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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. ) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. --
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO.
VANGUARD WHITEHALL FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
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VANGUARD WHITEHALL FUNDS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<S> <C> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... N/A
Item 4. General Description of Registrant............. Investment Objectives; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund........................ Directors and Officers; Management of
the Fund; The Vanguard Group
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of Each Portfolio;
Dividends, Capital Gains, and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objectives and Policies
Item 13. Investment Objective and Policies............. Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statement
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statement
</TABLE>
<PAGE> 3
VANGUARD
SELECTED VALUE PORFOLIO
P R O S P E C T U S
JANUARY __, 1996
Vanguard Selected Value Portfolio
A MID-CAP VALUE STOCK
MUTUTAL FUND
Contents
Portfolio Expenses 2
A Word About Risk 4
The Portfolio's
Objective 4
Investment Strategies
and Policies 5
Investment Practices 7
Investment Limitations 8
Investment
Performance 9
Dividends, Capital
Gains, and Taxes 10
Management
of the Portfolio 11
Investment Adviser 11
General Information 12
Investing
with Vanguard 13
- - Customizing Your
Account 00
- - Setting Up Your
Account 00
- - Accessing Your
Account 00
- - Fund and Account
Updates 00
Glossary Inside Back Cover
<PAGE> 4
INVESTMENT POLICIES AND OBJECTIVES
Vanguard Selected Value Portfolio (the "Portfolio") is an open-end diversified
investment company, or mutual fund. The Portfolio seeks to provide long-term
growth of capital and income by investing mainly in equity securities of
medium-sized U.S. companies. The Portfolio uses a "value" investment approach,
emphasizing companies with below-average price-to-earnings ratios, reasonable
financial strength, and strong cash flows. These companies tend to be out of
favor with investors.
Vanguard Selected Value Portfolios is part of Vanguard Whitehall Funds,
Inc. (the "Fund"), which currently offers shares of only one Portfolio.
It is important to note that the Portfolio's shares are not guaranteed
or insured by the FDIC or any other agency of the U.S. government. As with any
investment in common stocks, which are subject to wide fluctuations in market
value, you could lose money by investing in the Portfolio.
FEES AND EXPENSES
The Portfolio is offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 fees. You will, however, incur expenses for investment
advisory, management, administrative, and distribution services, which are
included in the expense ratio.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIO
A Statement of Additional Information containing more information about
the Portfolio is, by reference, part of this prospectus, and may be obtained by
writing to Vanguard or by calling our Investor Information Department.
WHY READING THIS PROPSECTUS IS IMPORTANT
This prospectus explains the risks and objectives of the Selected Value
Portfolio. To highlight terms and concepts important to mutual fund investors,
we have provided "Plain Talk" explanations along the way. Reading the
prospectus will help you to decide whether the Portfolio is the right
investment for you. We suggest that you keep it for future reference.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor has the Securities
and Exchange Commission or any state commission passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
<PAGE> 5
PORTFOLIO PROFILE
VANGUARD SELECTED VALUE PORTFOLIO
WHO SHOULD INVEST? (PAGE 4)
- - Investors seeking a stock mutual fund that emphasizes undervalued,
mid-sized companies as part of a balanced and diversified investment
program.
- - Investors seeking growth of their capital and income over the long term--at
least five years.
WHO SHOULD NOT INVEST?
- - Investors seeking current dividend income.
- - Investors unwilling to accept significant fluctuations in share price.
RISKS OF THE PORTFOLIO (PAGES 4-8)
This Portfolio's total return will fluctuate within a wide range, so an
investor could lose money over short, or even extended, periods. The Portfolio
is subject to manager risk (the chance that poor security selection will cause
it to lag the stock market as a whole), and as a mid-cap value stock fund, to
objective risk (the chance that returns from mid-cap or value stocks will trail
returns from the overall stock market).
DIVIDENDS AND CAPTIAL GAINS (PAGE 10)
Paid annually in December.
INVESTMENT ADVISER (PAGE 11)
James S. McClure and John P. Harloe of Barrow, Hanley, Mewhinney & Strauss,
Inc. of Dallas, Texas.
INCEPTION DATE: January __, 1996
NET ASSETS AS OF 1/31/96: $100,000.
PORTFOLIO EXPENSE RATIO ESTIMATE: 0.60% of net assets per year
LOADS AND 12B-1 FEES: None
SUITABLE FOR IRAS: Yes
MINIMUM INITIAL INVESTMENT $3,000; $1,000 for IRAs and custodial accounts
NEWSPAPER ABBREVIATION: Sel Valu
VANGUARD FUND NUMBER: 934
ACCOUNT FEATURES (PAGES 14-15)
- - Vanguard Direct Deposit Service(SM)
- - Telephone Redemption
- - Vanguard Automation Exchange Service(SM)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(SM)
<PAGE> 6
PORTFOLIO EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Portfolio.
As noted in this table, you do not pay fees of any kind when you buy,
sell, or exchange shares of the Portfolio:
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
The next table illustrates the fund operating expenses that you would
incur as a shareholder of the Portfolio. These expenses are deducted from the
Portfolio's income before it is paid to you. Expenses include investment
advisory fees as well as the costs of maintaining accounts, administering the
Fund, providing shareholder services, and other activities of the Portfolio.
The expenses shown in the table are estimates for the Portfolio's first full
year since the Portfolio was not in operation as of the date of this
prospectus.
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time,
have a dramatic impact on a fund's performance.
ESTIMATED ANNUAL PORTFOLIO OPERATING EXPENSES
Management and Administrative Expenses: 0.31%
Investment Advisory Expenses: 0.38%
12b-1 Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.02%
Total Other Expenses: 0.04%
Total Operating Expenses (Expense Ratio): 0.73%
The following example illustrates the hypothetical expenses that you
would incur on a $1,000 investment over various periods. The example assumes
(1) that the Portfolio provides a return of 5% a year and (2) that you redeem
your investment at the end of each period.
1 Year 3 Years 5 Years 10 Years
$___ $___ $___ $___
This example should not be considered a representation of actual expenses or
performance from the past or for the future, which may be higher or lower than
those shown.
<PAGE> 7
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
a fund. Vanguard Selected Value Portfolio's expense ratio in fiscal year 1996
is expected to be 0.60%, or $6.00 per $1,000 of net assets. The average
general equity mutual fund had expenses in 1995 of 1.__%, or $1_.__ per $1,000
of net assets, according to Lipper Analytical Services, Inc., which reports on
the mutual fund industry.
A WORD ABOUT RISK
This prospectus describes the risks you'll face as an investor in mutual funds
generally and in Vanguard Selected Value Portfolio specifically. It's important
to keep in mind one of the main axioms of investing: the higher the risk, the
higher the potential reward. The reverse, also, is generally true: the lower
the risk, the lower the potential reward. However, as you consider an
investment in the Selected Value Portfolio, you should also take into account
your personal tolerance for the daily fluctuations of the stock market.
Look for this "warning flag" symbol - throughout the prospectus. It is
used to mark detailed information about each type of risk that you, as a
shareholder of the Portfolio, may confront.
THE PORTFOLIO'S OBJECTIVE
Vanguard Selected Value Portfolio is a value fund that seeks to provide
long-term growth in captial and income by investing mainly in the common stocks
of mid-sized U.S. companies. Long-term growth of capital is a fundamental
objective, which means that this objective cannot be changed unless a majority
of shareholders vote to do so. Dividend income is incidental to the main
objective.
- - There is no assurance that this objective will be met. Your investment in the
Portfolio, as with any investment in common stocks, could lose money.
PLAIN TALK ABOUT
VALUE FUNDS AND
GROWTH FUNDS
Value funds generally emphasize companies that - considering their assets and
earnings potential - have relatively low stock prices. Growth funds emphasize
companies with above-average earnings prospects. Value and growth stocks have,
in the past, produced similar long-term returns, though each has had periods
when it outperforms the other. In general, growth funds appeal to investors
who will accept more volatility in hope of above-average capital growth,
while value funds are appropriate for investors who want the potential for
capital gains but are less tolerant of sharp share price fluctuations.
WHO SHOULD INVEST
The Portfolio may be a suitable investment for you if:
- - You wish to complement an existing portfolio of stock, bond, and money market
mutual funds with a stock that emphasizes undervalued, medium-sized
companies.
<PAGE> 8
- - You are seeking growth of capital over the long term--at least five years.
- - You are not looking for significant levels of current income from dividends
or interest.
- - You characterize your investment temperment as "moderately aggressive."
PLAIN TALK ABOUT
INVESTING FOR THE
LONG TERM
VANGUARD SELECT VALUE PORTFOLIO IS INTENDED TO BE A LONG-TERM INVESTMENT
VEHICLE AND IS NOT DESIGNED TO PROVIDE INVESTORS WITH A MEANS OF SPECULATING ON
SHORT-TERM FLUCUATIONS IN THE STOCK MARKET.
This Portfolio is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Portfolio's shareholders. To
minimize such costs, which reduce the ultimate returns achieved by you and
other shareholders, the Portfolio has adopted the following policies:
- - The Portfolio reserves the right to reject any purchase request--including
changes from other Vanguard Funds--that we regard as disruptive to the
efficient management of the Portfolio. This could be because of the timing of
the investment or because of a hisotry of excessive trading by the investor.
- - There is a limit on the number of times you can exchange into or out of the
Portfolio (see "Exchanging Shares" in the Investing with Vanguard section).
- - The Portfolio reserves the right to stop offering shares at any time.
PLAIN TALK ABOUT
COSTS AND
MARKET TIMING
Some investors try to profit from "market timing"--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and then selling securities. These costs are borne by all
fund shareholders, including long-term investors who do not generate the costs.
Therefore, the Portfolio discouragse short-term trading by, among other things,
limiting the number of exchange redemptions.
INVESTMENT AND STRATEGIES
AND POLICIES
This section explains how the Portfolio's investment adviser pursues the
objective of long-term growth in capital. It also explains three important
risks--securities market risk, objective risk, and manager risk--faced by
investors in the Portfolio. Unlike the Portfolio's investment objective, the
adviser's investment strategies are not fundamental policies and therefore
could be changed by the Portfolio's Board of Directors without shareholder
approval. However, before making any important change in its policies, the
Portfolio will notify shareholders of the impending change.
MARKET EXPOSURE
The Portfolio is a value fund that invests chiefly in medium-capitalization
common stocks with low prices in relation to corporate earnings and book value.
While mid-cap stock funds generally do not provide much taxable income, the
Portfolio's adviser does not consider tax consequences when carrying out its
strategy.
<PAGE> 9
- The Portfolio is subject to market risk, which is the possibility that
stock prices in general will decline over short or even extended
periods. Stock markets tend to move in cycles, with periods of rising
stock prices and periods of falling stock prices.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCK
Stocks--and mutual funds that hold stock--can be classified by their market
value, or capitalization. Vanguard defines small-capitalizaiton, or small-cap,
funds as those holding stocks with an average total market value of $750
million or less. Large-capitalization funds hold stocks with an average market
value exceeding $5 billion. Mid-cap funds hold stocks with an average market
value between $750 million and $5 billion.
U.S. STOCK MARKET RETURNS (1926-1994)
--INSERT CHART--
To illustrate the volatility of stock prices, the chart above [or, at
the top of the next page] shows the best, worst, and average returns for the
U.S stock market over various periods as measured by the Standard & Poor's 500
Composite Stock Price Index, a widely used barometer or stock market activity.
Note that the returns shown do not include the costs of buying and selling
stocks or other expenses that a real-world investment portfolio would incur.
Note, also, how volatility risk tends to decline over the long term.
The chart above shows the best, worst, and average total returns
(dividend income plus change in market value) from common stocks for all the
1-, 5-, 10-, and 20-year periods from 1926 through 1994. While the average
return on stocks for the 5-year period was +10.3%, returns ranged from a
negative -12.5% average from 1928 through 1932, to +23.9% from 1951 through
1955. These average returns reflect past performance on common stocks and
should not be regarded as an indication of future returns from either the stock
market as a whole or this Portfolio in particular.
Finally, the Selected Value Portfolio emphasizes mid-capitalization
stocks, but will also include smaller-capitalization stocks. Mid- and
small-cap stocks have historically been more volatile -- and at times have
performed quite differently from -- the large-cap stocks found in the S&P 500
Index. This is due to several factors, including less-certain growth and
dividend prospects for smaller companies. For these reasons and because the
Selected Value Portfolio does not hold the same securities held in the
Standard & Poor's 500 Index or any other market index, the performance of
the Portfolio will not mirror the returns of any particular index.
- The Portfolio is subject to objective risk, which is the possibility
that returns from mid-cap value stocks will trail returns from the
overall stock market. As a group, value stocks tend to go through
cycles of relative underperformance and outperformance in comparison
to common stocks in general. These periods have, in the past, lasted
for as long as several years.
SECURITY SELECTION AND PORTFOLIO CONCENTRATION
Barrow, Hanley, Mewhinney & Strauss (BHM&S), adviser to the Portfolio, seeks
out undervalued mid-sized companies through extensive research and meetings
with company management. A company is considered undervalued if, according to
BHM&S, its earnings potential is not reflected in its stock's share price.
These stocks generally have low price/earnings ratios. BHM&S holds the stock
until the share price reflects the company's underlying value. The top ten
holdings are expected to make up 40% to 50% of the Portfolio's total net assets,
a relatively high concentration.
The Portfolio is run by BHM&S according to traditional methods of "active"
investment management, which means securities are bought and sold according to
BHM&S's judgments about companies and their financial prospects, and about the
stock market and the broad economy in general.
<PAGE> 10
- The Portfolio is subject to manager risk, which is the possibility
that BHM&S may do a poor job of selecting stocks. As a result,
the Portfolio may fail to achieve its objective, and shareholders
could receive returns that lag those of mid-cap stocks overall.
PLAIN TALK ABOUT
PORTFOLIO CONCENTRATION
In general, greater diversification for a portfolio of stock results in lower
price fluctuations. One measure of diversification is a fund's portfolio
concentration--the percentage of assets represented by its ten largest stock
holdings. The higher a fund's concentration, the greater the risk to the
portfolio from problems with a specific stock. The average U.S. equity mutual
fund has about 25% of its assets invested in its ten largest holdings, while
some highly concentrated mutual funds have more than 50% of their assets
invested in the stocks of just ten companies.
PORTFOLIO TURNOVER
Although the Portfolio generally seeks to invest for the long term, it retains
the right to sell securities regardless of how long they've been held. The
anticipated annual turnover rate of the Portfolio is about 30%. (A turnover
rate of 33% would occur, for example, if one-third of the securities in the
Portfolio were sold and replaced with other securities within a one-year
period.)
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
actively managed funds investing in common stocks is 75%.
INVESTMENT PRACTICES
Besides investing in common stocks of medium-sized companies, the Portfolio may
use a number of other investment practices to achieve its objective.
- The Portfolio reserves the right to invest, to a limited extent, in
stock futures and options contracts, which are traditional types of
derivatives. However, using derivatives is not a standard part of the
adviser's approach to investing.
<PAGE> 11
PLAIN TALK ABOUT
DERIVATIVES
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). Futures
and options are derivatives that have been trading on regulated exchanges for
more than two decades. These "traditional" derivatives are standardized
contracts that can easily be bought and sold, and whose market values are
determined and published daily. It is these characteristics that differentiate
futures and options from the relatively new, exotic types of derivatives--some
of which can carry considerable risks.
This Portfolio will not use futures and options contracts as leveraged
investments that magnify the gains or losses of an investment. Rather, the
Portfolio will keep separate cash or short-term, cash-equivalent securities in
the amount of the obligation underlying the futures contract. Only a limited
percentage of the Portfolio's assets--up to 5% if required for deposit and no
more than 20% of total assets--may be committed to such contracts.
The reasons for which the Portfolio may use futures and options
contracts are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To make it easier to trade.
- - To reduce costs by buying futures instead of actual stocks when futures are
cheaper.
The Portfolio normally seeks to remain fully invested in equity securities.
However, the Portfolio may temporarily invest in certain short-term
fixed-income securities to invest cash not yet committed to stocks, to
maintain liquidity to meet shareholder redemptions, or to take a defensive
position against potential declines in the stock market. The short-term
securities that the Portfolio may invest include:
- - Debt (or IOUs) issued by the U.S. government and its agencies or
instrumentalities.
- - Commercial paper, a form of debt issued by corporations.
- - Bank certificates of deposit.
- - Banker's acceptances, a type of debt guaranteed by banks.
- - Repurchase agreements backed by short-term securities
PLAIN TALK ABOUT
CASH RESERVES
With mutual funds, holding "cash" does not mean literally that the fund holds a
stack of currency. Rather, cash refers to short-term, interest-bearing
securities that can easily and quickly be converted to cash. (Most mutual
funds keep at least a small percentage of assets in cash to accommodate
shareholder redemptions.) While some funds strive to keep cash levels at a
minimum and to always remain fully invested in stocks, other equity funds allow
investment advisers to hold up to 20% or more of a fund's assets in cash
reserves.
