<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-31333) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. /X/
POST-EFFECTIVE AMENDMENT NO. 44 /X/
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 44 /X/
VANGUARD/WELLESLEY INCOME FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
on April 23, 1996, pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1995 ON FEBRUARY 28, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
VANGUARD/WELLESLEY INCOME FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Not Applicable
Item 3. Condensed Financial Information............... Financial Highlights; Fund Expenses
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
General Information; Investment Risks
Item 5. Management of the Fund........................ Directors and Officers; Management of
the Fund; Investment Adviser
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Fund's Share Price; 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
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objective; Investment
Policies; General Information
Item 13. Investment Objective and Policies............. Investment Objective; Investment
Policies; Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund; Investment
Advisory Services
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of the Fund; Investment
Advisory Services
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information; Financial
Statements
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 Statements
</TABLE>
<PAGE> 3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[VANGUARD WELLESLEY
INCOME FUND LOGO]
A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- APRIL 23, 1996
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES &
POLICIES Vanguard/Wellesley Income Fund, Inc. (the "Fund") is an
open-end diversified investment company that seeks to
provide as much current income as is consistent with
reasonable risk. The Fund also offers the potential for
moderate growth of capital. The Fund invests primarily in
U.S. Government and corporate fixed-income securities of
investment grade quality and dividend-paying common
stocks. There is no assurance that the Fund will achieve
its stated objectives. Shares of the Fund are neither
insured nor guaranteed by any agency of the U.S.
Government, including the FDIC.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT To open a regular (non-retirement) account, please
complete and return the Account Registration Form. If you
need assistance in completing this Form, please call the
Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA
Adoption Agreement. To obtain a copy of this form, call
1-800-662-7447, Monday through Friday, from 8:00 a.m. to
9:00 p.m. and Saturday, from 9:00 a.m. to 4:00 p.m.
(Eastern time). The minimum initial investment is $3,000
or $1,000 for Uniform Gifts/Transfers to Minors Act
accounts. The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees). However,
the Fund incurs expenses for investment advisory,
management, administrative, and distribution services.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated April 23, 1996, and has been incorporated by
reference into this Prospectus. It may be obtained,
without charge, by writing to the Fund or by calling the
Investor Information Department.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Fund Expenses ...................2 Investment Limitations ............ 8 SHAREHOLDER GUIDE
Financial Highlights ............2 Management of the Fund ........... 9 Opening an Account and
Yield and Total Return ..........3 Investment Adviser ............... 9 Purchasing Shares ............ 14
FUND INFORMATION Performance Record ............... 11 When Your Account Will Be
Investment Objectives ...........4 Dividends, Capital Gains Credited ..................... 17
Investment Policies .............4 and Taxes ...................... 11 Selling Your Shares ............ 17
Investment Risks ................5 The Share Price of the Fund ...... 12 Exchanging Your Shares ......... 19
Who Should Invest ...............6 Important Information About
Implementation of Policies ......6 General Information ...............13 Telephone Transactions ....... 21
Transferring
Registration ................... 21
Other Vanguard Services ........ 22
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 4
FUND EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth below are for the 1995 fiscal year.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Redemption Fees............................................... None
Exchange Fees................................................. None
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------------------------------
Management & Administrative Expenses.......................... 0.24%
Investment Advisory Fees...................................... 0.07
12b-1 Fees.................................................... None
Other Expenses
Distribution Costs.......................................... 0.02%
Miscellaneous Expenses...................................... 0.02
----
Total Other Expenses.......................................... 0.04
------
TOTAL OPERATING EXPENSES............................. 0.35%
======
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Fund.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 4 $11 $20 $ 44
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of
the five years in the period ended December 31, 1995, have
been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This
information should be read in conjunction with the Fund's
financial statements and notes thereto, which, together
with the remaining portions of the Fund's 1995 Annual
Report to Shareholders, are incorporated by reference in
the Statement of Additional Information and in this
Prospectus, and which appear, along with the report of
Price Waterhouse LLP, in the Fund's 1995 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1995 Annual Report to
Shareholders which may be obtained without charge by
writing to the Fund or by calling our Investor Information
Department at 1-800-662-7447.
2
<PAGE> 5
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF
YEAR............... $17.05 $19.24 $18.16 $18.08 $16.02 $16.82 $15.26 $14.57 $16.27 $ 15.31
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
INVESTMENT OPERATIONS
Net Investment
Income........... 1.13 1.11 1.14 1.21 1.27 1.30 1.32 1.23 1.24 1.33
Net Realized and
Unrealized Gain
(Loss) on
Investments...... 3.68 (1.95) 1.48 .29 2.06 (.72) 1.79 .69 (1.52) 1.43
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM
INVESTMENT
OPERATIONS..... 4.81 (.84) 2.62 1.50 3.33 .58 3.11 1.92 (.28) 2.76
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment
Income........... (1.14) (1.11) (1.14) (1.21) (1.27) (1.30) (1.31) (1.23) (1.04) (1.33)
Distributions from
Realized Capital
Gains............ (.28) (.24) (.40) (.21) -- (.08) (.24) -- (.38) (.47)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL
DISTRIBUTIONS... (1.42) (1.35) (1.54) (1.42) (1.27) (1.38) (1.55) (1.23) (1.42) (1.80)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR........ $20.44 $17.05 $19.24 $18.16 $18.08 $16.02 $16.82 $15.26 $14.57 $ 16.27
=================================================================================================================================
TOTAL RETURN......... 28.91% (4.44)% 14.65% 8.67% 21.57% 3.76% 20.93% 13.61% (1.92)% 18.34%
=================================================================================================================================
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Year (Millions).... $7,181 $5,681 $6,011 $3,178 $1,934 $1,022 $788 $567 $495 $510
Ratio of Expenses to
Average Net
Assets............. .35%+ .34% .33% .35% .40% .45% .45% .51% .49% .58%
Ratio of Net
Investment
Income to Average
Net Assets......... 5.96% 6.16% 5.79% 6.50% 7.08% 7.77% 7.68% 8.14% 7.83% 7.74%
Portfolio Turnover
Rates:
Common Stocks...... 27% 32% 26% 16% 19% 12% 10% 19% 27% 18%
Bonds.............. 32% 31% 18% 24% 34% 23% 11% 21% 48% 39%
</TABLE>
+ Effective in 1995, does not include reductions from directed brokerage
arrangements. The 1995 Ratio of Expenses to Average Net Assets is .34% after
including these reductions.
- --------------------------------------------------------------------------------
YIELD AND TOTAL
RETURN From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Fund refers to the average annual compounded rates of
return over one-, five- and ten- year periods or for the
life of the Fund (as stated in the advertisement) that
would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Fund is calculated by dividing net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Fund's securities; it is net
of all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder accounts. The
yield calculation assumes that net investment income
earned over
3
<PAGE> 6
30 days is compounded monthly for six months and then
annualized. Methods used to calculate advertised yields
are standardized for all stock and bond mutual funds.
However, these methods differ from the accounting methods
used by the Fund to maintain its books and records, and so
the advertised 30-day yield may not fully reflect the
income paid to an investor's account.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES
THE FUND SEEKS TO
PROVIDE CURRENT
INCOME AND MODERATE
CAPITAL GROWTH
The Fund is an open-end diversified investment company.
The objective of the Fund is to provide as much current
income as is consistent with reasonable risk. The Fund
also offers the potential for moderate growth of capital.
The Fund invests primarily in U.S. Government and
corporate fixed-income securities of investment grade
quality and dividend-paying common stocks.
There is no assurance that the Fund will achieve its
stated objectives.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE FUND INVESTS IN
BONDS AND COMMON
STOCKS
The Fund invests in fixed-income securities and
dividend-paying common stocks. Under normal circumstances,
it is expected that fixed-income securities will represent
approximately 60% of the Fund's net assets. The remainder
of the Fund's assets will be invested primarily in common
stocks chosen largely for their income characteristics.
The Fund will invest at least 65% of its assets in
income-producing securities under normal circumstances.
The Fund is managed without regard to tax ramifications.
The fixed-income securities owned by the Fund will include
U.S. Government and corporate bonds and mortgage-backed
securities (such as Government National Mortgage
Association pass-through certificates), asset-backed
securities, U.S. dollar-denominated debt securities issued
by foreign governments, their agencies and
instrumentalities, supranational entities and companies
located outside the U.S., as well as bonds or preferred
stocks which are convertible into common stock.
Fixed-income securities will be primarily of investment
grade quality -- i.e., those rated at least Baa by Moody's
Investors Service, Inc. or BBB by Standard & Poor's
Corporation. Securities rated Baa or BBB are considered as
medium grade obligations. Interest and principal payments
for such bonds are regarded as adequate for the present
but certain protective elements found in higher-rated
bonds may be lacking. Such bonds lack outstanding
investment characteristics and, in fact, have speculative
characteristics as well.
The mix of bonds and stocks held by the Fund may be varied
from time to time depending on the investment adviser's
assessment of business, economic and investment
conditions. However, fixed-income securities can be
expected to represent the majority of the Fund's assets so
long as the general level of interest rates remains well
in excess of dividend yields available on common stocks.
In addition to investing in fixed-income securities and
dividend-paying common stocks, the Fund may also invest in
certain short-term fixed income securities as cash
reserves. The Fund is also authorized to invest in stock
and bond futures contracts and options to a limited
extent. See "Implementation of Policies" for a description
of these and other investment practices of the Fund.
4
<PAGE> 7
The Fund is responsible for voting the shares of all
securities it holds.
The investment objectives and policies of the Fund are not
fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material change
in either.
- --------------------------------------------------------------------------------
INVESTMENT RISKS
THE FUND IS SUBJECT
TO INTEREST RATE AND
STOCK MARKET RISK
Like any investment program, the Fund entails certain
risks. The Fund is subject to the risk that bond or stock
prices will decline during short or even extended periods.
The Fund is expected to invest the majority of its assets
(63% as of December 31, 1995) in longer-term fixed income
securities, such as government and corporate bonds. Bond
prices are influenced primarily by changes in the level of
interest rates. When interest rates rise, bond prices
generally fall; conversely, when interest rates fall, bond
prices generally rise. While bonds normally fluctuate less
than stocks, there have been extended periods of increases
in interest rates that have caused significant price
declines. For example, long-term U.S. government bond
prices fell 48% from December 1976 to September 1981. The
risk of bond holdings declining in value, however, may be
offset in whole or in part by the high level of income
that bonds provide.
A smaller portion of the Fund's assets will be invested in
stocks (37% of assets as of December 31, 1995). The stock
market tends to be cyclical, with periods when stock
prices generally rise and periods when stock prices
generally decline. Common stocks have provided annual
total returns (capital appreciation plus dividend income)
averaging +10.7% for all 10-year periods from 1926 to
1995. This level of return can be used as a guide for
setting reasonable expectations for future stock market
returns, but may not be useful for forecasting future
returns in any particular period, as stock returns are
quite volatile from year to year. For example, in the
period from 1926 to 1995, the range of annual returns on
the S&P 500 Index was +53.9% to -43.3%. Over longer-term
holding periods, stocks tend to be less volatile. For
five-year periods since 1926, the annualized rates of
return for the S&P 500 Index ranged from +23.9% to -12.5%.
