-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Y+TbNOETGKgBhfDmPrjZ6KCOyJOAMy2N8q9Bon94CckP5x8hhNZt7lr8FxktphTa v68KGMI4+2vIa6+WVvcjzA== 0000950109-95-000449.txt : 19950224 0000950109-95-000449.hdr.sgml : 19950224 ACCESSION NUMBER: 0000950109-95-000449 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19950223 EFFECTIVENESS DATE: 19950223 SROS: NONE 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: 1933 Act SEC FILE NUMBER: 002-14336 FILM NUMBER: 95514558 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-00834 FILM NUMBER: 95514559 BUSINESS ADDRESS: STREET 1: PO BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 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 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. [X] [X] POST-EFFECTIVE AMENDMENT NO. 86 AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 AMENDMENT NO. 89 VANGUARD/WINDSOR FUNDS, INC. (FORMERLY, THE WINDSOR FUNDS, INC.) (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) P.O. BOX 2600, VALLEY FORGE, PA 19482 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER (610) 669-1000 RAYMOND J. KLAPINSKY, ESQUIRE P.O. BOX 876 VALLEY FORGE, PA 19482 APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. IT IS PROPOSED THAT THIS REGISTRATION STATEMENT BECOME EFFECTIVE ON FEBRUARY 28, 1995 PURSUANT TO PARAGRAPH (B) OF RULE 485. REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS RULE 24(F)(2) NOTICE FOR THE YEAR ENDED OCTOBER 31, 1994, ON DECEMBER 21, 1994. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- VANGUARD/WINDSOR FUNDS, INC. CROSS REFERENCE SHEET
FORM N-1A ITEM NUMBER LOCATION IN PROSPECTUS Item 1. Cover Page..................... Cover Page Item 2. Synopsis....................... Highlights Item 3. Condensed Financial Information.................... Financial Highlights Item 4. General Description of Registrant..................... Investment Objective; Investment Limitations; Investment Policies; General Information Item 5. Management of the Fund......... Directors and Officers of the Fund; Management of the Fund Item 6. Capital Stock and Other Securities..................... Opening an Account and Purchasing Shares; Selling Your Shares; The Fund's Share Price; Dividends, Capital Gains and Taxes; General Information Item 7. Purchase of Securities Being Offered........................ Cover Page; Opening an Account and Purchasing Shares Item 8. Redemption or Repurchase....... Selling Your Shares Item 9. Pending Legal Proceedings...... Not Applicable FORM N-1A LOCATION IN STATEMENT ITEM NUMBER OF ADDITIONAL INFORMATION Item 10. Cover Page..................... Cover Page Item 11. Table of Contents.............. Cover Page Item 12. General Information and History........................ Investment Objectives and Policies; General Information Item 13. Investment Objective and Policies....................... Investment Objectives and Policies; Investment Limitations Item 14. Management of the Fund......... Management of the Fund; Investment Management Item 15. Control Persons and Principal Holders of Securities.......... Management of the Company; General Information Item 16. Investment Advisory and Other Services....................... Management of the Company; Investment Advisory Services Item 17. Brokerage Allocation........... Not Applicable Item 18. Capital Stock and Other Securities..................... General Information; Financial Statements Item 19. Purchase, Redemption and Pricing of Securities Being Offered........................ Purchase of Shares; Redemption of Shares Item 20. Tax Status..................... Dividends, Capital Gains and Taxes (Prospectus) Item 21. Underwriters................... Not Applicable Item 22. Calculations of Yield Quotations of Money Market Fund........................... Not Applicable Item 23. Financial Statements........... Financial Statements
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [LOGO OF VANGUARD WINDSOR FUND APPEARS HERE] A Series of Vanguard/Windsor Funds - -------------------------------------------------------------------------------- and A Member of The Vanguard Group - -------------------------------------------------------------------------------- PROSPECTUS--FEBRUARY 28, 1995 - -------------------------------------------------------------------------------- NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP) - -------------------------------------------------------------------------------- SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW) - -------------------------------------------------------------------------------- INVESTMENT Vanguard/Windsor Fund (the "Fund"), formerly Windsor Fund, is OBJECTIVE AND an open-end diversified investment company that seeks to pro- POLICIES vide long-term growth of capital and income by investing pri- marily in common stocks. The Fund's secondary objective is to provide current income. There can be no assurance that the Fund will achieve these objectives. Shares of the Fund are neither insured nor guaranteed by any agency of the U.S. Gov- ernment, including the FDIC. Vanguard/Windsor Fund is an independent series of Vanguard/Windsor Funds, Inc. (the "Company"), formerly The Windsor Funds, Inc. The Company is currently offering shares of two series. This Prospectus relates to the Vanguard/Windsor Fund series only. - -------------------------------------------------------------------------------- OPENING AN Currently, shares of the Fund are not being offered or sold ACCOUNT to new investors. Current shareholders of the Fund may make additional investments of up to $25,000 during calendar year 1995. See "Opening an Account and Purchasing Shares" for ad- ditional information. The Fund is offered on a no-load basis (i.e., there are no sales commissions or 12b-1 fees). However, the Fund incurs expenses for investment advisory, management, administrative, and distribution services. - -------------------------------------------------------------------------------- ABOUT THIS This Prospectus is designed to set forth concisely the infor- PROSPECTUS mation you should know about the Fund before you invest. It should be retained for future reference. A "Statement of Ad- ditional Information" containing additional information about the Fund has been filed with the Securities and Exchange Com- mission. This Statement is dated February 28, 1995, and has been incorporated by reference into this Prospectus. A copy may be obtained without charge by writing to the Fund or by calling the Investor Information Department. - --------------------------------------------------------------------------------
TABLE OF CONTENTS Page Fund Expenses.............................................. 2 Financial Highlights....................................... 2 Yield and Total Return..................................... 3 FUND INFORMATION Investment Objectives...................................... 4 Investment Policies........................................ 4 Investment Risks........................................... 4 Who Should Invest.......................................... 5 Page Implementation of Policies................................. 6 Investment Limitations..................................... 7 Management of the Fund..................................... 8 Investment Adviser......................................... 9 Performance Record......................................... 11 Dividends, Capital Gains and Taxes......................... 11 The Share Price of the Fund ............................... 13 General Information........................................ 13 Page SHAREHOLDER GUIDE Opening an Account and Purchasing Shares................... 14 When Your Account Will Be Credited......................... 16 Selling Your Shares........................................ 17 Exchanging Your Shares..................................... 19 Important Information About Telephone Transactions......... 20 Transferring Registration.................................. 21 Other Vanguard Services.................................... 21
- -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF- FENSE. - -------------------------------------------------------------------------------- FUND EXPENSES The following table illustrates ALL expenses and fees that you would incur as a shareholder of the Fund. The expenses and fees set forth in the table are for the 1994 fiscal year.
SHAREHOLDER TRANSACTION EXPENSES --------------------------------------------------------------- Sales Load Imposed on Purchases......................... None Sales Load Imposed on Reinvested Dividends.............. None Redemption Fees......................................... None Exchange Fees........................................... None ANNUAL FUND OPERATING EXPENSES --------------------------------------------------------------- Management & Administrative Expenses.................... 0.18% Investment Advisory Fees................................ 0.24 12b-1 Fees.............................................. None Other Expenses Distribution Costs................................ 0.02% Miscellaneous Expenses............................ 0.01 ---- Total Other Expenses.................................... 0.03 ---- TOTAL OPERATING EXPENSES........................... 0.45% ====
The purpose of this table is to assist you in understanding the various costs and expenses that you would bear directly or indirectly as an investor in the Fund. The following example illustrates the expenses that you would incur on a $1,000 investment over various periods, assuming (1) a 5% annual rate of return and (2) redemption at the end of each period. As noted in the table above, the Fund charges no redemption fees of any kind.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- $5 $14 $25 $57
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- FINANCIAL The following financial highlights for a share outstanding HIGHLIGHTS throughout each period, insofar as they relate to each of the five years in the period ended October 31, 1994, have been audited by Price Waterhouse LLP, independent accountants, whose report thereon was unqualified. This information should be read in conjunction with the Fund's financial statements and notes thereto which are incorporated by reference in the Statement of Additional Information and this Prospectus, and which appear, along with the report of Price Waterhouse LLP, in the Fund's 1994 Annual Report to Shareholders. For a more complete discussion of the Fund's performance, please see the Fund's 1994 Annual Report to Shareholders, which may be ob- tained without charge by writing to the Fund or by calling our Investor Information Department at 1-800-662-7447. 2
YEAR ENDED OCTOBER 31, --------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 - ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF YEAR...... $14.95 $12.37 $12.79 $ 9.72 $15.17 $14.13 $14.22 $13.85 $13.39 $12.12 ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ INVESTMENT OPERATIONS Net Investment Income.. .44 .37 .49 .58 .74 .71 .66 .78 .85 .79 Net Realized and Unrealized Gain (Loss) on Investments........ .42 2.98 .50 3.55 (4.59) 1.51 2.33 (.11) 3.05 2.01 ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ TOTAL FROM INVESTMENT OPERATIONS........... .86 3.35 .99 4.13 (3.85) 2.22 2.99 .67 3.90 2.80 - ------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS Dividends from Net In- vestment Income................ (.37) (.39) (.57) (.74) (.75) (.63) (.87) (.30) (.85) (.79) Distributions from Realized Capital Gains......... (.89) (.38) (.84) (.32) (.85) (.55) (2.21) -- (2.59) (.74) ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ TOTAL DISTRIBUTIONS... (1.26) (.77) (1.41) (1.06) (1.60) (1.18) (3.08) (.30) (3.44) (1.53) - ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF YEAR................... $14.55 $14.95 $12.37 $12.79 $ 9.72 $15.17 $14.13 $14.22 $13.85 $13.39 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ TOTAL RETURN............ 6.35% 28.29% 9.30% 44.69% (27.93)% 17.05% 27.01% 4.62% 29.31% 23.30% - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (Millions)............. $11,406 $10,537 $8,250 $7,859 $5,841 $8,313 $5,920 $4,848 $4,862 $3,813 Ratio of Expenses to Av- erage Net Assets................. .45% .40% .26% .30% .37% .41% .46% .43% .52% .53% Ratio of Net Investment Income to Average Net Assets..... 3.11% 2.68% 3.89% 4.84% 5.82% 5.07% 5.08% 4.86% 5.28% 6.19% Portfolio Turnover Rate. 34% 25% 32% 36% 21% 34% 24% 46% 51% 23%
- -------------------------------------------------------------------------------- YIELD AND From time to time the Fund may advertise its yield and total TOTAL RETURN return. Both yield and total return figures are based on his- torical earnings and are not intended to indicate future per- formance. The "total return" of the Fund refers to the aver- age annual compounded rates of return over one- , five- and ten-year periods or for the life of the Fund (as stated in the advertisement) that would equate an initial amount in- vested at the beginning of a stated period to the ending re- deemable value of the investment, assuming the reinvestment of all dividend and capital gains distributions. In accordance with industry guidelines set forth by the U.S. Securities and Exchange Commission, the "30-day yield" of the Fund is calculated daily by dividing the net investment in- come per share earned during a 30-day period by the net asset value per share on the last day of the period. Net investment income includes interest and dividend income earned on the Fund's securities and is net of all expenses and all recur- ring and nonrecurring charges that have been applied to all shareholder accounts. The yield calculation assumes that the net investment income earned over 30 days is compounded monthly for six months and then annualized. Methods used to calculate advertised yields are standardized for all stock and bond mutual funds. However, these methods differ from the accounting methods used by the Fund to maintain its books and records, and so the advertised 30-day yield may not fully re- flect the income paid to your own account or the yield re- ported in the Fund's reports to shareholders. - -------------------------------------------------------------------------------- 3 INVESTMENT The objective of the Fund is to provide long-term growth of OBJECTIVES capital and income. The Fund's secondary objective is to pro- vide current income. There can be no assurance that the Fund will achieve these objectives. THE FUND SEEKS These investment objectives are fundamental and so cannot be TO PROVIDE changed without the approval of a majority of the Fund's LONG-TERM shareholders. GROWTH OF CAPITAL AND INCOME - -------------------------------------------------------------------------------- INVESTMENT The Fund invests primarily in common stocks, which are se- POLICIES lected principally on the basis of fundamental investment value. Crucial to the valuation process is the relationship THE FUND of a company's underlying earning power and dividend payout INVESTS to the market price of its stock. The Fund's holdings usually PRIMARILY IN are characterized by relatively low price-earnings ratios and COMMON STOCKS meaningful income yields. At the time of purchase, many of the Fund's securities are considered to be undervalued or overlooked by the market. The Fund is managed without regard to tax ramifications. Although the Fund invests primarily in common stocks, it may invest in money market instruments, fixed-income securities, convertible securities and other equity securities, such as preferred stock. The Fund reserves the right to hold money market instruments and fixed-income securities in whatever proportion the adviser deems appropriate for temporary defen- sive purposes. The Fund may also invest in stock futures con- tracts and options. See "Implementation of Policies" for a description of these investment practices of the Fund. The investment policies of the Fund are not fundamental and so may be changed by the Board of Directors without share- holder approval. - -------------------------------------------------------------------------------- INVESTMENT As a mutual fund investing primarily in common stocks, the RISKS Fund is subject to MARKET RISK--i.e., the possibility that common stock prices will decline over short or even extended THE FUND IS periods. The U.S. stock market has tended to be cyclical, SUBJECT TO with periods when common stock prices generally rise and pe- MARKET RISK riods when prices generally decline. To illustrate the volatility of stock prices, the following table sets forth the extremes for stock market returns as well as the average return for the period from 1926 to 1994, as measured by the Standard & Poor's 500 Composite Stock Price Index. AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994) OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS ------ ------- -------- -------- Best +53.9 +23.9 +20.1 +16.9 Worst -43.3 -12.5 - 0.9 - 3.1 Average +12.2 +10.2 +10.7 +10.7
4 As shown, common stocks have provided annual total returns (capital appreciation plus dividend income) averaging +10.7% for all 10-year periods from 1926 to 1994. While this average return can be used as a guide for setting reasonable expecta- tions for future stock market returns, it may not be useful for forecasting future returns in any particular period, as stock returns are quite volatile from year to year. This table of U.S. stock market returns should not be viewed as a representation of future returns for the Fund or the U.S. stock market. The illustrated returns represent histori- cal investment performance, which may be a poor guide to fu- ture returns. Also, stock market indexes such as the S&P 500 are based on unmanaged portfolios of securities before trans- action costs and other expenses. Such costs will reduce the relative investment performance of the Fund and other "real world" portfolios. Finally, the Fund is likely to differ in portfolio composition from broad stock market averages, and so the Fund's performance should not be expected to mirror the returns provided by a specific index. THE FUND IS The investment adviser manages the Fund according to the tra- ALSO SUBJECT ditional methods of "active" investment management, which in- TO MANAGER volve the buying and selling of securities based upon econom- RISK ic, financial and market analysis and investment judgement. MANAGER RISK refers to the possibility that the Fund's in- vestment adviser may fail to execute the Fund's investment strategy effectively. As a result, the Fund may fail to achieve its stated objective. - -------------------------------------------------------------------------------- WHO SHOULD The Fund is intended for investors who are seeking growth of INVEST capital and income. Although the Fund's secondary objective is to provide current income, investors should not consider LONG-TERM the Fund a substitute for fixed-income investments. The Fund INVESTORS is intended to be a long-term investment vehicle and is not SEEKING GROWTH designed to provide investors with a means of speculating on OF CAPITAL AND short-term market movements. Investors who engage in exces- INCOME sive account activity generate additional costs which are borne by all of the Fund's shareholders. In order to minimize such costs, the Fund has adopted the following policies. The Fund reserves the right to reject any purchase request (in- cluding exchange purchases from other Vanguard portfolios) that is reasonably deemed to be disruptive to efficient port- folio management, either because of the timing of the invest- ment or previous excessive trading by the investor. Addition- ally, the Fund has adopted exchange privilege limitations as described in the section "Exchange Privilege Limitations." Finally, the Fund reserves the right to suspend the offering of its shares. No assurance can be given that the Fund will attain its ob- jectives or that shareholders will be protected from the risk of loss that is inherent in equity investing. Investors may wish to reduce the potential risk of investing in the Fund by purchasing shares on a regular, periodic basis (dollar-cost averaging) rather than making an investment in one lump sum. Investors should not consider the Fund a complete investment program. Most investors should maintain diversified holdings of securities with different risk 5 characteristics--including common stocks, bonds and money market instruments. Investors may also wish to complement an investment in the Fund with other types of common stock in- vestments. - -------------------------------------------------------------------------------- IMPLEMENTATION In addition to investing primarily in equity securities, the OF POLICIES Fund follows a number of additional investment practices to achieve its objectives. THE FUND MAY Although it normally seeks to remain substantially fully in- INVEST IN vested in equity securities, the Fund may invest in certain SHORT-TERM short-term fixed income securities. Such securities may be FIXED INCOME used temporarily to invest uncommitted cash balances, to SECURITIES maintain liquidity to meet shareholder redemptions, or to take a temporarily defensive position against a potential stock market decline. No more than 35% of the Fund's assets will be committed to short-term fixed income securities for purposes other than taking a temporary defensive position. These securities include: obligations of the United States government and its agencies or instrumentalities; commercial paper, bank certificates of deposit, and bankers' accept- ances; and repurchase agreements collateralized by these se- curities. In addition, the Fund may, on occasion, invest a small portion of its assets in bonds with ratings below in- vestment grade when selected issues are believed to offer prospective returns competitive with equity securities. A repurchase agreement is a means of investing monies for a short period. In a repurchase agreement, a seller--a U.S. commercial bank or recognized U.S. securities dealer--sells securities to the Fund and agrees to repurchase the securi- ties at the Fund's cost plus interest within a specified pe- riod (normally one day). In these transactions, the securi- ties purchased by the Fund will have a total value equal to or in excess of the value of the repurchase agreement, and will be held by the Fund's Custodian Bank until repurchased. THE FUND MAY The Fund may utilize stock futures contracts and options to a USE FUTURES limited extent. Specifically, the Fund may enter into futures CONTRACTS AND contracts provided that not more than 5% of its assets are OPTIONS required as a futures contract deposit. In addition, the Fund may enter into futures contracts and options transactions only to the extent that obligations under such contracts or transactions represent not more than 20% of the Fund's as- sets. Futures and options transactions may be used for several rea- sons: to maintain cash reserves while simulating full invest- ment, to facilitate trading, to reduce transaction costs, or to seek higher investment returns when a futures contract is priced more attractively than the underlying equity security or index. While futures contracts and options can be used as leveraged investments, the Fund may not use futures or op- tions transactions to leverage its net assets. For example, in order to remain fully invested in stocks while maintaining liquidity to meet potential shareholder re- demptions, the Fund may invest a portion of its assets in a stock futures contract. Because futures contracts only re- quire a small initial margin deposit, the Fund would then be able to maintain a cash reserve for potential redemptions, while at the same time remaining fully 6 invested. Also, because the transaction costs of futures and options may be lower than the costs of investing in stocks directly, it is expected that the use of futures contracts and options may reduce the Fund's total transaction costs. FUTURES The primary risks associated with the use of futures con- CONTRACTS AND tracts and options are: (i) imperfect correlation between the OPTIONS POSE change in market value of the stocks held by the Fund and the CERTAIN RISKS prices of futures contracts and options; and (ii) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position prior to its maturity date. The risk of imperfect correlation will be minimized by investing only in those contracts whose behavior is expected to resemble that of the Fund's underlying securi- ties. The risk that the Fund will be unable to close out a futures position will be minimized by entering into such transactions on a national exchange with an active and liquid secondary market. The risk of loss in trading futures contracts in some strate- gies can be substantial, due both to the low margin deposits required and the extremely high degree of leverage involved in futures pricing. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss (or gain) to the investor. When investing in futures contracts, the Fund will segregate cash or cash equivalents in the amount of the underlying obligation. THE FUND MAY The Fund may lend its investment securities to qualified in- LEND ITS stitutional investors for either short-term or long-term pur- SECURITIES poses of realizing additional income. Loans of securities by the Fund will be collateralized by cash, letters of credit, or securities issued or guaranteed by the U.S. Government or its agencies. The collateral will equal at least 100% of the current market value of the loaned securities. BORROWING The Fund may borrow money, subject to the restrictions de- scribed below in Investment Limitations, for temporary or emergency purposes, including the meeting of redemption re- quests which might otherwise require the untimely disposition of securities. PORTFOLIO Although it generally seeks to invest for the long term, the TURNOVER IS Fund retains the right to sell securities irrespective of how NOT EXPECTED long they have been held. It is anticipated that the annual TO EXCEED 100% portfolio turnover of the Fund will not exceed 100%. A turn- over rate of 100% would occur, for example, if all of the se- curities of the Fund were replaced within one year. - -------------------------------------------------------------------------------- INVESTMENT The Fund has adopted certain limitations on its investment LIMITATIONS practices. Specifically, the Fund will not: THE FUND HAS (a) with respect to 75% of the value of its total ADOPTED assets, purchase the securities of any issuer CERTAIN (except obligations of the United States govern- FUNDAMENTAL ment and its instrumentalities) if as a result LIMITATIONS the Fund would hold more than 10% of the out- standing voting securities of the issuer, or more than 5% of the value of the total assets of the Fund would be invested in the securities of such issuer; (b) invest more than 25% of its assets in any one industry; and 7 (c) borrow money, except that the Fund may borrow from banks (or through reverse repurchase agree- ments), for temporary or emergency (not leveraging) purposes, including the meeting of redemption requests which might otherwise re- quire the untimely disposition of securities, in an amount not exceeding 10% of the value of the net assets of the Fund (including the amount borrowed and the value of any outstanding re- verse repurchase agreements) at the time the borrowing is made. Whenever borrowings exceed 5% of the value of the net assets of the Fund, the Fund will not make any additional investments. These investment limitations are considered at the time in- vestment securities are purchased. The investment limitations described here and in the Statement of Additional information may be changed only with the approval of a majority of the Fund's shareholders. - -------------------------------------------------------------------------------- MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com- THE FUND panies, a family of more than 30 investment companies with more than 80 distinct investment portfolios and total assets VANGUARD in excess of $130 billion. Through their jointly-owned sub- ADMINISTERS sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and AND the other funds in the Group obtain at cost virtually all of DISTRIBUTES their corporate management, administrative and distribution THE FUND services. Vanguard also provides investment advisory services on an at-cost basis to certain Vanguard funds. As a result of Vanguard's unique corporate structure, the Vanguard funds have costs substantially lower than those of most competing mutual funds. In 1994, the average expense ratio (annual costs including advisory fees divided by total net assets) for the Vanguard funds amounted to approximately .30% com- pared to an average of 1.05% for the mutual fund industry (data provided by Lipper Analytical Services). The Officers of the Fund manage its day-to-day operations and are responsible to the Fund's Board of Directors. The Direc- tors set broad policies for the Fund and choose its Officers. A list of the Directors and Officers of the Fund and a state- ment of their present positions and principal occupations during the past five years can be found in the Statement of Additional Information. Vanguard employs a supporting staff of management and admin- istrative personnel needed to provide the requisite services to the funds and also furnishes the funds with necessary of- fice space, furnishings and equipment. Each fund pays its share of Vanguard's total expenses, which are allocated among the funds under methods approved by the Board of Directors (Trustees) of each fund. In addition, each fund bears its own direct expenses, such as legal, auditing and custodian fees. Vanguard provides distribution and marketing services to the funds. The funds are available on a no-load basis (i.e., there are no sales commissions or 12b-1 fees). However, each fund bears its share of the Group's distribution costs. - -------------------------------------------------------------------------------- 8 INVESTMENT The Fund has entered into an investment advisory agreement ADVISER with Wellington Management Company ("WMC"), 75 State Street, Boston, MA 02109, under which WMC manages the investment and WELLINGTON reinvestment of Vanguard/Windsor Fund's assets and continu- MANAGEMENT ously reviews, supervises and administers the Fund's invest- COMPANY SERVES ment program. WMC discharges its responsibilities subject to AS ADVISER TO the control of the Officers and Directors of the Fund. THE FUND WMC is a professional investment counseling firm which glob- ally provides investment services to investment companies, institutions, and individuals. Among the clients of WMC are more than 10 investment companies of The Vanguard Group. As of December 31, 1994, WMC held discretionary management au- thority with respect to more than $80 billion of assets. WMC and its predecessor organizations have provided investment advisory services to investment companies since 1931 and to investment counseling clients since 1960. John B. Neff, Managing Partner of WMC, serves as portfolio manager of the Fund, a position he has held since June 1964. In managing the Fund's investments, Mr. Neff is assisted by Charles T. Freeman, Senior Vice President of WMC and assis- tant portfolio manager of the Fund, who joined WMC in 1969. Messrs. Neff and Freeman are supported by research and other investment services provided by the professional staff of WMC. Effective at year-end 1995, Mr. Neff will retire and Mr. Freeman will assume the position of portfolio manager of the Fund. Mr. Neff will remain as an adviser to WMC, and will continue to work with the firm's investment professionals, including the portfolio managers of all Vanguard funds for which WMC serves as adviser. WMC earns a basic advisory fee, calculated by applying the following annual percentage rates to the average month-end net assets of the Fund:
ANNUAL NET ASSETS RATE ---------- ------ First $200 million .350% Next $250 million .275% Next $300 million .200% Assets in excess of $750 million .150%
9 The Fund's payments to WMC under the above schedule are sub- ject to an incentive/penalty fee arrangement which compares the performance of the Fund's assets with the performance of the Standard & Poor's 500 Composite Stock Price Index. This arrangement provides for the following adjustments to WMC's basic fee:
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/PENALTY DIFFERENTIAL VS. THE S&P 500 FEE ADJUSTMENT --------------------------------- ----------------- Less than or equal to -12% points 0.90 X Basic Fee Equal to or less than -6% points but greater than -9% points 0.95 X Basic Fee Less than +6% points but greater than -6% points Basic Fee Equal to or greater than +6% points but less than +9% points 1.05 X Basic Fee Greater than or equal to 9% points 1.10 X Basic Fee
During the fiscal year ended October 31, 1994, the total ad- visory fees paid by the Fund to WMC represented an effective annual rate of .16% of the Fund's average net assets before an increase of .08% based upon the investment performance. The investment advisory agreement authorizes WMC to select brokers or dealers to execute purchases and sales of the Fund's portfolio securities, and directs the adviser to use its best efforts to obtain the best available price and most favorable execution with respect to all transactions. The full range and quality of brokerage services available are considered in making these determinations. The Fund has authorized WMC to pay higher commissions in rec- ognition of brokerage services felt necessary for the achievement of better execution, provided the adviser be- lieves this to be in the best interest of the Fund. Although the Fund does not market its shares through intermediary bro- kers or dealers, the Fund may place orders with qualified broker-dealers who recommend the Fund to clients if the Offi- cers of the Fund believe that the quality of the transaction and the commission are comparable to what they would be with other qualified brokerage firms. The Fund's Board of Directors may, without the approval of shareholders, provide for: (a) the employment of a new in- vestment adviser pursuant to the terms of a new advisory agreement, either as a replacement for an existing adviser or as an additional adviser; (b) a change in the terms of an ad- visory agreement; and (c) the continued employment of an ex- isting adviser on the same advisory contract terms where a contract has been assigned because of a change in control of the adviser. Any such change will only be made upon not less than 30 days' prior written notice to shareholders of the Fund, which shall include substantially the information con- cerning the adviser that would have normally been included in a proxy statement. - -------------------------------------------------------------------------------- 10 PERFORMANCE The table below provides investment results for the Fund for RECORD several periods throughout the Fund's lifetime. The results shown represent the Fund's "total return" investment perfor- mance, which assumes the reinvestment of all capital gains and income dividends for the indicated periods. Also included is comparative information with respect to the unmanaged Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of stock market activity, and the Consumer Price Index, a statistical measure of changes in the prices of goods and services. The table does not make any allowance for federal, state or local income taxes which shareholders must pay on a current basis. The results shown should not be considered a representation of the total return from an investment made in the Fund to- day. This information is provided to help investors better understand the Fund and may not provide a basis for compari- son with other investments or mutual funds which use a dif- ferent method to calculate performance. AVERAGE ANNUAL RETURN FOR VANGUARD/WINDSOR FUND
PERCENTAGE INCREASE ------------------------------------------------ FISCAL PERIODS VANGUARD/WINDSOR S&P 500 CONSUMER ENDED 10/31/94 FUND INDEX PRICE INDEX -------------- ---------------- ------- ----------- 3 Years +14.2% + 9.5% +2.9% 5 Years + 9.2 +10.1 +3.6 10 Years +14.5 +14.8 +3.6 20 Years +18.3 +14.3 +5.5 Lifetime* +12.8 +10.4 +4.7
