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[PHOTO]
VANGUARD/
WELLESLEY
INCOME FUND
Annual Report
December 31, 1996
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation,of past, present, and future. The montage includes
a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings
named after Nelson's warships (Victory, Majestic, and Goliath are three shown),
to our artwork and ornamental compass rose.
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[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
4
Report From
The Adviser
6
Portfolio
Profile
8
Performance
Summary
12
Financial
Statements
13
Report Of
Independent
Accountants
23
Directors And
Officers
INSIDE BACK COVER
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[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
FELLOW SHAREHOLDER,
In a year of clear contrasts in the stock and bond markets, Vanguard/Wellesley
Income Fund achieved a total return of +9.4% during 1996. Stocks provided
extraordinarily high returns for the second consecutive year, while bonds,
which posted big gains in 1995, provided only meager returns.
The following table compares the Fund's total return (capital change plus
reinvested dividends) with those of unmanaged indexes of the two markets in
which we invest: for bonds, the Lehman Brothers Long-Term Corporate AA or
Better Bond Index; and for stocks, the Standard & Poor's 500 Composite Stock
Price Index. The table also presents the return on a hypothetical portfolio
constructed from the Indexes and weighted to mirror the Fund's typical balance
of 65% bonds and 35% stocks. While its conservative portfolio of course
substantially lagged the stock market's advance, Wellesley outpaced this tough
standard by a healthy margin of 2.6 percentage points.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURN
YEAR ENDED
DECEMBER 31, 1996
- -----------------------------------------------------------------
<S> <C>
Vanguard/Wellesley Income Fund + 9.4%
- -----------------------------------------------------------------
Lehman Long-Term Corporate
AA or Better Bond Index + 1.4%
- -----------------------------------------------------------------
S&P 500 Index +23.0%
- -----------------------------------------------------------------
Composite Bond/Stock Index* + 6.8%
- -----------------------------------------------------------------
</TABLE>
*65% Lehman Long-Term Corporate AA or Better Bond Index, 26% S&P/BARRA Value
Index, and 9% S&P Utility Index.
The Fund's return is based on an increase in net asset value from $20.44
per share on December 31, 1995, to $20.51 per share on December 31, 1996, with
the latter figure adjusted for dividends of $1.16 per share paid from net
investment income and distributions totaling $0.60 per share paid from net
realized capital gains. Wellesley's dividend yield on December 31, 1996, was
5.8%.
1996 PERFORMANCE OVERVIEW
Interest rates fluctuated substantially during 1996, rising early in the year
along with estimates of the economy's strength, then declining in the autumn as
estimates of economic growth abated--and with them, inflation anxieties.
However, interest rates closed the year with an upward spike in December. The
yield on the benchmark 30-year U.S. Treasury bond finished the year at 6.6%--up
six-tenths of a percentage point from 6.0% at the end of 1995--driving the
price of the long bond down by nearly -8%. For the full year, the Lehman
Brothers Aggregate Bond Index, a benchmark for the entire U.S. bond market
(long and short maturities alike), provided a return of +3.6%.
In contrast, the U.S. stock market flourished in 1996, thanks to a nearly
ideal environment of moderate economic growth, rising corporate profits, and
continued low inflation. The S&P 500 Index provided positive returns in all but
two months (July and December) en route to a total return of +23.0% for the
year; however, the equity market did not reward all stocks equally. Wall
Street's motto seemed to be "bigger is better," as investors favored familiar,
large-capitalization stocks over smaller companies. Because of this large-cap
bias, the S&P 500 Index led broader measures of the stock market. Indeed,
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the rest of the market, as measured by the Wilshire 4500 Equity Index, provided
a more modest return of +17.2%.
Compared with such gains, Wellesley's +9.4% return may seem paltry. In
reality, given our policy of investing approximately 65% of the Fund's assets
in long-term, high-quality bonds and about 35% in dividend-paying common
stocks, it was an excellent result. The Fund's bond holdings provided a total
return of +1.9%, a bit ahead of the +1.4% return on its (long-term) bond market
benchmark. This slight performance edge was due to our somewhat shorter
average maturity--17 years versus 25 years for the Lehman Long-Term Corporate
AA or Better Bond Index--during a period when rising interest rates caused
sharp declines in the prices of long-term bonds.
Wellesley's stock holdings returned +24.2% in 1996, an outstanding result
that was not only better than the S&P 500 Index return but also better than 85%
of all equity mutual funds. Our margin over our composite index's stock
component (comprising 26% S&P/BARRA Value Index and 9% S&P Utility Index) was
due primarily to excellent overall stock selection, especially in the financial
sector, by our adviser, Wellington Management Company, LLP. The year's returns
were particularly impressive given that we held no stocks in the
best-performing sector, technology, and had a heavy stake (averaging one-fourth
of our equities) in the worst-performing sector, utilities. Our traditional
conservative policy--calling for an equity position targeted at 35% of
assets--of course limited the impact of our adviser's fine performance in the
strong bull market, even as it will add to our stability when stocks decline.
Although we performed admirably versus the composite index, we trailed the
+11.5% return achieved by the average income-oriented mutual fund. As we said
in our Annual Report for 1995--a year in which our gain of more than seven
percentage points was above that of the average income fund--our competitors
use quite disparate strategies so "it is probably best not to place too much
emphasis on the results of any one year." That said, two specific factors
contributed to our shortfall versus the group: (1) our investment policy, which
happens to result in a lower-than-average commitment to common stocks; and (2)
the fact that many of our competitors hold bonds with lower credit quality and
somewhat shorter maturities than Wellesley. The relatively strong economy in
1996 made it a good year to hold shorter-term and lower-rated bonds; in the
longer run, we believe that our strategy will provide a better combination of
risk and return.
Our investment objective is to produce a high level of current income
without undue risk; we accomplished this objective in 1996. Our income
dividends totaling $1.16 per share represented an increase of +1.8% from the
$1.14 in dividends for 1995. At year-end, Wellesley's dividend yield was 5.8%,
a remarkable contrast to the average yield of 1.5% for the average stock mutual
fund.
LONG-TERM PERFORMANCE OVERVIEW
In the decade ended December 31, 1996, Wellesley compiled a solid lead over the
average income fund. The table on page 3 presents the average annual returns of
Wellesley, our average competitor, and our composite index. It also shows the
ending values of hypothetical $10,000 investments made in each a decade ago.
Our positive margin of 1.4 percentage points per year may seem small, but
it looms large over ten years. A $10,000 investment in Wellesley would, with
dividends and capital gains distributions reinvested, have grown to $28,548, a
margin of $3,364 over the $25,184 that would have been achieved by the average
competitor. Our advantage amounts to fully one-third of the original stake.
Roughly one-half of this advantage was earned through
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the skill of our investment adviser; the other half through our large cost
advantage. Our expenses for administration, fund operations, and investment
management totaled only 0.31% of average assets for the year, less than
one-third the 1.09% cost of the average income-oriented fund.
