<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 033-56443) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 4
POST-EFFECTIVE AMENDMENT NO. --
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 4
VANGUARD HORIZON FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is hereby requested that this registration statement be declared effective on
March 2, 1995, or as soon thereafter as the Commission may determine.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A) MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
VANGUARD HORIZON FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<S> <C> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... N/A
Item 4. General Description of Registrant............. Investment Objectives; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund........................ Directors and Officers; Management of
the Fund; The Vanguard Group
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of Each Portfolio;
Dividends, Capital Gains, and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment 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
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information; Financial
Statement
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statement
</TABLE>
<PAGE> 3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(LOGO) A Member of the Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- MARCH 2, 1995
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES AND
POLICIES Vanguard Horizon Fund, Inc. (the "Fund") is an open-end
diversified investment company. The Fund offers two
distinct Portfolios.
The CAPITAL APPRECIATION PORTFOLIO seeks to provide
maximum long-term total return by investing primarily in
equity securities of medium to small capitalization
companies. The GLOBAL EQUITY PORTFOLIO seeks to provide
long-term total return by investing primarily in stocks of
U.S. and foreign-based companies that exhibit good
prospects for growth. The Portfolios are geared towards
investors with a long-term investment horizon. Each
Portfolio's total return is expected to result primarily
from capital appreciation, with a less significant
contribution from dividend income. There is no assurance
that the Portfolios will achieve their stated objectives.
Shares of the Fund are neither insured nor guaranteed by
any agency of the U.S. Government, including the FDIC.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT To open a regular (non-retirement) account, please
complete and return the Account Registration Form. If you
need assistance in completing the form, please call the
Investor Information Department at 1-800-662-7447. To open
an Individual Retirement Account (IRA), please use a
Vanguard IRA Adoption Agreement. To obtain a copy of this
agreement, call the Investor Information Department,
Monday through Friday, from 8:00 a.m. to 9:00 p.m. and
Saturday, from 9:00 a.m. to 4:00 p.m. (Eastern time). The
minimum initial investment is $3,000 ($500 for Individual
Retirement Accounts and Uniform Gifts/Transfers to Minors
Act accounts.) The Fund is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, the Fund incurs expenses for investment advisory,
management, administrative and distribution services.
IMPORTANT NOTE:
1% REDEMPTION FEE If shares of the Capital Appreciation and Global Equity
Portfolios are redeemed or exchanged prior to being held
for five years, they will be subject to a 1% redemption
fee. See "Fund Expenses."
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the U.S. Securities and Exchange Commission. This
statement is dated March 2, 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
<TABLE>
<S> <C> <C>
Page Page Page
Highlights ........................ 2 Implementation of SHAREHOLDER GUIDE
Fund Expenses ..................... 4 Policies ........................ 10 Opening an Account and
Yield and Total Return ............ 5 Investment Limitations ............ 13 Purchasing Shares .............. 20
FUND INFORMATION Management of the Fund ............ 13 When Your Account Will Be
Investment Objectives ............. 5 Investment Adviser ................ 14 Credited ....................... 23
Investment Policies ............... 6 Dividends, Capital Gains and Selling Your Shares .............. 23
Investment Risk ................... 7 Taxes ........................... 16 Exchanging Your Shares ........... 25
Who Should Invest ................. 9 The Share Price of each Important Information About
Portfolio ....................... 18 Telephone Transactions ......... 27
General Information ............... 18 Transferring
Registration ................... 27
Other Vanguard Services .......... 27
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 4
HIGHLIGHTS
OBJECTIVES AND
POLICIES
The Fund is an open-end diversified investment company
designed for long-term investors seeking to maximize
capital appreciation commensurate with a relatively high
level of risk. Shares of the Fund are offered on a
no-load basis, although the Fund incurs certain
distribution expenses. The Fund consists of two distinct
Portfolios.
The CAPITAL APPRECIATION PORTFOLIO seeks to provide
long-term total return by investing primarily in stocks
of companies with medium to small capitalization.
The GLOBAL EQUITY PORTFOLIO seeks to provide long-term
total return by investing primarily in stocks of companies
located around the globe that exhibit good prospects for
growth. PAGE 5
- --------------------------------------------------------------------------------
RISK
CHARACTERISTICS The CAPITAL APPRECIATION and GLOBAL EQUITY PORTFOLIOS
invest in common stocks and have exposure to stock market
risk. STOCK MARKET RISK is the possibility that stock
prices in general will decline over short or extended
periods. The Global Equity Portfolio also invests in
stocks of foreign-based companies, and has exposure to
foreign stock market risk and currency risk. FOREIGN
SECURITIES' RISK is influenced by differences in
accounting and auditing practices, in addition to the
lower liquidity of foreign stock markets. The Capital
Appreciation Portfolio may invest a significant portion of
its assets in small capitalization stocks, which may
exhibit greater market volatility in the short-term than
larger capitalization stocks. Both Portfolios are actively
managed, and exposed to manager risk. MANAGER RISK refers
to the possibility that a portfolio's investment adviser
may fail to execute its investment strategy effectively.
See "Special Considerations" for specific types of
securities that may entail other risk factors. PAGE 7
- --------------------------------------------------------------------------------
THE VANGUARD
GROUP The Fund is a member of The Vanguard Group of Investment
Companies, a group of more than 30 investment companies
with more than 80 distinct investment portfolios and total
assets in excess of $130 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by The Vanguard
Funds, provides all corporate, management, administrative,
distribution and shareholder accounting services on an
at-cost basis to the Funds in the Group. PAGE 12
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS The CAPITAL APPRECIATION PORTFOLIO receives investment
advisory services from Vanguard's Core Management Group.
These advisory services are provided to the Portfolio on
an at-cost basis. As a result, the Portfolio advisory
costs are substantially lower than the fees that would be
charged by an external adviser.
The GLOBAL EQUITY PORTFOLIO receives investment advisory
services from Baring International Investment Limited. See
"Investment Advisers" for more information. Baring Asset
Management discharges its responsibilities subject to the
control of the Officers and Directors of the
Fund. PAGE 13
- --------------------------------------------------------------------------------
2
<PAGE> 5
DIVIDENDS, CAPITAL
GAINS AND TAXES Income is expected to be incidental to the objective of
each Portfolio. However, the Fund will distribute any
investment income in the form of dividends. The CAPITAL
APPRECIATION and GLOBAL EQUITY PORTFOLIOS will distribute
net dividends and capital gains, if any, annually. A sale
of shares of a Portfolio is a taxable event and may result
in a capital gain or loss. Dividend distributions, capital
gains distributions, and capital gains or losses from
redemptions and exchanges may be subject to federal, state
and local taxes. PAGE 15
- --------------------------------------------------------------------------------
PURCHASING
SHARES You may purchase shares by mail, wire or exchange from
another Vanguard Fund. The minimum initial investment is
$3,000 ($500 for Individual Retirement Accounts and
Uniform Gifts/Transfers to Minors Act accounts); the
minimum for subsequent investments is $100. There are no
sales commissions or 12b-1 fees. Telephone exchanges from
some Vanguard Funds are permitted. PAGE 20
- --------------------------------------------------------------------------------
SELLING SHARES You may redeem shares of each Portfolio in writing or by
telephone. The Capital Appreciation and Global Equity
Portfolios assess a 1% redemption fee on shares held less
than 5 years. The price of each portfolio is expected to
fluctuate, and may at redemption be more or less than at
the time of initial purchase, resulting in a gain or
loss. PAGE 22
- --------------------------------------------------------------------------------
EXCHANGING
SHARES You may exchange a Portfolio's shares for those of the
other Portfolio of the Fund or other Vanguard Funds. An
exchange from the Capital Appreciation and Global Equity
Portfolios will be subject to a 1% redemption fee on
shares held for less than 5 years. PAGE 24
- --------------------------------------------------------------------------------
SERVICES TO
SHAREHOLDERS The Fund offers special services: Fund Express, for
electronic transfers between the Fund and your bank
account; Tele-Account, for 24-hour telephone access to
your Fund account balances and certain transactions;
Direct Deposit, for automatic deposit of payroll checks;
Average Cost Statement, for determination of the average
cost of shares redeemed for tax purposes; and Dividend
Express for automatic transfer of dividends and/or capital
gains to a bank account. PAGE 27
- --------------------------------------------------------------------------------
SPECIAL
CONSIDERATIONS (1) Each Portfolio may invest a portion of its assets in
futures contracts, options, convertible securities and
swap agreements. PAGE 10
(2) Each Portfolio may invest in short-term fixed income
securities. PAGE 10
(3) Each Portfolio may lend its securities. PAGE 11
(4) Each Portfolio may borrow money. PAGE 12
- --------------------------------------------------------------------------------
3
<PAGE> 6
FUND
EXPENSES The following table illustrates all expenses and fees you
would incur as a shareholder of the Capital Appreciation
and Global Equity Portfolios. The expenses and fees set
forth below are estimates for the Portfolios' first full
year of operations, since the Fund had not commenced
operations as of the date of this Prospectus.
<TABLE>
<CAPTION>
SHAREHOLDER CAPITAL GLOBAL
TRANSACTION APPRECIATION EQUITY
EXPENSES PORTFOLIO PORTFOLIO
-------------------------------------------------------- ------------ --------
<S> <C> <C>
Sales Load Imposed on Purchases......................... None None
Sales Load Imposed on Reinvested Dividends.............. None None
Redemption Fees:
shares held less than 5 years......................... 1% 1%
shares held 5 years or more........................... None None
Exchange Fees........................................... None* None*
</TABLE>
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO CAPITAL GLOBAL
OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET APPRECIATION EQUITY
ASSETS) PORTFOLIO PORTFOLIO
-------------------------------------------------------- ------------ --------
<S> <C> <C>
Management & Administrative Expenses.................... 0.30% 0.30%
Investment Advisory Fees................................ 0.02 0.35
12b-1 Fees.............................................. None None
Other Expenses
Distribution Costs.................................... 0.02% 0.02%
Miscellaneous Expenses................................ 0.06 0.12
---------- --------
Total Other Expenses.................................... 0.08 0.14
TOTAL
OPERATING
EXPENSES............................................ 0.40% 0.79%
---------- --------
---------- --------
</TABLE>
* An exchange of shares held less than five years is
subject to a 1% redemption fee.
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
Capital Appreciation and Global Equity Portfolios.
