AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 2002
FILE NO. 333-84436
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
PART A. INFORMATION REQUIRED IN THE PROSPECTUS
Item 1. Beginning of Registration Statement Cover Page of Registration Statement
and Outside Front Cover Page of Prospectus
Item 2. Beginning and Outside Back Cover Page of Prospectus Table of Contents
Item 3. Fee Table, Synopsis Information and Risk "Overview" "Comparing Shareholder Fees
Factors and Fund Expenses," "Comparing
Objectives, Strategies and Policies,"
"Purchase, Redemption, and Exchange
Information," "Comparing Risk Factors"
Item 4. Information About the Transaction "Details of Reorganization Proposal"
Item 5. Information About the Registrant "Investment Advisory Arrangements,"
"Additional Information About Vanguard
Mid-Cap Growth Fund," "Obtaining
Information From the SEC"
Item 6. Information About the Company Being "Overview," "Details of Reorganization
Acquired Proposal," "Investment Advisory
Arrangements," "General Information,"
"Obtaining Information From the SEC,"
also incorporated by reference to
Company's Prospectus
Item 7. Voting Information "General Information"
Item 8. Interest of Certain Persons and Experts "General Information"
Item 9. Additional Information Required for Not Applicable
Reoffering by Persons Deemed to be Underwriters
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page Cover Page of Statement of Additional
Information
Item 11. Table of Contents Table of Contents
Item 12. Additional Information About the "Description of the Trust,"
Registrant "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"
Item 13. Additional Information About the Company Being Incorporated by reference to Company's
Acquired Prospectus and SAI
Item 14. Financial Statements "Financial Statements," also
incorporated by reference to Company's
SAI
PART C. OTHER INFORMATION
Item 15. Indemnification Indemnification
Item 16. Exhibits Exhibits
Item 17. Undertakings Undertakings
PIC INVESTMENT TRUST
PROVIDENT INVESTMENT COUNSEL MID CAP FUND A
Dear Shareholder:
A special meeting of shareholders of Provident Investment Counsel Mid Cap
Fund A series (the "PIC Fund") of PIC Investment Trust, a Delaware business
trust, has been scheduled for Monday, June 3, 2002. If you are a shareholder of
record as of the close of business on April 23, 2002, you are entitled to vote
at the meeting and at any adjournment of the meeting.
The meeting is being held to consider the approval of the proposed
reorganization of the PIC Fund into Vanguard Mid-Cap Growth Fund (the "Vanguard
Fund"), a series of Vanguard Whitehall Funds, a Delaware business trust (the
"Vanguard Trust"). 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 PIC TRUST RECOMMENDS THAT YOU APPROVE THE
PROPOSED REORGANIZATION.
Provident Investment Counsel, Inc. serves as investment adviser to the PIC
Mid Cap Portfolio, the New York trust in which all assets of the PIC Fund are
invested, and will become the investment adviser to the Vanguard Fund after the
proposed reorganization. The Vanguard Fund has been created to facilitate the
proposed transaction and has a substantially similar investment objective and
substantially similar investment strategies and policies as the PIC Fund. After
the reorganization, the underlying assets of the PIC Fund will be invested in
the same manner by the same portfolio managers. Each shareholder of the PIC Fund
will receive shares of the Vanguard Fund equal in value to the shares of the PIC
Fund such shareholder owns at the time of the reorganization. We encourage you
to support the Trustees' recommendation to approve the proposal.
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, post-paid envelope so that the maximum number of shares may be voted.
You can also vote over the telephone by following the enclosed instructions.
Your vote is important to us. Please do not hesitate to call 1-800-618-7643 if
you have any questions about the proposal. Thank you for taking the time to
consider this important matter and for your investment in the PIC Fund.
Sincerely,
/s/ Thomas M. Mitchell
Thomas M. Mitchell
President, PIC Investment Trust
KEY POINTS ABOUT THE PROPOSED REORGANIZATION
Provident Investment Counsel Mid Cap Fund A (the "PIC Fund"), a series of
PIC Investment Trust, will host a special meeting of shareholders on June 3,
2002, at the offices of Provident Investment Counsel, Inc. ("Provident") in
Pasadena, California. The purpose of this meeting is to vote on a proposal to
reorganize the PIC Fund into a substantially similar fund called Vanguard
Mid-Cap Growth Fund (the "Vanguard Fund"), which has been created within The
Vanguard Group of Investment Companies ("The Vanguard Group").
The first two pages of this booklet highlight key points about the proposed
reorganization and explain the proxy process - including how to cast your votes.
Before you vote, please read the full text of the combined proxy
statement/prospectus for a complete understanding of our proposal.
PURPOSE OF THE PROPOSED REORGANIZATION
The purpose of the proposed reorganization is to make the PIC Fund a part
of The Vanguard Group, the second largest mutual fund complex in the United
States. Under this proposal, the assets and liabilities of the PIC Fund would be
transferred to the Vanguard Fund, a substantially similar fund created just for
this purpose. Provident would continue to serve as investment adviser, carrying
out an investment program for the Vanguard Fund that is substantially similar to
the PIC Fund. As reorganized into the Vanguard Fund, the PIC Fund will continue
to seek to provide long-term capital appreciation. The Vanguard Group, Inc.
("Vanguard"), however, would replace Provident as overall manager of your fund,
subject to the direction of a Vanguard Board of Trustees. That Board has 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 PIC 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 funds within The
Vanguard Group 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 PIC Fund. The Vanguard
Fund expects to feature a total expense ratio of 0.65% for its first full year
of operations following the proposed reorganization - an annual cost to
shareholders of $6.50 for each $1,000 invested. By contrast, the PIC Fund's
total expense ratio for the year ended October 31, 2001 was 1.39% (after fees
waived and expenses reimbursed by Provident) - an annual cost to shareholders of
$13.90 for each $1,000 invested.
i
EXPANDED SHAREHOLDER SERVICES
As a shareholder of the Vanguard Fund, you will have access to a wide range
of shareholder services, including 24-hour access to your account, the ability
to transact through Vanguard's website, exchange privileges with more than 100
other Vanguard funds, and access to Vanguard's comprehensive investor education
programs.
FUTURE GROWTH OF THE PIC FUND
Joining The Vanguard Group should enable the PIC Fund (as reorganized into
the Vanguard Fund) to grow assets due to Vanguard's strong market penetration
and reputation as a low-cost provider. Provident expects (but cannot guarantee)
that assets in the reorganized PIC Fund will grow considerably once it joins The
Vanguard Group due to investments by new shareholders. As a result, expenses
will be shared by a larger group of shareholders and expenses for existing
shareholders may be reduced.
HOW THE REORGANIZATION WILL AFFECT YOUR ACCOUNT
If shareholders approve the proposed reorganization, your PIC 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.
TAX-FREE NATURE OF THE REORGANIZATION
The proposed reorganization will be accomplished on a tax-free basis,
meaning that you won't realize any capital gains when your PIC Fund shares are
exchanged for shares of the Vanguard Fund.
QUESTIONS AND ANSWERS
Q. I'm a small investor. Why should I bother to vote?
A. Your vote makes a difference. If numerous shareholders just like you fail to
vote their proxies, the PIC Fund may not receive enough votes to go forward with
its meeting. If this happens, we'll need to mail proxies again - a costly
proposition for your fund!
Q. Who gets to vote?
A. Any person who owned shares of the PIC Fund on the "record date," which was
April 23, 2002, gets to vote - even if the investor later sold the shares.
Shareholders are entitled to cast one vote for each PIC Fund share held on the
record date.
ii
Q. How can I vote?
A. You can vote by mail, using the enclosed ballot. Or, you can vote in person
at the meeting. You may also vote by telephone. Please follow the enclosed
instructions to use these methods of voting. Whichever method you choose, please
take the time to read the full text of our combined proxy statement and
prospectus before you vote.
Q. I plan to vote by mail. How should I sign my proxy card?
A. If you are an individual account owner, please sign exactly as your name
appears on the proxy card. Either owner of a joint account may sign the proxy
card, but the signer's name must exactly match one that appears on the card. You
should sign proxy cards for other types of accounts in a way that indicates your
authority (for instance, "John Brown, Custodian").
iii
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
PROVIDENT INVESTMENT COUNSEL MID CAP FUND A
Provident Investment Counsel Mid Cap Fund A will host a special meeting of
shareholders on Monday, June 3, 2002, at 10:00 a.m., Pacific time. The meeting
will be held at Provident Investment Counsel's offices at 300 North Lake Avenue,
Pasadena, California 91101. At the meeting, we will ask shareholders to vote on:
1. A proposal to reorganize Provident Investment Counsel Mid Cap Fund A
into Vanguard Mid-Cap Growth Fund.
2. Any other business properly brought before the meeting.
All shareholders are cordially invited to attend the meeting. However, if
you are unable to attend the meeting, please 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.
Shareholders of record at the close of business on April 23, 2002, are
entitled to notice of and to vote at the meeting or any adjournment thereof.
By Order of the Board of Trustees
/s/ Aaron W.L. Eubanks, Sr.
Aaron W.L. Eubanks, Sr., Secretary
May 3, 2002
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT!
You can vote easily and quickly. Just follow the simple instructions that
appear on your enclosed proxy card. Please help your fund avoid the expense
to shareholders of a follow-up mailing by voting today!
- --------------------------------------------------------------------------------
COMBINED PROSPECTUS/PROXY STATEMENT
This combined prospectus/proxy statement dated April 26, 2002, relates to
the special meeting of shareholders of Provident Investment Counsel Mid Cap Fund
A (the "PIC Fund"), a series of PIC Investment Trust (the "PIC Trust"), to be
held on June 3, 2002 concerning the acquisition of the assets and liabilities of
the PIC Fund, by and in exchange for shares of Vanguard Mid-Cap Growth Fund (the
"Vanguard Fund"), a series of Vanguard Whitehall Funds (the "Vanguard Trust").
The address of the PIC Trust is 300 North Lake Avenue, Pasadena, California
91101. The address of the Vanguard Trust is P.O. Box 2600, Valley Forge,
Pennsylvania 19482.
Please read this entire prospectus/proxy statement before casting your
vote. 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 Provident at
800-618-7643. The PIC Fund's prospectus and statement of additional information,
each dated February 28, 2002, are incorporated by reference into this
prospectus/proxy statement, are considered part of this prospectus/proxy
statement, and are available by calling Provident. These documents contain
information that is important to your voting decision, and you should keep them
for future reference.
