AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 2002
FILE NO. 333-84434
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1
VANGUARD WHITEHALL FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600
VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (610) 669-1000
(NAME AND ADDRESS OF AGENT FOR SERVICE)
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
NO FILING FEE IS REQUIRED BECAUSE AN INDEFINITE NUMBER OF SHARES HAVE PREVIOUSLY
BEEN REGISTERED PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
PURSUANT TO RULE 488
VANGUARD WHITEHALL FUNDS
Cross Reference Sheet
ITEMS REQUIRED BY FORM N-14
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PART A. INFORMATION REQUIRED IN THE PROSPECTUS
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Item 1. Beginning of Registration Statement Cover Page of Registration Statement
and Outside Front Cover Page of Prospectus
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Item 2. Beginning and Outside Back Cover Page of Prospectus Table of Contents
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Item 3. Fee Table, Synopsis Information and Risk "Overview" "Comparing Fund Expenses,"
Factors "Comparing Objectives, Strategies and
Policies," "Purchase, Redemption, and
Exchange Information," "Comparing Risk
Factors"
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Item 4. Information About the Transaction "Details of Reorganization Proposal"
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Item 5. Information About the Registrant "Investment Advisory Arrangements,"
"Additional Information About Vanguard
International Explorer Fund,"
"Obtaining Information From the SEC"
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Item 6. Information About the Company Being Acquired "Overview," "Details of Reorganization
Proposal," "Investment Advisory
Arrangements," "General Information,"
"Obtaining Information From the SEC,"
also incorporated by reference to
Company's prospectus
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Item 7. Voting Information "General Information"
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Item 8. Interest of Certain Persons and Experts "General Information"
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Item 9. Additional Information Required for Not Applicable
Reoffering by Persons Deemed to be Underwriters
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PART B. INFORMATION REQUIRED IN A
STATEMENT OF ADDITIONAL INFORMATION
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Item 10. Cover Page Cover Page of Statement of Additional
Information
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Item 11. Table of Contents Table of Contents
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Item 12. Additional Information About the Registrant "Description of the Trust,"
"Investment Policies," "Investment
Limitations," "Yield and Total
Return," "Share Price," "Purchase of
Shares," "Redemption of Shares,"
"Management of the Funds," "Investment
Advisory Services," "Portfolio
Transactions," "Financial Statements,"
"Comparative Indexes"
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Item 13. Additional Information About the Company Being Acquired Incorporated by reference to Company's
Prospectus and SAI
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Item 14. Financial Statements "Financial Statements," also
Incorporated by reference to Company's
SAI
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PART C. OTHER INFORMATION
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Item 15. Indemnification Indemnification
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Item 16. Exhibits Exhibits
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Item 17. Undertakings Undertakings
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SCHRODER INTERNATIONAL SMALLER COMPANIES FUND
A SERIES OF SCHRODER CAPITAL FUNDS (DELAWARE)
Dear Shareholder:
A Special Meeting of Shareholders of Schroder International Smaller
Companies Fund (the "Schroder Fund"), a series of Schroder Capital Funds
(Delaware) (the "Schroder Trust"), has been scheduled for 10:00 a.m. on June 18,
2002. If you are a shareholder of record as of the close of business on April
26, 2002, you are entitled to vote at the Meeting and at any adjournment of the
Meeting.
While you are, of course, welcome to join us at the Meeting, most
shareholders will cast their votes by filling out and signing the enclosed Proxy
Card. Whether or not you plan to attend the Meeting, we need your vote. Please
mark, sign, and date the enclosed Proxy Card and return it promptly in the
enclosed, postage-paid envelope so that the maximum number of shares may be
voted. You may also vote over the telephone by following the enclosed
instructions.
The attached combined prospectus/proxy statement is designed to give you
information relating to the proposal upon which you will be asked to vote. The
Board of Trustees of the Schroder Trust is recommending that you approve a
reorganization of the Schroder Fund with and into Vanguard International
Explorer Fund (the "Vanguard Fund"), a substantially similar fund created within
The Vanguard Group of Investment Companies just for this purpose. Assuming
approval of the reorganization, each shareholder of the Schroder Fund will
receive an amount of shares of the Vanguard Fund equal in value to the shares of
the Schroder Fund owned by such holder at the time of the reorganization. We
encourage you to support the Trustees' recommendation to approve the proposal.
The following page highlights key points about the proposed reorganization.
Before you vote, however, please read the full text of the combined
prospectus/proxy statement.
Your vote is important to us. Please do not hesitate to call (800) 464-3108
if you have any questions. Thank you for taking the time to consider this
important proposal and for your investment in Schroder International Smaller
Companies Fund.
Sincerely,
---------------------
Catherine A. Mazza
President
KEY POINTS ABOUT THE PROPOSED REORGANIZATION
Purpose of the Reorganization
The purpose of the reorganization is to make Schroder International Smaller
Companies Fund (the "Schroder Fund") a part of The Vanguard Group of Investment
Companies ("The Vanguard Group"), the second largest mutual fund complex in the
United States. Under this proposal, the assets and liabilities of the Schroder
Fund would be transferred to Vanguard International Explorer Fund (the "Vanguard
Fund"), a substantially similar fund created just for this purpose. Schroder
Investment Management North America Inc. ("Schroders") would continue to serve
as investment adviser, carrying out an investment program for the Vanguard Fund
that is substantially similar to that of the Schroder Fund. As reorganized into
the Vanguard Fund, the Schroder Fund will continue to seek to provide long-term
capital appreciation. The Vanguard Group, Inc. ("Vanguard"), however, would
replace Schroders as overall manager of your investment, subject to the
direction of a Vanguard Board of Trustees. That Board will have the flexibility
to make advisory changes - including changes to the contract of an existing
adviser - without shareholder vote, pursuant to an exemption obtained from the
U.S. Securities and Exchange Commission by The Vanguard Group. After the
reorganization, the Vanguard Fund would continue investing your portfolio and
the Schroder Fund, which will have no remaining assets, will be dissolved. Your
existing Board of Trustees believes that the reorganization is in shareholders'
best interests for the following reasons:
Lower Shareholder Costs
Because they jointly own their management company, the Vanguard funds
operate on an "at-cost" basis. This operating structure, combined with the
efficiencies inherent in Vanguard's size, will result in lower operating
expenses for the Vanguard Fund than for the Schroder Fund. The Vanguard Fund is
expected to feature a total expense ratio of 0.75% for its first full year of
operations following the reorganization - an annual cost to shareholders of $75
for each $10,000 invested. By contrast, the Schroder Fund's total expense ratio
for fiscal 2001 was 1.50% (pursuant to contractually imposed expense limitations
and/or fee waivers in effect through October 31, 2002) - an annual cost to
shareholders of $150 for each $10,000 invested.
Future Growth of the Fund
Given the competitive nature of the mutual fund industry, Schroders
determined that it would be prudent to enter into an arrangement with Vanguard.
Joining The Vanguard Group should enable the Schroder Fund (as reorganized into
the Vanguard Fund) to grow assets due to Vanguard's strong market penetration
and reputation as a low-cost provider. Schroders expects (but cannot guarantee)
that assets in the reorganized Schroder Fund will grow considerably once it
joins The Vanguard Group as the result of investments by new shareholders, which
would result in a larger, more stable asset base for the reorganized Schroder
Fund. As a result, expenses would be shared by a larger group of shareholders
and expenses for existing shareholders may be reduced.
i
Continuity of Investment Management
If shareholders approve the Reorganization, the Vanguard Fund will be
managed by Schroders using an investment program that is substantially similar
to the one used for the Schroder Fund. Schroders is uniquely qualified as an
international small companies investment manager with over thirty years of
experience investing in small companies. Schroders emphasizes fundamental
research into smaller companies.
Expanded Shareholder Services
Shareholders of the Vanguard Fund will have access to a wide range of
shareholder services, including 24-hour account access, the ability to transact
through Vanguard's website, exchange privileges with other Vanguard funds, and
access to Vanguard's comprehensive investor education programs.
Tax-Free Nature of The Reorganization
The reorganization will be accomplished on a tax-free basis. Accordingly,
it is expected that shareholders will not realize any capital gains when
Schroder Fund shares are exchanged for shares of the Vanguard Fund.
How The Reorganization Will Affect Your Account
If shareholders approve the reorganization, your Schroder Fund shares
will be exchanged, on a tax-free basis, for an equivalent dollar amount of
Vanguard Fund shares. Your account registration and account options will
remain the same unless you change them. In addition, your aggregate cost
basis in the account will remain the same.
ii
SCHRODER CAPITAL FUNDS (DELAWARE)
SCHRODER INTERNATIONAL SMALLER COMPANIES FUND
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
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May __, 2002
To the Shareholders:
This is to notify you that a Special Meeting of Shareholders of Schroder
International Smaller Companies Fund will be held on June 18, 2002, at 10:00
a.m., New York City time. The Meeting will be held at Schroders' offices at 875
Third Avenue, 22nd Floor, New York, New York 10022, for the following purposes:
1. To approve or disapprove a proposal to reorganize Schroder
International Smaller Companies Fund into Vanguard International
Explorer Fund.
2. To transact such other business as may properly come before the
Meeting.
All shareholders are cordially invited to attend the Meeting. However, if
you are unable to attend the Meeting, you are requested to mark, sign and date
the enclosed Proxy Card and return it promptly in the enclosed, postage-paid
envelope so that the Meeting may be held and a maximum number of shares may be
voted. Please see the enclosed materials for telephone voting instructions.
The Trustees have fixed the close of business on April 26, 2002, as the
record date for determination of shareholders entitled to notice of, and to vote
at, the Meeting or any adjournment thereof.
By Order of the Board of Trustees
---------------------------------
Carin F. Muhlbaum, Secretary
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YOUR VOTE IS IMPORTANT
WE URGE YOU TO MARK, SIGN, DATE AND MAIL THE ENCLOSED PROXY CARD IN THE
POSTAGE-PAID ENVELOPE PROVIDED SO THAT YOU WILL BE REPRESENTED AT THE MEETING.
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ACQUISITION OF THE ASSETS AND LIABILITIES OF
SCHRODER INTERNATIONAL SMALLER COMPANIES FUND
A SERIES OF SCHRODER CAPITAL FUNDS (DELAWARE)
875 Third Avenue, 22nd Floor
New York, NY 10022
IN EXCHANGE FOR SHARES OF
VANGUARD INTERNATIONAL EXPLORER FUND
A SERIES OF VANGUARD WHITEHALL FUNDS
P.O. Box 2600
Valley Forge, PA 19482
COMBINED PROSPECTUS/PROXY STATEMENT DATED APRIL 26, 2002
INTRODUCTION
Proposal Summary. This combined prospectus/proxy statement describes a
proposal to reorganize Schroder International Smaller Companies Fund (the
"Schroder Fund") into a substantially similar fund created by The Vanguard
Group, Inc. ("Vanguard"), called Vanguard International Explorer Fund (the
"Vanguard Fund"). The reorganization involves a few basic steps. The Schroder
Fund will transfer all of its assets to the Vanguard Fund, and the Vanguard Fund
will assume the Schroder Fund's liabilities. Simultaneously, the Vanguard Fund
will open an account for each shareholder of the Schroder Fund, crediting it
with an amount of shares of the Vanguard Fund equal in value to the shares of
the Schroder Fund owned by such holder at the time of the reorganization.
Thereafter, the Schroder Fund will be dissolved.
Read and Keep these Documents. Please read this entire prospectus/proxy
statement. This prospectus/proxy statement sets forth concisely the information
about the Vanguard Fund that a prospective investor ought to know before
investing. A statement of additional information (the "Reorganization SAI")
dated April 26, 2002, relating to this prospectus/proxy statement is
incorporated by reference into this prospectus/proxy statement and is available
by calling Schroders at 800-464-3108. In addition, the Schroder Fund's
prospectus and statement of additional information, each dated January 28, 2002,
are incorporated by reference into this prospectus/proxy statement, are
considered part of this prospectus/proxy statement, and are available by calling
Schroders. These documents are important and should be kept for future
reference.
Additional Information is Available. The Vanguard Fund has been organized
as a separate investment portfolio under the Vanguard Whitehall Funds, which
filed an amended registration statement with the U.S. Securities and Exchange
Commission (the "SEC") on March 19, 2002, in order to create the new fund. The
Vanguard Fund's registration statement has not yet been declared effective by
the SEC but is available without charge at the SEC's website (www.sec.gov). The
Schroder Fund's prospectus and statement of additional information, each dated
January 28, 2002, and its most recent annual report to shareholders, are
available without charge from Schroders or at the SEC's website.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OF THIS COMBINED PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
2
TABLE OF CONTENTS
I. OVERVIEW................................................................ __
II. Details of Reorganization Proposal..................................... __
III. Investment Advisory Arrangements...................................... __
IV. ADDITIONAL INFORMATION ABOUT Vanguard INTERNATIONAL EXPLORER Fund...... __
V. Management of Vanguard INTERNATIONAL EXPLORER Fund...................... __
VI. General Information.................................................... __
Appendix A - FORM OF Agreement and Plan of Reorganization................... A-1
3
I. OVERVIEW
The Proposed Reorganization. The Board of Trustees of Schroder Capital
Funds (Delaware) (the "Schroder Trust") approved an Agreement and Plan of
Reorganization providing for the reorganization of the Schroder Fund into the
Vanguard Fund (the "Reorganization"). The trustees concluded that the proposed
reorganization is in the best interests of the Schroder Fund and its
shareholders. The trustees also concluded that the proposed reorganization would
not dilute the interests of the Schroder Fund's shareholders. If shareholders do
not approve of the Reorganization, the Schroder Fund will continue in existence
(unless the Schroder Trust's Board of Trustees decides otherwise) and the
Vanguard Fund will not commence operations.
New Board of Trustees. The Vanguard Whitehall Funds (the "Vanguard Trust")
has a different Board of Trustees than the Schroder Trust. A brief description
of the backgrounds and compensation of the individuals who serve as trustees of
the Vanguard Trust is set forth below in the section entitled "Management of
Vanguard International Explorer Fund."
Investment Objectives, Strategies, and Policies of Each Fund. The Vanguard
Fund has been created with an investment objective and investment strategies and
policies that are substantially similar to those of the Schroder Fund. As
reorganized into the Vanguard Fund, the Schroder Fund will continue to seek to
provide long-term capital appreciation. There is additional information below
comparing the Schroder Fund to the Vanguard Fund in the section entitled,
"Details of the Reorganization Proposal - How the Reorganization will Affect the
Schroder Fund."
Investment Adviser. The Schroder Fund's investment adviser, Schroder
Investment Management North America Inc. ("Schroders"), will also serve as
investment adviser to the Vanguard Fund if shareholders approve the
Reorganization. Although there are no current plans to do so, one or more new
advisers could be added to the Vanguard Fund in the future, as either additions
to or replacements for Schroders. The Board of Trustees of the Vanguard Trust
has the flexibility to make changes to the investment adviser if they consider
it to be in shareholders' best interests, without a shareholder vote, pursuant
to a conditional exemption received from the SEC by Vanguard. Details of the
advisory arrangements for the Schroder Fund and the Vanguard Fund are provided
below in the section entitled, "Investment Advisory Arrangements."
Investment Advisory Fees. Investment advisory fees paid to Schroders by the
Schroder Fund are calculated as a fixed-percentage of average daily net assets.
Investment advisory fees paid to Schroders by the Vanguard Fund will be
calculated as a breakpoint-based annual percentage rate applied to average
month-end assets for each quarter, as increased or decreased based upon the
fund's cumulative investment performance over a trailing 36-month period as
compared to the cumulative total return of a benchmark index. Additional
information about the Schroder Fund and Vanguard Fund fee schedules appears
below in the section entitled "Investment Advisory Arrangements - Investment
Management Agreement."
4
Tax-Free Reorganization. The proposed reorganization will be accomplished
on a tax-free basis, meaning that you won't realize any capital gains when your
Schroder Fund shares are exchanged for shares of the Vanguard Fund.
Independent Auditors. PricewaterhouseCoopers LLP is expected to serve as
independent auditors to the Vanguard Fund, as they do for all other Vanguard
funds. PricewaterhouseCoopers LLP also serves as independent auditors to the
Schroder Fund.
5
II. DETAILS OF REORGANIZATION PROPOSAL
At their meetings on February 5, 2002 and April 9, 2002, the Board of
Trustees of the Schroder Trust approved an Agreement and Plan of Reorganization
pursuant to which the Schroder Fund would be reorganized into the Vanguard Fund.
The Vanguard Fund is a substantially similar fund that has been organized within
The Vanguard Group of Investment Companies (the "Vanguard Group"). Following are
some important details regarding the Reorganization:
REASONS FOR THE REORGANIZATION
The Board of Trustees of the Schroder Trust approved the Reorganization for
the following reasons:
Lower Shareholder Costs. As discussed above, the funds within The Vanguard
Group (the "Vanguard Group Funds") operate on an "at-cost" basis. This operating
structure, combined with the efficiencies inherent in Vanguard's size, will
result in lower operating expenses for the Vanguard Fund than for the Schroder
Fund. Joining The Vanguard Group should enable the Schroder Fund (as reorganized
into the Vanguard Fund) to grow assets due to Vanguard's strong market
penetration and reputation as a low-cost provider. Schroders expects (but cannot
guarantee) that assets in the reorganized Schroder Fund will grow considerably
once it joins The Vanguard Group as the result of investments by new
shareholders, which would produce a larger, more stable asset base for the
reorganized Schroder Fund. As a result, expenses would be shared by a larger
group of shareholders and expenses for existing shareholders may be reduced.
Continuity of Investment Management. If shareholders approve the
Reorganization, the Vanguard Fund will be managed by Schroders using an
investment program that is substantially similar to the one used for the
Schroder Fund. Schroders is uniquely qualified as an international small
companies investment manager with over thirty years of experience investing in
small companies. Schroders emphasizes fundamental research into smaller
companies.
Appropriate Investment Program. The investment objective and investment
strategies and policies of the Vanguard Fund are substantially similar to those
of the Schroder Fund, and the Board of Trustees of the Schroder Trust believe
that an investment in the Vanguard Fund will provide shareholders with an
investment opportunity comparable to that currently afforded by the Schroder
Fund.
Tax-Free Nature of the Reorganization. The Reorganization will be
accomplished on a tax-free basis. Accordingly, it is expected that shareholders
will not realize any capital gains when Schroder Fund shares are exchanged for
shares of the Vanguard Fund.
Vanguard management believes that the Schroder Fund will fit well within
The Vanguard Group. If the Reorganization is approved by shareholders, adoption
of the Schroder Fund will provide Vanguard investors with another proven growth
fund, and broaden the array of actively-managed funds available through The
Vanguard Group.
6
Vanguard has entered into a Fund Sponsorship Agreement with Schroders,
which generally provides that Schroders will use reasonable efforts to
facilitate the proposed Reorganization. However, neither Schroders nor any other
party is being compensated by Vanguard in consideration of the reorganization of
the Schroder Fund into the Vanguard Fund.
HOW THE REORGANIZATION WILL BE ACCOMPLISHED
Agreement and Plan of Reorganization. The Agreement and Plan of
Reorganization spells out the terms and conditions that will apply to the
reorganization of the Schroder Fund into the Vanguard Fund (assuming that
shareholders approve this proposal). The allocation of costs and expenses
incurred in connection with the Reorganization is set forth in the agreement.
Certain costs associated with the Reorganization may be paid by the Schroder
Fund, including, but not limited to, the fees, costs, and expenses of
PricewaterhouseCoopers LLP performing certain limited accounting procedures and
issuing a related letter. These accounting expenses will be shared equally by
Vanguard and the Schroder Fund. For a complete description of the terms and
conditions that will apply to the Reorganization, please see the form of
Agreement and Plan of Reorganization attached as Appendix A to this
prospectus/proxy statement.
Three steps to reorganize. After shareholder approval, the Reorganization
will be accomplished in a three-step process. First, the Schroder Fund will
transfer all of its assets to the Vanguard Fund, and the Vanguard Fund will
assume the Schroder Fund's liabilities. Second, and simultaneously with step
one, the Vanguard Fund will open an account for each shareholder, crediting it
with an amount of shares of the Vanguard Fund equal in value to the shares of
the Schroder Fund owned by such holder at the time of the reorganization. Third,
the Schroder Fund will be dissolved.
Effective as soon as practicable. If approved by shareholders, the
Reorganization will take place as soon as practicable after all necessary
regulatory approvals and legal opinions are received. It is currently
anticipated that the Reorganization will be accomplished by the end of June,
2002.
The Reorganization is Conditioned on Tax-Free Treatment at the Federal
Level. It is anticipated that the Reorganization will have no federal income tax
consequences for the Schroder Fund or its shareholders. The Reorganization will
not proceed until this point is confirmed by an IRS ruling or opinion of
counsel. Following the Reorganization, from a tax standpoint, the adjusted basis
of the Schroder Fund shares will be the same as before. Shareholders are not
expected to incur any personal state or local taxes as a result of the
Reorganization, but you should consult your own tax advisor regarding those
matters. There is additional information about the federal income tax
consequences of the Reorganization in the Agreement and Plan of Reorganization.
7
HOW THE REORGANIZATION WILL AFFECT THE SCHRODER FUND
Comparing Investment Objectives, Strategies, and Policies. The Vanguard
Fund's investment objective and its investment strategies and policies will be
substantially similar to those of the Schroder Fund, and Schroders intends to
manage the Vanguard Fund in the same general manner that it currently manages
the Schroder Fund.
As reorganized, the Vanguard Fund will continue to seek long-term capital
appreciation through investments in securities markets outside the United
States. It will also continue to invest a limited portion of its assets in the
securities of issuers domiciled or doing business in emerging market countries.