1% REDEMPTION FEE The Capital Appreciation and Global Equity Portfolios are
intended for long-term investors who can withstand
substantial price fluctuation. For this reason, the
Portfolios will assess a 1% redemption fee on shares that
are redeemed or exchanged out before they have been held
for five years. Solely for purposes of calculating the
five-year holding period the Portfolios will use the
"first-in, first-out" (FIFO) method. That is, the date of
the redemption or exchange will be compared to the
earliest purchase date. If this holding period is less
than five years, the fee will be assessed. The fee will be
prorated if a portion of the shares being redeemed or
exchanged has been held for more than five years. This fee
will not apply to dividend or capital gain reinvestment
and it is paid directly to the Portfolios. IN THE EVENT OF
AN EARLY REDEMPTION DUE TO A SHAREHOLDER'S DEATH, ALL
REDEMPTION FEES WILL BE WAIVED. IN ORDER TO SUBSTANTIATE
THE DEATH, A CERTIFIED COPY OF THE DEATH CERTIFICATE MUST
BE PROVIDED.
4
<PAGE> 7
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.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Capital Appreciation Portfolio...................... $ 15 $24
Global Equity Portfolio............................. $ 18 $37
</TABLE>
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.
- --------------------------------------------------------------------------------
YIELD AND
TOTAL RETURN From time to time the Portfolios may advertise their yield
and total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Portfolios refers to the average annual compounded rates
of return over one-, five-, and ten-year periods or for
the life of the Portfolios (as stated) that would equate
an initial amount invested at the beginning of a stated
period to the ending redeemable value of the investment,
assuming the reinvestment of all dividend and capital gain
distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing net
investment income per share earned during the 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 Portfolio's securities; it
is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that 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 Portfolios to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to your
own account.
Also, the Portfolios may compare their performance to
that of various stock market indices, including, but not
limited to, the Standard & Poor's Composite Stock Price
Index.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES The Fund is an open-end diversified investment company.
While the two Portfolios of the Fund differ in strategy
and investment policy, they share a common objective: to
provide long-term total return for shareholders. The
Portfolios are geared towards investors who have a
long-term investment horizon. To that end, both Portfolios
will assume above-average risk in exchange for the
potential of above-average return, although there is no
assurance that either Portfolio will achieve above-average
returns. Each Portfolio's total return is expected to
result primarily from capital appreciation, with a less
significant contribution from dividend income. Although
dividend income is not expected to be significant over
sustained periods of time, it is possible that dividend
income could be a more significant component of a
Portfolio's total return for any short-term period.
5
<PAGE> 8
Neither an investment in the Fund, nor its Portfolios
should be assumed to represent a total investment program.
Instead, investors are encouraged to consider a prudent
allocation of their investments among other asset classes,
such as equities of established domestic companies; bonds
and cash reserves.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES Both Portfolios invest primarily in common stocks that are
deemed to have attractive relative total return potential.
The Portfolios are managed without regard to tax
ramifications.
CAPITAL APPRECIATION
PORTFOLIO The Capital Appreciation Portfolio invests primarily in
common stocks that are considered undervalued by the
investment adviser, under normal circumstances the
Portfolio will invest at least 65% of its assets in stocks
that are considered to have the potential for capital
appreciation. Vanguard's Core Management Group utilizes a
quantitative approach to identify, from a large universe
of companies, those common stocks with the best relative
total return potential. The Portfolio will generally be
diversified across a broad range of industries; however,
the investment adviser may either overweight or
underweight certain industries. The Portfolio will be
primarily invested in medium (market capitalization of
approximately $2 billion to $14 billion) and small (market
capitalization of approximately $560 million to $2
billion) capitalization stocks; however, the emphasis on
these size classifications may vary, depending on Core
Management's determination of their relative
attractiveness. Large capitalization stocks may also be
included if they are deemed to be relatively attractive.
Small capitalization stocks may entail more short-term
risk and volatility than larger capitalization stocks.
Such companies may have limited product line, markets or
financial resources, and their securities may trade less
frequently and in more limited volume than the securities
of larger companies. In addition, available information
regarding these smaller companies may be less available
and when available, may be incomplete or inaccurate.
Similarly, both "value" and "growth" stocks will usually
be included in the Portfolio; however, the percentages
invested in either may vary over time as their relative
attractiveness changes. Among the characteristics
emphasized in stock selection are (i) market liquidity;
(ii) low volatility; and (iii) financial strength relative
to other stocks. There is no assurance that the stocks
identified by Core Management's quantitative analysis will
provide a superior rate of total return relative to funds
that employ other methods of stock analysis.
GLOBAL EQUITY
PORTFOLIO
The Global Equity Portfolio seeks to diversify its assets
among stocks traded in the U.S. and developed foreign
stock markets, as well as emerging stock markets. The
Portfolio will generally limit the emerging market
holdings to 25%. The Portfolio seeks to diversify among
foreign markets including Japan, the United Kingdom,
Germany, France, Switzerland, the Netherlands, Sweden,
Australia, and Hong Kong, as well as emerging markets,
such as Brazil, India, Indonesia, Korea, Mexico, the
Philippines and Thailand, which may be more volatile and
less liquid than more established foreign markets. Under
normal market conditions, the Portfolio will invest at
least 65% of its assets in at least three different
countries. The Portfolio's adviser determines country
allocations for the Global Equity Portfolio based on
economic trends, valuation levels, and earnings growth
relative to other markets.
6
<PAGE> 9
The Global Equity Portfolio stock selection is guided by
weighing the (i) growth, (ii) valuation, and (iii)
liquidity of equity securities of U.S. and foreign-based
companies. The Portfolio's adviser believes that both the
allocation of the Portfolio's assets across foreign stock
markets, and the selection of stocks are important in
managing a global equity portfolio.
Besides investing in equity securities, the Global Equity
Portfolio may also enter into forward foreign currency
exchange contracts in order to protect against
fluctuations in exchange rates. See "Implementation of
Policies" for a description of such contracts.
BOTH PORTFOLIOS Each Portfolio is expected to remain substantially fully
invested in equity securities. However, the proportion of
cash reserves held by a Portfolio may increase if the
adviser feels that a conservative investment posture is
warranted.
Each Portfolio of the Fund is authorized to invest in
stock index futures, options and swap agreements to a
limited extent. Each Portfolio is permitted to hold equity
securities other than common stock, such as debentures or
preferred stock that is convertible into common stock. See
"Implementation of Policies" for a description of these
and other investment practices of the Fund.
The investment objectives and policies of the Fund are not
fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material change
in either.
- --------------------------------------------------------------------------------
INVESTMENT RISKS As mutual funds investing primarily in common stocks, the
Portfolios are subject to market risk -- i.e., the
possibility that stock prices in general will decline over
short or even extended periods. Stock markets tend to be
cyclical, with periods when stock prices generally rise
and periods when stock prices generally decline.
INVESTORS ARE EXPOSED
TO THE MARKET RISK
OF STOCKS
To illustrate the volatility of U.S. stock prices as an
indicator of the market risk for the Capital Appreciation
Portfolio, the following table sets forth the extremes for
the U.S. 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:
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS (1926-1994)
OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.4 -12.5 - 0.9 + 3.1
Average +12.2 +10.2 +10.7 +10.7
</TABLE>
As shown, 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 expectations for future stock market returns,
it may not be useful for forecasting future returns in any
particular period, as stock market returns are quite
volatile from year to year. The return in individual years
has varied from a low of -43.4% to a high of +53.9%,
reflecting the short-term volatility of stock prices. The
Capital Appreciation Portfolio
7
<PAGE> 10
may be expected to involve greater market risk than the
Standard & Poor's 500 Composite Stock Price Index, and
should not be expected to mirror the return provided by
the index.
SMALL COMPANY STOCKS
MAY EXHIBIT GREATER
VOLATILITY
The Capital Appreciation Portfolio emphasizes stocks of
companies with medium and small market capitalization.
Many such stocks have historically been more volatile in
price than the stock market as a whole. Among the likely
reasons for the greater price volatility of small company
stocks are the less certain growth prospects of smaller
firms, a lower degree of liquidity in the markets for such
stocks, and the small to negligible dividends generally
paid by small companies. Besides exhibiting greater
volatility, small- and mid-cap stocks have at times
fluctuated in value independently of the broad stock
market.
Investors should therefore expect that small- and mid-cap
stocks (and hence the Portfolio's investments) may be more
volatile than the stocks of more established companies.
The companies that issue such stocks may have limited
product lines, markets or financial resources, and such
stocks may trade less frequently than the securities of
larger companies. Additionally, information regarding
these companies may not be as readily available, complete
or accurate as information regarding larger companies.
Accordingly, investors should expect the Portfolio's
return to be more volatile than that of equities as a
group.
INTERNATIONAL MARKETS
ARE EXPECTED TO BE
MORE VOLATILE
International Markets may offer potential for
above-average growth. However, commensurate with that
opportunity for a greater return lies greater risk. Risk
factors unique to international investing are the
volatility of a country's financial markets, a country's
political and economic climate, and the value of its
currency.
Investments in foreign stock markets can be as volatile,
if not more volatile, than investments in U.S. markets.
However, a diversified portfolio of U.S. and foreign
stocks may have volatility similar to that of a
diversified U.S. stock portfolio.
To illustrate the volatility of global stock prices as an
indicator of the market risk for the Global Equity
Portfolio, the following table sets forth the extremes for
some world markets from 1970 to 1994, as measured by the
Morgan Stanley Capital International World Index:
<TABLE>
<CAPTION>
AVERAGE ANNUAL MORGAN STANLEY CAPITAL INTERNATIONAL
WORLD INDEX RETURNS (1970-1994)
OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best 42.8% 28.0% 19.9% 14.8%
Worst -24.5% -1.3% 6.4% 10.9%
Average 12.7% 12.2% 14.0% 12.8%
</TABLE>
The chart shows average annual returns, without respect
to the effect of taxes. As shown, global stocks have
provided an average annual total return of 14.0% for 10
years. The returns in individual years has varied from a
low of -24.5% to a high of 42.8%, which reflects the
short-term volatility of stock prices. The figures on
total return and stock market volatility are provided
here only as a
8
<PAGE> 11
guide to potential market risk, and may not be useful for
forecasting future returns in any particular period.
The Morgan Stanley Capital International (MSCI) World
Index primarily contains return figures for developed
countries; whereas, the Global Equity Portfolio may invest
25% of its holdings in emerging market securities.
