<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
The first half of Wellesley Income Fund's 1996 fiscal year, which ended
on June 30, was a challenging and difficult period for income-oriented
investors. Stock and bond returns diverged during the period and, not
surprisingly, the -0.2% return of Wellesley Income Fund fell between the robust
positive returns provided by common stocks and the modest losses posted by
bonds.
The following table compares Wellesley Income Fund's total return (capital
change plus reinvested dividends) for the six-month period, with those of our
composite bond and stock market benchmark and the average income mutual fund.
Although we marginally outpaced the unmanaged composite index, our return was
well below that of the average income mutual fund, which turned in a gain of
+4.0%. The figures follow:
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURN
----------------
SIX MONTHS ENDED
JUNE 30, 1996
- -------------------------------------------------------
<S> <C>
WELLESLEY INCOME FUND -0.2%
- -------------------------------------------------------
COMPOSITE MARKET INDEX* -0.7%
AVERAGE INCOME MUTUAL FUND +4.0
- -------------------------------------------------------
</TABLE>
*Composite Market Index is 65% Lehman Long-Term Corporate AA or Better Bond
Index, 26% Standard & Poor's/BARRA Value Index, and 9% Standard & Poor's
Utility Index.
The Fund's total return is based on net asset values of $20.44 per share on
December 31, 1995, and $19.74 on June 30, 1996, adjusted to take into account
the reinvestment of our two quarterly dividends from net investment income
totaling $.56 per share, and a distribution of $.09 per share from realized net
capital gains. At June 30, 1996, our annualized dividend yield was 6.2%.
Wellesley Income Fund has traditionally maintained a portfolio of about 65%
in bonds and 35% in stocks. As such, we compare our performance to an unmanaged
composite bond/stock index, weighted 65% in the Lehman Long-Term Corporate AA
or Better Bond Index and 35% in a blended equity composite (26% Standard &
Poor's/BARRA Value Index and 9% Standard & Poor's Utility Index). This
composite bond/stock index reflects a change from our customary benchmark,
which was weighted 65% in the Lehman Long-Term Corporate Bond Index and 35% in
the Standard & Poor's 500 Composite Stock Price Index. In our view, our new
composite index better reflects the long-term strategic objectives of Wellesley
Income Fund; it is also the standard against which the Fund's performance is
measured in determining the amount of the fee paid to our investment adviser.
THE PERIOD IN REVIEW
The U.S. stock market continued to surge upward during the first half of our
Fund's fiscal year, albeit below the near-record pace that prevailed in 1995.
Even so, the advance was impressive, occurring as it did in the face of a sharp
rise in long-term interest rates.
While the stock market, as measured by the Standard & Poor's 500 Index,
chalked up a +10.1% return from January through June, the bond market slumped.
The price of the benchmark 30-year U.S. Treasury bond fell -12% during the half
year, as its yield rose from 6.0% at the beginning of the period to 7.0% at the
end. The Lehman Aggregate Bond Index, a good measure of the overall bond
market, provided a total return of -1.2% in the half year, earning income of
3.3% combined with a price decline of -4.5%. Short-term interest rates inched
higher during the period, with the rate on 90-day Treasury bills rising from
5.0% to 5.2%.
The primary reason for the divergence in the returns of stocks and bonds
appears to be differing responses by equity and bond investors to the
surprising strength of the U.S. economy. Faster-than-expected economic growth
during the first half of 1996 led stock investors to anticipate accelerated
growth in corporate earnings, even as bond investors worried about higher
inflation. It remains to be seen whether the bull market in stocks can continue
in the face of higher interest rates, which may provide heightened competition
for investors' dollars at a time when common stocks offer historically low
dividend yields.
(continued)
1
<PAGE> 2
Growth stocks led the way in the market advance, while higher yielding
stocks lagged. In this environment, Wellesley's equity target index rose by
+6.4% (about one-half the rise in the broader Standard & Poor's 500 Index), and
our bond index sagged. While we slightly outpaced the composite index, our
return fell short of that of the average income mutual fund. As we have often
noted, Wellesley's distinctive long-term, value-oriented characteristics often
result in significant differences between the Fund's returns and those of our
peers. Our equity holdings, for example, are dominated by large-cap stocks,
while our average competitor weights smaller-cap stocks more heavily. In
addition, our bond portfolio maintains a considerably longer average maturity
and higher quality than its competitors. In 1995, these strategies combined to
work in our favor, and we outpaced our peers by a wide margin (+28.9% versus
+21.7%). So far this year, on the other hand, both trends have reversed course,
and we relinquished a portion of that favorable margin.
IN SUMMARY
Six months ago in our Annual Report, following an extraordinarily bountiful
1995, we cautioned that the financial markets are not a "one-way street" and
that investors should prepare for the occasional rough patch by maintaining a
balanced portfolio of stock funds, bond funds, and money market funds. In the
first half of 1996, the weakness in the bond market was largely offset by the
solid performance of the stock market, but there will be other periods in which
the reverse is true. Therefore, we believe that our caution remains valid
today. So, too, does our comment about the major long-term risks of investing:
(1) failing to hold stocks and bonds at all because of their risks; and (2)
following an erratic and ever-changing course.
We pledge that Wellesley Income Fund will continue to steer a steady
course, remaining fully invested in stocks and bonds representing those
segments of the financial markets whose returns we emulate. We look forward to
reporting to you on the full 1996 fiscal year in our Annual Report six months
hence.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
John J. Brennan
President
July 19, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 3
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD/WELLESLEY INCOME FUND for the 25-year period ended June 30, 1996.