The Vanguard Fund will invest primarily in equity securities of smaller
companies located outside the United States. The Vanguard Fund will consider
smaller companies to be those with market capitalizations of $2.5 billion or
less, measured at the time of investment. Currently, the Schroder Fund invests
primarily in companies with available market capitalizations of $2.2 billion or
less. The $2.5 billion market capitalization threshold reflects the more current
market capitalization profile of the companies in the Salomon Smith Barney
Extended Market Index (Europe, Pacific Basin Countries) - the benchmark for the
Schroder Fund and the Vanguard Fund.
The Vanguard Fund will also continue investing in a variety of equity
securities, such as common stocks, preferred stocks, and warrants. The Vanguard
Fund will continue to have the ability to invest in closed-end investment
companies that invest primarily in foreign securities, and to invest a limited
portion of its assets in the securities of companies located or doing business
in emerging market countries.
In managing the Vanguard Fund, Schroders will continue to invest in small
capitalization companies that it believes offer the potential for capital
growth. In doing so, Schroders will continue to consider, among other things, an
issuer's likelihood of above average earnings growth, whether the company's
securities are attractively valued, and whether the company has any proprietary
advantages. In selecting investments for the Vanguard Fund, Schroders will
employ a fundamental investment approach that considers macroeconomic factors,
while focusing primarily on company-specific factors. Those company-specific
factors will continue to include the company's potential for long-term growth,
financial condition, quality of management, sensitivity to cyclical factors, and
the relative value of the company's securities (compared to that of other
companies and to the market as a whole). Under Schroders' management, the
Vanguard Fund (like the Schroder Fund) will generally sell securities when they
reach fair valuation or when significantly more attractive investment candidates
become available.
Certain investment policies of the Vanguard Fund are different than those
of the Schroder Fund, but these changes will not have a material impact on the
management of the Vanguard Fund. Specifically, the borrowing policies of the two
funds differ to some extent. The Vanguard Fund may participate, pursuant to a
conditional exemption obtained from the SEC, in an interfund lending program.
This program permits the Vanguard Fund and other funds in The Vanguard Group to
borrow money from and lend money to each other for temporary or emergency
purposes, subject to certain conditions. One condition is that the Vanguard Fund
8
may not 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. Generally, the Vanguard Fund may borrow up to 15% of the its net
assets only through banks, reverse repurchase agreements, or Vanguard's
interfund lending program. The Schroder Fund may borrow up to 33-1/3% of its
total assets taken at market value (including the amount borrowed) and then only
from a bank as a temporary measure for extraordinary or emergency purposes.
In addition, the Schroder Fund has a more restrictive lending policy. The
non-fundamental policies of Vanguard Fund (which may be changed by its Board
without shareholder approval) permit the fund to participate in the interfund
lending program described above, and allows it to lend its portfolio securities
and purchase certain fixed-income securities. The Schroder Fund, however, is not
permitted to make loans, though it is specifically authorized to enter into
repurchase agreements or acquire any otherwise permissible debt securities or
engage in securities lending. The Vanguard Fund's increased ability to lend
increases the risk that a borrower will default on a payment, possibly causing
the fund to lose money.
The Vanguard Fund also has policies restricting the use of margin, the
pledging of assets, and the use of puts and calls that have not been adopted by
the Schroder Fund. Finally, the investment objective of the Schroder Fund is
"fundamental," meaning that it is changeable only with shareholder approval. The
investment objective of the Vanguard Fund is substantially similar to that of
the Schroder Fund but is non-fundamental. This is consistent with the
non-fundamental approach taken by most of the other Vanguard Group Funds, and is
also consistent with the Investment Company Act of 1940, as amended (the
"Investment Company Act"), which does not require a fund's objective to be
fundamental. The Board of Trustees has no plans to change the investment
objective of the Vanguard Fund in the foreseeable future.
CONSIDERED INDIVIDUALLY AND IN THE AGGREGATE, THE INVESTMENT STRATEGY AND
POLICY DIFFERENCES BETWEEN THE SCHRODER FUND AND THE VANGUARD FUND DESCRIBED
ABOVE ARE EXPECTED TO HAVE NO MATERIAL IMPACT ON EITHER SCHRODERS' DAY-TO-DAY
INVESTMENT DECISION MAKING PROCESS OR ON THE INVESTMENT PORTFOLIO THAT IS
REORGANIZED INTO THE VANGUARD FUND.
Comparing Risk Factors. The Vanguard Fund is subject to the same principal
risk factors as the Schroder Fund because it has substantially similar
investment strategies and policies and invests principally in the same types of
securities. An investment in the Vanguard Fund could lose money over short or
even long periods. You should expect the Vanguard Fund's share price and total
return to fluctuate within a wide range like the fluctuations of the overall
stock market. The Vanguard Fund's performance could be hurt by:
o 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. Country risk is especially high
in emerging markets. Because the Vanguard Fund may invest a large
portion of its assets in securities of companies located in any one
country, its performance may be hurt disproportionately by the poor
performance of its investments in a single country.
o Currency risk, which is the chance that investments in a particular
country will decrease in value if the U.S. dollar rises in value
against that country's currency.
9
o Investment style risk, which is the chance that returns from
small-capitalization stocks will trail returns from the overall stock
market. Historically, these stocks have been more volatile in price
than the large-cap stocks that dominate the overall stock market, and
they often perform quite differently.
o Manager risk, which is the chance that poor security selection will
cause the Vanguard Fund to underperform other funds with similar
investment objectives.
Comparing Fund Expenses. The table set forth below compares the expenses
the Schroder Fund expects to incur in its current fiscal year and the estimated
expenses of the Vanguard Fund for the first full year after the Reorganization
is consummated (assuming current asset levels remain the same).
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
- --------------------------------------------------------------------------------
CURRENT EXPENSES
SCHRODER INTERNATIONAL ESTIMATED EXPENSES PRO-FORMA EXPENSES
SMALLER COMPANIES FUND VANGUARD AS OF THE
INTERNATIONAL REORGANIZATION DATE
EXPLORER FUND
- --------------------------------------------------------------------------------
Management 1.10%(1) 0.66% 0.66%
Fees
- --------------------------------------------------------------------------------
12b-1 Fees None None None
- --------------------------------------------------------------------------------
Other Expenses 1.09%(1) 0.09% 0.09%
- --------------------------------------------------------------------------------
Total Fund 2.19%(2) 0.75% 0.75%
Operating
Expenses
- --------------------------------------------------------------------------------
Fee Waiver (0.69%)(2) N/A N/A
and/or Expense
Limitation
- --------------------------------------------------------------------------------
Net Expenses 1.50%(2) 0.75% 0.75%
- --------------------------------------------------------------------------------
(1) Management Fees include all fees payable to Schroders and its affiliates
for investment advisory and fund administration services.
(2) Reflects the effect of contractually imposed expense limitations and/or fee
waivers in effect through October 31, 2002.
EXAMPLE
The following Example is intended to help you compare the cost of investing
in the Schroder Fund and the Vanguard Fund with the cost of investing in other
mutual funds. The Example assumes that you invest $10,000 in each Fund for the
time periods indicated and that you sell your shares at the end of each period.
The Example also assumes that each year your investment has a 5% return and that
each Fund's operating expenses for each year are equal to the Total Fund
Operating Expenses (except in the case of the Schroder Fund where, in the first
year, operating expenses are the same as the Schroder Fund's Net Expenses).
Although your actual costs and returns might be different based on these
assumptions, your costs would be:
10
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Schroder International Smaller $154 $625 $1,122 $2,490
Companies Fund
- --------------------------------------------------------------------------------
Vanguard International $77 $240 $417 $930
Explorer Fund
- --------------------------------------------------------------------------------
This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.
The Reorganization will have no impact on the net asset value per share
("NAV") of the Schroder Fund. As indicated below, the Reorganization will not
cause the Schroder Fund's share price to go up or down, and each shareholder
will own an amount of shares of the Vanguard Fund equal in value to the shares
of the Schroder Fund owned by such holder at the time of the reorganization. Any
declared but undistributed dividends or capital gains will carry over in the
Reorganization.
CAPITALIZATION TABLE
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------
SCHRODER INTERNATIONAL VANGUARD
SMALLER COMPANIES FUND INTERNATIONAL PRO FORMA
EXPLORER FUND CAPITALIZATION
AS OF THE RECORD DATE
- ---------------------------------------------------------------------------------------------------------------------
Total Net Assets as of the Record Date $[o] N/A $[o]
- ---------------------------------------------------------------------------------------------------------------------
Total Number of Shares Outstanding on the $[o] N/A $[o]
Record Date
- ---------------------------------------------------------------------------------------------------------------------
NAV on the Record Date $[o] N/A $[o]
- ---------------------------------------------------------------------------------------------------------------------
Comparing Trustees. As previously discussed, the Schroder Fund will be
reorganized into an investment portfolio of the Vanguard Trust if shareholders
approve the Reorganization. Information on the trustees of the Vanguard Trust
appears below in the section entitled, "Management of Vanguard International
Explorer Fund." Following the Reorganization, the Board of Trustees of the
Schroder Trust will have no oversight over, or other involvement with, the
Vanguard Fund.
Comparing Independent Auditors. PricewaterhouseCoopers, LLP, the same
independent auditor for the Schroder Fund, is expected to serve as the
independent auditor for the Vanguard Fund, and currently serves in that capacity
for all other Vanguard Group Funds. In this role, PricewaterhouseCoopers audits
and certifies the financial statements of all Vanguard Group Funds.
PricewaterhouseCoopers also reviews the Annual Reports to Shareholders of the
Vanguard Group Funds and their filings with the SEC. Neither
PricewaterhouseCoopers nor any of its partners have any direct or material
indirect financial interest in the Vanguard Group Funds. Any shareholder may
request the attendance of a PricewaterhouseCoopers representative at the
shareholder meeting, by contacting the Schroder Fund's Secretary (Carin F.
Muhlbaum) at 875 Third Avenue, 22nd Floor, New York, NY 10022. The Vanguard Fund
will keep the same fiscal year end as the Schroder Fund and will continue to
make distributions on an annual basis.
11
Organization. The Schroder Fund and the Vanguard Fund are both series of
separately organized Delaware business trusts. The rights of shareholders in the
Schroder Fund and those in the Vanguard Fund are substantially similar. One
difference, however, is in the requirement of how many shares constitutes a
quorum for the transaction of business at a shareholders' meeting. In the case
of the Schroder Fund, one-third of shares entitled to vote constitute a quorum.
The Vanguard Fund requires shareholders of more than fifty percent of the total
combined net asset value of all shares issued and outstanding to constitute a
quorum. The Vanguard Fund will commence operations only if shareholders approve
the Reorganization.
Description of Securities to be Issued. Full and fractional shares of the
Vanguard Fund will be issued to Schroder Fund shareholders in accordance with
the procedures set forth in the Agreement and Plan of Reorganization.
Purchase, Redemption, and Exchange Information. After the Reorganization,
the Schroder Fund (as reorganized into the Vanguard Fund) will continue to be
sold to individuals and institutional investors, including retirement and other
plans. The following chart highlights the purchase, redemption and exchange
features of the Schroder Fund as compared to such features of the Vanguard Fund.
- --------------------------------------------------------------------------------------------------------------------
PURCHASE, REDEMPTION AND EXCHANGE SCHRODER FUND VANGUARD FUND(1)
FEATURES
- --------------------------------------------------------------------------------------------------------------------
Minimum initial purchase/additional $10,000/$1,000 $10,000/$100 by mail or exchange
investment and $1,000 by wire
- --------------------------------------------------------------------------------------------------------------------
Purchases By mail, wire, systematic investment By mail, wire, systematic
investment plan, Vanguard Fund
Express(R)and Vanguard Direct
Deposit Service(SM)
- --------------------------------------------------------------------------------------------------------------------
Redemptions By mail, telephone, wire By mail, 24-hour telephone, or
Vanguard's website
- --------------------------------------------------------------------------------------------------------------------
Free Exchange Privileges Most other funds in Schroder family Yes, with other Vanguard Funds
of mutual funds that have exchange privileges -
by mail, 24-hour telephone, or
Vanguard's website, subject to
share class eligibility and other
conditions(2)
- --------------------------------------------------------------------------------------------------------------------
(1) Explanations of each of the services available through the Vanguard Fund
appear below in the section entitled "Additional Information About Vanguard
International Explorer Fund."
(2) Explanations of exchange privileges of Vanguard Fund shareholders appear
below in the section entitled "Additional Information About Vanguard
International Explorer Fund."
Calculating NAV. The Schroder Fund calculates its NAV once each business
day at the regularly scheduled close of normal trading on the New York Stock
Exchange (normally, 4:00 p.m. Eastern time). Similarly, the Vanguard Fund
calculates its NAV after the close of regular trading on the New York Stock
Exchange.
12
III. INVESTMENT ADVISORY ARRANGEMENTS
Schroder Investment Management North America Inc. The Schroder Fund's
investment adviser, Schroder Investment Management North America Inc., will also
serve as investment adviser to the Vanguard Fund if shareholders approve the
Reorganization, in continuation of the Schroder Fund's investment program.
Schroders' address is 875 Third Avenue, 22nd Floor, New York, NY 10022. Under
its investment advisory agreement with the Schroder Fund, dated June 2, 1999,
Schroders is responsible for managing the investment and reinvestment of the
Schroder Fund's assets, and for continuously reviewing, supervising and
directing the Schroder Fund's investment program subject to the supervision of,
and policies established by, the Board of Trustees of the Schroder Trust.
Schroders will have these same responsibilities under its investment advisory
agreement with the Vanguard Fund.
Schroders (together with its predecessors) has served as the investment
adviser of the Schroder Fund since its inception. Schroders is a wholly owned
subsidiary of Schroder U.S. Holdings Inc., which currently engages through its
subsidiary firms in the asset management business. Affiliates of Schroder U.S.
Holdings Inc. (or their predecessors) have been investment managers since 1927.
Schroder U.S. Holdings Inc. is an indirect, wholly owned U.S. subsidiary of
Schroders plc, a publicly owned holding company organized under the laws of
England. Schroder plc and its affiliates currently engage in the asset
management business, and as of December 31, 2001, had under management assets of
approximately $160.1 billion.
Matthew Dobbs is Chair of the Schroder International Smallcap Investment
Committee which is responsible for the management of the Fund. The Committee,
which is comprised of senior smallcap specialists, determines the country
allocation for the Schroder Fund. As Chair of the Committee, Mr. Dobbs has
primary responsibility for the management and direction of the Schroder Fund's
investment policy. Stock selection is primarily the responsibility of senior
regional smallcap portfolio managers. Mr. Dobbs, a Senior Vice President of
Schroders, has been with Schroders since 1981. Education: B.A., Worcester
College, Oxford University. These arrangements would continue for the Vanguard
Fund if the proposed Reorganization is approved by shareholders.
Comparing Investment Advisory Agreements. The investment advisory agreement
between Schroders and the Schroder Fund is similar to the investment advisory
agreement that will be entered into between Schroders and the Vanguard Fund if
shareholders approve the Reorganization. Specifically, the standard of care is
identical, and the duration and termination provisions are substantially
similar. The principal difference between the two agreements is the compensation
structure. Under the Schroder Fund agreement, Schroders is entitled to a fee of
0.85% of the Schroder Fund's average daily net assets. In contrast, the
agreement relating to the Vanguard Fund has a different fee schedule, including
breakpoints and a performance component, as described below.
13
Under the proposed investment advisory agreement between Schroders and the
Vanguard Fund, the Vanguard Fund will pay to Schroders at the end of each of the
Vanguard Fund's fiscal quarters an amount (the "Adjusted Fee") equal to a basic
fee ("Basic Fee") plus a performance adjustment amount ("Adjustment Amount").
For purposes of the calculations, both the Basic Fee and the Adjustment Amount
will incorporate an asset-based fee ("Asset Fee") that is determined by applying
a quarterly rate, calculated based on the following annual percentage rate
schedule, to the average month-end net assets of the portion of the Vanguard
Fund allocated to Schroders (the "Schroder Portfolio") over the applicable time
period:
- --------------------------------------------------
ANNUAL PERCENTAGE RATE SCHEDULE
- --------------------------------------------------
ANNUAL PERCENTAGE AVERAGE MONTH-END
RATE NET ASSETS
- --------------------------------------------------
0.30% On the first $500 million
- ---------------------------------------------------
0.22% On the next
$500 million
- --------------------------------------------------
0.15% Over $1 billion
- --------------------------------------------------
The Basic Fee is equal to the Asset Fee as computed over the fiscal quarter
for which the Adjusted Fee is being calculated ("Relevant Fiscal Quarter").
Subject to the transition rules described below, the Adjustment Amount is
equal to the product of an adjustment percentage ("Adjustment Percentage") and
the Asset Fee as computed over the 36-month period ending with the Relevant
Fiscal Quarter ("Relevant 36-Month Period"). The Adjustment Percentage will vary
based on the investment performance of the Schroder Portfolio relative to the
investment performance of the Salomon Smith Barney Extended Market EPAC Index
(the "Index") as determined for the Relevant 36-Month Period. The Adjustment
Percentage applies as follows:
- --------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE OF
SCHRODERS PORTFOLIO VS. INDEX ADJUSTMENT PERCENTAGE
OVER RELEVANT 36-MONTH PERIOD
- --------------------------------------------------------------------------------
Less than -12% -50%
- --------------------------------------------------------------------------------
From -12% up to and including -6% -25%
- --------------------------------------------------------------------------------
Between -6% and +6% 0%
- --------------------------------------------------------------------------------
From +6% up to and including +12% +25%
- --------------------------------------------------------------------------------
More than +12% +50%
- --------------------------------------------------------------------------------
The Adjustment Amount will not be fully incorporated into the determination
of the Adjusted Fee until the close of the quarter ending July 31, 2005. Until
that date, the following transition rules will apply:
14
1. Date of Reorganization through April 30, 2003. The Adjusted Fee will
be equal to the Basic Fee. No Adjustment Amount will apply during this
period.
2. May 1, 2003 through July 31, 2005. Beginning May 1, 2003, the Adjusted
Fee will be equal to the Basic Fee plus the Adjustment Amount as
calculated on the following basis. The Adjustment Amount for the
Relevant Fiscal Quarter will be determined on a progressive basis with
regards to the number of months elapsed between July 31, 2002, and the
end of the Relevant Fiscal Quarter ("Progressive Adjustment Period").
During the Progressive Adjustment Period, the Asset Fee for purposes
of calculating the Adjustment Amount will be determined with respect
to the period from July 31, 2002, through and including the end of the
Relevant Fiscal Quarter. Similarly, the Adjustment Percentage will be
calculated with respect to the cumulative performance of the Vanguard
Fund and the Index from August 1, 2002, through and including the end
of the Relevant Fiscal Quarter. For these purposes, the endpoints and
size of the range over which a positive or negative Adjustment
Percentage applies and the corresponding maximum Adjusted Percentage
will be multiplied by a fractional time-elapsed Adjustment Percentage.
The fraction will equal the number of months elapsed since July 31,
2002, divided by thirty-six.
Example: Assume that Schroders' compensation is being calculated for
the quarter ended January 31, 2004, and that the cumulative
performance of the Schroder Portfolio versus the Index for the
applicable period is +4%. In this case, an Adjustment Percentage of
12.5% of the Asset Fee calculated over the 18-month period would
apply. Each performance breakpoint would be scaled by 18/36 = 0.5, and
the performance adjustment percentage would also be scaled by 18/36 =
0.5. Hence, 4% cumulative outperformance for the 18 months ending
January 31, 2004, would result in a 12.5% Adjustment. (Note that this
example reflects rounding. In practice, calculations will be extended
to the eighth decimal point. Performance shortfalls versus the Index
are treated in a symmetric manner to the example provided.)
3. On and After August 1, 2005. The Adjusted Fee will be equal to the
Basic Fee plus the Adjustment Amount as determined for the Relevant
36-Month Period.
Based on the Schroder Fund's current size, the maximum possible fee payable
by the Vanguard Fund to Schroders under the advisory agreement during the first
year the performance-based fee is fully in effect would be 0.45% of the Vanguard
Fund's average month-end net assets. This compares favorably with the
contractual fee payable to Schroders by the Schroder Fund, which is 0.85% of the
Schroder Fund's average daily net assets.
The following table shows on a comparative basis for the calendar year
ended December 31, 2001, the investment advisory fees actually paid to Schroders
under the Schroder Fund fee schedule and the investment advisory fees (presented
on a pro forma basis) that would have been paid to Schroders had the Vanguard
Fund fee schedule been in place and fully effective for the same period.
15
Actual Aggregate Pro Forma Aggregate
Investment Advisory Fee for Investment Advisory Fee for
Calendar Year Ended Calendar Year Ended
December 31, 2001(1) December 31, 2001(2)
$41,739.27 $99,333.70
- ----------------------------
1 Actual fees shown would have been $186,225.86 if Schroders had not granted
a waiver of $145,486.59 in advisory fees pursuant to a separate contract
with the Schroder Fund.
2 Pro forma fees shown reflect the Vanguard Fund fee schedule as it would be
implemented after an initial 36-month transition period.
Duration and Termination of Schroders' Investment Advisory Agreement with
the Vanguard Fund. The terms of Schroders' investment advisory agreement with
the Vanguard Fund have been approved by the Board of Trustees of the Vanguard
Trust and a formal agreement will be approved by the Board if this transaction
is approved by shareholders. The agreement will remain in effect for an initial
two-year period, and may be continued beyond that for successive one-year
periods, if approved at least annually by the vote of the Board of Trustees of
the Vanguard Fund. Board approval must include the votes of a majority of those
trustees who are not parties to the contract or "interested persons" (as defined
under the Investment Company Act) of any party to the contract. In addition, the
trustees must vote in person on Schroders' investment advisory agreement, at a
meeting called for that purpose. The agreement is automatically terminated if
assigned, and may be terminated without penalty at any time (i) either by vote
of the Vanguard Fund's trustees or by vote of the outstanding shares of the
Vanguard Fund on 60 days' written notice to Schroders, or (ii) by Schroders on
90 days' written notice to the Vanguard Fund.