The Vanguard Fund has been organized as a separate investment portfolio of
the Vanguard Trust, 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 (http://www.sec.gov). The PIC Fund's prospectus and statement of
additional information (each dated February 28, 2002) and its most recent annual
report to shareholders are available without charge from Provident 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 PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
i
TABLE OF CONTENTS
Page
----
1. OVERVIEW ................................................................ __
2. Details of Reorganization Proposal....................................... __
Why We Want to Reorganize Your Fund.................................... __
How We Plan to Accomplish the Reorganization........................... __
How The Reorganization Will Affect Your Fund........................... __
How Many Shareholder Votes We Need to Approve the Reorganization....... __
3. Investment Advisory Arrangements......................................... __
4. ADDITIONAL INFORMATION ABOUT Vanguard Mid-Cap GROWTH Fund................ __
5. Management of Vanguard Mid-Cap GROWTH Fund............................... __
6. General Information...................................................... __
Appendix A - Agreement and Plan of Reorganization........................... A-1
ii
1. OVERVIEW
PROPOSAL SUMMARY. This combined prospectus/proxy statement describes a
proposal to reorganize Provident Investment Counsel Mid Cap Fund A (the "PIC
Fund') into a substantially similar fund called Vanguard Mid-Cap Growth Fund
(the "Vanguard Fund"), which has been created within The Vanguard Group of
Investment Companies ("The Vanguard Group"). The proposed reorganization
involves a few basic steps. First, your fund will redeem all of its interests in
PIC Mid Cap Portfolio (the "PIC Portfolio") in exchange for its share of the
underlying investment securities held by the PIC Portfolio. This step is
necessary because your fund currently invests all of its assets in the PIC
Portfolio. Second, your fund will simultaneously transfer all of its portfolio
securities and other assets to the Vanguard Fund, and the Vanguard Fund will
assume your fund's liabilities. Third, and simultaneously with step two, the
Vanguard Fund will open an account for you, crediting it with shares of the
Vanguard Fund that are equivalent in value to your investment in the PIC Fund at
the time of the proposed reorganization. Fourth, the PIC Fund will be dissolved.
At their meeting on February 26, 2002, your Board of Trustees approved the
proposed reorganization. We believe that the reorganization is in the best
interests of your fund and its shareholders (more on this further into this
prospectus/proxy statement). Also, the proposed reorganization will not dilute
the interests of the PIC Fund's shareholders. If we do not win shareholder
approval of the proposed reorganization, the PIC Fund will simply continue in
existence (unless the Board of Trustees decides otherwise) and the Vanguard Fund
will not commence operations.
FORM OF ORGANIZATION. For legal purposes, your fund, Provident Investment
Counsel Mid Cap Fund A, is organized as series of PIC Investment Trust, a
Delaware business trust (the "PIC Trust"). Vanguard Mid-Cap Growth Fund is has
been organized as a new series of Vanguard Whitehall Funds, a Delaware business
trust (the "Vanguard Trust"). Additional information on organizational matters
is discussed below in the section entitled "Details of the Reorganization
Proposal - How the Reorganization will Affect the PIC Fund."
NEW BOARD OF TRUSTEES. The Vanguard Trust has a different Board of Trustees
than the PIC Trust. We describe the backgrounds and compensation of the
individuals who serve as trustees of Vanguard Trust in the section below
entitled "Management of Vanguard Mid-Cap Growth 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 PIC Fund. As
reorganized, the Vanguard Fund will continue to seek to provide long-term
capital appreciation. Additional information comparing your fund to the Vanguard
Fund is provided below in the section entitled "Details of the Reorganization
Proposal - How the Reorganization will Affect the PIC Fund."
INVESTMENT ADVISER. If shareholders approve the proposed reorganization,
Provident Investment Counsel ("Provident"), the investment adviser to the PIC
Portfolio (in which all of the PIC Fund's assets are invested), will also serve
as investment adviser to the Vanguard Fund, continuing a substantially similar
investment program. Details of the advisory arrangements for your fund and the
1
Vanguard Fund are provided below in the section entitled "Investment Advisory
Arrangements." The Board of Trustees of the Vanguard Trust has the flexibility
to make advisory changes in shareholders' best interests, without a shareholder
vote, pursuant to an exemption received from the SEC by Vanguard. 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
Provident.
INVESTMENT ADVISORY FEES. Investment advisory fees paid to Provident by the
Provident Fund are calculated as a fixed-percentage of average daily net
assets. Investment advisory fees paid to Provident 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 Provident Fund and Vanguard Fund fee schedules appears
below in the section entitled "Investment Advisory Arrangements - Investment
Advisory Agreement."
SHARE DISTRIBUTION ARRANGEMENTS. Unlike the PIC Fund, shareholders of the
Vanguard Fund do not pay a sales commission to a distributor when they purchase
Vanguard Fund shares. In addition, the Vanguard Fund does not pay annual 12b-1
(distribution) expenses. Although the Vanguard Fund has higher requirements than
the Provident Fund for minimum initial purchases, additional investments, and
account balances, Provident Fund shareholders who join the Vanguard Fund as a
result of the reorganization will continue to be subject to the lower Provident
Fund minimum initial purchase and account balance requirements.
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
PIC Fund shares are exchanged for shares of the Vanguard Fund.
INDEPENDENT ACCOUNTANTS. 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 PIC
Fund and the PIC Portfolio.
2
2. DETAILS OF REORGANIZATION PROPOSAL
The Board of Trustees of PIC Investment Trust has approved a plan to
reorganize Provident Investment Counsel Mid Cap Fund A into a substantially
similar fund that has been created within Vanguard Whitehall Funds, called
Vanguard Mid-Cap Growth Fund. A copy of the Agreement and Plan of Reorganization
is attached as Appendix A to this combined prospectus/proxy statement. To
proceed with the proposed reorganization, we need shareholder approval. The next
few pages of this prospectus/proxy statement discuss important details of the
reorganization plan, including the following:
* Why we want to reorganize your fund.
* How we plan to accomplish the reorganization.
* How the reorganization will affect your fund.
* How many shareholder votes we need to approve the reorganization.
WHY WE WANT TO REORGANIZE YOUR FUND
The Board of Trustees of your fund believes that the proposed
reorganization will provide substantial benefits to the shareholders of your
fund because, as shareholders of the Vanguard Fund, they will obtain access to
Vanguard's expansive client service capabilities and will have exchange
privileges with more than 100 other Vanguard funds. In addition, Provident
expects (but cannot guarantee) that assets in the reorganized PIC Fund will grow
considerably once it joins the Vanguard Group due to investments by new
shareholders. As a result, expenses will be shared by a larger group of
shareholders and expenses for existing shareholders may be reduced.
Vanguard management believes that the reorganized PIC Fund will fit well
within The Vanguard Group. If the proposed reorganization is approved by
shareholders, the PIC Fund will provide Vanguard investors with another proven
fund, and broaden the array of actively-managed funds available through
Vanguard.
The Vanguard Group, Inc. ("Vanguard") and Provident have entered into a
Sponsorship Agreement, which generally provides that Provident will use
reasonable efforts to facilitate the proposed reorganization. However, neither
Provident nor any other party is being compensated by Vanguard in consideration
of the PIC Fund joining The Vanguard Group through the reorganization.
HOW WE PLAN TO ACCOMPLISH THE REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION. The PIC Trust intends to enter into
an Agreement and Plan of Reorganization with the Vanguard Trust that spells out
the terms and conditions that will apply to the reorganization of the PIC Fund
into the Vanguard Fund (assuming that shareholders approve this proposal). For a
complete description of these terms and conditions, please see the agreement,
which is attached as Appendix A to this prospectus/proxy statement.
3
FOUR STEPS TO REORGANIZE. After shareholder approval, the proposed
reorganization will be accomplished in a four-step process. First, your fund
will redeem all of its interests in the PIC Portfolio in exchange for its share
of the underlying investment securities held by the PIC Portfolio. This step is
necessary because your fund currently invests all of its assets in the PIC
Portfolio. Second, your fund will transfer all of its assets to the Vanguard
Fund, and the Vanguard Fund will assume all of your fund's liabilities. Third,
and simultaneously with step two, the Vanguard Fund will open an account for
you, crediting it with shares of the Vanguard Fund equal in value to the shares
of the PIC Fund owned by you at the time of the reorganization. Fourth, the PIC
Fund will be dissolved.
EFFECTIVE AS SOON AS PRACTICABLE. If approved by shareholders, the proposed
reorganization will take place as soon as practicable after all necessary
regulatory approvals and legal opinions are received. We think the
reorganization will be accomplished by late June, 2002.
We expect that the proposed reorganization will have no federal income tax
consequences for the PIC Fund or its shareholders. The reorganization will not
proceed until this point is confirmed by an opinion of counsel. Following the
proposed reorganization, the adjusted tax basis of your fund shares will be the
same as before. We do not expect shareholders to incur any personal state or
local taxes as a result of the proposed reorganization, but you should consult
your own tax adviser regarding those matters. More information about the opinion
of counsel required as a condition of the reorganization appears in the
Agreement and Plan of Reorganization.
HOW THE REORGANIZATION WILL AFFECT THE PIC FUND
COMPARING INVESTMENT OBJECTIVES, STRATEGIES, AND POLICIES. The PIC Fund's
investment objective and its investment strategies and policies will be
substantially similar to those of the Vanguard Fund, and Provident intends to
manage the Vanguard Fund in the same general manner that it currently manages
the PIC Portfolio.
As reorganized, the Vanguard Fund will continue to seek to provide
long-term capital appreciation. It will continue to invest primarily in the
common stock of medium size companies whose market capitalizations at the time
of the initial purchase are within the capitalization range of the Russell Mid
Cap Growth Index ($1 billion to $12.5 billion as of January 31, 2002).
In selecting investments for the Vanguard Fund, Provident will continue to
invest in those medium-capitalization companies which it believes have the best
prospects for future growth. Provident will continue to focus on individual
companies rather than trying to identify the best market sectors going forward.
This is often referred to as a "bottom-up" approach to investing. Provident will
continue to seek companies that have displayed exceptional profitability, market
share, return on equity, reinvestment rates and sales and dividend growth.
