<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-47371) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 45
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 46
VANGUARD FIXED INCOME
SECURITIES FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
100 VANGUARD BOULEVARD
MALVERN, PA 19355-0741
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS HEREBY REQUESTED THAT THIS FILING BECOME EFFECTIVE
60 days after filing pursuant to paragraph (a) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24f-2 NOTICE FOR THE YEAR ENDED JANUARY 31, 1997 ON MARCH 13, 1997.
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VANGUARD FIXED INCOME SECURITIES FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund........................ Directors and Officers; Management of
the Fund
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of the Portfolio;
Dividends, Capital Gains and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objective and Policies;
General Information
Item 13. Investment Objective and Policies............. Investment Objective and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund; Investment
Management
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of the Fund; Investment
Management
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information; Financial
Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE.
THE SHORT-TERM CORPORATE PORTFOLIO INSTITUTIONAL SHARES OF THE FUND MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION SHALL NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY, NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATES IN WHICH SUCH OFFER,
SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. TO OBTAIN A
CURRENTLY EFFECTIVE PROSPECTUS OF THE SHORT-TERM CORPORATE PORTFOLIO.
PORTFOLIO SHARES OF THE FUND PLEASE CONTACT VANGUARD INSTITUTIONAL
INVESTOR SERVICES AT 1-800-523-1036.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 22, 1997
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[VANGUARD FIXED INCOME SECURITIES FUND LOGO]
Short-Term Corporate Portfolio --
Institutional Shares A Member of The Vanguard Group
================================================================================
PROSPECTUS -- JULY 21, 1997
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FUND INFORMATION: PARTICIPANT SERVICES -- 1-800-523-8066
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INVESTMENT Vanguard Fixed Income Securities Fund, Inc. (the "Fund") is an
OBJECTIVE open-end diversified investment company that consists of nine
AND POLICIES Portfolios. This prospectus pertains only to the Fund's
Short-Term Corporate Portfolio (the "Portfolio"). The objective
of the Portfolio is to provide investors with a high level of
income consistent with the maintenance of principal and
liquidity by investing in investment grade fixed income
securities with an average maturity of one to three years.
There is no assurance that the Portfolio will achieve its
stated objective. Shares of the Portfolio are neither insured
nor guaranteed by any agency of the U.S. Government, including
the FDIC.
- --------------------------------------------------------------------------------
INVESTMENT The Portfolio offers two separate classes of shares to
ALTERNATIVES investors. The Portfolio's "Institutional Shares" are designed
primarily for investors who meet a minimum initial investment
of $50 million and generally do not require special employee
benefit plan services. Only the Institutional Shares are
offered through this prospectus; the Portfolio's other class of
shares, the "Portfolio Shares," are offered through a separate
prospectus. To obtain information on the Portfolio Shares,
please call 1-800-662-7447 (SHIP), Monday through Friday, from
8:00 a.m. to 9:00 p.m. and Saturday from 9:00 a.m. to 4:00 p.m.
(Eastern time).
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OPENING AN Shares of the Portfolio may be purchased by Federal Funds wire.
ACCOUNT The minimum initial investment is $50 million.
- --------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the
PROSPECTUS information you should know about the Portfolio before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Portfolio has been filed with the
Securities and Exchange Commission. This Statement is dated
July 21, 1997 and has been incorporated by reference into this
Prospectus. A copy may be obtained without charge by writing to
the Portfolio or by calling our Participant Services
Department. The Securities and Exchange Commission maintains a
website (http.//WWW.sec.gov) which contains the Statement of
Additional Information, material incorporated by reference, and
other information regarding the Fund.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Portfolio Expenses................. 2
Financial Highlights............... 3
Yield and Total Return............. 4
FUND INFORMATION
Investment Objective............... 4
Investment Policies................ 4
Page
Investment Risks................... 5
Who Should Invest.................. 6
Implementation of Policies......... 7
Investment Limitations............. 10
Management of the Portfolio........ 11
Investment Advisers................ 11
Page
Dividends, Capital Gains
and Taxes........................ 13
The Share Price of
The Portfolio.................... 14
General Information................ 14
Shareholder Guide.................. 16
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 4
PORTFOLIO EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of each share class of
the Short-Term Corporate Portfolio. For the Portfolio
Shares, these expenses and fees are based upon those
incurred during the fiscal year ended January 31, 1997.