In large part, the common stocks held by the Fund will be
selected for their current income and potential growth in
income. The aggregate characteristics of such stocks will
tend to be quite different from those exhibited by the S&P
500 Index. As a result, investors should anticipate that
the common stocks in the Fund may perform differently than
those in the Index.
From time to time, the stock and bond markets may
fluctuate independently of one another. In other words, a
decline in the stock market may be offset by a rise in the
bond market, or vice versa. As a result, the Fund with its
balance of common stock and bond investments, is expected
to entail less investment risk (and a potentially lower
return) than a mutual fund investing exclusively in common
stocks.
From the Fund's inception on July 1, 1970 to December 31,
1995, the Fund has provided an average annual return of
+11.6%. During this period, the Fund has experienced 21
years of positive returns and four years of negative
returns. Annual returns have ranged from +28.9% to -6.4%.
These return characteristics are
5
<PAGE> 8
provided to illustrate the risks and returns that the Fund
has provided in the past and may not be indicative of
future results.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST
INVESTORS SEEKING A
CURRENT INCOME OR
A CONSERVATIVE "TOTAL
RETURN" INVESTMENT The Fund is designed for investors seeking a high level of
current income from a portfolio of bonds and stocks.
Because of the risks associated with common stock and bond
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term market
movements. Investors who engage in excessive account
activity generate additional costs which are borne by all
of the Fund's shareholders. In order to minimize such
costs, the Fund has adopted the following policies. The
Fund reserves the right to reject any purchase request
(including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the
timing of the investment or previous excessive trading by
the investor. Additionally, the Fund has adopted exchange
privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Fund
reserves the right to suspend the offering of its shares.
Although capital appreciation is not a primary objective
of the Fund, the Fund's investment in common stocks may
provide modest growth in income and capital over time.
Thus, the Fund is also suitable for conservative "total
return" investors who seek to build capital gradually,
through moderate appreciation and the compounding of
income.
Because of the inevitable fluctuations in bond and stock
prices, the share price of the Fund is expected to
fluctuate, sometimes substantially. Investors should be
able to tolerate such fluctuations in the value of their
investment in pursuit of the current income and moderate
growth that the Fund may provide. Investors may wish to
reduce the potential risk of investing in the Fund by
purchasing shares on a regular, periodic basis
(dollar-cost averaging) rather than making an investment
in one lump sum.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES In addition to investing primarily in fixed-income
securities and dividend-paying common stocks, the Fund
uses a number of other investment vehicles to achieve its
objective.
THE FUND MAY INVEST
IN SHORT-TERM FIXED
INCOME SECURITIES The Fund may invest temporarily in certain short-term
fixed income securities. Such securities may be used to
invest uncommitted cash balances, to maintain liquidity to
meet shareholder redemptions, or to take a temporary
defensive position against potential stock market
declines. These securities include: obligations of the
United States Government and its agencies or
instrumentalities; commercial paper, bank certificates of
deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.
THE FUND MAY INVEST
IN SECURITIES OF
FOREIGN ISSUERS The Fund may invest up to 15% of its equity assets in
foreign common stocks and securities convertible into
foreign common stocks, and may engage in currency
transactions with respect to these investments. The Fund
may also invest in fixed income securities of foreign
issuers, but all such securities must be denominated in
U.S. dollars and must meet the Fund's credit quality
standards. Securities of foreign
6
<PAGE> 9
issuers may trade in U.S. or foreign securities markets.
Securities of foreign issuers may involve investment risks
that are different from those of domestic issuers. Such
risks include the effect of foreign economic policies and
conditions, future political and economic developments,
and the possible imposition of exchange controls or other
foreign governmental restrictions on foreign issuers.
There may also be less publicly available information
about a foreign issuer than a domestic issuer of
securities. Foreign issuers are generally not subject to
the uniform accounting, auditing and financial reporting
standards that apply to domestic issuers. Also, foreign
markets may be characterized by lower liquidity, greater
price volatility, and higher transactions costs.
Additionally, it may be difficult to obtain or enforce a
legal judgment in a foreign court.
THE FUND MAY LEND
ITS SECURITIES The Fund may lend its investment securities to qualified
institutional investors for the short-term or long-term
purpose of realizing additional income. Loans of
securities by the Fund will be collateralized by cash,
letters of credit, or securities issued or guaranteed by
the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the
loaned securities.
PORTFOLIO TURNOVER
IS NOT EXPECTED TO
EXCEED 40% Although it generally seeks to invest for the long term,
the Fund retains the right to sell securities irrespective
of how long they have been held. It is anticipated that
the annual portfolio turnover of the Fund will not exceed
40%. A turnover rate of 40% would occur, for example, if
four-tenths of the securities of the Fund were replaced
within one year.
DERIVATIVE
INVESTING
Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
THE FUND MAY
INVEST IN DERIVATIVE
SECURITIES
The Fund may invest in futures contracts and options, but
only to a limited extent. Specifically, the Fund may enter
into futures contracts provided that not more than 5% of
its assets are required as a futures contract deposit; in
addition, the Fund may enter into futures contracts and
options transactions only to the extent that obligations
under such contracts or transactions represent not more
than 20% of the Fund's assets.
Futures contracts and options may be used for several
common fund management strategies: to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index.
The Fund may use futures contracts for bona fide "hedging"
purposes. In executing a hedge, a manager sells, for
example, stock index futures to protect against a decline
in the stock market. As such, if the market drops, the
value of the futures position will rise, thereby
offsetting the decline in value of the Fund's stock
holdings.
THE FUND MAY
INVEST IN CMOS The Fund may also invest modestly in a fairly conservative
class of collateralized mortgage obligations (CMOs) which
feature a high degree of cash flow predictability and
moderate vulnerability to mortgage prepayment risk. To
reduce credit risk,
7
<PAGE> 10
Vanguard purchases these less risky classes of
collateralized mortgage obligations issued only by
agencies of the U.S. Government or privately-issued
collateralized mortgage obligations that carry
high-quality investment-grade ratings.
FUTURES CONTRACTS
AND OPTIONS POSE
CERTAIN RISKS
The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks or bonds
held by the Fund and the prices of futures contracts and
options; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability
to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by
investing in those contracts whose price fluctuations are
expected to resemble those of the Fund's underlying
securities. The risk that the Fund will be unable to close
out a futures position will be minimized by entering into
such transactions on a national exchange with an active
and liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
investor. When investing in futures contracts, the Fund
will segregate cash or cash equivalents in the amount of
the underlying obligation.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS The Fund has adopted certain limitations on its investment
practices. Specifically, the Fund will not:
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS (a) invest more than 25% of its assets in any one
industry;
(b) 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 Fund would hold
more than 10% of the outstanding voting securities of
the issuer, or more than 5% of the value of the Fund's
total assets would be invested in the securities of
such issuer;
(c) borrow money, except that the Fund may borrow 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 exceeding 10% of the
value of the Fund's net assets (including the amount
borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of
the Fund's net assets, the Fund will not make any
additional investments.
These investment limitations are considered at the time
investment securities are purchased. The investment
limitations described here and in the Statement of
Additional Information are fundamental and may be changed
only with the approval of a majority of the Fund's
shareholders.
- --------------------------------------------------------------------------------
8
<PAGE> 11
MANAGEMENT
OF THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES THE
FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct investment portfolios and total
assets in excess of $190 billion. Through their
jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other funds in the Group
obtain at cost virtually all of their corporate
management, administrative and distribution services.
Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard funds
have costs substantially lower than those of most
competing mutual funds. In 1995, the average expense ratio
(annual costs including advisory fees divided by total net
assets) for the Vanguard funds amounted to approximately
.31% compared to an average of 1.11% for the mutual fund
industry (data provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel to provide the requisite services
to the funds and also furnishes the funds with necessary
office space, furnishings and equipment. Each fund pays
its share of Vanguard's net expenses, which are allocated
among the funds under methods approved by the Board of
Directors (Trustees) of each fund. In addition, each fund
bears its own direct expenses, such as legal, auditing and
custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER
WELLINGTON
MANAGEMENT COMPANY
SERVES AS ADVISER
TO THE FUND The Fund has entered into an investment advisory agreement
with Wellington Management Company ("WMC"), 75 State
Street, Boston, MA 02109, under which WMC manages the
investment and reinvestment of the Fund's assets and
continuously reviews, supervises and administers the
Fund's investment program. WMC discharges its
responsibility subject to the control of the Officers and
Directors of the Fund.
WMC is a professional investment advisory firm which
globally provides investment services to investment
companies, institutions and individuals. Among the clients
of WMC are more than 10 of the investment companies of The
Vanguard Group. As of December 31, 1995, WMC held
discretionary management authority with respect to more
than $108 billion of assets. WMC and its predecessor
organizations have provided investment advisory services
to investment companies since 1933 and to investment
counseling clients since 1960.
Earl E. McEvoy, Senior Vice President of WMC, serves as
portfolio manager of the Fund, a position he has held
since October 1982. Mr. McEvoy is assisted by John R.
Ryan, Senior Vice President and a managing partner of WMC,
who has managed the
9
<PAGE> 12
Fund's equity investments since January 1986. Messrs.
McEvoy and Ryan are supported by research and other
investment services provided by the professional staff of
WMC.
The Fund pays WMC a basic advisory fee calculated by
applying varying percentage rates to the average net
assets of the Fund:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------- -----
<S> <C>
First $1 billion .100%
Next $2 billion .050%
Next $7 billion .040%
Over $10 billion .030%
</TABLE>
Effective with the quarter ending March 31, 1997, the
basic advisory fee may be increased or decreased by
applying an adjustment formula based on the investment
performance of the Fund relative to the investment
performance of a "composite index." This composite index
comprises the Lehman Long-Term Corporate AA or Better Bond
Index (65%) and a 35% weighting in a blended equity
composite (75% Standard & Poor's/BARRA Value Index and 25%
Standard & Poor's Utilities Index).
During the fiscal year ended December 31, 1995, the total
advisory fees paid by the Fund to WMC represented an
effective annual base rate of .07 of 1% of the Fund's
average net assets. This fee was paid under a previous fee
schedule that provided for a higher rate of fees.
The investment advisory agreement authorizes WMC to select
brokers or dealers to execute purchases and sales of the
Fund's portfolio securities, and directs WMC to use its
best efforts to obtain the best available price and most
favorable execution with respect to all transactions. The
full range and quality of brokerage services are
considered in making these determinations.
The Fund has authorized WMC to pay higher commissions in
recognition of brokerage services felt necessary for the
achievement of better execution, provided WMC believes
this to be in the best interest of the Fund. Although the
Fund does not market its shares through intermediary
brokers or dealers, the Fund may place orders with
qualified broker-dealers who recommend the Fund to clients
if the Officers of the Fund believe that the quality of
the transaction and the commission are comparable to what
they would be with other qualified brokerage firms.
The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement either as a replacement for an exiting adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser. Any such change will only be made
upon not less than 30 days' prior written notice to
shareholders of the Fund which shall include substantially
the information concerning the adviser that would have
normally been included in a proxy statement.
- --------------------------------------------------------------------------------
10
<PAGE> 13
PERFORMANCE
RECORD The table in this section provides investment results for
the Fund for several periods throughout the Fund's
lifetime. The results shown represent "total return"
investment performance, which assumes the reinvestment of
all capital gains and income dividends for the indicated
periods. Also included is comparative information with
respect to two performance indexes: a Composite Index,
comprised of 65% of the Lehman Long-Term Corporate AA or
Better Bond Index and a 35% weighting in a blended equity
composite (75% Standard & Poor's/BARRA Value Index and 25%
Standard & Poor's Utilities Index); and the Consumer Price
Index, a statistical measure of changes in the prices of
goods and services. The tables do not make any allowance
for federal, state or local income taxes, which
shareholders must pay on a current basis.