Our benchmark composite index, of course, exists only on paper, and
therefore incurs no expenses at all. This more than explains its tiny
performance lead of 0.1% per year over Wellesley for the decade.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED DECEMBER 31, 1996
----------------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Vanguard/Wellesley Income Fund +11.1% $28,548
- -----------------------------------------------------------------------------------------
Average Income Fund + 9.7% $25,184
- -----------------------------------------------------------------------------------------
Composite Bond/Stock Index +11.2% $29,014
- -----------------------------------------------------------------------------------------
</TABLE>
IN SUMMARY
Since we began operations in 1970--more than a quarter-century ago--Wellesley
Income Fund has been dedicated to emphasizing income return and relative
capital stability, even at the expense of sacrificing maximum participation in
rising stock markets. Our yield remains generous; our limited capital
appreciation in the current bull market--a manifestation of our ongoing
moderate volatility--is the price paid to reach that conservative goal.
Most mutual fund investors understand that volatility risk is a measure of
how much an investment can fluctuate in value over a given period of time. But
many equity fund investors today have experienced mainly "upside volatility."
The U.S. stock market has been rising--with only a few brief setbacks--for
nearly 15 years. Bond returns also have been unusually high over much of this
period.
Against this backdrop, it seems appropriate to step back and assess the
outlook for the financial markets. While no one can accurately predict what
will happen over the next decade--or even the next year--it seems unlikely that
stocks or bonds will enjoy a repeat of the exceptional returns of this
remarkable era. Indeed, there are sure to be some rough seas ahead.
Nonetheless, we believe that investors who maintain a balanced investment
portfolio--the essence of Wellesley's investment approach--will overcome the
volatility of the financial markets and be rewarded. "Stay the course" has
proved wise counsel in the past, and we see no reason why it should not
continue to be in the future.
/s/ JOHN C. BOGLE /s/ JOHN BRENNAN
Chairman of the Board President
January 22, 1997
3
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THE MARKETS IN PERSPECTIVE: YEAR ENDED DECEMBER 31, 1996
[PHOTO]
U.S. EQUITY MARKETS
The stock market in 1996 could not match its astonishing 37.6% return of the
previous year--but it made a good run, with the Standard & Poor's 500 Composite
Stock Price Index up by 23.0%. When the two years are considered cumulatively,
the S&P 500 Index has risen 69.2%. Not surprisingly, many of the factors that
drove the market higher in 1995 were still at work: Once again, steady economic
growth, low inflation, and solid earnings growth were powerful motivators.
The market's gains, however, were far from evenly distributed. Investors
strongly favored larger companies, such as those that dominate the S&P 500
Index. In fact, even within the Index, it was the largest companies that
prevailed: The 50 biggest (which account for roughly half the Index's market
value) gained 26.7% in 1996, compared with an increase of 23.0% for the entire
Index. Looking at the S&P 500 Index's performance by sector, technology stocks
were strongest, closing the year with a 42.5% gain. Financial stocks were a
close second, gaining 35.5%. Utilities, plagued early in the year by higher
interest rates and a rapidly changing competitive landscape, eked out a meager
1.8% return, the lowest within the Index.
With the largest companies performing so well, most smaller issues could
not keep pace. This was evidenced in the considerable difference between the
23.0% return of the S&P 500 Index and the 16.5% return of the Russell 2000
Index of small stocks. Even for the smaller companies, there was a significant
range of performance among sectors. Energy stocks led the Russell 2000 Index
with a 62.0% gain for the year. Here, rising prices, limited exposure to the
cyclical refining business, and a reduced number of competitors created a
favorable environment for the stocks. At the other end of the spectrum were
health-care stocks, which showed a loss of -3.3%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1996
-------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 23.0% 19.7% 15.2%
Russell 2000 Index 16.5 13.7 15.6
MSCI-EAFE Index 6.4 8.6 8.5
- -----------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.6% 6.0% 7.0%
Lehman 10-Year Municipal
Bond Index 4.5 5.3 7.5
Salomon 90-Day U.S. Treasury Bills 5.3 5.1 4.4
- -----------------------------------------------------------------------------
Other
Consumer Price Index 3.3% 2.8% 2.8%
- -----------------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
At year-end, the yield on the 30-year U.S. Treasury bond was 6.64%, noticeably
higher than its 5.95% level on December 31, 1995. The change in rates during
1996 reflects increased concern about the prospects for rising inflation, due
to indications of greater than expected strength in the economy.
When the year began, the general expectation was that modest economic
growth and benign inflation would continue, giving the Federal Reserve no
reason to boost inter-
4
<PAGE> 7
est rates. That complacency was shattered by an exceptionally strong February
jobs report, the first of what turned out to be a succession of signs that in
fact the economy was growing at a much faster--and potentially
inflation-inducing--pace. The bond market reacted swiftly to meet the perceived
risk: The 30-year Treasury bond's yield jumped from just below 6.0% at the end
of 1995 to 6.7% in late March. The next several months saw a consistent pattern
in which bond yields rose on the Friday of the jobs-report release only to fall
back by the middle of the month. Hindsight shows that most of the worry was
wasted: Inflation, as measured by the Consumer Price Index, remained near an
annualized rate of 3.3%. But increasing signs of growth in late November and
December reignited inflation concerns and caused bonds to finish the year on a
sour note.
Despite the numerous setbacks suffered by the bond market in 1996,
indexes were able to finish the year with positive total returns. Although the
specter of the Federal Reserve Board loomed large during the year, in fact the
Board acted only once, lowering the federal funds rate by a total of 0.25% in
January.
Corporate bonds, mortgage-backed issues, and municipals were three
relatively bright spots in 1996. The strength in earnings that benefited stock
prices extended to the corporate bond sector as well. These bonds, especially
those of lower credit quality, performed well relative to Treasuries, supported
by general confidence in companies' ability to meet payments. The
stable-to-rising interest-rate environment throughout most of the year
benefited another large segment of the bond market--mortgage-backed
securities--as the threat of refinancings receded. Finally, municipal bonds
outpaced their U.S. Treasury counterparts. The sector was shielded to a certain
extent from the inflation wars of the Treasury market, as demand outstripped
supply for much of the year.
INTERNATIONAL EQUITY MARKETS
Investors who assess international markets by the often-cited EAFE
benchmark--the Morgan Stanley Capital International-Europe, Australasia, Far
East Index, with its 1996 return of 6.4%--could have overlooked a striking
regional disparity between the European and Pacific markets. Europe's markets
gained 21.4% during the year, while their Pacific counterparts posted a decline
of -8.2%. Clearly, the outlook and environments that characterized the
European and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing concern
about the health of the Japanese economy. Growth in Japan has remained modest
at best for several years despite government efforts to stimulate the economy
through public works programs and tax incentives. In Europe, the picture was
dramatically different, with the region benefiting from a variety of factors.