Future Changes to Vanguard Fund's Advisory Arrangements. Although there are
no current plans to do so, one or more new investment advisers could be added to
the Vanguard Fund in the future, as either additions to or replacements for
Schroders. The Board of Trustees of the Vanguard Trust has the flexibility to
make advisory changes - including changes to the contract of an existing
investment adviser - without a shareholder vote, pursuant to a conditional
exemption obtained from the SEC by Vanguard.
16
IV. ADDITIONAL INFORMATION ABOUT
VANGUARD INTERNATIONAL EXPLORER FUND
This section sets forth additional information about the Vanguard Fund,
including information regarding its investment program and expected advisory
arrangements, considerations regarding dividends, capital gains, and taxes, the
determination of its share price, and account related options. References to
"us," "we" or "our" refer to Vanguard or the Vanguard Fund, as applicable.
References to "you" or "your" refer to shareholders of the Vanguard Fund.
Performance/Risk Information
The Vanguard Fund has not commenced operations, so performance information
(including annual total returns and average annual total returns) for a full
calendar year is not yet available.
Primary Investment Strategies and Policies
The following sections explain the primary investment strategies and
policies that the Vanguard Fund will use in pursuit of its objective. You will
also find information on other important features of the Vanguard Fund.
Market Exposure. The Vanguard Fund will invest primarily in the common
stocks of smaller companies (which, at the time of purchase, typically have a
market value of less than $2.5 billion) located outside the United States. The
Vanguard Fund may also invest a limited portion of its assets in the securities
of issuers domiciled or doing business in emerging market countries.
Because it will invest mainly in foreign stocks, the Vanguard Fund will be
subject to certain risks.
THE VANGUARD FUND WILL BE 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.
IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE RISKIER THAN U.S.
STOCK INVESTMENTS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES OF U.S.
STOCKS HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
Because foreign stock and bond markets operate differently from the U.S.
market, Americans investing abroad will encounter risks not typically associated
with U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stocks may not be as liquid as those of similar U.S. firms.
In addition, foreign stock exchanges, brokers, and companies generally have less
government supervision and regulation than their counterparts in the United
States. These factors, among others, could negatively impact the returns
Americans receive from foreign investments.
17
THE VANGUARD FUND WILL BE SUBJECT TO COUNTRY RISK AND CURRENCY RISK.
COUNTRY RISK IS THE CHANCE THAT DOMESTIC EVENTS--SUCH AS POLITICAL UPHEAVAL,
FINANCIAL TROUBLES, OR NATURAL DISASTERS--WILL WEAKEN A COUNTRY'S SECURITIES
MARKETS. COUNTRY RISK IS ESPECIALLY HIGH IN EMERGING MARKETS. BECAUSE THE
VANGUARD FUND MAY INVEST A LARGE PORTION OF ITS ASSETS IN SECURITIES OF
COMPANIES LOCATED IN ANY ONE COUNTRY, ITS PERFORMANCE MAY BE HURT
DISPROPORTIONATELY BY THE POOR PERFORMANCE OF ITS INVESTMENTS IN A SINGLE
COUNTRY. CURRENCY RISK IS THE CHANCE THAT INVESTMENTS IN A PARTICULAR COUNTRY
WILL DECREASE IN VALUE IF THE U.S. DOLLAR RISES IN VALUE AGAINST THAT COUNTRY'S
CURRENCY.
The Vanguard Fund will invest in companies that are smaller and less
well-known than larger, more widely held companies. Small companies tend to be
more vulnerable to adverse developments than larger companies. Small companies
may have limited product lines, markets, or financial resources, or may depend
on a limited management group. Their securities may trade infrequently and in
limited volumes. As a result, the prices of these securities may fluctuate more
than the prices of securities of larger, more widely traded companies. Also,
there may be less publicly available information about small companies or less
market interest in their securities as compared to larger companies, and it may
take longer for the prices of the securities to reflect the full value of their
issuers' earnings potential or assets.
THE VANGUARD FUND WILL BE 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 STOCK MARKET. AS A GROUP, SMALL-CAP 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. Schroders will employ a fundamental investment approach
in managing the Vanguard Fund that considers macroeconomic factors, while
focusing primarily on company-specific factors. These company-specific factors
include the company's potential for long-term growth, financial condition,
quality of management, sensitivity to cyclical factors, and the relative value
of the company's securities (compared to that of other companies and to the
market as a whole).
Schroders will invest the Vanguard Fund's assets in small-capitalization
companies that Schroders believes offer the potential for capital growth. In
doing so, Schroders will consider, among other things, an issuer's likelihood of
above average earnings growth, whether the company's securities are attractively
valued, and whether the company has any proprietary advantages. The Vanguard
Fund generally will sell securities when they reach fair valuation or when
significantly more attractive investment candidates become available.
The Vanguard Fund will generally be managed without regard to tax
ramifications.
18
THE VANGUARD FUND WILL BE 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 VANGUARD FUND INVESTS.
Other Investment Policies and Risks. Besides investing in stocks of foreign
companies, the Vanguard Fund may make certain other kinds of investments to
achieve its objective.
The Vanguard Fund may enter into forward foreign currency exchange
contracts to help protect its holdings against unfavorable changes in exchange
rates. A forward foreign currency exchange contract is an agreement to buy or
sell a country's currency at a specific price on a specific date, usually 30,
60, or 90 days in the future. In other words, the contract guarantees an
exchange rate on a given date. These contracts will not, however, prevent the
Vanguard Fund's securities from falling in value during foreign market
downswings.
THE VANGUARD FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES.
DERIVATIVES MAY INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE
OF TRADITIONAL INVESTMENTS.
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Nonstandardized derivatives (such as swap agreements), on the other hand,
tend to be more specialized or complex, and may be harder to value. If used for
speculation or as leveraged investments, derivatives can carry considerable
risks.
The Vanguard Fund may also invest in stock futures and options contracts
and warrants, which are types of derivatives. Losses (or gains) involving
futures can sometimes be substantial--in part because a relatively small price
movement in a futures contract may result in an immediate and substantial loss
(or gain) for a fund. Similar risks exist for warrants (securities that permit
their owners to purchase a specific number of stock shares at a predetermined
price), and convertible securities (securities that may be exchanged for another
asset). The Vanguard Fund will not use derivatives for speculative purposes or
as leveraged investments that magnify gains or losses. The Vanguard Fund's
obligation under futures contracts will not exceed 20% of its total assets.
The reasons for which the Vanguard Fund will invest in futures and options
are:
o To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks.
o To reduce the Vanguard Fund's transaction costs or add value when
these instruments are favorably priced.
19
The Vanguard Fund may invest in preferred stocks and closed-end investment
companies that invest primarily in foreign securities. with preferred stocks,
holders receive set dividends from the issuer; their claim on the issuer's
income and assets rank before that of common stock holders, but after that of
bondholders.
The Vanguard 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 Vanguard Fund may succeed in avoiding losses but otherwise fail to
achieve its investment objective.
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 Group Funds
have adopted special policies to discourage short-term trading or to compensate
the funds for the costs associated with it. Specifically:
o Each Vanguard Group Fund reserves the right to reject any purchase
request--including exchanges from other Vanguard Group 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.
o Each Vanguard Group Fund (except the money market funds) limits the
number of times that an investor can exchange into and out of the
fund.
o Each Vanguard Group Fund reserves the right to stop offering shares at
any time. o Certain Vanguard Group Funds charge purchase and/or
redemption fees on transactions.
See the section below entitled "Investing with Vanguard" for further
details on Vanguard's transaction policies.
THE VANGUARD GROUP FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH
VANGUARD IF YOU ARE A MARKET-TIMER.
Turnover Rate
Although the Vanguard Fund normally seeks to invest for the long term, it
may sell securities regardless of how long they have been held. The Vanguard
Fund has not commenced operations, so its turnover rate is not yet available.
20
The Vanguard Fund and Vanguard
The Vanguard Fund is a member of The Vanguard Group, a family of more than
35 investment companies with more than 100 funds holding assets in excess of
$500 billion. All of the Vanguard Group Funds share in the expenses associated
with business operations, such as personnel, office space, equipment, and
advertising.
Vanguard also provides marketing services to the Vanguard Group 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.
Investment Adviser
The adviser will be authorized to choose broker-dealers to handle the
purchase and sale of the Vanguard Fund's portfolio securities, and to obtain the
best available price and most favorable execution for all transactions. Also,
the Vanguard Fund may direct the adviser to use a particular broker for certain
transactions in exchange for commission rebates or research services provided to
the Vanguard Fund.
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 will be authorized to choose a broker who, in addition to executing
the transaction, will provide research services to the adviser or the Vanguard
Fund.
Dividends, Capital Gains, and Taxes
Vanguard Fund Distributions. The Vanguard 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 Vanguard Fund.
As a shareholder, you would be entitled to your portion of the Vanguard
Fund's income from interest and dividends as well as gains from the sale of
investments. You receive such earnings as either an income or a capital gains
distribution. 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.
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:
21
o Distributions are taxable to you for federal income tax purposes
whether or not you reinvest these amounts in additional Vanguard Fund
shares.
o 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.
o Any dividends and short-term capital gains that you receive are
taxable to you as ordinary income for federal income tax purposes.
o 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 Vanguard Fund.
o Capital gains distributions may vary considerably from year to year as
a result of the Vanguard Fund's normal investment activities and cash
flows.
o A sale or exchange of Vanguard 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.
o Dividend and capital gains distributions that you receive, as well as
your gains or losses from any sale or exchange of Vanguard Fund
shares, may be subject to state and local income taxes.
o 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.
General Information
Backup withholding. By law, Vanguard must withhold 30% of any taxable
distributions or redemptions from your account if you do not:
o Provide us with your correct taxpayer identification number;
o Certify that the taxpayer identification number is correct; and
o 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 Group 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 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 Group 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.
22
Tax Consequences. This prospectus/proxy statement 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 Vanguard 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 of the Vanguard Fund by the number of
Vanguard Fund shares outstanding. On holidays or other days when the Exchange is
closed, the NAV is not calculated, and the Vanguard Fund does not transact
purchase or redemption requests. However, on those days the value of the
Vanguard Fund's assets may be affected to the extent that the Vanguard Fund
holds foreign securities that trade on foreign markets that are open.
Stocks held by a Vanguard Group 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 net asset value may differ from quoted or published prices for the
same securities.
Vanguard Group Fund share prices can be found daily in the mutual fund
listings of most major newspapers under various "Vanguard" headings.
Financial Highlights
The Vanguard Fund has not commenced operations, so financial highlights are
not yet available.
Buying Shares
If shareholders approve the reorganization, your Schroder Fund shares will
be exchanged, on a tax-free basis, for an equivalent dollar amount of Vanguard
Fund shares. Your account registration and account options will remain the same
unless you change them. In addition, your aggregate cost basis in the account
will remain the same.
The following sections describe the other purchase rules of the Vanguard
Fund.
23
Account Minimums For Investor Shares
To open and maintain an account: $10,000 for regular accounts; $1,000 for
IRAs, and custodial accounts for minors. (Shareholders who invested in the
Vanguard Fund as part of the Reorganization will continue to be subject to a
minimum account balance of $1,000 for regular accounts; $500 for retirement
accounts.)
To add to an existing account: $100 by mail or exchange; $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.
How to Buy Shares
By Check: Mail your check and a completed account registration form to
Vanguard. When adding to an existing account, send your check with an
Invest-By-Mail form detached from your last account statement. Make your check
payable to: The Vanguard Group--Vanguard International Explorer Fund. For a list
of addresses, see the section below entitled "Contacting Vanguard."
By Exchange Purchase: You can purchase shares with the proceeds of a
redemption from another Vanguard Group Fund under our exchange privilege. See
the section below entitled "Exchanging Shares."
By Wire: Call Vanguard to purchase shares by wire. See the section below
entitled "Contacting Vanguard."
Your Purchase Price
You buy shares at a fund's next-determined NAV after Vanguard receives your
purchase request. As long as your request is received before the close of
regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time),
you will buy your shares at that day's NAV. This is known as your trade date.
Purchase Rules You Should Know
Third Party Checks. To protect the funds from check fraud, Vanguard will
not accept checks made payable to third parties.
U.S. Checks Only. All purchase checks must be written in U.S. dollars and
drawn on a U.S. bank.
Large Purchases. Vanguard reserves the right to reject any purchase request
that may disrupt a fund's operation or performance. Please call us before
attempting to invest a large dollar amount.
24
No Cancellations. Place your transaction requests carefully. Vanguard will
not cancel any transaction once it has been initiated and a confirmation number
has been assigned (if applicable).
Future Purchases. All Vanguard Group Funds reserve the right to stop
selling shares at any time, or to reject specific purchase requests, including
purchases by exchange from another Vanguard Group Fund, at anytime, for any
reason.
Redeeming Shares
How to Redeem Shares
Be sure to check the section below entitled "Other Rules You Should Know"
before initiating your request.
Online: Request a redemption through our website at Vanguard.com.
By Telephone: Contact Vanguard by telephone to request a redemption. For
telephone numbers, see the section below entitled "Contacting Vanguard."
By Mail: Send your written redemption instructions to Vanguard. For
addresses, see the section below entitled "Contacting Vanguard."
Your Redemption Price
You redeem shares at the Vanguard 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 Group Fund under our
exchange privilege. See the section below entitled "Exchanging Shares."
Wire Redemptions: Wire redemptions are not available for the Vanguard Fund.
25
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 Vanguard 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 Vanguard Fund collects
payment for your purchase. This may take up to ten calendar days for shares
purchased by check or Vanguard Fund Express(R).
Payment To a Different Person or Address. We can make your redemption check
payable to a different person or send it to a different address. However, this
requires the written consent of all registered account owners, which must be
provided under signature guarantees. You can obtain a signature guarantee from
most commercial and savings banks, credit unions, trust companies, or member
firms of a U.S. stock exchange.
No Cancellations. Place your transaction requests carefully. Vanguard will
not cancel any transaction once it has been initiated and a confirmation number
has been assigned (if applicable).
Emergency Circumstances. Vanguard Group Funds can postpone payment of
redemption proceeds for up to seven calendar days at any time. In addition,
Vanguard Group 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 SEC.
Exchanging Shares
All Vanguard Group Funds accept exchange requests by Web, telephone or
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. For 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 these limits generally are as follows:
o No telephone or Web exchanges between 2:30 p.m. and 4 p.m., Eastern
time on business days. Any exchange request placed during these hours
will be rejected.
26
On days when the New York Stock Exchange is scheduled to close early,
this end-of-day restriction will be adjusted to 1.5 hours prior to the
scheduled close. (For example, if the NYSE is scheduled to close at 1
p.m., Eastern time, the cut-off for phone and Web exchanges will be
11:30 a.m. Eastern time.)
o No more than two exchanges out of a fund may be requested by telephone
or Web within any 12-month period.
o Each fund reserves the right to reject exchanges considered excessive.
For all other Vanguard funds, the following limits generally apply:
o No more than two substantive "round trips" through a non-money-market
fund during any 12-month period.
o A "round trip" is a redemption out of a fund (by any means) followed
by a purchase back into the same fund (by any means).
o Round trips must be at least 30 days apart.
o "Substantive" means a dollar amount that Vanguard determines, in its
sole discretion, could adversely affect management of the fund.
o Each fund reserves the right to reject exchanges considered excessive.
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
privileges of two Vanguard funds, the stricter policy will apply to the
transaction.
Other Rules You Should Know
Telephone Transactions
Automatic. In setting up your account, we'll automatically enable you to do
business with us by regular telephone, unless you instruct us otherwise in
writing.
Tele-Account(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:
o Ten-digit account number.
o Complete owner name and address.
o Primary Social Security or employer identification number.
o Personal Identification Number (PIN), if applicable.
Subject To Revision. We reserve the right to revise or terminate Vanguard's
telephone transaction service at any time, without notice.
27
Some Vanguard Group Funds do not permit telephone exchanges between 2:30
p.m. and 4 p.m. To discourage market-timing, the following Vanguard Group Funds
generally do not permit telephone exchanges between 2:30 p.m. and 4 p.m. on
business days: the U.S. Stock Index Funds, the 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. Vanguard Group Funds may be added to or deleted from this list
at any time without prior notice to shareholders.
Vanguard.com
Registration. You can use your personal computer to review
your account holdings, to sell or exchange shares of most Vanguard Group Funds,
and to perform other transactions. To establish this service, you can register
online.
Some Vanguard Group Funds do not permit online exchanges between 2:30 p.m.
and 4 p.m. To discourage market-timing, the following Vanguard Group Funds
generally do not permit online exchanges between 2:30 p.m. and 4 p.m. on
business days: the U.S. Stock Index Funds, the 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:
o The fund name and account number.
o The amount of the transaction (in dollars or shares).
o Signatures of all owners exactly as registered on the account.
o Signature guarantees, if required for the type of transaction.*
o Any supporting legal documentation that may be required.
- ---------
* For instance, signature guarantees must be provided by all registered
account shareholders when redemption proceeds are to be sent to a different
person or address. Call Vanguard for specific signature guarantee
requirements.
Responsibility For Fraud
Vanguard will not be responsible for any account losses due to fraud, so
long as we reasonably believe that the person transacting on an account is
authorized to do so. Please take precautions to protect yourself from fraud.
Keep your account information private and immediately review any account
statements that we send to you. Contact Vanguard immediately about any
transactions you believe to be unauthorized.
28
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 transaction request by regular or express
mail. See the section below entitled "Contacting Vanguard" for addresses.
Investing with Vanguard Through Other Firms
You may purchase or sell Investor Shares of most Vanguard Group Funds
through a financial intermediary, such as a bank, broker, or investment adviser.
If you invest with Vanguard through an intermediary, please read that firm's
program materials carefully to learn of any special rules that may apply. For
example, special terms may apply to additional service features, fees, or other
policies.
Low-Balance Accounts
All Vanguard Group 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 that are 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 STAR(TM) Fund). The fee
is waived if your total Vanguard account assets are $50,000 or more.
Vanguard Fund and Account Updates
Portfolio Summaries
We will send you quarterly portfolio summaries to help you keep track of
your accounts throughout the year. Each summary shows the market value of your
account at the close of the statement period, as well as all distributions,
purchases, sales, and exchanges for the current calendar year.
Average Cost Review Statements
For most taxable accounts, average cost review statements will accompany
the quarterly portfolio summaries. These statements show the average cost of
shares that you redeemed during the current calendar year, using the average
cost single category method, which is one of the methods established by the IRS.
29
Confirmation Statements
Each time you buy, sell, or exchange shares, we will send you a statement
confirming the trade date and amount of your transaction.
Tax Statements
We will send you annual tax statements to assist in preparing your income
tax returns. These statements, which are generally mailed in January, will
report the previous year's dividend and capital gains distributions, proceeds
from the sale of shares, and distributions from IRAs or other retirement plans.
Annual and Semiannual Reports
Financial reports about Vanguard International Explorer Vanguard Fund will
be mailed twice a year, in June and December. These comprehensive reports
include overviews of the financial markets and specific information concerning
the Vanguard Fund:
o Performance assessments with comparisons to industry benchmarks.
o Reports from the adviser.
o Financial statements with detailed listings of the Vanguard Fund's
holdings.
To keep the Vanguard Fund's costs as low as possible (so that you and other
shareholders can keep more of its 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
Vanguard Fund report to that address, instead of mailing separate reports to
each shareholder. If you want us to send separate reports, however, you may
notify our Client Services Department.
Contacting Vanguard
Online - Vanguard.com
o Your best source of Vanguard news
o For fund, account, and service information
o For most account transactions
o For literature requests
o 24 hours per day, 7 days per week
30
Vanguard Tele-Account(R)
1-800-662-6273
(ON-BOARD)
o For automated fund and account information
o For redemptions by check, exchange (subject to certain
limitations), or wire
o Toll-free, 24 hours per day, 7 days per week
Investor Information
1-800-662-7447 (SHIP)
(Text telephone at 1-800-952-3335)
o For fund and service information
o For literature requests
o Business hours only
Client Services
1-800-662-2739 (CREW)
(Text telephone at 1-800-749-7273)
o For account information
o For most account transactions
o Business hours only
Institutional Division
1-888-809-8102
o For information and services for large institutional investors
o Business hours only
Vanguard Addresses
Regular Mail (Individuals--Current Clients):
The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
Regular Mail (Institutions):
The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
31
Regular Mail (General Inquiries):
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600
Registered or Express Mail:
The Vanguard Group 455 Devon
Park Drive Wayne, PA 19087-1815
32
V. MANAGEMENT OF VANGUARD INTERNATIONAL EXPLORER FUND
Officers and Trustees. The officers of Vanguard International Explorer Fund
and the other Vanguard Group Funds manage their day-to-day operations under the
direction of a Board of Trustees. The trustees set broad policies for, and
choose the officers of, the Vanguard Group Funds. Each trustee serves the
relevant Vanguard Group Fund until its termination; until the trustee's
retirement, resignation, death; or otherwise as specified in the relevant
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 each Vanguard Group Fund. Each trustee also serves as a director
of Vanguard.
The following chart shows information for each trustee and executive
officer of Vanguard International Explorer Fund. The mailing address of the
trustees and officers is P.O. Box 876, Valley Forge, PA 19482.