Because the Institutional Shares of the Portfolio were not
offered prior to July 21, 1997, expenses and fees for this
share class are estimates based on the historical expenses
of the Portfolio Shares for the 1997 fiscal year.
<TABLE>
<CAPTION>
INSTITUTIONAL
SHARES OF
SHORT-TERM SHORT-TERM
CORPORATE CORPORATE
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------
<S> <C> <C>
Sales Load Imposed on Purchases................. None None
Sales Load Imposed on Reinvested Dividends...... None None
Redemption Fees*................................ None None
Exchange Fees................................... None None
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL
SHARES OF
SHORT-TERM SHORT-TERM
CORPORATE CORPORATE
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------
<S> <C> <C>
Management & Administrative Expenses............ 0.19% --%
Investment Advisory Fees........................ 0.01 --
12b-1 Fees...................................... None None
Other Expenses
Distribution Costs............................ 0.03% --%
Miscellaneous Expenses........................ 0.02 --
--------- -----------
Total Other Expenses............................ 0.05 --
--------- -----------
TOTAL OPERATING EXPENSES.............. 0.25% 0.15%
========= ===========
</TABLE>
* Wire redemptions of less than $5,000 are subject to a
$5 processing fee.
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Portfolio.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Short-Term Corporate Portfolio.......... $ 3 $ 8 $14 $ 32
Short-Term Corporate
Portfolio - Institutional Shares...... $ -- $-- $-- $ --
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
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2
<PAGE> 5
FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period have been audited by Price
Waterhouse LLP, independent accountants, whose reports on
the financial statements which contain this information
were unqualified. This information should be read in
conjunction with the Portfolio's financial statements and
notes thereto, which, together with the remaining portions
of the Fund's 1997 Annual Report to Shareholders, are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear,
along with the reports of Price Waterhouse LLP, in the
Fund's 1997 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1997 Annual Report to Shareholders which may be
obtained without charge by writing to the Fund or by
calling our Investor Information Department at
1-800-662-7447.
These financial highlights relate only to the Portfolio
Shares of the Short-Term Corporate Portfolio; the
Institutional Shares were not available prior to July 21,
1997.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO -- PORTFOLIO SHARES
-----------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
YEAR............................. $10.94 $10.40 $10.94 $10.99 $10.88 $10.50 $10.34 $10.23 $10.43 $10.67
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............ .663 .671 .596 .605 .695 .804 .876 .895 .833 .761
Net Realized and Unrealized Gain
(Loss) on Investments.......... (.190) .540 (.540) .049 .275 .380 .160 .110 (.200) (.240)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... .473 1.211 .056 .654 .970 1.184 1.036 1.005 .633 .521
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income.............. (.663) (.671) (.596) (.605) (.695) (.804) (.876) (.895) (.833) (.761)
Distributions from Realized
Capital Gains.................. -- -- -- (.099) (.165) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............ (.663) (.671) (.596) (.704) (.860) (.804) (.876) (.895) (.833) (.761)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....... $10.75 $10.94 $10.40 $10.94 $10.99 $10.88 $10.50 $10.34 $10.23 $10.43
============================================================================================================================
TOTAL RETURN....................... 4.52% 11.95% 0.60% 6.11% 9.29% 11.70% 10.47% 10.18% 6.31% 5.16%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)....................... $4,531 $3,873 $2,924 $3,573 $2,811 $1,911 $829 $597 $493 $429
Ratio of Expenses to Average
Net Assets....................... 0.25% 0.27% 0.28% 0.26% 0.27% 0.26% 0.31% 0.28% 0.34% 0.33%
Ratio of Net Investment Income to
Average Net Assets............... 6.18% 6.23% 5.66% 5.48% 6.33% 7.44% 8.48% 8.70% 8.17% 7.36%
Portfolio Turnover Rate............ 45% 62% 69% 61% 71% 99% 107% 121% 165% 258%
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</TABLE>
3
<PAGE> 6
YIELD AND From time to time each share class of the Portfolio may
TOTAL RETURN advertise its yield and total return. Both yield and total
return figures are based on historical earnings and are
not intended to indicate future performance. The "total
return" of a class of shares of the Portfolio refers to
the average annual compounded rates of return over one- ,
five- and ten-year periods or for the life of the class of
shares of the Portfolio (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all
dividends and capital gains distributions. The investment
results of each class of shares of the Portfolio will
vary.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of each share class of the Portfolio is calculated
by dividing net investment income per share earned during
a 30-day period by the net asset value per share on the
last day of the period. Net investment income includes
interest and dividend income per share earned by the class
of shares; it is net of all expenses and all recurring and
nonrecurring charges that have been applied to all
shareholder accounts of that class. The yield calculation
assumes that net investment income earned over 30 days is
compounded monthly for six months and then annualized.
Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds. However,
these methods differ from the accounting methods used by
the Portfolio to maintain its books and records, and so
the advertised 30-day yield may not fully reflect the
income paid to an investor's account or the yield reported
in the Fund's Reports to Shareholders.
Additionally, the Portfolio may compare its performance to
that of the Lehman Aggregate Bond Index, and may advertise
its duration, a measure of a Portfolio's sensitivity to
interest rate changes.
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INVESTMENT The Short-Term Corporate Portfolio is part of Vanguard
OBJECTIVE Fixed Income Securities Fund, a no-load, open-end,
diversified investment company that seeks to provide
THE PORTFOLIO investors with a high level of income consistent with the
SEEKS TO PROVIDE maintenance of principal and liquidity.
A HIGH LEVEL
OF CURRENT INCOME
The Portfolio seeks to achieve this objective by investing
in investment-grade fixed income securities and by
maintaining an average maturity of one to three years.
There is no assurance that the Portfolio will achieve its
stated objective.
The investment objective for the Fund is not fundamental
and so may be changed by the Board of Directors without
shareholder approval. Any such change could result in the
Fund having investment objectives different from the
objectives which a shareholder considered appropriate at
the time of investment in the Fund. However, shareholders
would be notified prior to any material change in the
Fund's objective.
- --------------------------------------------------------------------------------
INVESTMENT The SHORT-TERM CORPORATE PORTFOLIO invests in the
POLICIES following investment grade fixed-income securities:
(1) Short-term and intermediate-term corporate debt
securities;
(2) U.S. Treasury and U.S. Government agency obligations;
4
<PAGE> 7
(3) Obligations issued by state and municipal governments
and their agencies and instrumentalities;
(4) Bank obligations, including certificates of deposit
and bankers acceptances;
(5) Commercial paper; and
(6) Repurchase agreements collateralized by these
securities.
Investment grade corporate debt securities are those rated
a minimum of Baa3 by Moody's Investors Service, Inc.
("Moody's") or BBB- by Standard & Poor's Corporation
("Standard & Poor's"). Investment grade commercial paper
is rated A-1 or better by Standard & Poor's or Prime-1 by
Moody's, or, if unrated, issued by a corporation having an
outstanding unsecured debt issue rated A or better by
Moody's or Standard & Poor's. At least 70% of the
Short-Term Corporate Portfolio's assets will be invested
in debt securities rated a minimum of A3 by Moody's or A-
by Standard & Poor's, and not more than 30% of the
Portfolio's assets may be invested in debt securities
rated Baa by Moody's or BBB by Standard & Poor's.
Securities rated Baa or BBB are considered medium grade
obligations. Interest payments and principal are regarded
as adequate for the present, but certain protective
elements found in higher rated bonds may be lacking. Such
bonds lack outstanding investment characteristics and have
speculative characteristics.
In the event that a security held by the Portfolio is
downgraded, the Portfolio may continue to hold such
security until such time as the adviser deems it
advantageous to dispose of the security.
In an effort to minimize fluctuations in market value, the
Short-Term Corporate Portfolio is expected to maintain a
dollar-weighted average maturity between 1 and 3 years.
The Short-Term Corporate Portfolio may also hold
securities of foreign issuers provided such securities are
denominated in U.S. dollars, and may invest in bond
(interest rate) futures and options to a limited extent.