*October 23, 1958, to October 31, 1994. Data for the Consumer Price Index begins October 31, 1958. - -------------------------------------------------------------------------------- DIVIDENDS, The Fund expects to pay dividends from ordinary income semi- CAPITAL GAINS annually. Capital gains distributions, if any, will be made AND TAXES annually. THE FUND PAYS In addition, in order to satisfy certain distribution re- SEMI- ANNUAL quirements of the Tax Reform Act of 1986, the Fund may de- DIVIDENDS AND clare special year-end dividend and capital gains distribu- ANY CAPITAL tions during December. Such distributions, if received by GAINS ANNUALLY shareholders by January 31, are deemed to have been paid by the Fund and received by shareholders on December 31 of the prior year. Dividend and capital gains distributions may be automatically reinvested or received in cash. See "Choosing a Distribution Option" for a description of these distributions methods. The Fund intends to continue to qualify for taxation as a "regulated investment company" under the Internal Revenue Code so that it will not be subject to federal tax to the ex- tent its income is distributed to shareholders. Dividends paid by the Fund from net investment income, whether received in cash or reinvested in additional shares, will be taxable to shareholders as ordinary income. For corporate investors, dividends from net investment income will gen- 11 erally qualify in part for the corporate dividends received deduction. However, the portion of the dividends so qualified depends on the aggregate taxable qualifying dividend income received by the Fund from domestic (U.S.) sources. Distributions paid by the Fund from long-term capital gains, whether received in cash or reinvested in additional shares, are taxable as long-term capital gains, regardless of the length of time you have owned shares in the Fund. Capital gains distributions are made when the Fund realizes net capi- tal gains on sales of portfolio securities during the year. The Fund does not seek to realize any particular amount of capital gains during a year; rather, realized gains are a by- product of portfolio management activities. Consequently, capital gains distributions may be expected to vary consider- ably from year to year; there will be no capital gains dis- tributions in years when the Fund realizes net capital loss- es. Note that if you accept capital gains distributions in cash instead of reinvesting them in additional shares, you are in effect reducing the capital at work for you in the Fund. Al- so, keep in mind that if you purchase shares in the Fund shortly before the record date for a dividend or capital gains distribution, a portion of your investment will be re- turned to you as a taxable distribution, regardless of whether you are reinvesting your distributions or receiving them in cash. The Fund will notify you annually as to the tax status of dividend and capital gains distributions paid by the Fund. A CAPITAL GAIN A sale of shares of the Fund is a taxable event and may re- OR LOSS MAY BE sult in a capital gain or loss. A capital gain or loss may be REALIZED UPON realized from an ordinary redemption of shares or an exchange EXCHANGE OR of shares between two mutual funds (or two portfolios of a REDEMPTION mutual fund). Dividend distributions, capital gains distributions, and cap- ital gains or losses from redemptions and exchanges may be subject to state and local taxes. The Fund is required to withhold 31% of taxable dividends, capital gains distributions, and redemptions paid to share- holders who have not complied with IRS taxpayer identifica- tion regulations. You may avoid this withholding requirement by certifying on your Account Registration Form your proper Social Security or Employer Identification number and certi- fying that you are not subject to backup withholding. The Fund has obtained a Certificate of Authority to do busi- ness as a foreign corporation in Pennsylvania and does busi- ness and maintains an office in that state. In the opinion of counsel, the shares of the Fund are exempt from Pennsylvania personal property taxes. The tax discussion set forth above is included for general information only. Prospective investors should consult their own tax advisers concerning the tax consequences of an in- vestment in the Fund. The Fund is managed without regard to tax ramifications. - -------------------------------------------------------------------------------- 12 THE SHARE The Fund's share price or "net asset value" per share is de- PRICE OF THE termined by dividing the total market value of the Fund's in- FUND vestments and other assets, less any liabilities, by the num- ber of outstanding shares of the Fund. Net asset value per share is calculated at the close of regular trading on the New York Stock Exchange on each day the Exchange is open for business. Portfolio securities that are listed on a securities exchange are valued at the latest quoted sales prices as of 4:00 p.m. on the valuation date. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities which are listed on an exchange and which are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Unlisted securi- ties for which market quotations are readily available are valued at the latest quoted bid price. Temporary cash invest- ments are valued at amortized cost, which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Directors. Securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The Fund's share price can be found daily in the mutual fund listings of most major newspapers under the heading of The Vanguard Group. - -------------------------------------------------------------------------------- GENERAL The Company is a Maryland corporation. The Articles of Incor- INFORMATION poration permit the Directors to issue 1,600,000,000 shares of common stock, with a one cent par value. The Board of Di- rectors has the power to designate one or more classes ("se- ries") of shares of common stock and to classify and reclas- sify any unissued shares with respect to such series. Cur- rently the Company is offering shares of two series. The shares of each series of the Company are fully paid and non-assessable; have no preference as to conversion, ex- change, dividends, retirement or other features; and have no pre-emptive rights. Such shares have non-cumulative voting rights, meaning that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they so choose. Annual meetings of shareholders will not be held except as required by the Investment Company Act of 1940 and other ap- plicable law. An annual meeting will be held to vote on the removal of a Director or Directors of the Company if re- quested in writing by the holders of not less than 10% of the outstanding shares of the Company. All securities and cash are held by State Street Bank and Trust Company. Boston, MA. The Vanguard Group, Inc., Valley Forge, Pa, serves as the Fund's Transfer and Dividend Dis- bursing Agent. Price Waterhouse LLP, serves as independent accountants for the Fund and will audit its financial state- ments annually. The Fund is not involved in any litigation. - -------------------------------------------------------------------------------- 13 SHAREHOLDER GUIDE OPENING AN Currently, shares of the Fund are not being offered or sold ACCOUNT AND to new investors. Current shareholders of the Fund may make PURCHASING additional investments, but the aggregate amount of such in- SHARES vestments made during the calendar year may not exceed $25,000. Regular annual contributions to existing Vanguard/Windsor Fund retirement accounts are being accepted. For IRAs, you may make annual contributions up to the applicable tax law limit ($2,000) as well as asset transfers and rollovers, but the total of such purchases may not exceed $25,000. For other retirement plans, total purchases generally may not exceed $25,000. However, annual contributions to retirement plans sponsored by Vanguard may be higher if permitted under the tax laws. Because of the risks associated with common stock invest- ments, the Fund is intended to be a long-term investment ve- hicle and is not designed to provide investors with a means of speculating on short-term stock market movements. Conse- quently the Fund reserves the right to reject any specific purchase (or exchange purchase) request. The Fund also re- serves the right to suspend the offering of shares for a pe- riod of time. The Fund's shares are purchased at the next-determined net asset value after your investment has been received. The Fund is offered on a no-load basis (i.e., there are no sales com- missions or 12b-1 fees). ADDITIONAL Subsequent investments by current shareholders may be made INVESTMENTS only by mail ($100 minimum), wire ($1,000 minimum), exchange from another Vanguard Fund account, or Vanguard Fund Express. -------------------------------------------------------------- PURCHASING BY Additional investments should include the Invest-by-Mail re- MAIL mittance form attached to your Fund confirmation statement. Please make your check payable to The Vanguard Group-22, write your account number on your check and, using the return envelope provided, mail to the address indicated on the In- vest-by-Mail form. Do not send registered or express mail to the post office box address. If you do not have a business reply envelope, mail your re- quest to VANGUARD FINANCIAL CENTER, VANGUARD/WINDSOR FUND, P.O. BOX 2600, VALLEY FORGE, PA 19482. For express or regis- tered mail, send your request to Vanguard Financial Center, Vanguard/Windsor Fund, 455 Devon Park Drive, Wayne, PA 19087. -------------------------------------------------------------- PURCHASING BY CORESTATES BANK, N.A. WIRE Money ABA 031000011 should be CORESTATES NO. 0101 9897 wired to: ATTN VANGUARD VANGUARD/WINDSOR FUND BEFORE WIRING ACCOUNT NUMBER Please contact ACCOUNT REGISTRATION Client Services (1-800-662-2739) 14 To assure proper receipt, please be sure your bank includes the Fund name, the account number Vanguard has assigned to you and the eight-digit CoreStates number. NOTE: Federal Funds wire purchase orders will be accepted only when the Fund and Custodian Bank are open for business. -------------------------------------------------------------- PURCHASING BY Current shareholders may purchase additional shares of the EXCHANGE (from Fund by exchange from an existing Vanguard account. (As ex- a Vanguard plained on page 5, however, the Fund reserves the right to account) refuse any exchange purchase request.) Please call our Client Services Department at 1-800-662-2739. -------------------------------------------------------------- PURCHASING BY The Fund Express Special Purchase option lets you move money FUND EXPRESS from your bank account to your Vanguard account at your re- quest. Or, if you choose the Automatic Investment option, Special money will be moved from your bank account to your Vanguard Purchase and account on the schedule (monthly, bimonthly [every other Automatic month], quarterly or yearly) you select. To establish these Investment Fund Express options, please call 1-800-662-7447 for a Fund Express application. We will send you a confirmation of your Fund Express service: please wait three weeks before using the service. - -------------------------------------------------------------------------------- CHOOSING A You must select one of three distribution options: DISTRIBUTION OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital gains distributions will be reinvested in additional Fund shares. This option will be se- lected for you automatically unless you specify one of the other options. 2. CASH DIVIDEND OPTION--Your dividends will be paid in cash and your capital gains will be reinvested in additional Fund shares. 3. ALL CASH OPTION--Both dividend and capital gains distributions will be paid in cash. You may change your option by calling our Client Services De- partment (1-800-662-2739). In addition, an option to invest your cash dividends and/or capital gains distributions in another Vanguard Fund account is available. Please call our Client Services Department (1-800-662-2739) for information. You may also elect Vanguard Dividend Express which allows you to transfer your cash divi- dends and/or capital gains distributions automatically to your bank account. Please see "Other Vanguard Services" for more information. - -------------------------------------------------------------------------------- TAX CAUTION Under federal tax laws, the Fund is required to distribute net capital gains and dividend income to Fund shareholders. INVESTORS These distributions are made to all shareholders who own Fund SHOULD ASK shares as of the distribution's record date, regardless of ABOUT THE how long the shares have been owned. Purchasing shares just TIMING OF prior to the record date could have a significant impact on CAPITAL GAINS your tax liability for the year. For example, if you purchase AND DIVIDEND shares immediately prior to the record date of a sizable cap- DISTRIBUTIONS ital gain or income dividend distribution, you will be as- BEFORE sessed taxes INVESTING 15 on the amount of the capital gain and/or dividend distribu- tion later paid even though you owned the Fund shares for just a short period of time. (Taxes are due on the distribu- tions even if the dividend or gain is reinvested in addi- tional Fund shares.) While the total value of your investment will be the same after the distribution--the amount of the distribution will offset the drop in the net asset value of the shares--you should be aware of the tax implications the timing of your purchase may have. Prospective investors should, therefore, inquire about poten- tial distributions before investing. The Fund's annual capi- tal gains distribution normally occurs in December, while in- come dividends are generally paid semi-annually in June and December. For additional information on distributions and taxes, see the section titled "Dividends, Capital Gains, and Taxes." - -------------------------------------------------------------------------------- IMPORTANT The easiest way to establish optional Vanguard services on ACCOUNT your account is to select the options you desire when you INFORMATION complete your Account Registration Form. IF YOU WISH TO ADD SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD ESTABLISHING WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE OPTIONAL CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FUR- SERVICES THER ASSISTANCE. SIGNATURE For our mutual protection, we may require a signature guaran- GUARANTEES tee on certain written transaction requests. A signature guarantee verifies the authenticity of your signature and may be obtained from banks, brokers and any other guarantors that Vanguard deems acceptable. A SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC. CERTIFICATES Share certificates will be issued upon request. If a certifi- cate is lost, you may incur an expense to replace it. BROKER/DEALER If you purchase shares in Vanguard funds through a registered PURCHASES broker-dealer or investment adviser, the broker-dealer or ad- viser may charge a service fee. CANCELLING The Fund will not cancel any trade (e.g., purchase, exchange TRADES or redemption) believed to be authentic, received in writing or by telephone, once the trade request has been received. - -------------------------------------------------------------------------------- WHEN YOUR Your trade date is the date on which your account is credit- ACCOUNT WILL ed. If your purchase is made by check, Federal Funds wire or BE CREDITED exchange, and is received by the regular close of the New York Stock Exchange (generally 4:00 p.m. Eastern time), your trade date is the date of receipt. If your purchase is re- ceived after the close of the Exchange, your trade date is the next business day. Your shares are purchased at the net asset value determined on your trade date. In order to prevent lengthy processing delays caused by the clearing of foreign checks, Vanguard will only accept a for- eign check which has been drawn in U.S. dollars and has been issued by a foreign bank with a U.S. correspondent bank. 16 The name of the U.S. correspondent bank must be printed on the face of the foreign check. - -------------------------------------------------------------------------------- SELLING YOUR You may withdraw any portion of the funds in your account by SHARES redeeming shares at any time. You may initiate a request by writing or by telephoning. Your redemption proceeds are nor- mally mailed within two business days after the receipt of the request in Good Order. -------------------------------------------------------------- SELLING BY Requests should be mailed to VANGUARD FINANCIAL CENTER, MAIL VANGUARD/WINDSOR FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482. (For express or registered mail, send your request to Van- guard Financial Center, Vanguard/Windsor Fund, 455 Devon Park Drive, Wayne, PA 19087.) The redemption price of shares will be the Fund's net asset value next determined after Vanguard has received all re- quired documents in Good Order. -------------------------------------------------------------- DEFINITION OF GOOD ORDER means that the request includes the following: GOOD ORDER 1. The account number and Fund name. 2. The amount of the transaction (specified in dollars or shares). 3. Signatures of all owners EXACTLY as they are registered on the account. 4. Any required signature guarantees. 5. Other supporting legal documentation that might be re- quired, in the case of estates, corporations, trusts, and certain other accounts. 6. Any certificates that you hold for the account. IF YOU HAVE ANY QUESTIONS ABOUT THIS DEFINITION AS IT PER- TAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DE- PARTMENT AT 1-800-662-2739. -------------------------------------------------------------- SELLING BY To sell shares by telephone, you or your pre-authorized rep- TELEPHONE resentative may call our Client Services Department at 1-800- 662-2739. The proceeds will be sent to you by mail. Please see also "Important Information About Telephone Transactions." -------------------------------------------------------------- SELLING BY If you select the Fund Express Automatic Withdrawal option, FUND EXPRESS money will be automatically moved from your Vanguard Fund ac- count to your bank account according to the schedule you have Automatic selected. The Special Redemption option lets you move money Withdrawal & from your Vanguard account to your bank account on your re- Special quest. To establish Fund Express, call our Investor Informa- Redemption tion Department at 1-800-662-7447 for a Fund Express application. -------------------------------------------------------------- SELLING BY You may sell shares of the Fund by making an exchange into EXCHANGE another Vanguard Fund account. Please see "Exchanging Your Shares" for details. -------------------------------------------------------------- 17 IMPORTANT Shares purchased by check or Fund Express may be redeemed at REDEMPTION any time. However, your redemption proceeds will not be paid INFORMATION until payment for the purchase is collected, which may take up to ten calendar days. -------------------------------------------------------------- DELIVERY OF If you choose to close your Vanguard/Windsor account through REDEMPTION a redemption, you will not be able to open another account at PROCEEDS a later date, since Windsor Fund is currently closed to new investors. But, if you choose to close your account through an exchange to another Vanguard portfolio, your account can be reopened for UP TO ONE YEAR. Redemption requests received by telephone prior to the regu- lar close of the New York Stock Exchange (generally 4:00 p.m. Eastern time) are processed on the day of receipt and the re- demption proceeds are normally sent on the following business day. Redemption requests received by telephone after the close of the Exchange are processed on the business day following re- ceipt and the proceeds are normally sent on the second busi- ness day following receipt. Redemption proceeds must be sent to you within seven days of receipt of your request in Good Order. If you experience difficulty in making a telephone redemption during periods of drastic economic or market changes, your redemption request may be made by regular or express mail. It will be implemented at the net asset value next determined after your request has been received by Vanguard in Good Or- der. The Fund reserves the right to revise or terminate the telephone redemption privilege at any time. The Fund may suspend the redemption right or postpone payment at times when the New York Stock Exchange is closed or under any emergency circumstances as determined by the United States Securities and Exchange Commission. If the Board of Directors determines that it would be detri- mental to the best interests of the Fund's remaining share- holders to make payment in cash, the Fund may pay redemption proceeds in whole or in part by a distribution in kind of readily marketable securities. -------------------------------------------------------------- VANGUARD'S If you make a redemption from a qualifying account, Vanguard AVERAGE COST will send you an Average Cost Statement which provides you STATEMENT with the tax basis of the shares you redeemed. Please see "Other Vanguard Services" for additional information. -------------------------------------------------------------- MINIMUM Due to the relatively high cost of maintaining smaller ac- ACCOUNT counts, the Fund reserves the right to redeem shares in any BALANCE account that is below the minimum initial investment amount. REQUIREMENT If at any time your total investment does not have a value of at least $3,000, you may be notified that your account is be- low the Fund's minimum account balance requirement. You would then be allowed 60 days to make an additional investment be- fore the account is liquidated. Pro 18 ceeds would be promptly paid to the registered shareholder. (This minimum does not apply to IRAs, certain other retire- ment accounts, and Uniform Gifts/Transfers to Minors Act ac- counts.) The Fund's minimum account balance requirement will not apply if your account falls below $3,000 solely as a result of de- clining markets (i.e., a decline in a Fund's net asset val- ue). - -------------------------------------------------------------------------------- EXCHANGING Should your investment goals change, you may ex- YOUR SHARES change your shares of Vanguard/Windsor Fund for those of other available Vanguard Funds. EXCHANGING BY When exchanging shares by telephone, please have ready the TELEPHONE Fund name, account number, Social Security number or Employer Identification number listed on the account, and the exact Call Client name and address in which the account is registered. Only the Services (1- registered shareholder, or his or her pre-authorized repre- 800-662-2739) sentative, may complete such an exchange. Requests for tele- phone exchanges received prior to the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) are processed at the close of business that same day. Re- quests received after 4:00 p.m. are processed the next busi- ness day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD BALANCED INDEX, VANGUARD INDEX TRUST, VANGUARD IN- TERNATIONAL EQUITY INDEX FUND, AND VANGUARD QUANTITATIVE PORTFOLIOS. If you experience difficulty in making a tele- phone exchange, your exchange request may be made by regular or express mail, and it will be implemented at the closing net asset value on the date received by Vanguard provided the request is received in Good Order. Please see "Important Information About Telephone Transac- tions" for additional important details. -------------------------------------------------------------- EXCHANGING BY Please be sure to include on your exchange request the name MAIL and account number of your current Fund, and the name of the Fund you wish to exchange into, the amount you wish to ex- change, and the signatures of all registered account holders. Send your request to VANGUARD FINANCIAL CENTER, VANGUARD/WINDSOR FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482. (For express or registered mail, send your request to Van- guard Financial Center, Vanguard/Windsor Fund, 455 Devon Park Drive, Wayne, PA 19087.) -------------------------------------------------------------- IMPORTANT Before you make an exchange, you should consider the follow- EXCHANGE ing: INFORMATION . Please read the Fund's prospectus before making an exchange. For a copy and for answers to any ques- tions you may have, call our Investor Information Department (1-800-662-7447). . An exchange is treated as a redemption and a pur- chase; therefore, you could realize a taxable gain or loss on the transaction. . Exchanges are accepted only if the registrations and the Taxpayer Identification numbers of the two accounts are identical. 19 . The shares to be exchanged must be on deposit and not held in certificate form. . The redemption price of shares redeemed by ex- change is the net asset value next determined af- ter Vanguard has received any required documents in Good Order. . When opening a new account by exchange, you must meet the minimum investment requirement of the new Fund. You cannot open a new account in the Fund by exchange. Every effort will be made to maintain the exchange privilege. However, the Fund reserves the right to revise or terminate its provisions, or to limit the amount of or reject any ex- change, as deemed necessary, at any time. - -------------------------------------------------------------------------------- EXCHANGE The Fund's exchange privilege is not intended to afford PRIVILEGE shareholders a way to speculate on short-term movements in LIMITATIONS the market. Accordingly, in order to prevent excessive use of the exchange privilege that may potentially disrupt the man- agement of the Fund and increase transaction costs, the Fund has established a policy of limiting excessive exchange ac- tivity. Exchange activity generally will not be deemed excessive if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30 DAYS APART) from the Fund during any twelve month period. Notwithstanding these limitations, the Fund reserves the right to reject any purchase request (including exchange pur- chases from other Vanguard portfolios) that is reasonably deemed to be disruptive to efficient portfolio management. - -------------------------------------------------------------------------------- IMPORTANT The ability to initiate redemptions (except wire redemptions) INFORMATION and exchanges by telephone is automatically established on ABOUT your account unless you request in writing that telephone TELEPHONE transactions on your account not be permitted. TRANSACTIONS To protect your account from losses resulting from unautho- rized or fraudulent telephone instructions, Vanguard adheres to the following security procedures: 1. SECURITY CHECK. To request a transaction by telephone, the caller must know (i) the name of the Portfolio; (ii) the 10- digit account number; (iii) the exact name and address used in the registration; and (iv) the Social Security or Employer Identification number listed on the account. 2. PAYMENT POLICY. The proceeds of any telephone redemption by mail will be made payable to the registered shareowners and mailed to the address of record, only. Neither the Fund nor Vanguard will be responsible for the au- thenticity of transaction instructions received by telephone, provided that reasonable security procedures have been fol- lowed. Vanguard believes that the security procedures de- scribed above are reasonable, and that if such procedures are followed, you will bear the risk of any losses resulting from unauthorized or fraudulent telephone transactions on your ac- count. - -------------------------------------------------------------------------------- 20 TRANSFERRING You may transfer the registration of any of your Fund shares REGISTRATION to another person, provided that the amount of each transfer equals at least $3,000 for non-retirement and $2,000 for IRAs, by completing a transfer form and sending it to: VAN- GUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY FORGE, PA 19482. The request must be in Good Order. Before mailing your request, please call our Client Services Department (1-800- 662-2739) for full instructions. - -------------------------------------------------------------------------------- STATEMENTS AND Vanguard will send you a confirmation statement each time you REPORTS initiate a transaction in your account, except for checkwriting redemptions from Vanguard money market accounts. You will also receive a comprehensive account statement at the end of each calendar quarter. The fourth-quarter state- ment will be a year-end statement, listing all transaction activity for the entire calendar year. Vanguard's Average Cost Statement provides you with the aver- age cost of shares redeemed from your account, using the av- erage cost single category method. This service is available for most taxable accounts opened since January 1, 1986. In general, investors who redeemed shares from a qualifying Van- guard account may expect to receive their Average Cost State- ment in February of the following year. Please call our Cli- ent Services Department (1-800- 662-2739) for information. Financial reports on the Fund will be mailed to you semi-an- nually, according to the Fund's fiscal year-end. - -------------------------------------------------------------------------------- OTHER VANGUARD For more information about any of these services, SERVICES please call our Investor Information Department at 1-800-662-7447. VANGUARD With Vanguard's Direct Deposit Service, most U.S. Government DIRECT DEPOSIT checks (including Social Security and military pension SERVICE checks) and private payroll checks may be automatically de- posited into your Vanguard Fund account. Separate brochures and forms are available for direct deposit of U.S. Government and private payroll checks. VANGUARD Vanguard's Automatic Exchange Service allows you to move AUTOMATIC money automatically among your Vanguard fund accounts. For EXCHANGE instance, the service can be used to "dollar cost average" SERVICE from a money market portfolio into a stock or bond fund, or to contribute to an IRA or other retirement plan. Please con- tact our Client Services Department at 1-800-662-2739 for ad- ditional information. VANGUARD FUND Vanguard's Fund Express allows you to transfer money between EXPRESS your Fund account and your account at a bank, savings and loan association, or a credit union that is a member of the Automated Clearing House (ACH) system. You may elect this service on the Account Registration Form or call our Investor Information Department (1-800-662-7447) for a Fund Express application. The minimum amount that can be transferred by telephone is $100. However, if you have established one of the automatic options, the minimum amount is $50. The maximum amount that can be transferred using any of the options is $100,000. 21 Special rules govern how your Fund Express purchases or re- demptions are credited to your account. In addition, some services of Fund Express cannot be used with specific Van- guard funds. For more information, please refer to the Van- guard Fund Express brochure. VANGUARD Vanguard's Dividend Express allows you to transfer your divi- DIVIDEND dends and/or capital gains distributions automatically from EXPRESS your Fund account, one business day after the Fund's payable date, to your account at a bank, savings and loan associa- tion, or a credit union that is a member of the Automated Clearing House (ACH) network. You may elect this service on the Account Registration Form, or call our Investor Informa- tion Department (1-800-662-7447) for a Vanguard Dividend Ex- press application. VANGUARD TELE- Vanguard's Tele-Account is a convenient, automated service ACCOUNT that provides share price, price change and yield quotations on Vanguard Funds through any TouchToneTM telephone. This service also lets you obtain information about your account balance, your last transaction, and your most recent dividend or capital gains payment. To contact Vanguard's Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273). A brochure of- fering detailed operating instructions is available from our Investor Information Department (1-800-662-7447). - -------------------------------------------------------------------------------- 22 [LOGO OF VANGUARD WINDSOR FUND APPEARS HERE] [LOGO OF VANGUARD - --------------- WINDSOR FUND APPEARS HERE] THE VANGUARD GROUP OF INVESTMENT P R O S P E C T U S COMPANIES Vanguard Financial Center FEBRUARY 28, 1995 P.O. Box 2600 Valley Forge, PA 19482 INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TELE-ACCOUNT FOR 24-HOUR ACCESS: 1-800-662-6273 (ON-BOARD) TELECOMMUNICATION SERVICE FOR THE HEARING-IMPAIRED: 1-800-662-2738 TRANSFER AGENT: The Vanguard Group, Inc. Vanguard Financial Center Valley Forge, PA 19482 [LOGO OF THE VANGUARD GROUP APPEARS HERE] P022 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [LOGO OF VANGUARD WINDSOR A Series of Vanguard/Windsor Funds FUND APPEARS HERE] and A Member of The Vanguard Group - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS--FEBRUARY 28, 1995 - -------------------------------------------------------------------------------- FUND INFORMATION: INSTITUTIONAL PARTICIPANT SERVICES--1-800-523-1188 - -------------------------------------------------------------------------------- INVESTMENT Vanguard/Windsor Fund (the "Fund"), formerly Windsor Fund, is OBJECTIVES an open-end diversified investment company that seeks to pro- AND POLICIES vide long-term growth of capital and income by investing pri- marily in common stocks. The Fund's secondary objective is to provide current income. There can be no assurance that the Fund will achieve these objectives. Shares of the Fund are neither insured nor guaranteed by any agency of the U.S. Gov- ernment, including the FDIC. Vanguard/Windsor Fund is an independent series of Vanguard/Windsor Funds, Inc. (the "Company"), formerly The Windsor Funds, Inc. The Company is currently offering shares of two series. This Prospectus relates to the Vanguard/Windsor Fund series only. - -------------------------------------------------------------------------------- IMPORTANT This Prospectus is intended exclusively for participants in NOTE employer-sponsored retirement or savings plans, such as tax- qualified pension and profit-sharing plans and 401(k) thrift plans, as well as 403(b)(7) custodial accounts for non-profit educational and charitable organizations. - -------------------------------------------------------------------------------- OPENING AN The Fund is an investment option under a retirement or sav- ACCOUNT ings program sponsored by your employer. The administrator of your retirement plan 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 op- tion. If you have any questions about the Fund, please contact Par- ticipant Services at 1-800-523-1188. If you have any ques- tions about your plan account, contact your plan administra- tor or the organization that provides recordkeeping services for your plan. - -------------------------------------------------------------------------------- ABOUT THIS This Prospectus is designed to set forth concisely the infor- PROSPECTUS mation you should know about the Fund before you invest. It should be retained for future reference. A "Statement of Ad- ditional Information" containing additional information about the Fund has been filed with the Securities and Exchange Com- mission. This Statement is dated February 28, 1995, and has been incorporated by reference into this Prospectus. A copy may be obtained without charge by writing to the Fund or by calling Participant Services. - --------------------------------------------------------------------------------
Page Fund Expenses......... 2 Financial Highlights.. 2 Yield and Total Return............... 3 Investment Objectives. 4 Investment Policies... 4 Investment Risks...... 4
Page Who Should Invest..... 5 Implementation of Policies............. 6 Investment Limitations.......... 7 Management of the Fund................. 8 Investment Adviser.... 9 Performance Record.... 10
Page Dividends, Capital Gains and Taxes...... 11 The Share Price of the Fund ............ 11 General Information... 12 SERVICE GUIDE Participating in Your Plan................. 13
TABLE OF CONTENTS - -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF- FENSE. - -------------------------------------------------------------------------------- FUND EXPENSES The following table illustrates all expenses and fees that a shareholder of the Fund would incur. The expenses and fees set forth in the table are for the 1994 fiscal year.