Companies with significant management goals, plans and controls, and leading
proprietary positions in given market niches are especially attractive. Finally,
the valuation of each company will continue to be assessed relative to its
industry, earnings growth and the market in general. In determining whether to
sell a security, Provident will continue to consider various factors such as
fundamental changes within a particular company or its industry. These
4
considerations will continue to be based on Provident's research, including
analytical procedures, market research or discussions with company management.
Provident and your Board of Trustees believe that there is adequate
capacity in the mid-cap sector of the stock markets to absorb any additional
assets which the PIC Fund may obtain as a result of joining The Vanguard Group
and that the reorganization will not impair Provident's flexibility in managing
the assets of the Vanguard Fund.
Currently, the PIC Fund invests all of its assets in the PIC Portfolio, and
the PIC Portfolio in turn invests its assets directly in investment securities;
after the proposed reorganization, the Vanguard Fund will invest all of its
assets directly in investment securities. Your Board of Trustees believes this
change is more a matter of form than substance. The investment objective of the
PIC Fund is "fundamental," meaning that it can be changed only with shareholder
approval. The investment objective of the Vanguard Fund is substantially similar
but is non-fundamental. This is consistent with the non-fundamental approach
taken by most of the other funds in the Vanguard Group (the "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 of the Vanguard Trust has no
plans to change the investment objective of the Vanguard Fund in the foreseeable
future.
Certain investment policies of the Vanguard Fund are different than those
of the PIC Fund. These differences conform to the limitations on other Vanguard
Group Funds, and will not have a material impact on Provident's management of
the Vanguard Fund. The most significant differences are as follows:
* The PIC Fund and the Vanguard Fund have different policies regarding
borrowing. As a fundamental investment policy (which cannot be changed
without shareholder approval), the PIC Fund may not borrow money or
issue senior securities, other than borrowings from banks for
temporary or emergency purposes or for the clearance of transactions
in amounts up to 10% of the Fund's total assets. The Vanguard Fund may
borrow up to 15% of its net assets, but only through banks, reverse
repurchase agreements, or Vanguard's interfund lending program. The
Vanguard interfund lending program permits the funds within The
Vanguard Group to borrow money from and lend money to each other for
temporary or emergency purposes, subject to certain conditions.
Because the Vanguard Fund's 15% borrowing policy is non-fundamental,
the Board of Trustees may change the policy without shareholder vote.
Although there is no current intention to do so, increasing the
Vanguard Fund's borrowing ability could increase the risk that
shareholders will lose money in the fund.
* The PIC Fund and the Vanguard Fund have different policies regarding
lending. As a fundamental policy, the PIC Fund may not make loans
other than loans of portfolio securities in an amount not exceeding
25% of the fund's total assets. The Vanguard Fund may lend up to 50%
of its total assets (the current limit under the Investment Company
Act) and may participate in Vanguard's interfund lending program. 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
5
money. Neither the PIC Fund nor the Vanguard Fund consider the
purchase of fixed income securities issued by unaffiliated third
parties to be lending for purposes of these restrictions.
* The PIC Fund and the Vanguard Fund have different policies regarding
the pledging of assets. As a fundamental policy, the PIC Fund may not
pledge its assets. The Vanguard Fund may pledge up to 15% of its
assets to secure borrowings, and this limitation may be changed by the
Board of Trustees of the Vanguard Trust without shareholder approval.
* The PIC Fund and the Vanguard Fund have different policies regarding
the use of commodity futures contracts. As a fundamental policy, the
PIC Fund may only purchase stock index futures contracts. The Vanguard
Fund may engage in a wider range of futures contracts, and its current
limitations may be changed by the Board of Trustees of the Vanguard
Trust without shareholder approval. Increased use of futures contracts
involve significant risks, including an increased risk that the fund
will lose money.
CONSIDERED INDIVIDUALLY AND IN THE AGGREGATE, PROVIDENT DOES NOT EXPECT THE
INVESTMENT POLICY DIFFERENCES BETWEEN THE PIC FUND AND THE VANGUARD FUND
DESCRIBED ABOVE TO HAVE A MATERIAL IMPACT ON EITHER PROVIDENT'S DAY-TO-DAY
INVESTMENT DECISION MAKING PROCESS OR ON YOUR INVESTMENT PORTFOLIO AS IT IS
REORGANIZED INTO THE VANGUARD FUND.
COMPARING RISK FACTORS. The Vanguard Fund is subject to the same principal
risk factors as the PIC 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 overall stock market. The Vanguard fund's
performance could be hurt by:
* INVESTMENT STYLE RISK, which is the chance that returns from
mid-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.
* MANAGER RISK, which is the chance that poor security selection will
cause the Vanguard Fund to underperform other funds with similar
investment objectives.
COMPARING SHAREHOLDER FEES AND FUND EXPENSES. The following table compares
the fees and expenses of buying and holding shares of the PIC Fund and the
Vanguard Fund, and the expenses the PIC Fund expects to incur in its current
fiscal year and the estimated expenses of the Vanguard Fund for the first full
year after the proposed reorganization (assuming current asset levels remain the
same). As illustrated, the PIC Fund imposes a sales charge on most share
purchases, while the Vanguard Fund has no sales charges. This means that the
Vanguard Fund will be able to invest your entire purchase price in portfolio
securities, rather than only a portion. As also shown below, the Vanguard Fund
has no 12b-1 fees, no administration fees, and considerably lower other
6
expenses, and we expect that the Vanguard Fund's annual operating expenses will
be lower than those of the PIC Fund even without any growth in your fund's
assets.
PIC Fund Vanguard Fund
-------- -------------
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge
(load) imposed on purchases (as a
percentage of offering price) 5.75% 0.00%
Redemption fee 0.00%(1) 0.00%
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
Management Fees(2) 0.70% 0.51%
Distribution (12b-1) Fees 0.25% 0.00%
Other Expenses 0.87% 0.03%
Administration Fees 0.20% 0.00%
Shareholder Service Fee 0.15% 0.00%
----- -----
Total Annual Fund Operating Expenses 2.17% 0.65%
Expense Reimbursements (0.78%)(3) 0.00%
----- -----
Net Expenses 1.39% 0.65%
- ----------
(1) Shareholders who buy $1 million of PIC Fund shares without paying a sales
charge will be charged a 1% fee on redemptions made within one year of
purchase.
(2) Advisory fees under the Provident Fund fee schedule are calculated as a
fixed-percentage of average daily net assets. Advisory fees under the
Vanguard Fund fee schedule are 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
Provident Fund and Vanguard Fund fee schedules appears under the heading
"Investment Advisory Arrangements - Investment Advisory Agreement."
(3) This table reflects the aggregate expenses of both the PIC Fund and a PRO
RATA portion of the expenses of the PIC Portfolio. Provident has
contractually agreed to waive fees and reimburse expenses in order to keep
total operating expenses from exceeding 1.39% until March 1, 2011.
Provident reserves the right to be reimbursed for any waiver of its fees or
expenses paid on behalf of the PIC Fund if, within three years following
the fiscal year in which such reimbursement were made, the PIC Fund's
expenses are less than the limit agreed to by Provident. Any reimbursements
to Provident are subject to approval by the Board of Trustees of the PIC
Trust.
EXPENSE EXAMPLE. The following expense example is intended to help you
compare the cost of investing in the PIC Fund with the cost of investing in the
Vanguard Fund. 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 fund
expenses remain the same as shown above. Although your actual costs and returns
might be different based on these assumptions, your costs would be:
7
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
PIC Fund $ 708 $ 990 $1,292 $2,148
Vanguard Fund $ 66 $ 208 $ 362 $ 810
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.
NET ASSET VALUE. The PIC Fund calculates its net asset value per share
("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.
The proposed reorganization will have no impact on your fund's NAV. As
indicated below, the proposed reorganization will not cause your fund's share
price to go up or down, and you will own shares of the Vanguard Fund equal in
value to the shares of the PIC Fund you own at the time of the reorganization.
Any declared but undistributed dividends or capital gains will carry over in the
proposed reorganization.
Capitalization Table
April 23, 2002
(unaudited)
Pro Forma
PIC Fund Vanguard Fund Capitalization
------------- ------------- --------------
Total Net Assets as of the Record Date $ 32,317,568 $0 $ 32.317,568
Total Number of Shares Outstanding on
the Record Date 2,312,524.53 0 2,312,524.53
NAV on the Record Date $13.98 $0 $13.98
TRUSTEES. The Vanguard Trust has a different Board of Trustees than the PIC
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 Mid-Cap Growth Fund." Following the
reorganization, the Board of Trustees of the PIC Trust will have no oversight
over, or other involvement with, the Vanguard Fund.
PURCHASE, REDEMPTION, AND EXCHANGE INFORMATION. Shares of the PIC Fund are
sold to individuals and institutional investors, including retirement and other
plans, and after the proposed reorganization shares of the Vanguard Fund will be
sold to the same types of investors. This chart highlights the purchase,
redemption and exchange features of your fund as compared to the Vanguard Fund.
8
Purchase, Redemption and Exchange Features PIC Fund Vanguard Fund(1)
- ------------------------------------------ -------- ----------------
Minimum initial purchase/Additional
investments/Minimum balance ................... $2,000 / $250 / $1,000 $10,000/ $100 / $10,000 by mail
or exchange and $1,000 by wire(2)
Purchases ..................................... By mail, wire, or systematic By mail, wire, systematic
investment plan investment plan, Vanguard Fund
Express(R)and Vanguard Direct
Deposit Service(SM)
Redemptions ................................... In person, by mail, wire or By mail, 24-hour telephone, or
telephone (business hours only), Vanguard's website
or through a financial
institution
Free exchange privileges ...................... Yes, with three other series Yes, with other Vanguard Funds
of PIC Investment Trust -- in that have exchange privileges --
person, by mail or telephone by mail, 24-hour telephone, or
(business hours only) Vanguard's website, subject to
share class eligibility and
other conditions(3)
- ----------
(1) Explanations of each of the services available through the Vanguard Fund
appear below in the section entitled "Additional Information About Vanguard
Mid-Cap Growth Fund."
(2) Shareholders of the PIC Fund at the closing of the reorganization will
continue to be subject to the PIC Fund's minimum initial purchase and
account balance requirements.
