-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Blul/v8YzfuTQg8YGM21iwjVyE7e/kFk4/akwfsQk3dsmrIbARaH6paQmBZfRn0a flc6gTldRpvCgI8FLto1oA== 0000893220-98-000687.txt : 19980409 0000893220-98-000687.hdr.sgml : 19980409 ACCESSION NUMBER: 0000893220-98-000687 CONFORMED SUBMISSION TYPE: PRER14A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980408 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD CONVERTIBLE SECURITIES FUND INC CENTRAL INDEX KEY: 0000791107 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-04627 FILM NUMBER: 98589421 BUSINESS ADDRESS: STREET 1: PO BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD EXPLORER FUND INC CENTRAL INDEX KEY: 0000034066 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 510106626 STATE OF INCORPORATION: PA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-01530 FILM NUMBER: 98589422 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 FORMER COMPANY: FORMER CONFORMED NAME: EXPLORER FUND INC DATE OF NAME CHANGE: 19900305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD WORLD FUND INC CENTRAL INDEX KEY: 0000052848 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 046035483 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-01027 FILM NUMBER: 98589423 BUSINESS ADDRESS: STREET 1: PO BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 FORMER COMPANY: FORMER CONFORMED NAME: IVEST FUND INC DATE OF NAME CHANGE: 19850923 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD MORGAN GROWTH FUND INC CENTRAL INDEX KEY: 0000068138 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510108190 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-01685 FILM NUMBER: 98589424 BUSINESS ADDRESS: STREET 1: 100 VANGUARD BLVD STREET 2: P O BOX 1100 CITY: MALVERN STATE: PA ZIP: 19355 BUSINESS PHONE: 6106696289 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN W L GROWTH FUND INC DATE OF NAME CHANGE: 19900507 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN GROWTH FUND DATE OF NAME CHANGE: 19681203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD TRUSTEES EQUITY FUND CENTRAL INDEX KEY: 0000313850 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 232120820 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-02968-99 FILM NUMBER: 98589425 BUSINESS ADDRESS: STREET 1: PO BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 MAIL ADDRESS: STREET 1: PO BOX 2600 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: TRUSTEES COMINGLED FUND DATE OF NAME CHANGE: 19930302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD SPECIALIZED PORTFOLIOS INC CENTRAL INDEX KEY: 0000734383 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-03916 FILM NUMBER: 98589426 BUSINESS ADDRESS: STREET 1: 100 VANGUARD BLVD STREET 2: VM #V34 CITY: MALVERN STATE: PA ZIP: 19355 BUSINESS PHONE: 6106696289 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD STAR FUND CENTRAL INDEX KEY: 0000736054 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-03919 FILM NUMBER: 98589427 BUSINESS ADDRESS: STREET 1: 100 VANGUARD BLVD34 STREET 2: P O BOX 1100 CITY: MALVERNE STATE: PA ZIP: 19355 BUSINESS PHONE: 6106696289 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD SPECIAL TAX ADVANTAGED RETIREMENT FUND DATE OF NAME CHANGE: 19850318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD/PRIMECAP FUND INC CENTRAL INDEX KEY: 0000752177 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 232311358 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-04098 FILM NUMBER: 98589428 BUSINESS ADDRESS: STREET 1: PO BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 FORMER COMPANY: FORMER CONFORMED NAME: PRIMECAP FUND INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD VARIABLE INSURANCE FUND CENTRAL INDEX KEY: 0000857490 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-05962 FILM NUMBER: 98589429 BUSINESS ADDRESS: STREET 1: PO BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD VARIABLE INSURANCE FUND INC DATE OF NAME CHANGE: 19910505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD TAX MANAGED FUND INC CENTRAL INDEX KEY: 0000923202 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-07175 FILM NUMBER: 98589430 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 610-669-62 MAIL ADDRESS: STREET 1: PO BOX 2600 VM V#34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD HORIZON FUND INC CENTRAL INDEX KEY: 0000932471 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 232787277 STATE OF INCORPORATION: MD FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-07239 FILM NUMBER: 98589431 BUSINESS ADDRESS: STREET 1: P O BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106691000 MAIL ADDRESS: STREET 1: P O BOX 2600 VM #V34 STREET 2: P O BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD WHITEHALL FUNDS INC CENTRAL INDEX KEY: 0001004655 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MD FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 811-07443 FILM NUMBER: 98589432 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: VM # 34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106691000 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: VM # 34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 PRER14A 1 VANGUARD COMBINED PROXY STATEMENT PHASE III REV. 1 IMPORTANT NEWS FOR VANGUARD SHAREHOLDERS VANGUARD CONVERTIBLE SECURITIES FUND VANGUARD EXPLORER FUND VANGUARD HORIZON FUND VANGUARD/MORGAN GROWTH FUND VANGUARD/PRIMECAP FUND VANGUARD SELECTED VALUE PORTFOLIO VANGUARD SPECIALIZED PORTFOLIOS VANGUARD STAR FUND/LIFESTRATEGY AND TOTAL INTERNATIONAL PORTFOLIOS VANGUARD TAX-MANAGED FUND VANGUARD/TRUSTEES EQUITY FUND VANGUARD VARIABLE INSURANCE FUND VANGUARD WORLD FUND Please Vote Immediately! You can vote by mail, telephone, or our website . . . details can be found on the enclosed proxy insert. YOUR VANGUARD FUND WILL HOST A SPECIAL MEETING OF SHAREHOLDERS ON JUNE 30, 1998, AT OUR HEADQUARTERS IN MALVERN, PENNSYLVANIA. THE PURPOSE IS TO VOTE ON SOME IMPORTANT PROPOSALS AFFECTING THE FUND. THE FIRST FEW PAGES OF THIS BOOKLET SUMMARIZE VANGUARD'S PROPOSALS AND EXPLAIN THE PROXY PROCESS-INCLUDING HOW TO CAST YOUR VOTES. BEFORE YOU VOTE, PLEASE READ THE FULL TEXT OF THE PROXY STATEMENT FOR A COMPLETE UNDERSTANDING OF OUR PROPOSALS. PROPOSAL 1: REORGANIZATION INTO A DELAWARE BUSINESS TRUST We want to reorganize your Fund into a Delaware business trust. Currently, your Fund is organized as either a Maryland Corporation or a Pennsylvania trust. WHY? We expect this administrative change to save most Funds (and, ultimately, their shareholders) a substantial amount of money in state taxes each year-$13,000 for Convertible Securities Fund, $172,000 for Explorer Fund, $44,000 for Horizon Fund, $184,000 for Morgan Growth Fund, $471,000 for PRIMECAP Fund, $525,000 for Specialized Portfolios, $94,000 for Tax-Managed Fund and $931,000 for World Fund, at current asset levels. The savings realized would reduce these Fund's expenses. STAR Fund/LifeStrategy and Total International Portfolios, Trustees' Equity Fund, and Variable Insurance Fund would not realize tax savings as a result of the change, but they would benefit from the efficiency of being organized the same way as all other Vanguard Funds. 2 KEY POINTS: The reorganization would not change your Fund's investment objective or policies (except for any changes approved by shareholders under Proposal 2). Your Fund also would keep the same Directors, officers, investment advisers, and auditors. PROPOSAL 2: FIVE CHANGES TO INVESTMENT LIMITATIONS We want to make a number of minor changes to the Vanguard Funds' fundamental investment limitations. Not all of these changes relate to your Fund; you will have the opportunity to vote separately on each change that does apply. Proposal 2a is the most important of these. It concerns an interfund lending program that we would like to establish for all Funds. This program would permit your Fund to borrow money from other Vanguard Funds as needed to make redemptions while awaiting payment for securities that it has sold. In addition, your Fund could lend its cash reserves to other Vanguard Funds to meet their temporary borrowing needs. WHY: Normally, your Fund has sufficient cash on hand to meet redemption requests. If not, however, the Fund can either delay paying shareholders for up to seven days-not an acceptable alternative-or pay them immediately by taking out a temporary loan. A temporary loan through the interfund lending program could be cheaper and easier for your Fund than borrowing from a bank. By lending money to other Funds through this program, your Fund could earn a better rate of interest on its cash reserves than it might receive from a bank. KEY POINTS: The interfund lending program would feature a number of safeguards to make sure it is fair and beneficial to all Vanguard Funds. One especially important safeguard is this: No Fund could borrow or lend money in the program unless it would get a more favorable interest rate than a typical bank would offer. PROPOSAL 3: SWITCH TO DOLLAR-BASED VOTING RIGHTS We want to amend the Treasury Fund's Declaration of Trust to switch from share-based voting rights to dollar-based voting rights. This is the type of voting rights that all other Vanguard Funds propose to offer their shareholders after reorganizing into Delaware business trust form. (See the description of Proposal 1.) WHY: When funds offer multiple portfolios-something that your Fund doesn't do now, but may do in the future-the share prices of the different portfolios typically diverge over time. If voting is share-based, owners of lower-priced shares end up with a disproportionate amount of clout on issues voted at the fund level. Dollar-based voting keeps shareholders' voting rights in proportion with their relative financial interests. KEY POINTS: The change to dollar-based voting rights will have no immediate impact on your Fund, since it offers only one portfolio at this time. 3 - Q&A- Q. I'm a small investor. Why should I bother to vote? A. Your vote makes a difference. If numerous shareholders just like you fail to vote their proxies, your Fund may not receive enough votes to go forward with its meeting. If this happens, we'll need to mail proxies again-a costly proposition for your Fund! Q. I've owned shares of Vanguard Funds for several years. Why is this the first notice I've received about a shareholder meeting? A. Unlike publicly traded companies, most mutual funds do not hold shareholder meetings every year. Instead, they