933. (k) "PERSONAL ACCOUNT" refers to any account (including, without limitation, a custody account, safekeeping account and an account maintained by an entity that may act in a brokerage or a principal capacity) in which an Access Person or Employee has any Beneficial Ownership and any such account maintained by or for a financial dependent. For example, this definition includes Personal Accounts of: (i) an Access Person's or Employee's spouse, including a legally separated or divorced spouse who is a financial dependent, (ii) financial dependents residing with the Access Person or Employee, and (iii)any person financially dependent on an Access Person or Employee who does not reside with that person, including financially dependent children away at college. (l) "PURCHASE OR SALE OF A SECURITY" includes, among other transactions, the writing or purchase of an option to sell a Security and any short sale of a Security. (m) "SECURITY" has the meaning set forth in Section 2(a)(36) of the Investment Company Act and any derivative thereof, commodities, options or forward contracts, except that it shall not include shares of open-end investment companies registered under the Investment Company Act, securities issued by the Government of the United States, short-term debt securities that are government securities within the meaning of Section 2(a)(16) of the Investment Company Act, bankers' acceptances, bank certificates of deposit, commercial paper, and such other money market instruments as are designated by the Compliance Officer. (n) "SECURITY HELD OR TO BE ACQUIRED OR SOLD" means: (i) any Security which, within the most recent 15 days (1) is or has been held by a Client or (2) is being or has been considered by a Client (to the extent known by Alliance) or Alliance for purchase by the Client; and (ii) any option to purchase or sell, and any Security convertible into or exchangeable for, a Security. 6 (o) "SUBSIDIARY" refers to either of the following types of entities with respect to which Alliance, directly or indirectly, through the ownership of voting securities, by contract or otherwise has the power to direct or cause the direction of management or policies of such entity: (i) any U.S. entity engaged in money management; and (ii) any non-U.S. entity engaged in money management for U.S. accounts. 3. APPLICATION (a) This Code and Statement applies to all Employees and to all other individuals who are Access Persons. Please note that certain provisions apply to all Employees while other provisions apply only to Access Persons and others apply only to certain categories of Access Persons who are also Investment Personnel (e.g., portfolio managers and research analysts). (b) Alliance will provide a copy of this Code and Statement to all Employees and all individuals who are Access Persons. In addition, the Compliance Officer will maintain lists of Access Persons and Investment Personnel, including a separate list of portfolio managers and research analysts. 4. LIMITATIONS ON PERSONAL SECURITIES TRANSACTIONS (a) ALL EMPLOYEES It is the responsibility of each employee to ensure that all personal securities transactions are made in strict compliance with the restrictions and procedures in the Code and Statement and otherwise comply with all applicable legal and regulatory requirements. EMPLOYEES MUST HOLD ALL SECURITIES IN A PERSONAL ACCOUNT. This requirement applies to all types of personal securities transactions including, for example, the purchase of Securities in a private placement or other direct investment. In addition, employees may not take physical possession of certificates or other formal evidence of ownership. Personal securities transactions for employees may be effected only in a Personal Account and in accordance with the following provisions: (i) DESIGNATED BROKERAGE ACCOUNTS Personal Accounts of an employee that are maintained as brokerage accounts must be held at the following designated broker-dealers: Donaldson, Lufkin & Jenrette Securities Corporation, DLJ Direct, Merrill Lynch & Co. or Charles Schwab. In addition, employees who currently maintain a Personal Account at Sanford C. Bernstein & Co., LLC should continue to use this account for all personal securities transactions. 7 (ii) SECURITIES BEING CONSIDERED FOR CLIENT PURCHASE OR SALE An employee may not purchase or sell a Security, or engage in any short sale of a Security, in a Personal Account if, at the time of the transaction, the Security is being considered for purchase or sale for a Client or is being purchased or sold for a Client. The following non-exhaustive list of examples illustrates this restriction: o An Alliance research analyst issues research information (including as part of the daily morning call) regarding initial coverage of, or changing a rating with respect to, a Security. o A portfolio manager has, during the daily morning call, indicated his or her intention to purchase or sell a Security. o A portfolio manager places an order in the Security to purchase or sell the Security for a Client. o An open order in the Security exists on the trading desk. o An open limit order exists on the trading desk, and it is reasonably likely that the Security will reach that limit price in the near future. (iii)RESTRICTED LIST A Security may not be purchased or sold in a Personal Account if, at the time of the transaction, the Security appears on the Alliance Daily Restricted List and is restricted for Employee transactions. The Daily Restricted List is made available each business day to all Employees via Lotus Notes and the Alliance Alert. (iv) PRECLEARANCE REQUIREMENT An Employee may not purchase or sell, directly or indirectly, any Security in which the Employee has (or after such transaction would have) any Beneficial Ownership unless the Employee obtains the prior written approval to the transaction from the Compliance Department and, in the case of Investment Personnel, the head of the business unit in which the Employee works. A request for preclearance must be made in writing in advance of the contemplated transaction and must state: a. the name of the Security involved, b. the number of shares or principal amount to be purchased or sold, and 8 c. a response to all questions contained in the appropriate pre-clearance form. Preclearance requests will be acted on only between the hours of 10:00 a.m. and 3:30 p.m. Any approval given under this paragraph will remain in effect only until the end of the trading day on which the approval was granted. When a Security is being considered for purchase or sale for a Client or is being purchased or sold for a Client following the approval on the same day of a personal trading request form with respect to the same security, the Compliance Department is authorized to cancel the personal order if (x) it has not been executed and the order exceeds a market value of $50,000 or (y) the Compliance Department determines, after consulting with the trading desk and the appropriate business unit head (if available), that the order, based on market conditions, liquidity and other relevant factors, could have an adverse impact on a Client or on a Client's ability to purchase or sell the Security or other Securities of the issuer involved. (v) AMOUNT OF TRADING No more than an aggregate of 20 securities transactions may occur in an Employee's Personal Accounts in any consecutive thirty-day period. (vi) DISSEMINATION OF RESEARCH INFORMATION An Employee may not buy or sell any Security that is the subject of "significantly new" or "significantly changed" research during a forty-eight hour period commencing with the first publication or release of the research. The terms "significantly new" and "significantly changed" include: a. the initiation of coverage by an Alliance research analysts; b. any change in a research rating or position by an Alliance research analyst (unless the research analyst who makes the change advises the Compliance Department in writing that the change is the result of an unanticipated widely disseminated announcement or market event, e.g., the announcement of a major earnings warning as opposed to the research analysts independently rethinking his or her subjective assessment of the security); and c. any other rating, view, opinion, or advice from an Alliance research analyst, the issuance (or reissuance) of which in the opinion of such research analyst or head of research would be reasonably likely to have a material effect on the price of the security. 9 (vii)INITIAL PUBLIC OFFERINGS No Employee shall acquire any direct or indirect Beneficial Ownership in any Securities in any Initial Public Offering. (viii)LIMITED OFFERINGS No Employee shall acquire any Beneficial Ownership in any Securities in any Limited Offering of Securities unless the Compliance Officer and the business unit head give express prior written approval and document the basis for granting or denying approval after due inquiry. The Compliance Officer, in determining whether approval should be given, will take into account, among other factors, whether the investment opportunity should be reserved for a Client and whether the opportunity is being offered to the individual by virtue of his or her position with the Alliance Group. Employees authorized to acquire Securities in a Limited Offering must disclose that investment when they play a part in any Client's subsequent consideration of an investment in the issuer, and in such a case, the decision of Alliance to purchase Securities of that issuer for a Client will be subject to an independent review by Investment Personnel with no personal interest in such issuer. (b) ACCESS PERSONS In addition to the requirements set forth in paragraph (a) of this Section 4, the following restrictions apply to all Access Persons: (i) SHORT SALES No Access Person shall engage in any short sale of a Security if, at the time of the transaction, any Client has a long position in such Security (except that an Access Person may engage in short sales against the box and covered call writing provided that these personal securities transactions do not violate the prohibition against short-term trading). (ii) SHORT-TERM TRADING All Access Persons are subject to a mandatory buy and hold of all Securities for 60 calendar days. An Access Person may, however, after 30 calendar days, sell a Security if the sale price is lower than the original purchase price (i.e., at a loss on the original investment). Any trade made in violation of this paragraph shall be unwound, or, if that is not practicable, all profits from the short-term trading must be disgorged as directed by the Compliance Officer. 10 (iii)NON-EMPLOYEE ACCESS PERSONS Any non-Employee Access Person with actual knowledge that a Security is being considered for purchase or sale for a Client may not purchase or sell such Security. (c) INVESTMENT PERSONNEL In addition to the requirements set forth in paragraphs (a) and (b) of this Section 4, the following restrictions apply to all Investment Personnel: (i) BOARD MEMBER OR TRUSTEE No Investment Personnel shall serve on any board of directors or trustees or in any other management capacity of any private or public company without prior written authorization from the Compliance Officer based upon a determination that such service would not be inconsistent with the interests of any Client. This prohibition does not include non-profit corporations, charities or foundations; however, approval from the Investment Personnel's supervisor is necessary. (ii) RECEIPT OF GIFTS No Investment Personnel shall receive any gift or other thing of more than de minimis value from any person or entity, other than a member of the Alliance Group, that does business with Alliance on behalf of a Client, provided, however, that receipt of the following shall not be prohibited: a. an occasional breakfast, luncheon, dinner or reception, ticket to a sporting event or the theater, or comparable entertainment, that is not so frequent, so costly, nor so extensive as to raise any question of impropriety; b. a breakfast, luncheon, dinner, reception or cocktail party in conjunction with a bona fide business meeting; and c. a gift approved in writing by the Compliance Officer. (d) PORTFOLIO MANAGERS In addition to the requirements set forth in paragraphs (a), (b) and (c) of this Section 4, the following restrictions apply to all persons acting in the capacity of a portfolio manager of a Client account: 11 (i) BLACKOUT PERIODS No person acting in the capacity of a portfolio manager shall buy or sell a Security for a Personal Account within seven calendar days before and after a Client trades in that Security. In the case of Client accounts managed by more than one portfolio manager, this restriction will apply to the portfolio manager who makes the decision to purchase or sell the relevant Security. If a portfolio manager engages in such a personal securities transaction during a blackout period, the Compliance Officer will break the trade or, if the trade cannot be broken, the Compliance Officer will direct that any profit realized on the trade be disgorged. (ii) ACTIONS DURING BLACKOUT PERIODS No person acting in the capacity of a portfolio manager shall delay or accelerate a Client trade due to a previous purchase or sale of a Security for a Personal Account. In the event that a portfolio manager determines that it is in the best interest of a Client to buy or sell a Security for the account of the Client within seven days of the purchase or sale of the same Security in a Personal Account, the portfolio manager should contact the Compliance Officer immediately who may direct that the trade in the Personal Account be canceled or take other appropriate relief. (iii)TRANSACTIONS CONTRARY TO CLIENT POSITIONS No person acting in the capacity of a portfolio manager shall purchase or sell a Security in a Personal Account contrary to investment decisions made on behalf of a Client, unless the portfolio manager represents and warrants in the personal trading request form that (x) it is appropriate for the Client account to buy, sell or continue to hold that Security and (y) the decision to purchase or sell the Security for the Personal Account arises from the need to raise or invest cash or some other valid reason specified by the portfolio manager and approved by the Compliance Officer and is not otherwise based on the portfolio manager's view of how the Security is likely to perform. (e) RESEARCH ANALYSTS In addition to the requirements set forth in paragraphs (a), (b), (c) of this Section 4, the following restrictions apply to all persons acting in the capacity of a research analyst: (i) BLACKOUT PERIODS No person acting as a research analyst shall buy or sell a Security within seven calendar days before and after making a change in a rating or other published view with respect to that Security. If a research analyst engages in such a personal securities transaction during a blackout period, the Compliance Officer will break the trade or, if the trade cannot be broken, the Compliance Officer will direct that any profit realized on the trade be disgorged. 