(3) Explanations of exchange privileges of Vanguard Fund shareholders appear
below in the section entitled "Additional Information About Vanguard
Mid-Cap Growth Fund."
SALES CHARGES. The Vanguard Fund does not impose any sales charge on your
purchase of shares. Your fund does impose a front-end sales charge. Shares of
the PIC Fund are purchased at the NAV calculated after your investment is
received by the PIC Fund's transfer agent plus the shares charge. The sales
charge for the PIC Fund declines with the size of your purchase, as shown below:
Sales Charge as a % of Sales Charge as a % of
Your Investment Offering Price Your Investment
--------------- -------------- ---------------
Up to $49,999 5.75% 6.10%
$50,000 to $99,999 4.50% 4.71%
$100,000 to $249,999 3.50% 3.63%
$250,000 to $499,999 2.50% 2.56%
$500,000 to $999,999 2.00% 2.04%
$1,000,000 and over None(1) None(1)
- ----------
(1) Shareholders who buy $1 million of PIC Fund shares without paying a sales
charge will be charged a 1% fee on redemptions made within one year of
purchase.
COMPARING FISCAL YEAR ENDS. The fiscal years of the Provident Fund and the
Vanguard Fund end on October 31st.
9
COMPARING SERVICE PROVIDERS. PricewaterhouseCoopers, LLP, the independent
auditor for the PIC Fund, is expected to serve as the independent auditor for
the Vanguard Fund, and currently serves in that capacity for all other funds in
The Vanguard Group (the "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. A
PricewaterhouseCoopers representative will attend the shareholder meeting.
Your fund's custodian, Provident National Bank, 200 Stevens Drive, Lester,
Pennsylvania 19113, is responsible for holding your fund's assets. Following the
reorganization, the Board of Trustees of the Vanguard Trust will select a
custodian for the Vanguard Fund.
Provident Financial Processing Corporation, 400 Bellevue Parkway,
Wilmington, Delaware 19809, acts as your fund's transfer agent. U.S. Bancorp
Fund Services, LLC acts as your fund's administrator. Following the
reorganization, The Vanguard Group, Inc., P.O. Box 2600, Valley Forge,
Pennsylvania 19482, will serve as the Vanguard Fund's transfer agent and
administrator.
Quasar Distributors, LLC, 615 E. Michigan Street, Milwaukee, Wisconsin
53202, an affiliate of U.S. Bancorp Fund Services, LLC, is your fund's principal
underwriter. Following the reorganization, Vanguard Marketing Corporation, a
wholly-owned subsidiary of The Vanguard Group, Inc., will serve as the Vanguard
Fund's principal underwriter.
SHARES. The shares to be issued by the Vanguard Fund will be substantially
similar to the shares issued by the PIC Fund. The material differences between
the shares are that (1) the PIC Trust provides for the indemnification of any
shareholder found liable for any claim relating to such shareholder's status as
a shareholder, and the Vanguard Trust has no similar provision, and (2) 40% of
shares entitled to vote at a shareholders meeting constitute a quorum of the PIC
Trust, while 50% constitutes a quorum of the Vanguard Trust.
HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE THE REORGANIZATION
To go forward with the proposed reorganization, a majority of your fund's
shares outstanding on April 23, 2002 (the "Record Date"), must vote in favor of
this proposal. YOUR FUND'S BOARD OF TRUSTEES RECOMMENDS THAT YOU APPROVE THE
PROPOSED REORGANIZATION.
10
3. INVESTMENT ADVISORY ARRANGEMENTS
The PIC Fund invests all of its assets in the PIC Portfolio. The PIC
Portfolio in turn invests its assets in investment securities to achieve the PIC
Fund's investment objective. Following the proposed reorganization, the Vanguard
Fund will invest its assets directly in such investment securities. This will
have no impact on the Vanguard Fund's investment strategies and policies.
The PIC Portfolio contracts with Provident to provide investment advisory
and other services. Under its investment advisory agreement dated December 31,
1997, with the PIC Portfolio, Provident is responsible for managing the
investment and reinvestment of the PIC Portfolio's assets, and for continuously
reviewing, supervising and directing the PIC Portfolio's investment program. If
the proposed reorganization is approved by shareholders, Provident will
similarly serve as investment adviser to the Vanguard Fund, continuing the PIC
Fund's investment program. Provident will have the same responsibilities under
its proposed investment advisory agreement with the Vanguard Fund as it does
under its agreement with the PIC Portfolio.
INVESTMENT ADVISER. Provident's address is 300 North Lake Avenue, Pasadena,
California 91101. Provident traces its origins to an investment partnership
formed in 1951. It is now an indirect, wholly owned subsidiary of Old Mutual
plc. Old Mutual is a United Kingdom-based financial services group with
substantial asset management, insurance and banking businesses. Provident
employs a team-oriented approach, with a group of investment professionals
responsible for the day-to-day management of the PIC Portfolio, including
determining which securities should be bought and sold. These arrangements would
continue for the Vanguard Fund if the proposed reorganization is approved by
shareholders. As of December 31, 2001, Provident had discretionary management
authority with respect to approximately $8.6 billion of assets.
INVESTMENT ADVISORY AGREEMENT. The investment advisory agreement between
Provident and the PIC Portfolio is substantially similar to the proposed
investment advisory agreement between Provident and the Vanguard Fund, including
the services to be provided and the duration and termination provisions. Under
the PIC Portfolio advisory agreement, the PIC Portfolio holds Provident harmless
for any losses other than losses due to Provident's bad faith, gross negligence,
willful misconduct or reckless disregard of its obligations under the agreement,
and the PIC Portfolio indemnifies Provident for any losses Provident incurs
other than losses due to Provident's bad faith, gross negligence, willful
misconduct or reckless disregard of its obligations under the agreement. The
Vanguard Fund advisory agreement does not provide that the Vanguard Fund will
hold Provident harmless under any circumstances, nor does it have an
indemnification provision.
The principal difference between the two agreements is the compensation
structure. In the PIC Portfolio agreement, Provident is entitled to a fee of
0.70% of the PIC Portfolio's (and therefore the PIC Fund's) average daily net
assets. In contrast, the Vanguard Fund agreement has certain breakpoints and a
performance component.
11
Under the proposed investment advisory agreement between Provident and the
Vanguard Fund, the Vanguard Fund will pay Provident a quarterly advisory fee
that is based on certain annual percentage rates applied to the PIC Fund's
average month-end assets for each quarter. In addition, after April 30, 2003,
the quarterly fee will be increased or decreased based upon the PIC Fund's
performance in comparison to its benchmark index. For these purposes, the PIC
Fund's cumulative investment performance over a trailing 36-month period will be
compared to the cumulative total return of the Russell Midcap Growth Index.
Please consult the Statement of Additional Information for the Vanguard Fund for
a complete explanation of how Provident's advisory fees will be calculated.
Based on the PIC Fund's current size, the maximum possible fee payable by
the Vanguard Fund to Provident under the advisory agreement during the first
year of operations would be 0.50% of the PIC Fund's net assets. This compares
favorably with the maximum fee payable to Provident by the PIC Fund, which is
0.70% of the PIC Fund's average daily net assets based on the fully applied fee
schedule.
The following table shows on a comparative basis for the calendar year
ended December 31, 2001, the investment advisory fees actually paid to Provident
under the Provident Fund fee schedule and the investment advisory fees
(presented on a pro forma basis) that would have been paid to Provident had the
Vanguard Fund fee schedule been in place and fully effective for the same
period.
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)
$* $*
- ----------
(1) Actual fees shown would have been $o if Provident had not waived $o in
advisory fees under a contract with the Provident Fund.
(2) Pro forma fees shown reflect the Vanguard Fund fee schedule as it would be
implemented after an initial 36-month transition period.
Last year, the PIC Portfolio paid Provident a fee equal to 0.41% of its
average daily net assets, net of fee waivers. For the fiscal year ended October
31, 2001, the PIC Portfolio paid Provident fees of $133,569, net of a waiver of
$93,892. For the fiscal year ended October 31, 2000, the PIC Portfolio paid
Provident fees of $121,216, net of a waiver of $104,920. For the fiscal year
ended October 31, 1999, the PIC Portfolio accrued advisory fees of $58,869, all
of which were waived.
DURATION AND TERMINATION OF PROVIDENT'S INVESTMENT ADVISORY AGREEMENT WITH
THE VANGUARD FUND. The terms of Provident's 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 Trust. Board approval must include the votes of a majority of those
12
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 Provident's 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 Trust's trustees or by vote of the outstanding shares of the
Vanguard Fund on 60 days' written notice, or (ii) by Provident on 90 days'
written notice to the Vanguard Fund.
FUTURE CHANGES TO THE 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 Provident. 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 an exemption
obtained from the SEC by The Vanguard Group. This exemption was granted pursuant
to certain representations made by The Vanguard Group, including that each fund
to which the exemption is applicable continues to operate as a member of The
Vanguard Group, with management and distribution services provided on an at-cost
basis.
13
4. ADDITIONAL INFORMATION ABOUT VANGUARD MID-CAP GROWTH 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's primary strategy is to invest at least
80% of its net assets in the common stocks of mid-cap companies that offer
strong growth potential. However, the Vanguard Fund has flexibility to invest
the balance in other market capitalizations and security types. Investing in
medium capitalization stocks may involve greater risk than investing in large
capitalization stocks, since they can be subject to more abrupt or erratic
movements in value. However, they tend to involve less risk than stocks of small
companies.
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.
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 MARKET. AS A GROUP, MID-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. In managing the Vanguard Fund, the investment adviser
will focus on individual companies rather than trying to identify the best
market sectors going forward. This is often referred to as a "bottom-up"
approach to investing. The adviser will seek companies that have displayed
exceptional profitability, market share, return on equity, reinvestment rates
and sales and dividend growth. Companies with significant management goals,
plans and controls, and leading proprietary positions in given market niches are
especially attractive. Finally, the valuation of each company will be assessed
relative to its industry, earnings growth and the market in general.
14
In determining whether to sell a security, the adviser will consider
various factors such as fundamental changes within a particular company or its
industry. These considerations will be based on the adviser's research,
including analytical procedures, market research or discussions with company
management.
The Vanguard Fund will generally be managed without regard to tax
ramifications.
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 FUND INVESTS.
