<PAGE>
[Translation]
[H&M Final]
SECURITIES REGISTRATION STATEMENT
(including amendments)
VANGUARD WELLESLEY INCOME FUND
<PAGE>
SECURITIES REGISTRATION STATEMENT
To: Director of Kanto Local Finance Bureau
Filing Date of SRS: September 1, 2000
Name of the Registrant Trust: VANGUARD WELLESLEY INCOME FUND
Name of Trustees: John J. Brennan,
Trustee
Address of Principal Office: 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355
U.S.A.
Name and Title of Registration Ken Miura
Agent: Attorney-at-Law
Signature [Ken Miura]
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(Seal)
Address or Place of Business Kasumigaseki Building, 25th Floor
2-5, Kasumigaseki 3-chome
Chiyoda-ku, Tokyo
Name of Liaison Contact: Emi Matsushima
Teruyo Oyamada
Nobuhiko Shimose
Place of Liaison Contact: Hamada & Matsumoto
Kasumigaseki Building, 25th Floor
2-5, Kasumigaseki 3-chome
Chiyoda-ku, Tokyo
Attorney-at-Law
Phone Number: 03-3580-3377
Public Offering or Sale for Registration
-----------------------------------------
Name of the Fund Making Public VANGUARD WELLESLEY INCOME FUND
Offering or Sale of Foreign
Investment Fund Securities:
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Type and Aggregate Amount of Foreign Registered Shares with par value $0.001
per Share Up to 52,356,000 Shares
Investment Fund Securities to be In respect of 52,356,000 Shares, up to the
Publicly Offered or Sold: total amount aggregating the amounts
calculated by multiplying the respective
approximate issue price per Share
by the respective number of Shares
(The approximate amount of the
limit: U.S.$1 billion (approximately
(Y)109.65 billion))
Note 1: The total amount of issue price during Offering Period is an amount
calculated by multiplying the net asset value per Share of the Fund as
of the end of July 2000 ($19.10) (US$ shall be referred to as "$"
hereafter) by the number of Shares to be subscribed in Japan
(52,356,000 Shares).
Note 2: The Yen amount is translated for convenience at the rate of $1.00 =
(Y)109.65 (the mean of the exchange rate quotations by The Bank of
Tokyo - Mitsubishi, Ltd. for buying and selling spot Dollars by
telegraphic transfer against Yen on July 31, 2000). The same applies
hereafter.
Places where a copy of this Securities Registration
---------------------------------------------------
Statement is available for Public Inspection
--------------------------------------------
Not applicable.
(Total number of pages of this Securities Registration
Statement in Japanese is 51 including front and back pages.)
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C O N T E N T S
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Japanese This
Original English
Translation
PART I. INFORMATION CONCERNING SECURITIES 1 1
PART II. INFORMATION CONCERNING ISSUER 3 6
I. DESCRIPTION OF THE FUND 3 6
l. GENERAL INFORMATION 3 6
2. INVESTMENT POLICY 7 13
3. MANAGEMENT STRUCTURE 17 34
4. INFORMATION CONCERNING THE EXERCISE
OF RIGHTS BY SHAREHOLDERS, ETC. 21 45
5. STATUS OF INVESTMENT FUND 24 50
II. OUTLINE OF THE TRUST 27 55
III. OUTLINE OF THE OTHER RELATED COMPANIES 31 61
IV. FINANCIAL CONDITIONS OF THE FUND 33 64
V. SUMMARY OF INFORMATION CONCERNING
FOREIGN INVESTMENT FUND SECURITIES 92 67
VI. MISCELLANEOUS 92 67
PART III. SPECIAL INFORMATION 93 68
I. OUTLINE OF THE SYSTEM OF INVESTMENT
TRUSTS IN DELAWARE 93 68
II. FORM OF FOREIGN INVESTMENT
FUND SECURITIES 98 79
<PAGE>
PART I. INFORMATION CONCERNING SECURITIES
1. NAME OF FUND: Vanguard Wellesley Income Fund (hereinafter
referred to as the "Fund")
2. NATURE OF FOREIGN Investor Shares (hereinafter referred to as
INVESTMENT FUND the "Shares") Registered Shares with par
SECURITIES CERTIFICATES: value $0.001 per Share.
No rating has been acquired.
3. NUMBER OF SHARES Up to 52,356,000 Shares of the Fund
TO BE OFFERED FOR
SALE (IN JAPAN):
4. TOTAL AMOUNT OF In respect of 52,356,000 Shares, up to the
OFFERING PRICE: total amount aggregating the amounts
calculated by multiplying the respective
issue price per Share by the respective
number of Shares (The approximate amount
of the limit: U.S.$1 billion
(approximately (Y)109.65 billion))
Note 1: The total amount of the issue price during the Offering Period is an
amount calculated by multiplying the net asset value per Share of the Fund
as of the end of July 2000 ($19.10) (US$ shall be referred to as "$"
hereinafter) by the number of Shares to be subscribed in Japan (52,356,000
Shares).
Note 2: The Yen amount is translated for convenience at the rate of $1.00 =
(Y)109.65 (the mean of the exchange rate quotations by The Bank of Tokyo -
Mitsubishi, Ltd. for buying and selling spot U.S. Dollars by telegraphic
transfer against Yen on July 31, 2000). The same applies hereafter.
Note 3: Since Shares are denominated in U.S. Dollars, the amounts appearing
hereafter are all Dollar amounts unless otherwise specifically indicated.
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Note 4: In this document, money amounts and percentages have been rounded.
Therefore, there are cases in which the amount of the "total column" is not
equal to the aggregate amount. Also, translation into Yen is made simply by
multiplying the corresponding amount by the conversion rate specified and
rounded up when necessary. As a result, in this document, there are cases
in which Japanese Yen figures for the same information differ from each
other.
5. ISSUE PRICE: The Net Asset Value per Share to be
calculated on a Fund Business Day
immediately after an application for
purchase is received by the Fund.
6. FUND BUSINESS DAY: A day on which the New York Stock Exchange
is open for business
7. SALES CHARGE: None.
8. ACCOUNT ADMINISTRATION Account Administration Fee at an annual
FEE: rate of 0.70% multiplied by the
Shareholder's average account balance shall
be assessed upon each Shareholder quarterly
in arrears. For Shareholder accounts which
are redeemed partially or in full prior to
the end of the quarter, the Account
Administration Fee shall be charged in
proportion to the period in which such
shareholder holds the shares and assessed at
the time of each redemption. Quarterly
assessments shall be net of any fees charged
for partial redemptions during the quarter.
9. MINIMUM AMOUNT OR Minimum shares to open an account shall be 50
NUMBER OF SHARES: shares and integral multiples of five shares.
Ongoing purchases shall be made in increments
of five shares.
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10. PERIOD OF From: September 18, 2000 (Monday)
SUBSCRIPTION: To: June 29, 2001 (Friday)
Provided that the subscription is handled
only on a Fund Business Day when sales
handling companies are open for business in
Japan, with the exception of a day in which
the next business day is a national holiday
in Japan.
11. DEPOSIT FOR SUBSCRIPTION: None
12. PLACE OF SUBSCRIPTION: Monex, Inc.
Takebashi Yasuda Building
2F,
3-13, Kanda-Nishiki-cho,
Chiyoda-ku, Tokyo
(the "Distributor" or
"Sales Handling Company")
Note:The subscription is handled at the head office and the branch offices in
Japan of the above-mentioned Sales Handling Company and online.
13. DATE AND PLACE Investors shall pay the Offering Price to the
OF PAYMENT: Distributors in Japan within four(4) business
days in Japan from and including the day when
the Distributors in Offering Price to the
execution of the application (the "Trade
Day"). (See page 39.)
The total issue price for each application
day for subscription will be transferred in
U. S. Dollars by each Distributor in Japan to
the Fund's custodian within 1 Fund Business
Day after the subscription date ("Payment
Date").
14. OUTLINE OF UNDERWRITING, ETC.:
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(A) The Distributor in Japan undertakes to sell the Shares in accordance
with an agreement dated August 2, 2000, as amended with The Vanguard
Group, Inc. in connection with the sale of the Shares in Japan.
(B) During the public offering period, each Distributor in Japan will
execute or forward the purchase orders and repurchase requests of the
Shares received directly to the Fund's Transfer Agent.
Note:Sales Handling Company means a securities agent company and/or
registration agent financial institution which shall conclude the agreement
with a distributor concerning agency business of Shares of the Fund, act as
agent for a distributor for subscription or redemption of Shares of the
Fund from investors and handle the business, etc. concerning receipt of
subscription money from investors or payment of redemption proceeds to
investors, etc.
(C) The Fund has appointed Monex, Inc. as the Agent Company in Japan.
Note:"The Agent Company" shall mean a sales handling company who is a member of
the Japan Securities Dealers Association ("JSDA") which, under a contract
made with a foreign issuer of investment securities, makes public the net
asset value per Share and submits or forwards the financial reports or
other documents to JSDA and other Sales and Repurchase Handling Companies
rendering such other services.
15. MISCELLANEOUS:
(A) Method of Subscription:
Investors who subscribe for Shares shall enter with the
Distributor or Sales Handling Company an agreement concerning the
foreign securities transactions. For this purpose, the Sales Handling
Company shall deliver to investors an Agreement of Foreign Securities
Transactions Account and investors shall submit to the Sales Handling
Company an Application for opening of Transactions Account opened in
accordance with such Agreement.
The subscription amount shall be paid in Yen in principal and the
Yen exchange rate shall be the rate to be determined by the Sales
Handling Company based on the foreign exchange rate of the foreign
exchange market in Tokyo on the Trade Day of each application.
No interest accrues on the subscription money.
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The subscription amount shall be paid in U.S. Dollars to the
Fund's Custodian by each Distributor on the Payment Date.
(B) Offerings other than in Japan:
In parallel with the Offering, Investor Shares are offered in the
United States of America.
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PART II. INFORMATION CONCERNING ISSUER
I. DESCRIPTION OF THE FUND
1. GENERAL INFORMATION
(A) Outline of Laws Regulating the Fund in the Jurisdiction Where
Established:
(1) Name of the Fund: VANGUARD WELLESLEY INCOME FUND
(the "Fund" or the "Trust")
(2) Form of the Fund
The Fund was organized as a Delaware Corporation in 1968, before
before becoming a Maryland corporation in 1973, and then reorganized
as a Delaware business trust in May, 1998. Prior to its reorganization
as a Delaware business trust, the Fund was known as Vanguard/Wellesley
Income Fund, Inc. The Fund is registered with the United States
Securities and Exchange Commission (the "Commission" or the "SEC")
under the Investment Company Act of 1940 (the "1940 Act") as an
open-end, diversified management investment company. It currently
offers the following fund in Japan: Vanguard Wellesley Income Fund.
The Fund offers one class of shares (Investor Shares) in Japan.
The Fund has the ability to offer additional funds or classes of
shares. There is no limit on the number of full and fractional shares
that the Trust may issue for a single fund or class of shares.
(3) Governing Laws
The Trust was created under, and is subject to, the General Laws
and the common law of the State of Delaware. With respect to its
operations, the Fund is also subject to the Investment Company Act of
1940, as amended, the United States Internal Revenue Code, as amended,
and regulations promulgated under each statute. With respect to the
sale of its Shares, the Fund is subject to the Securities Act of 1933,
the Securities Exchange Act of 1934, the "Blue Sky" laws (state
securities laws of the various states in the United States) and the
regulations promulgated under such laws.
The substance of the governing law is as follows:
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a. Delaware Business Trust Act (Delaware Code Chapter 38 et seq.
("Treatment of Delaware Business Trusts")
Chapter 38 provides as follows:
Delaware has had in effect since October 1, 1988, the Business Trust
Act which expressly recognizes the Delaware business trust. The
principal purpose of the Business Trust Act is to modernize the common
law and provide certainty by codifying Delaware law with respect to
the use of trusts in business transactions. The Business Trust Act
permits the trust agreement of a business trust to establish whatever
rights and obligations of the trustees and of the beneficial owners as
are desirable. The voting rights of trustees or beneficial owners, or
any class or series thereof, may be expanded, limited or eliminated
with respect to virtually any matter relating to the business trust.
This flexibility provides an advantage over alternative forms of
business organizations and common law trusts which often are subject
to mandatory provisions.
A Delaware business trust may be merged or with a foreign or Delaware
corporation, liability company or limited partnership, limited
business trust pursuant to statutory procedures contained in the
Business Trust Act. A merger or consolidation may be pre-authorized,
or may be conditioned upon the approval of a specific class or
percentage of trustees or beneficial owners, as set forth in the trust
agreement of the business trust. Thus, a business trust may be
converted into another form of business entity in order to take
advantage of future changes in the tax laws or the securities markets.
Under the Business Trust Act, the beneficial owners of a Delaware
business trust have the same limitations of personal liability as
shareholders of a Delaware corporation. Except to the extent otherwise
provided in the trust agreement, a business trust is managed by or
under the direction of its trustees, who are not liable for the
obligations of the business trust. The Business Trust Act provides
that at least one trustee must be a Delaware resident. However, a
trust that is or will become a registered investment company is exempt
from this requirement. This requirement may be satisfied by engaging a
trust company with its principal place of business in Delaware. The
duties of the trustees may be specified in
<PAGE>
-8-
the trust agreement. Moreover, the trust agreement may provide for the
appointment of managers, employees or other persons to manage the
business trust with such rights, powers and duties as are set forth
herein.
To the extent that trustees or other persons who are responsible for
managing the business trust have duties (including fidiciary duties)
and liabilities relating thereto to the business trust or to the
beneficial owners, such persons' duties may be expanded or restricted
by the trust agreement. In addition, such persons shall not be liable
for their good faith reliance on the provisions of the trust
agreement.
b. Delaware Common Law
Common law is a non-statutory law developed through court judgments.
Certain legal principles developed through decisions rendered by the
courts of the State of Delaware may be applicable to Delaware Business
Trusts and trustees of such trusts.
c. Investment Company Act of 1940
The Investment Company Act of 1940 (the "1940 Act") gives the SEC the
authority to enforce the 1940 Act's provisions. The 1940 Act requires
an investment company to (i) disclose financial information and
fundamental policies, (ii) submit registration statements to the SEC,
and (iii) submit and deliver certain reports to the SEC and
shareholders. The 1940 Act generally prohibits such companies from
changing the nature of their business or other fundamental policies
without the approval of the shareholders. The 1940 Act regulates the
custody of a fund's assets and, more generally, a fund's business and
conduct.
d. Securities Act of 1933
The Securities Act of 1933 (the "1933 Act") regulates the sales of
securities. The 1933 Act requires information with regard to
securities being issued or sold to be disclosed by means of a
registration statement, including a prospectus. The 1933 Act makes any
fraudulent act in connection with the issuance or sale of such
securities unlawful.
e. Securities Exchange Act of 1934
<PAGE>
-9-
The Securities Exchange Act of 1934 (the "1934 Act") regulates the
purchase and sale of securities and pertains to continuous disclosure
with respect to securities, proxy statements, unlawful use of inside
information and other fraudulent conduct. It also includes provisions
relating to the securities markets as well as extensive regulations
relating to securities dealers.
f. The Internal Revenue Code of 1986
The Code provides for the qualification of a fund to be treated as a
regulated investment company.
(B) Outline of the Supervisory Authorities
The Fund is subject to supervision by the SEC and the securities
authorities of the various U.S. states.
a. The SEC
(i)Acceptance of registration applications
(Sections 7 and 8 of the 1940 Act)
An investment company must register with the SEC by filing a
notification of registration in such form as the SEC shall prescribe.
An investment company is deemed to have been registered when it has
filed such registration notification with the SEC. After filing the
proscribed notification, an investment company must file a
registration statement with the SEC.
(ii)Suspension or revocation of registration as a registered
investment company
(Section 8 of the 1940 Act)
An investment company may have its registration suspended or revoked
by order of the SEC if it fails to submit a registration statement or
report or if either is materially defective.
(iii)Supervision of changes in trustees and officers
(Section 9(b) of the 1940 Act)
The SEC can prohibit trustees and officers from serving as such in the
event they are found to have willfully violated certain U.S. federal
securities laws.
(iv)Examination of registration statement
(Sections 5 and 8 of the 1933 Act)
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In order to sell Shares to the public, the Fund must file a
registration statement with the SEC and such statement must have
become effective. The registration statement is prepared in accordance
with Form N-1A and must include the information required by Form N-1A
and, more generally, the 1933 Act and rules thereunder. The SEC will
examine the registration statement and, if it does not comply with the
requirements of Form N-1A, may order its modification or deny its
effectiveness. Parts A and B of the Form N-1A registration statement
consist of the investment company's prospectus and statement of
additional information, respectively.
(v)Supervision of the business
(Section 12 of the 1940 Act)
The SEC regulates the function and activities of investment companies,
including such matters as the purchase of securities on margin, short
sales of securities, underwriting commitments, acquisition of
securities issued by other investment companies, organization of face
amount certificate companies, acquisition of voting stock of insurance
companies and other matters.
(vi)Acceptance of periodic reports
(Section 30 of the 1940 Act)
The SEC requires all investment companies to submit annual and other
reports. The SEC regulates the content of these reports, thereby
exercising its supervisory authority.
b. State Securities Supervisory Authorities
(i)Provisions concerning licenses
Most states require brokers, dealers, securities salespersons, and
certain investment advisers either to acquire licenses from the state
or, at least, to be registered with a state agency. agency.
(ii)Provisions concerning registration of securities
Most of the 50 states require notification of the availability of
shares upon registration of a fund's shares with the SEC prior to any
lawful sale or offer to sell.
(iii)Provisions concerning prevention of fraud
<PAGE>
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In general, the Blue Sky Laws provide various sanctions for fraudulent
acts in connection with the sale of securities, such as prosecution
resulting in fine and/or imprisonment, injunction, an order requiring
payment of the deposit, temporary suspension or revocation of license
or registration, and civil liability for damages. (C) Objects and
Basic Nature of the Fund: The Fund seeks to provide a high and
sustainable level of current income along with moderate long-term
capital growth.
(D) History of the Fund:
September 24, 1968:Organized as a Delaware corporation
January 10, 1973: Reorganized as a Maryland corporation
January 23, 1998: Execution of the Agreement and Declaration of Trust
May 1, 1998: The Trust was reorganized as a Delaware business trust
(E) Related Companies of the Fund:
Names and related businesses of the related companies of the Fund are
as follows:
(1) The Vanguard Group, Inc. (the "Investment Manager" and the
"Transfer and Dividend-Paying Agent") acts as investment manager
and the transfer and dividend-paying agent and renders investment
management and transfer and dividend-paying agency services to
the Fund.
(2) Wellington Management Company, LLP. (the "Investment Adviser")
acts as Investment Adviser of the Fund and renders investment
advisory services to the Fund.
(3) The Chase Manhattan Bank (the "Custodian") acts as custodian and
renders custody services to the Fund.
(4) Monex, Inc. (the "Agent Company" and "Distributor in Japan") acts
as the Fund's Agent Company with respect to the sale of the
Fund's Shares in Japan and engages in forwarding the purchase or
repurchase orders for the Shares in Japan.
<PAGE>
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Related Parites of the Fund
---------------------------
Trust
Vanguard Wellesley Income Fund
Trustees
(Agreement and Declaration of Trust)
Investment Advisory Agreement
Investment Adviser
Wellington Management Company, LLP.
investment adviser
Global Custody Agreement
Custodian
The Chase Manhattan Bank
custodian
Funds' Service Agreement
Investment Manager, Transfer and Dividend-Paying Agent
The Vanguard Group, Inc.
Investment Manager, Transfer and Dividend-Paying Agent
Agent Company Agreement
Agent Company
Distributor in Japan
Monex, Inc.
agent company
distributor in Japan
Shares Distribution And Redemption Agreement
<PAGE>
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2. INVESTMENT POLICY
(A) Investment Policies and Investment Objectives:
INVESTMENT OBJECTIVE
The Fund seeks to provide a high and sustainable level of current
income along with moderate long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests approximately 60% to 65% of its assets in
investment-grade, longer-term corporate, U.S. Treasury, government
agency, and mortgage-backed bonds. The remaining 35% to 40% of Fund
assets are invested in common stocks of companies that have a history
of above-average dividends or expectations of increasing dividends.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK AND BOND PRICES GENERALLY,
WILL FLUCTUATE WITHIN A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY
OVER SHORT OR EVEN LONG PERIODS.
The Fund is also subject to:
o Interest rate risk, which is the chance that bond prices overall
will decline over short or even long periods due to rising
interest rates. Interest rate risk is generally high for
longer-term bond funds.
o Income risk, which is the chance that falling interest rates will
cause the Fund's income to decline. Income risk is generally low
for longer-term bond funds.
o Credit risk, which is the chance that a bond issuer will fail to
pay interest and principal in a timely manner, reducing the
Fund's return. Credit risk should be low for the Fund.
o Call risk, which is the chance that during periods of falling
interest rates, a bond issuer will "call" - or repay - a
high-yielding bond before the bond's maturity date. For
mortgage-backed bonds, this phenomena is called prepayment risk.
Forced to reinvest the unanticipated proceeds at lower interest
rates, the Fund would experience a decline in income and lose the
opportunity for additional price appreciation associated with
falling rates. Call (or prepayment) risk is generally high for
longer-term bond funds.
o Investment style risk, which is the chance that returns from
large- and mid-capitalization value stocks will trail returns
from other asset classes or the overall stock market.