SHAREHOLDER TRANSACTION EXPENSES --------------------------------------------------------------- Sales Load Imposed on Purchases......................... None Sales Load Imposed on Reinvested Dividends.............. None Redemption Fees......................................... None Exchange Fees........................................... None ANNUAL/FUND OPERATING EXPENSES --------------------------------------------------------------- Management & Administrative Expenses.................... 0.18% Investment Advisory Fees................................ 0.24 12b-1 Fees.............................................. None Other Expenses Distribution Costs................................ 0.02% Miscellaneous Expenses............................ 0.01 ---- Total Other Expenses.................................... 0.03 ---- TOTAL OPERATING EXPENSES.............................. 0.45% ====
The purpose of this table is to assist you in understanding the various costs and expenses that an investor would bear directly or indirectly as a shareholder in the Fund. The following example illustrates the expenses that a share- holder would incur on a $1,000 investment over various peri- ods, assuming (1) a 5% annual rate of return and (2) redemp- tion at the end of each period. As noted in the table above, the Fund charges no redemption fees of any kind.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- $5 $14 $25 $57
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- FINANCIAL The following financial highlights for a share outstanding HIGHLIGHTS throughout each year, insofar as they relate to each of the five years in the period ended October 31, 1994, have been audited by Price Waterhouse LLP, independent accountants, whose report thereon was unqualified. This information should be read in conjunction with the Fund's financial statements and notes thereto which are incorporated by reference in the Statement of Additional Information and this Prospectus, and which appear, along with the report of Price Waterhouse LLP, in the Fund's 1994 Annual Report to Shareholders. For a more complete discussion of the Fund's performance, please see the Fund's 1994 Annual Report to Shareholders, which may be ob- tained without charge by writing to the Fund or by calling Participant Services at 1-800-523-1188. 2
YEAR ENDED OCTOBER 31, --------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 - ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF YEAR...... $14.95 $12.37 $12.79 $9.72 $15.17 $14.13 $14.22 $13.85 $13.39 $12.12 ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ INVESTMENT OPERATIONS Net Investment Income.. .44 .37 .49 .58 .74 .71 .66 .78 .85 .79 Net Realized and Unrealized Gain (Loss) on Investments........ .42 2.98 .50 3.55 (4.59) 1.51 2.33 (.11) 3.05 2.01 ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ TOTAL FROM INVESTMENT OPERATIONS........... .86 3.35 .99 4.13 (3.85) 2.22 2.99 .67 3.90 2.80 - ------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS Dividends from Net Investment Income..... (.37) (.39) (.57) (.74) (.75) (.63) (.87) (.30) (.85) (.79) Distributions from Realized Capital Gains................. (.89) (.38) (.84) (.32) (.85) (.55) (2.21) -- (2.59) (.74) ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ TOTAL DISTRIBUTIONS... (1.26) (.77) (1.41) (1.06) (1.60) (1.18) (3.08) (.30) (3.44) (1.53) - ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF YEAR................... $14.55 $14.95 $12.37 $12.79 $ 9.72 $15.17 $14.13 $14.22 $13.85 $13.39 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ TOTAL RETURN............ 6.35% 28.29% 9.30% 44.69% (27.93)% 17.05% 27.01% 4.62% 29.31% 23.30% - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (Millions)............. $11,406 $10,537 $8,250 $7,859 $5,841 $8,313 $5,920 $4,848 $4,862 $3,813 Ratio of Expenses to Average Net Assets..... .45% .40% .26% .30% .37% .41% .46% .43% .52% .53% Ratio of Net Investment Income to Average Net Assets................. 3.11% 2.68% 3.89% 4.84% 5.82% 5.07% 5.08% 4.86% 5.28% 6.19% Portfolio Turnover Rate. 34% 25% 32% 36% 21% 34% 24% 46% 51% 23%
- -------------------------------------------------------------------------------- YIELD AND From time to time the Fund may advertise its yield and total TOTAL RETURN return. Both yield and total return figures are based on his- torical earnings and are not intended to indicate future per- formance. The "total return" of the Fund refers to the aver- age annual compounded rates of return over one-, five-and ten-year periods or for the life of the Fund (as stated in the advertisement) that would equate an initial amount in- vested at the beginning of a stated period to the ending re- deemable value of the investment, assuming the reinvestment of all dividend and capital gains distributions. In accordance with industry guidelines set forth by the U.S. Securities and Exchange Commission, the "30-day yield" of the Fund is calculated daily by dividing the net investment in- come per share earned during a 30-day period by the net asset value per share on the last day of the period. Net investment income includes interest and dividend income earned on the Fund's securities and is net of all expenses and all recur- ring and nonrecurring charges that have been applied to all shareholder accounts. The yield calculation assumes that the net investment income earned over thirty days is compounded monthly for six months and then annualized. Methods used to calculate advertised yields are standardized for all stock and bond mutual funds. However, these methods differ from the accounting methods used by the Fund to maintain its books and records, and so the advertised 30-day yield may not fully re- flect the income paid to your own account or the yield re- ported in the Fund's reports to shareholders. - -------------------------------------------------------------------------------- 3 INVESTMENT The objective of the Fund is to provide long-term growth of OBJECTIVES capital and income. The Fund's secondary objective is to pro- vide current income. There can be no assurance that the Fund will achieve these objectives. THE FUND SEEKS TO PROVIDE These investment objectives are fundamental and so cannot be LONG-TERM changed without the approval of a majority of the Fund's GROWTH OF shareholders. CAPITAL AND INCOME - -------------------------------------------------------------------------------- INVESTMENT The Fund invests primarily in common stocks, which are se- POLICIES lected principally on the basis of fundamental investment value. Crucial to the valuation process is the relationship THE FUND of a company's underlying earning power and dividend payout INVESTS to the market price of its stock. The Fund's holdings usually PRIMARILY IN are characterized by relatively low price-earnings ratios and COMMON STOCKS meaningful income yields. At the time of purchase, many of the Fund's securities are considered to be undervalued or overlooked by the market. The Fund is managed without regard to tax ramifications. Although the Fund invests primarily in common stocks, it may invest in money market instruments, fixed-income securities, convertible securities and other equity securities, such as preferred stock. The Fund reserves the right to hold money market instruments and fixed-income securities in whatever proportion the adviser deems appropriate for temporary defen- sive purposes. The Fund may also invest in stock futures con- tracts and options. See "Implementation of Policies" for a description of these investment practices of the Fund. The investment policies of the Fund are not fundamental and so may be changed by the Board of Directors without share- holder approval. - -------------------------------------------------------------------------------- INVESTMENT As a mutual fund investing primarily in common stocks, the RISKS Fund is subject to MARKET RISK--i.e., the possibility that common stock prices will decline over short or even extended THE FUND IS periods. The U.S. stock market has tended to be cyclical, SUBJECT TO with periods when common stock prices generally rise and pe- MARKET RISK riods when prices generally decline. To illustrate the volatility of stock prices, the following table sets forth the extremes for stock market returns as well as the average return for the period from 1926 to 1994, as measured by the Standard & Poor's 500 Composite Stock Price Index. AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994) OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS ------ ------- -------- -------- Best +53.9% +23.9% +20.1% +16.9% Worst -43.3 -12.5 - 0.9 + 3.1 Average +12.2 +10.2 +10.7 +10.7
4 As shown, common stocks have provided annual total returns (capital appreciation plus dividend income), averaging +10.7% for all 10-year periods from 1926 to 1994. While this average return can be used as a guide for setting reasonable expecta- tions for future stock market returns, it may not be useful for forecasting future returns in any particular period, as stock returns are quite volatile from year to year. This table of U.S. stock market returns should not be viewed as a representation of future returns for the Fund or the U.S. stock market. The illustrated returns represent histori- cal investment performance, which may be a poor guide to fu- ture returns. Also, stock market indexes such as the S&P 500 are based on unmanaged portfolios of securities before trans- action costs and other expenses. Such costs will reduce the relative investment performance of the Fund and other "real world" portfolios. Finally, the Fund is likely to differ in portfolio composition from broad stock market averages, and so the Fund's performance should not be expected to mirror the returns provided by a specific index. THE FUND IS The investment adviser manages the Fund according to the tra- ALSO SUBJECT ditional methods of "active" investment management, which in- TO MANAGER volve the buying and selling of securities based upon econom- RISK ic, financial and market analysis and investment judgement. Manager risk refers to the possibility that the Fund's in- vestment adviser may fail to execute the Fund's investment strategy effectively. As a result, the Fund may fail to achieve its stated objective. - -------------------------------------------------------------------------------- WHO SHOULD The Fund is intended for investors who are seeking growth of INVEST capital and income. Although the Fund's secondary objective is to provide current income, investors should not consider LONG-TERM the Fund a substitute for fixed-income investments. The Fund INVESTORS is intended to be a long-term investment vehicle and is not SEEKING GROWTH designed to provide investors with a means of speculating on OF CAPITAL AND short-term market movements. Investors who engage in exces- INCOME sive account activity generate additional costs which are borne by all of the Fund's shareholders. In order to minimize such costs the Fund has adopted certain policies. The Fund reserves the right to reject any purchase request (including exchange purchases from other Vanguard portfolios) that is reasonably deemed to be disruptive to efficient portfolio management, either because of the timing of the investment or previous excessive trading by the investor. Additionally, the Fund reserves the right to suspend the offering of its shares. No assurance can be given that the Fund will attain its ob- jectives or that shareholders will be protected from the risk of loss that is inherent in equity investing. Investors may wish to reduce the potential risk of investing in the Fund by purchasing shares on a regular, periodic basis (dollar-cost- averaging) rather than making an investment in one lump sum. Investors should not consider the Fund a complete investment program. Most investors should maintain diversified holdings of securities with different risk characteristics--including common stocks, bonds and money market instru- 5 ments. Investors may also wish to complement an investment in the Fund with other types of common stock investments. - -------------------------------------------------------------------------------- IMPLEMENTATION In addition to investing primarily in equity securities, the OF POLICIES Fund follows a number of additional investment practices to achieve its objectives. THE FUND MAY Although it normally seeks to remain substantially fully in- INVEST IN vested in equity securities, the Fund may invest in certain SHORT-TERM short-term fixed income securities. Such securities may be FIXED INCOME used temporarily to invest uncommitted cash balances, to SECURITIES maintain liquidity to meet shareholder redemptions, or to take a temporarily defensive position against a potential stock market decline. No more than 35% of the Fund's assets will be committed to short-term fixed income securities for purposes other than taking a temporary defensive position. These securities include: obligations of the United States government and its agencies or instrumentalities; commercial paper, bank certificates of deposit, and bankers' accept- ances; and repurchase agreements collateralized by these se- curities. In addition, the Fund may, on occasion, invest a small portion of its assets in bonds with ratings below in- vestment grade when selected issues are believed to offer prospective returns competitive with equity securities. A repurchase agreement is a means of investing monies for a short period. In a repurchase agreement, a seller--a U.S. commercial bank or recognized U.S. securities dealer--sells securities to the Fund and agrees to repurchase the securi- ties at the Fund's cost plus interest within a specified pe- riod (normally one day). In these transactions, the securi- ties purchased by the Fund will have a total value equal to or in excess of the value of the repurchase agreement, and will be held by the Fund's Custodian Bank until repurchased. THE FUND MAY The Fund may utilize stock futures contracts and options to a USE FUTURES limited extent. Specifically, the Fund may enter into futures CONTRACTS AND contracts provided that not more than 5% of its assets are OPTIONS required as a futures contract deposit. In addition, the Fund may enter into futures contracts and options transactions only to the extent that obligations under such contracts or transactions represent not more than 20% of the Fund's as- sets. Futures and options transactions may be used for several rea- sons: to maintain cash reserves while simulating full invest- ment, to facilitate trading, to reduce transaction costs, or to seek higher investment returns when a futures contract is priced more attractively than the underlying equity security or index. While futures contracts and options can be used as leveraged investments, the Fund may not use futures or op- tions transactions to leverage its net assets. For example, in order to remain fully invested in stocks while maintaining liquidity to meet potential shareholder re- demptions, the Fund may invest a portion of its assets in a stock futures contract. Because futures contracts only re- quire a small initial margin deposit, the Fund would than be able to maintain a cash reserve for potential redemptions, while at the same time remaining fully invested. Also, be- cause the transaction costs of futures and options may be 6 lower than the costs of investing in stocks directly, it is expected that the use of futures contracts and options may reduce the Fund's total transaction costs. FUTURES The primary risks associated with the use of futures con- CONTRACTS AND tracts and options are: (i) imperfect correlation between the OPTIONS POSE change in market value of the stocks held by the Fund and the CERTAIN RISKS prices of futures contracts and options; and (ii) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position prior to its maturity date. The risk of imperfect correlation will be minimized by investing only in those contracts whose behavior is expected to resemble that of the Fund's underlying securi- ties. The risk that the Fund will be unable to close out a futures position will be minimized by entering into such transactions on a national exchange with an active and liquid secondary market. The risk of loss in trading futures contracts in some strate- gies can be substantial, due both to the low margin deposits required and the extremely high degree of leverage involved in futures pricing. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss (or gain) to the investor. When investing in futures contracts, the Fund will segregate cash or cash equivalents in the amount of the underlying obligation. THE FUND MAY The Fund may lend its investment securities to qualified in- LEND ITS stitutional investors for either short-term or long-term pur- SECURITIES poses of realizing additional income. Loans of securities by the Fund will be collateralized by cash, letters of credit, or securities issued or guaranteed by the U.S. Government or its agencies. The collateral will equal at least 100% of the current market value of the loaned securities. BORROWING The Fund may borrow money, subject to the restrictions de- scribed below in Investment Limitations, for temporary or emergency purposes, including the meeting of redemption re- quests which might otherwise require the untimely disposition of securities. PORTFOLIO Although it generally seeks to invest for the long term, the TURNOVER IS Fund retains the right to sell securities irrespective of how NOT EXPECTED long they have been held. It is anticipated that the annual TO EXCEED 100% portfolio turnover of the Fund will not exceed 100%. A turn- over rate of 100% would occur, for example, if all of the se- curities of the Fund were replaced within one year. - -------------------------------------------------------------------------------- INVESTMENT The Fund has adopted certain limitations on its investment LIMITATIONS practices. Specifically, the Fund will not: THE FUND HAS (a) with respect to 75% of the value of its total assets, ADOPTED purchase the securities of any issuer (except obligations CERTAIN of the United States government and its instrumentali- FUNDAMENTAL ties) if as a result the Fund would hold more than 10% of LIMITATIONS the outstanding voting securities of the issuer, or more than 5% of the value of the total assets of the Fund would be invested in the securities of such issuer; (b) invest more than 25% of its assets in any one industry; and 7 (c) borrow money, except that the Fund may borrow from banks (or through reverse repurchase agreements), for temporary or emergency (not leveraging) purposes, including the meeting of redemption requests which might otherwise re- quire the untimely disposition of securities, in an amount not exceeding 10% of the value of the net assets of the Fund (including the amount borrowed and the value of any outstanding reverse repurchase agreements) at the time the borrowing is made. Whenever borrowings exceed 5% of the value of the net assets of the Fund, the Fund will not make any additional investments. These investment limitations are considered at the time in- vestment securities are purchased. The investment limitations described here and in the Statement of Additional Information may be changed only with the approval of a majority of the Fund's shareholders. - -------------------------------------------------------------------------------- MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com- THE FUND panies, a family of more than 30 investment companies with more than 80 distinct investment portfolios and total assets VANGUARD in excess of $130 billion. Through their jointly-owned sub- ADMINISTERS sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and AND the other funds in the Group obtain at cost virtually all of DISTRIBUTES their corporate management, administrative and distribution THE FUND services. Vanguard also provides investment advisory services on an at-cost basis to certain Vanguard funds. As a result of Vanguard's unique corporate structure, the Vanguard funds have costs substantially lower than those of most competing mutual funds. In 1994, the average expense ratio (annual costs including advisory fees divided by total net assets) for the Vanguard funds amounted to approximately .30% com- pared to an average of 1.05% for the mutual fund industry (data provided by Lipper Analytical Services). The Officers of the Fund manage its day-to-day operations and are responsible to the Fund's Board of Directors. The Direc- tors set broad policies for the Fund and choose its Officers. A list of the Directors and Officers of the Fund and a state- ment of their present positions and principal occupations during the past five years can be found in the Statement of Additional Information. Vanguard employs a supporting staff of management and admin- istrative personnel needed to provide the requisite services to the funds and also furnishes the funds with necessary of- fice space, furnishings and equipment. Each fund pays its share of Vanguard's total expenses, which are allocated among the funds under methods approved by the Board of Directors (Trustees) of each fund. In addition, each fund bears its own direct expenses, such as legal, auditing and custodian fees. Vanguard provides distribution and marketing services to the funds. The funds are available on a no-load basis (i.e., there are no sales commissions or 12b-1 fees). However, each fund bears its share of the Group's distribution costs. - -------------------------------------------------------------------------------- 8 INVESTMENT The Fund has entered into an investment advisory agreement ADVISER with Wellington Management Company ("WMC"), 75 State Street, Boston, MA 02109, under which WMC manages the investment and WELLINGTON reinvestment of Vanguard/Windsor Fund's assets and continu- MANAGEMENT ously reviews, supervises and administers the Fund's invest- COMPANY SERVES ment program. WMC discharges its responsibilities subject to AS ADVISER TO the control of the Officers and Directors of the Fund. THE FUND WMC is a professional investment counseling firm which glob- ally provides investment services to investment companies, institutions, and individuals. Among the clients of WMC are more than 10 investment companies of The Vanguard Group. As of December 31, 1994 WMC held discretionary management au- thority with respect to more than $80 billion of assets. WMC and its predecessor organizations have provided investment advisory services to investment companies since 1931 and to investment counseling clients since 1960. John B. Neff, Managing Partner of WMC, serves as portfolio manager of the Fund, a position he has held since June 1964. In managing the Fund's investments, Mr. Neff is assisted by Charles T. Freemen, Senior Vice President of WMC and assis- tant portfolio manager of the Fund, who joined WMC in 1969. Messrs. Neff and Freemen are supported by research and other investment services provided by the professional staff of WMC. Effective at year-end 1995, Mr. Neff will retire and Mr. Freeman will assume the position of portfolio manager of the Fund. Mr. Neff will remain as an adviser to WMC, and will continue to work with the firm's investment professionals, including the portfolio managers of all Vanguard funds for which WMC serves as adviser. WMC earns a basic advisory fee, calculated by applying the following annual percentage rates to the average month-end net assets of the Fund:
ANNUAL NET ASSETS RATE ---------- ------ First $200 million .350% Next $250 million .275% Next $300 million .200% Assets in excess of $750 million .150%
The Fund's payments to WMC under the above schedule are sub- ject to an incentive/penalty fee arrangement which compares the performance of the Fund's assets with the performance of the Standard & Poor's 500 Composite Stock Price Index. This arrangement provides for the following adjustments to WMC's basic fee: 9
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/PENALTY DIFFERENTIAL VS. THE S&P 500 FEE ADJUSTMENT --------------------------------- ----------------- Less than or equal to -12% points 0.90 X Basic Fee Equal to or less than -6% points but greater than -9% points 0.95 X Basic Fee Less than +6% points but greater than -6% points Basic Fee Equal to or greater than +6% points but less than +9% points 1.05 X Basic Fee Greater than or equal to 9% points 1.10 X Basic Fee
During the fiscal year ended October 31, 1994, the total ad- visory fees paid by the Fund to WMC represented an effective annual rate of .16% of the Fund's average net assets before an increase of .08% based upon investment performance. The investment advisory agreement authorized WMC to select brokers or dealers to execute purchases and sales of the Fund's portfolio securities, and directs the adviser to use its best efforts to obtain the best available price and most favorable execution with respect to all transactions. The full range and quality of brokerage services available are considered in making these determinations. The Fund has authorized WMC to pay higher commissions in rec- ognition of brokerage services felt necessary for the achievement of better execution, provided the adviser be- lieves this to be in the best interest of the Fund. Although the Fund does not market its shares through intermediary bro- kers or dealers, the Fund may place orders with qualified broker-dealers who recommend the Fund to clients if the Offi- cers of the Fund believe that the quality of the transaction and the commission are comparable to what they would be with other qualified brokerage firms. The Fund's Board of Directors may, without the approval of shareholders, provide for: (a) the employment of a new in- vestment adviser pursuant to the terms of a new advisory agreement, either as a replacement for an existing adviser or as an additional adviser; (b) a change in the terms of an ad- visory agreement; and (c) the continued employment of an ex- isting adviser on the same advisory contract terms where a contract has been assigned because of a change in control of the adviser. Any such change will only be made upon not less than 30 days' prior written notice to shareholders of the Fund, which shall include substantially the information con- cerning the adviser that would have normally been included in a proxy statement. - -------------------------------------------------------------------------------- PERFORMANCE The table below provides investment results for the Fund for RECORD several periods throughout the Fund's lifetime. The results shown represent the Fund's "total return" investment perfor- mance, which assumes the reinvestment of all capital gains and income dividends for the indicated periods. Also included is comparative information with respect to the unmanaged Standard & Poor's 500 Composite Stock Price Index, a widely used barometer of stock market activity, and the Consumer Price Index, a statistical measure of changes in the prices of goods 10 and services. The table does not make any allowance for fed- eral, state, or local income taxes which shareholders must pay on a current basis. The results shown should not be considered a representation of the total return from an investment made in the Fund to- day. This information is provided to help investors better understand the Fund and may not provide a basis for compari- son with other investments or mutual funds which use a dif- ferent method to calculate performance. AVERAGE ANNUAL RETURN FOR VANGUARD/WINDSOR FUND
PERCENTAGE INCREASE ------------------------------------------------ FISCAL PERIODS VANGUARD/WINDSOR S&P 500 CONSUMER ENDED 10/31/94 FUND INDEX PRICE INDEX -------------- ---------------- ------- ----------- 3 Years +14.2% + 9.5% +2.9% 5 Years + 9.2 +10.1 +3.6 10 Years +14.5 +14.8 +3.6 20 Years +18.3 +14.3 +5.5 Lifetime* +12.8 +10.4 +4.7
*October 23, 1958 to October 31, 1994. Data for the Consumer Price Index begins October 31, 1958. - -------------------------------------------------------------------------------- DIVIDENDS, The Fund expects to pay dividends from ordinary income semi- CAPITAL GAINS annually. Capital gains distributions, if any, will be made AND TAXES annually. All dividend and capital gains distributions are automatically reinvested in additional shares of the Fund. In THE FUND PAYS order to satisfy certain distribution requirements of the SEMI-ANNUAL IRS, the Fund may also declare special year-end distributions DIVIDENDS AND during December. The Fund intends to continue to qualify for ANY CAPITAL taxation as a "regulated investment company" under the Inter- GAINS ANNUALLY nal Revenue Code so that it will not be subject to federal income tax to the extent that its income is distributed to its shareholders. If you utilize the Fund as an investment option in an employ- er-sponsored retirement or savings plan, dividend and capital gains distributions from the Fund generally will not be sub- ject to current taxation, but will accumulate on a tax-de- ferred basis. In general, employer-sponsored retirement and savings plans are governed by a complex set of tax rules. You should consult your plan administrator, the plan's "Summary Plan Description," or a professional tax adviser regarding the tax consequences of your participation in the plan and of any plan contributions or withdrawals. - -------------------------------------------------------------------------------- THE SHARE The Fund's share price or "net asset value" per share is de- PRICE OF THE termined by dividing the total market value of the Fund's in- FUND vestments and other assets, less any liabilities, by the num- ber of outstanding shares of the Fund. Net asset value per share is calculated at the close of regular trading on the New York Stock Exchange on each day the Exchange is open for business. 11 Portfolio securities that are listed on a securities exchange are valued at the latest quoted sales prices as of 4:00 p.m. on the valuation date. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities which are listed on an exchange and which are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Unlisted securi- ties for which market quotations are readily available are valued at the latest quoted bid price. Temporary cash invest- ments are valued at amortized cost, which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Directors. Securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The Fund's share price can be found daily in the mutual fund listings of most major newspapers under the heading of The Vanguard Group. - -------------------------------------------------------------------------------- GENERAL The Company is a Maryland corporation. The Articles of Incor- INFORMATION poration permit the Directors to issue 1,600,000,000 shares of common stock, with a one cent par value. The Board of Di- rectors has the power to designate one or more classes ("se- ries") of shares of common stock and to classify and reclas- sify any unissued shares with respect to such series. Cur- rently the Company is offering shares of two series. The shares of each series of the Company are fully paid and non-assessable; have no preference as to conversion, ex- change, dividends, retirement or other features; and have no pre-emptive rights. Such shares have non-cumulative voting rights, meaning that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they so choose. Annual meetings of shareholders will not be held except as required by the Investment Company Act of 1940 and other ap- plicable law. An annual meeting will be held to vote on the removal of a Director or Directors of the Company if re- quested in writing by the holders of not less than 10% of the outstanding shares of the Company. All securities and cash are held by State Street Bank and Trust Company, Boston, MA. The Vanguard Group, Inc., Valley Forge, PA. serves as the Fund's Transfer and Dividend Dis- bursing Agent. Price Waterhouse LLP, serves as independent accountants for the Fund and will audit its financial state- ments annually. The Fund is not involved in any litigation. - -------------------------------------------------------------------------------- 12 SERVICE GUIDE PARTICIPATING The Fund is available as an investment option in your retire- IN YOUR PLAN ment or savings plan. The administrator of your plan or your employee benefits office can provide you with detailed infor- mation 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, including the Fund's investment objective, policies, risk characteristics or historical performance, please contact Participant Serv- ices at 1-800-523-1188. If you have questions about your account, contact your plan administrator or the organization which provides recordkeep- ing services for your plan. -------------------------------------------------------------- INVESTMENT You may be permitted to elect different investment options, OPTIONS AND alter the amounts contributed to your plan, or change how ALLOCATIONS contributions are allocated among your investment options in accordance with your plan's specific provisions. See your plan administrator or employee benefits office for more de- tails. -------------------------------------------------------------- TRANSACTIONS Contributions, exchanges or distributions of the Fund's INFUND SHARES shares are effective when received in "good order" by Van- guard. "Good order" means that complete information on the purchase, exchange, or redemption and the appropriate monies have been received by Vanguard. -------------------------------------------------------------- MAKING Your plan may allow you to exchange monies from one invest- EXCHANGES ment option to another. Check with your plan administrator for details on the rules governing exchanges in your plan. Certain investment options, particularly company stock or guaranteed investment contracts (GICs), may be subject to unique restrictions. Before making an exchange, you should consider the following: . If you are making an exchange to another Vanguard Fund op- tion, please read the Fund's prospectus. Contact Partici- pant Services at 1-800-523-1188 for a copy. . Exchanges are accepted by Vanguard only as permitted by your plan. Your plan administrator can explain how fre- quently exchanges are allowed. . As explained on page 5, the Fund reserves the right to ref- use any exchange purchase request. - -------------------------------------------------------------------------------- 13 [LOGO OF VANGUARD WINDSOR FUND APPEARS HERE] - --------------- THE VANGUARD GROUP [LOGO OF VANGUARD OF INVESTMENT WINDSOR FUND COMPANIES APPEARS HERE] Vanguard Financial Center I N S T I T U T I O N A L P.O. Box 2900 P R O S P E C T U S Valley Forge, PA 19482 FEBRUARY 28, 1995 INSTITUTIONAL PARTICIPANT SERVICES DEPARTMENT: 1-800-523-1188 TRANSFER AGENT: The Vanguard Group, Inc. Vanguard Financial Center Valley Forge, PA 19482 [LOGO OF THE VANGUARD GROUP APPEARS HERE] IO22 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [LOGO OF VANGUARD WINDSOR II APPEARS HERE] A Series of Vanguard/Windsor Funds and A Member of The Vanguard Group - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS--FEBRUARY 28, 1995 - -------------------------------------------------------------------------------- NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP) - -------------------------------------------------------------------------------- SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW) - -------------------------------------------------------------------------------- INVESTMENT Vanguard/Windsor II (the "Fund"), formerly Windsor II, is an OBJECTIVES open-end diversified investment company that seeks to provide AND POLICIES long-term growth of capital and income by investing primarily in common stocks. The Fund's secondary objective is to pro- vide current income. There can be no assurance that the Fund will achieve these objectives. Shares of the Fund are neither insured nor guaranteed by any agency of the U.S. Government, including the FDIC. Vanguard/Windsor II is an independent series of Vanguard/Windsor Funds, Inc. (the "Company"), formerly The Windsor Funds, Inc. The Company is currently offering shares of two series. This Prospectus relates to the Vanguard/Windsor II series only. - -------------------------------------------------------------------------------- OPENING AN To open a regular (non-retirement) account, please complete ACCOUNT and return the Account Registration Form. If you need assis- tance in completing this Form, please call the Investor In- formation Department. To open an Individual Retirement Ac- count (IRA), please use a Vanguard IRA Adoption Agreement. To obtain a copy of this form, call 1-800-662-7447, Monday through Friday, from 8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to 4:00 p.m. (Eastern time). The minimum ini- tial investment is $3,000, or $500 for Uniform Gift/Transfers to Minors Act accounts. The Fund is offered on a no-load ba- sis (i.e., there are no sales commissions or 12b-1 fees). However, the Fund incurs expenses for investment advisory, management, administrative, and distribution services. - -------------------------------------------------------------------------------- ABOUT THIS This Prospectus is designed to set forth concisely the infor- PROSPECTUS mation you should know about the Fund before you invest. It should be retained for future reference. A "Statement of Ad- ditional Information" containing additional information about the Fund has been filed with the Securities and Exchange Com- mission. This Statement is dated February 28, 1995, and has been incorporated by reference into this Prospectus. A copy may be obtained without charge by writing to the Fund or by calling the Investor Information Department. - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page Fund Expenses.......... 2 Financial Highlights... 2 Yield and Total Return. 3 FUND INFORMATION Investment Objectives.. 4 Investment Policies.... 4 Investment Risks....... 4 Who Should Invest...... 5 Implementation of Policies.............. 6
Page Investment Limitations........... 8 Management of the Fund.................. 8 Investment Advisers.... 9 Performance Record..... 13 Dividends, Capital Gains and Taxes....... 14 The Share Price of the Fund ................. 15 General Information.... 16
Page SHAREHOLDER GUIDE Opening an Account and Purchasing Shares..... 17 When Your Account Will Be Credited........... 20 Selling Your Shares.... 20 Exchanging Your Shares................ 22 Important Information About Telephone Transactions.......... 23 Transferring Registration.......... 24 Other Vanguard Services.............. 24
- -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF- FENSE. - -------------------------------------------------------------------------------- FUND EXPENSES The following table illustrates all expenses and fees that you would incur as a shareholder of the Fund. The expenses and fees set forth in the table are for the 1994 fiscal year.