The results shown should not be considered a
representation of the total return from an investment made
in the Fund today. This information is provided to help
investors better understand the Fund and may not provide a
basis for comparison with other investments or mutual
funds which use a different method to calculate
performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN FOR
VANGUARD/WELLESLEY INCOME FUND
<S> <C> <C> <C>
---------------------------------------------
<CAPTION>
FISCAL PERIODS
ENDED 12/31/95
---------------
VANGUARD/WELLESLEY COMPOSITE CONSUMER
INCOME INDEX PRICE
FUND INDEX
---------
------------------ --------
<S> <C> <C> <C>
1 Year +28.9% +31.3% +2.6%
5 Years +13.3 +14.0 +2.8
10 Years +11.9 +12.7 +3.5
Lifetime* +11.6 +11.1 +5.5
* July 1, 1970 to December 31, 1995.
</TABLE>
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
THE FUND PAYS
QUARTERLY DIVIDENDS
AND ANY CAPITAL
GAINS ANNUALLY The Fund expects to pay dividends quarterly from ordinary
income. Net capital gain distributions, if any, will be
made annually.
Dividend and capital gains distributions may be
automatically reinvested or received in cash. See
"Choosing a Distribution Option" for a description of
these distribution methods.
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the Fund may
declare special year-end dividend and capital gains
distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on
December 31 of the prior year.
The Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax
to the extent its income is distributed to shareholders.
Dividends paid by the Fund from net investment income and
net short-term capital gains, whether received in cash or
reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corporate investors,
dividends from net investment income will generally
qualify in part for the intercorporate dividends-received
deduction.
11
<PAGE> 14
However, the portion of the dividends so qualified depends
on the aggregate taxable qualifying dividend income
received by the Fund from domestic (U.S.) sources.
Distributions paid by the Fund from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital gains,
regardless of the length of time you have owned shares in
the Fund. Capital gains distributions are made when the
Fund realizes net capital gains on sales of portfolio
securities during the year. The Fund does not seek to
realize any particular amount of capital gains during a
year; rather, realized gains are a by-product of portfolio
management activities. Consequently, capital gains
distributions may be expected to vary considerably from
year to year; there will be no capital gains distributions
in years when the Fund realizes net capital losses.
Note that if you accept capital gains distributions in
cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in
the Fund. Also, keep in mind that if you purchase shares
in the Fund shortly before the record date for a dividend
or capital gains distribution, a portion of your
investment will be returned to you as a taxable
distribution, regardless of whether you are reinvesting
your distributions or receiving them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
A CAPITAL GAIN OR
LOSS MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of the Fund is a taxable event, and may
result in a capital gain or loss. A capital gain or loss
may be realized from an ordinary redemption of shares or
an exchange of shares between two mutual funds (or two
portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration
Form your proper Social Security or Employer
Identification Number and by certifying that you are not
subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund will be exempt
from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF THE FUND The Fund's share price or "net asset value" per share is
determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities,
by the number of outstanding shares of the Fund. Net asset
value per share is determined as of the close of the New
York Stock Exchange (generally 4:00 p.m.
12
<PAGE> 15
Eastern time) on each day that the Exchange is open for
trading. Portfolio securities that are listed on a
securities exchange are valued at the last quoted sales
price on the day the valuation is made. Price information
on listed securities is taken from the exchange where the
security is primarily traded. Securities which are listed
on an exchange and which are not traded on the valuation
date are valued at the mean between the bid and asked
prices. Unlisted securities for which market quotations
are readily available and preferred stocks are valued at
the latest quoted bid price.
Securities may be valued on the basis of prices provided
by a pricing service when such prices are believed to
reflect the fair market value of such securities. For
bonds and other fixed-income securities, the prices
provided by a pricing service may be determined without
regard to bid or last sale prices of each security but
take into account institutional-size trading in similar
groups of securities and any developments related to
specific securities. Short-term instruments (with
remaining maturities of 60 days or less) are valued at
cost, plus or minus any amortized discount or premium,
which approximates market values. Other assets and
securities for which no quotations are readily available
are valued at fair value as determined in good faith by
the Directors.
The Fund's share price can be found daily in the mutual
fund listings of most major newspapers under the heading
of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 450,000,000
shares of common stock, with a $.10 par value. The Board
of Directors has the power to designate one or more
classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect to
such series. Currently the Fund is offering one series of
shares.
The shares of the Fund are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive
rights. Such shares have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the
Directors if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than than
10% of the outstanding shares of the Fund.
All securities and cash are held by Morgan Guaranty Trust
Company, New York, NY. CoreStates Bank, N.A., holds daily
cash balances that are used by the Fund to invest in
repurchase agreements or securities acquired in these
transactions. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.
- --------------------------------------------------------------------------------
13
<PAGE> 16
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement ($1,000 for Uniform
Gifts/Transfers to Minors Act accounts). You must open a
new Individual Retirement Account by mail (IRAs may not be
opened by wire) using a Vanguard IRA Adoption Agreement.
Your purchase must be equal to or greater than the $1,000
minimum initial investment requirement, but no more than
$2,000 if you are making a regular IRA contribution.
Rollover contributions are generally limited to the amount
withdrawn within the past 60 days from an IRA or other
qualified Retirement Plan. If you need assistance with the
forms or have any questions about the Fund, please call
our Investor Information Department at 1-800-662-7447.
Note: For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts or
powers of attorney), please call us to determine which
additional forms you may need.
The Fund's shares generally are purchased at the
next-determined net asset value after your investment has
been received. The Fund is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
PURCHASE
RESTRICTIONS 1) Because of the risks associated with common stock and
bond investments, the Fund is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term market movements. Consequently, the Fund
reserves the right to reject any specific purchase (and
exchange purchase) request. The Fund also reserves the
right to suspend the offering of shares for a period of
time.
2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable to the Vanguard Group.
ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made by
mail ($100 minimum), wire ($1,000 minimum), exchange from
another Vanguard Fund account ($100 minimum), or Vanguard
Fund Express. Subsequent investments to Individual
Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some
instances, contributions may be made by wire or Vanguard
Fund Express. Please call us for more information on these
options.
- --------------------------------------------------------------------------------
14
<PAGE> 17
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment on the include the Invest-by-Mail
Complete and sign the registration form, make your remittance form attached to your
enclosed Account check payable to The Vanguard Fund confirmation statements.
Registration Form Group-27, and mail to: Please make your check payable
to The Vanguard Group-27, write
VANGUARD FINANCIAL CENTER your account number on your
P.O. BOX 2600 check and, using the return
VALLEY FORGE, PA 19482 envelope provided, mail to the
address indicated on the Invest-
by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
--------------------------------------------------------------------------
</TABLE>
PURCHASING BY WIRE
Money should be
wired to:
BEFORE WIRING
Please contact
Client Services
(1-800-662-2739) CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 0101 9897
ATTN VANGUARD
VANGUARD/WELLESLEY INCOME FUND
ACCOUNT NUMBER
ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank
includes the name of the Fund, the account number Vanguard
has assigned to you and the eight-digit CoreStates number.
If you are opening a new account, please complete the
Account Registration Form and mail it to the "New Account"
address above after completing your wire arrangement.
NOTE: Federal Funds wire purchase orders will be accepted
only when the Fund and Custodian Bank are open for
business.
- --------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares by
making an exchange from another Vanguard Fund account.
However, the Fund reserves the right to refuse any
exchange purchase request. Call our Client Services
Department toll-free (1-800-662-2739) for assistance. The
new account will have the same registration as the
existing account.
- --------------------------------------------------------------------------------
PURCHASING BY
FUND EXPRESS
Special Purchase and
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic
Investment option, money will be moved automatically from
your bank account to your Vanguard account on the schedule
(monthly, bimonthly [every other month], quarterly or
yearly) you select. To establish these Fund Express
options, please provide the appropriate information on the
Account Registration
15
<PAGE> 18
Form. We will send you a confirmation of your Fund Express
service; please wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund
shareholders. These distributions are made to all
shareholders who own Fund shares as of the distribution's
record date, regardless of how long the shares have been
owned. Purchasing shares just prior to the record date
could have a significant impact on your tax liability for
the year. For example, if you purchase shares immediately
prior to the record date of a sizable capital gain or
income dividend distribution, you will be assessed taxes
on the amount of the capital gain and/or dividend
distribution later paid even though you owned the Fund
shares for just a short period of time. (Taxes are due on
the distributions even if the dividend or gain is
reinvested in additional Fund shares.) While the total
value of your investment will be the same after the
distribution -- the amount of the distribution will offset
the drop in the net asset value of the shares -- you
should be aware of the tax implications the timing of your
purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's
annual capital gains distribution normally occurs in
December, while income dividends are generally paid
quarterly in March, June, September and December. For
additional information on distributions and taxes, see the
section titled "Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
16
<PAGE> 19
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO
ADD OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD WITH
ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR
FURTHER ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES
Share certificates will be issued upon request. If a
certificate is lost, you may incur an expense to replace
it.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange, or redemption) believed to be authentic,
received in writing or by telephone, once the trade
request has been received.
ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire or exchange, and is received by the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time),
your trade date is the day of receipt. If your purchase is
received after the close of the Exchange, your trade date
is the next business day. Your shares are purchased at the
net asset value determined on your trade date.
In order to prevent lengthy processing delays caused by
the clearing on foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. You generally may
initiate a request by writing or by telephoning. Your
redemption proceeds are normally mailed within two
business days after the receipt of the request in Good
Order.
SELLING BY MAIL
Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD/WELLESLEY INCOME FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send
your request to Vanguard Financial Center,
Vanguard/Wellesley Income Fund, 455 Devon Park Drive,
Wayne, PA 19087.)
17
<PAGE> 20
The redemption price of shares will be the Fund's net
asset value next determined after Vanguard has received
all required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER
GOOD ORDER means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations, trusts,
and certain other accounts.
6. Any certificates that you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR ACCOUNT, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739).
- --------------------------------------------------------------------------------
SELLING BY
TELEPHONE
To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
PLEASE NOTE: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 10
calendar days following any expedited address change to
your account. An expedited address change is one that is
made by telephone, by Vanguard Online or, in writing,
without the signatures of all account owners. Please see
"Important Information About Telephone Transactions."
- --------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option lets you move money from your Vanguard account to
your bank account on an "as needed" basis. To establish
these Fund Express options, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express service; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
SELLING BY
EXCHANGE You may sell shares by making an exchange into another
Vanguard Fund account. Please see "Exchanging Your Shares"
for details.
- --------------------------------------------------------------------------------
IMPORTANT
REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
- --------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time) are processed on the day of receipt and the
redemption proceeds are normally sent on the following
business day.
Redemption requests received by telephone after the close
of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
18
<PAGE> 21
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as
described above in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution
in kind of readily marketable securities.