Among the most important were (1) ongoing efforts to lower government deficits
consistent with the Maastricht Treaty guidelines, (2) improving economic
growth, and (3) a greater commitment by corporate executives to increasing
"shareholder value."
5
<PAGE> 8
REPORT FROM THE ADVISER
[PHOTO]
Vanguard/Wellesley Income Fund outperformed its unmanaged benchmark but
underperformed its competitive fund benchmark in 1996. For the year, the Fund
returned 9.4% versus 6.8% for the unmanaged benchmark. When stocks are up over
20% and bonds provide only marginally positive returns, as was the case in
1996, asset allocation between stocks and bonds overshadows the performance of
each segment relative to its own market.
Wellesley, by charter, has a heavier weighting in bonds (60%-65%) than in
stocks (35%-40%). In general, the Fund's performance is extremely sensitive to
the direction of long-term interest rates because of the long average maturity
of the bonds we hold and because of our meaningful weighting in high-yielding,
interest-rate-sensitive stocks. The rise in interest rates especially hurt the
Fund's bond segment this year. Its return was 1.9%, marginally ahead of the
1.4% return on the Lehman Brothers Long-Term Corporate AA or Better Bond Index,
against which we measure the performance of our bond holdings. The equity
portion of the Fund managed a return of 24.2%, which exceeded the strong return
of 23.0% on the Standard & Poor's 500 Composite Stock Price Index. Thus both
our bond and stock portfolios outperformed their respective indexes. For more
details on the Fund's performance, see the Message To Shareholders, which
begins on page 1.
Wellesley's bond portfolio had an average duration slightly shorter than
that of our benchmark index during the year, which helped the Fund's relative
performance as rates rose. The shorter a bond portfolio's average duration, the
less its principal value will change in response to a change in interest rates.
In 1996, when rates rose and bond prices declined, less change was better. The
largest contributors to our stock portfolio's margin over the S&P 500 Index
during 1996 were our holdings in the financial sector and in real estate
investment trusts (REITs). The Fund's REIT investments provided total returns
exceeding 20% in the fourth quarter.
Throughout the year, the Fund maintained its traditional allocation of
60%-65% of assets to longer-term bonds of investment-grade quality and 35%-40%
to dividend-paying equities. We kept the stock allocation near the high end of
its permitted range. We do not anticipate a change in the Fund's asset
allocation strategy.
INVESTMENT PHILOSOPHY
The Fund reflects a belief that relatively high
current income and moderate long-term growth in income and
capital can be achieved without undue risk by holding 60% to
65% of assets in fixed-income securities and the balance in
income-oriented common stocks. Consistent with this
approach, the Fund's bond segment comprises intermediate- and
long-term U.S. Treasury and mortgage-backed securities and
high-quality corporate bonds; its equity segment is dominated
by stocks with above-average dividend yields and strong
potential for dividend increases.
THE OUTLOOK FOR THE FIRST HALF OF 1997
The current economic expansion is almost six years old, with few signs of
excess. Growth is moderate, inflation remains low, and the interest rate
environment is benign. The mix of economic activity continues to be healthy,
with capital investment leading the way. Consumer demand, by comparison, is
growing at a more modest pace. In 1997, we expect improving foreign demand to
boost U.S. exports. This should offset somewhat-slower growth in demand
domestically. Overall, we expect the inflation-adjusted output of the economy
to increase 2.3% in the
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year ahead, identical to the estimated gain during 1996. The rate of inflation
should be stable, with consumer prices rising around 3% for the year.
Long-term interest rates should fluctuate within a range of 6.25% to 7%.
The stock market is highly valued by historical standards, but still offers
opportunities on a stock-by-stock basis. With most segments of the economy
fully recovered from the last recession, and the easiest gains from
restructuring already reflected in corporate earnings reports, corporate
profits should grow at a mid-single-digit rate in 1997. Growth in profits per
share could be somewhat greater if corporations continue to repurchase their
own stock, instead of raising dividends. A stronger dollar is acting as a drag
on the profits of multinational companies, since their sales and earnings from
abroad translate into fewer dollars.
STRATEGY IN 1997
Our strategy remains consistent. As noted, the percentages of the Fund's assets
in stocks and bonds will vary only marginally. The maturity of the bonds will
remain long-term, and we will emphasize those that provide protection against
calls, or early redemptions, to protect the income stream. We purchase only
investment-grade bonds, and we look for corporate issuers with stable or
improving credit fundamentals. Currently, 91% of the bond portfolio carries a
credit rating of A or better. The strategy for our stock portfolio is to
purchase companies with above-market dividend yields across different
industries. We are focusing on companies whose stock prices have been punished
severely for disappointing the short-term expectations of investors.
The majority of Wellesley's stocks are listed on the New York Stock
Exchange and have above-average yields. At 3.9%, their average dividend yield
is 95% higher than that of the S&P 500 Index, although we avoid stocks with
ultra-high dividend yields that may not be sustainable over the longer term.
Our investment strategy is guided by 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 dividends by purchasing stocks of strong companies whose successful
business strategies enable them to provide higher dividends generated from
rising earnings. Since we wrote to you six months ago, equities in our
portfolio have had 24 dividend increases.
SUMMARY
The strong stock market and weak bond market that prevailed in 1996 may make
Wellesley Income Fund appear to be a relatively unattractive investment.
Actually, we were not displeased with last year's performance, as both segments
of the Fund outpaced their respective benchmarks. If stocks cool off and if
interest rates are stable, Wellesley should perform relatively well versus more
aggressive bond and stock funds. We will continue to focus on maintaining the
charter of the Fund and on outperforming the composite benchmark. Increasing
income remains an objective in 1997.
Earl E. McEvoy, Senior Vice President
John R. Ryan, Senior Vice President
Wellington Management Company, LLP
January 13, 1997
7
<PAGE> 10
PORTFOLIO PROFILE: WELLESLEY INCOME FUND
DECEMBER 31, 1996
This Profile provides a snapshot of the Fund's fixed-income and equity
characteristics, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on pages 10 and 11.
<TABLE>
<CAPTION>
TOTAL FUND CHARACTERISTICS
- -----------------------------------------
<S> <C>
Turnover Rate 26%
Expense Ratio 0.31%
Cash Reserves 2.4%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION
- -----------------------------------------
<S> <C>
Bonds 60%
Cash Reserves 2%
Stocks 38%
</TABLE>
<TABLE>
<CAPTION>
TOTAL FUND VOLATILITY MEASURES
- -----------------------------------------
WELLESLEY S&P 500
- -----------------------------------------
<S> <C> <C>
R-Squared 0.62 1.00
Beta 0.57 1.00
</TABLE>
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- -----------------------------------------
<S> <C>
Number of Issues 176
Yield to Maturity* 7.2%
Average Coupon 7.5%
Average Maturity 17.2 years
Average Quality Aa3
Average Duration 7.9 years
</TABLE>
*After expenses.