NUMBER OF
VANGUARD FUND 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/OFFICER
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTEED TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
John J. Brennan* Chairman of the May, 1987 Chairman of the Board, Chief Executive 107
(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 107
(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 85
(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.
33
NUMBER OF
VANGUARD FUND 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/OFFICER
- ------------------------------------------------------------------------------------------------------------------------------------
JoAnn Heffernan Heisen Trustee July, 1998 Vice President, Chief Information Officer, and 107
(1950) Member of the Executive Committee of
Johnson & Johnson (pharmaceuticals/
consumer products); Director of the Medical
Center at Princeton and Women's Research
and Education Institute.
Burton G. Malkiel Trustee May, 1977 Chemical Bank Chairman's Professor of 105
(1932) Economics, Princeton University; Director of
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 107
(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 107
(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.
- ------------------------------------------------------------------------------------------------------------------------------------
34
NUMBER OF
VANGUARD FUND 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/OFFICER
- ------------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
R. Gregory Barton* Secretary June, 2001 Managing Director and General Counsel 107
(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.; 107
(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
Vanguard, subscribe to programs of research-based consulting. Vanguard has paid
Greenwich subscription fees amounting to less than $250,000 over the past two
years. Vanguard's subscription rates are similar to those of other subscribers.
Trustees' Ownership of Vanguard Group Fund Shares. All trustees allocate
their investments among the various Vanguard Group Funds based on their own
investment needs. The following table shows each trustee's ownership of shares
of the Vanguard Group Funds and of all Vanguard Group Funds served by the
trustee as of December 31, 2001. As a group, the Vanguard Group Funds' trustees
and officers own less than 1% of the outstanding shares of Vanguard
International Explorer Fund at the time of the Reorganization.
Dollar Range of Aggregate Dollar Range of
Vanguard Fund Shares Vanguard Group Fund Shares
Name of Trustee Owned by Trustee Owned by Trustee
John J. Brennan None 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. None Over $100,000
J. Lawrence Wilson None Over $100,000
35
Trustee Compensation. The same individuals serve as trustees of all
Vanguard Group Funds (with three exceptions, which are noted in the table in the
section above entitled "Officers and Trustees"), and each fund pays a
proportionate share of the trustees ` compensation. The Vanguard Group Funds
employ their officers on a shared basis, as well. However, officers are
compensated by Vanguard, not the Vanguard Group Funds.
Independent Trustees. The funds compensate their independent trustees--that
is, the ones who are not also officers of the fund--in three ways:
o 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.
o The independent trustees are reimbursed for the travel and other
expenses that they incur in attending board meetings.
o 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 had 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" Trustees. Mr. Brennan serves as a trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of Vanguard.
Compensation Table. The following table provides compensation details for
each of the trustees. The amounts paid as compensation and accrued as retirement
benefits by the Vanguard Group Funds for each trustee are listed. The first two
columns relate to amounts that have been paid from the assets of Vanguard
Selected Value Fund, another investment portfolio currently offered by the
Vanguard Trust. In addition, the table shows the total amount of benefits that
the Vanguard Trust expects each trustee to receive from all Vanguard Group Funds
upon retirement, and the total amount of compensation paid to each trustee by
all Vanguard Group Funds.
36
PENSION OR
RETIREMENT
BENEFITS ACCRUED TOTAL
AGGREGATE AS PART OF VANGUARD ACCRUED COMPENSATION
COMPENSATION SELECTED VALUE RETIREMENT FROM ALL VANGUARD
NAMES OF TRUSTEE FROM VANGUARD FUND'S BENEFIT AT FUNDS PAID TO
SELECTED VALUE FUND(1) EXPENSES(1) JANUARY 1, 2001 TRUSTEE(2)
- ---------------------------------------------------------------------------------------------------
John J. Brennan None None None None
Charles D. Ellis(3) $ 81 None None $104,000
Rajiv L. Gupta(4) N/A N/A N/A N/A
JoAnn Heffernan Heisen 100 $11 $23,607 104,000
Bruce K. MacLaury(5) 104 10 78,176 99,000
Burton G. Malkiel 100 10 90,680 104,000
Alfred M. Rankin, Jr. 100 7 46,267 104,000
James O. Welch, Jr.(5) 100 12 97,720 104,000
J. Lawrence Wilson 100 4 67,240 119,000
(1) The amounts shown in this column are based on Vanguard Selected Value
Fund's fiscal year ended October 31, 2001. Vanguard International Explorer
Fund and Vanguard Mid-Cap Growth Fund did not commence operation until .,
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. Ellis joined the Fund's board effective January 1, 2001.
(4) Mr. Gupta joined the Fund's board effective December 31, 2001.
(5) Mr. MacLaury and Mr. Welch retired from the Fund's board effective December
31, 2001.
The Vanguard Group. Vanguard International Explorer Fund has been organized
as a member of The Vanguard Group of Investment Companies, which consists of
more than 100 mutual funds. The Vanguard Group, Inc., located at P.O. Box 2600,
Valley Forge, PA 19482-6200, which is a jointly owned subsidiary of the Vanguard
Group Funds, provides corporate management, administrative and distribution
services to the Vanguard Group Funds on an at-cost basis. Vanguard also provides
investment advisory services on an at-cost basis to many of the Vanguard Group
Funds.
37
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Vanguard Group Funds
and also furnishes the funds with necessary office space, furnishings, and
equipment. Each Vanguard Group Fund pays its share of Vanguard's total expenses,
which are allocated among the funds under methods approved by the Board of
trustees of each Vanguard Group Fund. In addition, each Vanguard Group Fund
bears its own direct expenses, such as legal, auditing and custodian fees.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement that was approved by the shareholders of each of the Vanguard
Group Funds. The amount that each Vanguard Group Fund has invested in Vanguard
is 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. Under the Amended and Restated Service Agreement, no fund
can be called on to invest more than 0.40% of its current assets in Vanguard.
38
VI. GENERAL INFORMATION
This section provides information on a number of topics relating to proxy
voting and the shareholder meeting.
Proxy Solicitation Methods. The Schroder Fund will solicit shareholder
proxies in a variety of ways. All shareholders that are entitled to vote will
receive these proxy materials by mail. In addition, Schroders employees and
officers may solicit shareholder proxies in person or by telephone.
The Schroder Fund has retained D.F. King & Co., Inc. (the "Proxy
Solicitor), 77 Water Street, 20th Floor, New York, NY 10005, to aid in the
solicitation of proxies. The costs of retaining the Proxy Solicitor and other
expenses incurred in connection with the solicitation of proxies, other than
expenses in connection with solicitation by the employees of Schroders, will be
borne by the Schroder Fund. The anticipated cost associated with the
solicitation of proxies by the Proxy Solicitor is $2,000 plus any reasonable out
of pocket expenses incurred by the Proxy Solicitor.
In addition to voting by mail or in person at the Meeting, you may give
your voting instructions over the telephone by calling (800) 290-4628. A
representative of the Proxy Solicitor will answer your call. When receiving your
instructions by telephone, the Proxy Solicitor representative is required to ask
you for your full name, address, the last four digits of your social security
number or employer identification number, title (if the person giving the proxy
is authorized to act for an entity, such as a corporation), the number of shares
of the Schroder Fund owned, and to confirm that you have received the proxy
statement in the mail. If the information you provided matches the information
provided to the Proxy Solicitor by Schroders, then the Proxy Solicitor
representative will explain the voting process. The Proxy Solicitor is not
permitted to recommend to you how to vote, other than to read any recommendation
included in the prospectus/proxy statement. The Proxy Solicitor will record your
instructions and transmit them to the official tabulator and send you a letter
or mailgram to confirm your vote. That letter will also ask you to call The
Proxy Solicitor immediately if the confirmation does not reflect your
instructions correctly. You may receive a call from a representative of the
Proxy Solicitor if Schroders has not yet received your vote. The Proxy Solicitor
may ask you for authority by telephone to permit the Proxy Solicitor to sign a
proxy on your behalf. The Proxy Solicitor will record all instructions, in
accordance with the procedures set forth above. The Schroder Trust believes
those procedures are reasonably designed to determine accurately the
shareholder's identity and voting instructions.
Proxy Solicitation Costs. The Schroder Fund will pay all costs of
soliciting proxies, including costs relating to the preparation, printing,
mailing, and tabulation of proxies. Voting immediately can help the Schroder
Fund avoid the considerable expense of a second solicitation.
Quorum. In order for the shareholder meeting to go forward, the Schroder
Fund must achieve a quorum. This means that one third (33.3%) of the Schroder
Fund's shares must be represented at the meeting - either in person or by proxy.
All returned proxies count towards a quorum regardless of how they are voted
("For," "Against," or "Abstain"). As discussed more fully below in the section
entitled "Tabulation of Votes," broker non-votes are considered present for
purposes of determining the presence of a quorum.
39
Required Vote. Proceeding with the Reorganization requires the affirmative
vote of a "majority of the outstanding voting securities" of the Schroder Fund
(as defined in the Investment Company Act), which means the affirmative vote of
the lesser of (1) more than 50% of the outstanding shares of the Schroder Fund
or (2) 67% or more of the shares of the Schroder Fund present at a meeting if
more than 50% of the outstanding shares of the Schroder Fund are represented at
the meeting in person or by proxy. THE BOARD OF TRUSTEES RECOMMENDS THAT
SHAREHOLDERS APPROVE THE REORGANIZATION.
Revoking a Proxy. Shareholders may revoke a proxy at any time up until
voting results are announced at the shareholder meeting. You can do this by
writing to the Schroder Fund's Secretary, c/o Schroder Investment Management
North America Inc., 875 Third Avenue, 22nd Floor, New York, NY 10022, or by
voting in person at the meeting.
Adjournment. In the event that sufficient votes in favor of the
Reorganization are not received by the time scheduled for the Meeting, the
persons named as proxies may propose one or more adjournments of the Meeting for
a reasonable time after the date set for the original Meeting to permit further
solicitation of proxies. In addition, if, in the judgment of the persons named
as proxies, subsequent developments make it advisable to defer action on the
proposal, the persons named as proxies may propose one or more adjournments of
the Meeting for a reasonable time in order to defer action on the proposal. Any
such adjournments will require the affirmative vote of a majority of the of the
votes cast on the question in person or by proxy at the session of the Meeting
to be adjourned, as required by the Schroder Trust's Trust Instrument and
Bylaws. The persons named as proxies will vote in favor of such adjournment all
shares which those persons are entitled to vote in favor of the proposal. They
will vote against any such adjournment all shares represented by proxies that
vote against the proposal. The persons named as proxies will abstain from voting
on adjournment all shares represented by proxies that abstain from voting on
such proposal. The costs of any additional solicitation of proxies and of any
adjourned session with regard to a proposal will be borne by the Schroder Fund.
Tabulation of Votes. Votes cast by proxy or in person at the Meeting will
be counted by one or more persons appointed by the President of the Schroder
Trust to act as tellers for the Meeting. The tellers will count the total number
of votes case "FOR" the proposal for purposes of determining whether sufficient
affirmative votes have been cast. The tellers will count shares represented by
proxies that withhold authority to vote or that reflect abstentions or "broker
non-vote" (i.e., shares held by brokers or nominees as to which (i) instructions
have not been received from the beneficial owners or persons entitled to vote
and (ii) the broker or nominee does not have the discretionary voting power on a
particular matter) as shares that are present and entitled to vote on the matter
for purposes of determining the presence of a quorum. Abstentions and broker
non-votes will have the effect of negative votes on the proposal.
Shareholder proposals. Any shareholder proposals to be included in the
proxy statement for the Schroder Fund's next annual or special meeting must be
received by the Schroder Fund within a reasonable period of time prior to that
meeting. The Schroder Fund has no current plans to hold an annual or special
meeting in 2002. If the Reorganization is consummated there will be no further
meeting of shareholders of the Schroder Fund.
40
Principal Shareholders. As of April 26, 2002, the Schroder Fund had
approximately $________________ million in net assets and ___________________
outstanding shares. As of the same date, the officers and trustees of the
Schroder Trust, as a group, owned less than 1% of the outstanding shares of the
Schroder Fund. As of the same date, each of the following persons was known to
be the record or beneficial owner of more than 5% of the outstanding shares of
the Schroder Fund:
- --------------------------------------------------------------------------------
RECORD OR BENEFICIAL OWNER PERCENTAGE OF OUTSTANDING SHARES OWNED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other Matters. Schroders knows of no other business to be brought before
the Meeting. However, if additional matters do arise, we will use our best
judgment to vote on your behalf. If you object to our voting other matters on
your behalf, please tell us so in writing before the meeting.
Obtaining Information from the SEC. The Vanguard Trust is subject to the
informational requirements of the Securities Exchange Act of 1934 and must file
certain reports and other information with the SEC.
The proxy materials, reports and other information filed by the Schroder
Trust and the Vanguard Trust can be inspected and copied at the public reference
facilities maintained by the SEC located at 450 5th Street N.W., Washington,
D.C. 20549 and 233 Broadway, New York, New York 10279. Copies of such material
also can be obtained from the Public Reference Branch, Office of Consumer
Affairs and Information Services, Securities and Exchange Commission,
Washington, D.C. 20549 at prescribed rates.
- --------------------------------------------------------------------------------
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE REQUESTED TO
DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. YOU MAY ALSO VOTE OR BY
TELEPHONE. PLEASE FOLLOW THE ENCLOSED INSTRUCTIONS TO UTILIZE THESE METHODS OF
VOTING.
- --------------------------------------------------------------------------------
41
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this ____ day of ___, 2002, between Vanguard Whitehall Funds, a business trust
formed under the laws of the State of Delaware with its principal place of
business at P.O. Box 2600, Valley Forge, PA 19482 (the "Vanguard Trust"), on
behalf of Vanguard International Explorer Fund, a series of the Vanguard Trust
(the "Acquiring Fund"); Schroder Capital Funds (Delaware), a business trust
formed under the laws of the State of Delaware with its principal place of
business at 875 Third Avenue, 22nd Floor, New York, New York 10022 (the
"Schroder Trust"), on behalf of the Schroder International Smaller Companies
Fund, a series of the Schroder Trust (the "Selling Fund"); The Vanguard Group,
Inc., a Pennsylvania corporation, with its principal place of business at P.O.
Box 2600, Valley Forge, PA 19482 ("The Vanguard Group") (with respect to the
provisions of Paragraphs 9.2 and 9.4 only); and Schroder Investment Management
North America Inc., a ____ corporation, with its principal place of business at
875 Third Avenue, 22nd Floor, New York, New York 10022 ("Schroder Management")
(with respect to the provisions of Paragraphs 9.2 and 9.3 only).
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(F) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization of the Selling Fund (the "Reorganization") will consist of (i)
the transfer of all of the assets of the Selling Fund in exchange solely for
units of beneficial interest (the "Shares") of the Acquiring Fund (the
"Acquiring Fund Shares"), (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date (as defined in paragraph 1.2 of this Agreement), of Acquiring
Fund Shares to the shareholders of the Selling Fund in liquidation of the
Selling Fund as provided in this Agreement, all upon the terms and conditions
set out below.
WHEREAS, the Vanguard Trust and the Schroder Trust are each registered as
an open-end management investment company under the Investment Company Act of
1940, as amended (the "1940 Act");
WHEREAS, the Acquiring Fund and the Selling Fund are authorized to issue
shares of beneficial interest;
WHEREAS, the Board of Trustees, including a majority of the trustees who
are not "interested persons" (as defined in the 1940 Act), of the Vanguard Trust
has determined with respect to the Acquiring Fund that the exchange of all of
the assets of the Selling Fund for Acquiring Fund Shares is in the best
interests of the Acquiring Fund and its shareholders;
WHEREAS, the Board of Trustees, including a majority of the trustees who
are not "interested persons" (as defined under the 1940 Act), of the Schroder
Trust has determined with respect to the Selling Fund that the exchange of all
the assets of, and certain identified liabilities of, the Selling Fund for
Acquiring Fund Shares is in the best interests of the Selling Fund and its
shareholders; and
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WHEREAS, The purpose and effect of the Reorganization is to change the form
of organization of the Selling Fund from a series of Schroder Trust to a series
of the Vanguard Trust. It is anticipated that the Reorganization will provide
long-term benefits to the Selling Fund's shareholders by immediately reducing
expenses and providing access to a larger, more diverse complex of funds, which
can appeal to a broader spectrum of investors, and thus increase the size and
efficiency of the fund and increase the likelihood of the realization of
economies of scale.
NOW THEREFORE, in consideration of the mutual promises contained in this
Agreement, the Vanguard Trust and the Schroder Trust agree as follows:
ARTICLE I
Transfer of Assets of the Selling Fund in Exchange for Acquiring Fund Shares and
- --------------------------------------------------------------------------------
Assumption of Certain Identified Selling Fund Liabilities; Liquidation of the
Selling Fund
- --------------------------------------------------------------------------------
1.1 Subject to the terms and conditions set out in this Agreement and on
the basis of the representations and warranties contained in this Agreement, the
Schroder Trust agrees to transfer the Selling Fund's assets in the manner set
out in paragraph 1.2 of this Agreement to the Acquiring Fund, and the Vanguard
Trust agrees in exchange for such assets: (a) to deliver to the Selling Fund the
number of Acquiring Fund Shares, including fractional Acquiring Fund Shares,
determined by dividing the value of the Selling Fund's net assets, computed in
the manner and as of the time and date set out in paragraph 2.1 of this
Agreement, by the net asset value of one Acquiring Fund Share, computed in the
manner and as of the time and date set out in paragraph 2.2 of this Agreement;
and (b) to assume certain identified liabilities of the Selling Fund, as set out
in paragraph 1.3 of this Agreement. Each of these transactions will take place
at the closing provided for in paragraph 3.1 of this Agreement (the "Closing").
1.2 The assets of the Selling Fund to be acquired by the Acquiring Fund
will consist of all property of the Selling Fund including, without limitation,
all cash, securities, commodities and futures interests, and dividend or
interest receivables that are owned by the Selling Fund and any deferred or
prepaid expenses shown as an asset on the books of the Selling Fund on the
closing date described in paragraph 3.1 of this Agreement (the "Closing Date").
The Schroder Trust, on behalf of the Selling Fund, shall have provided on
or before the date hereof the Vanguard Trust with (a) the financial statements
of the Selling Fund as of and for its most recently completed fiscal year (the
"Financial Statements"), and (b) a list of all of the Selling Fund's assets as
of the date of execution of this Agreement. The Schroder Trust, on behalf of the
Selling Fund, represents that as of the date of the execution of this Agreement
no changes have occurred in its financial position as reflected in its Financial
Statements other than those occurring in the ordinary course of its business in
connection with the purchase and sale of securities and the payment of its
normal operating expenses. The Schroder Trust, on behalf of the Selling Fund,
reserves the right to sell any of the Selling Fund's assets but will not,
without the prior written approval of the Vanguard Trust, acquire any
A-2
additional assets for the Selling Fund other than instruments of the type in
which the Acquiring Fund is permitted to invest. The Schroder Trust, on behalf
of the Selling Fund, will, within a reasonable time prior to the Closing Date,
furnish the Vanguard Trust with a list of the assets, if any, on the Selling
Fund's list referred to in the first sentence of this paragraph that do not
conform to the Acquiring Fund's investment objectives, policies and
restrictions. In the event that the Selling Fund holds any assets that the
Acquiring Fund may not hold, the Selling Fund will use its best efforts to
dispose of such assets prior to the Closing Date.
1.3 The Schroder Trust, on behalf of the Selling Fund, will seek to
discharge all of the Selling Fund's known liabilities and obligations prior to
the Closing Date, other than those liabilities and obligations that would
otherwise be discharged at a later date in the ordinary course of the Selling
Fund's business. Except as specifically provided in this paragraph 1.3, the
Acquiring Fund will assume the liabilities, expenses, costs, charges and
reserves reflected on a Statement of Assets and Liabilities of the Selling Fund
(as defined in paragraph 4.1(g)) prepared on behalf of the Selling Fund, as of
the Valuation Date (as defined in paragraph 2.1 of this Agreement), in
accordance with generally accepted accounting principles consistently applied
from the prior audited period (hereinafter the "Liabilities"). The Acquiring
Fund will assume only those Liabilities of the Selling Fund reflected in the
Statement of Assets and Liabilities and will not, except as specifically
provided in this paragraph 1.3, assume any other contingent, unknown, or
unaccrued liabilities, all of which will remain the obligation of the Selling
Fund.
1.4 As provided in paragraph 3.4 of this Agreement, as soon after the
Closing Date as is practicable (the "Liquidation Date"), the Selling Fund will
liquidate and distribute on a proportionate basis to the Selling Fund's
shareholders of record determined as of the close of business on the Closing
Date (the "Selling Fund Shareholders") the Acquiring Fund Shares it receives
pursuant to paragraph 1.1 of this Agreement. This liquidation and distribution
will be accomplished by the transfer of the Acquiring Fund Shares then credited
to the account of the Selling Fund on the books of the Acquiring Fund to open
accounts on the share records of the Acquiring Fund in the names of the Selling
Fund Shareholders representing the respective proportionate number of Acquiring
Fund Shares due those shareholders. All issued and outstanding Shares of the
Selling Fund ("Selling Fund Shares") will simultaneously be canceled on the
books of the Selling Fund. The Acquiring Fund will not issue certificates
representing the Acquiring Fund's Shares in connection with the exchange of
Acquiring Fund Shares for shares of the Selling Fund.
1.5 After the Reorganization, ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the Acquiring Fund's
current prospectus and statement of additional information.