<PAGE> 12
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolio has adopted certain
limits on its investment practices. Specifically, the Portfolio will not:
- - Invest more than 5% of its assets in the securities of companies that have
been in business for less than three years.
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for the emergency purpose of meeting shareholder
requests to redeem shares.
- - Use more than 15% of its assets as collateral for any type of debt or similar
obligation.
Although this Portfolio is not expected to invest more than 10% of its assets
in the securities of a single company, it is, like any diversified mutual fund,
permitted by law to invest up to 25% of its assets in the securities of a
single company. With respect to the remaining 75% of its assets, this
Portfolio will not:
- - Investment more than 5% in the securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statement of Additional
Information may be changed only by approval of a majority of the Portfolio's
shareholders.
INVESTMENT PERFORMANCE
Vanguard Selected Value Portfolio invests primarily in common stocks, so its
performance is somewhat correlated to the performance of the overall stock
market. Historically, stock markete performance has been characterized by
sharp up-and-down swings in the short term and by more stable growth over the
long term.
From time to time, the Vanguard Funds advertise yield and total return
figures. Yield is a prospective measure of dividend income, and total return
is a measure of past dividend income plus capital appreciation. Neither yield
nor total return should be used to predict the future performance of the fund.
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, please don't consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history doesn't repeat itself in neat, predictable patterns!
SHARE PRICE
The Portfolio's share price, called its net asset value, is calculated each
business day after the close of regular trading (generally 4:00 p.m. Eastern
time) of the New York Stock Exchange. Net asset value per share is computed by
adding up the total value of the Portfolio's investments and other assets,
subtracting any of its liabilities, or debts, and then dividing by the number
of outstanding shares of the Portfolio:
Total Assets - Liabilities
Net Asset Value = -------------------------------
Number of Shares Outstanding
<PAGE> 13
Daily net asset value, or NAV, is useful to you as a shareholder
because the NAV, multiplied by the number of Portfolio shares you own, gives
you the dollar amount you would have received had you sold all of your shares
back to the Portfolio that day.
The Portfolio's share price can be found daily in the mutual fund
listings of most major newspapers under the heading Vanguard Group. Different
newspapers use different abbreviations of the Portfolio's name, but the most
common is SEL VALUE.
DIVIDENDS, CAPITAL GAINS,
AND TAXES
Each year in December, the Portfolio distributes to shareholders virtually all
of its income from interest and dividends, as well as any capital gains
realized from the sale of securities. You may receive distributions of income
or capital gains in cash, or you may have them automatically reinvested in more
shares of the Portfolio. In either case, distributions of dividends or capital
gains that are declared in December--even if paid to you in January--are taxed
as if they had been paid to you in December. Vanguard is responsible for
processing your dividend distribution and will send you a statement each year
showing the tax status of all your distributions.
- - The dividends and short-term capital gains distributions that you receive are
taxable to you as ordinary dividend income. Any distributions of net
long-term capital gains by the Portfolio are taxable to you as long-term
capital gains, no matter how long you've owned shares in the Portfolio. Both
dividends and captial gains distributions are taxable to you whether received
in cash or reinvested in additional shares. Although the Portfolio does not
seek to realize any particular amount of capital gains during a year, such
gains are often realized from time to time as byproducts of the ordinary
investment activities of the Portfolio. Consequently, distributions of
capital gains by the Portfolio may vary considerably from year to year.
- - If you sell or exchange shares of the Portfolio, any gain or loss you have is
a taxable event, which means that you may have a capital gain to report as
income, or a captial loss to report as a deduction, when you complete your
Federal income tax return.
- - Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Portfolio shares, may be subject to state and local
income taxes as well.
The tax information in this prospectus is provided as general information.
You should consult your own tax adviser about the tax consquences of an
investment in the Portfolio.
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either income dividends or capital gains distributions. Income
dividends come from the dividends that the fund earns from its stock holdings
and interest it receives from its money market and bond investments. Capital
gains distributions are realized when the fund sells securities for higher
prices than it paid for them. The capital gains are designated as short-term
or long-term accoding to whether the fund held the securities for less than or
more than one year.
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing in a tax-sheltered retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because part of your investment will come back to you as
a taxable distribution. This is known as "buying a dividend." For example: on
December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays
a distribution of $1 per
<PAGE> 14
share on December 16, its share price would drop to $19. You would still have
only $5,000 (250 shares x $19 = $4750 in share value, plus 250 shares x $1 =
$250 in distributions), but you would owe tax on the $250 distribution you
received, even if you had reinvested the dividends in more shares. To avoid
"buying a dividend," check a fund's distribution schedule before you invest.
MANAGEMENT OF THE PORTFOLIO
The Fund is a member of The Vanguard Group of Investment Companies, a family of
more than 30 investment companies with more than 90 distinct investment
portfolios and total net assets of more than $160 billion. All of the Vanguard
Funds contribute to the expenses associated with business operations, such as
personnel, office space, equipment, and advertising.
Vanguard adheres to a Code of Ethics that was designed to prevent
unethical practices in the buying or selling of securities by employees. Under
our Code, officers of the company and those who in performing their regular
duties might have the opportunity to particlate in decisions, or obtain
information regarding, the purchase or sale of a security in one of our Funds,
can engage in personal securities transactions only under guidelines
substantially similar to those recommended by the mutual fund industry and
approved by the SEC. Barrow, Hanley, Mewhinney & Strauss, Inc. adheres to a
similar code.
Vanguard also provides distribution and marketing services to the
Funds. Although shareholders do not pay sales commissions or 12b-1 distribution
fees, each Fund pays its allocated share of The Vanguard Group's distribution
costs.
A list of the Directors and Officers of the Fund, and a statement of
their present and principal occupations during the past five years, can be
found in the Statement of Additional Information.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group, Inc, is the only mutual mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits as other mutual
fund companies do, Vanguard returns profits to fund shareholders in the form
of lower operating expenses.
INVESTMENT ADVISER
The Porfolio employs Barrow, Hanley, Mewhinney & Strauss, Inc., 200 Crescent
Court, Dallas, TX 75201, as its investment adviser. BHM&S manages the Portfolio
subject to the control of the Officers and Directors of the Fund.
Each quarter, BHM&S is paid a base advisory fee based on average
month-end net assets of the Portfolio:
<TABLE>
<CAPTION>
ASSETS MANAGED ANNUALIZED BASE FEE
<S> <C>
First $100 million 0.40%
Next $200 million 0.35
Next $300 million 0.25
Next $400 million 0.20
Assets over $1 billion 0.15
</TABLE>
<PAGE> 15
Beginning with the quarter ending April 30, 1997, the base fee may be
increased or decreased, depending on the Portfolio's investment performance
relative to the Russell Midcap Index a market benchmark that covers the
smallest 800 of the 1,000 largest companies in the United States. The
Portfolio adds or subtracts the following performance adjustments to the
quarter's base fee payable to BHM&S:
<TABLE>
<CAPTION>
DIFFERENCE BETWEEN THE PORTFOLIO'S
36-MONTH CUMULATIVE RETURN AND INCENTIVE/PENALTY
THAT OF THE RUSSELL MIDCAP INDEX PERFORMANCE ADJUSTMENT
<S> <C>
More than -12% -0.50 x Base Fee for Performance Period
From -12% to -6% -0.25 x Base Fee for Performance Period
Between -6% and +6% 0
From +6% to +12% +0.25 x Base Fee for Performance Period
More than +12% +0.50 x Base Fee for Performance Period
</TABLE>
The incentive/penalty fee structure will not be in full operation until
the quarter ending April 30, 1999. Until then, the incentive/penalty fee will be
calculated using certain transition rules. The incentive/penalty fee schedule
and calculation process for the Portfolio's first three years are described
in the Fund's Statement of Additional Information. This report can be obtained
by writing to or calling Vanguard.
The agreement authorizes BHM&S to choose brokers or dealers to handle
the purchases and sales of the Portfolio's securities, and directs BHM&S to use
every effort to get the best available price and most favorable execution from
these brokers with respect to all transitions.
The Board of Directors may, without prior approval from shareholders,
change the terms of the advisory agreement or hire a new investment adviser,
either as a replacement for BHM&S or as an additional adviser. However, no such
change would be made before giving shareholders 30-days notice, in writing.
PLAIN TALK ABOUT
THE PORTFOLIO'S ADVISER
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC., AN INVESTMENT ADIVSORY FIRM FOUNDED
IN 1979, MANAGES MORE THAN $16 BILLION IN STOCK AND BOND PORTFOLIOS FOR A
LIMITED NUMBER OF INSTITUTIONAL CLIENTS. BHM&S HAS MANAGED THE MAJORITY OF THE
ASSETS FOR VANGUARD/WINDSOR II SINCE 1985. THE MANAGERS RESPONSIBLE FOR
OVERSEEING THE IMPLEMENTATION OF BHM&S'S STRATEGY FOR VANGUARD SELECTED VALUE
PORTFOLIO ARE:
JAMES S. MCCLURE, PRINCIPAL AT BHM&S; 23 YEARS INVESTMENT EXPERIENCE; BA
AND MBA FROM UNIVERSITY OF TEXAS. FROM 1989 THROUGH JULY 1995, HE WAS VICE
PRESIDENT AT GOLDMAN SACHS ASSET MANAGEMENT WHERE HE WAS SENIOR PORTFOLIO
MANAGER OF THE GOLDMAN SACHS CAPITAL GROWTH FUND.
JOHN P. HARLOE, PRINCPAL AT BHM&S; 19 YEARS INVESTMENT EXPERIENCE; BA
AND MBA FROM UNIVERSITY OF SOUTH CAROLINA. FROM 1986 THROUGH JULY 1995, HE WAS
A VICE PRESIDENT AND EQUITY PORTFOLIO MANAGER AT STERLING CAPITAL MANAGEMENT.
BOTH SPENT ABOUT 10 YEARS WORKING TOGETHER AT AMERICAN NATIONAL
INSURANCE COMPANY, AMERICAN CAPITAL MANAGEMENT & RESEARCH, AND OPPENHEIMER &
CO., INC.
GENERAL INFORMATION
<PAGE> 16
The Selected Value Portfolio is a Portfolio offered by Vanguard Whitehall
Funds, Inc. Vanguard Whitehall Funds, Inc. is a corporation organized under the
laws of the State of Maryland. Shareholders of the Selected Value Portfolio
have rights and privileges similar to those enjoyed by other corporate
shareholders. For example, shareholders will not be responsible for any
liabilities of the corporation. If any matters are to be voted on by
shareholders (such as a change in a fundamental investment objective or the
election of directors), each share outstanding at that point would be entitled
to one vote.
<PAGE> 17
GLOSSARY OF INVESTMENT TERMS
ACTIVE INVESTMENT MANAGEMENT
An investment approach that seeks to exceed the returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
repay the loan by a specific date and to pay interest regularly during that
period.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Investments in short-term bank deposits, money market instruments, investment
contracts, and U.S. Treasury bills.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which are paid out as
dividends.
DIVERSIFICATION
Spreading your money among a variety of securities.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by the
fund's investments.
DOLLAR-COST AVERAGING
Investing equal amounts of money at regular intervals on an ongoing basis.
This technique ensures that an investor buys fewer shares when prices are high
and more shares when prices are low.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio takes into account management fees, administrative fees, and any
12b-1 fees for marketing and distribution.
FIXED-INCOME SECURITIES
Investment, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securites is predetermined, their prices may
fluctuate.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies expected to maintain rapid
growth in earnings (re: growth stocks). Such stocks typically sell at
relatively high prices in relation to earnings, book value, and dividends.
INCOME
Earnings on a investment. Income on stocks comes in the form of dividends,
income on bonds in the form of interest payments. All income paid by a mutual
fund, even bond funds, is referred to as dividends.
INVESTMENT ADVISER
An individual or organization that manages a fund, making the day-to-day
investment decisions regarding the purchase or sale of securities.
MARKET RISK
The possibility that stock or bond prices will decline.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
OBJECTIVE RISK
The possibility that a fund's investment objective (e.g., growth vs. value or
small-capitalization vs. large-capitalization) will underperform relative to
the overall stock market.
<PAGE> 18
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share,
has a price/earnings ratio of 10.
PRINCIPAL
The amount of his or her own money and individual puts into an investment.
PRINCIPAL RISK
The possibility that your investment will fall in value.
SECURITIES
Stock, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
TURNOVER RATE
A measure of a mutual fund's trading activity. Turnover is calculated by
taking the lesser of a fund's total purchases or total sales of securities, and
dividing by its average assets. A turnover rate of 100% means that during a
year, a fund has sold and replaced securities with a value equal to 100% of its
average net assets.
VALUE STOCK FUND
A mutual fund that invests in companies whose stocks have relatively low prices
in relation to earnings, book value, and dividends.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) paid by an investment, expressed as a
percentage of the investment's price.
<PAGE> 19
VANGUARD
SELECTED VALUE PORTFOLIO
The Vanguard Group of Investment Companies
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
Investment Information Department
For Information on our Funds and Fund Services,
Requests for Literature
1-800-662-7447 (SHIP)
Text Telephone: 1-800-952-3335
Client Services Department
For Information on Your Account, Account Transactions,
Account Statements
1-800-662-2739 (CREW)
Text Telephone: 1-800-662-2739
Vanguard Retirement Resource Center
For Information on Establishing Individual Retirement
Accounts, Direct Rollovers, Asset Transfers
1-800-205-6189
Vanguard Retirement Services
For Information on Establishing Qualified Employee
Retirement Plans: SEPs and Keoghs, Money Purchase Plans,
Profit-Sharing Plans
1-800-662-2003
Vanguard Brokerage Services
For Information on Trading Stocks, Bonds, and Options
at Reduced Commissions
1-800-992-8327
Vanguard Tele-Account(R)
For 24-Hour Automated Access to Price and Yield,
Information on Your Account, Certain Transactions
1-800-662-6273 (ON-BOARD)
Electronic Access to Vanguard
To Reach the Vanguard Mutual Fund Education and
Information Center on Vanguard Online(SM) (on America Online(R))
Keyword: VANGUARD
To Send E-Mail to Vanguard
[email protected]
P023N
<PAGE> 20
PART B
VANGUARD WHITEHALL FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
JANUARY __, 1996
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated January __, 1996). To obtain the
Prospectus please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies........................................................ 1
Investment Policies....................................................................... 2
Investment Limitations.................................................................... 5
Management of the Fund.................................................................... 7
Investment Advisory Services.............................................................. 9
Securities Transactions................................................................... 14
Purchase of Shares........................................................................ 14
Redemption of Shares...................................................................... 15
Comparative Indexes....................................................................... 15
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the Fund's investment objectives and
policies set forth in the Prospectus.
<PAGE> 21
PORTFOLIO TURNOVER While the rate of portfolio turnover is not a limiting
factor when management deems changes appropriate, it is anticipated that the
Portfolio's annual portfolio turnover rate will not normally exceed 30%. A
portfolio turnover rate of 33% would occur if one-third of the Portfolio's
securities, exclusive of U.S. Government securities and other securities whose
maturities at the time of acquisition are one year or less, are replaced in the
period of one year. Turnover rates may vary greatly from year to year as well as
within a particular year and may also be affected by cash requirements for
redemptions of each Portfolio's shares and by requirements which enable the Fund
to receive certain favorable tax treatments. The portfolio turnover rates will,
of course, depend in large part on the level of purchases and redemptions of
shares of each Portfolio. Higher portfolio turnover can result in corresponding
increases in brokerage costs to the Portfolios of the Fund and their
shareholders.
INVESTMENT POLICIES
FUTURES CONTRACTS Each Portfolio may enter into futures contracts,
options, and options on futures contracts for several reasons: to maintain cash
reserves while remaining fully invested, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when a futures contract
is priced more attractively than the underlying equity security or index.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a U.S.
Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. The Fund's margin deposits will be placed in a
segregated account maintained by the Fund's custodian bank. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Futures contracts are customarily
purchased and sold on margin which may range upward from less than 5% of the
value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
2
<PAGE> 22
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.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Portfolio's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS A Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of its total assets. In addition, a Portfolio will not enter
into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts would exceed 20% of its total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, a
Portfolio may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Portfolios are subject to the risks of loss frequently
associated with futures transactions. A Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline. Futures
and options are derivative instruments, in that their value is derived from the
value of another security.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option. Additionally, investments in futures contracts and options
involve the risk that the investment advisers will incorrectly predict stock
market and interest rate trends.
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
3
<PAGE> 23
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of future positions and
subjecting some futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Except for transactions the
Fund has identified as hedging transactions, each Portfolio is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In most cases, any gain
or loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Portfolio may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition.