During the period illustrated, stock and bond prices fluctuated widely; these
results should not be considered a representation of the dividend income or
capital gain or loss that may be realized from an investment made in the Fund
today.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- ----------------------------------------------------------------------------------------------------------------------
Composite
Wellesley Income Fund Index**
Value with Income ----------------------------- -----------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1972 $12.66 $.26 $ .82 $ 13.78 + 2.9% + 6.8% + 9.7% +11.4%
- ----------------------------------------------------------------------------------------------------------------------
1973 11.40 -- .83 13.30 -10.0 + 6.5 - 3.5 - 4.4
- ----------------------------------------------------------------------------------------------------------------------
1974 9.84 -- .82 12.45 -13.7 + 7.3 - 6.4 -14.2
- ----------------------------------------------------------------------------------------------------------------------
1975 10.69 -- .82 14.62 + 8.6 + 8.9 + 17.5 +24.4
- ----------------------------------------------------------------------------------------------------------------------
1976 12.23 -- .88 18.03 +14.4 + 8.9 + 23.3 +22.0
- ----------------------------------------------------------------------------------------------------------------------
1977 11.81 -- .93 18.80 - 3.4 + 7.7 + 4.3 - 0.8
- ----------------------------------------------------------------------------------------------------------------------
1978 11.27 -- .96 19.47 - 4.6 + 8.2 + 3.6 + 2.2
- ----------------------------------------------------------------------------------------------------------------------
1979 10.98 -- 1.00 20.68 - 2.6 + 8.8 + 6.2 + 3.8
- ----------------------------------------------------------------------------------------------------------------------
1980 11.08 -- 1.14 23.14 + 0.9 +11.0 + 11.9 + 9.7
- ----------------------------------------------------------------------------------------------------------------------
1981 10.74 -- 1.25 25.14 - 3.1 +11.8 + 8.7 - 1.8
- ----------------------------------------------------------------------------------------------------------------------
1982 11.82 -- 1.26 31.00 +10.1 +13.2 + 23.3 +36.5
- ----------------------------------------------------------------------------------------------------------------------
1983 12.66 -- 1.31 36.77 + 7.1 +11.5 + 18.6 +13.3
- ----------------------------------------------------------------------------------------------------------------------
1984 13.28 -- 1.37 42.89 + 4.9 +11.7 + 16.6 +13.6
- ----------------------------------------------------------------------------------------------------------------------
1985 15.31 .10 1.38 54.64 +16.0 +11.4 + 27.4 +29.3
- ----------------------------------------------------------------------------------------------------------------------
1986 16.27 .47 1.33 64.66 + 9.2 + 9.1 + 18.3 +18.7
- ----------------------------------------------------------------------------------------------------------------------
1987 14.57 .38 1.04 63.42 - 8.1 + 6.2 - 1.9 + 2.8
- ----------------------------------------------------------------------------------------------------------------------
1988 15.26 -- 1.23 72.05 + 4.7 + 8.9 + 13.6 +12.6
- ----------------------------------------------------------------------------------------------------------------------
1989 16.82 .24 1.31 87.14 +11.8 + 9.1 + 20.9 +21.0
- ----------------------------------------------------------------------------------------------------------------------
1990 16.02 .08 1.30 90.41 - 4.3 + 8.1 + 3.8 + 3.1
- ----------------------------------------------------------------------------------------------------------------------
1991 18.08 -- 1.27 109.91 +12.9 + 8.7 + 21.6 +24.3
- ----------------------------------------------------------------------------------------------------------------------
1992 18.16 .21 1.21 119.44 + 1.6 + 7.1 + 8.7 + 8.7
- ----------------------------------------------------------------------------------------------------------------------
1993 19.24 .40 1.14 136.94 + 8.2 + 6.4 + 14.6 +12.4
- ----------------------------------------------------------------------------------------------------------------------
1994 17.05 .24 1.11 130.86 -10.2 + 5.8 - 4.4 - 3.3
- ----------------------------------------------------------------------------------------------------------------------
1995 20.44 .28 1.14 168.69 +21.6 + 7.3 + 28.9 +31.3
- ----------------------------------------------------------------------------------------------------------------------
1996 (6/30) 19.74 .09 .56 168.34 - 3.0 + 2.8 - 0.2 - 0.7
- ----------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +1,240.3% +1,071.2%
- ----------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +11.2% +10.6%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains
distributions for both the Fund and the Index.
** Composite index shown for comparative purposes is composed of the Lehman
Long-Term AA or Better Bond Index (65%), the Standard & Poor's/BARRA Value
Index (26%), and the Standard & Poor's Utility Index (9%).
Note: The initial net asset value was $12.56 on December 31, 1971. No
adjustment has been made for income taxes payable by shareholders on reinvested
income dividends and capital gains distributions.
3
<PAGE> 4
REPORT FROM THE INVESTMENT ADVISER
Intermediate- and long-term interest rates rose throughout the first half of
1996. The rise in rates contributed significantly to Wellesley Income Fund's
disappointing negative total return of -0.2% for the first six months of 1996.
The decline in total return for the Fund removed some of the luster from last
year's +28.9% return when long interest rates fell almost two percentage
points. In the last two and a half years, long-term U.S. Treasury rates have
roamed freely between 6% to 8% creating volatile returns for
interest-rate-sensitive funds such as Wellesley Income Fund.