12 (ii) ACTIONS DURING BLACKOUT PERIODS No person acting as a research analyst shall delay or accelerate a rating or other published view with respect to any Security because of a previous purchase or sale of a Security in such person's Personal Account. In the event that a research analyst determines that it is appropriate to make a change in a rating or other published view within seven days of the purchase or sale of the same Security in a Personal Account, the research analyst should contact the Compliance Officer immediately who may direct that the trade in the Personal Account be canceled or take other appropriate relief. (iii)ACTIONS CONTRARY TO RATINGS No person acting as a research analyst shall purchase or sell a Security (to the extent such Security is included in the research analyst's research universe) contrary to an outstanding rating or a pending ratings change, unless (x) the research analyst represents and warrants in the personal trading request form that (as applicable) there is no reason to change the outstanding rating and (y) the research analyst's personal trade arises from the need to raise or invest cash or some other valid reason specified by the research analyst and approved by the Compliance Officer and is not otherwise based on the research analyst's view of how the security is likely to perform. 5. EXEMPTED TRANSACTIONS (a) The pre-clearance requirements, as described in Section 4(a)(iv) of this Code and Statement, do not apply to: (i) NON-VOLITIONAL TRANSACTIONS Purchases or sales that are non-volitional (including, for example, any Security received as part of an individual's compensation) on the part of an Employee (and any Access Person who is not an Employee) or are pursuant to a dividend reinvestment plan (up to an amount equal to the cash value of a regularly declared dividend, but not in excess of this amount). (ii) EXERCISE OF PRO RATA ISSUED RIGHTS Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of the issuer's Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. This exemption applies only to the exercise or sale of rights that are issued in connection with a specific upcoming public offering on a specified date, as opposed to rights acquired from the issuer (such as warrants or options), which may be exercised from time-to-time up until an expiration date. This exemption does not apply to the sale of stock acquired pursuant to the exercise of rights. 13 (b) The restrictions on effecting transactions in a (1) Security being considered for purchase or sale, as described in Sections 4(a)(ii) and 4(b)(iii) or (2) that is the subject of "significantly new" or "significantly changed" research, as described in Section 4(a)(vi) of this Code and Statement, do not apply to: (i) NON-VOLITIONAL TRANSACTIONS Purchases or sales that are non-volitional (including, for example, any Security received as part of an individual's compensation) on the part of an Access Person or are pursuant to a dividend reinvestment plan (up to an amount equal to the cash value of a regularly declared dividend, but not in excess of this amount). (ii) EXERCISE OF PRO RATA ISSUED RIGHTS Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of the issuer's Securities, to the extent such rights were acquired from such issuer, and sales of such rights so acquired. This exemption applies only to the exercise or sale of rights that are issued in connection with a specific upcoming public offering on a specified date, as opposed to rights acquired from the issuer (such as warrants or options), which may be exercised from time-to-time up until an expiration date. This exemption does not apply to the sale of stock acquired pursuant to the exercise of rights. (iii)DE MINIMIS TRANSACTIONS -- FIXED INCOME SECURITIES Any of the following Securities, if at the time of the transaction, the Access Person has no actual knowledge that the Security is being considered for purchase or sale by a Client, that the Security is being purchased or sold by the Client or that the Security is the subject of significantly new or significantly changed research: a. Fixed income securities transaction involving no more than 100 units or having a principal amount not exceeding $25,000; or b. Non-convertible debt securities and non-convertible preferred stocks which are rated by at least one nationally recognized statistical rating organization ("NRSRO") in one of the three highest investment grade rating categories. 14 (iv) DE MINIMIS TRANSACTIONS -- EQUITY SECURITIES Any equity Securities transaction, or series of related transactions, involving shares of common stock and excluding options, warrants, rights and other derivatives, provided a. any orders are entered after 10:00 a.m. and before 3:00 p.m. and are not designated as "market on open" or "market on close"; b. the aggregate value of the transactions do not exceed (1) $10,000 for securities with a market capitalization of less than $1 billion; (2) $25,000 for securities with a market capitalization of $1 billion to $5 billion and (3) $50,000 for securities with a market capitalization of greater than $5 billion; and c. the Access Person has no actual knowledge that the Security is being considered for purchase or sale by a Client, that the Security is being purchased or sold by or for the Client or that the Security is the subject of significantly new or significantly changed research. PLEASE NOTE: Even if your trade qualifies for a de minimus exception, you must pre-clear your transaction with the Compliance Department in advance of placing the trade. (c) NON-EMPLOYEE ACCESS PERSONS The restrictions on Employees and Access Persons, as described in Sections 4(a) and 4(b) of this Code and Statement, do not apply to non-Employee Access Persons, if at the time of the transaction involved, such person has no actual knowledge that the Security involved is being considered for purchase or sale. (d) EXTREME HARDSHIP In addition to the exceptions contained in Section 5(a) and (b), the Compliance Officer may, in very limited circumstances, grant other exceptions under any Section of the Code and Statement on a case-by-case basis, provided: (i) The individual seeking the exception furnishes to the Compliance Officer: a. a written statement detailing the efforts made to comply with the requirement from which the individual seeks an exception; b. a written statement containing a representation and warranty that (1) compliance with the requirement would impose a severe undue hardship on the individual and (2) the exception would not, in any manner or degree, harm or defraud the Client or compromise the individual's or Alliance's fiduciary duty to any Client; and 15 c. any supporting documentation that the Compliance Officer may request; (ii) The Compliance Officer conducts an interview with the individual or takes such other steps the Compliance Officer deems appropriate in order to verify that granting the exception will not in any manner or degree, harm or defraud the Client or compromise the individual's or Alliance's fiduciary duty to any Client; and (iii)The Compliance Officer maintains, along with statements provided by the individual, a written record that contains: a. the name of the individual; b. the specific requirement of Section 4 from which the individual sought an exception; c. the name of the Security involved, the number of shares or principal amount purchased or sold, and the date or dates on which the Securities were purchased or sold; d. the reason(s) the individual sought an exception from the requirements of Section 4; e. the efforts the individual made to comply with the requirements of Section 4 from which the individual sought to be excepted; and f. the independent basis upon which the Compliance Officer believes that the exemption should be granted. (e) Any Employee or Access Person who acquires an interest in any private investment fund (including a "hedge fund") or any other Security that cannot be purchased and held in a Personal Account shall be excepted from the requirement that all Securities be held in a Personal Account, as described in Section 4(a) of this Code and Statement. Such Employee or Access Person shall provide the Compliance Officer with a written statement detailing the reason why such Security cannot be purchased and held in a Personal Account. Transactions in these Securities nevertheless remain subject to all other requirements of this Code and Statement, including applicable private placement procedures, preclearance requirements and blackout period trading restrictions. 16 6. REPORTING (a) INITIAL HOLDINGS REPORTS Upon commencement of employment with a member of the Alliance Group, an employee must provide an Initial Holdings Report to the Compliance Officer disclosing the following: (i) all Securities beneficially owned by the employee (including the title, number of shares and/or principal amount of each Security beneficially owned); (ii) the name of any broker-dealer or financial institution where the employee maintains a Personal Account; and (iii)the date the report is submitted by the employee. This report must be submitted no later than 10 days after joining Alliance. (b) ANNUAL HOLDINGS REPORTS BY EMPLOYEE ACCESS PERSONS Each Access Person must, by January 30 of each year, provide an annual holdings report to the Compliance Officer disclosing the following: (i) all Securities beneficially owned by the Access Person (including the title, number of shares and/or principal amount of each Security beneficially owned); (ii) the name of any broker-dealer or financial institution where the Access Person maintains a Personal Account; and (iii)the date the report is submitted by the Access Person. The information must be current as of a date not more than 30 days before the report is submitted. In the event that Alliance already maintains a record of the required information via account statements received from the Access Person's broker-dealer, an Access Person may satisfy this requirement by (i) confirming in writing (which may include e-mail) the accuracy of the record and (ii) recording the date of the confirmation. (c) ACCESS PERSONS WHO ARE NOT EMPLOYEES OF ALLIANCE Every Access Person who is not an Employee of Alliance, shall report to the Compliance Officer the information described in Section 6(a) and (b) as well as 6(e) below with respect to transactions in any Security in which such Access Person has, or by reason of such transaction acquires, any Beneficial Ownership in the Security; provided, however, that such Access Person is not required to make a report with respect to transactions effected in any account over which the Access Person does not have any direct or indirect influence or control, including such an account in which an Access Person has any Beneficial Ownership. 17 (d) AFFILIATED AND NON-AFFILIATED DIRECTORS As non-employee Access Persons, affiliated directors are also required to provide the Compliance Department with the information set forth in Sections 6(a) and 6(b), above. Non-affiliated directors are only required to provide the Compliance Department with the information set forth in Section 6(e) below. (e) REPORT CONTENTS Every report of a non-Employee Access Person required by Section 6(c) above shall be in writing and shall be delivered not later than ten days after the end of the calendar quarter in which a transaction to which the report relates was effected, and shall contain the following information: (i) the date of the transaction, the title and the number of shares, and the principal amount of each Security involved; (ii) the nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); (iii) the price at which the transaction was effected; and (iv) the name of the broker, dealer or bank with or through whom the transaction was effected. (f) REPORT REPRESENTATIONS Any such report may contain a statement that the report is not to be construed as an admission by the person making the report that he or she has any direct or indirect Beneficial Ownership in the Security to which the report relates. (g) MAINTENANCE OF REPORTS The Compliance Officer shall maintain the information required by Section 6 and such other records, if any, as are required by Rule 17j-1 under the Investment Company Act and Rule 204-2 under the Advisers Act. All reports furnished pursuant to this Section will be kept confidential, subject to the rights of inspection by the Compliance Officer, the Transaction Compliance Committee, the Securities and Exchange Commission and by other third parties pursuant to applicable law. 18 7. ANNUAL VERIFICATIONS Each person subject to this Code and Statement must certify annually that he or she has read and understands this Code and Statement, recognizes that he or she is subject thereto and has complied with its provisions and disclosed or reported all personal Securities transactions required to be disclosed or reported by this Code and Statement. Such certificates and reports are to be given to the Compliance Officer. 8. SANCTIONS Upon learning of a violation of this Code and Statement, any member of the Alliance Group, with the advice of the Compliance Officer, may impose such sanctions as it deems appropriate, including, among other things, censure, suspension or termination of service. Individuals subject to this Code and Statement who fail to comply with this Code and Statement may also be violating the federal securities laws or other federal and state laws. Any such person who is suspected of violating this Code and Statement should be reported immediately to the Compliance Officer. 