See "Implementation of Policies" for a description of
these investment practices of the Portfolio.
The Portfolio is managed without regard to tax
ramifications, and is also responsible for voting the
shares of all securities it holds.
- --------------------------------------------------------------------------------
INVESTMENT RISKS As a mutual fund investing in fixed-income securities, the
Portfolio is subject primarily to interest rate and credit
THE PORTFOLIO IS risk. INTEREST RATE RISK is the potential for a decline in
SUBJECT PRIMARILY bond prices due to rising interest rates. In general, bond
TO INTEREST RATE, prices vary inversely with interest rates. When interest
INCOME, CREDIT AND rates rise, bond prices generally fall. Conversely, when
MANAGER RISK interest rates fall, bond prices generally rise. The
change in price depends on several factors, including the
bond's maturity date. In general, bonds with longer
maturities are more sensitive to changes in interest rates
than bonds with shorter maturities.
These principles of interest rate risk also apply to U.S.
Treasury and U.S. Government agency securities. As with
other bond investments, U.S. Government securities will
rise and fall in value as interest rates change. A
SECURITY BACKED BY THE U.S. TREASURY OR THE FULL FAITH AND
CREDIT OF THE UNITED STATES IS GUARANTEED ONLY AS TO THE
TIMELY PAYMENT OF INTEREST AND PRINCIPAL WHEN HELD TO
MATURITY. THE CURRENT MARKET PRICES FOR SUCH SECURITIES
ARE NOT GUARANTEED AND WILL FLUCTUATE.
5
<PAGE> 8
As an illustration of interest rate risk, the charts below
depict the effect of a one and two percentage point change
in interest rates on three bonds of varying maturities:
PERCENT CHANGE IN THE PRICE OF A PAR BOND YIELDING 7.5%
<TABLE>
<CAPTION>
1 PERCENTAGE POINT 1 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
------------------------------- ------------------ ------------------
<S> <C> <C>
Short-Term (2.5 years) - 2.2% + 2.3%
Intermediate-Term (10 years) - 6.6% + 7.3%
Long-Term (20 years) - 9.5% +11.1%
</TABLE>
<TABLE>
<CAPTION>
2 PERCENTAGE POINT 2 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
------------------------------- ------------------ ------------------
<S> <C> <C>
Short-Term (2.5 years) - 4.3% + 4.6%
Intermediate-Term (10 years) -12.7% +15.2%
Long-Term (20 years) -17.8% +24.1%
</TABLE>
These charts are intended to provide you with guidelines
for determining the degree of interest rate risk you may
be willing to assume. The yield and price changes shown
should not be taken as representative of the Portfolio's
current or future yield or expected changes in the
Portfolio's share price.
INCOME RISK is the potential for a decline in the
Portfolio's income due to falling market interest rates.
In relative terms, income risk will be higher for the
Fund's shorter-term Portfolios and lower for the Fund's
longer-term Portfolios.
The Portfolio is also subject to credit risk. CREDIT RISK,
also known as default risk, is the possibility that a bond
issuer will fail to make timely payments of interest or
principal to the Portfolio. The credit risk of the
Portfolio depends on the quality of its investments.
Reflecting their higher risks, lower-quality bonds
generally offer higher yields (all other factors being
equal).
Finally, the investment adviser manages the Portfolio
according to the traditional methods of "active"
investment management, which involve the buying and
selling of securities based upon economic, financial and
market analysis and investment judgment. MANAGER RISK
refers to the possibility that the Portfolio's investment
adviser may fail to execute the Portfolio's investment
strategy effectively. As a result, the Portfolio may fail
to achieve its stated objective.
THE PORTFOLIO Interest rate risk for the SHORT-TERM CORPORATE PORTFOLIO
PROVIDES MODERATE should be modest. Because of its short-term average
EXPOSURE TO weighted maturities, the Portfolio is expected to exhibit
INTEREST RATE RISK low to moderate price fluctuations as interest rates
change.
THE PORTFOLIO With its well diversified corporate bond holdings and its
PROVIDES emphasis on high-quality bonds, overall credit risk should
LOW EXPOSURE be quite low.
