-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R9ScyLcoAuM26Q0G7/CtDm+DWnYTD9dmj8EfUjvIVz+sEmWPtCTrN4e94KAVqT9G a8w0gGyyyvcq3zWx49Azvg== 0000932471-02-000861.txt : 20021122 0000932471-02-000861.hdr.sgml : 20021122 20021122154336 ACCESSION NUMBER: 0000932471-02-000861 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20021122 EFFECTIVENESS DATE: 20021212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD PRIMECAP FUND/ CENTRAL INDEX KEY: 0000752177 IRS NUMBER: 232311358 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-92948 FILM NUMBER: 02837918 BUSINESS ADDRESS: STREET 1: PO BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 FORMER COMPANY: FORMER CONFORMED NAME: PRIMECAP FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD/PRIMECAP FUND INC DATE OF NAME CHANGE: 19940608 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD PRIMECAP FUND/ CENTRAL INDEX KEY: 0000752177 IRS NUMBER: 232311358 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-04098 FILM NUMBER: 02837919 BUSINESS ADDRESS: STREET 1: PO BOX 2600 VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 FORMER COMPANY: FORMER CONFORMED NAME: PRIMECAP FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD/PRIMECAP FUND INC DATE OF NAME CHANGE: 19940608 485BPOS 1 primecapnia2002.txt VANGUARD PRIMECAP FUND - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT 2-92948 UNDER THE SECURITIES ACT OF 1933 PRE-EFFECTIVE AMENDMENT NO. POST-EFFECTIVE AMENDMENT NO. 24 AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 AMENDMENT NO. 25 VANGUARD PRIMECAP FUND (EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST) P.O. BOX 2600, VALLEY FORGE, PA 19482 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER (610) 669-1000 R. GREGORY BARTON, ESQUIRE P.O. BOX 876 VALLEY FORGE, PA 19482 IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE: ON DECEMBER 13, 2002, PURSUANT TO PARAGRAPH (B) OF RULE 485. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- VANGUARD(R) PRIMECAP FUND INVESTOR SHARES AND ADMIRAL(TM) SHARES - DECEMBER 13, 2002 STOCK This prospectus contains financial data for the Fund through the fiscal period ended August 31, 2002. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. [THE VANGUARD GROUP(R) LOGO] VANGUARD PRIMECAP FUND Investor Shares and Admiral Shares Prospectus December 13, 2002 A Growth Stock Mutual Fund - -------------------------------------------------------------------------------- CONTENTS - -------------------------------------------------------------------------------- 1 FUND PROFILE 4 ADDITIONAL INFORMATION 4 MORE ON THE FUND 8 THE FUND AND VANGUARD 9 INVESTMENT ADVISER 10 DIVIDENDS, CAPITAL GAINS, AND TAXES 12 SHARE PRICE 13 FINANCIAL HIGHLIGHTS 15 INVESTING WITH VANGUARD 15 Buying Shares 17 Converting Shares 18 Redeeming Shares 20 Exchanging Shares 21 Other Rules You Should Know 23 Fund and Account Updates 24 Contacting Vanguard GLOSSARY (inside back cover) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk(R) explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SHARE CLASS OVERVIEW The Fund offers two separate classes of shares: Investor Shares and Admiral Shares. Please note that Admiral Shares are NOT available to: - - SIMPLE IRAs and 403(b)(7) custodial accounts; - - Other retirement plan accounts receiving special administrative services from Vanguard; or - - Accounts maintained by financial intermediaries, except in limited circumstances. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. - -------------------------------------------------------------------------------- 1 FUND PROFILE INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital growth. PRIMARY INVESTMENT STRATEGIES The Fund invests in stocks with above-average earnings growth potential that is not reflected in their current market prices. The Fund's portfolio consists predominantly of mid- and large-capitalization stocks. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - - Investment style risk, which is the chance that returns from mid- and large-cap growth stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. - - Manager risk, which is the chance that poor security selection will cause the Fund to underperform other funds with a similar investment objective. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares (including operating expenses but excluding shareholder fees) has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- 1992- 8.99% 1993- 18.03% 1994- 11.41% 1995- 35.48% 1996- 18.31% 1997- 36.79% 1998- 25.44% 1999- 41.34% 2000- 4.47% 2001- -13.35% ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended September 30, 2002, was -30.82%. If applicable shareholder fees were reflected, returns would be less than those shown. ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 28.84% (quarter ended December 31, 1998), and the lowest return for a quarter was -21.68% (quarter ended September 30, 2001). The table shows how the average annual total returns of the Fund's Investor Shares (including operating expenses and any applicable shareholder fees) compare with those of a relevant market index. The table presents information for the Investor Shares only, because Admiral Shares were not in operation long enough to report a full calendar-year return. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local 2 income taxes. You should keep in mind that the after-tax returns are only for the Fund's Investor Share class and that after-tax returns for Admiral Shares will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS-INVESTOR SHARES - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2001 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- VANGUARD PRIMECAP FUND INVESTOR SHARES Return Before Taxes -14.20% 17.03% 17.56% Return After Taxes on Distributions -14.61 15.60 16.27 Return After Taxes on Distributions and Sale of Fund Shares -8.53 14.00 14.89 - -------------------------------------------------------------------------------- STANDARD & POOR'S 500 INDEX (reflects no deduction for fees, expenses, or taxes) -11.89% 10.70% 12.94% - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended August 31, 2002. INVESTOR ADMIRAL SHARES SHARES SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None None Sales Charge (Load) Imposed on Reinvested Dividends: None None Redemption Fee: 1%* 1%* ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.47% 0.37% 12b-1 Distribution Fee: None None Other Expenses: 0.02% 0.01% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.49% 0.38% - -------------- *The 1% fee applies to shares redeemed within five years of purchase by selling, by exchanging to another fund, or by application of the low-balance account closure policy. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for five years or more are not subject to the 1% fee. The policy applies only to shares purchased on or after April 23, 2001. 3 The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. The first examples assume that the Fund provides a return of 5% a year, that operating expenses remain the same, that you bought your shares on or after April 23, 2001, and that you redeem your shares at the end of the given period. --------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------------------------------------------------------- Investor Shares $155 $271 $274 $616 Admiral Shares 143 237 213 480 --------------------------------------------------------- The one- and three-year figures above include the Fund's 1% redemption fee. The five- and ten-year figures do not include the fee, because it applies only to shares held for less than five years. The next examples assume that you did not redeem your shares at the end of the given period. Expenses for the one- and three-year periods are lower than in the first examples, because the Fund's 1% redemption fee does not apply. --------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS --------------------------------------------------------- Investor Shares $50 $157 $274 $616 Admiral Shares 39 122 213 480 --------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT FUND EXPENSES All mutual funds have operating expenses. These expenses, which are deducted from a fund's gross income, are expressed as a percentage of the net assets of the fund. Vanguard PRIMECAP Fund's expense ratios in fiscal year 2002 were as follows: for Investor Shares, 0.49%, or $4.90 per $1,000 of average net assets; for Admiral Shares, 0.38%, or $3.80 per $1,000 of average net assets. The average multi-cap core mutual fund had expenses in 2001 of 1.35%, or $13.50 per $1,000 of average net assets (derived from data provided by Lipper Inc., which reports on the mutual fund industry). Management expenses, which are one part of operating expenses, include investment advisory fees as well as other costs of managing a fund--such as account maintenance, reporting, accounting, legal, and other administrative expenses. - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES Distributed annually in December Investor Shares--May be converted to Admiral Shares if you meet certain account INVESTMENT ADVISER balance and tenure requirements PRIMECAP Management Company, Admiral Shares--Will be converted to Pasadena, Calif., since inception Investor Shares if you are no longer eligible for Admiral Shares INCEPTION DATE Investor Shares--November 1, 1984 NEWSPAPER ABBREVIATION Admiral Shares--November 12, 2001 Investor Shares--Prmcp Admiral Shares--PrmcpAdml NET ASSETS (ALL SHARE CLASSES) AS OF AUGUST 31, 2002 VANGUARD FUND NUMBER $14.6 billion Investor Shares--59 Admiral Shares--559 SUITABLE FOR IRAS CUSIP NUMBER Yes Investor Shares--921936100 Admiral Shares--921936209 MINIMUM INITIAL INVESTMENT Investor Shares--$25,000 for TICKER SYMBOL regular accounts, IRAs, and Investor Shares--VPMCX most custodial accounts Admiral Shares--VPMAX for minors Admiral Shares--$250,000 - -------------------------------------------------------------------------------- MORE ON THE FUND This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. 5 MARKET EXPOSURE The Fund invests mainly in common stocks of companies that the adviser expects to have favorable prospects for capital growth and sell at attractive prices, but that typically produce little current income. The Fund focuses on companies whose market values range from $3 billion to $30 billion, which are considered mid- to large-cap by the Fund's investment adviser. However, the adviser will occasionally select stocks that fall outside of this range. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT MARKET CAPITALIZATION Stocks of publicly traded companies are often classified according to market value, or market capitalization. In the same way, stock funds are considered to be large-cap, mid-cap, or small-cap funds based on the market capitalization of the companies in which they predominantly invest. Knowing the market-capitalization range targeted by a fund will help you to compare the fund with other funds and to decide how it might fit into your investment program. It's important to understand that, for both companies and stock funds, market capitalization changes over time. Also, interpretations of size vary, and there is no "official" definition of the boundaries of large-, mid-, and small-cap. When evaluating particular stock funds, be sure to consider each fund's approach to market-cap boundaries. - -------------------------------------------------------------------------------- Because it invests mainly in stocks, the Fund is subject to certain risks. [FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. Note, also, that the gap between best and worst tends to narrow over the long term. ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2001) ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.6 1.11 1.21 1.41 ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2001. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 11.1%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or this Fund in particular. 6 Growth stocks, which are the Fund's primary investments, are likely to be even more volatile in price than the stock market as a whole. Historically, growth funds have tended to outperform in bull markets and underperform in declining markets. Of course, there is no guarantee that this pattern will continue in the future. The Fund also holds a significant number of mid-cap stocks, which tend to be more volatile than the large-cap stocks that dominate the S&P 500 Index. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS Growth investing and value investing are two styles employed by stock fund managers. Growth funds generally focus on companies believed to have above-average potential for growth in revenue and earnings. Reflecting the market's high expectations for superior growth, such stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. Value funds generally emphasize stocks of companies from which the market does not expect strong growth. The prices of value stocks typically are below-average in comparison with such measures as earnings and book value, and these stocks typically pay above-average dividend yields. Growth and value stocks have, in the past, produced similar long-term returns, though each category has periods when it outperforms the other. In general, growth funds appeal to investors who will accept more volatility in hopes of a greater increase in share price. Growth funds also may appeal to investors with taxable accounts who want a higher proportion of returns to come as capital gains (which may be taxed at lower rates than dividend income). Value funds, by contrast, are appropriate for investors who want some dividend income and the potential for capital gains, but are less tolerant of share-price fluctuations. - -------------------------------------------------------------------------------- [FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM THE TYPES OF STOCKS IN WHICH IT INVESTS WILL TRAIL RETURNS FROM THE OVERALL MARKET. AS A GROUP, GROWTH STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS. SECURITY SELECTION PRIMECAP Management Company (PRIMECAP), adviser to the Fund, selects common stocks that it believes have above-average earnings growth potential that is not reflected in the current market price. Stocks selected for the Fund typically have strong positions within their industries, increasing sales, improving profitability, good long-term prospects for above-average growth in earnings, and strong management teams. Using careful analysis, the adviser attempts to quantify a company's "fundamental value." The adviser compares the fundamental value with the market price of the company's stock. PRIMECAP then decides whether to purchase the stock mainly on the basis of how attractive its market price is in relation to its fundamental value. Although the Fund invests with a long-term horizon of three to five years, the adviser may sell a stock if its market price appears to have risen above its fundamental value, or if other securities appear to be more favorably priced. 7 PRIMECAP does not try to make investment decisions based on short-term trends in the stock market. If attractively priced stocks cannot be found, the Fund's cash levels will increase. Because the Fund's selections are determined by an analysis of each individual stock, the Fund's makeup may differ substantially from the overall market's characteristics. For example, the proportion of the Fund's assets invested in a particular industry may be significantly larger or smaller than that industry's proportion in the overall stock market. The Fund is generally managed without regard to tax ramifications. [FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER WILL DO A POOR JOB OF SELECTING THE SECURITIES OR COUNTRIES IN WHICH THE FUND INVESTS. OTHER INVESTMENT POLICIES AND RISKS Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 20% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to (1) country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets; and (2) currency risk, which is the chance that foreign investments in a particular country will decrease in value if the U.S. dollar rises in value against that country's currency. TEMPORARY INVESTMENT MEASURES The Fund may temporarily depart from its normal investment policies--for instance, by allocating substantial assets to cash investments--in response to extraordinary market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses but otherwise fail to achieve its investment objective. REDEMPTION FEE The Fund charges a redemption fee on shares that are redeemed before they have been held for five years (for shares purchased on or after April 23, 2001). This fee also applies when shares are redeemed by exchange to another Vanguard fund or by application of the low-balance account closure policy. Unlike a sales charge or load paid to a broker or fund management company, the redemption fee is paid directly to the Fund to offset the costs of buying and selling securities. The fee ensures that short-term investors pay their share of the Fund's transaction costs and that long-term investors do not subsidize the activities of short-term traders. COSTS AND MARKET-TIMING Some investors try to profit from a strategy called market-timing--switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all Vanguard funds have adopted special policies to discourage short-term trading or to compensate the funds for the costs associated with it. Specifically: - - Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--that it regards as disruptive to efficient portfolio management. A purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor. 8 - - Each Vanguard fund (except the money market funds) limits the number of times that an investor can exchange into and out of the fund. - - Each Vanguard fund reserves the right to stop offering shares at any time. - - Certain Vanguard funds charge purchase and/or redemption fees on transactions. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. TURNOVER RATE Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS section of this prospectus shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of August 31, 2002, the average turnover rate for all large-cap growth funds was approximately 119%, according to Morningstar, Inc. - -------------------------------------------------------------------------------- THE FUND AND VANGUARD The Fund is a member of The Vanguard Group, a family of 35 investment companies with more than 100 funds holding assets in excess of $540 billion. All of the funds that are members of The Vanguard Group share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. - -------------------------------------------------------------------------------- 9 INVESTMENT ADVISER PRIMECAP Management Company, 225 South Lake Avenue, Pasadena, CA 91101, adviser to the Fund, is an investment advisory firm founded in 1983. PRIMECAP also provides investment advisory services to endowment funds, employee benefit plans, and foundations unrelated to Vanguard. As of August 31, 2002, PRIMECAP managed about $22 billion in assets. The firm manages the Fund subject to the supervision and oversight of the trustees and officers of the Fund. Its advisory fee is paid quarterly and is based on certain annual percentage rates applied to the Fund's average month-end net assets for each quarter. Please consult the Fund's Statement of Additional Information for a complete explanation of how advisory fees are calculated. For the fiscal year ended August 31, 2002, the advisory fee represented an effective annual rate of 0.18% of the Fund's average net assets. The adviser is authorized to choose broker-dealers to handle the purchase and sale of the Fund's securities, and to seek to obtain the best available price and most favorable execution for all transactions. In the interest of obtaining better execution of a transaction, the adviser may at times choose brokers who charge higher commissions. If more than one broker can obtain the best available price and most favorable execution, then the adviser is authorized to choose a broker who, in addition to executing the transaction, will provide brokerage or research services to the adviser. Also, the board of trustees may direct the adviser to use a particular broker for certain transactions in exchange for commission rebates paid to the Fund or brokerage or research services provided to the adviser. Under the terms of an SEC exemptive order, the board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment adviser--either as a replacement for an existing adviser or as an additional adviser. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard Group may provide investment advisory services to the Fund, on an at-cost basis, at any time. 10 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUND'S ADVISER The managers primarily responsible for overseeing the Fund's investments are listed below, along with the percentage of Fund assets for which each is responsible. HOWARD B. SCHOW (32%), Chairman of PRIMECAP. He has worked in investment management since 1956; has managed assets since 1962; has been with PRIMECAP since 1983; and has managed the Fund since 1984. Education: B.A., Williams College; M.B.A., Harvard Business School. THEO A. KOLOKOTRONES (24%), President of PRIMECAP. He has worked in investment management since 1970; has managed assets since 1979; has been with PRIMECAP since 1983; and has managed the Fund since 1984. Education: B.A., University of Chicago; M.B.A., Harvard Business School. JOEL P. FRIED (22%), Executive Vice President of PRIMECAP. He has worked in investment management since 1985; has managed assets for PRIMECAP since 1986; and has managed the Fund since 1993. Education: B.S., University of California, Los Angeles; M.B.A., Anderson Graduate School of Business, University of California, Los Angeles. MITCHELL J. MILIAS (10%), Vice Chairman of PRIMECAP. He has worked in investment management since 1964; has managed assets since 1967; has been with PRIMECAP since 1983; and has managed the Fund since 2002. Education: B.A., Stanford University; M.B.A., Harvard Business School. ALFRED W. MORDECAI (10%), Vice President of PRIMECAP. He has worked in investment management since 1997; has managed assets for PRIMECAP since 1998; and has managed assets in the Fund since 1998. Education: B.S.E., Duke University; M.E.A., Virginia Polytechnic Institute and State University; M.B.A., Harvard Business School. Each of these five individuals manages his portion of the Fund autonomously; there is no decision-making by committee. The remaining 2% of the Fund is managed by individuals in PRIMECAP's research department. - -------------------------------------------------------------------------------- DIVIDENDS, CAPITAL GAINS, AND TAXES FUND DISTRIBUTIONS The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any capital gains realized from the sale of its holdings. Distributions generally occur in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. 11 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- BASIC TAX POINTS Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, taxable investors should be aware of the following basic tax points: - - Distributions are taxable to you for federal income tax purposes whether or not you reinvest these amounts in additional Fund shares. - - Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. - - Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. - - Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned shares in the Fund. - - Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows. - - A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. - - Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. - - Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT "BUYING A DIVIDEND" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. - -------------------------------------------------------------------------------- 12 GENERAL INFORMATION BACKUP WITHHOLDING. By law, Vanguard must withhold 30% of any taxable distributions or redemptions from your account if you do not: - - Provide us with your correct taxpayer identification number; - - Certify that the taxpayer identification number is correct; and - - Confirm that you are not subject to backup withholding. Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so. FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United States, except to certain qualifying investors. If you reside outside the United States, please consult our website at www.vanguard.com and review "Non-U.S. Investors." Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds. INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address. TAX CONSEQUENCES. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax adviser for detailed information about a fund's tax consequences for you. SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day after the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets attributed to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. When reliable market quotations are not readily available, securities are priced at their fair value, calculated according to procedures adopted by the board of trustees. A fund also may use fair-value pricing if the value of a security it holds is materially affected by events occurring after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, but may occur in other cases as well. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 13 FINANCIAL HIGHLIGHTS The following financial highlights tables are intended to help you understand the Fund's financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all dividend and capital gains distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. You may have the annual report sent to you without charge by contacting Vanguard. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE This explanation uses the PRIMECAP Investor Shares as an example. The Investor Shares began fiscal year 2002 with a net asset value (price) of $51.90 per share. During the year, each Investor Share earned $0.188 from investment income (interest and dividends). There was a decline of $12.183 per share in the value of investments held or sold by the Fund, resulting in a net decline of $11.995 per share from investment operations. Shareholders received $0.395 per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $39.51, reflecting losses of $11.995 per share and distributions of $0.395 per share. This was a decrease of $12.39 per share (from $51.90 at the beginning of the year to $39.51 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was -23.28% for the year. As of August 31, 2002, the Investor Shares had $13.2 billion in net assets. For the year, the expense ratio was 0.49% ($4.90 per $1,000 of net assets), and the net investment income amounted to 0.42% of average net assets. The Fund sold and replaced securities valued at 11% of its net assets. - -------------------------------------------------------------------------------- 14
VANGUARD PRIMECAP FUND INVESTOR SHARES - ------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 1 TO YEAR ENDED DECEMBER 31, AUG. 31, AUG. 31, ------------------------------------------------- 2002 2001* 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $51.90 $60.38 $62.07 $47.66 $39.56 $30.08 - ------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .188 .21 .52 .26 .34 .21 Net Realized and Unrealized Gain (Loss) on Investments (12.183) (8.28) 2.33 19.07 9.63 10.77 - ------------------------------------------------------------------------------------------------- Total from Investment Operations (11.995) (8.07) 2.85 19.33 9.97 10.98 - ------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.260) (.02) (.49) (.27) (.35) (.20) Distributions from Realized Capital Gains (.135) (.39) (4.05) (4.65) (1.52) (1.30) - ------------------------------------------------------------------------------------------------- Total Distributions (.395) (.41) (4.54) (4.92) (1.87) (1.50) - ------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $39 51 $51.90 $60.38 $62.07 $47.66 $39.56 ================================================================================================= TOTAL RETURN** -23.28% $39.51 -13.39% 4.47% 41.34% 25.44% ================================================================================================= RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $13,216 $18,894 $21,762 $17,912 $11,210 $8,186 Ratio of Total Expenses to Average Net Assets 0.49% 0.50%** 0.48% 0.51% 0.51% 0.51% Ratio of Net Investment Income to Average Net Assets 0.42% 0.58%** 0.80% 0.50% 0.78% 0.69% Turnover Rate 11% 7% 11% 19% 13% 13% ================================================================================================= *The Fund's fiscal year-end changed from December 31 to August 31, effective August 31, 2001. **Total return figures do not reflect the 1% fee assessed on redemptions of shares purchased on or after April 23, 2001, and held for less than five years. +Annualized.
PRIMECAP FUND ADMIRAL SHARES - -------------------------------------------------------------------------------- NOV. 12, 2001* TO AUG. 31, 2002 - -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $50.00 - -------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .191 Net Realized and Unrealized Gain (Loss) on Investments (8.776) - -------------------------------------------------------------------------------- Total from Investment Operations (8.585) - -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.275) Distributions from Realized Capital Gains (.140) - -------------------------------------------------------------------------------- Total Distributions (.415) - -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $41.00 - -------------------------------------------------------------------------------- TOTAL RETURN** -17.35% - -------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $1,369 Ratio of Total Expenses to Average Net Assets 0.38%+ Ratio of Net Investment Income to Average Net Assets 0.52%+ Turnover Rate 11% - -------------------------------------------------------------------------------- *Inception. **Total returns do not reflect the 1% fee assessed on redemptions of shares purchased on or after April 23, 2001, and held for less than five years. +Annualized. 15 - -------------------------------------------------------------------------------- INVESTING WITH VANGUARD This section of the prospectus explains the basics of doing business with Vanguard. A special booklet, Investing Made Easy, provides information that will help individual investors make the most of their relationship with Vanguard. A separate booklet, The Compass, does the same for institutional investors. You can request either booklet by calling or writing Vanguard, using the Contacting Vanguard instructions at the end of this section. BUYING SHARES CONVERTING SHARES REDEEMING SHARES EXCHANGING SHARES OTHER RULES YOU SHOULD KNOW FUND AND ACCOUNT UPDATES CONTACTING VANGUARD - -------------------------------------------------------------------------------- BUYING SHARES ACCOUNT MINIMUMS FOR INVESTOR SHARES TO OPEN AND MAINTAIN AN ACCOUNT: $25,000 for regular accounts, IRAs, and custodial accounts for minors. TO ADD TO AN EXISTING ACCOUNT: $100 by mail, exchange, or Fund Express; $1,000 by wire. Vanguard reserves the right to increase or decrease the minimum amount required to open and maintain an account, or to add to an existing account, without prior notice. ACCOUNT MINIMUMS FOR ADMIRAL SHARES TO OPEN AND MAINTAIN AN ACCOUNT: $250,000 for new investors; $150,000 or $50,000 for existing investors who are eligible to convert Investor Shares into Admiral Shares (see Converting Shares). Institutional clients should contact Vanguard for information on special rules that may apply to them. TO ADD TO AN EXISTING ACCOUNT: $100 by mail, exchange, or Fund Express; $1,000 by wire. HOW TO BUY SHARES ONLINE: You can open certain types of accounts or buy shares in an existing account through our website at www.vanguard.com. BY CHECK: Mail your check and a completed account registration form to Vanguard. When adding to an existing account, send your check with an Invest-By-Mail form detached from your last account statement. Make your check payable to: The Vanguard Group-Fund number. For a list of Fund numbers and addresses, see Contacting Vanguard. BY EXCHANGE PURCHASE: You can purchase shares with the proceeds of a redemption from another Vanguard(R) fund. See Exchanging Shares and Other Rules You Should Know. 16 BY WIRE: Call Vanguard to purchase shares by wire. See Contacting Vanguard. BY FUND EXPRESS(R) (AUTOMATIC OR SPECIAL PURCHASES): You can purchase shares by electronically transferring money from a previously designated bank account. To establish this option, you must complete a special form or the appropriate section of your account registration. YOUR PURCHASE PRICE ONLINE, BY CHECK, BY EXCHANGE, OR BY WIRE: You buy shares at a fund's NAV determined as of your TRADE DATE. For all Vanguard funds (except money market funds), purchases received at Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) receive a trade date of the same day, and purchases received after that time receive a trade date of the first business day following the date of receipt. For money market funds, the trade date depends on the method of payment for the purchase. BY FUND EXPRESS: For all Vanguard funds, Fund Express purchases received at Vanguard before the close of regular trading on the Exchange receive a trade date of the next business day (two business days later for money market funds). PURCHASE RULES YOU SHOULD KNOW ^ADMIRAL SHARES. Please note that Admiral Shares are NOT available to: - - SIMPLE IRAs and 403(b)(7) custodial accounts; - - Other retirement plan accounts receiving special administrative services from Vanguard; or - - Accounts maintained by financial intermediaries, except in limited circumstances. ^CHECK PURCHASES. All purchase checks must be written in U.S. dollars and drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or money orders. In addition, to protect the funds from check fraud, Vanguard will not accept checks made payable to third parties. ^NEW ACCOUNTS. We are required by law to obtain from you certain personal information that will be used by us to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right to close your account or take such other steps as we deem reasonable. ^LARGE PURCHASES. Vanguard reserves the right to reject any purchase request that may disrupt a fund's operation or performance. Please call us before attempting to invest a large dollar amount. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). 17 ^FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares at any time, or to reject specific purchase requests, including purchases by exchange from another Vanguard fund, at any time, for any reason. CONVERTING SHARES ANY CONVERSION BETWEEN CLASSES OF SHARES OF THE SAME FUND IS A NONTAXABLE EVENT. PRICING OF SHARE CLASS CONVERSIONS If you convert from one class of shares to another, the transaction will be based on the respective share prices of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's share prices. At the time of conversion, the total value of your "old" shares will equal the total value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total value of your "new" shares as compared with that of your "old" shares. IMMEDIATE CONVERSIONS INTO ADMIRAL SHARES All shares purchased before the issuance of Admiral Shares are considered Investor Shares. You may convert Investor Shares into Admiral Shares at any time if your account balance in the Fund is at least $250,000. Registered users of Vanguard.com may request a conversion to Admiral Shares online. Or you may contact Vanguard by telephone or mail to request this transaction. TENURE CONVERSIONS INTO ADMIRAL SHARES THREE-YEAR PRIVILEGE. After three years in the Fund, you may convert Investor Shares into Admiral Shares if your account balance within the Fund is at least $150,000 and you are registered with Vanguard.com. TEN-YEAR PRIVILEGE. After ten years in the Fund, you may convert Investor Shares into Admiral Shares if your account balance within the Fund is at least $50,000 and you are registered with Vanguard.com. Registered users of Vanguard.com may request a tenure conversion online. Or you may contact Vanguard by telephone or mail to request this transaction. MANDATORY CONVERSIONS INTO INVESTOR SHARES If an investor no longer meets the requirements for Admiral Shares, the Fund may reclassify the investor's Admiral Shares into Investor Shares. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. 18 REDEEMING SHARES HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before initiating your request. ONLINE: Request a redemption through our website at www.vanguard.com. BY TELEPHONE: Contact Vanguard by telephone to request a redemption. For telephone numbers, see Contacting Vanguard. BY MAIL: Send your written redemption instructions to Vanguard. For addresses, see Contacting Vanguard. BY FUND EXPRESS: If you've established the Fund Express option on your account, you can redeem shares by electronically transferring your redemption proceeds to a previously designated bank account. The Fund Express option is not automatic; you must establish it by completing a special form or the appropriate section of your account registration. REDEMPTION FEES The Fund charges a 1% redemption fee on shares redeemed within five years of purchase by selling, by exchanging to another fund, or by application of the low-balance account closure policy. The fee is withheld from redemption proceeds and retained by the Fund. The redemption fee applies only to shares purchased on or after April 23, 2001. Shares held for five years or more are not subject to the 1% fee. We will always redeem your "oldest" shares first. In addition, in the event that you transfer your shares to a different account registration (or convert them to a different share class), the shares will retain their redemption fee status. If you transfer (or convert) less than 100% of your account, we will carry over the redemption fee status of your shares on a proportionate basis. From time to time, the Fund may waive or modify redemption fees for certain categories of investors. YOUR REDEMPTION PRICE You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request, including any special documentation required under the circumstances. As long as your request is received before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your shares are redeemed at that day's NAV. This is known as your TRADE DATE. TYPES OF REDEMPTIONS ^CHECK REDEMPTIONS. Unless instructed otherwise, Vanguard will mail you a check, normally within two business days of your trade date. ^EXCHANGE REDEMPTIONS. You may instruct Vanguard to apply the proceeds of your redemption to purchase shares of another Vanguard fund. See Exchanging Shares and Other Rules You Should Know. 19 ^FUND EXPRESS REDEMPTIONS. Proceeds of shares redeemed by Fund Express will be credited to your bank account two business days after your trade date. ^WIRE REDEMPTIONS. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must establish it by completing a special form or the appropriate section of your account registration. A $5 fee applies to wire redemptions under $5,000. Money Market Funds: For telephone requests received at Vanguard by 10:45 a.m. (2 p.m. for Vanguard Prime Money Market Fund), Eastern time, the redemption proceeds will leave Vanguard by the close of business that same day. For other requests received before 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. Bond Funds: For requests received at Vanguard by 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. REDEMPTION RULES YOU SHOULD KNOW ^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. ^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or part of your redemption in-kind--that is, in the form of securities--if we believe that a cash redemption would disrupt the Fund's operation or performance. Under these circumstances, Vanguard also reserves the right to delay payment of your redemption proceeds for up to seven days. By calling us before you attempt to redeem a large dollar amount, you are more likely to avoid in-kind or delayed payment of your redemption. ^RECENTLY PURCHASED SHARES. While you can redeem shares at any time, proceeds will not be made available to you until the Fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or Vanguard Fund Express. ^SHARE CERTIFICATES. If share certificates have been issued for your account, those shares cannot be redeemed until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard. ^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make your redemption check payable to a different person or send it to a different address. However, this requires the written consent of all registered account owners, which must be provided under signature guarantees. You can obtain 20 a signature guarantee from most commercial and savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange. A notary public cannot provide a signature guarantee. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). ^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days at any time. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds at times when the New York Stock Exchange is closed or during emergency circumstances, as determined by the U.S. Securities and Exchange Commission. EXCHANGING SHARES All open Vanguard funds accept exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. However, because excessive exchanges can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on the exchange privilege. If you are exchanging into or out of the U.S. STOCK INDEX FUNDS, INTERNATIONAL STOCK INDEX FUNDS, REIT INDEX FUND, BALANCED INDEX FUND, CALVERT SOCIAL INDEX FUND, INTERNATIONAL GROWTH FUND, INTERNATIONAL VALUE FUND, INTERNATIONAL EXPLORER(TM) FUND, or GROWTH AND INCOME FUND, these limits generally are as follows: - - No online or telephone exchanges between 2:30 p.m. and 4 p.m., Eastern time, on business days. Any exchange request placed during these hours will not be accepted. On days when the New York Stock Exchange is scheduled to close early, this end-of-day restriction will be adjusted to begin 11^2 hours prior to the scheduled close. (For example, if the New York Stock Exchange is scheduled to close at 1 p.m., Eastern time, the cutoff for online and phone exchanges will be 11:30 a.m., Eastern time.) - - No more than two exchanges OUT of a fund may be requested online or by telephone within any 12-month period. For ALL OTHER VANGUARD FUNDS, the following limits generally apply: - - No more than two substantive "round trips" through a non-money-market fund during any 12-month period. A "round trip" is a redemption OUT of a fund (by any means) 21 followed by a purchase back INTO the same fund (by any means). "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect management of the fund. - - Round trips must be at least 30 days apart. Please note that Vanguard reserves the right to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Also, in the event of a conflict between the exchange- privilege limitations of two funds, the stricter policy will apply to the transaction. OTHER RULES YOU SHOULD KNOW VANGUARD.COM(R) ^REGISTRATION. You can use your personal computer to review your account holdings, to sell or exchange shares of most Vanguard funds, and to perform other transactions. To establish this service, you can register online. ^SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES BETWEEN 2:30 P.M. AND 4 P.M., EASTERN TIME. To discourage market-timing, the following Vanguard funds generally do not permit online exchanges between 2:30 p.m. and 4 p.m., Eastern time, on business days: the U.S. Stock Index Funds, International Stock Index Funds, REIT Index Fund, Balanced Index Fund, Calvert Social Index Fund, International Growth Fund, International Value Fund, International Explorer Fund, and Growth and Income Fund. Funds may be added to or deleted from this list at any time without prior notice to shareholders. TELEPHONE TRANSACTIONS ^AUTOMATIC. In setting up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. ^TELE-ACCOUNT(R). To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account to obtain a PIN, and allow seven days before using this service. ^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone request if the caller is unable to provide the following information exactly as registered on the account: - - Ten-digit account number. - - Complete owner name and address. - - Primary Social Security or employer identification number. - - Personal Identification Number (PIN), if applicable. 22 ^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's telephone transaction service at any time, without notice. ^SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES BETWEEN 2:30 P.M. AND 4 P.M., EASTERN TIME. To discourage market-timing, the following Vanguard funds generally do not permit telephone exchanges between 2:30 p.m. and 4 p.m., Eastern time, on business days: the U.S. Stock Index Funds, International Stock Index Funds, REIT Index Fund, Balanced Index Fund, Calvert Social Index Fund, International Growth Fund, International Value Fund, International Explorer Fund, and Growth and Income Fund. Funds may be added to or deleted from this list at any time without prior notice to shareholders. WRITTEN INSTRUCTIONS ^"GOOD ORDER" REQUIRED. We reserve the right to reject any written transaction instructions that are not in "good order." This means that your instructions must include: - - The fund name and account number. - - The amount of the transaction (in dollars, shares, or percent). - - Authorized signatures, as registered on the account. - - Signature guarantees, if required for the type of transaction.* - - Any supporting legal documentation that may be required. *For instance, signature guarantees must be provided by all registered account owners when redemption proceeds are to be sent to a different person or address. Call Vanguard for specific signature-guarantee requirements. ACCOUNTS WITH MORE THAN ONE OWNER In the case of an account with more than one owner, Vanguard will accept telephone or written instructions from any owner unless all owners specifically instruct us otherwise. RESPONSIBILITY FOR FRAUD Vanguard will not be responsible for any account losses due to fraud, so long as we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private and immediately review any account statements that we send to you. Contact Vanguard immediately about any transactions you believe to be unauthorized. UNCASHED CHECKS Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard online, by telephone, or by Tele-Account, you can send us your 23 transaction request by regular or express mail. See Contacting Vanguard for addresses. INVESTING WITH VANGUARD THROUGH OTHER FIRMS You may purchase or sell Investor Shares of most Vanguard funds through a financial intermediary, such as a bank, broker, or investment adviser. HOWEVER, ACCESS TO ADMIRAL SHARES THROUGH A FINANCIAL INTERMEDIARY IS RESTRICTED. PLEASE CONSULT YOUR FINANCIAL INTERMEDIARY TO DETERMINE WHETHER ADMIRAL SHARES ARE AVAILABLE THROUGH THAT FIRM. If you invest with Vanguard through an intermediary, please read that firm's program materials carefully to learn of any special rules that may apply. For example, special terms may apply to additional service features, fees, or other policies. LOW-BALANCE ACCOUNTS All Vanguard funds reserve the right to close any investment-only retirement-plan account or any nonretirement account whose balance falls below the minimum initial investment. If a fund has a redemption fee, that fee will apply to shares redeemed upon closure of the account. Vanguard deducts a $10 fee in June from each nonretirement account whose balance at that time is below $2,500 ($500 for Vanguard(R) STAR(TM) Fund). The fee can be waived if your total Vanguard account assets are $50,000 or more. FUND AND ACCOUNT UPDATES CONFIRMATION STATEMENTS We will send you a statement confirming the trade date and amount of your transaction when you buy, sell, or exchange shares. PORTFOLIO SUMMARIES We will send you quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, sales, and exchanges for the current calendar year. TAX STATEMENTS We will send you annual tax statements to assist in preparing your income tax returns. These statements, which are generally mailed in January, will report the previous year's dividend and capital gains distributions, proceeds from the sale of shares, and distributions from IRAs or other retirement plans. AVERAGE-COST REVIEW STATEMENTS For most taxable accounts, average-cost review statements will accompany the quarterly portfolio summaries. These statements show the average cost of shares that you redeemed during the current calendar year, using the average-cost single-category method, which is one of the methods established by the IRS. 24 ANNUAL AND SEMIANNUAL REPORTS Financial reports about Vanguard PRIMECAP Fund will be mailed twice a year, in October and April. These comprehensive reports include overviews of the financial markets and specific information concerning the Fund: - - Performance assessments with comparisons to industry benchmarks. - - Reports from the adviser. - - Financial statements with detailed listings of the Fund's holdings. To keep the Fund's costs as low as possible (so that you and other shareholders can keep more of the Fund's investment earnings), Vanguard attempts to eliminate duplicate mailings to the same address. When we find that two or more shareholders have the same last name and address, we send just one copy of the Fund report to that address, instead of mailing separate reports to each shareholder, unless you contact our Client Services Department in writing, by telephone, or by e-mail and instruct us otherwise. Vanguard can deliver your Fund reports electronically, if you prefer. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of Fund reports by logging on and changing your mailing preference under "My Profile." You can revoke your electronic consent at any time, and we will send paper copies of Fund reports within 30 days of receiving your notice. CONTACTING VANGUARD ONLINE VANGUARD.COM - - Your best source of Vanguard news - - For fund, account, and service information - - For most account transactions - - For literature requests - - 24 hours per day, 7 days per week VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) - - For automated fund and account information - - For redemptions by check, exchange (subject to certain limitations), or wire - - Toll-free, 24 hours per day, 7 days per week INVESTOR INFORMATION 1-800-662-7447 (SHIP) (Text telephone at 1-800-952-3335) - - For fund and service information - - For literature requests - - Business hours only 25 CLIENT SERVICES 1-800-662-2739 (CREW) (Text telephone at 1-800-749-7273) - - For account information - - For most account transactions - - Business hours only ADMIRAL SERVICE CENTER 1-888-237-9949 - - For Admiral account information - - For most Admiral transactions - - Business hours only INSTITUTIONAL DIVISION 1-888-809-8102 - - For information and services for large institutional investors - - Business hours only VANGUARD ADDRESSES REGULAR MAIL (INDIVIDUALS): The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 REGULAR MAIL (INSTITUTIONS): The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 REGISTERED, EXPRESS, OR OVERNIGHT MAIL: The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 FUND NUMBERS Please use the specific fund number when contacting us about Vanguard PRIMECAP Fund--59 (Investor Shares) or 559 (Admiral Shares). The Vanguard Group, Vanguard, Vanguard.com, Plain Talk, Admiral, Vanguard Fund Express, Fund Express, Vanguard Tele-Account, Tele-Account, STAR, Explorer, and the ship logo are trademarks of The Vanguard Group, Inc. Calvert Social Index Fund is a trademark of Calvert Group, Ltd., and has been licensed for use by The Vanguard Group, Inc. Vanguard Calvert Social Index Fund is not sponsored, endorsed, sold, or promoted by Calvert Group, Ltd., and Calvert Group, Ltd., makes no representation regarding the advisability of investing in the Fund. All other marks are the exclusive property of their respective owners. (THIS PAGE INTENTIONALLY LEFT BLANK.) (THIS PAGE INTENTIONALLY LEFT BLANK.) (THIS PAGE INTENTIONALLY LEFT BLANK.) GLOSSARY OF INVESTMENT TERMS CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. GROWTH STOCK FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth in revenue and earnings. Reflecting market expectations for superior growth, these stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. MUTUAL FUND An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The amount of money you put into an investment. SECURITIES Stocks, bonds, money market instruments, and other investment vehicles. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE STOCK FUND A mutual fund that emphasizes stocks of companies whose growth prospects are generally regarded as subpar by the market. Reflecting these market expectations, the prices of value stocks typically are below-average in comparison with such measures as earnings and book value, and these stocks typically pay above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [GRAPHIC-SHIP] THE VANGUARD GROUP Post Office Box 2600 Valley Forge, PA 19482-2600 FOR MORE INFORMATION If you'd like more information about Vanguard PRIMECAP Fund, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP INVESTOR INFORMATION DEPARTMENT P.O. BOX 2600 VALLEY FORGE, PA 19482-2600 TELEPHONE: 1-800-662-7447 (SHIP) TEXT TELEPHONE: 1-800-952-3335 WORLD WIDE WEB: WWW.VANGUARD.COM If you are a current Fund shareholder and would like information about your account, account transactions, and/or account statements, please call: CLIENT SERVICES DEPARTMENT TELEPHONE: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273 INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Fund are also available on the SEC's Internet site at http:www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Fund's Investment Company Act file number: 811-4098 (C) 2002 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P059 122002 VANGUARD(R) PRIMECAP FUND INVESTOR SHARES FOR PARTICIPANTS - DECEMBER 13, 2002 STOCK This prospectus contains financial data for the Fund through the fiscal period ended August 31, 2002. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. [THE VANGUARD GROUP(R) LOGO] VANGUARD PRIMECAP FUND Investor Shares Participant Prospectus December 13, 2002 A Growth Stock Mutual Fund - -------------------------------------------------------------------------------- CONTENTS - -------------------------------------------------------------------------------- 1 FUND PROFILE 3 ADDITIONAL INFORMATION 3 MORE ON THE FUND 7 THE FUND AND VANGUARD 7 INVESTMENT ADVISER 9 DIVIDENDS, CAPITAL GAINS, AND TAXES 9 SHARE PRICE 10 FINANCIAL HIGHLIGHTS 11 INVESTING WITH VANGUARD 12 ACCESSING FUND INFORMATION BY COMPUTER GLOSSARY (inside back cover) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk(R) explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SHARE CLASS OVERVIEW This Prospectus offers the Fund's Investor Shares and is intended for participants in employer-sponsored retirement or savings plans. Another version--for investors who would like to open a personal investment account--can be obtained by calling Vanguard at 1-800-662-7447. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. - -------------------------------------------------------------------------------- 1 FUND PROFILE INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital growth. PRIMARY INVESTMENT STRATEGIES The Fund invests in stocks with above-average earnings growth potential that is not reflected in their current market prices. The Fund's portfolio consists predominantly of mid- and large-capitalization stocks. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - - Investment style risk, which is the chance that returns from mid- and large-cap growth stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. - - Manager risk, which is the chance that poor security selection will cause the Fund to underperform other funds with a similar investment objective. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares (including operating expenses but excluding shareholder fees) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns (including operating expenses and any applicable shareholder fees) compare with those of a relevant market index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- 1992- 8.99% 1993- 18.03% 1994- 11.41% 1995- 35.48% 1996- 18.31% 1997- 36.79% 1998- 25.44% 1999- 41.34% 2000- 4.47% 2001- -13.35% ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended September 30, 2002, was -30.82%. If applicable shareholder fees were reflected, returns would be less than those shown. ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 28.84% (quarter ended December 31, 1998), and the lowest return for a quarter was -21.68% (quarter ended September 30, 2001). 2 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2001 - -------------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- Vanguard PRIMECAP Fund Investor Shares -14.20% 17.03% 17.56% Standard & Poor's 500 Index -11.89 10.70 12.94 - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended August 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: 1%* ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.47% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.49% - -------- *The 1% fee applies to shares redeemed within five years of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for five years or more are not subject to the 1% fee. The policy applies only to shares purchased on or after April 23, 2001. The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. The first example assumes that the Fund provides a return of 5% a year, that operating expenses remain the same, that you bought your shares on or after April 23, 2001, and that you redeem your shares at the end of the given period. ---------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------------------- $155 $271 $274 $616 ---------------------------------------------------- The one- and three-year figures above include the Fund's 1% redemption fee. The five- and ten-year figures do not include the fee, because it applies only to shares held for less than five years. The next example assumes that you did not redeem your shares at the end of the given period. Expenses for the one- and three-year periods are lower than in the first example, because the Fund's 1% redemption fee does not apply. ---------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------------------- $50 $157 $274 $616 ---------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 3 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT FUND EXPENSES All mutual funds have operating expenses. These expenses, which are deducted from a fund's gross income, are expressed as a percentage of the net assets of the fund. Vanguard PRIMECAP Fund Investor Shares' expense ratio in fiscal year 2002 was 0.49%, or $4.90 per $1,000 of average net assets. The average multi-cap core mutual fund had expenses in 2001 of 1.35%, or $13.50 per $1,000 of average net assets (derived from data provided by Lipper Inc., which reports on the mutual fund industry). Management expenses, which are one part of operating expenses, include investment advisory fees as well as other costs of managing a fund--such as account maintenance, reporting, accounting, legal, and other administrative expenses. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December Prmcp INVESTMENT ADVISER VANGUARD FUND NUMBER PRIMECAP Management Company, Pasadena, 59 Calif., since inception CUSIP NUMBER INCEPTION DATE 921936100 November 1, 1984 TICKER SYMBOL NET ASSETS (ALL SHARE CLASSES) AS OF VPMCX AUGUST 31, 2002 $14.6 billion - -------------------------------------------------------------------------------- MORE ON THE FUND This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this LOGO symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. 4 MARKET EXPOSURE The Fund invests mainly in common stocks of companies that the adviser expects to have favorable prospects for capital growth and sell at attractive prices, but that typically produce little current income. The Fund focuses on companies whose market values range from $3 billion to $30 billion, which are considered mid- to large-cap by the Fund's investment adviser. However, the adviser will occasionally select stocks that fall outside of this range. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT MARKET CAPITALIZATION Stocks of publicly traded companies are often classified according to market value, or market capitalization. In the same way, stock funds are considered to be large-cap, mid-cap, or small-cap funds based on the market capitalization of the companies in which they predominantly invest. Knowing the market-capitalization range targeted by a fund will help you to compare the fund with other funds and to decide how it might fit into your investment program. It's important to understand that, for both companies and stock funds, market capitalization changes over time. Also, interpretations of size vary, and there is no "official" definition of the boundaries of large-, mid-, and small-cap. When evaluating particular stock funds, be sure to consider each fund's approach to market-cap boundaries. - -------------------------------------------------------------------------------- Because it invests mainly in stocks, the Fund is subject to certain risks. [FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. Note, also, that the gap between best and worst tends to narrow over the long term. ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2001) ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.6 1.11 1.21 1.41 ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2001. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 11.1%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or this Fund in particular. Growth stocks, which are the Fund's primary investments, are likely to be even more volatile in price than the stock market as a whole. Historically, growth funds have tended to outperform in bull markets and underperform in declining markets. Of course, there is no guarantee that this pattern will continue in the future. The Fund also holds a significant 5 number of mid-cap stocks, which tend to be more volatile than the large-cap stocks that dominate the S&P 500 Index. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS Growth investing and value investing are two styles employed by stock fund managers. Growth funds generally focus on companies believed to have above-average potential for growth in revenue and earnings. Reflecting the market's high expectations for superior growth, such stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. Value funds generally emphasize stocks of companies from which the market does not expect strong growth. The prices of value stocks typically are below-average in comparison with such measures as earnings and book value, and these stocks typically pay above-average dividend yields. Growth and value stocks have, in the past, produced similar long-term returns, though each category has periods when it outperforms the other. In general, growth funds appeal to investors who will accept more volatility in hopes of a greater increase in share price. Growth funds also may appeal to investors with taxable accounts who want a higher proportion of returns to come as capital gains (which may be taxed at lower rates than dividend income). Value funds, by contrast, are appropriate for investors who want some dividend income and the potential for capital gains, but are less tolerant of share-price fluctuations. - -------------------------------------------------------------------------------- [FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM THE TYPES OF STOCKS IN WHICH IT INVESTS WILL TRAIL RETURNS FROM THE OVERALL MARKET. AS A GROUP, GROWTH STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS. SECURITY SELECTION PRIMECAP Management Company (PRIMECAP), adviser to the Fund, selects common stocks that it believes have above-average earnings growth potential that is not reflected in the current market price. Stocks selected for the Fund typically have strong positions within their industries, increasing sales, improving profitability, good long-term prospects for above-average growth in earnings, and strong management teams. Using careful analysis, the adviser attempts to quantify a company's "fundamental value." The adviser compares the fundamental value with the market price of the company's stock. PRIMECAP then decides whether to purchase the stock mainly on the basis of how attractive its market price is in relation to its fundamental value. Although the Fund invests with a long-term horizon of three to five years, the adviser may sell a stock if its market price appears to have risen above its fundamental value, or if other securities appear to be more favorably priced. PRIMECAP does not try to make investment decisions based on short-term trends in the stock market. If attractively priced stocks cannot be found, the Fund's cash levels will increase. Because the Fund's selections are determined by an analysis of each individual stock, the Fund's makeup may differ substantially from the overall market's characteristics. For example, the proportion of the Fund's assets invested in a particular industry may be significantly larger or smaller than that industry's proportion in the overall stock market. The Fund is generally managed without regard to tax ramifications. 