OTHER INVESTMENT POLICIES AND RISKS. The Vanguard Fund may also invest in
stock index futures and options contracts, which are types of derivative. 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 the Fund.
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 will not use derivatives for speculative purposes or as
leveraged investments that magnify gains or losses. In addition, 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:
* To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks.
* To reduce the Vanguard Fund's transaction costs or add value when
these instruments are favorably priced.
Although the Vanguard Fund typically will not make significant investments
in foreign securities, it reserves the right to invest up to 20% of its assets
this way. Foreign securities may be traded in U.S. or foreign markets. To the
extent that it owns foreign securities, the Fund will be subject to (1) COUNTRY
RISK, which is the chance that domestic events--such as political upheaval,
financial troubles, or a natural disaster--will weaken a country's securities
markets; and (2) CURRENCY RISK, which is the chance that a foreign investment
will decrease in value because of unfavorable changes in currency exchange
rates.
15
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:
* 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.
* 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.
* Each Vanguard Group Fund reserves the right to stop offering shares at
any time.
* 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.
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.
16
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:
* Distributions are taxable to you for federal income tax purposes
whether or not you reinvest these amounts in additional Vanguard Fund
shares.
* Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
* Any dividends and short-term capital gains that you receive are
taxable to you as ordinary income for federal income tax purposes.
17
* 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.
* Capital gains distributions may vary considerably from year to year as
a result of the Vanguard Fund's normal investment activities and cash
flows.
* 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.
* 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.
* 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:
* Provide us with your correct taxpayer identification number;
* Certify that the taxpayer identification number is correct; and
* Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS
instructs us to do so.
FOREIGN INVESTORS. Vanguard 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.
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.
18
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
ACCOUNT MINIMUMS FOR INVESTOR SHARES
If shareholders approve the reorganization, your Provident 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.
19
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 MID-CAP GROWTH 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.
20
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.
21
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.
22
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, MID-CAP GROWTH FUND AND
GROWTH AND INCOME FUND these limits generally are as follows:
* 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. 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.)
* NO MORE THAN TWO EXCHANGES OUT OF A FUND MAY BE REQUESTED BY TELEPHONE
OR WEB WITHIN ANY 12-MONTH PERIOD.
* Each fund reserves the right to reject exchanges considered excessive.
For ALL OTHER VANGUARD FUNDS, the following limits generally apply:
* No more than two substantive "round trips" through a non-money-market
fund during any 12-month period.
* A "round trip" is a redemption OUT of a fund (by any means) followed
by a purchase back INTO the same fund (by any means).
* Round trips must be at least 30 days apart.
* "Substantive" means a dollar amount that Vanguard determines, in its
sole discretion, could adversely affect management of the fund.
* 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.
23
TELE-ACCOUNT(R). To conduct account transactions through Vanguard's
automated telephone service, you must first obtain a personal identification
number (PIN). Call Tele-Account to obtain a PIN, and allow seven days before
using this service.
PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a
telephone request if the caller is unable to provide the following information
EXACTLY AS REGISTERED ON THE ACCOUNT:
* Ten-digit account number.
* Complete owner name and address.
* Primary Social Security or employer identification number.
* Personal Identification Number (PIN), if applicable.
SUBJECT TO REVISION. We reserve the right to revise or terminate
Vanguard's telephone transaction service at any time, without notice.
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, Mid-Cap Growth 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, Mid-Cap Growth 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:
24
* The fund name and account number.
* The amount of the transaction (in dollars or shares).
* Signatures of all owners EXACTLY as registered on the
account.
* Signature guarantees, if required for the type of
transaction.*
* Any supporting legal documentation that may be required.
- ----------
* For instance, signature guarantees must be provided by all registered
account 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.
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.
25
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.
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 Mid-Cap Growth 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:
* Performance assessments with comparisons to industry benchmarks.
* Reports from the adviser.
* 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
26
each shareholder. If you want us to send separate reports, however, you may
notify our Client Services Department.
CONTACTING VANGUARD
ONLINE - VANGUARD.COM
* Your best source of Vanguard news
* For fund, account, and service information
* For most account transactions
* For literature requests
* 24 hours per day, 7 days per week
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273
(ON-BOARD)
* For automated fund and account information
* For redemptions by check, exchange (subject to certain limitations),
or wire
* Toll-free, 24 hours per day, 7 days per week
INVESTOR INFORMATION
1-800-662-7447 (SHIP)
(TEXT TELEPHONE AT 1-800-952-3335)
* For fund and service information
* For literature requests
* Business hours only
CLIENT SERVICES
1-800-662-2739 (CREW)
(TEXT TELEPHONE AT 1-800-749-7273)
* For account information
* For most account transactions
* Business hours only
INSTITUTIONAL DIVISION
1-888-809-8102
* For information and services for large institutional investors
* Business hours only
27
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
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
28
5. MANAGEMENT OF VANGUARD MID-CAP GROWTH FUND
OFFICERS AND TRUSTEES. The officers of the Vanguard Mid-Cap Growth 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, or death; or otherwise as specified in the relevant
organizational documents. Any trustee of the Vanguard Trust may be removed at a
meeting of shareholders by a vote representing two-thirds of the total net asset
value of all shares of the various series of the Vanguard Trust, voting without
regard to series. Each trustee also serves as a director of Vanguard.
The following chart shows information for each trustee and executive
officer of the Vanguard Trust and, except as noted, all the other Vanguard Group
Funds. The mailing address of the trustees and officers is P.O. Box 876, Valley
Forge, PA 19482.
NUMBER OF
VANGUARD VANGUARD
POSITION(S) HELD GROUP FUNDS PRINCIPAL GROUP FUNDS
WITH VANGUARD TRUSTEE/OFFICER OCCUPATION(S) DURING OVERSEEN BY
NAME, YEAR OF BIRTH GROUP FUNDS SINCE THE PAST FIVE YEARS TRUSTEE/OFFICER
- ------------------- ----------- ----- ------------------- ---------------
INTERESTED 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 107
(1937) in 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.
29
NUMBER OF
VANGUARD VANGUARD
POSITION(S) HELD GROUP FUNDS PRINCIPAL GROUP FUNDS
WITH VANGUARD TRUSTEE/OFFICER OCCUPATION(S) DURING OVERSEEN BY
NAME, YEAR OF BIRTH GROUP FUNDS SINCE THE PAST FIVE YEARS TRUSTEE/OFFICER
- ------------------- ----------- ----- ------------------- ---------------
Joann Heffernan Heisen Trustee July, 1998 Vice President, Chief Information 107
(1950) Officer, and 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
(1941) Economics, Princeton University;
Director of Vanguard Investment Series,
plc (Irish investment fund) since
November, 2001, Vanguard Group (Ireland)
Limited (Irish investment management
firm) since November, 2001, Director of
Prudential Insurance Co. of America, BKF
Capital (investment management firm),
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 Corporation (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.
30
NUMBER OF
VANGUARD VANGUARD
POSITION(S) HELD GROUP FUNDS PRINCIPAL GROUP FUNDS
WITH VANGUARD TRUSTEE/OFFICER OCCUPATION(S) DURING OVERSEEN BY
NAME, YEAR OF BIRTH GROUP FUNDS SINCE THE PAST FIVE YEARS TRUSTEE/OFFICER
- ------------------- ----------- ----- ------------------- ---------------
EXECUTIVE OFFICERS
R. Gregory Barton* Secretary June, 2001 Managing Director and General Counsel of 107
(1951) 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 Vanguard Group Funds are "interested persons" as defined in
the Investment Company Act.
Mr. Ellis is a Senior Advisor to Greenwich Associates, a firm that consults
on business strategy to professional financial service 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. The Vanguard Fund will not commence operations
until the effective date of the reorganization, if approved by shareholders.
Accordingly, as a group, the Vanguard Group Funds' trustees and officers own
less than 1% of the outstanding shares of the Vanguard Fund.
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
31
DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF
VANGUARD FUND SHARES VANGUARD GROUP FUND SHARES
NAME OF TRUSTEE OWNED BY TRUSTEE OWNED BY TRUSTEE
- --------------- ---------------- ----------------
Alfred M. Rankin, Jr. None Over $100,000
J. Lawrence Wilson None Over $100,000
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 (with those exceptions)
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 Vanguard Group Funds compensate their independent
trustees--that is, the ones who are not also officers of the fund--in three
ways:
* The independent trustees receive an annual fee for their service to
the funds, which is subject to reduction based on absences from
scheduled board meetings.
* The independent trustees are reimbursed for the travel and other
expenses that they incur in attending board meetings.
* Upon retirement (after attaining age 65 and completing five years of
service), the independent trustees who began their service prior to
January 1, 2001, receive a retirement benefit under a separate account
arrangement. As of January 1, 2001, the opening balance of each
eligible trustee's separate account was generally equal to the net
present value of the benefits he or she 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.
32
VANGUARD WHITEHALL FUNDS
COMPENSATION TABLE
AGGREGATE PENSION OR RETIREMENT TOTAL COMPENSATION
COMPENSATION FROM BENEFITS ACCRUED AS PART ESTIMATED ANNUAL FROM ALL
VANGUARD SELECTED OF VANGUARD SELECTED VALUE BENEFITS UPON VANGUARD GROUP FUNDS
NAMES OF TRUSTEE VALUE FUND(1) FUND'S EXPENSES(1) RETIREMENT PAID TO TRUSTEES(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 the Vanguard Selected Value
Fund's fiscal year ended October 31, 2001.
(2) The amounts reported in this column reflect the total compensation paid to
each trustee for his or her service as trustee of 107 Vanguard Group Funds
(105 in the case of Mr. Malkiel; 88 in the case of Mr. MacLaury; and 85 in
the case of Mr. Gupta) for the 2001 calendar year.
(3) Mr. Ellis joined the Vanguard Selected Value Fund's board, effective
January 1, 2001.
(4) Mr. Gupta joined the Vanguard Selected Value Fund's board, effective
December 31, 2001.
(5) Mr. MacLaury and Mr. Welch retired from the Vanguard Selected Value Fund's
board, effective December 31, 2001.
THE VANGUARD GROUP. The Vanguard Mid-Cap Growth 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, Pennsylvania 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.
33
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.
34
6. GENERAL INFORMATION
This section provides information on a number of topics relating to proxy
voting and shareholder meetings.