19 CERTIFICATION I hereby acknowledge receipt of the Code of Ethics and Statement of Policy and Procedures Regarding Personal Securities Transactions (the "Code and Statement") of Alliance Capital Management L.P. and its Subsidiaries. I certify that I have read and understand the Code and Statement and recognize that I am subject to its provisions. I also certify that I have complied with the requirements of the Code and Statement and have disclosed or reported all personal securities transactions required to be disclosed or reported pursuant to the Code and Statement. Name _________________________________________ (please print) Signature _________________________________________ Date _________________________________________ 20 SANFORD C. BERNSTEIN & CO., LLC CODE OF ETHICS PART II CERTAIN ADDITIONAL RULES OF CONDUCT AND TRADING RESTRICTIONS FOR STAFF MEMBERS OF SANFORD C. BERNSTEIN & CO., LLC 21 OTHER CONDUCT RULES GIFTS - ----- The following policies do not apply to personal gifts between staff members, or to personal gifts between a staff member and a family member or personal friend that are given or received outside of a business related setting. GIFTS RECEIVED BY STAFF MEMBERS You may not accept any gift (including gifts of tickets to sporting events or theatre where the person providing the entertainment is not present) other than gifts of nominal value (under $100) from any one person in any one year. Under no circumstances may you accept a gift of cash. ENTERTAINING CLIENTS You may engage in normal and customary business entertainment (such as business meals, sporting events and shows) provided that you are present for the event. GIFTS GIVEN BY STAFF MEMBERS You may not give or permit to be given anything of value, including gratuities, in excess of $100 per individual per year to any person where such payment or gratuity is in relation to the business of the recipient's employer. This limit applies, for example, to a gift of tickets to an event if you will not be accompanying the recipient to the event. The maximum is $50 if the recipient is a principal, officer or employee of the NYSE or its subsidiaries. You may give gifts of securities to charity, and we permit you to choose the securities you wish to give from any type of securities account. Please note the following regarding the charity's subsequent sale of those securities. If the charity's account is a managed account held at Bernstein, and the charity wishes to sell the gifted security, then the charity's account will compete equally (for allocation purposes) with the managed accounts of our other clients. If the charity's account is one for which you have the power to control the choice of securities to trade (and thus the charity's account is a brokerage account held at Bernstein), then the charity will be required to wait for client orders to be completed before selling the securities that it received from you. COMPENSATION TO CERTAIN EMPLOYEES OF OTHERS Bernstein is permitted by applicable regulations to pay for services of up to $200 per person per year to certain specified operations persons with the prior written consent of a Senior Vice President or Vice President of Operations. Such permitted recipients include a telephone clerk on the New York Stock Exchange floor who provides courtesy telephone relief to the Firm's floor clerk or handles orders for the Firm. Please refer to the Firm's Compliance Manual for detailed procedures regarding compensation of this type. 22 OTHER CONDUCT RULES (continued) FINANCIAL INTEREST - ------------------ You may not act on the firm's behalf in any transaction involving persons or entities with whom you or your family has any significant connection or financial interest without prior written approval from our Board of Directors. You should direct to the office of the General Counsel any requests for approval from the Board of Directors. For purposes of this policy, your family includes parents, parents-in-law, spouse, siblings, siblings-in-law, children, children-in-law, or a person to whom you provide material support. AWARDING CONTRACTS - ------------------ We must award orders, contracts and commitments to suppliers strictly based on merit and without favoritism. The Legal Department must review and approve all contracts for goods or services before execution, and an authorized Firm officer must sign each contract. The officer signing the contract must provide a copy of the final, signed version to the Legal Department for retention. OUTSIDE DIRECTORSHIPS & OFFICERSHIPS AND OTHER OUTSIDE ACTIVITIES - ----------------------------------------------------------------- Whether or not in connection with your duties and responsibilities at Bernstein, you may not accept the following without prior written approval from the Board of Directors: o A directorship or officership of any company or organization (other than a charitable organization), regardless of whether you receive compensation, or o Outside employment or remuneration from any source for any services performed (for example, consulting fees or finder's fees). You must submit any requests for such approval in writing to the General Counsel. In a rare instance in which we grant your request to serve as a board member of a public company, we may require that you be isolated from making any decisions for our clients with respect to investing in that company. You may not use the firm's name in connection with any outside activity without prior written approval from our Board of Directors. You must submit any request for approval in writing to the General Counsel. 23 OTHER CONDUCT RULES (continued) NO RECOMMENDATION OR SALE OF PRODUCTS OTHER THAN BERNSTEIN PRODUCTS - ------------------------------------------------------------------- You may not recommend to clients that they participate in any securities transaction (including any private transaction) other than a Bernstein product. And, you may not receive "selling" or other compensation in connection with any securities transaction (including any private transaction) other than a Bernstein product. PROPRIETARY INFORMATION - ----------------------- IDENTITY OF COMPANIES ON OUR RESTRICTED LISTS Our firm maintains lists of securities relating to companies for which we have agreed to participate in an underwriting, or about which we intend to publish a research recommendation. You may not disclose outside our Firm the identity of securities on these lists, since the fact that we have listed a security may signal the market that we know of a significant development which may affect the price of the security. CLIENTS' PROPRIETARY INFORMATION You must never disclose confidential business or personal information, including names of clients, client account balances, financial information obtained from a client, or anticipated changes in the management or financial condition of a client, outside the normal and necessary course of the firm's business. This policy does not preclude you from sharing information about a client with his or her lawyers, accountants or other advisors upon the client's request. OUR RESEARCH Our firm gathers and develops information that we use to service our clients. For example, our Institutional Research Analysts publish "Black Book" reports. You may not disclose this information outside the firm except as required to perform your job duties. Also, any material marked "Not for External Distribution," including research prepared by investment management research analysts, should not be distributed outside the firm. 24 OTHER CONDUCT RULES - Proprietary Information (continued) OTHER During the course of your employment, you may have access to information relating to our business, including information that provides our firm with a competitive advantage. This confidential information may include, for example, information relating to our investment strategies, our investment management processes or systems, our existing or anticipated corporate activity, our financial condition or performance, or compensation paid to our staff. You may not disclose confidential information to anyone outside Bernstein except in the course of the proper exercise of your job duties. RUMORS - ------ New York Stock Exchange rules, as well as our policy, prohibit the circulation of rumors concerning the affairs of any company, as well as the affairs of other NYSE member organizations, since rumors can influence securities prices. If a rumor comes to your attention, you must contact the Legal Department immediately and refrain from spreading the rumor. COMMUNICATION WITH CLIENTS & THE PUBLIC - --------------------------------------- Our Compliance Manual sets forth our policies and procedures regarding our communications with clients or other members of the public, with which you must comply. Also, you must comply with sections of our Compliance Manual governing our review of incoming and outgoing correspondence of certain staff members. In addition, when communicating with clients or the public, truthfulness and good taste are always required. 25 OTHER CONDUCT RULES (continued) REPORTABLE EVENTS INVOLVING STAFF MEMBERS - ----------------------------------------- We are required to notify regulatory authorities in the event that a staff member is involved in or is the subject of a "reportable event," for the most part when a staff member faces actual or potential disciplinary action or finds him or herself in some other kind of legal or regulatory trouble. While we are likely to become aware of certain types of reportable events in the course of our supervision of staff members, we may not necessarily be aware of all reportable events without your disclosure. In order to facilitate our firm's compliance with these requirements, you are required to notify the Legal Department immediately in the event you, or a person under your supervision, comes under scrutiny by our firm or any outside person or entity or engages in conduct warranting a higher level of supervisory oversight by our firm. For example, you must notify the our Legal Department if you, or a person under your supervision: o violates a law or regulation, or any agreement with or rule or standard of any government agency, self-regulatory organization or business or professional organization; o is the subject of any customer complaint; o is named as a defendant or respondent in any proceeding; o is denied registration or membership or is disciplined by any regulatory or self-regulatory organization; o makes any false or misleading statement, or omits a fact required to be disclosed, in connection with any matter involving a regulatory agency, whether in connection with an application, report, proceeding or otherwise; o is arrested, or is charged with, convicted of, pleads guilty to, or pleads no contest to, any criminal offense (other than minor traffic violations); o has any association with an entity or person which was disciplined, suspended, expelled or had its registration denied or revoked by any agency, jurisdiction or organization, or which was convicted of, or pleaded no contest to, any criminal offense; o makes a compromise with creditors, files a bankruptcy petition or is the subject of an involuntary bankruptcy petition; o is or may become the subject of any internal disciplinary action; o violates rules of our firm including this Code. 26 SPECIAL RESTRICTIONS FOR: - ------------------------ |X| INSTITUTIONAL RESEARCH ANALYSTS |X| INSTITUTIONAL RESEARCH ASSOCIATES o You must sell all holdings in a security upon your initiation of research coverage of that security. In other words, you may not recommend purchase of a security that you hold. The applicable Director of Institutional Research may grant discretionary exceptions to this policy (in consultation with the Legal Department) based on factors including: >> the length of time since your last purchase of the security, >> your intent regarding future holding of the security, >> reasons for your original purchase, >> the liquidity, capitalization and volatility of the security, and >> the size of your holding (in both absolute terms and relative to your overall portfolio). The Director might condition an exception on your agreement to hold the security until we have disseminated to our institutional clients a recommendation that the security is rated "underperform." The Director also might grant limited exceptions for new employees with respect to securities purchased before joining us. o With respect to securities you cover, you may purchase only securities that you rate "outperform," and you may sell only securities that you rate "underperform." You may neither buy nor sell securities that you rate "marketperform." To obtain an exemption from this policy, you will need the written approval of your supervisor and the Legal Department, which might consider such factors as the length of your holding period, the size of your holding in absolute terms and relative to your other holdings, and the reasons for the proposed trade. o You may not trade options of any kind in securities you cover. o You may not "short" securities you cover. 27 TUKMAN CAPITAL MANAGEMENT, INC. Second Amended and Restated Personal Trading/Confidential Information Policy Statements and Compliance Procedures Effective as of December 8, 1995 (last amended on May 17, 1999) TUKMAN CAPITAL MANAGEMENT, INC. Second Amended and Restated Personal Trading/Confidential Information Policy Statements and Compliance Procedures Effective as of December 8, 1995 (last amended on May 17, 1999) Federal and state laws prohibit the Company and each of its employees, officers and directors (collectively, "Employees") from purchasing or selling any publicly traded stock, bond, option or other security on the basis of material, nonpublic information (i.e., insider trading). In addition, the Company and each Employee has a fiduciary obligation to the Company's clients to protect the confidentiality of all proprietary, sensitive or other confidential information communicated to the Company or its Employees by the Company's clients. Finally, because the Company and each of its Employees is a fiduciary to the Company's clients, the Company and its Employees must also maintain the highest ethical standards and refrain from engaging in activities that may create conflicts of interest between the interests of the Company or its Employees and the interests of the Company's clients. To ensure that insider trading laws are not violated, that client confidences are maintained, and that conflicts of interest are avoided, the Company has adopted the policies and procedures set forth herein. The policies and procedures set forth herein are intended to articulate the Company's policies, educate its Employees about the issues and the Company's policies, establish procedures for complying with those policies, monitor compliance with such policies and procedures, and ensure, to the extent feasible, that the Company satisfies its obligations in this area. By doing so, the Company hopes that the highest ethical standards are maintained and that the reputation of the Company is sustained. The Company has appointed Mel Tukman and Dan Grossman as its Compliance Officers. I. BACKGROUND A. INSIDER TRADING It is unlawful to engage in "insider trading." This means, in general, that no "insider" (as defined below) may (i) purchase or sell a security on the basis of material, nonpublic information or (ii) communicate material, nonpublic information to another where the communication leads to, or