undertake this expensive process only when significant issues requiring shareholder approval come up-such as your Fund's plan to save on taxes by changing its form of organization. The last time all Vanguard Funds held shareholder meetings was in 1993. Q. Who gets to vote? A. Any person who owned shares of your Fund on the "record date," which was March 16, 1998, gets to vote-even if the investor later sold the shares. Shareholders are entitled to cast one vote for each Fund share owned on the record date. Q. How can I vote? A. You can vote in any one of four ways: - Through the Internet at www.proxyvote.com (or by going to www.vanguard.com and clicking on "Proxy Voting"). - By telephone, with a toll-free call to the number listed on your proxy card. - By mail, with the enclosed ballot. - In person at the meeting. We encourage you to vote by Internet or telephone, using the 12-digit "control" number that appears on your proxy card. These voting methods will save your Fund a good deal of money (no return-mail postage!). Whichever method you choose, please take the time to read the full text of our proxy statement before you vote. Q. Is it hard to vote by Internet? A. Not at all! If you have not yet visited Vanguard's website-at www.vanguard.com-this is a great opportunity to check it out. Scan our website and, when you're ready, click on the "Proxy Voting" link on our homepage to access www.proxyvote.com (the voting location). Problems? Please call us at 1-800-891-5345. Q. I plan to vote by mail. How should I sign my proxy card? A. If you are an individual account owner, please sign exactly as your name appears on the proxy card. Either owner of a joint account may sign the proxy card, but the signer's name must exactly match one that appears on the card. You should sign proxy cards for other types of accounts in a way that indicates your authority (for instance, "John Brown, Custodian"). 4 VANGUARD CONVERTIBLE SECURITIES FUND VANGUARD EXPLORER FUND VANGUARD HORIZON FUND VANGUARD/MORGAN GROWTH FUND VANGUARD/PRIMECAP FUND VANGUARD SELECTED VALUE PORTFOLIO VANGUARD SPECIALIZED PORTFOLIOS VANGUARD STAR FUND: LIFESTRATEGY PORTFOLIOS, STAR PORTFOLIO, TOTAL INTERNATIONAL PORTFOLIO VANGUARD TAX-MANAGED FUND VANGUARD/TRUSTEES' EQUITY FUND: INTERNATIONAL VALUE PORTFOLIO, U.S. PORTFOLIO VANGUARD VARIABLE INSURANCE FUND VANGUARD WORLD FUND: INTERNATIONAL GROWTH PORTFOLIO, U.S. GROWTH PORTFOLIO NOTICE OF SPECIAL MEETING OF SHAREHOLDERS Your Vanguard Fund will host a Special Meeting of Shareholders on TUESDAY, JUNE 30, 1998, AT 9:30 A.M., EASTERN TIME. This will be a joint meeting for all the Vanguard Funds listed above. It will be held at Vanguard's Malvern, Pennsylvania headquarters, at 100 Vanguard Boulevard, in the Majestic Building. At the meeting, we'll ask shareholders to vote on: 1. A proposal to reorganize your Fund into a Delaware business trust. 2. Five proposed changes to your Fund's fundamental investment limitations (none of which would alter your Fund's current investment objective). 3. Any other business properly brought before the meeting. By Order of the Board of Directors/Trustees Raymond J. Klapinsky, Secretary 100 Vanguard Boulevard Malvern, PA 19355 April 13, 1998 YOUR VOTE IS IMPORTANT! YOU CAN VOTE EASILY AND QUICKLY BY TOLL-FREE TELEPHONE CALL, AT OUR WEBSITE, OR BY MAIL. JUST FOLLOW THE SIMPLE INSTRUCTIONS THAT APPEAR ON YOUR ENCLOSED PROXY CARD. PLEASE HELP YOUR FUND AVOID THE EXPENSE OF A FOLLOW-UP MAILING BY VOTING TODAY! VANGUARD VARIABLE INSURANCE FUND Please turn the page for important information about your voting rights. 5 VANGUARD VARIABLE ANNUITY PLAN CONTRACT OWNERS You have the right to instruct your annuity provider--either Providian Life & Health Insurance Company or First Providian Life & Health Insurance Company (New York State residents only)--on how to vote the Vanguard Variable Insurance Fund shares held under your plan contract. You can issue voting instructions for these shares by toll-free telephone call, at our website, or by mail. Just follow the simple instructions that appear on your enclosed proxy card. Note that your annuity provider will "shadow vote" any Fund shares for which contract owners fail to provide voting instructions. This means that the uninstructed shares will be voted in proportionately the same manner--either "For," "Against," or "Abstain"--as the instructed shares. VANGUARD VARIABLE ANNUITY PLAN CONTRACT OWNERS You have the right to instruct your annuity provider--either Providian Life & Health Insurance Company, First Providian Life & Health Insurance Company or Ameritas Life Insurance Company--on how to vote the Vanguard Variable Insurance Fund shares held under your plan contract. You can issue voting instructions for these shares by toll-free telephone call, at our website, or by mail. Just follow the simple instructions that appear on your enclosed proxy card. Note that your annuity provider will "shadow vote" any Fund shares for which contract owners fail to provide voting instructions. This means that the uninstructed shares will be voted in proportionately the same manner--either "For," "Against," or "Abstain"--as the instructed shares. 6 VANGUARD CONVERTIBLE SECURITIES FUND VANGUARD EXPLORER FUND VANGUARD HORIZON FUND VANGUARD/MORGAN GROWTH FUND VANGUARD/PRIMECAP FUND VANGUARD SELECTED VALUE PORTFOLIO VANGUARD SPECIALIZED PORTFOLIOS VANGUARD STAR FUND: LIFESTRATEGY PORTFOLIOS, STAR PORTFOLIO, TOTAL INTERNATIONAL PORTFOLIO VANGUARD TAX-MANAGED FUND VANGUARD/TRUSTEES' EQUITY FUND: INTERNATIONAL VALUE PORTFOLIO, U.S. PORTFOLIO VANGUARD VARIABLE INSURANCE FUND VANGUARD WORLD FUND: INTERNATIONAL GROWTH PORTFOLIO, U.S. GROWTH PORTFOLIO SPECIAL MEETING OF SHAREHOLDERS JUNE 30, 1998 PROXY STATEMENT INTRODUCTION ------------ This is a combined proxy statement for the Vanguard Funds listed at the top of this page. We've divided the proxy statement into five parts: Part 1-- An Overview begins on page 2. Part 2-- Your Fund's Proposals--the longest part--also begins on page 2. Part 3-- More on Proxy Voting and Shareholder Meetings begins on page 15. Part 4-- Fund Information begins on page 17. Part 5-- Director/Trustee Information begins on page 21.
Please be sure to read the entire proxy statement before casting your vote. Questions? Call us at 1-800-891-5345 (individual investors) or 1-800-523-1188 (participants in company-sponsored retirement plans administered by Vanguard). This proxy statement was first mailed to shareholders the week of April 13, 1998. 1 7 PART 1--AN OVERVIEW The Board of Directors/Trustees has sent you this proxy statement to ask for your vote on several proposals affecting your Fund. This table summarizes the proposals and how they apply to the twelve Vanguard Funds that have scheduled a shareholder meeting for June 30, 1998.
PROPOSAL FUNDS AFFECTED -------- -------------- 1. Reorganization into a Delaware Business Trust All Funds 2. Investment Limitation Changes a. Interfund lending program All Funds b. Borrowing money and pledging assets Convertible Securities Fund: Explorer Fund; Morgan Growth Fund; PRIMECAP Fund; STAR Fund: LifeStrategy, STAR, and Total International Portfolios; Trustees' Equity Fund: International Value and U.S. Portfolios; Variable Insurance Fund; World Fund: International Growth and U.S. Growth Portfolios c. Investments in securities owned by affiliates Convertible Securities Fund; PRIMECAP Fund; Specialized Portfolios; STAR Fund: LifeStrategy, STAR, and Total International Portfolios d. Investments in unseasoned companies Convertible Securities Fund; Morgan Growth Fund; STAR Fund: LifeStrategy, STAR, and Total International Portfolios; Trustees' Equity Fund: International Value and U.S. Portfolios; World Fund: International Growth and U.S. Growth Portfolios e. Investments in reserves STAR Portfolio only
- -------------------------------------------------------------------------------- PART 2--YOUR FUND'S PROPOSALS PROPOSAL 1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST (ALL FUNDS) The Board of Directors/Trustees has approved a plan to reorganize your Fund into a Delaware business trust. THE PURPOSE OF THE REORGANIZATION IS TO 2 8 REDUCE THE AMOUNT OF STATE TAXES THAT THE VANGUARD FUNDS PAY ANNUALLY. To proceed with the reorganization plan, we need shareholder approval. The next few pages of this proxy statement discuss important details of the reorganization plan, including the following: - Why we want to reorganize your Fund. - How we plan to accomplish the reorganization. - How the reorganization will affect your Fund. - How a Delaware business trust compares to your Fund's current legal structure. - How many shareholder votes we need to approve the reorganization. A. WHY WE WANT TO REORGANIZE YOUR FUND MOST FUNDS WILL PAY LESS TAXES AS BUSINESS TRUSTS. This is true of Convertible Securities Fund, Explorer Fund, Horizon Fund, Morgan Growth Fund, PRIMECAP Fund, Selected Value Portfolio, Specialized Portfolios, Tax-Managed Fund, and World Fund: International Growth and U.S. Growth Portfolios. Each of these Funds currently pays foreign franchise taxes to the Commonwealth of Pennsylvania. This tax applies to these Funds because they are headquartered in Pennsylvania and are "foreign" corporations--that is, organized as corporations under the laws of a different state, Maryland. If these Funds were instead organized in the form of a business trust (as many mutual funds are), they would be exempt from the Pennsylvania foreign franchise tax. As business trusts, these Funds would be subject to a different tax, the Pennsylvania county personal property tax. However, Pennsylvania counties generally have stopped assessing personal property taxes. This is because the Pennsylvania Supreme Court is expected to declare the personal property tax unconstitutional. (The U.S. Supreme Court declared a similar North Carolina tax unconstitutional in 1996.) We believe it unlikely that the Vanguard Funds, as reorganized, would become subject to the personal property tax in the foreseeable future. If the personal property tax were reinstated, or any similar state tax were imposed, we would reevaluate the Funds' options at that time. 3 9 The following table shows (i) the amount of Pennsylvania foreign franchise taxes paid by your Fund for its last fiscal year; and (ii) the amount of Pennsylvania personal property taxes that your Fund would have paid if it had been organized as a business trust for the last fiscal year.