PROXY SOLICITATION METHODS. The PIC 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, Provident employees and officers may
solicit shareholder proxies in person or by telephone.
PROXY SOLICITATION COSTS. Provident will pay all costs of soliciting
proxies from the PIC Fund's shareholders, including costs relating to the
preparation, printing, mailing, and tabulation of proxies.
QUORUM. In order for the shareholder meeting to go forward, the PIC Fund
must achieve a quorum. This means that a majority of your fund's shares must be
represented at the meeting - either in person or by proxy. All returned proxies
count towards a quorum, regardless of how they are voted ("For," "Against," or
"Abstain"). Your fund will count broker non-votes and abstentions toward a
quorum, but not toward the approval of any proposals. Broker non-votes and
abstentions will have the effect of a vote "against" the proposal. Broker
non-votes are shares for which (i) the underlying owner has not voted and (ii)
the broker holding the shares does not have discretionary authority to vote on
the particular matter.
REVOKING YOUR PROXY. You may revoke your proxy at any time up until voting
results are announced at the shareholder meeting. You can do this by writing to
your fund's Secretary, c/o Provident Investment Counsel, 300 North Lake Avenue,
Pasadena, California 91101, or by voting in person at the meeting.
SHAREHOLDER PROPOSALS. Any shareholder proposals to be included in the
proxy statement for the PIC Fund's next meeting of shareholders must be received
by the PIC Fund within a reasonable period of time prior to that meeting. Your
fund has no current plans to hold other meetings of shareholders.
NOMINEE ACCOUNTS. Upon request, Provident will reimburse nominees for their
reasonable expenses in forwarding proxy materials to beneficial owners of the
PIC Fund's shares. Please submit invoices for our review to Provident Investment
Counsel, 300 North Lake Avenue, Pasadena, California 91101.
ANNUAL/SEMI-ANNUAL REPORTS. The PIC Fund's most recent annual and
semi-annual reports to shareholders are available at no cost. To request a
report, please call Provident toll-free at 1-800-618-7643 or write us at 300
North Lake Avenue, Pasadena, California 91101.
PRINCIPAL SHAREHOLDERS. As of March 31, 2002, the PIC Fund had
approximately $33,406,738 million in net assets and 2,363,480.32 outstanding
shares. As of the same date, each of the following persons was known to be the
record owner of more than 5% of the outstanding shares of the PIC Fund:
35
Shareholder Total Number Of Shares Percentages
- ----------- ---------------------- -----------
George E. Handtmann III Trustee
FBO Handtmann Family Trust
Carpinteria, CA 93013 127,942.59 5.41%
Merrill Lynch
Attn: Fund Administration
Jacksonville, FL 32246-6484 282,475.64 11.95%
State Street Corp.
FBO City of Roanoke Pension Plan
Quincy, MA 02171-2126 736,497.55 31.16%
OTHER MATTERS. At this point, we know of no other business to be brought
before the shareholder 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 Provident
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.
IF YOU DO NOT EXPECT TO BE PRESENT AT THE MEETING, PLEASE 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 BY TELEPHONE. PLEASE FOLLOW THE
ENCLOSED INSTRUCTIONS TO USE THESE METHODS OF VOTING.
36
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this _____ day of _________, 2002, between on Vanguard Whitehall Funds, a
business trust formed under the laws of the State of Delaware with its principal
place of business at on P.O. Box 2600, Valley Forge, PA 19482 (the "Vanguard
Trust"), on behalf of Vanguard Mid-Cap Fund, a series of the Vanguard Trust (the
"Acquiring Fund"), and PIC Investment Trust, a business trust formed under the
laws of the State of Delaware with its principal place of business at 300 North
Lake Avenue, Pasadena, California 91101-4106 (the "Provident Trust"), on behalf
of the Provident Investment Counsel Mid Cap Fund A, a series of the Provident
Trust (the "Selling Fund").
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 on (the "Reorganization") will consist of (i)
the transfer of all of the assets of the Selling Fund in exchange solely for
units of on 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 on of this Agreement), of
Acquiring Fund Shares to the shareholders of the Selling Fund in liquidation of
the Selling Fund as provided on in this Agreement, all upon the terms and
conditions set out below.
WHEREAS, the Vanguard Trust and the Provident Trust are each registered as
an open-end management investment company under on the Investment Company Act of
1940, as amended (the "1940 Act");
WHEREAS, the Selling Fund, in reliance on Section 12(d)(1)(E) of the 1940
Act, invests substantially all of its assets in on Shares of the PIC Mid Cap
Portfolio, a New York trust that is registered as an investment company under
the 1940 Act (the "Master on Fund");
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 on 1940 Act), of the Vanguard
Trust has determined with respect to the Acquiring Fund that the exchange of all
of the assets of the on 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 Provident
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 on
shareholders; and
A-1
WHEREAS, The purpose and effect of the Reorganization is to change the form
of organization of the Selling Fund from a on series of Provident Trust to a
series of the Vanguard Trust, and the parties anticipate that the Reorganization
will provide on long-term benefits to the Selling Fund and its shareholders by
immediately reducing expenses and providing access to a larger, more on diverse
complex of funds, which can appeal to a broader spectrum of investors, and thus
increase the size and efficiency of the on Acquiring 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 Provident on Trust agree as follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR ACQUIRING FUND SHARES
AND ON ASSUMPTION OF CERTAIN IDENTIFIED SELLING FUND LIABILITIES; LIQUIDATION
OF THE SELLING FUND ON
1.1 Subject to the terms and conditions set out in this Agreement and on
the basis of the representations and on warranties contained in this Agreement,
the Provident Trust agrees to transfer the Selling Fund's assets in the manner
set out in on paragraph 1.2 of this Agreement to the Acquiring Fund, and the
Vanguard Trust agrees in exchange for such assets: (a) to deliver to on 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 on
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 on Fund including, without
limitation, all cash, securities, commodities and futures interests, and
dividend or interest receivables on 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 on closing date described in paragraph 3.1 of this Agreement (the
"Closing Date").
The Provident Trust, on behalf of the Selling Fund, shall have
provided on or before the date hereof the Vanguard on Trust with (a) the
financial statements of the Selling Fund as of and for its most recently
completed fiscal year (the "Financial on Statements"), and (b) a list of all of
the Selling Fund's assets as of the date of execution of this Agreement. The
Provident on Trust, on behalf of the Selling Fund, represents that as of the
date of the execution of this Agreement no changes have occurred in on 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
Provident 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 additional assets for the Selling Fund other
than instruments of the type in which the Acquiring Fund is permitted to invest.
The Provident Trust, on behalf of the Selling Fund, will, within a reasonable
A-2
time prior to the Closing on 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
on this paragraph that do not conform to the Acquiring Fund's investment
objectives, policies and restrictions. In the event that the on Selling Fund
holds any assets that the Acquiring Fund may not hold, the Selling Fund will use
its best efforts to dispose of such on assets prior to the Closing Date.
1.3 The Provident Trust, on behalf of the Selling Fund, will seek to
discharge all of the Selling Fund's known on liabilities and obligations prior
to the Closing Date, other than those liabilities and obligations that would
otherwise be on discharged at a later date in the ordinary course of the Selling
Fund's business. Except as specifically provided in this paragraph on 1.3, the
Acquiring Fund will assume the liabilities, expenses, costs, charges and
reserves reflected on the Audited Statements of on Assets and Liabilities (as
defined in paragraph 4.1(g)) and the Unaudited Financial Statements (as defined
in paragraph 7.8), as on well as liabilities incurred in the ordinary course of
the Selling Fund's business occurring after the date of the Unaudited on
Financial Statements (collectively, the "Liabilities"). The Acquiring Fund will
assume only the Liabilities and will not, except as on 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 on determined as of the close of business on the Closing
Date (the "Selling Fund Shareholders") the Acquiring Fund Shares it receives on
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
on Fund Shares due those shareholders. All issued and outstanding Shares of the
Selling Fund ("Selling Fund Shares") will on simultaneously be canceled on the
books of the Selling Fund and all certificates relating to the Selling Fund
Shares, if any, will be marked "Cancelled." The Acquiring Fund will not issue
certificates representing the Acquiring Fund's Shares in connection with the on
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 on transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the Acquiring Fund's
current prospectus and on statement of additional information.
1.6 As soon as practicable after distribution of the Acquiring Fund Shares
pursuant to paragraph 1.4 of this Agreement but in any event within 180 calendar
days after the Closing Date the Selling Fund will be terminated as a series of
the Provident on Trust ("Termination Date"). In addition, the Provident Trust
will as soon as practicable after the Termination Date take all other on 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 on 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 on the person to whom the Acquiring Fund Shares are to be
issued and transferred.
A-4
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 June 14, 2002, or such
other date agreed to in writing by the Vanguard Trust and the Provident 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 Provident Trust.
3.2 The Acquiring Fund will arrange for its custodian to deliver at the
Closing a certificate of an authorized officer stating that: (a) the Selling
Fund's portfolio securities, cash and any other assets will 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, will 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
A-5
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 Provident 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
the Acquiring Fund Shares to be credited to the Selling Fund's account on the
Closing Date to the Secretary of the Provident Trust or provide evidence
satisfactory to the Provident 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 Provident Trust, on behalf of the Selling Fund, represents and
warrants to the Vanguard Trust as follows:
(a) The Selling Fund is a series of the Provident Trust, a business
trust duly organized, validly existing, and in good standing under the laws
of the State of Delaware;
(b) The Provident 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 Provident 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
Declaration of Trust or any material agreement, indenture, instrument,
contract, lease or other undertaking to which the Provident Trust on behalf
of itself or on behalf of the Selling Fund is a party or by which its
property is bound;
(d) The Provident 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 Provident 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 Selling Fund prior to the Closing Date;
A-6
(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
Provident Trust's knowledge threatened, against the Provident Trust in
connection with the Selling Fund or any of its properties or assets that,
if adversely determined, would materially and adversely affect the Selling
Fund's financial condition or the conduct of its business. The Provident
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 Provident Trust's ability to consummate the transactions contemplated
by this Agreement;
(g) The statements of assets and liabilities of the Provident Trust
relating to the Selling Fund for each annual period beginning with
commencement of the Selling Fund and ending on October 31, 2001 (the
"Audited Statements of Assets and Liabilities") have been audited by
McGladrey & Pullen, LLP or PricewaterhouseCoopers LLP, as applicable, each
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 October 31, 2001, 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 in writing to the Vanguard Trust prior to the Closing Date. 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, 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 Provident
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 Provident 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;
A-7
(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 Provident
Trust's transfer agent as provided in paragraph 3.4 of this Agreement. The
Provident 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 (other than by exchange from other series of Provident Trust);
(l) At the Closing Date, (i) the Provident Trust, on behalf of the
Selling Fund, will have redeemed all Shares of the Master Fund held by the
Selling Fund and received in-kind a distribution of a pro rata portion of
the assets of the Master Fund in accordance with applicable law, (ii) the
assets of the Selling Fund will not be composed, in whole or in part, of
Shares of the Master Fund, and (iii) the Provident 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 Provident
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 Provident Trust, enforceable against the Provident 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 and to general equity principles;
(n) The information to be furnished by the Provident 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;
(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 such statements were made, not materially misleading; and
A-8
(p) The current prospectus and statement of additional information
filed with the Commission as part of the Provident Trust's registration
statement on Form N-1A, insofar as they relate to the Selling Fund (the
"Provident 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 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 Provident Trust Registration Statement or necessary to make the
statements therein, in light of the circumstances under which they were
made, not materially misleading.