As we have stated before, the performance of Wellesley Income Fund remains
extremely sensitive to the general direction of long-term interest rates
because of the long average maturity of the Fund's bonds and because of our
meaningful weighting in high-yielding, interest-rate-sensitive stocks. The rise
in rates especially hurt the bond segment of our portfolio this year, which had
a negative return thus far in 1996 of -4.0%, which is in line with the return
of -4.4% for the Lehman Long-Term Corporate AA or Better Bond Index, against
which we measure our performance. The Wellesley equities managed a positive
return of +6.7%, which is below the S&P 500's strong return of +10.1%.
The bond market has now priced 30-year U.S. Treasuries right in the middle
of that 6% to 8% range, at 7%. This rate seems generous for an inflation rate
slightly below 3%, but would represent "fair value" for a future inflation rate
close to 4%, which we do not currently foresee. Thus, bonds seem to offer some
attractiveness at the current levels. The rise in long rates occurred despite
the fact that the Federal Reserve lowered short rates in January. The economy
emerged from its mid-cycle slowdown a little sooner and somewhat stronger than
widely anticipated. Second quarter real GDP is estimated to have increased at
nearly twice the first quarter's annual rate of 2.2%. This acceleration was
driven by strong gains in consumer spending and by an end to the manufacturing
sector's year-long inventory correction.
Throughout the first half of the fiscal year ending December 31, 1996, the
Fund maintained its traditional posture of 60% to 65% of assets invested in
longer-term bonds of investment-grade quality, and 35% to 40% of assets
invested in dividend-paying equities. We kept the Fund's allocation to stocks
at the high end of its permitted range and do not anticipate a change in that
strategy going forward.
INVESTMENT OUTLOOK FOR SECOND HALF OF 1996
Stronger than expected second quarter growth has raised concerns about Federal
Reserve tightening and higher short-term rates. While the prospect for lower
short rates has certainly been eliminated, there are some strong reasons to
suggest a period of stable monetary policy as opposed to one of tightening.
The current Federal Reserve policy is already slightly restrictive. Consumer
spending gains are moderate, as consumers choose to borrow less and as lenders
pull back on the margin. Inflation numbers should be benign in the months
ahead, giving the Fed an additional reason to keep a steady monetary policy.
Fiscal policy is on hold until after the Presidential election in November.
Ironically, the policy gridlock is helping the budget deficit to improve. The
growth rate of corporate earnings is still decelerating although for this year
as a whole, we project an increase of 4%. Better economic performance
domestically and abroad should give us a stronger profits picture in 1997.
STRATEGY IN 1996
Our strategy remains consistent with that of previous years with an emphasis on
maintaining the upper end of the equity range of 40%. On the stock side of the
portfolio, we remain overweighted in the financial sector as we believe that
strong balance sheets and earnings should allow for strong dividend growth.
Though utilities are an important component of the portfolio, we continue to be
under our traditional weighting as growing competitive pressures warrant a
discount to historical valuation parameters. We remain committed to our
position in REITs, which appears to be the one income sector which is glaringly
undervalued. REITs provide an upfront yield of 7% to 8% and dividend growth of
more than 5% per year.
The majority of Wellesley's stocks are New York Stock Exchange listed
issues and generally have above-average yields. The average yield on our
4
<PAGE> 5
stocks, at 4.3%, is currently 100% higher than the yield on the S&P 500.
We will maintain the long average duration and maturity on the bond
segment since long rates appear fairly valued after having risen 1% this year.
High quality will be maintained. The Fund's bond investments will continue to
have excellent call protection which should lend sustainability to the Fund's
income stream, even though long-term bonds are subject to price fluctuations in
the short term. Currently, 92% of the bond portfolio is "single A" or better.
These assets currently have an average maturity of slightly over 17 years and
an average quality rating of "Aa."
The dominant theme which guides the investment strategy for Wellesley
Income Fund is our ongoing obligation to shareholders to achieve an attractive
absolute level of income with high-quality securities. Our long-term goal is to
achieve increases in Wellesley's dividend by purchasing stocks of strong
companies which are able to pass on to shareholders higher dividends generated
from rising earnings spurred by successful business strategies. Since we wrote
to you six months ago, the equity portfolio has had twenty-six dividend
increases. We avoid investments in bonds rated below investment-grade and in
stocks with ultra-high dividends which may not be sustainable over the longer
term.
SUMMARY
Currently, the financial markets are preoccupied with the future course of the
U.S. economy and are subject to volatile perception changes which are shaped by
the latest economic report. These emotional swings, in an alternating pattern,
can create investment opportunities. In our view, a balance of forces will
maintain economic growth near its sustainable rate of 2.5% and thus permit
Wellesley Income Fund to regain some of the ground it has lost this year. We
will continue to employ the same investment disciplines utilized for Wellesley
Income Fund over the past two decades.
Respectfully,
Earl E. McEvoy, Senior Vice President
John R. Ryan, Senior Vice President
Wellington Management Company
July 16, 1996
5
<PAGE> 6
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
June 30, 1996
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (38.8%)
- ----------------------------------------------------------------
ASSET-BACKED SECURITIES (.3%)
NationsBank Credit Card Trust
6.00%, 12/15/05 $20,000 $ 18,887
---------
- ----------------------------------------------------------------
FINANCE (10.1%)
Allstate Corp.