SHAREHOLDER TRANSACTION EXPENSES ------------------------------------------------------------------- Sales Load Imposed on Purchases............................. None Sales Load Imposed on Reinvested Dividends.................. None Redemption Fees............................................. None Exchange Fees............................................... None ANNUAL FUND OPERATING EXPENSES ------------------------------------------------------------------- Management & Administrative Expenses........................ 0.22% Investment Advisory Fees.................................... 0.14 12b-1 Fees.................................................. None Other Expenses Distribution Costs.................................... 0.02% Miscellaneous Expenses................................ 0.01 ---- Total Other Expenses........................................ 0.03 ---- TOTAL OPERATING EXPENSES.................................. 0.39% ====
The purpose of this table is to assist you in understanding the various costs and expenses that you would bear directly or indirectly as an investor in the Fund. The following example illustrates the expenses that you would incur on a $1,000 investment over various periods, assuming (1) a 5% annual rate of return and (2) redemption at the end of each period. As noted in the table above, the fund charges no redemption fees of any kind.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- $4 $13 $22 $49
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- FINANCIAL The following financial highlights for a share outstanding HIGHLIGHTS throughout each period, insofar as they relate to each of the five years in the period ended October 31, 1994, have been audited by Price Waterhouse LLP, independent accountants, whose report thereon was unqualified. This information should be read in conjunction with the Fund's financial statements and notes thereto, which are incorporated by reference in the Statement of Additional Information and this Prospectus, and which appear, along with the report of Price Waterhouse LLP, in the Fund's 1994 Annual Report to Shareholders. For a more complete discussion of the Fund's performance, please see the Fund's 1994 Annual Report to Shareholders which may be ob- tained without charge by writing to the Fund or by calling our Investor Information Department at 1-800-662-7447. 2
JUNE 24, YEAR ENDED OCTOBER 31, 1985, TO ----------------------------------------------------------------------- OCT. 31, 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 - ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD.... $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48 $ 9.91 $10.00 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ INVESTMENT OPERATIONS Net Investment Income.. .55 .50 .56 .62 .67 .73 .60 .52 .43 .11 Net Realized and Unrealized Gain (Loss) on Investments........ (.19) 2.47 1.17 3.55 (3.22) 2.42 1.63 (.39) 3.09 (.09) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL FROM INVESTMENT OPERATIONS........... .36 2.97 1.73 4.17 (2.55) 3.15 2.23 .13 3.52 .02 - ------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS Dividends from Net Investment Income..... (.51) (.52) (.61) (.73) (.74) (.57) (.61) (.20) (.43) (.11) Distributions from Realized Capital Gains................. (.50) (.22) (.44) (.28) (.61) -- (.80) -- (.52) -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL DISTRIBUTIONS... (1.01) (.74) (1.05) (1.01) (1.35) (.57) (1.41) (.20) (.95) (.11) - ------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD................. $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48 $ 9.91 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ TOTAL RETURN............ 2.22% 19.51% 12.50% 36.61% (17.48)% 24.68% 20.54% .90% 35.62% .20% - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions)...... $8,246 $7,486 $4,878 $3,298 $2,087 $2,162 $1,485 $1,323 $ 814 $ 133 Ratio of Expenses to Average Net Assets..... .39% .39% .41% .48% .52% .53% .58% .49% .65% .80%* Ratio of Net Investment Income to Average Net Assets................. 3.26% 3.11% 3.72% 4.51% 4.93% 5.29% 4.94% 4.11% 4.33% 4.56%* Portfolio Turnover Rate. 24% 26% 23% 41% 20% 22% 25% 46% 50% 1%
*Annualized. - -------------------------------------------------------------------------------- YIELD AND From time to time the Fund may advertise its yield and total TOTAL RETURN return. Both yield and total return figures are based on his- torical earnings and are not intended to indicate future per- formance. The "total return" of the Fund refers to the aver- age annual compounded rates of return over one- , five- and ten-year periods or for the life of the Fund (as stated in the advertisement) that would equate an initial amount in- vested at the beginning of a stated period to the ending re- deemable value of the investment, assuming the reinvestment of all dividend and capital gains distributions. In accordance with industry guidelines set forth by the U.S. Securities and Exchange Commission, the "30-day yield" of the Fund is calculated daily by dividing the net investment in- come per share earned during a 30-day period by the net asset value per share on the last day of the period. Net investment income includes interest and dividend income earned on the Fund's securities and is net of all expenses and all recur- ring and nonrecurring charges that have been applied to all shareholder accounts. The yield calculation assumes that the net investment income earned over 30 days is compounded monthly for six months and then annualized. Methods used to calculate advertised yields are standard 3 ized for all stock and bond mutual funds. However, these methods differ from the accounting methods used by the Fund to maintain its books and records, and so the advertised 30- day yield may not fully reflect the income paid to your own account or the yield reported in the Fund's reports to share- holders. Additionally, the Fund may compare its performance to that of the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"). - -------------------------------------------------------------------------------- INVESTMENT The objective of the Fund is to provide long-term growth of OBJECTIVES capital and income. The Fund's secondary objective is to pro- vide current income. There can be no assurance that the Fund will achieve these objectives. THE FUND SEEKS These investment objectives are fundamental and so cannot be TO PROVIDE changed without the approval of a majority of the Fund's LONG-TERM shareholders. GROWTH OF CAPITAL AND INCOME - -------------------------------------------------------------------------------- INVESTMENT The Fund follows a flexible investment strategy, emphasizing POLICIES income-producing stocks which the investment advisers believe to be undervalued by the market at the time of purchase. Gen- THE FUND erally, these securities are characterized by below-average INVESTS price-earnings ratios relative to the stock market, as mea- PRIMARILY IN sured by the Standard & Poor's Composite Stock Price Index. COMMON STOCKS The Fund is managed without regard to tax ramifications. Stocks will be selected based upon assessments of statistical measures of current value (such as low price-earnings and low price-to-book value ratios) and future earnings prospects. Returns on such stocks can be influenced by the recognition of their undervaluation by other investors based on statisti- cal measures or changes in expectations regarding potential earnings and dividend growth. If a stock has reached a fully- valued position as determined by one of the Fund's investment advisers, the stock will ordinarily be sold regardless of the time it has been held and replaced by one or more securities that are considered to be undervalued. Although the Fund invests primarily in common stocks, it may invest in money market instruments, fixed-income securities, and other equity securities, such as preferred stock. The Fund is expected, under normal circumstances, to be substan- tially fully invested in common stocks. In addition, the Fund may invest in stock futures and options to a limited extent. See "Implementation of Policies" for a description of these and other investment practices of the Fund. The investment policies of the Fund are not fundamental and so may be changed by the Board of Directors without share- holder approval. - -------------------------------------------------------------------------------- INVESTMENT As a mutual fund investing primarily in common stocks, the RISKS Fund is subject to MARKET RISK--i.e., the possibility that common stock prices will decline over short or even extended THE FUND IS periods. The U.S. stock market has tended to be cyclical, SUBJECT TO with periods when stock prices generally rise and periods MARKET RISK when prices generally decline. 4 To illustrate the volatility of stock prices, the following table sets forth the extremes for stock market returns as well as the average return for the period from 1926 to 1994, as measured by the Standard & Poor's 500 Composite Stock Price Index: AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994) OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS ------- ------- -------- -------- Best +53.9 +23.9 +20.1 +16.9 Worst -43.3 -12.5 - 0.9 + 3.1 Average +12.2 +10.2 +10.7 +10.7
As shown, common stocks have provided annual total returns (capital appreciation plus dividend income) averaging +10.7% for all 10-year periods from 1926 to 1994. While this average return can be used as a guide for setting reasonable expecta- tions for future stock market returns, it may not be useful for forecasting future returns in any particular period, as stock returns are quite volatile from year to year. This table of U.S. stock market returns should not be viewed as a representation of future returns for the Fund or the U.S. stock market. The illustrated returns represent histori- cal investment performance, which may be a poor guide to fu- ture returns. Also, stock market indexes such as the S&P 500 are based on unmanaged portfolios of securities before trans- action costs and other expenses. Such costs will reduce the relative investment performance of the Fund and other "real world" portfolios. Finally, the Fund is likely to differ in portfolio composition from broad stock market averages, and so the Fund's performance should not be expected to mirror the returns provided by a specific index. THE FUND IS The investment adviser manages the Fund according to the tra- ALSO SUBJECT ditional methods of "active" investment management, which in- TO MANAGER volve the buying and selling of securities based upon econom- RISK ic, financial and market analysis and investment judgement. MANAGER RISK refers to the possibility that the Fund's in- vestment advisers may fail to execute the Fund's investment strategy effectively. As a result, the Fund may fail to achieve its stated objective. - -------------------------------------------------------------------------------- WHO SHOULD The Fund is intended for investors who are seeking growth of INVEST capital and income. Although the Fund's secondary objective is to provide current income, investors should not consider LONG-TERM the Fund a substitute for fixed-income investments. The Fund INVESTORS is intended to be a long-term investment vehicle and is not SEEKING GROWTH designed to provide investors with a means of speculating on OF CAPITAL AND short-term market movements. Investors who engage in exces- INCOME sive account activity generate additional costs which are borne by all of the Fund's shareholders. In order to minimize such costs, the Fund has adopted the following policies. The Fund reserves the right to reject any purchase request (in- cluding exchange purchases from other Vanguard portfolios) that is reasonably deemed to be disruptive to efficient 5 portfolio management, either because of the timing of the in- vestment or previous excessive trading by the investor. Addi- tionally the Fund has adopted exchange privilege limitations as described in the section "Exchange Privilege Limitations." Finally, the Fund reserves the right to suspend the offering of its shares. No assurance can be given that the Fund will attain its ob- jectives or that shareholders will be protected from the risk of loss that is inherent in equity investing. Investors may wish to reduce the potential risk of investing in the Fund by purchasing shares on a regular, periodic basis (dollar-cost averaging) rather than making an investment in one lump sum. Investors should not consider the Fund a complete investment program. Most investors should maintain diversified holdings of securities with different risk characteristics--including common stocks, bonds and money market instruments. Investors may also wish to complement an investment in the Fund with other types of common stock investments. - -------------------------------------------------------------------------------- IMPLEMENTATION In addition to investing primarily in equity securities, the OF POLICIES Fund follows a number of additional investment practices to achieve its objectives. THE FUND MAY Although it normally seeks to remain substantially fully in- INVEST IN vested in equity securities, the Fund may invest temporarily SHORT-TERM in certain short-term fixed income securities. Such securi- FIXED INCOME ties may be used to invest uncommitted cash balances, to SECURITIES maintain liquidity to meet shareholder redemptions, or to take a temporarily defensive position against a potential stock market decline. No more than 35% of the Fund's assets will be committed to short-term fixed income securities for purposes other than taking a temporary defensive position. These securities include: obligations of the United States Government and its agencies or instrumentalities; commercial paper, bank certificates of deposit, and bankers' accept- ances; and repurchase agreements collateralized by these se- curities. A repurchase agreement is a means of investing monies for a short period. In a repurchase agreement, a seller--a U.S. commercial bank or recognized U.S. securities dealer--sells securities to the Fund and agrees to repurchase the securi- ties at the Fund's cost plus interest within a specified pe- riod (normally one day). In these transactions, the securi- ties purchased by the Fund will have a total value equal to or in excess of the value of the repurchase agreement, and will be held by the Fund's Custodian Bank until repurchased. THE FUND MAY The Fund may utilize stock futures contracts and options to a USE FUTURES limited extent. Specifically, the Fund may enter into futures CONTRACTS AND contracts provided that not more than 5% of its assets are OPTIONS required as a futures contract deposit. In addition, the Fund may enter into futures contracts and options transactions only to the extent that obligations under such contracts or transactions represent not more than 20% of the Fund's as- sets. Futures and options transactions may be used for several rea- sons: to maintain cash reserves while simulating full invest- ment, to facilitate trading, to reduce 6 transaction costs, or to seek higher investment returns when a futures contract is priced more attractively than the un- derlying equity security or index. While futures contracts and options can be used as leveraged investments, the Fund may not use futures contracts or options transactions to lev- erage its net assets. For example, in order to remain fully invested in stocks while maintaining liquidity to meet potential shareholder re- demptions, the Fund may invest a portion of its assets in a stock futures contract. Because futures contracts only re- quire a small initial margin deposit, the Fund would then be able to maintain a cash reserve for potential redemptions, while at the same time remaining fully invested. Also, be- cause the transaction costs of futures and options may be lower than the costs of investing in stocks directly, it is expected that the use of futures contracts and options may reduce the Fund's total transaction costs. FUTURES The primary risks associated with the use of futures con- CONTRACTS AND tracts and options are: (i) imperfect correlation between the OPTIONS POSE change in market value of the stocks held by the Fund and the CERTAIN RISKS prices of futures contracts and options; and (ii) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position prior to its maturity date. The risk of imperfect correlation will be minimized by investing only in those contracts whose behavior is expected to resemble that of the Fund's underlying securi- ties. The risk that the Fund will be unable to close out a futures position will be minimized by entering into such transactions on a national exchange with an active and liquid secondary market. The risk of loss in trading futures contracts in some strate- gies can be substantial, due both to the low margin deposits required and the extremely high degree of leverage involved in futures pricing. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss (or gain) to the investor. When investing in futures contracts, the Fund will segregate cash or cash equivalents in the amount of the underlying obligation. THE FUND MAY The Fund may lend its investment securities to qualified in- LEND ITS stitutional investors for either short-term or long-term pur- SECURITIES poses of realizing additional income. Loans of securities by the Fund will be collateralized by cash, letters of credit, or securities issued or guaranteed by the U.S. government or its agencies. The collateral will equal at least 100% of the current market value of the loaned securities. BORROWING The Fund may borrow money, subject to the restrictions de- scribed below in Investment Limitations, for temporary or emergency purposes, including the meeting of redemption re- quests which might otherwise require the untimely disposition of securities. PORTFOLIO Although it generally seeks to invest for the long term, the TURNOVER IS Fund retains the right to sell securities irrespective of how NOT EXPECTED long they have been held. It is anticipated that the annual TO EXCEED 100% portfolio turnover of the Fund will not exceed 100%. A turn- over rate of 100% would occur, for example, if all of the se- curities of the Fund were replaced within one year. - -------------------------------------------------------------------------------- 7 INVESTMENT The Fund has adopted certain limitations on its investment LIMITATIONS practices. Specifically, the Fund will not: THE FUND HAS (a) with respect to 75% of the value of its total assets, ADOPTED purchase the securities of any issuer (except obligations CERTAIN of the United States government and its instrumentali- FUNDAMENTAL ties) if as a result the Fund would hold more than 10% of LIMITATIONS the outstanding voting securities of the issuer, or more than 5% of the value of the total assets of the Fund would be invested in the securities of such issuer; (b) invest more than 25% of its assets in any one industry; and (c) borrow money, except that the Fund may borrow from banks (or through reverse repurchase agreements), for temporary or emergency (not leveraging) purposes, including the meeting of redemption requests which might otherwise re- quire the untimely disposition of securities, in an amount not exceeding 10% of the value of the net assets of the Fund (including the amount borrowed and the value of any outstanding reverse repurchase agreements) at the time the borrowing is made. Whenever borrowings exceed 5% of the value of the net assets of the Fund, the Fund will not make any additional investments. These investment limitations are considered at the time in- vestment securities are purchased. The investment limitations described here and in the Statement of Additional Information may be changed only with the approval of a majority of the Fund's shareholders. - -------------------------------------------------------------------------------- MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com- THE FUND panies, a family of more than 30 investment companies with more than 80 distinct investment portfolios and total assets VANGUARD in excess of $130 billion. Through their jointly owned sub- ADMINISTERS sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and AND the other funds in the Group obtain at cost virtually all of DISTRIBUTES their corporate management, administrative and distribution THE FUND services. Vanguard also provides investment advisory services on an at-cost basis to certain Vanguard funds, including Vanguard/Windsor II. As a result of Vanguard's unique corpo- rate structure, the Vanguard funds have costs substantially lower than those of most competing mutual funds. In 1994, the average expense ratio (annual costs including advisory fees divided by total net assets) for the Vanguard funds amounted to approximately .30% compared to an average of 1.05% for the mutual fund industry (data provided by Lipper Analytical Services). The Officers of the Fund manage its day-to-day operations and are responsible to the Fund's Board of Directors. The Direc- tors set broad policies for the Fund and choose its Officers. A list of the Directors and Officers of the Fund and a state- ment of their present positions and principal occupations during the past five years can be found in the Statement of Additional Information. Vanguard employs a supporting staff of management and admin- istrative personnel needed to provide the requisite services to the funds and also furnishes 8 the funds with necessary office space, furnishings and equip- ment. Each fund pays its share of Vanguard's net expenses, which are allocated among the funds under methods approved by the Board of Directors (Trustees) of each fund. In addition, each fund bears its own direct expenses, such as legal, au- diting and custodian fees. Vanguard provides distribution and marketing services to the funds. The funds are available on a no-load basis (i.e., there are no sales commissions or 12b-1 fees). However, each fund bears its share of the Group's distribution costs. - -------------------------------------------------------------------------------- INVESTMENT Vanguard/Windsor II employs a "multi-manager" approach util- ADVISERS izing four investment advisers to manage the Fund's assets. The Fund has investment advisory contracts with Barrow, Han- FOUR ADVISERS ley, Mewhinney & Strauss, Inc. ("BHM&S"), 200 Crescent Court, OVERSEE THE Dallas, TX 75201; Equinox Capital Management, Inc. ("Equi- FUND'S nox"), 399 Park Avenue, 28th floor, New York, NY 10022 and INVESTMENTS Tukman Capital Management, Inc. ("Tukman"), 60 East Sir Fran- cis Drake Boulevard, Larkspur, CA 94939. Additionally, a por- tion of the Fund's assets are managed on an at-cost basis by Vanguard's Core Management Group. BHM&S, Equinox and Tukman are not affiliated in any way with Wellington Management Com- pany, the investment adviser to Vanguard/Windsor Fund. The proportion of the net assets of the Fund managed by each adviser is established by the Board of Directors and may be changed in the future as circumstances warrant. Currently, BHM&S manages approximately 72% of the assets of the Fund, Equinox and Tukman manage approximately 10% each, and Van- guard's Core Management Group manages approximately 8% of the Fund's assets. Investors will be advised of any substantive change in the proportions managed by each adviser. Each ad- viser discharges their responsibilities subject to the con- trol of the Directors and Officers. BARROW, The Fund has entered into an advisory agreement with BHM&S HANLEY, under which BHM&S manages the investment and reinvestment of MEWHINNEY & a portion (currently approximately 72%) of the Fund's assets STRAUSS and continuously reviews, supervises, and administers the (BHM&S) Fund's investment program with respect to those assets. BHM&S discharges its responsibilities subject to the control of the Officers and Directors of the Fund. BHM&S founded in 1979, is a professional investment counsel- ing firm which provides investment services to investment companies, institutions, and individuals. As of December 31, 1994, BHM&S held discretionary management authority with re- spect to approximately $13.7 billion of assets. The investment principals at BHM&S develop a common, firm- wide investment strategy that is employed in managing client investment portfolios and selecting individual securities for those portfolios. James P. Barrow, a founding principal and vice president of BHM&S, has been designated as portfolio manager for the assets of the Fund managed by BHM&S, a posi- tion he has held since the Fund's inception in 1985. He con- tributes to the development of the common 9 portfolio management strategy used at BHM&S and is also re- sponsible for seeing that the Fund's assets are managed in a way consistent with the firm's overall approach. BHM&S earns a basic advisory fee calculated by applying the following annual percentage rates to the average month-end net assets of the Fund managed by BHM&S:
ANNUAL NET ASSETS RATE ---------- ------ First $200 million 0.300% Next $300 million 0.200% Next $500 million 0.150% Over $1 billion 0.125%
The Fund's payments to BHM&S under the above schedule are subject to an incentive/penalty fee arrangement which com- pares the performance of the Fund's assets managed by BHM&S with the performance of the Standard & Poor's/BARRA Value In- dex. This arrangement provides for the following adjustments to BHM&S's basic fee:
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/PENALTY DIFFERENTIAL VS. THE S&P/BARRA VALUE INDEX FEE ADJUSTMENT -------------------------------------------- ----------------- Less than or equal to -9% points 0.75 X Basic Fee Equal to or less than -6% points but greater than -9% points 0.85 X Basic Fee Less than +6% points but greater than -6% points Basic Fee Equal to or greater than +6% points but less than +9% points 1.15 X Basic Fee Greater than or equal to +9% points 1.25 X Basic Fee
Under rules of the Securities and Exchange Commission, the incentive/penalty fee structure will not be fully operable until the quarter ending April 30, 1996, and, until that date, will be calculated according to certain transition rules. A detailed description of the incentive/penalty fee schedule for BHM&S and the applicable transition rules is contained in the Statement of Additional Information. EQUINOX Equinox is a professional investment counseling firm founded CAPITAL in 1989. As of December 31, 1994, Equinox provided investment MANAGEMENT advisory services with respect to approximately $3.2 billion (EQUINOX) of assets. Ronald J. Ulrich, Director and President, is the principal investment officer and founder of Equinox. Mr. Ulrich has served as portfolio manager for the assets of the Fund managed by Equinox since 1991, when the Fund first hired Equinox. 10 Equinox earns a basic advisory fee, calculated by applying the following annual percentage rates to the average month- end net assets of the Fund managed by Equinox.
ANNUAL NET ASSETS RATE ---------- ------ First $100 million 0.300% Next $300 million 0.200% Over $400 million 0.150%
The Fund's payments to Equinox under the above schedule are subject to an incentive/penalty fee arrangement which com- pares the performance of the Fund's assets managed by Equinox with the performance of the Standard & Poor's 500 Composite Stock Price Index. This arrangement provides for the follow- ing adjustments to Equinox's basic fee:
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/PENALTY DIFFERENTIAL VS. THE S&P 500 FEE ADJUSTMENT --------------------------------- ----------------- Less than or equal to -9% points 0.50 X Basic Fee Equal to or less than -4.5% points but greater than -9% points 0.75 X Basic Fee Less than +4.5% points but greater than -4.5% points Basic Fee Equal to or greater than +4.5% points but less than +9% points 1.25 X Basic Fee Greater than or equal to +9% points 1.50 X Basic Fee
TUKMAN CAPITAL Tukman is a professional investment counseling firm founded MANAGEMENT in 1980. As of December 31, 1994, Tukman provided investment (TUKMAN) advisory services with respect to assets of approximately $2.1 billion. Melvin T. Tukman, President, Director and foun- der of Tukman, has served as portfolio manager for the assets of the Fund managed by the firm since 1991, when the Fund first hired Tukman. Tukman earns a basic advisory fee, calculated by applying the following annual percentage rates to the average month-end net assets of the Fund managed by Tukman:
ANNUAL NET ASSETS RATE ---------- ------ First $25 million .400% Next $125 million .350% Next $350 million .250% Next $500 million .200% Over $1 billion .150%
11 The Fund's payments to Tukman under the above schedule are subject to an incentive/penalty fee arrangement which com- pares the performance of the Fund's assets managed by Tukman with the performance of the Standard & Poor's 500 Composite Stock Price Index. This arrangement provides for the follow- ing adjustments to Tukman's basic fee.
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/ DIFFERENTIAL VS. THE S&P 500 PENALTY FEE ADJUSTMENT --------------------------------- ---------------------- Less than or equal to -12% points 0.50 X Basic Fee Equal to or less than -6% points but greater than -12% points 0.75 X Basic Fee Less than +6% points but greater than -6% points Basic Fee Equal to or greater than +6% points but less than +12% points 1.25 X Basic Fee Greater than or equal to +12% points 1.50 X Basic Fee
VANGUARD'S Vanguard's Core Management Group provides investment advisory CORE services on an at-cost basis with respect to a portion of the MANAGEMENT Fund's assets (currently approximately 8%). The Core Manage- GROUP ment Group also provides investment advisory services to sev- eral Vanguard funds, including Vanguard Index Trust, Vanguard Balanced Index Fund, Vanguard International Equity Index Fund, Vanguard Institutional Index Fund, several indexed sep- arate accounts, as well as a portion of Vanguard/Morgan Growth Fund's assets. Total assets under management by the Core Management Group were approximately $18 billion as of December 31, 1994. The portion of the Fund allocated to the Core Management Group is managed using computerized, quanti- tative techniques based on a value index constructed to ap- proximate the aggregate fundamental characteristics of a typ- ical large capitalization value fund, such as Vanguard/Windsor II. For further information concerning the index, please refer to the Statement of Additional Informa- tion. The Core Management Group is supervised by the Officers of the Fund. AGGREGATE For the fiscal year ended October 31, 1994, the aggregate in- ADVISORY FEES vestment advisory fees paid by the Fund to BHM&S, Equinox PAID BY THE Capital Management and Tukman Capital Management, Inc., rep- FUND resented an effective annual rate of .14 of 1% of average net assets before a decrease of $145,000 based on performance. The investment advisory fees paid by the Fund for this period to BHM&S represented an effective annual rate of .14 of 1% of the average net assets managed by BHM&S. The investment advi- sory fees paid by the Fund for this period to Equinox and Tukman represented an effective annual rate of .19 of 1% and .25 of 1% of the average net assets managed by Equinox and Tukman, respectively. OTHER ADVISORY BHM&S, Equinox, Tukman and Vanguard's Core Management Group INFORMATION are authorized to select brokers or dealers to execute pur- chases and sales of the Fund's portfolio securities, and di- rect the advisers to use their best efforts to obtain the best available price and most favorable execution with re- spect to all transac- 12 tions. The full range and quality of brokerage services available are considered in making these determinations. The Fund has authorized BHM&S, Equinox, Tukman and Vanguard's Core Management Group to pay higher commissions in recogni- tion of brokerage services deemed necessary for the achieve- ment of better execution, provided the advisers believe this to be in the best interest of the Fund. Although the Fund does not market its shares through intermediary brokers or dealers, the Fund may place orders with qualified broker- dealers who recommend the Fund to clients if the Officers of the Fund believe that the quality of the transaction and the commission are comparable to what they would be with other qualified brokerage firms. The Fund's Board of Directors may, without the approval of shareholders, provide for: (a) the employment of a new in- vestment adviser pursuant to the terms of a new advisory agreement, either as a replacement for an existing adviser or as an additional adviser; (b) a change in the terms of an ad- visory agreement; and (c) the continued employment of an ex- isting adviser on the same advisory contract terms where a contract has been assigned because of a change in control of the adviser. Any such change will only be made upon not less than 30 days' prior written notice to shareholders of the Fund, which shall include substantially the information con- cerning the adviser that would have normally been included in a proxy statement. - -------------------------------------------------------------------------------- PERFORMANCE The table on page 14 provides investment results for the Fund RECORD for several periods throughout the Fund's lifetime. The re- sults shown represent "total return" investment performance, which assumes the reinvestment of all capital gains and in- come dividends for the indicated periods. Also included is comparative information with respect to the unmanaged Stan- dard & Poor's 500 Composite Stock Price Index, a widely used barometer of stock market activity, and the Consumer Price Index, a statistical measure of changes in the prices of goods and services. The table does not make any allowance for federal, state or local income taxes which shareholders must pay on a current basis. 13 The results shown should not be considered a representation of the total return from an investment made in the Fund to- day. This information is provided to help investors better understand the Fund and may not provide a basis of comparison with other investments or mutual funds which use a different method to calculate performance. AVERAGE ANNUAL RETURN FOR VANGUARD/WINDSOR II
PERCENTAGE INCREASE -------------------------------------------------- FISCAL PERIODS VANGUARD/ S&P 500 CONSUMER ENDED 10/31/94 WINDSOR II INDEX PRICE INDEX -------------- ---------- ------- ----------- 1 Year + 2.2% + 3.9% +2.6% 3 Years +11.2 + 9.5 +2.9 5 Years + 9.2 +10.1 +3.6 Lifetime* +13.2 +13.9 +3.6