LAST YEAR'S SAME BILL AS A FUND PENNSYLVANIA TAX BILL BUSINESS TRUST ---- --------------------- -------------- Convertible Securities Fund $ 13,000 $0 Explorer Fund $172,000 $0 Horizon Fund $ 44,000 $0 Morgan Growth Fund $184,000 $0 PRIMECAP Fund $471,000 $0 Selected Value Portfolio $ 10,000 $0 Specialized Portfolios $525,000 $0 STAR Fund: LifeStrategy, STAR, and Total International Portfolios $ 0 $0 Tax-Managed Fund $ 94,000 $0 Trustees' Equity Fund: International Value and U.S. Portfolios $ 0 $0 Variable Insurance Fund $ 0 $0 World Fund: International Growth and U.S. Growth Portfolios $931,000 $0
"Last Year's Pennsylvania Tax Bill" is the approximate amount that we expect to save your Fund ANNUALLY by reorganizing it into a Delaware business trust. These anticipated savings are based on the size of your Fund during its last fiscal year. If your Fund grows, so will the amount of its tax savings as a business trust. Of course, the ONE-TIME costs of reorganizing will offset your Fund's tax savings to a limited extent. These costs, which mostly relate to the printing, mailing, and tabulation of proxies, are estimated at $8,000 for Convertible Securities Fund; $142,000 for Explorer Fund; $55,000 for Horizon Fund; $105,000 for Morgan Growth Fund; $310,000 for PRIMECAP Fund; $11,000 for Selected Value Portfolio; $385,000 for Specialized Portfolios; $420,000 for STAR Fund: LifeStrategy, STAR, and Total International Portfolios; $21,000 for Tax-Managed Fund; $39,000 for Trustees' Equity Fund: International Value and U.S. Portfolios; $78,000 for Variable Insurance Fund; and $646,000 for World Fund: International Growth and U.S. Growth Portfolios. SOME FUNDS ARE ALREADY ORGANIZED AS TRUSTS. This is true of STAR Fund: LifeStrategy, STAR, and Total International Portfolios, Trustees' Equity Fund: International Value and U.S. Portfolios; and Variable Insurance Fund. Each of these Funds is currently organized as either a PENNSYLVANIA business trust or a Pennsylvania common law trust, and therefore pays no Pennsylvania foreign franchise taxes. We propose to reorganize these Funds into DELAWARE business 4 10 trusts to take advantage of that state's more favorable mutual fund climate, and to gain the administrative convenience of having it organized the same way as all other Vanguard Funds. The change will not increase or decrease these Funds' tax liability. DELAWARE LAW IS FAVORABLE TO MUTUAL FUNDS. We have proposed to reorganize your Fund as a DELAWARE business trust because that state's business trust law contains provisions that are well suited to mutual funds. The "move" to Delaware will be largely on paper; your Fund will continue to operate out of Pennsylvania, just as it does now. B. HOW WE PLAN TO ACCOMPLISH THE REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION. The Board of Directors/Trustees has approved a written Agreement and Plan of Reorganization for your Fund. This document spells out the terms and conditions that will apply to your Fund's reorganization into a Delaware business trust. THREE STEPS TO REORGANIZE. In essence, the reorganization will be a three- step process. The first step is already taken: We have established a Delaware business trust especially for your Fund. Prior to the reorganization, this trust will issue a single share--to your Fund. Second, if this proposal is approved, your Fund will transfer all of its assets and liabilities to the trust. As part of this second step, the trust will open an account for each Fund shareholder. The trust will then credit these accounts with the exact number of full and fractional shares that each shareholder owned in the Fund on the reorganization date. And third, we will dissolve your Fund's Maryland corporate entity or Pennsylvania trust entity. EFFECTIVE AS SOON AS PRACTICABLE. If approved by shareholders, the reorganization will take place as soon as feasible after your Fund receives the necessary regulatory approvals and legal opinions. We think this could be accomplished by October of 1998. However, at any time prior to the reorganization, the Board of Directors may decide that it is in the best interest of your Fund and its shareholders not to go forward with this project. If that happens, your Fund will continue to operate as it is currently organized. C. HOW THE REORGANIZATION WILL AFFECT YOUR FUND YOUR FUND'S INVESTMENT OBJECTIVE, POLICIES, INVESTMENT ADVISERS, AND FISCAL YEAR WILL STAY THE SAME. The reorganization will not change any of these. However, we are asking shareholders to waive temporarily any existing investment restrictions that would otherwise prohibit the reorganization. (For instance, many mutual funds are prohibited from acquiring control of any company. As part of the reorganization, however, your Fund would be acquiring control of the newly formed trust.) Your vote in favor of the reorganization will operate as a temporary waiver of any such restrictions. THE REORGANIZATION WILL HAVE NO IMPACT ON YOUR FUND'S SHARE PRICE. On the day of the reorganization, the newly formed trust's share price will be the same as 5 11 that of your Fund. The reorganization will not cause your Fund's share price to go up or down, and you will own the same number of shares. Any declared but undistributed dividends or capital gains for your Fund will carry over in the reorganization. YOUR FUND'S EXISTING DIRECTORS/TRUSTEES WILL BE REELECTED. Federal securities laws require that at least one-half of your Fund's Directors/Trustees be elected by shareholders. While your Fund more than meets this standard now, that technically will not be true once it reorganizes as a trust. Rather than call another shareholder meeting to vote on Trustees after the reorganization, we will treat shareholder approval of this proposal as authorization to elect your Fund's current Board members to the same positions with the trust. This approach will avoid the considerable expense of printing, mailing, and tabulating more proxies after the reorganization. (Please refer to Part 5 of this proxy statement for detailed information concerning your Directors/Trustees.) YOUR FUND'S EXISTING INDEPENDENT AUDITORS WILL BE RATIFIED. We will treat shareholder approval of the reorganization as ratification of your Fund's existing independent auditors, Price Waterhouse LLP. Price Waterhouse is the independent auditor for all Vanguard Funds. In this role, Price Waterhouse audits and certifies the Funds' financial statements. Price Waterhouse also reviews the Funds' Annual Reports to Shareholders and their filings with the U.S. Securities and Exchange Commission. Neither Price Waterhouse nor any of its partners have any direct or material indirect financial interest in the Vanguard Funds. If you wish to request the attendance of a Price Waterhouse representative at the shareholder meeting, you should contact the Fund's Secretary at 100 Vanguard Boulevard, Malvern, PA 19355. THE REORGANIZATION IS CONDITIONED ON TAX-FREE TREATMENT AT THE FEDERAL LEVEL. We fully expect that the reorganization will have no federal income tax consequences for you or your Fund. We will not proceed with the reorganization until this point is confirmed by an IRS ruling or opinion of counsel. Following the reorganization, from a tax standpoint, the adjusted basis of your Fund shares will be the same as before. We do not expect shareholders to incur any personal state or local taxes as a result of the reorganization, but you should consult your own tax adviser to be sure. VOTING RIGHTS WILL BE BASED ON THE DOLLAR AMOUNT OF YOUR INVESTMENT. After the reorganization, your voting rights will become "dollar-based"--which is a different voting rights system than your Fund uses now. Currently, all Vanguard Funds provide shareholders with one vote for each share that they own. This share-based system treats shareholders equitably so long as all shares of a particular Fund have the same share price. However, fairness tends to erode when a Fund offers more than one series of shares (we often refer to these as "portfolios") or more than one class of shares. The share prices of a Fund's different portfolios inevitably diverge over time due to their different investment programs. Similarly, the share prices of a Fund's different share classes will 6 12 deviate over time because of their different expense structures. As a result, when issues are voted at the Fund level, the owners of lower-priced shares have relatively greater voting clout than the owners of higher-priced shares. The change to dollar-based voting will ensure that shareholders' voting rights remain proportionate to their financial interests. Many Vanguard Funds currently offer only one portfolio or class of shares; however, dollar-based voting rights would apply to any additional portfolios or share classes that these Funds might offer in the future. YOUR FUND WILL STOP ISSUING SHARE CERTIFICATES AND WILL CONVERT ANY OUTSTANDING SHARE CERTIFICATES TO RECORD ENTRY FORM. In today's financial world, very few investors hold share certificates as physical evidence of their mutual fund investments. Instead, investors' mutual fund holdings are maintained and accounted for as "record entries" on the fund's computer system. The main problems with share certificates are that: - They present opportunities for theft, loss and fraud--and therefore offer less protection to shareholders, rather than more. - They're especially inconvenient--you must return your certificates to the fund before your shares can be redeemed or exchanged. In light of these downsides and the minimal demand for share certificates, your Fund will stop issuing them after the reorganization. In addition, your Fund will convert any outstanding share certificates to record entry form. This will not happen automatically; we will arrange conversion details separately with the Fund's certificate holders. (This change will have no effect on Variable Insurance Fund, which doesn't issue share certificates.) D. HOW A DELAWARE BUSINESS TRUST COMPARES TO YOUR FUND'S CURRENT LEGAL STRUCTURE Federal securities laws have much to say about the way that mutual funds operate, but they do not cover every aspect of a fund's existence. State law and each fund's governing documents fill in most of the gaps. The following discussion compares the state law and documents currently governing your Fund with the state law and documents that will apply if it reorganizes as a Delaware business trust. This discussion is not a comprehensive review of all technical distinctions between the different legal structures. (You or your attorney would need to review the laws and Fund documents first hand for that sort of analysis.) We simply want you to know how a Delaware business trust