Emerging market countries traditionally provide greater
returns, but with substantially greater volatility. The
Portfolio is likely to differ in terms of portfolio
composition from the MSCI World Index, and so the
performance of the Global Equity Portfolio should not be
expected to mirror the return provided by the index.
FOREIGN SECURITIES'
RISK For U.S. investors, the returns of foreign investments,
such as the non-domestic equity securities held by the
Global Equity Portfolio, are influenced by not only the
returns on foreign common stocks themselves, but also by
currency risk -- i.e., changes in the value of the
currencies in which the stocks are denominated. In a
period when the U.S. dollar generally rises against
foreign currencies, the returns on foreign stocks for a
U.S. investor will be diminished. By contrast, in a period
when the U.S. dollar generally declines, the returns on
foreign stocks will be enhanced.
Other risks and considerations of international investing
include the following: differences in accounting, auditing
and financial reporting standards; generally higher
commission rates on foreign portfolio transactions;
smaller trading volumes and generally lower liquidity of
foreign stock markets, which may result in greater price
volatility; foreign withholding taxes payable on the
Portfolio's foreign securities, which may reduce dividend
income payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations; difficulty in
obtaining a judgment from a foreign court; political
instability which could affect U.S. investment in foreign
countries; and potential restrictions on the flow of
international capital. Investments in countries that are
considered to be "emerging markets" may involve exposure
to a greater degree of risk due to increased political and
economic instability.
THE FUND IS ALSO
SUBJECT TO
MANAGER RISK The investment advisers manage their respective Portfolios
"actively" in an effort to provide long-term returns that
exceed those of comparable unmanaged indexes. However, the
Portfolios entail the risk that managers will underperform
such indexes. The adviser to the Capital Appreciation
Portfolio selects stocks primarily based on quantitative
models. The adviser for the Global Equity Portfolio
selects stocks based on economic, financial and market
analysis and investment judgment. Both Portfolios are
exposed to manager risk. MANAGER RISK refers to the
possibility that the Portfolio's investment adviser may
fail to execute its investment strategy effectively. As a
result, the Portfolio may fail to achieve its stated
objective.
- --------------------------------------------------------------------------------
WHO SHOULD INVEST
LONG-TERM
INVESTORS SEEKING
MAXIMUM TOTAL RETURN The Portfolios are designed for investors who have a
long-term (five years or longer) investment horizon, and
seek long-term total return. The major portion of total
return is expected to be the result of capital
appreciation; therefore, the Portfolios are more suitable
for investors seeking capital appreciation than those
seeking dividend income. The CAPITAL APPRECIATION and
GLOBAL EQUITY PORTFOLIOS are
9
<PAGE> 12
designed for investors with the perspective, patience and
financial resources to assume above-average risk and
volatility for the potential of achieving above-average
return. Investors in the Portfolios should be able to
tolerate sudden, sometimes substantial fluctuations in the
value of their investments. Each Portfolio's share price
is expected to be volatile.
The GLOBAL EQUITY PORTFOLIO is designed for long-term
investors who seek an actively-managed approach to
investing in a diversified portfolio of common stock of
U.S. and foreign-based companies. Investors in the Global
Equity Portfolio should be cognizant of the unique risks
of international investing, including their exposure to
currency fluctuations.
Because of the risks associated with common stock
investments, the Capital Appreciation and Global Equity
Portfolios are intended to be long-term investment
vehicles and are not designed to provide investors with a
means of speculating on short-term market movements.
Investors who engage in excessive account activity
generate additional costs which are borne by all of the
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 (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 has adopted exchange privilege
limitations as described in the section entitled "Exchange
Privilege Limitations." Finally, the Fund reserves the
right to suspend the offering of its shares.
No assurance can be given that the Portfolios of the Fund
will attain their objectives 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 Portfolios by purchasing shares on a
periodic basis (dollar-cost averaging) rather than making
an investment in one lump sum.
The Fund is not intended as 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
OF POLICIES
BOTH PORTFOLIOS MAY
INVEST IN SHORT-TERM
FIXED-INCOME
SECURITIES
Each Portfolio will generally remain fully invested in
common stock. The Portfolios of the Fund may invest
temporarily in certain short-term fixed income securities
for defensive purposes. Such securities may be used to
invest uncommitted cash balances or to maintain liquidity
to meet shareholder redemptions. Although it is not
expected to do so, the Fund may invest up to 100% of its
assets in such securities. These securities include:
obligations of the United States Government and its
agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
10
<PAGE> 13
BOTH PORTFOLIOS MAY
USE FUTURES CONTRACTS,
OPTIONS AND WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS Each Portfolio of the Fund may utilize stock futures
contracts, options, including puts and calls, warrants,
convertible securities and swap agreements to a limited
extent. Each Portfolio may use over-the-counter options
when exchange traded options do not exist. Specifically,
each Portfolio may enter into futures contracts and
options provided that not more than 5% of their assets are
required as a margin deposit for futures contracts or
options, and provided that not more than 20% of a
Portfolio's assets are invested in futures and options at
any time. Additionally, both Portfolios' investments in
warrants will not exceed more than 15% of their assets.
Futures contracts, options, warrants, convertible
securities and swap agreements may be used for several
reasons: to simulate full investment while retaining a
cash balance for fund management purposes, to facilitate
the portfolio management process, or to reduce transaction
costs. While each of these instruments can be used as
leveraged investments, the Portfolios will not use them to
leverage their net assets.
FUTURES CONTRACTS,
OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS
POSE CERTAIN RISKS The risk of loss associated with futures contracts in some
strategies can be substantial due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in an immediate and substantial loss or gain.
However, the Portfolios will not use futures contracts,
options, warrants, convertible securities and swap
agreements for speculative purposes or to leverage their
net assets. Accordingly the primary risks associated with
the use of futures contracts, options, including puts and
calls, warrants, convertible securities and swap
agreements by the Portfolio are: (i) imperfect correlation
between the change in market value of the stocks held by a
Portfolio and the prices of futures contracts, options,
warrants, convertible securities and swap agreements; (ii)
the risk that the investment advisers will incorrectly
predict stock market and interest rate trends; and (iii)
possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those
contracts whose behavior is expected to resemble that of a
Portfolio's underlying securities. The risk that a
Portfolio will be unable to close out a futures position
will be minimized by entering into such transactions on an
exchange with an active and liquid secondary market.
However, options, warrants, convertible securities and
swap agreements purchased or sold over-the-counter may be
less liquid than exchange traded securities. Illiquid
securities, in general, may not represent more than 15% of
the net assets of a Portfolio of the Fund.
Swap agreements are contracts between parties in which one
party agrees to make payments to the other party based on
the change in market value of a specified index or asset.
In return, the other party agrees to make payments to the
first party based on the return of a different specified
index or asset. Although swap agreements entail the risk
that a party will default on its payment obligations the
Portfolios will minimize this risk by entering into
agreements that mark to market no less frequently than
quarterly. Swap agreements also bear the risk that the
Portfolios will not be able to meet their obligations to
the counterparty. This risk will be mitigated by having
the Portfolios invest in the specific asset for which they
are obligated to pay a return. Swap agreements are
considered illiquid, and are
11
<PAGE> 14
therefore subject to the 15% limitation on illiquid
securities described in the Statement of Additional
Information.
BOTH PORTFOLIOS MAY
LEND THEIR SECURITIES
Both Portfolios of the Fund may lend their investment
securities to qualified institutional investors for either
short-term or long-term periods for the purpose of
realizing additional income. Loans or securities by a
Portfolio 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, and such loans may not exceed 33 1/3% of the
value of the Portfolio's net assets.
BOTH PORTFOLIOS MAY
OWN RESTRICTED
SECURITIES
Both Portfolios of the Fund may own restricted securities
to a limited extent. Restricted securities are securities
which are subject to restrictions upon sale under the
Securities Act of 1933. Each Portfolio may invest up to
15% of its net assets in restricted securities. (Included
within this limit are restricted securities and, other
securities for which price quotations are not readily
available, as well as OTC options and swap agreements.)
THE GLOBAL EQUITY
PORTFOLIO MAY ENTER
INTO FORWARD CURRENCY
CONTRACTS The Global Equity Portfolio may enter into forward foreign
currency exchange contracts. Such contracts are used to
protect the Portfolio's securities against uncertainty in
the level of future foreign exchange rates.
A forward foreign currency exchange contract is an
obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a
price set at the time of the contract. The contracts may
be bought or sold to protect the Portfolio to a limited
extent, against adverse changes in exchange rates between
foreign currencies and the U.S. dollar. Such contracts,
which protect the value of a Portfolio's investment
securities against a decline in the value of a currency,
do not eliminate fluctuations in the underlying prices of
the securities. They simply establish an exchange rate at
a future date. Also, although such contracts tend to
minimize the risk of loss due to a decline in the value of
a hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of
such currency increase.
PORTFOLIO TURNOVER Although both Portfolios seek to invest for the long term,
they retain the right to sell securities irrespective of
how long they have been held. The annual Portfolio
turnover of the CAPITAL APPRECIATION PORTFOLIO is
anticipated to be between 100% and 150%. The GLOBAL EQUITY
PORTFOLIO'S annual Portfolio turnover is expected to be
between 50% and 100%.
A turnover rate of 100% would occur, for example, if all
the securities of a Portfolio were replaced within one
year. Higher portfolio turnover rates generally result in
increased brokerage commissions and the realization of
higher capital gains, which may make these Portfolios
suitable for the tax-deferred portion of an investment
portfolio rather than the fully taxable portion. Both
Portfolios are managed without regard to tax
ramifications.
- --------------------------------------------------------------------------------
12
<PAGE> 15
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS
Each Portfolio has adopted certain limitations designed to
reduce its exposure to specific situations. Some of these
limitations are that a Portfolio will not:
(a) with respect to 75% of the value of its total assets,
invest more than 5% of its assets in the securities of
any single issuer (other than obligations issued or
guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities);
(b) with respect to 75% of the value of its total assets,
purchase more than 10% of the voting securities of any
issuer;
(c) invest more than 25% of its assets in any one
industry; and
(d) borrow money except from banks for temporary or
emergency purposes, and in no event in excess of 15%
of the market value of its total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information are fundamental, and may only be changed with
the approval of a majority of each Portfolio's
shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT
OF THE FUND
VANGUARD
ADMINISTERS
AND DISTRIBUTES
THE FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 80 distinct portfolios and total assets in
excess of $130 billion. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Fund and the other funds in the Group obtain at cost
virtually all of their corporate management,
administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost basis
to certain 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 1993, 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 1.02% 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
Directors set broad policies for the Fund and chose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and provides 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, auditing and custodial fees.