*June 24, 1985, to October 31, 1994. Data for the Consumer Price Index begins June 30, 1985. - -------------------------------------------------------------------------------- DIVIDENDS, The Fund expects to pay dividends from ordinary income semi- CAPITAL GAINS annually. Capital gains distributions, if any, will be made AND TAXES annually. THE FUND PAYS In addition, in order to satisfy certain distribution re- SEMI-ANNUAL quirements of the Tax Reform Act of 1986, the Fund may de- DIVIDENDS AND clare special year-end dividend and capital gains distribu- ANY CAPITAL tions during December. Such distributions, if received by GAINS ANNUALLY shareholders by January 31, are deemed to have been paid by the Fund and received by shareholders on December 31 of the prior year. Dividend and capital gains distributions may be automatically reinvested or received in cash. See "Choosing a Distribution Option" for a description of these distributions methods. The Fund intends to continue to qualify for taxation as a "regulated investment company" under the Internal Revenue Code so that it will not be subject to federal income tax to the extent its income is distributed to shareholders. Divi- dends paid by the Fund from net investment income, whether received in cash or reinvested in additional shares, will be taxable to shareholders as ordinary income. For corporate in- vestors, dividends from net investment income will generally qualify in part for the corporate dividends received deduc- tion. However, the portion of the dividends so qualified de- pends on the aggregate taxable qualifying dividend income re- ceived by the Fund from domestic (U.S.) sources. Distributions paid by the Fund from long-term capital gains, whether received in cash or reinvested in additional shares, are taxable as long-term capital gains, regardless of the length of time you have owned shares in the Fund. Capital gains distributions are made when the Fund realizes net capi- tal gains on sales of portfolio securities during the year. The Fund does not seek to realize any particular amount of capital gains during a year; rather, realized gains are a by- product 14 of portfolio management activities. Consequently, capital gains distributions may be expected to vary considerably from year to year; there will be no capital gains distributions in years when the Fund realizes net capital losses. Note that if you accept capital gains distributions in cash, instead of reinvesting them in additional shares, you are in effect reducing the capital at work for you in the Fund. Al- so, keep in mind that if you purchase shares in the Fund shortly before the record date for a dividend or capital gains distribution, a portion of your investment will be re- turned to you as a taxable distribution, regardless of whether you are reinvesting your distributions or receiving them in cash. The Fund will notify you annually as to the tax status of dividend and capital gains distributions paid by the Fund. A CAPITAL GAIN A sale of shares of the Fund is a taxable event, and may re- OR LOSS MAY BE sult in a capital gain or loss. A capital gain or loss may be REALIZED UPON realized from an ordinary redemption of shares or an exchange EXCHANGE OR of shares between two mutual funds (or two portfolios of a REDEMPTION mutual fund). Dividend distributions, capital gains distributions, and cap- ital gains or losses from redemptions and exchanges may be subject to state and local taxes. The Fund is required to withhold 31% of taxable dividends, capital gains distributions, and redemptions paid to share- holders who have not complied with IRS taxpayer identifica- tion regulations. You may avoid this withholding requirement by certifying on your Account Registration Form your proper Social Security or Employer Identification number and certi- fying that you are not subject to backup withholding. The Fund has obtained a Certificate of Authority to do busi- ness as a foreign corporation in Pennsylvania and does busi- ness and maintains an office in that state. In the opinion of counsel, the shares of the Fund are exempt from Pennsylvania personal property taxes. The tax discussion set forth above is included for general information only. Prospective investors should consult their own tax advisers concerning the tax consequences of an in- vestment in the Fund. The Fund is managed without regard to tax ramifications. - -------------------------------------------------------------------------------- THE SHARE The Fund's share price or "net asset value" per share is de- PRICE OF THE termined by dividing the total market value of the Fund's in- FUND vestments and other assets, less any liabilities, by the num- ber of outstanding shares of the Fund. Net asset value per share is calculated at the close of regular trading on the New York Stock Exchange on each day the Exchange is open for business. Portfolio securities that are listed on a securities exchange are valued at the latest quoted sales prices as of 4:00 p.m. on the valuation date. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities which are listed on an exchange and which are not traded on 15 the valuation date are valued at the mean of the latest quoted bid and asked prices. Unlisted securities for which market quotations are readily available are valued at the latest quoted bid price. Temporary cash investments are val- ued at amortized cost, which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Directors. Securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities. The Fund's share price can be found daily in the mutual fund listings of most major newspapers under the heading of The Vanguard Group. - -------------------------------------------------------------------------------- GENERAL The Company is a Maryland corporation. The Articles of Incor- INFORMATION poration permit the Directors to issue 1,600,000,000 shares of common stock, with a one cent par value. The Board of Di- rectors has the power to designate one or more classes ("se- ries') of shares of common stock and to classify or reclas- sify any unissued shares with respect to such series. Cur- rently the Company is offering shares of two series. The shares of each series of the Company are fully paid and non-assessable; have no preference as to conversion, ex- change, dividends, retirement or other features; and have no pre-emptive rights. Such shares have non-cumulative voting rights, meaning that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they so choose. Annual meetings of shareholders will not be held except as required by the Investment Company Act of 1940 and other ap- plicable law. An annual meeting will be held to vote on the removal of a Director or Directors of the Company if re- quested in writing by the holders of not less than 10% of the outstanding shares of the Company. All securities and cash are held by State Street Bank and Trust Company, Boston, MA. The Vanguard Group, Inc., Valley Forge, PA, serves as the Fund's Transfer and Dividend Dis- bursing Agent. Price Waterhouse LLP, serves as independent accountants for the Fund and will audit its financial state- ments annually. The Fund is not involved in any litigation. - -------------------------------------------------------------------------------- 16 SHAREHOLDER GUIDE OPENING AN You may open a regular (non-retirement) account, either by ACCOUNT AND mail or wire. Simply complete and return an Account Registra- PURCHASING tion Form and any required legal documentation, indicating SHARES the amount you wish to invest. Your purchase must be equal to or greater than the $3,000 minimum initial investment re- quirement ($500 for Uniform Gifts/Transfer to Minors Act ac- counts). You must open a new Individual Retirement Account by mail (IRAs may not be opened by wire) using a Vanguard IRA Adoption Agreement. Your purchase must be equal to or greater than the $500 minimum initial investment requirement, but no more than $2,000 if you are making a regular IRA contribu- tion. Rollover contributions are generally limited to the amount withdrawn within the past 60 days from an IRA or other qualified Retirement Plan. If you need assistance with the forms or have any questions about the Fund, please call our Investor Information Department at 1-800-662-7447. NOTE: For other types of account registrations (e.g., corporations, as- sociations, other organizations, trusts or powers of attor- ney), please call us to determine which additional forms you may need. Because of the risks associated with common stock invest- ments, the Fund is intended to be a long-term investment ve- hicle and is not designed to provide investors with a means of speculating on short-term stock market movements. Conse- quently the Fund reserves the right to reject any specific purchase (or exchange purchase) request. The Fund also re- serves the right to suspend the offering of shares for a pe- riod of time. The Fund's shares are purchased at the next-determined net asset value after your investment has been received. The Fund is offered on a no-load basis (i.e., there are no sales com- missions or 12b-1 fees). ADDITIONAL Subsequent investments to regular accounts may be made by INVESTMENTS mail ($100 minimum), wire ($1,000 minimum), exchange from an- other Vanguard Fund account, or Vanguard Fund Express. Subse- quent investments to Individual Retirement Accounts may be made by mail ($100 minimum) or exchange from another Vanguard Fund account. In some instances, contributions may be made by wire or Vanguard Fund Express. Please call us for more infor- mation on these options. -------------------------------------------------------------- ADDITIONAL INVESTMENTS NEW ACCOUNT TO EXISTING ACCOUNTS PURCHASING BY Please include the Additional investments MAIL Complete amount of your initial should include the In- and sign the investment on the reg- vest-by-Mail remit- enclosed istration form, make tance form attached to Account your check payable to your Fund confirmation Registration The Vanguard Group-73, statements. Please Form and mail to: make your check pay- able to The Vanguard VANGUARD FINANCIAL Group-73, write your CENTER P.O. BOX 2600 account number on your VALLEY FORGE, PA 19482 check and, using the return envelope pro- vided, mail to the ad- dress indicated on the Invest-by-Mail Form. 17 For express or VANGUARD FINANCIAL CENTER All purchase requests registered 455 DEVON PARK DRIVE should be mailed to mail,send to: WAYNE, PA 19087 the address indicated for new accounts. Do not send registered or express mail to the post office box ad- dress. -------------------------------------------------------------- PURCHASING BY CORESTATES BANK, N.A. WIRE Money ABA 031000011 should be CORESTATES NO. 0101 9897 wired to: ATTN VANGUARD VANGUARD/WINDSOR II BEFORE WIRING ACCOUNT NUMBER Please contact ACCOUNT REGISTRATION Client Services (1- 800-662-2739) To assure proper receipt, please be sure your bank includes the name of the Fund, the account number Vanguard has as- signed to you and the eight-digit CoreStates number. If you are opening a new account, please complete the Account Regis- tration Form and mail it to the "New Account" address above after completing your wire arrangement. NOTE: Federal Funds wire purchase orders will be accepted only when the Fund and Custodian Bank are open for business. -------------------------------------------------------------- PURCHASING BY You may open an account or purchase additional shares by mak- EXCHANGE (from ing an exchange from an existing Vanguard Fund account. (As a Vanguard explained on page 5, however, the Fund reserves the right to account) refuse any exchange purchase request.) Please call our Client Services Department at 1-800-662-2739. The new account will have the same registration as the existing account. -------------------------------------------------------------- PURCHASING BY The Fund Express Special Purchase option lets you move money FUND EXPRESS from your bank account to your Vanguard account at your re- quest. Or if you choose the Automatic Investment option, Special money will be moved from your bank account to your Vanguard Purchase and account on the schedule (monthly, bimonthly [every other Automatic month], quarterly or yearly) you select. To establish these Investment Fund Express options, please provide the appropriate informa- tion on the Account Registration Form. We will send you a confirmation of your Fund Express service, please wait three weeks before using the service. - -------------------------------------------------------------------------------- CHOOSING A You must select one of three distribution options: DISTRIBUTION OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital gains distributions will be reinvested in additional Fund shares. This option will be selected for you automatically unless you specify one of the other options. 2. CASH DIVIDEND OPTION--Your dividends will be paid in cash and your capital gains will be reinvested in additional Fund shares. 3. ALL CASH OPTION--Both dividend and capital gains distribu- tions will be paid in cash. 18 You may change your option by calling our Client Services De- partment (1-800-662-2739). In addition, an option to invest your cash dividend and/or capital gains distributions in another Vanguard Fund account is available. Please call our Client Services Department (1- 800-662-2739) for information. You may also elect Vanguard Dividend Express which allows you to transfer your cash divi- dends and/or capital gains distributions automatically to your bank account. Please see "Other Vanguard Services" for more information. - -------------------------------------------------------------------------------- TAX CAUTION Under federal tax laws, the Fund is required to distribute net capital gains and dividend income to Fund shareholders. INVESTORS These distributions are made to all shareholders who own Fund SHOULD ASK shares as of the distribution's record date, regardless of ABOUT THE how long the shares have been owned. Purchasing shares just TIMING OF prior to the record date could have a significant impact on CAPITAL GAINS your tax liability for the year. For example, if you purchase AND DIVIDEND shares immediately prior to the record date of a sizable cap- DISTRIBUTIONS ital gain or income dividend distribution, you will be as- BEFORE sessed taxes on the amount of the capital gain and/or divi- INVESTING dend distribution later paid even though you owned the Fund shares for just a short period of time. (Taxes are due on the distributions even if the dividend or gain is reinvested in additional Fund shares.) While the total value of your in- vestment will be the same after the distribution--the amount of the distribution will offset the drop in the net asset value of the shares--you should be aware of the tax implica- tions the timing of your purchase may have. Prospective investors should, therefore, inquire about poten- tial distributions before investing. The Fund's annual capi- tal gains distribution normally occurs in December, while in- come dividends are generally paid semi-annually in June and December. For additional information on distributions and taxes, see the section titled "Dividends, Capital Gains, and Taxes." - -------------------------------------------------------------------------------- IMPORTANT The easiest way to establish optional Vanguard services on ACCOUNT your account is to select the options you desire when you INFORMATION complete your Account Registration Form. IF YOU WISH TO ADD SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD ESTABLISHING WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE OPTIONAL CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FUR- SERVICES THER ASSISTANCE. SIGNATURE For our mutual protection, we may require a signature guaran- GUARANTEES tee on certain written transaction requests. A signature guarantee verifies the authenticity of your signature and may be obtained from banks, bankers and any other guarantors that Vanguard deems acceptable. A SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC. CERTIFICATES Share certificates will be issued upon request. If a certifi- cate is lost, you may incur an expense to replace it. 19 BROKER/DEALER If you purchase shares in Vanguard funds through a registered PURCHASES broker-dealer or investment adviser, the broker-dealer or ad- viser may charge a service fee. CANCELLING The Fund will not cancel any trade (e.g., a purchase, ex- TRADES change or redemption) believed to be authentic, received in writing or by telephone, once the trade request has been re- ceived. - -------------------------------------------------------------------------------- WHEN YOUR Your trade date is the date on which your account is credit- ACCOUNT WILLBE ed. If your purchase is made by check, Federal Funds wire, or CREDITED exchange, and is received by the close of the New York Stock Exchange (generally 4:00 p.m. Eastern time), your trade date is the day of receipt. If your purchase is received after the close of the Exchange, your trade date is the next business day. Your shares are purchased at the net asset value deter- mined on your trade date. Vanguard will not accept third- party checks to open an account. Please be sure your purchase check is made payable to The Vanguard Group-73. In order to prevent lengthy processing delays caused by the clearing of foreign checks, Vanguard will only accept a for- eign check which has been drawn in U.S. dollars and has been issued by a foreign bank with a U.S. correspondent bank. The name of the U.S. correspondent bank must be printed on the face of the foreign check. - -------------------------------------------------------------------------------- SELLING YOUR You may withdraw any portion of the funds in your account by SHARES redeeming shares at any time. You may initiate a request by writing or by telephoning. Your redemption proceeds are nor- mally mailed within two business days after the receipt of the request in Good Order. -------------------------------------------------------------- SELLING BY Requests should be mailed to VANGUARD FINANCIAL CENTER, MAIL VANGUARD/WINDSOR II, P.O. BOX 1120, VALLEY FORGE, PA 19482. (For express or registered mail, send your request to Van- guard Financial Center, Vanguard/Windsor II, 455 Devon Park Drive, Wayne, PA 19087.) The redemption price of shares will be the Fund's net asset value next determined after Vanguard has received all re- quired documents in Good Order. -------------------------------------------------------------- DEFINITION GOOD ORDER means that the request includes the following: OF GOOD ORDER 1. The account number and Fund name. 2. The amount of the transaction (specified in dollars or shares). 3. Signatures of all owners EXACTLY as they are registered on the account. 4. Any required signature guarantees. 5. Other supporting legal documentation that might be re- quired, in the case of estates, corporations, trusts, and certain other accounts. 6. Any certificates that you hold for the account. IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT AT 1-800-662-2739. -------------------------------------------------------------- 20 SELLING BY To sell shares by telephone, you or your pre-authorized rep- TELEPHONE resentative may call our Client Services Department at 1-800- 662-2739. The proceeds will be sent to you by mail. Please see also "Important Information About Telephone Transac- tions." -------------------------------------------------------------- SELLING BY If you select the Fund Express Automatic Withdrawal option, FUND EXPRESS money will be automatically moved from your Vanguard Fund ac- count to your bank account according to the schedule you have Automatic selected. The Special Redemption option lets you move money Withdrawal & from your Vanguard account to your bank account on your re- Special quest. You may elect Fund Express on the Account Registration Redemption Form or call our Investor Information Department at 1-800- 662-7447 for a Fund Express application. -------------------------------------------------------------- SELLING BY You may sell shares of the Fund by making an exchange into EXCHANGE another Vanguard Fund account. Please see "Exchanging Your Shares" for details. -------------------------------------------------------------- IMPORTANT Shares purchased by check or Fund Express may be redeemed at REDEMPTION any time. However, your redemption proceeds will not be paid INFORMATION until payment for the purchase is collected, which will take ten calendar days. -------------------------------------------------------------- DELIVERY OF Redemption requests received by telephone prior to the close REDEMPTION of the New York Stock Exchange are processed on the day of PROCEEDS receipt and the redemption proceeds are normally sent on the following business day. Redemption requests received by telephone after the close of the Exchange (generally 4:00 p.m., Eastern time) are proc- essed on the business day following receipt and the proceeds are normally sent on the second business day following re- ceipt. Redemption proceeds must be sent to you within seven days of receipt of your request in Good Order. If you experience difficulty in making a telephone redemption during periods of drastic economic or market changes, your redemption request may be made by regular or express mail. It will be implemented at the net asset value next determined after your request has been received by Vanguard in Good Or- der. The Fund reserves the right to revise or terminate the telephone redemption privilege at any time. The Fund may suspend the redemption right or postpone payment at times when the New York Stock Exchange is closed or under any emergency circumstances as determined by the United States Securities and Exchange Commission. If the Board of Directors determines that it would be detri- mental to the best interests of the Fund's remaining share- holders to make payment in cash, the Fund may pay redemption proceeds in excess of $250,000 in whole or in part by a dis- tribution in kind of readily marketable securities. -------------------------------------------------------------- 21 VANGUARD'S If you make a redemption from a qualifying account, Vanguard AVERAGE COST will send you an Average Cost Statement which provides you STATEMENT with the tax basis of the shares you redeemed. Please see "Other Vanguard Services" for additional information. -------------------------------------------------------------- MINIMUM Due to the relatively high cost of maintaining smaller ac- ACCOUNT counts, the Fund reserves the right to redeem shares in any BALANCE account that is below the minimum initial investment amount REQUIREMENT of $3,000. If at any time your total investment does not have a value of at least $3,000, you may be notified that your ac- count is below the Fund's minimum account balance require- ment. You would then be allowed 60 days to make an additional investment before the account is liquidated. Proceeds would be promptly paid to the registered shareholder. (This minimum does not apply to IRAs, certain other retirement accounts, and Uniform Gifts/Transfers to Minors Act accounts.) The Fund's minimum account balance requirement will not apply if your account falls below $3,000 solely as a result of de- clining markets (i.e., a decline in a Fund's net asset val- ue). - -------------------------------------------------------------------------------- EXCHANGING Should your investment goals change, you may exchange your YOUR SHARES shares of Vanguard/Windsor II for those of other available Vanguard Funds. EXCHANGING BY When exchanging shares by telephone, please have ready the TELEPHONE Fund name, account number, Social Security number or Employer Identification number listed on the account, and the exact Call Client name and address in which the account is registered. Only the Services registered shareholder, or his or her pre-authorized repre- (1-800-662- sentative, may complete such an exchange. Requests for tele- 2739) phone exchanges received prior to the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) are processed at the close of business that same day. Re- quests received after the close of the Exchange are processed the next business day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST, VANGUARD INTERNATIONAL EQUITY INDEX FUND AND VANGUARD QUANTITATIVE PORTFOLIOS. If you experience difficulty in mak- ing a telephone exchange, your exchange request may be made by regular or express mail, and it will be implemented at the closing net asset value on the date received by Vanguard pro- vided the request is received in Good Order. Please see "Important Information About Telephone Transac- tions" for additional important details. -------------------------------------------------------------- EXCHANGING BY Please be sure to include on your exchange request the name MAIL and account number of your current Fund, and the name of the Fund you wish to exchange into, the amount you wish to ex- change, and the signatures of all registered account holders. Send your request to VANGUARD FINANCIAL CENTER, VANGUARD/WINDSOR II, P.O. BOX 1120, VALLEY FORGE, PA 19482. (For express or registered mail, send your request to Van- guard Financial Center, Vanguard/Windsor II, 455 Devon Park Drive, Wayne, PA 19087.) -------------------------------------------------------------- 22 IMPORTANT Before you make an exchange, you should consider the follow- EXCHANGE ing: INFORMATION . Please read the Fund's prospectus before making an ex- change. For a copy and for answers to any questions you may have, call our Investor Information Department (1-800-662- 7447). . An exchange is treated as a redemption and a purchase; therefore, you could realize a taxable gain or loss on the transaction. . Exchanges are accepted only if the registrations and the Taxpayer Identification numbers of the two accounts are identical. . The shares to be exchanged must be on deposit and not held in certificate form. . New accounts are not currently accepted in Vanguard/Windsor Fund. . The redemption price of shares redeemed by exchange is the net asset value next determined after Vanguard has received any required documents in Good Order. . When opening a new account by exchange, you must meet the minimum investment requirement of the new Fund. Every effort will be made to maintain the exchange privilege. However, the Fund reserves the right to revise or terminate its provisions, or to limit the amount of or reject any ex- change, as deemed necessary, at any time. The Fund's exchange purchase privilege is available only in states in which the shares of the Fund are registered for sale. The Fund's shares are currently registered for sale in all 50 states and the Fund intends to maintain such registra- tion. - -------------------------------------------------------------------------------- EXCHANGE The Fund's exchange privilege is not intended to afford PRIVILEGE shareholders a way to speculate on short-term movements in LIMITATIONS the market. Accordingly, in order to prevent excessive use of the exchange privilege that may potentially disrupt the man- agement of the Fund and increase transaction costs, the Fund has established a policy of limiting excessive exchange ac- tivity. Exchange activity generally will not be deemed excessive if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30 DAYS APART) from the Fund during any twelve month period. Notwithstanding these limitations, the Fund reserves the right to reject any purchase request (including exchange pur- chases from other Vanguard portfolios) that is reasonably deemed to be disruptive to efficient portfolio management. - -------------------------------------------------------------------------------- IMPORTANT The ability to initiate redemptions (except wire redemptions) INFORMATION and exchanges by telephone is automatically established on ABOUT your account unless you request in writing that telephone TELEPHONE transactions on your account not be permitted. TRANSACTIONS To protect your account from losses resulting from unautho- rized or fraudulent telephone instructions, Vanguard adheres to the following security procedures: 23 1.SECURITY CHECK. To request a transaction by telephone, the caller must know (i) the name of the Portfolio; (ii) the 10- digit account number; (iii) the exact name and address used in the registration; and (iv) the Social Security or Employer Identification number listed on the account. 2.PAYMENT POLICY. The proceeds of any telephone redemption by mail will be made payable to the registered shareowners and mailed to the address of record, only. Neither the Fund nor Vanguard will be responsible for the au- thenticity of transaction instructions received by telephone, provided that reasonable security procedures have been fol- lowed. Vanguard believes that the security procedures de- scribed above are reasonable, and that if such procedures are followed, you will bear the risk of any losses resulting from unauthorized or fraudulent telephone transactions on your ac- count. - -------------------------------------------------------------------------------- TRANSFERRING You may transfer the registration of any of your Fund shares REGISTRATION to another person by completing a transfer form and sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY FORGE, PA 19482. The request must be in Good Order. Before mailing your request, please call our Client Services Depart- ment (1-800-662-2739) for full instructions. - -------------------------------------------------------------------------------- STATEMENTS AND Vanguard will send you a confirmation statement each time you REPORTS initiate a transaction in your account, except for checkwriting redemptions from Vanguard money market accounts. You will also receive a comprehensive account statement at the end of each calendar quarter. The fourth-quarter state- ment will be a year-end statement, listing all transaction activity for the entire calendar year. Vanguard's Average Cost Statement provides you with the aver- age cost of shares redeemed from your account, using the av- erage cost single category method. This service is available for most taxable accounts opened since January 1, 1986. In general, investors who redeemed shares from a qualifying Van- guard account may expect to receive their Average Cost State- ment in February of the following year. Please call our Cli- ent Services Department (1-800-662-2739) for information. Financial reports on the Fund will be mailed to you semi-an- nually, according to the Fund's fiscal year-end. - -------------------------------------------------------------------------------- OTHER VANGUARD For more information about any of these services, please call SERVICES our Investor Information Department at 1-800-662-7447. VANGUARD With Vanguard's Direct Deposit Service, most U.S. Government DIRECT DEPOSIT checks (including Social Security and military pension SERVICE checks) and private payroll checks may be automatically de- posited into your Vanguard Fund account. Separate brochures and forms are available for direct deposit of U.S. Government and private payroll checks. 24 VANGUARD Vanguard's Automatic Exchange Service allows you to move AUTOMATIC money automatically among your Vanguard fund accounts. For EXCHANGE instance, the service can be used to "dollar cost average" SERVICE from a money market portfolio into a stock or bond fund, or to contribute to an IRA or other retirement plan. Please con- tact our Client Services Department at 1-800-662-2739 for ad- ditional information. VANGUARD FUND Vanguard's Fund Express allows you to transfer money between EXPRESS your Fund account and your account at a bank, savings and loan association, or a credit union that is a member of the Automated Clearing House (ACH) system. You may elect this service on the Account Registration Form or call our Investor Information Department (1-800-662-7447) for a Fund Express application. The minimum amount that can be transferred by telephone is $100. However, if you have established one of the automatic options, the minimum amount is $50. The maximum amount that can be transferred using any of the options is $100,000. Special rules govern how your Fund Express purchases or re- demptions are credited to your account. In addition, some services of Fund Express cannot be used with specific Van- guard funds. For more information, please refer to the Van- guard Fund Express brochure. VANGUARD Vanguard's Dividend Express allows you to transfer your divi- DIVIDEND dends and/or capital gains distributions automatically from EXPRESS your Fund account, one business day after the Fund's payable date, to your account at a bank, savings and loan associa- tion, or a credit union that is a member of the Automated Clearing House (ACH) network. You may elect this service on the Account Registration Form, or call our Investor Informa- tion Department (1-800-662-7447) for a Vanguard Dividend Ex- press application. VANGUARD TELE- Vanguard's Tele-Account is a convenient, automated service ACCOUNT that provides share price, price change and yield quotations on Vanguard Funds through any TouchToneTM telephone. This service also lets you obtain information about your account balance, your last transaction, and your most recent dividend or capital gains payment. To contact Vanguard's Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273). A brochure of- fering detailed operating instructions is available from our Investor Information Department (1-800-662-7447). - -------------------------------------------------------------------------------- 25 [LOGO VANGUARD WINDSOR II APPEARS HERE] [LOGO OF VANGUARD - --------------- WINDSOR II APPEARS HERE] THE VANGUARD GROUP OF INVESTMENT COMPANIES P R O S P E C T U S Vanguard Financial Center P.O. Box 2600 FEBRUARY 28, 1995 Valley Forge, PA 19482 INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TELE-ACCOUNT FOR 24-HOUR ACCESS: 1-800-662-6273 (ON-BOARD) TELECOMMUNICATION SERVICE FOR THE HEARING-IMPAIRED: 1-800-662-2738 TRANSFER AGENT: The Vanguard Group, Inc. Vanguard Financial Center Valley Forge, PA 19482 [LOGO OF THE VANGUARD GROUP APPEARS HERE] P073 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [LOGO OF VANGUARD A Series of Vanguard/Windsor Funds WINDSOR II and A Member of The Vanguard Group APPEARS HERE] ================================================================================ PROSPECTUS--FEBRUARY 28, 1995 - -------------------------------------------------------------------------------- FUND INFORMATION: INSTITUTIONAL PARTICIPANT SERVICES--1-800-523-1188 - -------------------------------------------------------------------------------- INVESTMENT Vanguard/Windsor II (the "Fund"), formerly Windsor II, is an OBJECTIVES AND open-end diversified investment company that seeks to provide POLICIES long-term growth of capital and income by investing primarily in common stocks. The Fund's secondary objective is to pro- vide current income. There can be no assurance that the Fund will achieve these objectives. Shares of the Fund are neither insured nor guaranteed by any agency of the U.S. Government, including the FDIC. Vanguard/Windsor II is an independent series of Vanguard/Windsor Funds, Inc. (the "Company"), formerly The Windsor Funds, Inc. The Company is currently offering shares of two series. This Prospectus relates to the Vanguard/Windsor II series only. - -------------------------------------------------------------------------------- IMPORTANT NOTE This Prospectus is intended exclusively for participants in employer-sponsored retirement or savings plans, such as tax- qualified pension and profit-sharing plans and 401(k) thrift plans, as well as 403(b)(7) custodial accounts for non-profit educational and charitable organizations. Another version of this Prospectus, containing information on how to open a per- sonal investment account with the Fund, is available for in- dividual investors. To obtain a copy of that version of the Prospectus, please call 1-800-662-7447. - -------------------------------------------------------------------------------- OPENING AN The Fund is an investment option under a retirement or sav- ACCOUNT ings program sponsored by your employer. The administrator of your retirement plan 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 op- tion. If you have any questions about the Fund, please contact Par- ticipant Services at 1-800-523-1188. If you have any ques- tions about your plan account, contact your plan administra- tor or the organization that provides recordkeeping services for your plan. - -------------------------------------------------------------------------------- ABOUT THIS This Prospectus is designed to set forth concisely the infor- PROSPECTUS mation you should know about the Fund before you invest. It should be retained for future reference. A "Statement of Ad- ditional Information" containing additional information about the Fund has been filed with the Securities and Exchange Com- mission. This Statement is dated February 28, 1995, and has been incorporated by reference into this Prospectus. A copy may be obtained without charge by writing to the Fund or by calling Participant Services. - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page Fund Expenses......... 2 Financial Highlights.. 2 Yield and Total Return............... 3 Investment Objectives. 4 Investment Policies... 4 Investment Risks...... 4
Page Who Should Invest..... 5 Implementation of Policies............. 6 Investment Limitations.......... 8 Management of the Fund................. 8 Investment Advisers... 9 Performance Record ... 13
Page Dividends, Capital Gains and Taxes..... 14 The Share Price of the Fund ........... 14 General Information.. 15 SERVICE GUIDE Participating in Your Plan................ 16
- -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF- FENSE. - -------------------------------------------------------------------------------- FUND EXPENSES The following table illustrates all expenses and fees that a shareholder of the Fund would incur. The expenses and fees set forth in the table are for the 1994 fiscal year.