7.50%, 6/15/13 20,000 19,705
Banc One Corp.
7.75%, 7/15/25 30,000 29,803
Bank of Boston
6.625%, 12/1/05 15,000 14,194
6.875%, 7/15/03 15,000 14,583
Bank of New York
7.875%, 11/15/02 15,000 15,557
Boatmen's Bancshares Inc.
7.625%, 10/1/04 10,000 10,095
Chase Manhattan Corp.
8.625%, 5/1/02 20,000 21,487
Citicorp
MTN 6.65%, 12/15/10 25,000 23,371
7.125%, 9/1/05 15,000 14,827
7.625%, 5/1/05 10,000 10,176
Comerica, Inc.
7.125%, 12/1/13 15,000 13,833
CoreStates Capital
6.625%, 3/15/05 20,000 18,753
Fifth Third Bancorp
6.75%, 7/15/05 25,000 24,041
First Bank NA
7.55%, 6/15/04 8,000 8,100
First Bank System
6.625%, 5/15/03 10,000 9,627
7.625%, 5/1/05 7,500 7,593
First Chicago Corp.
7.625%, 1/15/03 15,000 15,344
First Union Corp.
6.00%, 10/30/08 15,000 13,266
7.50%, 4/15/35 11,000 11,364
Fleet Financial Group
6.875%, 3/1/03 30,000 29,490
General Electric Global Insurance
Holdings Corp.
7.00%, 2/15/26 25,000 23,224
General Motors Acceptance Corp.
7.00%, 9/15/02 30,000 29,838
J.P. Morgan & Co., Inc.
5.75%, 10/15/08 20,000 17,412
6.25%, 1/15/09 20,000 18,069
MBIA Inc.
7.00%, 12/15/25 10,000 9,182
Morgan Guaranty Trust
7.375%, 2/1/02 20,000 20,348
NBD Bank N.A.
6.25%, 8/15/03 20,000 18,829
National City Cleveland Bank
6.50%, 5/1/03 10,000 9,514
National City Corp.
7.20%, 5/15/05 20,000 19,743
NationsBank Corp.
7.25%, 10/15/25 20,000 18,637
7.75%, 8/15/04 20,000 20,559
Norwest Corp.
6.00%, 3/15/00 15,000 14,637
Norwest Financial Corp.
7.95%, 5/15/02 10,000 10,444
Republic New York Corp.
5.875%, 10/15/08 15,000 13,197
Society National Bank
7.85%, 11/1/02 7,500 7,691
Suntrust Banks
6.00%, 2/15/26 25,000 22,961
6.125%, 2/15/04 20,000 18,734
7.375%, 7/1/02 16,000 16,318
Wachovia Corp.
6.375%, 4/15/03 20,000 19,319
6.605%, 10/1/25 30,000 28,907
Wells Fargo & Co.
6.125%, 11/1/03 15,000 13,917
---------
SECTOR TOTAL 696,689
---------
- ----------------------------------------------------------------
INDUSTRIAL (13.4%)
Air Products & Chemicals, Inc.
7.375%, 5/1/05 15,000 15,150
8.75%, 4/15/21 12,550 14,060
Amoco Canada Petroleum Co.
6.75%, 9/1/23 25,000 21,938
Browning-Ferris Industries, Inc.
6.375%, 1/15/08 15,000 13,877
7.40%, 9/15/35 30,000 28,533
Burlington Northern Santa Fe Corp.
6.375%, 12/15/05 12,500 11,593
CPC International, Inc.
6.15%, 1/15/06 20,000 18,650
The Coca-Cola Co.
6.00%, 7/15/03 10,000 9,502
The Walt Disney Co.
6.75%, 3/30/06 15,000 14,515
E.I. du Pont de Nemours & Co.
8.25%, 1/15/22 30,000 30,740
Eastman Chemical Co.
7.25%, 1/15/24 25,000 23,539
Eaton Corp.
6.50%, 6/1/25 10,000 9,533
7.625%, 4/1/24 10,000 9,858
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Ford Motor Co.
8.875%, 1/15/22 $20,000 $ 22,344
General Electric Capital Corp.
8.125%, 5/15/12 10,000 10,700
General Electric Capital Services
7.50%, 8/21/35 14,000 13,985
General Motors Corp.
7.40%, 9/1/25 20,000 18,956
9.40%, 7/15/21 20,000 23,377
Georgia Pacific Corp.
8.625%, 4/30/25 10,000 9,964
9.125%, 7/1/22 10,000 10,373
9.50%, 5/15/22 10,000 10,592
Gillette Co.
5.75%, 10/15/05 20,000 18,099
6.25%, 8/15/03 10,000 9,598
Hubbell Inc.
6.625%, 10/1/05 10,000 9,636
International Paper Co.
7.625%, 1/15/07 15,000 15,221
Johnson & Johnson
6.73%, 11/15/23 20,000 18,419
Johnson Controls
8.20%, 6/15/24 6,000 6,127
Eli Lilly & Co.
7.125%, 6/1/25 40,000 38,292
Lockheed Corp.
6.75%, 3/15/03 7,000 6,860
McDonald's Corp.
7.05%, 11/15/25 23,300 21,605
7.375%, 7/15/33 8,500 8,107
Merck & Co.
6.30%, 1/1/26 30,000 26,173
Mobil Corp.
8.625%, 8/15/21 20,000 22,650
Monsanto Co.