- --------------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
- --------------------------------------------------------------------------------
LOW BALANCE FEE AND
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund will automatically deduct a $10 annual
fee from non-retirement accounts with balances falling
below $2,500 ($1,000 for Uniform Gifts/Transfers to Minors
Act accounts). This fee deduction will occur mid-year,
beginning in 1996. The fee generally will be waived for
investors whose aggregate Vanguard assets exceed $50,000.
In addition, the Fund reserves the right to liquidate any
non-retirement account that is below the minimum initial
investment amount of $3,000. If at any time your total
investment does not have a value of at least $3,000, you
may be notified that your account is below the Fund's
minimum account balance requirement. You would then be
allowed 60 days to make an additional investment before
the account is liquidated. Proceeds would be promptly paid
to the registered shareholder.
Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets
(i.e., a decline in a Fund's net asset value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange your
shares of Wellesley Income Fund for those of other
available Vanguard Funds.
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) When exchanging shares by telephone, please have ready the
Fund name, account number, Social Security Number or
Employer Identification Number listed on the account and
exact name and address in which the account is registered.
Only the registered shareholder may complete such an
exchange. Requests for telephone exchanges received prior
to the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after
the close of the Exchange are processed the next
19
<PAGE> 22
business day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR
FROM VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may be
made by regular or express mail, and it will be
implemented at the closing net asset value on the date
received by Vanguard provided that the request is received
in Good Order.
- --------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, the name of
the Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD/WELLESLEY INCOME FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send
your request to Vanguard Financial Center,
Vanguard/Wellesley Income Fund, 455 Devon Park Drive,
Wayne, PA 19087.)
- --------------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION
Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received the required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise
or terminate its provisions, limit the amount of or reject
any exchange, as deemed necessary, at any time.
The exchange privilege is only available in states in
which the shares of the Fund are registered for sale. The
Fund's shares are currently registered for sale in all 50
states and the Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
manage-
20
<PAGE> 23
ment of the Fund and increase transaction costs, the Fund
has established a policy of limiting excessive exchange
activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Fund during any
twelve-month period. Notwithstanding these limitations,
the Fund reserves the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT
TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio;
(ii) the 10-digit account number; (iii) the exact name
and address used in the registration; and (iv) the
Social Security or Employer Identification number
listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account. If Vanguard fails
to follow reasonable security procedures, it may be liable
for any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482 ATTENTION: TRANSFER DEPARTMENT. The
request must be in Good Order. To obtain a transfer form
and complete instructions, please call our Client Services
Department (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time
you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This
21
<PAGE> 24
service is available for most taxable accounts opened
since January 1, 1986. In general, investors who redeemed
shares from a qualifying Vanguard account may expect to
receive their Average Cost Statement with their Fund
Summary Statement. Please call our Client Services
Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semiannually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE
With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
VANGUARD FUND
EXPRESS
Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS
Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any TouchTone(TM)
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. To
contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
22
<PAGE> 25
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 26
[VANGUARD WELLESLEY
INCOME FUND LOGO]
---------------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P027
[FLAG LOGO]
[VANGUARD WELLESLEY
INCOME FUND LOGO]
P R O S P E C T U S
APRIL 23, 1996
[THE VANGUARD GROUP LOGO]
- --------------------------------------------------------------------------------
<PAGE> 27
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WELLESLEY INCOME FUND LOGO
A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- APRIL 23, 1996
- --------------------------------------------------------------------------------
FUND INFORMATION: PARTICIPANT SERVICES -- 1-800-523-1188
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES &
POLICIES Vanguard/Wellesley Income Fund, Inc. (the "Fund") is an
open-end diversified investment company that seeks to
provide as much current income as is consistent with
reasonable risk. The Fund also offers the potential for
moderate growth of capital. The Fund invests primarily in
U.S. Government and corporate fixed-income securities of
investment grade quality and dividend-paying common
stocks. There is no assurance that the Fund will achieve
its stated objectives. Shares of the Fund are neither
insured nor guaranteed by any agency of the U.S.
Government, including the FDIC.
- --------------------------------------------------------------------------------
IMPORTANT NOTE This Prospectus is intended exclusively for participants
in employer-sponsored retirement or savings plans, such as
tax-qualified pension and profit-sharing plans and 401(k)
thrift plans, as well as 403(b) custodial accounts for
non-profit educational and charitable organizations.
Another version of this Prospectus, containing information
on how to open a personal investment account with the
Fund, is available for individual investors. To obtain a
copy of that version of the Prospectus, please call
1-800-662-7447.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT The Fund is an investment option under a retirement or
savings program sponsored by your employer. The
administrator of your retirement plan or your employee
benefits office can provide you with detailed information
on how to participate in your plan and how to elect the
Fund as an investment option.
If you have any questions about the Fund, please contact
Participant Services at 1-800-523-1188. If you have any
questions about your plan account, contact your plan
administrator or the organization that provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated April 23, 1996 and has been incorporated by
reference into this Prospectus. A copy may be obtained
without charge by writing to the Fund or by calling
Participant Services at 1-800-523-1188.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Fund Expenses ................... 2 Investment Risks ................. 5 Performance Record ............... 11
Financial Highlights ...............2 Who Should Invest ................ 6 Dividends, Capital Gains
Yield and Total Return .............3 Implementation of Policies .........6 and Taxes ........................ 11
FUND INFORMATION Investment Limitations ............ 8 The Share Price of the Fund ...... 11
Investment Objectives ............. 4 Management of the Fund ........... 8 General Information ...............12
Investment Policies ............... 4 Investment Adviser ............... 9 Service Guide .....................13
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 28
FUND EXPENSES The following table illustrates ALL expenses and fees that
a shareholder of the Fund would incur. The expenses and
fees set forth below are for the 1995 fiscal year.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Redemption Fees............................................... None
Exchange Fees................................................. None
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------------------------------
Management & Administrative Expenses.......................... 0.24%
Investment Advisory Fees...................................... 0.07
12b-1 Fees.................................................... None
Other Expenses
Distribution Costs.......................................... 0.02%
Miscellaneous Expenses...................................... 0.02
----
Total Other Expenses.......................................... 0.04
------
TOTAL OPERATING EXPENSES............................. 0.35%
------
------
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that an
investor would bear directly or indirectly as a
shareholder in the Fund.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR
------ 3 YEARS 5 YEARS 10 YEARS
------- ------- --------
<S> <C> <C> <C>
$4 $ 11 $ 20 $ 44
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of
the five years in the period ended December 31, 1995, have
been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This
information should be read in conjunction with the Fund's
financial statements and notes thereto, which, together
with the remaining portions of the Fund's 1995 Annual
Report to Shareholders, are incorporated by reference in
the Statement of Additional Information and in this
Prospectus, and which appear, along with the report of
Price Waterhouse LLP, in the Fund's 1995 Annual Report to
the Shareholders. For a more complete discussion of the
Fund's performance, please see the Fund's 1995 Annual
Report to Shareholders which may be obtained without
charge by writing to the Fund or by calling Participant
Services at 1-800-523-1188.
2
<PAGE> 29
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF
YEAR............... $17.05 $19.24 $18.16 $18.08 $16.02 $16.82 $15.26 $14.57 $16.27 $ 15.31
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
INVESTMENT OPERATIONS
Net Investment
Income........... 1.13 1.11 1.14 1.21 1.27 1.30 1.32 1.23 1.24 1.33
Net Realized and
Unrealized Gain
(Loss) on
Investments...... 3.68 (1.95) 1.48 .29 2.06 (.72) 1.79 .69 (1.52) 1.43
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM
INVESTMENT
OPERATIONS..... 4.81 (.84) 2.62 1.50 3.33 .58 3.11 1.92 (.28) 2.76
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment
Income........... (1.14) (1.11) (1.14) (1.21) (1.27) (1.30) (1.31) (1.23) (1.04) (1.33)
Distributions from
Realized Capital
Gains............ (.28) (.24) (.40) (.21) -- (.08) (.24) -- (.38) (.47)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL
DISTRIBUTIONS... (1.42) (1.35) (1.54) (1.42) (1.27) (1.38) (1.55) (1.23) (1.42) (1.80)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR........ $20.44 $17.05 $19.24 $18.16 $18.08 $16.02 $16.82 $15.26 $14.57 $ 16.27
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN......... 28.91% (4.44)% 14.65% 8.67% 21.57% 3.76% 20.93% 13.61% (1.92)% 18.34%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Year (Millions).... $7,181 $5,681 $6,011 $3,178 $1,934 $1,022 $788 $567 $495 $510
Ratio of Expenses to
Average Net
Assets............. .35%+ .34% .33% .35% .40% .45% .45% .51% .49% .58%
Ratio of Net
Investment Income
to Average Net
Assets............. 5.96% 6.16% 5.79% 6.50% 7.08% 7.77% 7.68% 8.14% 7.83% 7.74%
Portfolio Turnover
Rates:
Common Stocks...... 27% 32% 26% 16% 19% 12% 10% 19% 27% 18%
Bonds.............. 32% 31% 18% 24% 34% 23% 11% 21% 48% 39%
</TABLE>
+Effective in 1995, does not include reductions from directed brokerage
arrangements. The 1995 Ratio of Expenses to Average Net Assets is .34% after
including those reductions.
- --------------------------------------------------------------------------------
YIELD AND TOTAL
RETURN From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Fund refers to the average annual compounded rates of
return over one-, five-and ten-year periods or for the
life of the Fund (as stated in the advertisement) that
would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Fund is calculated by dividing net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Fund's securities; it is net
of all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder
3
<PAGE> 30
accounts. The yield calculation assumes that net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by the Fund to maintain
its books and records, and so the advertised 30-day yield
may not fully reflect the income paid to an investor's
account.
- --------------------------------------------------------------------------------
INVESTMENT The Fund is an open-end diversified investment company.
OBJECTIVES The objective of the Fund is to provide as much current
income as is consistent with reasonable risk. The Fund
THE FUND SEEKS TO also offers the potential for moderate growth of capital.
PROVIDE CURRENT The Fund invests primarily in U.S. Government and
INCOME AND MODERATE corporate fixed-income securities of investment grade
CAPITAL GROWTH quality and dividend-paying common stocks.
There is no assurance that the Fund will achieve its
stated objectives.
- --------------------------------------------------------------------------------
INVESTMENT The Fund invests in fixed-income securities and
POLICIES dividend-paying common stocks. Under normal
circumstances, it is expected that fixed-income
THE FUND INVESTS IN securities will represent approximately 60% of the Fund's
BONDS AND COMMON net assets. The remainder of the Fund's assets will be
STOCKS invested primarily in common stocks chosen largely for
their income characteristics.
The fixed-income securities owned by the Fund will include
U.S. Government and corporate bonds and mortgage-backed
securities (such as Government National Mortgage
Association pass-through certificates), asset-backed
securities, U.S. dollar-denominated debt securities issued
by foreign governments, their agencies and
instrumentalities, supranational entities and companies
located outside the U.S., as well as bonds or preferred
stocks which are convertible into common stock.
Fixed-income securities will be primarily of investment
grade quality -- i.e., those rated at least Baa by Moody's
Investors Service, Inc. or BBB by Standard & Poor's
Corporation. Securities rated Baa or BBB are considered as
medium grade obligations. Interest and principal payments
for such bonds are regarded as adequate for the present
but certain protective elements found in higher-rated
bonds may be lacking. Such bonds lack outstanding
investment characteristics and, in fact, have speculative
characteristics as well.