In order for a Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or foreign currencies or other income derived with respect to the
Fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, the Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on futures contracts, which have been open for less than three months as
of the end of the Portfolio's fiscal year and which are recognized for tax
purposes, will not be considered gains on sales of securities held less than
three months for the purpose of the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Portfolio's other investments and shareholders will be advised on the nature
of the transactions.
REPURCHASE AGREEMENTS Each Portfolio may invest in repurchase agreements
with commercial banks, brokers or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Fund acquires a money
market instrument (generally a security issued by the U.S Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
commercial bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Portfolio and is unrelated to the interest rate on the underlying
instrument. In these transactions, the securities acquired by the Portfolio
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by the Fund's Custodian Bank
until repurchased. In addition, the Fund's Board of Directors will monitor each
Portfolio's repurchase agreement transactions generally and will establish
guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker or dealer party to a repurchase agreement
with any Portfolio of the Fund. No more than an aggregate of 15% of a
Portfolio's assets, at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale, or for which there are no readily
available market quotations.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement
4
<PAGE> 24
becomes insolvent and subject to liquidation or reorganization under the
Bankruptcy Code or other laws, a court may determine that the underlying
security is collateral for a loan by the Portfolio not within the control of the
Portfolio and therefore the realization by the Portfolio on such collateral may
be automatically stayed. Finally, it is possible that the Portfolio may not be
able to substantiate its interest in the underlying security and may be deemed
an unsecured creditor of the other party to the agreement. While the Fund's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES Each Portfolio may lend its securities on a
short-term basis (less than nine months) to qualified institutional investors
who need to borrow securities in order to complete certain transactions, such as
covering short sales, avoiding failures to deliver securities or completing
arbitrage operations. By lending its securities, the Portfolio will be
attempting to increase its net investment income through the receipt of interest
on the loan. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the account of the
Portfolio. Each Portfolio may lend its portfolio securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms,
the structure and the aggregate amount of such loans are not inconsistent with
the Investment Company Act of 1940, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission (the "Commission")
thereunder, which currently require that (a) the borrower pledge and maintain
with the Fund collateral consisting of cash, an irrevocable letter of credit or
securities issued or guaranteed by the United States Government having a value
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Portfolio at any time and (d) the
Portfolio receives reasonable interest on the loan which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments, any distribution on the loaned securities and any increase in their
market value. A Portfolio will not be required to pay any service, placement or
other fee in connection with such loans, and will retain voting rights to the
loaned securities. A Portfolio will not lend its portfolio securities, if as a
result, the aggregate value of such loans exceeds 33 1/3% of the value of the
Portfolio's net assets. Loan arrangements made by a Portfolio will comply with
all other applicable regulatory requirements, including the rules of the New
York Stock Exchange, which rules presently require the borrower, after notice,
to redeliver the securities within the normal settlement time of five business
days. All relevant facts and circumstances, including the credit-worthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board of
Directors.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Directors (Trustees). In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
INVESTMENT LIMITATIONS
The following policies supplement the Fund's investment limitations set
forth in the Prospectus. It is a fundamental policy of each Portfolio not to
engage in any of the following activities or business practices. These
restrictions may not be changed with respect to a particular Portfolio without
the approval of a majority of the outstanding shares (as defined in the
Investment Company Act of 1940) of that Portfolio. A Portfolio may not:
1) Issue senior securities;
2) Borrow money, except from banks (or through reverse repurchase
agreements), for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not in
excess of 15% of the value of the net assets of the Portfolio
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrow-
5
<PAGE> 25
ings exceed 5% of the value of the net assets of the Portfolio,
the Portfolio will not make any additional investments;
3) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Portfolio
would hold more than 10% of the outstanding voting securities of the
issuer, or more than 5% of the value of the Portfolio's total assets
would be invested in the securities of such issuer;
4) Engage in the business of underwriting securities issued by others,
except to the extent that the Portfolio may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;
5) Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including the Fund's investment in The Vanguard Group, Inc., as
described on page 7);
6) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (5) above) which are either publicly distributed or
customarily purchased by institutional investors, and (ii) by lending
its securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the
Investment Company Act or the Rules and Regulations or interpretations
of the Commission thereunder and the aggregate value of all securities
loaned does not exceed 33 1/3% of the market value of the Portfolio's
total assets;
7) Pledge, mortgage, or hypothecate its assets, except to secure
borrowings permitted by limitation (2) above;
8) Buy any securities or other property on margin (except for such
short-term credits as are necessary for the clearance of transactions),
or, engage in short sales (unless by virtue of its ownership of other
securities it has a right to obtain at no added cost securities
equivalent in kind and amount to the securities sold) except as set
forth below in (12);
9) Purchase or sell puts or calls, or combinations thereof except as
provided for in the prospectus; provided however, that a Portfolio may
enter into futures contracts, options transactions or forward foreign
currency exchange transactions except as set forth below in (12);
10) Purchase or sell real estate or real estate limited partnerships
(although it may purchase securities secured by real estate interests
or interests therein, or issued by companies or investment trusts which
invest in real estate or interests therein);
11) The Fund will not invest in securities of other investment companies,
except as may be acquired as a part of a merger, consolidation or
acquisition of assets approved by the Fund's shareholders or otherwise
to the extent permitted by Section 12 of the Investment Company Act of
1940. The Fund will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Fund;
12) Purchase or sell commodities or commodity contracts; provided, however,
that a Portfolio may enter into forward foreign currency exchange
transactions and that each Portfolio may invest in futures contracts
and options to the extent that not more than 5% of the Portfolio's
assets are required as deposit to secure obligations under futures
contracts, within these limitations, each portfolio may purchase put
options as provided for in the prospectus. Additionally each Portfolio
will invest no more than 20% of its assets in swap agreements;
13) Invest in companies for the purpose of exercising control of
management; and
14) Invest more than 25% of its assets in any single industry.
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, make loans to, or contribute to the costs or other financial
requirements of, any company which will be wholly owned by
6
<PAGE> 26
the Fund and one or more other investment companies and is primarily engaged in
the business of providing at cost services, such as management, administrative,
distribution or other related services to the Fund and other investment
companies. (See "Management of the Fund").
In order to permit the sale of shares of the Fund in certain states, the
Fund may make commitments more restrictive than the fundamental or
non-fundamental operating restrictions described above. Should the Fund
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders it will revoke the commitment by terminating sales of
its shares in the state(s) involved.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
MANAGEMENT OF THE FUND
THE VANGUARD GROUP The Fund is a member of The Vanguard Group of
Investment Companies which consists of more than 30 investment companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Vanguard Funds obtain at cost virtually all of their corporate management,
administrative and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain of the Vanguard Funds.
Vanguard employs a supporting staff of management personnel needed to
provide the requisite services to the Funds and also furnishes the Funds with
necessary office space, furnishings and equipment. Each Fund pays its share of
Vanguard's net expenses which are allocated among the Funds under procedures
approved by the Directors (Trustees) of each Fund. In addition, each Fund bears
its own direct expenses such as legal, auditing and custodian fees.
The Officers of the Fund and the Vanguard Funds are also Officers and
employees of Vanguard. No Officer or employee is permitted to own any securities
of any external adviser for the Vanguard Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-l under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures, restrictions and guidelines
substantially similar to those recommended by the mutual fund industry and
approved by the U.S. Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. The Fund's Service
Agreement provides as follows: (a) each Vanguard Fund may invest up to .40% of
its current assets in Vanguard, and (b) there is no other limitation on the
amount that each Vanguard Fund may contribute to Vanguard's capitalization. The
amount contributed to Vanguard by the Fund's Portfolios included the Service
Economy and Technology Portfolios which are no longer in existence.
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of the Directors
and Officers of the Funds and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
7
<PAGE> 27
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman, Chief JOHN C. SAWHILL, Director
Executive Officer and Director* President and Chief Executive Officer, The
Chairman, Chief Executive Officer and Nature Conservancy; formerly, Director and
Director of The Vanguard Group, Inc. and of Senior Partner, McKinsey & Co.; and
each of the investment companies in The President, New York University; Director of
Vanguard Group; Director of The Mead Pacific Gas and Electric Company and NACCO
Corporation and General Accident Insurance. Industries.
JOHN J. BRENNAN, President and Director* JAMES O. WELCH, JR., Director
President and Director of The Vanguard Retired Chairman of Nabisco Brands, Inc.,
Group, Inc. and of each of the investment retired Vice Chairman and Director of RJR
companies in The Vanguard Group. Nabisco; Director of TECO Energy, Inc.
ROBERT E. CAWTHORN, Director J. LAWRENCE WILSON, Director
Chairman of Rhone-Poulenc Rorer, Inc.; Chairman and Chief Executive Officer of Rohm &
Director of Sun Company, Inc. Haas Company; Director of Cummins Energy
Company, and Trustee of Vanderbilt
BARBARA BARNES HAUPTFUHRER, Director University and the Culver Educational
Director of The Great Atlantic and Pacific Foundation.
Tea Company, ALCO Standard Corp., Raytheon
Company, Knight-Ridder, Inc., Massachusetts RAYMOND J. KLAPINSKY, Secretary*
Mutual Life Insurance Co. and Trustee Senior Vice President and Secretary of The
Emerita of Wellesley College. Vanguard Group, Inc.; Secretary of each of the
investment companies in The Vanguard Group.
BRUCE K. MACLAURY, Director
President, The Brookings Institution; RICHARD F. HYLAND, Treasurer*
Director of American Express Bank, Ltd., The Treasurer of The Vanguard Group, Inc. and of
St. Paul Companies, Inc. and Scott Paper Co. each of the investment companies in The
Vanguard Group.
BURTON G. MALKIEL, Director
Chemical Bank Chairman's Professor of KAREN E. WEST, Controller*
Economics, Princeton University; Director of Vice President of The Vanguard Group, Inc.;
Prudential Insurance Co. of America, Amdahl Controller of each of the investment companies
Corporation, Baker Fentress & Co., The in The Vanguard Group.
Jeffrey Co. and Southern New England ---------------
Communications Company. *Officers of the Fund are "interested persons"
as defined in the Investment Company Act of
ALFRED M. RANKIN, JR., Director 1940.
Chairman, President, and Chief Executive
Officer of NACCO Industries, Inc.; Director
of The BFGoodrich Company, The Standard
Products Company and The Reliance Electric
Company.
</TABLE>
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Vanguard Funds by third parties.
DISTRIBUTION Vanguard also provides all distribution and marketing
services for the Vanguard Funds. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of the
Group. The Directors and Officers of Vanguard determine the amount to be spent
annually on distribution activities, the manner and amount to be spent on each
Fund, and whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
are allocated among the Vanguard Funds based upon their relative net assets. The
remaining one half of these expenses is allocated among the Vanguard Funds based
upon each Fund's sales for the preceding 24 months relative to the total sales
of the Funds as a Group. Provided, however, that no Fund's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100 of
1% of its average month-end net assets.
INVESTMENT ADVISORY SERVICES An experienced investment management staff
employed directly by Vanguard also provides investment advisory services to the
Fund, Vanguard Money Market Reserves, Vanguard Institutional Money Market
Portfolio, Vanguard Municipal Bond Fund, several Portfolios of Vanguard Fixed
Income Securities Fund, Vanguard California Tax-Free Fund, Vanguard Florida
Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, Vanguard New York
Insured Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard
8
<PAGE> 28
Pennsylvania Tax-Free Fund, Vanguard Admiral Funds, Vanguard Bond Index Fund,
Vanguard Balanced Index Fund, Vanguard Index Trust, Vanguard International
Equity Index Fund, Vanguard Tax-Managed Fund, Vanguard Institutional Index Fund,
several Portfolios of Vanguard Variable Insurance Fund, a portion of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as well as several
indexed separate accounts. The compensation and other expenses of this staff are
paid by the Portfolios and Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund will pay each Director who
is not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. Directors who are also Officers receive no
remuneration for their services as Directors. The Fund's Officers and employees
are paid by Vanguard which, in turn, is reimbursed by the Fund, and each other
Fund in the Group, for its proportionate share of Officers' and employees'
salaries and retirement benefits.
Under its retirement plan, Vanguard contributes annually an amount equal to
10% of each Officer's annual compensation plus 5.7% of that part of an eligible
Officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under its Thrift Plan, all employees of
Vanguard are permitted to make pre-tax basic contributions in a maximum amount
equal to 4% of total compensation. Vanguard matches the basic contributions on a
100% basis.
DIRECTORS' RETIREMENT FEES A Retirement Plan for Directors has been
implemented to provide a fee to retired Directors equal to $1,000 per year of
service on the Board, up to 15 years of service. This fee will remain in place
subsequent to the Director's retirement for a period of 10 years or until a
retired Director's death.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY AGREEMENT WITH BARROW, HANLEY, MEWHINNEY & STRAUSS.
The Vanguard Selected Value Portfolio is managed by Barrow, Hanley, Mewhinney &
Strauss ("BHM&S"), 200 Crescent Court, Dallas, TX under the terms of an
agreement dated November __, 1995. BHM&S was founded in 1979 and provides
asset management services to companies, institutions, and individuals.
As of December 31, 1994, BHM&S had over $13.7 billion in assets under
management.
The investment philosophy of BHM&S is to use fundamental research to
identify undervalued stocks. Jim Clure and John Harloe have been designated as
portfolio managers for the assets of Vanguard Selected Value Portfolio. They
both have over 10 years experience.
For the services to be rendered by BHM&S, the Fund shall pay to BHM&S at
the end of each quarter a base advisory fee adjusted by an incentive/penalty
performance adjustment reflecting the investment performance of the Portfolio
relative to the return of the Russell Midcap Index. The Russell Midcap Index
is prepared by Frank Russell Company (which is unaffiliated with the Fund or
any of the Fund's affiliates) and is composed of the 800 smallest stocks (by
market capitalization) in the Russell 1000 Index. The fees shall be calculated
according to the following rules:
a) Total Quarterly Fee Payable. The total quarterly fee payable by the Fund to
BHM&S under this advisory agreement shall be the base advisory fee for the
quarter plus the performance adjustment (which may be negative).
b) Base Advisory Fee for the Quarter. The base advisory fee for the quarter
will be calculated by applying the following quarterly percentage rates to the
average of month-end assets of the Portfolio for the quarter:
<TABLE>
<CAPTION>
Net Assets Annual Rate Quarterly Rate
---------- ----------- --------------
<S> <C> <C>
First $100 million 0.40% 0.1000%
Next $200 million 0.35% 0.0875%
Next $300 million 0.25% 0.0625%
Next $400 million 0.20% 0.0500%
Over $1 billion 0.15% 0.0375%
</TABLE>
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<PAGE> 29
c) Performance Adjustment. The performance adjustment will be calculated as
follows:
i) the performance adjustment for the quarters ending April 30, 1996,
July 31, 1996 and October 31, 1996 wil be $0.
ii) beginning with the quarter ending January 31, 1997 and thereafter,
the performance adjustment will be calculated for the relevant performance
period. The performance period will be the 36 months preceding the
quarter-end or the months that have elapsed between January 31, 1996 and
the end of the quarter for which the fee is being computed, whichever is
shorter. A base fee for the performance period will be calculated based on
the average of month end assets during the performance period multiplied by
the quarterly rates used in calculating the base advisory fee for the
quarter. An incentive/penalty adjustment reflecting the investment
performance of the Portfolio relative to the return of the Russell Midcap
Index will be applied to the base fee for the performance period. The
following table sets forth the calculation of the performance adjustment:
<TABLE>
<CAPTION>
Cumulative 36-month Performance
vs. the Russell Midcap Index Performance Adjustment
----------------------------------- -----------------------
<S> <C>
Less than -12% -0.50 x Base Fee for Performance Period
Between -12% and -6% -0.25 x Base Fee for Performance Period
Between -6% and +6% 0 x Base Fee for Performance Period
Between +6% and +12% 0.25 x Base Fee for Performance Period
More than +12% 0.50 x Base Fee for Performance Period
</TABLE>
Until the quarter ending January 31, 1999, the performance adjustment
for BHM&S will be calculated according to the following transition rules:
(ii-a) November 1, 1996 through January 31, 1999. Beginning with the
quarter ending January 31, 1997, and until the quarter ending January
31, 1999, the Performance adjustment will be computed based upon a
comparison of the investment performance of the Portfolio and that of
the Russell Midcap Index over the number of months that have elapsed
between January 31, 1996 and the end of the quarter for which the fee is
computed. The number of percentage points by which the investment
performance of the Portfolio must exceed the investment record of the
Russell Midcap Index shall increase proportionately from four and two,
respectively, for the twelve months ending January 31, 1997, to twelve
and six, for the thirty-six months ending January 31, 1999.