is intended to lead to, a purchase or sale of securities. Although the insider trading prohibitions extend to the activities of each Employee of the Company, because the Company does not have an investment banking division or affiliate, it is anticipated that such Employees will not routinely receive "inside information." However, to educate the Company's Employees, more information describing "insider trading" and the penalties for such trading is set forth below. Compliance procedures regarding the use of inside information by the Company's Employees are also described just in case an Employee of the Company receives inside information. B. OTHER CONFIDENTIAL INFORMATION Certain information obtained by the Company that does not constitute "inside" information still constitutes confidential information that must be protected by the Company and its insiders. Compliance procedures regarding the use and treatment of that confidential information are set forth below. C. CONFLICTS OF INTEREST As a fiduciary to the Company's clients, each Employee must avoid conflicts of interest with the Company's clients. Such conflicts of interest could arise if securities are bought or sold for personal accounts in a manner that would significantly compete with the purchase or sale of securities for clients or if securities are bought or sold for client accounts in a manner that is advantageous to such personal accounts. Conflicts could also arise if an Employee would gain some other benefit as a result of directing a client account to purchase or sell a particular security. More information describing such conflicts of interest and the compliance procedures for avoiding such conflicts of interest are set forth below. II. INSIDER TRADING A. INSIDER TRADING DEFINED The term "insider trading" is generally used to refer to (i) a person's use of material, nonpublic information in connection with transactions in securities and (ii) certain communications of material, nonpublic information. The laws concerning insider trading generally prohibit: o The purchase or sale of securities by an insider on the basis of material, nonpublic information; o The purchase or sale of securities by a non-insider on the basis of material nonpublic information where the information was disclosed to the non-insider in violation of an insider's duty to keep the information confidential or was misappropriated; or o The communication of material, nonpublic information in violation of a confidentiality obligation where the information leads to a purchase or sale or securities. 1. WHO IS AN INSIDER? The concept of "insider" is broad. It includes the officers, directors, employees and majority shareholders of a company. In addition, a person can be considered a "temporary insider" of a company if he or she enters into a confidential relationship in the conduct of the company's affairs and, as a result, is given access to company information that is intended to be used solely for company purposes. A temporary insider can include, among others, a company's attorneys, accountants, consultants, investment bankers, commercial bankers and the employees of such organizations. In order for a person to be considered a temporary insider of a particular company, the company must expect that the person receiving the information keep the information confidential and the relationship between the company and the person must at least imply such a duty. Analysts are usually not considered insiders of the companies that they follow, although if an analyst is given confidential information by a company's representative in a manner in which the analyst knows or should know to be a breach of that representative's duties to the company, the analyst may become a temporary insider. 2. WHAT IS MATERIAL INFORMATION? Trading on inside information is not a basis for liability unless the information is "material." "Material" information is generally defined as information that a reasonable investor would likely consider important in making his or her investment decision, or information that is reasonably certain to have a substantial effect on the price of a company's securities. Information that should be considered material includes, but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidity problems and extraordinary management developments. Material information does not have to relate to a company's business, but may be nonetheless significant market information. For example, a reporter for The Wall Street Journal was found criminally liable for disclosing to others the dates on which reports on various companies would appear in The Wall Street Journal and whether or not those reports would be favorable. 3. WHAT IS NONPUBLIC INFORMATION? Information is nonpublic unless it has been effectively communicated to the market place. For information to be considered public, one must be able to point to some fact to show that the information has been generally disseminated to the public. For example, information found in a report filed with the SEC or appearing in Dow Jones, Reuters Economic Services or The Wall Street Journal or another publication of general circulation is considered public. Market rumors are not considered public information. B. PENALTIES FOR INSIDER TRADING Penalties for trading on or communicating material, nonpublic information are severe, both for the individuals involved in the unlawful conduct and for their employers. A person can be subject to some or all of the penalties set forth below even if he or she does not personally benefit from the violation. Penalties include: o civil injunctions; o disgorgement of profits; o jail sentences; o fines for the person who committed the violation of up to three times the profit gained or loss avoided (per violation or illegal trade), whether or not the person actually benefited from the violation; and o fines for the employer or other person controlling the person who committed the violation of up to the greater of $1,000,000 or three times the amount of the profit gained or loss avoided (per violation or illegal trade). In addition, any violation of the procedures set forth herein can be expected to result in serious sanctions by the Company, including censure or dismissal of the persons involved. C. POLICY STATEMENT REGARDING INSIDER TRADING The Company expects that each of its Employees will obey the law and not trade on the entire basis of material, nonpublic information. In addition, the Company discourages its Employees from seeking or knowingly obtaining material nonpublic information. The Company also prohibits each of its Employees from serving as an officer or director or a company having publicly traded securities. D. PROCEDURES TO PREVENT INSIDER TRADING As indicated above, because the Company does not have an investment banking division or affiliate and because the Company prohibits its Employees from serving as an officer or director of a company having publicly traded securities, the Company does not anticipate its Employees routinely being in receipt of material, nonpublic information. Nevertheless, such Employees may from time to time receive such information. If any such Employee receives any information, which may constitute such material, nonpublic information, such Employee (i) should not buy or sell any securities (including option or other securities convertible into or exchangeable for such securities) for a personal account or a client account, (ii) should not communicate such information to any other person (other than a Compliance Officer) and (iii) should discuss promptly such information with a Compliance Officer. Under no circumstances should such information be shared with any persons not employed by the Company including family members and friends. Each Employee contacting an issuer or analyst to obtain information about an issuer should identify himself or herself as associated with the Company and identify the Company as an investment management firm and, after the conversation, making a memorandum memorializing the conversation with the issuer or analyst (including the beginning of the conversation where the Employee identified himself or herself as associated with the Company). III. OTHER CONFIDENTIAL INFORMATION A. CONFIDENTIAL INFORMATION DEFINED As noted above, even if the Company and its Employees do not receive material, nonpublic information (i.e., "inside information"), the Company or its Employees may receive other confidential or sensitive information from or about the Company's clients. Furthermore, the Company's Employees will receive confidential or sensitive information about the Company's affairs. Such confidential or sensitive information may include, among other things: o The name of the client. The Company's client agreements may not permit it to divulge or use its clients' names without their consent. o Financial or other information about the client, such as the client's financial condition or the specific securities held in a specific client's portfolio. o The names of the securities that the Company intends to buy or sell. o Any information privately given to an Employee that, if publicly known, would be likely to (i) affect the price of any security in the portfolio of any client of the Company, (ii) embarrass or harm the client or the Company. Given the breadth of the above, all information that an Employee obtains through the Company should be considered confidential unless that information is specifically available to the public. B. Policy Statement Regarding Use and Treatment of Confidential Information All confidential information, whatever the source, may be used only in the discharge of the Employee's duties with the Company. Confidential information may not be used for any personal purpose, including the purchase or sale of securities for a personal account. C. PROCEDURES REGARDING USE AND TREATMENT OF CONFIDENTIAL INFORMATION The Company encourages each of its Employees to be aware of, and sensitive to, such Employee's treatment of confidential information. Each Employee is encouraged not to discuss such information unless necessary as part of his or her duties and responsibilities with the Company, not to store confidential information in plain view in public areas of the Company's facilities where anyone entering the room may see it, and to remove confidential information from conference rooms, reception areas or other areas where third parties may inadvertently see it. Particular care should be exercised if confidential information must be discussed in public places, such as elevators, taxicabs, trains or airplanes, where such information may be overheard. Under no circumstances may confidential information be shared with any person, including any spouse or other family member, who is not an Employee of the Company. IV. CONFLICTS OF INTEREST INVOLVING TRADING SECURITIES FOR PERSONAL ACCOUNTS A. FIDUCIARY DUTY TO AVOID CONFLICTS OF INTEREST BETWEEN CLIENT ACCOUNTS AND PERSONAL ACCOUNTS As noted above, because the Company and each of its Employees is a fiduciary to the Company's clients, the Company and such Employees must avoid conflicts of interest with the Company's clients. In any situation where the potential for conflict exists, the client's interest must take precedence over personal interests. If there is any doubt, the matter must be resolved in the client's favor. If an Employee of the Company and a client of the Company both trade securities, a conflict of interest could arise. In those case, transactions for client accounts must take precedence over transactions for Personal Accounts (as hereinafter defined). B. PERSONAL ACCOUNT DEFINED 1. Generally. The "Personal Account" of an Employee of the Company shall include each and every account (other than an account for the benefit of any of the Company's clients, including Vista Partners) for which such Employee influences or controls investment decisions. An account for the benefit of any of the following will be presumed to be a "Personal Account" unless the Company agrees in writing with the Employee otherwise. o An Employee. o The spouse of an Employee. o Any child under the age of 22 of an Employee, whether or not residing with the Employee. o Any other dependent of an Employee residing in the same household with the Employee. o Any other account in which an Employee has a beneficial interest. For example, an account for a trust, estate, partnership or closely held corporation in which the Employee has a beneficial interest. An account for Vista Partners shall not be considered a Personal Account. 