compares in certain key areas to a Maryland corporation or Pennsylvania business or common law trust--your Fund's present legal structure. SHAREHOLDER LIABILITY. Shareholders of a Fund organized as a Maryland corporation generally have no personal liability for the Fund's obligations. By contrast, shareholders of a Fund organized as a Pennsylvania trust theoretically could have this type of liability if the Fund had no remaining assets to pay its 7 13 obligations. A Delaware business trust offers shareholders essentially the same amount of protection from personal liability as a Maryland corporation. DIRECTOR/TRUSTEE LIABILITY AND INDEMNIFICATION. With a Maryland corporation, Directors cannot be held liable for their activities in that role so long as they perform their duties in good faith, prudently, and in the Fund's best interests. The same is generally true for the Trustees of a Pennsylvania or Delaware business trust, if so provided in the Fund's governing documents. Under each legal structure, the Fund can indemnify its Directors/Trustees from claims and expenses arising out of their service to the Fund--unless, that is, a Director/ Trustee has acted improperly in a particular matter. SHAREHOLDER VOTING RIGHTS AND MEETINGS. Under a Fund organized as a Maryland corporation or a Pennsylvania trust, shareholders' voting rights currently are based on the number of shares that they own. As we explained on page 6, as a Delaware business trust, your Fund would shift to a dollar-based voting rights system. As a Maryland corporation, a Fund generally must call a shareholder meeting if one is requested in writing by investors entitled to cast 25% or more of the Fund's votes. For a Pennsylvania trust, 20% is the required percentage. As Delaware business trusts, the Funds will adopt a 25% standard. SHARE CERTIFICATES. Funds organized as Maryland corporations generally issue share certificates to their investors upon request. Funds organized as Pennsylvania or Delaware business trusts are not required to issue share certificates. As explained on page 7, following the reorganization, your Fund will stop issuing share certificates and will convert any outstanding certificates to record entry form. E. HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE THE REORGANIZATION To go forward with the reorganization, a majority of your Fund's outstanding shares on April 13, 1998, must vote in favor of this proposal. YOUR FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU APPROVE THE REORGANIZATION. PROPOSAL 2. FIVE CHANGES TO FUNDAMENTAL INVESTMENT LIMITATIONS 2a. INTERFUND LENDING PROGRAM (ALL FUNDS) We want to establish an interfund lending program for all Vanguard Funds, including the ones that are not covered in this proxy statement. The program will allow the Vanguard Funds to loan money to each other if--and only if--it makes good financial sense to do so on both sides of the transaction. THE FUNDS WILL NOT USE THIS PROGRAM TO LEVERAGE THEIR INVESTMENTS. The U.S. Securities and Exchange Commission has granted permission for the Vanguard Funds to partici- 8 14 pate in this program, subject to several conditions. We need shareholder approval, as well. In the following paragraphs we explain these important points: - Why your Fund would want to borrow money. - Why your Fund would want to lend money. - How the interfund lending program will work. - What safeguards will ensure fair and beneficial treatment of your Fund. - What your Fund's new investment limitation will say. - How many shareholder votes we need to approve the interfund lending program. YOUR FUND WOULD BORROW MONEY TO MEET REDEMPTION REQUESTS WHILE AWAITING THE PROCEEDS OF SECURITIES SALES. Normally, your Fund has sufficient cash on hand to satisfy all redemption requests. However, at times your Fund could be short on cash while awaiting settlement of its securities trades (typically a three business-day process). While the law permits your Fund to defer redemption payments for up to seven days, we know that shareholders prefer to be paid immediately. This is the sole circumstance--and an unusual one, at that--under which your Fund would want to borrow money. YOUR FUND ROUTINELY LENDS MONEY TO BANKS--THROUGH REPURCHASE AGREEMENTS--TO GENERATE INCOME ON ITS CASH RESERVES. All Funds--including your own--maintain cash reserves to satisfy day-to-day redemption requests. Funds put their cash reserves to work by entering into repurchase agreements with banks (and other institutions, as well). In essence, these transactions are loans from the Fund to a bank. The Fund acquires a short-term, high-quality security from the bank, which, in turn, agrees to buy that same security back from the Fund the next day--at a higher price. The difference between the purchase and resale prices represents the Fund's "interest" on the loan. THE NEW PROGRAM WILL LET VANGUARD MATCH THE BORROWING AND LENDING NEEDS OF DIFFERENT FUNDS--TO EVERYONE'S BENEFIT. On a given day, some Vanguard Funds may wish to meet redemptions by borrowing money from banks, and other Vanguard Funds may wish to generate additional income by lending money to banks. Under the interfund lending program, Vanguard could match borrowing Funds with lending Funds. Vanguard would then arrange loans between the matched Funds, in keeping with a master loan agreement and the SEC's conditions for this program. By dealing with each other instead of banks, the Funds will be able to borrow money more cheaply and lend money more profitably. This is because (i) there will be no bank fees for these transactions, and (ii) we will have eliminated the banks' spread--that is, the difference between the rates that they typically charge borrowers and pay lenders. In addition, the interfund lending program will allow the Funds to forego the otherwise prudent--but expensive--step of maintaining a committed line of credit with a bank to cover any emergency borrowing needs. (We estimate that, altogether, the Vanguard Funds will save more than $800,000 annually by eliminating the need for a committed line of credit.) 9 15 INTERFUND LOANS WILL PRESENT VERY LITTLE CREDIT RISK. When it lends money to another Fund, your Fund would be subject to credit risk--the possibility that the other Fund might fail to repay the loan. But your Fund faces this same type of risk when it lends money to a bank, through a repurchase agreement. And we believe that the risk is extremely small in both cases. Below we describe various safeguards designed to minimize the credit risk of interfund loans. THESE SAFEGUARDS ARE IN PLACE TO ENSURE FAIR AND BENEFICIAL TREATMENT OF ALL VANGUARD FUNDS. No Vanguard Fund will be permitted to borrow or lend through the program unless it gets a more favorable interest rate than is available from a typical bank. Other important protections for your Fund include these points: (i) Interfund loan rates will be determined by a pre-established formula based on quotations from independent banks. (ii) Funds that borrow money must fully secure their interfund loans OR have total assets at least 10 times greater than the amount of the loan. (iii) Equity Funds will be permitted to loan no more than 5% of their net assets through the interfund lending program; bond Funds could lend no more than 7.5%; and money market Funds could lend no more than 10%. (iv) All interfund loans will be very short-term. They must be repaid within the time it takes for securities trades to settle, not to exceed seven days. (v) No Fund can use the interfund lending program to borrow an amount larger than 125% of its total net cash redemptions for the preceding seven calendar days. (vi) A lending Fund may call in its loans on one business day's notice to the borrowing Fund. (vii) Each Fund will continue to maintain noncommitted loan arrangements with banks to provide for situations where an interfund loan is not possible or beneficial. (viii) Each Fund's Board of Directors/Trustees will monitor the interfund lending program to make sure that the interfund loan rate formula and the Fund's participation in the program continue to be appropriate. YOUR FUND WILL ADOPT A NEW INVESTMENT POLICY TO PROVIDE FOR INTERFUND LOANS. Your Fund's existing investment policies on borrowing and lending do not allow for interfund loans. If shareholders approve this proposal, we'll adopt a new investment policy which states that your Fund can borrow and lend money through the interfund loan program so long as it complies with SEC conditions. We'll designate this new policy as "fundamental," meaning that your Fund will not be able to change it in the future without shareholder approval. 10 16 HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE INTERFUND LENDING. Shareholders of each Fund's separate portfolios (if any) will vote separately on this proposal. Each Fund's or portfolio's participation in the interfund lending program must be approved by the lesser of (i) a majority of the Fund's or portfolio's outstanding shares on April 13, 1998, or (ii) 67% of the shares voted, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU APPROVE THE INTERFUND LENDING PROGRAM. 2b. BORROWING MONEY AND PLEDGING ASSETS (CONVERTIBLE SECURITIES FUND; EXPLORER FUND; MORGAN GROWTH FUND; PRIMECAP FUND; STAR FUND: LIFESTRATEGY, STAR, AND TOTAL INTERNATIONAL PORTFOLIOS; TRUSTEES' EQUITY FUND: INTERNATIONAL VALUE AND U.S. PORTFOLIOS; VARIABLE INSURANCE FUND; WORLD FUND: INTERNATIONAL GROWTH AND U.S. GROWTH PORTFOLIOS) We want to establish standard limits on (i) the total amount of money that each Vanguard Fund can borrow from all sources and (ii) the assets that each Fund can pledge to secure any loans. This proposal ties in with proposal 2a., concerning the interfund lending program. BY STANDARDIZING THE FUNDS' BORROWING AND PLEDGE LIMITS, WE EXPECT TO SIMPLIFY VANGUARD'S ADMINISTRATION OF THE INTERFUND LENDING PROGRAM. As you can see from the following table, currently there is a good deal of variation in the Funds' stated borrowing and pledge limitations:
FUND BORROWING LIMIT PLEDGE LIMIT ---- --------------- ------------ Convertible Securities Fund 10% of total 5% of total assets assets Explorer Fund 15% of net assets 10% of total assets Morgan Growth Fund 10% of net assets 5% of total assets PRIMECAP Fund 10% of net assets 5% of total assets STAR Fund: LifeStrategy, STAR, 5% of assets, 5% of assets at and Total International taken at the market value Portfolios lower of market value or cost Trustees' Equity Fund: 10% of net assets No stated limit International Value and U.S. Portfolios Variable Insurance Fund 15% of net assets 5% of total assets World Fund: International 10% of total 15% of total assets Growth and U.S. Growth assets Portfolios