<PAGE>
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o Manager risk, which is the chance that poor security selection
will cause the Fund to underperform other funds with similar
investment objectives.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser
uses in pursuit of the Fund's objective, income and moderate growth of
capital. It also explains how the adviser implements these strategies.
In addition, this section discusses several important risks--income
risk, interest rate risk, stock market risk, manager risk, credit
risk, call or prepayment risk, and investment style risk--faced by
investors in the Fund. The Fund's Board of Trustees, which oversees
the management of the Fund, may change the Fund's investment objective
or strategies in the interest of shareholders, without a shareholder
vote.
MARKET EXPOSURE
Bonds
The Fund invests approximately two-thirds of its assets in bonds.
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT THE
FUND'S DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING INTEREST RATES.
INCOME RISK IS GENERALLY THE GREATEST FOR SHORT-TERM BOND FUNDS, AND
THE LEAST FOR LONG-TERM BOND FUNDS.
Changes in interest rates will affect bond prices as well as bond
income.
THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE
THAT BOND PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS
DUE TO RISING INTEREST RATES. INTEREST RATE RISK SHOULD BE HIGH FOR
LONGER-TERM BOND FUNDS.
In the past, bond investors have seen the value of their
investments rise and fall - sometimes significantly - with changes in
interest rates. Between December 1976 and September 1981, for
instance, rising interest rates caused long-term bond prices to fall
by almost 48%.
Because the Wellesley Income Fund invests mainly in bonds,
changes in interest rates will have a significant impact on the value
of the Fund's assets. To illustrate how much of an impact, the
following table shows the effect of a 1% and a 2% change (both up
<PAGE>
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and down) in interest rates on three bonds of different maturities,
each with a face value of $1,000.
--------------------------------------------------------------------------------
How Interest Rate Changes Affect the Value of a $1,000 Bond*
--------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
INCREASE DECREASE INCREASE DECREASE
--------------------------------------------------------------------------------
TYPE OF BOND (MATURITY)
--------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1,023 $956 $1,046
--------------------------------------------------------------------------------
Intermediate-Term (10 years) 932 1,074 870 1,156
--------------------------------------------------------------------------------
Long-Term (20 years) 901 1,116 816 1,251
--------------------------------------------------------------------------------
*Assuming a 7% yield
--------------------------------------------------------------------------------
These figures are for illustrative purposes only and should not
be regarded as an indication of future returns from the bond market as
a whole, or the Fund in particular.
STOCKS
Roughly one-third of the Fund's assets are invested in common
stocks.
THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE
THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG
PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING
PRICES AND PERIODS OF FALLING PRICES.
To illustrate the volatility of stock prices, the following table
shows the best, worst, and average total returns for the U.S. stock
market over various periods as measured by the S&P 500 Index, a widely
used barometer of stock market activity. (Total returns consist of
dividend income plus change in market price.) Note that the returns
shown do not include the costs of buying and selling stocks or other
expenses that a real-world investment portfolio would incur. Note,
also, that the gap between best and worst tends to narrow over the
long term.
--------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
--------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
--------------------------------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
--------------------------------------------------------------------------------
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The table covers all of the 1-, 5-, 10-, and 20-year periods from
1926 through 1999. Investors can see, for example, that while the
average return on stocks for all of the 5-year periods was 11.0%,
returns for individual 5-year periods ranged from a -12.4% average
(from 1928 through 1932) to 28.6% (from 1995 through 1999). These
average returns reflect past performance on common stocks; investors
should not regard them as an indication of future returns from either
the stock market as a whole or this Fund in particular.
S&P 500 is a registered trademark of The McGraw-Hill Companies, Inc.
Because bond prices and stock prices can move in different
directions, the Fund's stock holdings help to dampen - but not
eliminate - some of the bond-price fluctuations caused by changes in
interest rates. Likewise, stock market volatility may not be as
dramatic for the Fund as it would be for a fund made up entirely of
stocks.
SECURITY SELECTION
Investment Adviser invests approximately 60% to 65% of the Fund's
assets in investment-grade bonds and approximately 35% to 40% of the
Fund's assets in dividend-paying common stocks. While the mix of
stocks and bonds varies from time to time depending on the Adviser's
view of economic and market conditions, bonds can be expected to
represent at least 60% of the Fund's holdings.
The Fund is run by Investment Adviser according to traditional
methods of active investment management. To achieve the Fund's
objective, income and moderate capital growth, the Adviser follows
specific strategies for bond and stock selection.
The Fund is generally managed without regard to tax
ramifications.
THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
ADVISER WILL DO A POOR JOB OF SELECTING STOCKS AND BONDS.
BONDS
Investment Adviser selects investment-grade bonds that it
believes will generate a high and sustainable level of current income.
These bonds may include intermediate- and long-term corporate, U.S.
Treasury, government agency, mortgage-backed, and asset-
<PAGE>
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backed bonds. The bonds are bought and sold according to the
Investment Adviser's judgment about bond issuers and the general
direction of interest rates, within the context of the economy in
general. The dollar-weighted average maturity of the Fund's bonds as
of December 31, 1999, was 15.8 years, but is expected to decline in
2000.
A breakdown of the Fund's bond holdings (which amounted to 59% of
net assets) as of December 31, 1999, follows:
--------------------------------------------------------------------------------
TYPE OF BOND PERCENTAGE OF FUND'S BOND HOLDINGS
--------------------------------------------------------------------------------
Industrial 35.5%
Bank/Finance 25.0
Utilities 15.4
Mortgage 15.1
U.S. Treasury and government agency 8.3
Non-U.S. issuers 0.7
--------------------------------------------------------------------------------
Keep in mind that, because the bond makeup of the Fund changes
daily, this listing is only a "snapshot" at one point in time.
THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A
BOND ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY
MANNER.
Investment Adviser purchases bonds that are investment-grade
quality--that is, bonds that are rated at least Baa by Moody's
Investors Service, Inc., or BBB by Standard & Poor's Corporation. The
dollar-weighted average quality of bonds held by the Fund, as of
December 31, 1999, was Aa3, according to Moody's.
The U.S. government guarantees the timely payment of interest and
principal for its Treasury bonds; many (but not all) agency bonds have
the same guarantee. The government does not, however, guarantee its
bonds' prices. In other words, while Treasury and agency bonds enjoy
the highest credit ratings, their prices - like the prices of other
bonds in the Fund - will fluctuate with changes in interest rates.
<PAGE>
-18-
While falling interest rates tend to strengthen bond prices, they can
cause another sort of problem for bond fund investors - bond calls.
THE FUND IS SUBJECT TO CALL RISK, WHICH IS THE CHANCE THAT DURING
PERIODS OF FALLING INTEREST RATES A BOND ISSUER WILL "CALL" -OR REPAY-
A HIGH-YIELDING BOND BEFORE THE BOND'S MATURITY DATE. FOR
MORTGAGE-BACKED BONDS, THIS PHENOMENA IS CALLED PREPAYMENT RISK.
FORCED TO REINVEST THE UNANTICIPATED PROCEEDS AT LOWER INTEREST RATES,
THE FUND WOULD EXPERIENCE A DECLINE IN INCOME AND LOSE THE OPPORTUNITY
FOR ADDITIONAL PRICE APPRECIATION ASSOCIATED WITH FALLING RATES. CALL
(OR PREPAYMENT) RISK IS GENERALLY HIGH FOR LONGER-TERM BOND FUNDS.
To protect the Fund's corporate bond holdings against call risk,
the Investment Adviser purchases bonds that have reasonable protection
from being called.
Bond issuers take advantage of falling interest rates by calling
corporate bonds. With mortgage-backed securities, it is the mortgage
holder - such as the American homeowner - who benefits from lower
rates.
STOCKS
The Fund's stocks are chosen primarily for their
dividend-producing capabilities, but must also have the potential for
moderate long-term capital growth. The Investment Adviser looks for
stocks of companies that either offer significant dividends now or
expect to increase their dividends in the future. Securities are sold
when an investment has achieved its intended purpose, or because it is
no longer considered attractive.
THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE
THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION VALUE STOCKS WILL
TRAIL RETURNS FROM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET.
AS A GROUP, VALUE STOCKS TEND TO GO THROUGH CYCLES OF DOING
BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS HAVE,
IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
<PAGE>
-19-
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it
retains the right to sell securities regardless of how long the
securities have been held. The Fund's average turnover rate for the
past five years has been about 29%. (A turnover rate of 100% would
occur, for example, if the Fund sold and replaced securities valued at
100% of its net assets within a one-year period.)
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in bonds and stocks, the Fund may make certain
other kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments
in securities of companies based outside the United States, it
reserves the right to invest up to 20% of stock holdings in non-U.S.
common stocks as well as securities that are convertible into common
stocks. These securities may be traded in U.S. or non-U.S. markets. To
the extent that it owns non-U.S. stocks, the Fund is subject to (1)
country risk, which is the chance that political events (such as a
war), financial problems (such as government default), or natural
disasters (such as an earthquake) will weaken a country's economy and
cause investments in that country to lose money; and (2) currency
risk, which is the chance that Americans investing outside the United
States could lose money because of a rise in the value of the U.S.
Dollar versus non-U.S. currencies.
The Fund may also invest in fixed-income securities issued by
governments and by companies domiciled outside the United States;
however, these securities must be valued in U.S. Dollars and meet the
Fund's credit quality standards. With respect to its investments in
non-U.S. bonds, the Fund is subject to country risk.
The Fund may also invest, to a limited extent, in futures and
options contracts, which are traditional types of derivatives. The
Fund may also invest modestly in less-risky classes of collateralized
mortgage obligations (CMOs).
Losses (or gains) involving futures can sometimes be
substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or
gain) for a fund. This Fund will not use futures for speculative
purposes or as leveraged investments that magnify the gains or losses
of an investment.
<PAGE>
-20-
The Fund's obligation to purchase securities under futures contracts
will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options
are:
o To keep cash on hand to meet shareholder redemptions or other
needs while simulating full investment in stocks and bonds.
o To reduce the Fund's transaction costs or add value when these
instruments are favorably priced.
The Fund may temporarily depart from its normal investment
policies--for instance, by investing substantially in cash
reserves--in response to extraordinary market, economic, political, or
other conditions. In doing so, the Fund may succeed in avoiding losses
but otherwise fail to achieve its investment objective.
INVESTMENT POLICIES
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements
with commercial banks, brokers or dealers either for defensive
purposes due to market conditions or to generate income from its
excess cash balances. A repurchase agreement is an agreement under
which the Fund acquires a fixed-income security (generally a security
issued by the U.S. Government or an agency thereof, a banker's
acceptance or a certificate of deposit) from a commercial bank, broker
or dealer, subject to resale to the seller at an agreed upon price and
date (normally, the next business day). A repurchase agreement may be
considered a loan collateralized by securities. The resale price
reflects an agreed upon interest rate effective for the period the
instrument is held by the Fund and is unrelated to the interest rate
on the underlying instrument. In these transactions, the securities
acquired by the Fund (including accrued interest earned thereon) must
have a total value in excess of the value of the repurchase agreement
and are held by a custodian bank until repurchased. In addition, the
Fund's Board of Trustees will monitor the Fund's repurchase agreement
transactions generally and will establish guidelines and standards for
review by the Investment Adviser of the creditworthiness of any bank,
broker or dealer party to a repurchase agreement with the Fund.
<PAGE>
-21-
The use of repurchase agreements involves certain risks. For
example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time when the
value of the security has declined, the Fund may incur a loss upon
disposition of the security. If the other party to the agreement
becomes insolvent and subject to liquidation or reorganization under
bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by the Fund not within the control
of the Fund and therefore the realization by the Fund on such
collateral may be automatically stayed. Finally, it is possible that
the Fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the
other party to the agreement. While the Investment Adviser
acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES. The Fund may lend its securities to qualified
institutional investors (typically brokers, dealers, banks or other
financial institutions) who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding
failures to deliver securities or completing arbitrage operations. By
lending its portfolio securities, the Fund attempts to increase its
net investment income through the receipt of interest on the loan. Any
gain or loss in the market price of the securities loaned that might
occur during the term of the loan would be for the account of the
Fund. The terms, the structure and the aggregate amount of such loans
must be consistent with the 1940 Act, and the rules and regulations or
interpretations of the Commission thereunder. These provisions limit
the amount of securities the Fund may lend to 33 1/3% of the Fund's
total assets, and require that (a) the borrower pledge and maintain
with the Fund collateral consisting of cash, a letter of credit issued
by a U.S. bank, or securities issued or guaranteed by the United
States Government having at all times not less than 100% of the value
of the securities loaned, (b) the borrower add to such collateral
whenever the price of the securities loaned rises (i.e. the borrower
"marks to the market" on a daily basis), (c) the loan be made subject
to termination by the Fund at any time, and (d) the Fund receive
reasonable interest on the loan (which may include the Fund's
investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any
increase in their market value. Loan arrangements made by the Fund
will comply with all other applicable regulatory requirements,
including the rules of the New York Stock
<PAGE>
-22-
Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of three
business days. All relevant facts and circumstances, including the
creditworthiness of the broker, dealer or institution, will be
considered in making decisions with respect to the lending of
securities, subject to review by the Fund's Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with
loaned securities, so long as such fees are set forth in a written
contract and approved by the investment company's trustees. In
addition, voting rights pass with the loaned securities, but if a
material event occurs that affects the securities on loan, the Fund
must call the loan and vote the securities.
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an
exemptive order permitting the Fund and other Vanguard funds to
participate in Vanguard's interfund lending program. This program
allows the Vanguard funds to borrow money from and loan money to each
other for temporary or emergency purposes. The program is subject to a
number of conditions, including the requirement that no fund may
borrow or lend money through the program unless it receives a more
favorable interest rate than is available from a typical bank for a
comparable transaction. In addition, a Vanguard fund may participate
in the program only if and to the extent that such participation is
consistent with the fund's investment objective and other investment
policies. The Boards of Trustees of the Vanguard funds are responsible
ensuring that the interfund lending program operates in compliance
with all conditions of the Commission's exemptive order.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets
in illiquid securities. Illiquid securities are securities that may
not be sold or disposed of in the ordinary course of business within
seven business days at approximately the value at which they are being
carried on the Fund's books.
The Fund may invest in restricted, privately placed securities
that, under securities laws, may be sold only to qualified
institutional buyers. Because these securities can be resold only to
qualified institutional buyers or after they have been held for a
number of years, they may be considered illiquid securities--meaning
that they could be difficult for the Fund to convert to cash if
needed.
<PAGE>
-23-
If a substantial market develops for a restricted security held
by the Fund, it will be treated as a liquid security, in accordance
with procedures and guidelines approved by the Fund's Board of
Trustees. This generally includes securities that are unregistered
that can be sold to qualified institutional buyers in accordance with
Rule 144A under the Securities Act of 1933 (the "1933 Act"). While the
Fund's Investment Adviser determines the liquidity of restricted
securities on a daily basis, the Fund's Board of Trustees oversees and
retains ultimate responsibility for the Adviser's decisions. Several
factors that the Board considers in monitoring these decisions include
the valuation of a security, the availability of qualified
institutional buyers, and the availability of information about the
security's issuer.
MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities. Mortgage-backed securities are instruments that entitle
the holder to a share of all interest and principal payments from
mortgages underlying the security. The mortgages backing these
securities include conventional thirty-year fixed rate mortgages,
graduated payment mortgages and adjustable rate mortgages. During
periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities may be expected to accelerate.
Prepayment of mortgages which underlie securities purchased at a
premium often results in capital losses, while prepayment of mortgages
purchased at a discount often results in capital gains. Because of
these unpredictable prepayment characteristics, it is often not
possible to predict accurately the average life or realized yield of a
particular issue.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are debt
obligations or multi-class pass-through certificates issued by
agencies or instrumentalities of the U.S. Government, or by private
originators or investors in mortgage loans. In a CMO, series of bonds
or certificates are usually issued in multiple classes, with principal
and interest allocated to each class in a variety of ways. Each class
of a CMO or "tranche" is issued with a specific fixed or floating
coupon rate and has a stated maturity or final distribution date. The
Fund will invest modestly in those CMO classes which feature a high
degree of cash flow predictability and moderate vulnerability to
prepayment risk, and that carry high-quality investment grade credit
ratings.
<PAGE>
-24-
NON-U.S. INVESTMENTS. The Fund may invest up to 20% of its equity
assets in non-U.S. common stocks and securities convertible into
non-U.S. stocks. The Fund may also invest without limit in U.S. Dollar
denominated debt securities issued by governments outside the United
States, their agencies and instrumentalities, supranational entities
and companies located outside the U.S. Investors should recognize that
investing in non-U.S. companies involves certain special
considerations which are not typically associated with investing in
U.S. companies. Among these risks are the following:
Country Risk. As non-U.S. companies are not generally subject to
uniform accounting, auditing and financial reporting standards and
practices comparable to those applicable to U.S. companies, there may
be less publicly available information about certain non-U.S.
companies than about U.S. companies. Securities of some non-U.S.
companies are generally less liquid and more volatile than securities
of comparable U.S. companies. There is generally less government
supervision and regulation of non-U.S. stock exchanges, brokers and
listed companies than in the U.S. In addition, with respect to certain
countries outside the United States, there is the possibility of
expropriation of confiscatory taxation, political or social
instability, or diplomatic developments which could affect U.S.
investments in those countries.
Although the Fund will endeavor to achieve most favorable
execution costs in its portfolio transactions, fixed commissions on
many non-U.S. stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. In addition, it is expected that the
expenses for custodial arrangements of the Fund's non-U.S. securities
will be somewhat greater than the expenses for the custodial
arrangements for handling U.S. securities of equal value.
Certain governments outside the United States levy withholding
taxes against dividend and interest income. Although in some countries
a portion of these taxes is recoverable, the non-recovered portion of
non-U.S. withholding taxes will reduce the income the Fund receives
from its non-U.S. investments.
Currency Risk. Since the stocks of non-U.S. companies are frequently
denominated in non-U.S. currencies, and since the Fund may temporarily
hold uninvested reserves in bank deposits in non-U.S. currencies, the
Fund will be affected favorably or unfavorably by changes in currency
rates and in exchange control regulations, and may incur costs in
<PAGE>
-25-
connection with conversions between various currencies. The investment
policies of the Fund permit it to enter into forward foreign currency
exchange contracts in order to hedge holdings and commitments against
changes in the level of future currency rates. Such contracts involve
an obligation to purchase or sell a specific currency at a future date
at a price set at the time of the contract.
U.S. FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules
govern the U.S. federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. Dollar or
determined by reference to the value of one or more currencies other
than the U.S. Dollar. The types of transactions covered by the special
rules include the following: (i) the acquisition of, or becoming the
obligor under, a bond or other debt instrument (including, to the
extent provided in U.S. Treasury regulations, preferred stock); (ii)
the accruing of certain trade receivables and payables; and (iii) the
entering into or acquisition of any forward contract, futures
contract, option and similar financial instrument if such instrument
is not marked to market. The disposition of a currency other than the
U.S. Dollar by a taxpayer whose functional currency is the U.S. Dollar
is also treated as a transaction subject to the special currency
rules. However, non-U.S. currency-related regulated futures contracts
and nonequity options are generally not subject to the special
currency rules if they are or would be treated as sold for their fair
market value at year-end under the marking-to-market rules applicable
to other futures contracts unless an election is made to have such
currency rules apply. With respect to transactions covered by the
special rules, non-U.S. currency gain or loss is calculated separately
from any gain or loss on the underlying transaction and is normally
taxable as ordinary income or loss. A taxpayer may elect to treat as
capital gain or loss non-U.S. currency gain or loss arising from
certain identified forward contracts, futures contracts and options
that are capital assets in the hands of the taxpayer and which are not
part of a straddle. The U.S. Treasury Department issued regulations
under which certain transactions subject to the special currency rules
that are part of a "section 988 hedging transaction" (as defined in
the U.S. Internal Revenue Code of 1986, as amended, and the U.S.
Treasury regulations) will be integrated and treated as a single
transaction or otherwise treated consistently for purposes of the
Code. Any gain or loss attributable to the non-U.S. currency component
of a transaction engaged in by the Fund which is not
<PAGE>
-26-
subject to the special currency rules (such as non-U.S. equity
investments other than certain preferred stocks) will be treated as
capital gain or loss and will not be segregated from the gain or loss
on the underlying transaction. It is anticipated that some of the
non-U.S. Dollar-denominated investments and non-U.S. currency
contracts the Fund may make or enter into will be subject to the
special currency rules described above.
FUTURES CONTRACTS. The Fund may enter into futures contracts, options,
and options on futures contracts for the purpose of simulating full
investment and reducing transaction costs. Futures contracts provide
for the future sale by one party and purchase by another party of a
specified amount of a specific security at a specified future time and
at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on
national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC), a U.S. Government agency. Assets committed
to futures contracts will be segregated to the extent required by law.
Although futures contracts by their terms call for actual
delivery or acceptance of the underlying securities, in most cases the
contracts are closed out before the settlement date without the making
or taking of delivery. Closing out an open futures position is done by
taking an opposite position ("buying" a contract which has previously
been "sold," or "selling" a contract previously purchased) in an
identical contract to terminate the position. Brokerage commissions
are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit
in cash or government securities with a broker or custodian to
initiate and maintain open positions in futures contracts. A margin
deposit is intended to assure completion of the contract (delivery or
acceptance of the underlying security) if it is not terminated prior
to the specified delivery date. Minimal initial margin requirements
are established by the futures exchange and may be changed. Brokers
may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on
margin which may range upward from less than 5% of the value of the
contract being traded.