2. EXEMPTION. If an Employee certifies in writing to a Compliance Officer (or, in the case of a Compliance Officer, to the other Compliance Officer) that (i) the certifying Employee does not influence the investment decisions for any specified account of such spouse, child, family member or dependent person and (ii) the person or persons making the investment decisions for such account do not make such decisions, in whole or in part, upon information that the certifying Employee has provided, a Compliance Officer receiving the certification may, in his discretion, determine that such an account is not an Employee's "Personal Account." C. DEFINITION OF SECURITIES. "Securities" shall have the meaning set forth in Section 2(a)(36) of the Investment Company Act and shall include (a) an equity or debt instrument traded on an exchange, through the Nasdaq Stock Market or through the "pink sheets," (b) options to purchase or sell such equity or debt instrument, (c) index stock or bond group options that include such equity or debt instrument, (d) futures contracts on stock or bond groups that include such equity or debt instrument, and (e) any option on such futures contracts. "Securities" shall also include securities which are not traded on an exchange, through the Nasdaq Stock Market and through the "pink sheets" such as preferred stock acquired in a private placement. The definition of securities shall not include (1) equity securities issued by mutual funds, (2) certificates of deposit, U.S. treasury bills and other U.S. government-issued debt instruments, (3) bankers' acceptances, and (4) commercial paper. D. POLICY STATEMENT REGARDING TRADING FOR PERSONAL ACCOUNTS The Company recognizes that the personal securities transactions of its Employees demand the application of a high code of ethics. Consequently, the Company requires that all personal securities transactions be carried out in a manner that does not endanger the interest of any client or create any conflict of interest between the Company or the Employees, on the one hand, and the client, on the other hand. At the same time, the Company believes that if investment goals are similar for clients and Employees, it is logical and even desirable that there be a common ownership of some securities. The Company also recognizes that the securities it purchases for its clients are highly liquid, publicly traded securities of large capitalization companies, and that the market prices of such securities are not as easily affected as illiquid, thinly traded securities of small capitalization companies. As a result, the Company has adopted the procedures set forth below. E. PROCEDURES REGARDING TRADING FOR PERSONAL ACCOUNTS 1. TRADING-PROCEDURES. Each Employee must follow the procedures described below before buying or selling securities. a. CONFIRM THAT NOT IN RECEIPT OF INSIDE INFORMATION. Each Employee wishing to buy or sell a security for a Personal Account should first confirm that he or she is not in receipt of any material, nonpublic information (i.e., "inside information") that would affect the price of that security. b. DETERMINE IF SECURITY IS PUBLICLY TRADED SECURITY. Each Employee wishing to buy or sell a security for a Personal Account should determine if the security is publicly traded. A security is publicly traded if it is traded on an exchange, through the Nasdaq Stock Market or through the "pink sheets." c. IF SECURITY IS PUBLICLY TRADED, CONFIRM THAT SECURITY IS NOT IN "COOLING-OFF" PERIOD. In order to avoid a conflict between a Personal Account and a client account, no Employee may knowingly engage in the following transactions for his or her Personal Account: o Buy or sell a publicly traded security that the Company has brought for its clients until the 4th calendar day after all purchases for client accounts have been completed. o Buy or sell a publicly traded security that the Company has sold for its clients until the 4th calendar day after all sales for client accounts have been completed. o Buy any security that the Company intends to buy for its clients within 7 calendar days for any reason, including buying to increase clients' positions. o Sell any security that the Company intends to sell for its clients within 7 calendar days for any reason, including selling to decrease clients' positions. o Buy and sell or sell and buy any security for a profit within 60 days except as disclosed to and agreed to by Vanguard. With the exception of the aforementioned prohibited transactions, an Employee may purchase or sell any securities for a Personal Account provided that the Employee preclears the transaction with a Compliance Officer pursuant to the procedures set forth below. In addition, nothing in these policies and procedures is intended to limit the Company's ability to purchase or sell securities in a client's account at the client's instruction, whether or not such purchases and sales occur within the seven calendar days after an Employee has purchased or sold a security for a Personal Account, and provided that, at the time such Employee executed such transaction for a Personal Account, such Employee did not know that the client intended to give such instructions, such Employee shall not have violated these policies and procedures. In addition, nothing in these policies and procedures is intended to limit an Employee's ability to participate in tender offers simultaneously with the Company's clients or to make gifts of securities at anytime. d. SEEK PRE-APPROVAL OF ALL TRADES OF SECURITIES. Any Employee wishing to buy or sell any securities (whether or not such securities are publicly traded) for any Personal Account (except for purchases or sales that are nonvolitional on the part of the Employee, such as purchases made through an automatic dividend reinvestment plan) shall request a Compliance Officer's approval to buy or sell such securities. A Compliance Officer's approval must be granted in writing before the trade may be executed or the transaction completed. A Compliance Officer may grant such approval if, in his good faith judgement, (1) the Company is not in receipt of inside information with respect to the securities or the issuer of the securities, (ii) it is unlikely that the contemplated transaction will have a material effect on the market price of the securities, and (iii) the Personal Account will not benefit from any change in the market price of the securities caused by transactions in client accounts. If an Employee is authorized to purchase securities in a private placement when either the issuer is not a public company or the Company does not own such securities for its clients' accounts, such Employee shall disclose his or her investment whenever the Company subsequently considers purchasing securities in the same issuer. e. EXECUTE TRADE. All trades of publicly traded securities must be executed through the Company's trading desk. F. REPORT OF PERSONAL TRANSACTIONS 1. DISCLOSURE OF PERSONAL SECURITIES HOLDINGS AND TRANSACTIONS. All Employees shall disclose to a Compliance Officer all personal Securities holdings upon commencement of employment. The initial report shall be made on the form attached hereto as Exhibit A. Thereafter, on an annual basis, all Employees must complete the Annual Certification attached hereto as Exhibit B and submit that Certification within 10 days after the end of the year. The Annual Certification must be completed and submitted regardless of whether or not an Employee effected Securities transactions during the year . If any Employee is aware of any transaction involving Securities for a Personal Account that was not executed through the Company's trading desk, the Employee shall report in writing such transaction to a Compliance Officer immediately. In place of separate quarterly reports of Securities transactions, each Employee is required to arrange for the timely submission of duplicate transaction confirmations and account statements as stated below. This arrangement is intended to satisfy the legal obligation of each Employee to report within 10 days after the end of each quarter all Securities transactions effected during that quarter. 2. DUPLICATE COPIES OF TRANSACTIONS. Every Employee shall direct his or her broker to supply to a Compliance Officer on a timely basis duplicate copies of the confirmation of all personal Securities transactions and copies of all periodic statements for all Securities accounts. 3. COMPLIANCE REVIEW AND RETENTION OF DOCUMENTS. On a quarterly basis, a Compliance Officer will monitor the Company's compliance with its insider and conflict of interest policies by reviewing the duplicate copies any transaction confirmations and account statements submitted by the Employees. The Company shall retain all such confirmations and statements as well as the Annual Certifications as part of the books and records required by the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder. 4. ANNUAL CERTIFICATION. Every Employee shall certify annually that he or she has read and understood the Personal Trading Policies and Procedures and complied with the provisions therein. The annual certification shall be made on the form attached hereto as Exhibit B. V. OTHER CONFLICTS OF INTEREST A. FIDUCIARY DUTY TO AVOID CONFLICTS OF INTEREST BETWEEN CLIENT ACCOUNTS AND PERSONAL INTERESTS Conflicts between an Employee's interest and a client's can also arise as a result of an Employee's affiliation with an issuer, where such affiliation may create a reason, other than the client's best interest, for the Employee to cause a client to acquire the securities of such issuer. Such an affiliation may arise, for example, where the Employee owns private securities of a publicly traded company. Such an affiliation might arise from the Employee's relationship with a non-Employee. For example, an Employee's spouse may be an officer, employee, consultant, investment banker, or member of the Board of Directors of the issuer. In order to avoid such conflicts, each Employee having an affiliation, economic or personal interest or relationship with an issuer must disclose such interest or relationship to a Compliance Officer if such Employee learns that the Company is considering making an investment in such issuer. If after disclosure, the Company determines that it has no inside information as a result of the Employee's disclosure of the relationship, and acquires the securities for its clients' accounts, then thereafter the affiliated Employee shall not participate in any discussion or have any communications with the Company or any of its Employees concerning the issuer or the purchase, sale or holding of any of such issuer's securities. B. PROHIBITION ON PURCHASING SECURITIES IN AN INITIAL PUBLIC OFFERING In addition, all Employees are prohibited from buying securities in an initial public offering in order to preclude the possibility of such Employee's unfairly profiting from his or her position with the Company. C. PROHIBITION AGAINST GIFTS In order to preclude the possibility of undue influence, the Company prohibits its Employees from seeking or accepting gift(s) of more than de minimis value from broker-dealers or other persons providing services to the Company and/or its clients. This prohibition shall not apply to occasional meals, theater or sporting event tickets, and holiday gifts having a nominal value. VI. SUMMARY A. IMPORTANCE OF ADHERENCE TO PROCEDURES It is very important that all Employees adhere strictly to the Policies and Procedures set forth herein. Any violations of such policies and procedures may result in serious sanctions, including censure or dismissal from the Company, unwinding of a transaction or, if unwinding is impractical, disgorgement of profits. B. QUESTIONS Any questions regarding the Company's policies or procedures regarding insider trading, confidential information and conflicts of interest should be referred to a Compliance Officer. Exhibit A TUKMAN CAPITAL MANAGEMENT, INC. PERSONAL TRADING/CONFIDENTIAL INFORMATION POLICY STATEMENT AND COMPLIANCE PROCEDURES INITIAL REPORT To the Compliance Officer of Tukman Capital Management, Inc. (the "Company"): 1. I hereby acknowledge receipt of a copy of the Personal Trading Policies and Procedures for the Company. 2. I have read and understand the Personal Trading Policies and Procedures and recognize that I am subject thereto in the capacity of an employee, officer and/or director of the Company. 3. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve a client of the Company, such as any economic relationship between my transactions and securities held or to be acquired by or on behalf of a client. 4. As of the date below I had a direct or indirect beneficial ownership in the following securities: Type of Interest Name of Securities Number of Shares (Direct or Indirect) - ------------------ ---------------- -------------------- Date: _______________ Signature: ___________________________________ Print Name: _________________________________ Exhibit B TUKMAN CAPITAL MANAGEMENT, INC. PERSONAL TRADING/CONFIDENTIAL INFORMATION POLICY STATEMENT AND COMPLIANCE PROCEDURES ANNUAL CERTIFICATION To the Compliance Officer of Tukman Capital Management, Inc. (the "Company"): 1. I have read and understand the Personal Trading Policies and Procedures and recognize that I am subject thereto in my capacity as an employee, officer and/or director of the Company. 2. I hereby certify that, during the year ended December 31, _______, I have complied with the requirements of the Personal Trading Policies and Procedures and during the period covered by this report (check one): ____ no Securities transactions requiring preapproval were effected in any Personal Account (as defined in the Personal Trading Policies and Procedures), or ____ the only Securities transactions that were effected have been timely disclosed to the Compliance Officer through a duplicate transaction confirmation or account statement. 3. Except as noted below, I hereby certify that I have no knowledge of the existence of any personal conflict of interest relationship which may involve a client of the Company, such as any economic relationship between my transactions and securities held or to be acquired by or on behalf of a client of the Company. 4. As of December 31, _______, I had a direct or indirect beneficial ownership in the following Securities:
- ----------------------------- ------------------------ ------------------------------- TYPE OF INTEREST NAME OF SECURITIES NUMBER OF SHARES (DIRECT OR INDIRECT) - ----------------------------- ------------------------ ------------------------------- - ----------------------------- ------------------------ ------------------------------- - ----------------------------- ------------------------ ------------------------------- - ----------------------------- ------------------------ ------------------------------- - ----------------------------- ------------------------ ------------------------------- - ----------------------------- ------------------------ ------------------------------- - ----------------------------- ------------------------ ------------------------------- - ----------------------------- ------------------------ ------------------------------- - ----------------------------- ------------------------ ------------------------------- - ----------------------------- ------------------------ ------------------------------- - ----------------------------- ------------------------ -------------------------------