SHAREHOLDER TRANSACTION EXPENSES ----------------------------------------------------------------- Sales Load Imposed on Purchases............................ None Sales Load Imposed on Reinvested Dividends................. None Redemption Fees............................................ None Exchange Fees.............................................. None ANNUAL FUND OPERATING EXPENSES ----------------------------------------------------------------- Management & Administrative Expenses....................... 0.22% Investment Advisory Fees................................... 0.14 12b-1 Fees................................................. None Other Expenses Distribution Costs.................................. 0.02% Miscellaneous Expenses.............................. 0.01 ----- Total Other Expenses....................................... 0.03 ----- TOTAL OPERATING EXPENSE.................................. 0.39% =====
The purpose of this table is to assist you in understanding the various costs and expenses that an investor would bear directly or indirectly as a shareholder in the Fund. The following example illustrates the expenses that you would incur on a $1,000 investment over various periods, assuming (1) a 5% annual rate of return and (2) redemption at the end of each period. As noted in the table above, the Fund charges no redemption fees of any kind.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- $4 $13 $22 $49
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- FINANCIAL The following financial highlights for a share outstanding HIGHLIGHTS through each period, insofar as they relate to each of the five years in the period ended October 31, 1994, have been audited by Price Waterhouse LLP, independent accountants, whose report thereon was unqualified. This information should be read in conjunction with the Fund's financial statements and notes thereto which are incorporated by reference in the Statement of Additional Information and this Prospectus, and which appear, along with the report of Price Waterhouse LLP, in the Fund's 1994 Annual Report to Shareholders. For a more complete discussion of the Fund's performance, please see the Fund's 1994 Annual Report to Shareholders which may be ob- tained without charge by writing to the Fund or by calling Participant Services at 1-800-523-1188. 2
JUNE 24, YEAR ENDED OCTOBER 31, 1985 TO ----------------------------------------------------------------------- OCT. 31, 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 - ----------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD.... $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48 $ 9.91 $10.00 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ INVESTMENT OPERATIONS Net Investment Income.. .55 .50 .56 .62 .67 .73 .60 .52 .43 .11 Net Realized and Unrealized Gain (Loss) on Investments ....... (.19) 2.47 1.17 3.55 (3.22) 2.42 1.63 (.39) 3.09 (.09) ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL FROM INVESTMENT OPERATIONS........... .36 2.97 1.73 4.17 (2.55) 3.15 2.23 .13 3.52 .02 - ----------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income..... (.51) (.52) (.61) (.73) (.74) (.57) (.61) (.20) (.43) (.11) Distributions from Realized Capital Gains................. (.50) (.22) (.44) (.28) (.61) -- (.80) -- (.52) -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL DISTRIBUTIONS... (1.01) (.74) (1.05) (1.01) (1.35) (.57) (1.41) (.20) (.95) (.11) - ----------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD................. $17.33 $17.98 $15.75 $15.07 $11.91 $15.81 $13.23 $12.41 $12.48 $ 9.91 =========================================================================================================== TOTAL RETURN............ 2.22% 19.51% 12.50% 36.61% (17.48)% 24.68% 20.54% .90% 35.62% .20% =========================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions)...... $8,246 $7,486 $4,878 $3,298 $2,087 $2,162 $1,485 $1,323 $ 814 $ 133 Ratio of Expenses to Average Net Assets..... .39% .39% .41% .48% .52% .53% .58% .49% .65% .80%* Ratio of Net Investment Income to Average Net Assets................. 3.26% 3.11% 3.72% 4.51% 4.93% 5.29% 4.94% 4.11% 4.33% 4.56% Portfolio Turnover Rate. 24% 26% 23% 41% 20% 22% 25% 46% 50% 1%*
*Annualized. - -------------------------------------------------------------------------------- YIELD AND From time to time the Fund may advertise its yield and total TOTAL RETURN return. Both yield and total return figures are based on his- torical earnings and are not intended to indicate future per- formance. The "total return" of the Fund refers to the aver- age annual compounded rates of return over one- , five- and ten-year periods or for the life of the Fund (as stated in the advertisement) that would equate an initial amount in- vested at the beginning of a stated period to the ending re- deemable value of the investment, assuming the reinvestment of all dividend and capital gains distributions. In accordance with the industry guidelines set forth by the U.S. Securities and Exchange Commission, the "30-day yield" of the Fund is calculated daily by dividing the net invest- ment income per share earned during a 30-day period by the net asset value per share on the last day of the period. Net investment income includes interest and dividend income earned on the Fund's securities, and is net of all expenses and all recurring and nonrecurring charges that have been ap- plied to all shareholder accounts. The yield calculation as- sumes that the net investment income earned over thirty days is compounded monthly for six months and then annualized. Methods used to calculate advertised yields are standardized for all stock and bond mutual funds. However, these methods differ from the accounting methods used by the Fund to main- tain its books and 3 records, and so the advertised 30-day yield may not fully re- flect the income paid to your own account or the yield re- ported in the Fund's reports to shareholders. Additionally, the Fund may compare its performance to that of the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"). - -------------------------------------------------------------------------------- INVESTMENT The objective of the Fund is to provide long-term growth of OBJECTIVES capital and income. The Fund's secondary objective is to pro- vide current income. There can be no assurance that the Fund THE FUND SEEKS will achieve these objectives. TO PROVIDE LONG-TERM These investment objectives are fundamental and so cannot be GROWTH OF changed without the approval of a majority of the Fund's CAPITAL AND shareholders. INCOME - -------------------------------------------------------------------------------- INVESTMENT The Fund follows a flexible investment strategy, emphasizing POLICIES income-producing stocks which the investment advisers believe to be undervalued by the market at the time of purchase. Gen- THE FUND erally, these securities are characterized by below-average INVESTS price-earnings ratios relative to the stock market, as mea- PRIMARILY IN sured by the Standard & Poor's 500 Composite Stock Price In- COMMON STOCKS dex. The Fund is managed without regard to tax ramifications. Stocks will be selected based upon assessments of statistical measures of current value (such as low price-earnings and low price-to-book value ratios) and future earnings prospects. Returns on such stocks can be influenced by the recognition of their undervaluation by other investors based on statisti- cal measures or changes in expectations regarding potential earnings and dividend growth. If a stock has reached a fully- valued position as determined by one of the Fund's investment advisers, the stock will ordinarily be sold regardless of the time it has been held and replaced by one or more securities that are considered to be undervalued. Although the Fund invests primarily in common stocks, it may invest in money market instruments, fixed-income securities, and other equity securities, such as preferred stock. The Fund is expected, under normal circumstances, to be substan- tially fully invested in common stocks. In addition, the Fund may invest in stock futures and options to a limited extent. See "Implementation of Policies" for a description of these and other investment practices of the Fund. The investment policies of the Fund are not fundamental and so may be changed by the Board of Directors without share- holder approval. - -------------------------------------------------------------------------------- INVESTMENT As a mutual fund investing primarily in common stocks, the RISKS Fund is subject to MARKET RISK--i.e., the possibility that common stock prices will decline over short or even extended THE FUND IS periods. The U.S. stock market has tended to by cyclical, SUBJECT TO with periods when stock prices generally rise and periods MARKET RISK when prices generally decline. 4 To illustrate the volatility of stock prices, the following table sets forth the extremes for stock market returns as well as the average return for the period from 1926 to 1994, as measured by the Standard & Poor's 500 Composite Stock Price Index: AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994) OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS ------ ------- -------- -------- Best +53.9% +23.9% +20.1% +16.9% Worst -43.3 -12.5 - 0.9 + 3.1 Average +12.2 +10.2 +10.7 +10.7
As shown common stocks have provided annual total returns (capital appreciation plus dividend income) averaging + 10.7% for all 10-year periods from 1926 to 1994. While this average return can be used as a guide for setting reasonable expecta- tions for future stock market returns, it may not be useful for forecasting future returns in any particular period, as stock returns are quite volatile from year to year. This table of U.S. stock market returns should not be viewed as a representation of future returns for the Fund or the U.S. stock market. The illustrated returns represent histori- cal investment performance, which may be a poor guide to fu- ture returns. Also, stock market indexes such as the S&P 500 are based on unmanaged portfolios of securities before trans- action costs and other expenses. Such costs will reduce the relative investment performance of the Fund and other "real world" portfolios. Finally, the Fund is likely to differ in portfolio composition from broad stock market averages, and so the Fund's performance should not be expected to mirror the returns provided by a specific index. THE FUND IS The investment adviser manages the Fund according to the tra- ALSO SUBJECT TO ditional methods of "active" investment management, which in- MANAGER RISK volve the buying and selling of securities based upon econom- ic, financial and market analysis and investment judgement. MANAGER RISK refers to the possibility that the Fund's in- vestment adviser may fail to execute the Fund's investment strategy effectively. As a result, the Fund may fail to achieve its stated objective. - -------------------------------------------------------------------------------- WHO SHOULD The Fund is intended for investors who are seeking growth of INVEST capital and income. Although the Fund's secondary objective is to provide current income, investors should not consider LONG-TERM the Fund a substitute for fixed-income investments. The Fund INVESTORS is intended to be a long-term investment vehicle and is not SEEKING GROWTH designed to provide investors with a means of speculating on OF CAPITAL AND short-term stock market movements. Investors who engage in INCOME excessive account activity generate additional costs which are borne by all of the Fund's shareholders. In order to min- imize such costs, the Fund has adopted certain policies. The Fund reserves the right to reject any purchase request (in- cluding exchange purchases from other Vanguard portfolios) that is reasonably deemed to be disruptive to efficient port- folio management, either because of the timing of the invest- ment or 5 previous excessive trading by the investor. Additionally, the Fund reserves the right to suspend the offering of its shares. No assurance can be given that the Fund will attain its ob- jectives or that shareholders will be protected from the risk of loss that is inherent in equity investing. Investors may wish to reduce the potential risk of investing in the Fund by purchasing shares on a regular periodic basis (dollar-cost averaging) rather than making an investment in one lump sum. Investors should not consider the Fund a complete investment program. Most investors should maintain diversified holdings of securities with different risk characteristics--including common stocks, bonds and money market instruments. Investors may also wish to complement an investment in the Fund with other types of common stock investments. - -------------------------------------------------------------------------------- IMPLEMENTATION In addition to investing primarily in equity securities, the OF POLICIES Fund follows a number of additional investment practices to achieve its objectives. THE FUND MAY Although it normally seeks to remain substantially fully in- INVEST IN vested in equity securities, the Fund may invest temporarily SHORT-TERM in certain short-term fixed income securities. Such securi- FIXED INCOME ties may be used to invest uncommitted cash balances, to SECURITIES maintain liquidity to meet shareholder redemptions, or to take a temporarily defensive position against a potential stock market decline. No more than 35% of the Fund's assets will be committed to short-term fixed income securities for purposes other than taking a temporary defensive position. These securities include: obligations of the U.S. Government and its agencies or instrumentalities; commercial paper, bank certificates of deposit, and bankers' acceptances; and repur- chase agreements collateralized by these securities. A repurchase agreement is a means of investing monies for a short period. In a repurchase agreement, a seller--a U.S. commercial bank or recognized U.S. securities dealer--sells securities to the Fund and agrees to repurchase the securi- ties at the Fund's cost plus interest within a specified pe- riod (normally one day). In these transactions, the securi- ties purchased by the Fund will have a total value equal to or in excess of the value of the repurchase agreement, and will be held by the Fund's Custodian Bank until repurchased. THE FUND MAY The Fund may utilize stock futures contracts and options to a USE FUTURES limited extent. Specifically, the Fund may enter into futures CONTRACTS AND contracts provided that not more than 5% of its assets are OPTIONS required as a futures contract deposit. In addition, the Fund may enter into futures contracts and options transactions only to the extent that obligations under such contracts or transactions represent not more than 20% of the Fund's as- sets. Futures and options transactions may be used for several rea- sons: to maintain cash reserves while simulating full invest- ment, to facilitate trading, to reduce transaction costs, or to seek higher investment returns when a futures contract is priced more attractively than the underlying equity security or index. While 6 futures contracts and options can be used as leveraged in- vestments, the Fund may not use futures contracts or options transactions to leverage its net assets. For example, in order to remain fully invested in stocks while maintaining liquidity to meet potential shareholder re- demptions, the Fund may invest a portion of its assets in a stock futures contract. Because futures contracts only re- quire a small initial margin deposit, the Fund would then be able to maintain a cash reserve for potential redemptions, while at the same time remaining fully invested. Also, be- cause the transaction costs of futures and options may be lower than the costs of investing in stocks directly, it is expected that the use of futures contracts and options may reduce the Fund's total transaction costs. FUTURES The primary risks associated with the use of futures con- CONTRACTS AND tracts and options are: (i) imperfect correlation between the OPTIONS POSE change in market value of the stocks held by the Fund and the CERTAIN RISKS prices of futures contracts and options; and (ii) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures position prior to its maturity date. The risk of imperfect correlation will be minimized by investing only in those contracts whose behavior is expected to resemble that the Fund's underlying securi- ties. The risk that the Fund will be unable to close out a futures position will be minimized by entering into such transactions on a national exchange with an active and liquid secondary market. The risk of loss in trading futures contracts in some strate- gies can be substantial, due both to the low margin deposits required and the extremely high degree of leverage involved in futures pricing. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss (or gain) to the investor. When investing in futures contracts, the Fund will segregate cash or cash equivalents in the amount of the underlying obligation. THE FUND MAY The Fund may lend its investment securities to qualified in- LEND ITS stitutional investors for either short-term or long-term pur- SECURITIES poses of realizing additional income. Loans of securities by the Fund will be collateralized by cash, letters of credit, or securities issued or guaranteed by the U.S. government or its agencies. The collateral will equal at least 100% of the current market value of the loaned securities. BORROWING The Fund may borrow money, subject to the restrictions de- scribed below in Investment Limitations, for temporary or emergency purposes, including the meeting of redemption re- quests which might otherwise require the untimely disposition of securities. PORTFOLIO Although it generally seeks to invest for the long term, the TURNOVER IS Fund retains the right to sell securities irrespective of how NOT EXPECTED long they have been held. It is anticipated that the annual TO EXCEED 100% portfolio turnover of the Fund will not exceed 100%. A turn- over rate of 100% would occur, for example, if all of the se- curities of the Fund were replaced within one year. - -------------------------------------------------------------------------------- 7 INVESTMENT The Fund has adopted certain limitations on its investment LIMITATIONS practices. Specifically, the Fund will not: THE FUND HAS (a) with respect to 75% of the value of its total assets, ADOPTED purchase the securities of any issuer (except obligations CERTAIN of the United States government and its instrumentali- FUNDAMENTAL ties) if as a result the Fund would hold more than 10% of LIMITATIONS the outstanding voting securities of the issuer, or more than 5% of the value of the total assets of the Fund would be invested in the securities of such issuer; (b) invest more than 25% of its assets in any one industry; and (c) borrow money, except that the Fund may borrow from banks (or through reverse repurchase agreements), for temporary or emergency (not leveraging) purposes, including the meeting of redemption requests which might otherwise re- quire the untimely disposition of securities, in an amount not exceeding 10% of the value of the net assets of the Fund (including the amount borrowed and the value of any outstanding reverse repurchase agreements) at the time the borrowing is made. Whenever borrowings exceed 5% of the value of the net assets of the Fund, the Fund will not make any additional investments. These investment limitations are considered at the time in- vestment securities are purchased. The investment limitations described here and in the Statement of Additional Information may be changed only with the approval of a majority of the Fund's shareholders. - -------------------------------------------------------------------------------- MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com- THE FUND panies, a family of more than 30 investment companies with more than 80 distinct investment portfolios and total assets VANGUARD in excess of $130 billion. Through their jointly-owned sub- ADMINISTERS AND sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and DISTRIBUTES the other funds in the Group obtain at cost virtually all of THE FUND their corporate management, administrative and distribution services. Vanguard also provides investment advisory services on an at-cost basis to certain Vanguard funds. As a result of Vanguard's unique corporate structure, the Vanguard funds have costs substantially lower than those of most competing mutual funds. In 1994, the average expense ratio (annual costs including advisory fees divided by total net assets) for the Vanguard funds amounted to approximately .30% com- pared to an average of 1.05% for the mutual fund industry (data provided by Lipper Analytical Services). The Officers of the Fund manage its day-to-day operations and are responsible to the Fund's Board of Directors. The Direc- tors set broad policies for the Fund and choose its Officers. A list of the Directors and Officers of the Fund and a state- ment of their present positions and principal occupations during the past five years can be found in the Statement of Additional Information. Vanguard employs a supporting staff of management and admin- istrative personnel needed to provide the requisite services to the funds and also furnishes 8 the funds with necessary office space, furnishings and equip- ment. Each fund pays its share of Vanguard's net expenses, which are allocated among the funds under methods approved by the Board of Directors (Trustees) of each fund. In addition, each fund bears its own direct expenses, such as legal, au- diting and custodian fees. Vanguard provides distribution and marketing services to the funds. The funds are available on a no-load basis (i.e., there are no sales commissions or 12b-1 fees). However, each fund bears its share of the Group's distribution costs. - -------------------------------------------------------------------------------- INVESTMENT Vanguard/Windsor II employs a multi-manager approach utiliz- ADVISERS ing four investment advisers to manage the Fund's assets. The Fund has investment advisory contracts with: Barrow, Hanley, FOUR ADVISERS Mewhinney & Strauss, Inc. ("BHM&S"), 200 Crescent Court, Dal- OVERSEE THE las, TX 75201; Equinox Capital Management, Inc. ("Equinox"), FUND'S 399 Park Ave., 28th floor, New York, NY 10022; and Tukman INVESTMENTS: Capital Management, Inc. ("Tukman"), 60 East Sir Francis Drake Boulevard, Larkspur, CA 94939. Additionally, a portion of the Fund's assets will be managed on an at cost basis by Vanguard's Core Management Group. Neither BHM&S, Equinox nor Tukman is affiliated in any way with Wellington Management Company, the investment adviser to Windsor Fund. The proportion of the net assets of the Fund managed by each adviser is established by the Board of Directors and may be changed in the future as circumstances warrant. Currently, BHM&S manages approximately 72% of the assets of the Fund, Equinox and Tukman manage approximately 10% each and Van- guard's Core Management Group manages approximately 8% of the Fund's assets. Investors will be advised of any substantive changes in the proportions managed by each adviser. Each ad- viser discharges their responsibilities subject to the con- trol of the Directors and Officers. BARROW, The Fund has entered into an advisory agreement with BHM&S HANLEY, under which BHM&S manages the investment and reinvestment of MEWHINNEY & a portion (currently approximately 72%) of the Fund's assets STRAUSS and continuously reviews, supervises, and administers the (BHM&S) Fund's investment program with respect to those assets. BHM&S discharges its responsibilities subject to the control of the Officers and Directors of the Fund. BHM&S, founded in 1979, is a professional investment counsel- ing firm which provides investment services to investment companies, institutions, and individuals. As of December 31, 1994, BHM&S held discretionary management authority with re- spect to approximately $13.7 billion of assets. The investment principals at BHM&S develop a common, firm- wide investment strategy that is employed in managing client investment portfolios and selecting individual securities for those portfolios. James P. Barrow, a founding principal and Vice President of BHM&S, has been designated as portfolio manager for the assets of the Fund managed by BHM&S, a posi- tion he has held since the Fund's inception in 1985. He con- tributes to the development of the common 9 portfolio management strategy used at BHM&S, and is also re- sponsible for seeing that the Fund's assets are managed in a way consistent with the firm's overall approach. BHM&S earns a basic advisory fee, calculated by applying the following annual percentage rates to the average month-end net assets of the Fund managed by BHM&S:
ANNUAL NET ASSETS RATE ---------- ------ First $200 million 0.300% Next $300 million 0.200% Next $500 million 0.150% Over $1 billion 0.125%
The Fund's payments to BHM&S under the above schedule are subject to an incentive/penalty fee arrangement which com- pares the performance of the Fund's assets managed by BHM&S with the performance of the Standard & Poor's/BARRA Value In- dex. This arrangement provides for the following adjustments to BHM&S's basic fee:
CUMULATIVE THREE-YEAR PERFORMANCE DIFFERENTIAL VS. THE S&P/BARRA VALUE INCENTIVE/ INDEX PENALTY FEE ADJUSTMENT ------------------------------------ ---------------------- Less than or equal to -9% points 0.75 X Basic Fee Equal to or less than -6% points but greater than -9% points 0.85 X Basic Fee Less than +6% points but greater than -6% points Basic Fee Equal to or greater than +6% points but less than +9% points 1.15 X Basic Fee Greater than or equal to +9% points 1.25 X Basic Fee
Under rules of the Securities and Exchange Commission, the incentive/penalty fee structure will not be fully operable until the quarter ending April 30, 1996 and, until that date, will be calculated according to certain transition rules. A detailed description of the incentive/penalty fee schedule for BHM&S and the applicable transition rules is contained in the Statement of Additional Information. EQUINOX Equinox is a professional investment counseling firm founded CAPITAL in 1989. As of December 31, 1994, Equinox provided investment MANAGEMENT advisory services with respect to approximately $3.2 billion (EQUINOX) of assets. Ronald J. Ulrich, Director and President, is the principal investment officer and founder of Equinox. Mr. Ulrich has served as portfolio manager for the assets of the Fund managed by Equinox since 1991, when the Fund first hired Equinox. 10 Equinox earns a basic advisory fee, calculated by applying the following annual percentage rates to the average month- end net assets of the Fund managed by Equinox:
ANNUAL NET ASSETS RATE ---------- ------ First $100 million .300% Next $300 million .200% Over $400 million .150%
The Fund's payments to Equinox under the above schedule are subject to an incentive/penalty fee arrangement which com- pares the performance of the Fund's assets managed by Equinox with the performance of the Standard & Poor's 500 Composite Stock Price Index. This arrangement provides for the follow- ing adjustments to Equinox's basic fee:
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/ DIFFERENTIAL VS. THE S&P 500 PENALTY FEE ADJUSTMENT --------------------------------- ---------------------- Less than or equal to -9% points 0.50 X Basic Fee Equal to or less than -4.5% points but greater than -9% points 0.75 X Basic Fee Less than +4.5% points but greater than -4.5% points Basic Fee Equal to or greater than +4.5% points but less than +9% points 1.25 X Basic Fee Greater than or equal to +9% points 1.50 X Basic Fee
TUKMAN CAPITAL Tukman is a professional investment counseling firm founded MANAGEMENT in 1980. As of December 31, 1994, Tukman provided investment (TUKMAN) advisory services with respect to assets of approximately $2.1 billion. Melvin T. Tukman, President, Director and foun- der of Tukman, has served as portfolio manager for the assets of the Fund managed by the firm since 1991, when the Fund first hired Tukman. Tukman earns a basic advisory fee, calculated by applying the following annual percentage rates to the average month-end net assets of the Fund managed by Tukman.
ANNUAL NET ASSETS RATE ---------- ------ First $25 million .400% Next $125 million .350% Next $350 million .250% Next $500 million .200% Over $1 billion .150%
11 The Fund's payments to Tukman under the above schedule are subject to an incentive/penalty fee arrangement which com- pares the performance of the Fund's assets managed by Tukman with the performance of the Standard & Poor's 500 Composite Stock Price Index. This arrangement provides for the follow- ing adjustments to Tukman's basic fee:
CUMULATIVE THREE-YEAR PERFORMANCE INCENTIVE/PENALTY DIFFERENTIAL VS. THE S&P 500 FEE ADJUSTMENT --------------------------------- ----------------- Less than or equal to -12% points 0.50 X Basic Fee Equal to or less than -6% points but greater than -12% points 0.75 X Basic Fee Less than +6% points but greater than -6% points Basic Fee Equal to or greater than +6% points but less than +12% points 1.25 X Basic Fee Greater than or equal to +12% points 1.50 X Basic Fee
VANGUARD'S CORE Vanguard's Core Management Group provides investment advisory MANAGEMENT GROUP services on an at-cost basis with respect to a portion of the Fund's assets (currently approximately 8%). The Core Manage- ment Group also provides investment advisory services to sev- eral Vanguard funds, including Vanguard Index Trust, Vanguard Balanced Index Fund, Vanguard International Equity Index Fund, Vanguard Institutional Index Fund, several indexed sep- arate accounts, as well as a portion of Vanguard/Morgan Growth Fund's assets. Total assets under management by the Core Management Group were approximately $18 billion as of December 31, 1994. The portion of the Fund allocated to the Core Management Group is managed using computerized, quanti- tative techniques based on a value index constructed to ap- proximate the aggregate fundamental characteristics of a typ- ical large capitalization-value fund such as Windsor II. For further information concerning the index, please refer to the Statement of Additional Information. The Core Management Group is supervised by the Officers of the Fund. AGGREGATE For the fiscal year ended October 31, 1994, the investment ADVISORY FEES advisory fees paid by the Fund to BHM&S, Equinox Capital Man- PAID BY THE agement and Tukman Capital Management, Inc. represented an FUND effective annual rate of .14 of 1% of average net assets be- fore a decrease of $145,000 based on performance. The invest- ment advisory fees paid by the Fund for this period to BHM&S represented an effective annual rate of .14 of 1% of the av- erage net assets managed by BHM&S. The investment advisory fees paid by the Fund for the period to Equinox and Tukman represented an effective annual rate of .19 of 1% and .25 of 1% of the average net assets managed by Equinox and Tukman, respectively. OTHER ADVISORY BHM&S, Equinox, Tukman and Vanguard's Core Management Group INFORMATION are authorized to select brokers or dealers to execute pur- chases and sales of the Fund's portfolio securities, and di- rect the advisers to use their best efforts to obtain the 12 best available price and most favorable execution with re- spect to all transactions. The full range and quality of bro- kerage services available are considered in making these de- terminations. The Fund has authorized BHM&S, Equinox, Tukman and Vanguard's Core Management Group to pay higher commissions in recogni- tion of brokerage services deemed necessary for the achieve- ment of better execution, provided the advisers believe this to be in the best interest of the Fund. Although the Fund does not market its shares through intermediary brokers or dealers, the Fund may place orders with qualified broker- dealers who recommend the Fund to clients if the Officers of the Fund believe that the quality of the transaction and the commission are comparable to what they would be with other qualified brokerage firms. The Fund's Board of Directors may, without the approval of shareholders, provide for: (a) the employment of a new in- vestment adviser pursuant to the terms of a new advisory agreement, either as a replacement for an existing adviser or as an additional adviser; (b) a change in the terms of an ad- visory agreement; and (c) the continued employment of an ex- isting adviser on the same advisory contract terms where a contract has been assigned because of a change in control of the adviser. Any such change will only be made upon not less than 30 days' prior written notice to shareholders of the Fund which shall include substantially the information con- cerning the adviser that would have normally been included in a proxy statement. - -------------------------------------------------------------------------------- PERFORMANCE The table on page 14 provides investment results for the Fund RECORD for several periods throughout the Fund's lifetime. The re- sults shown represent "total return" investment performance which assumes the reinvestment of all capital gains and in- come dividends for the indicated periods. Also included is comparative information with respect to the unmanaged Stan- dard & Poor's 500 Composite Stock Price Index, a widely-used barometer of stock market activity, and the Consumer Price Index, a statistical measure of changes in the prices of goods and services. The table does not make any allowance for federal, state or local income taxes which shareholders must pay on a current basis. The results should not be considered a representation of the total return from an investment made in the Fund today. This information is provided to help investors better understand the Fund and may not provide a basis for comparison with other investments or mutual funds which use a different method to calculate performance. 13 AVERAGE ANNUAL RETURN FOR VANGUARD/WINDSOR II
PERCENTAGE INCREASE ---------------------------------------------- FISCAL PERIODS VANGUARD/ S&P 500 CONSUMER ENDED 10/31/94 WINDSOR II INDEX PRICE INDEX -------------- ---------- ------- ----------- 1 Year + 2.2% + 3.9% +2.6% 3 Years +11.2 + 9.5 +2.9 5 Years + 9.2 +10.1 +3.6 Lifetime* +13.2 +13.9 +3.6
* June 24, 1985 to October 31, 1994. Data for the Con- sumer Price Index begins June 30, 1985. - -------------------------------------------------------------------------------- DIVIDENDS, The Fund expects to pay dividends from ordinary income semi- CAPITAL GAINS annually. Capital gains distributions, if any, will be made AND TAXES annually. All dividend and capital gains distributions are automatically reinvested in additional shares of the Fund. In THE FUND PAYS order to satisfy certain distribution requirements of the SEMI-ANNUAL IRS, the Fund may also declare special year-end distributions DIVIDENDS AND during December. The Fund intends to continue to qualify as a ANY CAPITAL "regulated investment company" under the Internal Revenue GAINS ANNUALLY Code so that it will not be subject to federal income tax to the extent that its income is distributed to its sharehold- ers. If you utilize the Fund as an investment option in an employ- er-sponsored retirement savings plan, dividend and capital gains distributions from the Fund generally will not be sub- ject to current taxation, but will accumulate on a tax-de- ferred basis. In general, employer-sponsored retirement and savings plans are governed by a complex set of tax rules. You should consult your plan administrator, the plan's "Summary Plan Description," or a professional tax adviser regarding the tax consequences of your participation in the plan and of any plan contributions or withdrawals. - -------------------------------------------------------------------------------- THE SHARE The Fund's share price or "net asset value" per share is de- PRICE OF THE termined by dividing the total market value of the Fund's in- FUND vestments and other assets, less any liabilities, by the num- ber of outstanding shares of the Fund. Net asset value per share is calculated at the close of regular trading on the New York Stock Exchange on each date the Exchange is open for business. Portfolio securities that are listed on a securities exchange are valued at the latest quoted sales prices as of 4:00 p.m. on the valuation date. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities which are listed on an exchange and which are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Unlisted securi- ties for which market quotations are readily available are valued at the latest quoted bid price. Temporary cash invest- ments are valued at amortized cost, which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Directors. Securities may be valued on the basis of 14 prices provided by a pricing service when such prices are be- lieved to reflect the fair market value of such securities. The Fund's share price can be found daily in the mutual fund listings of most major newspapers under the heading of The Vanguard Group. - -------------------------------------------------------------------------------- GENERAL The Company is a Maryland corporation. The Articles of Incor- INFORMATION poration permit the Directors to issue 1,600,000,000 shares of common stock, with a one cent par value. The Board of Di- rectors has the power to designate one or more classes ("se- ries") of shares of common stock and to classify or reclas- sify any unissued shares with respect to such series. Cur- rently the Company is offering shares of two series. The shares of each series of the Company are fully paid and non-assessable; have no preference as to conversion, ex- change, dividends, retirement or other features, and have no pre-emptive rights. Such shares have non-cumulative voting rights, meaning that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Directors if they so choose. Annual meetings of shareholders will not be held except as required by the Investment Company Act of 1940 and other ap- plicable law. An annual meeting will be held to vote on the removal of a Director or Directors of the Company if re- quested in writing, by the holders of not less than 10% of the outstanding shares of the Company. All securities and cash are held by State Street Bank and Trust Company, Boston, MA. The Vanguard Group, Inc., Valley Forge, PA. serves as the Fund's Transfer and Dividend Dis- bursing Agent. Price Waterhouse LLP, serves as independent accountants for the Fund and will audit its financial state- ments annually. The Fund is not involved in any litigation. - -------------------------------------------------------------------------------- 15 SERVICE GUIDE PARTICIPATING The Fund is available as an investment option in your retire- IN YOUR PLAN ment or savings plan. The administrator of your plan or your employee benefits office can provide you with detailed infor- mation 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, including the Fund's investment objective, policies, risk characteristics or historical performance, please contact Participant Serv- ices at 1-800-523-1188. If you have questions about your account, contact your plan administrator or the organization which provides recordkeep- ing services for your plan. -------------------------------------------------------------- INVESTMENT You may be permitted to elect different investment options, OPTIONS AND alter the amounts contributed to your plan, or change how ALLOCATIONS contributions are allocated among your investment options in accordance with your plan's specific provision. See your plan administrator or employee benefits office for more details. -------------------------------------------------------------- TRANSACTIONS Contributions, exchanges or distributions of the Fund's IN FUND SHARES shares are effective when received in "good order" by Van- guard. "Good order" means that complete information on the purchase, exchange or redemption and the appropriate monies have been received by Vanguard. -------------------------------------------------------------- MAKING Your plan may allow you to exchange monies from one invest- EXCHANGES ment option to another. Check with your plan administrator for details on the rules governing exchanges in your plan. Certain investment options, particularly company stock or guaranteed investment contracts (GICs), may be subject to unique restrictions. Before making an exchange, you should consider the following: . If you are making an exchange to another Vanguard Fund op- tion, please read the Fund's prospectus. Contact Partici- pant Services at 1-800-523-1188 for a copy. . Exchanges are accepted by Vanguard only as permitted by your plan. Your plan administrator can explain how fre- quently exchanges are allowed. . As explained on page 5, the Fund reserves the right to ref- use any exchange purchase request. - -------------------------------------------------------------------------------- 16 [LOGO OF VANGUARD WINDSOR II APPEARS HERE] - ------------------- THE VANGUARD GROUP OF INVESTMENT COMPANIES Vanguard Financial Center P.O. Box 2900 Valley Forge, PA 19482 INSTITUTIONAL PARTICIPANT SERVICES DEPARTMENT: 1-800-523-1188 TRANSFER AGENT: The Vanguard Group, Inc. Vanguard Financial Center Valley Forge, PA 19482 IO73 [LOGO OF VANGUARD WINDSOR II APPEARS HERE] I N S T I T U T I O N A L P R O S P E C T U S FEBRUARY 28, 1995 [LOGO OF THE VANGUARD GROUP OF INVESTMENT COMPANIES APPEARS HERE] PART B VANGUARD/WINDSOR FUNDS, INC. (FORMERLY THE WINDSOR FUNDS, INC.) STATEMENT OF ADDITIONAL INFORMATION FEBRUARY 28, 1995 This Statement is not a prospectus, but should be read in conjunction with: (1) the current Prospectus (dated February 28, 1995) relating to the Windsor Fund series; or the Windsor II series, as appropriate. To obtain either Pro- spectus please call the Investor Information Department: 1-800-662-7447 TABLE OF CONTENTS
PAGE ---- The Company................................................................ B-1 Investment Objectives and Policies......................................... B-1 Purchase of Shares......................................................... B-5 Redemption of Shares....................................................... B-6 Yield and Total Return..................................................... B-6 Investment Limitations..................................................... B-7 Management of the Company.................................................. B-9 Investment Advisory Services............................................... B-12 Portfolio Transactions..................................................... B-18 Performance Measures....................................................... B-19 Description of Shares and Voting Rights.................................... B-20 Financial Statements....................................................... B-21