6 [FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER WILL DO A POOR JOB OF SELECTING THE SECURITIES OR COUNTRIES IN WHICH THE FUND INVESTS. OTHER INVESTMENT POLICIES AND RISKS Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 20% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to (1) country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets; and (2) currency risk, which is the chance that foreign investments in a particular country will decrease in value if the U.S. dollar rises in value against that country's currency. TEMPORARY INVESTMENT MEASURES The Fund may temporarily depart from its normal investment policies--for instance, by allocating substantial assets to cash investments--in response to extraordinary market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses but otherwise fail to achieve its investment objective. REDEMPTION FEE The Fund charges a redemption fee on shares that are redeemed before they have been held for five years (for shares purchased on or after April 23, 2001). This fee also applies when shares are redeemed by exchange to another Vanguard fund. Unlike a sales charge or load paid to a broker or fund management company, the redemption fee is paid directly to the Fund to offset the costs of buying and selling securities. The fee ensures that short-term investors pay their share of the Fund's transaction costs and that long-term investors do not subsidize the activities of short-term traders. COSTS AND MARKET-TIMING Some investors try to profit from a strategy called market-timing--switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all Vanguard funds have adopted special policies to discourage short-term trading or to compensate the funds for the costs associated with it. Specifically: - - Each Vanguard fund reserves the right to reject any purchase -request--including exchanges from other Vanguard funds--that it regards as disruptive to efficient portfolio management. A purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor. - - Each Vanguard fund (except the money market funds) limits the number of times that an investor can exchange into and out of the fund. - - Each Vanguard fund reserves the right to stop offering shares at any time. - - Certain Vanguard funds charge purchase and/or redemption fees on transactions. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. TURNOVER RATE Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS section of this prospectus 7 shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of August 31, 2002, the average turnover rate for all large-cap growth funds was approximately 119%, according to Morningstar, Inc. - -------------------------------------------------------------------------------- THE FUND AND VANGUARD The Fund is a member of The Vanguard Group, a family of 35 investment companies with more than 100 funds holding assets in excess of $540 billion. All of the funds that are members of the Vanguard Group share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. - -------------------------------------------------------------------------------- INVESTMENT ADVISER PRIMECAP Management Company, 225 South Lake Avenue, Pasadena, CA 91101, adviser to the Fund, is an investment advisory firm founded in 1983. PRIMECAP also provides investment advisory services to endowment funds, employee benefit plans, and foundations unrelated to Vanguard. As of August 31, 2002, PRIMECAP managed about $22 billion in assets. The firm manages the Fund subject to the supervision and oversight of the trustees and officers of the Fund. Its advisory fee is paid quarterly and is based on certain annual percentage rates applied to the Fund's average month-end net assets for each quarter. Please consult the Fund's Statement of Additional Information for a complete explanation of how advisory fees are calculated. 8 For the fiscal year ended August 31, 2002, the advisory fee represented an effective annual rate of 0.18% of the Fund's average net assets. The adviser is authorized to choose broker-dealers to handle the purchase and sale of the Fund's securities, and to seek to obtain the best available price and most favorable execution for all transactions. In the interest of obtaining better execution of a transaction, the adviser may at times choose brokers who charge higher commissions. If more than one broker can obtain the best available price and most favorable execution, then the adviser is authorized to choose a broker who, in addition to executing the transaction, will provide brokerage or research services to the adviser. Also, the board of trustees may direct the adviser to use a particular broker for certain transactions in exchange for commission rebates paid to the Fund or brokerage or research services provided to the adviser. Under the terms of an SEC exemptive order, the board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment adviser--either as a replacement for an existing adviser or as an additional adviser. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard Group may provide investment advisory services to the Fund, on an at-cost basis, at any time. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUND'S ADVISER The managers primarily responsible for overseeing the Fund's investments are listed below, along with the percentage of Fund assets for which each is responsible. HOWARD B. SCHOW (32%), Chairman of PRIMECAP. He has worked in investment management since 1956; has managed assets since 1962; has been with PRIMECAP since 1983; and has managed the Fund since 1984. Education: B.A., Williams College; M.B.A., Harvard Business School. THEO A. KOLOKOTRONES (24%), President of PRIMECAP. He has worked in investment management since 1970; has managed assets since 1979; has been with PRIMECAP since 1983; and has managed the Fund since 1984. Education: B.A., University of Chicago; M.B.A., Harvard Business School. JOEL P. FRIED (22%), Executive Vice President of PRIMECAP. He has worked in investment management since 1985; has managed assets for PRIMECAP since 1986; and has managed the Fund since 1993. Education: B.S., University of California, Los Angeles; M.B.A., Anderson Graduate School of Business, University of California, Los Angeles. MITCHELL J. MILIAS (10%), Vice Chairman of PRIMECAP. He has worked in investment management since 1964; has managed assets since 1967; has been with PRIMECAP since 1983; and has managed the Fund since 2002. Education: B.A., Stanford University; M.B.A., Harvard Business School. ALFRED W. MORDECAI (10%), Vice President of PRIMECAP. He has worked in investment management since 1997; has managed assets for PRIMECAP since 1998; and has managed assets in the Fund since 1998. Education: B.S.E., Duke University; M.E.A., Virginia Polytechnic Institute and State University; M.B.A., Harvard Business School. Each of these five individuals manages his portion of the Fund autonomously; there is no decision-making by committee. The remaining 2% of the Fund is managed by individuals in PRIMECAP's research department. - -------------------------------------------------------------------------------- 9 DIVIDENDS, CAPITAL GAINS, AND TAXES The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any capital gains realized from the sale of its holdings. Distributions generally occur in December. Your distributions will be reinvested in additional Fund shares and accumulate on a tax-deferred basis if you are investing through an employer-sponsored retirement or savings plan. You will not owe taxes on these distributions until you begin withdrawals from the plan. You should consult your plan administrator, your plan's Summary Plan Description, or your tax adviser about the tax consequences of plan withdrawals. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day after the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets attributed to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. When reliable market quotations are not readily available, securities are priced at their fair value, calculated according to procedures adopted by the board of trustees. A fund also may use fair-value pricing if the value of a security it holds is materially affected by events occurring after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, but may occur in other cases as well. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. PAGE> 10 FINANCIAL HIGHLIGHTS The following financial highlights table is intended to help you understand the Investor Shares' financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all dividend and capital gains distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. You may have the annual report sent to you without charge by contacting Vanguard. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE The Investor Shares began fiscal year 2002, with a net asset value (price) of $51.90 per share. During the year, each Investor Share earned $0.188 from investment income (interest and dividends). There was a decline of $12.183 per share in the value of investments held or sold by the Fund, resulting in a net decline of $11.995 per share from investment operations. Shareholders received $0.395 per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $39.51, reflecting losses of $11.995 per share and distributions of $0.395 per share. This was a decrease of $12.39 per share (from $51.90 at the beginning of the year to $39.51 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was -23.28% for the year. As of August 31, 2002, the Investor Shares had $13.2 billion in net assets. For the year, the expense ratio was 0.49% ($4.90 per $1,000 of net assets), and the net investment income amounted to 0.42% of average net assets. The Fund sold and replaced securities valued at 11% of its net assets. - -------------------------------------------------------------------------------- 11
VANGUARD PRIMECAP FUND INVESTOR SHARES - ------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 1 TO YEAR ENDED DECEMBER 31, AUG. 31, AUG. 31, ------------------------------------------------- 2002 2001* 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $51.90 $60.38 $62.07 $47.66 $39.56 $30.08 - ------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .188 .21 .52 .26 .34 .21 Net Realized and Unrealized Gain (Loss) on Investments (12.183) (8.28) 2.33 19.07 9.63 10.77 - ------------------------------------------------------------------------------------------------- Total from Investment Operations (11.995) (8.07) 2.85 19.33 9.97 10.98 - ------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.260) (.02) (.49) (.27) (.35) (.20) Distributions from Realized Capital (.135) (.39) (4.05) (4.65) (1.52) (1.30) Gains - ------------------------------------------------------------------------------------------------- Total Distributions (.395) (.41) (4.54) (4.92) (1.87) (1.50) - ------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $39 51 $51.90 $60.38 $62.07 $47.66 $39.56 ================================================================================================= TOTAL RETURN** -23.28% $39.51 -13.39% 4.47% 41.34% 25.44% ================================================================================================= RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $13,216 $18,894 $21,762 $17,912 $11,210 $8,186 Ratio of Total Expenses to Average Net Assets 0.49% 0.50%** 0.48% 0.51% 0.51% 0.51% Ratio of Net Investment Income to Average Net Assets 0.42% 0.58%** 0.80% 0.50% 0.78% 0.69% Turnover Rate 11% 7% 11% 19% 13% 13% ================================================================================================= *The Fund's fiscal year-end changed from December 31 to August 31, effective August 31, 2001. **Total return figures do not reflect the 1% fee assessed on redemptions of shares purchased on or after April 23, 2001, and held for less than five years. +Annualized.
INVESTING WITH VANGUARD The Fund is an investment option in your retirement or savings plan. Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect the Fund as an investment option. - - If you have any questions about the Fund or Vanguard, including those about the Fund's investment objective, strategies, or risks, contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188. - - If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan. INVESTMENT OPTIONS AND ALLOCATIONS Your plan's specific provisions may allow you to change your investment selections, the amount of your contributions, or how your contributions are allocated among the investment choices available to you. Contact your plan administrator or employee benefits office for more details. TRANSACTIONS Contributions, exchanges, or redemptions of the Fund's shares are processed as soon as they have been received by Vanguard in good order. Good order means that your request includes complete information on your contribution, exchange, or redemption, and that Vanguard has received the appropriate assets. 12 In all cases, your transaction will be based on the Fund's next-determined net asset value (NAV) after Vanguard receives your request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the order from your plan administrator). As long as this request is received before the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern time, you will receive that day's NAV. This is known as your TRADE DATE. EXCHANGES The exchange privilege (your ability to redeem shares from one fund to purchase shares of another fund) may be available to you through your plan. Although we make every effort to maintain the exchange privilege, Vanguard reserves the right to revise or terminate this privilege, limit the amount of an exchange, or reject any exchange, at any time, without notice. Because excessive exchanges can potentially disrupt the management of the Vanguard funds and increase their transaction costs, Vanguard limits participant exchange activity to no more than FOUR SUBSTANTIVE "ROUND TRIPS" THROUGH NON-MONEY-MARKET FUNDS (at least 90 days apart) during any 12-month period. A "round trip" is a redemption from a fund followed by a purchase back into the fund. "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect the management of a fund. Before making an exchange to or from another fund available in your plan, consider the following: - - Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions. - - Be sure to read that fund's prospectus. Contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188 for a copy. - - Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on the exchange policies that apply to your plan. ACCESSING FUND INFORMATION BY COMPUTER VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM Use your personal computer to visit Vanguard's education-oriented website, which provides timely news and information about Vanguard funds and services; the online Education Center that offers a variety of mutual fund classes; and easy-to-use, interactive tools to help you create your own investment and retirement strategies. - ------- The Vanguard Group, Vanguard, Plain Talk, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners. GLOSSARY OF INVESTMENT TERMS CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. GROWTH STOCK FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth in revenue and earnings. Reflecting market expectations for superior growth, these stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. MUTUAL FUND An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The amount of money you put into an investment. SECURITIES Stocks, bonds, money market instruments, and other investment vehicles. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE STOCK FUND A mutual fund that emphasizes stocks of companies whose growth prospects are generally regarded as subpar by the market. Reflecting these market expectations, the prices of value stocks typically are below-average in comparison with such measures as earnings and book value, and these stocks typically pay above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [GRAPHIC-SHIP] THE VANGUARD GROUP(R) Institutional Division Post Office Box 2900 Valley Forge, PA 19482-2900 FOR MORE INFORMATION If you'd like more information about Vanguard PRIMECAP Fund, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP PARTICIPANT ACCESS CENTER P.O. BOX 2900 VALLEY FORGE, PA 19482-2900 TELEPHONE: 1-800-523-1188 TEXT TELEPHONE: 1-800-523-8004 WORLD WIDE WEB: WWW.VANGUARD.COM INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Fund are also available on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Fund's Investment Company Act file number: 811-4098 (C) 2002 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I059 122002 VANGUARD(R) PRIMECAP FUND ADMIRAL(TM) SHARES FOR PARTICIPANTS - DECEMBER 13, 2002 STOCK This prospectus contains financial data for the Fund through the fiscal period ended August 31, 2002. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. [THE VANGUARD GROUP(R) LOGO] VANGUARD PRIMECAP FUND Admiral Shares Participant Prospectus December 13, 2002 A Growth Stock Mutual Fund - -------------------------------------------------------------------------------- CONTENTS - -------------------------------------------------------------------------------- 1 FUND PROFILE 3 ADDITIONAL INFORMATION 3 MORE ON THE FUND 7 THE FUND AND VANGUARD 7 INVESTMENT ADVISER 9 DIVIDENDS, CAPITAL GAINS, AND TAXES 9 SHARE PRICE 10 FINANCIAL HIGHLIGHTS 11 INVESTING WITH VANGUARD 12 ACCESSING FUND INFORMATION BY COMPUTER GLOSSARY (inside back cover) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk(R) explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SHARE CLASS OVERVIEW This prospectus offers the Fund's Admiral Shares and is intended for participants in employer-sponsored retirement or savings plans. Another version--for investors who would like to open a personal investment account--can be obtained by calling Vanguard at 1-800-662-7447. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. - -------------------------------------------------------------------------------- 1 FUND PROFILE INVESTMENT OBJECTIVE The Fund seeks to provide long-term capital growth. PRIMARY INVESTMENT STRATEGIES The Fund invests in stocks with above-average earnings growth potential that is not reflected in their current market prices. The Fund's portfolio consists predominantly of mid- and large-capitalization stocks. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - - Investment style risk, which is the chance that returns from mid- and large-cap growth stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. - - Manager risk, which is the chance that poor security selection will cause the Fund to underperform other funds with a similar investment objective. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares (including operating expenses but excluding shareholder fees) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns (including operating expenses and any applicable shareholder fees) compare with those of a relevant market index. Both the bar chart and table present information for the Fund's Investor Shares, because Admiral Shares were not in operation long enough to report a full calendar-year return. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- 1992- 8.99% 1993- 18.03% 1994- 11.41% 1995- 35.48% 1996- 18.31% 1997- 36.79% 1998- 25.44% 1999- 41.34% 2000- 4.47% 2001- -13.35% ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended September 30, 2002, was -30.82%. If applicable shareholder fees were reflected, returns would be less than those shown. ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 28.84% (quarter ended December 31, 1998), and the lowest return for a quarter was -21.68% (quarter ended September 30, 2001). 2 -------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2001 -------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS -------------------------------------------------------------------------- Vanguard PRIMECAP Fund Investor Shares -14.20% 17.03% 17.56% Standard & Poor's 500 Index -11.89 10.70 12.94 -------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal period ended August 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: 1%* ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.37% 12b-1 Distribution Fee: None Other Expenses: 0.01% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.38% - ------- * The 1% fee applies to shares redeemed within five years of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for five years or more are not subject to the 1% fee. The policy applies only to shares purchased on or after April 23, 2001. The following examples are intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. The first example assumes that the Fund provides a return of 5% a year, that operating expenses remain the same, that you bought your shares on or after April 23, 2001, and that you redeem your shares at the end of the given period. ---------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------------------- $143 $237 $213 $480 ---------------------------------------------------- The one- and three-year figures above include the Fund's 1% redemption fee. The five- and ten-year figures do not include the fee, because it applies only to shares held for less than five years. The next example assumes that you did not redeem your shares at the end of the given period. Expenses for the one- and three-year periods are lower than in the first example, because the Fund's 1% redemption fee does not apply. ---------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ---------------------------------------------------- $39 $122 $213 $480 ---------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 3 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT FUND EXPENSES All mutual funds have operating expenses. These expenses, which are deducted from a fund's gross income, are expressed as a percentage of the net assets of the fund. Vanguard PRIMECAP Fund Admiral Shares' expense ratio in fiscal year 2002 was 0.38%, or $3.80 per $1,000 of average net assets. The average multi-cap core mutual fund had expenses in 2001 of 1.35%, or $13.35 per $1,000 of average net assets (derived from data provided by Lipper Inc., which reports on the mutual fund industry). Management expenses, which are one part of operating expenses, include investment advisory fees as well as other costs of managing a fund--such as account maintenance, reporting, accounting, legal, and other administrative expenses. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December PrmcpAdml INVESTMENT ADVISER VANGUARD FUND NUMBER PRIMECAP Management Company, Pasadena, 559 Calif., since inception CUSIP NUMBER INCEPTION DATE 921936209 Investor Shares--November 1, 1984 Admiral Shares--November 12, 2001 TICKER SYMBOL VPMAX NET ASSETS (ALL SHARE CLASSES) AS OF AUGUST 31, 2002 $14.6 billion - -------------------------------------------------------------------------------- MORE ON THE FUND This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. 4 MARKET EXPOSURE The Fund invests mainly in common stocks of companies that the adviser expects to have favorable prospects for capital growth and sell at attractive prices, but that typically produce little current income. The Fund focuses on companies whose market values range from $3 billion to $30 billion, which are considered mid- to large-cap by the Fund's investment adviser. However, the adviser will occasionally select stocks that fall outside of this range. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT MARKET CAPITALIZATION Stocks of publicly traded companies are often classified according to market value, or market capitalization. In the same way, stock funds are considered to be large-cap, mid-cap, or small-cap funds based on the market capitalization of the companies in which they predominantly invest. Knowing the market-capitalization range targeted by a fund will help you to compare the fund with other funds and to decide how it might fit into your investment program. It's important to understand that, for both companies and stock funds, market capitalization changes over time. Also, interpretations of size vary, and there is no "official" definition of the boundaries of large-, mid-, and small-cap. When evaluating particular stock funds, be sure to consider each fund's approach to market-cap boundaries. - -------------------------------------------------------------------------------- Because it invests mainly in stocks, the Fund is subject to certain risks. [FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. Note, also, that the gap between best and worst tends to narrow over the long term. ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2001) ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.6 1.11 1.21 1.41 ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2001. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 11.1%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or this Fund in particular. Growth stocks, which are the Fund's primary investments, are likely to be even more volatile in price than the stock market as a whole. Historically, growth funds have tended to outperform in bull markets and underperform in declining markets. Of course, there is no guarantee that this pattern will continue in the future. The Fund also holds a significant 5 number of mid-cap stocks, which tend to be more volatile than the large-cap stocks that dominate the S&P 500 Index. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS Growth investing and value investing are two styles employed by stock fund managers. Growth funds generally focus on companies believed to have above-average potential for growth in revenue and earnings. Reflecting the market's high expectations for superior growth, such stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. Value funds generally emphasize stocks of companies from which the market does not expect strong growth. The prices of value stocks typically are below-average in comparison with such measures as earnings and book value, and these stocks typically pay above-average dividend yields. Growth and value stocks have, in the past, produced similar long-term returns, though each category has periods when it outperforms the other. In general, growth funds appeal to investors who will accept more volatility in hopes of a greater increase in share price. Growth funds also may appeal to investors with taxable accounts who want a higher proportion of returns to come as capital gains (which may be taxed at lower rates than dividend income). Value funds, by contrast, are appropriate for investors who want some dividend income and the potential for capital gains, but are less tolerant of share-price fluctuations. - -------------------------------------------------------------------------------- [FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM THE TYPES OF STOCKS IN WHICH IT INVESTS WILL TRAIL RETURNS FROM THE OVERALL MARKET. AS A GROUP, GROWTH STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS. SECURITY SELECTION PRIMECAP Management Company (PRIMECAP), adviser to the Fund, selects common stocks that it believes have above-average earnings growth potential that is not reflected in the current market price. Stocks selected for the Fund typically have strong positions within their industries, increasing sales, improving profitability, good long-term prospects for above-average growth in earnings, and strong management teams. Using careful analysis, the adviser attempts to quantify a company's "fundamental value." The adviser compares the fundamental value with the market price of the company's stock. PRIMECAP then decides whether to purchase the stock mainly on the basis of how attractive its market price is in relation to its fundamental value. Although the Fund invests with a long-term horizon of three to five years, the adviser may sell a stock if its market price appears to have risen above its fundamental value, or if other securities appear to be more favorably priced. PRIMECAP does not try to make investment decisions based on short-term trends in the stock market. If attractively priced stocks cannot be found, the Fund's cash levels will increase. Because the Fund's selections are determined by an analysis of each individual stock, the Fund's makeup may differ substantially from the overall market's characteristics. For example, the proportion of the Fund's assets invested in a particular industry may be significantly larger or smaller than that industry's proportion in the overall stock market. The Fund is generally managed without regard to tax ramifications. 6 [FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER WILL DO A POOR JOB OF SELECTING THE SECURITIES OR COUNTRIES IN WHICH THE FUND INVESTS. OTHER INVESTMENT POLICIES AND RISKS Although the Fund typically does not make significant investments in foreign securities, it reserves the right to invest up to 20% of its assets this way. Foreign securities may be traded on U.S. or foreign markets. To the extent that it owns foreign securities, the Fund is subject to (1) country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets; and (2) currency risk, which is the chance that foreign investments in a particular country will decrease in value if the U.S. dollar rises in value against that country's currency. TEMPORARY INVESTMENT MEASURES The Fund may temporarily depart from its normal investment policies--for instance, by allocating substantial assets to cash investments--in response to extraordinary market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses but otherwise fail to achieve its investment objective. REDEMPTION FEE The Fund charges a redemption fee on shares that are redeemed before they have been held for five years (for shares purchased on or after April 23, 2001). This fee also applies when shares are redeemed by exchange to another Vanguard fund. Unlike a sales charge or load paid to a broker or fund management company, the redemption fee is paid directly to the Fund to offset the costs of buying and selling securities. The fee ensures that short-term investors pay their share of the Fund's transaction costs and that long-term investors do not subsidize the activities of short-term traders. COSTS AND MARKET-TIMING Some investors try to profit from a strategy called market-timing--switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all Vanguard funds have adopted special policies to discourage short-term trading or to compensate the funds for the costs associated with it. Specifically: - - Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--that it regards as disruptive to efficient portfolio management. A purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor. - - Each Vanguard fund (except the money market funds) limits the number of times that an investor can exchange into and out of the fund. - - Each Vanguard fund reserves the right to stop offering shares at any time. - - Certain Vanguard funds charge purchase and/or redemption fees on transactions. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. TURNOVER RATE Although the Fund normally seeks to invest for the long term, it may sell securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS section of this prospectus 7 shows historical turnover rates for the Fund. A turnover rate of 100%, for example, would mean that the Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of August 31, 2002, the average turnover rate for all large-cap growth funds was approximately 119%, according to Morningstar, Inc. - -------------------------------------------------------------------------------- THE FUND AND VANGUARD The Fund is a member of The Vanguard Group, a family of 35 investment companies with more than 100 funds holding assets in excess of $540 billion. All of the funds that are members of The Vanguard Group share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. - -------------------------------------------------------------------------------- INVESTMENT ADVISER PRIMECAP Management Company, 225 South Lake Avenue, Pasadena, CA 91101, adviser to the Fund, is an investment advisory firm founded in 1983. PRIMECAP also provides investment advisory services to endowment funds, employee benefit plans, and foundations unrelated to Vanguard. As of August 31, 2002, PRIMECAP managed about $22 billion in assets. The firm manages the Fund subject to the supervision and oversight of the trustees and officers of the Fund. Its advisory fee is paid quarterly and is based on certain annual percentage rates applied to the Fund's average month-end net assets for each quarter. Please consult the Fund's Statement of Additional Information for a complete explanation of how advisory fees are calculated. 8 For the fiscal year ended August 31, 2002, the advisory fee represented an effective annual rate of 0.18% of the Fund's average net assets. The adviser is authorized to choose broker-dealers to handle the purchase and sale of the Fund's securities, and to seek to obtain the best available price and most favorable execution for all transactions. In the interest of obtaining better execution of a transaction, the adviser may at times choose brokers who charge higher commissions. If more than one broker can obtain the best available price and most favorable execution, then the adviser is authorized to choose a broker who, in addition to executing the transaction, will provide brokerage or research services to the adviser. Also, the board of trustees may direct the adviser to use a particular broker for certain transactions in exchange for commission rebates paid to the Fund or brokerage or research services provided to the adviser. Under the terms of an SEC exemptive order, the board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment adviser--either as a replacement for an existing adviser or as an additional adviser. Any significant change in the Fund's advisory arrangements will be communicated to shareholders in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard Group may provide investment advisory services to the Fund, on an at-cost basis, at any time. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUND'S ADVISER The managers primarily responsible for overseeing the Fund's investments are listed below, along with the percentage of Fund assets for which each is responsible. HOWARD B. SCHOW (32%), Chairman of PRIMECAP. He has worked in investment management since 1956; has managed assets since 1962; has been with PRIMECAP since 1983; and has managed the Fund since 1984. Education: B.A., Williams College; M.B.A., Harvard Business School. THEO A. KOLOKOTRONES (24%), President of PRIMECAP. He has worked in investment management since 1970; has managed assets since 1979; has been with PRIMECAP since 1983; and has managed the Fund since 1984. Education: B.A., University of Chicago; M.B.A., Harvard Business School. JOEL P. FRIED (22%), Executive Vice President of PRIMECAP. He has worked in investment management since 1985; has managed assets for PRIMECAP since 1986; and has managed the Fund since 1993. Education: B.S., University of California, Los Angeles; M.B.A., Anderson Graduate School of Business, University of California, Los Angeles. MITCHELL J. MILIAS (10%), Vice Chairman of PRIMECAP. He has worked in investment management since 1964; has managed assets since 1967; has been with PRIMECAP since 1983; and has managed the Fund since 2002. Education: B.A., Stanford University; M.B.A., Harvard Business School. ALFRED W. MORDECAI (10%), Vice President of PRIMECAP. He has worked in investment management since 1997; has managed assets for PRIMECAP since 1998; and has managed assets in the Fund since 1998. Education: B.S.E., Duke University; M.E.A., Virginia Polytechnic Institute and State University; M.B.A., Harvard Business School. Each of these five individuals manages his portion of the Fund autonomously; there is no decision-making by committee. The remaining 2% of the Fund is managed by individuals in PRIMECAP's research department. - -------------------------------------------------------------------------------- 9 DIVIDENDS, CAPITAL GAINS, AND TAXES The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any capital gains realized from the sale of its holdings. Distributions generally occur in December. Your distributions will be reinvested in additional Fund shares and accumulate on a tax-deferred basis if you are investing through an employer-sponsored retirement or savings plan. You will not owe taxes on these distributions until you begin withdrawals from the plan. You should consult your plan administrator, your plan's Summary Plan Description, or your tax adviser about the tax consequences of plan withdrawals. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day after the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets attributed to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. When reliable market quotations are not readily available, securities are priced at their fair value, calculated according to procedures adopted by the board of trustees. A fund also may use fair-value pricing if the value of a security it holds is materially affected by events occurring after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, but may occur in other cases as well. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 10 FINANCIAL HIGHLIGHTS The following financial highlights table is intended to help you understand the Admiral Shares' financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all dividend and capital gains distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. You may have the annual report sent to you without charge by contacting Vanguard. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE The Admiral Shares began the fiscal period ended August 31, 2002, with a net asset value (price) of $50.00 per share. During the period, each Admiral Share earned $0.191 from investment income (interest and dividends). There was a decline of $8.776 per share in the value of investments held or sold by the Fund, resulting in a net decline of $8.585 per share from investment operations. Shareholders received $0.415 per share in the form of dividend and capital gains distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the period was $41.00, reflecting losses of $8.585 per share and distributions of $0.415 per share. This was a decrease of $9.00 per share (from $50.00 at the beginning of the period to $41.00 at the end of the period). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was -17.35% for the period. As of August 31, 2002, the Admiral Shares had $1.4 billion in net assets. For the period, the annualized expense ratio was 0.38% ($3.80 per $1,000 of net assets), and the annualized net investment income amounted to 0.52% of average net assets. The Fund sold and replaced securities valued at an annualized rate of 11% of its net assets. - -------------------------------------------------------------------------------- 11 PRIMECAP FUND ADMIRAL SHARES - -------------------------------------------------------------------------------- NOV. 12, 2001* TO AUG. 31, 2002 - -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $50.00 - -------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .191 Net Realized and Unrealized Gain (Loss) on Investments (8.776) - -------------------------------------------------------------------------------- Total from Investment Operations (8.585) - -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.275) Distributions from Realized Capital Gains (.140) - -------------------------------------------------------------------------------- Total Distributions (.415) - -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $41.00 - -------------------------------------------------------------------------------- TOTAL RETURN** -17.35% - -------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $1,369 Ratio of Total Expenses to Average Net Assets 0.38%+ Ratio of Net Investment Income to Average Net Assets 0.52%+ Turnover Rate 11% - -------------------------------------------------------------------------------- *Inception. **Total returns do not reflect the 1% fee assessed on redemptions of shares purchased on or after April 23, 2001, and held for less than five years. +Annualized. INVESTING WITH VANGUARD The Fund is an investment option in your retirement or savings plan. Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect the Fund as an investment option. - - If you have any questions about the Fund or Vanguard, including those about the Fund's investment objective, strategies, or risks, contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188. - - If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan. INVESTMENT OPTIONS AND ALLOCATIONS Your plan's specific provisions may allow you to change your investment selections, the amount of your contributions, or how your contributions are allocated among the investment choices available to you. Contact your plan administrator or employee benefits office for more details. TRANSACTIONS Contributions, exchanges, or redemptions of the Fund's shares are processed as soon as they have been received by Vanguard in good order. Good order means that your request includes complete information on your contribution, exchange, or redemption, and that Vanguard has received the appropriate assets. In all cases, your transaction will be based on the Fund's next-determined net asset value (NAV) after Vanguard receives your request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the order from your plan administrator). As long as this request is received before the close of trading on the New York Stock 12 Exchange, generally 4 p.m., Eastern time, you will receive that day's NAV. This is known as your TRADE DATE. EXCHANGES The exchange privilege (your ability to redeem shares from one fund to purchase shares of another fund) may be available to you through your plan. Although we make every effort to maintain the exchange privilege, Vanguard reserves the right to revise or terminate this privilege, limit the amount of an exchange, or reject any exchange, at any time, without notice. Because excessive exchanges can potentially disrupt the management of the Vanguard funds and increase their transaction costs, Vanguard limits participant exchange activity to no more than FOUR SUBSTANTIVE "ROUND TRIPS" THROUGH NON-MONEY-MARKET FUNDS (at least 90 days apart) during any 12-month period. A "round trip" is a redemption from a fund followed by a purchase back into the fund. "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect the management of a fund. Before making an exchange to or from another fund available in your plan, consider the following: - - Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions. Be sure to read that fund's prospectus. Contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188 for a copy. - - Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on the exchange policies that apply to your plan. ACCESSING FUND INFORMATION BY COMPUTER VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM Use your personal computer to visit Vanguard's education-oriented website, which provides timely news and information about Vanguard funds and services; the online Education Center that offers a variety of mutual fund classes; and easy-to-use, interactive tools to help you create your own investment and retirement strategies. - -------- The Vanguard Group, Vanguard, Plain Talk, Admiral, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners. GLOSSARY OF INVESTMENT TERMS CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. GROWTH STOCK FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth in revenue and earnings. Reflecting market expectations for superior growth, these stocks typically have low dividend yields and above-average prices in relation to such measures as revenue, earnings, and book value. INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. MUTUAL FUND An investment company that pools the money of many people and invests it in a variety of securities in an effort to achieve a specific objective over time. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The amount of money you put into an investment. SECURITIES Stocks, bonds, money market instruments, and other investment vehicles. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE STOCK FUND A mutual fund that emphasizes stocks of companies whose growth prospects are generally regarded as subpar by the market. Reflecting these market expectations, the prices of value stocks typically are below-average in comparison with such measures as earnings and book value, and these stocks typically pay above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [GRAPHIC - SHIP] THE VANGUARD GROUP(R) Institutional Division Post Office Box 2900 Valley Forge, PA 19482-2900 FOR MORE INFORMATION If you'd like more information about Vanguard PRIMECAP Fund, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments is available in the Fund's annual and semiannual reports to shareholders. In the Fund's annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP PARTICIPANT ACCESS CENTER P.O. BOX 2900 VALLEY FORGE, PA 19482-2900 TELEPHONE: 1-800-523-1188 TEXT TELEPHONE: 1-800-523-8004 WORLD WIDE WEB: WWW.VANGUARD.COM INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Fund are also available on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Fund's Investment Company Act file number: 811-4098 (C) 2002 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I559 122002 PART B VANGUARD(R) PRIMECAP FUND (THE TRUST) STATEMENT OF ADDITIONAL INFORMATION DECEMBER 13, 2002 This Statement is not a prospectus but should be read in conjunction with the Trust's current Prospectus (dated December 13, 2002). To obtain, without charge, the Prospectus or the most recent Annual Report to Shareholders, which contains the Trust's financial statements as hereby incorporated by reference, please call: INVESTOR INFORMATION DEPARTMENT 1-800-662-7447 TABLE OF CONTENTS PAGE DESCRIPTION OF THE TRUST.........................................B-1 INVESTMENT POLICIES..............................................B-3 FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-18 SHARE PRICE......................................................B-20 PURCHASE OF SHARES...............................................B-20 REDEMPTION OF SHARES.............................................B-20 MANAGEMENT OF THE FUND...........................................B-21 INVESTMENT ADVISORY SERVICES.....................................B-25 PORTFOLIO TRANSACTIONS...........................................B-27 YIELD AND TOTAL RETURN...........................................B-28 FINANCIAL STATEMENTS.............................................B-32 COMPARATIVE INDEXES..............................................B-32 DESCRIPTION OF THE TRUST ORGANIZATION The Trust was organized as a Maryland corporation on November 1, 1984, and was reorganized as a Delaware statutory trust on July 30, 1998. The Trust is registered with the United States Securities and Exchange Commission (the Commission) under the Investment Company Act of 1940 (the 1940 Act) as an open-end, diversified management investment company. The Trust currently offers the following fund: Vanguard PRIMECAP Fund (the Fund), which offers two classes of shares: Investor Shares and Admiral Shares. The Trust has the ability to offer additional funds or classes of shares. There is no limit on the number of full and fractional shares that the Trust may issue for a single fund or class of shares. SERVICE PROVIDERS CUSTODIANS. The Bank of New York, One Wall Street, New York, New York 10286 serves as the Fund's custodian. The custodian is responsible for maintaining the Fund's assets and keeping all necessary accounts and records of Fund assets. INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 2001 Market Street, Suite 1700, Philadelphia, Pennsylvania 19103, serves as the Fund's independent accountants. The accountants audit the Fund's annual financial statements and provide other related services. TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania 19355. B-1 CHARACTERISTICS OF THE FUND'S SHARES RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions on the right of shareholders to retain or dispose of the Fund's shares, other than the possible future termination of the Fund. The Fund may be terminated by reorganization into another mutual fund or by liquidation and distribution of its assets. Unless terminated by reorganization or liquidation, the Fund will continue indefinitely. SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which provides that shareholders of a statutory trust are entitled to the same limitations of personal liability as shareholders of a corporation organized under Delaware law. Effectively, this means that a shareholder of the Trust will not be personally liable for payment of the Trust's debts except by reason of his or her own conduct or acts. In addition, a shareholder could incur a financial loss on account of a Trust obligation only if the Trust itself had no remaining assets with which to meet such obligation. We believe that the possibility of such a situation arising is extremely remote. DIVIDEND RIGHTS. The shareholders of the Fund are entitled to receive any dividends or other distributions declared by the Fund. No shares have priority or preference over any other shares with respect to distributions. Distributions will be made from the assets of the Fund, and will be paid ratably to all shareholders according to the number of shares held by shareholders on the record date. VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a shareholder vote is required under the 1940 Act; (ii) the matter concerns an amendment to the Declaration of Trust that would adversely affect to a material degree the rights and preferences of the shares of any class or fund; or (iii) the trustees determine that it is necessary or desirable to obtain a shareholder vote. The 1940 Act requires a shareholder vote under various circumstances, including to elect or remove trustees upon the written request of shareholders representing 10% or more of the Fund's net assets, and to change any fundamental policy of the Fund. Unless otherwise required by applicable law, fund shareholders receive one vote for each dollar of net asset value owned on the record date, and a fractional vote for each fractional dollar of net asset value owned on the record date. Voting rights are noncumulative and cannot be modified without a majority vote. LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be entitled to receive a pro rata share of the Fund's net assets. In the event that a class of shares is liquidated, shareholders of that class will be entitled to receive a pro rata share of the Fund's net assets that are attributable to that class. PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Fund's shares. CONVERSION RIGHTS. Shareholders of the Fund may convert their shares into another class of shares of the same Fund upon the satisfaction of any then applicable eligibility requirements. REDEMPTION PROVISIONS. The Fund's redemption provisions are described in its current prospectus and elsewhere in this Statement of Additional Information. SINKING FUND PROVISIONS. The Fund has no sinking fund provisions. CALLS OR ASSESSMENT. The Fund's shares, when issued, are fully paid and non assessable. TAX STATUS OF THE FUND The Fund intends to continue to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code, of 1986, as amended. This special tax status means that the Fund will not be liable for federal tax on income and capital gains distributed to shareholders. In order to preserve its tax status, the Fund must comply with certain requirements. If the Fund fails to meet these requirements in any taxable year, it will be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, will be taxable to shareholders as ordinary income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before regaining its tax status as a regulated investment company. B-2 INVESTMENT POLICIES Some of the investment policies described below and in the Fund's prospectus set forth percentage limitations on the Fund's investment in, or holdings of, certain securities or other assets. Unless otherwise required by law, compliance with these policies will be determined immediately after the acquisition of such securities or assets. Subsequent changes in values, net assets, or other circumstances will not be considered when determining whether the investment complies with the Fund's investment policies and limitations. BORROWING. A fund's ability to borrow money is limited by its investment policies, by the Investment Company Act of 1940, as amended ("1940 Act"), and by exemptive orders, no-action letters, interpretations and other pronouncements by the Securities and Exchange Commission and its staff ("SEC") and any other any regulatory authority having jurisdiction, from time to time. Under the 1940 Act, a fund is required to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the fund's total assets made for temporary or emergency purposes. Any borrowings for temporary purposes in excess of 5% of the fund's total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, a fund may be required to sell some of its portfolio holdings within three days (excluding Sundays and holidays) to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a fund's portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. A fund also may be required to maintain minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. The SEC takes the position that other transactions that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing can be viewed as constituting a form of borrowing by the fund. These transactions can include entering into reverse repurchase agreements, engaging in mortgage dollar roll transactions, selling securities short (other than short sales "against-the-box"), buying and selling certain derivatives (such as futures contracts), selling (or writing) put and call options, engaging in sale-buybacks, entering into firm commitment agreements and standby commitment agreements, engaging in when-issued, delayed delivery and forward commitment transactions, and other trading practices that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing (additional discussion about a number of these transaction can be found below). A borrowing transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund (1) "covers" the borrowing transaction by maintaining an offsetting financial position or (2) segregates liquid assets (with such liquidity determined by the adviser in accordance with procedures established by the board of trustees) equal (as determined on a daily mark-to-market basis) in value to the fund's potential economic exposure under the borrowing transaction. A fund may have to buy or sell a security at a disadvantageous time or price in order to cover a borrowing transaction or segregate sufficient liquid assets. In addition, assets so segregated may not be available to satisfy redemptions or for other purposes. COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. Common stock typically entitles the owner to vote on the election of directors and other important matters as well as to receive dividends on such stock. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds, other debt holders and owners of preferred stock take precedence over the claims of those who own common stock. CONVERTIBLE SECURITIES. Convertible securities are hybrid securities that combine the investment characteristics of bonds and common stocks. Convertible securities typically consist of debt securities or preferred stock that may be converted (on a voluntary or mandatory basis) within a specified period of time (normally for the entire life of the security) into a certain amount of common stock or other equity security of the same or a different issuer at a predetermined price. Convertible securities also include debt securities with warrants or common stock attached and derivatives combining the features of debt securities and equity securities. Other convertible securities with features and risks not specifically referred to herein may become available in the future. Convertible securities involve risks similar to both fixed-income and equity securities. B-3 The market value of a convertible security is a function of its "investment value" and its "conversion value." A security's "investment value" represents the value of the security without its conversion feature (i.e., a nonconvertible fixed income security). The investment value may be determined by reference to its credit quality and the current value of its yield to maturity or probable call date. At any given time, investment value is dependent upon such factors as the general level of interest rates, the yield of similar nonconvertible securities, the financial strength of the issuer and the seniority of the security in the issuer's capital structure. A security's "conversion value" is determined by multiplying the number of shares the holder is entitled to receive upon conversion or exchange by the current price of the underlying security. If the conversion value of a convertible security is significantly below its investment value, the convertible security will trade like nonconvertible debt or preferred stock and its market value will not be influenced greatly by fluctuations in the market price of the underlying security. In that circumstance, the convertible security takes on the characteristics of a bond, and its price moves in the opposite direction from interest rates. Conversely, if the conversion value of a convertible security is near or above its investment value, the market value of the convertible security will be more heavily influenced by fluctuations in the market price of the underlying security. In that case, the convertible security's price may be as volatile as that of common stock. Because both interest rate and market movements can influence its value, a convertible security generally is not as sensitive to interest rates as a similar fixed income security, nor is it as sensitive to changes in share price as its underlying equity security. Convertible securities are often rated below investment grade or are not rated, and are generally subject to a high degree of credit risk. While all markets are prone to change over time, the generally high rate at which convertible securities are retired (through mandatory or scheduled conversions by issuers or voluntary redemptions by holders) and replaced with newly issued convertibles may cause the convertible securities market to change more rapidly than other markets. For example, a concentration of available convertible securities in a few economic sectors could elevate the sensitivity of the convertible securities market to the volatility of the equity markets and to the specific risks of those sectors. Moreover, convertible securities with innovative structures, such as mandatory conversion securities and equity-linked securities, have increased the sensitivity of the convertible securities market to the volatility of the equity markets and to the special risks of those innovations, which may include risks different from, and possibly greater than, those associated with traditional convertible securities. DEBT SECURITIES. A debt security is a security consisting of a certificate or other evidence of a debt (secured or unsecured) on which the issuing company or governmental body promises to pay the holder thereof a fixed, variable, or floating rate of interest for a specified length of time, and to repay the debt on the specified maturity date. Some debt securities, such as zero coupon bonds, do not make regular interest payments but are issued at a discount to their principal or maturity value. Debt securities include a variety of fixed-income obligations, including, but not limited to, corporate bonds, government securities, municipal securities, convertible securities, mortgage-backed securities and asset-backed securities. Debt securities include investment grade securities, non-investment grade securities, and unrated securities. Debt securities are subject to a variety of risks, such as interest rate risk, income risk, call/prepayment risk, inflation risk, credit risk, and (in the case of foreign securities) country risk and currency risk. DEBT SECURITIES - NON-INVESTMENT GRADE SECURITIES. Non-investment grade securities, also referred to as "high yield securities" or "junk bonds," are debt securities that are rated lower than the four highest rating categories by an nationally recognized statistical rating organization (for example, lower than Baa3 by Moody's Investors Service, Inc. or lower than BBB- by Standard & Poor's Corporation) or by independent analysis of a fund's adviser. These securities are generally considered to be, on balance, predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation and will generally involve more credit risk and other risks than securities in the investment grade categories. Investment in these securities generally provides greater income and increased opportunity for capital appreciation than investments in higher quality securities, but they also typically entail greater price volatility and principal and income risk. Analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of investment grade securities. Thus, reliance on credit ratings in making investment decisions entails greater risks for high yield securities than for investment grade debt securities. The success of a fund's adviser in managing high yield securities is more dependent upon its own credit analysis than is the case with investment grade securities. B-4 Some high yield securities are issued by smaller, less-seasoned companies, while others are issued as part of a corporate restructuring, such as an acquisition, merger, or leveraged buyout. Companies that issue high yield securities are often highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risk associated with acquiring the securities of such issuers generally is greater than is the case with investment grade securities. Some high yield securities were once rated as investment grade but have been downgraded to junk bond status because of financial difficulties experienced by their issuers. The market values of high yield securities tend to reflect individual corporate developments to a greater extent than do investment grade securities, which in general react to fluctuations in the general level of interest rates. High yield securities also tend to be more sensitive to economic conditions than are investment grade securities. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in junk bond prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If an issuer of high yield securities defaults, in addition to risking payment of all or a portion of interest and principal, a fund investing in such securities may incur additional expenses to seek recovery. In the case of high yield securities structured as zero-coupon or pay-in-kind securities, market prices are affected to a greater extent by interest rate changes, and therefore tend to be more volatile than securities which pay interest periodically and in cash. Junk bonds frequently have call or buy-back features that would permit an issuer to call or repurchase the security from mutual funds and other investors. If a call were exercised by the issuer during a period of declining interest rates, a fund would likely have to replace such called security with a lower yielding security, thus decreasing the net investment income to the fund. The secondary market on which high yield securities are traded may be less liquid than the market for investment grade securities. Less liquidity in the secondary trading market could adversely affect the ability of a fund to sell a high yield security or the price at which a fund could sell a high yield security, and could adversely affect the daily net asset value of fund shares. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high yield securities, especially in a thinly-traded market. When secondary markets for high yield securities are less liquid than the market for investment grade securities, it may be more difficult to value the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data available. Except as otherwise provided in a fund's prospectus, if a credit rating agency changes the rating of a portfolio security held by a fund, the fund may retain the portfolio security if the adviser deems it in the best interest of shareholders. DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository." Depositary receipt may be sponsored or unsponsored and include American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts. In ADRs, the depository is typically a U.S. financial institutional and the underlying securities are issued by a foreign issuer. In other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and are generally designed for use in securities markets outside the U.S. While the two types of depositary receipt facilities (unsponsored or sponsored) are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities. B-5 Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities. For purposes of a fund's investment policies, investments in depositary receipts will be deemed to be investments in the underlying securities. Thus, a depositary receipt representing ownership of common stock will be treated as common stock. Depository receipts do not eliminate all of the risks associated with directly investing in the securities of foreign issuers. DERIVATIVES. A derivative is a financial instrument which has a value that is based on - or "derived from" - the values of other assets, reference rates or indices. Derivatives may relate to a wide variety of underlying references, such as commodities, stocks, bonds, interest rates, currency exchange rates and related indices. Derivatives include futures contracts and options on futures contracts (see additional discussion below), forward agreements (see additional discussion below), options on securities (see additional discussion below), caps, floors, collars, swap agreements (see additional discussion below) and other financial instruments. Some derivatives, such as futures contracts and certain options, are traded on U.S. commodity and securities exchanges, while other derivatives, such as swap agreements, are privately negotiated and entered into in the over-the-counter ("OTC") market. The risks associated with the use of derivatives are different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are used by some investors for speculative purposes. Derivatives also may be used for a variety of purposes that do not constitute speculation, such as hedging, risk management, seeking to stay fully invested, seeking to reduce transaction costs, seeking to simulate an investment in equity or debt securities or other investments, seeking to add value when derivatives are favorably priced relative to equity or debt securities or other investments, and for other purposes. There is no assurance that any derivatives strategy used by a fund's adviser will succeed. A fund will not use derivatives for speculative purposes or as leveraged investments that magnify the gains or losses of an investment. Derivative products are highly specialized instruments that require investment techniques and risk analyses different from those associated with stocks, bonds and other traditional investments. The use of a derivative requires an understanding not only of the underlying instrument but also of the derivative itself, without the benefit of observing the performance of the derivative under all possible market conditions. The use of a derivative agreement involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the other party to the contract (usually referred to as a "counterparty") or the failure of the counterparty to make required payments or otherwise comply with the terms of the agreement. Additionally, the use of credit derivatives can result in losses if a fund's adviser does not correctly evaluate the creditworthiness of the issuer on which the credit derivative is based. Derivatives may be subject to liquidity risk, which exists when a particular derivative is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC derivatives), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price. Derivatives may be subject to pricing or "basis" risk, which exists when a particular derivative becomes extraordinarily expensive relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity. Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate or index can result in a loss substantially greater than the amount B-6 invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Like most other investments, derivative instruments are subject to the risk that the market value of the instrument will change in a way detrimental to a fund's interest. A fund bears the risk that its adviser will incorrectly forecast future market trends or the values of assets, reference rates, indices or other economic factors in establishing derivative positions for the fund. If the adviser attempts to use a derivative as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the derivative will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many derivatives, in particular OTC derivatives, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. EXCHANGE-TRADED FUNDS. A fund may purchase shares of exchange-traded funds ("ETFs"), including ETF shares issued by other Vanguard funds. Typically, a fund would purchase ETF shares for the same reason it would purchase (and as an alternative to purchasing) futures contracts: to obtain exposure to all or a portion of the stock market while maintaining flexibility to meet the liquidity needs of the fund. ETF shares enjoy several advantages over futures. Depending on the market, the holding period, and other factors, ETF shares can be less costly and more tax-efficient than futures. In addition, ETF shares can be purchased for smaller sums, offer exposure to market sectors and styles for which there is no suitable or liquid futures contract, and do not involve leverage. Most ETFs are investment companies. Therefore, a fund's purchases of ETF shares generally are subject to the limitations on a fund's investments in other investment companies, which are described below under the heading "Other Investment Companies." An investment in an ETF generally presents the same primary risks as an investment in a conventional fund (i.e., one that is not exchange traded) that has the same investment objectives, strategies, and policies. The price of an ETF can fluctuate within a wide range, and a fund could lose money investing in an ETF if the prices of the stocks owned by the ETF go down. In addition, ETFs are subject to the following risks that do not apply to conventional funds: (1) the market price of the ETF's shares may trade at a discount to their net asset value; (2) an active trading market for an ETF's shares may not develop or be maintained; or (3) trading of an ETF's shares may be halted if the listing exchange's officials deem such action appropriate, the shares are de-listed from the exchange, or the activation of market-wide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally. FOREIGN SECURITIES. Foreign securities are equity or debt securities issued by entities organized, domiciled or with a principal place of business outside the United States, such as foreign corporations and governments. Foreign securities may trade in U.S. or foreign securities markets. A fund may make foreign investments either directly by purchasing foreign securities or indirectly by purchasing depositary receipts or depositary shares of similar instruments ("depositary receipts") for foreign securities (see discussion above). Depositary receipts are securities that are listed on exchanges or quoted in OTC markets in one country but represent shares of issuers domiciled in another country. Direct investments in foreign securities may be made either on foreign securities exchanges or in the OTC markets. Investing in foreign securities involves certain special risk considerations that are not typically associated with investing in U.S. companies or governments. Because foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards and practices comparable to those applicable to U.S. issuers, there may be less publicly available information about certain foreign issuers than about U.S. issuers. Evidence of securities ownership may be uncertain in many foreign countries. As a result, there is a risk that a fund's trade details could be incorrectly or fraudulently entered at the time of the transaction, resulting in a loss to the fund. Securities of foreign issuers B-7 are generally less liquid and more volatile than securities of comparable U.S. issuers. 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, terrorism, nationalization, limitations on the removal of funds or other assets, or diplomatic developments which could affect U.S. investments in those countries. Although an adviser will endeavor to achieve most favorable execution costs for a fund's portfolio transactions in foreign securities, commissions (and other transaction costs) are generally higher than those on U.S. securities. In addition, it is expected that the expenses for custodian arrangements of a funds' foreign securities will be somewhat greater than the expenses for a fund that invests primarily in domestic securities. Certain foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion of foreign withholding taxes will reduce the income received from the companies comprising a funds. The value of the foreign securities held by a fund may be significantly affected by changes in currency exchange rates. The U.S. dollar value of a foreign security generally decreases when the value of the U.S. dollar rises against the foreign currency in which the security is denominated and tends to increase when the value of the U.S. dollar falls against such currency (as discussed below, a fund may attempt to hedge its currency risks). In addition, the value of fund assets may be affected by losses and other expenses incurred in converting between various currencies in order to purchase and sell foreign securities, and by currency restrictions, exchange control regulation, currency devaluations and political and economic developments. FOREIGN SECURITIES - EMERGING MARKET RISK. Investing in emerging market countries involves certain risks not typically associated with investing in the United States, and imposes risks greater than, or in addition to, risks of investing in more developed foreign countries. These risks include, but are not limited to, the following: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic and political uncertainty and instability (including the risk of terrorism and war); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on the fund's ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned and newly organized companies; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; and greater price volatility, substantially less liquidity, and significantly smaller market capitalization of securities markets. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. In addition, a number of emerging market countries restrict, to various degrees, foreign investment in securities. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. FOREIGN SECURITIES - FOREIGN CURRENCY TRANSACTIONS. The value of a fund's foreign securities as measured in United States dollars may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the fund may incur costs in connection with conversions between various currencies. To minimize the impact of such factors on net asset values, a fund may engage in foreign currency transactions in connection with its investments in foreign securities. A fund will not speculate in foreign currency exchange, and will enter into foreign currency transactions only to "hedge" the currency risk associated with investing in foreign securities. Although such transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also may limit any potential gain which might result should the value of such currency increase. A fund may conduct its currency exchange transactions either on a spot (i.e., cash) basis at the rate prevailing in the currency exchange market, or through forward contracts to purchase or sell foreign currencies. A forward currency contract involves 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 B-8 time of the contract. These contracts are entered into with large commercial banks or other currency traders who are participants in the interbank market. Currency exchange transactions also may be effected through the use of swap agreements or other derivatives. Currency exchange transactions may be considered borrowings. A currency exchange transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." By entering into a forward contract for the purchase or sale of foreign currency involved in underlying security transactions, a fund may be able to protect itself against possible loss between trade and settlement dates for that purchase or sale resulting from an adverse change in the relationship between the U.S. dollar and such foreign currency. This practice is sometimes referred to as "transaction hedging." In addition, when it appears that a particular foreign currency may suffer a substantial decline against the U.S. dollar, a fund may enter into a forward contract to sell an amount of foreign currency approximating the value of some or all of its portfolio securities denominated in such foreign currency. This practice is sometimes referred to as "portfolio hedging." Similarly, when it appears that the U.S. dollar may suffer a substantial decline against a foreign currency, a fund may enter into a forward contract to buy that foreign currency for a fixed dollar amount. A fund may also attempt to hedge its foreign currency exchange rate risk by engaging in currency financial futures, options and "cross-hedge" transactions. In "cross-hedge" transactions, a fund holding securities denominated in one foreign currency will enter into a forward currency contract to buy or sell a different foreign currency (one that the adviser reasonably believes generally tracks the currency being hedged with regard to price movements). The adviser may select the tracking (or substitute) currency rather than the currency in which the security is denominated in order to take advantage of pricing or other opportunities presented by the tracking currency. Such cross-hedges are expected to help protect a fund against an increase or decrease in the value of the U.S. dollar against certain foreign currencies. A fund may hold a portion of its assets in bank deposits denominated in foreign currencies, so as to facilitate investment in foreign securities as well as protect against currency fluctuations and the need to convert such assets into U.S. dollars (thereby also reducing transaction costs). To the extent these monies are converted back into U.S. dollars, the value of the assets so maintained will be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations. The forecasting of short-term currency market movement is extremely difficult and whether a short-term hedging strategy will be successful is highly uncertain. Moreover, it is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of a foreign currency forward contract. Accordingly, a fund may be required to buy or sell additional currency on the spot market (and bear the expense of such transaction) if its adviser's predictions regarding the movement of foreign currency or securities markets prove inaccurate. In addition, the use of cross-hedging transactions may involve special risks, and may leave a fund in a less advantageous position than if such a hedge had not been established. Because foreign currency forward contracts are privately negotiated transactions, there can be no assurance that a fund will have flexibility to roll-over the foreign currency forward contract upon its expiration if it desires to do so. Additionally, there can be no assurance that the other party to the contract will perform its services thereunder. FOREIGN SECURITIES - FOREIGN INVESTMENT COMPANIES. Some of the countries in which a fund may invest may not permit, or may place economic restrictions on, direct investment by outside investors. Fund investments in such countries may only be permitted through foreign government-approved or authorized investment vehicles, which may include other investment companies. Such investments may also be made through registered or unregistered closed-end investment companies that invest in foreign securities. Investing through such vehicles may involve frequent or layered fees or expenses and may also be subject to limitation under the 1940 Act, as described below under the heading "Other Investment Companies." FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A futures contract is a standardized agreement between two parties to buy or sell at a specific time in the future a specific quantity of a commodity at a specific price. The commodity may consist of an asset, a reference rate, or an index. A security futures contract relates to the sale of a specific quantity of shares of a single equity security or a narrow-based securities index. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying commodity. The buyer of a futures contract enters into an agreement to purchase the underlying commodity on B-9 the settlement date and is said to be "long" the contract. The seller of a futures contract enters into an agreement to sell the underlying commodity on the settlement date and is said to be "short" the contract. The price at which a futures contract is entered into is established by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying commodity or payment of the cash settlement amount on the settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. Other financial futures contracts (such as those relating to interest rates, foreign currencies and broad-based securities indices) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are "offset" before the settlement date through the establishment of an opposite and equal futures position. The purchaser or seller of a futures contract is not required to deliver or pay for the underlying commodity unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit "initial margin" with a futures commission merchant ("FCM") when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. This process is known as "marking-to-market." Because the exchange of initial and variation margin payments prior to the settlement date will not represent payment in full for a futures contract, a fund's futures transactions can be considered borrowing transactions. A futures transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." An option on a futures contract (or "futures option") conveys the right, but not the obligation, to purchase (in the case of a "call" option) or sell (in the case of a "put" option) a specific futures contract at a specific price (called the "exercise" or "strike" price) any time before the option expires. The buyer of a call option is said to go "long" a futures contract, while the buyer of a put option is said to go "short" a futures contract. The seller of an option is called an option writer. The purchase price of an option is called the "premium." Although the potential loss to an option buyer is limited to the amount of the premium plus transaction costs, that person can lose the entire amount of the premium. This will be the case, for example, if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying futures contract exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying futures contract. Generally, any profit realized by an option buyer represents a loss for the option writer. A fund that takes the position of a writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option, as described above in the case of futures contracts. Because the exchange of initial and variation margin payments prior to the expiration date of the option will not represent payment in full for a futures option, a fund's put and call option transactions can be considered borrowing transactions. A futures option transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Each fund intends to comply with the Rule 4.5 of the Commodity Futures Trading Commission ("CFTC"), under which a mutual fund avoids being deemed a "commodity pool" or a "commodity pool operator" by limiting its use of futures contracts and futures options to "bona fide hedging" transactions (as defined by the CFTC) and by limiting the maximum amount or value of those futures and options transactions that do not B-10 constitute bona fide hedging transactions. A fund will only enter into futures contracts and futures options which are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS - RISKS. The risk of loss in trading futures contracts and in writing futures options can be substantial, due to the low margin deposits required, the extremely high degree of leverage involved in futures and options pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position 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, and the writing of a futures option, may result in losses in excess of the amount invested in the position. In the event of adverse price movements, a fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if the fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements (and segregation requirements, if applicable) at a time when it may be disadvantageous to do so. In addition, on the settlement date, a fund may be required to make delivery of the instruments underlying the futures positions it holds. A fund could suffer losses if it is unable to close out a futures contract or a futures option because of an illiquid secondary market. Futures contracts and futures options may be closed out only on an exchange which provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures or option position. Moreover, 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. The inability to close futures and options positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment. A fund bears the risk that its adviser will incorrectly predict future market trends. If the adviser attempts to use a futures contract or a futures option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the futures position will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. A fund could lose margin payments it has deposited with its FCM, if, for example, the FCM breached its agreement with the fund or became insolvent or goes into bankruptcy. In that event, the fund may be entitled to return of margin owed to it only in proportion to the amount received by the FCM's other customers, potentially resulting in losses to the fund. INTERFUND BORROWING AND LENDING. The SEC has issued an exemptive order permitting the Vanguard funds to participate in Vanguard's interfund lending program. This program allows the Vanguard funds to borrow money from and loan money to each other for temporary or emergency purposes. The program is subject to a number of conditions, including the requirement that no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is available from a typical bank for a comparable transaction. In addition, a Vanguard fund may participate in the program only if and to the extent that such participation is consistent with the fund's investment objective and other investment policies. The boards of trustees of the Vanguard funds are responsible for ensuring that the interfund lending program operates in compliance with all conditions of the SEC's exemptive order. B-11 OPTIONS. An option on a security (or index) is a contract that gives the holder of the option, in return for the payment of a "premium," the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option. The writer of an option on a security has the obligation upon exercise of the option (i) to deliver the underlying security upon payment of the exercise price (in the case of a call option) or (ii) to pay the exercise price upon delivery of the underlying security (in the case of a put option). The writer of an option on an index has the obligation upon exercise of the option to pay an amount equal to the cash value of the index minus the exercise price, multiplied by the specified multiplier for the index option. The multiplier for an index option determines the "size" of the investment position the option represents. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the purchaser or writer greater flexibility to tailor an option to its needs, OTC options generally involve greater credit risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded. The buyer of a call option is said to go "long" on the underlying position, while the buyer of a put option is said to go "short" the underlying position. The seller of an option is called an option writer. The purchase price of an option is called the "premium." Although the potential loss to an option buyer is limited to the amount of the premium plus transaction costs, that person can lose the entire amount of the premium. This will be the case if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer, but that person could also seek to profit from an anticipated rise or decline in option prices. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying position exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying position. Generally, any profit realized by an option buyer represents a loss for the option writer. The writing of an option may be considered a borrowing transaction. The writing of an option will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." If a trading market in particular options were to become unavailable, investors in those options would be unable to close out their positions until trading resumes, and they may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Even if the market were to remain available, there may be times when options prices will not maintain their customary or anticipated relationships to the prices of the underlying interests and related interests. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity or even the orderliness of the market for particular options. A fund bears the risk that its adviser will not accurately predict future market trends. If the adviser attempts to use an option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the option will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving options can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many options, in particular OTC options, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. OTHER INVESTMENT COMPANIES. A fund may invest in other investment companies (including other Vanguard funds), subject to the limitations of the 1940 Act and the fund's investment policies. Under the 1940 Act, a fund generally may invest up to 10% of its assets in shares of investment companies and up to 5% of its assets in any one investment company as long as the investment does not represent more than 3% of the B-12 voting stock of the acquired investment company. If a fund invests in investment companies, shareholders will bear not only their proportionate share of the fund's expenses (including operating expenses and the fees of the adviser), but also, indirectly, the similar expenses of the underlying investment companies. Shareholders would also be exposed to the risks associated not only to the investments of the fund but also to the portfolio investments of the underlying investment companies. Certain types of investment companies, such as closed-end investment companies, issue a fixed number of shares that typically trade on a stock exchange or over-the-counter at a premium or discount to their net asset value. Others are continuously offered at net asset value but also may be traded in the secondary market. PREFERRED STOCK. Preferred stock represents an equity or ownership interest in an issuer that normally pays dividends at a specified rate and that has precedence over common stock. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred and common stock. Preferred stock generally has a preference over common stock (but is generally subordinated to bonds and other debt obligations) on the distribution of an issuer's assets in the event of bankruptcy or liquidation. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporation's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. "Cumulative" dividend provisions require all or a portion of prior unpaid dividends to be paid before dividends can be paid to the issuer's common stock. "Participating" preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. Government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The resale price reflects an agreed upon interest rate effective for the period the instrument is held by a fund and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by a fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and are held by a custodian bank until repurchased. In addition, the board of trustees will monitor a fund'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 relating to a fund. The use of repurchase agreements involves certain risks. One risk is the seller's ability to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. For example, if the other party to the agreement becomes insolvent and subject to liquidation or reorganization under the bankruptcy or other laws, a court may determine that the underlying security is collateral for a loan by the fund not within its control and therefore the realization by the fund on such collateral may be automatically stayed. Finally, it is possible that the fund 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. RESTRICTED AND ILLIQUID SECURITIES. Illiquid securities are securities that may not be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on a fund's books. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits which are not subject to prepayment or provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, municipal lease obligations, commercial paper issued pursuant to Section 4(2) of the Securities Act of 1933, as amended ("1933 Act"), and securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, may be sold only to qualified institutional buyers. Because these securities can be resold only to qualified institutional buyers, they may be considered illiquid securities-meaning that they could be difficult for a fund to convert to cash if needed. If a B-13 substantial market develops for a restricted security (or other illiquid investment) held by a fund, it will be treated as a liquid security, in accordance with procedures and guidelines approved by the board of trustees. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. While a fund's adviser monitors the liquidity of restricted securities on a daily basis, the board of trustees oversees and retains ultimate responsibility for the adviser's decisions. Several factors that the board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer. REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund sells a security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase that security at an agreed-upon price and time. Under a reverse repurchase agreement, the fund continues to receive any principal and interest payments on the underlying security during the term of the agreement. Reverse repurchase agreements involve the risk that the market value of securities retained by the fund may decline below the repurchase price of the securities sold by the fund which it is obligated to repurchase. A reverse repurchase agreement may be considered a borrowing transaction. A reverse repurchase agreement transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." A fund will enter into reverse repurchase agreements only with parties whose creditworthiness has been reviewed and found satisfactory by the adviser. SECURITIES LENDING. A fund may lend its investment securities to qualified institutional investors (typically brokers, dealers, banks, or other financial institutions) who need to borrow securities in order to complete certain transactions, such as covering short sales, avoiding failures to deliver securities, or completing arbitrage operations. By lending its investment securities, a fund attempts to increase its net investment income through the receipt of interest on the loan. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the fund. If the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons, a fund could experience delays and costs in recovering the securities loaned or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If a fund is not able to recover the securities loaned, a fund may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased. Cash received as collateral through loan transactions may be invested in other eligible securities. Investing this cash subjects that investment, as well as the securities loaned, to market appreciation or depreciation. The terms and the structure and the aggregate amount of securities loans must be consistent with the 1940 Act, and the rules or interpretations of the SEC thereunder. These provisions limit the amount of securities a fund may lend to 33-1/3% of the fund's total assets, and require that (1) 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 at all times not less than 100% of the value of the securities loaned, (2) 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), (3) the loan be made subject to termination by the fund at any time, and (4) the fund receive reasonable interest on the loan (which may include the fund's investing any cash collateral in interest bearing short-term investments), any distribution on the loaned securities and any increase in their market value. Loan arrangements made by each fund will comply with all other applicable regulatory requirements, including the rules of the New York Stock Exchange, which presently require the borrower, after notice, to redeliver the securities within the normal settlement time of three business days. All relevant facts and circumstances, including the creditworthiness of the borrower, will be considered in making decisions with respect to the lending of securities, subject to review by the board of trustees, and a fund may pay such fees. At the present time, the staff of the SEC does not object if an investment company pays reasonable negotiated fees in connection with loaned securities, so long as such fees are set forth in a written contract and approved by the investment company's trustees. In addition, voting rights pass with the loaned securities, but if a material event will occur affecting an investment on loan, the loan must be called and the securities voted. B-14 SHORT SALES. A short sale is a transaction in which a fund sells a security it does not own, in anticipation of a decline in the market value of that security. To complete the transaction, the fund must borrow the security to make delivery to the buyer. The fund then is obligated to replace the security borrowed by purchasing it at the market price at or prior to the time of replacement. The price at such time may be more or less than the price at which the security was sold by the fund. Until the security is replaced, the fund is required to repay the lender any dividends or interest that accrue during the period of the loan. To borrow the security, the fund also may be required to pay a premium, which would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker (or by the fund's custodian in a special custody account), to the extent necessary to meet margin requirements, until the short position is closed out. The fund also will incur transaction costs in effecting short sales. The fund will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the fund replaces the borrowed security. The fund may realize a gain if the security declines in price between those dates. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of the premium, dividends, interest or expenses the fund may be required to pay in connection with a short sale. A fund's loss on a short sale could theoretically be unlimited in a case where the fund is unable, for whatever reason, to close out its short position. There can be no assurance that the fund will be able to close out a short position at any particular time or at an acceptable price. In addition, short positions may result in a loss if a portfolio strategy of which the short position is a part is otherwise unsuccessful. A short sale transaction may be considered a borrowing transaction. A short sale transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." SHORT SALES AGAINST-THE-BOX. Short sales against-the-box are short sales of securities that a fund owns or has the right to obtain (equivalent in kind or amount to the securities sold short). If a fund enters into a short sale against-the-box, it will be required to set aside securities equivalent in kind and amount to the securities sold short (or securities convertible or exchangeable into such securities) and will be required to hold such securities while the short sale is outstanding. Short sales against-the-box could be used to protect the net asset value per share of a money market fund in anticipation of increased interest rates, without sacrificing the current yield of the securities sold short. A money market fund will incur transaction costs in connection with opening and closing short sales against-the-box. A fund (other than a money market fund) will incur transaction costs, in connection with opening and closing short sales against-the-box. A fund (other than a money market fund) will incur transaction costs, including interest expenses, in connection with opening, maintaining, and closing short sales against-the-box. SWAP AGREEMENTS. A swap agreement is an agreement between two parties ("counterparties") to exchange payments at specified dates ("periodic payment dates") on the basis of a specified amount ("notional amount") with the payments calculated with reference to a specified asset, reference rate or index. Examples of swap agreements include, but are not limited to, interest rate swaps, credit default swaps, equity swaps, commodity swaps, foreign currency swaps, index swaps and total return swaps. Most swap agreements provide that when the periodic payment dates for both parties are the same, payments are netted and only the net amount is paid to the counterparty entitled to receive the net payment. Consequently, a fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each counterparty. Swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchange for floating rate payments; dollar-denominated payments may be exchanged for non-dollar-denominated payments; and payments tied to the price of one asset, reference rate or index may be exchanged for payments tied to the price of another asset, reference rate or index. An option on a swap agreement, also called a "swaption," is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based "premium." A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate or index. A payer swaption gives the owner the right to pay the total return of a specified asset, reference rate or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties.The use of swap agreements by a fund entails certain risks, which are different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Swaps B-15 are highly specialized instruments that require investment techniques and risk analyses different from those associated with stocks, bonds and other traditional investments. The use of a swap requires an understanding not only of the referenced asset, reference rate or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions. Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. If a swap transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC swaps), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price. For this reason, a swap transaction may be subject to a fund's limitation on investments in illiquid securities. Swap agreements may be subject to pricing risk, which exists when a particular swap becomes extraordinarily expensive relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity. Because some swap agreements have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate or index can result in a loss substantially greater than the amount invested in the swap itself. Certain swaps have the potential for unlimited loss, regardless of the size of the initial investment. Certain swap transactions may be considered to constitute borrowing transactions. Such a swap transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Like most other investments, swap agreements are subject to the risk that the market value of the instrument will change in a way detrimental to a fund's interest. A fund bears the risk that its adviser will not accurately forecast future market trends or the values of assets, reference rates, indices or other economic factors in establishing swap positions for the fund. If the adviser attempts to use a swap as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the swap will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving swap instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many swaps, in particular OTC swaps, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. The use of a swap agreement involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the counterparty or the failure of the counterparty to make required payments or otherwise comply with the terms of the agreement. Additionally, the use of credit default swaps can result in losses if a fund's adviser does not correctly evaluate the creditworthiness of the issuer on which the credit swap is based. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements. TAX MATTERS - FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. A fund is required for federal income tax purposes to recognize as income for each taxable year its net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. In these cases, any gain or loss recognized with respect to a futures contract is considered to be 60% long-term capital gain or loss and 40% short-term capital gain or loss, without regard to the holding period of the contract. Gains and losses on certain other futures contracts (primarily non-U.S. futures contracts) are not recognized until the contracts are closed and are treated as long-term or short-term depending on the holding period of the contract. Sales of futures contracts which are intended to hedge against a change in the value of securities held by a fund may affect the holding period of such securities and, consequently, the nature of the gain or loss on such securities upon disposition. A fund may be required to defer the recognition of losses on one position, such as futures contracts, to the extent of any unrecognized gains on a related offsetting position held by the fund. B-16 In order for a fund to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income; i.e., dividends, interest, income derived from loans of securities, gains from the sale of securities or of foreign currencies or other income derived with respect to the fund's business of investing in securities or currencies. It is anticipated that any net gain recognized on futures contracts will be considered qualifying income for purposes of the 90% requirement. A fund will distribute to shareholders annually any net capital gains which have been recognized for federal income tax purposes on futures transactions. Such distributions will be combined with distributions of capital gains realized on the fund's other investments and shareholders will be advised on the nature of the distributions. TAX MATTERS - FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the Federal income tax treatment of certain transactions denominated in terms of a currency other than the U.S. dollar or determined by reference to the value of one or more currencies other than the U.S. dollar. The types of transactions covered by the special rules include the following: (1) the acquisition of, or becoming the obligor under, a bond or other debt instrument (including, to the extent provided in Treasury regulations, preferred stock); (2) the accruing of certain trade receivables and payables; and (3) the entering into or acquisition of any forward contract, futures contract, option or similar financial instrument if such instrument is not marked to market. The disposition of a currency other than the U.S. dollar by a taxpayer whose functional currency is the U.S. dollar is also treated as a transaction subject to the special currency rules. However, foreign currency-related regulated futures contracts and non-equity options are generally not subject to the special currency rules if they are or would be treated as sold for their fair market value at year-end under the marking-to-market rules applicable to other futures contracts unless an election is made to have such currency rules apply. With respect to transactions covered by the special rules, foreign currency gain or loss is calculated separately from any gain or loss on the underlying transaction and is normally taxable as ordinary income or loss. A taxpayer may elect to treat as capital gain or loss foreign currency gain or loss arising from certain identified forward contracts, futures contracts and options that are capital assets in the hands of the taxpayer and which are not part of a straddle. The Treasury Department issued regulations under which certain transactions subject to the special currency rules that are part of a "section 988 hedging transaction" (as defined in the Code and the Treasury regulations) will be integrated and treated as a single transaction or otherwise treated consistently for purposes of the Code. Any gain or loss attributable to the foreign currency component of a transaction engaged in by a fund which is not subject to the special currency rules (such as foreign equity investments other than certain preferred stocks) will be treated as capital gain or loss and will not be segregated from the gain or loss on the underlying transaction. It is anticipated that some of the non-U.S. dollar-denominated investments and foreign currency contracts a fund may make or enter into will be subject to the special currency rules described above. TAX MATTERS - FOREIGN TAX CREDIT. Foreign governments may withhold taxes on dividends and interest paid with respect to foreign securities. Foreign governments may also impose taxes on other payments or gains with respect to foreign securities. If, at the close of its fiscal year, more than 50% of a fund's total assets are invested in securities of foreign issuers, the fund may elect to pass through foreign taxes paid, and thereby allow shareholders to take a deduction or, if they meet certain holding period requirements, a tax credit on their tax returns. If shareholders do not meet the holding period requirements, they may still be entitled to a deduction for certain gains than were actually distributed by the fund, but will also show the amount of the available offsetting credit or deduction. TEMPORARY INVESTMENTS. A fund may take temporary defensive measures that are inconsistent with the fund's normal fundamental or non-fundamental investment policies and strategies in response to adverse market, economic, political or other conditions. Such measures could include, but are not limited to, investments in (1) highly liquid short-term fixed income securities issued by or on behalf of municipal or corporate issuers, obligations of the U.S. Government and its agencies, commercial paper, and bank certificates of deposit; (2) shares of other investment companies which have investment objectives consistent with those of the fund; (3) repurchase agreements involving any such securities; and (4) other money market instruments. There is no limit on the extent to which the fund may take temporary defensive measures. In taking such measures, the fund may fail to achieve its investment objective. B-17 VIPER SHARES. VIPER Shares are exchange-traded shares that represent an interest in a portfolio of stocks held by Vanguard index funds. "VIPER" stands for Vanguard Index Participation Equity Receipts. Any fund that issues VIPER Shares may repurchase those shares on the open market at the current market price if doing so would be advantageous for the fund. A repurchase might be advantageous, for example, because the VIPER Shares are more cost-effective than alternative investments, are selling at a discount to net asset value, will cause the fund to more closely track its index than alternative investments, or some combination of the three. A fund that repurchases its VIPER Shares also may lend those shares to qualified institutional borrowers as part of the fund's securities lending activities. A fund's investments in VIPER Shares are also subject to the descriptions and risks described above under the headings "Exchange Traded Funds" and "Other Investment Companies." WARRANTS. Warrants are instruments which give the holder the right, but not the obligation, to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments. WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS. When-issued, delayed delivery and forward commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these transactions, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued as anticipated. Because payment for the securities is not required until the delivery date, these risks are in addition to the risks associated with a fund's investments. When a fund has sold a security pursuant to one of these transactions, the fund does not participate in further gains or losses with respect to the security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, a fund could miss a favorable price or yield opportunity or suffer a loss. A fund may renegotiate a when-issued or forward transaction and may sell the underlying securities before delivery, which may result in capital gains or losses for the fund. When-issued, delayed delivery and forward commitment transactions may be considered to constitute borrowing transactions. When-issued, delayed delivery and forward commitment transactions will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." FUNDAMENTAL INVESTMENT LIMITATIONS The Fund is subject to the following fundamental investment limitations, which cannot be changed in any material way without the approval of the holders of a majority of the Fund's shares. For these purposes, a "majority" of shares means shares representing the lesser of: (i) shares representing 67% or more of the Fund's net assets voted, so long as shares representing more than 50% of a Fund's net assets are present or represented by proxy; or (ii) shares representing more than 50% of the Fund's net assets. BORROWING. The Fund may not borrow money, except for temporary or emergency purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may borrow money through banks, reverse repurchase agreements, or Vanguard's interfund lending program only, and must comply with all applicable regulatory conditions. The Fund may not make any additional investments if its outstanding borrowings exceed 5% of net assets. COMMODITIES. The Fund may not invest in commodities, except that it may invest in stock futures contracts, stock options, and options on stock futures contracts. No more than 5% of the Fund's total assets may be used as initial margin deposit for futures contracts, and no more than 20% of the Fund's total assets may be invested in futures contracts or options at any time. B-18 DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not: (i) purchase more than 10% of the outstanding voting securities of any one issuer; or (ii) purchase securities of any issuer if, as a result, more than 5% of the Fund's total assets would be invested in that issuer's securities. This limitation does not apply to obligations of the United States Government or its agencies or instrumentalities. ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result, more than 15% of its net assets would be invested in securities that are illiquid. INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total assets in any one industry. INVESTING FOR CONTROL. The Fund may not invest in a company for purposes of controlling its management. INVESTMENT COMPANIES. The Fund may not invest in any other investment company, except through a merger, consolidation or acquisition of assets, or to the extent permitted by Section 12 of the 1940 Act. Investment companies whose shares the Fund acquires pursuant to Section 12 must have investment objectives and investment policies consistent with those of the Fund. LOANS. The Fund may not lend money to any person except (i) by purchasing bonds or other fixed income securities or by entering into repurchase agreements; (ii) by entering into collateralized repurchase agreements; (iii) as provided under the heading "Lending of Securities"; or (iv) to another Vanguard fund through Vanguard's interfund lending program. MARGIN. The Fund may not purchase securities on margin or sell securities short, except as permitted by the Fund's investment policies relating to commodities. OIL, GAS, MINERALS. The Fund may not invest in interests in oil, gas, or other mineral exploration or development programs. OPTIONS. The Fund may not purchase or sell put or call options, except as permitted by the Fund's investment policies relating to commodities. PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more than 15% of its net assets. REAL ESTATE. The Fund may not invest directly in real estate, although it may invest in securities of companies that deal in real estate. SENIOR SECURITIES. The Fund may not issue senior securities, except in compliance with the 1940 Act. UNDERWRITING. The Fund may not engage in the business of underwriting securities issued by other persons. The Fund will not be considered an underwriter when disposing of its investment securities. None of these limitations prevents the Fund from participating in The Vanguard Group (Vanguard). As a member of the Group, the Fund may own securities issued by Vanguard, make loans to Vanguard, and contribute to Vanguard's costs or other financial requirements. See "Management of the Fund" for more information. Compliance with the investment limitations set forth above is measured at the time the securities are purchased. If a percentage restriction is adhered to at the time the investment is made, a later change in percentage resulting from a change in the market value of assets will not constitute a violation of such restriction. B-19 SHARE PRICE The Fund's share price, called its net asset value, or NAV, is calculated each business day after the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. Net asset value per share is computed by dividing the net assets attributed to each share class by the number of Fund shares outstanding for that class. The Exchange typically observes the following holidays: New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Although the Fund expects the same holidays to be observed in the future, the Exchange may modify its holiday schedule or hours of operation at any time. PURCHASE OF SHARES The purchase price of shares of the Fund is the net asset value per share next determined after the order is received. The net asset value per share is calculated as of the close of the New York Stock Exchange on each day the Exchange is open for business. An order received prior to the close of the Exchange will be executed at the price computed on the date of receipt; and an order received after the close of the Exchange will be executed at the price computed on the next day the Exchange is open. The Fund reserves the right in its sole discretion (i) to suspend the offerings of its shares; (ii) to reject purchase and exchange purchase orders when in the judgment of management such rejection is in the best interest of the Fund; and (iii) to reduce or waive the minimum investment for or any other restrictions on initial and subsequent investments for certain fiduciary accounts 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 Commission; (ii) during any period when an emergency exists as defined by the Commission as a result of which it is not reasonably practicable for the Fund to dispose of securities owned by it, or fairly to determine the value of its assets; and (iii) for such other periods as the Commission may permit. The Fund has made an election with the Commission to pay in cash all redemptions requested by any shareholder of record limited in amount during any 90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of such period. Shares purchased on or after April 23, 2001, are subject to a 1% redemption fee if redeemed within five years of purchase. Shares purchased before April 23, 2001, are not subject to the 1% fee. The fee is withheld from redemption proceeds and retained by the Fund. Shares redeemed may be worth more or less than what was paid for them, depending on the market value of the securities held by the Funds. We will always redeem your oldest shares first. In addition, in the event that you transfer your shares to a different account registration, or convert them to a different share class, the shares will retain their redemption fee status. If you transfer or convert less than 100% of your account, we will carry over the redemption fee status of your shares on a proportionate basis. For example, assume that John and Mary Doe hold 200 Fund shares in a jointly registered account, with 150 shares (75% of the total shares) currently subject to the redemption fee, and 50 shares (25% of the total shares) currently exempt from the redemption fee. If the Does transfer 50 of their 200 shares to an account registered in one of their individual names, 25% of the transferred shares (or, 12.5 shares) will be exempt from the redemption fee, and 75% of the transferred shares (or, 37.5 shares) will continue to be subject to the redemption fee. Following the share transfer, the jointly registered account will hold 150 shares, with 25% of those shares (or, 37.5 shares) exempt from the redemption fee, and 75% of those shares (or, 112.5 shares) still subject to the redemption fee. This same procedure would apply if, rather than transferring shares to a different account registration, the Does were to convert a portion of their shares to a different share class. B-20 All shares become exempt from the redemption fee based on their initial purchase date, regardless of whether such shares are subsequently transferred to a different account registration or converted to a different share class. MANAGEMENT OF THE FUND THE VANGUARD GROUP The Fund is a member of The Vanguard Group of Investment Companies, which consists of more than 100 funds. Through their jointly-owned subsidiary, The Vanguard Group, Inc. (Vanguard), the Fund and the other funds in The Vanguard Group obtain at cost virtually all of their corporate management, administrative, and distribution services. Vanguard also provides investment advisory services on an at-cost basis to several Vanguard funds. Vanguard employs a supporting staff of management and administrative personnel needed to provide the requisite services to the funds and also furnishes the funds with necessary office space, furnishings, and equipment. Each fund pays its share of Vanguard's net expenses, which are allocated among the funds under methods approved by the board of trustees of each fund. In addition, each fund bears its own direct expenses, such as legal, auditing, and custodian fees. The funds' officers are also officers and employees of Vanguard. No officer or employee owns, or is permitted to own, any securities of any external adviser for the funds. Vanguard, Vanguard Marketing Corporation, the funds' advisers, and the funds have adopted Codes of Ethics designed to prevent employees who may have access to nonpublic information about the trading activities of the funds (access persons) from profiting from that information. The Codes permit access persons to invest in securities for their own accounts, including securities that may be held by the funds, but place substantive and procedural restrictions on their trading activities. For example, the Codes require that access persons receive advance approval for every securities trade to ensure that there is no conflict with the trading activities of the funds. Vanguard was established and operates under an Amended and Restated Funds' Service Agreement which was approved by the shareholders of each of the funds. The amounts which each of the funds has invested are adjusted from time to time in order to maintain the proportionate relationship between each fund's relative net assets and its contribution to Vanguard's capital. At August 31, 2002, the Fund had contributed capital to Vanguard representing 0.40% of its net assets. The amount contributed by the Fund was $2,842,000, which represented 0.02% of Vanguard's capitalization. The Amended and Restated Funds' Service Agreement provides that each Vanguard fund may be called upon to invest up to 0.40% of its current net assets in Vanguard as contributions to Vanguard's capitalization. MANAGEMENT. Corporate management and administrative services include: (1) executive staff; (2) accounting and financial; (3) legal and regulatory; (4) shareholder account maintenance; (5) monitoring and control of custodian relationships; (6) shareholder reporting; and (7) review and evaluation of advisory and other services provided to the Fund by third parties. DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of The Vanguard Group, Inc., provides all distribution and marketing activities for the funds in the Group. The principal distribution expenses are for advertising, promotional materials and marketing personnel. Distribution services may also include organizing and offering to the public, from time to time, one or more new investment companies which will become members of The Vanguard Group. The trustees review and approve the amount to be spent annually on distribution activities, and the manner and amount to be spent on each fund. The trustees also determine whether to organize new investment companies. One half of the distribution expenses of a marketing and promotional nature is allocated among the funds based upon relative net assets. The remaining one half of those expenses is allocated among the funds based upon each fund's sales for the preceding 24 months relative to the total sales of the funds as a Group; provided, however, that no fund's aggregate quarterly rate of contribution for distribution expenses of a marketing and promotional nature shall exceed 125% of average distribution expense rate for The Vanguard Group, and that no fund shall incur annual distribution expenses in excess of 0.20 of 1% of its average month-end net assets. B-21 During the fiscal year ended December 31, 2000, the fiscal period January 1 through August 31, 2001, and the fiscal year ended August 31, 2002, the Fund incurred approximately $67,242,000, $42,477,000, and $52,193,000, respectively, of The Vanguard Group's management and administrative (including transfer agency), distribution, and marketing expenses. The Fund has asked its investment adviser to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the Fund part of the commissions generated. Such rebates are used solely to reduce the Fund's management and administrative expenses and are not reflected in these totals. INVESTMENT ADVISORY SERVICES Vanguard provides investment advisory services to several Vanguard funds. These services are provided on an at-cost basis from an experienced investment management staff employed directly by Vanguard. OFFICERS AND TRUSTEES The officers of the Fund manage its day-to-day operations under the direction of the Fund's board of trustees. The trustees set broad policies for the Fund and choose the Fund's officers. Each trustee serves the Fund until its termination; until the trustee's retirement, resignation, death; or otherwise as specified in the Trust's organizational documents. Any trustee may be removed at a meeting of shareholders by a vote representing two-thirds of the total net asset value of all shares of the Fund. Each trustee also serves as a director of The Vanguard Group, Inc. The following chart shows information for each trustee and executive officer of the Fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.