8.20%, 4/15/25 20,000 20,704
Motorola Inc.
7.50%, 5/15/25 40,000 40,196
New York Times
8.25%, 3/15/25 26,000 26,700
Northrop-Grumman
9.375%, 10/15/24 15,000 16,127
Petro-Canada
7.875%, 6/15/26 11,840 11,974
Phillips Petroleum Co.
9.375%, 2/15/11 10,000 11,512
PPG Industries, Inc.
9.00%, 5/1/21 15,000 17,308
Praxair Inc.
6.75%, 3/1/03 25,000 24,182
Procter & Gamble Co.
9.36%, 1/1/21 30,000 35,537
Raytheon Co.
7.375%, 7/15/25 25,000 23,683
Rohm & Haas Co.
9.80%, 4/15/20 10,000 11,923
Talisman Energy
7.125%, 6/1/07 20,000 19,420
Texaco Capital
8.625%, 4/1/32 30,000 33,689
Union Pacific Corp.
7.00%, 2/1/16 20,000 18,518
United Parcel Service
8.375%, 4/1/20 10,000 11,036
Weyerhaeuser Co.
8.50%, 1/15/25 20,000 21,819
Whirlpool Corp.
9.00%, 3/1/03 10,000 10,976
Witco Chemical Corp.
6.875%, 2/1/26 15,000 13,602
Worthington Industries Inc.
7.125%, 5/15/06 15,000 14,881
---------
SECTOR TOTAL 926,353
---------
- ----------------------------------------------------------------
UTILITIES (15.0%)
AT&T Corp.
7.125%, 1/15/02 30,000 30,375
8.625%, 12/1/31 40,000 41,961
Arizona Public Service Co.
6.625%, 3/1/04 10,000 9,529
Baltimore Gas & Electric
7.25%, 7/1/02 15,000 15,154
8.375%, 8/15/01 10,000 10,631
BellSouth Telecommunications
6.25%, 5/15/03 12,000 11,441
7.00%, 10/1/25 10,000 9,436
8.25%, 7/1/32 35,000 36,083
Carolina Power & Light Co.
6.875%, 8/15/23 10,000 9,021
Chesapeake & Potomac
Telephone Co., MD
7.15%, 5/1/23 20,000 18,925
Chesapeake & Potomac
Telephone Co., VA
7.875%, 1/15/22 15,000 15,547
Cincinnati Gas & Electric Co.
6.90%, 6/1/25 9,500 9,164
7.20%, 10/1/23 15,100 13,754
Coastal Corp.
7.75%, 10/15/35 10,000 9,658
8.125%, 9/15/02 10,000 10,426
9.75%, 8/1/03 11,275 12,710
10.00%, 2/1/01 27,000 29,942
Commonwealth Edison Co.
7.375%, 9/15/02 10,000 10,003
</TABLE>
7
<PAGE> 8
STATEMENTS OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Consolidated Edison Co. of NY
6.375%, 4/1/03 $20,000 $ 19,260
Duke Power Co.
5.875%, 6/1/01 19,900 18,878
7.00%, 7/1/33 30,000 27,251
Enron Corp.
6.875%, 10/15/07 20,000 19,236
7.00%, 8/15/23 10,000 8,810
Florida Power & Light Co.
5.375%, 4/1/00 12,500 11,890
GTE Florida, Inc.
6.31%, 12/15/02 20,000 19,206
GTE Southwest, Inc.
6.00%, 1/15/06 10,000 9,203
Houston Lighting & Power Co.
7.50%, 7/1/23 20,000 19,207
Illinois Bell Telephone Co.
6.625%, 2/1/25 13,575 11,988
7.25%, 3/15/24 20,000 19,113
Illinois Power Co.
5.625%, 4/15/00 10,000 9,547
6.50%, 8/1/03 10,000 9,474
Iowa-Illinois Gas & Electric Co.
6.95%, 10/15/25 5,000 4,499
Kentucky Utilities
7.92%, 5/15/07 5,000 5,202
MCI Communications Corp.
7.50%, 8/20/04 15,000 15,318
Michigan Bell Telephone Co.
7.50%, 2/15/23 35,000 33,993
New Jersey Bell Telephone Co.
8.00%, 6/1/22 35,000 36,985
New York Telephone Co.
6.50%, 3/1/05 30,000 28,631
Northern States Power Co.
6.375%, 4/1/03 8,000 7,664
7.125%, 7/1/25 30,000 28,653
Ohio Bell Telephone Co.
6.125%, 5/15/03 15,000 14,255
Oklahoma Gas & Electric Co.
7.30%, 10/15/25 15,000 13,983
Pacific Bell Telephone Co.
7.125%, 3/15/26 25,000 23,616
Pacific Gas & Electric Co.
8.25%, 11/1/22 25,000 25,115
PacifiCorp
6.625%, 6/1/07 10,000 9,463
6.71%, 1/15/26 10,000 8,871
Pennsylvania Power & Light Co.
6.50%, 4/1/05 15,000 14,169
6.75%, 10/1/23 9,000 7,895
Philadelphia Electric Co.
6.50%, 5/1/03 30,000 28,825
Southern California Edison Co.
6.25%, 6/15/03 6,050 5,744
Southern California Gas Co.
6.875%, 11/1/25 15,000 13,349
Southwestern Bell Telephone Co.
7.20%, 10/15/26 32,500 30,562
7.25%, 7/15/25 37,500 35,239
Southwestern Public Service Co.