After a futures contract position is opened, the value of the
contract is marked to market daily. If the futures contract price
changes to the extent that the margin on deposit
<PAGE>
-27-
does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a
repayment of excess margin to the contract holder. Variation margin
payments are made to and from the futures broker for as long as the
contract remains open. The Fund expects to earn interest income on its
margin deposits.
Traders in futures contracts may be broadly classified as either
"hedgers" or "speculators." Hedgers use the futures markets primarily
to offset unfavorable changes in the value of securities held for
investment purposes or expected to be acquired by them. Speculators
are less inclined to own, or intend to purchase, the securities
underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations
in the prices of underlying securities. The Fund intends to use
futures contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all
of its futures transactions constitute bona fide hedging transactions
except to the extent that the aggregate initial margins and premiums
required to establish any non-hedging positions do not exceed five
percent of the value of the Fund's portfolio. The Fund will only sell
futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging
interest, the Fund expects that approximately 75% of its futures
contract purchases will be "completed;" that is, equivalent amounts of
related securities will have been purchased or are being purchased by
the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures
contracts could be used to control the Fund's exposure to market
fluctuations, the use of futures contracts may be a more effective
means of hedging this exposure. While the Fund will incur commission
expenses in both opening and closing out futures positions, these
costs are lower than transaction costs incurred in the purchase and
sale of the underlying securities.
Restrictions on the Use of Futures Contracts. The Fund will not enter
into futures contract transactions to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts
exceeds 5% of the market value of the Fund's total assets. In
addition, the Fund will not enter into futures contracts to the extent
that its outstanding obligations to purchase securities under these
contracts would exceed 20% of the Fund's total assets.
<PAGE>
-28-
Risk Factors in Futures Transactions. Positions in futures contracts
may be closed out only on an Exchange which provides a secondary
market for such futures. However, there can be no assurance that a
liquid secondary market will exist for any particular futures contract
at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments to maintain its
required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In
addition, the Fund may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options
and futures positions also could have an adverse impact on the ability
to effectively hedge.
The Fund will minimize the risk that it will be unable to close
out a futures contract by only entering into futures which are traded
on national futures exchanges and for which there appears to be a
liquid secondary market.
The risk of loss in trading futures contracts in some strategies
can be substantial, due both to the low margin deposits required, and
the extremely high degree of leverage involved in futures pricing. As
a result, a relatively small price movement in a futures contract may
result in immediate and substantial loss (as well as gain) to the
investor. For example, if at the time of purchase, 10% of the value of
the futures contract is deposited as margin, a subsequent 10% decrease
in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if
the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were
closed out. Thus, a purchase or sale of a futures contract may result
in losses in excess of the amount invested in the contract. The Fund
also bears the risk that the Investment Adviser will incorrectly
predict market trends. However, because the futures strategies of the
Fund are engaged in only for hedging purposes, the Investment Adviser
does not believe that the Fund is subject to the risks of loss
frequently associated with futures transactions. The Fund would
presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial instrument and
sold it after the decline.
<PAGE>
-29-
Utilization of futures transactions by the Fund does involve the
risk of imperfect or no correlation where the securities underlying
futures contracts have different maturities than the portfolio
securities being hedged. It is also possible that the Fund could both
lose money on futures contracts and also experience a decline in value
of its portfolio securities. There is also the risk of loss by the
Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related
option. Additionally, investments in futures contracts and options
involve the risk that the adviser will incorrectly predict stock
market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been
reached in a particular type of contract, no trades may be made on
that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation
of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial losses.
U.S. Federal Tax Treatment of Futures Contracts. The Fund is required
for U.S. federal income tax purposes to recognize as income for each
taxable year its net unrealized gains and losses on certain futures
contracts as of the end of the year as well as those actually realized
during the year. In these cases, any gain or loss recognized with
respect to a futures contract is considered to be 60% long-term
capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts)
are not recognized until the contracts are closed and are treated as
long-term or short-term depending on the holding period of the
contract. Sales of futures contracts which are intended to hedge
against a change in the value of securities held by the Fund may
affect the holding period of such securities and, consequently, the
nature of the gain or loss on such securities upon disposition. The
Fund may be required to defer the recognition of losses on futures
contracts to the extent of any unrecognized gains on related positions
held by the Fund.
<PAGE>
-30-
In order for the Fund to continue to qualify for U.S. federal
income tax treatment as a regulated investment company, at least 90%
of its gross income for a taxable year must be derived from qualifying
income; i.e., dividends, interest, income derived from loans of
securities, gains from the sale of securities or of non-U.S.
currencies or other income derived with respect to the Fund's business
of investing in securities or currencies. It is anticipated that any
net gain recognized on futures contracts will be considered qualifying
income for purposes of the 90% requirement.
The Fund will distribute to Shareholders annually any net capital
gains which have been recognized for U.S. federal income tax purposes
on futures transactions. Such distributions will be combined with
distributions of capital gains realized on the Fund's other
investments and Shareholders will be advised on the nature of the
distributions.
TEMPORARY INVESTMENTS. The Fund may take temporary defensive measures
that are inconsistent with the Fund's normal fundamental or
non-fundamental investment policies and strategies in response to
adverse market, economic, political or other conditions. Such measures
could include investments in (a) highly liquid short-term fixed-income
securities issued by or on behalf of municipal or corporate issuers,
obligations of the U.S. Government and its agencies, commercial paper,
and bank certificates of deposit; (b) shares of other investment
companies which have investment objectives consistent with those of
the Fund; (c) repurchase agreements involving any such securities; and
(d) other money market instruments. There is no limit on the extent to
which the Fund may take temporary defensive measures. In taking such
measures, the Fund may fail to achieve its investment objective.
(B) Investment Restrictions:
The Fund is subject to the following fundamental investment
limitations, which cannot be changed in any material way without the
approval of the holders of a majority of the Fund's shares. For these
purposes, a "majority" of Shares means Shares representing the lesser
of: (i) 67% or more of the votes cast to approve a change, so long as
Shares representing more than 50% of the Fund's net asset value are
present or represented by proxy; or (ii) Shares representing more than
50% of the Fund's net asset value.
<PAGE>
-31-
(1) BORROWING. The Fund may not borrow money, except for temporary or
emergency purposes in an amount not exceeding 15% of the Fund's
net assets. The Fund may borrow money through banks, reverse
repurchase agreements, or Vanguard's interfund lending program
only, and must comply with all applicable regulatory conditions.
The Fund may not make any additional investments whenever its
outstanding borrowings exceed 5% of its net assets.
(2) COMMODITIES. The Fund may not invest in commodities. The Fund may
invest in futures contracts on securities and indexes. The Fund
may also invest in options on futures and options on securities
and indexes. No more than 5% of the Fund's assets may be used as
initial margin deposit and premium for futures contracts and
options, and the notional amount of futures contracts may not
exceed 20% of the Fund's assets at any time.
(3) DIVERSIFICATION. With respect to 75% of its total assets, the
Fund may not: (i) purchase more than 10% of the outstanding
voting securities of any one issuer; or (ii) purchase securities
of any issuer if, as a result, more than 5% of the Fund's total
assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States
Government, its agencies, or instrumentalities.
(4) ILLIQUID SECURITIES. The Fund may not acquire any security if, as
a result, more than 15% of its net assets would be invested in
securities that are illiquid.
(5) INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of
its total assets in any one industry. Utility companies will be
divided according to their services; for example, gas, gas
transmission, electric and gas, electric, and telephone will each
be considered a separate industry.
(6) INVESTING FOR CONTROL. The Fund may not invest in a company for
purposes of controlling its management.
(7) INVESTMENT COMPANIES. The Fund may not invest in any other
investment company, except through a merger, consolidation or
acquisition of assets, or to the extent permitted by Section 12
of the 1940 Act. Investment companies whose shares the Fund
acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
<PAGE>
-32-
(8) LOANS. The Fund may not lend money to any person except by
purchasing fixed-income securities that are publicly distributed
or customarily purchased by institutional investors, or by
entering into repurchase agreements, or by lending its portfolio
securities.
(9) MARGIN. The Fund may not purchase securities on margin or sell
securities short, except as permitted by the Fund's investment
policies relating to commodities.
(10) PLEDGING ASSETS. The Fund may not pledge, mortgage or hypothecate
more than 15% of its net assets.
(11) REAL ESTATE. The Fund may not invest directly in real estate,
although it may invest in securities of companies that deal in
real estate or interests therein.
(12) senior SECURITIES. The Fund may not issue senior securities,
except in compliance with the 1940 Act.
(13) UNDERWRITING. The Fund may not engage in the business of
underwriting securities issued by other persons. The Fund will
not be considered an underwriter when disposing of its investment
securities.
The above-mentioned investment limitations are considered at the
time investment securities are purchased. If a percentage restriction
is adhered to at the time the investment is made, a later increase in
percentage resulting from a change in the market value of assets will
not constitute a violation of such restriction.
None of these limitations prevents the Fund from participating in
The Vanguard Group, Inc. (Vanguard). As a member of the Vanguard Group
of Investment Companies, the Fund may own securities issued by
Vanguard, make loans to Vanguard, and contribute to Vanguard's costs
or other financial requirements. See "Management Structure" for more
information.
In order to permit the sale of its Shares in Japan, the Fund may
make commitments more restrictive than the investment policies and
limitations described above and in its prospectus. Should the Fund
determine that such commitment is no longer in its best interests, it
will revoke the commitment by terminating sales of its Shares in
Japan. In order to comply with the "Standards of Selection of Foreign
Investment Fund Securities" established under the Rules of Foreign
Securities Transaction by the Japanese Securities Dealers Association,
as a matter of operating policy:
<PAGE>
-33-
(1) The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 10% of the Fund's net assets;
(2) The Fund, together with other mutual funds managed by The
Vanguard Group, Inc. may not purchase more than 50% of the
outstanding shares of any issuer;
(3) The Fund may not invest more than 15% of its net assets in
illiquid securities (which include securities restricted as to
resale unless they are determined to be readily marketable in
accordance with procedures established by the Board of Trustees);
(4) The Fund may not sell securities short at any time in excess of
its net assets; and
(5) The Fund may not sell, purchase or loan securities (excluding
Shares in the Fund) or grant or receive a loan or loans to or
from the Investment Adviser, corporate and domiciliary agent, or
paying agent, the distributors and the authorized agents or any
of their directors, officers or employees or any of their major
Shareholders (meaning a Shareholder who holds, in his own or
other name (as well as a nominee's name), more than 10% of the
total issued and outstanding Shares of stock of such company)
acting as principal, or for their own account, unless the
transaction is made within the other restrictions set forth above
and either (a) at a price determined by current publicly
available quotations, or (b) at competitive prices or interest
rates prevailing from time to time on internationally recognized
securities markets or internationally recognized money markets.
(C) Distribution Policy:
The Fund distributes to Shareholders virtually all of its net
income (interest and dividends less expenses) as well as any capital
gains realized from the sale of its holdings. Income dividends
generally are distributed in March, June, September, and December for
the Fund; capital gains distributions for the Fund generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental dividend or capital gains distributions at some other
time during the year.
Investors in Japan will receive distributions of income dividends
or capital gains in cash.
3. MANAGEMENT STRUCTURE
<PAGE>
-34-
(A) Outline of Management of Assets, etc.:
A. Valuation of Assets:
The Fund's Share price, or "net asset value" per Share is
calculated by dividing the total assets of the Fund attributed to each
Share class, less all liabilities attributed to each Share class, by
the total number of Shares outstanding for each class. The net asset
value is determined as of the close of the New York Stock Exchange
(generally 4:00 p.m. U.S. Eastern time) on each day the Exchange is
open for trading.
Portfolio securities for which market quotations are readily
available (includes those securities listed on national securities
exchanges, as well as those quoted on the NASDAQ Stock Market) will be
valued at the last quoted sales price on the day the valuation is
made. Such securities which are not traded on the valuation date are
valued at the mean of the bid and ask prices. Price information on an
exchange-listed security is taken from the exchange where the security
is primarily traded. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect
the fair market value of such securities.
Short-term instruments (those with remaining maturities of 60
days or less) may be valued at cost, plus or minus any amortized
discount or premium, which approximates market value.
Bonds and other fixed income securities may be valued on the
basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities. The
prices provided by a pricing service may be determined without regard
to bid or last sale prices of each security, but take into account
institutional-size transactions in similar groups of securities as
well as any developments related to specific securities.
Non-U.S. securities are valued at the last quoted sales price,
according to the broadest and most representative market, available at
the time the Fund is valued. If events which materially affect the
value of the Fund's investments occur after the close of the
securities markets on which such securities are primarily traded,
those investments may be valued by such methods as the Board of
Trustees deems in good faith to reflect fair value.
<PAGE>
-35-
In determining the Fund's net asset value per Share, all assets
and liabilities initially expressed in non-U.S. currencies will be
converted into U.S. Dollars using the officially quoted daily exchange
rates used by Morgan Stanley Capital International in calculating
various benchmarking indices. This officially quoted exchange rate may
be determined prior to or after the close of a particular securities
market. If such quotations are not available, or do not reflect market
conditions at the time the Fund is valued, the rate of exchange will
be determined in accordance with policies established in good faith by
the Board of Trustees.
Other assets and securities for which no quotations are readily
available or which are restricted as to sale (or resale) are valued by
such methods as the Board of Trustees deems in good faith to reflect
fair value.
B. Management Fee, etc.:
(a) Trustee Fees
The same individuals serve as Trustees of all Vanguard funds
(with two exceptions, which are noted in the table below), and each
fund pays a proportionate share of the Trustees' compensation. The
funds employ their officers on a shared basis, as well. However,
officers are compensated by The Vanguard Group, Inc., not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent
Trustees - that is, the ones who are not also officers of the funds -
in three ways.
o The independent Trustees receive an annual fee for their service
to the funds, which is subject to reduction based on absences
from scheduled Board meetings.
o The independent Trustees are reimbursed for the travel and other
expenses that they incur in attending Board meetings.
o Upon retirement, the independent Trustees receive an aggregate
annual fee of $1,000 for each year served on the Board, up to
fifteen years of service. This annual fee is paid ten years
following retirement, or until each Trustee's death.
"INTERESTED" TRUSTEES. Mr. Brennan serves as a Trustee, but
he is not paid in that capacity. However, he is paid in his role
as Officer of The Vanguard Group, Inc.
<PAGE>
-36-
COMPENSATION TABLE. The following table provides
compensation details for each of the Trustees. We list the
amounts paid as compensation and accrued as retirement benefits
by the Fund for each Trustee. In addition, the table shows the
total amount of benefits that we expect each Trustee to receive
from all Vanguard funds upon retirement, and the total amount of
compensation paid to each Trustee by all Vanguard funds. All
information shown is for the fiscal year ended December 31, 1999.
VANGUARD WELLESLEY INCOME FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED FROM ALL
COMPENSATION PART OF THIS ANNUAL VANGUARD
FROM THIS FUND'S BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUNDS(1) EXPENSES(1) RETIREMENT TRUSTEES(2)
---------------------------------------------------------------------------------------------------------------
John C. Bogle(3) None None None None
John J. Brennan None None None None
JoAnn Heffernan Heisen $1,555 $86 $15,000 $80,000
Bruce K. MacLaury $1,609 $144 $12,000 $75,000
Burton G. Malkiel $1,566 $142 $15,000 $80,000
Alfred M. Rankin, Jr. $1,555 $104 $15,000 $80,000
John C. Sawhill(4) $1,555 $131 $15,000 $80,000
James O. Welch, Jr. $1,555 $152 $15,000 $80,000
J. Lawrence Wilson $1,555 $110 $15,000 $80,000
</TABLE>
<PAGE>
-37-
(1) The amounts shown in this column are based on the Fund's fiscal year ended
December 31, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the
1999 calendar year.
(3) Mr. Bogle has retired from the Fund's Board, effective December 31, 1999.
(4) Mr. Sawhill passed away in May 2000.
(b) Management Expenses and Other Expenses
For its investment management services and other services to the Fund,
the Fund shall pay management expenses and other expenses computed
daily and paid monthly based on the Fund's average daily net assets at
the annual rate of 0.30% of net assets.
For the fiscal year ended December 31, 1999, the Fund incurred
$19,749,000 of The Vanguard Group, Inc.'s management (including
transfer agency), distribution, and marketing expenses. The net fee
paid to Investment Adviser for investment advisory services during the
same period represented an effective annual rate of 0.05% of the
Fund's average net assets, or $3,567,000.
(c) Account Administration Fee
In Japan, an Account Administration Fee at the rate of 0.70%
multiplied by the Shareholder's average account balance shall be
assessed upon each Shareholder quarterly in arrears. For Shareholder
accounts which are redeemed in full prior to the end of each quarter,
the Account Administration Fee shall be charged on a pro rata basis
and assessed at the time of redemption. An Account Administration Fee
is compensation to the Distributor for providing account
administration and related services. A consumption tax of 5% is added
to the Account Administration Fee.
<PAGE>
-38-
The Account Administration Fee shall be calculated and collected from
each Shareholder in the following manner.
1. At the end of each calendar quarter, the Shareholder's average
daily account will be calculated in respect of the Fund. This
initial calculation is in Yen.
2. A fee of one quarter of the 70 basis point annual fee (60 basis
point annual fee from July 17, 2001) will be calculated based on
the average account balance so calculated. (Note that in the case
of Shareholder accounts which are partially or fully redeemed
prior to the end of each calendar quarter, the fee shall be
charged in proportion to the period in which such shareholder
holds the shares and assessed at the time of each redemption.
Quarterly assessments shall be net of any fees charged for
partial redemptions during the quarter.)
3. The Distributor will first attempt to withdraw the Account
Administration Fee from the Shareholder's account of Daiwa MRF
(Money Reserve Fund) of Daiwa Securities Investment Trust
Management Co., Ltd.
4. If there is an insufficient balance, the Distributor will next
attempt to withdraw the fee from the Shareholder's account of
DKA's MMF (Money Market Fund) of Dai-ichi Kangyo Asset Management
Co., Ltd., with the exception that Distributor will only withdraw
from balances invested for periods greater than thirty days.
5. If there is an insufficient balance, the Distributor will then
redeem shares from the Fund in respect of which the Account
Administration Fee is collected. If the Shareholder holds two or
more Vanguard Funds' Shares, the Distributor will redeem shares
in the following order:
(i) Vanguard Small-Cap Index Fund
(ii) Vanguard Wellesley Income Fund
6. Shares are redeemed in whole amounts at a level that is necessary
to fund any shortfall. The Distributor will then redeem the
necessary Shares, deduct the Account Administration Fee owed by
the Shareholder and return any excess proceeds to the Shareholder
within four Bank Business Days
<PAGE>
-39-
following the redemption. These proceeds will then be swept by
the Distributor to the Shareholder's Daiwa MRF on the following
Bank Business Day.
C. Sales, Repurchases and Custody:
(1) Sales of Shares:
a. Sales in the United States
------------------------------
Investors buy their Shares at the Fund's next-determined net asset
value after The Vanguard Group, Inc. receives their request. As long
as their request is received before the close of trading on the New
York Stock Exchange, generally 4 p.m. U.S. Eastern time, investors
will buy their Shares at that day's net asset value.
b. Sales in Japan
----------------------
In Japan, Shares of the Fund are offered on any Fund Business Day
(i.e., any day on which the New York Stock Exchange is open for
trading) when sales handling companies are open for business in Japan
(with the exception of a day in which the next business day is a
national holiday in Japan) during the subscription period mentioned in
"10. Period of Subscription, Part I Information Concerning Securities"
of the securities registration statement. A Sales Handling Company
shall provide to the investors a Contract Concerning a Foreign
Securities Transactions Account (the "Contract") and receive from such
investors an application for requesting the opening of a transactions
account under the Contract. The minimum shares to open an account
shall be 50 shares and integral multiples of five shares. Ongoing
purchase shall be made in increments of five shares.
The issue price for Shares during the subscription period shall be, in
principal, the net asset value per Share next calculated after the
Fund has received such application. The Trade Day in Japan is the day
when the Sales Handling Company accepts the order. The payment and
delivery shall be made in Yen on the fourth business day from and
including the Trade Day. No sales charge is added in Japan, provided,
however, that an Account Administration Fee at an annual rate of 0.70%
multiplied by the Shareholder's average account balance shall be
assessed upon each Shareholder quarterly in arrears. For Shareholder
accounts which are redeemed partially or in full prior to the end of
each quarter, the Account
<PAGE>
-40-
Administration Fee shall be charged on a pro rata basis and assessed
at the time of each redemption. Quarterly assessments shall be net of
any fees charged for partial redemptions during the quarter. An
Account Administration Fee is compensation to the Distributor in Japan
for providing account administration and related services. A
consumption tax of 5% is added to the Account Administration Fee.
Shareholders will receive from the Sales Handling Company a
certificate of safekeeping in exchange for the purchase price. In such
case payment shall be made in Yen in principal and the applicable
exchange rate shall be the exchange rate which shall be based on the
foreign exchange rate quoted in the Tokyo Foreign Exchange Market on
the Trade Day and which shall be determined by the Sales Handling
Company. The payment by the investor to the Distributor may be made in
U.S. Dollars to the extent that the Sales Handling Companies can
agree. In addition, the Sales Handling Companies in Japan who are
members of the Japan Securities Dealers Association cannot continue
sales of the Shares in Japan when the net assets of the Fund are less
than (Y)100,000,000 or the Shares otherwise cease to comply with the
"Standards of Selection of Foreign Investment Fund Securities"
established under the Rules of Foreign Securities Transactions by the
Japanese Securities Dealers Association.