The mix of bonds and stocks held by the Fund may be varied
from time to time depending on the investment adviser's
assessment of business, economic and investment
conditions. However, fixed-income securities can be
expected to represent the majority of the Fund's assets so
long as the general level of interest rates remains well
in excess of dividend yields available on common stocks.
In addition to investing in fixed-income securities and
dividend-paying common stocks, the Fund may also invest in
certain short-term fixed-income securities as cash
reserves. The Fund is also authorized to invest in stock
and bond futures contracts and options to a limited
extent. See "Implementation of Policies" for a description
of these and other investment practices of the Fund.
The Fund is responsible for voting the shares of all
securities it holds.
4
<PAGE> 31
The investment objectives and policies of the Fund are not
fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material change
in either.
- --------------------------------------------------------------------------------
INVESTMENT RISKS
THE FUND IS SUBJECT
TO INTEREST RATE AND
STOCK MARKET RISK
Like any investment program, the Fund entails certain
risks. The Fund is subject to the risk that bond or stock
prices will decline during short or even extended periods.
The Fund is expected to invest the majority of its assets
(63% as of December 31, 1995) in longer-term fixed-income
securities, such as government and corporate bonds. Bond
prices are influenced primarily by changes in the level of
interest rates. When interest rates rise, bond prices
generally fall; conversely, when interest rates fall, bond
prices generally rise. While bonds normally fluctuate less
than stocks, there have been extended periods of increases
in interest rates that have caused significant price
declines. For example, long-term U.S. government bond
prices fell 48% from December 1976 to September 1981. The
risk of bond holdings declining in value, however, may be
offset in whole or in part by the high level of income
that bonds provide.
A smaller portion of the Fund's assets will be invested in
stocks (37% of assets as of December 31, 1995). The stock
market tends to be cyclical, with periods when stock
prices generally rise and periods when stock prices
generally decline. Common stocks have provided annual
total returns (capital appreciation plus dividend income)
averaging +10.7% for all 10-year periods from 1926 to
1995. This level of return can be used as a guide for
setting reasonable expectations for future stock market
returns, but may not be useful for forecasting future
returns in any particular period, as stock returns are
quite volatile from year to year. For example, in the
period from 1926 to 1995, the range of annual returns on
the S&P 500 Index was +53.9% to -43.3%. Over longer-term
holding periods, stocks tend to be less volatile. For
five-year periods since 1926, the annualized rates of
return for the S&P 500 Index ranged from +23.9% to -12.5%.
In large part, the common stocks held by the Fund will be
selected for their current income and potential growth in
income. The aggregate characteristics of such stocks will
tend to be quite different from those exhibited by the S&P
500 Index. As a result, investors should anticipate that
the common stocks in the Fund may perform differently than
those in the Index.
From time to time, the stock and bond markets may
fluctuate independently of one another. In other words, a
decline in the stock market may be offset by a rise in the
bond market, or vice versa. As a result, the Fund with its
balance of common stock and bond investments, is expected
to entail less investment risk (and a potentially lower
return) than a mutual fund investing exclusively in common
stocks.
From the Fund's inception on July 1, 1970 to December 31,
1995, the Fund has provided an average annual return of
+11.6%. During this period, the Fund has experienced 21
years of positive returns and four years of negative
returns. Annual returns have ranged from +28.9% to -6.4%.
These return characteristics are provided to illustrate
the risks and returns that the Fund has provided in the
past and may not be indicative of future results.
- --------------------------------------------------------------------------------
5
<PAGE> 32
WHO SHOULD INVEST
INVESTORS SEEKING A
CURRENT INCOME OR
A CONSERVATIVE "TOTAL
RETURN" INVESTMENT The Fund is designed for investors seeking a high level of
current income from a portfolio of bonds and stocks.
Because of the risks associated with common stock and bond
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term stock
and/or bond market movements. Investors who engage in
excessive account activity generate additional costs which
are borne by all of the Fund's shareholders. In order to
minimize such costs, the Fund has adopted the following
policies. The Fund reserves the right to reject any
purchase request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management, either
because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Fund
reserves the right to suspend the offering of its shares.
Although capital appreciation is not a primary objective
of the Fund, the Fund's investment in common stocks may
provide modest growth in income and capital over time.
Thus, the Fund is also suitable for conservative "total
return" investors who seek to build capital gradually,
through moderate appreciation and the compounding of
income.
Because of the inevitable fluctuations in bond and stock
prices, the share price of the Fund is expected to
fluctuate, sometimes substantially. Investors should be
able to tolerate such fluctuations in the value of their
investment in pursuit of the current income and moderate
growth that the Fund may provide. Investors may wish to
reduce the potential risk of investing in the Fund by
purchasing shares on a regular, periodic basis
(dollar-cost averaging) rather than making an investment
in one lump sum.
- --------------------------------------------------------------------------------
IMPLEMENTATION OF
POLICIES
In addition to investing primarily in fixed-income
securities and dividend-paying common stocks, the Fund
follows a number of additional investment practices to
achieve its objectives.
THE FUND MAY INVEST
IN SHORT-TERM FIXED
INCOME SECURITIES The Fund may invest temporarily in certain short-term
fixed income securities. Such securities may be used to
invest uncommitted cash balances, to maintain liquidity to
meet shareholder redemptions, or to take a temporary
defensive position against potential stock market
declines. These securities include: obligations of the
United States Government and its agencies or
instrumentalities; commercial paper, bank certificates of
deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.
THE FUND MAY INVEST
IN SECURITIES OF FOREIGN
ISSUERS
The Fund may invest up to 15% of its equity assets in
foreign common stocks and securities convertible into
foreign common stocks, and may engage in currency
transactions with respect to these investments. The Fund
may also invest in fixed income securities of foreign
issuers, but all such securities must be denominated in
U.S. dollars and must meet the Fund's credit quality
standards. Securities of foreign issuers may trade in U.S.
or foreign securities markets. Securities of foreign
issuers may involve investment risks that are different
from those of domestic issuers. Such risks include the
effect of foreign economic policies and conditions, future
political and economic developments, and the possible
imposition of exchange controls or other foreign
governmental restrictions on foreign issuers. There may
also be less
6
<PAGE> 33
publicly available information about a foreign issuer than
a domestic issuer of securities. Foreign issuers are
generally not subject to the uniform accounting, auditing
and financial reporting standards that apply to domestic
issuers. Also, foreign markets may be characterized by
lower liquidity, greater price volatility, and higher
transactions costs. Additionally, it may be difficult to
obtain or enforce a legal judgment in a foreign court.
THE FUND MAY LEND ITS
SECURITIES
The Fund may lend its investment securities to qualified
institutional investors for the short-term or long-term
purpose of realizing additional income. Loans of
securities by the Fund will be collateralized by cash,
letters of credit, or securities issued or guaranteed by
the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the
loaned securities.
PORTFOLIO TURNOVER IS
NOT EXPECTED TO
EXCEED 40%
Although it generally seeks to invest for the long term,
the Fund retains the right to sell securities irrespective
of how long they have been held. It is anticipated that
the annual portfolio turnover of the Fund will not exceed
40%. A turnover rate of 40% would occur, for example, if
four-tenths of the securities of the Fund were replaced
within one year.
DERIVATIVE
INVESTING
Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
THE FUND MAY
INVEST IN DERIVATIVE
SECURITIES
The Fund may invest in futures contracts and options, but
only to a limited extent. Specifically, the Fund may enter
into futures contracts provided that not more than 5% of
its assets are required as a futures contract deposit; in
addition, the Fund may enter into futures contracts and
options transactions only to the extent that obligations
under such contracts or transactions represent not more
than 20% of the Fund's assets.
Futures contracts and options may be used for several
common fund management strategies: to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index.
The Fund may use futures contracts for bona fide "hedging"
purposes. In executing a hedge, a manager sells, for
example, stock index futures to protect against a decline
in the stock market. As such, if the market drops, the
value of the futures position will rise, thereby
offsetting the decline in value of the Fund's stock
holdings.
THE FUND MAY
INVEST IN CMOS The Fund may also invest modestly in a fairly conservative
class of collateralized mortgage obligations (CMOs) which
feature a high degree of cash flow predictability and
moderate vulnerability to mortgage prepayment risk. To
reduce credit risk, Vanguard purchases these less risky
classes of collateralized mortgage obligations issued only
by agencies of the U.S. Government or privately-issued
collateralized mortgage obligations that carry
high-quality investment-grade ratings.
7
<PAGE> 34
FUTURES CONTRACTS
AND OPTIONS POSE
CERTAIN RISKS
The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between the change in market value of the stocks or bonds
held by the Fund and the prices of futures contracts and
options; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability
to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by
investing in those contracts whose price fluctuations are
expected to resemble those of the Fund's underlying
securities. The risk that the Fund will be unable to close
out a futures position will be minimized by entering into
such transactions on a national exchange with an active
and liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
investor. When investing in futures contracts, the Fund
will segregate cash or cash equivalents in the amount of
the underlying obligation.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS The Fund has adopted certain limitations on its investment
practices. Specifically, the Fund will not:
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS
(a) invest more than 25% of its assets in any one
industry;
(b) 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 Fund would hold
more than 10% of the outstanding voting securities of
the issuer, or more than 5% of the value of the Fund's
total assets would be invested in the securities of
such issuer;
(c) borrow money, except that the Fund may borrow 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 exceeding 10% of the
value of the Fund's net assets (including the amount
borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of
the Fund's net assets, the Fund will not make any
additional investments.
These investment limitations are considered at the time
investment securities are purchased. The investment
limitations described here and in the Statement of
Additional Information are fundamental and may be changed
only with the approval of a majority of the Fund's
shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT
OF THE FUND
VANGUARD
ADMINISTERS AND
DISTRIBUTES THE
FUND
The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct investment portfolios and total
assets in excess of $190 billion. Through their
jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other funds in the Group
obtain at cost virtually all of their corporate
management, administrative and distribution services.
Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of
Vanguard's unique
8
<PAGE> 35
corporate structure, the Vanguard funds have costs
substantially lower than those of most competing mutual
funds. In 1995, the average expense ratio (annual costs
including advisory fees divided by total net assets) for
the Vanguard funds amounted to approximately .31% compared
to an average of 1.11% for the mutual fund industry (data
provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel to provide the requisite services
to the funds and also furnishes the funds with necessary
office space, furnishings and equipment. Each fund pays
its share of Vanguard's net expenses, which are allocated
among the funds under methods approved by the Board of
Directors (Trustees) of each fund. In addition, each fund
bears its own direct expenses, such as legal, auditing and
custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER
WELLINGTON
MANAGEMENT
COMPANY SERVES AS
ADVISER TO THE FUND The Fund has entered into an investment advisory agreement
with Wellington Management Company ("WMC"), 75 State
Street, Boston, MA 02109, under which WMC manages the
investment and reinvestment of the Fund's assets and
continuously reviews, supervises and administers the
Fund's investment program. WMC discharges its
responsibility subject to the control of the Officers and
Directors of the Fund.
WMC is a professional investment advisory firm which
globally provides investment services to investment
companies, institutions and individuals. Among the clients
of WMC are more than 10 of the investment companies of The
Vanguard Group. As of December 31, 1995, WMC held
discretionary management authority with respect to more
than $108 billion of assets. WMC and its predecessor
organizations have provided investment advisory services
to investment companies since 1933 and to investment
counseling clients since 1960.