The Funds' different investment objectives do not explain the variations in their borrowing and pledge limits. Rather, these variations arise from the fact that many different attorneys and regulators have worked with the Funds over the years. We would like to realign these Funds' limits with the other Vanguard 11 17 Funds by establishing a uniform 15% OF NET ASSETS limitation on any money borrowed or assets pledged. Any future changes to this policy would require shareholder approval. Keep in mind that borrowing money and pledging assets are not integral parts of your Fund's investment program. As we explained in the interfund lending discussion, your Fund would borrow money only to meet redemptions while awaiting the proceeds of securities sales. HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE THE 15% BORROWING AND PLEDGE LIMIT. Shareholders of each Fund's separate portfolios (if any) will vote separately on this proposal. Each Fund's or portfolio's adoption of the 15% borrowing and pledge limit must be approved by the lesser of (i) a majority of the Fund's or portfolio's outstanding shares on April 13, 1998, or (ii) 67% of the shares voted, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU APPROVE THE STANDARD BORROWING AND PLEDGE LIMITS. 2c. INVESTMENTS IN SECURITIES OWNED BY AFFILIATES (CONVERTIBLE SECURITIES FUND; PRIMECAP FUND; SPECIALIZED PORTFOLIOS; STAR FUND: LIFESTRATEGY, STAR, AND TOTAL INTERNATIONAL PORTFOLIOS; WORLD FUND: INTERNATIONAL GROWTH AND U.S. GROWTH PORTFOLIOS) We want to eliminate your Fund's policy of avoiding investments in securities issued by companies whose securities are owned in certain amounts by Directors/Trustees, officers, and key advisory personnel. THIS POLICY IS WELL- INTENTIONED, BUT WRONGLY FOCUSED AND UNNECESSARY FOR YOUR FUND. Having originated many years ago with now obsolete state securities laws, which were intended to prevent conflicts of interest in the management of mutual funds, the policy generally states that your Fund will not: Purchase or retain any security if (i) one or more officers, directors or partners of the Fund or its investment adviser individually owns or would own, directly or beneficially, more than 1/2 of 1 percent of the securities of such issuer, and (ii) in the aggregate such persons own or would own or would own more than 5% of such securities. Confused? You're not alone. Preventing conflicts of interest in fund management is, of course, a critically important objective. However, we believe that your Fund's Code of Ethics is the best way to accomplish this objective. The Code of Ethics, which has been adopted in accordance with SEC rules, restricts the private investment activities of Directors/Trustees, officers, key advisory personnel and a wide range of Vanguard employees. Our Code of Ethics supplements management's separate fiduciary obligation to act with the Fund's best interests at heart. It places the burden of avoiding potential conflicts squarely on those who would stand to gain by inappropriately influencing or benefiting from your 12 18 Fund's investment program. The current policy takes the opposite approach--it potentially restricts your Fund's investments. In other words, the current policy subordinates your Fund's investment interests to those of its Directors/Trustees, officers and key advisory personnel. We believe that this is wrong. HOW MANY SHAREHOLDER VOTES WE NEED TO ELIMINATE THE POLICY CONCERNING INVESTMENTS IN SECURITIES OWNED BY AFFILIATES. Shareholders of each Fund's separate portfolios (if any) will vote separately on this proposal. Each Fund's or portfolio's elimination of this policy will require approval by the lesser of (i) a majority of the Fund's or portfolio's outstanding shares on April 13, 1998, or (ii) 67% of the shares voted, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU VOTE TO ELIMINATE THIS POLICY. 2d. INVESTMENTS IN UNSEASONED COMPANIES (CONVERTIBLE SECURITIES FUND; MORGAN GROWTH FUND; STAR FUND: LIFESTRATEGY, STAR, AND TOTAL INTERNATIONAL PORTFOLIOS; TRUSTEES' EQUITY FUND: INTERNATIONAL VALUE AND U.S. PORTFOLIOS; WORLD FUND: INTERNATIONAL GROWTH AND U.S. GROWTH PORTFOLIOS) We want to eliminate your Fund's policy of not investing more than 5% of its assets in securities issued by companies that have fewer than three years operating history, taking into account any predecessors. Like the investment policy discussed in Proposal 2c. above, this "unseasoned companies" policy originated many years ago with now-obsolete state securities laws. FOR MOST FUNDS, THE UNSEASONED COMPANIES POLICY IS UNDULY RESTRICTIVE. Each Fund adheres to a carefully constructed investment strategy, under which its investment advisers analyze many factors in determining whether to purchase or sell a company's securities. A company's age would normally be one of these factors, in that less-seasoned companies generally involve greater risks than mature companies. However, we believe that it is preferable to manage your Fund's investment risks based on an overall assessment of the financial prospects of particular companies. By contrast, the current policy requires your Fund to use issuer age as a "litmus test" in the investment process. FOR STAR FUND: LIFESTRATEGY, STAR, AND TOTAL INTERNATIONAL PORTFOLIOS, THE UNSEASONED COMPANIES POLICY IS SIMPLY IRRELEVANT. These portfolios operate as "funds of funds," meaning that they invest solely in other Vanguard Funds. Because the portfolios do not invest in companies, the unseasoned companies policy has no application whatsoever. (Mutual funds are excluded from the policy; that is, these portfolios may invest in funds that are less than 3 years old.) HOW MANY SHAREHOLDER VOTES WE NEED TO ELIMINATE THE POLICY CONCERNING INVESTMENTS IN UNSEASONED COMPANIES. Shareholders of each Fund's separate portfolios will vote separately on this proposal. Each Fund's or portfolio's elimination of the policy will require approval by the lesser of (i) a majority of 13 19 the Fund's or portfolio's outstanding shares on April 13, 1998, or (ii) 67% of the shares voted, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU VOTE TO ELIMINATE THIS POLICY. 2e. INVESTMENTS IN RESERVES (STAR PORTFOLIO ONLY) We want to amend your Fund's current policies by adding Vanguard's Short-Term Corporate Portfolio, part of our Fixed Income Securities Fund, as a permissible investment for your Fund's reserves. WE EXPECT THIS CHANGE TO MARGINALLY INCREASE YOUR FUND'S EARNINGS AT LITTLE ADDITIONAL RISK. Let's review your Fund's special structure--it's a "fund of funds"--and then we'll explain Short-Term Corporate Portfolio. As a "fund of funds," STAR Portfolio invests its assets exclusively in ten other Vanguard Funds. Your Fund's current policies require it to allocate its assets among the different categories of underlying funds as follows: - 60%-70% in specified Vanguard EQUITY FUNDS--Windsor Fund, Windsor II, Explorer Fund, Morgan Growth Fund, U.S. Growth Portfolio, PRIMECAP Fund, and Index Trust's 500 Portfolio. - 20%-30% in specified Vanguard BOND FUNDS--GNMA Portfolio and Long-Term Corporate Portfolio, both part of the Fixed Income Securities Fund. - 10%-20% as RESERVES in Vanguard Money Market Reserves Prime Portfolio. If shareholders approve this proposal, your Fund will be permitted to invest all or part of its reserves--constituting 10%-20% of its assets--in Short-Term Corporate Portfolio. This Portfolio focuses its investments on short-term corporate debt securities, at least 70% of which are rated high grade. (The remaining 30% of the Portfolio's investments may bear medium grade ratings, but no lower.) Unlike the Prime Portfolio, the Short-Term Corporate Portfolio is NOT a money market fund. While the Prime Portfolio's paramount objective is to maintain a stable share price, the Short-Term Corporate Portfolio accepts a modest amount of share price fluctuation in order to achieve slightly higher income yields. For example, as of March 31, 1998, the seven-day average yield for the Prime Portfolio was 5.32%; for the Short-Term Corporate Portfolio, the 30-day average yield on that date was 5.94%. We believe that your Fund will modestly improve its total return on reserves by investing in the Short-Term Corporate Portfolio. At the same time, we see the proposed change as presenting little additional risk to your Fund. What's more, because reserves are a permanent part of your Fund's investment program, its investments in the Short-Term Corporate Portfolio would be long-term in nature. The share price fluctuations in Short-Term Corporate Portfolio tend to be 14 20 minimal, due to the Portfolio's policy of maintaining an average-weighted maturity of one to three years. In fact, Vanguard's other "funds of funds"--the LifeStrategy Portfolios--already invest their reserves in the Short-Term Corporate Portfolio. HOW MANY SHAREHOLDER VOTES WE NEED TO CHANGE THE PORTFOLIO'S RESERVES POLICY. The change will require approval by the lesser of (i) a majority of the Portfolio's outstanding shares on April 13, 1998, or (ii) 67% of the shares voted, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD OF TRUSTEES RECOMMENDS THAT YOU VOTE TO APPROVE THE NEW RESERVES POLICY. - -------------------------------------------------------------------------------- PART 3--MORE ON PROXY VOTING AND SHAREHOLDER MEETINGS This section provides information on a number of topics relating to proxy voting and shareholder meetings. PROXY SOLICITATION METHODS. Your Fund will solicit shareholder proxies in a variety of ways. All shareholders who are entitled to vote will receive these proxy materials by mail. In addition, Vanguard employees and officers may solicit shareholder proxies in person, by telephone, or through the Internet. We may also arrange for an outside firm, Shareholder Communications Corporation, to solicit shareholder votes by telephone on the Fund's behalf. This procedure, which is expected to cost the Fund approximately $4 per shareholder vote, will be employed only after all more cost-effective means of soliciting shareholder votes have been exhausted. PROXY SOLICITATION COSTS. Your Fund will pay all costs of soliciting proxies from its own shareholders, including costs relating to the printing, mailing, and tabulation of proxies. By voting immediately, you can help your Fund avoid the considerable expense of a second solicitation. QUORUM. In order for the shareholder meeting to go forward, your Fund must achieve a quorum. This means that a majority of your Fund's shares must be represented at the meeting--either in person or by proxy. All returned proxies count towards a quorum, regardless of how they are voted ("For," "Against," or "Abstain"). Your Fund will count broker