NUMBER OF VANGUARD FUNDS POSITION(S) HELD TRUSTEE/OFFICER PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY NAME, YEAR OF BIRTH WITH FUND SINCE THE PAST FIVE YEARS TRUSTEE - ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEE John J. Brennan* Chairman of the May, 1987 Chairman of the Board, Chief Executive 112 (1954) Board, Chief Officer, and Director(Trustee) of The Executive Officer Vanguard Group, Inc. and each of the and Trustee investment companies served by The Vanguard Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES Charles D. Ellis Trustee January, 2001 The Partners of '63 (pro bono ventures in 112 (1937) education); Senior Advisor to Greenwich Associates (international business strategy consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. Rajiv L. Gupta Trustee December, 2001 Chairman and Chief Executive Officer 90 (1945) (since October, 1999), Vice Chairman (January-September, 1999), and Vice President (prior to September 1999) of Rohm and Haas Co. (chemicals); Director of Technitrol, Inc. (electronic components) and AgereSystems (communication components); Board Member of American Chemistry Council; Trustee of Drexel University. - ------------------------------------------------------------------------------------------------------------------------------------ *Officers of the Fund are "Interested persons" as defined in the 1940 Act.
B-22
NUMBER OF VANGUARD FUNDS POSITION(S) HELD TRUSTEE/OFFICER PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY NAME, YEAR OF BIRTH WITH FUND SINCE THE PAST FIVE YEARS TRUSTEE - ------------------------------------------------------------------------------------------------------------------------------------ JoAnn Heffernan Heisen Trustee July, 1998 Vice President, Chief Information Officer, and 112 (1950) Member of the Executive Committee of Johnson & Johnson (pharmaceuticals/ consumer products); Director of the Medical Center at Princeton and Women's Research Burton G. Malkiel Trustee May, 1977 Chemical Bank Chairman's Professor of 110 (1932) Economics, Princeton University; Director of Vanguard Investment Series plc (Irish investment (Ireland) Limited (Irish investment managementfirm) since November, 2001, Prudential Insurance Co. of America, BKF Capital (investment management), The Jeffrey Co. (holding company), and NeuVis, Inc. (software company). Alfred M. Rankin, Jr. Trustee January, 1993 Chairman, President, Chief Executive 112 (1941) Officer, and Director of NACCO Industries, Inc. (forklift trucks/housewares/lignite); Director of Goodrich Corporporation (industrial products/aircraft systems and services). Director of the Standard Products Company (supplier for automotive industry) until 1998. - ------------------------------------------------------------------------------------------------------------------------------------ J. Lawrence Wilson Trustee April, 1985 Retired Chairman and Chief Executive 112 (1936) Officer of Rohm and Haas Co. (chemicals); Director of Cummins Inc. (diesel engines), The Mead Corp. (paper products), and AmerisourceBergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University. - ------------------------------------------------------------------------------------------------------------------------------------ EXECUTIVE OFFICERS R. Gregory Barton* Secretary June, 2001 Managing Director and General Counsel 112 (1951) of The Vanguard Group, Inc. (since September, 1997); Secretary of The Vanguard Group, Inc. and of each of the investment companies served by The Vanguard Group, Inc. (since June, 2001); Principal of The Vanguard Group, Inc. (prior to September, 1997). Thomas J. Higgins* Treasurer July, 1998 Principal of The Vanguard Group, Inc.; 112 (1957) Treasurer of each of the investment companies served by The Vanguard Group, Inc. (since July, 1998). - ------------------------------------------------------------------------------------------------------------------------------------ *Officers of the Fund are "Interested persons" as defined in the 1940 Act.
Mr. Ellis is a Senior Advisor to Greenwich Associates, a firm that consults on business strategy to professional financial services organizations in markets around the world. A large number of financial service providers, including The Vanguard Group, Inc., subscribe to programs of research-based consulting. During 2000 and 2001, Vanguard paid Greenwich subscription fees amounting to less than $175,000. Vanguard's subscription rates are similar to those of other subscribers. Board Committees: The Fund's board has the following committees: - - Audit Committee: This committee oversees the accounting and financial reporting policies, the systems of internal controls, and the independent audits of the Fund and The Vanguard Group, Inc. All independent B-23 trustees serve as members of the committee. The committee held two meetings during the Fund's last fiscal year. - - Compensation Committee: This committee oversees the compensation programs established by the Fund and The Vanguard Group, Inc., for the benefit of their employees, officers, and trustees/directors. All independent trustees serve as members of the committee. The committee held two meetings during the Fund's last fiscal year. - - Nominating Committee: This committee nominates candidates for election to the board of directors of The Vanguard Group, Inc. and the board of trustees of the Fund (collectively, the "Vanguard boards"). The committee also has the authority to recommend the removal of any director or trustee from the Vanguard boards. All independent trustees serve as members of the committee. The committee held two meetings during the Fund's last fiscal year. The Nominating Committee will consider shareholder recommendations for trustee nominees. Shareholders may send recommendations to Mr. Wilson, Chairman of the Committee. TRUSTEES' OWNERSHIP OF FUND SHARES All trustees allocate their investments among the various Vanguard funds based on their own investment needs. The following table shows each trustee's ownership of shares of the Fund and of all Vanguard funds served by the Trustee as of December 31, 2001. As a group, the Fund's trustees and officers own less than 1% of the outstanding shares of the Fund.
DOLLAR RANGE OF AGGREGATE DOLLAR RANGE FUND SHARES OF VANGUARD FUND SHARES FUND NAME OF TRUSTEE OWNED BY TRUSTEE OWNED BY TRUSTEE - ---------------------------------------------------------------------------------------------------------------- Vanguard PRIMECAP Fund John J. Brennan Over $100,000 Over $100,000 Charles D. Ellis None Over $100,000 Rajiv L. Gupta None Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel None Over $100,000 Alfred M. Rankin, Jr. Over $100,000 Over $100,000 J. Lawrence Wilson None Over $100,000 - ----------------------------------------------------------------------------------------------------------------
- - TRUSTEE COMPENSATION The same individuals serve as trustees of all Vanguard funds (with two exceptions, which are noted in the table appearing on page B-25), and each fund pays a proportionate share of the trustees' compensation. The funds employ their officers on a shared basis, as well. However, officers are compensated by The Vanguard Group, Inc., not the funds. INDEPENDENT TRUSTEES. The funds compensate their independent trustees--that is, the ones who are not also officers of the fund--in three ways: - - The independent trustees receive an annual fee for their service to the funds, which is subject to reduction based on absences from scheduled board meetings. - - The independent trustees are reimbursed for the travel and other expenses that they incur in attending board meetings. - - Upon retirement (after attaining age 65 and completing five years of service), the independent trustees who began their service prior to January 1, 2001, receive a retirement benefit under a separate account arrangement. As of January 1, 2001, the opening balance of each eligible trustee's separate account was generally equal to the net present value of the benefits he or she accrued under the trustees' former retirement plan. Each eligible trustee's separate account will be credited annually with interest at a rate of 7.5% until the trustee receives his or her final distribution. Those independent trustees who began their service on or after January 1, 2001, are not eligible to participate in the plan. "INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in this capacity. He is, however, paid in his role as officer of The Vanguard Group, Inc. B-24 COMPENSATION TABLE. The following table provides compensation details for each of the trustees. We list the amounts paid as compensation and accrued as retirement benefits by the Fund for each trustee. In addition, the table shows the total amount of benefits that we expect each trustee to receive from all Vanguard funds upon retirement, and the total amount of compensation paid to each trustee by all Vanguard funds. VANGUARD PRIMECAP FUND TRUSTEES' COMPENSATION TABLE
PENSION OR RETIREMENT BENEFITS ACCRUED ACCRUED COMPENSATION AGGREGATE AS PART OF THIS RETIREMENT FROM ALL COMPENSATION FUND'S BENEFIT AT VANGUARD FUNDS NAMES OF TRUSTEE FROM THIS FUND(1) EXPENSES(1) JANUARY 1, 2002 AID TO TRUSTEE(2) - -------------------------------------------------------------------------------------------------------------- John J. Brennan N/A N/A N/A N/A Charles D. Ellis $3,033 N/A N/A N/A Rajiv L. Gupta(3) 2,022 N/A N/A N/A JoAnn Heffernan Heisen 3,033 $56 $29,918 $104,000 Bruce K. MacLaury(4) 962 57 78,176 99,000 Burton G. Malkiel 3,033 214 97,991 104,000 Alfred M. Rankin, Jr. 3,033 109 49,997 104,000 James O. Welch, Jr.(4) 1,011 71 97,720 104,000 J. Lawrence Wilson 3,472 158 72,661 119,000 - -------------------------------------------------------------------------------------------------------------- (1) The amounts shown in this column are based on the Fund's fiscal year ended August 31, 2002. (2) The amounts reported in this column reflect the total compensation paid to each trustee for his or her service as trustee of 106 Vanguard funds (104 in the case of Mr. Malkiel; 86 in the case of Mr. MacLaury; and 84 in the case of Mr. Gupta) for the 2001 calendar year. (3) Mr. Gupta joined the Fund's board, effective December 31, 2001. (4) Mr. MacLaury and Mr. Welch retired from the Fund's board, effective December 31, 2001.
INVESTMENT ADVISORY SERVICES The Fund has entered into an investment advisory agreement with PRIMECAP Management Company (PRIMECAP), located at 225 South Lake Street, Pasadena, CA 91101, under which PRIMECAP manages the investment and reinvestment of the Fund's assets and continuously reviews, supervises, and administers the Fund's investment program. PRIMECAP discharges its responsibilities subject to the supervision and oversight of the officers and trustees of the Fund. PRIMECAP is a California corporation whose outstanding shares are owned by its directors and officers. The directors of the corporation and the offices they currently hold are: Howard Bernard Schow, Chairman; Mitchell John Milias, Vice Chairman; and Theofanis Anastasios Kolokotrones, President. The Fund pays PRIMECAP an advisory fee at the end of each fiscal quarter, calculated by applying a quarterly rate, based on the following annual percentage rates, to the Fund's average month-end net assets for the quarter:
NET ASSETS RATE ---------- ----- First $50 million. . . . . . . . . . . . . . . . .500% Next $200 million. . . . . . . . . . . . . . . . .450% Next $250 million. . . . . . . . . . . . . . . . .375% Next $1,750 million. . . . . . . . . . . . . . . .250% Next $2,750 million. . . . . . . . . . . . . . . .200% Next $5,000 million. . . . . . . . . . . . . . . .175% Over $10,000 million . . . . . . . . . . . . . . .150%
B-25 During the fiscal year ended December 31, 2000, the fiscal period January 1 through August 31, 2001, and the fiscal year ended August 31, 2002, the Fund incurred investment advisory fees of approximately $39,304,000, $24,289,000, and $31,593,000, respectively. The Fund's current agreement with its adviser is renewable for one-year periods, only if (1) each renewal is specifically approved at least annually by a vote of the Fund's board of trustees, including the affirmative votes of a majority of the trustees who are not parties to the agreement or "interested persons" (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of considering such approval, or (2) each renewal is specifically approved by a vote of a majority of the Fund's outstanding voting securities. An agreement is automatically terminated if assigned, and may be terminated without penalty at any time (1) by vote of the board of trustees of the Fund on (sixty) 60 days' written notice to PRIMECAP; or (2) by a vote of a majority of the Fund's outstanding voting securities, or (3) by PRIMECAP upon 90 days' written notice to the Fund. BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT Each Fund's board of trustees oversees the Fund's management and performance on a regular basis, and the board determines annually whether to approve and renew the Fund's investment advisory agreement. Vanguard provides the board with monthly, quarterly, and annual analyses of the adviser performance. In addition, the investment adviser provides the board with quarterly self-evaluations and certain other information the board deems important to evaluate the short- and long-term performance of the adviser. Each Fund's portfolio managers meet with the board periodically to discuss the management and performance of the Fund. When considering whether to renew an investment advisory contract, the board examines several factors, but does not identify any particular factor as controlling their decision. Some of the factors considered by the board include: the nature, extent, and quality of the advisory services provided as well as other material facts, such as the investment performance of the Fund's assets managed by the adviser and the fair market value of the services provided. The board reviews and considers the extent to which the adviser has realized or will realize economies of scale as the Fund grows. Additional information is provided to the board detailing other sources of revenue to the adviser or its affiliates from its relationship with the Fund and intangible or "fall-out" benefits that accrue to the adviser and its affiliates, if relevant, and the adviser's control of the investment expenses of each Fund, such as transaction costs, including ways in which portfolio transactions for the Funds are conducted and brokers are selected. For PRIMECAP, the board also takes into account the nature of the fee arrangements, which include breakpoints that will adjust the fee downward as the size of a Fund increases. The board also reviews the investment performance of each Fund compared with a peer group of funds and an appropriate index or combination of indexes, in addition to a comparative analysis of expense ratios of, and advisory fees paid by, similar funds. The following tables reflect a sample of the most recent data for each Fund:
ONE-YEAR ADVISORY FEES FIVE-YEAR (EXPRESSED AS AVERAGE AVERAGE TEN-YEAR AN ANNUAL ANNUAL RETURN ANNUAL RETURN AVERAGE ANNUAL EFFECTIVE (BEFORE TAXES) (BEFORE TAXES) RETURN (BEFORE RATE OF THE FOR PERIOD FOR PERIOD TAXES) FOR PERIOD FUND'S AVERAGE PRIMECAP ENDED 8/31/02 ENDED 8/31/02 ENDED 8/31/02 EXPENSE RATIO NET ASSETS) - -------------------------------------------------------------------------------------------------------- Investor Shares -23.38% 4.74% 15.21% 0.49% 0.18% Admiral Shares -- -- -- 0.38 0.18 Average Multi-cap Growth Fund* -25.62 -0.70 8.66 1.68 0.69 S&P 500 Index -17.99 1.74 10.39 N/A N/A - -------------------------------------------------------------------------------------------------------- *Data provided by Lipper, Inc.
B-26 Based upon its most recent evaluation of the investment staff, the portfolio management process, the short- and long-term performance results, and the current advisory arrangements for the Fund, the board determined that it would be in the best interest of the Fund's shareholders to renew the agreement with Primecap. PORTFOLIO TRANSACTIONS The investment advisory agreement authorizes PRIMECAP (with the approval of the Fund's board of trustees) to select the brokers or dealers that will execute the purchases and sales of portfolio securities for the Fund and directs PRIMECAP to use its best efforts to obtain the best available price and most favorable execution as to all transactions for the Fund. PRIMECAP has undertaken to execute each investment transaction at a price and commission which provides the most favorable total cost or proceeds reasonably obtainable under the circumstances. In placing portfolio transactions, PRIMECAP 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 PRIMECAP. PRIMECAP considers such information useful in the performance of its obligations under the agreement, but is unable to determine the amount by which such services may reduce its expenses. The investment advisory agreement also incorporates 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 trustees, the 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 PRIMECAP to the Fund. Currently, it is the Fund's policy that PRIMECAP 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. PRIMECAP 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 PRIMECAP and/or the Fund. However, PRIMECAP has informed the Fund that it generally will not pay higher commission rates specifically for the purpose of obtaining research services. During the fiscal year ended December 31, 2000, the fiscal period January 1 through August 31, 2001, and the fiscal year ended August 31, 2002, the Fund paid approximately $6,720,000, $3,582,000, and $7,999,000, in brokerage commissions, respectively. Some securities that are considered for investment by the Fund may also be appropriate for other Vanguard funds or for other clients served by PRIMECAP. If such securities are compatible with the investment policies of the Fund and one or more of the adviser's other clients, and are considered for purchase or sale at or about the same time, then transactions in such securities will be aggregated by the adviser and the purchased securities or sale proceeds will be allocated among the Fund and the other participating clients in a manner deemed equitable by PRIMECAP. Although there may 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 trustees. B-27 YIELD AND TOTAL RETURN The yields of the Fund for the 30-day period ended August 31, 2002, were as follows: 0.59% for Investor Shares and 0.68% for Admiral Shares. The average annual total returns (both before and after taxes) for the one-, five-, and ten-year periods, or since inception ended August 31, 2002, are set forth below: 1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED 8/31/2002* 8/31/2002 8/31/2002 VANGUARD PRIMECAP FUND INVESTOR SHARES Return Before Taxes -24.04% 4.74% 15.21% Return After Taxes on Distributions -24.27 3.48 13.98 Return After Taxes on Distributions and Sale of Fund Shares -14.72 3.79 12.91 VANGUARD PRIMECAP FUND ADMIRAL SHARES** Return Before Taxes -17.35% NA NA *Reflective of the 1% fee assessed on redemptions of shares purchased on or after April 23, 2001, and held for less than five years. **The 1 year return is for the period November 12, 2001, through August 31, 2002. AVERAGE ANNUAL TOTAL RETURN Average annual total return is the average annual compounded rate of return for the periods of one year, five years, ten years or the life of the fund, all ended on the last day of a recent month. Average annual total return quotations will reflect changes in the price of the fund's shares and assume that all dividends and capital gains distributions during the respective periods were reinvested in fund shares. Average annual total returns are quoted to the nearest hundredth of one percent. AVERAGE ANNUAL TOTAL RETURN (BEFORE TAXES) Average annual total return is calculated by finding the average annual compounded rates of return over the 1-, 5-, and 10-year periods (or for the periods of the fund's operations) that would equate the initial amount invested to the ending redeemable value, according to the following formula: T = (ERV/P)1/N - 1 Where: T =average annual total return P =a hypothetical initial investment of $1,000 n =number of years ERV =ending redeemable value of a hypothetical $1,000 investment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, and 10-year periods (or fraction portion thereof) Instructions: 1. Assume the maximum sales load (or other charges deducted from payments) is deducted from the initial $1,000 investment. 2. Assume all distributions by the fund are reinvested at the price stated in the prospectus (including any sales load imposed upon reinvestment of dividends) on the reinvestment dates during the period. Adjustments may be made for subsequent re-characterizations of distributions. 3. Include all recurring fees that are charged to all shareholder accounts. For any account fees that vary with the size of the account, assume an account size equal to the fund's mean (or median) account size. Reflect, as appropriate, any recurring fees charged to shareholder accounts that are paid other than by redemption of the fund's shares. B-28 4. Determine the ending value by assuming a complete redemption at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) and the deduction of all nonrecurring charges deducted at the end of each period. If shareholders are assessed a deferred sales load, assume the maximum deferred sales load is deducted at the times, in the amounts, and under the terms disclosed in the prospectus. AVERAGE ANNUAL TOTAL RETURN (AFTER TAXES ON DISTRIBUTIONS) We calculate a fund's average annual total return (after taxes on distributions) by finding the average annual compounded rates of return over the 1-, 5-, and 10-year periods (or for the periods of the fund's operations) that would equate the initial amount invested to the after-tax ending value, according to the following formulas: T = (ATV\\D\\/P)1/N - 1 Where: T =average annual total return (after taxes on distributions) P =a hypothetical initial investment of $1,000 n =number of years ATVD =ending value of a hypothetical $1,000 investment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof), after taxes on fund distributions but not after taxes on redemption Instructions: 1. Assume the maximum sales load (or other charges deducted from payments) is deducted from the initial $1,000 investment. 2. Assume all distributions by the fund--less the taxes due on such distributions--are reinvested at the price stated in the prospectus (including any sales load imposed upon reinvestment of dividends) on the reinvestment dates during the period. 3. Include all recurring fees that are charged to all shareholder accounts. For any account fees that vary with the size of the account, assume an account size equal to the fund's mean (or median) account size. Assume that no additional taxes or tax credits result from any redemption of shares required to pay such fees. Reflect, as appropriate, any recurring fees charged to shareholder accounts that are paid other than by redemption of the fund's shares. 4. Calculate the taxes due on any distributions by the fund by applying the highest individual marginal federal income tax rates in effect on the reinvest date, to each component of the distributions on the reinvestment date (e.g., ordinary income, short-term capital gain, long-term capital gain). Note that the applicable tax rates may vary over the measurement period. Distributions should be adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date. Assume no taxes are due on the portion of any distribution that would not result in federal income tax on an individual, e.g., tax-exempt interest or non-taxable returns of capital. The effect of applicable tax credits, such as the foreign tax credit, should be taken into account in accordance with federal tax law. Disregard any potential tax liabilities other than federal tax liabilities (e.g., state and local taxes); the effect of phaseouts of certain exemptions, deductions, and credits at various income levels; and the impact of the federal alternative minimum tax. 5. Determine the ending value by assuming a complete redemption at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) and the deduction of all nonrecurring charges deducted at the end of each period. If shareholders are assessed a deferred sales load, assume the maximum deferred sales load is deducted at the times, in the amounts, and under the terms disclosed in the prospectus. Assume that the redemption has no tax consequences. B-29 AVERAGE ANNUAL TOTAL RETURN (AFTER TAXES ON DISTRIBUTIONS AND REDEMPTION) We calculate a fund's average annual total return (after taxes on distributions and redemption) by finding the average annual compounded rates of return over the 1-, 5-, and 10-year periods (or for the periods of the fund's operations) that would equate the initial amount invested to the after-tax ending value, according to the following formulas: T = (ATV\\DR\\/P)1/N - 1 Where: T =average annual total return (after taxes on distributions and redemption) P =a hypothetical initial investment of $1,000 n =number of years ATVDR =ending value of a hypothetical $1,000 investment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof), after taxes on fund distributions and redemption Instructions: 1. Assume the maximum sales load (or other charges deducted from payments) is deducted from the initial $1,000 investment. 2. Assume all distributions by the fund--less the taxes due on such distributions--are reinvested at the price stated in the prospectus (including any sales load imposed upon reinvestment of dividends) on the reinvestment dates during the period. 3. Include all recurring fees that are charged to all shareholder accounts. For any account fees that vary with the size of the account, assume an account size equal to the fund's mean (or median) account size. Assume that no additional taxes or tax credits result from any redemption of shares required to pay such fees. Reflect, as appropriate, any recurring fees charged to shareholder accounts that are paid other than by redemption of the fund's shares. 4. Calculate the taxes due on any distributions by the fund by applying the highest individual marginal federal income tax rates in effect on the reinvest date, to each component of the distributions on the reinvestment date (e.g., ordinary income, short-term capital gain, long-term capital gain). Note that the applicable tax rates may vary over the measurement period. Distributions should be adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date. Assume no taxes are due on the portion of any distribution that would not result in federal income tax on an individual, e.g., tax-exempt interest or non-taxable returns of capital. The effect of applicable tax credits, such as the foreign tax credit, should be taken into account in accordance with federal tax law. Disregard any potential tax liabilities other than federal tax liabilities (e.g., state and local taxes); the effect of phaseouts of certain exemptions, deductions, and credits at various income levels; and the impact of the federal alternative minimum tax. 5. Determine the ending value by assuming a complete redemption at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) and the deduction of all nonrecurring charges deducted at the end of each period. If shareholders are assessed a deferred sales load, assume the maximum deferred sales load is deducted at the times, in the amounts, and under the terms disclosed in the prospectus. 6. Determine the ending value by subtracting capital gains taxes resulting from the redemption and adding the tax benefit from capital losses resulting from the redemption. (a) Calculate the capital gain or loss upon redemption by subtracting the tax basis from the redemption proceeds (after deducting any nonrecurring charges as specified by Instruction 5). B-30 (b) The fund should separately track the basis of shares acquired through the $1,000 initial investment and each subsequent purchase through reinvested distributions. In determining the basis for a reinvested distribution, include the distribution net of taxes assumed paid from the distribution, but not net of any sales loads imposed upon reinvestment. Tax basis should be adjusted for any distributions representing returns of capital and any other tax basis adjustments that would apply to an individual taxpayer, as permitted by applicable federal tax law. (c) The amount and character (e.g., short-term or long-term) of capital gain or loss upon redemption should be separately determined for shares acquired through the $1,000 initial investment and each subsequent purchase through reinvested distributions. The fund should not assume that shares acquired through reinvestment of distributions have the same holding period as the initial $1,000 investment. The tax character should be determined by the length of the measurement period in the case of the initial $1,000 investment and the length of the period between reinvestment and the end of the measurement period in the case of reinvested distributions. (d )Calculate the capital gains taxes (or the benefit resulting from tax losses) using the highest federal individual capital gains tax rate for gains of the appropriate character in effect on the redemption date and in accordance with federal tax law applicable on the redemption date. For example, applicable federal tax law should be used to determine whether and how gains and losses from the sale of shares with different holding periods should be netted, as well as the tax character (e.g., short-term or long-term) of any resulting gains or losses. Assume that a shareholder has sufficient capital gains of the same character from other investments to offset any capital losses from the redemption so that the taxpayer may deduct the capital losses in full. CUMULATIVE TOTAL RETURN Cumulative total return is the cumulative rate of return on a hypothetical initial investment of $1,000 for a specified period. Cumulative total return quotations reflect changes in the price of the Fund's shares and assume that all dividends and capital gains distributions during the period were reinvested in Fund shares. Cumulative total return is calculated by finding the cumulative rates of a return of a hypothetical investment over such periods, according to the following formula (cumulative total return is then expressed as a percentage): C = (ERV/P) - 1 Where: C =cumulative total return P =a hypothetical initial investment of $1,000 ERV =ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period SEC YIELDS Yield is the net annualized yield based on a specified 30-day (or one month) period assuming semiannual compounding of income. Yield is calculated by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula: YIELD = 2[((A-B)CD+1)6 - 1] Where: a =dividends and interest earned during the period b =expenses accrued for the period (net of reimbursements) c =the average daily number of shares outstanding during the period that were entitled to receive dividends d =the maximum offering price per share on the last day of the period B-31 FINANCIAL STATEMENTS The Fund's Financial Statements for the fiscal year ended August 31, 2002, appearing in the Vanguard PRIMECAP Fund's 2002 Annual Report to Shareholders, and the report thereon of PricewaterhouseCoopers LLP, independent accountants, also appearing therein, are incorporated by reference in this Statement of Additional Information. For a more complete discussion of the performance, please see the Fund's Annual Report to Shareholders, which may be obtained without charge. COMPARATIVE INDEXES Vanguard may use reprinted material discussing The Vanguard Group, Inc. or any of the member funds of The Vanguard Group of Investment Companies. Each of the investment company members of The Vanguard Group, including Vanguard PRIMECAP Fund, may, from time to time, use one or more of the following unmanaged indexes for comparative performance purposes. AVERAGE MULTI-CAP CORE FUND--An industry benchmark of average multi-cap core funds with similsr investment objectives and policies as measured by Lipper Inc. AVERAGE MULTI-CAP GROWTH FUND--An industry benchmark of average multi-cap growth funds with similsr investment objectives and policies as measured by Lipper Inc. STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by Standard & Poor's (S&P) Index Committee to include leading companies in leading industries and to reflect the U.S. stock market. STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic stocks. STANDARD & POOR'S 500/BARRA VALUE INDEX--contains stocks of the S&P 500 Index which have a lower than average price-to-book ratio. STANDARD & POOR'S SMALL CAP 600/BARRA VALUE INDEX--contains stocks of the S&P SmallCap 600 Index which have a lower than average price-to-book ratio. STANDARD & POOR'S SMALL CAP 600/BARRA GROWTH INDEX--contains stocks of the S&P SmallCap 600 Index which have a higher than average price-to-book ratio. RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index (comprising the 1,000 largest U.S.-based companies measured by total market capitalization) with the lowest price-to-book ratios, comprising 50% of the market capitalization of the Russell 1000. WILSHIRE 5000 TOTAL MARKET INDEX--consists of approximately 6,000 common equity securities, covering all stocks in the U.S. for which daily pricing is available. WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000 except for the 500 stocks in the S&P 500 Index. MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market value-weighted average of the performance of over 1,000 securities listed on the stock exchanges of countries in Europe, Australia, Asia, and the Far East. GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29 preferreds. The original list of names was generated by screening for convertible issues of $100 million or greater in market capitalization. The index is priced monthly. LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index that contains individually priced U.S. Treasury securities with maturities of 10 years or greater. MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S. Treasury, agency, and investment grade corporate bonds. LEHMAN BROTHERS 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 $100 million outstanding. This index includes over 1,500 issues. BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade general obligation municipal bonds. B-32 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--65% S&P 500 Index and 35% Lehman Brothers Corporate A or Better Bond Index. COMPOSITE INDEX--65% Lehman Brothers Credit A or Better Bond Index, 26% S&P/Barra Value Index, 4.5% S&P Utilities Index, and 4.5% S&P Integrated Telecommunication Services Index. LEHMAN BROTHERS LONG CREDIT A OR BETTER BOND INDEX--consists of all publicly issued, fixed rate, nonconvertible investment grade, dollar-denominated, SEC-registered corporate debt rated AA or AAA. 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 $5 trillion. LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CREDIT INDEX--is a market weighted index that contains individually priced U.S. Treasury, agency, and corporate investment grade bonds rated BBB- or better with maturities between one and five years. The index has a market value of over $1.6 trillion. LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CREDIT INDEX--is a market weighted index that contains individually priced U.S. Treasury, agency, and corporate securities rated BBB- or better with maturities between five and ten years. The index has a market value of over $800 billion. LEHMAN BROTHERS LONG (10+) GOVERNMENT/CREDIT INDEX--is a market weighted index that contains individually priced U.S. Treasury, agency, and corporate securities rated BBB- or better with maturities greater than ten years. The index has a market value of over $1.1 trillion. LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general equity funds with similar investment objectives and policies, as measured by Lipper Inc. LIPPER FIXED-INCOME FUND AVERAGE--an industry benchmark of average fixed-income funds with similar investment objectives and policies, as measured by Lipper Inc. LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds with similar investment objectives and policies, as measured by Lipper 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 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 Inc. LIPPER SMALL-CAP GROWTH FUND AVERAGE--an industry benchmark of funds that by prospectus or portfolio practice invest primarily in growth companies with market capitalizations less than $1 billion at the time of purchase. 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. B-33 SAI059 122002 B-34 PART C VANGUARD PRIMECAP FUND OTHER INFORMATION ITEM 23. EXHIBITS (a) Declaration of Trust, amended and restated July 19, 2002, is filed herewith. (b) By-Laws, filed on October 30, 2001, Post-Effective Amendment No. 23, are hereby incorporated by reference. (c) Not applicable (d) Investment Advisory Contract, is filed herewith. (e) Not applicable (f) Reference is made to the section entitled "Management of the Fund" in the Registrant's Statement of Additional Information (g) Custodian Agreement, for The Bank of New York, is filed herewith. (h) Amended and Restated Funds' Service Agreement, is filed herewith. (i) Legal Opinion (j) Consent of Independent Accountants, is filed herewith. (k) Not Applicable (l) Not Applicable (m) Not Applicable (n) Rule 18f-3 Plan, is filed herewith. (o) Not Applicable (p) Code of Ethics, filed herewith for The Vanguard Group; filed on May 25, 2001, Post-Effective Amendment No. 20, for PRIMECAP, is hereby incorporated by reference. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Registrant is not controlled by or under common control with any person. ITEM 25. INDEMNIFICATION The Registrant's organizational documents contain provisions indemnifying Trustees and officers against liability incurred in their official capacity. Article VII, Section 2 of the Declaration of Trust provides that the Registrant may indemnify and hold harmless each and every Trustee and officer from and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or related to the performance of his or her duties as a Trustee or officer. However, this provision does not cover any liability to which a Trustee or officer would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. Article VI of the By-Laws generally provides that the Registrant shall indemnify its Trustees and officers from any liability arising out of their past or present service in that capacity. Among other things, this provision excludes any liability arising by reason of willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the Trustee's or officer's office with the Registrant. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER PRIMECAP Management Company (PRIMECAP), is an investment adviser registered under the Investment Advisers Act of 1940, as amended (the Adviser Act). The list required by this Item 26 of officers and partners of PRIMECAP, together with any information as to any business profession, vocation or employment of a substantial nature engaged in by such officers and partners during the past two years, is incorporated herein by reference from Schedules B and D of Form ADV filed by PRIMECAP pursuant to the Advisers Act (SEC File No. 801-19765). C-1 ITEM 27. PRINCIPAL UNDERWRITERS (a) Not Applicable (b) Not Applicable (c) Not Applicable ITEM 28. LOCATION OF ACCOUNTS AND RECORDS The books, accounts, and other documents required to be maintained by Section 31 (a) of the Investment Company Act and the rules promulgated thereunder will be maintained at the offices of Registrant; Registrant's Transfer Agent, The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; and the Registrant's Custodian, The Bank of New York, One Wall Street, New York, New York, 10286. ITEM 29. MANAGEMENT SERVICES Other than as set forth under the description of The Vanguard Group in Part B of this Registration Statement, the Registrant is not a party to any management-related service contract. ITEM 30. UNDERTAKINGS Not Applicable C-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant hereby certifies that it meets all requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on the 22nd day of November, 2002. VANGUARD PRIMECAP FUND BY:_____________(signature)________________ (HEIDI STAM) JOHN J. BRENNAN* CHAIRMAN AND CHIEF EXECUTIVE OFFICER - -------------------------------------------------------------------------------- SIGNATURE TITLE DATE - -------------------------------------------------------------------------------- By:/S/ JOHN J. BRENNAN President, Chairman, Chief November 22, 2002 --------------------------- Executive Officer, and Trustee (Heidi Stam) John J. Brennan* By:/S/ CHARLES D ELLIS Trustee November 22, 2002 --------------------------- (Heidi Stam) Charles D. Ellis* By:/S/ JOANN HEFFERNAN HEISEN Trustee November 22, 2002 --------------------------- (Heidi Stam) JoAnn Heffernan Heisen* By:/S/ RAJIV L. GUPTA Trustee November 22, 2002 --------------------------- (Heidi Stam) Rajiv L. Gupta* By:/S/ BURTON G. MALKIEL Trustee November 22, 2002 --------------------------- (Heidi Stam) Burton G. Malkiel* By:/S/ ALFRED M. RANKIN, JR. Trustee November 22, 2002 --------------------------- (Heidi Stam) Alfred M. Rankin, Jr.* By:/S/ J. LAWRENCE WILSON Trustee November 22, 2002 --------------------------- (Heidi Stam) J. Lawrence Wilson* By:/S/ THOMAS J. HIGGINS Treasurer and Principal November 22, 2002 --------------------------- Financial Officer and Principal (Heidi Stam) Accounting Officer Thomas J. Higgins* *By Power of Attorney. See File Number 33-32216, filed on January 29, 2002. Incorporated by Reference. EXHIBIT INDEX Declaration of Trust . . . . . . . . . . . . . . . . . .Ex-99.a Custodian Agreement. . . . . . . . . . . . . . . . . . .Ex-99.g Service Agreement. . . . . . . . . . . . . . . . . . . .Ex-99.h Consent of Independent Accountants . . . . . . . . . . .Ex-99.j Multiclass Plan. . . . . . . . . . . . . . . . . . . . .Ex-99.n Code of Ethics . . . . . . . . . . . . . . . . . . . . .Ex-99.p EX-99.G 3 bankofny092002.txt BANK OF NEW YORK AMENDED AND RESTATED CUSTODY AGREEMENT AMENDED AND RESTATED CUSTODY AGREEMENT, dated as of June 19, 2001 between each open-end management investment company listed on Schedule II hereto as amended from time to time (each such investment company, a "Fund"), each a business trust organized and existing under the laws of the State of Delaware and registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the "1940 Act"), on behalf of certain of their series (each a "Series") having their principal office and place of business at c/o The Vanguard Group ("Vanguard"), P.O. Box 2600, Valley Forge, Pennsylvania 19482 and The Bank of New York, a New York corporation authorized to do a banking business having its principal office and place of business at One Wall Street, New York, New York 10286 ("Custodian"). W I T N E S S E T H: that for and in consideration of the mutual promises hereinafter set forth each Fund and Custodian agree as follows: 1. DEFINITIONS Whenever used in this Agreement, the following words shall have the meanings set forth below: 1.1 "AUTHORIZED PERSON" shall be any person, whether or not an officer or employee of a Fund, duly authorized to execute any Certificate or to give any Oral Instruction with respect to one or more Accounts, such persons to be designated in a Certificate as may be received by Custodian from time to time. 2. "AUTOFAX" shall mean an unsigned hard copy facsimile generated by a Fund's computer system and transmitted to Custodian. 3. "BNY AFFILIATE" shall mean any office, branch or subsidiary of The Bank of New York Company, Inc. 4. "BOOK-ENTRY SYSTEM" shall mean the Federal Reserve/Treasury book-entry system for receiving and delivering securities, its successors and nominees. 5. "BUSINESS DAY" shall mean any day on which Custodian, Book-Entry System and relevant Depositories are open for business. 6. "CERTIFICATE" shall mean any notice, instruction, or other instrument in writing, authorized or required by this Agreement to be given to Custodian, which is actually received by Custodian by letter or facsimile transmission and signed on behalf of a Fund by an Authorized Person of the Fund or a person reasonably believed by Custodian to be an Authorized Person. 7. "COMPOSITE CURRENCY UNIT" shall mean the Euro or any other composite currency unit consisting of the aggregate of specified amounts of specified currencies, as such unit may be constituted from time to time. 8. "DEPOSITORY" shall include (a) the Book-Entry System, (b) the Depository Trust Company, (c) any other clearing agency or securities depository registered with the Securities and Exchange Commission identified to a Fund from time to time, and (d) the respective successors and nominees of the foregoing. 9. "FOREIGN DEPOSITORY" shall mean (a) Euroclear, (b) Clearstream Banking, societe anonyme, (c) each Eligible Securities Depository as defined in Rule 17f-7 under the 1940 Act, as amended, identified to a Fund from time to time, and (d) the respective successors and nominees of the foregoing. 10. "INSTRUCTIONS" shall mean communications transmitted by electronic or telecommunications media, including S.W.I.F.T., computer-to- computer interface, dedicated transmission lines, telex or Autofax. 11. "ORAL INSTRUCTIONS" shall mean verbal instructions received by Custodian from an Authorized Person or from a person reasonably believed by Custodian to be an Authorized Person. 12. "SECURITIES" shall include, without limitation, any common stock and other equity securities, bonds, debentures and other debt securities, notes, mortgages or other obligations, and any instruments representing rights to receive, purchase, or subscribe for the same, or representing any other rights or interests therein (whether represented by a certificate or held in a Depository or by a Subcustodian). 13. "SERIES" shall mean the various portfolios, if any, of a Fund listed on Schedule II hereto, and if none are listed references to Series shall be references to the Fund. 14. "SUBCUSTODIAN" shall mean a bank (including any branch thereof) or other financial institution (other than a Foreign Depository) located outside the U.S. which is utilized by Custodian in connection with the purchase, sale or custody of Securities hereunder and identified to a Fund from time to time, and their respective successors and nominees. 2. APPOINTMENT OF CUSTODIAN; ACCOUNTS; REPRESENTATIONS, WARRANTIES, AND COVENANTS 2.1.(a) Each Fund hereby appoints Custodian as custodian of all Securities and cash at any time delivered to Custodian during the term of this Agreement, and authorizes Custodian to hold Securities in registered form in its name or the name of its nominees. Custodian hereby accepts such appointment and agrees to establish and maintain one or more securities accounts and cash accounts for each Series in which Custodian will hold Securities and cash as provided herein. Custodian shall maintain books and records segregating the assets of each Series from the assets of any other Series. Such accounts (each, an "Account"; collectively, the "Accounts") shall be in the name of the Fund on behalf of the relevant Series. (a) Custodian may from time to time establish on its books and records such sub-accounts within each Account as a Fund and Custodian may reasonably agree upon (each a "Special Account"), and Custodian shall reflect therein such assets as the Fund may specify in a Certificate or Instructions. (b) Custodian may from time to time establish pursuant to a written agreement with and for the benefit of a broker, dealer, futures commission merchant or other third party identified in a Certificate or Instructions such accounts on such terms and conditions as a Fund and Custodian shall reasonably agree, and Custodian shall transfer to such account such Securities and money as the Fund may specify in a Certificate or Instructions. 2.2 Each Fund hereby represents and warrants, which representations and warranties shall be continuing and shall be deemed to be reaffirmed upon each delivery of a Certificate or each giving of Oral Instructions or Instructions by such Fund, that: (i) It is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement, and to perform its obligations hereunder; (ii) This Agreement has been duly authorized, executed and delivered by the Fund, approved by a resolution of its board of trustees, constitutes a valid and legally binding obligation of the Fund, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency or other laws affecting generally the enforceability of creditors' rights or by equitable principles generally applied, and there is no statute, regulation, rule, order or judgment binding on it, and no provision of its charter or by-laws, nor of any mortgage, indenture, credit agreement or other contract binding on it or affecting its property, which would prohibit its execution or performance of this Agreement; (b) It is conducting its business in substantial compliance with all applicable laws and requirements, both state and federal, and has obtained all regulatory licenses, approvals and consents necessary to carry on its business as now conducted; (c) It will not use the services provided by Custodian hereunder in any manner that is, or will result in, a violation of any law, rule or regulation applicable to the Fund; (d) Its board of trustees or its foreign custody manager, as defined in Rule 17f-5 under the 1940 Act, has determined that use of each Subcustodian (including any Replacement Custodian) and each Depository which Custodian or any Subcustodian is authorized to utilize in accordance with Section 1(a) of Article III hereof, satisfies the applicable requirements of the 1940 Act and Rules 17f-4 or 17f-5 thereunder, as the case may be; (e) Upon receiving from Custodian an initial analysis of and information concerning changes in the custody risks associated with maintaining assets at a Foreign Depository, the Fund or its investment adviser has determined that the custody arrangements of each Foreign Depository provide reasonable safeguards against the custody risks associated with maintaining assets with such Foreign Depository within the meaning of Rule 17f-7 under the 1940 Act; (f) It is fully informed of the protections and risks associated with various methods of transmitting Instructions and Oral Instructions and delivering Certificates to Custodian, understands that there may be more secure methods of transmitting or delivering the same than the methods selected by the Fund, agrees that the security procedures (if any) to be utilized provide a commercially reasonable degree of protection in light of its particular needs and circumstances, acknowledges and agrees that Instructions need not be reviewed by Custodian if such Instructions require authentication codes and have such codes, acknowledges and agrees the same may conclusively be presumed by Custodian to have been given by person(s) duly authorized, and may be acted upon as given; (g) It shall manage its borrowings, including, without limitation, any advance or overdraft (including any day-light overdraft) in the Accounts, so that the aggregate of its total borrowings for each Series does not exceed the amount such Series is permitted to borrow under the 1940 Act; (h) Its transmission or giving of, and Custodian acting upon and in reliance on, Certificates, Instructions, or Oral Instructions pursuant to this Agreement shall at all times comply with the 1940 Act; (i) It shall impose and maintain restrictions on the destinations to which cash may be disbursed by Instructions to ensure that each disbursement is for a proper purpose; and (j) It has the right to make the pledge and grant the security interest and security entitlement to Custodian contained in Section 1 of Article V hereof, free of any right or prior claim of any other person or entity (except as otherwise provided by law), such pledge and such grants shall have a first priority subject to no setoffs, counterclaims, or other liens or grants prior to or on a parity therewith (except as otherwise provided by law). 