10
<PAGE> 30
(ii-b) On and After January 31, 1999. For the quarter ending January
31, 1999 and thereafter, the period used to calculate the
incentive/penalty adjustment shall be the 36 months preceding the end
of the quarter for which the fee is being computed and the number of
percentage points used shall be twelve and six.
Calculating Relative Investment Performance
The investment performance of the Portfolio for such period, expressed as
a percentage of the net asset value per share of the Portfolio at the beginning
of such period, shall be the sum of: (i) the change in the net asset value per
share of the Portfolio during such period; (ii) the value of the cash
distributions per share of the Portfolio accumulated to the end of such period;
and (iii) the value of capital gains taxes per share paid or payable by the
Portfolio on undistributed realized long-term capital gains accumulated to the
end of such period.
The investment record of the Russell Midcap Index will be calculated
monthly by (i) multiplying the total return for the month (change in market
price plus dividends) of each stock included in the Russell Midcap Index by its
weighting in the Russell Midcap Index at the beginning of the month, and (ii)
adding the values discussed in (i). For any period, therefore, the investment
record of the Russell Midcap Index will be the compounded monthly returns of
the Russell Midcap Index.
11
<PAGE> 31
RELATED INFORMATION CONCERNING BHM&S. BHM&S, 200 Crescent Ct., Dallas,
Texas, is an independent, owner-managed investment management firm
founded in 1979 which provides investment advisory services to individuals,
employee benefit plans, investment companies and other institutions. As of
December 31, 1994, BHM&S provided investment advisory services to clients
having assets with an approximate value of $13.7 billion.
The agreement will continue until January 31, 1998 and will be renewable
thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the Directors who are not parties to the
agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party cast in person at a meeting called for the purpose of
considering such approval. In addition, the question of continuance of the
agreement may be presented to the shareholders of the Fund; in such event
continuance shall be effected only if approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund. If the holders of any
Portfolio fail to approve the agreement, BHM&S may continue to serve as
investment adviser to each Portfolio which approved the agreement, and to any
Portfolio which did not approve the agreement until new arrangements have been
made. The agreement is automatically terminated if assigned, and may be
terminated by any Portfolio without penalty, at any time, (1) either by vote of
the Board of Directors or by vote of the outstanding voting securities of the
Portfolio on sixty (60) days' written notice to BHM&S, or (2) by BHM&S upon
ninety (90) days' written notice to the Fund.
12
<PAGE> 32
SECURITIES TRANSACTIONS
The investment advisory agreements with BHM&S authorizes the investment
adviser (with the approval of the Fund's Board of Directors) to select
the brokers or dealers that will execute the purchases and sales of securities
for the Fund and directs each investment adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to
all transactions for the Fund. The investment adviser has undertaken to execute
each investment transaction at a price and commission which provides the most
favorable total cost or proceeds reasonably obtainable under the circumstances.
In placing portfolio transactions, the Fund's investment adviser will use
its best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable
execution. The full range and quality of brokerage services available will be
considered in making these determinations. In those instances where it is
reasonably determined that more than one broker can offer the brokerage services
needed to obtain the best available price and most favorable execution,
consideration may be given to those brokers which supply investment research and
statistical information, and provide other services in addition to execution
services to the Fund and/or the investment adviser. The investment adviser
considers the investment services it receives useful in the performance of its
obligations under the agreement but is unable to determine the amount by which
such services may reduce its expenses.
The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, the investment adviser may cause the
Fund to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the investment adviser to the Fund and the other Funds in
the Group.
Currently, it is the Fund's policy that the investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to the investment adviser and/or the Fund.
However, the investment adviser has informed the Fund that it will not pay
higher commission rates specifically for the purpose of obtaining research
services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the sale of shares of the Fund and may, when a
number of brokers and dealers can provide comparable best price and execution on
a particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified broker-dealers.
Some securities considered for investment by one Portfolio may also be
appropriate for the other Portfolios and the other Funds and/or clients served
by the investment advisers. If purchase or sale of securities consistent with
the investment policies of a Portfolio, the other Portfolios and/or one or more
of these other Funds or clients are considered at or about the same time,
transactions in such securities will be allocated among the Portfolios and the
several Funds and clients in a manner deemed equitable by the respective
investment adviser. Although there will be no specified formula for allocating
such transactions, the allocation methods used, and the results of such
allocations, will be subject to periodic review by the Fund's Board of
Directors.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund or any Portfolio,
and (iii) to reduce or waive the minimum for initial and subsequent investments
as well as
13
<PAGE> 33
redemption fees for certain fiduciary accounts such as employee benefit plans or
under circumstances where certain economies can be achieved in sales of the
Fund's shares.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% or the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make a
practice detrimental to the best interests of the Fund. If redemptions are paid
in investment securities, such securities will be valued as set forth in the
Prospectus under "The Share Price of Each Portfolio" and a redeeming shareholder
would normally incur brokerage expenses if he converted these securities to
cash.
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc.
or any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group, including
Vanguard Horizon Fund, Inc., may, from time to time, use one or more of the
following unmanaged indices for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of approximately 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the
Far East.
MORGAN STANLEY CAPITAL INTERNATIONAL ALL COUNTRY INDEX -- is an arithmetic,
market value-weighted average of the performance of over 2,427 securities listed
on the stock exchanges of countries included in the EAFE Index, United States,
Canada, and Emerging Markets.
CAPITAL OPPORTUNITIES FUND STOCK INDEX -- the Index is composed of the various
common stocks that are held in the largest aggressive growth stock mutual funds,
using year-end net assets, monitored by Morningstar, Inc.
GLOBAL BALANCED INDEX -- a fixed weighted index of global stocks, bonds and U.S.
cash reserves, the component parts of which are derived from the adjusted
capitalization weighted averages of individual currency adjusted local country
indices.
MORGAN STANLEY CAPITAL INTERNATIONAL WORLD INDEX -- an arithmetic, market
value-weighted average of the performance of over 1,460 securities listed on the
stock exchanges of 23 countries.
14
<PAGE> 34
SALOMON BROTHERS WORLD GOVERNMENT BOND INDEX -- a market capitalization-weighted
index consisting of government bond markets of 14 countries.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers High
Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers High
Grade Bond Index.
RUSSELL 2000 SMALL COMPANY STOCK INDEX -- consists of the smallest 2,000 stocks
within the Russell 3000; a widely-used benchmark for small capitalization common
stocks.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
15
<PAGE> 35
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
RUSSELL 3000 INDEX -- consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Exchanges
or the NASDAQ over-the-counter market, accounting for over 90% of the market
value of publicly traded Stocks in the U.S.
RUSSELL 2000(R) VALUE INDEX -- composed of the 2,000 smallest securities in the
Russell 3000 Index, representing approximately 7% of the Russell 3000 total
market capitalization.
RUSSELL MIDCAP(TM) INDEX -- composed of all medium and medium/small companies in
the Russell 1000 Index.
Advertisements which refer to the use of the fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no Federal income tax applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's Portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield. In addition there can be no assurance that the Fund
will continue its performance as compared to such other averages.
16
<PAGE> 36
PART C
VANGUARD WHITEHALL FUNDS, INC.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Statement of Assets and Liabilities**
Report of Independent Accountants**
(B) EXHIBITS
1. Articles of Incorporation*
2. By-Laws of Registrant*
3. Not Applicable
4. Not Applicable
5. Investment Advisory Agreement*
6. Not Applicable
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
9. Form of Vanguard Service Agreement*
10. Opinion of Counsel*
11. Consent of Independent Accountants**
12. Financial Statements**
13. Not Applicable
14. Not Applicable
15. Not Applicable
16. Not Applicable
- ---------------
* Filed herewith.
** To be filed
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The officers of the Registrant, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management of the Fund" in the Prospectus constituting Part
A and in the Statement of Additional Information constituting Part B of this
Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
None.
ITEM 27. INDEMNIFICATION
Reference is made to Article IX of Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to trustees, directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with
<PAGE> 37
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the caption "Investment Advisers" in the prospectus
constituting Part "A" of this Registration Statement and "Investment Advisory
Services" in Part "B" of this Registration Statement.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodians.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which is filed herewith as Exhibit 9 and described in Part
B hereof under "Management of the Fund"; the Registrant is not a party of any
management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant undertakes to file a pre-effective amendment, using financial
statements which reflect its initial capitalization prior to being declared
effective.
Registrant also undertakes to hold a First Annual Meeting of Shareholders
by the end of the Registrant's first sixteen months of operation for the purpose
of electing directors, approving the Investment Advisory and Service Agreements
and appointing auditors. Thereafter, annual meetings will not be held except as
required by the Investment Company Act of 1940 ("1940 Act") or other applicable
law. Registrant undertakes to comply with the provisions of Section 16(c) of the
1940 Act in regard to shareholders' rights to call a meeting of shareholders for
the purpose of voting on the removal of Directors and to assist in shareholder
communications in such matters, to the extent required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
Registrant undertakes to file a post-effective amendment containing
financial statements, which need not be audited, within 4-6 months from
effectiveness.
<PAGE> 38
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on
the 8th day of December 1995.
VANGUARD WHITEHALL FUNDS, INC.
BY: (Raymond J. Klapinsky) John C. Bogle*, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
BY: (Raymond J. Klapinsky)
John C. Bogle*, Chairman of the Board, Director
and Chief Executive Officer
December 8, 1995
BY: (Raymond J. Klapinsky)
John J. Brennan*, President and Director
December 8, 1995
BY: (Raymond J. Klapinsky)
Robert C. Cawthorn*, Director
December 8, 1995
BY: (Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*, Director
December 8, 1995
BY: (Raymond J. Klapinsky)
Burton G. Malkiel*, Director
December 8, 1995
BY: (Raymond J. Klapinsky)
Bruce K. MacLaury, Jr.*, Director
December 8, 1995
BY: (Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*, Director
December 8, 1995
BY: (Raymond J. Klapinsky)
John C. Sawhill*, Director
December 8, 1995
BY: (Raymond J. Klapinsky)
James O. Welch, Jr.*, Director
December 8, 1995
BY: (Raymond J. Klapinsky)
J. Lawrence Wilson*, Director
December 8, 1995
BY: (Raymond J. Klapinsky)
Richard F. Hyland*, Treasurer and Principal
Financial Officer and Accounting Officer
December 8, 1995
<PAGE> 39
VANGUARD WHITEHALL FUNDS, INC.
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Articles of Incorporation............................................................ Ex-99.B1
By-Laws.............................................................................. Ex-99.B2
Funds Service Agreement.............................................................. Ex-99.B9
</TABLE>
<PAGE> 1
EX-99.B1
ARTICLES OF INCORPORATION
OF
THE WHITEHALL FUNDS, INC.
VANGUARD SELECTED VALUE PORTFOLIO
FIRST: The undersigned, Curtis R. Hilliard, whose post office address
is 100 Vanguard Boulevard, Malvern, Pennsylvania 19355 and being at least
eighteen years of age, does hereby cause to be filed these Articles of
Incorporation for the purpose of forming a Corporation under the General
Corporation Law of the State of Maryland.
SECOND: The name of the Corporation is The Whitehall Funds, Inc.
THIRD: The purpose for which the Corporation is formed is to operate
as an investment company and to exercise all of the powers and to do any and
all of the things as fully and to the same extent as any other Corporation
incorporated under the laws of the State of Maryland, now or hereinafter in
force.
FOURTH: The post office address of the principal office if the
Corporation in the State of Maryland is:
c/o Mr. James E. Baker, Esquire
CSC
Lawyers Incorporating Service Company
11 East Chase Street
Suite 9E
Baltimore, MD 21202
The name and post office address of the initial resident agent
of the Corporation is:
c/o Mr. James E. Baker, Esquire
CSC
Lawyers Incorporating Service
11 East Chase Street
Baltimore, MD 21202
FIFTH: The total number of shares of stock which the corporation
shall have authority to issue is one billion (1,000,000,000) shares of
stock, with a par value of one-tenth of one cent ($.001) per share, to be
known and designated as Common Stock, such shares of Common Stock having an
aggregate par value of one million ($1,000,000).
1
<PAGE> 2
Subject to the provisions of these Articles of Incorporation, the Board of
Directors shall have the power to issue shares of Common Stock of the
Corporation from time to time, at prices not less than the net asset value or
par value thereof, whichever is greater, for such consideration as may be fixed
from time to time pursuant to the direction of the Board of Directors.
Pursuant to Section 2-105 of the Maryland General Corporation Law, the
Board of Directors of the Corporation shall have the power to designate one or
more series of shares of Common Stock and sub-series (classes) thereof, and to
classify or reclassify any unissued shares with respect to such series or
sub-series thereof, and such series and sub-series (subject to any applicable
rule, regulation or order of the Securities and Exchange Commission or other
applicable law or regulation) shall have such preference, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, terms and conditions of redemption and other characteristics as
the Board may determine, unless inconsistent with this Article FIFTH.
Subject to such aforesaid power, the Board of Directors has initially
designated one series of shares of Common Stock of the Corporation. The name
of the series and the number of shares of Common Stock initially classified and
allocated to it is as follows:
<TABLE>
<CAPTION>
Number of Shares of
Common Stock
Initially Classified
Name of Series and Allocated
-------------- -------------
<S> <C>
Vanguard Selected Value Portfolio 250,000,000
</TABLE>
At any time when there are no shares outstanding or subscribed for a
particular series previously established and designated herein by the Board of
Directors, the Series may be liquidated by similar means. Each share of a
series shall have equal rights with each other share of that series with
respect to the assets of the Corporation pertaining to that series. The
dividends payable to the holders of any series (subject to any applicable rule,
regulation or order of the Securities and Exchange Commission or any other
applicable law or regulation) shall be determined by the Board and need not be
individually declared, but may be declared and paid in accordance with a
formula adopted by the Board. Except as otherwise provided herein, all
references in these Articles of Incorporation to Common Stock or series of
stock shall apply without discrimination to the shares of each series of stock.
The holder of each share of stock of the Corporation shall be entitled to
one vote for each full share, and a fractional vote for each fractional share
of stock, irrespective of the series then standing in his or her name in the
books of the Corporation. On any matter submitted to a vote of shareholders,
all shares of the Corporation then issued and outstanding and entitled to vote,
irrespective of the series, shall be voted in the aggregate and not by series
except (1) when
2
<PAGE> 3
otherwise expressly provided by the Maryland General Corporation Law, or (2)
when required by the Investment Company Act of 1940, as amended, shares shall
be voted by individual series; and (3) when the matter does not affect any
interest of a particular series, then only shareholders of affected series
shall be entitled to vote thereon. Holders of shares of stock of the
Corporation shall not be entitled to cumulative voting in the election of
Directors or on any other matter.
Each series of stock of the Corporation shall have the following powers,
preferences and participating, voting, or other special rights and the
qualifications, restrictions, and limitations thereof shall be as follows:
1. All consideration received by the Corporation for the issue or
sale of stock of each series, together with all income, earnings, profits and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation thereof, and any funds or payments derived from any reinvestment of
such proceeds in whatever form the same may be shall irrevocably belong to the
series of shares of stock with respect to which such assets, payments or funds
were received by the Corporation for all purposes, subject only to the rights
of creditors, and shall be so handled upon the books of account of the
Corporation. Such assets, income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation thereof
and any assets derived from any reinvestment of such proceeds, in whatever form
the same may be, are herein referred to as "assets belonging to" such series.
2. The Board of Directors may from time to time declare and pay
dividends of distributions, in stock or in cash, on any or all series of stock;
provided, such dividends or distributions on shares of any series of stock
shall be paid only out of earnings, surplus, or other lawfully available assets
belonging to such series.
3. The Board of Directors shall have the power in its discretion
to distribute in any fiscal year as dividends, including dividends designated
in whole or in part as capital gain distributions, amounts sufficient, in the
opinion of the Board of Directors, to enable the Corporation to qualify as a
"regulated investment company" under the Internal Revenue Code of 1954, as
amended, or any successor or comparable statute thereto, and regulations
promulgated thereunder (collectively, the "IRC"), and to avoid liability for
the Corporation for Federal income tax in respect of that year and to make
other appropriate adjustments in connection therewith. In furtherance, and not
in limitation of the foregoing, to the extent deemed necessary or appropriate
by the Board of Directors to comply with the provisions of the IRC, in the
event that a series of shares has a net capital loss for a fiscal year, and to
the extent that the net capital loss offsets net capital gains from another
series, the amounts to be deemed available for distribution to the series with
the net capital gain shall be reduced by the amount of offset. The
shareholders of the series with the net capital gain shall be entitled to a
full distribution of the net income to the extent earned and to recognition in
the net asset value of such series of the amount of the realized net capital
loss of a series exceeds the net capital gain from another series, the excess
loss shall not reduce the net investment income available for distribution to
the series with the loss, but shall be carried forward.