(2) Repurchase of Shares:
a. Repurchase in the United States
----------------------------------
Investors can request a redemption of Shares at any time from
their Fund account in any one of three ways: online, by telephone, or
by mail.
The transaction will be based on the Fund's next-determined Share
price, subject to any special rules discussed in this document. No
charge is made by the Fund for redemptions. The proceeds of a
redemption may be worth more or less than the Shareholder's cost,
depending on the market value of the securities held by the Fund.
b. Repurchase in Japan
----------------------------
Shareholders in Japan may at any time request repurchase of their
Shares. Repurchase requests in Japan may be made to the Sales Handling
Company on a Fund Business Day that is also a business day of the
Sales Handling Companies in Japan (with the exception of a day in
which the next business day is a national
<PAGE>
-41-
holiday in Japan). The Sales Handling Company shall send such requests
to The Vanguard Group, Inc. One share is acceptable as the minimum
redemption amount. The price a Shareholder in Japan will receive is
the net asset value next calculated after the Fund receives the
repurchase request from the Sales Handling Company. The payment of the
price shall be made in Yen through the Sales Handling Companies
pursuant to the Contracts or, if the Sales Handling Companies agree,
in U.S. Dollars. The payment for repurchase proceeds shall be made on
the fourth business day of the Sales Handling Companies in Japan from
and including the Trade Day.
Although the Account Administration Fee is funded from a Shareholder's
account of Daiwa MRF and then DKA's MMF (balances invested for periods
greater than thirty-days), if there is an insufficient balance, the
Distributor may redeem Shareholder's Shares in the Fund or Funds in
which the Shareholder is invested. If the Shareholder holds Shares in
more than one Fund the Distributor shall redeem Shares in the
following order :
(i) Vanguard Small-Cap Index Fund
(ii) Vanguard Wellesley Income Fund
Please refer to "3. Management Structure, (A) Outline of Management of
Assets, etc., B. Management Fee, etc., (c) Account Administration Fee"
in detail.
(3) Suspension of Repurchase:
The Fund may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is
closed, or trading on the Exchange is restricted as determined by the
SEC, (ii) during any period when an emergency exists as defined by the
rules of the SEC as a result of which it is not reasonably practicable
for the Fund to dispose of securities owned by it, or fairly to
determine the value of its assets, and (iii) for such other periods as
the SEC may permit.
The Fund reserves the right to delay delivery of redemption proceeds
up to seven days if the amount will disrupt the Fund's operation or
performance. If a Shareholder redeems more than $250,000 worth of
Shares within any 90-day period, the Fund reserves the right to pay
part or all of the redemption proceeds
<PAGE>
-42-
above $250,000 in-kind, i.e., in securities rather than in cash. If
payment is made in kind, the Shareholder may incur brokerage
commissions if the Shareholder elects to sell the securities for cash.
(4) Conversion of Shares
In Japan, Shares cannot be converted to securities of other classes or
series of the Trust.
(5) Custody of Shares:
To eliminate the need for safekeeping, the Fund will not issue
certificates for Shares.
D. Miscellaneous:
(1) Duration and Liquidation:
Unless terminated as provided in the Agreement and Declaration of the
Trust, the Trust shall continue without limitation of time. The Trust
may be terminated at any time by the Trustees upon 60 days prior
written notice to the Shareholders. Any series may be terminated at
any time by the Trustees upon 60 days prior written notice to the
Shareholders of that series.
(2) Accounting Year:
The accounts of the Fund will be closed each year on December 31.
(3) Authorized Shares:
There is no prescribed authorized number of Shares, and Shares may be
issued from time to time.
(4) Agreement and Declaration of Trust:
Originals or copies of the Agreement and Declaration of Trust, as
amended, are maintained in the office of the Trust and are made
available for public inspection for the Shareholders. Originals or
copies of the Agreement and Declaration of Trust, as amended, are on
file in the United States with the Secretary of State of the State of
Delaware. The Agreement and Declaration of Trust may be restated
and/or amended at any time by an instrument in writing signed by a
majority of the Trustees then holding office. Any such restatement
and/or amendment thereto shall be effective immediately upon execution
and approval. The Certificate of Trust of the Trust may be restated
and/or amended by a similar procedure, and any such
<PAGE>
-43-
restatement and/or amendment shall be effective immediately upon
filing with the Office of the Secretary of State of the State of
Delaware or upon such future date as may be stated therein. In Japan,
material changes in the Agreement and Declaration of Trust shall be
published or notice thereof shall be sent to the Japanese
Shareholders.
(B) Outline of Disclosure System:
(1) Disclosure in U.S.A.:
(i) Disclosure to Shareholders
In accordance with the 1940 Act, the Fund is required to send to its
Shareholders annual and semi-annual reports containing financial
information.
(ii) Disclosure to the SEC
The Fund has filed a registration statement with the SEC on Form N-1A;
the Fund updates that registration statement periodically in
accordance with the 1940 Act.
(2) Disclosure in Japan:
a. Disclosure to the Supervisory Authority
(i) Disclosure Required under the Securities and Exchange Law:
When the Trustees intend to offer the Shares of the Fund amounting to
100 million Yen or more in Japan, it shall submit to the Director of
Kanto Local Finance Bureau of the Ministry of Finance the securities
registration statement together with the copies of the Agreement and
Declaration of Trust and the agreements with major related companies
as attachments thereto. The said documents are made available for
public inspection for the investors and any other persons who desire
at Kanto Local Finance Bureau of the Ministry of Finance. The Sales
Handling Companies of the Shares shall deliver to the investors
prospectuses the contents of which are substantially identical to Part
I and Part II of the securities registration statement. For the
purpose of disclosure of the financial conditions, etc., the Trustees
shall submit to the Director of Kanto Local Finance Bureau of the
Ministry of Finance securities reports within 6 months of the end of
each fiscal year, semi-annual reports within 3 months of the end of
each semi-annual period and extraordinary reports from time to time
when changes occur as to material subjects of the Fund. These
documents are available for public
<PAGE>
-44-
inspection for the investors and any other persons who desire at Kanto
Local Finance Bureau of the Ministry of Finance.
(ii) Notifications, etc. under the Law Concerning Securities
Investment Trusts and Securities Investment Companies
If the Management Company conducts business of offering for sale
Shares of the Fund, it must file in advance the prescribed matters on
the Fund with the Commissioner of Financial Services Agency under the
Law Concerning Securities Investment Trusts and Securities Investment
Companies (the Law No.198, 1951) (hereinafter referred to as the
"Investment Trusts Law"). In addition, if the Management Company
amends the Agreement and Declaration of Trust, it must file in advance
such amendment and the details thereof with the Commissioner of
Financial Services Agency. Further, the Trustees must prepare the
Management Report on the prescribed matters concerning the assets of
the Fund under the Investment Trusts Law immediately after the end of
each calculation period of the Fund and must file such Report with the
Commissioner of Financial Services Agency.
b. Disclosure to Japanese Shareholders:
If the Management Company makes any amendment to the Agreement and
Declaration Trust, the substance of which is important, it must give
in advance public notice concerning its intention to make such
amendment and the substance of such amendment at least 30 days prior
to such amendment, and must deliver the written documents containing
the above matters to the Shareholders known in Japan. Provided,
however, that if the said written documents are delivered to all the
Shareholders in Japan, the relevant public notice is not required to
be given. The Japanese Shareholders will be notified of the material
facts which would change their position and of notices from the
Trustees, through the Sales Handling Companies.
The above-described Management Report on the Fund will be sent to the
Shareholders known in Japan.
(C) Restrictions on Transactions with Interested Parties:
<PAGE>
-45-
The Fund may not sell, purchase or loan securities (excluding
Shares in the Fund) or grant or receive a loan or loans to or from the
Investment Adviser, corporate and domiciliary agent, or paying agent,
the distributors and the authorized agents or any of their directors,
officers or employees or any of their major Shareholders (meaning a
Shareholder who holds, in his own or other name (as well as a
nominee's name), more than 10% of the total issued and outstanding
Shares of stock of such company) acting as principal, or for their own
account, unless the transaction is made within the other restrictions
set forth above and either (a) at a price determined by current
publicly available quotations, or (b) at competitive prices or
interest rates prevailing from time to time on internationally
recognized securities markets or internationally recognized money
markets.
4. INFORMATION CONCERNING THE EXERCISE OF RIGHTS BY SHAREHOLDERS, ETC.
(A) Rights of Shareholders and Procedures for Their Exercise:
Shareholders in Japan must generally register their shares in
their own name in order to exercise directly their rights as
Shareholders. Therefore, the Shareholders in Japan who entrust the
custody of their Shares to the Sales Handling Company cannot exercise
directly their Shareholder rights, because their Shares are registered
in the name of the Sales Handling Company. Shareholders in Japan may
have the Sales Handling Companies exercise their rights on their
behalf in accordance with the Contract with the Sales Handling
Companies.
Shareholders in Japan who do not entrust the custody of their
Shares to the Sales Handling Companies may exercise their rights in
accordance with their own arrangement under their own responsibility.
The major rights enjoyed by Shareholders are as follows:
(i) Voting rights
Shareholders of the Fund are entitled to vote on a matter
if: (i) a Shareholder vote is required under the 1940 Act; (ii)
the matter concerns an amendment to the Agreement and Declaration
of Trust that would adversely affect to a material degree the
rights and preferences of the Shares; or (iii) the Trustees
determine that it is necessary or desirable to obtain a
Shareholder vote. The 1940 Act requires a
<PAGE>
-46-
Shareholder vote under various circumstances, including to elect
or remove Trustees upon the written request of Shareholders
representing 10% or more of the Fund's net assets, and to change
any fundamental policy of the Fund. Shareholders of the Fund
receive one vote for each U.S. Dollar of net asset value owned on
the record date, and a fractional vote for each fractional Dollar
of net asset value owned on the record date, except where voting
is otherwise required by law to be based on Share ownership.
However, only the Shares of the Fund affected by a particular
matter are entitled to vote on that matter. Voting rights are
non-cumulative and cannot be modified without a majority vote.
Shareholders in Japan are entitled to receive from the Sales
Handling Companies pursuant to the Account Agreement to be
entered between a Sales Handling Company and a Shareholder
notices of the Fund, whereby Shareholders have the Sales Handling
Company exercise their voting rights.
(ii) Repurchase rights
Shareholders are entitled to request repurchase of Shares at the
Shares' Net Asset Value.
(iii) Rights to receive dividends
The Shareholders of the Fund are entitled to receive any
dividends or other distributions declared by the Fund. No Shares
have priority or preference over any other Shares of the Fund
with respect to distributions. Distributions will be made from
the assets of the Fund, and will be paid ratably to all
Shareholders of the Fund according to the number Shares of the
Fund held by Shareholders on the record date.
(iv) Right to receive distributions upon dissolution
Shareholders of the Fund are entitled to receive distributions
upon dissolution in proportion to the number of Shares then held
by them, except as otherwise required.
(v) Right to inspect accounting books and the like
Shareholders are entitled to inspect the Agreement and
Declaration of Trust, and at the discretion of the Court the
accounting books and the minutes of any Shareholders' meetings.
<PAGE>
-47-
(vi) Right to Transfer Shares
Shares are transferable within Japan to Japanese investors
without restriction except as limited by applicable law.
(B) Tax Treatment of Shareholders in Japan:
The tax treatment of Shareholders in Japan shall be as follows:
(1) The distributions to be made by the Fund will be treated as
distributions made by a domestic investment trust.
a. The distributions to be made by the Fund to Japanese individual
Shareholders will be subject to separate taxation from other
income (i.e. withholding of Japanese income tax at the rate of
15% and withholding of local taxes at the rate of 5% in Japan).
In this case, no report concerning distributions will be filed
with the Japanese tax authorities.
b. The distributions to be made by the Fund to Japanese corporate
Shareholders will be subject to withholding of Japanese income
tax at the rate of 15% and to withholding of local taxes at the
rate of 5% in Japan. In certain cases, the Payment Handling
Companies, which are normally the Sales Handling Companies, will
prepare a report concerning distributions and file such report
with the Japanese tax authorities.
c. The Fund's distribution of dividends, which include net
investment income such as interest and net short-term capital
gain, will be subject to withholding of U. S. federal income tax
at the rate of 15% provided the Japanese investor and the record
owner of the Shares submit the necessary documentation to qualify
for the 15% rate under an applicable tax treaty. If for any
reason the investor is not eligible for a reduced rate under an
applicable tax treaty, a 30% U.S. withholding rate will apply.
Distributions of net long-term realized capital gain will not be
subject to withholding of U. S. federal income tax, and the full
amount thereof will be subject to tax in Japan.
If the Distributor obtains the necessary approval from the
Japanese tax authorities, the Japanese withholding tax imposed on
distributions as referred to in a. and b. above will be collected
by way of the so-called "difference collecting method." In this
method only the difference, if any, between the amount equivalent
to 20% of
<PAGE>
-48-
the distributions before U.S. withholding tax and the amount of
U.S. tax withheld will be collected in Japan. If the Distributor
is unable to use the so-called "difference collecting method,"
the Distributor will withhold Japanese income tax at the full 20%
rate, and Shareholders may obtain a credit for U.S. withholding
taxes by submitting the appropriate claim form to the Japanese
tax authorities.
(2) The provisions of Japanese tax laws giving the privilege of a
certain deduction from taxable income to corporations, which may
apply to dividends paid by a domestic corporation, shall not
apply.
(3) Capital gains and losses arising from purchase and repurchase of
the Shares shall be treated in the same way as those arising from
purchase and sale of Shares of a domestic investment trust. The
distribution of the net liquidation assets shall also be treated
in the same way as those arising from liquidation of a domestic
investment trust.
(C) Foreign Exchange Control in U.S.A.:
In the United States, there are no foreign exchange control
restrictions on remittance of dividends, repurchase money, etc. of the
Shares to Japanese Shareholders.
(D) Agent in Japan:
Hamada & Matsumoto
Kasumigaseki Building, 25th Floor
2-5, Kasumigaseki 3-chome
Chiyoda-ku, Tokyo
The foregoing law firm is the true and lawful agent of the Fund
to represent and act for the Fund in Japan for the purpose of;
(1) the receipt of any and all communications, claims, actions,
proceedings and processes as to matters involving problems under
the laws and the rules and regulations of the JSDA and
(2) representation in and out of court in connection with any and all
disputes, controversies or differences regarding the transactions
relating to the public offering, sale and repurchase in Japan of
the Shares of the Fund.
The agent for the registration with the Director of Kanto Local
Finance Bureau of the Ministry of Finance of Japan of the public
offering concerned as well as for the continuous disclosure and filing
the notification with the Commissioner of the Financial Services
Agency is the following person:
<PAGE>
-49-
Ken Miura
Attorney-at-law
Hamada & Matsumoto
Kasumigaseki Building, 25th Floor
2-5, Kasumigaseki, 3-chome
Chiyoda-ku, Tokyo
(E) Jurisdiction:
Limited only to litigation brought by Japanese investors
regarding transactions relating to (D)(2) above, the Fund has agreed
that the following court has jurisdiction over such litigation and the
Japanese law is applicable thereto:
Tokyo District Court
1-4, Kasumigaseki 1-chome
Chiyoda-ku, Tokyo
<PAGE>
-50-
5. STATUS OF INVESTMENT FUND
(A) Diversification of Investment Portfolio
--------------------------------------------------------------------------------
(as of the end of July, 2000)
--------------------------------------------------------------------------------
TYPE OF ASSETS NAME OF MARKET VALUE TOTAL Investment Ratio
--------------------------------------------------------------------------------
Common Stocks United Kingdom $67,448,675.00 1.11
United States $2,199,048,741.15 36.14
Corporate Bonds Canada $30,392,980.00 0.50
United States $2,363,515,859.30 38.85
U. S. Treasury United States $1,261,585,517.00 20.73
--------------------------------------------------------------------------------
Sub Total $5,921,991,772.45 97.33
--------------------------------------------------------------------------------
Cash, Deposit and Other
Assets (After Deduction of $162,600,790.40 2.67
--------------------------------------------------------------------------------
Total (Net Asset Value) $6,084,592,562.85 100.00
667,175.57 million JPY
--------------------------------------------------------------------------------
Note: Investment ratio is calculated by dividing each asset at its market value
by the total Net Asset Value of the Fund. The same applies hereafter.
<PAGE>
-51-
(B) Results of Past Operations
(1) Record of Changes in Net Assets
Record of changes in net assets at the end of the following
fiscal years and at the end of each month within one year prior to the
end of July, 2000 is as follows:
<PAGE>
-52-
--------------------------------------------------------------------------------
TOTAL NET ASSET VALUE NET ASSET VALUE PER SHARE
--------------------------------------------------------------------------------
DOLLAR YEN DOLLAR YEN
(MILLIONS) (MILLIONS)
--------------------------------------------------------------------------------
THE 20TH FISCAL YEAR ENDED
ON DECEMBER 31, 1990 1,022 112,062 16.02 7,757
--------------------------------------------------------------------------------
THE 21ST FISCAL YEAR ENDED
ON DECEMBER 31, 1991 1,934 212,063 18.08 1,982
--------------------------------------------------------------------------------
THE 22ND FISCAL YEAR ENDED
ON DECEMBER 31, 1992 3,178 348,468 18.16 1,991
--------------------------------------------------------------------------------
THE 23RD FISCAL YEAR ENDED
ON DECEMBER 31, 1993 6,011 659,106 19.24 2,110
--------------------------------------------------------------------------------
THE 24TH FISCAL YEAR ENDED
ON DECEMBER 31, 1994 5,681 622,922 17.05 1,870
--------------------------------------------------------------------------------
THE 25TH FISCAL YEAR ENDED
ON DECEMBER 31, 1995 7,181 787,397 20.44 2,241
--------------------------------------------------------------------------------
THE 26TH FISCAL YEAR ENDED
ON DECEMBER 31, 1996 7,013 768,975 20.51 2,249
--------------------------------------------------------------------------------
THE 27TH FISCAL YEAR ENDED
ON DECEMBER 31, 1997 7,646 838,384 21.86 2,397
--------------------------------------------------------------------------------
THE 28TH FISCAL YEAR ENDED
ON DECEMBER 31, 1998 8,498 931,806 22.12 2,425
--------------------------------------------------------------------------------
THE 29TH FISCAL YEAR ENDED
ON DECEMBER 31, 1999 6,976 764,918 18.85 2,067
================================================================================
1999 END OF AUGUST 7,671 841,125 20.77 2,277
SEPTEMBER 7,520 824,568 20.38 2,235
OCTOBER 7,482 820,401 20.56 2,254
NOVEMBER 7,314 801,980 20.42 2,239
DECEMBER 6,976 764,918 18.85 2,067
2000 END OF JANUARY 6,539 717,001 18.66 2,046
FEBRUARY 6,121 671,168 18.10 1,985
MARCH 6,244 684,655 18.84 2,066
APRIL 6,152 674,567 18.87 2,069
MAY 6,158 675,225 19.11 2,095
JUNE 6,039 662,176 18.73 2,054
JULY 6,085 667,220 19.10 2,094
================================================================================
<PAGE>
-53-
(2) Record of Distributions Paid
Amount of distributions per Share for the following fiscal years and
for each month during the current fiscal year are shown below.