2.3 The Fund hereby covenants that it shall from time to time complete and execute and deliver to Custodian upon Custodian's request a Form FR U-1 (or successor form) whenever the Fund borrows from Custodian any money to be used for the purchase or carrying of margin stock as defined in Federal Reserve Regulation U. 4. Custodian hereby represents and warrants, which representations and warranties shall be continuing and shall be deemed to be reaffirmed upon each receipt of a Certificate or each receipt of Oral Instructions or Instructions by the Custodian, that: (a) It is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder; (b) This Agreement has been duly authorized, executed and delivered by Custodian, constitutes a valid and legally binding obligation of Custodian, enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency or other laws affecting generally the enforceability of creditors' rights or by equitable principles generally applied, and there is no statute, regulation, rule, order or judgment binding on it, and no provision of its charter or by-laws, nor of any mortgage, indenture, credit agreement or other contract binding on it or affecting its property, which would prohibit its execution or performance of this Agreement; (c) It is conducting its business in substantial compliance with all applicable laws and requirements, both state and federal, and has obtained all regulatory licenses, approvals and consents necessary to carry on its business as now conducted; (d) It will not provide services hereunder in any manner that is, or will result in, a violation of any law, rule or regulation applicable to the Custodian; (e) Custodian will submit to the Funds on an annual basis a copy of its report prepared in compliance with the requirements of Statement of Auditing Standards No. 70 issued by the American Institute of Certified Public Accountants, as it may be amended from time to time; and (f) Custodian shall maintain, directly or through a third party selected with reasonable care, back-up computer and communication systems. 3. CUSTODY AND RELATED SERVICES 3.1(a) Subject to the terms hereof, each Fund hereby authorizes Custodian to hold any Securities and cash received by it from time to time for such Fund's account. Custodian shall be entitled to utilize Depositories, Subcustodians, and, subject to subsection (c) of this Section 1, Foreign Depositories, to the extent possible in connection with its performance hereunder. Securities and cash held in a Depository or Foreign Depository will be held subject to the rules, terms and conditions of such entity. Securities and cash held through Subcustodians shall be held subject to the terms and conditions of Custodian's agreements with such Subcustodians. Subcustodians may be authorized to hold Securities in Foreign Depositories in which such Subcustodians participate. Unless otherwise required by local law or practice or a particular subcustodian agreement, Securities deposited with a Subcustodian, a Depository or a Foreign Depository will be held in a commingled account, in the name of Custodian, holding only Securities held by Custodian as custodian for its customers. Custodian shall identify on its books and records the Securities and cash belonging to each Fund and their Series, whether held directly or indirectly through Depositories, Foreign Depositories, or Subcustodians. Custodian shall, directly or indirectly through Subcustodians, Depositories, or Foreign Depositories, endeavor, to the extent feasible, to hold Securities in the country or other jurisdiction in which the principal trading market for such Securities is located, where such Securities are to be presented for cancellation and/or payment and/or registration, or where such Securities are acquired. Custodian at any time may cease utilizing any Subcustodian and/or may replace a Subcustodian with a different Subcustodian (the "Replacement Subcustodian"). In the event Custodian selects a Replacement Subcustodian, Custodian shall not utilize such Replacement Subcustodian until after the Fund's board or foreign custody manager has determined that utilization of such Replacement Subcustodian satisfies the requirements of the 1940 Act and Rule 17f-5 thereunder. (a) Unless Custodian has received a Certificate or Instructions to the contrary, Custodian shall hold Securities indirectly through a Subcustodian only if (i) the Securities are not subject to any right, charge, security interest, lien or claim of any kind in favor of such Subcustodian or its creditors or operators, including a receiver or trustee in bankruptcy or similar authority, except for a claim of payment for the safe custody or administration of Securities on behalf of the Fund by such Subcustodian, and (ii) beneficial ownership of the Securities is freely transferable without the payment of cash or value other than for safe custody or administration. (b) With respect to each Foreign Depository, Custodian shall exercise reasonable care, prudence, and diligence (i) to provide the Fund with an analysis of the custody risks associated with maintaining assets with the Foreign Depository, and (ii) to monitor such custody risks on a continuing basis and promptly notify the Fund or the Fund's investment adviser of any material change in such risks. Each Fund acknowledges and agrees that such analysis and monitoring shall be made on the basis of, and limited by, information gathered from Subcustodians or through publicly available information otherwise obtained by Custodian, and shall include information concerning, but no evaluation of, Country Risks. As used herein the term "Country Risks" shall mean with respect to any Foreign Depository: (a) the financial infrastructure of the country in which it is organized, (b) such country's prevailing custody and settlement practices, (c) nationalization, expropriation or other governmental actions, (d) such country's regulation of the banking or securities industry, (e) currency controls, restrictions, devaluations or fluctuations, and (f) market conditions which affect the order execution of securities transactions or affect the value of securities. 2. Promptly after the close of business on each Business Day or the next Business Day in the case of a Subcustodian or Foreign Depositary, or in accordance with practices in the related local market, Custodian shall furnish each Fund with confirmations and a summary, on a per Series basis, of all transfers to or from the Accounts, either hereunder or with any Subcustodian appointed in accordance with this Agreement during said day. Where Securities are transferred to an Account for a Series, Custodian shall also by book-entry or otherwise identify as belonging to such Series a quantity of Securities in a fungible bulk of Securities registered in the name of Custodian (or its nominee) or shown on Custodian's account on the books of the Book-Entry System or a Depository. At least monthly and from time to time, Custodian shall furnish each Fund with a detailed statement, on a per Series basis, of the Securities and cash held by Custodian for such Fund. 3. With respect to all Securities held hereunder, Custodian shall, unless otherwise instructed to the contrary: (iii) Collect and receive all income and other payments and advise each Fund as promptly as practicable of any such amounts due but not paid; (b) Give notice to each Fund and present payment and collect the amount payable upon such Securities that are called, but only if either (i) Custodian receives a written notice of such call, or (ii) notice of such call appears in or is received from a nationally recognized bond or corporate action service to which Custodian subscribes; (c) Unless otherwise instructed by a Fund, Custodian shall retain in the appropriate account any stock dividends, subscription rights and other non-cash distributions on the Securities, or the proceeds from the sale of any distributions. Custodian shall notify a Fund upon the receipt of any non-cash item. (d) Present for payment and collect the amount payable upon all Securities which may mature, promptly deposit or withdraw such proceeds as designated therein and advise each Fund as promptly as practicable of any such amounts due but not paid; (e) Surrender Securities in temporary form for definitive Securities; (f) Forward to each Fund copies of all information or documents that it may actually receive from an issuer of Securities which, in the opinion of Custodian, are intended for the beneficial owner of Securities; (g) Execute, as custodian, any certificates of ownership, affidavits, declarations or other certificates under any tax laws now or hereafter in effect in connection with the collection of bond and note coupons; (h) Hold directly or through a Depository, a Foreign Depository, or a Subcustodian all rights and similar Securities issued with respect to any Securities credited to an Account hereunder; and (i) Endorse for collection checks, drafts or other negotiable instruments. 4. (a) Custodian shall notify each Fund of rights or discretionary actions with respect to Securities held hereunder, and of the date or dates by when such rights must be exercised or such action must be taken (each a "Notice" and collectively "Notices"), provided that Custodian has actually received, from the issuer or the relevant Depository (with respect to Securities issued in the United States) or from the relevant Subcustodian, Foreign Depository, or a nationally or internationally recognized bond or corporate action service to which Custodian subscribes (each a " Notice Provider" and collectively " Notice Providers"), timely notice of such rights or discretionary corporate action or of the date or dates such rights must be exercised or such action must be taken. Absent actual receipt of Notices, Custodian shall have no liability for failing to so notify a Fund except as provided in the last sentence of this paragraph. Custodian shall use reasonable care in forwarding such Notice to the relevant Fund. Custodian shall use reasonable care in the selection of a Notice Provider other than a Foreign Depository. To the extent an officer of the Custodian, with working knowledge of the Accounts, has actual knowledge that a Notice Provider has failed to provide Notices to the Custodian, the Custodian shall use reasonable careto obtain a mailing of such Notice from such Notice Provider or except in the case of a Foreign Depository use an alternative Notice Provider. (b) Whenever Securities (including, but not limited to, warrants, options, tenders, options to tender or non-mandatory puts or calls) confer discretionary rights on a Fund or provide for discretionary action or alternative courses of action by a Fund, the Fund shall be responsible for making any decisions relating thereto and for directing Custodian to act. In order for Custodian to act, it must receive the Fund's Certificate or Instructions at Custodian's offices, addressed as Custodian may from time to time request, at such date or time as Custodian may specify to the Fund. Absent Custodian's timely receipt of such Certificate or Instructions, Custodian shall not be liable for failure to take any action relating to or to exercise any rights conferred by such Securities. 5. All voting rights with respect to Securities, however registered, shall be exercised by the Fund or its designee. For Securities issued in the United States, Custodian's only duty shall be to mail to the Funds any documents (including proxy statements, annual reports and signed proxies) actually received by Custodian relating to the exercise of such voting rights. With respect to Securities issued outside of the United States, Custodian's only duty shall be to provide the Funds with access to a provider of global proxy services at a Fund's request. The Fund using the services shall be responsible for all associated costs. 6. Custodian shall promptly advise a Fund upon Custodian's actual receipt of notification of the partial redemption, partial payment or other action affecting less than all Securities of the relevant class. If Custodian, any Subcustodian, any Depository, or any Foreign Depository holds any Securities in which the Fund has an interest as part of a fungible mass, Custodian, such Subcustodian, Depository, or Foreign Depository may select the Securities to participate in such partial redemption, partial payment or other action in any non-discriminatory manner that it customarily uses to make such selection. 7. Custodian shall not under any circumstances accept bearer interest coupons which have been stripped from United States federal, state or local government or agency securities unless explicitly agreed to by Custodian in writing. 8. Each Fund shall be liable for all taxes, assessments, duties and other governmental charges, including any interest or penalty with respect thereto ("Taxes"), with respect to any cash or Securities held on behalf of such Fund or any transaction related thereto. Each Fund shall indemnify Custodian and each Subcustodian for the amount of any Tax that Custodian, any such Subcustodian or any other withholding agent is required under applicable laws (whether by assessment or otherwise) to pay on behalf of, or in respect of income earned by or payments or distributions made to or for the account of the Fund (including any payment of Tax required by reason of an earlier failure to withhold). Custodian shall, or shall instruct the applicable Subcustodian or other withholding agent to, withhold the amount of any Tax which is required to be withheld under applicable law upon collection of any dividend, interest or other distribution made with respect to any Security and any proceeds or income from the sale, loan or other transfer of any Security. In the event that Custodian or any Subcustodian is required under applicable law to pay any Tax on behalf of a Fund, Custodian is hereby authorized to withdraw cash from any cash account in the amount required to pay such Tax and to use such cash, or to remit such cash to the appropriate Subcustodian or other withholding agent, for the timely payment of such Tax in the manner required by applicable law. If the aggregate amount of cash in all cash accounts is not sufficient to pay such Tax, Custodian shall promptly notify the Fund of the additional amount of cash (in the appropriate currency) required, and the Fund shall directly deposit such additional amount in the appropriate cash account promptly after receipt of such notice, for use by Custodian as specified herein. In the event that Custodian reasonably believes that Fund is eligible, pursuant to applicable law or to the provisions of any tax treaty, for a reduced rate of, or exemption from, any Tax which is otherwise required to be withheld or paid on behalf of the Fund under any applicable law, Custodian shall, or shall instruct the applicable Subcustodian or withholding agent to, either withhold or pay such Tax at such reduced rate or refrain from withholding or paying such Tax, as appropriate; provided that Custodian shall have received from the Fund all documentary evidence of residence or other qualification for such reduced rate or exemption required to be received under such applicable law or treaty. In the event that Custodian reasonably believes that a reduced rate of, or exemption from, any Tax is obtainable only by means of an application for refund, Custodian and the applicable Subcustodian shall have no responsibility for the accuracy or validity of information provided by a Fund on any forms or documentation provided by the Fund to Custodian hereunder. Each Fund hereby agrees to indemnify and hold harmless Custodian and each Subcustodian in respect of any liability arising from any underwithholding or underpayment of any Tax which results from the inaccuracy or invalidity of information provided by a Fund on any such forms or other documentation, and such obligation to indemnify shall be a continuing obligation of such Fund, its successors and assigns notwithstanding the termination of this Agreement. 9. (a) For the purpose of settling Securities and foreign exchange transactions, each Fund shall provide Custodian with sufficient immediately available funds for all transactions by such time and date as conditions in the relevant market dictate. As used herein, "sufficient immediately available funds" shall mean either (i) sufficient cash denominated in U.S. dollars to purchase the necessary foreign currency, or (ii) sufficient applicable foreign currency to settle the transaction. Custodian shall provide each Fund with immediately available funds each day which result from the actual settlement of all sale transactions, based upon advices received by Custodian from Subcustodians, Depositories, and Foreign Depositories. Such funds shall be in U.S. dollars or such other currency as a Fund may specify to Custodian. (b) Any foreign exchange transaction effected by Custodian in connection with this Agreement may be entered with Custodian or a BNY Affiliate acting as principal or otherwise through customary banking channels. Each Fund may issue a standing Certificate or Instructions with respect to foreign exchange transactions, but Custodian may establish rules or limitations concerning any foreign exchange facility made available to the Funds. Each Fund shall bear all risks of investing in Securities or holding cash denominated in a foreign currency. (c) To the extent that Custodian has agreed to provide pricing or other information services in connection with this Agreement, Custodian is authorized to utilize any vendor (including brokers and dealers of Securities) reasonably believed by Custodian to be reliable to provide such information. Each Fund understands that certain pricing information with respect to complex financial instruments (e.g., derivatives) may be based on calculated amounts rather than actual market transactions and may not reflect actual market values, and that the variance between such calculated amounts and actual market values may or may not be material. Where vendors do not provide information for particular Securities or other property, an Authorized Person may advise Custodian in a Certificate regarding the fair market value of, or provide other information with respect to, such Securities or property as determined by it in good faith. Custodian shall not be liable for any loss, damage or expense incurred as a result of errors or omissions in pricing or other information received and utilized by Custodian hereunder. Nevertheless, Custodian shall be liable for the performance of any vendor selected by Custodian that is a BNY Affiliate to the same extent as Custodian would have been liable if it performed such services itself. 10. Custodian shall promptly send to a Fund (a) any reports it receives from a Depository on such Depository's system of internal accounting control, and (b) such reports on its own system of internal accounting control as the Fund may reasonably request from time to time. 4. PURCHASE AND SALE OF SECURITIES; CREDITS TO ACCOUNT 4.1 Promptly after each purchase or sale of Securities by a Fund, the Fund shall deliver to Custodian a Certificate or Instructions, or with respect to a purchase or sale of a Security generally required to be settled on the same day the purchase or sale is made, Oral Instructions specifying all information Custodian may reasonably request to settle such purchase or sale. Custodian shall account for all purchases and sales of Securities on the actual settlement date unless otherwise agreed by Custodian. 4.2 Each Fund understands that when Custodian is instructed to deliver Securities against payment, delivery of such Securities and receipt of payment therefor may not be completed simultaneously. Notwithstanding any provision in this Agreement to the contrary, settlements, payments and deliveries of Securities may be effected by Custodian or any Subcustodian in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction in which the transaction occurs, including, without limitation, delivery to a purchaser or dealer therefor (or agent) against receipt with the expectation of receiving later payment for such Securities. Each Fund assumes full responsibility for all risks, including, without limitation, credit risks, involved in connection with such deliveries of Securities, except the foregoing shall not excuse Custodian's acting in accordance with such practices and procedures in a manner that constitutes negligence, bad faith or willful misconduct. 4.3 Custodian may, as a matter of bookkeeping convenience or by separate agreement with a Fund, credit the Account with the proceeds from the sale, redemption or other disposition of Securities or interest, dividends or other distributions payable on Securities prior to its actual receipt of final payment therefor. All such credits shall be conditional until Custodian's actual receipt of final payment and may be reversed by Custodian to the extent that final payment is not received. Custodian shall notify the appropriate Fund at least 48 hours prior to any such reversal, but such reversal shall be made as of the date Custodian determines it has not received final payment. Payment with respect to a transaction will not be "final" until Custodian shall have received immediately available funds which under applicable local law, rule and/or practice are irreversible and not subject to any security interest, levy or other encumbrance, and which are specifically applicable to such transaction. 5. OVERDRAFTS OR INDEBTEDNESS 5.1 If Custodian should in its sole discretion advance funds on behalf of any Series which results in an overdraft (including, without limitation, any day-light overdraft) because the cash held by Custodian in an Account for such Series shall be insufficient to pay the total amount payable upon a purchase of Securities specifically allocated to such Series, as set forth in a Certificate, Instructions or Oral Instructions, or if an overdraft arises in the separate Account of a Series for some other reason, including, without limitation, because of a reversal of a conditional credit or the purchase of any currency, or if the Fund is for any other reason indebted to Custodian with respect to a Series, (except a borrowing for investment or for temporary or emergency purposes using Securities as collateral pursuant to a separate agreement and subject to the provisions of Section 2 of this Article), Custodian shall promptly notify the appropriate Fund of any such advance and the time at which such advance or overdraft must be paid. Such overdraft or indebtedness shall be deemed to be a loan made by Custodian to the Fund for such Series payable on demand and shall bear interest from the date incurred at a rate per annum agreed by such Fund and Custodian from time to time, or, in the absence of an agreement, at the rate ordinarily charged by Custodian to its institutional customers, as such rate may be adjusted from time to time. In addition, the Fund hereby agrees that Custodian shall to the maximum extent permitted by law have a continuing lien, security interest, and security entitlement in and to such Securities of such Series as shall have a fair market value equal to the aggregate amount of all overdrafts of, or advances to, such Series, together with accrued interest, such lien, security interest and security entitlement to be effective only so long as such advance, overdraft, or accrued interest thereon remains outstanding. The Fund authorizes Custodian to charge any such overdraft or indebtedness together with interest due thereon against any balance of account standing to such Series' credit on Custodian's books. 2. If a Fund borrows money from any bank (including Custodian if the borrowing is pursuant to a separate agreement) for investment or for temporary or emergency purposes using Securities held by Custodian hereunder as collateral for such borrowings, the Fund shall deliver to Custodian a Certificate specifying with respect to each such borrowing: (a) the Series to which such borrowing relates; (b) the name of the bank, (c) the amount of the borrowing, (d) the time and date, if known, on which the loan is to be entered into, (e) the total amount payable to the Fund on the borrowing date, (f) the Securities to be delivered as collateral for such loan, including the name of the issuer, the title and the number of shares or the principal amount of any particular Securities, and (g) a statement specifying whether such loan is for investment purposes or for temporary or emergency purposes and that such loan is in conformance with the 1940 Act and the Fund's prospectus. Custodian shall deliver on the borrowing date specified in a Certificate the specified collateral against payment by the lending bank of the total amount of the loan payable, provided that the same conforms to the total amount payable as set forth in the Certificate. Custodian may, at the option of the lending bank, keep such collateral in its possession, but such collateral shall be subject to all rights therein given the lending bank by virtue of any promissory note or loan agreement. Custodian shall deliver such Securities as additional collateral as may be specified in a Certificate to collateralize further any transaction described in this Section. The Fund shall cause all Securities released from collateral status to be returned directly to Custodian, and Custodian shall receive from time to time such return of collateral as may be tendered to it. In the event that the Fund fails to specify in a Certificate the Series, the name of the issuer, the title and number of shares or the principal amount of any particular Securities to be delivered as collateral by Custodian, Custodian shall not be under any obligation to deliver any Securities. In this event, Custodian shall notify the Fund that the Securities were not delivered, and the information that the Fund failed to specify in the Certificate. 6. SALE AND REDEMPTION OF SHARES 6.1 Whenever a Fund shall sell any shares issued by the Fund ("Shares") it shall deliver to Custodian a Certificate, Instructions or Oral Instructions specifying the amount of cash and/or Securities to be received by Custodian for the sale of such Shares and specifically allocated to an Account for such Series. 6.2 Upon receipt of such cash from a Fund's transfer agent, Custodian shall credit such cash to an Account in the name of the Series for which such cash was received. 6.3 Except as provided hereinafter, whenever a Fund desires Custodian to make payment out of the cash held by Custodian hereunder in connection with a redemption of any Shares, it shall furnish to Custodian a Certificate, Instructions or Oral Instructions specifying the total amount to be paid for such Shares. Custodian shall make payment of such total amount to the transfer agent specified in such Certificate, Instructions or Oral Instructions out of the cash held in an Account of the appropriate Series. 6.4 Notwithstanding the above provisions regarding the redemption of any Shares, whenever any Shares are redeemed pursuant to any check redemption privilege which may from time to time be offered by a Fund, Custodian, unless otherwise instructed by a Certificate, Instructions, or Oral Instructions shall, upon presentment of such check, charge the amount thereof against the cash held in the Account of the Series of the Shares being redeemed, provided, that if the Fund or its agent timely advises Custodian that such check is not to be honored, Custodian shall return such check unpaid. 7. PAYMENT OF DIVIDENDS OR DISTRIBUTIONS 7.1 Whenever a Fund shall determine to pay a dividend or distribution on Shares it shall furnish to Custodian Instructions, Oral Instructions or a Certificate setting forth with respect to the Series specified therein the date of the declaration of such dividend or distribution, the total amount payable, and the payment date. 7.2 Upon the payment date specified in such Instructions, Oral Instructions or Certificate, Custodian shall pay out of the cash held for the Account of such Series the total amount payable to the dividend agent of the Fund with respect to the Series specified therein. 8. CONCERNING CUSTODIAN 8.1(a) Except as otherwise expressly provided herein, Custodian shall not be liable for any costs, expenses, damages, liabilities or claims, including attorneys' and accountants' fees (collectively, "Losses"), incurred by or asserted against a Fund, except those Losses arising out of Custodian's own negligence, bad faith or willful misconduct. Custodian shall have no liability whatsoever for the action or inaction of any Depositories, or, except to the extent such action or inaction is a direct result of the Custodian's failure to fulfill its duties hereunder, of any Foreign Depositories. With respect to any Losses incurred by the Fund as a result of the acts or any failures to act by any Depository, Foreign Depository or Subcustodian (other than a BNY Affiliate), Custodian shall take appropriate action to recover such Losses from such Subcustodian, Depository or Foreign Depository; and Custodian's sole responsibility and liability to the Fund shall be limited to amounts so received from such Subcustodian, Depository or Foreign Depository (exclusive of costs and expenses incurred by Custodian), except to the extent that (A) Custodian's negligence, bad faith or willful misconduct is the direct cause of such Subcustodian, Depository, or Foreign Depository's act or omission (it being agreed that Custodian's decision to use any Subcustodian, Depository or Foreign Depository shall not constitute negligence, bad faith or willful misconduct), or (B) a transaction or other matter between Custodian and such Subcustodian, Depository or Foreign Depository unrelated to the Funds was the cause of the loss or damage, in each of which events, Custodian shall be liable for such losses. (b) In no event shall Custodian be liable to a Fund or any third party for special, indirect or consequential damages, or lost profits or loss of business, arising in connection with this Agreement, nor shall BNY or any Subcustodian be liable: (i) for acting in accordance with any Certificate or Oral Instructions actually received by Custodian and reasonably believed by Custodian to be given by an Authorized Person; (ii) for acting in accordance with Instructions requiring authentication codes if such Instructions have authentication codes without reviewing the same; (iii) for conclusively presuming that all disbursements of cash directed by the Fund, whether by a Certificate, an Oral Instruction, or an Instruction, are in accordance with Section 2(i) of Article II hereof; (iv) for holding property in any particular country, including, but not limited to, Losses resulting from nationalization, expropriation or other governmental actions; regulation of the banking or securities industry; exchange or currency controls or restrictions, devaluations or fluctuations; availability of cash or Securities or market conditions which prevent the transfer of property or execution of Securities transactions or affect the value of property; (v) for the insolvency of any Subcustodian (other than a BNY Affiliate), any Depository, or, except to the extent such action or inaction is a direct result of the Custodian's failure to fulfill its duties hereunder, any Foreign Depository; or (vi) for any Losses arising from the applicability of any law or regulation now or hereafter in effect, or from the occurrence of any event, including, without limitation, implementation or adoption of any rules or procedures of a Foreign Depository, which may affect, limit, prevent or impose costs or burdens on, the transferability, convertibility, or availability of any currency or Composite Currency Unit in any country or on the transfer of any Securities, and in no event shall Custodian be obligated to substitute another currency for a currency (including a currency that is a component of a Composite Currency Unit) whose transferability, convertibility or availability has been affected, limited, or prevented by such law, regulation or event, and to the extent that any such law, regulation or event imposes a cost or charge upon Custodian in relation to the transferability, convertibility, or availability of any cash currency or Composite Currency Unit, such cost or charge shall be for the Account of the Fund, and Custodian may treat any Account denominated in an affected currency as a group of separate accounts denominated in the relevant component currencies. BNY shall not be liable for any Losses due to forces beyond the control of Custodian, including without limitation strikes, work stoppages, acts of war or terrorism, insurrection, revolution, nuclear or natural catastrophes or acts of God, or interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services. Custodian shall endeavor to promptly notify the Funds when it becomes aware of any situation outlined above, but shall not be liable for a failure to do so. The Funds shall not be responsible for temporary delays in the performance of their duties and obligations hereunder and correspondingly shall not be liable for any Losses attributable to such delay in consequence of an event as described above affecting the Funds' principal place of business operations or administration (c) Custodian may enter into subcontracts, agreements and understandings with any BNY Affiliate, whenever and on such terms and conditions as it deems necessary or appropriate to perform its services hereunder. No such subcontract, agreement or understanding shall discharge Custodian from its obligations hereunder. (d) The Funds agree to indemnify Custodian and hold Custodian harmless from and against any and all Losses sustained or incurred by or asserted against Custodian by reason of or as a result of any action or inaction, or arising out of Custodian's performance hereunder, including reasonable fees and expenses of counsel incurred by Custodian in a successful defense of claims by the Fund; provided however, that the Funds shall not indemnify Custodian for those Losses arising out of Custodian's own negligence, bad faith or willful misconduct. This indemnity shall be a continuing obligation of each Fund, their successors and assigns, notwithstanding the termination of this Agreement. (e) Custodian agrees to indemnify each Fund against and hold each Fund harmless from and against any and all direct damages sustained or incurred because of or in connection with this Agreement; provided however, that Custodian shall only indemnify the Funds for those direct damages arising out of Custodian's own negligence, bad faith or willful misconduct. This indemnity shall be a continuing obligation of Custodian, its successors and assigns, notwithstanding the termination of this Agreement. 8.2 Without limiting the generality of the foregoing, Custodian shall be under no obligation to inquire into, and shall not be liable for (except to the extent that either (a) or (b) involves Custodian's negligence, bad faith or willful misconduct): (i) Any Losses incurred by a Fund or any other person as a result of the receipt or acceptance of fraudulent, forged or invalid Securities, or Securities which are otherwise not freely transferable or deliverable without encumbrance in any relevant market; (ii) The validity of the issue of any Securities purchased, sold, or written by or for the Fund, the legality of the purchase, sale or writing thereof, or the propriety of the amount paid or received therefor; (iii) The legality of the sale or redemption of any Shares, or the propriety of the amount to be received or paid therefor; (iv) The legality of the declaration or payment of any dividend or distribution by a Fund; (v) The legality of any borrowing by a Fund; (vi) The legality of any loan of portfolio Securities, nor shall Custodian be under any duty or obligation to see to it that any cash or collateral delivered to it by a broker, dealer or financial institution or held by it at any time as a result of such loan of portfolio Securities is adequate collateral for the Fund against any loss it might sustain as a result of such loan, which duty or obligation shall be the sole responsibility of the Fund. In addition, Custodian shall be under no duty or obligation to see that any broker, dealer or financial institution to which portfolio Securities of the Fund are lent makes payment to it of any dividends or interest which are payable to or for the account of the Fund during the period of such loan or at the termination of such loan, provided, however that Custodian shall promptly notify the Fund in the event that such dividends or interest are not paid and received when due; (vii) The sufficiency or value of any amounts of cash and/or Securities held in any Special Account in connection with transactions by a Fund; whether any broker, dealer, futures commission merchant or clearing member makes payment to the Fund of any variation margin payment or similar payment which the Fund may be entitled to receive from such broker, dealer, futures commission merchant or clearing member, or whether any payment received by Custodian from any broker, dealer, futures commission merchant or clearing member is the amount the Fund is entitled to receive, or to notify the Fund of Custodian's receipt or non-receipt of any such payment; or (viii) Whether any Securities at any time delivered to, or held by it or by any Subcustodian, for the account of a Fund and specifically allocated to a Series are such as properly may be held by the Fund or such Series under the provisions of its then current prospectus and statement of additional information, or to ascertain whether any transactions by a Fund, whether or not involving Custodian, are such transactions as may properly be engaged in by the Fund. 8.3 Custodian may, with respect to questions of law specifically regarding an Account, obtain the advice of counsel and shall be fully protected with respect to anything done or omitted by it in good faith in conformity with such advice. 8.4 Custodian shall be under no obligation to take action to collect any amount payable on Securities in default, or if payment is refused after due demand and presentment, unless and until (i) it shall be directed to take such action by a Certificate or Instructions and (ii) it shall be assured to its satisfaction of reimbursement of its reasonable costs and expenses in connection with any such action. 8.5 Custodian shall have no duty or responsibility to inquire into, make recommendations, supervise, or determine the suitability of any transactions affecting any Account. 8.6 Each Fund shall pay to Custodian the fees and charges as may be specifically agreed upon from time to time and such other fees and charges at agreed rates for such services as may be applicable. 8.7 In addition to, and not as a limitation of, Custodian's rights under Section 1 of Article V, Custodian has the right to debit a cash account in advance for any amount payable by a Fund in connection with any and all obligations of the Fund to Custodian, provided Custodian has given the Fund prior notice of such debit. 8.8 Each Fund agrees to forward to Custodian a Certificate or Instructions confirming Oral Instructions by the close of business of the same day that such Oral Instructions are given to Custodian. Each Fund agrees that the fact that such confirming Certificate or Instructions are not received or that a contrary Certificate or contrary Instructions are received by Custodian shall in no way affect the validity or enforceability of transactions authorized by such Oral Instructions and effected by Custodian. Under either of the two foregoing circumstances, Custodian shall promptly notify the Fund. If a Fund elects to transmit Instructions through an on-line communications system offered by Custodian, the Fund's use thereof shall be subject to the Terms and Conditions attached as Appendix I hereto, and Custodian shall provide user and authorization codes, passwords and authentication keys only to an Authorized Person or a person reasonably believed by Custodian to be an Authorized Person. 8.9 The books and records pertaining to a Fund which are in possession of Custodian shall be the property of such Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and the rules thereunder and other applicable securities laws, rules and regulations. The Fund, or its authorized representatives, shall have access to such books and records during Custodian's normal business hours. Upon the reasonable request of a Fund, copies of any such books and records shall be provided by Custodian to the Fund or its authorized representative. Upon the reasonable request of a Fund, Custodian shall provide in hard copy or on computer disc any records included in any such delivery which are maintained by Custodian on a computer disc, or are similarly maintained. 8.10 It is understood that Custodian is authorized to supply any information regarding the Accounts which is required by any law, regulation or rule now or hereafter in effect. The Custodian shall provide each Fund with any report obtained by the Custodian on the system of internal accounting control of a Depository or OCC, and with such reports on its own system of internal accounting control as a Fund may reasonably request from time to time. 8.11 Neither Custodian nor any Fund shall have any duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement. 9. TERMINATION 9.1 Either of the parties hereto may terminate this Agreement by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than sixty (60) days after the date of giving of such notice. In the event such notice is given by a Fund, it shall be accompanied by a copy of a resolution of the board of trustees of such Fund, certified by the Secretary or any Assistant Secretary, electing to terminate this Agreement and designating a successor custodian or custodians, each of which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits. In the event such notice is given by Custodian, the Fund shall, on or before the termination date, deliver to Custodian a copy of a resolution of the board of trustees of the Fund, certified by the Secretary or any Assistant Secretary, designating a successor custodian or custodians. In the absence of such designation by the Fund, Custodian may designate a successor custodian which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits, and which shall be satisfactory to the Funds. Upon the date set forth in such notice, this Agreement shall terminate with respect to the affected Fund(s), and Custodian shall upon receipt of a notice of acceptance by the successor custodian on that date deliver directly to the successor custodian all Securities and cash then owned by the Fund(s) and held by it as Custodian, after deducting all fees, expenses and other amounts for the payment or reimbursement of which it shall then be entitled. 9.2 If a successor custodian is not designated by the Fund or Custodian in accordance with the preceding section, the Fund shall upon the date specified in the notice of termination of this Agreement and upon the delivery by Custodian of all Securities (other than Securities which cannot be delivered to the Fund) and cash then owned by the Fund be deemed to be its own custodian and Custodian shall thereby be relieved of all duties and responsibilities pursuant to this Agreement, other than the duty with respect to Securities which cannot be delivered to the Fund to hold such Securities hereunder in accordance with this Agreement. 10. MISCELLANEOUS 10.1 Each Fund agrees to furnish to Custodian a new Certificate of Authorized Persons in the event of any change in the then present Authorized Persons. Until such new Certificate is received, Custodian shall be fully protected in acting upon Certificates, Instructions or Oral Instructions of such present Authorized Persons. 10.2 Any notice or other instrument in writing, authorized or required by this Agreement to be given to Custodian, shall be sufficiently given if addressed to Custodian and received by it at its offices at 100 Church Street, New York, New York 10286, or at such other place as Custodian may from time to time designate in writing. 10.3 Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Fund shall be sufficiently given if addressed to the Fund and received by it at its offices at Attn.: Assistant Treasurer, The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, Pennsylvania 19482, or at such other place as the Fund may from time to time designate in writing. 10.4 Each and every right granted to a party hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of either party to exercise, and no delay in exercising, any right will operate as a waiver thereof, nor will any single or partial exercise by either party of any right preclude any other or future exercise thereof or the exercise of any other right. 10.5 In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any exclusive jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected thereby. This Agreement, may not be amended or modified in any manner except by a written agreement executed by both parties, except that any amendment to the Schedule I hereto need be signed only by the Fund and any amendment to Appendix I hereto need be signed only by Custodian. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by either party without the written consent of the other. 10.6 This Agreement shall be construed in accordance with the substantive laws of the State of New York, without regard to conflicts of laws principles thereof. The Fund and Custodian hereby consent to the jurisdiction of a federal court situated in New York City, New York in connection with any dispute arising hereunder. Each Fund hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that such proceeding brought in such a court has been brought in an inconvenient forum.] Each Fund and Custodian each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement. 7. This Agreement is executed on behalf of the Board of Trustees of each Fund as Trustees and not individually and the obligations of this Agreement are not binding upon any of the Trustees or shareholders individually but are binding only upon the assets and property of such Funds; further, the assets of a particular Series of such Fund shall under no circumstances be charged with liabilities attributable to any other Series of such Fund and that all persons extending credit to, or contracting with or having any claim against a particular Series of such Fund shall look only to the assets of that particular Series for payment of such credit, contract or claim. 8. The parties hereto agree that each shall treat confidentially the terms and conditions of this Agreement and all information provided by each party to the other regarding its business and operations. All confidential information provided by a party hereto shall be used by any other party hereto solely for the purpose of rendering or obtaining services pursuant to this Agreement and, except as may be required in carrying out this Agreement, shall not be disclosed to any third party without the prior consent of such providing party. The foregoing shall not be applicable to any information that is publicly available when provided or thereafter becomes publicly available other than through a breach of this Agreement, or that is required to be disclosed by or to any regulatory authority, any external or internal accountant, auditor or counsels of the parties hereto, by judicial or administration process or otherwise by applicable law, or to any disclosure made by a party if such party's counsel has advised that such party could be liable under any applicable law or any judicial or administrative order or process for a failure to make such disclosure. 9. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument. IN WITNESS WHEREOF, the Funds and Custodian have caused this Agreement to be executed by their respective officers, thereunto duly authorized, as of the day and year first above written. Vanguard Funds By: /S/ Robert D. Snowden Title: Assistant Treasurer THE BANK OF NEW YORK By: /S/ Edward G. McGann Title: Vice President SCHEDULE II FUND: Vanguard Admiral Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Admiral Treasury Money Market Fund/ 23-2696041 FUND: Vanguard Fixed Income Securities Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Intermediate-Term Corporate Fund/ 23-2735379 Vanguard Intermediate-Term Treasury Fund/ 23-2659568 Vanguard Long-Term Treasury Fund/23-2439151 Vanguard Short-Term Corporate Fund/23-2439153 Vanguard Short-Term Federal Fund/23-2483049 Vanguard Short-Term Treasury Fund/23-2659567 FUND: Vanguard Horizon Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Capital Opportunity Fund/23-2801528 Vanguard Strategic Equity Fund/23-2787277 FUND: Vanguard Money Market Reserves SERIES/TAX IDENTIFICATION NO.: Vanguard Prime Money Market Fund/23-6607979 Vanguard Federal Money Market Fund/23-2439136 FUND: Vanguard PRIMECAP Fund/23-2311358 FUND: Vanguard Treasury Fund SERIES/TAX IDENTIFICATION NO.: Vanguard Treasury Money Market Fund/ 23-2439140 FUND: Vanguard Variable Insurance Funds SERIES/TAX IDENTIFICATION NO.: Growth Portfolio/23-2719785 Money Market Portfolio/23-2585135 Short-Term Corporate Portfolio/23-2980466 FUND: Vanguard Whitehall Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Selected Value Fund/23-2827110 APPENDIX I THE BANK OF NEW YORK ON-LINE COMMUNICATIONS SYSTEM (THE "SYSTEM") TERMS AND CONDITIONS 1. License; Use. Upon delivery to the Funds of software enabling the Funds to obtain access to the System (the "Software"), Custodian grants to each Fund a personal, nontransferable and nonexclusive license to use the Software solely for the purpose of transmitting Instructions, receiving reports, making inquiries or otherwise communicating with Custodian in connection with the Account(s). Each Fund shall use the Software solely for its own internal and proper business purposes and not in the operation of a service bureau. Except as set forth herein, no license or right of any kind is granted to the Funds with respect to the Software. Each Fund acknowledges that Custodian and its suppliers retain and have title and exclusive proprietary rights to the Software, including any trade secrets or other ideas, concepts, know-how, methodologies, or information incorporated therein and the exclusive rights to any copyrights, trademarks and patents (including registrations and applications for registration of either), or other statutory or legal protections available in respect thereof. Each Fund further acknowledges that all or a part of the Software may be copyrighted or trademarked (or a registration or claim made therefor) by Custodian or its suppliers. No Fund shall take any action with respect to the Software inconsistent with the foregoing acknowledgments, nor shall any Fund attempt to decompile, reverse engineer or modify the Software. No Fund may copy, sell, lease or provide, directly or indirectly, any of the Software or any portion thereof to any other person or entity without Custodian's prior written consent. No Fund may remove any statutory copyright notice or other notice included in the Software or on any media containing the Software. Each Fund shall reproduce any such notice on any reproduction of the Software and shall add any statutory copyright notice or other notice to the Software or media upon Custodian's request. 2. Equipment. Each Fund shall obtain and maintain at its own cost and expense all equipment and services, including but not limited to communications services, necessary for it to utilize the Software and obtain access to the System, and Custodian shall not be responsible for the reliability or availability of any such equipment or services. Custodian agrees to provide reasonable training, instruction manuals and access to Custodian's "help desk" in connection with each Fund's user support necessary to use the Software. At a Fund's request, Custodian agrees to permit reasonable testing of the Software by any Fund. 3. Proprietary Information. The Software, any data base (other than databases relating solely to the assets of a Fund and transactions with respect thereto) and any proprietary data, processes, information and documentation made available to the Fund (other than which are or become part of the public domain or are legally required to be made available to the public) (collectively, the "Information"), are the exclusive and confidential property of Custodian or its suppliers. Each Fund shall keep the Information confidential by using the same care and discretion that each Fund uses with respect to its own confidential property and trade secrets, but not less than reasonable care. Upon termination of the Agreement or the Software license granted herein for any reason, the Funds shall return to Custodian any and all copies of the Information which are in their possession or under their control. 