FIXED-INCOME INVESTMENT FOCUS
- -----------------------------------------
[CHART]
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF BONDS)
- -----------------------------------------
<S> <C>
Industrial 25.6%
Utilities 25.6
Banks/Finance 15.9
Mortgage 14.2
Treasury/Agency 12.6
Foreign 5.6
Other 0.5
- -----------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- ------------------------------------------
<S> <C>
Aaa 33.1%
Aa 19.6
A 38.2
Baa 9.1
Ba --
B --
Not Rated --
- -----------------------------------------
Total 100.0%
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- --------------------------------------------
WELLESLEY S&P 500
- --------------------------------------------
<S> <C> <C>
Number of Stocks 73 500
Median Market Cap $12.8B $24.5B
Price/Earnings Ratio 16.3x 19.6x
Price/Book Ratio 2.4x 3.4x
Yield 5.8% 2.0%
Return on Equity 14.7% 19.6%
Earnings Growth Rate 5.3% 13.5%
Foreign Holdings 1.4% 3.7%
</TABLE>
EQUITY INVESTMENT FOCUS
- --------------------------------------------
[CHART]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF COMMON STOCK)
- --------------------------------------------
<S> <C>
First Union Corp. 4.5%
Bristol-Myers Squibb Co. 4.1
Keycorp 4.1
Amoco Corp. 3.9
Ford Motor Co. 3.2
J.C. Penney Co., Inc. 3.0
Royal Dutch Petroleum Co. ADR 3.0
Kimberly-Clark Corp. 2.8
BankAmerica Corp. 2.8
NYNEX Corp. 2.8
- --------------------------------------------
Top Ten 34.2%
Top Ten as % of Total Net Assets 12.8
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------------------------
WELLESLEY WELLESLEY S&P 500
----------------------------------------
<S> <C> <C> <C>
Basic Materials . . . . . . . . . . . 10.0% 10.4% 6.2%
Capital Goods & Construction . . . . . 0.9 1.1 8.4
Consumer Cyclical . . . . . . . . . . 8.0 8.1 12.1
Consumer Staples . . . . . . . . . . . 3.5 4.6 12.4
Energy . . . . . . . . . . . . . . . . 15.9 15.6 9.7
Financial . . . . . . . . . . . . . . 29.8 28.3 15.0
Health Care . . . . . . . . . . . . . 3.0 5.8 10.4
Technology . . . . . . . . . . . . . . 0.0 0.0 12.1
Transport & Services . . . . . . . . . 0.0 0.0 1.5
Utilities . . . . . . . . . . . . . . 27.3 23.8 9.9
Miscellaneous . . . . . . . . . . . . 1.6 2.3 2.3
- ------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
[PHOTO]
AVERAGE COUPON. The average interest rate, expressed as a percentage of face
value, paid on the securities held by a portfolio. Average Duration. An
estimate of how much a bond portfolio's share price will fluctuate in response
to a change in interest rates. To estimate the price sensitivity of a
portfolio, multiply its duration by the change in rates. If interest rates rise
by one percentage point, the share price of a portfolio with an average
duration of five years would decline by about 5%. If rates decrease by a
percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity and are repaid. In general, the longer the average maturity, the
more a portfolio's share price will fluctuate in response to changes in market
interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating
agencies. The agencies assign ratings after appraising an issuer's ability to
meet its obligations. Quality is graded on a scale, with Aaa indicating the
most creditworthy corporate bond issuers.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing investments.
DISTRIBUTION BY CREDIT QUALITY. An indicator of the risk of default or other
credit problems on securities held by a portfolio.
DISTRIBUTION BY ISSUER. A breakdown of a portfolio's holdings by type of
issuer.
EARNINGS GROWTH RATE. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio. Equity Investment Focus.
This grid indicates the focus of a portfolio's equity holdings in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a portfolio's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (high, medium, or low).
FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts of companies based outside of the United
States.
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio
have higher market capitalizations and half lower.
NUMBER OF ISSUES. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from
the problems of a particular issue.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PORTFOLIO ALLOCATION. This chart shows the distribution, by type of asset, of a
portfolio's holdings.
10
<PAGE> 13
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies represented in the portfolio.
SECTOR DIVERSIFICATION. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of a portfolio's stock holdings in its ten
largest stocks (the average for stock mutual funds is about 25%). As this
percentage rises, a portfolio's returns are likely to be more volatile, since
its return is more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to realize and distribute capital gains (which are taxable to
investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on income earned over the past 30 days and is annualized, or projected forward
for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
11
<PAGE> 14
PERFORMANCE SUMMARY: WELLESLEY INCOME FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Fund could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 12/31/76-12/31/96
- -----------------------------------------------------------------
WELLESLEY INCOME FUND COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
1977 -3.4% 7.7% 4.3% -0.8%
1978 -4.6 8.2 3.6 2.2
1979 -2.6 8.8 6.2 3.5
1980 0.9 11.0 11.9 9.4
1981 -3.1 11.8 8.7 -1.7
1982 10.1 13.2 23.3 36.3
1983 7.1 11.5 18.6 13.2
1984 4.9 11.7 16.6 13.8
1985 16.0 11.4 27.4 29.4
1986 9.2 9.1 18.3 19.9
1987 -8.1 6.2 -1.9 2.5
1988 4.7 8.9 13.6 13.7
1989 11.8 9.1 20.9 21.0
1990 -4.3 8.1 3.8 2.5
1991 12.9 8.7 21.6 20.5
1992 1.6 7.1 8.7 9.2
1993 8.2 6.4 14.6 14.6
1994 -10.2 5.8 -4.4 -4.6
1995 21.6 7.3 28.9 30.7
1996 3.3 6.1 9.4 6.8
- -----------------------------------------------------------------
</TABLE>
*65% Lehman Long-Term Corporate Bond Index and 35% S&P 500 Index through
December 31, 1985; 65% Lehman Long-Term Corporate AA or Better Bond Index, 26%
S&P/BARRA Value Index, and 9% S&P Utility Index thereafter.