3
<PAGE> 4
4. In the event of the liquidation or dissolution of the
Corporation, shareholders of each series shall be entitled to receive, as a
series, out of the assets of the Corporation available for distribution to
shareholders, but other than general assets belonging to such series, and the
assets so distributable to the shareholders of any series shall be distributed
among such shareholders in proportion to the number of shares held by them and
recorded on the books of the Corporation. In the event that there are any
general assets not belonging to any particular series of stock and available
for distribution, such distribution shall be made to the holders of stock of
all series in proportion to the net asset value of the respective series
determined as hereinafter provided.
5. The assets belonging to any series of stock shall be charged
with the liabilities in respect to such series, and shall also be charged with
its share of the general liabilities of the Corporation, in proportion to the
net asset value of the respective series determined as hereinafter provided.
The determination of the Board of Directors shall be conclusive as to the
amount of liabilities, including accrued expenses and reserves, as to the
allocation of the same as to a given series, and as to whether the same or
general assets of the Corporation are allocable to one or more series.
The Board of Directors may provide for a holder of any series of stock of
the Corporation, who surrenders his certificate in good form for transfer to
the Corporation or, if the shares in question are not represented by
certificates, who delivers to the Corporation a written request in good order
signed by the shareholder, to convert the shares in question on such basis as
the Board may provide, into shares of stock of any other series of the
Corporation.
The Board of Directors shall have power to fix an initial offering price
for the shares of any class which shall yield to the Corporation not less than
the par value thereof, at which price the shares of the Common Stock of the
Corporation shall be offered for sale, and to determine from time to time
thereafter the offering price which shall yield to the Corporation not less
than the par value thereof from the sales of shares of its Common Stock
provided, however, that no shares of Common Stock of the Corporation shall be
issued or sold for a consideration which shall yield to the Corporation less
than the net asset value of such class determined as hereinafter provided, as
of the business day on which such shares were sold, or at times set by the
Board of Directors, except in the case of a dividend properly declared and
payable.
The net asset value per share of a series of the Corporation's Common
Stock shall be determined in accordance with the Investment Company Act of
1940, as amended, and with generally accepted accounting principles, by adding
the market or appraised value of all securities, cash and other assets of the
Corporation pertaining to that series, subtracting the liabilities determined
by the Board of Directors to be applicable to that series, allocating any
general assets and general liabilities to that series, and dividing the net
result by the number of shares of that series outstanding. Securities and
other investments and assets will be valued at the current
4
<PAGE> 5
market value, and in the absence of a readily available market value, will be
valued at fair value as determined in good faith by the Board of Directors.
The holders of the shares of Common Stock or other securities of the
Corporation shall have no pre-emptive rights to subscribe to new or additional
shares of its Common Stock or other securities.
SIXTH: The number of Directors of the Corporation shall be such
number as may from time to time be fixed by the By-Laws of the Corporation or
pursuant to authorization contained in such By-Laws; provided, notwithstanding
anything herein to the contrary, the Board of Directors shall initially consist
of eight Directors until such time as the number of Directors is fixed as
stated above. The name of the Directors who shall act as such until successors
are duly chosen and qualify are: John C. Bogle, John J. Brennan, Robert E.
Cawthorn, Barbara B. Hauptfuhrer, Bruce K. McLaury. Burton G. Malkiel, Alfred
M. Rankin, Jr., John C. Sawhill, James O. Welch, Jr. and J. Lawrence Wilson.
SEVENTH: The following provisions are inserted for the management of
the business and for the conduct of the affairs of the Corporation:
1. The Board shall have the power to fix an initial offering
price for the shares of any series which shall yield to the Corporation not
less than the par value thereof, at which price the shares of the Common Stock
of the Corporation shall be offered for sale, and to determine from time to
time thereafter the offering price which shall yield to the Corporation not
less than the par value thereof from sales of the shares of its Common Stock;
provided, however, that no shares of the Common Stock of the Corporation shall
be issued or sold for a consideration which shall yield to the Corporation less
than the net asset value of such series determined as hereinafter provided, as
of the business day on which such shares are sold, or at such other times set
by the Board of Directors, except in the case of a dividend properly declared
and payable.
The net asset value of the property and assets of any series of the
Corporation shall be determined at such times as the Board of Directors may
direct, by deducting from the total appraised value of all of the property and
assets of the Corporation, determined in the manner hereinafter provided, all
debts, obligations and liabilities of the Corporation (including, but without
limitation of the generality of any of the foregoing, any or all debts,
obligations, liabilities or claims of any and every kind and nature, whether
fixed, accrued, or unmatured, and any reserves or charges, determined in
accordance with generally accepted accounting principles, for any or all
thereof, whether for taxes, including estimated taxes or unrealized book
profits, expenses, contingencies or otherwise).
In determining the total appraised value of all the property and assets of
the Corporation or belonging to any series thereof:
5
<PAGE> 6
(a) Securities owned shall be valued at market value or, in the
absence of readily available market quotations, at fair value as determined in
good faith by or as directed by the Board of Directors in accordance with
applicable statutes and regulations.
(b) Dividends declared but not yet received, or rights, in respect
of securities which are quoted ex-dividend or ex-rights, shall be included in
the value of such securities as determined by or pursuant to the direction f
the Board of Directors on the day the particular securities are first quoted
ex-dividend or ex-rights, and on each succeeding day until the said dividends
or rights are received and become part of the assets of the Corporation.
(c) The value of any other assets of the Corporation (and any of
the assets mentioned in paragraphs (a) or (b), in the discretion of the Board
of Directors in the event of a national financial emergency, as hereinafter
defined) shall be determined in such manner as may be approved from time to
time by or pursuant to the direction of the Board of Directors.
The net asset value of each share of the Common Stock of the Corporation
shall be determined by dividing the total market value of the property and
assets of the relevant series of the Corporation by the total number of shares
of its Common Stock then issued and outstanding for such series, including any
shares sold by the Corporation up to and including the date as of which such
net asset value is to be determined whether or not certificates therefor have
actually been issued. In case the net asset value of each share so determined
shall include a fraction of one cent, such net asset value of each shares shall
be adjusted to the nearest full cent.
For the purpose of these Articles of Incorporation, a "national financial
emergency" is defined as the whole or any part of any period (i) during which
the New York Stock Exchange is closed other than customary weekend and holiday
closings, (ii) during which trading on the New York Stock Exchange is
restricted, (iii) during which an emergency exists as a result of which
disposal by the Corporation of securities owned by such series is not
reasonably practicable or it is not reasonably practicable for the Corporation
fairly to determine the value of the net assets of such series, or (iv) during
any other period when the Securities and Exchange Commission (or any succeeding
governmental authority) may for the protection of security holders of the
Corporation by order permit suspension of the right of redemption or
postponement of the date of payment on redemption; provided that applicable
rules and regulations of the Securities and Exchange Commission (or any
succeeding governmental authority) shall govern as to whether the conditions
prescribed in (ii), (iii), or (iv) exist. The Board of Directors may, in its
discretion, declare the suspension described in (iv) above at an end, and such
other suspension relating to a natural financial emergency shall terminate as
the case may be on the first business day on which said Stock Exchange shall
have opened or the period specified in (ii) or (iii) shall have expired as to
which in the absence of an official ruling by said Commission or succeeding
authority, the determination of the Board of Directors shall be conclusive.
2. To the extent permitted by law, and except in the case of a
national financial emergency, the Corporation shall redeem shares of its Common
Stock from its
6
<PAGE> 7
stockholders upon request of the holder thereof received by the Corporation or
its designated agent during business hours of any business day, provided that
such request must be accompanied by surrender of outstanding certificate or
certificates for such shares in form for transfer, together with such proof of
the authenticity of signatures as may reasonably be required on such shares
(or, on such request in the event no certificate is outstanding) by, or
pursuant to the direction of the Board of Directors of the Corporation, and
accompanied by proper stock transfer stamps. Shares redeemed upon any such
request shall be purchased by the Corporation at the net asset value of such
shares determined in the manner provided in Paragraph (1) of this Article
Seventh, as of the close of business on the business day during which such
request was received in good order by the Corporation.
Payments for shares of its Common Stock so redeemed by the Corporation
shall be made from assets of the applicable series in cash, except payment for
such shares may, at the option of the Board of Directors, or such officer or
officers as they may duly authorize for the purpose in their complete
discretion, be made from the assets of that series in kind or partially in cash
and partially in kind. In case of any payment in kind the Board of Directors,
or their delegate, shall have absolute discretion as to what security or
securities of such series shall be distributed in kind and the amount of the
same; and the securities shall be valued for purposes of distribution at the
value at which they were appraised in computing the current net asset value of
the series of the Fund's shares, provided that any stockholder who cannot
legally acquire securities so distributed in kind by reason of the prohibitions
of the Investment Company Act of 1940 shall receive cash.
Payment for shares of its Common stock so redeemed by the Corporation
shall be made by the Corporation as provided above within seven days after the
date which such shares are deposited; provided, however, that if payment shall
be made by delivery of assets of the Corporation, as provided above, any
securities to be delivered as part of such payment shall be delivered as
promptly as any necessary transfers of such securities on the books of the
several Corporations whose securities are to be delivered may be made, but not
necessarily within such seven day period.
The right of any holder of shares of the Common Stock of the Corporation
to receive dividends thereon and all other rights of such stockholder with
respect to the shares so redeemed by the Corporation shall cease and determine
from and after the time as of which the purchase price of such shares shall be
fixed, as provided above except the right of such stockholder to receive
payment for such shares as provided for herein.
3. The Board of Directors, may from time to time, without the
vote or consent of stockholders, establish uniform standards with respect to
the minimum net asset value of a stockholder account or minimum net asset value
of a stockholder account or minimum investment which may be made by a
stockholder. The Board of Directors may authorize the closing of those
stockholder accounts not meeting the specified minimum standards of net asset
value by redeeming all of the shares in such accounts, provided there is mailed
to each affected stockholder account, at least thirty (30) days prior to the
planned redemption date, a notice
7
<PAGE> 8
setting forth the minimum account size requirement and the date on which the
account will be closed if the minimum size requirement is not met prior to said
closing date.
EIGHTH: The Corporation expressly reserves the right to amend, alter,
change or repeal any provision contained in these Articles of Incorporation,
and all rights, contract and otherwise, conferred herein upon the stockholders
are granted subject to such reservation.
NINTH: (a) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General Corporation Law,
no director or officer of the Corporation shall have any liability to the
Corporation or its stockholders for damages. This limitation on liability
applies to events occurring at the time a person serves as a director or
officer of the Corporation whether or not such person is a director or officer
at the time of any proceeding in which liability is asserted.
(b) The Corporation shall indemnify and advance expenses of its currently
acting and its former directors to the fullest extent that indemnification of
directors is permitted by the Maryland General Corporation Law. The
Corporation shall indemnify and advance expenses to its officers to the same
extent as its directors and to such further extent as is consistent with law.
The Board of Directors may by By-Law, resolution or agreement make further
provisions for indemnification of directors, officers, employees and agents to
the fullest extent permitted by the Maryland General Corporation Law.
(c) No provision of this Article shall be effective to protect or purport
to protect any director or officer of the Corporation against any liability to
the Corporation or its security holders to which he would otherwise be subject
by reason or willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
(d) References to the Maryland General Corporation Law in this Article are
to the law as from time to time amended. No further amendment to the Articles
of Incorporation of the Corporation shall affect any right of any person under
this Article based on any event, omission or proceeding prior to such
amendment.
TENTH: In furtherance, and not in limitation, of the powers conferred by
the laws of the State of Maryland, the Board of Directors is expressly
authorized to make, alter or repeal the By-Laws of the Corporation, except
where such power is reserved by the By-Laws to the stockholders, and except as
otherwise required by the Investment Company Act of 1940.
IN WITNESS WHEREOF, the undersigned incorporator of The Whitehall Funds,
Inc. who executed the foregoing Articles of Incorporation hereby acknowledged
the same to be his act and further acknowledge that, to the best of his
knowledge the matters and facts set forth therein are true in all material
respects under the penalties of perjury.
Dated this 20th day of November, 1995.
8
<PAGE> 9
/s/ Curtis R. Hilliard
----------------------------------------
Curtis R. Hilliard
9
<PAGE> 1
EX-99.B2
BY-LAWS OF
VANGUARD WHITEHALL FUNDS, INC.
VANGUARD SELECTED VALUE PORTFOLIO
NOVEMBER 20, 1995
ARTICLE I
FISCAL YEAR AND OFFICES
SECTION 1. FISCAL YEAR. Unless otherwise provided by resolution of the
Board of Directors, the fiscal year of the Corporation shall begin on November
1 and end on the last day of October.
SECTION 2. REGISTERED OFFICE. The registered office of the Corporation
in Maryland shall be located at 11 East Chase Street, Suite 9E, Baltimore,
Maryland 21202, and the name and address of its Resident Agent is James S.
Baker, Esquire, c/o CSC, Lawyers Incorporating Service, 11 East Chase Street,
Baltimore, Maryland 21202.
SECTION 3. OTHER OFFICES. The Corporation shall also have a place of
business in Valley Forge, Pennsylvania, and the Corporation shall have the
power to open additional offices for the conduct of its business, either within
or outside the States of Maryland and Pennsylvania, at such places as the Board
of Directors may from time to time designate.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETING. Meetings of the Stockholders for the
election of Directors shall be held in such place as the Board of Directors may
by resolution establish. In the absence of any specific resolution, Annual
Meetings of Stockholders shall be held at the Corporation's principal
1
<PAGE> 2
office in Valley Forge, Pennsylvania. Meetings of Stockholders for any other
purpose may be held at such place and time as shall be fixed by resolution of
the Board of Directors and stated in the notice of the Meeting, or in a duly
executed waiver of notice thereof.
SECTION 2. ANNUAL MEETINGS. Annual Meetings of Stockholders shall be
held in years in which action by Stockholders on any one or more of the
following is required by the Investment Company Act of 1940:
A) Election of Directors;
B) Approval of the Investment Advisory Agreement;
C) Ratification of the Selection of Independent Public Accountants; or
D) Approval of a Distribution Agreement.
In any year in which Stockholder action on none of the above is required
by the Investment Company Act of 1940, no Annual Meeting shall be held unless
called by the Board of Directors of the Corporation. The Annual Meeting, if
held, shall be held at such time and such date during the first six months of
each fiscal year of the Corporation as may be fixed by the Board of Directors
by resolution in each year.
SECTION 3. SPECIAL MEETINGS. Special Meetings of the Stockholders may be
called at any time by the Chairman of the Board or the President, or by a
majority of the Board of Directors, and shall be called by the Chairman of the
Board, President or Secretary upon written request of the holders of shares
entitled to cast not less than twenty-five percent of all the votes entitled to
be cast at such meeting (the total shares of all of the Corporation's classes
of shares ("Portfolios") will be considered as a single class) provided that
(a) such request shall state the purposes of such
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meeting and the matters proposed to be acted on, and (b) the Stockholders
requesting such meeting shall have paid to the Corporation the reasonably
estimated cost of preparing and mailing the notice thereof, which the Secretary
shall determine and specify to such Stockholders. No Special Meeting need be
called to consider any matter which is substantially the same as a matter voted
on at any meeting of the Stockholders held during the preceding twelve months.
SECTION 4. NOTICE. Not less than ten days before the date of every
Annual or Special Stockholders' Meeting, the Secretary shall cause to be mailed
to each Stockholder entitled to vote at such meeting at his (her) address (as
it appears on the records of the Corporation at the time of mailing) written
notice stating the time and place of the meeting and, in the case of a Special
Meeting of Stockholders shall be limited to the purposes stated in the notice.
Notice of any Stockholders' meeting need not be given to any Stockholder who
shall sign a written waiver of such notice whether before or after the time of
such meeting, or to any Stockholder who shall attend such meeting in person or
by proxy. Notice of adjournment of a Stockholders' meeting to another time or
place need not be given, if such time and place are announced at the meeting.
SECTION 5. RECORD DATE FOR MEETINGS. The Board of Directors may fix in
advance a date not more than sixty days, nor less than ten days, prior to the
date of any Annual or Special Meeting of the Stockholders as a record date for
the determination of the Stockholders entitled to receive notice of, and to
vote at any meeting and any adjournment thereof; and in such case such
Stockholders and only such Stockholders as shall be Stockholders of record on
the date so fixed shall be entitled to receive notice of and to vote at such
meeting and any adjournment thereof as
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the case may be, notwithstanding any transfer of any stock on the books of the
Corporation after any such record date fixed as aforesaid.