non-votes toward a quorum, but not toward the approval of any proposals. (Broker non-votes are shares for which (i) the underlying owner has not voted and (ii) the broker holding the shares does not have discretionary authority to vote on the particular matter.) REVOKING YOUR PROXY. You may revoke your proxy at any time up until voting results are announced at the shareholder meeting. You can do this by writing to your Fund's Secretary, Raymond J. Klapinsky, at 100 Vanguard Boulevard, Malvern, PA 19355, or by voting in person at the meeting. In 15 21 addition, you can revoke a prior proxy simply by voting again--using your original proxy card, by toll-free telephone call, or at our website. SHAREHOLDER PROPOSALS. Any shareholder proposals to be included in the proxy statement for your Fund's next annual or special meeting must be received by the Fund within a reasonable period of time prior to that meeting. Your Fund has no current plans to hold an annual or special meeting in 1999. NOMINEE ACCOUNTS. Upon request, the Vanguard Funds will reimburse nominees for their reasonable expenses in forwarding proxy materials to beneficial owners of the Funds' shares. Please submit invoices for our review to Vanguard Legal Department, P.O. Box 2600, Valley Forge, PA 19482. ANNUAL/SEMIANNUAL REPORTS. Your Fund's most recent annual and semi annual reports to shareholders are available at no cost. To request a report, please call us toll-free at 1-800-891-5345 or write us at P.O. Box 2600, Valley Forge, PA 19482-2600. LITIGATION. Your Fund is not involved in any litigation. OTHER MATTERS. At this point, we know of no other business to be brought before the shareholder meeting. However, if any other matters do come up, we will use our best judgment to vote on your behalf. If you object to our voting other matters on your behalf, please tell us so in writing before the meeting. THE VANGUARD GROUP, INC. Your Fund is a member of The Vanguard Group, Inc., the only mutual mutual fund company. Vanguard is owned jointly by the Funds it oversees (and therefore by the shareholders of those Funds). Vanguard provides the Funds--more than 95 distinct investment portfolios--with their corporate management, administrative, and distribution services on an at-cost basis. 16 22 - -------------------------------------------------------------------------------- PART 4--FUND INFORMATION This section contains background information about your Fund and its investment adviser(s). A. YOUR FUND (AS OF MARCH 19, 1998)
FUND NET ASSETS OUTSTANDING 5% FUND/PORTFOLIO INCEPTION ($000) SHARES OWNERS* -------------- --------- ---------- ----------- ------- CONVERTIBLE SECURITIES FUND 1986 $ 204,822 15,865,382 None EXPLORER FUND 1967 $2,503,437 41,543,932 (1) HORIZON FUND Aggressive Growth 1995 $ 537,716 33,754,910 None Capital Opportunity 1995 $ 80,144 6,891,104 None Global Asset Allocation 1995 $ 87,805 8,018,722 (2)(3) Global Equity 1995 $ 137,621 10,301,009 (4) MORGAN GROWTH FUND 1968 $2,949,558 150,564,450 (5) PRIMECAP FUND 1984 $8,571,631 195,565,378 None SPECIALIZED PORTFOLIOS Energy 1984 $1,158,163 47,098,948 None Gold & Precious Metals 1984 $ 315,338 44,289,044 None Health Care 1984 $5,594,948 67,990,621 None REIT Index 1996 $1,231,219 90,864,900 None Utilities Income 1984 $ 754,509 47,097,911 None SELECTED VALUE PORTFOLIO 1996 $ 224,922 16,636,253 None STAR FUND STAR 1985 $7,955,365 424,286,138 None Total International 1996 $1,051,843 94,675,298 (6)(7) LifeStrategy Income 1994 $ 276,512 21,368,750 (8) LifeStrategy Conservative Growth 1994 $ 884,522 62,158,979 (9) LifeStrategy Moderate Growth 1994 $1,521,352 94,847,384 (10)(11)(12) LifeStrategy Growth 1994 $1,306,591 73,777,037 (13) TAX-MANAGED FUND Balanced 1994 $ 145,010 9,259,872 (14) Growth and Income 1994 $ 781,208 33,200,519 None Capital Appreciation 1994 $1,101,259 48,174,081 None TRUSTEES' EQUITY FUND International Value 1983 $ 796,710 30,189,837 None U.S. 1980 $ 182,752 4,437,879 None
17 23
FUND NET ASSETS OUTSTANDING 5% FUND/PORTFOLIO INCEPTION ($000) SHARES OWNERS* -------------- --------- ---------- ----------- ------- VARIABLE INSURANCE FUND Money Market 1992 $ 437,241 437,247,529 None High Grade Bond 1992 $ 234,229 21,818,906 None High Yield Bond 1996 $ 125,382 11,709,211 None Balanced 1992 $ 548,578 29,982,927 None Equity Income 1993 $ 383,205 18,621,401 None Equity Index 1992 $ 904,633 31,591,499 None Growth 1993 $ 570,198 23,274,534 None Small Company Growth 1996 $ 140,893 11,751,193 None International 1994 $ 230,818 16,149,964 None WORLD FUND International Growth 1981 $7,108,376 391,430,393 None U.S. Growth 1959 $8,756,275 269,009,974 None
- ------------------------------------------ *SEC rules require each Fund to tell you the name and address of any person known to be the beneficial owner of more than 5% of any class of the Fund's outstanding shares. The Fund must also tell you how many shares such persons own and what percentage of the class these shares represent. (1) Vanguard STAR Fund, 100 Vanguard Boulevard, Malvern, PA 19355, owns approximately 6,679,444 shares (16.1%) of the Fund. (2) The John E Fetzer Institute, Inc. 9292 W KL Avenue, Kalamazoo, MI 49009, owns approximately 1,336,189 shares (16.7%) of the Fund. (3) The Public Institution For Social Security, 1001 19th Street North, Arlington, VA 22209, owns approximately 857,024 shares (10.7%) of the Fund. (4) Lafayette College, 234 Markle Hall, Easton, PA 18042, owns approximately 2,713,111 shares (26.3%) of the Fund. (5) Vanguard STAR Fund, 100 Vanguard Boulevard, Malvern, PA 19355, owns approximately 20,541,446 shares (13.6%) of the Fund. (6) Vanguard STAR Fund-Growth Portfolio, 100 Vanguard Boulevard, Malvern, PA 19355, owns approximately 19,151,009 shares (20.2%) of the Fund. (7) Vanguard STAR Fund-Moderate Growth Portfolio, 100 Vanguard Boulevard, Malvern, PA 19355, owns approximately 14,884,599 shares (15.7%) of the Fund. (8) Sierra Pacific Industries, 19794 Riverside Avenue, Anderson, CA 96007, owns approximately 3,589,329 shares (16.8%) of the Fund. (9) RJR Nabisco Defined Contribution Master Trust, P O Box 3073, Winston- Salem, NC 27150, owns approximately 3,845,851 shares (6.2%) of the Fund. (10) Commonwealth Edison Thrift Savings Plan, 4 Irving Place--Office E, New York, NY 10003, owns approximately 9,306,376 shares (9.8%) of the Fund. (11) Community Funds, Inc., Two Park Avenue, New York, NY 10016, owns approximately 7,354,794 shares (7.8%) of the Fund. (12) RJR Nabisco Defined Contribution Master Trust, P O Box 3073, Winston- Salem, NC 27150, owns approximately 5,882,740 shares (6.2%) of the Fund. 18 24 (13) RJR Nabisco Defined Contribution Master Trust, P O Box 3073, Winston- Salem, NC 27150, owns approximately 5,371,894 shares (7.3%) of the Fund. (14) Commonwealth Edison Supplemental Master Trust, P O Box 92956, Chicago, IL 60675, owns approximately 902,365 shares (9.7%) of the Fund. B. YOUR FUND'S INVESTMENT ADVISER(S)
FUND NAME ADVISER NAME AND ADDRESS --------- ------------------------ CONVERTIBLE SECURITIES FUND Oaktree Capital Management LLC 550 South Hope Street, 22nd Floor Los Angeles, CA 90071 EXPLORER FUND Granahan Investment Management, Inc. (4 ADVISERS) 275 Wyman Street Waltham, MA 02154 Wellington Management Company, LLP 75 State Street Boston, MA 02109 The Vanguard Group, Inc. 100 Vanguard Boulevard Malvern, PA 19355 Chartwell Investment Partners 2135 Westlakes Drive Suite 330 Berwyn, PA 19312 HORIZON FUND Aggressive Growth The Vanguard Group, Inc. Global Asset Allocation Strategic Investment Management 1001 19th Street North, 16th Floor Arlington, VA 22209 Capital Opportunity PRIMECAP Management Company 225 South Lake Avenue Pasadena, CA 91101 Global Equity Marathon Asset Management Limited Orion House 5 Upper Street Martin's Lane London, England WC2H 8AD
19 25
FUND NAME ADVISER NAME AND ADDRESS --------- ------------------------ MORGAN GROWTH FUND Wellington Management Company, LLP (3 ADVISERS) Franklin Portfolio Associates LLC Two International Place Boston, MA 02109 The Vanguard Group, Inc. PRIMECAP FUND PRIMECAP Management Company SPECIALIZED PORTFOLIOS Energy Wellington Management Company, LLP Health Care Same Utilities Income Same Gold & Precious Metals M&G Investment Management Limited 3 Minister Court, Great Tower Street London, England EC3R 7XH REIT Index The Vanguard Group, Inc. SELECTED VALUE PORTFOLIO Barrow, Hanley, Mewhinney & Strauss, Inc. One McKinney Plaza 3232 McKinney Avenue, 15th Floor Dallas, TX 75204 STAR FUND STAR The Vanguard Group, Inc. LifeStrategy Income Same LifeStrategy Conservative Same Growth LifeStrategy Moderate Growth Same LifeStrategy Growth Same TAX-MANAGED FUND Balanced Same Growth and Income Same Capital Appreciation Same TRUSTEES' EQUITY FUND International Value UBS International Investment London Limited Triton Court, 14 Finsbury Square London, England EC2A 1PD U.S. Portfolio Geewax, Terker & Company 99 Starr Street Phoenixville, PA 19460
20 26
FUND NAME ADVISER NAME AND ADDRESS --------- ------------------------ VARIABLE INSURANCE FUND Money Market The Vanguard Group, Inc. High-Grade Bond Same High Yield Bond Wellington Management Company, LLP Balanced Same Equity Income Newell Associates 525 University Avenue Palo Alto, CA 94301 Equity Index The Vanguard Group, Inc. Growth Lincoln Capital Management Company 200 South Wacker Drive Chicago, IL 60606 Small Company Growth Granahan Investment Management, Inc. International Schroder Capital Management International 33 Gutter Lane London, England EC2V 8AS WORLD FUND International Growth Same U.S. Growth Lincoln Capital Management Company
- -------------------------------------------------------------------------------- PART 5--DIRECTOR/TRUSTEE INFORMATION Your "yes" vote on the reorganization proposal (see page 2) will be treated as a vote to elect each of your Fund's current Directors/Trustees to the position of Trustee with the newly organized Delaware business trust. Following the reorganization, the Trustees will serve until the next election or until their terms are for some reason terminated. This section provides detailed information about the individual Directors/Trustees. The information presented includes: - The backgrounds and qualifications of the Directors/Trustees. - The identity of your Fund's principal executive officers. - How many Fund shares are owned by management. - How often the Board and its committees meet. - How Directors/Trustees are compensated. 21 27 A. THE BACKGROUNDS AND QUALIFICATIONS OF DIRECTORS/TRUSTEES Except as otherwise noted, the individuals listed below currently serve as Directors/Trustees of The Vanguard Group, Inc. and all Vanguard Funds. The mailing address of the Directors/Trustees is P.O. Box 876, Valley Forge, PA 19482.