TO CREDIT RISK
- --------------------------------------------------------------------------------
WHO SHOULD The Portfolio is intended for investors who are seeking a
INVEST high level of current income from their investments. The
Portfolio is also suitable for investors with common stock
INVESTORS SEEKING holdings who are seeking a complementary fixed-income
CURRENT INCOME investment to create a more diversified and balanced
investment mix. Because of potential fluctuations in its
share price, the Portfolio may be inappropriate for
6
<PAGE> 9
short-term investors who require maximum stability of
principal. Because of the risks associated with bond
investments, the Portfolio is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term bond
market movements.
Investors who engage in excessive account activity
generate additional costs which are borne by all of the
Portfolio's shareholders. In order to minimize such costs
the Portfolio has adopted the following policies. The
Portfolio reserves the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the
timing of the investment or previous excessive trading by
the investor. Additionally, the Portfolio has adopted
exchange privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Portfolio
reserves the right to suspend the offering of its shares.
You should base your selection of the Portfolio on your
own objectives, risk preferences, and time horizon.
The SHORT-TERM CORPORATE PORTFOLIO is designed for
investors who are seeking yields that are more durable and
usually higher than those available from money market
funds, and who can tolerate modest fluctuations in the
value of their investment.
- --------------------------------------------------------------------------------
IMPLEMENTATION The Portfolio utilizes a variety of investment practices
OF POLICIES in pursuit of its objective.
THE PORTFOLIO MAY
INVEST IN REPURCHASE
AGREEMENTS
The Portfolio may invest in repurchase agreements
according to the restrictions and limitations set forth in
"Investment Policies." A repurchase agreement is a means
of investing monies for a short period. In a repurchase
agreement, a seller -- a U.S. commercial bank or
recognized U.S. securities dealer -- sells securities to a
Portfolio and agrees to repurchase the securities at the
Portfolio's cost plus interest within a specified period
(normally one day). In these transactions, the securities
purchased by the Portfolio will have a total value equal
to or in excess of the value of the repurchase agreement,
and will be held by the Fund's Custodian Bank until
repurchased.
The use of repurchase agreements involves certain risks.
For example, if the other party to the agreement defaults
on its obligation to repurchase the underlying security at
a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the
security. If the other party to the agreement becomes
insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may
determine that the underlying security is collateral for a
loan by the Portfolio and not within the control of the
Portfolio. As a result, the Portfolio's ability to realize
on such collateral may be automatically stayed. Finally,
it is possible that the Portfolio may not be able to
substantiate its interest in the underlying security and
may be deemed an unsecured creditor of the other party to
the agreement. While the Portfolio's management
acknowledges these risks, it is expected that they can be
controlled through careful monitoring procedures.
THE PORTFOLIO MAY The Portfolio may own restricted or illiquid securities to
OWN RESTRICTED OR a limited extent. Restricted or illiquid securities are
ILLIQUID SECURITIES securities which are not freely marketable or which are
subject to restrictions upon sale under the Securities Act
of 1933. The Portfolio may invest up to 15% of its net
assets in restricted or illiquid securities. The Fund's
Board of Directors may from time to time determine certain
restricted securities
7
<PAGE> 10
known as Rule 144A securities to be liquid. Such
securities will not be subject to the 15% limitation
described above.
THE PORTFOLIO MAY The Short-Term Corporate Portfolio may hold securities of
INVEST IN SECURITIES foreign issuers, but all such securities must be
OF FOREIGN ISSUERS denominated in U.S. dollars. Securities of foreign issuers
may trade in U.S. or foreign securities markets.
Securities of foreign issuers may involve investment risks
that are different from those of domestic issuers. Such
risks include the effect of foreign economic policies and
conditions, future political and economic developments,
and the possible imposition of exchange controls or other
foreign governmental restrictions on foreign debt issuers.
There may also be less publicly available information
about a foreign issuer than a domestic issuer of
securities. Foreign issuers are generally not subject to
the uniform accounting, auditing and financial reporting
standards that apply to domestic issuers. Also, foreign
debt markets may be characterized by lower liquidity,
greater price volatility, and higher transaction costs.
Additionally, it may be difficult to obtain or enforce a
legal judgment in a foreign court.