4. Indemnification. Custodian will indemnify and hold harmless the Funds with respect to any liability, damages, loss or claim incurred by or brought against any Fund by reason of any claim or infringement against any patent, copyright, license or other property right arising out or by reason of a Fund's use of the Software in the form provided under this Appendix. Custodian at its own expense will defend such action or claim brought against a Fund to the extent that it is based on a claim that the Software in the form provided by Custodian infringes any patents, copyrights, license or other property right, provided that Custodian is provided with reasonable notice of such claim, provided that the Fund has not settled, compromised or confessed any such claim without the Custodian's written consent, in which event Custodian shall have no liability or obligation hereunder, and provided Fund cooperates with and assists Custodian in the defense of such claim. Custodian shall have the right to control the defense of all such claims, lawsuits and other proceedings. If, as a result of any claim of infringement against any patent, copyright, license or other property right, Custodian is enjoined from using the Software, or if Custodian believes that the System is likely to become the subject of a claim of infringement, Custodian may in its sole discretion either (a) at its expense procure the right for the Funds to continue to use the Software, or (b) replace or modify the Software so as to make it non-infringing, or (c) may discontinue the license granted herein upon written notice to the Funds. 5. Modifications. Custodian reserves the right to modify the Software from time to time at its own expense and each Fund shall install new releases of the Software as Custodian may direct. Each Fund agrees not to modify or attempt to modify the Software without Custodian's prior written consent. Each Fund acknowledges that any modifications to the Software, whether by a Fund or Custodian and whether with or without Custodian's consent, shall become the property of Custodian. 6. NO REPRESENTATIONS OR WARRANTIES. CUSTODIAN AND ITS MANUFACTURERS AND SUPPLIERS MAKE NO WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE SOFTWARE, SERVICES OR ANY DATABASE, EXPRESS OR IMPLIED, IN FACT OR IN LAW, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. EACH FUND ACKNOWLEDGES THAT THE SOFTWARE, SERVICES AND ANY DATABASE ARE PROVIDED "AS IS." IN NO EVENT SHALL CUSTODIAN OR ANY SUPPLIER BE LIABLE FOR ANY DAMAGES, WHETHER DIRECT, INDIRECT SPECIAL, OR CONSEQUENTIAL, WHICH A FUND MAY INCUR IN CONNECTION WITH THE SOFTWARE, SERVICES OR ANY DATABASE, EVEN IF CUSTODIAN OR SUCH SUPPLIER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL CUSTODIAN OR ANY SUPPLIER BE LIABLE FOR ACTS OF GOD, MACHINE OR COMPUTER BREAKDOWN OR MALFUNCTION, INTERRUPTION OR MALFUNCTION OF COMMUNICATION FACILITIES, LABOR DIFFICULTIES OR ANY OTHER SIMILAR OR DISSIMILAR CAUSE BEYOND THEIR REASONABLE CONTROL. 7. Security; Reliance; Unauthorized Use. The Fund will cause all persons utilizing the Software and System to treat all applicable user and authorization codes, passwords and authentication keys with extreme care, and it will establish internal control and safekeeping procedures to restrict the availability of the same to persons duly authorized to give Instructions. Custodian is hereby irrevocably authorized to act in accordance with and rely on Instructions received by it through the System. Each Fund acknowledges that it is its sole responsibility to assure that only persons duly authorized use the System and that Custodian shall not be responsible or liable for any unauthorized use thereof. 8. System Acknowledgments. Custodian shall acknowledge through the System its receipt of each transmission communicated through the System, and in the absence of such acknowledgment Custodian shall not be liable for any failure to act in accordance with such transmission and a Fund may not claim that such transmission was received by Custodian. 9. EXPORT RESTRICTIONS. EXPORT OF THE SOFTWARE IS PROHIBITED BY UNITED STATES LAW. THE FUNDS MAY NOT UNDER ANY CIRCUMSTANCES RESELL, DIVERT, TRANSFER, TRANSSHIP OR OTHERWISE DISPOSE OF THE SOFTWARE (IN ANY FORM) IN OR TO ANY OTHER COUNTRY. IF CUSTODIAN DELIVERED THE SOFTWARE TO THE FUNDS OUTSIDE OF THE UNITED STATES, THE SOFTWARE WAS EXPORTED FROM THE UNITED STATES IN ACCORDANCE WITH THE EXPORTER ADMINISTRATION REGULATIONS. DIVERSION CONTRARY TO U.S. LAW IS PROHIBITED. Each Fund hereby authorizes Custodian to report its name and address to government agencies to which Custodian is required to provide such information by law. 10. ENCRYPTION. Each Fund acknowledges and agrees that encryption may not be available for every communication through the System, or for all data. Each Fund agrees that Custodian may deactivate any encryption features at any time, without notice or liability to the Funds, for the purpose of repairing or troubleshooting the System or the Software. Custodian shall promptly advise each Fund whenever Custodian has deactivated any encryption features. Custodian also may deactivate any encryption features without liability, for the purpose of scheduled maintenance, so long as it provides reasonable advance notice to the Funds. FOREIGN CUSTODY MANAGER AGREEMENT AGREEMENT made as of June 19, 2001 between each open-end management investment company listed on Schedule II hereto, as amended from time to time (each such investment company, a "Fund"), on behalf of certain of their series (each, a "Series") and The Bank of New York ("BNY"). W I T N E S S E T H: WHEREAS, each Fund desires to appoint BNY as a Foreign Custody Manager on the terms and conditions contained herein; WHEREAS, BNY desires to serve as a Foreign Custody Manager and perform the duties set forth herein on the terms and conditions contained herein; NOW THEREFORE, in consideration of the mutual promises hereinafter contained in this Agreement, each Fund and BNY hereby agree as follows: ARTICLE I. DEFINITIONS Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: 1. "BOARD" shall mean the board of directors or board of trustees, as the case may be, of a Fund. 2. "ELIGIBLE FOREIGN CUSTODIAN" shall have the meaning provided in the Rule. 3. "MONITORING SYSTEM" shall mean a system established by BNY to fulfill the Responsibilities specified in clauses (d) and (e) of Section 1 of Article III of this Agreement. 4. "RESPONSIBILITIES" shall mean the responsibilities delegated to BNY under the Rule as a Foreign Custody Manager with respect to each Specified Country and each Eligible Foreign Custodian selected by BNY, as such responsibilities are more fully described in Article III of this Agreement. 5. "RULE" shall mean Rule 17f-5 under the Investment Company Act of 1940, as amended on June 12, 2000. 6. "SPECIFIED COUNTRY" shall mean each country, other than the United States, constituting the primary market for a security with respect to which a Fund has given settlement instructions to The Bank of New York as custodian (the "Custodian") under its Custody Agreement with the Fund. ARTICLE II. BNY AS A FOREIGN CUSTODY MANAGER 1. Each Fund on behalf of its Board hereby delegates to BNY with respect to each Specified Country the Responsibilities. 2. BNY accepts the Board's delegation of Responsibilities with respect to each Specified Country and agrees in performing the Responsibilities as a Foreign Custody Manager to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of a Fund's assets would exercise. 3. BNY shall provide to the Board at such times as the Board deems reasonable and appropriate based on the circumstances of the relevant Fund's foreign custody arrangements written reports notifying the Board of the placement of assets of the Fund with a particular Eligible Foreign Custodian within a Specified Country and of any material change in the arrangements (including the contract governing such arrangements) with respect to assets of the Fund with any such Eligible Foreign Custodian. ARTICLE III. RESPONSIBILITIES 1. Subject to the provisions of this Agreement, BNY shall with respect to each Specified Country select an Eligible Foreign Custodian. In connection therewith, BNY shall: (a) determine that assets of a Fund held by such Eligible Foreign Custodian will be subject to reasonable care, based on the standards applicable to custodians in the relevant market in which such Eligible Foreign Custodian operates, after considering all factors relevant to the safekeeping of such assets, including, without limitation, those contained in paragraph (c)(1)(i) through (iv) of the Rule; (b) determine that the Fund's foreign custody arrangements with each Eligible Foreign Custodian are governed by a written contract with the Custodian which will provide reasonable care for the Fund's assets based on the standards specified in paragraph (c)(1) of the Rule; (c) determine that each contract with an Eligible Foreign Custodian shall include the provisions specified in paragraph (c)(2)(i)(A) through (F) of the Rule or, alternatively, in lieu of any or all of such (c)(2)(i)(A) through (F) provisions, such other provisions as BNY determines will provide, in their entirety, the same or a greater level of care and protection for the assets of the Fund as such specified provisions; (d) monitor pursuant to the Monitoring System the appropriateness of maintaining the assets of the Fund with a particular Eligible Foreign Custodian pursuant to paragraph (c)(1) of the Rule and the performance of the contract governing such arrangement pursuant to paragraph (c)(2) of the Rule; (e) advise the Fund whenever BNY determines under the Monitoring System that an arrangement no longer meets the requirement of the Rule or there has been any material changes in a Fund's foreign custody arrangements (including a material change in the contract governing such arrangement) described in preceding clause (d) no longer meets the requirements of the Rule; and (f) provide the Fund's Board at least annually and more frequently as mutually agreed between the parties, written reports specifying placement of a Fund's assets with each Eligible Foreign Custodian. 2. For purposes of preceding Section 1 of this Article, BNY's determination of appropriateness or of a material change in an arrangement, respectively, shall not include, nor be deemed to include, any evaluation of Country Risks associated with investment in a particular country. For purposes hereof, "Country Risks" shall mean systemic risks of holding assets in a particular country including but not limited to (a) an Eligible Foreign Custodian's use of any depositories that act as or operate a system or a transnational system for the central handling of securities or any equivalent book-entries; (b) such country's financial infrastructure; (c) such country's prevailing custody and settlement practices; (d) nationalization, expropriation or other governmental actions; (e) regulation of the banking or securities industry; (f) currency controls, restrictions, devaluations or fluctuations; and (g) market conditions which affect the orderly execution of securities transactions or affect the value of securities. ARTICLE IV. REPRESENTATIONS 1. Each Fund hereby represents that: (a) this Agreement has been duly authorized, executed and delivered by such Fund, constitutes a valid and legally binding obligation of the Fund enforceable in accordance with its terms, and no statute, regulation, rule, order, judgment or contract binding on the Fund prohibits the Fund's execution or performance of this Agreement; (b) this Agreement has been approved and ratified by the Board at a meeting duly called and at which a quorum was at all times present, and (c) the Board or the Fund's investment advisor has considered the Country Risks associated with investment in each Specified Country and will have considered such risks prior to any settlement instructions being given to the Custodian with respect to any other country. 2. BNY hereby represents that: (a) BNY is duly organized and existing under the laws of the State of New York, with full power to carry on its businesses as now conducted, and to enter into this Agreement and to perform its obligations hereunder; (b) this Agreement has been duly authorized, executed and delivered by BNY, constitutes a valid and legally binding obligation of BNY enforceable in accordance with its terms, and no statute, regulation, rule, order, judgment or contract binding on BNY prohibits BNY's execution or performance of this Agreement; and (c) BNY has established the Monitoring System. ARTICLE V. CONCERNING BNY 1. BNY shall not be liable for any costs, expenses, damages, liabilities or claims, including attorneys' and accountants' fees, sustained or incurred by, or asserted against a Fund with respect to custody of a Fund's Foreign Assets (as defined in the Rule), except to the extent the same arises out of the failure of BNY to exercise the care, prudence and diligence required by Section 2 of Article II hereof. In no event shall BNY be liable to a Fund, the Board, or any third party for special, indirect or consequential damages, or for lost profits or loss of business, arising in connection with this Agreement. 2. Each Fund shall indemnify BNY and hold it harmless from and against any and all costs, expenses, damages, liabilities or claims, including attorneys' and accountants' fees, sustained or incurred by, or asserted against, BNY by reason or as a result of any action or inaction, or arising out of BNY's performance hereunder, provided that no Fund shall indemnify BNY to the extent any such costs, expenses, damages, liabilities or claims arises out of BNY's failure to exercise the reasonable care, prudence and diligence required by Section 2 of Article II hereof. 3. BNY shall indemnify each Fund and hold them harmless from and against any and all direct damages sustained or incurred by, or asserted against, the Funds to the extent any such damages arise out of BNY's failure to exercise the reasonable care, prudence and diligence required by Section 2 of Article II hereof. 4. For its services hereunder, each Fund agrees to pay to BNY such compensation as shall be mutually agreed. 5. BNY shall have only such duties as are expressly set forth herein. In no event shall BNY be liable for any Country Risks associated with investments in a particular country. ARTICLE VI. MISCELLANEOUS 1. This Agreement constitutes the entire agreement between each Fund and BNY as a foreign custody manager, and no provision in the Custody Agreement between the Funds and the Custodian shall affect the duties and obligations of BNY hereunder, nor shall any provision in this Agreement affect the duties or obligations of the Custodian under the Custody Agreement. 2. Any notice or other instrument in writing, authorized or required by this Agreement to be given to BNY, shall be sufficiently given if received by it at its offices at 100 Church Street, 10th Floor, New York, New York 10286, or at such other place as BNY may from time to time designate in writing. 3. Any notice or other instrument in writing, authorized or required by this Agreement to be given to a Fund shall be sufficiently given if received by it at its offices at c/o The Vanguard Group, P.O. Box 2600, Valley Forge, Pennsylvania 19482, Attn: Assistant Treasurer, or at such other place as the Funds may from time to time designate in writing. 4. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected thereby. This Agreement may not be amended or modified in any manner except by a written agreement executed by the parties. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided however, that this Agreement shall not be assignable by any party without the written consent of the other. 5. This Agreement shall be construed in accordance with the substantive laws of the State of New York, without regard to conflicts of laws principles thereof. Each Fund and BNY hereby consent to the jurisdiction of a federal court situated in New York City, New York in connection with any dispute arising hereunder. Each Fund hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that such proceeding brought in such a court has been brought in an inconvenient forum. Each Fund and BNY each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement. 6. The parties hereto agree that in performing hereunder, BNY is acting solely on behalf of the Funds and no contractual or service relationship shall be deemed to be established hereby between BNY and any other person by reason of this Agreement. 7. This Agreement is executed on behalf of the Board of Trustees of each Fund as Trustees and not individually and the obligations of this Agreement are not binding upon any of the Trustees or shareholders individually but are binding only upon the assets and property of such Funds; further, the assets of a particular Series of such Fund shall under no circumstances be charged with liabilities attributable to any other Series of such Fund and that all persons extending credit to, or contracting with or having any claim against a particular Series of such Fund shall look only to the assets of that particular Series for payment of such credit, contract or claim. 8. The parties hereto agree that each shall treat confidentially the terms and conditions of this Agreement and all information provided by each party to the other regarding its business and operations. All confidential information provided by a party hereto shall be used by any other party hereto solely for the purpose of rendering or obtaining services pursuant to this Agreement and, except as may be required in carrying out this Agreement, shall not authorize it to be disclosed to any third party without the prior consent of such providing party. The foregoing shall not be applicable to any information that is publicly available when provided or thereafter becomes publicly available other than through a breach of this Agreement, or that is required to be disclosed by or to any regulatory authority, any external or internal accountant, auditor or counsels of the parties hereto, by judicial or administration process or otherwise by applicable law, or to any disclosure made by a party if such party's counsel has advised that such party could be liable under any applicable law or any judicial or administrative order or process for a failure to make such disclosure. 9. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument. 10. This Agreement shall terminate simultaneously with the termination of the Custody Agreement between the Funds and the Custodian, and may otherwise be terminated by any party giving to the other party a notice in writing specifying the date of such termination, which shall be not less than sixty (60) days after the date of such notice. IN WITNESS WHEREOF, the Funds and BNY have caused this Agreement to be executed by their respective officers, thereunto duly authorized, as of the date first above written. EACH FUND LISTED ON SCHEDULE II By: /S/ Robert Snowden Title: Assistant Treasurer THE BANK OF NEW YORK By: /S/ Edward D. McGann Title: Vice President SCHEDULE II Funds/Series FUND: Vanguard Admiral Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Admiral Treasury Money Market Fund/ 23-2696041 FUND: Vanguard Fixed Income Securities Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Intermediate-Term Corporate Fund/ 23-2735379 Vanguard Intermediate-Term Treasury Fund/ 23-2659568 Vanguard Long-Term Treasury Fund/23-2439151 Vanguard Short-Term Corporate Fund/23-2439153 Vanguard Short-Term Federal Fund/23-2483049 Vanguard Short-Term Treasury Fund/23-2659567 FUND: Vanguard Horizon Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Capital Opportunity Fund/23-2801528 Vanguard Strategic Equity Fund/23-2787277 FUND: Vanguard Money Market Reserves SERIES/TAX IDENTIFICATION NO.: Vanguard Prime Money Market Fund/23-6607979 Vanguard Federal Money Market Fund/23-2439136 FUND: Vanguard PRIMECAP Fund/23-2311358 FUND: Vanguard Treasury Fund SERIES/TAX IDENTIFICATION NO.: Vanguard Treasury Money Market Fund/ 23-2439140 FUND: Vanguard Variable Insurance Funds SERIES/TAX IDENTIFICATION NO.: Growth Portfolio/23-2719785 Money Market Portfolio/23-2585135 Short-Term Corporate Portfolio/23-2980466 FUND: Vanguard Whitehall Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Selected Value Fund/23-2827110 SCHEDULE II - AMENDMENT #1 The following is an amendment ("Amendment") to the Amended And Restated Custody Agreement, dated June 19, 2001 (the "Agreement") by and between The Bank of New York ("Custodian") and each open-end management investment company listed on Schedule II thereto (each, a "Fund", collectively, the "Client"). This Amendment serves to update the names of the Funds listed on Schedule II. Custodian and Client hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Funds listed below. Schedule II is hereby amended as follows: FUND: Vanguard Admiral Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Admiral Treasury Money Market Fund/ 23-2696041 FUND: Vanguard Fixed Income Securities Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Intermediate-Term Corporate Fund/ 23-2735379 Vanguard Intermediate-Term Treasury Fund/ 23-2659568 Vanguard Long-Term Treasury Fund/23-2439151 Vanguard Short-Term Corporate Fund/23-2439153 Vanguard Short-Term Federal Fund/23-2483049 Vanguard Short-Term Treasury Fund/23-2659567 FUND: Vanguard Horizon Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Capital Opportunity Fund/23-2801528 Vanguard Strategic Equity Fund/23-2787277 FUND: Vanguard Money Market Reserves SERIES/TAX IDENTIFICATION NO.: Vanguard Prime Money Market Fund/23-6607979 Vanguard Federal Money Market Fund/23-2439136 FUND: Vanguard PRIMECAP Fund/23-2311358 FUND: Vanguard Treasury Fund SERIES/TAX IDENTIFICATION NO.: Vanguard Treasury Money Market Fund/ 23-2439140 FUND: Vanguard Variable Insurance Funds SERIES/TAX IDENTIFICATION NO.: Capital Growth Portfolio/55-0795775 Growth Portfolio/23-2719785 Money Market Portfolio/23-2585135 Short-Term Corporate Portfolio/23-2980466 FUND: Vanguard Whitehall Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Selected Value Fund/23-2827110 AGREED TO as of September 30, 2002 BY: THE BANK OF NEW YORK Each Fund Listed on Schedule II By: /S/ Edward G. McGann By: /S/ Thomas J. Higgins Name: Edward G. McGann Name: Thomas J. Higgins Title: Vice President Title: Treasurer Mutual Funds Division SCHEDULE II - AMENDMENT #1 The following is an amendment ("Amendment") to the Foreign Custody Manager Agreement, dated June 19, 2001 (the "Agreement") by and between The Bank of New York ("Custodian") and each open-end management investment company listed on Schedule II thereto (each, a "Fund", collectively, the "Client"). This Amendment serves to update the names of the Funds listed on Schedule II. Custodian and Client hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Funds listed below. Schedule II is hereby amended as follows: FUND: Vanguard Admiral Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Admiral Treasury Money Market Fund/ 23-2696041 FUND: Vanguard Fixed Income Securities Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Intermediate-Term Corporate Fund/ 23-2735379 Vanguard Intermediate-Term Treasury Fund/ 23-2659568 Vanguard Long-Term Treasury Fund/23-2439151 Vanguard Short-Term Corporate Fund/23-2439153 Vanguard Short-Term Federal Fund/23-2483049 Vanguard Short-Term Treasury Fund/23-2659567 FUND: Vanguard Horizon Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Capital Opportunity Fund/23-2801528 Vanguard Strategic Equity Fund/23-2787277 FUND: Vanguard Money Market Reserves SERIES/TAX IDENTIFICATION NO.: Vanguard Prime Money Market Fund/23-6607979 Vanguard Federal Money Market Fund/23-2439136 FUND: Vanguard PRIMECAP Fund/23-2311358 FUND: Vanguard Treasury Fund SERIES/TAX IDENTIFICATION NO.: Vanguard Treasury Money Market Fund/ 23-2439140 FUND: Vanguard Variable Insurance Funds SERIES/TAX IDENTIFICATION NO.: Capital Growth Portfolio/55-0795775 Growth Portfolio/23-2719785 Money Market Portfolio/23-2585135 Short-Term Corporate Portfolio/23-2980466 FUND: Vanguard Whitehall Funds SERIES/TAX IDENTIFICATION NO.: Vanguard Selected Value Fund/23-2827110 AGREED TO as of September 30, 2002 BY: THE BANK OF NEW YORK Each Fund Listed on Schedule II By: /S/ Edward G. McGann By: /S/ Thomas J. Higgins Name: Edward G. McGann Name: Thomas J. Higgins Title: Vice President Title: Treasurer Mutual Funds Division EX-99.N 4 multiclassplan.txt MULTICLASS PLAN 11-17-2000 VANGUARD FUNDS MULTIPLE CLASS PLAN I. INTRODUCTION ------------ This Multiple Class Plan (the "Plan") describes four separate classes of shares that may be offered by investment company members of The Vanguard Group (collectively the "Funds," individually a "Fund"). The Plan explains the separate arrangements for each class, how expenses are allocated to each class, and the conversion features of each class. Each Fund may offer any one or more of the specified classes. The Plan has been approved by the Board of Directors of The Vanguard Group ("Vanguard"). In addition, the Plan has been adopted by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of each Fund. The classes of shares offered by each Fund are designated in Schedule A hereto, as such Schedule may be amended from time to time. II. SHARE CLASSES ------------- A Fund may offer any one or more of the following share classes: Investor Shares Admiral Shares Institutional Shares VIPER Shares If a Fund has not previously issued separate classes of shares, all of its currently outstanding shares will be designated as Investor Shares, except as otherwise provided in Schedule A hereto. Currently outstanding shares of other Funds will continue to be designated as Investor Shares or Institutional Shares, as appropriate. III. DISTRIBUTION AND ELIGIBILITY ---------------------------- Distribution arrangements will be the same for all classes, although eligibility requirements for purchasing shares of each class will differ, as follows: A. INVESTOR SHARES Investor Shares will be available to investors who are not permitted to purchase other classes of shares, subject to the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Investor Shares will be substantially lower than the amount required for any other class of the Fund's shares. B. ADMIRAL SHARES Admiral Shares will be available to investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. These eligibility requirements may take into account: (i) the amount of an investment in the Fund; (ii) the length of time that a Fund account has been maintained; and (iii) whether the investor has registered for on-line access to the Fund account through Vanguard's web site. C. INSTITUTIONAL SHARES Institutional Shares will be available to investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Institutional Shares will be substantially higher than the amount required for any other class of the Fund's shares. D. VIPER SHARES VIPER Shares will be available to investors that are (or who purchase through) Authorized DTC Participants, and who pay for their VIPER shares by depositing a prescribed basket of securities rather than paying cash. An Authorized DTC Participant is an institution, usually a broker-dealer, that is a participant in the Depository Trust Company (DTC) and that has executed a Participant Agreement with the Fund's distributor. IV. SERVICE ARRANGEMENTS -------------------- All share classes will receive a range of services provided by Vanguard on a per account basis. These "account-based" services may include transaction processing and shareholder recordkeeping, as well as the mailing of updated prospectuses, shareholder reports, tax statements, confirmation statements, quarterly portfolio summaries, and other items. It is expected that the aggregate amount of account-based services provided to Investor Shares will materially exceed the amount of such services provided to any other class, due to the existence of many more accounts holding Investor Shares. In addition to this difference in the volume of services provided, arrangements will differ among the classes as follows: A. INVESTOR SHARES Investor Shares will receive the most basic level of service from Vanguard. In general, Investor Shares will be serviced through a pool of Vanguard client service representatives. Investor Shares held through an employee benefit plan may receive VISTA recordkeeping and participant education services from Vanguard. B. ADMIRAL SHARES Admiral Shares will receive a higher level of service from Vanguard as compared to Investor Shares. Special client service representatives will be assigned 2 to service Admiral Shares, and holders of such shares from time to time may receive special mailings from Vanguard and unique additional services, as well as discounts on certain financial services provided by Vanguard and its affiliates. Admiral Shares are not eligible to receive VISTA recordkeeping or participant education services. C. INSTITUTIONAL SHARES Institutional Shares will receive the highest level of service from Vanguard as compared to any other share classes. Special client service representatives will be assigned to service Institutional Shares, and most holders of such shares periodically will receive special updates from Vanguard's investment staff. Holders of Institutional Shares may receive unique additional services from Vanguard, and generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation's FundSERV system and other special servicing platforms for institutional investors. Institutional Shares generally are not eligible to receive VISTA recordkeeping or participant education services. D. VIPER SHARES The Fund will maintain only one shareholder of record for VIPER Shares--DTC or its nominee. Special client service representatives will be assigned to the DTC account, and all transactions on this account will be handled electronically. Due to the nature and purpose of the DTC account, VIPER Shares will not receive any special updates from Vanguard's investment staff. VIPER Shares are not eligible to receive VISTA recordkeeping or participant education services. V. CONVERSION FEATURES ------------------- A. VOLUNTARY CONVERSIONS 1. CONVERSION INTO INVESTOR SHARES. An investor may convert Admiral Shares or Institutional Shares into Investor Shares, provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Investor Shares; and (ii) receives services consistent with Investor Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 2. CONVERSION INTO ADMIRAL SHARES. An investor may convert Investor Shares or Institutional Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives 3 services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 3. CONVERSION INTO INSTITUTIONAL SHARES. An investor may convert Investor Shares or Admiral Shares into Institutional Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Institutional Shares; and (ii) receives services consistent with Institutional Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. 4. CONVERSION INTO VIPER SHARES. An investor may convert Investor Shares, Admiral Shares, or Institutional Shares into VIPER Shares (if available), provided that: (i) the shares to be converted are not held through an employee benefit plan; and (ii) following the conversion, the investor will hold VIPER Shares through a brokerage account. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard's receipt of the investor's request in good order. Vanguard or the Fund may charge an administrative fee to process conversion transactions. B. INVOLUNTARY CONVERSIONS AND CASH OUTS 1. CASH OUTS. If an investor in any class of shares no longer meets the eligibility requirements for such shares, the Fund may cash out the investor's remaining account balance. Any such cash out will be preceded by written notice to the investor and will be subject to the Fund's normal redemption fees, if any. 2. CONVERSION OF ADMIRAL SHARES. If an investor no longer meets the eligibility requirements for Admiral Shares, the Fund may convert the investor's Admiral Shares into Investor Shares. Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge. 3. CONVERSION OF INSTITUTIONAL SHARES. If an investor no longer meets the eligibility requirements for Institutional Shares, the Fund may convert the investor's Institutional Shares into Admiral Shares (or into Investor Shares if the investor does not meet the eligibility requirements for Admiral Shares). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge. 4 VI. EXPENSE ALLOCATION AMONG CLASSES -------------------------------- A. BACKGROUND Vanguard is a jointly-owned subsidiary of the Funds. Vanguard provides the Funds, on an at-cost basis, virtually all of their corporate management, administrative and distribution services. Vanguard also may provide investment advisory services on an at-cost basis to the Funds. Vanguard was established and operates pursuant to a Funds' Service Agreement between itself and the Funds (the "Agreement"), and pursuant to certain exemptive orders granted by the U.S. Securities and Exchange Commission ("Exemptive Orders"). Vanguard's direct and indirect expenses of providing corporate management, administrative and distribution services to the Funds are allocated among such funds in accordance with methods specified in the Agreement. B. CLASS SPECIFIC EXPENSES 1. Expenses for Account-Based Services. Expenses associated with Vanguard's provision of account-based services to the Fund will be allocated among the share classes on the basis of the amount incurred by each such class as follows: (a) ACCOUNT MAINTENANCE EXPENSES. Expenses associated with the maintenance of investor accounts will be proportionately allocated among the Fund's share classes based upon a monthly determination of the costs to service each class of shares. Factors considered in this determination are (i) the percentage of total shareholder accounts represented by each class; (ii) the percentage of total account transactions performed by Vanguard for each class; and (iii) the percentage of new accounts opened for each class. (b) EXPENSES OF SPECIAL SERVICING ARRANGEMENTS. Expenses relating to any special servicing arrangements for a specific class will be allocated entirely to that class. (c) LITERATURE PRODUCTION AND MAILING EXPENSES. Expenses associated with shareholder reports, proxy materials and other literature will be allocated among the Fund's share classes based upon the number of such items produced and mailed for each class. 2. OTHER CLASS SPECIFIC EXPENSES. Expenses for the primary benefit of a particular share class will be allocated to that share class. Such expenses would include any legal fees attributable to a particular class. C. FUND-WIDE EXPENSES 1. MARKETING AND DISTRIBUTION EXPENSES. Expenses associated with Vanguard's marketing and distribution activities will be allocated among 5 the Funds and their separate share classes according to the "Vanguard Modified Formula," with each share class treated as if it were a separate Fund. The Vanguard Modified Formula, which is set forth in the Agreement and in certain of the SEC Exemptive Orders, has been deemed an appropriate allocation methodology by each Fund's Board of Trustees under paragraph (c)(1)(v) of Rule 18f-3 under the Investment Company Act of 1940. 2. ASSET MANAGEMENT EXPENSES. Expenses associated with management of a Fund's assets (including all advisory, tax preparation and custody fees) will be allocated among the Fund's share classes on the basis of their relative net assets. 3. OTHER FUND EXPENSES. Any other Fund expenses not described above will be allocated among the share classes on the basis of their relative net assets. VII. ALLOCATION OF INCOME, GAINS AND LOSSES -------------------------------------- Income, gains and losses will be allocated among the Fund's share classes on the basis of their relative net assets. As a result of differences in allocated expenses, it is expected that the net income of, and dividends payable to, each class of shares will vary. Dividends and distributions paid to each class of shares will be calculated in the same manner, on the same day and at the same time. VIII. VOTING AND OTHER RIGHTS ----------------------- Each share class will have: (i) exclusive voting rights on any matter submitted to shareholders that relates solely to its service or distribution arrangements; and (ii) separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of the other class; and (iii) in all other respects the same rights, obligations and privileges as each other, except as described in the Plan. IX. AMENDMENTS ---------- All material amendments to the Plan must be approved by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of the Fund. In addition, any material amendment to the Plan must be approved by the Board of Directors of Vanguard. 6 Updated: 11-17-2000 SCHEDULE A TO VANGUARD FUNDS MULTIPLE CLASS PLAN Note: This Schedule reflects multiple class arrangements approved by the Boards of Directors/Trustees of Vanguard and the Vanguard Funds on July 21, 2000, as further amended on November 17, 2000. Classes not yet in existence will be implemented in the normal course of business. - -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES OFFERED - -------------------------------------------------------------------------------- Vanguard Admiral Funds o Short-Term Treasury Fund Investor o Intermediate-Term Treasury Fund Investor o Long-Term Treasury Fund Investor o Treasury Money Market Fund Investor Vanguard Balanced Index Fund Investor, Admiral, Institutional Vanguard Bond Index Funds o Short-Term Bond Index Fund Investor, Admiral o Intermediate-Term Bond Index Fund Investor, Admiral o Long-Term Bond Index Fund Investor o Total Bond Market Index Fund Investor, Admiral, Institutional Vanguard California Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Insured Intermediate-Term Tax-Exempt Fund Investor, Admiral o Insured Long-Term Tax-Exempt Fund Investor, Admiral Vanguard Convertible Securities Fund Investor Vanguard Explorer Fund Investor, Admiral Vanguard Fenway Funds o Equity Income Fund Investor, Admiral o Growth Equity Fund Investor, Admiral Vanguard Fixed Income Securities Funds o Short-Term Treasury Fund Investor, Admiral o Short-Term Federal Fund Investor, Admiral o Short-Term Corporate Fund Investor, Admiral, Institutional o Intermediate-Term Treasury Fund Investor, Admiral o Intermediate-Term Corporate Fund Investor, Admiral o GNMA Fund Investor, Admiral o Long-Term Treasury Fund Investor, Admiral o Long-Term Corporate Fund Investor, Admiral o High Yield Corporate Fund Investor, Admiral o Inflation-Protected Securities Fund Investor Vanguard Florida Insured Tax-Exempt Fund Investor
- -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES OFFERED - -------------------------------------------------------------------------------- Vanguard Horizon Funds o Aggressive Growth Fund Investor o Capital Opportunity Fund Investor, Admiral o Global Asset Allocation Fund Investor o Global Equity Fund Investor Vanguard Index Trust o 500 Index Fund Investor, Admiral, VIPER o Extended Market Index Fund Investor, Admiral, Institutional, VIPER o Growth Index Fund Investor, Admiral, Institutional, VIPER o Mid-Cap Index Fund Investor, Institutional, VIPER o Small-Cap Growth Index Fund Investor, Institutional, VIPER o Small-Cap Index Fund Investor, Admiral, Institutional, VIPER o Small-Cap Value Index Fund Investor, Institutional, VIPER o Total Stock Market Index Fund Investor, Admiral, Institutional, VIPER o Value Index Fund Investor, Admiral, Institutional, VIPER
Vanguard International Equity Index Funds o Emerging Markets Stock Index Fund Investor, Admiral, Institutional o European Stock Index Fund Investor, Admiral, Institutional o Pacific Stock Index Fund Investor, Admiral, Institutional Vanguard Malvern Funds o Asset Allocation Fund Investor, Admiral o U.S. Value Fund Investor Vanguard Massachusetts Tax-Exempt Fund Investor Vanguard Money Market Reserves o Prime Money Market Fund Investor, Institutional o Federal Money Market Fund Investor Vanguard Morgan Growth Fund Investor, Admiral Vanguard Municipal Bond Funds o Tax-Exempt Money Market Fund Investor o Short-Term Tax-Exempt Fund Investor, Admiral o Limited-Term Tax-Exempt Fund Investor, Admiral o Intermediate-Term Tax-Exempt Fund Investor, Admiral o Insured Long-Term Tax-Exempt Fund Investor, Admiral o Long-Term Tax-Exempt Fund Investor, Admiral o High Yield Tax-Exempt Fund Investor, Admiral - -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES OFFERED - -------------------------------------------------------------------------------- Vanguard New Jersey Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Insured Long-Term Tax-Exempt Fund Investor, Admiral Vanguard New York Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Insured Long-Term Tax-Exempt Fund Investor, Admiral Vanguard Ohio Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Insured Long-Term Tax-Exempt Fund Investor Vanguard Pennsylvania Tax-Exempt Funds o Tax-Exempt Money Market Fund Investor o Insured Long-Term Tax-Exempt Fund Investor, Admiral Vanguard Preferred Stock Fund Investor Vanguard PRIMECAP Fund Investor, Admiral Vanguard Quantitative Funds o Growth and Income Fund Investor, Admiral Vanguard Specialized Funds o Energy Fund Investor, Admiral o Gold and Precious Metals Fund Investor o Health Care Fund Investor, Admiral o Utilities Income Fund Investor o REIT Index Fund Investor, Admiral Vanguard Tax-Managed Funds o Tax-Managed Balanced Fund Investor o Tax-Managed Capital Appreciation Fund Investor, Admiral, Institutional o Tax-Managed Growth and Income Fund Investor, Admiral, Institutional o Tax-Managed International Fund Investor, Institutional o Tax-Managed Small-Cap Fund Investor, Institutional - -------------------------------------------------------------------------------- VANGUARD FUND SHARE CLASSES OFFERED - -------------------------------------------------------------------------------- Vanguard Treasury Funds o Treasury Money Market Fund Investor Vanguard Trustees' Equity Fund o International Value Fund Investor, Admiral Vanguard Wellesley Income Fund Investor, Admiral Vanguard Wellington Fund Investor, Admiral Vanguard Whitehall Funds o Selected Value Fund Investor Vanguard Windsor Funds o Windsor Fund Investor, Admiral o Windsor II Investor, Admiral Vanguard World Funds o U.S. Growth Fund Investor, Admiral o International Growth Fund Investor, Admiral o Calvert Social Index Fund Investor, Institutional Vanguard Variable Insurance Funds o Balanced Portfolio Investor o Diversified Value Portfolio Investor o Equity Income Portfolio Investor o Equity Index Portfolio Investor o Growth Portfolio Investor o High-Grade Bond Portfolio Investor o High Yield Bond Portfolio Investor o International Portfolio Investor o Mid-Cap Index Portfolio Investor o Money Market Portfolio Investor o REIT Index Portfolio Investor o Short-Term Corporate Portfolio Investor o Small Company Growth Portfolio Investor Updated: January 2002 SCHEDULE B to VANGUARD FUNDS MULTIPLE CLASS PLAN NOTE: This Schedule reflects class eligibility requirements approved by the Boards of Directors/Trustees of Vanguard and the Vanguard Funds on July 21, 2000, as further amended on November 17, 2000, September 20, 2001, and January 18, 2002. Classes not yet in existence will be implemented in the normal course of business. INVESTOR SHARES - ELIGIBILITY REQUIREMENTS - ------------------------------------------ Investor Shares generally require a minimum initial investment and ongoing account balance of $3,000 ($1,000 for IRAs and UGMA accounts). Particular Vanguard Funds may, from time to time, establish higher or lower minimum amounts for Investor Shares. ADMIRAL SHARES - ELIGIBILITY REQUIREMENTS - ----------------------------------------- Admiral Shares require a minimum initial investment and ongoing account balance of $250,000, subject to the following exceptions: o Tenure exception - The minimum amount for Admiral Shares is $150,000 if the investor has maintained an account in the applicable Fund for 3 years and $50,000 if the investor has maintained an account in the applicable Fund for 10 years, subject to administrative policies developed by Vanguard to exclude costly accounts. For these purposes, a Fund may, in appropriate cases, count periods during which an investor maintained an account in the Fund through a financial intermediary. To take advantage of the tenure exception, an investor must be registered for on-line access to their Fund account through vanguard.com or transact with Vanguard on a similarly cost-effective basis. o Financial intermediary exception -Admiral Shares are not available to financial intermediaries who would meet eligibility requirements by aggregating the holdings of underlying investors, within an omnibus account. However, a financial intermediary may hold Admiral Shares in an omnibus account if: (1) each underlying investor in the omnibus account individually meets the $250,000 minimum amount or the tenure exception described above; and (2) a sub-accounting arrangement for the omnibus account allows Vanguard to monitor compliance with eligibility requirements. o VISTA exception -- Admiral Shares are not available to participants in employee benefit plans that utilize Vanguard's VISTA system for plan recordkeeping. o Retirement plans exception -- Admiral Shares are not available to 403(b)(7) custodial accounts, SIMPLE IRAs, and other Vanguard Retirement Plans receiving special administrative services from Vanguard. o Asset Allocation Fund exception -- Admiral Shares of Asset Allocation Fund are not available to Vanguard's Institutional Investment Only (IIO) clients. o Institutional exception-- Vanguard Institutional clients may meet the $250,000 minimum amount by aggregating up to three separate accounts within the same Vanguard Fund, provided that the total balance of such accounts must be at least $1 million. This exception does not apply to clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does this exception apply to omnibus accounts maintained by financial intermediaries. INSTITUTIONAL SHARES - ELIGIBILITY REQUIREMENTS - ----------------------------------------------- Institutional Shares require a minimum initial investment and ongoing account balance of $10,000,000, subject to the following exceptions: o Vanguard Short-Term Corporate Fund -- $50,000,000 minimum amount for Institutional Shares o Financial intermediary exception -- Institutional Shares are not available to financial intermediaries who would meet the eligibility requirements by aggregating the holdings of underlying investors. o VISTA exception -- Institutional Shares are not available to participants in employee benefit plans that utilize Vanguard's VISTA system for plan recordkeeping. However, Vanguard may determine to waive this rule for investors whose aggregate assets with the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. o Institutional exception -- Vanguard Institutional clients may meet the $10 million minimum ($50 million for Short-Term Corporate Fund) by aggregating up to three separate accounts within the same Vanguard Fund, provided that the total balance of such accounts must be at least $10 million. This exception does not apply to clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does this exception apply to omnibus accounts maintained by financial intermediaries. VIPER Shares - Eligibility Requirements The eligibility requirements for VIPER Shares will be set forth in the Fund's Registration Statement. To be eligible to purchase VIPER Shares directly from a Fund, an investor must be (or must purchase through) an Authorized DTC Participant, as defined in Paragraph III.D of the Multiple Class Plan. Investors purchasing VIPER Shares from a Fund must purchase a minimum number of shares, known as a Creation Unit. The number of VIPER Shares in a Creation Unit may vary from Fund to Fund, and will be set forth in the relevant prospectus. The value of a Fund's Creation Unit will vary with the net asset value of the Fund's VIPER Shares, but is expected to be several million dollars. An eligible investor generally must purchase a Creation Unit by depositing a prescribed basket of securities with the Fund, rather than paying cash. EX-99.P 5 vgi3222002.txt VANGUARD CODE OF ETHICS THE VANGUARD GROUP, INC. CODE OF ETHICS SECTION 1: BACKGROUND This Code of Ethics has been approved and adopted by the Board of Directors of The Vanguard Group, Inc. ("Vanguard") and the Boards of Trustees of each of the Vanguard funds in compliance with Rule 17j-1 under the Investment Company Act of 1940. This Code was adopted on May 1, 1999, and was last amended on March 22, 2002. Except as otherwise provided, the Code applies to all "Vanguard personnel," which term includes all employees, officers, Directors and Trustees of Vanguard and the Vanguard funds. Employees, officers, directors, and trustees of Vanguard subsidiaries that provide services to Vanguard funds, including subsidiaries located outside the Unites States, also are subject to the Code unless the subsidiary has adopted its own Code of Ethics. The Code also contains provisions which apply to the investment advisers to the Vanguard funds (see section 11). SECTION 2: STATEMENT OF GENERAL FIDUCIARY STANDARDS This Code of Ethics is based on the overriding principle that Vanguard personnel act as fiduciaries for shareholders' investments in the Vanguard funds. Accordingly, Vanguard personnel must conduct their activities at all times in accordance with the following standards: a) SHAREHOLDERS' INTERESTS COME FIRST. In the course of fulfilling their duties and responsibilities to Vanguard fund shareholders, Vanguard personnel must at all times place the interests of Vanguard fund shareholders first. In particular, Vanguard personnel must avoid serving their own personal interests ahead of the interests of Vanguard fund shareholders. b) CONFLICTS OF INTEREST MUST BE AVOIDED. Vanguard personnel must avoid any situation involving an actual or potential conflict of interest or possible impropriety with respect to their duties and responsibilities to Vanguard fund shareholders. c) COMPROMISING SITUATIONS MUST BE AVOIDED. Vanguard personnel must not take advantage of their position of trust and responsibility at Vanguard. Vanguard personnel must avoid any situation that might compromise or call into question their exercise of full independent judgment in the best interests of Vanguard fund shareholders. All activities of Vanguard personnel should be guided by and adhere to these fiduciary standards. The remainder of this Code sets forth specific rules and procedures which are consistent with these fiduciary standards. However, all activities by Vanguard personnel are required to conform with these fiduciary standards regardless of whether the activity is specifically covered in this Code. SECTION 3: DUTY OF CONFIDENTIALITY Vanguard personnel must keep confidential at all times any nonpublic information they may obtain in the course of their employment at Vanguard. This information includes but is not limited to: 1) information on the Vanguard funds, including recent or impending securities transactions by the funds, activities of the funds' advisers, offerings of new funds, and closings of funds; 2) information on Vanguard fund shareholders and prospective shareholders, including their identities, investments, and account transactions; 3) information on other Vanguard personnel, including their pay, benefits, position level, and performance ratings; and 4) information on Vanguard business activities, including new services, products, technologies, and business initiatives. Vanguard personnel have the highest fiduciary obligation not to reveal confidential Vanguard information to any party that does not have a clear and compelling need to know such information. SECTION 4: GIFT POLICY Vanguard personnel are prohibited from seeking or accepting gifts of material value from any person or entity, including any Vanguard fund shareholder or Vanguard client, when such gift is in relation to doing business with Vanguard. In certain cases, Vanguard personnel may accept gifts of de minimis value (as determined in accordance with guidelines set forth in Vanguard's Human Resources Policy Manual) but only if they obtain the approval of a Vanguard officer. SECTION 5: OUTSIDE ACTIVITIES a) PROHIBITIONS ON SECONDARY EMPLOYMENT. Vanguard employees are prohibited from working for any business or enterprise in the financial services industry that competes with Vanguard. In addition, Vanguard employees are prohibited from working for any organization that could possibly benefit from the employee's knowledge of confidential Vanguard information, such as new Vanguard services and technologies. Beyond these prohibitions, Vanguard employees may accept secondary employment, but only with prior approval from the Vanguard Compliance Department. Vanguard officers are prohibited from accepting or serving in any form of secondary employment unless they have received approval from a Vanguard Managing Director or the Vanguard Chairman and Chief Executive Officer. b) PROHIBITION ON SERVICE AS DIRECTOR OR PUBLIC OFFICIAL. Vanguard officers and employees are prohibited from serving on the board of directors of any publicly traded company or in an official capacity for any federal, state, or local government (or governmental agency or instrumentality) without prior approval from the Vanguard Compliance Department. c) PROHIBITION ON MISUSE OF VANGUARD TIME OR PROPERTY. Vanguard personnel are prohibited from using Vanguard time, equipment, services, personnel or property for any purposes other than the performance of their duties and responsibilities at Vanguard. SECTION 6: GENERAL PROHIBITIONS ON TRADING a) TRADING ON KNOWLEDGE OF VANGUARD FUNDS ACTIVITIES. All Vanguard personnel are prohibited from taking personal advantage of their knowledge of recent or impending securities activities of the Vanguard funds or the funds' investment advisers. In particular, Vanguard personnel are prohibited from purchasing or selling, directly or indirectly, any security when they have actual knowledge that the security is being purchased or sold, or considered for purchase or sale, by a Vanguard fund. This prohibition applies to all securities in which the person has acquired or will acquire "beneficial ownership." For these purposes, a person is considered to have beneficial ownership in all securities over which the person enjoys economic benefits substantially equivalent to ownership (for example, securities held in trust for the person's benefit), regardless of who is the registered owner. Under this Code of Ethics, Vanguard personnel are considered to have beneficial ownership of all securities owned by their spouse or minor children. b) VANGUARD INSIDER TRADING POLICY. All Vanguard personnel are subject to Vanguard's Insider Trading Policy, which is considered an integral part of this Code of Ethics. Vanguard's Insider Trading Policy prohibits Vanguard personnel from buying or selling any security while in the possession of material nonpublic information about the issuer of the security. The policy also prohibits Vanguard personnel from communicating to third parties any material nonpublic information about any security or issuer of securities. Any violation of Vanguard's Insider Trading Policy may result in penalties which could include termination of employment with Vanguard. SECTION 7: ADDITIONAL TRADING RESTRICTIONS FOR ACCESS PERSONS a) APPLICATION. The restrictions of this section 7 apply to all Vanguard access persons. For purposes of the Code of Ethics, "access persons" include: 1) any Director or Trustee of Vanguard or a Vanguard fund, excluding disinterested Directors and Trustees (i.e., any Director or Trustee who is not an "interested person" of a Vanguard fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940); 2) any officer of Vanguard or a Vanguard fund; and 3) any employee of Vanguard or a Vanguard fund who in the course of his or her regular duties participates in the selection of a Vanguard fund's securities or who works in a Vanguard department or unit that has access to information regarding a Vanguard fund's impending purchases or sales of securities. The Vanguard Compliance Department will notify all Vanguard personnel who qualify as access persons of their duties and responsibilities under this Code of Ethics. The restrictions of this section 7 apply to all transactions in which a Vanguard access person has or will acquire beneficial ownership (see section 6a) of a security, including transactions by a spouse or minor child. However, the restrictions do not apply to transactions involving: (i) direct obligations of the Government of the United States; (ii) high quality short-term debt instruments, including bankers' acceptances, bank certificates of deposit, commercial paper, and repurchase agreements; (iii) shares of registered open-end investment companies (including shares of any Vanguard fund); and (iv) shares of exchange-traded funds organized as open-end investment companies or unit investment trusts. In addition, the restrictions do not apply to transactions in accounts over which the access person has no direct or indirect control or influence. b) GENERAL RESTRICTIONS FOR ACCESS PERSONS. Vanguard access persons are subject to the following restrictions with respect to their securities transactions: 1) PRE-CLEARANCE OF SECURITIES TRANSACTIONS. Vanguard access persons must receive approval from the Vanguard Compliance Department before purchasing or selling any securities. The Vanguard Compliance Department will notify Vanguard access persons if their proposed securities transactions are permitted under this Code of Ethics. 