--------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS
--------------------------------------------------------------------------------
DOLLAR YEN
--------------------------------------------------------------------------------
THE 20TH FISCAL YEAR (1/1/90-12/31/90) 1.380 151
--------------------------------------------------------------------------------
THE 21ST FISCAL YEAR (1/1/91-12/31/91) 1.270 139
--------------------------------------------------------------------------------
THE 22ND FISCAL YEAR (1/1/92-12/31/92) 1.420 156
--------------------------------------------------------------------------------
THE 23RD FISCAL YEAR (1/1/93-12/31/93) 1.540 31
--------------------------------------------------------------------------------
THE 24TH FISCAL YEAR (1/1/94-12/31/94) 1.350 148
--------------------------------------------------------------------------------
THE 25TH FISCAL YEAR (1/1/95-12/31/95) 1.420 156
--------------------------------------------------------------------------------
THE 26TH FISCAL YEAR (1/1/96-12/31/96) 1.760 193
--------------------------------------------------------------------------------
THE 27TH FISCAL YEAR (1/1/97-12/31/97) 2.645 290
--------------------------------------------------------------------------------
THE 28TH FISCAL YEAR (1/1/98-12/31/98) 2.270 249
--------------------------------------------------------------------------------
THE 29TH FISCAL YEAR (1/1/99-12/31/99) 2.365 259
================================================================================
1999 END OF AUGUST - -
SEPTEMBER 0.280 30
OCTOBER - -
NOVEMBER - -
DECEMBER 1.350 148
2000 END OF JANUARY - -
FEBRUARY - -
MARCH 0.270 30
APRIL - -
MAY - -
JUNE 0.260 29
JULY - -
================================================================================
<PAGE>
-54-
(3) Record of Sales and Repurchase
Record of sales and repurchase as of the end of each fiscal year and
number of outstanding Shares of the Fund as of the end of each fiscal
year are as follows:
--------------------------------------------------------------------------------
Number of Number of Number of Out-
Shares Sold Shares Repurchased standing Shares
(000) (000) (000)
--------------------------------------------------------------------------------
The 20th Fiscal Year 27,843 (10,886) 63,793
1/1/90-12/31/90 (-) (-) (-)
--------------------------------------------------------------------------------
The 21st Fiscal Year 59,200 (15,993) 107,000
1/1/91-12/31/91 (-) (-) (-)
--------------------------------------------------------------------------------
The 22nd Fiscal Year 93,737 (25,746) 174,991
1/1/92-12/31/92 (-) (-) (-)
--------------------------------------------------------------------------------
The 23rd Fiscal Year 173,680 (36,146) 312,525
1/1/93-12/31/93 (-) (-) (-)
--------------------------------------------------------------------------------
The 24th Fiscal Year 106,735 (86,104) 333,156
1/1/94-12/31/94 (-) (-) (-)
--------------------------------------------------------------------------------
The 25th Fiscal Year 72,290 (54,185) 351,261
1/1/95-12/31/95 (-) (-) (-)
--------------------------------------------------------------------------------
The 26th Fiscal Year 71,401 (80,687) 341,975
1/1/96-12/31/96 (-) (-) (-)
--------------------------------------------------------------------------------
The 27th Fiscal Year 72,798 (65,083) 349,690
1/1/97-12/31/97 (-) (-) (-)
--------------------------------------------------------------------------------
The 28th Fiscal Year 87,548 (53,098) 384,140
1/1/98-12/31/98 (-) (-) (-)
--------------------------------------------------------------------------------
The 29th Fiscal Year 74,058 (88,183) 370,016
1/1/99-12/31/99 (-) (-) (-)
--------------------------------------------------------------------------------
<PAGE>
-55-
II. OUTLINE OF THE TRUST
(A) Law of Place of Incorporation
The Trust was organized as a Delaware Corporation in 1968, before
becoming a Maryland corporation in 1973, and then reorganized as a
Delaware business trust in May, 1998. Prior to its reorganization as a
Delaware business trust, the Trust was known as Vanguard/Wellesley
Income Fund, Inc. The Trust is registered with the SEC under the 1940
Act as an open-end, diversified management investment company. The
Trust currently offers a single class of shares, but has the ability
to offer additional classes of shares. There is no limit on the number
of full and fractional shares that the Fund may issue.
(B) Outline of the Supervisory Authority
Refer to I - l (B) Outline of the Supervisory Authority.
(C) Purpose of the Trust
The Trust was established to conduct, operate, and carry on the
business of a management investment company registered under the 1940
Act through one or more series investing primarily in securities.
(D) History of the Fund
September 24, 1968: Organized as a Delaware corporation
January 10, 1973: Reorganized as a Maryland corporation
May 1, 1998: Reorganized as a Delaware business trust
(E) Amount of Capital Stock
Not applicable.
(F) Structure of the Management of the Fund
The Trustees have exclusive and absolute control over the Trust
Property and over the business of the Trust to the same extent as if
the Trustees were the sole owners of the Trust Property and business
in their own right, but with such powers of delegation as may be
permitted by the Agreement and Declaration of Trust. The Agreement and
Declaration of Trust provides that the Trustees have the power to do
all things and execute all instruments as the Trustees deem necessary,
proper or desirable in order to promote the interests of the Fund.
<PAGE>
-56-
The number of Trustees shall be from 1 to 15 as fixed from time
to time by the Trustees. If any vacancies shall exist, the remaining
Trustees shall fill such vacancy by appointing such other individual
as they in their discretion shall see fit. A Trustee may be removed at
any meeting of Shareholders by a vote of two-thirds of the outstanding
Shares of each series. The Trustees shall hold office during the
lifetime of this Fund and until its termination or until he or she
resigns, is removed or dies.
The Trustees of the Trust are authorized by the Agreement and
Declaration of Trust to issue Shares and to authorize the division of
Shares into one or more series. The assets of each series shall
irrevocably belong to that series for all purposes. The variations in
the relative rights, privileges and preferences as between the
different series shall be fixed and determined by the Trustees. The
Trustees may authorize the division of Shares of any series into
Shares of one or more classes of such series, with such variations
between classes as may be approved by the Board of Trustees.
Under the Agreement and Declaration of Trust, the Shareholders
have the power, as and to the extent provided therein, to vote only
(i) for the election or removal of Trustees as provided in Article IV,
Section 1 of the Agreement and Declaration of Trust, and (ii) with
respect to such additional matters relating to the Fund as may be
required by the applicable provisions of the 1940 Act, including
Section 16(a) thereof, and (iii) on such other matters as the Trustees
may consider necessary or desirable. Each Shareholder shall have one
vote for each U.S. Dollar (and a fractional vote for each fractional
Dollar) of the net asset value of each Share (including fractional
Shares) held by such Shareholder on the record date on each matter
submitted to a vote at a meeting of Shareholders. There shall be no
cumulative voting in the election of Trustees. Votes may be made in
person or by proxy. A proxy purporting to be executed by or on behalf
of a Shareholder shall be deemed valid unless challenged at or prior
to its exercise and the burden of proving invalidity shall rest on the
challenger.
Meetings of the Shareholders may be called by the Trustees. A
meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given
or caused to be given by the Trustees by delivering personally or
mailing such notice not more than ninety (90), nor less than ten (10)
days
<PAGE>
-57-
before such meeting, postage prepaid, stating the time and place of
the meeting, to each Shareholder at the Shareholder's address as it
appears on the records of the Fund.
Except as otherwise provided by the Investment Company Act of
1940 or in the Agreement and Declaration of Trust, at any meeting of
Shareholders, the presence in person or by proxy of the holders of
record of Shares issued and outstanding and entitled to vote
representing more than fifty percent of the total combined net asset
value of all Shares issued and outstanding and entitled to vote shall
constitute a quorum for the transaction of any business at the
meeting. Any meeting of Shareholders may be adjourned from time to
time by a majority of the votes properly cast upon the question of
adjourning a meeting to another date and time, whether or not a quorum
is present, and the meeting may be held as adjourned within a
reasonable time after the date set for the original meeting without
further notice.
The Trustees are authorized by the Agreement and Declaration of
Trust to adopt By-Laws not inconsistent with the Agreement and
Declaration of Trust to provide for the conduct of the business of the
Fund. The By-Laws contemplate that the Trustees shall elect a
Chairman, a President, a Treasurer and a Secretary. The Trustees may
elect or appoint such other officers or agents as the business of the
Fund may require. The Trustees may delegate to any officer or
committee the power to appoint any subordinate officers or agent. The
Trustees may amend or repeal the By-Laws of the Trust to the extent
such power is not reserved to the Shareholders.
The Trustees may in their discretion provide for regular or
stated meetings of the Trustees. Notice of regular or stated meetings
need not be given. Meetings of the Trustees other than regular or
stated meetings shall be held whenever called by the Chairman or by
any Trustee. Notice of the time and place of each meeting other than
regular or stated meetings shall be mailed to each Trustee at least
two days before the meeting, or shall be telegraphed, cabled, or
wirelessed to each Trustee, or personally delivered to him at least
one day before the meeting.
A majority of the Trustees present in person at any regular or
special meeting of the Trustees shall constitute a quorum for the
transaction of business at such meeting. Except as otherwise required
by law, the Agreement and Declaration of Trust or the Trust's By-Laws,
any action to be taken by the Trustees may be taken by a majority of
the Trustees
<PAGE>
-58-
present at a meeting at which a quorum is present, or by written
consent of all of the Trustees.
The Agreement and Declaration of Trust contains provisions for
the indemnification of Trustees, officers and Shareholders of the Fund
under the circumstances and on the terms specified therein.
(G) Information Concerning Major Shareholders
As of the date hereof, no person owned of record 5% or more of
the outstanding Shares of the Fund.
(H) Information Concerning Directors, Officers and Employees
(1) Trustees and Officers of the Fund
<PAGE>
-59-
<TABLE>
<CAPTION>
(as of the end of July, 2000)
-------------------------------------------------------------------------------------------------------
Name Office and Title Resume Shares Owned
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John J. Brennan Chairman, Chief Chairman, Chief Executive Officer and 3,540.754
Executive Officer President of The Vanguard Group, Inc.
and Trustee
JoAnn Heffernan Trustee Vice President, Chief Information Officer, 0
Heisen and member of the Executive Committee of
Johnson and Johnson, Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co.,
The Medical Center at Princeton, and Women's
Research and Education Institute.
Bruce K. MacLaury Trustee President Emeritus of The Brookings 0
Institution; Director of American Express
Bank, Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
Burton G. Malkiel Trustee Chemical Bank Chairman's Professor of 0
Economics, Princeton University; Director of
Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker, Fentress & Co., The
Jeffrey Co., and Select SPDR Trust.
Alfred M. Rankin, Jr. Trustee Chairman, President, Chief Executive Officer, 0
and Director of NACCO Industries; and
Director of the BF Goodrich Co.
<PAGE>
-60-
James O. Welch, Jr. Trustee Retired Chairman of Nabisco Brands, Inc.; 0
retired Vice Chairman and Director of RJR
Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. Lawrence Wilson Trustee Retired Chairman of Rohm & Haas Co.; Director 0
of Cummins Engine Co., The Mead Corp., and
AmeriSource Health Corp.; and Trustee of
Vanderbilt University.
Raymond J. Klapinsky Secretary Managing Director of The Vanguard Group, 0
Inc., Secretary of The Vanguard Group, Inc.,
and of each of the investment companies in
The Vanguard Group.
Thomas J. Higgins Treasurer Principal of The Vanguard Group, Inc.; 0
Treasurer of each of the investment companies
in The Vanguard Group.
Robert D. Snowden Controller Principal of The Vanguard Group, Inc.; 0
Controller of each of the investment
companies in The Vanguard Group.
-------------------------------------------------------------------------------------------------------
</TABLE>
(2) Employees of the Trust
The Trust does not have any employees.
(I) Description of Business and Outline of Operation
The Fund may carry out any administrative and managerial act,
including the purchase, sale, subscription and exchange of any
securities, and the exercise of all rights directly or indirectly
pertaining to the Fund's assets. The Fund has retained The Vanguard
Group, Inc., as Investment Management Company and Transfer and
Dividend-Paying Agent, Wellington Management Company, LLP, as
Investment Adviser, and The Chase Manhattan Bank, as Custodian, to
hold the assets of the Fund in custody.
(J) Miscellaneous
(1) Changes of Trustees and Officers
Trustees may be removed by, among other things, a vote of
two-thirds of the outstanding Shares of each series. In the event of
vacancy, the remaining Trustees may fill such vacancy by appointing
such other person as they in their discretion shall see fit. The
Trustees may add to their number as they consider appropriate,
provided, however, that the number of Trustees shall in no event be
more than 15. The Trustees may elect and remove officers as they
consider appropriate.
<PAGE>
-61-
(2) Amendment to the Agreement and Declaration of Trust
Generally, approval of Shareholders is required to amend the
Agreement and Declaration of Trust, except for certain matters such as
change of name, designation of a series, any change which does not
adversely affect the economic value or legal rights of a Shareholder,
or changes deemed advisable by the Trustees to conform the Agreement
and Declaration of Trust to the requirements of applicable laws.
(3) Litigation and Other Significant Events
Nothing which has or which would have a material adverse effect
on the Fund has occurred which has not been disclosed. The fiscal year
end of the Fund is December 31.
III. OUTLINE OF THE OTHER RELATED COMPANIES
(A) The Vanguard Group, Inc. (the "Investment Manager" and the "Transfer
and Dividend-Paying Agent")
(1) Amount of Capital
US$ 100,025,410 (approximately \10,552,680,755)
(2) Description of Business
The Vanguard Group, Inc. was established in 1974 under the laws of
Pennsylvania and is registered as an investment adviser under the
Investment Advisers Act of 1940. The Vanguard Group, Inc. was
established and operates under an Amended and Restated Funds' Service
Agreement which was approved by the Shareholders of the Fund and other
members of The Vanguard Group of Investment Companies (separately, the
"Vanguard funds"). The Amended and Restated Funds' Service Agreement
provides that each Vanguard fund may be called upon to invest up to
0.40% of its current net assets in The Vanguard Group, Inc. as
contributions to Vanguard's capitalization, and that there is no limit
on the U.S. Dollar amount that each Vanguard fund may contribute to
Vanguard's capitalization. The amounts which each of the funds have
invested are adjusted from time to time in order to maintain the
proportionate relationship between each fund's relative net assets and
its contribution to Vanguard's capital. At December 31, 1999, the Fund
had contributed capital of U.S. $1,500,000 to The Vanguard Group,
Inc., representing 0.02% of the Fund's net assets, and 1.5% of
Vanguard's capitalization.
(3) Outline of Business Relationship with the Fund
The Vanguard Group, Inc. acts as investment manager and transfer and
dividend-paying agent to the Fund.
(B) The Chase Manhattan Bank(the "Custodian")
(1) Amount of Capital as of the end of June, 2000
US$2,151 million (approximately \226.9 billion)
(2) Description of Business
The Chase Manhattan Bank engages in business as a financial
institution.
(3) Outline of Business Relationship with the Fund
<PAGE>
-62-
The Chase Manhattan Bank acts as custodian and renders custody
services to the Fund.
(C) Wellington Management Company, LLP (the "Investment Adviser")
(1) Amount of partners' contribution
$112,867 thousand (approximately(Y)11,907 million) as of the end of
December, 1999
(2) Description of Business
Wellington Management Company, LLP ("WMC") is a professional
investment counseling firm that provides investment services to
investment companies, other institutions and individuals. WMC managed
more than $235 billion in stock and bond portfolios, including 15
Vanguard funds as of December 31, 1999. WMC and its predecessor
organizations have provided investment advisory services to investment
companies since 1928 and to investment counseling clients since
1960.WMC discharges its responsibilities subject to the control of the
officers and Trustees of the Fund. WMC is a Massachusetts limited
liability partnership whose managing partners are: Messrs. Duncan M.
McFarland, John R. Ryan and Ms. Laurie A. Gabriel.
(3) Outline of Business Relationship with the Fund
The Fund employs WMC under an investment advisory agreement to manage
the investment and reinvestment of the Fund's assets and to
continuously review, supervise and administer the Fund's investment
program. The Fund pays WMC its advisory fee at the end of each fiscal
quarter. The fee is based on certain annual percentage rates applied
to the Fund's average month-end net assets for the quarter. The
advisory fee can be increased or decreased based on the difference
between the Fund's total return performance and that of an unmanaged
composite index.
The Fund's Board of Trustees may, without prior approval from
Shareholders, change the terms of an advisory agreement or hire a new
investment adviser - either as a replacement for an existing adviser
or as an additional adviser. Any significant change in the Fund's
advisory arrangements will be communicated to Shareholders in writing.
In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an
at-cost basis, at any time.
<PAGE>
-63-
(D) Monex, Inc. (the "Agent Company" and the "Distributor in Japan")
(1) Amount of Capital: \ 3,551,264,000 as of the end of June,
2000.
(2) Description of Business: Monex, Inc. engages in business as
a securities company in Japan.
(3) Outline of Business Relationship with the Fund: Monex, Inc.
acts as the Agent Company and the Distributor in Japan.
(D) Capital Relationships
The Trust contributed 1.5% of the capitalization of The Vanguard
Group, Inc.
(E) Interlocking Directors
--------------------------------------------------------------------------------
Trust Investment Manager
--------------------------------------------------------------------------------
John J. Brennan Chairman Chairman, President and
Chief Executive Officer Chief Executive Officer
Trustee
--------------------------------------------------------------------------------
JoAnn Heffernan Heisen Trustee Director
--------------------------------------------------------------------------------
Burton G. Malkiel Trustee Director
--------------------------------------------------------------------------------
Alfred M. Rankin, Jr. Trustee Director
--------------------------------------------------------------------------------
James O. Welch, Jr. Trustee Director
--------------------------------------------------------------------------------
J. Lawrence Wilson Trustee Director
--------------------------------------------------------------------------------
<PAGE>
-64-
IV. FINANCIAL CONDITIONS OF THE FUND
1. FINANCIAL STATEMENTS
a. The following financial statements in the Japanese language of the
Fund for the recent two years are the translations into the Japanese
language of its original audited financial statements prepared by the
Fund (except for Japanese Yen amount converted). These translations
are incorporated into this document by application of the proviso of
the Article 127-5 of the "Regulations Concerning the Terms, Forms and
Methods of Preparation of Financial Statements, Etc. (Ministry of
Finance Ordinance No. 59 of 1963)" in accordance with the "Ministerial
Ordinance re: Disclosure of Information, Etc. of the Specified
Securities (Ministry of Finance Ordinance No. 22 of 1993)".
The above original financial statements of the Fund are audited by
PricewaterhouseCoopers LLP who are the auditors in the Fund's home
country. Its audit reports are obtained as shown on the following
pages.
b. The original financial statements of the Fund are expressed in U.S.
Dollars. The Japanese translations of the financial statements contain
certain Japanese Yen amounts converted. Such conversion is made at the
rate which is the mean of T.T. selling and buying exchange rates
vis-a-vis customers quoted by The Bank of Tokyo-Mitsubishi, Ltd. on
July 31, 2000 (US$1=(Y)109.65). The Yen amounts are rounded in
thousands.
<PAGE>
-65-
2. CONDITION OF THE FUND
(a) Statement of Net Assets (As of the end of July, 2000)
(As of the end of July, 2000
--------------------------------------------------------------------------------
US$ JPY
(in thousands except)
--------------------------------------------------------------------------------
a. Total Assets 6,116,793,065.42 670,706,360
--------------------------------------------------------------------------------
b. Total Liabilities 32,200,502.57 3,530,785
--------------------------------------------------------------------------------
c. Total Net Assets 6,084,592,562.85 667,175,575
(a-b)
--------------------------------------------------------------------------------
d. Total Number of Shares 318,622,481.27 shares
Outstanding
--------------------------------------------------------------------------------
e. Net Asset Value 19.10 2,093.94
per Share (c/d)
--------------------------------------------------------------------------------
<PAGE>
-66-
(b) Names of Major Portfolio Equity Shares
[ TOP 30 by Excel]
<PAGE>
-67-
V. SUMMARY OF INFORMATION CONCERNING FOREIGN INVESTMENT
FUND SECURITIES
1. Transfer of the Shares
The transfer agent for the Shares is The Vanguard Group, Inc.,
whose address is 100 Vanguard Boulevard, Malvern, Pennsylvania 19355.
The Japanese investors who entrust the custody of their Shares to
a Sales Handling Company shall have their Shares transferred under the
responsibility of such company, and the other investors shall make
their own arrangements.
No fee is chargeable for the transfer of Shares.
2. The Closing Period of the Shareholders' Book
No provision is made.
3. There are no annual Shareholders' meetings. Special Shareholders'
meeting may be held from time to time as required by the Agreement and
Declaration of Trust and the Investment Company Act of 1940.
4. No special privilege is granted to Shareholders.
The acquisition of Shares by any person may be restricted.
VI. MISCELLANEOUS
(1) The ornamental design is used in cover page of the Japanese
Prospectus.
[(2) Summarized Preliminary Prospectus will be used. Attached document will
be used pursuant to the below, as the document (Summarized Preliminary
Prospectus) as set forth at Item 1.(1)(b), of Article 12 of the
Ordinance Concerning the Disclosure of the Content, etc. of the
Specified Securities.
(a) The content of the Summarized Preliminary Prospectus may be
publicized by leaflets, pamphlets, direct mails (post cards
and mailers in envelopes) or by an internet home page,
newspapers, magazines and other books.
(b) The layout, quality of papers, printing color, design etc.
of the Summarized Preliminary Prospectus may vary depending
on manner of usage. Photos and illustrations set forth in
the attached may be used.]
<PAGE>
-68-
PART III. SPECIAL INFORMATION
I. OUTLINE OF THE SYSTEM OF INVESTMENT TRUSTS IN DELAWARE
A. Outline of the Investment Trusts in Delaware
Delaware business trusts are governed by Chapter 38 of the Delaware Code.
See Part II, Information Regarding the Issuer, Section I.1.(3) a. for a summary
of the provisions contained in Chapter 38. To create a trust, a certificate of
trust is filed with the Secretary of State of the State of Delaware. Delaware
business trusts are a common organizational form for U.S. registered management
investment companies.
B. The System of Mutual Funds created as Delaware Business Trusts in
Delaware
A Delaware business trust is in the widest sense a business organization
like a corporation or partnership. It can issue shares (beneficial holdings)
which may be freely transferred; the holders of such shares may receive
dividends out of the income of the trust; and the management is separate from
the ownership of each organization. Except to the extent otherwise provided in
the governing instrument of a Delaware business trust, the business and affairs
of a Delaware business trust shall be managed by or under the direction of its
trustees. See section 3806 of the Delaware Business Trust Act.
Additionally, as a registered investment company (mutual fund), a Delaware
business trust is regulated by the 1940 Act and other related U.S. federal and
state laws. As long as a Delaware business trust operates as a registered mutual
fund, the shareholders of the trust derive certain rights and protections under
the U.S. federal securities laws. Such federal laws prohibit all false and
misleading statements or omissions of material facts from the contents of the
mutual fund's registration statement filed with the SEC. Further, various
securities laws contain similar prohibitions in connection with the offer, sale
and advertising of mutual funds.
(1) Formation of a Delaware Business Trust
A Delaware business trust is created by a trust instrument
("Declaration") and the filing of a certificate of trust pursuant to
section 3810 of the Delaware Business Trust Act. Property of the trust
is transferred to the trustees in accordance with the Declaration, and
the trustees manage and operate the trust for the benefit of the
beneficial shareholders, whose shares may be freely transferred.