4.2 The Vanguard Trust, on behalf of the Acquiring Fund, represents and
warrants to the Provident Trust as follows:
(a) The Acquiring Fund is a series of the Vanguard Trust, 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 with the Commission 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 its property is bound;
(e) The current prospectus and statement of additional information
filed with the Commission as part of the Vanguard Trust's registration statement
on Form N-1A relating to the Acquiring Fund conform in all material respects to
the applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations thereunder 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.
(f) Except as previously disclosed in writing to and accepted by the
Provident 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
A-9
with the Acquiring Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect the Acquiring Fund'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;
(g) The Acquiring Fund has had no material business operations, and
has no material assets or liabilities since [DATE], the date of its
organization;
(h) 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;
(i) 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;
(j) 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;
(k) The execution, delivery and performance of this Agreement has been
duly authorized by all necessary actions on the part of the Vanguard Trust's
Board of Trustees, and this Agreement will constitute 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 and to general equity principles;
(l) 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;
(m) 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 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-10
(n) 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
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
(o) 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.
A-11
ARTICLE V
COVENANTS OF THE VANGUARD TRUST AND THE PROVIDENT TRUST
5.1 The Vanguard Trust will operate the business of the Acquiring Fund, and
the Provident 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 Provident 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 Provident 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 Provident 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 Provident Trust, on behalf of the Selling Fund, will assist the
Vanguard Trust in obtaining all information 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
Provident 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.
5.6 As promptly as practicable, but in any case within forty-five calendar
days after the Closing Date, the Provident Trust will furnish the Vanguard
Trust, in such form as is reasonably satisfactory to the Vanguard Trust, a
statement of the earnings and profits of the Selling Fund for federal income tax
purposes that will be carried over to the Acquiring Fund as a result of Section
381 of the Code, and that will be certified by the Selling Fund's President and
its Treasurer.
5.7 The Provident 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.
A-12
5.8 As promptly as practicable, but in any case within thirty days after
the Closing Date, the Provident 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 Provident 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 Provident Trust.
5.9 As promptly as practicable, but in any case within the period required
by applicable law or regulation, the Provident 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 PROVIDENT TRUST
The obligations of the Provident 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 Provident Trust a
certificate executed in its name, and on behalf of the Acquiring Fund, by its
Chief Executive Officer, President or Vice President and its Secretary,
Treasurer or Assistant Treasurer, in form and substance reasonably satisfactory
to the Provident 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 Provident Trust may reasonably request.
6.3 The Provident 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 form and substance reasonably satisfactory to the
Provident Trust, and based upon customary certificates with respect to matters
of fact from the officers of the Vanguard Trust, covering the following points:
A-13
(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 trust 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 Vanguard Trust'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 Provident 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;
(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 or the Acquiring Fund, 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 and fairly present the information required to be shown;
A-14
(h) such counsel does not know of any legal, administrative or
governmental proceeding, 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 or that materially and adversely affect the Acquiring
Fund's business; 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 Provident Trust or the Selling Fund, contained in the Proxy
Statement or the Vanguard Trust Registration Statement, and that such opinion is
solely for the benefit of the Provident Trust and its trustees 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
trustees of the Acquiring Fund. The opinion also will include such other matters
incident to the transaction contemplated by this Agreement as the Provident
Trust may reasonably request.
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.
A-15
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 Provident 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 Provident 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 Provident 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 bases (and, if
different from tax costs, book costs) of those securities by lot and the holding
periods of those securities as of the Closing Date, certified by the Treasurer
or Assistant Treasurer of the Provident Trust. Such list of tax cost bases and
holding periods shall reflect any allocations and adjustments which may arise
under the Code and/or Treasury Regulations as a result of the in-kind redemption
from the Master Fund to the Selling Fund (including, but not limited to, any
allocations and adjustments in accordance with Sections 732(b) and 732(c) of the
Code and any wash sale adjustments) and will be in such a form as to enable the
Vanguard Fund to accurately determine the tax cost bases for the securities
received from the Selling Fund on a lot basis without the need to consult any
additional schedules of allocation or adjustment.
7.3 The Provident 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 Chief Executive Officer, President or Vice President and its
Secretary, Treasurer or Assistant Treasurer, in form and substance reasonably
satisfactory to the Vanguard Trust and dated as of the Closing Date, to the
effect that the representations and warranties of the Provident 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 Paul, Hastings, Janofsky & Walker LLP, counsel to the Provident
Trust, dated as of the Closing Date, in form and substance reasonably
satisfactory to the Vanguard Trust, and based upon customary certificates with
respect to matters of fact from the officers of the Provident Trust, covering
the following points:
(a) the Selling Fund is a separate series of the Provident Trust, a
business trust that is duly organized, validly existing and in good standing
under the laws of the State of Delaware and the Provident Trust has the trust
power to own all of the Selling Fund's properties and assets and to carry on the
Selling Fund's business as presently conducted;
A-16
(b) the Provident Trust is registered as an investment company under
the 1940 Act and, to such counsel's knowledge, the Provident Trust's
registration 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 Provident 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 Provident Trust enforceable against the
Provident 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 Provident Trust's Declaration of Trust or in a material
violation of any provision of any agreement relating to the Selling Fund (known
to such counsel) to which the Provident 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 Provident 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 Provident
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) the descriptions in the Proxy Statement, insofar as they relate to
the Provident Trust or the Selling Fund, 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 and fairly present the information required to be shown; and
(g) such counsel does not know of any legal, administrative or
governmental proceeding, investigation, order, decree or judgment of any court
or governmental body, insofar as they relate to the Provident Trust, the Selling
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 or that materially and adversely affect the Selling Fund's business.
Counsel also will state that they have participated in conferences with
officers and other representatives of the Provident Trust at which the contents
of the Proxy Statement and related matters were discussed and, although they are
not passing upon and do not assume any responsibility for the accuracy,
A-17
completeness or fairness of the statements contained in the Proxy Statement
(except to the extent indicated in paragraph (f) 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 Provident Trust), they do 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 to make
the statements in the Proxy Statement regarding the Selling Fund not misleading
in the light of the circumstances under which they were made.
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, and that such opinion is solely for the benefit of the Vanguard Trust
and its trustees and officers. The opinion also will include such other matters
incident to the transaction contemplated by this Agreement as the Vanguard Trust
may reasonably request. 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 Provident Trust.
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.
7.5 The Vanguard Trust will have received on the Closing Date a favorable
opinion of Paul, Hastings, Janofsky & Walker LLP, addressed to, and in form and
substance reasonably satisfactory to the Vanguard Trust substantially to the
effect that, provided the redemption in-kind of all Shares of the Master Fund by
the Selling Fund, as contemplated hereby, is carried out as described herein,
and based upon customary certificates with respect to matters of fact from the
officers of the Provident Trust, that for federal income tax purposes:
(a) the Selling Fund will recognize no gain or loss on the redemption
in-kind of all of its Shares of the Master Fund in accordance with Section 731
of the Code;
(b) the basis of assets received by the Selling Fund on the redemption
in-kind of all of its Shares of the Master Fund will be the same basis as the
basis which the Selling Fund had in its Shares of the Master Fund immediately
prior to the redemption, less any cash distributed, and will be allocated to
such assets in accordance with Section 732(b) and Section 732(c) of the Code;
(c) the holding period of the assets received by the Selling Fund on
the redemption in-kind of its Shares of the Master Fund will include the period
during which the Master Fund held those Shares under Section 735(b) of the Code.
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-18
(a) they are independent public accountants with respect to the
Provident Trust within the meaning of the 1933 Act and the applicable
regulations under the 1933 Act;
(b) in their opinion, the Financial Statements and per share income
and capital changes 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;
(c) on the basis of limited procedures agreed upon by the Vanguard
Trust and the Provident Trust and described in the letter (but not an audit in
accordance with generally accepted auditing standards) with respect to the
unaudited pro forma financial statements of the Selling Fund included in the
Registration Statement and the Proxy Statement, and inquiries of appropriate
officials of the Provident Trust or the officers of the Provident Trust
responsible for financial and accounting matters, nothing came to their
attention that caused them to believe that (i) the unaudited pro forma financial
statements do not 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, or (ii) the unaudited pro forma financial statements are not fairly
presented in conformity with generally accepted accounting principles applied on
a basis substantially consistent with those of the audited Financial Statements;
and
(d) on the basis of limited procedures agreed upon by the Vanguard
Trust and the Provident Trust and described in the letter (but not an
examination in accordance with generally accepted auditing standards), the
information relating to the Selling Fund appearing in the Registration Statement
and the Proxy Statement that is expressed in dollars or percentages of dollars
(with the exception of performance comparisons) has been obtained from the
accounting records of the Selling Fund or from schedules prepared by officers of
the Provident Trust having responsibility for financial and reporting matters
and the information is in agreement with these records, schedules or
computations made from those documents.
7.7 The Provident Trust will have delivered to the Vanguard Trust, pursuant
to paragraph 4.1(g) of this Agreement, copies of Financial Statements of the
Selling Fund as of and for its most recently completed fiscal year.