1.6 After distribution of the Acquiring Fund Shares pursuant to paragraph
1.4 of this Agreement, the Selling Fund will be liquidated promptly and
terminated as a series of the Schroder Trust ("Termination Date"). In addition,
the Schroder Trust will as soon as practicable after the Termination Date take
all other actions in connection with the termination of the Selling Fund as
required by applicable law.
A-3
1.7 Any reporting responsibility of the Selling Fund to any public
authority is and will remain the responsibility of the Selling Fund up to and
including the Closing Date and the Termination Date.
1.8 Any transfer taxes payable upon issuance of the Acquiring Fund Shares
in a name other than the registered holder of Selling Fund Shares on the books
of the Selling Fund as of that time will, as a condition of the issuance and
transfer, be paid by the person to whom the Acquiring Fund Shares are to be
issued and transferred.
ARTICLE II
Valuation
---------
2.1 The value of the Selling Fund's assets to be acquired under this
Agreement will be the value of the assets computed as of the close of regular
trading on the New York Stock Exchange, Inc. (the "NYSE") on the Closing Date
(the time and date being referred to as the "Valuation Date" for purposes of
this Agreement), using the valuation procedures set out in the Selling Fund's
then-current prospectus and/or statement of additional information.
2.2 The net asset value of the Acquiring Fund Shares will be the net asset
value per share computed as of the Valuation Date, using the valuation
procedures set out in the Acquiring Fund's then-current prospectus and/or
statement of additional information.
2.3 The number of Acquiring Fund Shares to be issued (including fractional
shares, if any) in exchange for the Selling Fund's net assets will be determined
by dividing the value of the net assets of the Selling Fund determined using the
same valuation procedures referred to in paragraph 2.1 of this Agreement by the
net asset value per share of the Acquiring Fund determined in accordance with
paragraph 2.2 of this Agreement.
2.4 All computations of value will be made in accordance with the regular
practices of the Vanguard Trust, subject to this Article II.
ARTICLE III
Closing and Closing Date
------------------------
3.1 The Closing Date for the Reorganization will be _________, 2002, or
such other date agreed to in writing by the Vanguard Trust and the Schroder
Trust. All acts taking place at the Closing will be deemed to take place
simultaneously as of the close of business on the Closing Date unless otherwise
provided. The Closing will be held as of 4:00 p.m., at the offices of the
Vanguard Trust, 100 Vanguard Blvd., Malvern, PA 19355, or at such other time
and/or place agreed to by the Vanguard Trust and the Schroder Trust.
A-4
3.2 The custodian for the Acquiring Fund (the "Custodian") will deliver at
the Closing a certificate of an authorized officer stating that: (a) the Selling
Fund's portfolio securities, cash and any other assets have been delivered in
proper form to the Acquiring Fund prior to or on the Closing Date, and (b) all
necessary taxes, including all applicable federal and state stock transfer
stamps, if any, have been paid, or provision for payment has been made, in
conjunction with the delivery of portfolio securities.
3.3 In the event that on the Valuation Date (a) the NYSE or another primary
trading market for portfolio securities of the Acquiring Fund or the Selling
Fund is closed to trading or trading on the market is restricted; or (b) trading
or the reporting of trading on the NYSE or elsewhere is disrupted so that
accurate appraisal of the value of the net assets of the Acquiring
Fund or the Selling Fund is impracticable, the Closing Date will be postponed
until the first business day after the day when normal trading has fully resumed
and reporting has been restored.
3.4 The Schroder Trust, on behalf of the Selling Fund, will deliver at the
Closing a list of the names and addresses of the Selling Fund Shareholders and
the number of outstanding Selling Fund Shares owned by each such shareholder
immediately prior to the Closing or provide evidence that the information has
been provided to the Acquiring Fund's transfer agent. The Vanguard Trust, on
behalf of the Acquiring Fund, will issue and deliver a confirmation evidencing
that the Acquiring Fund Shares have been credited to the Selling Fund's account
on the Closing Date to the Secretary of the Schroder Trust or provide evidence
satisfactory to the Schroder Trust that the Acquiring Fund Shares have been
credited to the Selling Fund's account on the books of the Acquiring Fund. At
the Closing, each party to this Agreement will deliver to the other party such
bills of sale, checks, assignments, share certificates, if any, receipts or
other documents as the other party or its counsel may reasonably request.
ARTICLE IV
Representations and Warranties
------------------------------
4.1 The Schroder Trust, on behalf of the Selling Fund, represents and
warrants to the Vanguard Trust as follows:
(a) The Selling Fund is an investment series of the Schroder Trust, a
business trust duly organized, validly existing, and in good standing under
the laws of the State of Delaware;
(b) The Schroder Trust is a registered open-end management investment
company and its registration with the Securities and Exchange Commission
(the "Commission") as an investment company under the 1940 Act is in full
force and effect;
(c) The Schroder Trust is not, and the execution, delivery, and
performance of this Agreement (subject to approval of the Selling Fund
Shareholders) will not result, in a violation of any provision of its
A-5
Declaration of Trust or any material agreement, indenture, instrument,
contract, lease or other undertaking to which the Schroder Trust on behalf
of itself or on behalf of the Selling Fund is a party or by which its
property is bound;
(d) The Schroder Trust will turn over all of the books and records
relating to the Selling Fund (including all books and records required to
be maintained under the 1940 Act and the Code and the rules and regulations
under the 1940 Act and the Code) to the Vanguard Trust at the Closing;
(e) The Schroder Trust has no contracts or other commitments (other
than this Agreement) with respect to the Selling Fund that will be
terminated with liability to the Schroder Trust prior to the Closing Date;
(f) Except as previously disclosed in writing to and accepted by the
Vanguard Trust, no litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending, or to the
Schroder Trust's knowledge, threatened against the Schroder Trust in
connection with the Selling Fund or any of its properties or assets that,
if adversely determined, would materially and adversely affect the Schroder
Trust's financial condition or the conduct of its business. The Schroder
Trust knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body that materially
and adversely affects its business or the business of the Selling Fund or
the Schroder Trust's ability to consummate the transactions contemplated by
this Agreement;
(g) The statements of assets and liabilities of the Schroder Trust
relating to the Selling Fund for the period beginning with commencement of
the Selling Fund and ending on [Date] have been audited by
PricewaterhouseCoopers LLP, certified public accountants, and are in
accordance with generally accepted accounting principles consistently
applied, and those statements (copies of which have been furnished to the
Acquiring Fund) fairly reflect the financial condition of the Selling Fund
as of such dates, and no known contingent liabilities of the Selling Fund
exist as of such dates that are not disclosed in those statements;
(h) Since [Date], no material adverse change has occurred in the
Selling Fund's financial condition, assets, liabilities or business other
than changes occurring in the ordinary course of business, or any
incurrence by the Selling Fund of indebtedness maturing more than one year
from the date that such indebtedness was incurred, except as otherwise
disclosed to and accepted by the Vanguard Trust. For the purposes of this
subparagraph (h), a decline in net asset value per share or the total
assets of the Selling Fund in the ordinary course of business does not
constitute a material adverse change;
(i) At the Closing Date, all federal and other tax returns and other
reports or filings with respect to the Selling Fund required by law to have
been filed by the Closing Date will have been filed (including, without
A-6
limitation, tax returns for the Selling Fund's fiscal year ended October
31, 2001), and all federal and other taxes will have been paid so far as
due, or provision will have been made for the payment of those taxes and,
to the best of the Schroder Trust's knowledge, no such tax return is
currently under audit and no assessment has been asserted with respect to
such a return;
(j) For each of its prior fiscal years of operation and for each
subsequent quarter end of the current fiscal year, the Schroder Trust has
met the requirements of Subchapter M of the Code for qualification and
treatment of the Selling Fund as a regulated investment company; and all of
the Selling Fund's issued and outstanding shares have been offered and sold
in compliance in all material respects with applicable federal and state
securities laws;
(k) At the date of this Agreement, all issued and outstanding Selling
Fund Shares are, and at the Closing Date will be, duly and validly issued
and outstanding, fully paid and non-assessable. All of the issued and
outstanding Selling Fund Shares will, at the time of Closing, be held by
the persons and in the amounts set out in the records of the Schroder
Trust's transfer agent as provided in paragraph 3.4 of this Agreement. The
Schroder Trust does not have outstanding any options, warrants or other
rights to subscribe for or purchase any of the Selling Fund's Shares, nor
is any security convertible into any of the Selling Fund's shares currently
outstanding;
(l) At the Closing Date, the Schroder Trust will have good and
marketable title to the Selling Fund's assets to be transferred to the
Acquiring Fund pursuant to paragraph 1.2 of this Agreement, and full right,
power and authority to sell, assign, transfer and deliver the assets under
the terms and conditions of this Agreement and, upon delivery and payment
for the assets, the Acquiring Fund will acquire good and marketable title
to them, subject to no restrictions on the full transfer of the assets,
including such restrictions as might arise under the Securities Act of
1933, as amended (the "1933 Act"), other than as disclosed to the Vanguard
Trust;
(m) The execution, delivery and performance of this Agreement has been
duly authorized by all necessary actions on the part of the Schroder
Trust's Board of Trustees and, subject to the approval of the Selling Fund
Shareholders, this Agreement will constitute a valid and binding obligation
of the Schroder Trust, enforceable in accordance with its terms, subject to
the effect of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(n) The information to be furnished by the Schroder Trust for use in
no-action letters, applications for exemptive orders, registration
statements, proxy materials and other documents that may be necessary in
connection with the transactions contemplated by this Agreement will be
accurate and complete in all material respects and will comply in all
material respects with federal securities and other laws and regulations
under those laws applicable to those transactions;
A-7
(o) The proxy statement of the Selling Fund (the "Proxy Statement") to
be included in the Registration Statement referred to in paragraph 5.7 of
this Agreement (insofar as it relates to the Selling Fund) will, on the
effective date of the Registration Statement and on the Closing Date, not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated in the Proxy Statement or necessary to make the
statements in the Proxy Statement, in light of the circumstances under
which the statements were made, not materially misleading; and
(p) The current prospectus and statement of additional information
filed with the Commission as part of the Schroder Trust's registration
statement on Form N-1A, insofar as they relate to the Selling Fund, conform
in all material respects to the applicable requirements of the 1933 Act and
the 1940 Act and the rules and regulations under those Acts and do not
include any untrue statement of a material fact or omit to state any
material fact required to be stated in that registration statement or
necessary to make the statements in the registration statement, in light of
the circumstances under which they were made, not misleading.
4.2 The Vanguard Trust, on behalf of the Acquiring Fund, represents and
warrants to the Schroder Trust as follows:
(a) The Acquiring Fund is an investment series of a business trust,
duly organized, validly existing and in good standing under the laws of the
State of Delaware;
(b) The Vanguard Trust is a registered open-end management investment
company and its registration with the Commission as an investment company
under the 1940 Act is in full force and effect;
(c) The current prospectus and statement of additional information
filed as part of the Vanguard Trust's registration statement on Form N-1A,
which will become effective prior to the Closing Date, insofar as they
relate to the Acquiring Fund (the "Vanguard Trust Registration Statement")
conform in all material respects to the applicable requirements of the 1933
Act and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated in the Vanguard Trust
Registration Statement or necessary to make the statements therein, in
light of the circumstances under which they were made, not materially
misleading;
(d) The Vanguard Trust is not, and the execution, delivery and
performance of this Agreement will not result, in a violation of its
Declaration of Trust or any material agreement, indenture, instrument,
contract, lease or other undertaking to which the Vanguard Trust on behalf
of itself or on behalf of the Acquiring Fund is a party or by which it is
bound;
(e) Except as previously disclosed in writing to and accepted by the
Schroder Trust, no litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or, to the
Vanguard Trust's knowledge, threatened against the Vanguard Trust in
connection with the Acquiring Fund or any of its properties or assets that,
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if adversely determined, would materially and adversely affect the Vanguard
Trust's financial condition or the conduct of its business. The Vanguard
Trust knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body that materially
and adversely affects its business or the business of the Acquiring Fund or
the Vanguard Trust's ability to consummate the transactions contemplated in
this Agreement;
(f) Since the inception of the Acquiring Fund, no material adverse
change has occurred with respect to the Acquiring Fund's financial
condition, assets, liabilities or business other than changes occurring in
the ordinary course of business, or any incurrence by the Acquiring Fund of
indebtedness maturing more than one year from the date that such
indebtedness was incurred, except as otherwise disclosed to and accepted by
the Schroder Trust. For the purposes of this subparagraph (f), a decline in
net asset value per share or the total assets of the Acquiring Fund in the
ordinary course of business does not constitute a material adverse change;
(g) At the Closing Date, all federal and other tax returns and reports
with respect to the Acquiring Fund required by law to have been filed by
the Closing Date will have been filed, and all federal and other taxes will
have been paid so far as due, or provision will have been made for the
payment of those taxes;
(h) The Vanguard Trust intends to meet the requirements of Subchapter
M of the Code for qualification and treatment of the Acquiring Fund as a
regulated investment company in the future;
(i) At the date of this Agreement, all issued and outstanding
Acquiring Fund Shares are, and at the Closing Date will be, duly and
validly issued and outstanding, fully paid and non-assessable, with no
personal liability attaching to the ownership of those shares. The Vanguard
Trust does not have outstanding any options, warrants or other rights to
subscribe for or purchase any Acquiring Fund Shares, nor is any security
convertible into any Acquiring Fund Shares currently outstanding;
(j) The execution, delivery and performance of this Agreement has been
duly authorized by all necessary actions, if any, of the Vanguard Trust's
Board of Trustees, and this Agreement will constitute a valid and binding
obligation of the Vanguard Trust enforceable in accordance with its terms,
subject to the effect of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(k) The Acquiring Fund Shares to be issued and delivered to the
Selling Fund, for the account of the Selling Fund Shareholders, under the
terms of this Agreement, will at the Closing Date have been duly authorized
and, when so issued and delivered, will be duly and validly issued
Acquiring Fund Shares, and will be fully paid and non-assessable with no
personal liability attaching to the ownership of those shares;
(l) The information to be furnished by the Vanguard Trust for use in
no-action letters, applications for exemptive orders, registration
statements, proxy materials and other documents that may be necessary in
connection with the transactions contemplated in this Agreement will be
accurate and complete in all material respects and will comply in all
material respects with federal securities and other laws and regulations
applicable to those transactions;
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(m) The Registration Statement referred to in paragraph 5.7 of this
Agreement and the Proxy Statement to be included in the Registration
Statement (insofar as it relates to the Acquiring Fund) will, on the
effective date of the Registration Statement and on the Closing Date, not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated in the Proxy Statement or necessary to make the
statements in the Proxy Statement, in light of the circumstances under
which such statements were made, not materially misleading; and
(n) The Vanguard Trust agrees to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act and the 1940 Act
as it may deem appropriate in order to continue the operations of the
Acquiring Fund after the Closing Date.
ARTICLE V
Covenants of the Acquiring Fund and the Selling Fund
----------------------------------------------------
5.1 The Vanguard Trust will operate the business of the Acquiring Fund, and
the Schroder Trust will operate the business of the Selling Fund, in the
ordinary course between the date of this Agreement and the Closing Date. The
Vanguard Trust and the Schroder Trust agree for purposes of this Agreement that
the declaration and payment of customary dividends and distributions will be
considered to have been paid in the ordinary course of business.
5.2 The Schroder Trust, on behalf of the Selling Fund, will call a meeting
of its shareholders to consider and act upon this Agreement and to take all
other actions in coordination with the Vanguard Trust necessary to obtain
approval of the transactions contemplated by this Agreement.
5.3 The Schroder Trust, on behalf of the Selling Fund, covenants that the
Acquiring Fund Shares to be issued under this Agreement are not being acquired
for the purpose of making any distribution other than in accordance with the
terms of this Agreement.
5.4 The Schroder Trust, on behalf of the Selling Fund, will assist the
Vanguard Trust in obtaining all information on record with the Selling Fund's
transfer agent that the Vanguard Trust reasonably requests concerning the
beneficial ownership of the Selling Fund's Shares.
5.5 Subject to the provisions of this Agreement, the Vanguard Trust and the
Schroder Trust each will take, or cause to be taken, all action, and do, or
cause to be done, all actions reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement,
including any actions required to be taken after the Closing Date.
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5.6 Prior to the Closing Date, the Schroder Trust will furnish to the
Vanguard Trust copies of the tax returns for the Selling Fund which were filed
on its behalf for its immediately preceding five taxable years, together with
certification by the Selling Fund's President and Treasurer that, to the best of
their knowledge, they are correct and complete insofar as relevant to the
determination of earnings and profits of the Selling Fund for such time period.
5.7 The Schroder Trust, on behalf of the Selling Fund, will provide the
Vanguard Trust with information reasonably necessary for the preparation of a
prospectus (the "Prospectus") that will include the Proxy Statement referred to
in paragraphs 4.1(o) and 4.2(m) of this Agreement, all to be included in a
registration statement on Form N-14 of the Vanguard Trust (the "Registration
Statement"), in compliance with the 1933 Act, the Securities Exchange Act of
1934 (the "1934 Act") and the 1940 Act in connection with the meeting of the
Selling Fund's shareholders to consider approval of this Agreement and the
transactions contemplated by this Agreement.
5.8 As promptly as practicable, but in any case within thirty days of the
Closing Date, the Schroder Trust, on behalf of the Selling Fund, will furnish
the Vanguard Trust with a statement containing information required for purposes
of complying with Rule 24f-2 under the 1940 Act. A notice pursuant to Rule 24f-2
will be filed by the Acquiring Fund offsetting redemptions by the Selling Fund
during the fiscal year ending on or after the Closing Date against sales of the
Acquiring Fund Shares; and the Schroder Trust agrees that it will not net
redemptions during that period by the Selling Fund against sales of shares of
any other series of the Schroder Trust.
5.9 As promptly as practicable, but in any case within the period required
by applicable law or regulation, the Schroder Trust, on behalf of the Selling
Fund, will file all federal and other tax returns and other reports or filings
with respect to the Selling Fund required by applicable law or regulation to be
filed.
ARTICLE VI
Conditions Precedent to the Obligations of the Schroder Trust
-------------------------------------------------------------
The obligations of the Schroder Trust to consummate the transactions
provided for in this Agreement will be subject, at its election, to the
performance by the Vanguard Trust of all obligations to be performed by it under
this Agreement on or before the Closing Date and, in addition to those
obligations to the following specific conditions:
6.1 All representations and warranties of the Vanguard Trust contained in
this Agreement will be true and correct in all material respects as of the date
of this Agreement and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date.
6.2 The Vanguard Trust will have delivered to the Schroder Trust a
certificate executed in its name by its Chief Executive Officer, President or
Vice President and its Secretary, Treasurer or Assistant Treasurer, in a form
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reasonably satisfactory to the Schroder Trust and dated as of the Closing Date,
to the effect that the representations and warranties of the Vanguard Trust made
in this Agreement are true and correct at and as of the Closing Date, except as
they may be affected by the transactions contemplated by this Agreement and as
to such other matters as the Schroder Trust may reasonably request.
6.3 The Schroder Trust will have received on the Closing Date a favorable
opinion from Morgan, Lewis & Bockius, LLP, counsel to the Vanguard Trust, dated
as of the Closing Date, in a form reasonably satisfactory to the Schroder Trust,
covering the following points:
(a) the Acquiring Fund is a separate series of the Vanguard Trust, a
business trust duly organized, validly existing and in good standing under the
laws of the State of Delaware and the Vanguard Trust has the corporate power to
own all of the Acquiring Fund's properties and assets and to carry on the
Acquiring Fund's business as presently conducted;
(b) the Vanguard Trust is registered as an investment company under the
1940 Act, and, to such counsel's knowledge, the Fund's registration with the
Commission as an investment company under the 1940 Act is in force and effect
with respect to the Acquiring Fund;
(c) this Agreement has been duly authorized, executed and delivered by the
Vanguard Trust and, assuming that the Prospectus, Registration Statement and
Proxy Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and the
rules and regulations under those laws and, assuming due authorization,
execution and delivery of the Agreement by the Schroder Trust, is a valid and
binding obligation of the Vanguard Trust enforceable against the Vanguard Trust
in accordance with its terms, subject to the effect of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and to general equity principles;
(d) the Acquiring Fund Shares to be issued to the Selling Fund's
shareholders as provided by this Agreement are duly authorized and upon delivery
will be validly issued and outstanding and are fully paid and non-assessable
with no personal liability attaching to ownership of the Shares, and no
shareholder of the Acquiring Fund has any preemptive rights to subscription or
purchase in respect of the Shares;
(e) the execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, result in a
violation of the Vanguard Trust's Declaration of Trust or in a material
violation of any provision of any agreement relating to the Acquiring Fund
(known to such counsel) to which the Vanguard Trust is a party or by which it or
its properties are bound or, to the knowledge of such counsel, result in the
acceleration of any obligation or the imposition of any penalty, under any
agreement, judgment, or decree to which the Vanguard Trust is a party or by
which it or its properties are bound;
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(f) to the knowledge of such counsel, no consent, approval, authorization
or order of any court or governmental authority of the United States or State of
Delaware is required for the consummation by the Vanguard Trust of the actions
contemplated in this Agreement, except such as have been obtained under the 1933
Act, the 1934 Act and the 1940 Act;
(g) the descriptions in the Proxy Statement, insofar as they relate to the
Vanguard Trust, the Acquiring Fund, or The Vanguard Group of statutes, legal and
governmental proceedings, investigations, orders, decrees or judgments of any
court or governmental body in the United States, and contracts and other
documents, if any, are accurate in all material respects and fairly present the
information required to be shown;
(h) such counsel does not know of any legal, administrative or governmental
proceedings, investigation, order, decree or judgment of any court or
governmental body, insofar as they relate to the Vanguard Trust or the Acquiring
Fund or its assets or properties, pending, threatened or otherwise existing on
or before the effective date of the Registration Statement or the Closing Date,
which are required to be described in the Registration Statement or to be filed
as exhibits to the Registration Statement that are not described and filed as
required; and
(i) the Vanguard Trust Registration Statement is effective under the 1933
Act and the 1940 Act and no stop-order suspending its effectiveness or order
pursuant to section 8(e) of the 1940 Act has been issued.