A Declaration generally contains such matters as the name of the
trust, purpose, compensation to be paid to the trustees, powers and
responsibilities of the trustees, shareholder meetings, rights of
shareholders, payment of dividends, redemption of shares, period and
termination of the trust, and the governing law of the trust.
To become a registered mutual fund, a registration statement must
be filed with the SEC under the Securities Act of 1933 and an election
must be made under the 1940 Act.
<PAGE>
-69-
(2) Issuance of Shares
In order to issue mutual fund shares, a fund must have a
prospectus which contains various items of disclosure relating to the
fund and its shares, such as: the fees associated with a purchase of
the fund's shares, financial information about the fund for the past
five years (or for the length of time the fund has been in operation),
the fund's objectives and policies, any investment restrictions, the
price at which shares may be purchased, the method by which
shareholders may purchase and redeem shares, dividend and tax
information relating to the ownership of shares, descriptions of the
fund's management and expenses paid by the fund, a description of the
fund's shares and any other information the fund desires to provide
potential shareholders. The regulations regarding the issuance of a
mutual fund's shares are the U.S. federal securities laws, Blue Sky
laws and various sections of the Internal Revenue Code. The shares may
not be issued unless the fund has an effective registration statement
on file with the SEC. Further, each share of stock issued by a mutual
fund must be a voting share and have equal voting rights with all
other outstanding voting shares.
(3) Management and Operation of a Mutual Fund
Management and operation of a mutual fund is generally conducted
by having an investment advisory agreement with an investment adviser.
The requirements for becoming an investment adviser for a mutual fund
are that the adviser must be a registered investment adviser under the
Investment Advisers Act of 1940, and must have been approved by the
Board of Trustees/Directors of a fund and its shareholders. The
investment adviser discloses certain information to the competent
supervisory authorities and the fund's shareholders, in accordance
with the investment advisory agreement, with respect to the management
and operation of the fund's assets.
An advisory fee calculated in accordance with the net asset value
of the fund is paid to the investment adviser. An investment adviser
generally executes an investment advisory agreement with a fund
relating to the investment and reinvestment of the fund's assets. Such
investment and reinvestment must be conducted subject to the
investment objectives and restrictions provided for in the prospectus
and other governing instruments.
a. Valuation of Assets
The fund's net asset value per share is calculated each business day
of the fund, and it is furnished to the National Association of
Securities Dealers, Inc. (the "NASD"). Major newspapers in the United
States obtain the information from the NASD and report such
information on a daily basis. The total net asset value of the fund is
determined by subtracting the fund's total liabilities from its total
assets. The net asset value per share of the fund is determined by
dividing the fund's net assets by the total number of shares
outstanding at the time of calculation.
<PAGE>
-70-
b. Sale, Redemption and Custody of Shares
(i) The purchase price of a fund's shares will be the net asset
value per share next computed after receipt of the sales
order by the fund plus the sales charge, if applicable. Such
purchase price is set forth in the prospectus.
(ii) Redemption of shares shall be made for one share or its
multiple, and the redemption price per share shall be the
net asset value per share next computed after receipt by the
fund of the order and share certificate if share
certificates have been issued. Subject to certain rules of
the SEC, the fund may suspend the right of redemption
temporarily. The principal underwriter may charge fees upon
such redemption.
(iii)Custody of Shares
Investors' shares are usually held in book entry form by the
fund's transfer agent. Certificates for shares are issued
only on request of the shareholder. The transfer agent will
furnish such shareholders with detailed statements of their
accounts. In cases where certificates for shares have been
issued to investors, such certificates for shares are
usually in the custody of the shareholders.
c. Outline of Disclosure Requirements
(i) Disclosure to shareholders
In accordance with the 1940 Act, a fund sends to its
shareholders annual and semi-annual reports relating to its
operations that contain financial information.
(ii) Disclosure to the SEC
Pursuant to the 1940 Act, a fund reports details of its
financial condition and business operations to the SEC by
annual and semi-annual reports.
d. Shareholders' Rights, and Procedures for the Exercise Thereof
Shareholders must be registered with a fund in order to
exercise shareholders' rights directly against the fund. The
representative right afforded to shareholders is the voting
right. Other rights include the right to receive dividends,
the right to receive distributions upon dissolution, the
right to inspect accounting books and the like, the right to
transfer shares, and other rights with respect to the U.S.
registration statement (including the prospectus).
(i) Voting rights
Shareholders are entitled to one vote for each full fund
share owned and a proportionate fractional vote for each
fractional share owned with respect to such
<PAGE>
-71-
matters as the election and removal of trustees, approval or
termination of any investment advisory, management or
underwriting agreement, whether an action should be brought
derivatively or as a class action on behalf of the fund, and
certain amendments to the trust agreement. Voting rights
shall be exercised at a shareholders' meeting, or without
meeting if a consent in writing setting forth such action is
signed by the shareholders entitled to vote on the subject
matter thereof holding a majority of the shares entitled to
vote thereon. Shareholders' meetings shall be convened by
the trustees or such other persons as specified in the
fund's By-laws, and the meeting shall be held at the head
office of the fund or such other place as the trustees may
designate. Shareholders representing more than 50% of the
outstanding shares entitled to vote being present (including
those present by proxy) shall constitute a quorum unless
otherwise provided for in any applicable statutes, rules and
regulations, and, except as otherwise provided by law, the
fund's Declaration of Trust, or By-laws, approval of a
matter is given by vote (including vote by proxy) of a
majority of the shares present and entitled to vote.
(ii) Redemption rights
Shareholders are entitled to request redemption of shares at
their net asset value at any time, provided that the fund
may suspend the right of redemption temporarily during the
periods subject to the rules of the SEC under the 1940 Act.
(iii) Right to receive dividends
Shareholders are entitled to receive any declared
distributions for each share held by them. Record dates are
designated for the payment of distributions and payments are
usually made during the months in which the record date
falls or in the following month.
(iv) Right to receive distributions upon dissolution
Shareholders of a fund are entitled to receive distributions
upon dissolution in proportion to the number of shares then
held by them.
(v) Right to inspect accounting books and the like
Shareholders are entitled to inspect the Declaration of
Trust and, subject to the discretion of the court, the
fund's accounting books and minutes of shareholders'
meetings.
(vi) Right to transfer shares
Shares are transferable without restriction.
(vii) Rights with respect to the U.S. registration statement
<PAGE>
-72-
The Securities Act of 1933 provides that if any effective
part of the registration statement contains an untrue
statement of material fact or omits to state a material fact
required to be stated therein or necessary to make the
statement therein not misleading, any person acquiring such
security may sue every person who signed the registration
statement, every person who was a trustee (or person
performing similar functions) of the issuer at the time of
filing of the registration statement, certain other persons
who prepared any part of the registration statement and
every underwriter with respect to such security.
e. Related Company and Others
(i) Investment management company
The investment management company ordinarily sponsors or
organizes the mutual fund. The duties of the investment
management company include the management of the fund's
investments and performance of certain administrative,
clerical, bookkeeping and accounting services as set forth
in an agreement with the fund.
(ii) Investment adviser
The investment adviser shall manage and operate the assets
of a fund subject to the terms of the investment advisory
agreement and the fund's investment objectives and
restrictions. The requirements for becoming an investment
adviser are that the adviser must be a registered investment
adviser under the Investment Advisers Act of 1940 and must
have been approved by the Board of Trustees/Directors of a
fund and its shareholders.
(iii) Underwriter-distributor
The underwriter-distributor is usually connected with the
investment management company. Frequently, the
underwriter-distributor is a subsidiary of the investment
management company. The underwriter-distributor must
register as a broker-dealer with the SEC and must join the
NASD.
(iv) Custodian
The mutual fund usually appoints a bank to hold its
securities and other assets as custodian. The requirements
for becoming a custodian of a mutual fund are that the
entity be either a bank having aggregate capital, surplus
and undivided profits of not less than U.S.$500,000, be a
member of a national securities exchange, or be a central
certificate depositary established by a national securities
exchange or a registered national securities association. A
mutual fund may act as its own custodian under certain
circumstances.
f. Governing Laws and Competent Authorities
<PAGE>
-73-
(i) Governing laws regarding the creation and operation of a
mutual fund created as a Delaware business trust
A Delaware business trust is created under the laws of the
State of Delaware and is subject to the laws of that state.
With respect to its operation as a mutual fund, it is also
subject to the 1940 Act, the United States Internal Revenue
Code, and regulations promulgated under each statute. With
respect to the sale of its Shares, the fund is subject to
the Securities Act of 1933, the Securities Exchange Act of
1934, the Blue Sky Laws and the regulations promulgated
under said laws. In addition, a Delaware business trust and
its trustees may be subject to common law principles
established through judicial decisions.
The substance of the governing law is as follows:
Delaware Business Trust Act (Delaware Code Chapter 38 et
seq. ("Treatment of Delaware Business Trusts"))
Chapter 38 provides as follows:
Delaware has had in effect since October 1, 1988, the
Business Trust Act which expressly recognizes the Delaware
business trust. The principal purpose of the Business Trust
Act is to modernize the common law and provide certainty by
codifying Delaware law with respect to the use of trusts in
business transactions.
The Business Trust Act permits the trust agreement of a
business trust to establish whatever rights and obligations
of the trustees and of the beneficial owners as are
desirable. The voting rights of trustees or beneficial
owners, or any class or series thereof, may be expanded,
limited or eliminated with respect to virtually any matter
relating to the business trust. This flexibility provides an
advantage over alternative forms of business organizations
and common law trusts which often are subject to mandatory
provisions.
A Delaware business trust may be merged or consolidated with
a foreign or Delaware corporation, limited partnership,
limited liability company or business trust pursuant to
statutory procedures contained in the Business Trust Act. A
merger or consolidation may be pre-authorized, or may be
conditioned upon the approval of a specific class or
percentage of trustees or beneficial owners, as set forth in
the trust agreement of the business trust. Thus, a business
trust may be converted into another form of business entity
in order to take advantage of future changes in the tax laws
or the securities markets.
<PAGE>
-74-
Under the Business Trust Act, the beneficial owners of a
Delaware business trust have the same limitations of
personal liability as shareholders of a Delaware
corporation. Except to the extent otherwise provided in the
trust agreement, a business trust is managed by or under the
direction of its trustees, who are not liable for the
obligations of the business trust. The Business Trust Act
provides that at least one trustee must be a Delaware
resident. However, a trust that is or will become a
registered investment company is exempt from this
requirement. This requirement may be satisfied by engaging a
trust company with its principal place of business in
Delaware. The duties of the trustees may be specified in the
trust agreement. Moreover, the trust agreement may provide
for the appointment of managers, employees or other persons
to manage the business trust with such rights, powers and
duties as are set forth herein.
To the extent that trustees or other persons who are
responsible for managing the business trust have duties
(including fiduciary duties) and liabilities relating
thereto to the business trust or to the beneficial owners,
such persons' duties may be expanded or restricted by the
trust agreement. In addition, such persons shall not be
liable for their good faith reliance on the provision of the
trust agreement.
Common Law
Common law is non-statutory law developed through court
judgments. Certain legal principles developed through
decisions rendered by the courts of the State of Delaware
may be applicable to Delaware business trusts and trustees
of such trusts.
Investment Company Act of 1940
The Investment Company Act of 1940 ("the 1940 Act") gives
the SEC the authority to enforce the 1940 Act's provisions.
The 1940 Act requires an investment company to (i) disclose
financial information and fundamental policies, (ii) submit
registration statements to the SEC, and (iii) submit and
deliver certain reports to the SEC and shareholders. The
1940 Act generally prohibits such companies from changing
the nature of their business or other fundamental policies
without the approval of the shareholders. The 1940 Act
regulates the custody of the fund's assets and, more
generally, the fund's business and conduct.
Securities Act of 1933
<PAGE>
-75-
The Securities Act of 1933 (the "1933 Act") regulates the
registration of securities. The 1933 Act requires
information with regard to securities being issued or sold
to be disclosed by means of a registration statement,
including a prospectus. The 1933 Act makes any fraudulent
act in connection with the issuance or sale of such
securities unlawful.
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 (the "1934 Act")
regulates the purchase and sale of securities and pertains
to continuous disclosure with respect to securities, proxy
statements, unlawful use of inside information and other
fraudulent conduct. It also includes provisions relating to
the securities markets as well as extensive regulations
relating to securities dealers.
The Internal Revenue Code of 1986
The Code provides for the qualification of a fund to be
treated as a regulated investment company.
(ii) Outline of the Supervisory Authorities
A Delaware business trust which operates as a registered
investment company is subject to supervision by the SEC and
the securities authorities of the various U.S. states.
The SEC
(a) Acceptance of registration applications
(Sections 7 and 8 of the 1940 Act)
An investment company must register with the SEC by filing a
notification of registration in such form as the SEC shall
prescribe. An investment company is deemed to have been
registered when it has filed such registration notification
with the SEC. After filing the proscribed notification, an
investment company must file a registration statement with
the SEC.
(b) Suspension or revocation of registration as a registered investment
company
(Section 8 of the 1940 Act)
An investment company may have its registration suspended or
revoked by order of the SEC if it fails to submit a
registration statement or report if either is materially
defective.
(c) Supervision of changes in trustees and officers
<PAGE>
-76-
(Section 9(b) of the 1940 Act)
The SEC can prohibit trustees and officers from serving as
such in the event they are found to have willfully violated
certain U.S. federal securities laws.
(d) Examination of registration statement
(Sections 5 and 8 of the 1933 Act)
In order to sell shares to the public, a fund must file a
registration statement with the SEC and such statement must
have become effective. The registration statement is
prepared in accordance with Form N-1A and must include the
information required by Form N-1A and, more generally, the
1933 Act and rules thereunder. The SEC will examine the
registration statement and, if it is defective, may order
its modification or deny its effectiveness. Parts A and B of
the Form N-1A registration statement consist of the
investment company's prospectus and statement of additional
information, respectively.
(e) Supervision of the business
(Section 12 of the 1940 Act)
The SEC regulates the function and activities of investment
companies, including such matters as the purchase of
securities on margin, short sales of securities,
underwriting commitments, acquisition of securities issued
by other investment companies, organization of face amount
certificate companies, acquisition of voting stock of
insurance companies and other matters.
(f) Acceptance of periodic reports
(Section 30 of the 1940 Act)
The SEC requires all investment companies to submit annual
and other reports. The SEC regulates the content of these
reports, thereby exercising its supervisory authority.
State Securities Supervisory Authorities
(a) Provisions concerning licenses
Most states require brokers, dealers, securities
salespersons, and certain investment advisers either to
acquire licenses from the state or, at least, to be
registered with a state agency.
(b) Provisions concerning registration of securities
<PAGE>
-77-
Most of the 50 states require notification of the
availability of shares upon registration of a fund's shares
with the SEC prior to any lawful sale or offer to sell.
(c) Provisions concerning prevention of fraud
In general, the Blue Sky Laws provide various sanctions for
fraudulent acts in connection with the sale of securities,
such as prosecution resulting in fine and/or imprisonment,
injunction, an order requiring payment of the deposit,
temporary suspension or revocation of license or
registration, and civil liability for damages.
g. Dissolution, Termination, etc.
(i) Dissolution and termination
In order to dissolve or terminate a fund, one must obtain
approval of the fund's Board of Trustees/Directors to such
action, notify shareholders and file appropriate documents
with the SEC. To liquidate a fund, all of the assets of the
fund must be distributed to its shareholders.
(ii) Amendments to the trust agreements
Amendments to the trust agreement may be made by vote or
with the written consent of the trustees and, as to some
matters which might have detrimental effects upon the
shareholders, by approval of the holders of a majority of
the outstanding Shares.
h. Taxation of a Delaware business trust
If a fund complied with the conditions contained in Section
851 of the Internal Revenue Code, the fund is qualified as a
regulated investment company, and distributes all of its net
investment income and net capital gains, if any, to
shareholders annually. Thus it will be relieved of any U.S.
federal income tax liability. Income dividends and net
short-term gains distributions received by shareholders are
taxable as ordinary income and net long-term gains are
taxable as capital gains regardless of how long the
shareholder has held the shares of the fund.
<PAGE>
-78-
II. FINANCIAL CONDITIONS OF THE INVESTMENT MANAGEMENT COMPANY
A. The combined consolidated financial statements of the Investment Management
Company and the Vanguard Funds for the most recent two years are the
translations of the originals of the audited proforma combined financial
statements made by the Investment Management Company and the Vanguard Funds
applying the proviso of the article 127-5 of "Regulations Concerning the Terms,
Forms and Methods of Preparation of Financial Statements, Etc. (Ministry of
Finance Ordinance No. 59 of 1963)" in accordance with the "Ministerial Ordinance
re: Disclosure of Information, Etc. of the Specified Securities (Ministry of
Finance Ordinance No. 22 of 1993)", excluding the translated Yen amounts.
The above financial statements are audited by PricewaterhouseCoopers LLP
(formerly Price Waterhouse LLP) who are the auditors in the Investment
Management Company's home country and their audit reports are obtained as shown
on the following pages.
B. Original proforma combined financial statements of the Investment
Management Company and the Vanguard Funds are expressed in U.S. Dollars. In this
Japanese version, the equivalents in Japanese Yen are accompanied. The amounts
in Japanese Yen are translated at the mean of T.T. buying and selling exchange
rates vis-a-vis customer of The Bank of Tokyo - Mitsubishi, Ltd., on July 31,
2000 (US$1 =(Y)109.65) and are rounded in thousands.
<PAGE>
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II. FORM OF FOREIGN INVESTMENT FUND SECURITIES
No Share certificates of the Fund shall be issued.
<PAGE>
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS DECEMBER 31, 1999
--------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLESLEY INCOME FUND (000) (000)
--------------------------------------------------------------------------------
CORPORATE BONDS (44.5%)
--------------------------------------------------------------------------------
FINANCE (14.7%)
Allstate Corp.
6.75%, 5/15/2018 30,000 $ 26,697
7.50%, 6/15/2013 20,000 19,677
American Re Corp.
7.45%, 12/15/2026 25,000 23,372
Associates Corp. of North America
6.25%, 11/1/2008 25,000 22,984
Bank One Corp.
7.75%, 7/15/2025 40,000 38,773
BankBoston Corp.
6.625%, 12/1/2005 15,000 14,279
6.875%, 7/15/2003 10,000 9,847
Boatmen's Bancshares Inc.
7.625%, 10/1/2004 10,000 10,163
CIGNA Corp.
7.875%, 5/15/2027 25,000 23,286
Cincinnati Financial Corp.
6.90%, 5/15/2028 25,000 21,697
Citicorp
6.65%, 12/15/2010 25,000 23,125
7.125%, 9/1/2005 15,000 14,821
Citigroup, Inc.
6.625%, 1/15/2028 25,000 21,218
CoreStates Capital Corp.
6.625%, 3/15/2005 20,000 19,235
Equitable Companies Inc.
7.00%, 4/1/2028 25,000 22,354
Farmers Exchange Capital
7.05%, 7/15/2028 25,000 20,911
Fifth Third Bancorp
6.75%, 7/15/2005 25,000 24,266
First Bank N.A.
7.55%, 6/15/2004 8,000 8,072
First Bank System
6.625%, 5/15/2003 10,000 9,793
7.625%, 5/1/2005 7,500 7,515
First Chicago Corp.
7.625%, 1/15/2003 15,000 15,119
First Union Corp.
6.00%, 10/30/2008 15,000 13,348
Fleet Financial Group, Inc.
6.875%, 3/1/2003 30,000 29,598
General Electric Capital Corp.
8.125%, 5/15/2012 10,000 10,501
General Electric Capital Services
7.50%, 8/21/2035 14,000 13,423
General Electric Global Insurance
Holdings Corp.
7.00%, 2/15/2026 60,000 54,710
<PAGE>
GMAC
7.00%, 9/15/2002 30,000 $ 29,872
John Hancock Mutual Life
Insurance Co.
7.375%, 2/15/2024 50,000 46,207
Liberty Mutual Insurance Co.
8.50%, 5/15/2025 35,000 34,128
Lumbermens Mutual Casualty Co.
9.15%, 7/1/2026 27,250 26,219
MBIA Inc.
7.00%, 12/15/2025 19,500 17,391
Massachusetts Mutual Life
7.50%, 3/1/2024 8,690 8,101
7.625%, 11/15/2023 14,500 13,857
Metropolitan Life Insurance Co.
7.80%, 11/1/2025 30,000 29,362
J.P. Morgan & Co., Inc.
5.75%, 10/15/2008 20,000 17,572
6.25%, 1/15/2009 20,000 18,144
NBD Bank N.A.
6.25%, 8/15/2003 20,000 19,296
National City Bank Cleveland
6.50%, 5/1/2003 10,000 9,731
National City Bank Pennsylvania
7.25%, 10/21/2011 22,000 21,182
National City Corp.
7.20%, 5/15/2005 20,000 19,784
NationsBank Corp.
7.75%, 8/15/2004 20,000 20,417
Republic New York Corp.
5.875%, 10/15/2008 15,000 12,977
SunTrust Banks, Inc.
6.00%, 2/15/2026 25,000 23,129
6.125%, 2/15/2004 20,000 19,218
Transamerica Financial Corp.
6.125%, 11/1/2001 25,000 24,574
Travelers Property Casualty Corp.
7.75%, 4/15/2026 25,000 24,249
UNUM Corp.
6.75%, 12/15/2028 25,000 20,440
Wachovia Corp.