7.8 The Vanguard Trust will have received from PricewaterhouseCoopers LLP a
letter addressed to the Vanguard Trust and dated as of the Valuation Date
stating that as of a date no more than three business days prior to the
Valuation Date, PricewaterhouseCoopers LLC performed limited procedures in
connection with the Provident Trust's most recent unaudited financial statements
relating to the Selling Fund (the "Unaudited Financial Statements") and that (a)
nothing came to their attention in performing the limited procedures or
otherwise that led them to believe that any changes had occurred in the assets,
liabilities, net assets, net investment income, net increase (decrease) in net
assets from operations or net increase (decrease) in net assets as compared with
amounts as of the Selling Fund's most recent audited fiscal year end or the
corresponding period in the Selling Fund's most recent audited fiscal year,
other than changes occurring in the ordinary course of business and (b) based on
the limited procedures, no change has occurred in their report on the most
recent audited Financial Statements of the Provident Trust relating to the
Selling Fund.
A-19
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
AND THE SELLING FUND
The obligations of the Vanguard Trust and the Provident Trust, respectively, to
complete the transactions provided for in this Agreement are subject to the
performance by the other party of such other party's obligations, and the
following conditions:
8.1 This Agreement and the transactions contemplated in this 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 Provident
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 Provident 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 Provident 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 or the
Registration Statement will have been issued and, to the best knowledge of the
Vanguard Trust or the Provident Trust, no investigation or proceeding for that
purpose will have been instituted or be pending, threatened or contemplated
under the 1933 Act.
8.5 The parties will have received a favorable opinion of Morgan, Lewis &
Bockius, LLP, addressed to, and in form and substance reasonably satisfactory to
the Provident 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
A-20
the Provident 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 Provident Trust may waive the conditions set out in this
paragraph 8.5.
A-21
ARTICLE IX
BROKERAGE FEES AND EXPENSES; OTHER AGREEMENTS
9.1 The Vanguard Trust represents and warrants to the Provident Trust, and
the Provident 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, Inc. ("The Vanguard Group") and Provident
Investment Counsel, Inc. each agree to 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 7, 2002,
to which each is a party; provided, however, that The Vanguard Group shall also
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 the Selling Fund or Provident
Investment Counsel, Inc. ("Provident"), as mutually agreed between such two
parties, shall bear the fees, costs, and expenses of PricewaterhouseCoopers LLP
in performing the limited procedures required under paragraph 7.8.
9.3 (a) Provident will indemnify and hold harmless the Vanguard Trust, the
Acquiring Fund, The Vanguard Group, Inc., their trustees, 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 Provident Trust's representations or warranties under this Agreement, or as
a result of any willful misconduct or negligence by the Provident Trust in the
performance (or failure to perform) of the Provident Trust's obligations under
this Agreement.
(b) Provident's agreement to indemnify a Vanguard Indemnified Party
pursuant to this paragraph 9.3 is expressly conditioned upon Provident's being
notified of any action or claim brought against any Vanguard Indemnified Party
within thirty (30) days after that party receives notice of the action or claim.
The failure of a Vanguard Indemnified Party to notify Provident will not relieve
Provident from any liability that Provident 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 Provident of the commencement
of the action or claim, Provident 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.
Provident shall be entitled to select and engage counsel reasonably satisfactory
to the Vanguard Indemnified Party to handle and defend against any action or
claim. In the event Provident does not assume full control over the handling and
defense of any action or claim, the Vanguard Indemnified Party shall have the
right to handle, defend, and/or settle any such action or claim as it may deem
appropriate, at the cost and expense of Provident. Provident shall not enter
into the settlement of any action or claim on behalf of a Vanguard Indemnified
Party without the prior written consent of the Vanguard Indemnified Party.
A-22
9.4 (a) The Vanguard Group will indemnify and hold harmless the Provident
Trust, the Selling Fund, Provident Investment Counsel, Inc., their trustees,
directors, officers, employees and affiliates (each, a "Provident 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 Vanguard Trust's representations or warranties under
this Agreement, or as a result of any willful misconduct or negligence by the
Vanguard Trust in the performance (or failure to perform) of the Vanguard
Trust's obligations under this Agreement.
(b) Vanguard's agreement to indemnify a Provident Indemnified Party
pursuant to this paragraph 9.4 is expressly conditioned upon Vanguard's being
notified of any action or claim brought against any Provident Indemnified Party
within thirty (30) days after that party receives notice of the action or claim.
The failure of a Provident Indemnified Party to notify Vanguard will not relieve
Vanguard from any liability that Vanguard may have otherwise than on account of
this indemnification agreement.
(c) In case any action or claim is brought against any Provident
Indemnified Party and that party timely notifies Vanguard of the commencement of
the action or claim, Vanguard 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.
Vanguard shall be entitled to select and engage counsel reasonably satisfactory
to the Provident Indemnified Party to handle and defend against any action or
claim. In the event Vanguard does not assume full control over the handling and
defense of any action or claim, the Provident Indemnified Party shall have the
right to handle, defend, and/or settle any such action or claim as it may deem
appropriate, at the cost and expense of Vanguard. Vanguard shall not enter into
the settlement of any action or claim on behalf of a Provident Indemnified Party
without the prior written consent of the Provident Indemnified Party.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
10.1 The Vanguard Trust and the Provident 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
with respect to the Reorganization.
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-23
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 Provident Trust and the Vanguard
Trust; (ii) the Provident Trust, in the event the Vanguard Trust has, or the
Vanguard Trust in the event the Provident 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 Provident 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, neither the Vanguard Trust, nor
the Provident Trust, nor any series thereof other than the Selling Fund and the
Acquiring Fund, nor their respective trustees or officers, will 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 Provident 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
If to the Provident Trust, at:
Provident Investment Counsel
300 North Lake Avenue
Pasadena, California 91101-4106
Attention:
Telephone:
Facsimile:
A-24
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 State of Delaware.
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.
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.
* * * * *
A-25
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.
PIC INVESTMENT TRUST VANGUARD WHITEHALL FUNDS
- ----------------------------------- ------------------------------------
Signature Date Signature Date
- ----------------------------------- ------------------------------------
Print Name Title Print Name Title
PROVIDENT INVESTMENT COUNSEL, INC. THE VANGUARD GROUP (as to the
(as to the provisions of Paragraphs provisions of Paragraphs 9.2 and
9.2 and 9.5 only) 9.3 only)
- ----------------------------------- ------------------------------------
Signature Date Signature Date
- ----------------------------------- ------------------------------------
Print Name Title Print Name Title
A-26
PROXY
The proxy is being solicited by the Board of Trustees of PIC Investment Trust
(the "PIC Trust") for the Special Meeting of Shareholders of Provident
Investment Counsel Mid Cap Fund A of the PIC Trust (the "Meeting"). The
undersigned, revoking previous proxies with respect to the Shares (defined
below), hereby appoints Thomas M. Mitchell and Aaron W.L. Eubanks, Sr. as
proxies and each of them, each with full power of substitution, to vote at the
Meeting to be held in the offices of Provident Investment Counsel ("Provident"),
300 North Lake Avenue, Pasadena, California 91101, on Monday, June 3, 2002, at
10:00 a.m., and any adjournments or postponements thereof (the "Meeting") all
shares of beneficial interest of said Trust that the undersigned would be
entitled to vote if personally present at the Meeting ("Shares") on the proposal
set forth below, and in accordance with their own discretion, any other matters
properly brought before the Meeting.
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS A VOTE "FOR" THE PROPOSAL:
PROPOSAL 1. Approval of the reorganization of Provident Investment Counsel Mid
Cap Fund A into Vanguard Mid-Cap Growth Fund.
____For ____Against ____Abstain
This proxy will, when properly executed, be voted as directed herein by the
signing Shareholder. If no direction is given when the duly executed Proxy is
returned, this Proxy will be voted FOR the foregoing proposal and will be voted
in the appointed proxies' discretion upon such other business as may properly
come before the Meeting.
The undersigned acknowledges receipt with this Proxy of a copy of the Notice of
Special Meeting and the Proxy Statement of the Board of Trustees. Your
signature(s) on this Proxy should be exactly as your name(s) appear on this
Proxy. If the shares are held jointly, each holder should sign this Proxy.
Attorneys-in-fact, executors, administrators, trustees or guardians should
indicate the full title and capacity in which they are signing.
Dated: ________, 2002
---------------------------------
Signature of Shareholder
---------------------------------
Signature (Joint owners)
PLEASE DATE, SIGN AND RETURN PROMPTLY USING THE ENCLOSED, POSTAGE-PAID ENVELOPE
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING; YOU MAY, NEVERTHELESS, VOTE IN
PERSON IF YOU DO ATTEND.
Telephone Voting Instructions:
1) Read the Proxy Statement and have this Proxy card at hand.
2) Call ___________
3) Enter the 12-digit control number set forth on this Proxy card and follow
the simple instructions.
PART B
VANGUARD(R) WHITEHALL FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 26, 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 a separately filed combined
prospectus/proxy statement (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 the related combined prospectus/proxy
statement, dated April 26, 2002 (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 read in
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 is herein incorporated by
reference to Exhibit 4 of Registrant's Registration Statement on Form N-14 filed
March 18, 2002.
(5) Not applicable.
(6) Form of Investment Advisory Agreement between Vanguard Whitehall Funds and
Provident Investment Counsel 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.
C-1
(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)(a) 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.
(12)(b) Form of Opinion and Consent of Paul, Hastings, Janofsky & Walker LLP as
to certain tax matters and consequences is herein incorporated by reference to
Exhibit 12(b) 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 Provident Investment Counsel Mid Cap Fund A dated March
1, 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 Provident Investment Counsel Mid
Cap Fund A dated March 1, 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 Provident Investment Counsel Mid Cap Fund A 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.
C-2
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
- ----------------------------------- Executive Officer, and Trustee April 26, 2002
(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
- ----------------------------------- Financial Officer and Principal
(HEIDI STAM) Accounting Officer April 26, 2002
Thomas J. Higgins*
* BY POWER OF ATTORNEY. SEE FILE NUMBER 33-32216, FILED ON JANUARY 29, 2002.
INCORPORATED BY REFERENCE.
C-3
INDEX TO EXHIBITS
NONE.