SECTION 6. QUORUM. At any meeting of Stockholders, the presence in
person or by proxy of the holders of a majority of the aggregate number of
Shares of the Corporation's Portfolios at the time outstanding shall constitute
a quorum for the transaction of business at the meeting, except that where any
provision of law or the Articles of Incorporation require that the holders of
any Portfolio shall vote as a class, then a majority of the aggregate number of
shares of that Portfolio at the time outstanding shall be necessary to
constitute a quorum for the transaction of such business. If, however, such
quorum shall not be present or represented at any meeting of the Stockholders,
any officer entitled to preside at, or act as Secretary of, such meeting, shall
have the power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present and
represented. At such adjourned meeting at which a quorum shall be presented or
represented any business may be transacted which might have been transacted at
the meeting as originally notified.
SECTION 7. VOTING. Each Stockholders shall have one vote for each full
share and a fractional vote for each fractional share of stock having voting
power held by such Stockholder on the record date set pursuant to Section 5 on
each matter submitted to a vote at a meeting of Stockholders. Such vote may be
made in person or by proxy. If no record date has been fixed for the
determination of Stockholders, the record date for the determination of
Stockholders entitled to notice of or to vote at a meeting of Stockholders
shall be (a) at the close of business (i) on the day ten days before the day on
which notice of the meeting is mailed or (ii) on the day 60 days
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before the meeting, whichever is the closer date to the meeting; or (b) if
notice is waived by all Stockholders entitled to notice of or to vote at the
meeting, at the close of business on the tenth day next preceding the day on
which the meeting is held. At all meetings of the Stockholders, a quorum being
present, all matters shall be decided by majority vote of the shares of stock
entitled to vote held by Stockholders present in person or by proxy, unless the
question is one which by express provision of the laws of the State of
Maryland, the Investment Company Act of 1940, as from time to time amended, or
the Articles of Incorporation, a different vote is required, in which case such
express provision shall control the decision of such question. At all meetings
of Stockholders, unless the voting is conducted by inspectors, all questions
relating to the qualification of voters and the validity of proxies and the
acceptance or rejection of votes shall be decided by the Chairman of the
meeting.
SECTION 8. VOTING - PROXIES. The right to vote by proxy shall exist only
if the instrument authorizing such proxy to act shall have been executed in
writing by the Stockholder himself or by his attorney thereunto duly authorized
in writing. No proxy shall be voted on after eleven months from its date
unless it provides for a longer period. Each proxy shall be in writing
subscribed by the Stockholder or his duly authorized attorney and shall be
dated, but need not be sealed, witnessed or acknowledged. Proxies shall be
delivered to the Secretary of the Corporation or person acting as Secretary of
the meeting before being voted. A proxy with respect to stock held in the name
of two or more persons shall be valid if executed by one of them unless at or
prior to exercise of such proxy the Corporation receives a specific written
notice to the contrary from any
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one of them. A proxy purporting to be executed by or on behalf of a
Stockholder shall be deemed valid unless challenged at or prior to its
exercise.
SECTION 9. INSPECTORS. At any election of Directors, the Board of
Directors prior thereto may, or, if they have not so acted, the Chairman of the
meeting may appoint one or more inspectors of election who shall first
subscribe an oath of affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after the election make a certificate of the result of the
vote taken. No candidate for the office of Director shall be appointed such
inspector.
SECTION 10. STOCK LEDGER AND LIST OF STOCKHOLDERS. It shall be the duty
of the Secretary or Assistant Secretary of the Corporation to cause an original
or duplicate stock ledger to be maintained at the office of the Corporation's
transfer agent. Such stock ledger may be in written form or any other form
capable of being converted into written form within a reasonable time for
visual inspection. Any one or more persons, each of them has been a
Stockholder of record of the Corporation for more than six months next
preceding such request, who owns or own in the aggregate 5% or more of the
outstanding capital stock of the Corporation, (shares of all of the
Corporation's Portfolios considered as a single class) may submit a written
request to any officer of the Corporation or its resident agent in Maryland for
a list of the Stockholders of the Corporation. Within 20 days after such a
request, there shall be prepared and filed at the Corporation's principal
office a list containing the names and addresses of all Stockholders of the
Corporation and the number of shares of each class held by each Stockholder,
certified as correct by an officer of the Corporation, by its stock transfer
agent, or by its registrar.
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SECTION 11. ACTION WITHOUT MEETING. Any action to be taken by
Stockholders may be taken without a meeting if all Stockholders entitled to
vote on the matter consent to the action in writing, and the written consents
are filed with the records of the meetings of Stockholders. Such consent shall
be treated for all purposes as a vote at a meeting.
ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS. The business of the Corporation shall be
under the direction of its Board of Directors, which may exercise all powers of
the Corporation, except such as are by statue, or the Articles of
Incorporation, or by these By-Laws conferred upon or reserved to the
Stockholders. All acts done by any meeting of the Directors or by any person
acting as a Director, so long as his successor shall not have been duly elected
or appointed, shall, notwithstanding that it be afterwards discovered that
there was some defect in the election of the Directors or of such person acting
as a aforesaid or that they or any of them were disqualified, be as valid as if
the Directors or such other person, as the case may be, had been duly elected
and were or was qualified to be Directors or a Director of the Corporation.
SECTION 2. NUMBER AND TERM OF OFFICE. The number of Directors which
shall constitute the whole Board shall be determined from time to time by the
Board of Directors, but shall not be fewer than three, nor more than sixteen.
Each Director elected shall hold office until his successor is elected and
qualified. Directors need not be Stockholders.
SECTION 3. ELECTION. Initially the Directors shall be those persons
named as such in the Articles of Incorporation. The Directors shall be elected
annually by the vote of a majority of the
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shares present in person or by proxy at the Annual Meeting of the Stockholders,
except that any vacancy in the Board of Directors may be filled by a majority
vote of the Board of Directors, although less than a quorum, except that a
newly-created directorship may be filled only by a vote of the entire Board of
Directors. However, if at any time after the filling of any vacancy, less than
a majority of the Directors then holding office were elected by Stockholders, a
Stockholders Meeting shall be called as soon as possible, and in any event
within sixty days, for the purpose of electing an entire new Board of
Directors.
SECTION 4. REMOVAL OF DIRECTORS. At any Stockholders Meeting, provided a
quorum is present, any Director may be removed (either with or without cause)
by the vote of the holders of a majority of the shares present or represented
at the meeting, and at the same meeting a duly qualified person may be elected
in his stead by a majority of the votes validly cast.
SECTION 5. PLACE OF MEETING. Meetings of the Board of Directors, regular
or special, may be held at any place in or out of the State of Maryland as the
Board may from time to time determine.
SECTION 6. QUORUM. At all meetings of the Board of Directors a majority
of the entire Board of Directors shall constitute a quorum for the transaction
of business and the action of a majority of the Directors present at any
meeting at which a quorum is present shall be the action of the Board of
Directors unless the concurrence of a greater proportion is required for such
action by the laws of Maryland, the Investment Company Act of 1940, these
By-Laws or the Articles of Incorporation. If a quorum shall not be present at
any meeting of Directors, the Directors present
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thereat may be a majority vote adjourn the meeting from time to time without
notice other than announcement at the meeting, until a quorum shall be present.
SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice at such time and place as shall from time to time be
determined by the Board of Directors provided that notice of any change in the
time or place of such meetings shall be sent promptly to each Director not
present at the meeting at which such change was made in the manner provided for
notice of special meetings. Members of the Board of Directors or any committee
designated thereby may participate in a meeting of such Board or committee by
means of a conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time, and participation by such means shall constitute presence in person at a
meeting.
SECTION 8. SPECIAL MEETINGS. Special Meetings of the Board of Directors
may be called by the Chairman of the Board or the President on one day's notice
to each Director; Special Meetings shall be called by the Chairman of the
Board, President or Secretary in like manner and on like notice on the written
request of two Directors.
SECTION 9. INFORMAL ACTIONS. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting, if a written consent to such action is signed in
one or more counterparts by all members of the Board or of such committee, as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board or committee.
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SECTION 10. COMMITTEES. The Board of Directors may by resolution passed
by a majority of the entire Board appoint from among its members an Executive
Committee and other committees composed of two or more Directors, and may
delegate to such committees, in the intervals between meetings of the Board of
Directors, any or all of the powers of the Board of Directors in the management
of the business and affairs of the Corporation, except the powers to declare
dividends, to issue stock or to recommend to Stockholders any action requiring
Stockholder approval.
SECTION 11. ACTION OF COMMITTEES. In the absence of an appropriate
resolution of the Board of Directors each committee may adopt such rules and
regulations governing its proceedings, quorum and manner of acting as it shall
deem proper and desirable, provided that the quorum shall not be less than two
Directors. The committees shall keep minutes of their proceedings and shall
report the same to the Board of Directors at the meeting next succeeding, and
any action by the committee shall be subject to revision and alteration by the
Board of Directors, provided that no rights of their persons shall be affected
by any such revision or alteration. In the absence of any member of such
committee the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member.
SECTION 12. COMPENSATION. Any Director, whether or not he is a salaried
officer or employee of the Corporation, may be compensated for his services as
Director or as a member of a committee of Directors, or as Chairman of the
Board or chairman of a committee by fixed periodic payments or by fees for
attendance at meetings or by both, and in addition may be
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reimbursed for transportation and other expenses, all in such manner and
amounts as the Board of Directors may from time to time determine.
ARTICLE IV
NOTICES
SECTION 1. FORM. Notices to Stockholders shall be in writing and
delivered personally or mailed to the Stockholders at their addresses appearing
on the books of the Corporation. Notices to Directors shall be oral or by
telephone or telegram or in writing delivered personally or mailed to the
Directors at their addresses appearing on the books of the Corporation. Notice
by mail shall be deemed to be given at the time when the same shall be mailed.
Notice to Directors need not state the purpose of a Regular or Special Meeting.
SECTION 2. WAIVER. Whenever any notice of the time, place or purpose of
any meeting of Stockholders, Directors or a committee is required to be given
under the provisions of Maryland law or under the provisions of the Articles of
Incorporation or these By-Laws, a waiver thereof in writing, signed by the
person or persons entitled to such notice and filed with the records of the
meeting, whether before or after the holding thereof, or actual attendance at
the meeting of Stockholders in person or by proxy, or at the meeting of
Directors of committee in person, shall be deemed equivalent to the giving of
such notice to such persons.
ARTICLE V
OFFICERS
SECTION 1. EXECUTIVE OFFICERS. The officers of the Corporation shall be
chosen by the Board of Directors and shall include a President, who shall be a
Director, a Secretary and a Treasurer.
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The Board of Directors, at its discretion, may also appoint a Director as
Chairman of the Board who shall perform and execute such executive and
administrative duties and powers as the Board of Directors shall from time to
time prescribe. The same person may hold two or more offices, except that no
person shall be both President and Secretary and no officer shall execute,
acknowledge or verify any instrument in more than one capacity, if such
instrument is required by law, the Articles of Incorporation or these By-Laws
to be executed, acknowledged or verified by two or more officers.
SECTION 2. ELECTION. The Board of Directors shall choose a President, a
Secretary and a Treasurer at its first meeting and thereafter at the next
meeting following a Stockholders' Meeting at which Directors were elected.
SECTION 3. OTHER OFFICERS. The Board of Directors from time to time may
appoint such other officers and agents as it shall deem advisable, who shall
hold their offices for such terms and shall exercise powers and perform such
duties as shall be determined from time to time by the Board. The Board of
Directors from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties.
SECTION 4. COMPENSATION. The salaries or other compensation of all
officers and agents of the Corporation shall be fixed by the Board of
Directors, except that the Board of Directors may delegate to any person or
group of persons the power to fix the salary or other compensation of any
subordinate officers or agents appointed pursuant to Section 3 of this Article
V.
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SECTION 5. TENURE. The officers of the Corporation shall serve for one
year and until their successors are chosen and qualify. Any officer or agent
may be removed by the affirmative vote of a majority of the Board of Directors
whenever, in its judgment, the best interests of the Corporation will be served
thereby. In addition, any officer or agent appointed pursuant to Section 3 may
be removed, either with or without cause, by any officer upon whom such power
of removal shall have been conferred by the Board of Directors. Any vacancy
occurring in any office of the Corporation by death, resignation, removal or
otherwise shall be filled by the Board of Directors, unless pursuant to Section
3 the power of appointment has been conferred by the Board of Directors on any
other officer.
SECTION 6. PRESIDENT. The President, unless the Chairman has been so
designated, shall be the Chief Executive Officer of the Corporation; he (she)
shall preside at all meetings of the Stockholders and Directors, and shall see
that all orders and resolutions of the Board are carried into effect. The
President, unless the Chairman has been so designated, shall also be the chief
administrative officer of the Corporation and shall perform such other duties
and have such other powers as the Board of Directors may from time to time
prescribe.
SECTION 7. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one
shall be chosen, shall preside at all meetings of the Board of Directors and
Stockholders, and shall perform and execute such executive duties and
administrative powers as the Board of Directors shall from time to time
prescribe.
SECTION 8. VICE-PRESIDENTS. The Vice-Presidents, in the order of their
seniority, shall, in the absence or disability of the President, perform the
duties and exercise the powers of the President
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and shall perform such other duties as the Board of Directors or the Chief
Executive Officer may from time to time prescribe.
SECTION 9. SECRETARY. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the Stockholders and record all the
proceedings thereof and shall perform like duties for any Committee when
required. He (she) shall give, or cause to be given, notice of meetings of the
Stockholders and of the Board of Directors, shall have charge of the records of
the Corporation, including the stock books, and shall perform such other duties
as may be prescribed by the Board of Directors or Chief Executive Officer,
under whose supervision he (she) shall be. He (she) shall keep in safe custody
the seal of the Corporation and, when authorized by the Board of Directors,
shall affix and attest the same to any instrument requiring it. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his (her) signature.
SECTION 10. ASSISTANT SECRETARIES. The Assistant Secretaries, in order
of their seniority, shall, in the absence or disability of the Secretary,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties as the Board of Directors shall prescribe.
SECTION 11. TREASURER. The Treasurer, unless another officer has been so
designated, shall be the Chief Financial Officer of the Corporation. He (she)
shall have general charge of the finances and books of account of the
Corporation. Except as otherwise provided by the Board of Directors, he (she)
shall have general supervision of the funds and property of the Corporation and
of the funds and property of the Corporation and of the performance by the
custodian of its duties with respect thereto. He (she) shall render to the
Board of Directors, whenever directed by
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the Board, an account of the financial condition of the Corporation and of all
his (her) transactions as Treasurer; and as soon as possible after the close of
each financial year he (she) shall make and submit to the Board of Directors a
like report for such financial year. He (she) shall perform all the acts
incidental to the office of Treasurer, subject to the control of the Board of
Directors.
SECTION 12. CONTROLLER. The Controller shall be under the direct
supervision of the Chief Financial Officer of the Corporation. He (she) shall
maintain adequate records of all assets, liabilities and transactions of the
Corporation, and establish and maintain internal accounting controls. He (she)
shall have such further powers and duties as may be conferred upon him (her)
from time to time by the President or the Board of Directors.
SECTION 13. ASSISTANT TREASURERS. The Assistant Treasurers, in the order
of their seniority, shall, in the absence or disability of the Treasurer,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties as the Board of Directors may from time to time prescribe.
SECTION 14. SURETY BONDS. The Board of Directors may require any officer
or agent of the Corporation to execute a bond (including, without limitation,
any bond required by the federal Investment Company Act of 1940, as amended,
and the rules and regulations of the Securities and Exchange Commission) to the
Corporation in such sum and with such surety or sureties as the Board of
Directors may determine, conditioned upon the faithful performance of his (her)
duties to the Corporation, including responsibility for negligence and for the
accounting of any of the Corporation's property, funds or securities that may
come into his (her) hands.
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ARTICLE VI
OTHER RESTRICTIONS
SECTION 1. TRADING IN SECURITIES. Neither the investment adviser or any
officer or director thereof, nor any officer or director of the Corporation
shall take a long or short position in the securities issued by the
Corporation, except as permitted by applicable laws and regulation; provided,
that the foregoing shall not prevent the purchase from the Corporation of
shares issued by it by the officers or directors of the Corporation or of the
investment adviser or by the investment adviser at the price available to the
public at the moment of such purchase.
In any case where an officer or director of the Corporation or of the
investment adviser or a member of an advisory or portfolio committee of the
Corporation is also an officer or director of another corporation and the
purchase or sale of shares issued by that other corporation is under
consideration, the officer or director or committee member concerned will
abstain from participating in any decision made on behalf of the Corporation to
purchase or sell any securities issued by the other corporation.
SECTION 2. LOANS TO AFFILIATES. The Corporation shall not lend assets of
the Corporation to any officer or director of the Corporation, or to any
partner, officer, director or stockholder of, or person who has a material,
financial interest in, the investment adviser of the Corporation, or the
distributor of the Corporation, or to the investment adviser of the Corporation
or to the distributor of the Corporation.