6.375%, 4/15/2003 20,000 19,574
6.605%, 10/1/2025 30,000 28,891
----------------
1,023,099
----------------
INDUSTRIAL (20.8%)
AirTouch Communications, Inc.
6.35%, 6/1/2005 25,000 23,732
Aluminum Co. of America
6.75%, 1/15/2028 25,000 21,664
Baxter International, Inc.
7.65%, 2/1/2027 25,000 24,050
Bestfoods
6.625%, 4/15/2028 25,000 21,933
Bristol-Myers Squibb Co.
6.80%, 11/15/2026 25,000 23,137
<PAGE>
Burlington Northern Santa Fe Corp.
6.375%, 12/15/2005 12,500 $ 11,807
6.875%, 12/1/2027 25,000 22,116
CPC International, Inc.
7.25%, 12/15/2026 25,000 23,744
CSX Corp.
7.95%, 5/1/2027 25,000 24,682
Caterpillar Inc.
6.625%, 7/15/2028 25,000 21,546
Champion International Corp.
7.35%, 11/1/2025 30,000 27,057
Chrysler Corp.
7.45%, 3/1/2027 25,000 24,277
Coca Cola Enterprises
5.75%, 11/1/2008 25,000 22,323
Comcast Cable Communications
6.20%, 11/15/2008 25,000 22,629
Conoco Inc.
6.35%, 4/15/2009 25,000 23,124
The Walt Disney Co.
6.75%, 3/30/2006 15,000 14,631
E.I. du Pont de Nemours & Co.
6.50%, 1/15/2028 25,000 21,766
6.75%, 9/1/2007 25,000 24,181
Eaton Corp.
6.50%, 6/1/2025 10,000 9,495
Ferro Corp.
7.125%, 4/1/2028 10,000 8,276
Ford Motor Co.
7.50%, 8/1/2026 20,000 19,256
8.90%, 1/15/2032 20,000 22,283
General Motors Corp.
7.40%, 9/1/2025 30,000 28,596
9.40%, 7/15/2021 20,000 23,163
Georgia-Pacific Group
7.25%, 6/1/2028 25,000 22,411
Gillette Co.
5.75%, 10/15/2005 35,000 32,624
6.25%, 8/15/2003 10,000 9,762
Hershey Foods Corp.
6.95%, 3/1/2007 13,000 12,717
Hubbell Inc.
6.625%, 10/1/2005 10,000 9,680
Illinois Tool Works, Inc.
5.75%, 3/1/2009 25,000 22,405
International Business
Machines Corp.
7.00%, 10/30/2025 35,000 32,843
International Paper Co.
7.625%, 1/15/2007 15,000 14,904
Johnson & Johnson
6.73%, 11/15/2023 15,000 13,826
Kimberly-Clark Corp.
6.25%, 7/15/2018 25,000 22,024
Eli Lilly & Co.
7.125%, 6/1/2025 25,000 23,847
<PAGE>
Lockheed Corp.
6.75%, 3/15/2003 7,000 6,765
Masco Corp.
6.625%, 4/15/2018 20,000 17,721
Mead Corp.
7.35%, 3/1/2017 10,350 9,632
Merck & Co.
6.30%, 1/1/2026 25,000 21,758
Minnesota Mining &
Manufacturing Corp.
6.375%, 2/15/2028 35,000 30,430
Mobil Corp.
8.625%, 8/15/2021 20,000 22,284
Monsanto Co.
6.75%, 12/15/2027 20,000 17,274
Motorola, Inc.
7.50%, 5/15/2025 25,000 24,323
New York Times Co.
8.25%, 3/15/2025 26,000 25,723
News America Holdings Inc.
8.00%, 10/17/2016 40,000 39,113
Norfolk Southern Corp.
7.80%, 5/15/2027 25,000 24,433
PPG Industries, Inc.
6.875%, 2/15/2012 10,200 9,548
9.00%, 5/1/2021 15,000 16,779
Phelps Dodge Corp.
7.125%, 11/1/2027 12,500 10,624
Praxair, Inc.
6.75%, 3/1/2003 25,000 24,446
Procter & Gamble Co.
5.25%, 9/15/2003 15,000 14,173
6.45%, 1/15/2026 25,000 22,029
Procter & Gamble Co. ESOP
9.36%, 1/1/2021 30,000 34,474
Raytheon Co.
7.20%, 8/15/2027 25,000 22,294
Rohm & Haas Co.
7.85%, 7/15/2029 25,000 25,044
E.W. Scripps Co.
6.625%, 10/15/2007 20,000 18,874
Joseph Seagram & Sons, Inc.
7.50%, 12/15/2018 20,000 18,894
Tenneco Packaging Inc.
8.125%, 6/15/2017 30,000 27,982
8.375%, 4/15/2027 20,000 18,754
Texaco Capital
8.625%, 4/1/2032 25,000 27,275
Time Warner Inc.
6.625%, 5/15/2029 25,000 21,267
Tribune Co.
6.875%, 11/1/2006 20,000 19,293
USX Corp.
6.85%, 3/1/2008 25,000 23,520
<PAGE>
USA Waste Services Inc.
7.00%, 7/15/2028 25,000 $ 18,425
Ultramar Diamond Shamrock
7.20%, 10/15/2017 25,000 22,159
Vulcan Materials Co.
6.00%, 4/1/2009 25,000 22,384
Washington Post Co.
5.50%, 2/15/2009 50,000 44,039
Weyerhaeuser Co.
8.50%, 1/15/2025 10,000 10,600
Whirlpool Corp.
9.00%, 3/1/2003 10,000 10,357
----------------
1,449,201
----------------
UTILITIES (9.0%)
AT&T Corp.
6.50%, 3/15/2029 50,000 42,884
Alabama Power Co.
5.49%, 11/1/2005 8,250 7,520
Arizona Public Service Co.
6.625%, 3/1/2004 10,000 9,729
Baltimore Gas & Electric Co.
7.25%, 7/1/2002 15,000 15,075
BellSouth Telecommunications
6.25%, 5/15/2003 12,000 11,724
Chesapeake & Potomac Telephone
Co. (VA)
7.875%, 1/15/2022 16,000 16,051
Consolidated Edison Co. of
New York, Inc.
6.375%, 4/1/2003 20,000 19,579
Duke Energy Corp.
6.00%, 12/1/2028 25,000 19,922
El Paso Natural Gas Co.
7.50%, 11/15/2026 25,000 22,872
Enron Corp.
6.875%, 10/15/2007 20,000 18,939
Florida Power Corp.
6.75%, 2/1/2028 22,380 19,730
GTE California Inc.
6.70%, 9/1/2009 25,000 23,715
GTE Southwest, Inc.
6.00%, 1/15/2006 10,000 9,258
Illinois Power Co.
6.50%, 8/1/2003 10,000 9,679
Indiana Bell Telephone Co., Inc.
7.30%, 8/15/2026 30,000 28,279
Kentucky Utilities Co.
7.92%, 5/15/2007 5,000 5,076
MCI Communications Corp.
7.50%, 8/20/2004 15,000 15,186
Michigan Bell Telephone Co.
7.85%, 1/15/2022 25,000 24,885
New Jersey Bell Telephone Co.
8.00%, 6/1/2022 40,000 41,076
New York Telephone Co.
6.50%, 3/1/2005 30,000 28,924
<PAGE>
Northern States Power Co.
6.375%, 4/1/2003 8,000 $ 7,800
7.125%, 7/1/2025 30,000 27,884
Ohio Bell Telephone Co.
6.125%, 5/15/2003 15,000 14,532
Oklahoma Gas & Electric Co.
6.50%, 4/15/2028 12,770 10,520
Pacific Bell
7.125%, 3/15/2026 25,000 23,270
PacifiCorp
6.625%, 6/1/2007 10,000 9,539
Pennsylvania Power & Light Co.
6.50%, 4/1/2005 15,000 14,298
PECO Energy
6.50%, 5/1/2003 30,000 29,252
Southwestern Public Service Co.
7.25%, 7/15/2004 10,000 9,883
Sprint Capital Corp.
6.875%, 11/15/2028 20,000 17,795
Tennessee Gas Pipeline Co.
7.50%, 4/1/2017 25,000 23,850
Texas Utilities Electric Co.
6.75%, 7/1/2005 10,000 9,645
Union Electric Co.
6.875%, 8/1/2004 10,000 9,852
Wisconsin Electric Power Co.
6.50%, 6/1/2028 25,000 21,320
Wisconsin Power & Light
5.70%, 10/15/2008 12,650 11,170
----------------
630,713
--------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $3,307,895) 3,103,013
--------------------------------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR-DENOMINATED)(0.4%)
--------------------------------------------------------------------------------
Province of Manitoba
6.125%, 1/19/2004 7,000 6,794
Province of Ontario
6.00%, 2/21/2006 25,000 23,562
--------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $31,815) 30,356
--------------------------------------------------------------------------------
U.S. GOVERNMENT and AGENCY OBLIGATIONS (13.7%)
--------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (2.8%)
U.S. Treasury Bond
5.50%, 8/15/2028 25,000 21,332
U.S. Treasury Note
6.25%, 8/31/2002 50,000 49,942
6.875%, 5/15/2006 125,000 127,093
----------------
198,367
----------------
AGENCY BONDS & NOTES (2.1%)
Federal Home Loan Bank
5.125%, 9/15/2003 50,000 47,240
Federal Home Loan Mortgage Corp.
5.75%, 7/15/2003 50,000 48,348
Federal National Mortgage Assn.
5.75%, 6/15/2005 50,000 47,439
----------------
143,027
----------------
<PAGE>
MORTGAGE OBLIGATIONS (8.8%)
Federal National Mortgage Assn.
5.735%, 1/01/2009 14,843 $ 13,338
Government National
Mortgage Assn.
6.00%, 6/15/2028-3/15/2029 437,803 399,302
6.50%, 2/15/2026-8/15/2029 217,496 204,612
----------------
617,252
--------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT and AGENCY OBLIGATIONS
(Cost $1,025,913) 958,646
Shares
--------------------------------------------------------------------------------
COMMON STOCKS (40.2%)
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (2.6%)
CSX Corp. 285,600 8,961
Ford Motor Co. 2,350,500 125,605
General Motors Corp. 500,000 36,344
Norfolk Southern Corp. 655,000 13,428
----------------
184,338
----------------
CONSUMER DISCRETIONARY (2.1%)
Eastman Kodak Co. 916,000 60,685
May Department Stores Co. 1,695,000 54,664
J.C. Penney Co., Inc. 820,300 16,355
The Stanley Works 600,000 18,075
----------------
149,779
----------------
CONSUMER STAPLES (1.9%)
Flowers Industries, Inc. 2,718,300 43,323
H.J. Heinz Co. 1,000,800 39,844
Philip Morris Cos., Inc. 1,645,000 38,143
Universal Corp. 400,000 9,125
----------------
130,435
----------------
FINANCIAL SERVICES (7.0%)
American General Corp. 400,000 30,350
Bank of America Corp. 201,064 10,091
Brandywine Realty Trust REIT 484,500 7,934
CBL & Associates Properties, Inc. REIT 555,100 11,449
Colonial Properties Trust REIT 204,900 4,751
FelCor Lodging Trust, Inc. REIT 630,000 11,025
First Union Corp. 400,000 13,125
General Growth Properties Inc. REIT 882,300 24,704
HSB Group Inc. 233,300 7,888
IPC Holdings Ltd. 655,300 9,748
Kimco Realty Corp. REIT 258,700 8,763
The Macerich Co. REIT 619,100 12,885
Marsh & McLennan Cos., Inc. 785,000 75,115
National City Corp. 3,940,200 93,333
Nationwide Health Properties, Inc. REIT 680,000 9,350
St. Paul Cos., Inc. 300,000 10,106
Sun Communities, Inc. REIT 685,600 22,068
U.S. Bancorp 900,000 21,431
Urban Shopping Centers, Inc. REIT 682,000 18,499
Wachovia Corp. 1,206,900 82,069
----------------
484,684
----------------
HEALTH CARE (2.3%)
Baxter International, Inc. 1,197,700 75,231
<PAGE>
Pharmacia & Upjohn, Inc. 1,808,500 81,383
----------------
156,614
----------------
INTEGRATED OILS (7.2%)
Atlantic Richfield Co. 1,036,000 89,614
BP Amoco PLC ADR 926,204 54,935
Exxon Mobil Corp. 1,779,463 143,358
Royal Dutch Petroleum Co. ADR 1,263,000 76,333
Texaco Inc. 1,070,000 58,114
USX-Marathon Group 3,266,100 80,632
----------------
502,986
----------------
OTHER ENERGY (1.6%)
Ashland, Inc. 1,030,000 33,926
(2)Equitable Resources, Inc. 2,352,100 78,501
----------------
112,427
----------------
MATERIALS & PROCESSING (4.1%)
Air Products & Chemicals, Inc. 800,000 26,850
CK Witco Corp. 212,858 2,847
Consolidated Papers 403,200 12,827
Eastman Chemical Co. 1,383,400 65,971
The Timber Co. 2,277,000 56,071
Westvaco Corp. 1,414,400 46,145
Weyerhaeuser Co. 1,064,000 76,409
----------------
287,120
----------------
UTILITIES (8.7%)
AT&T Corp. 1,347,500 68,386
Bell Atlantic Corp. 1,500,000 92,344
Central & South West Corp. 2,232,300 44,646
Consolidated Edison Inc. 947,400 32,685
Constellation Energy Group 850,000 24,650
DQE Inc. 2,051,650 71,038
DTE Energy Co. 1,238,200 38,849
Duke Energy Corp. 300,000 15,037
GPU, Inc. 1,208,600 36,182
MCN Energy Group Inc. 501,100 11,901
National Fuel Gas Co. 182,100 8,468
NICOR, Inc. 722,300 23,475
PECO Energy Corp. 810,000 28,148
Pinnacle West Capital Corp. 760,000 23,228
Questar Corp. 2,000,000 30,000
SCANA Corp. 1,021,600 27,456
Southern Co. 1,340,000 31,490
----------------
607,983
----------------
OTHER (2.7%)
Cooper Industries, Inc. 995,900 40,272
Minnesota Mining & Manufacturing Co. 600,000 58,725
Shell Transport & Trading Co. ADR 1,738,900 85,641
----------------
184,638
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,368,613) 2,801,004
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
Face
Amount
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTs (0.9%)
--------------------------------------------------------------------------------
Repurchase Agreements
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
3.25%, 1/3/2000 60,467 60,467
3.40%-3.47%, 1/3/2000-Note G 104 104
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $60,571) 60,571
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(Cost $6,794,807) 6,953,590
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.3%)
--------------------------------------------------------------------------------
Other Assets-Note C 112,156
Liabilities-Note G (89,361)
-------------
22,795
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 370,015,613 outstanding
$.001 par value shares of beneficial interest $6,976,385
================================================================================
NET ASSET VALUE PER SHARE $ 18.85
--------------------------------------------------------------------------------
*See Note A in Notes to Financial Statements.
(1)The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments. (2)Considered an affiliated company as the
fund owns more than 5% of the outstanding voting securities of such company.
ADR-American Depositary Receipt.
REIT-Real Estate Investment Trust.
--------------------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Amount Per
(000) Share
--------------------------------------------------------------------------------
Paid in Capital 6,828,853 18.45
Overdistributed Net
Investment Income (3,989) (0.01)
Overdistributed Net Realized Gains (7,262) (0.02)
Unrealized Appreciation-Note F 158,783 0.43
--------------------------------------------------------------------------------
NET ASSETS $ 6,976,385 $ 18.85
================================================================================
<PAGE>
--------------------------------------------------------------------------------
STATEMENT OF NET ASSETS DECEMBER 31, 1998
--------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLESLEY INCOME FUND (000) (000)
--------------------------------------------------------------------------------
CORPORATE BONDS (45.1%)
--------------------------------------------------------------------------------
FINANCE (15.1%)
Allstate Corp.
6.75%, 5/15/2018 30,000 $ 30,851
7.50%, 6/15/2013 20,000 22,073
Ambac, Inc.
7.50%, 5/1/2023 5,500 5,927
American Re Corp.
7.45%, 12/15/2026 34,095 38,389
Associates Corp. of North America
6.25%, 11/1/2008 25,000 25,809
Banc One Corp.
7.75%, 7/15/2025 50,000 57,575
8.00%, 4/29/2027 15,000 17,806
BankBoston Corp.
6.625%, 12/1/2005 15,000 15,261
6.875%, 7/15/2003 10,000 10,272
Boatmen's Bancshares Inc.
7.625%, 10/1/2004 10,000 10,857
CIGNA Corp.
7.875%, 5/15/2027 25,000 27,059
Cincinnati Financial Corp.
6.90%, 5/15/2028 25,000 25,188
Citigroup
6.625%, 1/15/2028 25,000 24,637
6.65%, 12/15/2010 25,000 26,344
7.125%, 9/1/2005 15,000 15,984
CoreStates Capital Corp.
6.625%, 3/15/2005 20,000 20,833
Equitable Companies Inc.
7.00%, 4/1/2028 25,000 25,824
Farmers Exchange Capital
7.05%, 7/15/2028 25,000 25,030
Fifth Third Bancorp
6.75%, 7/15/2005 25,000 26,357
First Bank N.A.
7.55%, 6/15/2004 8,000 8,663
First Bank System
6.625%, 5/15/2003 10,000 10,323
7.625%, 5/1/2005 7,500 8,222
First Chicago Corp.
7.625%, 1/15/2003 15,000 15,980
First Union Corp.
6.00%, 10/30/2008 15,000 15,286
7.50%, 4/15/2035 11,000 12,043
Fleet Financial Group, Inc.
6.875%, 3/1/2003 30,000 31,126
6.875%, 1/15/2028 25,000 25,852
General Electric Capital Corp.
8.125%, 5/15/2012 10,000 12,180
General Electric Capital Services
7.50%, 8/21/2035 14,000 16,645
<PAGE>
General Electric Global Insurance
Holdings Corp.
7.00%, 2/15/2026 60,000 $ 65,926
GMAC
7.00%, 9/15/2002 30,000 31,420
John Hancock Mutual Life
Insurance Co.
7.375%, 2/15/2024 50,000 55,445
Liberty Mutual Group
8.50%, 5/15/2025 35,000 40,615
Lumbermens Mutual Casualty Co.
9.15%, 7/1/2026 45,000 53,057
MBIA Inc.
7.00%, 12/15/2025 19,500 20,250
Massachusetts Mutual Life
7.50%, 3/1/2024 8,690 9,660
7.625%, 11/15/2023 14,500 16,331
Metropolitan Life Insurance Co.
7.80%, 11/1/2025 40,000 44,954
J.P. Morgan & Co., Inc.
5.75%, 10/15/2008 20,000 19,760
6.25%, 1/15/2009 20,000 20,430
NBD Bank N.A.
6.25%, 8/15/2003 20,000 20,457
National City Bank Cleveland
6.50%, 5/1/2003 10,000 10,312
National City Bank Pennsylvania
7.25%, 10/21/2011 22,000 24,614
National City Corp.
7.20%, 5/15/2005 20,000 21,379
NationsBank Corp.
7.25%, 10/15/2025 10,000 10,824
7.75%, 8/15/2004 20,000 21,839
Republic New York Corp.
5.875%, 10/15/2008 15,000 14,958
SunTrust Banks, Inc.
6.00%, 2/15/2026 25,000 25,434
6.125%, 2/15/2004 20,000 20,422
Transamerica Financial Corp.
6.125%, 11/1/2001 25,000 25,177
Travelers Property Casualty Corp.
7.75%, 4/15/2026 25,000 27,960
Unum Corp.
6.75%, 12/15/2028 25,000 24,560
Wachovia Corp.
6.375%, 4/15/2003 20,000 20,588
6.605%, 10/1/2025 30,000 31,712
----------------
1,286,480
----------------
INDUSTRIAL (20.9%)
Air Products & Chemicals, Inc.
8.75%, 4/15/2021 12,550 15,270
AirTouch Communications, Inc.
6.35%, 6/1/2005 25,000 25,924
Aluminum Co. of America
6.75%, 1/15/2028 25,000 25,601
<PAGE>
Baxter International, Inc.
7.65%, 2/1/2027 25,000 $ 28,195
Bestfoods
6.625%, 4/15/2028 30,000 31,753
Bristol-Myers Squibb Co.
6.80%, 11/15/2026 40,000 44,364
Burlington Northern Santa Fe Corp.
6.375%, 12/15/2005 12,500 12,945
6.875%, 12/1/2027 25,000 26,249
CPC International, Inc.
7.25%, 12/15/2026 30,000 33,768
CSX Corp.
7.95%, 5/1/2027 35,000 40,320
Caterpillar Inc.
6.625%, 7/15/2028 25,000 25,278
Champion International Corp.
7.35%, 11/1/2025 30,000 30,032
Chrysler Corp.
7.45%, 3/1/2027 25,000 28,803
Coca Cola Enterprises
5.75%, 11/1/2008 25,000 25,069
Comcast Cable Communications
6.20%, 11/15/2008 25,000 25,437
The Walt Disney Co.
6.75%, 3/30/2006 15,000 16,309
E.I. du Pont de Nemours & Co.
6.50%, 1/15/2028 25,000 25,937
6.75%, 9/1/2007 25,000 27,195
Eastman Chemical Co.
7.25%, 1/15/2024 25,000 24,604
7.60%, 2/1/2027 5,000 5,064
Eaton Corp.