7.25%, 7/15/04 10,000 9,990
8.20%, 12/1/22 12,500 13,059
Texas Utilities Co.
6.75%, 7/1/05 10,000 9,580
8.00%, 6/1/02 10,000 10,417
9.75%, 5/1/21 10,000 11,106
Union Electric Co.
6.875%, 8/1/04 10,000 9,823
U S WEST Communications Group
7.50%, 6/15/23 45,000 42,876
Virginia Electric & Power Co.
6.00%, 8/1/02 10,000 9,470
6.75%, 10/1/23 20,000 17,727
Wisconsin Public Service Co.
7.30%, 10/1/02 6,700 6,794
---------
SECTOR TOTAL 1,039,696
---------
- ----------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $2,735,113) 2,681,625
- ----------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR DENOMINATED) (2.4%)
- ----------------------------------------------------------------
ABN Amro Bank NV
(Chicago Branch)
7.55%, 6/28/06 25,000 25,410
BHP Finance USA
6.69%, 3/1/06 20,000 19,111
Italy Global Bond
6.875%, 9/27/23 25,000 22,543
Province of British Columbia
6.50%, 1/15/26 30,000 26,823
Province of Manitoba
6.125%, 1/19/04 7,000 6,595
8.875%, 9/15/21 10,000 11,520
Province of Ontario
6.00%, 2/21/06 25,000 22,897
7.75%, 6/4/02 15,000 15,653
Province of Saskatchewan
8.50%, 7/15/22 19,000 20,910
- ----------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $179,112) 171,462
- ----------------------------------------------------------------
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
----------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY
OBLIGATIONS (17.6%)
- -----------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (6.4%)
U.S. Treasury Bond
7.25%, 5/15/16 $175,000 $ 179,102
12.00%, 8/15/13 100,000 140,969
U.S. Treasury Note
5.75%, 8/15/03 125,000 119,043
-----------
SECTOR TOTAL 439,114
-----------
- -----------------------------------------------------------------
AGENCY BONDS & NOTES (.4%)
Federal Home Loan Mortgage Corp.
8.14%, 9/29/04 25,000 25,809
-----------
- -----------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (10.8%)
Government National
Mortgage Assn.
6.50%, 6/15/08-8/15/25 468,416 439,042
7.00%, 4/15/17-10/15/23 91,472 88,374
7.50%, 1/15/23-3/15/26 99,710 98,459
8.00%, 1/15/24-3/15/26 122,693 124,083
-----------
SECTOR TOTAL 749,958
-----------
- -----------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS
(Cost $1,209,678) 1,214,881
- -----------------------------------------------------------------
COMMON STOCKS (39.2%)
- -----------------------------------------------------------------
<CAPTION>
Shares
-------
<S> <C> <C>
BASIC MATERIALS (3.9%)
Dow Chemical Co. 670,000 50,920
E.I. du Pont de Nemours & Co. 386,200 30,558
Kimberly-Clark Corp. 770,000 59,483
Union Camp Corp. 1,314,900 64,101
Weyerhaeuser Co. 650,000 27,625
Witco Chemical Corp. 971,400 33,392
-----------
SECTOR TOTAL 266,079
-----------
- -----------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (.4%)
Cooper Industries, Inc. 600,000 24,900
-----------
- -----------------------------------------------------------------
CONSUMER CYCLICAL (3.0%)
Chrysler Corp. 578,100 35,842
Ford Motor Co. 2,631,000 85,179
J.C. Penney Co., Inc. 1,582,600 83,086
-----------
SECTOR TOTAL 204,107
-----------
- -----------------------------------------------------------------
CONSUMER STAPLES (1.6%)
American Brands, Inc. 890,000 40,384
Flowers Industries, Inc. 2,609,100 42,071
Universal Corp. 1,158,600 30,703
-----------
SECTOR TOTAL 113,158
-----------
- -----------------------------------------------------------------
ENERGY (6.1%)
Amoco Corp. 1,285,000 93,002
Atlantic Richfield Co. 518,000 61,383
Metrogas ADS 454,000 4,795
Questar Corp. 570,000 19,380
Royal Dutch Petroleum Co. ADR 659,500 101,398
Sun Co., Inc. 281,833 8,561
Texaco, Inc. 1,154,200 96,809
USX-Marathon Group 1,922,000 38,680
-----------
SECTOR TOTAL 424,008
-----------
- -----------------------------------------------------------------
FINANCIAL (11.3%)
BankAmerica 863,700 65,425
Bay Apartment
Communities, Inc. REIT 483,300 12,505
Boatmen's Bancshares, Inc. 1,254,000 50,003
(1)CBL & Associates Properties,
Inc. REIT 1,050,400 23,503
(1)Colonial Properties REIT 943,200 22,873
CoreStates Financial Corp. 3,238,200 124,671
DeBartolo Realty Corp. REIT 1,000,000 16,125
Equity Residential
Properties Trust REIT 383,200 12,598
First Union Corp. 1,503,200 91,507
General Growth Properties REIT 702,600 16,950
(1)Home Properties of
New York REIT 529,300 10,719
IPC Holdings Ltd. 722,500 14,540
J.P. Morgan & Co., Inc. 218,344 18,477
JP Realty Inc. REIT 500,000 10,688
Keycorp 2,129,050 82,501
Kimco Realty Corp. 400,000 11,300
The Macerich Co. REIT 417,000 8,757
National City Corp. 430,100 15,107
NationsBank Corp. 446,000 36,851
Nationwide Health Properties, Inc. 250,000 5,281