SECTION 3. CONFLICT OF INTEREST TRANSACTIONS. The Corporation shall not
permit any officer or director, or any officer or director of the investment
adviser or distributor of the Corporation
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to deal for or on behalf of the Corporation with himself as principal or agent,
or with any partnership, association or corporation in which he has a material,
financial interest; provided that the foregoing provisions shall not prevent
(a) officers or directors of the Corporation from buying, holding or selling
shares in the Corporation, or from being partners, officers or directors of or
otherwise financially interested in the investment adviser, sponsor, manager or
distributor of the Corporation; (b) purchases or sales of securities or other
property by the Corporation from or to an affiliated person or to the
investment adviser or distributor of the Corporation if such transaction is
exempt from the applicable provisions of the Investment Company Act of 1940;
(c) purchases of investments owned by the Corporation through a security dealer
who is, or one or more of those partners, stockholders, officers or director
is, an officer or director of the Corporation, if such transactions are handled
in the capacity of brokers only and commissions charged do not exceed customary
brokerage charges for such services; (d) employment of legal counsel,
registrar, transfer agent, dividend disbursing agent or custodian who is, or
has a partner, stockholder, officer or director, who is an officer or director
of the Corporation, if only customary fees are charged for services to the
Corporation; (e) sharing statistical, research, legal and management expenses
with a firm of which an officer or director of the Corporation is an officer or
director or otherwise financially interested; (f) purchase for the portfolio of
the Corporation of securities issued by an issuer having an officer, director
or security holder who is an officer or director of the Corporation or of any
investment adviser of the Corporation, unless the retention of such securities
in the portfolio of the Corporation would be a violation of these By-Laws or
the Articles of Incorporation of the Corporation.
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ARTICLE VII
STOCK
SECTION 1. Stock certificates shall not be issued by the Corporation.
The recording and transfer of ownership of shares of the Corporation's stock
shall be provided for by electronic or other means of certificates as approved
by the Board of Directors.
SECTION 2. TRANSFER OF CAPITAL STOCK. Transfers of shares of the stock
of the Corporation shall be made on the books of the Corporation by the holder
of record thereof (in person or by his attorney thereunto duly authorized by a
power of attorney duly executed in writings and filed with the Secretary of the
Corporation).
SECTION 3. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such shares or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the General Laws of the State of Maryland.
SECTION 4. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may,
from time to time, appoint or remove transfer agents and or registrars of
transfer of shares of stock of the Corporation, and it may appoint the same
person as both transfer agent and registrar. Upon any such appointment being
made all certificates representing shares of stock thereafter issued shall be
countersigned by one of such transfer agents or by one of such registrars of
transfers or by both
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and shall not be valid unless so countersigned. If the same person shall be
both transfer agent and registrar, only one countersignature by such person
shall be required.
SECTION 5. STOCK LEDGER. The Corporation shall maintain an original
stock ledger containing the names and addresses of all Stockholders and the
number and class of shares held by each Stockholder. Such stock ledger may be
in written form or any other form capable of being converted into written form
within a reasonable time for visual inspection.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 1. RIGHTS IN SECURITIES. The Board of Directors, on behalf of
the Corporation, shall have the authority to exercise all of the rights of the
Corporation as owner of any securities which might be exercised by an
individual owning such securities in his own right; including, but not limited
to, the rights to vote by proxy for any and all purposes, to consent to the
reorganization, merger or consolidation of any issuer or to consent to the
sale, lease or mortgage of all or substantially all of the property and assets
of any issuer; and to exchange any of the shares of stock of any issuer for the
shares of stock issued therefor upon any reorganization, merger, consolidation,
sale, lease or mortgage. The Board of Directors shall have the right to
authorize any officer of the investment adviser to execute proxies and the
right to delegate the authority granted by this Section 1 to any officer of the
Corporation.
SECTION 2. CUSTODIANSHIP.
(a) The Corporation shall place and at all times maintain in the custody
of a custodian (including any sub-custodian for the custodian) all funds,
securities and similar investments owned
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by the Corporation. Subject to the approval of the Board of Directors the
custodian may enter into arrangements with securities depositories, as long as
such arrangements comply with the provisions of the Investment Company Act of
1940 and the rules and regulations promulgated thereunder. The custodian (and
any sub-custodian) shall be a bank having not less than $2,000,000 aggregate
capital, surplus and undivided profits and shall be appointed from time to time
by the Board of Directors, which shall fix its remuneration.
(b) Upon termination of a custodian agreement or inability of the
custodian to continue to serve, the Board of Directors shall promptly appoint a
successor custodian. But in the event that no successor custodian can be found
who has the required qualifications and is willing to serve, the Board of
Directors shall call as promptly as possible a Special Meeting of the
Stockholders to determine whether the Corporation shall function without a
custodian or shall be liquidated. If so directed to vote of the holders of a
majority of the outstanding shares of stock of the Corporation, the custodian
shall deliver and pay over all property of the Corporation held by it as
specified in such vote.
(c) The following provisions shall apply to the employment of a custodian
and to any contract entered into with the custodian so employed:
The Board of Directors shall cause to be delivered to the
custodian all securities owned by the Corporation or to which it
may become entitled, and shall order the same to be delivered by
the custodian only in completion of a sale, exchange, transfer,
pledge, or other disposition thereof, all as the Board of
Directors may generally or from time to time require or approve
or to a successor custodian; and the Board of Directors shall
cause all funds owned by the Corporation or to which it may
become entitled to be paid to the custodian, and shall order the
same disbursed only for investment against delivery of the
securities acquired, or in payment of expenses, including
management compensation, and liabilities of the Corporation,
including distributions to shareholders or proper payments to
borrowers of securities representing partial return of
collateral, or to a successor custodian.
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SECTION 3. REPORTS. Not less often than semi-annually, the Corporation
shall transmit to the Stockholders a report of the operations of the
Corporation, based at least annually upon an audit by independent public
accountants, which report shall clearly set forth, in addition to the
information customarily furnished in a balance sheet and profit and loss
statement, a statement of all amounts paid to security dealers, legal counsel,
transfer agent, disbursing agent, registrar or custodian or trustee, where such
payments are made to a firm, corporation, bank or trust company, having a
partner, officer or director who is also an officer or director of the
Corporation. A copy, or copies, of all reports submitted to the Stockholders
of the Corporation shall also be sent, as required, to the regulatory agencies
of the United States and of the states in which the securities of the
Corporation are registered and sold.
SECTION 4. SEAL. The corporate seal shall have inscribed thereon the
name of the Corporation, the year or its organization and the words "Corporate
Seal, Maryland". The seal may be used by causing it or a facsimile thereof to
be impressed or affixed or reproduced or otherwise.
SECTION 5. EXECUTION OF INSTRUMENTS. All deeds, documents, transfers,
contracts, agreements and other instruments requiring execution by the
Corporation shall be signed by the Chairman or the President or a
Vice-President and by the Treasurer or Secretary or an Assistant Treasurer or
an Assistant Secretary, or as the Board of Directors may otherwise, from time
to time, authorize. Any such authorization may be general or confined to
specific instances. Except as otherwise authorized by the Board of Directors,
all requisitions or orders for the assignment of securities standing in the
name of the custodian or its nominee, or for the execution of powers to
21
<PAGE> 22
transfer the same, shall be signed in the name of the Corporation by the
Chairman or the President or a Vice-President and by the Secretary, Treasurer
or an Assistant Treasurer.
ARTICLE IX
AMENDMENTS
The By-Laws of the Corporation may be altered, amended or repealed either
by the affirmative vote of a majority of the stock issued and outstanding and
entitled to vote in respect thereof and represented in person or by proxy at
any annual or special meeting of the Stockholders, or by the Board of Directors
at any regular or special meeting of the Board of Directors; provided, that the
Board of Directors may not alter, amend or repeal Article VI, and that the vote
of Stockholders required for alteration, amendment or repeal of any of such
provisions shall be subject to all applicable requirements of federal or state
laws or of the Articles of Incorporation.
22
<PAGE> 1
EX-99.B9
SECOND AMENDED AND RESTATED FUNDS' SERVICE AGREEMENT
This second Amended and Restated Funds' Service Agreement, made as of
the 10th day of May, 1993 (the "Agreement"), between and among the 33
investment companies registered under the Investment Company Act of 1940 ("1940
Act"), whose names are set forth on the signature page of this Agreement, which
together with any additional investment companies which may become a party to
this Agreement pursuant to Section 5.4 are collectively called the "Funds"; and
The Vanguard Group, Inc., a Pennsylvania corporation ("Service Company").
Whereas, each of the Funds has heretofore determined (as evidenced by,
among many documents, prior versions* of this Agreement (the "Prior
Agreements"), and by prospectuses and proxy statements of the Funds related
thereto): (i) to manage and perform the corporate management, administrative
and share distribution functions required for its continued operation, (ii) to
create a structure which enhances the independence of the Funds from the
providers of external services, (iii) to share, on an equitable and fair basis,
with all of the other Funds the expenses of establishing the means to
accomplish these objectives at the lowest reasonable cost; and
Whereas, each of the Funds: (i) has heretofore determined that these
objectives can best be accomplished by establishing a company: (a) to be
wholly-owned by the Funds; (b) to provide corporate management, administrative,
and distribution services, and upon the reasonable request of any Fund to
provide other service to such Fund at cost; (c) to employ the executive,
managerial, administrative, secretarial and clerical personnel necessary or
appropriate to perform such services; and (d) to acquire such assets and to
obtain such facilities and equipment as are necessary or appropriate to carry
out such services, and to make those assets available to the Funds; and (ii)
since May 1, 1975 (or the commencement of its operations after this date) has
utilized Service Company, pursuant to the provisions of the Prior Agreements;
and
Whereas, each of the Funds recognizes that it may, from time to time,
be in the best interests of the Funds (i) for Service Company to provide
similar services to investment companies other than the Funds, (ii) for the
Funds to organize, from time to time, new investment companies which are
intended to become parties to this Agreement; and, (iii) for Service Company to
engage in business activities (directly or through subsidiaries), supportive of
the Funds' operations as investment companies; and
Whereas, each of the Funds desires to enter into a completely
integrated Seconded Amended and Restated Funds' Service Agreement with the
other Funds to set forth the current terms and provisions of the relationships
which the Funds have determined to establish;
Now, Therefore, each Fund agrees with each and all of the other Funds,
and with Service Company, as follows:
- ------------
*Funds' Service Agreement dated May 1, 1975; an Amended and Restated Funds'
Service Agreement dated October 1, 1977; and an Amended and Restated Funds'
Service Agreement dated May 10, 1993, as thereafter amended.
<PAGE> 2
1. CAPITALIZATION AND ASSETS OF SERVICE COMPANY
1.1 Capital and Assets. To provide the Service Company with
the cash and with the office space, facilities and equipment necessary for it
to discharge its responsibilities hereunder, each Fund agrees:
A. To make cash investments in the Service Company as
provided in Sections 1.2, 1.3 and 1.4.
B. To assign and transfer to Service Company on and
after May 1, 1975 any and all right, title and interest which the
Funds may have in any office facilities and equipment necessary for it
to discharge its responsibilities and in any other assets which
Service Company may develop or acquire, subject only to the rights
reserved in Section 1.6 (concerning certain major assets). Section
5.2 (concerning rights upon withdrawal) and Section 5.3 (concerning
rights upon termination) of the Agreement.
1.2 Cash Investments in Service Company. To provide Service
Company with such cash as may be necessary or appropriate from time to time to
accomplish the purposes of the Funds and to discharge its responsibilities
hereunder, each Fund agrees to purchase, for cash, shares of common stock of
Service Company ("Shares") or such other securities of Service Company
(hereafter referred to as "other securities") upon the favorable vote of the
holders of a majority of the Shares adopting a resolution setting forth the
terms and provisions of the purchase. Provided, however, that:
A. Without the consent of all of the Funds, the date for the
purchase of Shares or other securities shall not be less than 15 days
following the date on which the resolution is approved by
shareholders.
B. The cash purchase price to be paid by any Fund for the
Shares or other securities, expressed as a percentage of the total
purchase price for the additional securities to be paid by all of the
Funds shall not exceed the percentage which the then current net
assets of the Fund bears to the aggregate current net assets of all of
the Funds as of the most recent month-end preceding the purchase date.
1.3 Periodic Adjustments of Cash Investments. To maintain and
re-establish periodically a fair and proportionate ratio of cash investments by
each Fund in the Service Company as compared to its then current net assets,
each Fund agrees to purchase from one or more of the other Funds, or to sell
one or more of the Funds, sufficient Shares or other securities to re-establish
the ratio.
A. Such purchases and sales shall be made (1) as of the last
business day of any month upon the addition or withdrawal of any Fund
as a party to this Agreement, provided that if the addition or
withdrawal of a Fund creates no material disparity in the ratios (as
determined by the Service Company's Board of Directors), and no Fund
requests that an adjustment be made, the adjustment may be deferred
until the close of the Service Company's fiscal year; (2) in
connection with additional investments pursuant to Section 1.2; and
(3) annually as of the close of the Service Company's fiscal year, on
a date fixed by Service Company's Board of Directors within 90 days
after the close of the fiscal year unless there is no material
disparity in the ratios (as determined by the Service Company's Board
of Directors) and no Fund requests that an adjustment be made.
<PAGE> 3
B. The cash purchases and sale price of the Share or other
securities shall be for each Fund (1) in the case of Shares, the fair
market value of Shares determined in accord with generally accepted
accounting principles and procedures established by the Board of
Directors of Service Company; and (2) in the case of debt securities,
the face value thereof.
C. Unless specifically required by applicable law, the
issuance and transfer of Shares or other securities of Service
Company, and the cash investments of the Funds in Service Company, may
be evidenced by proper records of Service Company; and, no
certificates need be issued.
1.4 Limitation Upon Funds' Obligations to Make Cash Investments or
Purchases. Notwithstanding the provisions of Sections 1.1, 1.2 and 1.3, above,
no Fund shall be obligated to purchase Shares or other securities of Service
Company if, as a result of such purchase the Fund would thereby have invested
in cash a total of more than 0.40% of its then current net assets in Shares or
other securities of Service Company.
1.5 Restrictions on Transfer of Shares or Other Securities.
Each Fund agrees that it will not, without the written consent of all other
parties to this Agreement, transfer or dispose of or encumber any of its Shares
or other securities of Service Company except as provided in this Agreement,
and that, if issued, each certificate for Shares or other securities of Service
Company will be stamped with a legend referring to this restriction.
1.6 Assets of Service Company. The Funds agree that Service
Company may acquire, by purchase or lease, office space, furniture, equipment,
supplies, files, records, computer hardware and software, and other assets
necessary or appropriate for the discharge of the Service Company's
responsibilities hereunder. Each of the Funds hereby assigns and transfers to
Service Company any and all right, title and interest that it may have or
hereafter acquire in any such assets, subject to the rights of each Fund (A) to
receive the then fair value of such assets upon the purchase or sale of Shares
pursuant to this Agreement, (B) to the continued use of such assets in the
administration of the business affairs of a Fund so long as the Fund remains a
party to this Agreement.
1.7 Borrowing by Service Company. The Funds agree that Service
Company may borrow money, and may issue a note or other security in connection
with such borrowing, as long as such borrowing, is in connection with the
discharge of Service Company's responsibilities hereunder and is undertaken in
accord with procedures approved by the Service Company's Board of Directors.
II. SERVICES TO BE OBTAINED INDEPENDENTLY BY EACH FUND
2.1 Services and Expenses. Each Fund shall, at its own expense,
obtain from Service Company or an outside vendor (as that Fund's Board of
Directors shall determine):
A. Services of an independent public accountant.
B. Services of outside legal counsel.
C. Transfer agency services, including "shareholder services."
D. Custodian, registrar and dividend disbursing services.
<PAGE> 4
E. Brokerage fees, commissions and transfer taxes in
connection with the purchase and sale of securities for its investment
portfolio.
F. Investment advisory services.
G. Taxes and other fees applicable to its operations.
H. Costs incident to its annual or special meetings of
shareholders, including but not limited to legal and accounting fees,
and the preparation, printing and mailing of proxy materials.
I. Directors' fees.
J. Costs incurred in the continued maintenance of its
corporate existence, including reports to shareholders and government
agencies, and the expenses, if any, attributable to the registration
of the Fund's shares with Federal and state regulatory authorities.
K. And, in general and except as provided in Section 3.2(B),
any other costs directly attributable to and identified with a
particular Fund or Funds rather than all Funds which are parties to
this Agreement.
2.2 Disbursement of Payment for These Services.
Notwithstanding the provisions of Section 2.1 above, Service Company may, as
agent for any Fund, disburse to third parties payments for any of the foregoing
services or expenses. Each Fund shall reimburse Service Company promptly for
such disbursements made on behalf of the Fund.