Date: ________________ Signature: ___________________________________ Print Name: __________________________________ WELLINGTON MANAGEMENT COMPANY, LLP WELLINGTON TRUST COMPANY, NA WELLINGTON MANAGEMENT INTERNATIONAL WELLINGTON INTERNATIONAL MANAGEMENT COMPANY PTE LTD. CODE OF ETHICS - -------------------------------------------------------------------------------- Summary Wellington Management Company, llp and its affiliates have a fiduciary duty to investment company and investment counseling clients which requires each employee to act solely for the benefit of clients. Also, each employee has a duty to act in the best interest of the firm. In addition to the various laws and regulations covering the firm's activities, it is clearly in the firm's best interest as a professional investment advisory organization to avoid potential conflicts of interest or even the appearance of such conflicts with respect to the conduct of the firm's employees. Wellington Management's personal trading and conduct must recognize that the firm's clients always come first, that the firm must avoid any actual or potential abuse of our positions of trust and responsibility, and that the firm must never take inappropriate advantage of its positions. While it is not possible to anticipate all instances of potential conflict, the standard is clear. In light of the firm's professional and legal responsibilities, we believe it is appropriate to restate and periodically distribute the firm's Code of Ethics to all employees. It is Wellington Management's aim to be as flexible as possible in its internal procedures, while simultaneously protecting the organization and its clients from the damage that could arise from a situation involving a real or apparent conflict of interest. While it is not possible to specifically define and prescribe rules regarding all possible cases in which conflicts might arise, this Code of Ethics is designed to set forth the policy regarding employee conduct in those situations in which conflicts are most likely to develop. If an employee has any doubt as to the propriety of any activity, he or she should consult the President or Regulatory Affairs Department. The Code reflects the requirements of United States law, Rule 17j-1 of the Investment Company Act of 1940, as amended on October 29, 1999, as well as the recommendations issued by an industry study group in 1994, which were strongly supported by the SEC. The term "Employee" includes all employees and Partners. - -------------------------------------------------------------------------------- Policy on Personal Securities Transactions Essentially, this policy requires that all personal securities transactions (including acquisitions or dispositions other than through a purchase or sale) by all Employees must be cleared prior to execution. The only exceptions to this policy of prior clearance are noted below. - -------------------------------------------------------------------------------- Definition of "Personal Securities Transactions" The following transactions by Employees are considered "personal" under applicable SEC rules and therefore subject to this statement of policy: 1. Transactions for an Employee's own account, including IRA's. 2. Transactions for an account in which an Employee has indirect beneficial ownership, unless the Employee has no direct or indirect influence or control over the account. Accounts involving family (including husband, wife, minor children or other dependent relatives), or accounts in which an Employee has a beneficial interest (such as a trust of which the Employee is an income or principal beneficiary) are included within the meaning of "indirect beneficial interest". If an Employee has a substantial measure of influence or control over an account, but neither the Employee nor the Employee's family has any direct or indirect beneficial interest (e.g., a trust for which the Employee is a trustee but not a direct or indirect beneficiary), the rules relating to personal securities transactions are not considered to be directly applicable. Therefore, prior clearance and subsequent reporting of such transactions are not required. In all transactions involving such an account an Employee should, however, conform to the spirit of these rules and avoid any activity which might appear to conflict with the investment company or counseling clients or with respect to the Employee's position within Wellington Management. In this regard, please note "Other Conflicts of Interest", found later in this Code of Ethics, which does apply to such situations. - -------------------------------------------------------------------------------- Preclearance Required EXCEPT AS SPECIFICALLY EXEMPTED IN THIS SECTION, ALL EMPLOYEES MUST CLEAR PERSONAL SECURITIES TRANSACTIONS PRIOR TO EXECUTION. This includes bonds, stocks (including closed end funds), convertibles, preferreds, options on securities, warrants, rights, etc. for domestic and foreign securities, whether publicly traded or privately placed. The only exceptions to this requirement are automatic dividend reinvestment and stock purchase plan acquisitions, broad-based stock index and U.S. government securities futures and options on such futures, transactions in open-end mutual funds, U.S. Government securities, commercial paper, or non-volitional transactions. Non-volitional transactions include gifts to an Employee over which the Employee has no control of the timing or transactions which result from corporate action applicable to all similar security holders (such as splits, tender offers, mergers, stock dividends, etc.). Please note, however, that most of these transactions must be reported even though they do not have to be precleared. See the following section on reporting obligations. Clearance for transactions must be obtained by contacting the Director of Global Equity Trading or those personnel designated by him for this purpose. Requests for clearance and approval for transactions may be communicated orally or via email. The Trading Department will maintain a log of all requests for approval as coded confidential records of the firm. Private placements (including both securities and partnership interests) are subject to special clearance by the Director of Regulatory Affairs, Director of Enterprise Risk Management or the General Counsel, and the clearance will remain in effect for a reasonable period thereafter, not to exceed 90 days. CLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS FOR PUBLICLY TRADED SECURITIES WILL BE IN EFFECT FOR ONE TRADING DAY ONLY. THIS "ONE TRADING DAY" POLICY IS INTERPRETED AS FOLLOWS: O IF CLEARANCE IS GRANTED AT A TIME WHEN THE PRINCIPAL MARKET IN WHICH THE SECURITY TRADES IS OPEN, CLEARANCE IS EFFECTIVE FOR THE REMAINDER OF THAT TRADING DAY UNTIL THE OPENING OF THAT MARKET ON THE FOLLOWING DAY. O IF CLEARANCE IS GRANTED AT A TIME WHEN THE PRINCIPAL MARKET IN WHICH THE SECURITY TRADES IS CLOSED, CLEARANCE IS EFFECTIVE FOR THE NEXT TRADING DAY UNTIL THE OPENING OF THAT MARKET ON THE FOLLOWING DAY. - -------------------------------------------------------------------------------- Filing of Reports Records of personal securities transactions by Employees will be maintained. All Employees are subject to the following reporting requirements: 1 Duplicate Brokerage Confirmations All Employees must require their securities brokers to send duplicate confirmations of their securities transactions to the Regulatory Affairs Department. Brokerage firms are accustomed to providing this service. Please contact Regulatory Affairs to obtain a form letter to request this service. Each employee must return to the Regulatory Affairs Department a completed form for each brokerage account that is used for PERSONAL SECURITIES TRANSACTIONS OF THE EMPLOYEE. EMPLOYEES SHOULD NOT send the completed forms to their brokers directly. The form must be completed and returned to the Regulatory Affairs Department prior to any transactions being placed with the broker. The Regulatory Affairs Department will process the request in order to assure delivery of the confirms directly to the Department and to preserve the confidentiality of this information. When possible, the transaction confirmation filing requirement will be satisfied by electronic filings from securities depositories. 2 Filing of Quarterly Report of all "Personal Securities Transactions" SEC rules require that a quarterly record of all personal securities transactions submitted by each person subject to the Code's requirements and that this record be available for inspection. To comply with these rules, every Employee must file a quarterly personal securities transaction report within 10 calendar days after the end of each calendar quarter. Reports are filed electronically utilizing the firm's proprietary Personal Securities Transaction Reporting System (PSTRS) accessible to all Employees via the Wellington Management Intranet. At the end of each calendar quarter, Employees will be notified of the filing requirement. Employees are responsible for submitting the quarterly report within the deadline established in the notice. Transactions during the quarter indicated on brokerage confirmations or electronic filings are displayed on the Employee's reporting screen and must be affirmed if they are accurate. Holdings not acquired through a broker submitting confirmations must be entered manually. All Employees are required to submit a quarterly report, even if there were no reportable transactions during the quarter. Employees must also provide information on any new brokerage account established during the quarter including the name of the broker, dealer or bank and the date the account was established. IMPORTANT NOTE: The quarterly report must include the required information for all "personal securities transactions" as defined above, except transactions in open-end mutual funds, money market securities, U.S. Government securities, and futures and options on futures on U.S. government securities. Non-volitional transactions and those resulting from corporate actions must also be reported even though preclearance is not required and the nature of the transaction must be clearly specified in the report. 3 Certification of Compliance As part of the quarterly reporting process on PSTRS, Employees are required to confirm their compliance with the provisions of this Code of Ethics. 4 Filing of Personal Annually, all Employees must file a schedule indicating their personal securities holdings as of December 31 of each year by the following January 30. SEC Rules require that this report include the title, number of shares and principal amount of each security held in an Employee's personal account, and the name of any broker, dealer or bank with whom the Employee maintains an account. "Securities" for purposes of this report are those which must be reported as indicated in the prior paragraph. Newly hired Employees are required to file a holding report within ten (10) days of joining the firm. Employees may indicate securities held in a brokerage account by attaching an account statement, but are not required to do so, since these statements contain additional information not required by the holding report. 5 Review of Reports All reports filed in accordance with this section will be maintained and kept confidential by the Regulatory Affairs Department. Reports will be reviewed by the Director of Regulatory Affairs or personnel designated by her for this purpose. - -------------------------------------------------------------------------------- Restrictions on "Personal Securities Transactions" While all personal securities transactions must be cleared prior to execution, the following guidelines indicate which transactions will be prohibited, discouraged, or subject to nearly automatic clearance. The clearance of personal securities transactions may also depend upon other circumstances, including the timing of the proposed transaction relative to transactions by our investment counseling or investment company clients; the nature of the securities and the parties involved in the transaction; and the percentage of securities involved in the transaction relative to ownership by clients. The word "clients" refers collectively to investment company clients and counseling clients. Employees are expected to be particularly sensitive to meeting the spirit as well as the letter of these restrictions. Please note that these restrictions apply in the case of debt securities to the specific issue and in the case of common stock, not only to the common stock, but to any equity-related security of the same issuer including preferred stock, options, warrants, and convertible bonds. Also, a gift or transfer from you (an Employee) to a third party shall be subject to these restrictions, unless the donee or transferee represents that he or she has no present intention of selling the donated security. 1 No Employee may engage in personal transactions involving any securities which are: o being bought or sold on behalf of clients until one trading day after such buying or selling is completed or canceled. In addition, no Portfolio Manager may engage in a personal transaction involving any security for 7 days prior to, and 7 days following, a transaction in the same security for a client account managed by that Portfolio Manager without a special exemption. See "Exemptive Procedures" below. Portfolio Managers include all designated portfolio managers and others who have direct authority to make investment decisions to buy or sell securities, such as investment team members and analysts involved in Research Equity portfolios. All Employees who are considered Portfolio Managers will be so notified by the Regulatory Affairs Department. o the subject of a new or changed action recommendation from a research analyst until 10 business days following the issuance of such recommendation; o the subject of a reiterated but unchanged recommendation from a research analyst until 2 business days following reissuance of the recommendation o actively contemplated for transactions on behalf of clients, even though no buy or sell orders have been placed. This restriction applies from the moment that an Employee has been informed in any fashion that any Portfolio Manager intends to purchase or sell a specific security. This is a particularly sensitive area and one in which each Employee must exercise caution to avoid actions which, to his or her knowledge, are in conflict or in competition with the interests of clients. 2 The Code of Ethics strongly discourages short term trading by Employees. In addition, no Employee may take a "short term trading" profit in a security, which means the sale of a security at a gain (or closing of a short position at a gain) within 60 days of its purchase, without a special exemption. See "Exemptive Procedures". The 60 day prohibition does not apply to transactions resulting in a loss, nor to futures or options on futures on broad-based securities indexes or U.S. government securities. 3 No Employee engaged in equity or bond trading may engage in personal transactions involving any equity securities of any company whose primary business is that of a broker/dealer. 4 Subject to preclearance, Employees may engage in short sales, options, and margin transactions, but such transactions are strongly discouraged, particularly due to the 60 day short term profit-taking prohibition. Any Employee engaging in such transactions should also recognize the danger of being "frozen" or subject to a forced close out because of the general restrictions which apply to personal transactions as noted above. In specific case of hardship an exception may be granted by the Director of Regulatory Affairs or her designee upon approval of the Ethics Committee with respect to an otherwise "frozen" transaction. 5 No Employee may engage in personal transactions involving the purchase of any security on an initial public offering. This restriction also includes new issues resulting from spin-offs, municipal securities and thrift conversions, although in limited cases the purchase of such securities in an offering may be approved by the Director of Regulatory Affairs or her designee upon determining that approval would not violate any policy reflected in this Code. This restriction does not apply to open-end mutual funds, U. S. government issues or money market investments. 