THE COMPANY Vanguard/Windsor Funds, Inc. (the "Company") is an open-end, diversified, management investment company whose shares are currently offered in two sepa- rate series--the Vanguard/Windsor Fund series and the Vanguard/Windsor II se- ries. Each series in effect represents a separate mutual fund. Vanguard/Windsor Fund series has been offered under the name "Windsor Fund" since 1958. Shares of Vanguard/Windsor II were initially offered on June 24, 1985. Wellington Management Company has served as investment adviser to the Vanguard/Windsor Fund series since its inception. Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S"), Equinox Capital Management, Inc. ("'Equinox"); and Tukman Capital Management, Inc. ("Tukman''), three separate and distinct in- vestment counseling firms that have no affiliation with Wellington Management Company, nor with each other, serve as investment advisers to the Vanguard/Windsor II series. Additionally, The Vanguard Group, Inc., ("Van- guard") provides investment advisory services on an at-cost basis with respect to a portion of Vanguard/Windsor II's assets. INVESTMENT OBJECTIVES AND POLICIES The following policies supplement the investment objectives and policies set forth in each of the Company's Prospectuses. PORTFOLIO TURNOVER. While the rate of portfolio turnover is not a limiting factor when the investment adviser deems changes appropriate, it is anticipated that the annual portfolio turnover B-1 rate for each series will not normally exceed 100%. A rate of turnover of 100% could occur, for example, if all of the securities in a series' portfolio are replaced within a period of one year. The portfolio turnover rates for the Vanguard/Windsor Fund series for each of its last ten fiscal years and the Vanguard/Windsor II series for the period June 24, 1985 to October 31, 1985 and each of the fiscal years in the period ended October 31, 1994 are set forth under "Financial Highlights," in Vanguard/Windsor Fund's and Vanguard/Windsor II's Prospectuses, respectively. REPURCHASE AGREEMENTS. Each series may invest in repurchase agreements with domestic banks, brokers or dealers, either for temporary defensive purposes due to market conditions, or to generate income from its excess cash balances. A repurchase agreement is an agreement under which the series acquires a money market instrument (generally 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 series (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and are held by the Company's custodian bank until repurchased. In addition, the Board of Directors will monitor the repurchase agreement transactions for each series generally and will establish guidelines and standards for review by the investment adviser of the creditworthiness of any bank, broker or dealer party to a repurchase agreement with the Company. No more than an aggregate of 15% of a series' assets, at the time of investment, will be invested in repurchase agreements having maturities longer than seven days and in securities subject to legal or contractual restrictions on resale, or for which there are no readily available market quotations. The use of repurchase agreements involves certain risks. For example, if the seller of the securities under an agreement defaults on its obligation to re- purchase the underlying securities at a time when the value of these securi- ties has declined, the series may incur a loss upon disposition of them. If the seller becomes insolvent and subject to liquidation or reorganization un- der bankruptcy or other laws, a bankruptcy court may determine that the under- lying securities are collateral for a loan by the series not within the con- trol of the series and therefore subject to sale by the trustee in bankruptcy. Finally, it is possible that the series may not be able to substantiate its interest in the underlying securities. While the Company's management acknowl- edges these risks, it is expected that they can be controlled through careful monitoring procedures. LENDING OF SECURITIES. Each series may lend its portfolio securities to qualified institutional investors who need to borrow securities in order to complete certain transactions, such as covering short sales, avoiding failures to deliver securities or completing arbitrage operations. By lending its portfolio securities, each series attempts to increase its income through the receipt of interest on the loan. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the series. Each series may lend its portfolio securities to qualified brokers, dealers, domestic banks or other domestic financial institutions, so long as the terms, and the structure of such loans are not inconsistent with the Investment Company Act of 1940, or the Rules and Regulations or interpretations of the Securities and Exchange Commission (the "Commission") thereunder, which currently require that (a) the borrower pledge and maintain with the series collateral consisting of cash, an irrevocable letter of credit or securities issued or guaranteed by a domestic bank or the United States Government having a value at all times not less than 100% of the value of the securities loaned, (b) the borrower add to such collateral whenever the price of the securities loaned rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan be made subject to termination by the series at any time and (d) the series receive reasonable interest on the loan (which many include the series' investing any cash collateral in interest bearing B-2 short-term investments), any distributions on the loaned securities and any increase in their market value. A series will not lend portfolio securities if, as a result, the aggregate of such loans exceeds 33 1/3% of the value of the series' total assets. Loan arrangements made will comply with all other applicable regulatory requirements, including the rules of the New York Stock Exchange, which rules require the borrower, after notice, to redeliver the securities within the normal settlement time of five business days. All relevant facts and circumstances, including the creditworthiness of the broker, dealer or institution, will be considered in making decisions with respect to the lending of securities, subject to review by the Board of Directors. At the present time, the Staff of the Commission does not object if an in- vestment company pays reasonable negotiated fees in connection with loaned se- curities, so long as such fees are set forth in a written contract and ap- proved by the investment company's Directors (Trustees). In addition, voting rights may pass with the loaned securities, but if a material event occurs af- fecting an investment on loan, the loan must be called and the securities vot- ed. FUTURES CONTRACTS. Each series may enter into stock futures contracts, options, and options on futures contracts only for the purpose of remaining fully invested and reducing transactions costs. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. Futures contracts which are standardized as to maturity date and underlying financial instrument are traded on national futures exchanges. Futures exchanges and trading are regulated under the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a U.S. Government Agency. Although futures contracts by their terms call for actual delivery or ac- ceptance of the underlying securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. Clos- ing out an open futures position is done by taking an opposite position ("buy- ing" a contract which has previously been "sold," "selling" a contract previ- ously 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 comple- tion 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. Bro- kers 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, change in the con- tract value may reduce the required margin, resulting in a repayment of excess margin to the contract holder. Variation margin payments are made to and from the futures broker for as long as the contract remains open. Each series ex- pects 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 unfavor- able changes in the value of securities otherwise held for investment purposes or expected to be acquired by them. Speculators are less inclined to own the securities underlying the futures contracts which they trade, and use futures contracts with the expectation of realizing profits from fluctuations in in- terest rates. Each series intends to use futures contracts only for bona fide hedging purposes. B-3 Regulations of the CFTC applicable to the Company require that all of its futures transactions constitute bona fide hedging transactions. Each series will only sell futures contracts to protect securities it owns against price declines or purchase contracts to protect against an increase in the price of securities it intends to purchase. As evidence of this hedging interest, a se- ries expects that approximately 75% of its futures contract purchases will be "completed;" that is, equivalent amounts of related securities will have been purchased or are being purchased by the series upon sale of open futures con- tracts. Although techniques other than the sale and purchase of futures contracts could be used to control the exposure of the series' income to market fluctua- tions, the use of futures contracts may be a more effective means of hedging this exposure. While each series will incur commission expenses in both open- ing and closing out futures positions, these costs are lower than transaction costs incurred in the purchase and sale of portfolio securities. RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A series will not enter into futures contract transactions to the extent that, immediately thereafter, the sum of its initial margin deposits on open contracts exceeds 5% of the market value of the series' total assets. In addition, a series will not enter into futures contracts to the extent that its outstanding obligations to purchase securities under these contracts would exceed 20% of the series' total assets. Assets committed to futures contracts or options will be held in a segregated account at the Fund's custodian bank. RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be closed out only on an exchange which provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close a futures position. In the event of adverse price movements, a series would continue to be required to make daily cash payments to maintain its required margin. In such situations, if a series has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements at a time when it may be disadvantageous to do so. In addition, a series may be required to make delivery of the instruments underlying interest rate futures contracts it holds. The inability to close options and futures positions also could have an adverse impact on the ability to effectively hedge its portfolio. A series will minimize the risk that it will be unable to close out a futures contract by only entering into futures 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 sub- stantial, due both to the low margin deposits required, and the extremely high degree of leverage involved in futures pricing. As a result, a relatively small price movement in a futures contract may result in immediate and sub- stantial loss (as well as gain) to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount invested in the contract. However, because the futures strategies of the Portfolio are engaged in only for hedging purposes, the Ad- viser does not believe that the series is subject to the risks of loss fre- quently associated with futures transactions. The series would presumably have sustained comparable losses if, instead of the futures contract, it had in- vested in the underlying security and sold it after the decline. Utilization of futures transactions by the series does involve the risk of imperfect or no correlation where the securities underlying futures contracts have different maturities than the portfolio securities being hedged. It is also possible that a series could both lose money on futures contracts and also experience a decline in value of its portfolio securities. There is also the risk of loss by a series of margin deposits in the event of bankruptcy of a broker with whom the series has an open B-4 position in a futures contract or related option. Additionally, investments in futures and options involve the risk that the investment adviser will incor- rectly 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 unfa- vorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Each series is required for Federal income tax purposes to recognize as income for each taxable year its net unrealized gains and losses on futures contracts as of the end of the year as well as those actually realized during the year. In most cases, any gain or loss recognized with respect to a futures contract is considered to be 60% long-term capital gain or loss and 40% short-term capital gain or loss, without regard to the holding period of the contract. Furthermore, sales of futures contracts which are intended to hedge against a change in the value of securities held by a series may affect the holding period of such securities and, consequently, the nature of the gain or loss on such securities upon disposition. The series may be required to defer the recognition of losses on futures contracts to the extent of any unrecognized gains on related positions held by the series. In order for a series to continue to qualify for Federal income tax treat- ment 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, inter- est, income derived from loans of securities, and gains from the sale of secu- rities or foreign currencies, or other income derived from the fund's business of investing in securities or currencies. In addition, gains realized on the sale or other disposition of securities held for less than three months must be limited to less than 30% of the series annual gross income. It is antici- pated that any net gain realized from the closing of futures contracts will be considered gain from the sale of securities and therefore be qualifying income for purposes of the 90% requirement. In order to avoid realizing excessive gains on securities held less than three months, the series may be required to defer the closing out of futures contracts beyond the time when it would oth- erwise be advantageous to do so. It is anticipated that unrealized gains on futures contracts, which have been open for less than three months as of the end of the series' fiscal year and which are recognized for tax purposes, will not be considered gains on securities held less than three months for the pur- pose of the 30% test. The series will distribute to shareholders annually any net capital gains which have been recognized for Federal income tax purposes (including unrealized gains at the end of the series' fiscal year on futures transac- tions). Such distributions will be combined with distributions of capital gains realized on the series' other investments and shareholders will be ad- vised on the nature of the payments. PURCHASE OF SHARES The purchase price of shares of each series of the Company is the net asset value next determined after the order is received in Good Order, as defined in the Prospectus. The net asset value is calculated as of the close of the New York Stock Exchange on each day the Exchange is open for business. An order received prior to the close of the Exchange will be executed at the price com- puted on the date B-5 of receipt; and an order received after the close of the Exchange will be exe- cuted at the price computed on the next day the Exchange is open. Each series reserves the right in its sole discretion (i) to suspend the of- fering of its shares, (ii) to reject purchase orders when in the judgment of management such rejection is in the best interest of the series, and (iii) to reduce or waive the minimum for initial and subsequent investments for certain fiduciary accounts such as employee benefit plans or under circumstances where certain economies can be achieved in sales of the series' shares. REDEMPTION OF SHARES Each series may suspend redemption privileges or postpone the date of pay- ment (i) during any period that the New York Stock Exchange is closed, or trading on the Exchange is restricted as determined by the Securities and Ex- change Commission (the "Commission"); (ii) during any period when an emergency exists, as defined by the rules of the Commission, as a result of which it is not reasonably practicable for the series to dispose of securities owned by it, or to determine fairly the value of its assets; and (iii) for such other periods as the Commission may permit. The Company has made an election with the Commission to pay in cash all re- demptions requested by any shareholder of record limited in amount during any 90-day period to the lesser of $250,000 or 1% of the net assets of a series at the beginning of such period. Such commitment is irrevocable without the prior approval of the Commission. Redemptions in excess of the above limits may be paid in whole or in part, in readily marketable investment securities or in cash, as the Directors may deem advisable; however, payment will be made wholly in cash unless the Directors believe that economic or market conditions exist which would make such a practice detrimental to the best interests of the Company. If redemptions are paid in investment securities, such securities will be valued as set forth in the Prospectus for the appropriate series, and a redeeming shareholder would normally incur brokerage expenses if he con- verted these securities to cash. No charge is made by the Company for redemptions. Any redemption may be more or less than the shareholder's cost, depending on the market value of the se- ries' portfolio securities. SIGNATURES GUARANTEES. To protect your account, the Company and Vanguard from fraud, signature guarantees are required for certain redemptions. A signature guarantee verifies the authenticity of your signature. Examples of situations in which signature guarantees are required are: (1) REDEMPTIONS INVOLVING MORE THAN $25,000 ON THE DATE OF RECEIPT BY VANGUARD OF ALL NECESSARY DOCUMENTS; (2) 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 (3) SHARE TRANSFER REQUESTS. These requirements are not applicable to redemptions in Vanguard's prototype retirement plans, except in connection with: (1) distributions made when the proceeds are to be paid to someone other than the plan participant; (2) certain authorizations to effect exchanges by telephone; and (3) when proceeds are to be wired. These requirements may be waived by the Company in certain instances. Signature guarantees can be obtained from a bank, broker or any other guar- antor that Vanguard deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE GUAR- ANTORS. YIELD AND TOTAL RETURN The yield of Vanguard/Windsor Fund for the thirty-day period ended October 31, 1994 was +3.27%, and the yield for Vanguard/Windsor II for the same period was +3.35%. B-6 The average annual total returns for Vanguard/Windsor Fund for the one-, five- and ten-year periods ending October 31, 1994 were +6.35%, +9.23% and +14.45%, respectively. The average annual total returns for the one- and five- year periods, and the period since inception (6/24/85), for Vanguard/Windsor II were +2.22%, +9.15% and +13.21%, respectively. Total return is computed by determining the average compounded rates of return over the one-, five- and- ten year periods set forth above that would equate an initial amount invested at the beginning of the periods to the ending redeemable value of the invest- ment. INVESTMENT LIMITATIONS Each series of the Company is subject to the following restrictions which may not be changed without the approval of at least a majority of the out- standing voting securities of that series. A series will not: (1) with respect to 75% of the value of its total assets, purchase the securities of any issuer (except obligations of the United States govern- ment and its instrumentalities) if as a result the series would hold more than 10% of the outstanding voting securities of the issuer, or more than 5% of the value of the total assets of the series would be invested in the securities of such issuer; (2) invest in securities of other investment companies, except as may be acquired as a part of a merger, consolidation or acquisition of assets ap- proved by the shareholders of the series or otherwise to the extent permit- ted by Section 12 of the Investment Company Act of 1940. A series will in- vest only in investment companies which have investment objectives and in- vestment policies consistent with those of that series; (3) borrow money, except that a series may borrow from banks (or through reverse repurchase agreements), for temporary or emergency (not leveraging) purposes, including the meeting of redemption requests which might other- wise require the untimely disposition of securities, in an amount not ex- ceeding 10% of the value of the net assets of the series (including the amount borrowed and the value of any outstanding reverse repurchase agree- ments) at the time the borrowing is made. Whenever borrowings exceed 5% of the value of the net assets of the series, the series will not make any ad- ditional investments; (4) purchase securities on margin, or sell securities short except that each series may invest in stock futures contracts, stock options and op- tions on stock futures contracts to the extent that not more than 5% of a series' assets are required as deposit on a futures contract and not more than 20% of a series' assets are invested in futures contracts and options transactions at any time; (5) purchase or otherwise acquire any security if, as a result, more than 15% of its net assets would be invested in securities that are illiquid (including any investment in The Vanguard Group, Inc.); (6) invest for the purpose of exercising control over management of any company; (7) purchase or retain securities of any company in which those Officers and Directors of the Company and/or its investment advisers owning more than 1/2 of 1% of such securities, own in the aggregate more than 5% of such securities; (8) make loans, except (i) by purchasing bonds, debentures or similar ob- ligations (including repurchase agreements) which are either publicly dis- tributed or customarily purchased by institutional investors, and (ii) as provided under "Lending of Securities" (See page B-2); (9) purchase assessable securities; B-7 (10) engage in the business of underwriting securities issued by other persons, except to the extent that the series may technically be deemed to be an underwriter under the Securities Act of 1933, as amended, in dispos- ing of investment securities; (11) purchase real estate, commodities or commodity contracts except as described above in "(5)"; or (12) invest more than 25% of the value of its total assets in any one in- dustry. Notwithstanding these limitations, each series of the Company may own all or any portion of the securities of, or make loans to, or contribute to the costs or other financial requirements of any company which will be wholly owned by the Company and one or more other investment companies and is primarily en- gaged in the business of providing, at-cost, management, administrative or re- lated services to the Company and other investment companies. See "Management of the Company". These investment limitations are considered at the time investment securi- ties are purchased. Although not fundamental policies subject to shareholder vote, as long as the Company's shares are registered for sale in certain states, each series may not invest in put, call, straddle or spread options (except as described above in "(5)") or in interests in oil, gas or other mineral exploration or development programs. In addition, each series of the Company will not invest more than 10% of its assets, in the aggregate, determined at the time of in- vestment, in securities subject to legal or contractual restrictions on resale or for which there are no readily available market quotations, including re- purchase agreements having maturities of more than 7 days. B-8 MANAGEMENT OF THE COMPANY OFFICERS AND DIRECTORS The Officers of the Fund manage its day-to-day operations and are responsi- ble to the Fund's Board of Directors. The Directors set broad policies for each Fund and choose its Officers. The following is a list of the Directors and Officers of the Funds and a statement of their present positions and prin- cipal occupations during the past five years. The mailing address of the Di- rectors and Officers of the Fund is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, Chief ALFRED M. RANKIN, JR., Director Executive Officer and Director* Chairman, President and Chief Exec- Chairman, Chief Executive Officer, utive Officer of NACCO Industries, and Director of The Vanguard Group, Inc.; Director of The BFGoodrich Inc., and each of the investment Company, The Standard Products Com- companies in The Vanguard Group; pany and The Reliance Electric Com- Director of The Mead Corporation pany. and General Accident Insurance. JOHN C. SAWHILL, Director JOHN J. BRENNAN, President & President and Chief Executive Offi- Director* cer, The Nature Conservancy; for- President and Director of The Van- merly, Director and Senior Partner, guard Group, Inc. and each of the McKinsey & Co.; President, New York investment companies in The Van- University; Director of Pacific Gas guard Group. and Electric Company and NACCO In- dustries. BARBARA BARNES HAUPTFUHRER, Director Director of The Great Atlantic and JAMES O. WELCH, JR., Director Pacific Tea Company, Raytheon Com- Retired Chairman of Nabisco Brands, pany, Knight-Ridder, Inc., Massa- Inc. and retired Vice Chairman and chusetts Mutual Life Insurance Co., Director of RJR Nabisco; Director and ALCO Standard, Corp.; Trustee of TECO Energy, Inc. Emerita of Wellesley College. J. LAWRENCE WILSON, Director ROBERT E. CAWTHORN, Director Chairman and Chief Executive Offi- Chairman of Rhone-Poulenc Rorer, cer, Rohm & Haas Company; Director Inc.; Director of Sun Company, Inc. of Cummins Engine Company; Trustee of Vanderbilt University and the BRUCE K. MACLAURY, Director Culver Educational Foundation. President. The Brookings Institu- tion; Director of American Express RAYMOND J. KLAPINSKY, Secretary* Bank, Ltd., The St. Paul Companies, Senior Vice President and Secretary Inc. and Scott Paper Co. of The Vanguard Group, Inc.; Secre- tary of each of the investment com- BURTON G. MALKIEL, Director panies in The Vanguard Group. Chemical Bank Chairman's Professor of Economics, Princeton University; RICHARD F. HYLAND, Treasurer* Director of Prudential Insurance Treasurer of The Vanguard Group, Co. of America, Amdahl Corporation, Inc. and of each of the investment Baker Fentress & Co., The Jeffrey companies in The Vanguard Group. Co., and Southern New England Com- munications Company. KAREN E. WEST, Controller* Vice President of The Vanguard Group, Inc.; Controller of each of the investment companies in The Vanguard Group.
-------- * Officers of the Fund are "interested persons" as defined in the Investment Company Act of 1940. THE VANGUARD GROUP The Company is a member of The Vanguard Group of Investment Companies. Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Company and the other Funds in the Group obtain at cost virtually all of their corporate management, administrative and distribution services. Vanguard also provides investment advisory services on an at-cost basis to certain of the Vanguard Funds. B-9 Vanguard employs a supporting staff of management and administrative person- nel needed to provide the requisite services to the Funds and also furnishes the Funds with necessary office space, furnishings and equipment. Each Fund pays its share of Vanguard's total expenses which are allocated among the Funds under methods approved by the Board of Directors (Trustees) of each Fund. In addition, each Fund bears its own direct expenses, such as legal, au- diting and custodian fees. The Fund's Officers are also Officers and employees of Vanguard. No Officer or employee owns, or is permitted to own, any securities of any external ad- viser for the Funds. The Vanguard Group adheres to a Code of Ethics established pursuant to Rule 17j-1 under the Investment Company Act of 1940. The Code is designed to pre- vent 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 per- mitted to engage in personal securities transactions. However, such transac- tions are subject to procedures and guidelines substantially similar to those recommended by the mutual fund industry and approved by the U.S. Securities and Exchange Commission. The Vanguard Group was established and operates under a Funds' Service Agreement which was approved by the shareholders of each of the Funds. The amounts which each of the Funds have invested are adjusted from time to time in order to maintain the proportionate relationship between each Fund's rela- tive net assets and its contribution to Vanguard's capital. At October 31, 1994, Vanguard/Windsor Fund had contributed capital of $1,720,000 to Vanguard, representing 8.6% of Vanguard's capitalization and, at that time, Vanguard/Windsor II had contributed capital of $1,253,000 to Vanguard, repre- senting 6.3% of Vanguard's capitalization. The Funds' Service Agreement was amended on May 15, 1993, to provide as follows: (a) each Vanguard Fund may in- vest up to 0.40% of its current net assets in Vanguard and (b) there is no other limitation on the amount that each Vanguard Fund may contribute to Van- guard's capitalization. MANAGEMENT. Corporate management and administrative services include: (1) executive staff; (2) accounting and financial; (3) legal and regulatory; (4) shareholder account maintenance; (5) monitoring and control of custodian relationships; (6) shareholder reporting; and (7) review and evaluation of advisory and other services provided to the Funds by third parties. During the fiscal year ended October 31, 1994, Vanguard/Windsor Fund's share of Vanguard's actual net costs of operation relating to management and administrative services (including transfer agency) totaled approximately $19,582,000 and Vanguard/Windsor II's share of such costs of operation totaled approximately $17,200,000. DISTRIBUTION. Vanguard provides all distribution and marketing activities for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned subsidiary of The Vanguard Group, Inc., acts as Sales Agent for shares of the Funds, in connection with any sales made directly to investors in the states of Florida, Missouri, New York, Ohio, Texas and such other states as may be required. The principal distribution expenses are for advertising, promotional materi- als and marketing personnel. Distribution services may also include organizing and offering to the public, from time to time, one or more new investment com- panies which will become members of the Group. The Directors and Officers of Vanguard determine the amount to be spent annually on distribution activities, the manner and amount to be spent on each Fund, and whether to organize new investment companies. One half of the distribution expenses of a marketing and promotional nature is allocated among the Funds based upon their relative net assets. The remain- ing 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 na- ture shall exceed 125% of the average B-10 distribution expense rate for the Group, and that no Fund shall incur annual distribution expenses in excess of 2/100 of 1% of its average month-end net assets. During the fiscal year ended October 31, 1994, Vanguard/Windsor Fund paid approximately $1,662,000 of the Group's distribution and marketing ex- penses, which represented an effective annual rate of .02 of 1% of Vanguard/Windsor Fund's average net assets and Vanguard/Windsor II paid ap- proximately $1,481,000 of such expenses which represented an effective annual rate of .02 of 1% of Vanguard/Windsor II's net assets. INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory services to Vanguard Windsor II, Vanguard Money Market Reserves, Vanguard Municipal Bond Fund, several Portfolios of Vanguard Fixed Income Securities Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard California Tax-Free Fund, Vanguard New York Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard Index Trust, Vanguard Bond Index Fund, Vanguard International Equity Index Fund, Vanguard Balanced Index Fund, Vanguard Institutional Portfolios. Vanguard Admiral Funds, Vanguard Tax-Managed Fund, Vanguard Horizon Fund, Vanguard Institutional Index Fund, several Portfolios of Vanguard Variable Insurance Fund, a portion of Vanguard/Morgan Growth Fund as well as several indexed separate accounts. These services are provided on an at-cost basis by an investment management staff employed directly by Vanguard. The compensation and other expenses of this staff are paid by the Funds utilizing these services. REMUNERATION OF DIRECTORS AND OFFICERS The Company pays each Director who is not also an Officer an annual fee plus travel and other expenses incurred in attending Board meetings. The Company's Officers and employees are paid by Vanguard which, in turn, is reimbursed by the Company, and each other Fund in the Group, for its proportionate share of Officers' and employees' salaries and retirement benefits. Under its Retirement Plan, Vanguard contributes annually an amount equal to 10% of each Officer's annual compensation plus 5.7% of that part of the Offi- cer's compensation during the year, if any, that exceeds the Social Security Taxable Wage Base then in effect. Under the Thrift Plan, all Officers are per- mitted to make pre-tax basic contributions in a maximum amount equal to 4% of total compensation. Vanguard matches the basic contributions on a 100% basis. Upon retirement, Directors who are not Officers are paid an annual fee based on the number of years of service on the Board, up to fifteen years of serv- ice. The fee is equal to $1,000 for each year of service and each investment company member of The Vanguard Group contributes a proportionate amount of this fee based on its relative net assets. This fee is paid, subsequent to a Director's retirement, for a period of ten years or until the death of a re- tired Director. B-11 The following table provides detailed information with respect to the amounts paid or accrued for the Directors, and the Officers of the Company for whom the Company's proportionate share of remuneration exceeded $60,000, for the fiscal year ended October 31, 1994. VANGUARD/WINDSOR FUNDS COMPENSATION TABLE
PENSION OR TOTAL RETIREMENT COMPENSATION AGGREGATE BENEFITS ACCRUED ESTIMATED FROM ALL COMPENSATION AS PART OF ANNUAL BENEFITS VANGUARD FUNDS NAMES OF DIRECTORS FROM THE COMPANY COMPANY EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2) - ------------------ ---------------- ---------------- --------------- -------------------- John C. Bogle(1)J....... $425,292 $44,827 -- -- John J. Brennan(1)...... $191,238 $24,970 -- -- Barbara Barnes Hauptfuhrer............ $9,647 $1,956 $15,000 $50,000 Robert E. Cawthorn...... $9,647 $1,630 $13,000 $50,000 Bruce K. MacClaury...... $8,683 $1,630 $12,000 $45,000 Burton G. Malkiel....... $9,647 $1,304 $15,000 $50,000 Alfred M. Rankin........ $9,647 $1,030 $15,000 $50,000 John C. Sawhill......... $9,647 $1,223 $15,000 $50,000 James O. Welch, Jr...... $9,262 $1,505 $15,000 $48,000 J. Lawrence Wilson...... $9,455 $1,087 $15,000 $49,000
- -------- (1) As "Interested Directors", Messrs. Bogle and Brennan receive no compensa- tion for their service as Directors. Compensation amounts reported for Messrs. Bogle and Brennan relate to their respective positions as Chief Executive Officer and President of the Company. (2) The amounts reported in this column reflect the total compensation paid to each Director for their service as Director or Trustee of 33 Vanguard funds (32 in the case of Mr. MacClaury). INVESTMENT ADVISORY SERVICES VANGUARD/WINDSOR FUND The Company employs Wellington Management Company ("WMC") under an invest- ment advisory agreement dated June 19, 1985 to manage the investment and rein- vestment of the assets of Vanguard/Windsor Fund and to continuously review, supervise and administer Vanguard/Windsor Fund's investment program. WMC dis- charges its responsibilities subject to the control of the Officers and Direc- tors of the Company. WMC is a Massachusetts general partnership controlled by the following general partners: Robert W. Doran, Duncan M. McFarland and John B. Neff. Vanguard/Windsor Fund pays WMC a basic fee at the end of each fiscal quar- ter, calculated by applying a quarterly rate, based on the following annual percentage rates, to Vanguard/Windsor Fund's average month-end net assets for the quarter.
ANNUAL NET ASSETS RATE ---------- ------ First $200 million................................................. 0.350% Next $250 million.................................................. 0.275% Next $300 million.................................................. 0.200% Over $750 million.................................................. 0.150%
The basic fee paid to WMC may be increased or decreased by applying an ad- justment formula based on Vanguard/Windsor Fund's investment performance. Such formula provides for an increase B-12 or decrease in the basic fee paid to WMC each quarter, depending upon Vanguard/Windsor Fund's investment performance for the thirty-six months pre- ceding the end of the quarter relative to the investment record of the Stan- dard and Poor's Composite Stock Price Index (the "S&P 500") for the same peri- od. The schedule of incentive/penalty adjustments is set forth in the Vanguard/Windsor Fund Prospectus. For purposes of incentive/penalty adjustments, the investment performance of Vanguard/Windsor Fund for any period is expressed as a percentage of Vanguard/Windsor Fund's net asset value per share at the beginning of the pe- riod. This percentage is equal to the sum of: (i) the change in Vanguard/Windsor Fund's net asset value per share during the period; (ii) the value of Vanguard/Windsor Fund's cash distributions per share having an ex- dividend date occurring within the period; and (iii) the per share amount of capital gains taxes paid or accrued during the period by Vanguard/Windsor Fund for undistributed realized long-term capital gains. The investment record of the S&P Index for any period is expressed as a percentage of the S&P Index level at the beginning of the period. This percentage is equal to the sum of (i) the change in the level of the S&P Index, during the period and (ii) the value, computed consistently with the S&P Index, of cash distributions having an ex-dividend date occurring within the period made by companies whose secu- rities comprise the S&P Index. During the fiscal years ended October 31, 1992, 1993 and 1994 Vanguard/Windsor Fund paid the following advisory fees:
1992 1993 1994 ----------- ----------- ----------- Basic Fee.............................. $13,156,000 $15,547,000 $17,236,000 Increase or Decrease for Performance Adjustment............................ (7,680,000) 4,136,000 9,213,000 ----------- ----------- ----------- Total................................ $ 5,476,000 $19,683,000 $26,449,000 =========== =========== ===========
VANGUARD/WINDSOR II Vanguard/Windsor II employs a "multi-manager" approach utilizing four in- vestment advisors. BARROW, HANLEY, MEWHINNEY & STRAUSS Vanguard/Windsor II has entered into an investment advisory agreement dated May 1, 1993 with Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHM&S") to manage a portion of the assets of Vanguard/Windsor II (currently approximately 72%). Under this agreement, BHM&S manages the investment and reinvestment of the designated assets and continuously reviews, supervises and administers the in- vestment program of Vanguard/Windsor II with respect to those assets. BHM&S discharges its responsibilities subject to the control of the Officers and Di- rectors of the Company. BHM&S is a Texas corporation controlled by the following officers of BHM&S: James Pindy Barrow, Vice President; Bryant Miller Hanley, Jr., President; Michael Christopher Mewhinney, Vice President and John Luke Strauss, Vice President, Secretary and Treasurer. Vanguard/Windsor II pays BHM&S a basic fee at the end of each fiscal quar- ter, calculated by applying a quarterly rate, based on the following annual percentage rates, to the average month-end net assets of Vanguard/Windsor II managed by BHM&S for the quarter:
NET ASSETS ANNUAL RATE ---------- ----------- First $200 million............................................ 0.300% Next $300 million............................................. 0.200% Next $500 million............................................. 0.150% Over $1 billion............................................... 0.125%
B-13 Effective with the quarter ending April 30, 1996, the basic fee paid to BHM&S will be increased or decreased by applying an adjustment formula based on the investment performance of the assets of Vanguard/Windsor II managed by BHM&S (the "BHM&S Portfolio"). Such formula provides for an increase or de- crease in the basic fee paid to BHM&S each quarter, depending upon the BHM&S Portfolio's investment performance for the thirty-six months preceding the end of the quarter relative to the investment record of the Standard & Poor's/BARRA Value Index (the "BARRA Value Index"). The schedule of incentive/penalty adjustments is set forth on the Vanguard/Windsor II Prospec- tus. Until the quarter ending April 30, 1996, the incentive/penalty fee will be calculated according to the following transition rules: (a) For the period May 1, 1993 to January 31, 1994 the incentive/penalty fee was not operable. During this period, Vanguard/Windsor II paid BHM&S the basic advisory fee set forth above. (b) Beginning with the quarter ending April 30, 1994, the incentive/penalty fee has been calculated based on a comparison of the in- vestment performance of the BHM&S Portfolio and that of the BARRA Value In- dex over the number of months elapsed between May 1, 1993 and the end of the quarter for which the fee is being computed. The number of percentage points by which the investment performance of the BHM&S Portfolio must ex- ceed or fall below that of the BARRA Value Index will increase proportion- ately from 3 percentage points and 2 percentage points, respectively, for the twelve months ended April 30, 1994 to 9 percentage points and 6 per- centage points, respectively for the thirty-six months ended April 30, 1996. The BARRA Value Index includes stocks in the Standard and Poor's 500 Compos- ite Stock Price Index with lower than average ratios of market price to book value. These types of stocks are often referred to as "value" stocks. The investment performance of the BHM&S Portfolio for any period is ex- pressed as a percentage of the "BHM&S Portfolio Unit Value" at the beginning of such period. This percentage is equal to the sum of: (i) the change in the BHM&S Portfolio Unit Value during such period; (ii) the unit value of the Fund's cash distributions from the BHM&S Portfolio's net investment income and realized net capital gains (whether long-term or short-term) having an ex-div- idend date occurring within such period; and (iii) the unit value of capital gains taxes paid or accrued during such period by Vanguard/Windsor II for un- distributed realized long-term capital gains realized from the BHM&S Portfo- lio. The "BHM&S Portfolio Unit Value" will be determined by dividing the total net assets of the BHM&S Portfolio by a given number of units. On the initial date of the agreement, the number of units in the BHM&S Portfolio was equal to the total shares outstanding of Vanguard/Windsor II. After such initial date, as assets are added to or withdrawn from the BHM&S Portfolio, the number of units of the BHM&S Portfolio will be adjusted based on the unit value of the BHM&S Portfolio on the day such changes are executed. The investment record of the BARRA Value Index is calculated quarterly by (i) multiplying the total return for the quarter (change in market price plus dividends) of each stock included in the BARRA Value Index by its weighting in the BARRA Value Index at the beginning of the quarter, and (ii) adding the values discussed in (i). For any period, therefore, the investment record of the BARRA Value Index will be the compounded quarterly returns of the BARRA Value Index. During the fiscal years ended October 31, 1992, 1993 and 1994, Windsor II paid advisory fees to BHM&S of approximately $4,572,000, $6,488,000 and $7,518,000, respectively. OTHER ADVISERS. On November 1, 1991, Vanguard/Windsor II added Equinox Capi- tal Management ("Equinox") and Tukman Capital Management ("Tukman") to manage the investment and reinvestment of a portion of its assets (approximately 10% each). Additionally, Vanguard's Core Manage B-14 ment Group was added to manage approximately 8% of the Vanguard/Windsor II's assets as of that date. Equinox, Tukman and Vanguard's Core Management Group discharge their respective responsibilities subject to the control of the Di- rectors and Officers of the Fund. EQUINOX Equinox is a Delaware corporation controlled by the following officers of Equinox: Ronald J. Ulrich (Director and President), Edward E. Murphy (Princi- pal), Wendy D. Lee (Managing Director), David E. Walker (Vice President) and Laura Starr (Vice President). Under the terms of an investment advisory agreement dated November 1, 1991, Vanguard/Windsor II pays Equinox a basic fee at the end of each fiscal quar- ter, calculated by applying a quarterly rate, based on the following annual percentage rates, to the portion of Vanguard/Windsor II's average month-end net assets managed by Equinox for the quarter.