Earl E. McEvoy, Senior Vice President of WMC, serves as
portfolio manager of the Fund, a position he has held
since October 1982. Mr. McEvoy is assisted by John R.
Ryan, Senior Vice President and a managing partner of WMC,
who has managed the Fund's equity investments since
January 1986. Messrs. McEvoy and Ryan are supported by
research and other investment services provided by the
professional staff of WMC.
9
<PAGE> 36
The Fund pays WMC a basic advisory fee calculated by
applying varying percentage rates to the average net
assets of the Fund:
<TABLE>
<CAPTION>
NET ASSETS
-------------------- RATE
-----
<S> <C>
First $1 billion .100%
Next $2 billion .050%
Next $7 billion .040%
Over $10 billion .030%
</TABLE>
Effective with the quarter ending March 31, 1997 the basic
advisory fee may be increased or decreased by applying an
adjustment formula based on the investment performance of
the Fund relative to the investment performance of a
"composite index." This composite index comprises the
Lehman Long-Term Corporate AA or Better Bond Index (65%)
and a 35% weighting in a blended equity composite (75%
Standard & Poor's/BARRA Value Index and 25% Standard &
Poor's Utilities Index).
During the fiscal year ended December 31, 1995, the total
advisory fees paid by the Fund to WMC represented an
effective annual base rate of .07 of 1% of the Fund's
average net assets. This fee was paid under a previous fee
schedule that provided for a higher rate of fees.
The investment advisory agreement authorizes WMC to select
brokers or dealers to execute purchases and sales of the
Fund's portfolio securities, and directs WMC to use its
best efforts to obtain the best available price and most
favorable execution with respect to all transactions. The
full range and quality of brokerage services are
considered in making these determinations.
The Fund has authorized WMC to pay higher commissions in
recognition of brokerage services felt necessary for the
achievement of better execution, provided WMC believes
this to be in the best interest of the Fund. Although the
Fund does not market its shares through intermediary
brokers or dealers, the Fund may place orders with
qualified broker-dealers who recommend the Fund to clients
if the Officers of the Fund believe that the quality of
the transaction and the commission are comparable to what
they would be with other qualified brokerage firms.
The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser. Any such change will only be made
upon not less than 30 days' prior written notice to
shareholders of the Fund which shall include substantially
the information concerning the adviser that would have
normally been included in a proxy statement.
- --------------------------------------------------------------------------------
10
<PAGE> 37
PERFORMANCE
RECORD The table below provides investment results for the Fund
for several periods throughout the Fund's lifetime. The
results shown represent "total return" investment
performance, which assumes the reinvestment of all capital
gains and income dividends for the indicated periods. Also
included is comparative information with respect to two
performance indexes: a Composite Index, comprised of 65%
of the Lehman Long-Term Corporate AA or Better Bond Index
and a 35% weighting in a blended equity composite (75%
Standard & Poor's/BARRA Value Index and 25% Standard &
Poor's Utilities Index); and the Consumer Price Index, a
statistical measure of changes in the prices of goods and
services. The tables do not make any allowance for
federal, state or local income taxes, which shareholders
must pay on a current basis.
The results shown should not be considered a
representation of the total return from an investment made
in the Fund today. This information is provided to help
investors better understand the Fund and may not provide a
basis for comparison with other investments or mutual
funds which use a different method to calculate
performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN FOR
VANGUARD/WELLESLEY INCOME FUND
<S> <C> <C> <C>
------------------------------------------------
<CAPTION>
FISCAL PERIODS
ENDED 12/31/95
---------------
VANGUARD/WELLESLEY COMPOSITE CONSUMER
INCOME FUND INDEX PRICE INDEX
------------------ --------- -----------
<S> <C> <C> <C>
1 Year +28.9% +31.3% +2.6%
5 Years +13.3 +14.0 +2.8
10 Years +11.9 +12.7 +3.5
Lifetime* +11.6 +11.1 +5.5
* July 1, 1970 to December 31, 1995.
</TABLE>
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
THE FUND PAYS
QUARTERLY DIVIDENDS
AND ANY CAPITAL GAINS
ANNUALLY
The Fund expects to pay dividends quarterly from ordinary
income. Net capital gains distributions, if any, will be
made annually. Dividend and capital gains distributions
are automatically reinvested in additional shares. The
Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax
to the extent its income is distributed to shareholders.
If you utilize the Fund as an investment option in an
employer-sponsored retirement savings plan, dividend and
capital gains distributions from the Fund ordinarily will
not be subject to current taxation, but will accumulate on
a tax-deferred basis. In general, employer-sponsored
retirement and savings plans are governed by complex tax
rules. If you participate in such a plan, consult your
plan administrator, your plan's Summary Plan Description,
or a professional tax adviser regarding the tax
consequences of your participation in the plan and of any
plan contributions or withdrawals.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF THE FUND The Fund's share price or "net asset value" per share is
determined by dividing the total market value of the
Fund's investments and other assets, less any liabilities,
by the number of outstanding shares of the Fund. Net asset
value per share is
11
<PAGE> 38
determined as of the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day that the
Exchange is open for trading. Portfolio securities that
are listed on a securities exchange are valued at the last
quoted sales price on the day the valuation is made. Price
information on listed securities is taken from the
exchange where the security is primarily traded.
Securities which are listed on an exchange and which are
not traded on the valuation date are valued at the mean
between the bid and asked prices. Unlisted securities for
which market quotations are readily available and
preferred stocks are valued at the latest quoted bid
price.
Securities may be valued on the basis of prices provided
by a pricing service when such prices are believed to
reflect the fair market value of such securities. For
bonds and other fixed-income securities, the prices
provided by a pricing service may be determined without
regard to bid or last sale prices of each security but
take into account institutional-size trading in similar
groups of securities and any developments related to
specific securities. Short-term instruments (with
remaining maturities of 60 days or less) are valued at
cost, plus or minus any amortized discount or premium,
which approximates market values. Other assets and
securities for which no quotations are readily available
are valued at fair value as determined in good faith by
the Directors.
The Fund's share price can be found daily in the mutual
fund listings of most major newspapers under the heading
of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 450,000,000
shares of common stock, with a $.10 par value. The Board
of Directors has the power to designate one or more
classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect to
such series. Currently the Fund is offering one series of
shares.
The shares of the Fund are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive
rights. Such shares have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the
Directors if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash are held by Morgan Guaranty Trust
Company, New York, NY. CoreStates Bank, N.A., holds daily
cash balances that are used by the Fund to invest in
repurchase agreements or securities acquired in these
transactions. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.
- --------------------------------------------------------------------------------
12
<PAGE> 39
SERVICE GUIDE
PARTICIPATING IN
YOUR PLAN The Fund is available as an investment option in your
retirement or savings plan. The administrator of your plan
or your employee benefits office can provide you with
detailed information on how to participate in your plan
and how to elect the Fund as an investment option.
If you have any questions about the Fund, including the
Fund's investment objective, policies, risk
characteristics or historical performance, please contact
Participant Services (1-800-523-1188).
If you have questions about your account, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
INVESTMENT OPTIONS,
ALLOCATIONS AND
PAYROLL CHANGES You may be permitted to elect different investment
options, alter the amounts contributed to your plan, or
change how contributions are allocated among your
investment options in accordance with your plan's specific
provisions. See your plan administrator or employee
benefits office for more details.
- --------------------------------------------------------------------------------
TRANSACTIONS IN
FUND SHARES Purchases, exchanges or redemptions of the Fund's shares
are effective when received in "good order" by Vanguard.
"Good order" means that complete information on the
purchase, exchange or redemption and the appropriate
signatures and monies have been received by Vanguard.
- --------------------------------------------------------------------------------
MAKING EXCHANGES Your plan may allow you to exchange monies from one
investment option to another. However, the Fund reserves
the right to refuse any exchange purchase request. Check
with your plan administrator for details on the rules
governing exchanges in your plan. Certain investment
options, particularly company stock or guaranteed
investment contracts (GICs), may be subject to unique
restrictions.
Before making an exchange, you should consider the
following:
- If you are making an exchange to another Vanguard Fund
option, please read the Fund's prospectus. Contact
Participant Services (1-800-523-1188) for a copy.
- Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how
frequently exchanges are allowed.
- --------------------------------------------------------------------------------
13
<PAGE> 40
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 41
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 42
<TABLE>
<S> <C> <C> <C>
LOGO LOGO
------------------------------- LOGO
I N S T I T U T I O N A L
THE VANGUARD GROUP P R O S P E C T U S
OF INVESTMENT APRIL 23, 1996
COMPANIES LOGO
Vanguard Financial Center
P.O. Box 2900
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
I027
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 43
PART B
VANGUARD/WELLESLEY INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
APRIL 23, 1996
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated April 23, 1996). To obtain the Prospectus
please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................................... 1
Investment Limitations.................................................................... 5
Purchase of Shares........................................................................ 7
Redemption of Shares...................................................................... 7
Yield and Total Return.................................................................... 7
The Vanguard Group........................................................................ 8
Investment Advisory Services.............................................................. 11
Portfolio Transactions.................................................................... 13
Performance Measures...................................................................... 14
Appendix-Description and Ratings of Securities............................................ 16
Financial Statements...................................................................... 17
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
PORTFOLIO TURNOVER While the rate of portfolio turnover is not a limiting
factor when management deems changes appropriate, it is anticipated that the
Fund's annual common stock portfolio turnover rate will not normally exceed 40%.
The Fund's bond and common stock portfolio turnover rate for each of its last
ten fiscal years is set forth under "Financial Highlights," in the Fund's
Prospectus.
REPURCHASE AGREEMENTS The Fund may invest in repurchase agreements with
commercial banks, brokers or dealers either for defensive purposes due to market
conditions or to generate income from its excess cash balances. A repurchase
agreement is an agreement under which the Fund acquires a money market
instrument (generally a security issued by the U.S. Government or an agency
thereof, a banker's 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
Fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by a custodian bank until repurchased. In
addition, the Fund's Board of Directors will monitor the Fund's repurchase
agreement transactions generally and will establish guidelines and standards for
review by the investment adviser of the creditworthiness of any bank, broker or
dealer party to a repurchase agreement with the Fund. No more than an aggregate
of 15% of the Fund'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 for which there are no
readily available market quotations. From time to time, the Fund's Board of
Directors may determine that certain restricted securities known as Rule 144A
securities are liquid and not subject to the 15% limitation described above. See
"Illiquid Securities" on page 3.
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
1
<PAGE> 44
declined, the Fund may incur a loss upon disposition of the security. If the
other party to the agreement becomes insolvent and subject to liquidation or
reorganization under the Bankruptcy Code or other laws, a court may determine
that the underlying security is collateral for a loan by the Fund not within the
control of the Fund and therefore the Fund may not be able to substantiate its
interest in the underlying security and may be deemed an unsecured creditor of
the other party to the agreement. While the Fund's management acknowledges these
risks, it is expected that they can be controlled through careful monitoring
procedures.
LENDING OF SECURITIES The Fund may lend its securities 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 portfolio
securities, the Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The Fund 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
issued by a domestic U.S. bank, or securities issued or guaranteed by the United
States Government having a value at all times not less than 100% of the value of
the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e. the borrower "marks to the market" on
a daily basis), (c) the loan be made subject to termination by the Fund at any
time, and (d) the Fund receive reasonable interest on the loan (which may
include the Fund's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by the Fund will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of three business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the 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. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
FOREIGN INVESTMENTS As indicated in the Prospectus, the Fund may include
foreign securities to a certain extent. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies. Among these risks are
the following:
Country Risk As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Fund's foreign securities will be somewhat greater than the
expenses for the custodian arrangement for handling U.S. securities of equal
value.