6 EMPLOYEES MAY NOT PURCHASE SECURITIES IN PRIVATE PLACEMENTS UNLESS APPROVAL OF THE DIRECTOR OF REGULATORY AFFAIRS, DIRECTOR OF ENTERPRISE RISK MANAGEMENT OR THE GENERAL COUNSEL HAS BEEN OBTAINED. This approval will be based upon a determination that the investment opportunity need not be reserved for clients, that the Employee is not being offered the investment opportunity due to his or her employment with Wellington Management and other relevant factors on a case-by-case basis. If the Employee has portfolio management or securities analysis responsibilities and is granted approval to purchase a private placement, he or she must disclose the privately placed holding later if asked to evaluate the issuer of the security. An independent review of the Employee's analytical work or decision to purchase the security for a client account will then be performed by another investment professional with no personal interest in the transaction. Gifts and Other Sensitive Payments Employees should not seek, accept or offer any gifts or favors of more than minimal value or any preferential treatment in dealings with any client, broker/dealer, portfolio company, financial institution or any other organization WITH WHOM THE FIRM TRANSACTS business. Occasional participation in lunches, dinners, cocktail parties, sporting activities or similar gatherings conducted for business purposes are not prohibited. However, for both the Employee's protection and that of the firm it is extremely important that even the appearance of a possible conflict of interest be avoided. Extreme caution is to be exercised in any instance in which business related travel and lodgings are paid for other than by Wellington Management, and prior approval must be obtained from the Regulatory Affairs Department. Any question as to the propriety of such situations should be discussed with the Regulatory Affairs Department and any incident in which an Employee is encouraged to violate these provisions should be reported immediately. An explanation of all extraordinary travel, lodging and related meals and entertainment is to be reported in a brief memorandum to the Director of Regulatory Affairs. Employees must not participate individually or on behalf of the firm, a subsidiary, or any client, directly or indirectly, in any of the following transactions: 1 Use of the firm's funds for political purposes. 2 Payment or receipt of bribes, kickbacks, or payment or receipt of any other amount with an understanding that part or all of such amount will be refunded or delivered to a third party in violation of any law applicable to the transaction. 3 Payments to government officials or employees (other than disbursements in the ordinary course of business for such legal purposes as payment of taxes). 4 Payment of compensation or fees in a manner the purpose of which is to assist the recipient to evade taxes, federal or state law, or other valid charges or restrictions applicable to such payment. 5 Use of the funds or assets of the firm or any subsidiary for any other unlawful or improper purpose. - -------------------------------------------------------------------------------- Other Conflicts of Interest Employees should also be aware that areas other than personal securities transactions or gifts and sensitive payments may involve conflicts of interest. The following should be regarded as examples of situations involving real or potential conflicts rather than a complete list of situations to avoid. "Inside Information" Specific reference is made to the firm's policy on the use of "inside information" which applies to personal securities transactions as well as to client transactions. Use of Information Information acquired in connection with employment by the organization may not be used in any way which might be contrary to or in competition with the interests of clients. Employees are reminded that certain clients have specifically required their relationship with us to be treated confidentially. Disclosure of Information Information regarding actual or contemplated investment decisions, research priorities or client interests should not be disclosed to persons outside our organization and in no way can be used for personal gain. Outside Activities All outside relationships such as directorships or trusteeships of any kind or membership in investment organizations (e.g., an investment club) must be cleared by the Director of Regulatory Affairs prior to the acceptance of such a position. As a general matter, directorships in unaffiliated public companies or companies which may reasonably be expected to become public companies will not be authorized because of the potential for conflicts which may impede our freedom to act in the best interests of clients. Service with charitable organizations generally will be authorized, subject to considerations related to time required during working hours and use of proprietary information. Exemptive Procedure The Director of Regulatory Affairs, the Director of Enterprise Risk Management, the General Counsel or the Ethics Committee can grant exemptions from the personal trading restrictions in this Code upon determining that the transaction for which an exemption is requested would not result in a conflict of interest or violate any other policy embodied in this Code. Factors to be considered may include: the size and holding period of the Employee's position in the security, the market capitalization of the issuer, the liquidity of the security, the reason for the Employee's requested transaction, the amount and timing of client trading in the same or a related security, and other relevant factors. Any Employee wishing an exemption should submit a written request to the Director of Regulatory Affairs setting forth the pertinent facts and reasons why the employee believes that the exemption should be granted. Employees are cautioned that exemptions are intended to be exceptions, and repetitive exemptive applications by an Employee will not be well received. Records of the approval of exemptions and the reasons for granting exemptions will be maintained by the Regulatory Affairs Department. - -------------------------------------------------------------------------------- Compliance with The Code of Ethics Adherence to the Code of Ethics is considered a basic condition of employment with our organization. The Ethics Committee monitors compliance with the Code and reviews violations of the Code to determine what action or sanctions are appropriate. Violations of the provisions regarding personal trading will presumptively be subject to being reversed in the case of a violative purchase, and to disgorgement of any profit realized from the position (net of transaction costs and capital gains taxes payable with respect to the transaction) by payment of the profit to any client disadvantaged by the transaction, or to a charitable organization, as determined by the Ethics Committee, unless the Employee establishes to the satisfaction of the Ethics Committee that under the particular circumstances disgorgement would be an unreasonable remedy for the violation. Violations of the Code of Ethics may also adversely affect an Employee's career with Wellington Management with respect to such matters as compensation and advancement. Employees must recognize that a serious violation of the Code of Ethics or related policies may result, at a minimum, in immediate dismissal. Since many provisions of the Code of Ethics also reflect provisions of the U.S. securities laws, Employees should be aware that violations could also lead to regulatory enforcement action resulting in suspension or expulsion from the securities business, fines and penalties, and imprisonment. Again, Wellington Management would like to emphasize the importance of obtaining prior clearance of all personal securities transactions, avoiding prohibited transactions, filing all required reports promptly and avoiding other situations which might involve even an apparent conflict of interest. Questions regarding interpretation of this policy or questions related to specific situations should be directed to the Regulatory Affairs Department or Ethics Committee. Revised: March 1, 2000 THE VANGUARD GROUP, INC. ------------------------ CODE OF ETHICS -------------- SECTION 1: BACKGROUND This Code of Ethics has been approved and adopted by the Board of Directors of The Vanguard Group, Inc. ("Vanguard") and the Boards of Trustees of each of the Vanguard funds in compliance with Rule 17j-1 under the Investment Company Act of 1940. The Code has been amended and restated effective as of May 1, 1999. Except as otherwise provided, the Code applies to all "Vanguard personnel," which term includes all employees, officers, Directors and Trustees of Vanguard and the Vanguard funds. The Code also contains provisions which apply to the investment advisers to the Vanguard funds (see section 11). SECTION 2: STATEMENT OF GENERAL FIDUCIARY STANDARDS This Code of Ethics is based on the overriding principle that Vanguard personnel act as fiduciaries for shareholders' investments in the Vanguard funds. Accordingly, Vanguard personnel must conduct their activities at all times in accordance with the following standards: a) SHAREHOLDERS' INTERESTS COME FIRST. In the course of fulfilling their duties and responsibilities to Vanguard fund shareholders, Vanguard personnel must at all times place the interests of Vanguard fund shareholders first. In particular, Vanguard personnel must avoid serving their own personal interests ahead of the interests of Vanguard fund shareholders. b) CONFLICTS OF INTEREST MUST BE AVOIDED. Vanguard personnel must avoid any situation involving an actual or potential conflict of interest or possible impropriety with respect to their duties and responsibilities to Vanguard fund shareholders. c) COMPROMISING SITUATIONS MUST BE AVOIDED. Vanguard personnel must not take advantage of their position of trust and responsibility at Vanguard. Vanguard personnel must avoid any situation that might compromise or call into question their exercise of full independent judgment in the best interests of Vanguard fund shareholders. All activities of Vanguard personnel should be guided by and adhere to these fiduciary standards. The remainder of this Code sets forth specific rules and procedures which are consistent with these fiduciary standards. However, all activities by Vanguard personnel are required to conform with these fiduciary standards regardless of whether the activity is specifically covered in this Code. SECTION 3: DUTY OF CONFIDENTIALITY Vanguard personnel must keep confidential at all times any nonpublic information they may obtain in the course of their employment at Vanguard. This information includes but is not limited to: 1) information on the vanguard funds, including recent or impending securities transactions by the funds, activities of the funds' advisers, offerings of new funds, and closings of funds; 2) information on Vanguard fund shareholders and prospective shareholders, including their identities, investments, and account transactions; 3) information on other vanguard personnel, including their pay, benefits, position level, and performance ratings; and 4) information on Vanguard business activities, including new services, products, technologies, and business initiatives. Vanguard personnel have the highest fiduciary obligation not to reveal confidential Vanguard information to any party that does not have a clear and compelling need to know such information. SECTION 4: GIFT POLICY Vanguard personnel are prohibited from seeking or accepting gifts of material value from any person or entity, including any Vanguard fund shareholder or Vanguard client, when such gift is in relation to doing business with Vanguard. In certain cases, Vanguard PERSONNEL MAY ACCEPT GIFTS OF DE MINIMIS value (as determined in accordance with guidelines set forth in Vanguard's Human Resources Policy Manual) but only if they obtain the approval of a Vanguard officer. SECTION 5: OUTSIDE ACTIVITIES a) PROHIBITIONS ON SECONDARY EMPLOYMENT. Vanguard employees are prohibited from working for any business or enterprise in the financial services industry that competes with Vanguard. In addition, Vanguard employees are prohibited from working for any organization that could possibly benefit from the employee's knowledge of confidential Vanguard information, such as new Vanguard services and technologies. Beyond these prohibitions, Vanguard employees may accept secondary employment, but only with prior approval from the Vanguard Compliance Department. Vanguard officers are prohibited from accepting or serving in any form of secondary employment unless they have received approval from a Vanguard Managing Director or the Vanguard Chairman and Chief Executive Officer. b) PROHIBITION ON SERVICE AS DIRECTOR OR PUBLIC OFFICIAL. Vanguard officers and employees are prohibited from serving on the board of directors of any publicly traded company or in an official capacity for any federal, state, or local government (or governmental agency or instrumentality) without prior approval from the Vanguard Compliance Department. c) PROHIBITION ON MISUSE OF VANGUARD TIME OR PROPERTY. Vanguard personnel are prohibited from using Vanguard time, equipment, services, personnel or property for any purposes other than the performance of their duties and responsibilities at Vanguard. SECTION 6: GENERAL PROHIBITIONS ON TRADING a) TRADING ON KNOWLEDGE OF VANGUARD FUNDS ACTIVITIES. All Vanguard personnel are prohibited from taking personal advantage of their knowledge of recent or impending securities activities of the Vanguard funds or the funds' investment advisers. In particular, Vanguard personnel are prohibited from purchasing or selling, directly or indirectly, any security when they have actual knowledge that the security is being purchased or sold, or considered for purchase or sale, by a Vanguard fund. This prohibition applies to all securities in which the person has acquired or will acquire "beneficial ownership." For these purposes, a person is considered to have beneficial ownership in all securities over which the person enjoys economic benefits substantially equivalent to ownership (for example, securities held in trust for the person's benefit), regardless of who is the registered owner. Under this Code of Ethics, Vanguard personnel are considered to have beneficial ownership of all securities