PRINCIPAL OCCUPATION DURING THE NAME AGE LAST FIVE YEARS AND OTHER DIRECTORSHIPS ---- --- --------------------------------------- John C. Bogle(1) 68 Senior Chairman of the Board and Director of The Vanguard Group, Inc., and all Vanguard Funds; Director of The Mead Corporation, General Accident Insurance Company, and Chris-Craft Industries, Inc. John J. Brennan(1) 43 Chairman of the Board, Director, President, and Chief Executive Officer of The Vanguard Group, Inc., and all Vanguard Funds Robert E. Cawthorn 62 Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun Company, Inc., and Westinghouse Electric Corp. Barbara Barnes Hauptfuhrer 69 Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley College Bruce K. MacLaury(2) 66 President Emeritus of The Brookings Institution; Director of American Express Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp. Burton G. Malkiel(3) 65 Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England Telecommunications Co. Alfred M. Rankin, Jr. 56 Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
22 28
PRINCIPAL OCCUPATION DURING THE NAME AGE LAST FIVE YEARS AND OTHER DIRECTORSHIPS ---- --- --------------------------------------- John C. Sawhill 61 President and Chief Executive Officer of The Nature Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and President of New York University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and NACCO Industries James O. Welch, Jr. 66 Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp. J. Lawrence Wilson 61 Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins Engine Co. and The Mead Corporation; Trustee of Vanderbilt University
- --------------- (1) Messrs. Bogle and Brennan are considered "interested persons" because they serve as Fund officers, as well as Directors/Trustees. (2) Mr. MacLaury does not serve as a Director/Trustee of Vanguard Municipal Bond Fund or the Vanguard State Tax-Free Funds. (3) Mr. Malkiel does not serve as a Director of Vanguard Equity Income Fund. 23 29 B. PRINCIPAL EXECUTIVE OFFICERS The following individuals are the principal executive officers of The Vanguard Group, Inc., and all Vanguard Funds. Each principal executive officer has held substantially the same position with the Funds for the last five years or more (except that Mr. Brennan succeeded Mr. Bogle as Chairman of the Board on January 31, 1998). Their mailing address is P.O. Box 876, Valley Forge, PA 19482.
NAME AGE OFFICE ---- --- ------ John C. Bogle 68 Senior Chairman of the Board John J. Brennan 43 Chairman of the Board, President, and Chief Executive Officer Raymond J. Klapinsky 59 Secretary Richard F. Hyland 60 Treasurer Karen E. West 51 Controller
C. FUND SHARES OWNED BY DIRECTORS/TRUSTEES Messrs. Bogle and Brennan each have invested substantially all of their assets in the Vanguard Funds. The independent Directors/Trustees are also committed to investing a significant portion of their assets in the Funds. All Directors/Trustees allocate their investments among more than 95 Vanguard Funds based on their own investment needs. Their aggregate Vanguard investments totaled over $79.5 million as of December 31, 1997. The total amount of Fund shares beneficially owned by each Director/Trustee as of that date, along with the year in which each individual became a Director/Trustee of the Vanguard Funds, appears below. As of December 31, 1997, the Directors/Trustees and officers owned less than 1% of each Fund's total outstanding shares. JOHN C. BOGLE (1966) Explorer Fund--22,837 shares; Horizon Fund-Global Asset Allocation Portfolio--2,543 shares; Morgan Growth Fund--1,269 shares [7,924 shares]; PRIMECAP Fund--[24,106 shares]; Specialized Portfolios-Gold and Precious Metals Portfolio--3,335 shares; Tax Managed Fund (TMF)-Balanced Portfolio--116,566 shares [78,812 shares]; TMF-Capital Appreciation Portfolio--20,667 shares [76,960 shares]; Trustees' Equity Fund-U.S. Growth Portfolio--16,541 shares [16,541 shares]; World Fund (WF)-International Growth Portfolio--7,080 shares; WF-U.S. Growth Portfolio--7,666 shares [15,623 shares]; all Vanguard Funds--1,655,037 shares [701,163 shares] NOTE: The bracketed amounts represent shares held by charitable and related trusts created by Mr. Bogle, in which he disclaims ownership, control or voting power. 24 30 JOHN J. BRENNAN (1987) Explorer Fund--5,170 shares; Horizon Fund-Capital Opportunity Portfolio--1,862 shares; Morgan Growth Fund--7,071 shares; PRIMECAP Fund--3,588 shares; STAR Fund-Total International Portfolio--10,676 shares; Tax Managed Fund-Growth and Income Portfolio--16,773 shares; Trustees' Equity Fund-International Value Portfolio--374 shares; Variable Insurance Fund-Balanced Portfolio--908 shares; World Fund (WF)-International Growth Portfolio--6,445 shares; WF-U.S. Growth Portfolio--2,911 shares; all Vanguard Funds--684,779 shares. ROBERT E. CAWTHORN (1992) Specialized Portfolios-REIT Index Portfolio--16,835 shares; STAR Fund-STAR Portfolio--38,208 shares; Trustees' Equity Fund-International Value Portfolio--4,894 shares; all Vanguard Funds--8,369,629 shares. BARBARA B. HAUPTFUHRER (1972) Convertible Securities Fund--756 shares; Explorer Fund--695 shares; Morgan Growth Fund--3,445 shares; PRIMECAP Fund--2,724 shares; Specialized Portfolios-Gold & Precious Metals Portfolio--525 shares; STAR Fund-STAR Portfolio--19,797 shares; STAR Fund-Total International Portfolio--902 shares; Trustees' Equity Fund-International Value Portfolio--3,592 shares; World Fund-International Growth Portfolio--717 shares; all Vanguard Funds--1,910,269 shares. BRUCE K. MACLAURY (1989) All Vanguard Funds--20,373 shares. BURTON G. MALKIEL (1977) Trustees' Equity Fund-International Value Portfolio--1,804 shares; all Vanguard Funds--520,104 shares. ALFRED M. RANKIN, JR. (1992) Explorer Fund--3,788 shares; PRIMECAP Fund--3,615 shares; World Fund-International Growth Portfolio--3,220 shares; all Vanguard Funds--436,834 shares. JOHN C. SAWHILL (1991) Horizon Fund (HF)-Aggressive Growth Portfolio--11,785 shares; HF-Capital Opportunity Portfolio--1,005 shares; HF-Global Asset Allocation Portfolio--5,710 shares; HF-Global Equity Portfolio--5,849 shares; Tax Managed Fund-Capital Appreciation Portfolio--15,969 shares; all Vanguard Funds--790,828 shares. 25 31 JAMES O. WELCH, JR. (1971) Explorer Fund--1,275 shares; Morgan Growth Fund--1,362 shares; PRIMECAP Fund--39,897 shares; World Fund (WF)-International Growth Portfolio--3,087 shares; WF-U.S. Growth Portfolio--3,376 shares; all Vanguard Funds--144,797 shares. J. LAWRENCE WILSON (1985) Horizon Fund-Global Equity Portfolio--10,902 shares; Specialized Portfolios-REIT Index Portfolio--36,250 shares; STAR Fund-STAR Portfolio-- 10,487 shares; Tax Managed Fund-Capital Appreciation Portfolio--8,891 shares; all Vanguard Funds--311,590 shares. D. BOARD AND COMMITTEE MEETINGS During 1997, your Fund's Board of Directors/Trustees held 11 meetings. Your Board has a standing Compensation, Nomination, and Audit Committee, which consists of all Directors/Trustees who are not "interested persons" of the Fund (that is, all but Messrs. Bogle and Brennan). During 1997, the Committee held two meetings. The Committee's role is to: 1. Evaluate the performance of your Fund's officers and employees. 2. Develop and approve the compensation arrangements for your Fund's officers and employees. 3. Interview, evaluate and recommend to shareholders candidates for election to your Fund's Board of Directors/Trustees. (The Committee will consider shareholder nominations for Director/Trustee; please write to Mr. Wilson, Chairman of the Committee.) 4. Select your Fund's independent accountants and review their fees. 5. Oversee your Fund's internal controls. Following the reorganization, your Fund's Board of Trustees will form a similar committee. E. DIRECTOR/TRUSTEE COMPENSATION The same individuals serve as Directors/Trustees of all Vanguard Funds, and each Fund pays a proportionate share of the Directors'/Trustees' compensation. The Funds employ their officers on a shared basis, as well. However, officers are compensated by The Vanguard Group, Inc., not the Funds. The reorganization (Proposal 1) will not change the compensation arrangements described in this section. 26 32 INDEPENDENT DIRECTORS/TRUSTEES. The Funds compensate their independent Directors/Trustees--that is, the ones who are not also officers of the Fund--in three ways: - The independent Directors/Trustees receive an annual fee for their service to the Funds, which is subject to reduction based on absences from scheduled Board meetings. - The independent Directors/Trustees are reimbursed for the travel and other expenses that they incur in attending Board meetings. - Upon retirement, the independent Directors/Trustees receive an aggregate annual fee of $1,000 for each year served on the Board, up to fifteen years of service. This annual fee is paid for ten years following retirement, or until the Director's/Trustee's death. "INTERESTED" DIRECTORS/TRUSTEES. The Funds' interested Directors/ Trustees--Messrs. Bogle and Brennan--receive no compensation for their service in that capacity. However, they are paid by The Vanguard Group, Inc., for services that include their role as officers of the Funds. COMPENSATION TABLES. The following tables provide compensation details for each of the Directors/Trustees. For each Fund covered in this proxy statement, we list the amounts paid as compensation and accrued as retirement benefits by that Fund for each Director/Trustee. In addition, the last table shows the total amount of benefits that we expect each Director/Trustee to receive from all Vanguard Funds upon retirement, and the total amount of compensation paid to each Director/Trustee by all Vanguard Funds. All information shown in this section relates to each Fund's most recent fiscal year.