Ohio Casualty Corp. 487,000 16,923
PNC Bank Corp. 1,356,800 40,365
Paragon Group, Inc. REIT 561,000 9,186
Post Properties, Inc. REIT 329,600 11,660
Roc Communities, Inc. REIT 417,600 9,970
Simon Property Group REIT 314,200 7,698
Sun Communities, Inc. REIT 311,700 8,377
(1)Town & Country Trust REIT 947,000 12,429
Urban Shopping Centers REIT 600,700 14,267
-----------
SECTOR TOTAL 781,256
-----------
- -----------------------------------------------------------------
HEALTH CARE (1.5%)
Bristol-Myers Squibb Co. 1,151,000 103,590
-----------
- -----------------------------------------------------------------
UTILITIES (10.7%)
BCE, Inc. 1,286,200 50,805
Bell Atlantic Corp. 200,000 12,750
BellSouth Corp. 422,000 17,882
</TABLE>
9
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------
<S> <C> <C>
Central & South West Corp. 1,339,000 $ 38,831
CINergy Corp. 487,972 15,615
Consolidated Edison Co. of
New York 527,400 15,426
DQE Inc. 1,207,050 33,194
DTE Energy Co. 1,238,200 38,229
Edison International 1,266,000 22,313
Equitable Resources, Inc. 1,050,000 29,663
GTE Corp. 1,227,700 54,940
General Public Utilities Corp. 847,400 29,871
National Fuel & Gas Co. 577,100 20,776
Niagara Mohawk Power Corp. 20,900 162
NICOR, Inc. 862,100 24,462
Nova Scotia Power 718,300 6,575
NYNEX Corp. 1,486,772 70,622
Pacific Enterprises 505,000 14,961
Pacific Gas & Electric Co. 2,817,200 65,500
PacifiCorp 1,997,400 44,442
PECO Energy Corp. 396,200 10,301
Public Service Co. of Colorado 349,900 12,859
Rochester Gas & Electric Corp. 531,600 11,429
Sierra Pacific Resources 744,300 18,887
Southern Co. 1,176,000 28,959
Unicom Corp. 867,207 24,173
U S WEST Communications Group 765,000 24,384
---------
SECTOR TOTAL 738,011
---------
- ----------------------------------------------------------------
MISCELLANEOUS (.7%)
Minnesota Mining &
Manufacturing Co. 737,700 50,901
---------
- ----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,185,258) 2,706,010
- ----------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (.8%)
- ----------------------------------------------------------------
H.F. Ahmanson 6.00% 516,000 30,573
Reynolds Metals $3.31 267,600 12,443
* Salomon Inc. 7.625% 262,900 7,295
Santa Fe Energy 8.25% 609,100 6,624
- ----------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $51,087) 56,935
- ----------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.0%)
- ----------------------------------------------------------------
<CAPTION>
Face
Amount
(000)
------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations in
a Pooled Cash Account
5.35%, 7/1/96
(Cost $66,446) $66,446 66,446
- ----------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(Cost $6,426,694) 6,897,359
- ----------------------------------------------------------------
<CAPTION>
Market
Value
(000)+
- ----------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (.2%)
- ----------------------------------------------------------------
Other Assets--Notes C and E $ 113,694
Liabilities--Note E (102,896)
---------
10,798
- ----------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------
Applicable to 349,967,581 outstanding
$.10 par value shares
(authorized 450,000,000 shares) $6,908,157
- ----------------------------------------------------------------
NET ASSET VALUE PER SHARE $19.74
- ----------------------------------------------------------------
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
(1)Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of such company.
ADR--American Depository Receipt.
ADS--American Depository Share.
MTN--Medium-Term Note.
REIT--Real Estate Investment Trust.
- ----------------------------------------------------------------
AT JUNE 30, 1996, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT PER
(000) SHARE
--------- -------
<S> <C> <C>
PAID IN CAPITAL $6,326,628 $18.08
UNDISTRIBUTED NET
INVESTMENT INCOME 14,220 .04
ACCUMULATED NET
REALIZED GAINS 96,644 .28
UNREALIZED APPRECIATION
OF INVESTMENTS--NOTE D 470,665 1.34
- ----------------------------------------------------------------
NET ASSETS $6,908,157 $19.74
- ----------------------------------------------------------------
</TABLE>
10
<PAGE> 11
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
(000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,264
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,592
- ---------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,856
- ---------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee--Note B . . . . . . . . . . . . . . . . . . . . . . 1,809
The Vanguard Group--Note C . . . . . . . . . . . . . . . . . . . . . . . . .