13
<PAGE> 16
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 allocated share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS
VANGUARD SERVES AS
ADVISER TO THE CAPITAL
APPRECIATION The CAPITAL APPRECIATION PORTFOLIO receives investment
PORTFOLIO advisory services from VANGUARD'S CORE MANAGEMENT GROUP.
The Core Management Group also provides investment
advisory services to several other Vanguard Funds,
including Vanguard Index Trust, Vanguard International
Equity Index Fund, Vanguard Institutional Index Fund,
Vanguard Balanced Index Fund, the Equity Index Portfolio
of the Vanguard Variable Insurance Fund, the Growth and
Income and Capital Appreciation Portfolios and the equity
portion of the Balanced Portfolio of Vanguard Tax-Managed
Fund, and a portion of Vanguard/Windsor II and
Vanguard/Morgan Growth Fund, as well as to several indexed
separate accounts. Total assets under management by the
Core Management Group were $18.3 billion as of September
30, 1994. The Core Management Group is supervised by the
Officers of the Fund. George U. Sauter, Vice President of
the Core Management Group and the Portfolio Manager of
each of the Funds managed by the Core Management Group,
has served in this capacity for each of the Vanguard Funds
advised by the Group since 1987, and utilizes a team
approach to manage the Portfolio's assets.
Vanguard's Core Management Group will provide advisory
services on an at-cost basis. In placing portfolio
transactions, Vanguard's Core Management Group uses its
best judgment to choose the broker most capable of
providing the brokerage services necessary to obtain the
best available price and most favorable execution at the
lowest commission rate. The full range and quality of
brokerage services available are considered in making
these determinations. In selecting broker-dealers to
execute securities transactions for the Portfolio,
consideration will be given to such factors as: the price
of the security; the rate of the commission; the size and
difficulty of the order; the reliability, integrity,
financial condition, general execution, and operational
capabilities of competing brokers-dealers; and the
brokerage and research services provided to the Portfolio.
In those instances where it is reasonably determined that
more than one broker can offer the services needed to
obtain the best available price and most favorable
execution, consideration may be given to those brokers
which supply statistical information and provide other
services in addition to execution services to the
Portfolio.
BARING ASSET
MANAGEMENT SERVE AS
ADVISER TO THE GLOBAL
EQUITY PORTFOLIO The GLOBAL EQUITY PORTFOLIO is managed by BARING
INTERNATIONAL INVESTMENT LIMITED, a wholly-owned
subsidiary of Baring Asset Management Limited, 155
Bishopsgate, London. Baring Asset Management was founded
in 1762 and provides asset management services to
companies, institutions, and individuals. As of September
30, 1994, Baring Asset Management has more than $44
billion in assets under management, and more than 100
investment professionals in offices throughout the world.
The investment philosophy at Baring International
Investment is that investing in growing economies and
growing companies at the right valuation leads to superior
14
<PAGE> 17
long-term results. Baring International Investment
utilizes a regional strategic team approach to portfolio
management, where each team consists of experienced
members, who are specialists, that conduct the necessary
research for the team. Philip Bullen, Director, has been
designated as portfolio manager for the assets of the
Global Equity Portfolio. He has 17 years of investment
experience and specializes in asset and country
allocation. Mr. Bullen joined Baring in 1977 as a U.S.
Specialist. In July 1994, he moved to Boston, further
strengthening Baring's team committed to North American
clients. He received his MBA from the City University
Business School and holds a CFA designation.
The Global Equity Portfolio pays Baring International
Investment 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 Portfolio for the quarter:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
--------------------- ------
<S> <C>
First $100 million 0.35%
Next $150 million 0.30%
Next $250 million 0.25%
Over $500 million 0.20%
</TABLE>
The basic advisory fee may be increased or decreased by
applying an adjustment formula based on the investment
performance of the Portfolio relative to the Morgan
Stanley Capital International (MSCI) All Country Index.
The following table sets forth the incentive/penalty
adjustment to the basic advisory fee payable by the
Portfolio to Baring International Investment under the
investment advisory agreement. The adjustments to the fee
change proportionately with performance relative to the
Index.
<TABLE>
<CAPTION>
CUMULATIVE THREE YEAR PERFORMANCE
DIFFERENTIAL VS. THE MSCI INCENTIVE/
ALL COUNTRY INDEX PENALTY FEE ADJUSTMENT
------------------------------------------------ ------------------------
<S> <C>
Less than 3% 0.50 X Basic Fee
Between 3% and 6% 0.75 to 1.00 X Basic Fee
Between 6% and 9% 1.00 to 1.25 X Basic Fee
Between 9% and 12% 1.25 to 1.50 X Basic Fee
More than 12% 1.50 X Basic Fee
</TABLE>
Under rules of the Securities and Exchange Commission, the
incentive/penalty fee adjustment will not be fully
operable until the quarter ending March 31, 1998, and
until that date, will be calculated according to certain
transition rules. A detailed description of the
incentive/penalty fee adjustment schedule for Baring
International Investment and the applicable transition
rules is contained in the Statement of Additional
Information. Prior to December 31, 1995, the
incentive/penalty fee will not be in effect. Thereafter,
the number of percentage points by which the Portfolio's
performance record from February 17, 1995 must exceed that
of the Index for Baring
15
<PAGE> 18
International Investment to receive its full basic fee
will begin at 2% for the quarter ending March 31, 1996 and
will increase by 0.5% for each quarter until the
arrangement is fully phased in.
The Portfolio has authorized Baring International
Investment to pay higher commissions in recognition of
brokerage services felt necessary for the achievement of
better execution, provided the investment adviser believes
this to be in the best interest of the Portfolio. Although
the Portfolio does not market its shares through
intermediary brokers or dealers, the Portfolio may place
orders for the Portfolio with qualified broker-dealers who
recommend the Portfolio 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
investment 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 advisory agreement; and (c) the continued employment of
an existing 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 concerning the adviser that would have
normally been included in a proxy statement. In the event
that such notice is given, the 1% redemption fee will be
waived for a period of 90 days.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL
GAINS AND TAXES The Fund is expected to pay dividends annually from
ordinary income. Net capital gains distributions, if any,
will be made annually. In addition, to satisfy certain
distribution requirements of the Tax Reform Act of 1986,
the Fund may declare special year-end dividend and capital
gains distributions during the month of December. Such
distributions, if received by shareholders by January 31,
are deemed to have been paid by the Fund and received by
shareholders on December 31 of the prior year.
Dividends and capital gains distributions may be
automatically reinvested or received in cash. See
"Choosing a Distribution Option" for a description of
these options.
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.
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 generally qualify in part for the
intercorporate 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.
16
<PAGE> 19
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 capital 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 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 elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the capital
at work for you in the Fund. Also, 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 returned to you as a
taxable distribution, regardless of whether you are
reinvesting your distributions or receiving them in cash.
The Fund will notify you annually as to the tax status of
its dividend and capital gains distribution.
THE GLOBAL EQUITY
PORTFOLIO MAY
"PASS THROUGH"
FOREIGN TAXES The Global Equity Portfolio may elect to "pass through"
to the Portfolio's shareholders the amount of foreign
income taxes paid by the Portfolio. The Portfolio will
make such an election only if it deems it to be in the
best interests of its shareholders.
If this election is made, shareholders of the Portfolio
will be required to include in their gross income their
pro rata share of foreign taxes paid by the Portfolio.
However, shareholders will be able to treat their pro rata
share of foreign taxes as either an itemized deduction or
a foreign tax credit against U.S. income taxes (but not
both) on their tax return.
A CAPITAL GAIN OR
LOSS MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of the Funds is a taxable event and may
result in a capital gain or loss. A capital gain or loss
may be realized from an ordinary redemption of shares or
an exchange of shares between two mutual funds (or two
portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital 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 shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or Employer
Identification number and by certifying that you are not
subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund are exempt from
Pennsylvania personal property taxes.
17
<PAGE> 20
The tax discussion set forth on the previous page is
included for general information only. Prospective
investors should consult their own tax advisers concerning
the tax consequences of an investment in the Fund. The
Fund is managed without regard to tax ramifications.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF EACH PORTFOLIO The Fund's share price or "net asset value" per share is
determined by dividing the total assets of the Fund, less
all liabilities, by the total number of shares
outstanding. The net asset value is calculated at the
close of regular trading (generally 4:00 p.m. Eastern
time) each day the New York Stock Exchange is open for
trading.
Market values for securities listed on an exchange are
based upon the latest quoted sales price as of 4:00 p.m.
Eastern time on the valuation date. Securities not traded
on the valuation date are valued at the mean of the latest
quoted bid and asked price. Securities not listed on an
exchange are valued at the latest quoted bid price.
Temporary cash investments are valued at cost which
approximates market value. All prices of listed securities
are taken from the exchange where the security is
primarily traded. Securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such
securities. Securities for which market quotations are not
readily available or which are restricted as to sale and
other assets are valued by such methods as the Board of
Directors deems in good faith to reflect fair value.
All foreign securities are valued at the latest quoted
sales price available before the time when assets are
valued. Securities listed on a foreign exchange, as well
as American Depository Receipts ("ADRs"), which are traded
on U.S. exchanges are valued at the latest quoted sales
price available before the time when assets are valued.
Securities regularly traded in the over-the-counter market
for which market quotations are readily available will be
valued at the latest quoted bid price.
For purposes of determining the Global Equity Portfolio's
net asset value per share, all assets and liabilities,
initially expressed in foreign currencies, will be
translated into U.S. dollars at the bid prices of such
currencies, against U.S. dollars invested by major banks
as of 4:00 p.m. Central Europe time. If such quotations
are not available as of the close of the Exchange, the
rate of exchange will be determined in accordance with
policies established in good faith by the Board of
Directors.
The Fund's price per share can be found daily in the
mutual fund section of most major newspapers under the
heading of The Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION Vanguard Horizon Fund, Inc. is a Maryland Corporation.
The authorized capital stock of the Fund consists of
1,000,000,000 shares at the par value of $.001 each. The
Board of Directors has the power to designate one or more
classes ("Portfolios") of shares of common stock and to
classify or reclassify any unissued shares with respect to
such Portfolios. Currently the Fund is offering two
classes of shares.
18
<PAGE> 21
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the Fund.