2
<PAGE> 45
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments.
Currency Risk Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Fund permit it to enter into
forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
ILLIQUID SECURITIES Illiquid securities are securities that may not be
sold or disposed of in the ordinary course of business within seven business
days at approximately the value at which they are being carried on a Fund's
books. An illiquid security includes repurchase agreements which have a maturity
of longer than seven days, securities which are illiquid by virtue of the
absence of a readily available market, and demand instruments with a demand
notice exceeding seven days. Illiquid securities may include securities that are
not registered under the Securities Act of 1933 (the "1933 Act"); however,
unregistered securities that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act will not be considered illiquid so
long as it is determined by the Fund's advisor that an adequate trading market
exists for the security.
FUTURES CONTRACTS AND OPTIONS The Fund may enter into futures contracts,
options, and options on futures contracts for the purpose of simulating full
investment and reducing transactions costs. 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. Assets committed to
futures contracts will be segregated at the Fund's custodian bank to the extent
required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing
3
<PAGE> 46
profits from fluctuations in the prices of underlying securities. The Fund
intends to use futures contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. The Fund will
only sell futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase. As evidence of this hedging interest, the Fund expects
that approximately 75% of its futures contract purchases will be "completed,"
that is, equivalent amounts of related securities will have been purchased or
are being purchased by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets. In addition, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge it.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. The Fund also bears the risk that
the Adviser will incorrectly predict market trends. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Fund is subject to the risks of loss frequently
associated with futures transactions. The Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
4
<PAGE> 47
option. Additionally, investments in futures contracts and options involve the
risk that the investment adviser 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 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 The Fund is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts held 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 the Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. A Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to the
Fund's business of investing in securities. 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 Fund's annual gross income. 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 Fund 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 Fund'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.
The Fund 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 Fund's other investments and shareholders will be advised on the nature of
the distributions.
INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of the
Fund (as defined in the Investment Company Act of 1940). The Fund may not under
any circumstances:
1) Invest for the purpose of controlling management of any company;
2) 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 Fund would
hold more than 10% of the outstanding voting securities of the issuer,
or more than 5% of the value of the Fund's total assets would be
invested in the securities of such issuer;
3) Invest in securities of other investment companies, except as may be
acquired as 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
5
<PAGE> 48
investment companies which have investment objectives and investment
policies consistent with those of the Fund;
4) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed
to be an underwriter under the Securities Act of 1933, as amended, in
disposing of investment 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.);
6) Borrow money, except that the Fund may borrow 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 exceeding 10% of the value of the Fund's net assets
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Fund's net assets, the Fund
will not make any additional investments;
7) Invest in commodities except that the Fund may invest in stock futures
contracts or stock options to the extent that not more than 5% of the
Fund's assets are required as deposit to secure obligations under
futures contracts and not more than 20% of the Fund's assets are
invested in futures contracts and options at any time or purchase or
sell real estate, although the Fund may purchase and sell securities of
companies which deal in real estate, or interests therein;
8) Purchase securities on margin or sell any securities short except as
specified above in investment limitation No. 7;
9) Pledge, mortgage or hypothecate any of its assets to an extent greater
than 5% of the value of its total assets;
10) Purchase or retain securities of an issuer if an officer or director of
such issuer is an officer or Director of the Fund or its investment
adviser and one or more of such officers or directors of the Fund or
its investment adviser owns beneficially more than 1/2% of the shares
or securities of such issuer and all such directors and officers owning
more than 1/2% of such shares or securities together own more than 5%
of such shares or securities;
11) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements) which are either publicly
distributed or customarily purchased by institutional investors, and
(ii) as provided under "Lending of Securities"; and
12) Invest more than 25% of the value of its total assets in any one
industry. Utility companies will be divided according to their
services; for example, gas, gas transmission, electric and gas,
electric, and telephone will each be considered a separate industry.
Although not fundamental policies subject to shareholder vote, as long as
the Fund's shares are registered for sale in certain states, it may not invest
in put, calls, straddle or spread options (except as specified above in
investment limitation No. 7) or in interests in oil, gas or other mineral
exploration or development programs.
If a percentage restriction is adhered to at the time an investment is
made, a later increase in percentage resulting from a change in the value of
assets will not constitute a violation of such restriction.
The above-mentioned investment limitations are considered at the time
investment securities are purchased. Notwithstanding these limitations, the Fund
may own all or any portion of the securities of, or make loans to, or contribute
to the costs or other financial requirements of any company which will be wholly
owned by the Fund and one or more other investment companies and is primarily
engaged in the business of providing, at-cost, management, administrative,
distribution or related services to the Fund and other investment companies. See
"Management of the Fund."
6
<PAGE> 49
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase or exchange purchase orders
when in the judgment of management such rejection is in the best interest of the
Fund, and (iii) to reduce or waive the minimum for any other restrictions on
initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the 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% of 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 such
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 Fund's Share Price" and a redeeming shareholder would
normally incur brokerage expenses if he converted these securities to cash.
No charge is made by the Fund for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by the Fund.
SIGNATURE GUARANTEES To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signatures
guarantees enable the Fund to verify the identity of the person who has
authorized a redemption from your account. Signature guarantees are required in
connection with: (1) all redemptions, regardless of the amount involved, when
the proceeds are to be paid to someone other than the registered owner(s) and/or
to an address other than the address of record; and (2) share transfer requests.
These requirements are not applicable to redemptions in Vanguard's prototype
plans except in connection with: (1) distributions made when the proceeds are to
be paid to someone other than the plan participant; (2) certain authorizations
to effect exchanges by telephone; and (3) when proceeds are to be wired. These
requirements may be waived by the Fund in certain instances.
Signature guarantees may be provided by banks, brokers, or any other
guarantor institution that Vanguard deems acceptable. Notaries public are not
acceptable guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended December 31, 1995 was
+5.66%.
The average annual total return of the Fund for the one-, five- and
ten-year periods ended December 31, 1995 was +28.91%, +13.29% and +11.93%,
respectively. Total return is computed by finding the average compounded rates
of return over the one-, five- and ten-year periods set forth above that would
equate an initial amount invested at the beginning of the periods to the ending
redeemable value of the investment.
7
<PAGE> 50
THE VANGUARD GROUP
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for the Fund and choose its Officers. The following is a list of Directors and
Officers of the Fund and a statement of their present positions and principal
occupations during the past five years. The mailing address of the Fund's
Directors and Officers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, and Director
Chairman, and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group; Director of The Mead
Corporation and General Accident Insurance.
JOHN J. BRENNAN, President, Chief Executive Officer & Director*
President, Chief Executive Officer and Director of The Vanguard Group,
Inc., and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Director
Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director
Director of The Great Atlantic and Pacific Tea Company, ALCO Standard
Corp., Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual Life
Insurance Company and Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, Director
President, The Brookings Institution; Director of American Express Bank,
Ltd., The St. Paul Companies, Inc. and Scott Paper Company.
BURTON G. MALKIEL, Director
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co. and Southern New England Communications
Company.
ALFRED M. RANKIN, JR., Director
Chairman, President and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company, and The Standard Products Company.
JOHN C. SAWHILL, Director
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co., and President, New York
University; Director of Pacific Gas and Electric Company and NACCO
Industries.
JAMES O. WELCH, JR., Director
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc., and Director of
Kmart Corporation.
J. LAWRENCE WILSON, Director
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary
of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
- ---------------
* Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
8
<PAGE> 51
Vanguard/Wellesley Income Fund is a member of The Vanguard Group of
Investment Companies. Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group obtain at
cost virtually all of their corporate management, administrative and
distribution services. Vanguard also provides investment advisory services on an
at-cost basis to certain of the Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's net expenses which are allocated among the
Funds under methods approved by the Board of Directors (Trustees) of each Fund.
In addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees.
The Fund's officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 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 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 of 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. At December 31, 1995, the
Fund had contributed capital of $820,000 to Vanguard, representing 4.1% of
Vanguard's capitalization. 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.
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 Funds by third parties. During the
fiscal year ended December 31, 1995, the Fund's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $15,223,000.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The directors and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's sales
for the preceding 24 months relative to the total sales of the Funds as a Group,
provided, however, that no Fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for the Group, and that no Fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets. During the fiscal year ended December 31, 1995, the Fund paid
approximately $1,346,000 of the Group's distribution and marketing expenses.
9
<PAGE> 52
INVESTMENT ADVISORY SERVICES Vanguard provides Vanguard Money Market
Reserves, Vanguard Admiral Funds, Vanguard Municipal Bond Fund, the several
Portfolios of Vanguard Fixed Income Securities Fund, several Portfolios of
Vanguard Variable Insurance Fund, Vanguard Institutional Index Fund, Vanguard
Bond Index Fund, the 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 Pennsylvania Tax-Free Fund,
Vanguard Balanced Index Fund, Vanguard Index Trust, Vanguard International
Equity Index Fund, Vanguard Tax-Managed Fund, the Aggressive Growth Portfolio of
Vanguard Horizon Fund, a portion of Vanguard/Windsor II, a portion of
Vanguard/Morgan Growth Fund as well as several indexed separate accounts with
investment advisory services. These services are provided on an at-cost basis
from a money management staff employed directly by Vanguard. The compensation
and other expenses of this staff are paid by the Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director, who is
not also an officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. 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.
The following information is furnished with respect to the Directors and
officers of the Fund for whom the Fund's proportionate share of remuneration
exceeded $60,000 for the fiscal year ended December 31, 1995, and for all
Directors and officers as a group:
<TABLE>
<CAPTION>
NAMES AND CAPACITIES IN WHICH DIRECT
REMUNERATION WAS RECEIVED REMUNERATION(1)
- -------------------------------------------------------------------------------- ---------------
<S> <C>
John C. Bogle, Chairman......................................................... $ 136,072
John J. Brennan, President and Chief Executive Officer.......................... $ 67,545
All Directors and Officers as a Group........................................... $ 244,770
</TABLE>
(1) Includes, in the aggregate, $25,000 of fees and expenses paid by the Fund to
its "non-interested" Directors, and the Fund's proportionate share of
remuneration paid by Vanguard to all officers of the Fund, as a group.
Directors who are not Officers are paid an annual fee based on the number
of years of service on the Board upon retirement. The fee is equal to $1,000 for
each year of service (up to fifteen years) and each investment company member of
the Vanguard Group contributes a proportionate amount to this fee based on its
relative net assets. Under its retirement plan, Vanguard contributes annually an
amount equal to 10% of each eligible 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 eligible officers are permitted to make pre-tax contributions in an
amount up to 4% of total compensation, subject to federal tax limitations, which
are matched by Vanguard on a 100% basis. The Fund's proportionate share of
retirement contributions made by Vanguard under its Retirement and Thrift Plans
on behalf of all eligible officers of the Fund, as a group, during the 1995
fiscal year was approximately $6,150.
10
<PAGE> 53
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors and Officers of the Fund for the
fiscal year ended December 31, 1995.