6.50%, 6/1/2025 10,000 10,443
7.625%, 4/1/2024 10,000 11,197
Ferro Corp.
7.125%, 4/1/2028 10,000 9,920
Ford Motor Co.
7.50%, 8/1/2026 20,000 22,719
8.90%, 1/15/2032 20,000 26,527
General Motors Corp.
7.40%, 9/1/2025 30,000 33,438
9.40%, 7/15/2021 20,000 26,695
Georgia-Pacific Group
7.25%, 6/1/2028 25,000 24,730
Gillette Co.
5.75%, 10/15/2005 35,000 35,702
6.25%, 8/15/2003 10,000 10,351
Hershey Foods Corp.
6.95%, 3/1/2007 13,000 14,303
Hubbell Inc.
6.625%, 10/1/2005 10,000 10,660
International Business
Machines Corp.
7.00%, 10/30/2025 60,000 66,741
<PAGE>
International Paper Co.
7.625%, 1/15/2007 15,000 $ 16,225
Johnson & Johnson
6.73%, 11/15/2023 15,000 16,529
Kimberly-Clark Corp.
6.25%, 7/15/2018 25,000 25,744
Eli Lilly & Co.
7.125%, 6/1/2025 50,000 57,115
Lockheed Corp.
6.75%, 3/15/2003 7,000 7,259
Masco Corp.
6.625%, 4/15/2018 20,000 19,647
Mead Corp.
7.35%, 3/1/2017 10,350 11,061
Merck & Co.
6.30%, 1/1/2026 30,000 31,446
Minnesota Mining &
Manufacturing Corp.
6.375%, 2/15/2028 35,000 36,598
Mobil Corp.
8.625%, 8/15/2021 20,000 25,166
Monsanto Co.
6.75%, 12/15/2027 25,000 25,514
Motorola, Inc.
7.50%, 5/15/2025 50,000 56,679
New York Times Co.
8.25%, 3/15/2025 26,000 29,693
News America Holdings Inc.
8.00%, 10/17/2016 50,000 55,470
Norfolk Southern Corp.
7.80%, 5/15/2027 35,000 40,655
PPG Industries, Inc.
6.875%, 2/15/2012 10,200 10,894
9.00%, 5/1/2021 15,000 19,405
Phelps Dodge Corp.
7.125%, 11/1/2027 12,500 12,401
Praxair, Inc.
6.75%, 3/1/2003 25,000 25,508
Procter & Gamble Co.
5.25%, 9/15/2003 15,000 15,026
6.45%, 1/15/2026 30,000 31,425
Procter & Gamble Co. ESOP
9.36%, 1/1/2021 30,000 39,921
Raytheon Co.
7.20%, 8/15/2027 25,000 27,054
E.W. Scripps Co.
6.625%, 10/15/2007 20,000 20,963
Tenneco Inc.
7.625%, 6/15/2017 30,000 30,856
7.875%, 4/15/2027 20,000 21,019
Texaco Capital
8.625%, 4/1/2032 30,000 38,435
Time Warner Inc.
6.625%, 5/15/2029 25,000 25,213
Tribune Co.
6.875%, 11/1/2006 20,000 21,015
<PAGE>
USA Waste Services Inc.
7.00%, 7/15/2028 25,000 $ 25,506
USX Corp.
6.85%, 3/1/2008 40,000 40,369
Ultramar Diamond Shamrock
7.20%, 10/15/2017 25,000 24,870
Weyerhaeuser Co.
8.50%, 1/15/2025 10,000 11,868
Whirlpool Corp.
9.00%, 3/1/2003 10,000 11,132
Worthington Industries, Inc.
6.70%, 12/1/2009 20,500 20,957
7.125%, 5/15/2006 20,000 21,008
----------------
1,771,189
----------------
UTILITIES (9.1%)
Alabama Power Co.
5.49%, 11/1/2005 8,250 8,258
Arizona Public Service Co.
6.625%, 3/1/2004 10,000 10,338
Baltimore Gas & Electric Co.
7.25%, 7/1/2002 15,000 15,996
BellSouth Telecommunications
6.25%, 5/15/2003 12,000 12,416
7.00%, 10/1/2025 10,000 11,193
Chesapeake & Potomac Telephone
Co. (VA)
7.875%, 1/15/2022 16,000 19,512
Cincinnati Gas & Electric Co.
6.90%, 6/1/2025 9,500 9,830
Consolidated Edison Co. of
New York, Inc.
6.375%, 4/1/2003 20,000 20,692
Duke Energy Corp.
6.00%, 12/1/2028 25,000 24,192
El Paso Natural Gas Co.
7.50%, 11/15/2026 25,000 26,714
Enron Corp.
6.875%, 10/15/2007 20,000 20,816
Florida Power Corp.
6.75%, 2/1/2028 22,380 24,061
GTE California Inc.
6.70%, 9/1/2009 25,000 27,325
GTE Southwest, Inc.
6.00%, 1/15/2006 10,000 10,299
Illinois Power Co.
6.50%, 8/1/2003 10,000 10,339
Indiana Bell Telephone Co., Inc.
7.30%, 8/15/2026 30,000 34,600
Kentucky Utilities Co.
7.92%, 5/15/2007 5,000 5,707
MCI Communications Corp.
7.50%, 8/20/2004 15,000 16,346
Michigan Bell Telephone Co.
7.85%, 1/15/2022 25,000 29,203
<PAGE>
NGC Corp.
7.125%, 5/15/2018 20,000 $ 19,659
New Jersey Bell Telephone Co.
8.00%, 6/1/2022 40,000 48,603
New York Telephone Co.
6.50%, 3/1/2005 30,000 31,583
Northern States Power Co.
6.375%, 4/1/2003 8,000 8,308
7.125%, 7/1/2025 30,000 33,931
Ohio Bell Telephone Co.
6.125%, 5/15/2003 15,000 15,536
Oklahoma Gas & Electric Co.
6.50%, 4/15/2028 12,770 13,302
Pacific Bell
7.125%, 3/15/2026 25,000 27,878
PacifiCorp
6.625%, 6/1/2007 10,000 10,568
6.71%, 1/15/2026 12,500 12,689
Pennsylvania Power & Light Co.
6.50%, 4/1/2005 15,000 15,758
PECO Energy
6.50%, 5/1/2003 30,000 30,874
Southern California Edison Co.
6.25%, 6/15/2003 6,050 6,275
Southwestern Public Service Co.
7.25%, 7/15/2004 10,000 10,793
Sprint Capital Corp.
6.875%, 11/15/2028 35,000 36,388
Tennessee Gas Pipeline Co.
7.50%, 4/1/2017 25,000 26,757
Texas Utilities Electric Co.
6.75%, 7/1/2005 10,000 10,516
Union Electric Co.
6.875%, 8/1/2004 10,000 10,694
U S WEST Capital Funding, Inc.
6.875%, 7/15/2028 25,000 26,672
Wisconsin Electric Power Co.
6.50%, 6/1/2028 25,000 25,700
Wisconsin Power & Light
5.70%, 10/15/2008 12,650 12,875
----------------
773,196
--------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $3,566,523) 3,830,865
--------------------------------------------------------------------------------
FOREIGN BONDS (U. S. DOLLAR DENOMINATED)(2.4%)
--------------------------------------------------------------------------------
Province of British Columbia
6.50%, 1/15/2026 15,000 15,607
Husky Oil Ltd.
7.55%, 11/15/2016 20,000 18,808
Province of Manitoba
6.125%, 1/19/2004 7,000 7,246
8.875%, 9/15/2021 24,041 32,142
Province of Ontario
6.00%, 2/21/2006 25,000 25,907
Province of Quebec
7.50%, 7/15/2023 30,000 34,221
Saga Petroleum ASA
7.25%, 9/23/2027 12,795 11,937
<PAGE>
Province of Saskatchewan
8.50%, 7/15/2022 15,000 $ 19,153
Talisman Energy, Inc.
7.125%, 6/1/2007 20,000 20,631
7.25%, 10/15/2027 20,000 19,550
--------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $194,717) 205,202
--------------------------------------------------------------------------------
U.S. GOVERNMENT and AGENCY OBLIGATIONS (14.0%)
--------------------------------------------------------------------------------
U.S. Government Securities (8.3%)
U.S. Treasury Bonds
6.25%, 8/15/2023 75,000 83,815
7.25%, 5/15/2016 150,000 181,713
U.S. Treasury Notes
6.25%, 8/31/2002 200,000 210,398
6.875%, 5/15/2006 200,000 226,022
----------------
701,948
----------------
AGENCY BONDS & NOTES (1.8%)
Federal Home Loan Bank
Global Notes
5.125%, 9/15/2003 50,000 49,992
Federal Home Loan Mortgage
Corp. Global
5.75%, 7/15/2003 50,000 51,346
Federal National Mortgage Assn.
Global Bond
5.75%, 6/15/2005 50,000 51,371
----------------
152,709
----------------
MORTGAGE OBLIGATIONS (3.9%)
Federal National Mortgage Assn.
(1)5.735%, 1/1/2009 15,000 14,845
Government National
Mortgage Assn.
(1)6.00%, 7/15/2028-1/1/2029 325,251 322,354
----------------
337,199
--------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT and AGENCY OBLIGATIONS
(Cost $1,121,731) 1,191,856
--------------------------------------------------------------------------------
COMMON STOCKS (36.1%)
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (1.4%)
Ford Motor Co. 2,073,800 121,706
---------------
Consumer Discretionary (2.2%)
Eastman Kodak Co. 916,000 65,952
May Department Stores Co. 640,000 38,640
J.C. Penney Co., Inc. 1,732,600 81,216
----------------
185,808
----------------
CONSUMER STAPLES (1.8%)
Flowers Industries, Inc. 2,718,300 65,069
H.J. Heinz Co. 800,800 45,345
Philip Morris Cos., Inc. 820,000 43,870
----------------
154,284
----------------
FINANCIAL SERVICES (7.4%)
BankAmerica Corp. 511,064 30,728
Brandywine Realty Trust REIT 484,500 8,660
CBL & Associates Properties, Inc. REIT 613,100 15,826
Camden Property Trust REIT 832,972 21,657
<PAGE>
Colonial Properties Trust REIT 1,004,900 $ 26,755
FelCor Lodging Trust, Inc. REIT 630,000 14,529
First Union Corp. 2,311,400 140,562
General Growth Properties Inc. REIT 812,300 30,766
HSB Group Inc. 260,000 10,676
Highwood Properties, Inc. REIT 245,000 6,309
IPC Holdings Ltd. 290,300 6,731
KeyCorp 976,400 31,245
Kimco Realty Corp. REIT 218,700 8,680
The Macerich Co. REIT 619,100 15,864
Marsh & McLennan Cos., Inc. 370,000 21,622
National City Corp. 1,665,000 120,713
Nationwide Health Properties, Inc. REIT 616,000 13,283
Sun Communities, Inc. REIT 520,600 18,123
Urban Shopping Centers, Inc. REIT 617,000 20,207
Wachovia Corp. 766,900 67,056
----------------
629,992
----------------
HEALTH CARE (2.1%)
Baxter International, Inc. 1,147,700 73,811
Pharmacia & Upjohn, Inc. 1,808,500 102,406
----------------
176,217
----------------
INTEGRATED OIL (6.3%)
Amoco Corp. 2,320,000 136,880
Atlantic Richfield Co. 736,000 48,024
* Conoco Inc. 774,100 16,159
Equitable Resources, Inc. 1,496,200 43,577
Mobil Corp. 420,000 36,592
Royal Dutch Petroleum Co. ADR 1,713,000 82,010
Texaco Inc. 1,279,000 67,627
USX-Marathon Group 3,495,200 105,293
----------------
536,162
----------------
MATERIALS & PROCESSING (2.7%)
BOC Group PLC ADR 900,000 24,525
Consolidated Papers 503,200 13,838
Dow Chemical Co. 360,000 32,738
Eastman Chemical Co. 633,400 28,345
The Timber Co. 1,877,000 44,696
Westvaco Corp. 1,000,000 26,813
Weyerhaeuser Co. 964,000 48,983
Witco Chemical Corp. 435,900 6,947
----------------
226,885
----------------
UTILITIES (11.4%)
AT&T Corp. 865,000 65,091
American Electric Power Co., Inc. 760,000 35,767
Ameritech Corp. 666,000 42,208
Bell Atlantic Corp. 3,136,400 166,229
Central & South West Corp. 2,332,300 63,992
Consolidated Edison Inc. 707,400 37,404
DQE Inc. 1,601,650 70,373
DTE Energy Co. 1,238,200 53,088
GPU, Inc. 2,428,000 107,287
GTE Corp. 1,827,700 118,801
MCN Energy Group Inc. 501,100 9,552
National Fuel Gas Co. 122,500 5,535
New England Electric System 550,000 26,469
<PAGE>
NICOR, Inc. 722,300 30,517
Questar Corp. 1,140,000 22,088
SBC Communicatio 359,000 19,251
SCANA Corp. 188,000 6,063
Southern Co. 1,400,000 40,687
Telecom Corporation of
New Zealand Ltd. 4,400,000 19,710
Telecom Corporation of New Zealand Ltd. IR 703,200 1,542
U S WEST, Inc. 405,000 26,173
----------------
967,827
----------------
OTHER (0.8%)
Cooper Industries, Inc. 895,900 42,723
Shell Transport & Trading Co. ADR 700,000 26,031
----------------
68,754
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,143,199) 3,067,635
--------------------------------------------------------------------------------
Face
Amount
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.3%)
--------------------------------------------------------------------------------
Repurchase Agreements
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.76%, 1/4/1999 $212,975 212,975
4.77%-4.78%, 1/4/1999-Note G 148,190 148,190
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $361,165) 361,165
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.9%)
(Cost $7,387,335) 8,656,723
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.9%)
--------------------------------------------------------------------------------
Other Assets-Note C $ 171,763
Liabilities-Note G (330,706)
----------------
(158,943)
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 384,140,873 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $ 8,497,780
================================================================================
NET ASSET VALUE PER SHARE $ 22.12
================================================================================
*See Note A in Notes to Financial Statements.
*Non-Income-Producing Security.
(1)The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
ADR-American Depositary Receipt.
IR-Installment Receipt.
REIT-Real Estate Investment Trust.
AT DECEMBER 31, 1998, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Amount Per
(000) Share
--------------------------------------------------------------------------------
Paid in Capital $ 7,164,130 $ 18.65
Overdistributed Net
Investment Income (2,469) (0.01)
Accumulated Net Realized Gains 66,731 0.17
Unrealized Appreciation-
Note F 1,269,388 3.31
--------------------------------------------------------------------------------
NET ASSETS $ 8,497,780 $ 22.12
================================================================================
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES OF VANGUARD WELLESLEY INCOME FUND
In our opinion, the accompanying statements 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 31,1999, and 1998, the
results of its operations, the changes in its net assets and the financial
highlights for each of the two years in the period then ended, in conformity
with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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, 1999 and 1998, by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 2, 2000
<PAGE>
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: Equity securities 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. Prices are taken from the primary market in which each security
trades. 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.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair 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. 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.
4. Distributions: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
5. 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. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. Wellington Management Company, LLP provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
relative to a combined index comprising the Lehman Brothers Long Corporate AA or
Better Bond Index, the S&P 500/BARRA Value Index, the S&P Utilities Index, and
the S&P Telephone Index. For the year ended December 31, 1999, the advisory fee
represented an effective annual basic rate of 0.05% of the fund's average net
assets before a decrease of $196,000 based on performance. For the year ended
December 31, 1998, the advisory fee again represented an effective annual basic
rate of .05% of the fund's average net assets before an increase of $648,000
(.01%) based on performance.
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 Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At December 31, 1999, the fund had contributed capital of $1,500,000
to Vanguard (included in Other Assets), representing 0.02% of the fund's net
assets and 1.5% of Vanguard's capitalization. At December 31,1998, the fund had
contributed capital of $1,519,000 to Vanguard (included in Other Assets), again
representing 0.02% of the fund's net assets but 2.2% of Vanguard's
capitalization.
The fund's Trustees and officers are also Directors and officers of Vanguard.
D. Vanguard has asked the fund's investment adviser to direct certain security
trades, subject to obtaining the best price and execution, to brokers who have
agreed to rebate to the fund part of the
<PAGE>
commissions generated. Such rebates are used solely to reduce the fund's
management and administrative expenses. The fund's custodian bank has also
agreed to reduce its fees when the fund maintains cash on deposit in the
non-interest-bearing custody account. For the year ended December 31, 1999,
directed brokerage and custodian fee offset arrangements reduced expenses by
$410,000 and $19,000, respectively, the total expense reduction represented an
effective annual rate of 0.01% of the fund's average net assets. For the year
ended December 31, 1998, directed brokerage and custodian fee offset
arrangements reduced expenses by $391,000 and $4,000, respectively.
E. During the years ended December 31, 1999 and 1998, purchases and sales of
investment securities other than U.S. government securities and temporary cash
investments were:
---------------------------------
000
---------------------------------
Purchases Sales
---------------------------------
1999 $1,228,453 $1,721,450
1998 $1,757,443 $1,748,098
During the years ended December 31, 1999 and 1998, purchases and sales of U.S.
government securities were:
---------------------------------
000
---------------------------------
Purchases Sales
---------------------------------
1999 $349,380 $494,119
1998 $1,025,254 $777,098
F. At December 31, 1999, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $158,783,000,
consisting of unrealized gains of $584,652,000 on securities that had risen in
value since their purchase and $425,869,000 in unrealized losses on securities
that had fallen in value since their purchase. As of December 31, 1998, net
unrealized appreciation of investment securities for financial reporting and
federal income tax purposes was $1,269,388,000, consisting of unrealized gains
of $1,307,798,000 on securities that had risen in value since their purchase and
$38,410,000 in unrealized losses on securities that had fallen in value since
their purchase.
G. The market value of securities on loan to broker/dealers at December 31,
1999, was $274,183,000, for which the fund held cash collateral of $104,000 and
U.S. Treasury securities with a market value of $276,976,000. At December
31,1998, the market value of securities on loan to broker/dealers was
$144,060,000, for which the fund held cash collateral of $148,190,000. Cash
collateral received is invested in repurchase agreements. Security loans are
required to be secured at all times by collateral at least equal to the market
value of securities loaned; 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.
<PAGE>
--------------------------------------------------------------------------------
WELLESLEY INCOME FUND
YEAR ENDED DECEMBER 31,
1999 1998
(000) (000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 107,386* $ 98,236
Interest 328,795 329,890
Security Lending 264 230
-------------------------------------
Total Income 436,445 428,356
-------------------------------------
EXPENSES
Investment Advisory Fees-Note B
Basic Fee 3,763 4,026
Performance Adjustment (196) 648
The Vanguard Group-Note C
Management and Administrative 18,640 17,994
Marketing and Distribution 1,109 1,540
Taxes (other than income taxes) - 241
Custodian Fees 98 107
Auditing Fees 11 11
Shareholders' Reports 213 158
Annual Meeting and Proxy Costs - 33
Trustees' Fees and Expenses 12 15
-------------------------------------
Total Expenses 23,650 24,773
Expenses Paid Indirectly-Note D (429) (395)
-------------------------------------
Net Expenses 23,221 24,378
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 413,224 403,978
--------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 370,860* 397,100
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES (1,110,605) 96,210
--------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS (326,521) $ 897,288
================================================================================
*At December 31, 1999, dividend income and realized net gain from affiliated
companies were $2,549,000 and $288,000, respectively.
<PAGE>
<TABLE>
<CAPTION>
WELLESLEY INCOME FUND
YEAR ENDED DECMEBER 31,
1999 1998
(000) (000)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 413,224 $ 403,978
Realized Net Gain 370,860 397,100
Change in Unrealized Appreciation (Depreciation) (1,110,605) 96,210
--------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations (326,521) 897,288
--------------------------------------
DISTRIBUTIONS
Net Investment Income (414,744) (402,480)
Realized Capital Gain (444,853) (413,626)
--------------------------------------
Total Distributions (859,597) (816,106)
--------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 778,086 1,254,529
Issued in Lieu of Cash Distributions 739,241 705,454
Redeemed (1,852,604) (1,189,285)
--------------------------------------
Net Increase (Decrease) from Capital Share Transactions (335,277) 770,698
----------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (1,521,395) 851,880
----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 8,497,780 7,645,900
--------------------------------------
End of Year $ 6,976,385 $ 8,497,780
==========================================================================================================
1SHARES ISSUED (REDEEMED)
Issued 36,384 55,868
Issued in Lieu of Cash Distributions 37,674 31,680
Redeemed (88,183) (53,098)
--------------------------------------
Net Increase (Decrease) in Shares Outstanding (14,125) 34,450
==========================================================================================================
</TABLE>
<PAGE>
WELLESLEY INCOME FUND
YEAR ENDED DECEMBER 31,
--------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1999 1998
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Year 22.12 21.86
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.120 1.130
Net Realized and Unrealized Gain (Loss) on Investments (2.025) 1.400
--------------------------
Total from Investment Operations (0.905) 2.530
--------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.120) (1.130)
Distributions from Realized Capital Gains (1.245) (1.140)
--------------------------
Total Distributions (2.365) (2.270)
================================================================================
Net Asset Value, End of Year $ 18.85 $ 22.12
================================================================================
Total Return -4.14% 11.84%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $6,976 $8,498
Ratio of Total Expenses to Average Net Assets 0.30% 0.31%
Ratio of Net Investment Income to Average Net Assets 5.22% 5.05%
Portfolio Turnover Rate 20% 32%
================================================================================