The shares of the Funds are fully paid and nonassessable;
have no preferences as to conversion, exchange, dividends,
retirement or other features; and have no preemptive
rights. Such shares have noncumulative 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.
All securities and cash are held for the Capital
Appreciation Portfolio by Morgan Guaranty Trust Company,
New York, N.Y. For the Global Equity Portfolio all
securities and cash are held by Morgan Stanley Trust
Company, New York, N.Y. The Vanguard Group, Inc., Valley
Forge, PA, serves as the Fund's Transfer and Dividend
Disbursing Agent. Price Waterhouse LLP serves as
independent accountants for the Fund and audits its
financial statements annually. The Fund is not involved in
any litigation.
- --------------------------------------------------------------------------------
19
<PAGE> 22
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement ($500 for Uniform
Gifts/Transfers to Minors Act accounts). You must open a
new Individual Retirement Account by mail (IRAs may not be
opened by wire) using a Vanguard IRA Adoption Agreement.
Your purchase must be equal to or greater than the $500
minimum initial investment requirement, but no more than
$2,000 if you are making a regular IRA contribution.
Rollover contributions are generally limited to the amount
withdrawn within the past 60 days from an IRA or other
qualified Retirement Plan. If you need assistance with the
forms or have any questions about this Fund, please call
our Investor Information Department at 1-800-662-7447.
NOTE: For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts or
powers of attorney), please call us to determine which
additional forms you may need.
Because of the risks associated with common stock
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term stock
market movements. Consequently the Fund reserves the right
to reject any specific purchase (and exchange purchase)
request. The Fund also reserves the right to suspend the
offering of shares for a period of time.
The Portfolios' 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 commissions or 12b-1 fees).
IMPORTANT NOTE:
1% REDEMPTION FEE Potential investors should note that a 1% redemption fee
is charged for the Capital Appreciation and Global Equity
Portfolios. This fee, which is paid directly to the
Portfolios, applies to redemptions from and exchanges from
the Portfolios of shares held for less than 5 years. IN
THE EVENT OF AN EARLY REDEMPTION DUE TO A SHAREHOLDER'S
DEATH, ALL REDEMPTION FEES WILL BE WAIVED. IN ORDER TO
SUBSTANTIATE THE DEATH, A CERTIFIED COPY OF THE DEATH
CERTIFICATE MUST BE PROVIDED. Please see "Fund Expenses"
for more information.
ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made by
mail ($100 minimum), wire ($1,000 minimum), exchange from
another Vanguard Fund account, or Vanguard Fund Express.
Subsequent investments to Individual Retirement Accounts
may be made by mail ($100 minimum) or exchange from
another Vanguard Fund Account. In some instances,
contributions may be made by wire or Vanguard Fund
Express. Please call us for more information on these
topics.
- --------------------------------------------------------------------------------
20
<PAGE> 23
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of your ADDITIONAL INVESTMENTS SHOULD IN-
initial investment on the CLUDE THE INVEST-BY-MAIL
Complete and sign the registration form, make your check REMITTANCE FORM ATTACHED TO YOUR
enclosed Account payable to The Vanguard FUND CONFIRMATION STATEMENTS.
Registration Form Group -- (Portfolio Number) (see PLEASE MAKE YOUR CHECK PAYABLE TO
below for the appropriate The Vanguard Group -- (Portfolio
Portfolio number), and mail to: Number) (see below for the
appropriate Portfolio number),
VANGUARD FINANCIAL CENTER write your account number on your
P.O. BOX 2600 check and, using the return envel-
VALLEY FORGE, PA 19482 ope provided, mail to the address
indicated on the Invest-by-Mail
Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do not
send registered or express mail to
the post office box address.
</TABLE>
VANGUARD HORIZON FUND PORTFOLIO NUMBERS
Capital Appreciation Portfolio --
Global Equity Portfolio --
- --------------------------------------------------------------------------------
PURCHASING BY WIRE
Money should be
wired to:
BEFORE WIRING
Please contact
Client Services
(1-800-662-2739) CORESTATES BANK, N.A.
AB 031000011
CORESTATES NO. 01019897
ATTN. VANGUARD
VANGUARD HORIZON FUND
ACCOUNT NUMBER
ACCOUNT REGISTRATION
You should notify our Client Services Department of your
intended wire purchase, including the federal wire number
to be used, by 12:00 noon (Eastern Time).
To assure proper receipt, please be sure your bank
includes the name(s) of the Portfolio(s) selected, the
account number Vanguard has assigned to you and the eight
digit CoreStates number. If you are opening a new account,
please complete the Account Registration Form and mail it
to the "New Account" address above after completing your
wire arrangement. NOTE: Federal Funds wire purchase orders
will be accepted only when the Fund and Custodian Bank are
open for business.
- --------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard Account) You may open a new account or purchase additional shares
by making an exchange from an existing Vanguard account.
However, the Fund reserves the right to refuse any
exchange purchase request. Call our Client Services
Department (1-800-662-2739) for assistance. The new
account will have the same registration as the existing
account.
- --------------------------------------------------------------------------------
21
<PAGE> 24
PURCHASING BY
FUND EXPRESS
Special Purchase and
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic
Investment option, money will be moved automatically from
your bank account to your Vanguard account on the schedule
(monthly, bimonthly [every other month], quarterly or
yearly) you select. To establish these Fund Express
options, please provide the appropriate information 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
DISTRIBUTION
OPTION
You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Portfolio 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 Portfolio shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client
Services Department (1-800-662-2739) for information. You
may also elect Vanguard Dividend Express which allows you
to transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING
Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Portfolio
shareholders. These distributions are made to all
shareholders who own Portfolio shares as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain or income dividend distribution, you will be
assessed taxes on the amount of the capital gain and/or
dividend distribution later paid even though you owned the
Portfolio shares for just a short period of time. (Taxes
are due on the distributions even if the dividend or gain
is reinvested in additional Portfolio shares.) While the
total value of your investment will be the same after the
distribution -- the amount of the distribution will offset
the drop in the net asset value of the shares -- you
should be aware of the tax implications that the timing of
your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's
annual dividend income and capital gains distributions
22
<PAGE> 25
normally occur in December. For additional information on
distributions and taxes, see the section entitled
"Dividends, Capital Gains and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
ACCOUNT
INFORMATION
OPTIONAL SERVICES The easiest way to establish optional Vanguard services
on your account is to select the options you desire when
you complete your Account Registration Form. If you wish
to establish additional shareholder options for your
account at a later date, you may need to provide Vanguard
with additional information and a signature guarantee.
Please call our Client Services Department
(1-800-662-2739) for further assistance.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES
Share certificates will not be available for the Fund.
BROKER/DEALER
PURCHASES
If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELING TRADES The Fund will not cancel any trade (e.g., purchase,
redemption or exchange) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED Your Trade Date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire, or exchange, and is received by the regular 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 determined 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.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time (see "Important Redemption
Information"). You may initiate a request by writing or by
telephoning. Your redemption proceeds are normally mailed
within two business days after the receipt of the request
in Good Order.
IMPORTANT NOTE: For investors in the Capital Appreciation
and Global Equity Portfolios, a redemption fee equalling
1% of the value of the shares redeemed will be deducted
from the redemption proceeds if shares held for less than
5 years are redeemed. This fee is paid directly to the
Portfolio.
23
<PAGE> 26
SELLING BY MAIL
Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD HORIZON FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard Horizon 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 required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER
GOOD ORDER means that the request includes the following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners EXACTLY as they are registered
on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required in the case of estates, corporations, trusts,
and certain other accounts.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT AT 1-800-662-2739.
- --------------------------------------------------------------------------------
SELLING BY
TELEPHONE
To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
Please see "Important Information About Telephone
Transactions."
- --------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option lets you move money from your Vanguard account to
your bank account on an "as needed" basis. To establish
these Fund Express options, please provide the
appropriate information on the Account Registration Form.
We will send you a confirmation of your Fund Express
service; please wait three weeks before using the
service. The redemption fee described on pages 19 and 22
applies to redemption by Fund Express.
- --------------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares of the Fund by making an exchange into
another Vanguard Fund account. Exchanges to or from the
following funds may only be made by mail: VANGUARD
BALANCED INDEX FUND, VANGUARD INDEX TRUST, VANGUARD
INTERNATIONAL EQUITY INDEX FUND AND VANGUARD QUANTITATIVE
PORTFOLIOS. Please see "Exchanging Your Shares" for
details. The redemption fee described on pages 19 and 22
applies to exchange redemptions.
- --------------------------------------------------------------------------------
IMPORTANT
REDEMPTION
INFORMATION
Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will be
held at Vanguard until payment for the purchase is
collected, which may take up to ten calendar days.
DELIVERY OF
REDEMPTION
PROCEEDS
Redemption requests received by telephone prior to the
regular close of the New York Stock Exchange (generally
4:00 p.m. Eastern time), are processed on the day of
receipt and the redemption proceeds are normally sent on
the following business day.
24
<PAGE> 27
Redemption requests received by telephone after the close
of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
All unpaid dividend and capital gains distributions
credited to your account up to the date of redemption will
be included in the redemption check. Redemption proceeds
must be sent to you within seven days of receipt of your
request in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right to postpone
payments at times when the New York Stock Exchange is
closed, or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders 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 AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Other Vanguard Services" for
additional information.
- --------------------------------------------------------------------------------
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares in
any account that is below the minimum initial investment
amount of $3,000. If at any time your total investment
does not have a value of at least $3,000, you may be
notified that your account is below the Fund's minimum
account balance requirement. You would then be allowed 60
days to make an additional investment before the account
is liquidated. Proceeds would be promptly paid to the
registered shareholder. (This minimum does not apply to
IRAs, 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 declining markets (i.e., a decline in a
Portfolio's net asset value).
- --------------------------------------------------------------------------------
EXCHANGING
YOUR SHARES Should your investment goals change, you may exchange your
shares of Vanguard Horizon Fund for those of other
available Vanguard Funds.
IMPORTANT NOTE: For investors in the Capital Appreciation
and Global Equity Portfolios, a redemption fee amounting
to 1% of the value of the shares exchanged will be
deducted from the exchange proceeds if shares held for
less than 5 years are exchanged. This fee is paid directly
to the Portfolio.
25
<PAGE> 28
EXCHANGE BY
TELEPHONE
Call Client Services
(1-800-662-2739) When exchanging shares by telephone, please have ready the
Fund name, account number, Social Security number or
Employer Identification number listed on the account and
exact name and address in which the account is registered.