Counsel also will state that they have participated in conferences with
officers and other representatives of the Vanguard Trust at which the contents
of the Proxy Statement, the Vanguard Trust Registration Statement and related
matters were discussed and, although they are not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Proxy Statement and the Vanguard Trust Registration Statement
(except to the extent indicated in paragraph (g) of their above opinion), on the
basis of the foregoing information (relying as to materiality upon the opinions
of officers and other representatives of the Vanguard Trust), they do not
believe that the Proxy Statement and the Vanguard Trust Registration Statement
as of their respective dates, as of the date of the Selling Fund's shareholders'
meeting, and as of the Closing Date, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated in the Proxy
Statement and the Vanguard Trust Registration Statement or necessary to make the
statements in the Proxy Statement and the Vanguard Trust Registration Statement
in the light of the circumstances under which they were made not misleading.
The opinion may state that counsel does not express any opinion or belief
as to the Financial Statements or other financial data, or as to the information
relating to the Schroder Trust or the Selling Fund, contained in the Proxy
Statement, Registration Statement or the Vanguard Trust Registration Statement,
and that the opinion is solely for the benefit of the Schroder Trust and its
directors and officers. Such counsel may rely as to matters governed by the laws
of the State of Delaware on an opinion of local counsel and/or certificates of
officers or directors of the Acquiring Fund. The opinion also will include such
other matters incident to the transaction contemplated by this Agreement, as the
Schroder Trust may reasonably request.
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In this paragraph 6.3, references to the Proxy Statement include and relate
only to the text of such Proxy Statement and not, except as specifically stated
above, to any exhibits or attachments to the Proxy Statement or to any documents
incorporated by reference in the Proxy Statement.
ARTICLE VII
Conditions Precedent to the Obligations of the Vanguard Trust
-------------------------------------------------------------
The obligations of the Vanguard Trust to complete the transactions provided
for in this Agreement will be subject, at its election, to the performance by
the Schroder Trust of all the obligations to be performed by it under this
Agreement on or before the Closing Date and, in addition to those obligations,
the following conditions:
7.1 All representations and warranties of the Schroder Trust contained in
this Agreement will be true and correct in all material respects as of the date
of this Agreement and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date;
7.2 The Schroder Trust will have delivered to the Vanguard Trust a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs (and, if different
from tax costs, book costs) of those securities by lot and the holding periods
of the securities, as of the Closing Date, certified by the Treasurer or
Assistant Treasurer of the Schroder Trust;
7.3 The Schroder Trust will have delivered to the Vanguard Trust on the
Closing Date a certificate executed in its name, and on behalf of the Selling
Fund, by its President or Vice President and its Treasurer or Assistant
Treasurer, in form and substance satisfactory to the Vanguard Trust and dated as
of the Closing Date, to the effect that the representations and warranties of
the Schroder Trust made in this Agreement are true and correct at and as of the
Closing Date, except as they may be affected by the transactions contemplated by
this Agreement, and as to such other matters as the Vanguard Trust shall
reasonably request; and
7.4 The Vanguard Trust will have received on the Closing Date a favorable
opinion of Ropes & Gray, counsel to the Schroder Trust, dated as of the Closing
Date, in a form reasonably satisfactory to the Vanguard Trust, covering the
following points:
(a) the Selling Fund is a separate investment series of the Schroder Trust,
a business trust that is duly organized, validly existing and in good standing
under the laws of the State of Delaware and the Schroder Trust has the corporate
power to own all of the Selling Fund's properties and assets and to carry on the
Selling Fund's business as presently conducted;
(b) the Schroder Trust is registered as an investment company under the
1940 Act and, to such counsel's knowledge, the Schroder Trust's registration
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with the Commission as an investment company under the 1940 Act is in force and
effect with respect to the Selling Fund;
(c) this Agreement has been duly authorized, executed and delivered by the
Schroder Trust and, assuming that the Prospectus, the Registration Statement and
the Proxy Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations under those laws and, assuming due authorization,
execution and delivery of the Agreement by the Vanguard Trust, is a valid and
binding obligation of the Schroder Trust enforceable against the Schroder Trust
in accordance with its terms, subject to the effect of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other laws relating to or
affecting creditors, rights generally and to general equity principles;
(d) the execution and delivery of the Agreement did not, and the
consummation of the transactions contemplated by this Agreement will not, result
in a violation of the Schroder Trust's Declaration of Trust or a material
violation of any provision of any agreement (known to such counsel) to which the
Schroder Trust is a party or by which it or its properties are bound or, to the
knowledge of such counsel, result in the acceleration of any obligation or the
imposition of any penalty, under any agreement, judgment or decree to which the
Schroder Trust is a party or by which it or its properties are bound;
(e) to the knowledge of such counsel, no consent, approval, authorization
or order of any court or governmental authority of the United States or State of
Delaware is required for the consummation by the Schroder Trust of the
transactions contemplated in this Agreement, except such as have been obtained
under the 1933 Act, the 1934 Act and the 1940 Act;
(f) counsel does not know of any legal, administrative or governmental
proceedings, investigation, order, decree or judgment of any court or
governmental body, only insofar as they relate to the Schroder Trust or its
respective assets or properties, pending, threatened or otherwise existing on or
before the effective date of the Registration Statement or the Closing Date,
which are required to be described in the Registration Statement or to be filed
as exhibits to the Registration Statement that are not described and filed as
required or that materially and adversely affect the Selling Fund's business.
The opinion may state that counsel does not express any opinion or belief
as to the Financial Statements or other financial data, or as to the information
relating to the Vanguard Trust or the Acquiring Fund, contained in the Proxy
Statement or the Registration Statement, and that such opinion is solely for the
benefit of the Vanguard Trust and its directors and officers. The opinion also
will include such other matters incident to the transaction contemplated by this
Agreement as the Fund may reasonably request.
In this paragraph 7.4, references to the Proxy Statement include and relate
only to the text of the Proxy Statement and not to any exhibits or attachments
to the Proxy Statement or to any documents incorporated by reference in the
Proxy Statement.
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7.5 The Vanguard Trust will have received on the Closing Date a favorable
opinion of the General Counsel of Schroder Fund Advisors Inc. ("SFA") and
Secretary to the Schroder Trust (the "Schroder Officer"), dated as of the
Closing Date, in a form reasonably satisfactory to the Vanguard Trust, that the
description of the Schroder Trust, the Selling Fund, and Schroder Management in
the Proxy Statement is accurate in all material respects and fairly present the
information required to be shown.
The Schroder Officer also will state that such person has participated in
conferences with officers and other representatives of the Schroder Trust at
which the contents of the Proxy Statement and related matters were discussed
and, although such person is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Proxy Statement (except to the extent indicated in this
paragraph 7.5), on the basis of the foregoing information (relying as to
materiality to a large extent upon the opinions of officers and other
representatives of the Schroder Trust), she does not believe that the Proxy
Statement as of its date, as of the date of the Selling Fund's shareholder
meeting, and as of the Closing Date, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated in the Proxy
Statement regarding the Selling Fund or necessary in the light of the
circumstances under which they were made, to make the statements in the Proxy
Statement regarding the Selling Fund not misleading. The opinion referred to in
this paragraph 7.5 shall be given by the Schroder Officer solely in her capacity
as an officer of SFA and the Schroder Trust, and not personally.
In this paragraph 7.5, references to the Proxy Statement include and relate
only to the text of the Proxy Statement and not to any exhibits or attachments
to the Proxy Statement or to any documents incorporated by reference in the
Proxy Statement.
7.6 The Vanguard Trust will have received from PricewaterhouseCoopers LLP a
letter addressed to the Vanguard Trust dated as of the effective date of the
Registration Statement in form and substance satisfactory to the Vanguard Trust,
to the effect that:
(a) they are independent public accountants with respect to the Schroder
Trust within the meaning of the 1933 Act and the applicable regulations under
the 1933 Act;
(b) in their opinion, the Financial Statements and Financial Highlights of
the Selling Fund included or incorporated by reference in the Registration
Statement and reported on by them comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the rules and
regulations under the 1933 Act; and
(c) on the basis of limited procedures agreed upon by the Vanguard Trust
and the Schroder Trust and described in the letter (but not an examination in
accordance with generally accepted auditing standards), the specified
information relating to the Selling Fund appearing in the Registration Statement
and the Proxy Statement has been obtained from the accounting records of the
Selling Fund or from schedules prepared by officers of the Schroder Trust having
responsibility for financial and reporting matters and the information is in
agreement with these records, schedules or computations made from those
documents.
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7.7 The Schroder Trust will have delivered to the Vanguard Trust copies of
Financial Statements of the Selling Fund as of and for its most recently
completed fiscal year.
7.8 The Vanguard Trust shall have received from PricewaterhouseCoopers LLP
a letter addressed both to the Vanguard Trust and the Schroder Trust, dated as
of the Closing Date, stating that, as of a date no more than three (3) business
days prior to the Closing Date, PricewaterhouseCoopers LLP performed limited
procedures and that on the basis of those procedures it confirmed the matters
set forth in paragraph 7.6(c).
ARTICLE VIII
Further Conditions Precedent to Obligations of
the Acquiring Fund and the Selling Fund
----------------------------------------------------
8.1 The Agreement and the transactions contemplated in the Agreement will
have been approved by the requisite vote of the holders of the outstanding
shares of the Selling Fund in accordance with the provisions of the Schroder
Trust's Declaration of Trust and applicable law and certified copies of the
votes evidencing the approval will have been delivered to the Acquiring Fund.
8.2 On the Closing Date, no action, suit or other proceeding will be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated by this Agreement. On the Closing
Date, the Commission will not have issued an unfavorable report under Section
25(b) of the 1940 Act, nor instituted any proceeding seeking to enjoin the
consummation of the transactions contemplated by this Agreement under Section
25(c) of the 1940 Act, and no action, suit or other proceeding will be
threatened or pending before any court or governmental agency in which it is
sought to restrain or prohibit, or obtain damages or other relief in connection
with, this Agreement or the transactions contemplated by this Agreement.
8.3 All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including those of
the Commission and of state blue sky and securities authorities, including
no-action positions of and exemptive orders from federal and state authorities)
deemed necessary by the Vanguard Trust or the Schroder Trust to permit
consummation, in all material respects, of the transactions contemplated by this
Agreement will have been obtained, except if the failure to obtain any such
consent, order or permit would not involve a risk of a material adverse effect
on the assets or properties of the Acquiring Fund or the Selling Fund, provided
that either the Vanguard Trust or the Schroder Trust may for itself waive any of
the conditions in this paragraph 8.3.
8.4 The Vanguard Trust Registration Statement and the Registration
Statement will each have become effective under the 1933 Act and no stop orders
suspending the effectiveness of the Vanguard Trust Registration Statement and
the Registration Statement will have been issued and, to the best knowledge of
the Vanguard Trust or the Schroder Trust, no investigation or proceeding for
that purpose will have been instituted or be pending, threatened or contemplated
under the 1933 Act.
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8.5 The parties will have received a favorable opinion of Morgan, Lewis &
Bockius, LLP,, addressed to, and in form and substance satisfactory to the
Schroder Trust substantially to the effect that, provided the acquisition
contemplated hereby is carried out in accordance with this Agreement and based
upon customary certificates with respect to matters of fact from the officers of
the Schroder Trust and the Vanguard Trust, that for federal income tax purposes:
(a) the transfer of all or substantially all of the Selling Fund's assets
in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund
of the Liabilities of the Selling Fund will constitute a "reorganization" within
the meaning of Section 368(a)(1)(F) of the Code and the Acquiring Fund and the
Selling Fund are each a "party to a reorganization" within the meaning of
Section 368(b) of the Code; (b) no gain or loss will be recognized by the
Acquiring Fund upon the receipt of the assets of the Selling Fund solely in
exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of
the Liabilities of the Selling Fund; however, no opinion will be expressed as to
whether any accrued market discount will be required to be recognized as
ordinary income; (c) no gain or loss will be recognized by the Selling Fund upon
the transfer of the Selling Fund's assets to the Acquiring Fund in exchange for
the Acquiring Fund Shares and the assumption by the Acquiring Fund of the
Liabilities of the Selling Fund or upon the distribution of the Acquiring Fund
Shares to the Selling Fund's shareholders in exchange for their shares of the
Selling Fund; (d) no gain or loss will be recognized by shareholders of the
Selling Fund upon the exchange of their Selling Fund Shares for the Acquiring
Fund Shares and the assumption by the Acquiring Fund of the Liabilities of the
Selling Fund; (e) the aggregate tax basis for the Acquiring Fund Shares received
by each of the Selling Fund Shareholders pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund Shares held by the
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund shareholder will
include the period during which the Selling Fund Shares exchanged for the
Acquiring Fund Shares were held by the shareholder (provided that the Selling
Fund Shares were held as capital assets on the date of the Reorganization); and
(f) the tax basis of the Selling Fund's assets acquired by the Acquiring Fund
will be the same as the tax basis of the assets to the Selling Fund immediately
prior to the Reorganization, and the holding period of the assets of the Selling
Fund in the hands of the Acquiring Fund will include the period during which
those assets were held by the Selling Fund.
Notwithstanding anything in this Agreement to the contrary, neither the
Vanguard Trust nor the Schroder Trust may waive the conditions set out in this
paragraph 8.5.
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ARTICLE IX
Brokerage Fees and Expenses; Other Agreements
---------------------------------------------
9.1 The Vanguard Trust represents and warrants to the Schroder Trust, and
the Schroder Trust represents and warrants to the Vanguard Trust, that no
brokers or finders or other entities are entitled to receive any payments in
connection with the transactions provided for in this Agreement.
9.2 The Vanguard Group, the Schroder Trust and Schroder Management shall
each bear the fees, costs, and expenses incurred in connection with the
transactions contemplated by this Agreement in the manner set forth in the Fund
Sponsorship Agreement, dated February 4, 2002, to which The Vanguard Group and
Schroder Management are parties; provided, however, that (i) the Acquiring Fund
shall bear the fees, costs, and expenses of PricewaterhouseCoopers LLP in
performing the audit of the financial statements of the Selling Fund and the
Acquiring Fund for the fiscal year ending October 31, 2002, and (ii) the fees,
costs, and expenses of PricewaterhouseCoopers LLP in performing the limited
procedures and issuing the related letter pursuant to paragraphs 7.6 and 7.8
(the "Limited Procedures Expenses") shall be shared equally by The Vanguard
Group and the Schroder Trust.
9.3 (a) Schroder Management will indemnify and hold harmless the
Vanguard Trust, the Acquiring Fund, The Vanguard Group, their directors,
officers, employees, and affiliates (each, a "Vanguard Indemnified Party"), from
and against any and all damages, costs and expenses (including reasonable
attorney's fees and costs) incurred by any of them as a result of any breach or
failure of the Schroder Trust's representations or warranties under this
Agreement, or as a result of any willful misconduct or gross negligence by the
Schroder Trust in the performance (or failure to perform) of the Schroder
Trust's obligations under this Agreement.
(b) Schroder Management's agreement to indemnify a Vanguard Indemnified
Party pursuant to this paragraph 9.3 is expressly conditioned upon Schroder
Management's being promptly notified of any action or claim brought against any
Vanguard Indemnified Party after that party receives notice of the action. The
failure of a Vanguard Indemnified Party to notify Schroder Management will not
relieve Schroder Management from any liability that Schroder Management may have
otherwise than on account of this indemnification agreement.
(c) In case any action or claim is brought against any Vanguard Indemnified
Party and that party timely notifies Schroder Management of the commencement of
the action or claim, Schroder Management will be entitled to participate in and,
to the extent that it wishes to do so, to assume the defense of the action or
claim with counsel satisfactory to it. If Schroder Management decides to assume
the defense of the action, Schroder Management will not be liable to the
Vanguard Indemnified Party for any legal or other expenses subsequently incurred
by the Vanguard Indemnified Party in connection with the defense of the action
or claim other than: (i) reasonable costs of investigation or the furnishing of
documents or witnesses and (ii) all reasonable fees and expenses of separate
counsel to the Vanguard Indemnified Party if the Vanguard Indemnified Party has
concluded reasonably that representation of Schroder Management and the Vanguard
Indemnified Party would be inappropriate as a result of actual or potential
differing interests between them in the conduct of the defense of such action.
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9.4 (a) The Vanguard Group will indemnify and hold harmless the Schroder
Trust, the Selling Fund, Schroder Management, their directors, officers,
employees and affiliates (each, a "Schroder Indemnified Party") from and against
any and all damages (including reasonable attorney's fees and costs) incurred by
any of them as a result of any breach or failure of the Vanguard Trust's
representations or warranties under this Agreement, or as a result of any
willful misconduct or gross negligence by the Vanguard Trust in the performance
(or failure to perform) of the Vanguard Trust's obligations under this
Agreement.
(b) The Vanguard Group's agreement to indemnify a Schroder Indemnified
Party pursuant to this paragraph 9.4 is expressly conditioned upon The Vanguard
Group's being promptly notified of any action or claim brought against any
Schroder Indemnified Party after that party receives notice of the action. The
failure of a Schroder Indemnified Party to notify The Vanguard Group will not
relieve The Vanguard Group from any liability that The Vanguard Group may have
otherwise than on account of this indemnification agreement.
(c) In case any action or claim is brought against any Schroder Indemnified
Party and that party timely notifies The Vanguard Group of the commencement of
the action or claim, The Vanguard Group will be entitled to participate in and,
to the extent that it wishes to do so, to assume the defense of the action or
claim with counsel satisfactory to it. If The Vanguard Group decides to assume
the defense of the action, The Vanguard Group will not be liable to the Schroder
Indemnified Party for any legal or other expenses subsequently incurred by the
Schroder Indemnified Party in connection with the defense of the action or claim
other than: (i) reasonable costs of investigation or the furnishing of documents
or witnesses and (ii) all reasonable fees and expenses of separate counsel to
the Schroder Indemnified Party if the Schroder Indemnified Party has concluded
reasonably that representation of The Vanguard Group and the Schroder
Indemnified Party would be inappropriate as a result of actual or potential
differing interest between them in the conduct of the defense as a result of the
action.
ARTICLE X
Entire Agreement; Survival of Representations, Warranties and Covenants
-----------------------------------------------------------------------
10.1 The Vanguard Trust and the Schroder Trust agree that neither of them
has made any representation, warranty or covenant not set forth in this
Agreement and that this Agreement represents the entire agreement among them.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered in accordance with its terms will survive
the consummation of the transactions contemplated under this Agreement.
A-20
ARTICLE XI
Termination
-----------
11.1 This Agreement may be terminated at any time at or prior to the
Closing Date by: (i) mutual agreement of the Schroder Trust and the Vanguard
Trust; (ii) the Schroder Trust, in the event the Vanguard Trust has, or the
Vanguard Trust in the event the Schroder Trust has, materially breached any
representation, warranty or agreement contained in this Agreement to be
performed at or prior to the Closing Date; or (iii) the Schroder Trust, or the
Vanguard Trust in the event a condition included in this Agreement expressed to
be precedent to the obligations of the terminating party or parties has not been
met and it reasonably appears that it will not or cannot be met.
11.2 In the event of any such termination, the Vanguard Trust or the
Schroder Trust, or their respective directors or officers, will not be liable to
the other party or parties.
ARTICLE XII
Amendments
----------
This Agreement may be amended, modified or supplemented in writing in such
manner as may be mutually agreed upon by the authorized officers of the Vanguard
Trust and the Schroder Trust; provided, however, that following the meeting of
the Selling Fund's shareholders called pursuant to paragraph 5.2 of this
Agreement, no amendment may have the effect of changing the provisions for
determining the number of the Acquiring Fund Shares to be issued to the Selling
Fund's Shareholders under this Agreement to the detriment of the shareholders
without their further approval.
ARTICLE XIII
Notices
-------
13.1 Any notice, report, statement or demand required or permitted by any
provisions of this Agreement will be in writing and given by prepaid telegraph,
telecopy, or certified mail as follows:
If to the Vanguard Trust, at:
Vanguard Whitehall Funds
P.O. Box 2600
Valley Forge, PA 19482
Attention: Joel M. Dickson
Telephone: 610-669-5846
Facsimile: 610-503-5855
A-21
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-2921
Attention: Timothy W. Levin, Esq.
Telephone: 215-963-5037
Facsimile: 215-963-5299
If to the Schroder Trust, at:
Schroder Capital Funds (Delaware)
875 Third Avenue
22nd Floor
New York, New York 10022
Attention: Catherine A. Mazza
Telephone: 212-641-3889
Facsimile: 212-641-3897
With a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Attention: Timothy W. Diggins, Esq.
Telephone: 617-951-7389
Facsimile: 617-951-7050
ARTICLE XIV
Headings; Counterparts; Governing Law; Assignment; Limitation of Liability
--------------------------------------------------------------------------
14.1 The article and paragraph headings contained in this Agreement are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with
the laws (without giving effect to the conflicts-of-law principles thereof) of
the Commonwealth of Pennsylvania.
14.4 This Agreement will bind and inure to the benefit of the parties to
the Agreement and their respective successors and assigns, but no assignment or
transfer of the Agreement or of any rights or obligations under the Agreement
may be made by either party without the written consent of the other party.