See Financial Highlights table on page 20 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 12/31/86-12/31/96
- ----------------------------------------------
Wellesley Income Fund
Lipper Income
65% Lehm LT Corp AA+/35%
S&P Blend Corp. AA or Better
<S> <C> <C> <C> <C> <C> <C>
10000 10000 10000 10000 1986 12
10379 10586 10660 10203 1987 03
10121 10459 10553 9840 1987 06
9974 10402 10345 9230 1987 09
1987 9808 9957 10252 10050 1987 12
10345 10513 10832 10499 1988 03
10700 10829 11166 10592 1988 06
11007 11018 11406 10863 1988 09
1988 11143 11159 11657 11049 1988 12
11524 11514 12038 11170 1989 03
12534 12252 13232 12279 1989 06
12973 12720 13681 12371 1989 09
1989 13476 12939 14100 12765 1989 12
13202 12433 13711 12493 1990 03
13563 12941 14177 13015 1990 06
13057 12187 13541 12892 1990 09
1990 13982 12748 14449 13648 1990 12
14725 13712 15346 14223 1991 03
14877 13957 15438 14406 1991 06
15898 14952 16453 15454 1991 09
1991 16998 15674 17414 16406 1991 12
16416 15640 17089 16116 1992 03
17287 16180 17886 16813 1992 06
18251 16808 18667 17647 1992 09
1992 18472 17049 19017 17830 1992 12
19734 17928 20298 18755 1993 03
20337 18545 20958 19419 1993 06
21365 18979 21977 20283 1993 09
1993 21179 19124 21790 20140 1993 12
20232 18536 20797 19217 1994 03
20161 18703 20524 18753 1994 06
20321 18928 20663 18741 1994 09
1994 20239 18565 20796 18981 1994 12
21690 19670 22365 20265 1995 03
23534 21041 24317 22068 1995 06
24527 21841 25468 22636 1995 09
1995 26090 22587 27175 24050 1995 12
25767 23301 26680 22936 1996 03
26031 24020 26985 22992 1996 06
26784 24222 27424 23413 1996 09
1996 28548 25184 29014 24397 1996 12
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WELLESLEY INCOME FUND 9.42% 10.93% 11.06% $28,548
AVERAGE INCOME FUND 11.50 9.95 9.68 25,184
COMPOSITE INDEX* 6.77 10.75 11.24 29,014
LEHMAN LONG-TERM CORPORATE
AA OR BETTER BOND INDEX 1.44 8.26 9.33 24,397
- --------------------------------------------------------------------------------------
</TABLE>
*65% Lehman Long-Term Corporate AA or Better Bond Index, 26% S&P/BARRA Value
Index, and 9% S&P Utility Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- --------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wellesley Income Fund 7/1/70 9.42% 10.93% 3.73% 7.33% 11.06%
- --------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
FINANCIAL STATEMENTS
DECEMBER 31, 1996
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund
to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested
by shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the Fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the Fund's investments and their cost, and reflects
the gains (losses) that would be realized if the Fund were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLESLEY INCOME FUND (000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (39.5%)
- -----------------------------------------------------------------------------
ASSET-BACKED SECURITY (0.3%)
NationsBank Credit Card Trust
6.00%, 12/15/05 $ 20,000 $ 19,319
---------
FINANCE (10.0%)
Allstate Corp.
7.50%, 6/15/13 20,000 20,295
Banc One Corp.
7.75%, 7/15/25 30,000 30,636
BankBoston Corp.
6.625%, 12/1/05 15,000 14,532
6.875%, 7/15/03 15,000 14,832
Boatmen's Bancshares Inc.
7.625%, 10/1/04 10,000 10,264
Citicorp
MTN 6.65%, 12/15/10 25,000 23,989
7.125%, 9/1/05 15,000 15,116
7.625%, 5/1/05 10,000 10,342
Comerica Bank
7.125%, 12/1/13 15,000 14,377
CoreStates Capital
6.625%, 3/15/05 20,000 19,448
Fifth Third Bancorp
6.75%, 7/15/05 25,000 24,537
First Bank N.A.
7.55%, 6/15/04 8,000 8,233
First Bank System
6.625%, 5/15/03 10,000 9,801
7.625%, 5/1/05 7,500 7,728
First Chicago Corp.
7.625%, 1/15/03 15,000 15,626
First Union Corp.
6.00%, 10/30/08 15,000 13,635
7.50%, 4/15/35 11,000 11,499
Fleet Financial Group
6.875%, 3/1/03 30,000 30,078
General Electric Capital Corp.
8.125%, 5/15/12 10,000 11,055
General Electric Global Insurance
Holdings Corp.
7.00%, 2/15/26 25,000 24,076
General Motors Acceptance Corp.
7.00%, 9/15/02 30,000 30,276
J.P. Morgan & Co., Inc.
5.75%, 10/15/08 20,000 17,864
6.25%, 1/15/09 20,000 18,560
MBIA Inc.
7.00%, 12/15/25 10,000 9,505
NBD Bank N.A.
6.25%, 8/15/03 20,000 19,193
National City Bank Pennsylvania
7.25%, 10/21/11 22,000 21,855
National City Cleveland Bank
6.50%, 5/1/03 10,000 9,687
National City Corp.
7.20%, 5/15/05 20,000 20,094
NationsBank Corp.
7.25%, 10/15/25 20,000 19,221
7.75%, 8/15/04 20,000 20,886
Norwest Financial Corp.
7.95%, 5/15/02 10,000 10,544
Republic New York Corp.
5.875%, 10/15/08 15,000 13,568
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLESLEY INCOME FUND (000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
Suntrust Banks
6.00%, 2/15/26 $ 25,000 $ 23,507
6.125%, 2/15/04 20,000 19,115
7.375%, 7/1/02 16,000 16,519
Texaco Capital
8.625%, 4/1/32 30,000 34,606
Wachovia Corp.
6.375%, 4/15/03 20,000 19,669
6.605%, 10/1/25 30,000 29,767
Wells Fargo & Co.
6.125%, 11/1/03 15,000 14,386
---------
698,921
---------
INDUSTRIAL (14.0%)
Air Products & Chemicals, Inc.
7.375%, 5/1/05 15,000 15,470
8.75%, 4/15/21 12,550 14,422
Amoco Canada Petroleum Co.
6.75%, 9/1/23 25,000 22,538
Bristol-Myers Squibb
6.80%, 11/15/26 15,000 14,564
Browning-Ferris Industries, Inc.
6.375%, 1/15/08 15,000 14,208
7.40%, 9/15/35 30,000 29,129
Burlington Northern Santa Fe Corp.
6.375%, 12/15/05 12,500 11,977
CPC International, Inc.
6.15%, 1/15/06 20,000 18,976
7.25%, 12/15/26 13,000 12,869
The Coca-Cola Co.
6.00%, 7/15/03 10,000 9,657
The Walt Disney Co.
6.75%, 3/30/06 15,000 14,854
E.I. du Pont de Nemours & Co.
8.25%, 1/15/22 30,000 31,553
Eastman Chemical Co.
7.25%, 1/15/24 25,000 24,299
Eaton Corp.
6.50%, 6/1/25 10,000 9,734
7.625%, 4/1/24 10,000 10,080
Ford Motor Co.
8.875%, 1/15/22 20,000 23,102
General Electric Capital Services
7.50%, 8/21/35 14,000 14,538
General Motors Corp.
7.40%, 9/1/25 20,000 19,779
9.40%, 7/15/21 20,000 24,147
Georgia Pacific Corp.