Only the registered shareholder may complete such an
exchange. Requests for telephone 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. Requests 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
making 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 provided the request is received in
Good Order.
- --------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, and the name
of the Fund you wish to exchange into, the amount you wish
to exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD HORIZON FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your requests
to Vanguard Financial Center, Vanguard Horizon Fund, 455
Devon Park Drive, Wayne, PA 19087.)
- --------------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION
Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy of the prospectus 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 from one fund and
a purchase into another. 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.
- The redemption fee described on pages 19 and 22 applies
to exchange redemptions.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise
or terminate its provisions, limit the amount of or reject
any exchange, as deemed necessary, at any time.
The exchange privilege is only available in states in
which the shares of the Fund are registered for sale. The
Fund's shares are currently registered for sale in all 50
states and the Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive
exchange activity.
26
<PAGE> 29
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 purchases from other Vanguard portfolios) that
is reasonably deemed to be disruptive to efficient
portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio;
(ii) the 10-digit account number; (iii) the exact name
and address used in the registration; and (iv) the
Social Security or Employer Identification number
listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption made by mail will be payable to the
registered shareowner and mailed to the address of
record, only.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482. The request must be in Good Order.
BEFORE MAILING YOUR REQUEST, PLEASE CALL OUR CLIENT
SERVICES DEPARTMENT (1-800-662-2739) FOR FURTHER
INSTRUCTIONS.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES
STATEMENTS AND
REPORTS
For more information about any of these services, please
call our Investor Information Department at
(1-800-662-7447).
Vanguard will send you a confirmation statement each time
you initiate a transaction in your account (except for
checkwriting redemptions from Vanguard money market
accounts). You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may
27
<PAGE> 30
expect to receive their Average Cost Statement in February
of the following year. Please call our Client Services
Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
VANGUARD DIRECT
DEPOSIT SERVICE
With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
VANGUARD FUND
EXPRESS
Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
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
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard Funds. For more information please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS
Vanguard's Dividend Express allows you to transfer your
dividend and/or capital gains distribution automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automatic Clearing House (ACH) network. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any Touch ToneTM
telephone. This service also lets you obtain information
on your account balance, last transaction, and your most
recent dividend or capital gains payment. To contact
Vanguard's Tele-Account service, dial 1-800-ON-BOARD
(1-800-662-6273). A brochure offering detailed operating
instructions is available from the Investor Information
Department (1-800-662-7447).
- --------------------------------------------------------------------------------
28
<PAGE> 31
<TABLE>
<S> <C> <C>
(LOGO)
(LOGO) (LOGO)
P000 --------------------------- P R O S P E C T U S
THE VANGUARD GROUP
OF INVESTMENT MARCH 2, 1995
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATIONS SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT: (LOGO)
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
</TABLE>
<PAGE> 32
PART B
VANGUARD HORIZON FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
MARCH 2, 1995
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated March 2, 1995). To obtain the Prospectus
please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies........................................................ 1
Investment Policies....................................................................... 2
Investment Limitations.................................................................... 5
Management of the Fund.................................................................... 7
Investment Advisory Services.............................................................. 9
Securities Transactions................................................................... 11
Purchase of Shares........................................................................ 11
Redemption of Shares...................................................................... 11
Comparative Indexes....................................................................... 12
Yield and Total Return....................................................................
Financial Statements......................................................................
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the Fund's investment objectives and
policies set forth in the Prospectus.
FOREIGN INVESTMENTS As indicated in the Prospectus, The Global Equity will
include foreign securities. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. Since the stocks of foreign
companies are frequently denominated in foreign currencies, and since the
Portfolio may temporarily hold uninvested reserves in bank deposits in foreign
currencies, the Portfolio will be affected favorably or unfavorably by changes
in currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies. The investment policies
of each Portfolio permit it to enter into forward foreign currency exchange
contracts in order to hedge the Portfolio's holdings and commitments against
changes in the level of future currency rates. Such contracts involve an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S investments in those countries.
Although the Portfolio will endeavor to achieve most favorable execution
costs in its portfolio transactions in foreign securities, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions on
U.S. exchanges. In addition, it is expected that the expenses for custodial
1
<PAGE> 33
arrangements of the Portfolio's foreign securities will be somewhat greater than
the expenses for the custodian arrangements for handling U.S. securities of
equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Portfolio receives from its foreign investments. However, these
foreign withholding taxes are not expected to have a significant impact on the
Portfolios, since each Portfolio's investment objective is to seek long-term
capital appreciation and any income should be considered incidental.
PORTFOLIO TURNOVER While the rate of Portfolio turnover is not a limiting
factor when management deems changes appropriate, it is anticipated that each
Portfolio's annual portfolio turnover rate will not normally exceed 150%. A
portfolio turnover rate of 100% would occur if all of the Portfolio's
securities, exclusive of U.S. Government securities and other securities whose
maturities at the time of acquisition are one year or less, are replaced in the
period of one year. Turnover rates may vary greatly from year to year as well as
within a particular year and may also be affected by cash requirements for
redemptions of each Portfolio's shares and by requirements which enable the Fund
to receive certain favorable tax treatments. The portfolio turnover rates will,
of course, depend in large part on the level of purchases and redemptions of
shares of each Portfolio. Higher portfolio turnover can result in corresponding
increases in brokerage costs to the Portfolios of the Fund and their
shareholders.
INVESTMENT POLICIES
FUTURES CONTRACTS The Fund may enter into futures contracts, options, and
options on futures contracts for several reasons: to maintain cash reserves
while remaining fully invested, to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a futures contract is priced
more attractively than the underlying equity security or index. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security at a specified future time and at a
specified price. Futures contracts which are standardized as to maturity date
and underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC"), a U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. The Fund's margin deposits will be placed in a
segregated account maintained by the Fund's custodian bank. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Futures contracts are customarily
purchased and sold on margin which may range upward from less than 5% of the
value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities
2
<PAGE> 34
underlying the futures contracts which they trade, and use futures contracts
with the expectation of realizing profits from fluctuations in the prices of
underlying securities.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bonafide hedging transactions. A Portfolio will
only sell futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase. As evidence of this hedging interest, the Fund expects
that approximately 75% of its futures contract purchases will be "completed,"
that is, equivalent amounts of related securities will have been purchased or
are being purchased by the Portfolio upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Portfolio's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS A Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of its total assets. In addition, a Portfolio will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, a
Portfolio may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge.
Each Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Portfolios are subject to the risks of loss frequently
associated with futures transactions. A Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option. Additionally, investments in futures contracts and options
involve the risk that the investment advisers will incorrectly predict stock
market and interest rate trends.
3
<PAGE> 35
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Except for transactions the
Fund has identified as hedging transactions, each Portfolio is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In most cases, any gain
or loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Portfolio may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition.
In order for a Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or foreign currencies or other income derived with respect to the
Fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, the Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on futures contracts, which have been open for less than three months as
of the end of the Portfolio's fiscal year and which are recognized for tax
purposes, will not be considered gains on sales of securities held less than
three months for the purpose of the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Portfolio's other investments and shareholders will be advised on the nature
of the transactions.
REPURCHASE AGREEMENTS Each Portfolio may invest in repurchase agreements
with commercial banks, brokers or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Fund acquires a money
market instrument (generally a security issued by the U.S Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
commercial bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Portfolio and is unrelated to the interest rate on the underlying
instrument. In these transactions, the securities acquired by the Portfolio
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by the Fund's Custodian Bank
until repurchased. In addition, the Fund's Board of Directors will monitor each
Portfolio's repurchase agreement transactions 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 any Portfolio of the Fund. No more than an aggregate of 15% of a
Portfolio's assets, at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale, or for which there are no readily
available market quotations.
4
<PAGE> 36
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the realization by the Portfolio on such
collateral may be automatically stayed. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other party to the
agreement. While the Fund's management acknowledges these risks, it is expected
that they can be controlled through careful monitoring procedures.
LENDING OF SECURITIES Each Portfolio may lend its securities on a
short-term basis (less than nine months) 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 securities, the Portfolio will be
attempting to increase its net investment income through the receipt of interest
on the loan. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the account of the
Portfolio. Each Portfolio may lend its portfolio securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms,
the structure and the aggregate amount of such loans are not inconsistent with
the Investment Company Act of 1940, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission (the "Commission")
thereunder, which currently require that (a) the borrower pledge and maintain
with the Fund collateral consisting of cash, an irrevocable letter of credit or
securities issued or guaranteed by the United States Government having a value
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Portfolio at any time and (d) the
Portfolio receives reasonable interest on the loan which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments, any distribution on the loaned securities and any increase in their
market value. A Portfolio will not be required to pay any service, placement or
other fee in connection with such loans, and will retain voting rights to the
loaned securities. A Portfolio will not lend its portfolio securities, if as a
result, the aggregate value of such loans exceeds 33 1/3% of the value of the
Portfolio's total assets. Loan arrangements made by a Portfolio will comply with
all other applicable regulatory requirements, including the rules of the New
York Stock Exchange, which rules presently require the borrower, after notice,
to redeliver the securities within the normal settlement time of five business
days. All relevant facts and circumstances, including the credit-worthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board of
Directors.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors (Trustees). In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
INVESTMENT LIMITATIONS
The following policies supplement the Fund's investment limitations set
forth in the Prospectus. It is a fundamental policy of each Portfolio not to
engage in any of the following activities or business practices. These
restrictions may not be changed with respect to a particular Portfolio without
the approval of a majority of the outstanding shares (as defined in the
Investment Company Act of 1940) of that Portfolio. A Portfolio may not:
1) Issue senior securities;
2) Borrow money, except from banks (or through reverse repurchase
agreements), for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not in
excess of 15% of the
5
<PAGE> 37
value of the net assets of the Portfolio (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 Portfolio, the Portfolio will not make any
additional investments;
3) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Portfolio
would hold more than 10% of the outstanding voting securities of the
issuer, or more than 5% of the value of the Portfolio's total assets
would be invested in the securities of such issuer;
4) Engage in the business of underwriting securities issued by others,
except to the extent that the Portfolio may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;
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 the Fund's investment in The Vanguard Group, Inc., as
described on page 7);
6) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (5) above) which are either publicly distributed or
customarily purchased by institutional investors, and (ii) by lending
its securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the
Investment Company Act or the Rules and Regulations or interpretations
of the Commission thereunder and the aggregate value of all securities
loaned does not exceed 33 1/3% of the market value of the Portfolio's
total assets;
7) Pledge, mortgage, or hypothecate its assets, except to secure
borrowings permitted by limitation (2) above;
8) Buy any securities or other property on margin (except for such
short-term credits as are necessary for the clearance of transactions),
or engage in short sales (unless by virtue of its ownership of other
securities it has a right to obtain at no added cost securities
equivalent in kind and amount to the securities sold) except as set
forth below in (12);
9) Purchase or sell puts or calls, or combinations thereof; provided
however, that a Portfolio may enter into forward foreign currency
exchange transactions except as set forth below in (12);
10) Purchase or sell real estate or real estate limited partnerships
(although it may purchase securities secured by real estate interests
or interests therein, or issued by companies or investment trusts which
invest in real estate or interests therein);
11) The Fund will not invest in securities of other investment companies,
except as may be acquired as a part of a merger, consolidation or
acquisition of assets approved by the Fund's shareholders or otherwise
to the extent permitted by Section 12 of the Investment Company Act of
1940. The Fund will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Fund;
12) Purchase or sell commodities or commodity contracts; provided, however,
that a Portfolio may enter into forward foreign currency exchange
transactions and that each Portfolio may invest in futures contracts
and options to the extent that not more than 5% of the Portfolio's
assets are required as deposit to secure obligations under futures
contracts, additionally each Portfolio will invest no more than 15% of
its assets in swap agreements;
13) Invest in companies for the purpose of exercising control of
management; and
14) Invest more than 25% of its assets in any single industry.