owned by their spouse or minor children. b) VANGUARD INSIDER TRADING POLICY. All Vanguard personnel are subject to Vanguard's Insider Trading Policy, which is considered an integral part of this Code of Ethics. Vanguard's Insider Trading Policy prohibits Vanguard personnel from buying or selling any security while in the possession of material nonpublic information about the issuer of the security. The policy also prohibits Vanguard personnel from communicating to third parties any material nonpublic information about any security or issuer of securities. Any violation of Vanguard's Insider Trading Policy may result in penalties which could include termination of employment with Vanguard. SECTION 7: ADDITIONAL TRADING RESTRICTIONS FOR ACCESS PERSONS a) APPLICATION. The restrictions of this section 7 apply to all Vanguard access persons. For purposes of the Code of Ethics, "access persons" include: 1) any Director or Trustee of Vanguard or a Vanguard fund, excluding disinterested Directors and Trustees (i.e., any Director or Trustee who is not an "interested person" of a Vanguard fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940); 2) any officer of Vanguard or a Vanguard fund; and 3) any employee of Vanguard or a Vanguard fund who in the course of his or her regular duties participates in the selection of a Vanguard fund's securities or who works in a Vanguard department or unit that has access to information regarding a Vanguard fund's impending purchases or sales of securities. The Vanguard Compliance Department will notify all Vanguard personnel who qualify as access persons of their duties and responsibilities under this Code of Ethics. The restrictions of this section 7 apply to all transactions in which a Vanguard access person has or will acquire beneficial ownership (see section 6a) of a security, including transactions by a spouse or minor child. However, the restrictions do not apply to transactions involving: (i) direct obligations of the Government of the United States; (ii) high quality short-term debt instruments, including bankers' acceptances, bank certificates of deposit, commercial paper, and repurchase agreements; and (iii) shares of registered open-end investment companies (including shares of any Vanguard fund). In addition, the restrictions do not apply to transactions in accounts over which the access person has no direct or indirect control or influence. b) GENERAL RESTRICTIONS FOR ACCESS PERSONS. Vanguard access persons are subject to the following restrictions with respect to their securities transactions: 1) PRE-CLEARANCE OF SECURITIES TRANSACTIONS. Vanguard access persons must receive approval from the Vanguard Compliance Department before purchasing or selling any securities. The Vanguard Compliance Department will notify Vanguard access persons if their proposed securities transactions are permitted under this Code of Ethics. 2) TRADING THROUGH VANGUARD BROKERAGE SERVICES. Vanguard access persons must conduct all their securities transactions through Vanguard Brokerage Services. Vanguard Brokerage Services will send a confirmation notice of any purchase or sale of securities by a Vanguard access person to the Vanguard Compliance Department. 3) PROHIBITION ON INITIAL PUBLIC OFFERINGS. Vanguard access persons are prohibited from acquiring securities in an initial public offering. 4) PROHIBITION ON PRIVATE PLACEMENTS. Vanguard access persons are prohibited from acquiring securities in a private placement without prior approval from the Vanguard Compliance Department. In the event an access person receives approval to purchase securities in a private placement, the access person must disclose that investment if he or she plays any part in a Vanguard fund's later consideration of an investment in the issuer. 5) PROHIBITION ON OPTIONS. Vanguard access persons are prohibited from acquiring or selling any option on any security. 6) PROHIBITION ON SHORT-SELLING. Vanguard access persons are prohibited from selling any security that the access person does not own or otherwise engaging in "short-selling" activities. 7) PROHIBITION ON SHORT-TERM TRADING PROFITS. Vanguard access persons are prohibited from profiting in the purchase and sale, or sale and purchase, of the same (or related) securities within 60 calendar days. In the event that an access person realizes profits on such short-term trades, the access person must relinquish such profits to The Vanguard Group Foundation. c) BLACKOUT RESTRICTIONS FOR ACCESS PERSONS. All Vanguard access persons are subject to the following restrictions when their purchases and sales of securities coincide with trades by the Vanguard funds: 1) PURCHASES AND SALES WITHIN THREE DAYS FOLLOWING A FUND TRADE. Vanguard access persons are prohibited from purchasing or selling any security within three calendar days after a Vanguard fund has traded in the same (or a related) security. In the event that an access person makes a prohibited purchase or sale within the three-day period, the access person must unwind the transaction and relinquish any gain from the transaction to The Vanguard Group Foundation. 2) PURCHASES WITHIN SEVEN DAYS BEFORE A FUND PURCHASE. A Vanguard access person who purchases a security within seven calendar days before a Vanguard fund purchases the same (or a related) security is prohibited from selling the security for a period of six months following the fund's trade. In the event that an access person makes a prohibited sale within the six-month period, the access person must relinquish to The Vanguard Group Foundation any gain from the transaction. 3) SALES WITHIN SEVEN DAYS BEFORE A FUND SALE. A Vanguard access person who sells a security within seven days before a Vanguard fund sells the same (or a related) security must relinquish to The Vanguard Group Foundation the difference between the access person's sale price and the Vanguard fund's sale price (assuming the access person's sale price is higher). 4) RESTRICTIONS NOT APPLICABLE TO TRADES BY VANGUARD INDEX FUNDS. The restrictions of this section 7c do not apply to purchases and sales of securities by Vanguard access persons which would otherwise violate section 7c solely because the transactions coincide with trades by any Vanguard index funds. SECTION 8: ADDITIONAL TRADING RESTRICTIONS FOR INSTITUTIONAL CLIENT CONTACTS a) APPLICATION. The restrictions of this section 8 apply to all Vanguard Institutional client contacts. For purposes of the Code of Ethics, an "Institutional client contact" includes any Vanguard employee who works in a department or unit at Vanguard that has significant levels of interaction or dealings with the management of clients of Vanguard's Institutional Investor Group. The Vanguard Compliance Department will notify Vanguard employees who qualify as Institutional client contacts of the restrictions of this Section 8. b) PROHIBITION ON TRADING SECURITIES OF INSTITUTIONAL CLIENTS. Vanguard Institutional client contacts are prohibited from acquiring securities issued by clients of the Vanguard Institutional Investor Group (including any options or futures contracts based on such securities). In the event that any individual who becomes subject to this prohibition already owns securities issued by Institutional clients, the individual will be prohibited from disposing of those securities without prior approval from the Vanguard Compliance Department. The restrictions of this section 8 apply to all transactions in which Institutional client contacts have acquired or would acquire beneficial ownership (see section 6a) of a security, including transactions by a spouse or minor child. However, the restrictions do not apply to transactions in any account over which an individual does not possess any direct or indirect control or influence. The Vanguard Compliance Department will maintain a list of the Institutional clients to which the prohibitions of this section 8 apply. The Vanguard Compliance Department may waive the prohibition on acquiring securities of Institutional clients in appropriate cases (including, for example, cases in which an individual acquires securities as part of an inheritance or through an employer-sponsored employee benefits or compensation program). SECTION 9: COMPLIANCE PROCEDURES a) APPLICATION. The requirements of this section 9 apply to all Vanguard personnel other than disinterested Directors and Trustees (see section 7a). The requirements apply to all transactions in which Vanguard personnel have acquired or would acquire beneficial ownership (see section 6a) of a security, including transactions by a spouse or minor child. However, the requirements do not apply to transactions involving: (i) direct obligations of the Government of the United States; (ii) high quality short-term debt instruments, including bankers' acceptances, bank certificates of deposit, commercial paper, and repurchase agreements; and (iii) shares of registered open-end investment companies (including shares of any Vanguard fund). In addition, the requirements do not apply to securities acquired for accounts over which the person has no direct or indirect control or influence. b) DISCLOSURE OF PERSONAL HOLDINGS. All Vanguard personnel must disclose their personal securities holdings to the Vanguard Compliance Department upon commencement of employment with Vanguard. These disclosures must identify the title, number of shares, and principal amount with respect to each security holding. c) RECORDS OF SECURITIES TRANSACTIONS. All Vanguard personnel must notify the Vanguard Compliance Department if they have opened or intend to open a brokerage account. Vanguard personnel must direct their brokers to supply the Vanguard Compliance Department with duplicate confirmation statements of their securities transactions and copies of all periodic statements for their brokerage accounts. d) CERTIFICATION OF COMPLIANCE. All Vanguard personnel must certify annually to the Vanguard Compliance Department that: (i) they have read and understand this Code of Ethics; (ii) they have complied with all requirements of the Code of Ethics; and (3) they have reported all transactions required to be reported under the Code of Ethics. SECTION 10: REQUIRED REPORTS BY DISINTERESTED DIRECTORS AND TRUSTEES Disinterested Directors and Trustees (see section 7a) are required to report their securities transactions to the Vanguard Compliance Department only in cases where the Director or Trustee knew or should have known during the 15-day period immediately preceding or following the date of the transaction that the security had been purchased or sold, or was being considered for purchase or sale, by a Vanguard fund. SECTION 11: APPLICATION TO INVESTMENT ADVISERS a) ADOPTION OF CODE OF ETHICS. Each investment adviser to a Vanguard fund must adopt a code of ethics in compliance with Rule 17j-1 and provide the Vanguard Compliance Department with a copy of the code of ethics and any subsequent amendments. Each investment adviser is responsible for enforcing its code of ethics and reporting to the Vanguard Compliance Department on a timely basis any violations of the code of ethics and resulting sanctions. b) PREPARATION OF ANNUAL REPORTS. Each investment adviser to a Vanguard fund must prepare an annual report on its code of ethics for review by the Board of Trustees of the Vanguard fund. This report must contain the following: 1) a description of any issues arising under the adviser's code of ethics including, but not limited to, information about any violations of the code, sanctions imposed in response to such violations, changes made to the code's provisions or procedures, and any recommended changes to the code; and 2) a certification that the investment adviser has adopted such procedures as are reasonably necessary to prevent access persons from violating the code of ethics. SECTION 12: REVIEW BY BOARDS OF DIRECTORS AND TRUSTEES a) REVIEW OF INVESTMENT ADVISERS' CODE OF ETHICS. Prior to retaining the services of any investment adviser for a Vanguard fund, the Board of Trustees of the Vanguard fund must review the code of ethics adopted by the investment adviser pursuant to Rule 17j-1 under the Investment Company Act of 1940. The Board of Trustees must receive a certification from the investment adviser that the adviser has adopted such procedures as are reasonably necessary to prevent access persons from violating the adviser's code of ethics. A majority of the Trustees of the Vanguard fund, including a majority of the disinterested Trustees of the Fund, must determine whether the adviser's code of ethics contains such provisions as are reasonably necessary to prevent access persons from engaging in any act, practice, or course of conduct prohibited by the anti-fraud provisions of Rule 17j-1. b) REVIEW OF VANGUARD ANNUAL REPORTS. The Vanguard Compliance Department must prepare an annual report on this Code of Ethics for review by the Board of Directors of Vanguard and the Boards of Trustees of the Vanguard funds. The report must contain the following: 1) a description of issues arising under the Code of Ethics since the last report including, but not limited to, information about any violations of the Code, sanctions imposed in response to such violations, changes made to the Code's provisions or procedures, and any recommended changes to the Code; and 2) a certification that Vanguard and the Vanguard Funds have adopted such procedures as are reasonably necessary to prevent access persons from violating the Code of Ethics. SECTION 13: SANCTIONS In the event of any violation of this Code of Ethics, Vanguard senior management will impose such sanctions as deemed necessary and appropriate under the circumstances and in the best interests of Vanguard fund shareholders. In the case of any violations by Vanguard employees, the range of sanctions could include a letter of censure, suspension of employment without pay, or permanent termination of employment. SECTION 14: RETENTION OF RECORDS Vanguard must maintain all records required by Rule 17j-1 including: (i) copies of this Code of Ethics and the codes of ethics of all investment advisers to the Vanguard funds; (ii) records of any violations of the codes of ethics and actions taken as a result of the violations; (iii) copies of all certifications made by Vanguard personnel pursuant to section 9d; (iv) lists of all Vanguard personnel who are, or within the past five years have been, access persons subject to the trading restrictions of section 8 and lists of the Vanguard compliance personnel responsible for monitoring compliance with those trading restrictions; and (v) copies of the annual reports to the Boards of Directors and Trustees pursuant to section 12. -----END PRIVACY-ENHANCED MESSAGE-----