III. SERVICES PROVIDED BY AND EXPENSES OF SERVICE COMPANY
3.1 Services to be Provided to Funds. Service Company
shall with respect to each Fund, subject to the direction and control of the
Board of Directors and officers of the Fund:
A. Manage, administer and/or conduct the general business
activities of the Fund.
B. Provide the personnel and obtain the office space,
facilities and equipment necessary to perform such general business
activities under the direction of the Funds' executive officers (who
may also be officers of Service Company) who will have the full
responsibility for the general management of these functions.
C. Establish wholly-owned subsidiaries, and supervise the
management and operations of such subsidiaries, as are necessary or
appropriate to carry on or support the business activities of the
Fund; and authorize such subsidiaries to perform such other functions
for the Funds, including organizing new investment companies which are
intended to become parties to this Agreement pursuant to Section 5.4,
as Service Company's Board of Directors shall determine. No
provisions hereof shall prohibit the Service Company from performing
such additional services to the Fund as the Fund's Board of Directors
may appropriately request and which two-thirds of the shareholders of
the Service Company shall approve.
3.2 Expenses of Operation of Service Company. Each of the Funds
agrees to pay to the Service Company, within 10 days after the last business
day of each month or at such other
<PAGE> 5
time as agreed to by the Fund and the Service Company, the Fund's portion of
the actual cost of operation (determined in accord with generally accepted
accounting principles) of Service Company for each monthly period, or for such
other period as is agreed upon, during which the Fund is a party to this
Agreement.
A. Corporate Management and Administrative Expenses. A Fund's
portion of the cost of operation of Service Company shall mean its
share of the direct and indirect expenses of Service Company's
providing corporate management and administrative services, including
distribution services of an administrative nature, as allocated among
the Funds with allocation of indirect costs based on one or more of
the following methods of allocation:
(1) Net Assets: The proportionate allocation of
expenses based upon the value of each Fund's net assets,
computed as a percentage of the value of total net assets of
all Funds receiving services from Service Company, determined
at the end of the last preceding monthly period.
(2) Personnel Time: The proportionate allocation of
expenses based upon a summary by each Fund of the time spent
by each employee who works directly on the affairs of one or
more of the Funds, computed as a percentage of the total time
spent by such employee on the affairs of all of the Funds.
(3) Shareholder Accounts: The proportionate allocation
of expenses based upon the number of each Fund's shareholder
accounts and transaction activity in those accounts, measured
over a period of time, relative to the total number of
shareholder accounts and transaction activity in those
accounts for all Funds receiving number of portfolio
transactions for all Funds receiving services from the Service
Company during such period.
(4) Such other methods of allocation as may be approved
by the Board of Directors of the Service Company based upon
its determination that the allocation method is fair to each
Fund in view of (i) the nature, amount and purpose of the
expenditure, (ii) the benefits, if any, to be derived directly
by each Fund relative to the benefits derived by other Funds,
(iii) the need or desirability for the Funds as a group to
provide competitive investment programs and services at
competitive prices for the group to survive and grow, (iv) the
benefits which each Fund derives by being a member of a strong
Fund group, and (v) such other factors as the Board considers
relevant to the specific expenditure and allocation.
B. Distribution Expenses. Each of the Funds expressly
agrees to pay to Service Company, as requested, the Fund's portion of
the actual cost of distributing shares of the Funds, which shall mean
its share of all of the direct and indirect expenses of a marketing
and promotional nature including, but not limited to, advertising,
sales literature and sales personnel, as well as expenditures on
behalf of any newly organized registered investment company which is
to become a party of this Agreement pursuant to Section 5.4. The cost
of distributing shares of the Funds shall not include
distribution-related expenses of an administrative nature, which shall
be allocated among the Funds pursuant to Section 3.2(A). Distribution
expenses of a marketing and promotional nature shall be allocated
<PAGE> 6
among the Funds in the manner approved by the Securities and Exchange
Commission in Investment Company Act Release No. 11645 (Feb. 25,
1981):
(1) 50% of these expenses will be allocated based upon
each Fund's average month-end assets during the preceding
quarter relative to the average month-end assets during
preceding quarter of the Funds as a group.
(2) 50% of these expenses will be allocated initially
among the Funds based upon each Fund's sales for the 24 months
ended with the last day of the preceding quarter relative to
the sales of the Funds as a group for the same period.
(Shares issued pursuant to a reorganization shall be excluded
from the sales of a Fund and the Funds as a group.)
(3) Provided, however, that no Fund's aggregate
quarterly contribution for distribution expenses, expressed as
a percentage of its assets, shall exceed 125% of the average
expenses for the Funds as a Group, expressed as a percentage
of the total assets of the Funds. Expenses not charged to a
particular Fund(s) because of this 125% limitation shall be
re-allocated to other Funds on iterative basis; and that no
Fund's annual expenses for distribution shall exceed 0.2% of
its average month-end net assets.
IV. CONCERNING THE SERVICE COMPANY
4.1 Name. Each Fund acknowledges and agrees:
A. that the name "The Vanguard Group, Inc.", and any variants
thereof used to identify (1) the Funds as a group, (2) any Fund as a
member of a group being served by Service Company, or (3) any other
person as being served or related to Service Company (whether now in
existence or hereafter created), shall be the sole and exclusive
property of Service Company, its affiliates and its successors.
B. That Service Company shall have the sole and exclusive
right to permit the use of said name or variants thereof so long as
this Agreement or any amendments thereto are effective.
C. That upon its withdrawal from this Agreement and upon the
written request of Service Company, the Fund shall cease to use, or in
any way to refer to itself as related to, "The Vanguard Group, Inc."
or any variant thereof.
The foregoing agreements on the part of each Fund are hereby
made binding upon it, its directors, officers, shareholders and
creditors and all other persons claiming under or through it.
4.2 Services to Others. The Service Company may render
services to any person other than the Funds so long as:
A. The services to be rendered to the Funds hereunder are not
impaired thereby.
B. The terms and provisions upon which the services are to be
rendered have been approved by the holders of a majority of the
Shares.
C. The services rendered for compensation and, to the extent
achievable, for the purpose of gaining a profit thereon.
<PAGE> 7
D. Any income earned and fees received by Service Company
shall be used to reduce the total costs and expenses of Service
Company.
4.3 Books, Records and Audits of Service Company. The Service
Company, and any subsidiary established pursuant to Section 3.1(C), shall
maintain complete, accurate and current books, records and financial statements
concerning its activities. To the extent appropriate it will preserve said
records in the manner and for the periods prescribed by law. Financial records
and statements shall be kept in accord with generally accepted accounting
principles and shall be audited at least annually by independent public
accountants (who may also be accountants for any of the Funds). Within 120
days after the close of Service Company's fiscal year it shall deliver to each
Fund a copy of its audited financial statements for that year and the
accountants report thereon. Service Company, on behalf of itself and any
subsidiary, acknowledges that all of the records they shall prepare and
maintain pursuant to this Agreement shall be the property of the Funds and that
upon a request of any Fund they shall make the Fund's records available to it,
along with such other information and data as are reasonably requested by the
Fund, for inspection, audit or copying, or turn said records over to the Fund.
4.4 Indemnification.
A. Each Fund (herein the "Indemnitor") agrees to indemnify,
hold harmless and reimburse (herein "indemnify") every other Fund,
Service Company and/or any subsidiary of Service Company (herein the
"Indemnitee"):
(1) which Indemnitee (a) was or is a party to, or is
threatened to be made a party to, any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (herein a "suit"), or (b)
incurs an actual economic loss or expense (herein a "loss").
(2) if: (a) such suit or loss arises from an action
or failure to act, event, occurrence, transaction or other
analogous happening (herein an "event") under circumstances in
which the indemnitee is involved in a suit or incurs a loss.
(i) as a result substantially of, or
attributable primarily to, its being a party
to this Agreement, or to its indirect
participation in transactions contemplated by
this Agreement; and
(ii) where the suit or loss arises
primarily and substantially from an event
related primarily and substantially to the
business and/or operations of the Indemnitor;
and
(b) an independent third party, who may but
need not be legal counsel for the Funds, advises the
Funds in writing (I) that the condition set forth in
"(1)" and "(2)(a)" have occurred and (ii) that the
Indemnitee is without significant fault or
responsibility for the suit or loss as measured by
the comparative conduct of the Indemnitor and
Indemnitee and by the purposes sought to be
accomplished by this Agreement.
B. The financial obligations of the Indemnitor under this
Section shall be limited to:
(1) In the case of a suit, to expenses (including
attorneys' fees), actually incurred by the Indemnitee. The
termination of any suit by judgment, order, settlement, or
upon a plea of nolo contendere or its equivalent, shall not,
of itself,
<PAGE> 8
create a presumption that the Indemnitee is not entitled to be
indemnified hereunder.
(2) In the case of an event, to losses and/or
expenses (including attorneys' fees) actually incurred by the
Indemnitee.
The Indemnitee shall not be liable financially
hereunder for lost profits in the case of either a suit or
loss.
C. Expenses incurred in defending a suit or resolving an
event may be paid by the prospective Indemnitor in advance of the
final disposition of such suit or event if authorized by the Board of
Directors of the prospective Indemnitor in the specific case upon
receipt of an undertaking by or on behalf of the prospective
indemnitee to repay such amount unless it shall ultimately be
determined that the Indemnitee is entitled to be indemnified by the
Indemnitor as provided in this Section.
D. The indemnification provided by this Section shall not be
deemed exclusive of any other rights to which the Indemnitee may be
entitled under any agreement or otherwise.
V. TERM OF AGREEMENT
5.1 Effective Period. This Agreement shall become
effective on the date first written above, and shall continue in full force and
effect as to all parties hereto until terminated or amended by mutual agreement
of all parties hereto. The withdrawal pursuant to Section 5.2(A) or 5.2(B) of
one or more of the Funds from this Agreement shall not affect the continuance
of this Agreement except as to the parties withdrawing.
5.2 Withdrawal from Agreement.
A. Any Fund may elect to withdraw from this Agreement
effective at the end of any monthly period by giving at least 90 days'
prior written notice to each of the parties to this Agreement. Upon
the written demand of all other Funds which are parties to this
Agreement a Fund shall withdraw, and in the event of its failure to do
so shall be deemed to have withdrawn, from this Agreement; such demand
shall specify the date of withdrawal which shall be at the end of any
monthly period at least 90 days from the time of service of such
demand.
B. In the event of the withdrawal of any Fund from this
Agreement, all its rights and obligations, except for lease
commitments, under this Agreement (except such rights or obligations
as have accrued prior to the date of withdrawal) shall terminate as of
the date of the withdrawal. The withdrawing Fund shall surrender its
Shares to Service Company, and (1) shall be entitled to receive from
Service Company an amount equal to the excess of the fair value of (i)
its Shares of other securities Service Company as of the date of its
withdrawal less (ii) its proportionate interest in any liabilities of
Service Company, including when appropriate any commitments of Service
Company and unexpired leases at the date of withdrawal; (2) shall be
obligated to pay to Service Company an amount equal to the excess of
(ii) over (i). Such amount to be received from or paid to Service
Company shall be determined by the favorable vote of the holders of a
majority of the Shares whose determination shall be conclusive upon
the Funds. Any amount found payable by Service Company to the
withdrawing Fund shall be recoverable
<PAGE> 9
by Service Company from the Funds remaining under this Agreement in
accordance with the provisions of Sections 1.2, 1.3 and 1.4 hereof.
5.3 Termination by Mutual Consent. In the event that all Funds
withdraw from this Agreement without entering into a comparable successor
agreement, each Fund shall surrender its Shares to Service Company and after
payment by Service Company of all its liabilities, including the settlement of
unexpired lease obligations, shall:
A. Receive from Service Company in cash an amount equal to its
proportionate share of the actual value of all assets of the Service
Company which can be reduced readily to cash.
B. Negotiate in good faith with the other Funds provision for
the equitable use and/or disposition of assets of the Service Company
which are not readily reducible to cash.
5.4 Additional Parties to Agreement. Upon the favorable vote of
two-thirds of the shareholders and of the holders of two-thirds of the Shares
of the Service Company, any investment company registered under the Investment
Company Act of 1940 may become a party to this Agreement and share as a Fund in
all of the rights, duties and liabilities hereunder by adopting, executing and
delivering to the Service Company and the Funds a signed copy of this Agreement
which shall evidence that investment company's agreement to assume the duties
and obligations of a Fund hereunder. Upon the delivery of a signed copy of
this Agreement, the new Fund shall be subject to all the provisions of this
Agreement and become a holder of Shares by adjustment in cash investments among
the Funds pursuant to Section 1.3. No person shall become a holder of Shares
without becoming a party to this Agreement.
VI. GENERAL
6.1 Definition of Certain Terms. As used in this Agreement,
the terms set forth below shall mean:
A. "Fair Value of Shares" shall mean the proportionate interest,
as represented by the ratio of the number of Shares owned by a Fund to
the number of Shares issued and outstanding, in all assets of the
Service Company less all liabilities of the Service Company on the
date fair value is to be determined. Assets shall be valued at fair
market value. In case of any dispute as to the proportionate interest
of any Fund or as to the fair value of the Shares, the issue shall be
determined by the favorable vote of the holders of a majority of the
Shares, whose determination shall be conclusive upon the Fund.
B. "Person" shall mean a natural person, a corporation, a
partnership, an association, a joint-stock company, a trust, a fund or
any organized group of persons whether incorporated or not.
6.2 Assignment. This Agreement shall bind and inure to the
benefit of the parties thereto, their respective successors and assigns.
6.3 Captions. The captions in this Agreement are included
for convenience of reference only and in no way define any of the provisions
hereof or otherwise affect their construction or effect.
<PAGE> 10
6.4 Amendment. Unless prohibited by applicable laws,
regulations or orders of regulatory authorities and except as set forth below,
this Agreement may be amended at any time and in one or more respects upon the
favorable vote of the holders of a majority of the Shares (except that the vote
required in Sections 3.1 and 5.4 may be amended only by the favorable votes of
the number of holders or Shares specified therein) and without the further
approval or vote of shareholders of any of the Funds; provided, however, that
Section 1.4 (limiting cash investments by the Funds in Service Company) may not
be amended unless an exemptive order permitting such amendment is obtained from
the U.S. Securities and Exchange Commission.
6.5 Severability. If any provision of this Agreement shall
beheld or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
In Witness Whereof, each of the parties hereto has caused the
Agreement to be signed and its corporate seal to be hereto affixed by its
proper officers thereunto duly authorized, all as of the date and year first
above written.
Attest: The Vanguard Group, Inc.
By
/s/ Raymond J. Klapinsky /s/ John C. Bogle
- ----------------------------------- ----------------------------------
SECRETARY CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
The Vanguard Group of Investment Companies:
Vanguard Money Market Reserves, Inc.
Vanguard Institutional Portfolios, Inc.
Vanguard Municipal Bond Fund, Inc.
Vanguard California Tax-Free Fund
Vanguard Florida Tax-Free Fund
Vanguard New Jersey Tax-Free Fund
Vanguard New York Insured Tax-Free Fund
Vanguard Ohio Tax-Free Fund
Vanguard Pennsylvania Tax-Free Fund
Vanguard Bond Index Fund, Inc.
(formerly Vanguard Bond Market Fund, Inc.)
Vanguard Fixed Income Securities Fund, Inc.
Vanguard/Wellesley Income Fund, Inc.
(formerly Wellesley Income Fund, Inc.)
Vanguard Preferred Stock Fund
Vanguard Asset Allocation Fund, Inc.
Vanguard Convertible Securities Fund, Inc.
Vanguard/Wellington Fund, Inc.
(formerly Wellington Fund, Inc.)
Vanguard/Trustees' Equity Fund
(formerly Trustees' Commingled Fund)
<PAGE> 11
Vanguard Equity Income Fund, Inc.
Vanguard Index Trust
Vanguard International Equity Index Fund, Inc.
Vanguard Quantitative Portfolios, Inc.
Vanguard/Windsor Funds, Inc.
(formerly The Windsor Funds, Inc.)
Gemini II, Inc.
Vanguard/Primecap Fund, Inc.
(formerly PRIMECAP Fund, Inc.)
Vanguard World Fund, Inc.
Vanguard/Morgan Growth Fund, Inc.
Vanguard Explorer Fund, Inc.
Vanguard Small Capitalization Stock Fund, Inc.
Vanguard Specialized Portfolios
Vanguard Variable Insurance Fund
Vanguard Admiral Funds, Inc.
Vanguard Balanced Index Fund, Inc.
Vanguard Tax-Managed Fund, Inc.
Vanguard Horizon Fund, Inc.
Attest:
/s/ Raymond J. Klapinsky By /s/ John C. Bogle
- ------------------------------------- -------------------------------
SECRETARY CHAIRMAN AND CHIEF
EXECUTIVE OFFICER