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, make loans to, or contribute to the costs or other financial
requirements of, any company which will be wholly owned by
6
<PAGE> 38
the Fund and one or more other investment companies and is primarily engaged in
the business of providing at cost services, such as management, administrative,
distribution or other related services to the Fund and other investment
companies. (See "Management of the Fund").
In order to permit the sale of shares of the Fund in certain states, the
Fund may make commitments more restrictive than the fundamental or
non-fundamental operating restrictions described above. Should the Fund
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders it will revoke the commitment by terminating sales of
its shares in the state(s) involved.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
MANAGEMENT OF THE FUND
THE VANGUARD GROUP The Fund is a member of The Vanguard Group of
Investment Companies which consists of more than 30 investment companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Vanguard Funds obtain at cost virtually all of their corporate management,
administrative and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain of the Vanguard Funds.
Vanguard employs a supporting staff of management personnel needed to
provide the requisite services to the Funds and also furnishes the Funds with
necessary office space, furnishings and equipment. Each Fund pays its share of
Vanguard's net expenses which are allocated among the Funds under procedures
approved by the Directors (Trustees) of each Fund. In addition, each Fund bears
its own direct expenses such as legal, auditing and custodian fees.
The Officers of the Fund and the Vanguard Funds are also Officers and
employees of Vanguard. No Officer or employee is permitted to own any securities
of any external adviser for the Vanguard Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-l under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures, restrictions and guidelines
substantially similar to those recommended by the mutual fund industry and
approved by the U.S. Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. The Fund's Service
Agreement provides as follows: (a) each Vanguard Fund may invest up to .40% of
its current assets in Vanguard, and (b) there is no other limitation on the
amount that each Vanguard Fund may contribute to Vanguard's capitalization. The
amount contributed to Vanguard by the Fund's Portfolios included the Service
Economy and Technology Portfolios which are no longer in existence.
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for 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
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
7
<PAGE> 39
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman, Chief JOHN C. SAWHILL, Director
Executive Officer and Director* President and Chief Executive Officer, The
Chairman, Chief Executive Officer and Nature Conservancy; formerly, Director and
Director of The Vanguard Group, Inc. and of Senior Partner, McKinsey & Co.; and
each of the investment companies in The President, New York University; Director of
Vanguard Group; Director of The Mead Pacific Gas and Electric Company and NACCO
Corporation and General Accident Insurance. Industries.
JOHN J. BRENNAN, President and Director* JAMES O. WELCH, JR., Director
President and Director of The Vanguard Retired Chairman of Nabisco Brands, Inc.,
Group, Inc. and of each of the investment retired Vice Chairman and Director of RJR
companies in The Vanguard Group. Nabisco; Director of TECO Energy, Inc.
ROBERT E. CAWTHORN, Director J. LAWRENCE WILSON, Director
Chairman of Rhone-Poulenc Rorer, Inc.; Chairman and Chief Executive Officer of Rohm &
Director of Sun Company, Inc. Haas Company; Director of Cummins Energy
Company, and Trustee of Vanderbilt
BARBARA BARNES HAUPTFUHRER, Director University and the Culver Educational
Director of The Great Atlantic and Pacific Foundation.
Tea Company, ALCO Standard Corp., Raytheon
Company, Knight-Ridder, Inc., Massachusetts RAYMOND J. KLAPINSKY, Secretary*
Mutual Life Insurance Co. and Trustee Senior Vice President and Secretary of The
Emerita of Wellesley College. Vanguard Group, Inc.; Secretary of each of the
BRUCE K. MACLAURY, Director investment companies in The Vanguard Group.
President, The Brookings Institution; RICHARD F. HYLAND, Treasurer*
Director of American Express Bank, Ltd., The Treasurer of The Vanguard Group, Inc. and of
St. Paul Companies, Inc. and Scott Paper Co. each of the investment companies in The
BURTON G. MALKIEL, Director Vanguard Group.
Chemical Bank Chairman's Professor of KAREN E. WEST, Controller*
Economics, Princeton University; Director of Vice President of The Vanguard Group, Inc.;
Prudential Insurance Co. of America, Amdahl Controller of each of the investment companies
Corporation, Baker Fentress & Co., The in The Vanguard Group.
Jeffrey Co. and Southern New England ---------------
Communications Company. *Officers of the Fund are "interested persons"
as defined in the Investment Company Act of
ALFRED M. RANKIN, JR., Director 1940.
Chairman, President, and Chief Executive
Officer of NACCO Industries, Inc.; Director
of The BFGoodrich Company, The Standard
Products Company and The Reliance Electric
Company.
</TABLE>
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 Vanguard Funds by third parties.
DISTRIBUTION Vanguard also provides all distribution and marketing
services for the Vanguard Funds. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of the
Group. The Directors and Officers of Vanguard determine the amount to be spent
annually on distribution activities, the manner and amount to be spent on each
Fund, and whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Vanguard Funds based upon their relative net assets. The
remaining one half of these expenses is allocated among the Vanguard Funds based
upon each Fund's sales for the preceding 24 months relative to the total sales
of the Funds as a Group. Provided, however, that no Fund's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100 of
1% of its average month-end net assets.
INVESTMENT ADVISORY SERVICES An experienced investment management staff
employed directly by Vanguard also provides investment advisory services to the
Fund, Vanguard Money Market Reserves, Vanguard Institutional Money Market
Portfolio, Vanguard Municipal Bond Fund, several Portfolios of Vanguard Fixed
Income Securities Fund, Vanguard California Tax-Free Fund, Vanguard Florida
Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, Vanguard New York
Insured Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard
8
<PAGE> 40
Pennsylvania Tax-Free Fund, Vanguard Admiral Funds, Vanguard Bond Index Fund,
Vanguard Balanced Index Fund, Vanguard Index Trust, Vanguard International
Equity Index Fund, Vanguard Tax-Managed Fund, Vanguard Institutional Index Fund,
several Portfolios of Vanguard Variable Insurance Fund, a portion of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as well as several
indexed separate accounts. The compensation and other expenses of this staff are
paid by the Portfolios and Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund will pay each Director who
is not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. Directors who are also Officers receive no
remuneration for their services as Directors. The Fund's Officers and employees
are paid by Vanguard which, in turn, is reimbursed by the Fund, and each other
Fund in the Group, for its proportionate share of Officers' and employees'
salaries and retirement benefits.
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 an eligible
Officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under its Thrift Plan, all employees of
Vanguard are permitted 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.
DIRECTORS' RETIREMENT FEES A Retirement Plan for Directors has been
implemented to provide a fee to retired Directors equal to $1,000 per year of
service on the Board, up to 15 years of service. This fee will remain in place
subsequent to the Director's retirement for a period of 10 years or until a
retired Director's death.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY AGREEMENT WITH BARING INTERNATIONAL INVESTMENT
LIMITED. The Global Equity Portfolio is managed by Baring International
Investment Limited, a wholly-owned subsidiary of Baring Asset Management
Limited, 155 Bishopsgate, London. Baring Asset Management was founded in 1762
and provides asset management services to companies, institutions, and
individuals. As of September 30, 1994, Baring Asset Management has over $44
billion in assets under management, and over 100 investment professionals in
offices throughout the world.
The investment philosophy at Baring International Investment is that
investing in growing economies and growing companies at the right valuation
leads to superior long-term results. Baring International Investment utilizes a
regional strategic team approach to portfolio management, where each team
consists of experienced members, who are specialists, that conduct the necessary
research for the team. Philip Bullen, Director, has been designated as portfolio
manager for the assets of the Global Equity Portfolio. He has 17 years of
investment experience and specializes in asset and country allocation.
The Global Equity Portfolio pays Baring International Investment 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 Portfolio for the quarter:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
-------------------------------------------------------------------------------- ------
<S> <C>
First $100 million.............................................................. 0.35%
Next $150 million............................................................... 0.30%
Next $250 million............................................................... 0.25%
Over $500 million............................................................... 0.20%
</TABLE>
The basic advisory fee may be increased or decreased by applying an
adjustment formula based on the investment performance of the Portfolio relative
to the Morgan Stanley Capital International (MSCI) All Country Index. The
following table sets forth the incentive/penalty adjustment to the basic
advisory fee
9
<PAGE> 41
payable by the Portfolio to Baring International Investment under the investment
advisory agreement. The adjustments to the fee change proportionately with
performance relative to the Index.