A-22
Nothing expressed or implied in this Agreement is intended or may be construed
to confer upon or give any person, firm or corporation, other than the parties
to the Agreement and their respective successors and assigns, any rights or
remedies under or by reason of this Agreement.
14.5 The Schroder Trust is executing this Agreement solely on behalf of the
Selling Fund. References to the "Schroder Trust" shall be construed to refer
solely to the Schroder Trust acting on behalf of the Selling Fund, and no
liability shall accrue to the Schroder Trust generally or to any other fund in
respect of this Agreement or any of the obligations hereunder, and each of the
parties will look only to the assets of the Selling Fund for satisfaction of any
obligation or liability arising under or in respect of this Agreement.
Notice is hereby given that this instrument is executed on behalf of the
Trustees of the Schroder Trust as Trustees and not individually, and that the
obligations of or arising out of this instrument are not binding upon any of the
Trustees, officers, or shareholders individually but are binding only upon the
assets and property of the Selling Fund.
14.6 The Vanguard Trust is executing this Agreement solely on behalf of the
Acquiring Fund. References to the "Vanguard Trust" shall be construed to refer
solely to the Vanguard Trust acting on behalf of the Acquiring Fund, and no
liability shall accrue to the Vanguard Trust generally or to any other fund in
respect of this Agreement or any of the obligations hereunder, and each of the
parties will look only to the assets of the Acquiring Fund for satisfaction of
any obligation or liability arising under or in respect of this Agreement.
Notice is hereby given that this instrument is executed on behalf of the
Trustees of the Vanguard Trust as Trustees and not individually, and that the
obligations of or arising out of this instrument are not binding upon any of the
Trustees, officers, or shareholders individually but are binding only upon the
assets and property of the Acquiring Fund.
* * * * *
A-23
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan
of Reorganization to be executed as of the date first set forth herein.
SCHRODER CAPITAL FUNDS (DELAWARE) VANGUARD WHITEHALL FUNDS
- ----------------------------------- ------------------------------------
Signature Date Signature Date
- ----------------------------------- ------------------------------------
Print Name Title Print Name Title
SCHRODER INVESTMENT MANAGEMENT THE VANGUARD GROUP (as to the
NORTH AMERICA INC. (as to the provisions of provisions of
Paragraphs 9.2 and 9.3 only) Paragraphs 9.2 and 9.4 only)
- ----------------------------------- ------------------------------------
Signature Date Signature Date
- ----------------------------------- ------------------------------------
Print Name Title Print Name Title
A-24
SCHRODER CAPITAL FUNDS (DELAWARE)
PROXY SOLICITED BY THE BOARD OF TRUSTEES
PROXY FOR MEETING OF SHAREHOLDERS ON JUNE 18, 2002
The undersigned hereby appoints Barbara Gottlieb, Catherine A. Mazza, and Carin
F. Muhlbaum, and each of them separately, proxies, with power of substitution to
each, and hereby authorizes them, or any of them, to represent and to vote, as
designated below, at the Meeting of Shareholders (the "Meeting") of Schroder
International Smaller Companies Fund (the "Fund"), a series of Schroder Capital
Funds (Delaware) (the "Trust"), to be held at the offices of the Trust, 875
Third Avenue, 22nd Floor, New York, New York 10022 on June 18, 2002, at 10:00
a.m. (Eastern Time), and at any adjournments thereof, all of the shares of the
Fund which the undersigned would be entitled to vote if personally present.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE SHAREHOLDER SIGNING BELOW. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
IN FAVOR OF THE PROPOSAL.
TO VOTE BY MAIL, PLEASE VOTE, SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
Note: PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ON THIS PROXY CARD. All joint
owners should sign. When signing as executor, administrator, attorney, trustee
or guardian, or as custodian for a minor, please sign in full corporate name,
and indicate the signer's office. If a partner, sign in the partnership name.
Proposal 1. Approval of the reorganization of Schroder International
Smaller Companies Fund into Vanguard International
Explorer Fund.
[ ] For [ ] Against [ ] Abstain
-------------------------------------------
Signature of Shareholder
-------------------------------------------
Signature (Joint Owner)
PART B
VANGUARD(R) WHITEHALL FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
MAY ______, 2002
This Statement is not a prospectus but provides additional information with
respect to the following:
A proposal to reorganize Schroder International Smaller Companies Fund
(Schroder Fund), a series of Schroder Capital Funds (Delaware), a Delaware
business trust (Schroder Trust), into Vanguard International Explorer Fund,
a series of the Trust, as further described in the related combined
prospectus/proxy statement, dated May ______, 2002 (Schroder Proxy).
A proposal to reorganize Provident Investment Counsel Mid Cap Fund A
(Provident Fund), a series of PIC Investment Trust, a Delaware business
trust (Provident Trust), into Vanguard Mid-Cap Growth Fund, a series of the
Trust, as further described in a separately filed combined prospectus/proxy
statement (Provident Proxy).
This Statement contains information that may be of interest to shareholders
of the Schroder Fund or the Provident Fund but which is not included in the
Schroder Proxy or the Provident Proxy. This Statement should be readin
conjunction with the Schroder Proxy and the Provident Proxy (each, a Proxy, and
collectively, the Proxies), which may be obtained without charge by calling:
Schroder Proxy
Schroder Investment Management North America Inc.
800-464-3108
Provident Proxy
Provident Investment Counsel, Inc.
800-618-7643
INVESTOR INFORMATION DEPARTMENT:
1-800-662-7447
TABLE OF CONTENTS
PAGE
DESCRIPTION OF THE TRUST.........................................B-2
INVESTMENT POLICIES..............................................B-3
INVESTMENT LIMITATIONS...........................................B-9
YIELD AND TOTAL RETURN...........................................B-12
SHARE PRICE......................................................B-16
PURCHASE OF SHARES...............................................B-16
REDEMPTION OF SHARES.............................................B-16
MANAGEMENT OF THE FUNDS..........................................B-17
INVESTMENT ADVISORY SERVICES.....................................B-18
PORTFOLIO TRANSACTIONS...........................................B-20
FINANCIAL STATEMENTS.............................................B-20
COMPARATIVE INDEXES..............................................B-20
B-1
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as a Maryland corporation in 1995, and was
reorganized as a Delaware business trust in June, 1998. Prior to its
reorganization as a Delaware business trust, the Trust was known as Vanguard
Whitehall Funds, Inc. The Trust is registered with the United States Securities
and Exchange Commission (the Commission) under the Investment Company Act of
1940 (the 1940 Act) as an open-end, diversified management investment company.
It currently offers Vanguard Selected Value Fund, which offers a single class of
shares. The Trust has created the following additional funds that have not yet
commenced operations, each of which offers a single class of shares:
Vanguard International Explorer Fund
Vanguard Mid-Cap Growth Fund
(individually, a Fund; collectively, the Funds)
Vanguard International Explorer Fund was formed in connection with the
proposed reorganization of the Schroder Fund, which is sponsored by Schroder
Investment Management North America Inc. (Schroders). Under the proposal, the
assets and liabilities of the Schroder Fund would be transferred in a tax-free
transaction to Vanguard International Explorer Fund, a substantially similar
fund created just for this purpose. If the proposed reorganization is not
approved by shareholders of the Schroder Fund, Vanguard International Explorer
Fund will not commence operations.
Vanguard Mid-Cap Growth Fund was formed in connection with the proposed
reorganization of the Provident Fund, which is sponsored by Provident Investment
Counsel, Inc. (Provident). Under the proposal, the assets and liabilities of the
Provident Fund would be transferred in a tax-free transaction to Vanguard
Mid-Cap Growth Fund, a substantially similar fund created just for this purpose.
If the proposed reorganization is not approved by shareholders of the Provident
Fund, Vanguard Mid-Cap Growth Fund will not commence operations.
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 each Fund may
issue.
SERVICE PROVIDERS
CUSTODIAN. Because the Funds have not commenced operations, they have not
yet selected their custodians. The Funds will select custodians if the proposed
reorganizations are approved by shareholders of the Schroders Fund and the
Provident Fund, as applicable. The custodians will be responsible for
maintaining the Funds' assets and keeping all necessary accounts and records of
Fund assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, Two Commerce Square,
Suite 1700, 2001 Market Street, Philadelphia, PA 19103, is expected to serve as
the Funds' independent accountants if the proposed reorganizations are approved.
The accountants audit the Funds' annual financial statements and provide other
related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent will be The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, PA 19355.
CHARACTERISTICS OF THE FUNDS' SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Funds' shares, other
than the possible future termination of the Funds. The Trust or any of its
fund(s) may be terminated by reorganization into another mutual fund or by
liquidation and distribution of the assets of the affected fund. Unless
terminated by reorganization or liquidation, the Funds will continue
indefinitely.
SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of a Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a
B-2
financial loss on account of a Fund obligation only if the Fund itself had no
remaining assets with which to meet such obligation. We believe that the
possibility of such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a Fund are entitled to receive any
dividends or other distributions declared for such Fund. No shares have priority
or preference over any other shares of the same Fund with respect to
distributions. Distributions will be made from the assets of a Fund, and will be
paid ratably to all shareholders of the Fund according to the number of shares
of such Fund 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 a Fund's net assets, and to change any fundamental
policy of a Fund. Unless otherwise required by applicable law, shareholders of
each Fund receive one vote for each dollar of net asset value owned on the
record date, and a fractional vote for each fractional dollar of net asset value
owned on the record date. However, only the shares of the fund affected by a
particular matter are entitled to vote on that matter. Voting rights are
non-cumulative and cannot be modified without a majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rate share of the applicable Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with each
Fund's shares.
CONVERSION RIGHTS. There are no conversion rights associated with each
Fund's shares.
REDEMPTION PROVISIONS. Each Fund's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.
CALLS OR ASSESSMENT. Each Fund's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE FUND
Each of Vanguard International Explorer Fund and Vanguard Mid-Cap Growth
Fund expects to qualify as a "regulated investment company" under Subchapter M
of the Internal Revenue Code. This special tax status means that a Fund will not
be liable for federal tax on income and capital gains distributed to
shareholders. In order to preserve its tax status, each Fund must comply with
certain requirements. If a Fund fails to meet these requirements in any taxable
year, it will be subject to tax on its taxable income at corporate rates, and
all distributions from earnings and profits, including any distributions of net
tax-exempt income and net long-term capital gains, will be taxable to
shareholders as ordinary income. In addition, 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.
INVESTMENT POLICIES
Some of the investment policies described below and in the Proxies set
forth percentage limitations on a 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 a Fund's investment policies and limitations.
The following policies supplement the Funds' investment policies set forth
in the applicable Proxy:
Vanguard Mid-Cap Growth Fund invests at least 80% of its assets (net assets
plus any borrowings for investment purposes) in common stocks of medium size
companies. This policy may only be changed upon 60 days notice to shareholders.
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements with
commercial banks, brokers, or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Fund acquires a money
market instrument (generally a security issued by the U.S. Government or an
agency thereof, a banker's
B-3
acceptance or a certificate of deposit) from a commercial bank, broker or
dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan by the Fund collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by the
Fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by a custodian bank until repurchased. In
addition, the Funds' board of trustees will monitor the Funds' 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.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by a Fund not within the control of the Fund
and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that a 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. While the adviser
acknowledges these risks, it is expected that they can be controlled through
careful monitoring procedures.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on a Fund's books.
Each Fund may invest in restricted, privately placed securities that, under
the Commission's rules, may be sold only to qualified institutional buyers.
Because these securities can be resold only to qualified institutional buyers,
or after they have been held for a number of years, they may be considered
illiquid securities--meaning that they would be difficult for a Fund to convert
to cash if needed.
If a substantial market develops for a restricted security held by a Fund,
it may be treated as a liquid security, in accordance with procedures and
guidelines approved by the Funds' board of trustees. This generally includes
securities that are unregistered than can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933. While each
Fund's investment adviser determines the liquidity of restricted securities on a
daily basis, the board oversees and retains ultimate responsibility for the
adviser's decisions. Several factors that the board considers in monitoring
these decisions include the valuation of a security, the availability of
qualified institutional buyers, and the availability of information about the
security's issuer.
FOREIGN INVESTMENTS. Each Fund may invest up to 20% of its assets (and
Vanguard International Explorer Fund will invest primarily) in securities of
foreign companies. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies.
Currency Risk. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since each fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Funds will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the International Explorer and
Mid-Cap Growth Funds permit them to enter into forward foreign currency exchange
contracts in order to hedge holdings and commitments against changes in the
level of future currency rates. Such contracts involve an obligation to purchase
or sell a specific currency at a future date at a price set at the time of the
contract.
Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies than in the U.S. In addition, with respect to certain foreign
countries, there is the
B-4
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect U.S. investments in
those countries.
Although each Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions, commissions on many foreign stock exchanges are
generally higher than commissions on U.S. exchanges. In addition, it is expected
that the expenses for custodial arrangements of a Fund's foreign securities will
be somewhat greater than the expenses for custodial arrangements for handling
U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from foreign companies held by a Fund. However, these
foreign withholding taxes are not expected to have a significant impact on the
Funds, since the Funds seek long-term capital appreciation and any income should
be considered incidental.
Emerging Market Investments. Vanguard International Explorer Fund is
permitted to invest in a limited portion of its assets in the securities of
issuers domiciled or doing business in emerging market countries. Investing in
emerging market countries involves certain risks not typically associated with
investing in U.S. securities, and imposes risks greater than, or in addition to,
risks of investing in foreign, developed countries. These risks include: 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 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.
Federal Tax Treatment of Non-U.S. Transactions. Special rules govern the
Federal income tax treatment of certain transactions denominated in foreign
currency or determined by reference to the value of one or more foreign
currencies. The types of transactions covered by the special rules include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option, or similar financial instrument if such
instrument is not marked to market. The disposition of a currency other than the
U.S. dollar by a taxpayer whose functional currency is the U.S. dollar is also
treated as a transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are generally
not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the marking-to-market rules
applicable to other futures contracts unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary income or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts, and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle.
The Treasury Department issued regulations under which certain transactions
subject to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency
B-5
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 the Fund may make or enter into will be subject to the
special currency rules described above.
Foreign Tax Credit. Foreign governments may withhold taxes on dividends and
interest paid with respect to foreign securities. If, at the close of its fiscal
year, more than 50% of Vanguard International Explorer 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 tax credit or
deduction on their tax returns. If shareholders meet certain holding period
requirements with respect to Fund shares, an offsetting tax credit may be
available. If shareholders do not meet the holding period requirements, they may
still be entitled to a deduction for certain foreign taxes. In either case, a
shareholder's tax statement will show more taxable income or capital gains than
were actually distributed by the Fund, but will also show the amount of the
available offsetting credit or deduction.
FUTURES AND OPTIONS CONTRACTS. Each Fund may enter into stock futures
contracts, options, and options on futures contracts for several reasons: to
maintain cash investments while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher investment returns when
a futures contract is priced more attractively than the underlying equity
security or index. Futures contracts provide for the future sale by one party
and purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. Futures contracts which are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a
U.S. Government agency. To the extent required by law, a fund will establish a
segregated account containing liquid assets at least equal in value to the
amount of any obligation assumed by the fund under a futures contract.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been sold, or selling a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. Each Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. Each Fund intends to use futures contracts
only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Funds require that all of their
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of a Fund's
portfolio. The Funds will
B-6
only sell futures contracts to protect securities they own against price
declines or purchase contracts to protect against an increase in the price of
securities they intend to purchase. As evidence of this hedging interest, the
Funds expect that approximately 75% of all futures contract purchases will be
"completed;" that is, equivalent amounts of related securities will have been
purchased or are being purchased by the Funds upon sale of open futures
contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Funds' exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
a Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of portfolio securities.
Restrictions on the Use of Futures Contracts. A Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the Fund's
total assets. In addition, the Fund will not enter into futures contracts to the
extent that its outstanding obligations to purchase securities under these
contracts would exceed 20% of the Fund's total assets.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a 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
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge. Each Fund will minimize the
risk that it will be unable to close out a futures contract by only entering
into futures which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Funds are engaged in only for hedging purposes, the investment
advisers do not believe that the Funds are subject to the risks of loss
frequently associated with futures transactions. A Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by a Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
Federal Tax Treatment of Futures Contracts. Each Fund is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts held
B-7
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. The Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for a Fund to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of securities or
foreign currencies or other income derived with respect to the Fund's business
of investing in such 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.
Each Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Fund's other investments and shareholders will be advised
on the nature of the transactions.
LENDING OF SECURITIES. Each 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 securities, a Fund
will be attempting to increase its net investment income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Fund. The terms and the structure and the aggregate amount of such loans
must be consistent with the 1940 Act, and the Rules or interpretations of the
Commission thereunder. These provisions limit the amount of securities a fund
may lend to 33 1/3% of the Fund's total assets (although Vanguard Mid-Cap Growth
Fund has an operating policy of limiting the amount of loans to not more than
25% of the value of the total assets of the Fund), and require that (a) the
borrower pledge and maintain with the Fund collateral consisting of cash, an
irrevocable letter of credit or securities issued or guaranteed by the United
States Government having a value at all times not less than 100% of the value of
the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the borrower "marks to the market"
on a daily basis), (c) the loan be made subject to termination by the Fund at
any time and (d) 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 rules 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 broker,
dealer, or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Funds' board of trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company trustees. In addition, voting rights pass
with the loaned securities, but if a material event occurs that affects the
securities on loan, the fund must call the loan and vote the securities.
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Funds and other 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 fund may participate in the program only if and to
the extent that
B-8
such participation is consistent with the fund's investment objective and other
investment policies. The boards of trustees of the Vanguard funds are
responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the Commission's exemptive order.
WHEN-ISSUED SECURITIES. When-issued or delayed delivery securities are
subject to market fluctuations due to changes in market interest rates, and it
is possible that the market value at the time of settlement could be higher or
lower than the purchase price if the general level of interest rates has
changed. Although a Fund generally purchases securities on a when-issued or
forward commitment basis with the intention of actually acquiring securities for
its investment portfolio, a Fund may dispose of a when-issued security or
forward commitment prior to settlement if it deems this to be appropriate.
SHORT SALES. To the extent permitted under "Investment Restrictions" below
and in the Prospectus, Vanguard International Explorer Fund may seek to hedge
investments or realize additional gains through short sales. Short sales are
transactions in which the Fund sells a security it does not own, in anticipation
of a decline in the market value of that security. To complete such a
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. The 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.
TEMPORARY INVESTMENTS. Each Fund may take temporary defensive measures that
are inconsistent with the Fund's normal investment policies and strategies in
response to adverse market, economic, political or other conditions. Such
measures could include investments in (a) highly liquid short-term fixed income
securities issued by or on behalf of municipal or corporate issuers, obligations
of the U.S. Government and its agencies, commercial paper, and bank certificates
of deposit; (b) shares of other investment companies which have investment
objectives consistent with those of the Funds; (c) repurchase agreements
involving any such securities; and (d) other money market instruments. There is
no limit on the extent to which a Fund may take temporary defensive measures. In
taking such measures, the Fund may fail to achieve its investment objective.
INVESTMENT LIMITATIONS
VANGUARD INTERNATIONAL EXPLORER FUND
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) 67% or more of the Fund's net
assets voted, so long as shares representing more than 50% of the 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 borrow money or issue senior securities only as
permitted under the Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
B-9
COMMODITIES. The Fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other instruments. This
limitation shall not prevent the Fund from purchasing, selling or entering into
securities or other instruments backed by physical commodities, foreign
currencies, foreign currency forward contracts, foreign currency options,
futures contracts, options on futures contracts, swap agreements, or other
derivative instruments, subject to compliance with applicable provisions of the
federal securities and commodities laws.
DIVERSIFICATION. The Fund may not change its classification as a
"management company" or its subclassifications as an "open-end company" and as a
"diversified company" as each such term is defined in the Investment Company Act
of 1940, as amended, and as interpreted, modified, or otherwise permitted by
regulatory authority having jurisdiction, from time to time.
INDUSTRY CONCENTRATION. The Fund may not concentrate its investments in a
particular industry or group of industries, within the meaning of the Investment
Company Act of 1940, as amended, and as interpreted, modified, or otherwise
permitted by regulatory authority having jurisdiction, from time to time.
LOANS. The Fund may make loans only as permitted under the Investment
Company Act of 1940, as amended, and as interpreted, modified, or otherwise
permitted by regulatory authority having jurisdiction, from time to time.
REAL ESTATE. The Fund may not purchase or sell real estate unless acquired
as a result of ownership of securities or other instruments. This limitation
shall not prevent the Fund from investing in securities or other instruments
backed by real estate or securities issued by any company engaged in the real
estate business.
SENIOR SECURITIES. The Fund may borrow money or issue senior securities
only as permitted under the Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
UNDERWRITING. The Fund may not act as an underwriter of another issuer's
securities, except to the extent that the Fund may be deemed to be an
underwriter within the meaning of the Securities Act of 1933, as amended, in
connection with the purchase and sale of portfolio securities.
The Fund also has the following operational, NON-FUNDAMENTAL policies:
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 whenever its
outstanding borrowings exceed 5% of net assets.
COMMODITIES. 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 obligated under futures contracts, options, swap agreements,
or other derivative instruments at any time.
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 fundamental investment limitation governing
concentration of the Fund's investments in a particular industry or group of
industries shall not be deemed to (1) limit the ability of the Fund to invest in
securities issued by any company or group of companies located in any country or
group of countries, or (2) limit the ability of the Fund to invest in
obligations issued or guaranteed by any government, or any agency or
instrumentality of any government, of any country.
LOANS. The Fund may not lend money to any person except by purchasing fixed
income securities that are publicly distributed or customarily purchased by
institutional investors, by lending its portfolio securities, or 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.
PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more
than 15% of its net assets.