VANGUARD/WELLESLEY INCOME FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(3)
- --------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1),(2) -- -- -- --
John J. Brennan(2) -- -- -- --
Barbara Barnes Hauptfuhrer $ 2,704 $ 462 $15,000 $59,000
Robert E. Cawthorn $ 2,704 $ 385 $13,000 $59,000
Bruce K. MacLaury $ 2,981 $ 456 $12,000 $55,000
Burton G. Malkiel $ 2,749 $ 308 $15,000 $60,000
Alfred M. Rankin, Jr. $ 2,749 $ 243 $15,000 $60,000
John C. Sawhill $ 2,749 $ 289 $15,000 $60,000
James O. Welch, Jr. $ 2,704 $ 356 $15,000 $59,000
J. Lawrence Wilson $ 2,749 $ 257 $15,000 $60,000
</TABLE>
(1) For the period reported in this table, Mr. Bogle was the Fund's Chief
Executive Officer, and therefore an "Interested Director."
(2) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service as Directors. Compensation amounts reported for Messrs.
Bogle and Brennan relate to their respective positions as Chief Executive
Officer and President of the Fund.
(3) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard Funds
(27 in the case of Mr. MacLaury).
INVESTMENT ADVISORY SERVICES
The Fund employs Wellington Management Company (the "Adviser") under an
investment advisory agreement dated April 1, 1996 to manage the investment and
reinvestment of the assets of the Fund and to continuously review, supervise and
administer the Fund's investment program. The Adviser discharges its
responsibilities subject to the control of the officers and Directors of the
Fund. The Adviser is a Massachusetts general partnership whose managing partners
are Robert W. Doran, Duncan M. McFarland and John R. Ryan.
The Fund pays the Adviser an advisory fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------------------------------------------------- ----
<S> <C>
First $1 billion.................................... .100%
Next $2 billion..................................... .050%
Next $7 billion..................................... .040%
Over $10 billion.................................... .030%
</TABLE>
Effective with the quarter ending March 31, 1997, the basic advisory fee
may be increased or decreased by applying an adjustment formula based on the
investment performance of the Fund relative to the investment performance of a
"composite index." This composite index comprises the Lehman Long-Term Corporate
AA or Better Bond Index (65%) and a 35% weighting in a blended equity composite
(75% Standard & Poor's/BARRA Value Index and 25% Standard & Poor's Utilities
Index).
11
<PAGE> 54
The following table sets forth the incentive/penalty adjustment to the
basic advisory fee payable by the Fund to WMC under the new advisory agreement:
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VERSUS THE COMPOSITE INDEX ADJUSTMENT
-----------------------------------------------------------
<S> <C>
Less than -3% -0.20 X Basic Fee*
Between -1.5% and -3% -0.10 X Basic Fee
Between -1.5% and 1.5% 0 X Basic Fee
Between +1.5% and +3% +0.10 X Basic Fee
More than +3% +0.20 X Basic Fee
</TABLE>
* For purposes of this calculation, the Basic Fee is calculated by applying the
quarterly rate based on the Annual Basic Fee Rate using average assets over
the same time period which the performance is measured.
Until the quarter ending March 31, 1999, the performance adjustment for the
Adviser will be calculated according to the following transition rules:
(a) Prior to December 31, 1996. For the quarters ending on or prior
to December 31, 1996, the performance adjustment will not be operable. The
advisory fee payable by the Fund shall be the quarterly base advisory fee,
calculated as set forth above.
(b) January 1, 1997 through March 31, 1999. Beginning with the
quarter ending March 31, 1997, and until the quarter ending March 31, 1999,
the Performance adjustment will be computed based upon a comparison of the
investment performance of the Fund and that of the Composite Index over the
number of months that have elapsed between April 1, 1996 and the end of the
quarter for which the fee is computed, and will be applied to the average
monthly assets over the same period. The number of percentage points by
which the investment performance of the Fund must exceed the investment
record of the Composite Index shall increase proportionately from .5 and 1,
respectively, for the twelve months ending March 31, 1997, to 1.5 and 3,
for the thirty-six months ending March 31, 1999.
(c) On and After March 31, 1999. For the quarter ending March 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 1.5 and 3. Upon request, the Fund will provide the Adviser access
to the documents substantiating the calculation of the performance
adjustment.
The investment performance of the Fund for such period, expressed as a
percentage of the net asset value per share of the Fund at the beginning of
such period, shall be the sum of: (i) the change in the net asset value per
share of the Fund during such period; (ii) the value of the cash
distributions per share of the Fund accumulated to the end of such period;
and (iii) the value of capital gains taxes per share paid or payable by the
Fund on undistributed realized long-term capital gains accumulated to the
end of such period. For this purpose, the value of distributions per share
of realized capital gains, of dividends per share paid from investment
income and of capital gains taxes per share paid or payable on
undistributed realized long-term capital gains shall be treated as
reinvested in shares of the Fund at the net asset value per share in effect
at the close of business on the record date for the payment of such
distributions and dividends and the date on which provision is made for
such taxes, after giving effect to such distributions, dividends and taxes.
The "investment record" of the Stock Index for the period, expressed
as a percentage of the Stock Index level at the beginning of the period,
shall be the sum of (i) the change in the level of the Stock Index during
the period and (ii) the value, computed consistently with the Stock Index,
of cash distributions having an ex-dividend date occurring within the
period made by companies whose securities comprise the Stock Index. The
"investment record" of the Bond Index for the period, expressed as a
percentage of the Bond Index level at the beginning of such period shall be
the sum of (i) the change in the level of the Bond Index during the period
and (ii) the value of the interest accrued or paid on the bonds included in
the Bond Index, assuming the reinvestment of such interest on a monthly
basis. Computation of these two components as the Combined Index shall be
made on the basis of 35% in the Stock Index and 65% in the Bond Index at
the beginning of each quarter.
12
<PAGE> 55
During the fiscal years ended December 31, 1993, 1994 and 1995 the
investment advisory fees paid by the Fund totaled approximately $3,848,000,
$4,457,000, and $4,349,000 respectively. These fees were paid pursuant to the
terms of a previous investment advisory agreement, which called for a higher
rate of fees.
The agreement continues in effect until March 31, 1998 and is renewable
thereafter, for successive one-year periods, only if such 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
contract 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 shall be
effected only if approved by the affirmative vote of a majority of the
outstanding voting securities of the Fund. The agreement is automatically
terminated if assigned, and may be terminated without penalty at any time (1)
either by vote of the Board of Directors of the Fund or by vote of its
outstanding voting securities on 60 days' written notice to the Adviser, or (2)
by the Adviser upon 90 days' written notice to the Fund.
The Fund's Board of Directors may, without the approval of shareholders,
provide for:
A. The employment of a new investment adviser pursuant to the terms of a
new advisory agreement, either as a replacement for an existing adviser or as an
additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same advisory
contract terms where a contract has been assigned because of a change in control
of the adviser.
Any such change will only be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the
adviser that would have normally been included in a
proxy statement.
The agreement is automatically terminated if assigned, and may be
terminated without penalty at any time (1) by vote of the Board of Directors of
the Fund on 60 days' written notice to WMC, or (2) by WMC upon 90 days' written
notice to the Fund.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the 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 portfolio securities for the Fund and directs
the Adviser to use its best efforts to obtain the best available price and most
favorable execution as to all transactions for the Fund. The 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 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
Adviser. The Adviser considers such information useful in the performance of its
obligations under the agreement but is unable to determine the amount by which
such services may reduce its expenses.
The investment advisory 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 Adviser may cause the Fund to pay
a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the Adviser to the Fund and the other Funds in the Group.
13
<PAGE> 56
Currently, it is the Fund's policy that the 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. The 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 Adviser and/or the Fund. However, the
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 through such firms.
However, the Fund may place portfolio orders with qualified broker-dealers who
recommend the Fund to other clients, or who act as agent in the purchase of the
Fund's shares for their clients, 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.
During the fiscal years ended December 31, 1993, 1994 and 1995 the Fund
paid $2,183,737, $2,062,311 and $1,787,291 in brokerage commissions,
respectively.
Some securities considered for investment by the Fund may also be
appropriate for other Funds and/or clients served by the Adviser. If purchase or
sale of securities consistent with the investment policies of the Fund and one
or more of these other Funds or clients serviced by the Adviser are considered
at or about the same time, transactions in such securities will be allocated
among the several Funds and clients in a manner deemed equitable by the Adviser.
PERFORMANCE MEASURES
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/Wellesley Income Fund, 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 INDEX -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN 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.
14
<PAGE> 57
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.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued fixed-rate,
nonconvertible US debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
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 of four high-grade, noncallable 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 -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 25% Standard & Poor's Utilities Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
RUSSELL 2000 STOCK INDEX -- consists of the smallest 2,000 stocks within the
Russell 3000; a widely-used benchmark for small capitalization common stocks.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
15
<PAGE> 58
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.)
LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
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.
APPENDIX -- DESCRIPTION AND RATINGS OF SECURITIES
I. DESCRIPTION OF BOND RATINGS
The Fund will invest primarily in investment grade bonds (i.e. those rated
at least Baa by Moody's Investors Service, Inc. or those rated BBB by Standard &
Poor's Corporation). In the event that a bond held by the Fund is downgraded,
the adviser may continue to hold such bond. Excerpts from Moody's Investors
Service, Inc. description of its four highest preferred bond ratings:
AAA -- judged to be the best quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds;
A -- possess many favorable investment attributes and are to be considered as
"upper medium grade obligations"; BAA -- considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and 3 indicates a
ranking toward the lower end of the category.
The following are excerpts from Standard & Poor's Corporation description
of its four highest stock ratings:
AAA -- highest grade obligations. Capacity to pay interest and repay
principal is extremely strong; AA -- also qualify as high grade obligations, a
very strong capacity to pay interest and repay principal and differs from
AAA -- issues only in small degree; A -- regarded as upper medium grade. They
have a strong capacity to pay interest and repay principal although it is
somewhat susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB -- regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment.
Standard & Poor's applies indicators "+", no character and "-" to its
rating categories. The indicators show relative standing within the major rating
categories.
II. FOREIGN INVESTMENTS
The Fund may invest in the securities (payable in U.S. dollars) of foreign
issues and in the securities of foreign branches of U.S. banks such as
negotiable certificates of deposit (Eurodollars). Because the Fund
16
<PAGE> 59
invests in such securities, investment in the Fund involves investment risks
that are different in some respects from an investment in a fund which invests
only in debt obligations of U.S. issuers. Such risks may include future
political and economic developments, the possible imposition of withholding
taxes on interest income payable on the securities held, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption or other restrictions by foreign governments which may
adversely affect the payment of principal and interest on securities held by the
Fund, difficulty in obtaining and enforcing court judgments abroad, the
possibility of restrictions on investments in other jurisdictions, reduced
levels of government regulation of securities markets in foreign countries, and
difficulties in effecting the repatriation of capital invested abroad. A Fund
will not purchase any such foreign security if, as a result, more than 20% of
the value of the Fund's total assets would be invested in such securities.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended December 31, 1995,
including the financial highlights for each of the five fiscal years in the
period ended December 31, 1995, appearing in the Vanguard/Wellesley Income Fund
1995 Annual Report to Shareholders, and the report thereon of Price Waterhouse
LLP, independent accountants, also appearing therein, are incorporated by
reference in this Statement of Additional Information. The Fund's 1995 Annual
Report to Shareholders is enclosed with this Statement of Additional
Information.
17