8.625%, 4/30/25 10,000 10,331
9.125%, 7/1/22 10,000 10,525
9.50%, 5/15/22 10,000 10,819
Gillette Co.
5.75%, 10/15/05 20,000 18,599
6.25%, 8/15/03 10,000 9,779
Hubbell Inc.
6.625%, 10/1/05 10,000 9,838
International Business
Machines Corp.
7.00%, 10/30/25 25,000 23,917
International Paper Co.
7.625%, 1/15/07 15,000 15,588
Johnson & Johnson
6.73%, 11/15/23 20,000 19,030
Johnson Controls
8.20%, 6/15/24 6,000 6,260
Eli Lilly & Co.
7.125%, 6/1/25 40,000 39,668
Lockheed Corp.
6.75%, 3/15/03 7,000 6,975
McDonald's Corp.
7.05%, 11/15/25 23,300 22,375
7.375%, 7/15/33 8,500 8,438
Merck & Co.
6.30%, 1/1/26 30,000 26,820
Mobil Corp.
8.625%, 8/15/21 20,000 23,409
Monsanto Co.
8.20%, 4/15/25 20,000 20,571
Motorola Inc.
7.50%, 5/15/25 40,000 41,351
News America Holdings
8.00%, 10/17/16 25,000 24,743
New York Times
8.25%, 3/15/25 26,000 27,330
Northrop-Grumman
9.375%, 10/15/24 15,000 16,583
Philips Electronics NV
7.75%, 5/15/25 18,275 18,497
Phillips Petroleum Co.
9.375%, 2/15/11 10,000 11,944
PPG Industries, Inc.
9.00%, 5/1/21 15,000 17,854
Praxair Inc.
6.75%, 3/1/03 25,000 24,972
Procter & Gamble ESOP
9.36%, 1/1/21 30,000 36,432
Raytheon Co.
7.375%, 7/15/25 25,000 23,974
Rohm & Haas Co.
9.80%, 4/15/20 10,000 12,148
Tribune Co.
6.875%, 11/1/06 20,000 19,847
Union Pacific Corp.
7.00%, 2/1/16 20,000 19,006
United Parcel Service
8.375%, 4/1/20 10,000 11,311
Weyerhaeuser Co.
8.50%, 1/15/25 10,000 11,180
Whirlpool Corp.
9.00%, 3/1/03 10,000 11,053
Witco Chemical Corp.
6.875%, 2/1/26 15,000 13,923
Worthington Industries Inc.
7.125%, 5/15/06 20,000 20,246
---------
981,232
---------
UTILITIES (15.2%)
Arizona Public Service Co.
6.625%, 3/1/04 10,000 9,713
AT&T Corp.
7.125%, 1/15/02 30,000 30,579
8.625%, 12/1/31 40,000 42,355
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
Baltimore Gas & Electric
7.25%, 7/1/02 $ 15,000 $ 15,353
8.375%, 8/15/01 10,000 10,710
BellSouth Telecommunications
6.25%, 5/15/03 12,000 11,759
7.00%, 10/1/25 10,000 9,873
8.25%, 7/1/32 35,000 37,073
Carolina Power & Light Co.
6.875%, 8/15/23 10,000 9,230
Chesapeake & Potomac
Telephone Co., MD
7.15%, 5/1/23 20,000 19,326
Chesapeake & Potomac
Telephone Co., VA
7.875%, 1/15/22 15,000 15,964
Cincinnati Gas & Electric Co.
6.90%, 6/1/25 9,500 9,546
7.20%, 10/1/23 15,100 14,193
Coastal Corp.
7.75%, 10/15/35 10,000 10,181
8.125%, 9/15/02 10,000 10,577
9.75%, 8/1/03 11,275 12,815
10.00%, 2/1/01 20,000 22,190
Commonwealth Edison Co.
7.375%, 9/15/02 10,000 10,144
Consolidated Edison Co. of NY
6.375%, 4/1/03 20,000 19,611
Duke Power Co.
7.00%, 7/1/33 30,000 27,811
El Paso Natural Gas
7.50%, 11/15/26 17,815 17,827
Enron Corp.
6.875%, 10/15/07 20,000 19,792
7.00%, 8/15/23 10,000 9,125
Florida Power & Light Co.
5.375%, 4/1/00 12,500 12,118
GTE Florida, Inc.
6.31%, 12/15/02 20,000 19,670
GTE Southwest, Inc.
6.00%, 1/15/06 10,000 9,388
Houston Lighting & Power Co.
7.50%, 7/1/23 20,000 19,543
Illinois Bell Telephone Co.
6.625%, 2/1/25 13,575 12,275
7.25%, 3/15/24 20,000 19,552
Illinois Power Co.
6.50%, 8/1/03 10,000 9,652
Indiana Bell Telephone Co.
7.30%, 8/15/26 20,000 20,297
Iowa-Illinois Gas & Electric Co.
6.95%, 10/15/25 5,000 4,606
Kentucky Utilities
7.92%, 5/15/07 5,000 5,333
MCI Communications Corp.
7.50%, 8/20/04 15,000 15,550
Michigan Bell Telephone Co.
7.50%, 2/15/23 35,000 34,748
New Jersey Bell Telephone Co.
8.00%, 6/1/22 35,000 37,804
New York Telephone Co.
6.50%, 3/1/05 30,000 29,218
Northern States Power Co.
6.375%, 4/1/03 8,000 7,800
7.125%, 7/1/25 30,000 29,331
Ohio Bell Telephone Co.
6.125%, 5/15/03 15,000 14,519
Oklahoma Gas & Electric Co.
7.30%, 10/15/25 15,000 14,306
Pacific Bell Telephone Co.
7.125%, 3/15/26 25,000 24,344
Pacific Gas & Electric Co.
8.25%, 11/1/22 25,000 26,020
PacifiCorp
MTN 6.625%, 6/1/07 10,000 9,688
6.71%, 1/15/26 10,000 9,132
PECO Energy Corp.
6.50%, 5/1/03 30,000 29,365
Pennsylvania Power & Light Co.
6.50%, 4/1/05 15,000 14,469
6.75%, 10/1/23 9,000 8,060
Southern California Edison Co.
6.25%, 6/15/03 6,050 5,876
Southern California Gas Co.
6.875%, 11/1/25 15,000 13,663
Southwestern Bell Telephone Co.
7.20%, 10/15/26 32,500 31,403
7.25%, 7/15/25 37,500 36,431
Southwestern Public Service Co.
7.25%, 7/15/04 10,000 10,160
8.20%, 12/1/22 12,500 13,134
Texas Utilities Co.
6.75%, 7/1/05 10,000 9,778
8.00%, 6/1/02 10,000 10,520
9.75%, 5/1/21 13,500 15,279
Union Electric Co.