2) TRADING THROUGH VANGUARD BROKERAGE SERVICES. Vanguard access persons must conduct all their securities transactions through Vanguard Brokerage Services. Vanguard Brokerage Services will send a confirmation notice of any purchase or sale of securities by a Vanguard access person to the Vanguard Compliance Department. 3) PROHIBITION ON INITIAL PUBLIC OFFERINGS. Vanguard access persons are prohibited from acquiring securities in an initial public offering. 4) PROHIBITION ON PRIVATE PLACEMENTS. Vanguard access persons are prohibited from acquiring securities in a private placement without prior approval from the Vanguard Compliance Department. In the event an access person receives approval to purchase securities in a private placement, the access person must disclose that investment if he or she plays any part in a Vanguard fund's later consideration of an investment in the issuer. 5) PROHIBITION ON OPTIONS. Vanguard access persons are prohibited from acquiring or selling any option on any security. 6) PROHIBITION ON SHORT-SELLING. Vanguard access persons are prohibited from selling any security that the access person does not own or otherwise engaging in "short-selling" activities. 7) PROHIBITION ON SHORT-TERM TRADING PROFITS. Vanguard access persons are prohibited from profiting in the purchase and sale, or sale and purchase, of the same (or related) securities within 60 calendar days. In the event that an access person realizes profits on such short-term trades, the access person must relinquish such profits to The Vanguard Group Foundation. c) BLACKOUT RESTRICTIONS FOR ACCESS PERSONS. All Vanguard access persons are subject to the following restrictions when their purchases and sales of securities coincide with trades by the Vanguard funds: 1) PURCHASES AND SALES WITHIN THREE DAYS FOLLOWING A FUND TRADE. Vanguard access persons are prohibited from purchasing or selling any security within three calendar days after a Vanguard fund has traded in the same (or a related) security. In the event that an access person makes a prohibited purchase or sale within the three-day period, the access person must unwind the transaction and relinquish any gain from the transaction to The Vanguard Group Foundation. 2) PURCHASES WITHIN SEVEN DAYS BEFORE A FUND PURCHASE. A Vanguard access person who purchases a security within seven calendar days before a Vanguard fund purchases the same (or a related) security is prohibited from selling the security for a period of six months following the fund's trade. In the event that an access person makes a prohibited sale within the six-month period, the access person must relinquish to The Vanguard Group Foundation any gain from the transaction. 3) SALES WITHIN SEVEN DAYS BEFORE A FUND SALE. A Vanguard access person who sells a security within seven days before a Vanguard fund sells the same (or a related) security must relinquish to The Vanguard Group Foundation the difference between the access person's sale price and the Vanguard fund's sale price (assuming the access person's sale price is higher). 4) RESTRICTIONS NOT APPLICABLE TO TRADES BY VANGUARD INDEX FUNDS. The restrictions of this section 7c do not apply to purchases and sales of securities by Vanguard access persons which would otherwise violate section 7c solely because the transactions coincide with trades by any Vanguard index funds. SECTION 7A: ADDITIONAL TRADING RESTRICTIONS FOR NON-ACCESS PERSONS a) GENERALLY, Vanguard's Compliance and Legal Departments shall have the authority to apply any or all of the trading restrictions specified in Section 7 to all non-access persons or to groups of non-access persons. b) ON AN INDIVIDUAL BASIS, Vanguard's Compliance and Legal Departments shall have the authority to apply any or all of the trading restrictions specified in Section 7 to any individual non-access person for cause. For example, they may require a non-access person who has previously violated the Code or who has a history of frequent trading activity to pre-clear trades and/or effect trades through Vanguard Brokerage Services. SECTION 8: ADDITIONAL TRADING RESTRICTIONS FOR INSTITUTIONAL CLIENT CONTACTS a) APPLICATION. The restrictions of this section 8 apply to all Vanguard Institutional client contacts. For purposes of the Code of Ethics, an "Institutional client contact" includes any Vanguard employee who works in a department or unit at Vanguard that has significant levels of interaction or dealings with the management of clients of Vanguard's Institutional Investor Group. The Vanguard Compliance Department will notify Vanguard employees who qualify as Institutional client contacts of the restrictions of this Section 8. b) PROHIBITION ON TRADING SECURITIES OF INSTITUTIONAL CLIENTS. Vanguard Institutional client contacts are prohibited from acquiring securities issued by clients of the Vanguard Institutional Investor Group (including any options or futures contracts based on such securities). In the event that any individual who becomes subject to this prohibition already owns securities issued by Institutional clients, the individual will be prohibited from disposing of those securities without prior approval from the Vanguard Compliance Department. The restrictions of this section 8 apply to all transactions in which Institutional client contacts have acquired or would acquire beneficial ownership (see section 6a) of a security, including transactions by a spouse or minor child. However, the restrictions do not apply to transactions in any account over which an individual does not possess any direct or indirect control or influence. The Vanguard Compliance Department will maintain a list of the Institutional clients to which the prohibitions of this section 8 apply. The Vanguard Compliance Department may waive the prohibition on acquiring securities of Institutional clients in appropriate cases (including, for example, cases in which an individual acquires securities as part of an inheritance or through an employer-sponsored employee benefits or compensation program). SECTION 9: COMPLIANCE PROCEDURES a) APPLICATION. The requirements of this section 9 apply to all Vanguard personnel other than disinterested Directors and Trustees (see section 7a). The requirements apply to all transactions in which Vanguard personnel have acquired or would acquire beneficial ownership (see section 6a) of a security, including transactions by a spouse or minor child. However, the requirements do not apply to transactions involving: (i) direct obligations of the Government of the United States; (ii) high quality short-term debt instruments, including bankers' acceptances, bank certificates of deposit, commercial paper, and repurchase agreements; and (iii) shares of registered open-end investment companies (including shares of any Vanguard fund). In addition, the requirements do not apply to securities acquired for accounts over which the person has no direct or indirect control or influence. b) DISCLOSURE OF PERSONAL HOLDINGS. All Vanguard personnel must disclose their personal securities holdings to the Vanguard Compliance Department upon commencement of employment with Vanguard. These disclosures must identify the title, number of shares, and principal amount with respect to each security holding. c) RECORDS OF SECURITIES TRANSACTIONS. All Vanguard personnel must notify the Vanguard Compliance Department if they have opened or intend to open a brokerage account. Vanguard personnel must direct their brokers to supply the Vanguard Compliance Department with duplicate confirmation statements of their securities transactions and copies of all periodic statements for their brokerage accounts. d) CERTIFICATION OF COMPLIANCE. All Vanguard personnel must certify annually to the Vanguard Compliance Department that: (i) they have read and understand this Code of Ethics; (ii) they have complied with all requirements of the Code of Ethics; and (3) they have reported all transactions required to be reported under the Code of Ethics. SECTION 10: REQUIRED REPORTS BY DISINTERESTED DIRECTORS AND TRUSTEES Disinterested Directors and Trustees (see section 7a) are required to report their securities transactions to the Vanguard Compliance Department only in cases where the Director or Trustee knew or should have known during the 15-day period immediately preceding or following the date of the transaction that the security had been purchased or sold, or was being considered for purchase or sale, by a Vanguard fund. SECTION 11: APPLICATION TO INVESTMENT ADVISERS a) ADOPTION OF CODE OF ETHICS. Each investment adviser to a Vanguard fund must adopt a code of ethics in compliance with Rule 17j-1 and provide the Vanguard Compliance Department with a copy of the code of ethics and any subsequent amendments. Each investment adviser is responsible for enforcing its code of ethics and reporting to the Vanguard Compliance Department on a timely basis any violations of the code of ethics and resulting sanctions. b) PREPARATION OF ANNUAL REPORTS. Each investment adviser to a Vanguard fund must prepare an annual report on its code of ethics for review by the Board of Trustees of the Vanguard fund. This report must contain the following: 1) a description of any issues arising under the adviser's code of ethics including, but not limited to, information about any violations of the code, sanctions imposed in response to such violations, changes made to the code's provisions or procedures, and any recommended changes to the code; and 2) a certification that the investment adviser has adopted such procedures as are reasonably necessary to prevent access persons from violating the code of ethics. SECTION 12: REVIEW BY BOARDS OF DIRECTORS AND TRUSTEES a) REVIEW OF INVESTMENT ADVISERS' CODE OF ETHICS. Prior to retaining the services of any investment adviser for a Vanguard fund, the Board of Trustees of the Vanguard fund must review the code of ethics adopted by the investment adviser pursuant to Rule 17j-1 under the Investment Company Act of 1940. The Board of Trustees must receive a certification from the investment adviser that the adviser has adopted such procedures as are reasonably necessary to prevent access persons from violating the adviser's code of ethics. A majority of the Trustees of the Vanguard fund, including a majority of the disinterested Trustees of the Fund, must determine whether the adviser's code of ethics contains such provisions as are reasonably necessary to prevent access persons from engaging in any act, practice, or course of conduct prohibited by the anti-fraud provisions of Rule 17j-1. b) REVIEW OF VANGUARD ANNUAL REPORTS. The Vanguard Compliance Department must prepare an annual report on this Code of Ethics for review by the Board of Directors of Vanguard and the Boards of Trustees of the Vanguard funds. The report must contain the following: 1) a description of issues arising under the Code of Ethics since the last report including, but not limited to, information about any violations of the Code, sanctions imposed in response to such violations, changes made to the Code's provisions or procedures, and any recommended changes to the Code; and 2) a certification that Vanguard and the Vanguard Funds have adopted such procedures as are reasonably necessary to prevent access persons from violating the Code of Ethics. SECTION 13: SANCTIONS In the event of any violation of this Code of Ethics, Vanguard senior management will impose such sanctions as deemed necessary and appropriate under the circumstances and in the best interests of Vanguard fund shareholders. In the case of any violations by Vanguard employees, the range of sanctions could include a letter of censure, suspension of employment without pay, or permanent termination of employment. SECTION 14: RETENTION OF RECORDS Vanguard must maintain all records required by Rule 17j-1 including: (i) copies of this Code of Ethics and the codes of ethics of all investment advisers to the Vanguard funds; (ii) records of any violations of the codes of ethics and actions taken as a result of the violations; (iii) copies of all certifications made by Vanguard personnel pursuant to section 9d; (iv) lists of all Vanguard personnel who are, or within the past five years have been, access persons subject to the trading restrictions of section 8 and lists of the Vanguard compliance personnel responsible for monitoring compliance with those trading restrictions; and (v) copies of the annual reports to the Boards of Directors and Trustees pursuant to section 12. EX-99.H 6 vgifunds2001.txt SERVICE AGREEMENT FOURTH AMENDED AND RESTATED FUNDS' SERVICE AGREEMENT This Fourth Amended and Restated Funds' Service Agreement, made as the 15th day of June, 2001 (the "Agreement"), between and among the 34 investment companies registered under the Investment Company Act of 1940 ("1940 Act"), whose names are set forth on the signature page of this Agreement, which together with any additional investment companies which may become a party to this Agreement pursuant to Section 5.4 are collectively called the "Funds"; and The Vanguard Group, Inc., a Pennsylvania corporation ("Service Company"). Whereas, each of the Funds has heretofore determined (as evidenced by, among many documents, prior versions* of this Agreement (the "Prior Agreements"), and by prospectuses and proxy statements of the Funds related thereto): (i) to manage and perform the corporate management, administrative and share distribution functions required for its continued operation, (ii) to create a structure which enhances the independence of the Funds from the providers of external services, (iii) to share, on an equitable and fair basis, with all of the other Funds the expenses of establishing the means to accomplish these objectives at the lowest reasonable cost; and Whereas, each of the Funds: (i) has heretofore determined that these objectives can best be accomplished by establishing a company: (a) to be wholly-owned by the Funds; (b) to provide corporate management, administrative, and distribution services, and upon the reasonable request of any Fund to provide other service to such Fund at cost; (c) to employ the executive, managerial, administrative, secretarial and clerical personnel necessary or appropriate to perform such services; and (d) to acquire such assets and to obtain such facilities and equipment as are necessary or appropriate to carry out such services, and to make those assets available to the Funds; and (ii) since May 1, 1975 (or the commencement of its operations after this date) has utilized Service Company, pursuant to the provisions of the Prior Agreements; and Whereas, each of the Funds has further heretofore recognized that it may, from time to time, be in the best interests of the Funds (i) for Service Company to provide similar services to investment companies other than the Funds, (ii) for the Funds to organize, from time to time, new investment companies which are intended to become parties to this Agreement; and, (iii) for Service Company to engage in business activities (directly or through subsidiaries), supportive of the Funds' operations as investment companies; and Whereas, each of the Funds desires to enter into a completely integrated Fourth Amended and Restated Funds' Service Agreement with the other Funds to (i) set forth the current terms and provisions of the relationships which the Funds have determined to establish; and (ii) make non-substantive amendments to the Amended and Restated Funds' Service Agreement, including correcting the names of the Funds set forth on the signature page of this Agreement. Now, Therefore, each Fund agrees with each and all of the other Funds, and with Service Company, as follows: - -------- * Funds' Service Agreement dated May 1, 1975; an Amended and Restated Funds' Service Agreement dated October 1, 1977; and an Amended and Restated Funds' Service Agreement dated May 10, 1993, and an Amended and Restated Funds' Service Agreement dated January 1, 1996, as therefore amended. I. CAPITALIZATION AND ASSETS OF SERVICE COMPANY 1.1 Capital and Assets. To provide the Service Company with the cash and with the office space, facilities and equipment necessary for it to discharge its responsibilities hereunder, each Fund agrees: A. To make cash investments in the Service Company as provided in Sections 1.2, 1.3 and 1.4. B. To assign and transfer to Service Company on and after May 1, 1975 any and all right, title and interest which the Funds may have in any office facilities and equipment necessary for it to discharge its responsibilities and in any other assets which Service Company may develop or acquire, subject only to the rights reserved in Section 1.6 (concerning certain major assets). Section 5.2 (concerning rights upon withdrawal) and Section 5.3 (concerning rights upon termination) of the Agreement. 1.2 Cash Investments in Service Company. To provide Service Company with such cash as may be necessary or appropriate from time to time to accomplish the purposes of the Funds and to discharge its responsibilities hereunder, each Fund agrees to purchase, for cash, shares of common stock of Service Company ("Shares") or such other securities of Service Company (hereafter referred to as "other securities") upon the favorable vote of the holders of a majority of the Shares adopting a resolution setting forth the terms and provisions of the purchase. Provided, however, that: A. Without the consent of all of the Funds, the date for the purchase of Shares or other securities shall not be less than 15 days following the date on which the resolution is approved by the shareholders. B. The cash purchase price to be paid by any Fund for the Shares or other securities, expressed as a percentage of the total purchase price for the additional securities to be paid by all of the Funds shall not exceed the percentage which the then current net assets of the Fund bears to the aggregate current net assets of all of the Funds as of the most recent month-end preceding the purchase date. 1.3 Periodic Adjustments of Cash Investments. To maintain and re-establish periodically a fair and proportionate ratio of cash investments by each Fund in the Service Company as compared to its then current net assets, each Fund agrees to purchase from one or more of the other Funds, or to sell one or more of the Funds, sufficient Shares or other securities to re-establish the ratio. A. Such purchases and sales shall be made (1) as of the last business day of any month upon the addition or withdrawal of any Fund as a party to this Agreement, provided that if the addition or withdrawal of a Fund creates no material disparity in the ratios (as determined by the Service Company's Board of Directors), and no Fund requests that an adjustment be made, the adjustment may be deferred until the close of the Service Company's fiscal year; (2) in connection with additional investments pursuant to Section 1.2; and (3) annually as of the close of the Service Company's fiscal year, on a date fixed by Service Company's Board of Directors within 90 days after the close of the fiscal year unless there is no material disparity in the ratios (as determined by the Service Company's Board of Directors) and no Fund requests that an adjustment be made. B. The cash purchases and sale price of the Share or other securities shall be for each Fund (1) in the case of Shares, the fair market value of Shares determined in accord with generally accepted accounting principles and procedures established by the Board of Directors of Service Company; and (2) in the case of debt securities, the face value thereof. C. Unless specifically required by applicable law, the issuance and transfer of Shares or other securities of Service Company, and the cash investments of the Funds in Service Company, may be evidenced by proper records of Service Company; and no certificates need be issued. 1.4 Limitation Upon Funds' Obligations to Make Cash Investments or Purchases. Notwithstanding the provisions of Sections 1.1, 1.2 and 1.3 above, no Fund shall be obligated to purchase Shares or other securities of Service Company if, as a result of such purchase the Fund would thereby have invested in cash a total of more than 0.40% of its then current net assets in Shares or other securities of Service Company. 1.5 Restrictions on Transfer of Shares or Other Securities. Each Fund agrees that it will not, without the written consent of all other parties to this Agreement, transfer or dispose of or encumber any of its Shares or other securities of Service Company except as provided in this Agreement, and that, if issued, each certificate for Shares or other securities of Service Company will be stamped with a legend referring to this restriction. 1.6 Assets of Service Company. The Funds agree that Service Company may acquire, by purchase or lease, office space, furniture, equipment, supplies, files, records, computer hardware and software, and other assets necessary or appropriate for the discharge of the Service Company's responsibilities hereunder. Each of the Funds hereby assigns and transfers to Service Company, any and all right, title and interest that it may have or hereafter acquire in any such assets, subject to the rights of each Fund (A) to receive the then fair value of such assets upon the purchase or sale of Shares pursuant to this Agreement, (B) to the continued use of such assets in the administration of the business affairs of a Fund so long as the Fund remains a party to this Agreement. 1.7 Borrowing by Service Company. The Funds agree that Service Company may borrow money, and may issue a note or other security in connection with such borrowing, as long as such borrowing, is in connection with the discharge of Service Company's responsibilities hereunder and is undertaken in accord with procedures approved by the Service Company's Board of Directors. II. SERVICES TO BE OBTAINED INDEPENDENTLY BY EACH FUND 2.1 Services and Expenses. Each Fund shall, at its own expense, obtain from Service Company or an outside vendor (as that Fund's Board of Directors shall determine): A. Services of an independent public accountant. B. Services of outside legal counsel. C. Transfer agency services, including "shareholder services." D. Custodian, registrar and dividend disbursing services. E. Brokerage fees, commissions and transfer taxes in connection with the purchase and sale of securities for its investment portfolio. F. Investment advisory services. G. Taxes and other fees applicable to its operations. H. Costs incident to its annual or special meetings of shareholders, including but not limited to legal and accounting fees, and the preparations, printing and mailing of proxy materials. I. Directors' fees. J. Costs incurred in the continued maintenance of its corporate existence, including reports to shareholders and government agencies, and the expenses, if any, attributable to the registration of the Fund's shares with Federal and state regulatory authorities. K. And, in general and except as provided in Section 3.2(B), any other costs directly attributable to and identified with a particular Fund or Funds rather than all Funds which are parties to this Agreement. 2.2 Disbursement of Payment for These Services. Notwithstanding the provisions of Section 2.1 above, Service Company may, as agent for any Fund, disburse to third parties payments for any of the foregoing services or expenses. Each Fund shall reimburse Service Company promptly for such disbursements made on behalf of the Fund. III. SERVICES PROVIDED BY AND EXPENSES OF SERVICE COMPANY 3.1 Services to be Provided to Funds. Service Company shall with respect to each Fund, subject to the direction and control of the Board of Directors and officers of the Fund: A. Manage, administer and/or conduct the general business activities of the Fund. B. Provide the personnel and obtain the office space, facilities and equipment necessary to perform such general business activities under the direction of the Funds' executive officers (who may also be officers of Service Company) who will have the full responsibility for the general management of these functions. C. Establish wholly-owned subsidiaries, and supervise the management and operations of such subsidiaries, as are necessary or appropriate to carry on or support the business activities of the Fund; and authorize such subsidiaries to perform such other functions for the Fund, including organizing new investment companies which are intended to become parties to this Agreement pursuant to Section 5.4, as Service Company's Board of Directors shall determine. No provisions hereof shall prohibit the Service Company from performing such additional services to the Fund as the Fund's Board of Directors may appropriately request and which two-thirds of the shareholders of the Service Company shall approve. 3.2 Expenses of Operation of Service Company. Each of the Funds agrees to pay to the Service Company, within 10 days after the last business day of each month or at such other time as agreed to by the Fund and the Service Company, the Fund's portion of the actual costs of operation of Service Company for each monthly period, or for such other period as is agreed upon, during which the Fund is a party to this Agreement. A. Corporate Management and Administrative Expenses. A Fund's portion of the cost of operation of Service Company shall mean its share of the direct and indirect expenses of Service Company's providing corporate management and administrative services, including distribution services of an administrative nature, as allocated among the Funds with Allocation of indirect costs based on one or more of the following methods of allocation: (1) Net Assets: The proportionate allocation of expenses based upon the value of each Fund's net assets, computed as a percentage of the value of total net assets of all Funds receiving services from Service Company, determined at the end of the last preceding monthly period. (2) Personnel Time: The proportionate allocation of expenses based upon a summary by each Fund of the time spent by each employee who works directly on the affairs of one or more of the Funds, computed as a percentage of the total time spent by such employee on the affairs of all of the Funds. (3) Shareholder Accounts: The proportionate allocation of expenses based upon the number of each Fund's shareholder accounts and transaction activity in those accounts, measured over a period of time, relative to the total number of shareholder accounts and transaction activity in those accounts for all Funds receiving number of portfolio transactions for all Funds receiving services from the Service Company during such period. (4) Such other methods of allocation as may be approved by the Board of Directors of the Service Company based upon its determination that the allocation method is fair to each Fund in view of (i) the nature, amount and purpose of the expenditure, (ii) the benefits, if any, to be derived directly by each Fund relative to the benefits derived by other Funds, (iii) the need or desirability for the Funds as a group to provide competitive investment programs and services at competitive prices for the group to survive and grow, (iv) the benefits which each Fund derives by being a member of a strong Fund group, and (v) such other factors as the Board considers relevant to the specific expenditure and allocation. B. Distribution Expenses. Each of the Funds expressly agrees to pay to Service Company, as requested, the Fund's portion of the actual cost of distributing shares of the Funds, which shall mean its share of all of the direct and indirect expenses of a marketing and promotional nature including, but not limited to, advertising, sales literature, and sales personnel, as well as expenditures on behalf of any newly organized registered investment company which is to become a party of this Agreement pursuant to Section 5.4. The cost of distributing shares of the Funds shall not include distribution-related expenses of an administrative nature, which shall be allocated among the Funds pursuant to Section 3.2(A). Distribution expenses of a marketing and promotional nature shall be allocated among the Funds in the manner approved by the Securities and Exchange Commission in Investment Company Act Release No. 11645 (Feb. 25, 1981): (1) 50% of these expenses will be allocated based upon each Fund's average month-end assets during the preceding quarter relative to the average month-end assets during the preceding quarter of the Funds as a group. (2) 50% of these expenses will be allocated initially among the Funds based upon each Fund's sales for the 24 months ended with the last day of the preceding quarter relative to the sales of the Funds as a group for the same period. (Shares issued pursuant to a reorganization shall be excluded from the sales of a Fund and the Funds as a group.) (3) Provided, however, that no Fund's aggregate quarterly contribution for distribution expenses, expressed as a percentage of its assets, shall exceed 125% of the average expenses for the Funds as a Group, expressed as a percentage of the total assets of the Funds. Expenses not charged to a particular Fund(s) because of this 125% limitation shall be reallocated to other Funds on iterative basis; and that no Fund's annual expenses for distribution shall exceed 0.2% of its average month-end net assets. IV. CONCERNING THE SERVICE COMPANY 4.1 Name. Each Fund acknowledge and agrees: A. That the name "The Vanguard Group, Inc.", and any variants thereof used to identify (1) the Funds as a group, (2) any Fund as a member of a group being served by Service Company, or (3) any other person as being served or related to Service Company (whether now in existence or hereafter created), shall be the sole and exclusive property of Service Company, its affiliates, and its successors. B. That Service Company shall have the sole and exclusive right to permit the use of said name or variants thereof so long as this Agreement or any amendments thereto are effective. C. That upon its withdrawal from this Agreement and upon the written request of Service Company, the Fund shall cease to use, or in any way to refer to itself as related to, "The Vanguard Group, Inc." or any variant thereof. The foregoing agreements on the part of each Fund are hereby made binding upon it, its directors, officers, shareholders and creditors and all other persons claiming under or through it. 4.2 Services to Others. The Service Company may render services to any person other than the Funds so long as: A. The services to be rendered to the Funds hereunder are not impaired thereby. B. The terms and provisions upon which the services are to be rendered have been approved by the holders of a majority of the Shares. C. The services rendered for compensation and, to the extent achievable, for the purpose of gaining a profit thereon. D. Any income earned and fees received by Service Company shall be used to reduce the total costs and expenses of Service Company. 4.3 Books, Records, and Audits of Service Company. The Service Company, and any subsidiary established pursuant to Section 3.1(C), shall maintain complete, accurate, and current books, records, and financial statements concerning its activities. To the extent appropriate, it will preserve said records in the manner and for the periods prescribed by law. Financial records and statements shall be kept in accord with generally accepted accounting principles and shall be audited at least annually by independent public accountants (who may also be accountants for any of the Funds). Within 120 days after the close of Service Company's fiscal year, it shall deliver to each Fund a copy of its audited financial statements for that year and the accountants report thereon. Service Company, on behalf of itself and any subsidiary, acknowledges that all of the records they shall prepare and maintain pursuant to this Agreement shall be the property of the Funds and that upon a request of any Fund they shall make the Fund's records available to it, along with such other information and data as are reasonably requested by the Fund, for inspection, audit or copying, or turn said records over to the Fund. 4.4 Indemnification. A. Each Fund (herein the "Indemnitor") agrees to indemnify, hold harmless, and reimburse (herein "indemnify") every other Fund, Service Company and/or any subsidiary of Service Company (herein the "Indemnitee"): (1) which Indemnitee (a) was or is a party to, or is threatened to be made a party to, any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (herein a "suit"), or (b) incurs an actual economic loss or expense (herein a "loss"). (2) if: (a) such suit or loss arises from an action or failure to act, event, occurrence, transaction, or other analogous happening (herein an "event") under circumstances in which the Indemnitee is involved in a suit or incurs a loss. (i) as a result substantially of, or attributable primarily to, its being a party to this Agreement, or to its indirect participation in transactions contemplated by this Agreement; and (ii) where the suit or loss arises primarily and substantially from an event related primarily and substantially to the business and/or operations of the Indemnitor; and (b) an independent third party, who may but need not be legal counsel for the Funds, advises the Funds in writing (i) that the condition set forth in "(1)" and "(2)(a)" have occurred and (ii) that the Indemnitee is without significant fault or responsibility for the suit or loss as measured by the comparative conduct of the Indemnitor and Indemnitee and by the purposes sought to be accomplished by this Agreement. B. The financial obligations of the Indemnitor under this Section shall be limited to: (1) In the case of a suit, to expenses (including attorneys' fees), actually incurred by the Indemnitee. The termination of any suit by judgment, order, settlement, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnitee is not entitled to be indemnified hereunder. (2) In the case of an event, to losses and/or expenses (including attorney's fees) actually incurred by the Indemnitee. The Indemnitee shall not be liable financially hereunder for lost profits in the case of either a suit or loss. C. Expenses incurred in defending a suit or resolving an event may be paid by the prospective Indemnitor in advance of the final disposition of such suit or event if authorized by the Board of Directors of the prospective Indemnitor in the specific case upon receipt of an undertaking by or on behalf of the prospective indemnitee to repay such amount unless it shall ultimately be determined that the Indemnitee is entitled to be indemnified by the Indemnitor as provided in this Section. D. The indemnification provided by this section shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under any agreement or otherwise. V. TERM OF AGREEMENT 5.1 Effective Period. This Agreement shall become effective on the date first written above, and shall continue in full force and effect as to all parties hereto until terminated or amended by mutual agreement of all parties hereto. The withdrawal pursuant to Section 5.2(A) or 5.2(B) of one or more of the Funds from this agreement shall not affect the continuance of this Agreement except as to the parties withdrawing. 5.2 Withdrawal from Agreement. A. Any Fund may elect to withdraw from this Agreement effective at the end of any monthly period by giving at least 90 days' prior written notice to each of the parties to this Agreement. Upon the written demand of all other Funds which are parties to this Agreement a Fund shall withdraw, and in the event of its failure to do so shall be deemed to have withdrawn, from this Agreement; such demand shall specify the date of withdrawal which shall be at the end of any monthly period at least 90 days from the time of service of such demand. B. In the event of the withdrawal of any Fund from this Agreement, all its rights and obligations, except for lease commitments, under this Agreement (except such rights or obligations as have accrued prior to the date of withdrawal) shall terminate as of the date of the withdrawal. The withdrawing Fund shall surrender its Shares to Service Company, and (1) shall be entitled to receive from Service Company an amount equal to the excess of the fair value of (i) its Shares of other securities Service Company as of the date of its withdrawal less (ii) its proportionate interest in any liabilities of Service Company, including when appropriate any commitments of Service Company and unexpired leases at the date of withdrawal; (2) shall be obligated to pay Service Company an amount equal to the excess of (ii) over (i). Such amount to be received from or paid to Service Company shall be determined by the favorable vote of the holders of a majority of the Shares whose determination shall be conclusive upon the Funds. Any amount found payable by the Service Company to the withdrawing Fund shall be recoverable by Service Company from the Funds remaining under this Agreement in accordance with the provisions of Section 1.2, 1.3 and 1.4 hereof. 5.3 Termination by Mutual Consent. In the event that all Funds withdraw from this Agreement without entering into a comparable successor agreement, each Fund shall surrender its Shares to Service Company and after payment by Service Company of all its liabilities, including the settlement of unexpired lease obligations, shall: A. Receive from Service Company in cash an amount equal to its proportionate share of the actual value of all assets of the Service Company which can be reduced readily to cash. B. Negotiate in good faith with the other Funds provision for the equitable use and/or disposition of assets of the Service Company which are not readily reducible to cash. 5.4 Additional Parties to Agreement. Upon the favorable vote of two-thirds of the shareholders and of the holders of two-thirds of the Shares of the Service Company, any investment company registered under the Investment Company Act of 1940 may become a party to this Agreement and share as a Fund in all of the rights, duties and liabilities hereunder by adopting, executing and delivering to the Service Company and the Funds a signed copy of this Agreement which shall evidence that investment company's agreement to assume the duties and obligations of a Fund hereunder. Upon the delivery of a signed copy of this Agreement, the new Fund shall be subject to all provisions of this Agreement and become a holder of Shares by adjustment in cash investments among the Funds pursuant to Section 1.3. No person shall become a holder of shares without becoming a party to this Agreement. VI. GENERAL 6.1 Definition of Certain Terms. As used in this Agreement, the terms set forth below shall mean: A. "Fair Value of Shares" shall mean the proportionate interest, as represented by the ratio of the number of Shares owned by a Fund to the number of Shares issued and outstanding, in all assets of the Service Company less all liabilities of the Service Company on the date fair value is to be determined. Assets shall be valued at fair market value. In case of any dispute as to the proportionate interest of any Fund or as to the fair value of the Shares, the issue shall be determined by the favorable vote of the holders of a majority of the Shares, whose determination shall be conclusive upon the Fund. B. "Person" shall mean a natural person, a corporation, a partnership, an association, a joint-stock company, a trust, a fund or any organized group of persons whether incorporated or not. 6.2 Assignment. This Agreement shall bind and inure to the benefit of the parties thereto, their respective successors and assigns. 6.3 Captions. The captions in this Agreement are included for convenience of reference only and in no way define any of the provisions hereof or otherwise affect their construction or effect. 6.4 Amendment. Unless prohibited by applicable laws, regulations or orders of regulatory authorities and except as set forth below, this Agreement may be amended at any time and in one or more respects upon the favorable vote of the holders of a majority of the Shares (except that the vote required in Sections 3.1 and 5.4 may be amended only by the favorable votes of the number of holders or Shares specified therein) and without the further approval or vote of shareholders of any of the Funds; provided, however, that Section 1.4 (limiting cash investments by the Funds in Service Company) may not be amended unless and exemptive order permitting such amendment is obtained from the U.S. Securities and Exchange Commission. 6.5 Severability. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. In Witness Whereof, each of the parties hereto has caused the Agreement to be signed and its corporate seal to be hereto affixed by its proper officers thereunto duly authorized, all as of the date and year first above written. The Vanguard Group, Inc. Attest: /S/ Raymond J. Klapinsky BY: /S/ John J. Brennan Raymond J. Klapinsky John J. Brennan Secretary Chairman, President, and Chief Executive Officer The Vanguard Group of Investment Companies: Vanguard Admiral Funds Vanguard Balanced Index Funds Vanguard Bond Index Funds Vanguard California Tax-Free Funds Vanguard Convertible Securities Fund Vanguard Explorer Fund Vanguard Fenway Funds Vanguard Fixed Income Securities Funds Vanguard Florida Tax-Free Funds Vanguard Horizon Funds Vanguard Index Funds Vanguard International Equity Index Funds Vanguard Malvern Funds Vanguard Massachusetts Tax-Exempt Funds Vanguard Money Market Reserves Vanguard Morgan Growth Fund Vanguard Municipal Bond Funds Vanguard New Jersey Tax-Free Funds Vanguard New York Tax-Free Funds Vanguard Ohio Tax-Free Funds Vanguard Pennsylvania Tax-Free Funds Vanguard Preferred Stock Fund Vanguard PRIMECAP Fund Vanguard Quantitative Funds Vanguard Specialized Funds Vanguard Tax-Managed Funds Vanguard Treasury Fund Vanguard Trustees' Equity Fund Vanguard Variable Insurance Funds Vanguard Wellesley Income Fund Vanguard Wellington Fund Vanguard Whitehall Fund Vanguard Windsor Funds Vanguard World Fund Attest: /S/ Raymond J. Klapinsky BY: /S/ John J. Brennan Raymond J. Klapinsky John J. Brennan Secretary Chairman, President, and Chief Executive Officer EX-23 7 primecap.txt DECLARATION OF TRUST Effective as of January 23, 1998 As amended July 19, 2002 AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST OF VANGUARD PRIMECAP FUND A DELAWARE BUSINESS TRUST PRINCIPAL PLACE OF BUSINESS: 100 VANGUARD BOULEVARD MALVERN, PENNSYLVANIA 19355 AGREEMENT AND DECLARATION OF TRUST OF VANGUARD PRIMECAP FUND WHEREAS, this AGREEMENT AND DECLARATION OF TRUST is made and entered into as of the date set forth below by the Trustees named hereunder for the purpose of forming a Delaware business trust in accordance with the provisions hereinafter set forth, NOW, THEREFORE, the Trustees hereby direct that a Certificate of Trust be filed with the Office of the Secretary of State of the State of Delaware and do hereby declare that the Trustees will hold IN TRUST all cash, securities and other assets which the Trust now possesses or may hereafter acquire from time to time in any manner and manage and dispose of the same upon the following terms and conditions for the pro rata benefit of the holders of Shares in this Trust. ARTICLE I. Name and Definitions Section 1. Name. This trust shall be known as "VANGUARD PRIMECAP FUND" and the Trustees shall conduct the business of the Trust under that name or any other name as they may from time to time determine. Section 2. Definitions. Whenever used herein, unless otherwise required by the context or specifically provided: (a) The "Trust" refers to the Delaware business trust established by this Agreement and Declaration of Trust, as amended from time to time; (b) The "Trust Property" means any and all property, real or personal, tangible or intangible, which is owned or held by or for the account of the Trust; (c) "Trustees" refers to the persons who have signed this Agreement and Declaration of Trust, so long as they continue in office in accordance with the terms hereof, and all other persons who may from time to time be duly elected or appointed to serve on the Board of Trustees in accordance with the provisions hereof, and reference herein to a Trustee or the Trustees shall refer to such person or persons in their capacity as trustees hereunder; (d) "Shares" means the shares of beneficial interest into which the beneficial interest in the Trust shall be divided from time to time and includes fractions of Shares as well as whole Shares; (e) "Shareholder" means a record owner of outstanding Shares; (f) "Person" means and includes individuals, corporations, partnerships, trusts, foundations, plans, associations, joint ventures, estates and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof, whether domestic or foreign; (g) The "1940 Act" refers to the Investment Company Act of 1940 and the Rules and Regulations thereunder, all as amended from time to time. References herein to specific sections of the 1940 Act shall be deemed to include such Rules and Regulations as are applicable to such sections as determined by the Trustees or their designees; (h) The terms "Commission" and "Principal Underwriter" shall have the respective meanings given them in Section 2(a)(7) and Section (2)(a)(29) of the 1940 Act; (i) "Declaration of Trust" shall mean this Agreement and Declaration of Trust, as amended or restated from time to time; (j) "By-Laws" shall mean the By-Laws of the Trust as amended from time to time; (k) The term "Interested Person" has the meaning given it in Section 2(a)(19) of the 1940 Act; (l) "Investment Adviser" or "Adviser" means a party furnishing services to the Trust pursuant to any contract described in Article IV, Section 7(a) hereof; (m) "Series" refers to each Series of Shares established and designated under or in accordance with the provisions of Article III. ARTICLE II. Purpose of Trust The purpose of the Trust is to conduct, operate and carry on the business of a management investment company registered under the 1940 Act through one or more Series investing primarily in securities. 