CONVERTIBLE SECURITIES FUND EXPLORER FUND DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/ TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS -------- ------------ ------------------- ------------ ------------------- Bogle None None None None Brennan None None None None Cawthorn $53 $6 $796 $ 96 Hauptfuhrer $53 $8 $796 $115 MacLaury $58 $8 $846 $109 Malkiel $53 $5 $801 $ 77 Rankin $53 $4 $796 $ 60 Sawhill $53 $5 $796 $ 72 Welch $53 $6 $796 $ 88 Wilson $53 $4 $796 $ 64
27 33
HORIZON FUND MORGAN GROWTH FUND DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/ TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS -------- ------------ ------------------- ------------ ------------------- Bogle None None None None Brennan None None None None Cawthorn $190 $23 $716 $ 86 Hauptfuhrer $190 $27 $716 $103 MacLaury $200 $27 $762 $100 Malkiel $191 $18 $720 $ 69 Rankin $190 $14 $716 $ 54 Sawhill $190 $17 $716 $ 65 Welch $190 $21 $716 $ 79 Wilson $190 $15 $716 $ 57
PRIMECAP FUND SELECTED VALUE PORTFOLIO DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/ TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS -------- ------------ ------------------- ------------ ------------------- Bogle None None None None Brennan None None None None Cawthorn $1,562 $188 $40 $5 Hauptfuhrer $1,562 $225 $40 $6 MacLaury $1,659 $215 $45 $5 Malkiel $1,572 $151 $41 $4 Rankin $1,576 $119 $40 $3 Sawhill $1,562 $141 $40 $4 Welch $1,562 $173 $40 $5 Wilson $1,562 $125 $40 $3
SPECIALIZED PORTFOLIOS STAR FUND DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/ TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS -------- ------------ ------------------- ------------ ------------------- Bogle None None None None Brennan None None None None Cawthorn $1,912 $230 $0 $0 Hauptfuhrer $1,912 $276 $0 $0 MacLaury $2,033 $264 $0 $0 Malkiel $1,924 $185 $0 $0 Rankin $1,912 $145 $0 $0 Sawhill $1,912 $172 $0 $0 Welch $1,912 $212 $0 $0 Wilson $1,912 $153 $0 $0
28 34
TAX-MANAGED FUND TRUSTEES' EQUITY FUND DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/ TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS -------- ------------ ------------------- ------------ ------------------- Bogle None None None None Brennan None None None None Cawthorn $228 $27 $305 $37 Hauptfuhrer $228 $33 $305 $44 MacLaury $243 $32 $327 $42 Malkiel $230 $22 $308 $30 Rankin $228 $17 $305 $23 Sawhill $228 $21 $305 $27 Welch $228 $25 $305 $34 Wilson $228 $18 $305 $24
VARIABLE INSURANCE FUND WORLD FUND DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/ TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS -------- ------------ ------------------- ------------ ------------------- Bogle None None None None Brennan None None None None Cawthorn $648 $78 $3,670 $441 Hauptfuhrer $648 $94 $3,670 $530 MacLaury $692 $89 $3,909 $506 Malkiel $653 $63 $3,696 $356 Rankin $648 $49 $3,670 $279 Sawhill $648 $58 $3,670 $331 Welch $648 $72 $3,670 $407 Wilson $648 $52 $3,670 $294
ALL VANGUARD FUNDS(1) DIRECTORS/ AGGREGATE ACCRUED PENSION/ TRUSTEES COMPENSATION RETIREMENT BENEFITS -------- ------------ ------------------- Bogle None None Brennan None None Cawthorn $70,000 $13,000 Hauptfuhrer $70,000 $15,000 MacLaury $65,000 $12,000 Malkiel $70,000 $15,000 Rankin $70,000 $15,000 Sawhill $70,000 $15,000 Welch $70,000 $15,000 Wilson $70,000 $15,000
- --------------- (1) All Directors/Trustees serve as such for 35 Vanguard Funds, except for Messrs. Malkiel and MacLaury, who serve on the Boards of 34 and 28 Vanguard Funds, respectively. 29 35 VOTE BY TOUCH-TONE PHONE OR THE INTERNET - ---- -- ----- ---- ----- -- --- -------- [SHIP LOGO] The VANGUARD Group (R) CALL TOLL-FREE: 1-800-690-6903 OR VISIT OUR WEBSITE WWW.VANGUARD.COM OR WWW.PROXYVOTE.COM 12-DIGIT CONTROL NUMBER: (See enclosed insert for further instructions to vote by phone/internet) Please detach at perforation before mailing ("FUND") PROXY SOLICITED BY THE BOARD OF DIRECTORS By my signature below, I appoint John J. Brennan, J. Lawrence Wilson and Raymond J. Klapinsky as my attorneys to vote all Fund shares that I am entitled to vote at the Special Meeting of Shareholders to be held in the Majestic Building, Room 118A, Vanguard Financial Center, 100 Vanguard Boulevard, Malvern, PA on June 30, 1998 at 9:30 A.M., E.T. and at any adjournments of the meeting. Any one or more of Messrs. Brennan, Wilson and Klapinsky may vote my shares, and they may appoint substitutes to vote my shares on their behalf. I instruct Messrs. Brennan, Wilson and Klapinsky to vote this proxy as specified on the reverse side, and I revoke any previous proxies that I have executed. I acknowledge receipt of the Fund's Notice of Special Meeting of Shareholders and proxy statement. PLEASE SIGN, DATE AND RETURN PROMPTLY IN ENCLOSED ENVELOPE IF YOU ARE NOT VOTING BY PHONE OR INTERNET Date ------------------------- NOTE: Please sign exactly as your name appears on this proxy. When signing in a fiduciary capacity, such as executor, administrator, trustee, attorney, guardian, etc., please so indicate. Corporate and partnership proxies should be signed by an authorized person indicating the person's title. ------------------------------------- ------------------------------------- Signature(s)(and Title(s), if applicable) CONTINUED ON REVERSE SIDE VAN-PH3 36 Please refer to the Proxy Statement discussion of these proposals. THE PROXY WILL BE VOTED FOR THE PROPOSALS IF YOU DO NOT SPECIFY OTHERWISE. --- Your appointed attorneys will vote any other matters that arise at the meeting in accordance with their best judgment. THE BOARD OF DIRECTORS/TRUSTEES RECOMMENDS A VOTE FOR EACH OF THE FOLLOWING: --- Please detach at perforation before mailing. Please vote by checking the appropriate box(es) below.
FOR AGAINST ABSTAIN 1. To reorganize the Fund into a Delaware business trust. (All Funds) [ ] [ ] [ ] 1. 2. To change the Fund's fundamental investment limitations with regards to: (a) The interfund lending program. (All Funds) [ ] [ ] [ ] 2a. (b) Borrowing money and pledging assets. (Convertible Securities Fund, Explorer Fund, [ ] [ ] [ ] 2b. PRIMECAP Fund, Morgan Growth Fund, STAR Fund/LifeStrategy and Total International Portfolios, Variable Insurance Fund, World Fund) (c) Investments in securities owned by affiliates. (Convertible Securities Fund, PRIMECAP Fund, [ ] [ ] [ ] 2c. Specialized Portfolios, STAR Fund/LifeStrategy and Total International Portfolios) (d) Investments in unseasoned companies. (Convertible Securities Fund, Morgan Growth Fund, [ ] [ ] [ ] 2d. STAR Fund/LifeStrategy and Total International Portfolios, Trustees' Equity Fund, World Fund) (e) Investments in cash reserves. (STAR Portfolio, only) [ ] [ ] [ ] 2e. (f) Investments in futures and options. (Tax-Managed Fund, only) [ ] [ ] [ ] 2f. PLEASE SIGN ON REVERSE SIDE VAN-PH3
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