Management and Administrative . . . . . . . . . . . . . . . . . . . . . $7,905
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . 733 8,638
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . . . ------ 261
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . . 55
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 12
- ---------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,058
Expenses Paid Indirectly--Note C . . . . . . . . . . . . . . . . . . (217)
- ---------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 10,841
- ---------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . 200,015
- ---------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . . . 97,403
- ---------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . (318,919)
- ---------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations . . . . . . $ (21,501)
=====================================================================================================================
</TABLE>
11
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1996 December 31, 1995
(000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,015 $ 382,105
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,403 141,798
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . . . . . (318,919) 1,096,772
- --------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations . . (21,501) 1,620,675
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (195,910) (383,294)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,752) (95,611)
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . (227,662) (478,905)
- --------------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS (CHARGES)--Note A . . . . . . . . . . . . . . . . . . . . (1,837) 71
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573,644 963,895
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . . . . . 193,675 409,690
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (788,898) (1,015,317)
- --------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions . . . . . . (21,579) 358,268
- --------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . . . . (272,579) 1,500,109
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,180,736 5,680,627
- --------------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,908,157 $ 7,180,736
==========================================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,743 51,153
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . 9,794 21,137
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39,831) (54,185)
- --------------------------------------------------------------------------------------------------------------------------
(1,294) 18,105
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
SIX MONTHS ENDED ---------------------------------------------
For a Share Outstanding Throughout Each Period JUNE 30, 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $ 20.44 $17.05 $19.24 $18.16 $18.08 $16.02
INVESTMENT OPERATIONS ------ ------ ------ ------ ------ ------
Net Investment Income . . . . . . . . . . . . . . . .57 1.13 1.11 1.14 1.21 1.27
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . (.62) 3.68 (1.95) 1.48 .29 2.06
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . (.05) 4.81 (.84) 2.62 1.50 3.33
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.56) (1.14) (1.11) (1.14) (1.21) (1.27)
Distributions from Realized Capital Gains . . . . . (.09) (.28) (.24) (.40) (.21) --
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.65) (1.42) (1.35) (1.54) (1.42) (1.27)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $ 19.74 $20.44 $17.05 $19.24 $18.16 $18.08
=======================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . -0.23% +28.91% -4.44% +14.65% +8.67% +21.57%
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . $ 6,908 $7,181 $5,681 $6,011 $3,178 $1,934
Ratio of Total Expenses to Average Net Assets . . . . . .30%* .35% .34% .33% .35% .40%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 5.66%* 5.96% 6.16% 5.79% 6.50% 7.08%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 34%* 32% 32% 21% 21% 28%
Average Commission Rate Paid . . . . . . . . . . . . . $.0215+ N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
+ Represents total commissions paid on portfolio securities divided by the
total number of shares purchased or sold on which commissions are charged.
This disclosure is required by the SEC beginning in 1996.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
Vanguard/Wellesley Income Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company. Certain of the Fund's
investments are in long-term corporate debt instruments; the issuers' abilities
to meet these obligations may be affected by economic developments in their
respective industries.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Common stocks listed on an exchange are valued at the
latest quoted sales prices as of the close of the New York Stock Exchange
(generally 4:00 PM) on the valuation date; such securities not traded are
valued at the mean of the latest quoted bid and asked prices; those
securities not listed are valued at the latest quoted bid prices. Bonds are
valued utilizing the latest bid prices and on the basis of a matrix system
(which considers such factors as security prices, yields, maturities, and
ratings), both as furnished by independent pricing services. Temporary cash
investments are valued at cost which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital shares issued
and redeemed, equivalent to undistributed net investment income per share
on the date of the transaction, is credited or charged to undistributed
income. As a result, undistributed income per share is unaffected by Fund
share sales or redemptions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group, transfers uninvested cash balances into a Pooled Cash Account, the
daily aggregate of which is invested in repurchase agreements secured by
U.S. Government obligations. Securities pledged as collateral for
repurchase agreements are held by a custodian bank until maturity of each
repurchase agreement. Provisions of each agreement require that the market
value of this collateral is sufficient in the event of default; however, in
the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Discounts and premiums on debt securities purchased are
amortized to interest income over the lives of the respective securities.
B. Under the terms of a contract expiring April 1, 1997, the Fund pays
Wellington Management Company an investment advisory fee calculated at an
annual percentage rate of average net assets of the Fund. For the six months
ended June 30, 1996, the investment advisory fee represents an effective annual
rate of .05 of 1% of average net assets after giving effect to a fee waiver of
$342,000 (.01% of average net assets) for the period January 1, 1996, to March
31, 1996.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At June 30, 1996,
the Fund had contributed capital of $708,000 to Vanguard (included at cost in
Other Assets), representing 3.5% of Vanguard's capitalization. The Fund's
directors and officers are also directors and officers of Vanguard.
14
<PAGE> 15
Vanguard has requested the Fund's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate or credit to the Fund a portion of the commissions
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the six months ended June 30, 1996, directed
brokerage arrangements reduced the Fund's expenses by $217,000 (an annual rate
of .01 of 1% of average net assets).
D. During the six months ended June 30, 1996, the Fund made purchases of
$690,093,000 and sales of $648,073,000 of investment securities other than U.S.
Government securities and temporary cash investments. Purchases and sales of
U.S. Government obligations were $462,126,000 and $407,958,000, respectively.
At June 30, 1996, net unrealized appreciation for financial reporting and
Federal income tax purposes aggregated $470,665,000, of which $630,222,000
related to appreciated securities and $159,557,000 related to depreciated
securities.
E. The market value of securities on loan to broker/dealers at June 30, 1996,
was $11,638,000, for which the Fund had received as collateral cash of
$11,844,000.
15
<PAGE> 16
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-2739 1 (800) 662-7447
This Report has been prepared for shareholders and may be distributed
to others only if preceded or accompanied by a current prospectus.
All Funds in the Vanguard Family are offered by prospectus only.
Q272-6/96
VANGUARD
WELLESLEY
INCOME FUND
SEMI-ANNUAL REPORT
JUNE 30, 1996