6.875%, 8/1/04 10,000 10,050
U S WEST Communications Group
7.50%, 6/15/23 45,000 43,529
Virginia Electric & Power Co.
6.00%, 8/1/02 10,000 9,637
6.75%, 10/1/23 20,000 18,291
Wisconsin Public Service Co.
7.30%, 10/1/02 6,700 6,885
---------
1,067,171
---------
- -----------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $2,762,936) 2,766,643
- -----------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR DENOMINATED) (4.1%)
- -----------------------------------------------------------------------------
ABN Amro Bank NV
(Chicago Branch)
7.55%, 6/28/06 25,000 25,884
BHP Finance USA
6.69%, 3/1/06 20,000 19,555
Credit National
7.00%, 11/14/05 15,000 14,445
Husky Oil Ltd.
7.55%, 11/15/16 20,000 20,031
Italy Global Bond
6.875%, 9/27/23 35,000 33,284
Province of British Columbia
6.50%, 1/15/26 30,000 27,753
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLESLEY INCOME FUND (000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
Province of Manitoba
6.125%, 1/19/04 $ 7,000 $ 6,764
8.875%, 9/15/21 10,000 11,849
Province of Ontario
6.00%, 2/21/06 25,000 23,781
7.75%, 6/4/02 15,000 15,840
Petro-Canada
7.875%, 6/15/26 11,840 12,458
Province of Quebec
7.50%, 7/15/23 35,000 34,827
Province of Saskatchewan
8.50%, 7/15/22 19,000 21,566
Talisman Energy
7.125%, 6/1/07 20,000 19,858
- -----------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $289,759) 287,895
- -----------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (16.0%)
- -----------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (7.5%)
U.S. Treasury Bonds
7.25%, 5/15/16 225,000 237,587
12.00%, 8/15/13 175,000 250,332
U.S. Treasury Note
5.75%, 8/15/03 40,300 39,091
---------
527,010
---------
MORTGAGE-BACKED SECURITIES (8.5%)
Government National
Mortgage Assn.
6.50%, 6/15/08-8/15/24 452,507 435,185
7.00%, 4/15/17-10/15/23 86,859 85,656
7.50%, 1/15/23-3/15/26 72,586 72,873
---------
593,714
---------
- -----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $1,085,766) 1,120,724
- -----------------------------------------------------------------------------
SHARES
- -----------------------------------------------------------------------------
COMMON STOCKS (37.5%)
- -----------------------------------------------------------------------------
BASIC MATERIALS (3.9%)
Dow Chemical Co. 680,000 53,295
E.I. du Pont de Nemours & Co. 286,200 27,010
Kimberly-Clark Corp. 770,000 73,343
Reynolds Metals Co. 219,432 12,370
Union Camp Corp. 800,900 38,243
Weyerhaeuser Co. 800,000 37,900
Witco Chemical Corp. 1,011,400 30,848
---------
273,009
---------
CAPITAL GOODS & CONSTRUCTION (0.4%)
Cooper Industries, Inc. 660,000 27,802
---------
CONSUMER CYCLICAL (3.0%)
Chrysler Corp. 1,516,200 50,035
Ford Motor Co. 2,631,000 83,863
J.C. Penney Co., Inc. 1,612,600 78,614
---------
212,512
---------
CONSUMER STAPLES (1.7%)
American Brands, Inc. 890,000 44,166
Flowers Industries, Inc. 1,934,400 41,590
Universal Corp. 1,109,600 35,646
---------
121,402
---------
ENERGY (5.9%)
Amoco Corp. 1,285,000 103,442
Atlantic Richfield Co. 518,000 68,635
Exxon Corp. 200,000 19,600
Metrogas ADS 330,000 3,094
Questar Corp. 570,000 20,948
Royal Dutch Petroleum Co. ADR 459,500 78,460
Sun Co., Inc. 224,333 5,468
Texaco, Inc. 654,200 64,193
USX-Marathon Group 1,922,000 45,888
---------
409,728
---------
FINANCIAL (10.6%)
BankAmerica Corp. 730,000 72,817
Bay Apartment Communities,
Inc. REIT 578,600 20,830
Boatmen's Bancshares, Inc. 914,000 58,839
(1) CBL & Associates Properties,
Inc. REIT 1,050,400 27,179
(1) Colonial Properties REIT 958,800 29,124
CoreStates Financial Corp. 1,189,200 61,690
Equity Residential Properties
Trust REIT 84,800 3,498
First Union Corp. 1,603,200 118,637
General Growth Properties REIT 702,600 22,659
Home Properties of
New York REIT 157,000 3,532
IPC Holdings Ltd. 785,300 17,571
JP Realty Inc. REIT 500,000 12,937
Keycorp 2,129,050 107,517
The Macerich Co. REIT 817,000 21,344
National City Corp. 1,000,000 44,875
Nationwide Health
Properties, Inc. 363,200 8,808
Paragon Group, Inc. REIT 104,800 1,860
PNC Bank Corp. 1,506,800 56,693
Roc Communities, Inc. REIT 482,600 13,392
Sun Communities, Inc. REIT 320,600 11,061
Town & Country Trust REIT 714,000 10,442
Urban Shopping Centers REIT 617,000 17,893
---------
743,198
---------
HEALTH CARE (2.2%)
Baxter International, Inc. 617,600 25,322
Bristol-Myers Squibb Co. 1,001,000 108,859
Pharmacia & Upjohn, Inc. 450,000 17,831
---------
152,012
---------
UTILITIES (8.9%)
AT&T Corp. 1,000,000 43,500
# AT&T Corp. 245,400 10,245
Bell Atlantic Corp. 300,000 19,425
BellSouth Corp. 422,000 17,038
Central & South West Corp. 1,368,500 35,068
Consolidated Edison Co. of
New York 527,400 15,426
DQE Inc. 1,207,050 35,004
DTE Energy Co. 1,238,200 40,087
Edison International 1,266,000 25,162
Equitable Resources, Inc. 1,105,000 32,874
GPU, Inc. 847,400 28,494
GTE Corp. 1,227,700 55,860
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
New England Electric System 379,000 13,218
NICOR, Inc. 572,300 20,460
NYNEX Corp. 1,511,772 72,754
Pacific Gas & Electric Co. 1,408,600 29,581
PacifiCorp 2,017,400 41,357
PECO Energy Corp. 496,200 12,529
Rochester Gas & Electric Corp. 531,600 10,167
Southern Co. 1,200,000 27,150
Unicom Corp. 967,207 26,235
U S WEST
Communications Group 405,000 13,061
---------
624,695
---------
MISCELLANEOUS (0.9%)
Minnesota Mining &
Manufacturing Co. 777,700 64,452
---------
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $1,927,218) 2,628,810
- -----------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.5%)
- -----------------------------------------------------------------------------
H.F. Ahmanson 6.00% 450,000 31,050
Salomon Inc. 7.625% 262,900 7,887
- -----------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $29,634) 38,937
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (2.5%)
- -----------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.Government
Obligations in a Pooled
Cash Account
6.39%, 1/2/97
(COST $179,088) $179,088 179,088
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $6,274,401) 7,022,097
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- -----------------------------------------------------------------------------
Other Assets--Notes C and F 163,047
Liabilities--Note F (172,422)
---------
(9,375)
- -----------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------
Applicable to 341,976,236 outstanding
$.10 par value shares
(authorized 450,000,000 shares) $7,012,722
=============================================================================
NET ASSET VALUE PER SHARE $20.51
=============================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
# Non-Income Producing Security. Security purchased on a when-issued or
delayed delivery basis for which the Fund has not taken delivery as of
December 31, 1996.