2 ARTICLE III. Shares Section 1. Division of Beneficial Interest. The beneficial interest in the Trust shall at all times be divided into an unlimited number of Shares, with a par value of $ .001 per Share. The Trustees may authorize the division of Shares into separate Series and the division of Series into separate classes of Shares. The different Series shall be established and designated, and the variations in the relative rights and preferences as between the different Series shall be fixed and determined, by the Trustees. If only one Series shall be established, the Shares shall have the rights and preferences provided for herein and in Article III, Section 6 hereof to the extent relevant and not otherwise provided for herein. Subject to the provisions of Section 6 of this Article III, each Share shall have voting rights as provided in Article V hereof, and holders of the Shares of any Series shall be entitled to receive dividends, when, if and as declared with respect thereto in the manner provided in Article VI, Section 1 hereof. No Share shall have any priority or preference over any other Share of the same Series with respect to dividends or distributions of the Trust or otherwise. All dividends and distributions shall be made ratably among all Shareholders of a Series (or class) from the assets held with respect to such Series according to the number of Shares of such Series (or class) held of record by such Shareholders on the record date for any dividend or distribution or on the date of termination of the Trust, as the case may be. Shareholders shall have no preemptive or other right to subscribe to any additional Shares or other securities issued by the Trust or any Series. The Trustees may from time to time divide or combine the Shares of a Series into a greater or lesser number of Shares of such Series without thereby materially changing the proportionate beneficial interest of such Shares in the assets held with respect to that Series or materially affecting the rights of Shares of any other Series. Section 2. Ownership of Shares. The ownership of Shares shall be recorded on the books of the Trust or a transfer or similar agent for the Trust, which books shall be maintained separately for the Shares of each Series. No certificates evidencing the ownership of Shares shall be issued except as the Board of Trustees may otherwise determine from time to time. The Trustees may make such rules as they consider appropriate for the transfer of Shares of each Series (or class) and similar matters. The record books of the Trust as kept by the Trust or any transfer or similar agent, as the case may be, shall be conclusive as to the identity of the Shareholders of each Series and as to the number of Shares of each Series held from time to time by each Shareholder. Section 3. Investments in the Trust. Investments may be accepted by the Trust from such Persons, at such times, on such terms, and for such consideration as the Trustees from time to time may authorize. Each investment shall be credited to the Shareholder's account in the form of full and fractional Shares of the Trust, in such Series (or class) as the purchaser shall select, at the net asset value per Share next determined for such Series (or class) after receipt of the investment; provided, however, that the Trustees may, in their sole discretion, impose a sales charge or reimbursement fee upon investments in the Trust. 3 Section 4. Status of Shares and Limitation of Personal Liability. Shares shall be deemed to be personal property giving only the rights provided in this instrument and the By-Laws of the Trust. Every Shareholder by virtue of having become a Shareholder shall be held to have expressly assented and agreed to the terms hereof. The death of a Shareholder during the existence of the Trust shall not operate to terminate the Trust, nor entitle the representative of any deceased Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but shall entitle such representative only to the rights of said deceased Shareholder under this Declaration of Trust. Ownership of Shares shall not entitle a Shareholder to any title in or to the whole or any part of the Trust Property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders as partners or joint venturers. Neither the Trust nor the Trustees, nor any officer, employee or agent of the Trust shall have any power to bind personally any Shareholder, or to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time agree to pay. Section 5. Power of Board of Trustees to Change Provisions Relating to Shares. Notwithstanding any other provision of this Declaration of Trust to the contrary, and without limiting the power of the Board of Trustees to amend the Declaration of Trust as provided elsewhere herein, the Board of Trustees shall have the power to amend this Declaration of Trust, at any time and from time to time, in such manner as the Board of Trustees may determine in their sole discretion, without the need for Shareholder action, so as to add to, delete, replace or otherwise modify any provisions relating to the Shares contained in this Declaration of Trust, provided that before adopting any such amendment without Shareholder approval the Board of Trustees shall determine that it is consistent with the fair and equitable treatment of all Shareholders and that Shareholder approval is not required by the 1940 Act or other applicable law. If Shares have been issued, Shareholder approval shall be required to adopt any amendments to this Declaration of Trust which would adversely affect to a material degree the rights and preferences of the Shares of any Series (or class) or to increase or decrease the par value of the Shares of any Series (or class). Section 6. Establishment and Designation of Shares. The establishment and designation of any Series (or class) of Shares shall be effective upon the adoption by a majority of the Trustees, of a resolution which sets forth such establishment and designation and the relative rights and preferences of such Series (or class). Each such resolution shall be incorporated herein by reference upon adoption. Shares of each Series (or class) established pursuant to this Section 6, unless otherwise provided in the resolution establishing such Series, shall have the following relative rights and preferences: (a) Assets Held with Respect to a Particular Series. All consideration received by the Trust for the issue or sale of Shares of a Series, including dividends and distributions paid by, and reinvested in, such Series, together 4 with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof from whatever source derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably be held with respect to that Series for all purposes, subject only to the rights of creditors, and shall be so recorded upon the books of account of the Trust. Such consideration, assets, income, earnings, profits and proceeds thereof, from whatever source derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds, in whatever form the same may be, are herein referred to as "assets held with respect to" that Series. In the event that there are any assets, income, earnings, profits and proceeds thereof, funds or payments which are not readily identifiable as assets held with respect to any particular Series (collectively "General Assets"), the Trustees shall allocate such General Assets to, between or among any one or more of the Series in such manner and on such basis as the Trustees, in their sole discretion, deem fair and equitable, and any General Asset so allocated to a particular Series shall be held with respect to that Series. Each such allocation by the Trustees shall be conclusive and binding upon the Shareholders of all Series for all purposes in absence of manifest error. (b) Liabilities Held with Respect to a Particular Series. The assets of the Trust held with respect to each Series shall be charged with the liabilities of the Trust with respect to such Series and all expenses, costs, charges and reserves attributable to such Series, and any general liabilities of the Trust which are not readily identifiable as being held in respect of a Series shall be allocated and charged by the Trustees to and among any one or more Series in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. The liabilities, expenses, costs, charges, and reserves so charged to a Series are herein referred to as "liabilities held with respect to" that Series. Each allocation of liabilities, expenses, costs, charges and reserves by the Trustees shall be conclusive and binding upon the holders of all Series for all purposes in absence of manifest error. All Persons who have extended credit which has been allocated to a particular Series, or who have a claim or contract which has been allocated to a Series, shall look exclusively to the assets held with respect to such Series for payment of such credit, claim, or contract. In the absence of an express agreement so limiting the claims of such creditors, claimants and contracting parties, each creditor, claimant and contracting party shall be deemed nevertheless to have agreed to such limitation unless an express provision to the contrary has been incorporated in the written contract or other document establishing the contractual relationship. (c) Dividends, Distributions, Redemptions, and Repurchases. No dividend or distribution including, without limitation, any distribution paid upon termination of the Trust or of any Series (or class) with respect to, or any redemption or repurchase of, the Shares of any Series (or class) shall be effected by the Trust other than from the assets held with respect to such Series, nor shall any Shareholder of any Series otherwise have any right or claim against the assets held with respect to any other Series except to the extent that such Shareholder has such a right or claim hereunder as a Shareholder of such other Series. The Trustees shall have full discretion to determine which items shall be treated as income and which items as capital; and each such determination and allocation shall be conclusive and binding upon the Shareholders in absence of manifest error. 5 (d) Voting. All Shares of the Trust entitled to vote on a matter shall vote without differentiation between the separate Series on a one-vote-per-each dollar (and a fractional vote for each fractional dollar) of the net asset value of each share (including fractional shares) basis; provided however, if a matter to be voted on affects only the interests of not all Series (or class of a Series), then only the Shareholders of such affected Series (or class) shall be entitled to vote on the matter. (e) Equality. All the Shares of each Series shall represent an equal proportionate undivided interest in the assets held with respect to such Series (subject to the liabilities of such Series and such rights and preferences as may have been established and designated with respect to classes of Shares within such Series), and each Share of a Series shall be equal to each other Share of such Series. (f) Fractions. Any fractional Share of a Series shall have proportionately all the rights and obligations of a whole share of such Series, including rights with respect to voting, receipt of dividends and distributions and redemption of Shares. (g) Exchange Privilege. The Trustees shall have the authority to provide that the holders of Shares of any Series shall have the right to exchange such Shares for Shares of one or more other Series in accordance with such requirements and procedures as may be established by the Trustees. (h) Combination of Series. The Trustees shall have the authority, without the approval of the Shareholders of any Series unless otherwise required by applicable law, to combine the assets and liabilities held with respect to any two or more Series into assets and liabilities held with respect to a single Series. (i) Elimination of Series. At any time that there are no Shares outstanding of a Series (or class), the Trustees may abolish such Series (or class). ARTICLE IV. The Board of Trustees Section 1. Number, Election and Tenure. The number of Trustees constituting the Board of Trustees shall be fixed from time to time by a written instrument signed, or by resolution approved at a duly constituted meeting, by a majority of the Board of Trustees, provided, however, that the number of Trustees shall in no event be less than one (1) nor more than fifteen (15). Subject to the requirements of Section 16(a) of the 1940 Act, the Board of Trustees, by action of a majority of the then Trustees at a duly constituted meeting, may fill vacancies in the Board of Trustees and remove Trustees with or without cause. 6 Each Trustee shall serve during the continued lifetime of the Trust until he or she dies, resigns, is declared bankrupt or incompetent by a court of competent jurisdiction, or is removed. Any Trustee may resign at any time by written instrument signed by him and delivered to any officer of the Trust or to a meeting of the Trustees. Such resignation shall be effective upon receipt unless specified to be effective at some other time. Except to the extent expressly provided in a written agreement with the Trust, no Trustee resigning and no Trustee removed shall have any right to any compensation for any period following his or her resignation or removal, or any right to damages or other payment on account of such removal. Any Trustee may be removed at any meeting of Shareholders by a vote of two-thirds of the total combined net asset value of all Shares of the Trust issued and outstanding. A meeting of Shareholders for the purpose of electing or removing one or more Trustees may be called (i) by the Trustees upon their own vote, or (ii) upon the demand of Shareholders owning 10% or more of the Shares of the Trust in the aggregate. Section 2. Effect of Death, Resignation, etc. of a Trustee. The death, declination, resignation, retirement, removal, or incapacity of one or more Trustees, or all of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Declaration of Trust. Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is filled as provided in Article IV, Section 1, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration of Trust. Section 3. Powers. Subject to the provisions of this Declaration of Trust, the business of the Trust shall be managed by the Board of Trustees, and such Board shall have all powers necessary or convenient to carry out that responsibility including the power to engage in transactions of all kinds on behalf of the Trust. Trustees, in all instances, shall act as principals and are and shall be free from the control of the Shareholders. The Trustees shall have full power and authority to do any and all acts and to make and execute any and all contracts, documents and instruments that they may consider desirable, necessary or appropriate in connection with the administration of the Trust. Without limiting the foregoing, the Trustees may: adopt, amend and repeal By-Laws not inconsistent with this Declaration of Trust providing for the regulation and management of the affairs of the Trust; elect and remove such officers and appoint and terminate such agents as they consider appropriate; appoint from their own number and establish and terminate one or more committees consisting of two or more Trustees who may exercise the powers and authority of the Board of Trustees to the extent that the Trustees determine; employ one or more custodians of the assets of the Trust and may authorize such custodians to employ subcustodians and to deposit all or any part of such assets in a system or systems for the central handling of securities or with a Federal Reserve Bank, retain a transfer agent or a shareholder servicing agent, or both; provide for the issuance and distribution of Shares by the Trust directly or through one or more Principal Underwriters or otherwise; redeem, repurchase and transfer Shares pursuant to applicable law; set record dates for the determination of Shareholders with respect to various matters; declare and pay dividends and distributions to Shareholders of each Series from the assets of such Series; establish from time to time, in accordance with the provisions of Article III, 7 Section 6 hereof, any Series of Shares, each such Series to operate as a separate and distinct investment medium and with separately defined investment objectives and policies and distinct investment purpose; and in general delegate such authority as they consider desirable to any officer of the Trust, to any committee of the Trustees and to any agent or employee of the Trust or to any such custodian, transfer or shareholder servicing agent, Investment Manager or Principal Underwriter. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this Declaration of Trust, the presumption shall be in favor of a grant of power to the Trustees and unless otherwise specified herein or required by the 1940 Act or other applicable law, any action by the Board of Trustees shall be deemed effective if approved or taken by a majority of the Trustees then in office or a majority of any duly constituted committee of Trustees. Any action required or permitted to be taken at any meeting of the Board of Trustees, or any committee thereof, may be taken without a meeting if all members of the Board of Trustees or committee (as the case may be) consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the Board of Trustees, or committee, except as otherwise provided in the 1940 Act. Without limiting the foregoing, the Trust shall have power and authority: (a) To invest and reinvest cash and cash items, to hold cash uninvested, and to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, write options on, lend or otherwise deal in or dispose of contracts for the future acquisition or delivery of all types of securities, futures contracts and options thereon, and forward currency contracts of every nature and kind, including, without limitation, all types of bonds, debentures, stocks, preferred stocks, negotiable or non-negotiable instruments, obligations, evidences of indebtedness, certificates of deposit or indebtedness, commercial paper, repurchase agreements, bankers' acceptances, and other securities of any kind, issued, created, guaranteed, or sponsored by any and all Persons, including, without limitation, states, territories, and possessions of the United States and the District of Columbia and any political subdivision, agency, or instrumentality thereof, any foreign government or any political subdivision of the U.S. Government or any foreign government, or any international instrumentality or organization, or by any bank or savings institution, or by any corporation or organization organized under the laws of the United States or of any state, territory, or possession thereof, or by any corporation or organization organized under any foreign law, or in "when issued" contracts for any such securities, futures contracts and options thereon, and forward currency contracts, to change the investments of the assets of the Trust; and to exercise any and all rights, powers, and privileges of ownership or interest in respect of any and all such investments of every kind and description, including, without limitation, the right to consent and otherwise act with respect thereto, with power to designate one or more Persons, to exercise any of said rights, powers, and privileges in respect of any of said instruments; (b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or write options with respect to or otherwise deal in any property rights relating to any or all of the assets of the Trust or any Series; 8 (c) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver proxies or powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper; (d) To exercise powers and right of subscription or otherwise which in any manner arise out of ownership of securities; (e) To hold any security or property in a form not indicating that it is trust property, whether in bearer, unregistered or other negotiable form, or in its own name or in the name of a custodian or subcustodian or a nominee or nominees or otherwise or to authorize the custodian or a subcustodian or a nominee or nominees to deposit the same in a securities depository, subject in each case to the applicable provisions of the 1940 Act; (f) To consent to, or participate in, any plan for the reorganization, consolidation or merger of any corporation or issuer of any security which is held in the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer; and to pay calls or subscriptions with respect to any security held in the Trust; (g) To join with other security holders in acting through a committee, depository, voting trustee or otherwise, and in that connection to deposit any security with, or transfer any security to, any such committee, depository or trustee, and to delegate to them such power and authority with relation to any security (whether or not so deposited or transferred) as the Trustees shall deem proper, and to agree to pay, and to pay, such portion of the expenses and compensation of such committee, depository or trustee as the Trustees shall deem proper; (h) To litigate, compromise, arbitrate, settle or otherwise adjust claims in favor of or against the Trust or a Series, or any matter in controversy, including but not limited to claims for taxes; (i) To enter into joint ventures, general or limited partnerships and any other combinations or associations; (j) To borrow funds or other property in the name of the Trust or Series exclusively for Trust purposes; (k) To endorse or guarantee the payment of any notes or other obligations of any Person; to make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof; (l) To purchase and pay for entirely out of Trust Property such insurance as the Trustees may deem necessary, desirable or appropriate for the conduct of the business, including, without limitation, insurance policies 9 insuring the assets of the Trust or payment of distributions and principal on its portfolio investments, and insurance policies insuring the Shareholders, Trustees, officers, employees, agents, Investment Manager, principal underwriters, or independent contractors of the Trust, individually against all claims and liabilities of every nature arising by reason of holding Shares, holding, being or having held any such office or position, or by reason of any action alleged to have been taken or omitted by any such Person as Trustee, officer, employee, agent, Investment Manager, Principal Underwriter, or independent contractor, including any action taken or omitted that may be determined to constitute negligence, whether or not the Trust would have the power to indemnify such Person against liability; and (m) To adopt, establish and carry out pension, profit-sharing, share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust. The Trust shall not be limited to investing in obligations maturing before the possible termination of the Trust or one or more of its Series. The Trust shall not in any way be bound or limited by any present or future law or custom in regard to investment by fiduciaries. The Trust shall not be required to obtain any court order to deal with any assets of the Trust or take any other action hereunder. Section 4. Payment of Expenses by the Trust. Subject to the provisions of Article III, Section 6(b), the Trustees are authorized to pay or cause to be paid out of the principal or income of the Trust or Series, or partly out of the principal and partly out of income, and to charge or allocate the same to, between or among such one or more of the Series that may be established or designated pursuant to Article III, Section 6, all expenses, fees, charges, taxes and liabilities incurred or arising in connection with the Trust or Series, or in connection with the management thereof, including, but not limited to, the Trustees' compensation and such expenses and charges for the services of the Trust's officers, employees, Investment Manager^, Principal Underwriter, auditors, counsel, custodian, transfer agent, Shareholder servicing agent, and such other agents or independent contractors and such other expenses and charges as the Trustees may deem necessary or proper to incur. Section 5. Ownership of Assets of the Trust. Title to all of the assets of the Trust shall at all times be considered as vested in the Trust, except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust, or in the name of any other Person as nominee, on such terms as the Trustees may determine. Upon the resignation, incompetency, bankruptcy, removal, or death of a Trustee he or she shall automatically cease to have any such title in any of the Trust Property, and the title of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered. The Trustees may determine that the Trust or the Trustees, acting for and on behalf of the Trust, shall be deemed to hold beneficial ownership of any income earned on the securities owned by the Trust, whether domestic or foreign. 10 Section 6. Service Contracts. ----------------------------- (a) The Trustees may, at any time and from time to time, contract for exclusive or nonexclusive advisory, management and/or administrative services for the Trust or for any Series with any Person; and any such contract may contain such other terms as the Trustees may determine, including without limitation, authority for the Investment Adviser to determine from time to time without prior consultation with the Trustees what investments shall be purchased, held, sold or exchanged and what portion, if any, of the assets of the Trust shall be held uninvested and to make changes in the Trust's investments, and such other responsibilities as may specifically be delegated to such Person. (b) The Trustees may also, at any time and from time to time, contract with any Persons, appointing such Persons exclusive or nonexclusive distributor or Principal Underwriter for the Shares of one or more of the Series or other securities to be issued by the Trust. Every such contract may contain such other terms as the Trustees may determine. (c) The Trustees are also empowered, at any time and from time to time, to contract with any Persons, appointing such Person(s) to serve as custodian(s), transfer agent and/or shareholder servicing agent for the Trust or one or more of its Series. Every such contract shall comply with such terms as may be required by the Trustees. (d) The Trustees are further empowered, at any time and from time to time, to contract with any Persons to provide such other services to the Trust or one or more of the Series, as the Trustees determine to be in the best interests of the Trust and the applicable Series. (e) The fact that: (i) any of the Shareholders, Trustees, or officers of the Trust is a shareholder, director, officer, partner, trustee, employee, Manager, adviser, Principal Underwriter, distributor, or affiliate or agent of or for any Person with which an advisory, management or administration contract, or Principal Underwriter's or distributor's contract, or transfer, shareholder servicing or other type of service contract may be made, or that (ii) any Person with which an advisory, management or administration contract or Principal Underwriter's or distributor's contract, or transfer, shareholder servicing or other type of service contract may be made also has an advisory, management or administration contract, or principal underwriter's or distributor's contract, or transfer, shareholder servicing or other service contract, or has other business or interests with any other Person, shall not affect the validity of any such contract or disqualify any Shareholder, Trustee or officer of the Trust from voting upon or executing the same, or create any liability or accountability to the Trust or its Shareholders, provided approval of each such contract is made pursuant to the applicable requirements of the 1940 Act. 11 ARTICLE V. Shareholders' Voting Powers and Meetings Section 1. Voting Powers. Subject to the provisions of Article III, Sections 5 and 6(d), the Shareholders shall have right to vote only (i) for the election or removal of Trustees as provided in Article IV, Section 1, and (ii) with respect to such additional matters relating to the Trust as may be required by the applicable provisions of the 1940 Act, including Section 16(a) thereof, and (iii) on such other matters as the Trustees may consider necessary or desirable. Each shareholder shall have one vote for each dollar (and a fractional vote for each fractional dollar) of the net asset value of each share (including fractional shares) held by such shareholder on the record date on each matter submitted to a vote at a meeting of shareholders. For purposes of this section, net asset value shall be determined pursuant to Section 3 of Article VIII of the Trustee's Bylaws as of the record date for such meeting set pursuant to Section 5 of such Bylaws. There shall be no cumulative voting in the election of Trustees. Votes may be made in person or by proxy. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. Section 2. Voting Power and Meetings. Meetings of the Shareholders may be called by the Trustees for the purposes described in Section 1 of this Article V. A meeting of Shareholders may be held at any place designated by the Trustees. Written notice of any meeting of Shareholders shall be given or caused to be given by the Trustees by delivering personally or mailing such notice not more than ninety (90), nor less than ten (10) days before such meeting, postage prepaid, stating the time and place of the meeting, to each Shareholder at the Shareholder's address as it appears on the records of the Trust. Whenever notice of a meeting is required to be given to a Shareholder under this Declaration of Trust, a written waiver thereof, executed before or after the meeting by such Shareholder or his or her attorney thereunto authorized and filed with the records of the meeting, or actual attendance at the meeting of Shareholders in person or by proxy, shall be deemed equivalent to such notice. Section 3. Quorum and Required Vote. Except as otherwise provided by the Investment Company Act of 1940 or in the Trust's Declaration of Trust, at any meeting of shareholders, the presence in person or by proxy of the holders of record of Shares issued and outstanding and entitled to vote representing more than fifty percent of the total combined net asset value of all Shares issued and outstanding and entitled to vote shall constitute a quorum for the transaction of any business at the meeting. Any meeting of Shareholders may be adjourned from time to time by a majority of the votes properly cast upon the question of adjourning a meeting to another date and time, whether or not a quorum is present, and the meeting may be held as adjourned within a reasonable time after the date set for the original meeting without further notice. Subject 12 to the provisions of Article III, Section 6(d) and the applicable provisions of the 1940 Act, when a quorum is present at any meeting, a majority vote of the combined net asset value of all shares entitled to vote that are present in person or by proxy shall decide any questions, except only a plurality vote shall be necessary to elect trustees. Section 4. Action by Written Consent. Any action taken by Shareholders may be taken without a meeting if all the holders of Shares entitled to vote on the matter are provided with not less than 7 days written notice thereof and written consent to the action is filed with the records of the meetings of Shareholders by the holders of the number of votes that would be required to approve the matter as provided in Article V, Section 3. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders. Section 5. Record Dates. For the purpose of determining the Shareholders who are entitled to vote or act at any meeting or any adjournment thereof, the Trustees may fix a time, which shall be not more than ninety (90) nor less than ten (10) days before the date of any meeting of Shareholders, as the record date for determining the Shareholders having the right to notice of and to vote at such meeting and any adjournment thereof, and in such case only Shareholders of record on such record date shall have such right, notwithstanding any transfer of shares on the books of the Trust after the record date. For the purpose of determining the Shareholders who are entitled to receive payment of any dividend or of any other distribution, the Trustees may fix a date, which shall be before the date for the payment of such dividend or distribution, as the record date for determining the Shareholders having the right to receive such dividend or distribution. Nothing in this Section shall be construed as precluding the Trustees from setting different record dates for different Series. ARTICLE VI. Net Asset Value, Distributions, and Redemptions Section 1. Determination of Net Asset Value, Net Income, and Distributions. Subject to Article III, Section 6 hereof, the Trustees, in their absolute discretion, may prescribe and shall set forth in the By-laws or in a duly adopted resolution of the Trustees such bases and time for determining the per Share net asset value of the Shares of any Series and the declaration and payment of dividends and distributions on the Shares of any Series, as they may deem necessary or desirable. Section 2. Redemptions and Repurchases. The Trust shall purchase such Shares as are offered by any Shareholder for redemption, upon receipt by the Trust or a Person designated by the Trust that the Trust redeem such Shares or in accordance with such procedures for redemption as the Trustees may from time to time authorize; and the Trust will pay therefor the net asset value thereof, in accordance with the By-Laws and the applicable provisions of the 1940 Act. Payment for said Shares shall be made by the Trust to the Shareholder within seven days after the date on which the request for redemption is received in proper form. The obligation set forth in this Section 2 is subject to the provision that in the event that any time the New York Stock Exchange (the "Exchange") is closed for other than weekends or holidays, or if permitted by the Rules of the Commission during periods when trading on the Exchange is restricted or during any emergency which makes it impracticable for the Trust to dispose of the investments of the applicable Series or to determine fairly the value of the net assets held with respect to such Series or during any other period permitted by order of the Commission for the protection of investors, such obligations may be suspended or postponed by the Trustees. 13 The redemption price may in any case or cases be paid in cash or wholly or partly in kind in accordance with Rule 18f-1 under the 1940 Act if the Trustees determine that such payment is advisable in the interest of the remaining Shareholders of the Series of which the Shares are being redeemed. Subject to the foregoing, the selection and quantity of securities or other property so paid or delivered as all or part of the redemption price shall be determined by or under authority of the Trustees. In no case shall the Trust be liable for any delay of any corporation or other Person in transferring securities selected for delivery as all or part of any payment in kind. Section 3. Redemptions at the Option of the Trust. The Trust shall have the right, at its option, upon 30 days notice to the affected Shareholder at any time to redeem Shares of any Shareholder at the net asset value thereof as described in Section 1 of this Article VI: (i) if at such time such Shareholder owns Shares of any Series having an aggregate net asset value of less than a minimum value determined from time to time by the Trustees; or (ii) to the extent that such Shareholder owns Shares of a Series equal to or in excess of a maximum percentage of the outstanding Shares of such Series determined from time to time by the Trustees; or (iii) to the extent that such Shareholder owns Shares equal to or in excess of a maximum percentage, determined from time to time by the Trustees, of the outstanding Shares of the Trust. Section 4. Transfer of Shares. The Trust shall transfer shares held of record by any Person to any other Person upon receipt by the Trust or a Person designated by the Trust of a written request therefore in such form and pursuant to such procedures as may be approved by the Trustees. ARTICLE VII. Compensation and Limitation of Liability Section 1. Compensation of Trustees. The Trustees as such shall be entitled to reasonable compensation from the Trust, and they may fix the amount of such compensation from time to time. Nothing herein shall in any way prevent the employment of any Trustee to provide advisory, management, legal, accounting, investment banking or other services to the Trust and to be specially compensated for such services by the Trust. Section 2. Indemnification and Limitation of Liability. The Trustees shall not be responsible or liable in any event for any neglect or wrong-doing of any officer, agent, employee, Manager or Principal Underwriter of the Trust, nor shall any Trustee be responsible for the act or omission of any other Trustee, and, subject to the provisions of the Bylaws, the Trust out of its assets may indemnify and hold harmless each and every Trustee and officer of the Trust from 14 and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or related to such Trustee's or officer's performance of his or her duties as a Trustee or officer of the Trust; provided that nothing herein contained shall indemnify, hold harmless or protect any Trustee or officer from or against any liability to the Trust or any Shareholder to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. Every note, bond, contract, instrument, certificate or undertaking and every other act or thing whatsoever issued, executed or done by or on behalf of the Trust or the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been issued, executed or done only in or with respect to their or his or her capacity as Trustees or Trustee, and such Trustees or Trustee shall not be personally liable thereon. Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety. The exercise by the Trustees of their powers hereunder shall be binding upon everyone interested in or dealing with the Trust. A Trustee shall be liable to the Trust and to any Shareholder solely for his or her own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee, and shall not be liable for errors of judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust, and shall be under no liability for any act or omission in accordance with such advice nor for failing to follow such advice. The Trustees shall not be required to give any bond as such, nor any surety if a bond is required. Section 4. Insurance. The Trustees shall be entitled and empowered to the fullest extent permitted by law to purchase with Trust assets insurance for liability and for all expenses reasonably incurred or paid or expected to be paid by a Trustee or officer in connection with any claim, action, suit or proceeding in which he or she becomes involved by virtue of his or her capacity or former capacity with the Trust, whether or not the Trust would have the power to indemnify him or her against such liability under the provisions of this Article. ARTICLE VIII. Miscellaneous Section 1. Liability of Third Persons Dealing with Trustees. No Person dealing with the Trustees shall be bound to make any inquiry concerning the validity of any transaction made or to be made by the Trustees or to see to the application of any payments made or property transferred to the Trust or upon its order. 15 Section 2. Termination of Trust or Series. Unless terminated as provided herein, the Trust shall continue without limitation of time. The Trust may be terminated at any time by the Trustees upon 60 days prior written notice to the Shareholders. Any Series may be terminated at any time by the Trustees upon 60 days prior written notice to the Shareholders of that Series. Upon termination of the Trust (or any Series, as the case may be), after paying or otherwise providing for all charges, taxes, expenses and liabilities held, severally, with respect to each Series (or the applicable Series, as the case may be), whether due or accrued or anticipated as may be determined by the Trustees, the Trust shall, in accordance with such procedures as the Trustees consider appropriate, reduce the remaining assets held, severally, with respect to each Series (or the applicable Series, as the case may be), to distributable form in cash or shares or other securities, and any combination thereof, and distribute the proceeds held with respect to each Series (or the applicable Series, as the case may be), to the Shareholders of that Series, as a Series, ratably according to the number of Shares of that Series held by the several Shareholders on the date of termination. Section 3. Merger and Consolidation. The Trustees may cause (i) the Trust or one or more of its Series to the extent consistent with applicable law to be merged into or consolidated with another Trust, series or Person, (ii) the Shares of the Trust or any Series to be converted into beneficial interests in another business trust (or series thereof), (iii) the Shares to be exchanged for assets or property under or pursuant to any state or federal statute to the extent permitted by law or (iv) a sale of assets of the Trust or one or more of its Series. Such merger or consolidation, Share conversion, Share exchange or sale of assets must be authorized by vote as provided in Article V, Section 3 herein; provided that in all respects not governed by statute or applicable law, the Trustees shall have power to prescribe the procedure necessary or appropriate to accomplish a sale of assets, Share exchange, merger or consolidation including the power to create one or more separate business trusts to which all or any part of the assets, liabilities, profits or losses of the Trust may be transferred and to provide for the conversion of Shares of the Trust or any Series into beneficial interests in such separate business trust or trusts (or series thereof). Section 4. Amendments. This Declaration of Trust may be restated and/or amended at any time by an instrument in writing signed by a majority of the Trustees then holding office. Any such restatement and/or amendment hereto shall be effective immediately upon execution and approval. The Certificate of Trust of the Trust may be restated and/or amended by a similar procedure, and any such restatement and/or amendment shall be effective immediately upon filing with the Office of the Secretary of State of the State of Delaware or upon such future date as may be stated therein. Section 5. Filing of Copies, References, Headings. The original or a copy of this instrument and of each restatement and/or amendment hereto shall be kept at the office of the Trust where it may be inspected by any Shareholder. Anyone dealing with the Trust may rely on a certificate by an officer of the Trust as to whether or not any such restatements and/or amendments have been made and as to any matters in connection with the Trust hereunder; and, with the same effect 16 as if it were the original, may rely on a copy certified by an officer of the Trust to be a copy of this instrument or of any such restatements and/or amendments. In this instrument and in any such restatements and/or amendment, references to this instrument, and all expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to this instrument as amended or affected by any such restatements and/or amendments. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this instrument. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. This instrument may be executed in any number of counterparts each of which shall be deemed an original. Section 6. Applicable Law. This Agreement and Declaration of Trust is created under and is to be governed by and construed and administered according to the laws of the State of Delaware and the Delaware Business Trust Act, as amended from time to time (the "Act"). The Trust shall be a Delaware business trust pursuant to such Act, and without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a business trust. Section 7. Provisions in Conflict with Law or Regulations. (a) The provisions of the Declaration of Trust are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the regulated investment company provisions of the Internal Revenue Code or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of the Declaration of Trust; provided, however, that such determination shall not affect any of the remaining provisions of the Declaration of Trust or render invalid or improper any action taken or omitted prior to such determination. (b) If any provision of the Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of the Declaration of Trust in any jurisdiction. Section 8. Business Trust Only. It is the intention of the Trustees to create a business trust pursuant to the Act, and thereby to create only the relationship of trustee and beneficial owners within the meaning of such Act between the Trustees and each Shareholder. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment, joint venture, or any form of legal relationship other than a business trust pursuant to such Act. Nothing in this Declaration of Trust shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association. Section 9. Use of the Name "The Vanguard Group, Inc.". The name "The Vanguard Group, Inc." and any variants thereof and all rights to the use of the name "The Vanguard Group, Inc." or any variants thereof shall be the sole and exclusive property of The Vanguard Group, Inc. ("VGI"). VGI has permitted the 17 use by the Trust of the identifying word "Vanguard" and the use of the name "Vanguard" as part of the name of the Trust and the name of any Series of Shares. Upon the Trust's withdrawal from the Amended and Restated Funds' Service Agreement among the Trust, the other investment companies within the Vanguard Group of Investment Companies and VGI, and upon the written request of VGI, the Trust and any Series of Shares thereof shall cease to use or in any way to refer to itself as related to "The Vanguard Group, Inc." or any variant thereof. 18 IN WITNESS WHEREOF, the Trustees named below do hereby make and enter into this Declaration of Trust as of the 19th day of July 2002. For and on behalf of the Delaware business trusts listed on Appendix A attached hereto.* /s/ John J. Brennan /s/ Burton G. Malkiel - ---------------------------------- ---------------------------------- John J. Brennan Burton G. Malkiel /s/ Charles D. Ellis /s/ Alfred M. Rankin, Jr. - ---------------------------------- ---------------------------------- Charles D. Ellis Alfred M. Rankin, Jr. /s/ Rajiv L. Gupta /s/ J. Lawrence Wilson - ---------------------------------- ---------------------------------- Rajiv L. Gupta J. Lawrence Wilson /s/ JoAnn Heffernan Heisen - ---------------------------------- JoAnn Heffernan Heisen THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS 100 Vanguard Boulevard Malvern, PA 19355 * Mr. Malkiel is not signing as a trustee of Vanguard Fenway Funds. Mr. Gupta is not signing as a trustee of Vanguard Fenway Funds, Vanguard Municipal Bond Funds, and the Vanguard California, Florida, Massachusetts, New Jersey, New York, Ohio and Pennsylvania Tax-Exempt Funds. 19 TABLE OF CONTENTS Page ARTICLE I. Name and Definitions............................................. 1 Section 1. Name................................................... 1 Section 2. Definitions............................................ 1 (a) The Trust....................................................... 1 (b) Trust Property.................................................. 1 (c) Trustees........................................................ 1 (d) Shares.......................................................... 1 (e) Shareholder..................................................... 2 (f) Person.......................................................... 2 (g) 1940 Act........................................................ 2 (h) Commission and Principal Underwriter............................ 2 (i) Declaration of Trust............................................ 2 (j) By-Laws......................................................... 2 (k) Interested Person............................................... 2 (l) Investment Adviser.............................................. 2 (m) Series.......................................................... 2 ARTICLE II. Purpose of Trust.............................................. 2 ARTICLE III. Shares....................................................... 3 Section 1. Division of Beneficial Interest............................. 3 Section 2. Ownership of Shares......................................... 3 Section 3. Investments in the Trust.................................... 3 Section 4. Status of Shares and Limitation of Personal Liability................................................. 4 Section 5. Power of Board of Trustees to Change Provisions Relating to Shares............................. 4 Section 6. Establishment and Designation of Shares..................... 4 (a) Assets Held with Respect to a Particular Series............... 4 (b) Liabilities Held with Respect to a Particular Series........................................... 5 (c) Dividends, Distributions, Redemptions, and Repurchases................................................. 5 (d) Voting........................................................ 6 (e) Equality...................................................... 6 (f) Fractions..................................................... 6 (g) Exchange Privilege............................................ 6 (h) Combination of Series......................................... 6 (i) Elimination of Series......................................... 6 ARTICLE IV. The Board of Trustees......................................... 6 Section 1. Number, Election and Tenure.................................. 6 Section 2. Effect of Death, Resignation, etc. of a Trustee............................................... 7 Section 3. Powers....................................................... 7 Section 4. Payment of Expenses by the Trust............................. 10 Section 5. Ownership of Assets of the Trust............................. 10 Section 6. Service Contracts............................................ 10 ARTICLE V. Shareholders' Voting Powers and Meetings...................... 11 Section 1. Voting Powers................................................. 12 Section 2. Voting Power and Meetings..................................... 12 Section 3. Quorum and Required Vote...................................... 12 Section 4. Action by Written Consent..................................... 12 Section 5. Record Dates.................................................. 13 ARTICLE VI. Net Asset Value, Distributions, and Redemptions............... 13 Section 1. Determination of Net Asset Value, Net Income, and Distributions................................... 13 Section 2. Redemptions and Repurchases................................... 13 Section 3. Redemptions at the Option of the Trust........................ 14 Section 4. Transfer of Shares............................................ 14 ARTICLE VII. Compensation and Limitation of Liability...................... 14 Section 1. Compensation of Trustees...................................... 14 Section 2. Indemnification and Limitation of Liability................... 14 Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety................................... 15 Section 4. Insurance..................................................... 15 ARTICLE VIII. Miscellaneous............................................... 15 Section 1. Liability of Third Persons Dealing with Trustees............................................... 15 Section 2. Termination of Trust or Series................................ 15 Section 3. Merger and Consolidation...................................... 16 Section 4. Amendments.................................................... 16 Section 5. Filing of Copies, References, Headings........................ 16 Section 6. Applicable Law................................................ 16 Section 7. Provisions in Conflict with Law or Regulations................ 17 Section 8. Business Trust Only........................................... 17 Section 9. Use of the Name "The Vanguard Group, Inc.".................... 17 (ii) EX-99.J 8 pwcconsent.txt PWC CONSENT CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses and Statement of Additional Information constituting parts of this Post-Effective Amendment No. 24 to the registration statement on Form N-1A (the "Registration Statement") of our report dated October 7, 2002, relating to the financial statements and financial highlights appearing in the August 31, 2002 Annual Report to Shareholders of Vanguard PRIMECAP Fund, which are also incorporated by reference into the Registration Statement. We also consent to the references to us under the heading "Financial Highlights" in the Prospectuses and under the headings "Financial Statements" and "Service Providers--Independent Accountants" in the Statement of Additional Information. PricewaterhouseCoopers LLP Philadelphia, PA November 22, 2002 -----END PRIVACY-ENHANCED MESSAGE-----