PUTS AND CALLS. The Fund may not purchase or sell put options or call
options, except as provided in the prospectus.
B-10
VANGUARD MID-CAP GROWTH FUND
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) 67% or more of the Fund's net assets
voted, so long as shares representing more than 50% of the 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 borrow money or issue senior securities only as
permitted under the Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
COMMODITIES. The Fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other instruments. This
limitation shall not prevent the Fund from purchasing, selling or entering into
securities or other instruments backed by physical commodities, foreign
currencies, foreign currency forward contracts, foreign currency options,
futures contracts, options on futures contracts, swap agreements, or other
derivative instruments, subject to compliance with applicable provisions of the
federal securities and commodities laws.
DIVERSIFICATION. The Fund may not change its classification as a
"management company" or its subclassifications as an "open-end company" and as a
"diversified company" as each such term is defined in the Investment Company Act
of 1940, as amended, and as interpreted, modified, or otherwise permitted by
regulatory authority having jurisdiction, from time to time.
INDUSTRY CONCENTRATION. The Fund may not concentrate its investments in a
particular industry or group of industries, within the meaning of the Investment
Company Act of 1940, as amended, and as interpreted, modified, or otherwise
permitted by regulatory authority having jurisdiction, from time to time.
LOANS. The Fund may make loans only as permitted under the Investment
Company Act of 1940, as amended, and as interpreted, modified, or otherwise
permitted by regulatory authority having jurisdiction, from time to time.
REAL ESTATE. The Fund may not purchase or sell real estate unless acquired
as a result of ownership of securities or other instruments. This limitation
shall not prevent the Fund from investing in securities or other instruments
backed by real estate or securities issued by any company engaged in the real
estate business.
SENIOR SECURITIES. The Fund may borrow money or issue senior securities
only as permitted under the Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
UNDERWRITING. The Fund may not act as an underwriter of another issuer's
securities, except to the extent that the Fund may be deemed to be an
underwriter within the meaning of the Securities Act of 1933, as amended, in
connection with the purchase and sale of portfolio securities.
The Fund also has the following operational, NON-FUNDAMENTAL policies:
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 whenever its
outstanding borrowings exceed 5% of net assets.
COMMODITIES. 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 obligated under futures contracts, options, swap agreements,
or other derivative instruments at any time.
INDUSTRY CONCENTRATION. The fundamental investment limitation governing
concentration of the Fund's investments in a particular industry or group of
industries shall not be deemed to (1) limit the ability of the Fund to invest in
securities issued by any company or group of companies located in any country or
group of countries, or (2) limit the ability of the Fund to invest in
obligations issued or guaranteed by any government, or any agency or
instrumentality of any government, of any country.
B-11
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.
INVESTING FOR CONTROL. The Fund may not investment in a company for
purposes of controlling its management.
INVESTMENT COMPANIES. The Fund may invest in any other investment company
only as permitted under the Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
LOANS. The Fund may not lend money to any person except by purchasing fixed
income securities that are publicly distributed or customarily purchased by
institutional investors, by lending its portfolio securities, or through
Vanguard's interfund lending program.
MARGIN. The Fund may purchase securities on margin or sell securities
short, 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 nets assets.
PURCHASES ON MARGIN. The Fund may not purchase securities on margin.
PUTS AND CALLS. The Fund may not purchase or sell put options or call
options, except as provided in the prospectus.
SHORT SALES. The Fund may not sell securities short.
The above-mentioned investment limitations for each Fund are considered at
the time investment securities are purchased. If a percentage restriction is
adhered to at the time the investment is made, a later increase in percentage
resulting from a change in the market value of assets will not constitute a
violation of such restriction. None of these limitations prevents a Fund from
participating in The Vanguard Group, Inc. (Vanguard). As a member of The
Vanguard Group of Investment Companies, each 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 Funds" for more information.
YIELD AND TOTAL RETURN
Vanguard International Explorer Fund and Vanguard Mid-Cap Growth Fund have
not commenced operations, so performance information (including yield and
average annual total returns) for a full calendar year is not yet available.
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)
B-12
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.
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
ATV\\D\\ =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). For periods after December 31, 1997, the federal marginal tax rates
used for the calculations are 39.6% for ordinary income and short-term
capital gains and 20% for long-term capital gains. Note that the applicable
tax rates may vary over the measurement period. 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.
B-13
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.
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
ATV\\DR\\ =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). For periods after December 31, 1997, the federal marginal tax rates
used for the calculations are 39.6% for ordinary income and short-term
capital gains and 20% for long-term capital gains. Note that the applicable
tax rates may vary over the measurement period. 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.
B-14
(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) 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 YIELD
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)/6/ - 1]
Where:
a =dividends and interest earned during the period
b =expenses accrued for the period (net of reimbursements)
c =the average daily number of shares outstanding during
the period that were entitled to receive dividends
d =the maximum offering price per share on the last day of
the period
B-15
SHARE PRICE
Each 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 of the Fund by the number of Fund shares outstanding.
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 net asset value 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.
PURCHASE OF SHARES
The purchase price of shares of each 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 regular close of the Exchange on each day the Exchange is
open for business. An order received prior to the close of the Exchange will be
executed at the price computed on the date of receipt; and an order received
after the close of the Exchange will be executed at the price computed on the
next day the Exchange is open.
Each Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts, such as employee
benefit plans, or under circumstances where certain economies can be achieved in
sales of the Fund's shares.
REDEMPTION OF SHARES
Each Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the Commission as a result of
which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or fairly to determine the value of its assets, and (iii) for such
other periods as the Commission may permit.
Each Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
There is no charge for share redemptions from Vanguard International
Explorer Fund and Vanguard Mid-Cap Growth 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 Fund.
We will always redeem your oldest shares first. In addition, in the event
that you transfer your shares to a different account registration, ^the shares
will retain their redemption fee status. If you transfer ^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
B-16
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.
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.
From time to time, the Fund may waive or modify redemption ^fees for
certain categories of investors.
MANAGEMENT OF THE FUNDS
THE VANGUARD GROUP
The Vanguard Group, Inc. (Vanguard) and Vanguard Marketing Corporation 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. If shareholders approve the proposed
reorganization of the Schroder Fund and the Provident Fund, then Vanguard
International Explorer Fund, Vanguard Mid-Cap Growth Fund, Schroders and
Provident will also adopt the Codes once the Fund's commence operations. The
Codes permit access persons to invest in securities for their own accounts,
including securities that may be held by the funds, but places substantive and
procedural restrictions on their trading activities. For example, the Codes
require that access persons of the funds 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. The Amended and Restated
Funds' Service Agreement provides as follows: (a) each Vanguard fund may be
called upon to invest up to 0.40% of its current net assets in Vanguard, and (b)
there is no other limitation on the dollar amount that each Vanguard fund may
contribute to Vanguard's capitalization. Because Vanguard International Explorer
Fund and Vanguard Mid-Cap Growth Fund have not commenced operations, they have
not yet contributed capital to Vanguard.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Vanguard funds by third parties.
DISTRIBUTION. Vanguard 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 their relative net assets. The remaining
one half of these expenses is allocated among the funds based upon each fund's
sales for the preceding 24 months relative to the total sales of the funds as a
Group. Provided, however, that no fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for The Vanguard
Group, and that no fund shall incur annual distribution expenses in excess of
0.20 of 1% of its average month-end net assets.
B-17
Because Vanguard International Explorer Fund and Vanguard Mid-Cap Growth
Fund have not commenced operations, they have not yet incurred any portion of
the administrative (including transfer agency), distribution, or marketing
expenses of The Vanguard Group.
Upon commencement of operations, each Fund is expected to ask 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 will be used solely to reduce the
Fund's management and administrative expenses.
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to many Vanguard funds. These services are provided on an at-cost basis
from a money management staff employed directly by Vanguard.
OFFICERS AND TRUSTEES
The officers of the Funds manage their day-to-day operations under the
direction of the Funds' board of trustees. The trustees set broad policies for
the Funds and choose the Funds' officers. Each trustee serves each 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 each Fund. Each trustee also serves as a
director of The Vanguard Group, Inc.
Board Committees: Each 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 Funds and The Vanguard Group, Inc. All independent trustees
serve as members of the committee. The committee held three meetings during
the Funds' last fiscal year.
- - Compensation Committee: This committee oversees the compensation programs
established by the Funds 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 Funds' 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 Funds (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.
INVESTMENT ADVISORY SERVICES
The terms of Schroders' investment advisory agreement with Vanguard
International Explorer Fund have been approved by the Board of Trustees of the
Trust and a formal agreement will be approved by the Board if this transaction
is approved by shareholders. The terms of Provident's investment advisory
agreement with Vanguard Mid-Cap Growth Fund have been approved by the Board of
Trustees of the Trust and a formal agreement will be approved by the Board if
this transaction is approved by shareholders.
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENTS.
Each Fund's board of trustees is responsible for overseeing the performance
of the Fund's investment advisers and determining whether to approve and renew
the Fund's investment advisory arrangements. The board has a standing request
that Vanguard and the advisers provide the board with certain information the
board has deemed important to evaluating the short- and long-term performance of
the advisers. This information includes a monthly Fund performance analysis and
status report from Vanguard and quarterly self--
B-18
evaluations by the advisers. Vanguard also provides the board with written
analyses of each adviser's performance on a periodic basis. Each Fund's
portfolio managers also meet with the board from time to time to discuss the
management and performance of the Fund and respond to the board's questions
concerning the performance of the advisers.
In approving the formal investment advisory agreements with Schroders and
Provident, the boards are expected to take into account numerous factors they
considered in approving the terms of such agreements, including:
- The nature, extent and quality of the services to be provided by the
adviser.
- The prior investment performance of the adviser.
- The fair market value of the services provided by the adviser.
- A comparative analysis of expense ratios of, and advisory fees paid by
similar funds.
- The extent to which the adviser has realized or will realize economies
of scale as the fund grows.
- 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.
- The adviser's ability to control the operating expenses of the fund,
such as transaction costs, including ways in which portfolio
transactions for the fund will conducted and brokers selected.
In approving the formal investment advisory agreements with Schroders and
Provident, the boards are expected to make the following determinations,
assessments and evaluations, among others, that were made in connection with the
boards' approval of the terms of such agreements:
INVESTMENT ADVISORY AGREEMENT WITH SCHRODERS
- The board determined that performance results of the Schroder Fund
were reasonable as compared with the relevant performance standards,
including the performance results of: (a) Salomon Smith Barney
Extended Market EPAC Index for the same periods; (b) the average
international small-cap mutual fund (derived from data provided by
Lipper Inc.), and (c) other appropriate market indexes.
- The board assessed that the advisory fee to be paid by Vanguard
International Explorer Fund was reasonable based on the average
advisory fee for the fund's Lipper peer group. The board also took
into account the nature of the fee arrangements which include
breakpoints that will adjust the fee downward as the size of the
adviser's portfolio increases and a performance adjustment that is
designed to benefit shareholders by aligning the adviser's fee with
the investment returns delivered to shareholders.
- The board evaluated Schroders' investment staff and portfolio
management process and concluded that, under all the circumstances and
based on its informed business judgment, the most appropriate course
of action in the best interest of the future shareholders of Vanguard
International Explorer Fund was to approve the agreement with
Schroders.
INVESTMENT ADVISORY AGREEMENT WITH PROVIDENT
- The board determined that performance results of the Provident Fund
were reasonable as compared with the relevant performance standards,
including the performance results of: (a) Russell Midcap Growth Index
for the same periods; (b) the average mid-cap growth mutual fund
(derived from data provided by Lipper Inc.), and (c) other appropriate
market indexes.
- The board assessed that the advisory fee to be paid by Vanguard
Mid-Cap Growth Fund was reasonable based on the average advisory fee
for the fund's Lipper peer group. The board also took into account the
nature of the fee arrangements which include breakpoints that will
adjust the fee downward as the size of the adviser's portfolio
increases and a performance adjustment that is designed to benefit
shareholders by aligning the adviser's fee with the investment returns
delivered to shareholders.
- The board evaluated Provident's investment staff and portfolio
management process and concluded that, under all the circumstances and
based on its informed business judgment, the most appropriate course
of action in the best interest of the future shareholders of Vanguard
Mid-Cap Growth Fund was to approve the agreement with Provident.
B-19
PORTFOLIO TRANSACTIONS
If shareholders of the Schroder Fund and the Provident Fund approve the
proposed reorganizations, Schroders and Provident are expected to be authorized
to (with the approval of the board of trustees) select the brokers or dealers
that will execute the purchases and sales of portfolio securities for the
respective Fund. The investment advisory agreements direct the advisers to use
their best efforts to obtain the best available price and most favorable
execution as to all transactions. Each investment adviser will have undertaken
to execute each investment transaction at a price and commission which provides
the most favorable total cost or proceeds reasonably obtainable under the
circumstances.
In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain the best available price and most favorable
execution. The full range and quality of brokerage services available will be
considered in making these determinations. In those instances where it is
reasonably determined that more than one broker can offer the brokerage services
needed to obtain the best available price and most favorable execution,
consideration may be given to those brokers which supply investment research and
statistical information and provide other services in addition to execution
services to the Fund and/or the investment adviser. Each investment adviser
considers such information useful in the performance of its obligations under
the agreement, but is unable to determine the amount by which such services may
reduce its expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the board of trustees, each investment adviser may cause the Fund to
pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the adviser to the Funds and the other funds in the Group.
Each Fund is expected to maintain a policy that each investment adviser may
at times pay higher commissions in recognition of brokerage services felt
necessary for the achievement of better execution of certain securities
transactions that otherwise might not be available. An investment adviser will
only pay such higher commissions if it believes this to be in the best interest
of the Fund. Some brokers or dealers who may receive such higher commissions in
recognition of brokerage services related to execution of securities
transactions are also providers of research information to an investment adviser
and/or the Fund. However, the investment advisers have informed the Fund that
they generally will not pay higher commission rates specifically for the purpose
of obtaining research services.
Some securities that are considered for investment by a Fund may also be
appropriate for other Vanguard funds or for other clients served by the
advisers. If such securities that are compatible with the investment policies of
the Funds and one or more of an 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 that adviser and the purchased securities or sale proceeds
will be allocated among the participating Vanguard funds and the other
participating clients of the adviser in a manner deemed equitable by the
adviser. 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.
Because the Funds have not commenced operations, they have not yet incurred
brokerage commissions.
FINANCIAL STATEMENTS
Vanguard International Explorer Fund and Vanguard Mid-Cap Growth Fund have
not been capitalized and have not commenced operations, so financial statements
are not yet available.
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.
B-20
Each of the investment company members of The Vanguard Group, including
Vanguard Selected Value Fund use one or more of the following unmanaged indexes
for comparative performance purposes.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include 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 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.
WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 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 Standard & Poor's 500 Index.
RUSSELL 3000 STOCK INDEX--a diversified portfolio of approximately 3,000 common
stocks accounting for over 90% of the market value of publicly traded stocks in
the U.S.
RUSSELL 2000 STOCK INDEX--composed of the 2,000 smallest stocks contained in the
Russell 3000 Index, representing approximately 7% of the Russell 3000 total
market capitalization.
RUSSELL 2000 VALUE INDEX--contains stocks from the Russell 2000 Index with a
less-than-average growth orientation.
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.
RUSSELL MIDCAP INDEX--composed of all medium and medium/small companies in the
Russell 1000 Index.
RUSSELL MIDCAP GROWTH INDEX--measures the performance of those Russell Midcap
Index companies with higher price/book ratios and higher predicted growth rates.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic average of the
performance of over 1,000 securities listed on the stock exchanges of countries
in Europe, Australia, Asia, and the Far East.
SALOMON SMITH BARNEY EXTENDED MARKET EPAC INDEX--tracks the bottom 20% by total
market capitalization of the Europe Pan Asia Index.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index that
contains individually priced U.S. Treasury securities with maturities of ten
years or greater.
LEHMAN BROTHERS CREDIT (BAA) BOND INDEX--all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than one year and with more than $100 million outstanding. This index
includes over 1,500 issues.
LEHMAN BROTHERS LONG CREDIT BOND INDEX--is a subset of the Lehman Brothers
Credit Bond Index.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
of four high-grade, non-callable preferred stock issues.
B-21
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa- or better. The Index has a market value of over
$5 trillion.
LEHMAN BROTHERS CREDIT A OR BETTER BOND INDEX--consists of all publicly issued,
investment-grade corporate bonds rated A or better, of all maturity levels.
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 SMALL-CAP GROWTH FUND AVERAGE--an industry benchmark of average mutual
funds that by prospectus or portfolio practice invest primarily in growth
companies with market capitalizations less than $1 billion at the time of
purchase.
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.
SAI934 062002
B-22
VANGUARD WHITEHALL FUNDS
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FORM N-14
PART C
OTHER INFORMATION
ITEM 15. 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 16. EXHIBITS.
(1) Declaration of Trust of the Vanguard Whitehall Funds is herein incorporated
by reference to Exhibit 1 of Post-Effective Amendment No. 4 to Registrant's
Registration Statement on Form N-1A filed on June 30, 1998.
(2) By-laws of the Vanguard Whitehall Funds are herein incorporated by reference
to Exhibit 2 of Post-Effective Amendment No. 4 to Registrant's Registration
Statement on Form N-1A filed on June 30, 1998.
(3) Not applicable.
(4) Form of Agreement and Plan of Reorganization and Liquidation is filed
herewith.
(5) Not applicable.
(6) Form of Investment Advisory Agreement between Vanguard Whitehall Funds and
Schroder Investment Management North America Inc. is herein incorporated by
reference to Exhibit 6 of Registrant's Registration Statement on Form N-14 filed
March 18, 2002.
(7) Amended and Restated Fund's Service Agreement is herein incorporated by
reference to Registrant's Registration Statement on Form N-1A.
(8) Not applicable.
(9) Not applicable.
(10) Not applicable.
(11) Form of Opinion and Consent of Morgan Lewis that shares will be validly
issued, fully paid and non-assessable is herein incorporated by reference to
Exhibit 11 of Registrant's Registration Statement on Form N-14 filed March 18,
2002.
(12) Form of Opinion and Consent of Morgan Lewis as to certain tax matters and
consequences is herein incorporated by reference to Exhibit 12(a) of
Registrant's Registration Statement on Form N-14 filed March 18, 2002.
(13) Not applicable.
(14) Consent of PricewaterhouseCoopers LLP is herein incorporated by reference
to Exhibit 14 of Registrant's Registration Statement on Form N-14 filed March
18, 2002.
(15) Not applicable.
(16) Power of Attorney for Heidi Stam is herein incorporated by reference to
Post-Effective Amendment No. 21 to the Registration Statement of Vanguard
Variable Insurance Fund (File No. 33-32216) filed on January 29, 2002.
(17)(a) Prospectus for Schroder International Smaller Companies Fund dated
January 28, 2002 is herein incorporated by reference to Exhibit 17(a) of
Registrant's Registration Statement on Form N-14 filed March 18, 2002.
(17)(b) Statement of Additional Information for Schroder International Smaller
Companies Fund dated January 28, 2002 is herein incorporated by reference to
Exhibit 17(b) of Registrant's Registration Statement on Form N-14 filed March
18, 2002.
(17)(c) Annual Report to Shareholders including the Audited Financial Statements
dated October 31, 2001 for the Schroder Funds is herein incorporated by
reference to Exhibit 17(c) of Registrant's Registration Statement on Form N-14
filed March 18, 2002.
(17)(d) Preliminary Prospectus for Vanguard Mid-Cap Growth Fund is herein
incorporated by reference to Exhibit 17(d) of Registrant's Registration
Statement on Form N-14 filed March 19, 2002.
(17)(e) Preliminary Statement of Additional Information for Vanguard Mid-Cap
Growth Fund is herein incorporated by reference to Exhibit 17(e) of Registrant's
Registration Statement on Form N-14 filed March 19, 2002.
ITEM 17. UNDERTAKINGS.
Registrant undertakes to file the formal Opinion and Consent of Morgan Lewis as
to certain tax matters and consequences on or about the effective date of the
reorganization transaction referenced therein by filing a post-effective
amendment to this Registration Statement.
SIGNATURES
As required by the Securities Act of 1933 this Registration Statement has
been signed on behalf of the Registrant in Philadelphia on the 26th day of
April, 2002.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacity on the dates
indicated.
VANGUARD WHITEHALL FUNDS
Registrant
SIGNATURE TITLE DATE
--------- ----- ----
By: /s/ JOHN J. BRENNAN President, Chairman, Chief April 26, 2002
- ---------------------------------Executive Officer, and Trustee
(HEIDI STAM)
John J. Brennan*
By: /s/ CHARLES D. ELLIS Trustee April 26, 2002
- ----------------------------------
(HEIDI STAM)
Charles D. Ellis*
By: /s/ RAJIV L. GUPTA Trustee April 26, 2002
- ----------------------------------
(HEIDI STAM)
Rajiv L. Gupta*
By: /s/ JOANN HEFFERNAN HEISEN Trustee April 26, 2002
- ----------------------------------
(HEIDI STAM)
JoAnn Heffernan Heisen*
By: /s/ BURTON G. MALKIEL Trustee April 26, 2002
- ----------------------------------
(HEIDI STAM)
Burton G. Malkiel*
By: /s/ ALFRED M. RANKIN, JR. Trustee April 26, 2002
- ----------------------------------
(HEIDI STAM)
Alfred M. Rankin, Jr.*
By: /s/ J. LAWRENCE WILSON Trustee April 26, 2002
- ----------------------------------
(HEIDI STAM)
J. Lawrence Wilson*
By: /s/ THOMAS J. HIGGINS Treasurer and Principal April 26, 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.
INDEX TO EXHIBITS
Form of Agreement and Plan of Reorganization ................... EX-99.B4