ANNUAL NET ASSETS RATE ---------- ------ First $100 million................................................. 0.300% Next $300 million.................................................. 0.200% Over $400 million.................................................. 0.150%
The basic fee paid to Equinox may be increased or decreased by applying an adjustment formula based on the investment performance of the portion of Vanguard/Windsor II's assets managed by Equinox (the "Equinox Portfolio") rel- ative to the investment record of the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"). Such formula provides for an increase or decrease in the basic fee paid to Equinox each quarter, depending upon the Equinox Portfo- lio's investment performance for the thirty-six months preceding the end of the quarter. The schedule of incentive/penalty fee adjustments is set forth in the Vanguard/Windsor II Prospectus. The investment performance of the Equinox Portfolio for any period is ex- pressed as a percentage of the "Equinox Portfolio Unit Value" at the beginning of such period. This percentage is equal to the sum of: (i) the change in the Equinox Portfolio unit value during such period; (ii) the unit value of the Vanguard/Windsor II's cash distributions from the Equinox Portfolio net in- vestment income and realized net capital gains (whether long-term or short- term) having an ex-dividend date occurring within such period; and (iii) the unit value of capital gains taxes paid or accrued during such period by Vanguard/Windsor II for undistributed realized long-term capital gains real- ized from the Equinox Portfolio. The "Equinox Portfolio Unit Value" will be determined by dividing the total net assets of the Equinox Portfolio by a given number of units. On the initial date of the agreement, the number of units in the Equinox Portfolio was equal to the total shares outstanding of Vanguard/Windsor II. After such initial date, as assets are added to or withdrawn from the Equinox Portfolio, the num- ber of units of the Equinox Portfolio will be adjusted based on the unit value of the Equinox Portfolio on the day such changes are executed. The investment record of the S&P 500 will be calculated quarterly by (i) multiplying the total return for the quarter (change in the market price plus dividends) of each stock included in the S&P 500 by its weighting in the S&P 500 at the beginning of the quarter, and (ii) adding the values discussed in (i). For any period, therefore, the investment record of the S&P 500 will be the compounded quarterly returns of the S&P too. During the fiscal years ended October 31, 1992, 1993 and 1994, Vanguard/Windsor II paid advisory fees to Equinox of approximately $781,000, $1,171,000 and $1,424,000, respectively. B-15 TUKMAN Tukman is a Maryland 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 dated November 1, 1991, 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 the Vanguard/Windsor II's assets managed by Tukman:
ANNUAL NET ASSETS RATE ---------- ------ First $25 million.................................................. 0.400% Next $125 million.................................................. 0.350% Next $350 million.................................................. 0.250% Next $500 million.................................................. 0.200% Over $1 billion.................................................... 0.150%
The basic fee paid to Tukman may be increased or decreased by applying an adjustment formula based on the investment performance of the portion of Vanguard/Windsor II's assets managed by Tukman (the "Tukman Portfolio") rela- tive to the investment record of the Standard & Poor's 500 Composite Stock Price Index ("S&P 500"). Such formula provides for an increase or decrease in the basic fee paid to Tukman each quarter, depending upon the Tukman Portfo- lio's investment performance for the thirty-six months preceding the end of the quarter. The schedule of incentive/penalty fee adjustments is set forth in the Vanguard/Windsor II Prospectus. The investment performance of the Tukman Portfolio for any period is ex- pressed as a percentage of the "Tukman Portfolio Unit Value" at the beginning of such period. The percentage is equal to the sum of: (i) the change in the Tukman Portfolio unit value during such period; (ii) the unit value of Vanguard/Windsor II's cash distributions from the Tukman Portfolio net invest- ment income and realized net capital gains (whether long-term or short-term) having an ex-dividend date occurring within such period; and (iii) the unit value of capital gains taxes paid or accrued during such period by Vanguard/Windsor II for undistributed realized long-term capital gains real- ized from the Tukman Portfolio. The "Tukman Portfolio Unit Value" will be determined by dividing the total net assets of the Tukman Portfolio by a given number of units. On the initial date of the agreement, the number of units in the Tukman Portfolio was equal to the total shares outstanding of Vanguard/Windsor II. After such initial date, as assets are added to or withdrawn from the Tukman Portfolio, the num- ber of units of the Tukman Portfolio will be adjusted based on the unit value of the Tukman Portfolio on the day such changes are executed. The investment record of the S&P 500 will be calculated quarterly by (i) multiplying the total return for the quarter (change in market price plus div- idends) of each stock included in the S&P 500 by its weighting in the S&P 500 at the beginning of the quarter, and (ii) adding the values discussed in (i). For any period, therefore, the investment record of the S&P 500 will be the compounded quarterly returns of the S&P 500. During the fiscal years ended October 31, 1992, 1993 and 1994, Vanguard/Windsor II paid advisory fees to Tukman of approximately $1,028,000, $1,503,000 and $1,825,000, respectively. VANGUARD'S CORE MANAGEMENT GROUP Since November 1, 1991, Vanguard's Core Management Group has provided in- vestment advisory services on an at-cost basis with respect to a portion of the Vanguard/Windsor II's assets (currently B-16 approximately 8%). The Core Management Group also provides investment advisory services to several Vanguard Funds, including Vanguard Index Trust, Vanguard Balanced Index Fund, Vanguard International Equity Index Fund, Vanguard Insti- tutional Index Fund, several indexed separate accounts as well as a portion of Vanguard/Morgan Growth Fund's assets. The quantitative approach used by Van- guard's Core Management Department is designed to generate highly predictable results relative to a benchmark of large and medium capitalization "value" stocks. A portfolio is constructed from attractively priced "value" stocks us- ing an optimizer to assure that the characteristics of the portfolio are simi- lar to that of the benchmark. The Core Management Group is supervised by the Officers of the Fund. DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS Vanguard/Windsor Fund's present agreement with WMC continues in effect until May 31, 1995. Vanguard/Windsor II's present agreements with BHM&S, Equinox and Tukman continue in effect until April 30, 1995, October 31,1995 and October 31, 1995, respectively. Each agreement is renewable for successive one-year periods if specifically approved by a vote of the Company's Board of Directors at a meeting called for the purpose of considering such approval. The Board's approval must include the affirmative votes of a majority of the Directors who are neither parties to the contract or "interested persons" of such parties (as defined in the Investment Company Act of 1940). In addition, the question of continuing an investment advisory agreement may be presented to sharehold- ers. In such an event, the agreement would be continued only if approved by the affirmative vote of a majority of the outstanding shares of the Fund to which the agreement related. Each investment advisory agreement is automatically terminated if assigned, and may be terminated without penalty at any time (1) by majority vote of ei- ther the Board of Directors or the Fund's outstanding shares upon 60 days' written notice to the adviser, or (2) by the adviser upon 90 days' written no- tice to the Fund. The Company's Board of Directors may, without the approval of shareholders, provide for: (A) The employment of a new investment adviser pursuant to the terms of a new advisory agreement, either as a replacement for an existing ad- viser or as an additional adviser; (B) A change in the terms of an advisory agreement; or (C) The continued employment of an existing adviser, on the same advi- sory contract terms, where a contract has been assigned because of a change in control of the adviser. Any such change will be made upon not less than 30 days' prior written no- tice to shareholders, which shall include the information concerning the ad- viser that would have normally been included in a proxy statement. MORE INFORMATION ON ADVISERS' INCENTIVE/PENALTY FEES In April 1972, the Securities and Exchange Commission ("SEC") issued Release No. 7113 under the Investment Company Act of 1940 to call the attention of di- rectors and investment advisers to certain factors which must be considered in connection with investment company incentive fee arrangements. One of these factors is to "avoid basing significant fee adjustments upon random or insig- nificant differences" between the investment performance of a fund and that of the particular index with which it is being compared. The Release provides that "preliminary studies (of the SEC staff) indicate that as a "rule of thumb' the performance difference should be at least ^ 10 percentage points" annually before the maximum performance adjustment may be made. However, the Release also states that "because of the preliminary nature of these studies, the Commission is not recommending, at this time, that any particular perfor- mance difference exist before the maximum fee B-17 adjustment may be made." The Release concludes that the directors of a fund "should satisfy themselves that the maximum performance adjustment will be made only for performance differences that can reasonably be considered significant. "The Board of Directors has fully considered the SEC Release and believes that the performance adjustments as included in the agreements with WMC, BHM&S, Equinox and Tukman are entirely appropriate although not within the (plus or minus)10 percentage points per year range suggested in the Release. Under the Funds investment advisory agreements, the maximum performance adjustments are made at a difference of (plus or minus)12 and (plus or minus)9 percentage points from the performance of the respective index over a thirty-six month period, which would effectively be the equivalent of approximately (plus or minus)4 and (plus or minus)3 percentage points difference per year . PORTFOLIO TRANSACTIONS WMC, BHM&S, Equinox, Tukman and Vanguard are authorized to (with the ap- proval of the Board of Directors) select the brokers or dealers that will exe- cute the purchases and sales of portfolio securities for the respective series of the Company. The investment advisory agreements direct the advisers to use their best efforts to obtain the best available price and most favorable exe- cution as to all transactions. Each investment adviser has undertaken to exe- cute each investment transaction at a price and commission which provides the most favorable total cost or proceeds reasonably obtainable under the circum- stances. In placing portfolio transactions, each investment adviser will use its best judgment to choose the broker most capable of providing the brokerage services necessary to obtain best available price and most favorable execution. The full range and quality of brokerage services available will be considered in making these determinations. In those instances where it is reasonably deter- mined that more than one broker can offer the brokerage services needed to ob- tain the best available price and most favorable execution, consideration may be given to those brokers which supply investment research and statistical in- formation and provide other services in addition to execution services to the series and/or the investment adviser. Each investment adviser considers such information useful in the performance of its obligations under the agreement, but is unable to determine the amount by which such services may reduce its expenses. The investment advisory agreements also incorporate the concepts of Section 28(e) of the Securities Exchange Act of 1934 by providing that, subject to the approval of the Board of Directors, each investment adviser may cause the se- ries 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 re- sponsibilities of the adviser to the Company and the other Funds in the Group. Currently, it is the Company's policy that each investment adviser may at times pay higher commissions in recognition of brokerage services felt neces- sary for the achievement of better execution of certain securities transac- tions that otherwise might not be available. An investment adviser will only pay such higher commissions if it believes this to be in the best interest of the series. Some brokers or dealers who may receive such higher commissions in recognition of brokerage services related to execution of securities transac- tions are also providers of research information to investment adviser and/or the Company. However, the investment advisers have informed the Company that they will not pay higher commission rates specifically for the purpose of ob- taining research services. Since the Company does not market its shares through intermediary brokers or dealers, it is not the Company's practice to allocate brokerage or principal business on the basis of sales of its shares which may be through such firms. However, the Company may place portfolio orders with qualified broker-dealers who recommend shares of the Company to other clients, or who act as agent in the B-18 purchase of the Company's shares for their clients, and may, when a number of brokers and dealers can provide comparable best price and execution on a par- ticular transaction, consider the sale of the Company's shares by a broker or dealer in selecting among qualified broker-dealers. During the fiscal years ended October 31, 1992, 1993 and 1994 the Company paid $11,073,668, $14,909,648 and $14,906,748 in brokerage commissions, re- spectively. Some securities considered for investment by a series of the Company may also be appropriate for the other series and for other Funds and/or clients served by the investment adviser. If purchase or sale of securities consistent with the investment policies of the series and one or more of these other Funds or clients served by the investment adviser are considered at or about the same time, transactions in such securities will be allocated among the several Funds and clients in a manner deemed equitable by the investment ad- viser. PERFORMANCE MEASURES Each of the investment company members of the Vanguard Group, including Vanguard/Windsor Fund and Vanguard/Windsor II, may from time to time use one or more of the following unmanaged indices for comparative performance purpos- es. STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified list of 500 companies representing the U.S. Stock Market. STANDARD AND POOR'S/BARRA VALUE INDEX -- consists of the stocks in the Standard and Poor's 500 Composite Stock Price Index ("S&P 500") with the lowest price-to-book ratios, comprising 50% of the market capitalization of the S&P 500. WILSHIRE 5000 EQUITY INDEXES -- consists of more than 6,000 common equity securities, covering all stocks in the U.S. for which daily pricing is available. WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except for the 500 stocks in the Standard and Poor's 500 Index. 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 and the Far East. GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33 preferreds. The original list of names was generated by screening for convertible issues of 100 million or greater in market capitalization. The index is priced monthly. SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private lenders and guaranteed by the mortgage pools of the Government National Mortgage Association. SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued, non-convertible corporate bonds rated AA or AAA. It is a value- weighted, total return index, including approximately 800 issues with maturities of 12 years or greater. LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or greater. MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S. Treasury Agency and investment grade corporate bonds. B-19 LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate, nonconvertible domestic corporate bonds rated Baa by Moody's with a maturity longer than 1 year and with more than $25 million outstanding. This index includes over 1,000 issues. BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon high-grade general obligation municipal bonds. STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average yield for four high-grade, noncallable preferred stock issues. NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It is a value-weighted index calculated on price change only and does not include income. COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial Index. COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers High Grade Bond Index. COMPOSITE INDEX -- 65% Standard & Poor's 500 Index, 35% Salomon Brothers High Grade Bond Index. LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains individually priced U.S. Treasury, agency, corporate, and mortgage pass-through securities corporate rated BBB- or better. The Index has a market value of over $4 trillion. LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a market weighted index that contains individually priced U.S. Treasury, agency, and corporate investment grade bonds rated BBB- or better with maturities between 1 and 5 years. The index has a market value of over $1.3 trillion. LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is a market weighted index that contains individually priced U.S. Treasury, agency, and corporate securities rated BBB- or better with maturities between 5 and 10 years. The index has a market value of over $600 billion. LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market weighted index that contains individually priced U.S. Treasury, agency, and corporate securities rated BBB- or better with maturities greater than 10 years. The index has a market value of over $900 billion. LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced funds with similar investment objectives and policies, as measured by Lipper Analytical Services, Inc. LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of average non-government money market funds with similar investment objectives and policies, as measured by Lipper Analytical Services, Inc. LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of average government money market funds with similar investment objectives and policies, as measured by Lipper Analytical Services, Inc. DESCRIPTION OF SHARES AND VOTING RIGHTS The Company was originally organized as a corporation in 1959. On January 2, 1985, the Company was reorganized into a Pennsylvania business trust which was created solely for that purpose. The Company was reorganized as a Maryland corporation on December 30, 1985. The Amended and Restated Articles of Incor- poration permit the Directors to issue 1,600,000,000 shares of common stock, with one cent par value. The Board of Directors has the power to designate one or more classes ("series") of shares B-20 of common stock and to classify or reclassify any unissued shares with respect to such series. Currently the Company is offering shares of two series. The shares of each series are fully paid and non-assessable, and have no preference as to conversion, exchange, dividends, retirement or other fea- tures. The shares of each series have no pre-emptive rights. Such shares have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of Directors can elect 100% of the Direc- tors if they choose to do so. A shareholder is entitled to one vote for each full share held (and a fractional vote for each fractional share held), then standing in his name on the books of the Company. On any matter submitted to a vote of shareholders, all shares of the Company then issued and outstanding and entitled to vote, irrespective of the series, shall be voted in the aggre- gate and not by series except; (i) when required by the Investment Company Act of 1940, shares shall be voted by individual series; and (ii) when the matter does not affect any interest of a particular series, then only shareholders of the affected series shall be entitled to vote thereon. FINANCIAL STATEMENTS The Funds' Financial Statements for the year ended October 31, 1994, includ- ing the financial highlights for each of the five fiscal years in the period ended October 31, 1994, appearing in the Vanguard/Windsor Fund and Vanguard/Windsor II 1994 Annual Reports to Shareholders, and the reports thereon of Price Waterhouse LLP, independent accountants, also appearing therein, are incorporated by reference in this Statement of Additional Infor- mation. The Funds' 1994 Annual Reports to Shareholders are enclosed with this Statement of Additional Information. For a more complete discussion of a Fund's performance, please see the Fund's 1994 Annual Report to Shareholders, which may be obtained without charge. B-21 PART C VANGUARD/WINDSOR FUNDS, INC. (FORMERLY THE WINDSOR FUNDS, INC.) OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS (A) FINANCIAL STATEMENTS The Registrant's audited financial statements for the year ended October 31, 1994, including Price Waterhouse LLP's reports thereon, are incorporated by reference, in the Statement of Additional Information, from the Registrant's 1994 Annual Reports which have been filed with the Commission as Exhibits to this Registration Statement. The financial statements included in each of the Annual Reports are: 1. Statement of Net Assets as of October 31, 1994. 2. Statement of Operations for the year ended October 31, 1994. 3. Statement of Changes in Net Assets for the years ended October 31, 1993 and October 31, 1994. 4. Financial Highlights for each of the five years in the period ended October 31, 1994. 5. Notes to Financial Statements. 6. Report of Independent Accountants. (B) EXHIBITS 1.Articles of Incorporation 2.By-Laws of Registrant 3.Not Applicable 4.Not Applicable 5.Not Applicable 6.Not Applicable 7.Reference is made to the section entitled "Management of the Fund" in the Registrant's Statement of Additional Information 8.Form of Custody Agreement 9.Form of Vanguard Service Agreement 10.Opinion of Counsel 11.Consent of Independent Accountants* 12.Financial Statements--reference is made to (a) above 13.Not Applicable 14.Not Applicable 15.Not Applicable 16.Schedule for Computation of Performance Quotations* 27.Financial Data Schedule* -------- * Filed herewith ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Registrant is not controlled by or under common control with any person. The officers of the Registrant and the other investment companies in The Vanguard Group of Investment Companies are identical. In addition, the officers of the Registrant are also officers of the Vanguard Group, Inc. Reference is made to the caption "Management of the Fund" in the Prospectus constituting Part A and "Management of the Fund" in the Statement of Additional Information constitut- ing Part B of this Registration Statement. C-1 ITEM 26. NUMBER OF HOLDERS OF SECURITIES As of October 31, 1994 the number of shareholders of each Series of Common Stock ($.01 par value) was as follows: Vanguard/Windsor Fund Series............................................ 390,568 Vanguard/Windsor II Series.............................................. 392,535
ITEM 27. INDEMNIFICATION Reference is made to Article XI of Registrant's Articles of Incorporation. ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER Wellington Management Company is a Massachusetts general partnership of which the following persons are managing partners: Robert W. Doran, Duncan Mc- Farland and John B. Neff. Listed below are the names of, and office held by, each director and princi- pal officer of Barrow, Hanley, Mewhinney & Strauss, Inc., investment adviser to the Vanguard/Windsor II Series. The business address of each such director and officer is 200 Crescent Ct., 19th Floor, Dallas, Texas 75201. No officer or director of Barrow, Hanley, Mewhinney & Strauss, Inc. has any other affili- ation with the Registrant.
NAME POSITION ---- -------- James Purdy Barrow Vice President Bryant Miller Hanley, Jr. President Michael Christopher Mewhinney Vice President John Luke Strauss Vice President, Secretary and Treasurer John Stevens Williams Vice President
Listed below are the names and offices held by each principal officer of Equinox Capital Management, Inc., 399 Park Ave., 28th Floor, New York, NY 10022.
NAME POSITION ---- -------- Ronald J. Ulrich President & Director Edward E. Murphy Principal David E. Walker Vice President Wendy D. Lee Managing Director Laura Starr Vice President
Listed below are the names and offices held by each principal officer of Tukman Capital Management, Inc., 60 East Sir Francis Drake Boulevard, Larkspur, California 94939:
NAME POSITION ---- -------- Melvin T. Tukman President & Director Daniel L. Grossman Vice President
ITEM 29. PRINCIPAL UNDERWRITERS (a) None (b) Not Applicable ITEM 30. LOCATION OF ACCOUNTS AND RECORDS The books, accounts and other document required by Section 31(a) under the Investment Company Act and the rules promulgated thereunder will be maintained in the physical possession of Registrant; Registrant's Transfer Agent. The Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley C-2 Forge, Pennsylvania 19482; and the Registrant's Custodian, State Street Bank & Trust Company, Boston, Mass. ITEM 31. MANAGEMENT SERVICES Other than the Amended and Restated Funds' Service Agreement with The Van- guard Group, Inc. which was previously filed as Exhibit 9(c) and described in Part B hereof under "Management of the Company," the Registrant is not a party of any management-related service contract. ITEM 32. UNDERTAKINGS Registrant hereby undertakes to comply with the provisions of Section 16(c) of the Investment Company Act of 1940 in regard to shareholders' rights to call a meeting of shareholders for the purpose of voting on the removal of di- rectors and to assist in shareholder communications in such matters, to the extent required by law. Registrant hereby undertakes to provide an Annual Report to Shareholders or prospective investors, free of charge, upon request. C-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL THE REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS POST- EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF VALLEY FORGE AND THE COMMONWEALTH OF PENNSYLVANIA, ON THE 23RD DAY OF FEBRUARY 1995. Vanguard/Windsor Funds, Inc. By: Raymond J. Klapinsky ---------------------------------- (RAYMOND J. KLAPINSKY) JOHN C. BOGLE*, CHAIRMAN, AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST- EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED: SIGNATURES TITLE DATE Raymond J. Klapinsky Chairman of the February 23, 1995 - ----------------------------------- Board, Director, (RAYMOND J. KLAPINSKY) and Chief Executive JOHN C. BOGLE* Officer Raymond J. Klapinsky President and February 23, 1995 - ----------------------------------- Director (RAYMOND J. KLAPINSKY) JOHN J. BRENNAN* Raymond J. Klapinsky Director February 23, 1995 - ----------------------------------- (RAYMOND J. KLAPINSKY) ROBERT E. CAWTHORN* Raymond J. Klapinsky Director February 23, 1995 - ----------------------------------- (RAYMOND J. KLAPINSKY) BARBARA B. HAUPTFUHRER* Raymond J. Klapinsky Director February 23, 1995 - ----------------------------------- (RAYMOND J. KLAPINSKY) BURTON G. MALKIEL* Raymond J. Klapinsky Director February 23, 1995 - ----------------------------------- (RAYMOND J. KLAPINSKY) ALFRED M. RANKIN, JR.* Raymond J. Klapinsky Director February 23, 1995 - ----------------------------------- (RAYMOND J. KLAPINSKY) JOHN C. SAWHILL* C-4
SIGNATURES TITLE DATE Raymond J. Klapinsky Director February 10, 1995 - ------------------------------------- (RAYMOND J. KLAPINSKY) BRUCE K. MACLAURY* Raymond J. Klapinsky Director February 10, 1995 - ------------------------------------- (RAYMOND J. KLAPINSKY) JAMES O. WELCH, JR.* Raymond J. Klapinsky Director February 10, 1995 - ------------------------------------- (RAYMOND J. KLAPINSKY) J. LAWRENCE WILSON* Raymond J. Klapinsky Treasurer and February 10, 1995 - ------------------------------------- Principal Financial (RAYMOND J. KLAPINSKY) Officer and RICHARD F. HYLAND* Accounting Officer
* By Power of Attorney. See 1933 Act File No. 2-14336, January 23, 1990. Incor- porated by Reference. C-5 VANGUARD/WINDSOR FUNDS, INC. (FORMERLY THE WINDSOR FUNDS, INC.) INDEX TO EXHIBITS Consent of Independent Accountants.................................... EX-99-B11 Schedule for Computation of Performance Quotations.................... EX-99-B16 Financial Data Schedule............................................... EX-27
EX-99.B.11 2 CONSENT EX-99-B11 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses and the Statement of Additional Information, constituting parts of this amended Registration Statement on Form N-1A, of our reports dated November 29, 1994 relating to the financial statements, including the financial highlights, appearing in the October 31, 1994 Annual Reports to Shareholders of Vanguard/Windsor Fund and Vanguard/Windsor II which are also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Highlights" and "General Information" in the Prospectuses and "Financial Statements" in the Statement of Additional Information. Price Waterhouse LLP Philadelphia, PA February 22, 1995 EX-99.B.16 3 SCHEDULE FOR WINDSOR EX-99.B16 SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS* VANGUARD/WINDSOR FUND (FORMERLY WINDSOR FUND) 1. AVERAGE ANNUAL TOTAL RETURN P (1 + T)n = ERV Where: P = a hypothetical initial payment of $1,000 T = average annual total return N = number of years ERV = ending redeemable value at the end of the period EXAMPLE: One Year P = $1,000 T = 6.35% N = 1 ERV = $1,063.45 Five Year P = $1,000 T = 9.23% N = 5 ERV = $1,554.99 Ten Year P = $1,000 T = 14.45% N = 10 ERV = $3,856.18 2. YIELD a Yield = 2 [(----- + 1)/6/ - 1] - b X 100 c X d Where: a = dividends and interest paid during the period b = expense dollars during the period (net of reimbursements) c = the average daily number of shares outstanding during the period d = the maximum offering price per share on the last day of the period Example a = $34,606,376.97 b = $3,738,166.02 c = 786,025,233.442 d = $14.52 Yield = 3.27% *Figures presented are as of the year ended October 31, 1994. EX-99.B16 SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS* VANGUARD/WINDSOR II (FORMERLY WINDSOR II) 1.Average Annual Total Return P (1 + T)n = ERV Where: P = a hypothetical initial payment of $1,000 T = average annual total return N = number of years ERV = ending redeemable value at the end of the period EXAMPLE: One Year P = $1,000 T = 2.22% N = 1 ERV = $1,022.20 Five Year P = $1,000 T = 9.15% N = 5 ERV = $1,549.31 Ten Year P = $1,000 T = 13.21%* N = * ERV = $3,192.58* *Since Inception (June 24, 1985). 2. YIELD Yield = 2 [( a + 1)/6/ - 1] - b X 100 c X d Where: a = dividends and interest paid during the period b = expense dollars during the period (net of reimbursements) c = the average daily number of shares outstanding during the period d = the maximum offering price per share on the last day of the period Example a = $25,381,085.69 b = $2,481,656.13 c = 476,635,942.888 d = $17.34 Yield = 3.35% *Figures presented are as of the year ended October 31, 1994. EX-27 4 FINANCIAL DATA SCHEDULE
6 0000107606 VANGUARD/WINDSOR FUNDS, INC. 1 VANGUARD/WINDSOR FUND 1,000 US YEAR OCT-31-1994 NOV-01-1993 OCT-31-1994 1 10377708 11368631 603873 1720 0 11974224 59867 0 508052 567919 0 9621779 783736 705025 118075 0 675528 0 990923 11406305 289003 100319 0 49194 340128 676522 (338197) 678453 0 274533 629907 0 95222 78940 62430 869041 52480 628913 0 0 26449 0 49194 10924842 14.950 0.440 0.420 0.370 0.890 0.000 14.550 0.004 0 0
EX-27.1 5 FINANCIAL DATA SCHEDULE
6 0000107606 VANGUARD/WINDSOR FUNDS, INC. 2 VANGUARD/WINDSOR II 1,000 US YEAR OCT-31-1994 NOV-01-1993 OCT-31-1994 1 7391360 8229035 83616 1253 0 8313904 38548 0 29207 67755 0 7072053 475720 416242 112585 0 223481 0 838030 8246149 262862 23697 0 30532 256027 226060 (296749) 185338 0 225292 212053 0 110672 76350 25156 760535 81850 209474 0 0 10700 0 30532 7860145 17.980 0.550 (0.190) 0.510 0.500 0 17.330 0.004 0 0
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