(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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------
<S> <C> <C>
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
Paid in Capital $6,166,680 $18.03
Undistributed Net
Investment Income 12,026 .04
Accumulated Net
Realized Gains 86,320 .25
Unrealized Appreciation--
Note E 747,696 2.19
- -----------------------------------------------------------------------------
NET ASSETS $7,012,722 $20.51
=============================================================================
</TABLE>
17
<PAGE> 20
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
WELLESLEY INCOME FUND
YEAR ENDED DECEMBER 31, 1996
(000)
- ----------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $116,424
Interest 307,821
--------
Total Income 424,245
--------
EXPENSES
Investment Advisory Fee--Note B 3,606
The Vanguard Group--Note C
Management and Administrative 15,368
Marketing and Distribution 1,383
Taxes (other than income taxes) 486
Custodian Fees 209
Auditing Fees 15
Shareholders' Reports 315
Annual Meeting and Proxy Costs 94
Directors' Fees and Expenses 22
--------
Total Expenses 21,498
Expenses Paid Indirectly--Note C (344)
--------
Net Expenses 21,154
- ----------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 403,091
- ----------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 258,042
- ----------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES (41,888)
- ----------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $619,245
==========================================================================================================
</TABLE>
18
<PAGE> 21
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains may
not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the
one in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
WELLESLEY INCOME FUND
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
(000) (000)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 403,091 $ 382,105
Realized Net Gain 258,042 141,798
Change in Unrealized Appreciation (Depreciation) (41,888) 1,096,772
----------------------------
Net Increase in Net Assets Resulting from Operations 619,245 1,620,675
----------------------------
DISTRIBUTIONS
Net Investment Income (398,277) (383,294)
Realized Capital Gain (202,715) (95,611)
----------------------------
Total Distributions (600,992) (478,905)
----------------------------
NET EQUALIZATION CREDITS (CHARGES)--Note A (4,740) 71
----------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 912,255 963,895
Issued in Lieu of Cash Distributions 519,028 409,690
Redeemed (1,612,810) (1,015,317)
----------------------------
Net Increase (Decrease) from Capital Share Transactions (181,527) 358,268
- -----------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (168,014) 1,500,109
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 7,180,736 5,680,627
----------------------------
End of Year $7,012,722 $7,180,736
=================================================================================================================
(1)Shares Issued (Redeemed)
Issued 45,503 51,153
Issued in Lieu of Cash Distributions 25,898 21,137
Redeemed (80,687) (54,185)
----------------------------
Net Increase (Decrease) in Shares Outstanding (9,286) 18,105
=================================================================================================================
</TABLE>
19
<PAGE> 22
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
WELLESLEY INCOME FUND
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $20.44 $17.05 $19.24 $18.16 $18.08
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.17 1.13 1.11 1.14 1.21
Net Realized and Unrealized Gain (Loss) on Investments .66 3.68 (1.95) 1.48 .29
-----------------------------------------------------
Total from Investment Operations 1.83 4.81 (.84) 2.62 1.50
-----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.16) (1.14) (1.11) (1.14) (1.21)
Distributions from Realized Capital Gains (.60) (.28) (.24) (.40) (.21)
-----------------------------------------------------
Total Distributions (1.76) (1.42) (1.35) (1.54) (1.42)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $20.51 $20.44 $17.05 $19.24 $18.16
========================================================================================================================
TOTAL RETURN 9.42% 28.91% -4.44% 14.65% 8.67%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $7,013 $7,181 $5,681 $6,011 $3,178
Ratio of Total Expenses to Average Net Assets 0.31% 0.35% 0.34% 0.33% 0.35%
Ratio of Net Investment Income to Average Net Assets 5.74% 5.96% 6.16% 5.79% 6.50%
Portfolio Turnover Rate 26% 32% 32% 21% 21%
Average Commission Rate Paid $.0334 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Vanguard/Wellesley Income Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company, or mutual fund. 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 conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange are
valued at the latest quoted bid prices. Bonds are valued using the latest bid
prices or using valuations based on 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 capital share
transactions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Under a contract that expires March 31, 1998, the Fund pays Wellington
Management Company, LLP an investment advisory fee calculated at an annual
percentage rate of average net assets. For the year ended December 31, 1996,
the advisory fee represented an effective annual basic rate of 0.05% of the
Fund's average net assets after giving effect to a fee waiver of $342,000 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 December 31,
1996, the Fund had contributed capital of $641,000 to Vanguard (included in
Other Assets), representing 3.2% of Vanguard's capitalization. The Fund's
directors and officers are also directors and officers of Vanguard.
Vanguard has asked 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 to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended December 31, 1996, these arrangements reduced the Fund's expenses by
$344,000.
21
<PAGE> 24
D. During the year ended December 31, 1996, the Fund purchased $1,163,774,000
of investment securities and sold $1,425,499,000 of investment securities,
other than U.S. government securities and temporary cash investments. Purchases
and sales of U.S. government securities were $621,608,000 and $663,194,000,
respectively.
E. At December 31, 1996, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $747,696,000,
consisting of unrealized gains of $834,431,000 on securities that had risen in
value since their purchase and $86,735,000 in unrealized losses on securities
that had fallen in value since their purchase.
F. The market value of securities on loan to broker/dealers at December 31,
1996, was $52,790,000, for which the Fund held cash collateral of $54,427,000.
22
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard/Wellesley Income Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Wellesley Income Fund (the "Fund") at December 31, 1996, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian and, with respect to unsettled securities
transactions, the application of alternative auditing procedures, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1997
23
<PAGE> 26
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD/WELLESLEY INCOME FUND
This information for the fiscal year ended December 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $225,067,000 as capital gain dividends (from net
long-term capital gains), of which $171,684,000 was distributed to shareholders
in December 1996 and $53,383,000 will be distributed in March 1997.
For corporate shareholders, 25.0% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
24
<PAGE> 27
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, 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, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.
and President of New York University; Director of Pacific Gas and
Electric Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
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; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1996 Vanguard Marketing Corporation, Distributor
<PAGE> 28
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q270-12/96
[PHOTO]