<TABLE>
<CAPTION>
CUMULATIVE THREE YEAR PERFORMANCE
DIFFERENTIAL VS. THE MSCI ALL COUNTRY INDEX INCENTIVE/PENALTY FEE ADJUSTMENT
------------------------------------------------------------- --------------------------------
<S> <C>
Less than 3%................................................. 0.50 X Basic Fee
Between 3% and 6%............................................ 0.75 to 1.00 X Basic Fee
Between 6% and 9%............................................ 1.00 to 1.25 X Basic Fee
Between 9% and 12%........................................... 1.25 to 1.50 X Basic Fee
More than 12%................................................ 1.50 X Basic Fee
</TABLE>
Under the rules of the Securities & Exchange Commission, the
incentive/penalty fee for Baring International Investment will not be fully
operable until the quarter ending March 31, 1998. Prior to that date the
incentive/penalty fee will be calculated according to the following transition
rules:
(a) Prior to March 31, 1996. For the quarters ending on or prior to
December 31, 1995, the incentive/penalty fee will not be operable. The
advisory fee payable by the Global Equity Portfolio shall be the basic
fee, calculated as set forth above.
(b) January 1, 1996 through December 31, 1997. Beginning with the quarter
ending March 31, 1996, and until the quarter ending December 31, 1997,
the incentive/penalty fee will be based on a comparison of the
investment performance of the Global Equity Portfolio and the MSCI All
Country Index over the number of months that have elapsed between
January 1, 1995 and the end of the quarter for which the fee is being
computed.
(c) On and After December 31, 1997. For the quarter ending December 31,
1997, and thereafter, the period used to calculate the
incentive/penalty fee shall be the 36 months preceding the end of the
quarter for which the fee is being computed and the number of
percentage points used shall be 3.
For the purpose of determining the incentive/penalty fee, the net assets of
the Global Equity Portfolio will be averaged over the same period as the
investment performance of the portfolio as well as the investment record of the
MSCI All Country Index.
The current agreement will continue until December 31, 1997 and will be
renewable thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the Directors who are not parties to the
agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party cast in person at a meeting called for the purpose of
considering such approval. In addition, the question of continuance of the
agreement may be presented to the shareholders of the Fund; in such event
continuance shall be effected only if approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund. If the holders of any
Portfolio fail to approve the agreement, Baring International Investment may
continue to serve as investment adviser to each Portfolio which approved the
agreement, and to any Portfolio which did not approve the agreement until new
arrangements have been made. The agreement is automatically terminated if
assigned, and may be terminated by any Portfolio without penalty, at any time,
(1) either by vote of the Board of Directors or by vote of the outstanding
voting securities of the Portfolio on sixty (60) days' written notice to Baring
International Investment, or (2) by Baring International Investment upon ninety
(90) days' written notice to the Fund.
DESCRIPTION OF BARING INTERNATIONAL INVESTMENT
SECURITIES TRANSACTIONS
The investment advisory agreement with Baring International Investment
Limited authorizes the investment adviser (with the approval of the Fund's Board
of Directors) to select the brokers or dealers that will execute the purchases
and sales of securities for the Fund's Portfolio(s) and directs the investment
adviser to use its best efforts to obtain the best available price and most
favorable execution with respect to all transactions for the Portfolio(s). Each
investment adviser has undertaken to execute each investment transaction at a
price and commission which provides the most favorable total cost or proceeds
reasonably obtainable under the circumstances.
10
<PAGE> 42
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
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information, and provide other services in addition to execution services to the
Fund and/or the investment adviser. Each investment adviser considers the
investment services it receives 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 Fund's Board of Directors, each investment adviser may cause the
Fund to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the investment adviser to the Fund and the other Funds in
the Group.
Currently, it is the Fund's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to the investment adviser and/or the Fund.
However, the investment adviser has informed the Fund that it will not pay
higher commission rates specifically for the purpose of obtaining research
services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the sale of shares of the Fund and may, when a
number of brokers and dealers can provide comparable best price and execution on
a particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified broker-dealers.
Some securities considered for investment by one Portfolio may also be
appropriate for the other Portfolios and the other Funds and/or clients served
by the investment advisers. If purchase or sale of securities consistent with
the investment policies of a Portfolio, the other Portfolios and/or one or more
of these other Funds or clients are considered at or about the same time,
transactions in such securities will be allocated among the Portfolios and the
several Funds and clients in a manner deemed equitable by the respective
investment adviser. Although there will be no specified formula for allocating
such transactions, the allocation methods used, and the results of such
allocations, will be subject to periodic review by the Fund's Board of
Directors.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund or any Portfolio,
and (iii) to reduce or waive the minimum for initial and subsequent investments
as well as redemption fees for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of the Fund's shares.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Fund to
11
<PAGE> 43
dispose of securities owned by it, or fairly to determine the value of its
assets, and (iii) for such other periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% or the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make a
practice detrimental to the best interests of the Fund. If redemptions are paid
in investment securities, such securities will be valued as set forth in the
Prospectus under "The Share Price of Each Portfolio" and a redeeming shareholder
would normally incur brokerage expenses if he converted these securities to
cash.
COMPARATIVE INDEXES
Each of the investment company members of the Vanguard Group, including
Vanguard Horizon Fund, Inc., may, from time to time, use one or more of the
following unmanaged indices for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of approximately 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.
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, non-callable preferred stock issues.
12
<PAGE> 44
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 and 35% Salomon Brothers High
Grade Bond Index.
RUSSELL 2000 SMALL COMPANY STOCK INDEX -- consists of the smallest 2,000 stocks
within the Russell 3000; a widely-used benchmark for small capitalization common
stocks.
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.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
RUSSELL 3000 INDEX -- consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Exchanges
or the NASDAQ over-the-counter market, accounting for over 90% of the market
value of publicly traded Stocks in the U.S.
Advertisements which refer to the use of the fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no Federal income tax applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's Portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield. In addition there can be no assurance that the Fund
will continue its performance as compared to such other averages.
13
<PAGE> 45
PART C
VANGUARD HORIZON FUND, INC.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Statement of Assets and Liabilities*
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
9. Form of Vanguard Service Agreement*
10. Opinion of Counsel*
11. Consent of Independent Accountants**
12. Financial Statements*
13. Not Applicable
14. Not Applicable
15. Not Applicable
16. Not Applicable
- ---------------
* Previously filed.
** 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, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management of the Fund" in the Prospectus constituting Part
A and in the Statement of Additional Information constituting Part B of this
Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
None.
ITEM 27. INDEMNIFICATION
Reference is made to Article IX of Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to trustees, directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
<PAGE> 46
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the caption "Investment Advisers" in the prospectus
constituting Part "A" of this Registration Statement and "Investment Advisory
Services" in Part "B" of this Registration Statement.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodians.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which is filed herewith as Exhibit 9 and described in Part
B hereof under "Management of the Fund"; the Registrant is not a party of any
management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant undertakes to file a pre-effective amendment, using financial
statements which reflect its initial capitalization prior to being declared
effective.
Registrant also undertakes to hold a First Annual Meeting of Shareholders
by the end of the Registrant's first sixteen months of operation for the purpose
of electing directors, approving the Investment Advisory and Service Agreements
and appointing auditors. Thereafter, annual meetings will not be held except as
required by the Investment Company Act of 1940 ("1940 Act") or other applicable
law. Registrant undertakes to comply with the provisions of Section 16(c) of the
1940 Act in regard to shareholders' rights to call a meeting of shareholders for
the purpose of voting on the removal of Directors and to assist in shareholder
communications in such matters, to the extent required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
Registrant undertakes to file a post-effective amendment containing
financial statements, which need not be audited, within 4-6 months from
effectiveness.
<PAGE> 47
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on
the 16th day of February 1995.
VANGUARD HORIZON FUND, INC.
BY: (Raymond J. Klapinsky) John C. Bogle*, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
BY: (Raymond J. Klapinsky)
John C. Bogle*, Chairman of the Board, Director
and Chief Executive Officer
February 16, 1995
BY: (Raymond J. Klapinsky)
John J. Brennan*, President and Director
February 16, 1995
BY: (Raymond J. Klapinsky)
Robert C. Cawthorn*, Director
February 16, 1995
BY: (Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*, Director
February 16, 1995
BY: (Raymond J. Klapinsky)
Burton G. Malkiel*, Director
February 16, 1995
BY: (Raymond J. Klapinsky)
Bruce K. MacLaury, Jr.*, Director
February 16, 1995
BY: (Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*, Director
February 16, 1995
BY: (Raymond J. Klapinsky)
John C. Sawhill*, Director
February 16, 1995
BY: (Raymond J. Klapinsky)
James O. Welch, Jr.*, Director
February 16, 1995
BY: (Raymond J. Klapinsky)
J. Lawrence Wilson*, Director
February 16, 1995
BY: (Raymond J. Klapinsky)
Richard F. Hyland*, Treasurer and Principal
Financial Officer and Accounting Officer
February 16, 1995
*By Power of Attorney. See File Number 2-14336, January 23, 1990. Incorporated
by Reference.
<PAGE> 48
VANGUARD HORIZON FUND, INC.
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants................................................... Ex-99.B11
Financial Statements................................................................. Ex-99.B12
</TABLE>
<PAGE> 49
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this amended Registration Statement on Form N-1A of our
report dated January 27, 1995, relating to the financial statement of the
Capital Appreciation Portfolio of Vanguard Horizon Fund, Inc., which appears in
such Statement of Additional Information. We also consent to the reference to us
under the heading "General Information" in the Prospectus.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 16, 1995
<PAGE> 50
EX-99.B12
VANGUARD HORIZON FUND, INC.
CAPITAL APPRECIATION PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JANUARY 27, 1995
<TABLE>
<S> <C>
Assets
Cash............................................................. $100,000
=========
Liabilities........................................................ None
Net Assets......................................................... $100,000
=========
Net Asset Value and Offering Price Per Share: One Billion Shares of
common stock authorized with $.001 par value, 10,000 shares
issued and outstanding........................................... $10.00
</TABLE>
The Vanguard Horizon Fund, Inc. (the "Fund") is an open-end, diversified
management investment company registered under the Investment Company Act of
1940, as amended (the "Act"). The Fund was organized as a Maryland Corporation
on November 9, 1994. The Fund had no operations other than the sale of shares of
common stock of the Fund, at an aggregate cost of $100,000, to an officer of the
Fund, representing the initial capital of the Fund. Costs incurred in connection
with the organization and registration of the Fund have been borne by The
Vanguard Group, Inc. ("Vanguard"), a jointly-owned subsidiary of The Vanguard
Group of Investment Companies.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors
Vanguard Horizon Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of the Capital
Appreciation Portfolio of Vanguard Horizon Fund, Inc. (the "Fund") at January
27, 1995, in conformity with generally accepted principles. This financial
statement is the responsibility of the Fund's management; our responsibility is
to express an opinion on this financial statement based on our audit. We
conducted our audit of this financial statement in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 27, 1995