THE PORTFOLIO MAY The Portfolio may invest in futures contracts and options
INVEST IN FUTURES to a limited extent. Specifically, a Portfolio may enter
CONTRACTS, OPTIONS, into futures contracts provided that not more than 5% of
AND OTHER DERIVATIVE its assets are required as a futures contract margin
SECURITIES deposit; in addition, the Portfolio may enter into futures
contracts and options transactions only to the extent that
obligations under such contracts or transactions represent
not more than 20% of the Portfolio's assets.
Futures contracts and options may be used for several
reasons: to maintain cash reserves while simulating full
investment, to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a
specific futures contract is priced more attractively than
other futures contracts or the underlying security or
index. The Portfolio intends to use futures contracts only
for bona fide hedging purposes and will not use futures
contracts or options for speculative purposes.
FUTURES CONTRACTS The primary risks associated with the use of futures
AND OPTIONS POSE contracts and options are: (i) imperfect correlation
CERTAIN RISKS between the change in market value of the bonds held by a
Portfolio and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of
imperfect correlation will be minimized by investing only
in those contracts whose price fluctuations are expected
to resemble those of the Portfolio's underlying
securities. The risk that a Portfolio will be unable to
close out a futures position will be minimized by entering
into such transactions on a national exchange with an
active and liquid secondary market.
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (or gain) to the
investor. When investing in futures contracts, a Portfolio
will segregate cash or other liquid portfolio securities
in the amount of the underlying obligation.
DERIVATIVE INVESTING Derivatives are instruments whose value is linked to or
derived from an underlying security or index. The most
common are futures and options which are described above.
Other derivatives include swaps, inverse floaters, IO's
(interest only), and PO's (principal only). Derivatives
may be traded separately on exchanges or in the
over-the-counter market, or they may be imbedded in other
securities. The most
8
<PAGE> 11
common imbedded derivative is the call option attached to
or imbedded in a callable government or callable corporate
bond. The owner of a traditional callable bond holds a
combination of a long position in a non-callable bond and
a short position in a call option on that bond, i.e. the
bond issuer has the right to call the bond away from the
holder of the bond. Any of these instruments may also be
used individually or in combination to hedge against
unfavorable changes in interest rates, or to speculate on
anticipated changes in interest rates. Derivatives may be
structured with no or a high degree of leverage. When
derivatives are used as hedges, the risk incurred is that
the derivative instrument's value may change differently
than the value of the security being hedged. This "basis
risk" is generally lower than the risk associated with an
unhedged position in the security being hedged. Some
derivatives may entail liquidity risk, i.e. the risk that
the instrument cannot be sold at a reasonable price in
highly volatile markets. Leveraged derivatives used for
speculation are very volatile, and therefore, very risky.
However, the Portfolio will only utilize derivatives for
hedging or arbitrage purposes, and not for speculative
purposes. Over-the-counter derivatives involve a
counterparty risk, i.e. the risk that the individual or
institution on the other side of the agreement will not or
cannot meet its obligations under the derivative
agreement.
THE PORTFOLIO MAY The Portfolio Fund may lend its investment securities to
LEND ITS qualified institutional investors for either short-term or
SECURITIES long-term purposes of realizing additional income. Loans
of securities by the Portfolio will be collateralized by
cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market
value of the loaned securities, and such loans may not
exceed 33 1/3% of the value of the Portfolio's total
assets.
THE PORTFOLIO MAY The Short-Term Corporate Portfolio may invest in
INVEST IN CMOS collateralized mortgage obligations (CMOs), bonds that are
collateralized by whole loan mortgages or mortgage
pass-through securities.The Short Corporate Portfolio may
also purchase CMO's issued by agencies or
instrumentalities of the U.S. Government and privately-
issued CMOs carrying investment grade ratings. The bonds
issued under a CMO structure are divided into groups with
varying maturities, and the cash flows generated by the
mortgages or mortgage pass-through securities in the
collateral pool are used to first pay interest and then
pay principal to the CMO bondholders. Under the CMO
structure, the repayment of principal among the different
groups is prioritized in accordance with the terms of the
particular CMO issuance. The "fastest-pay" group of bonds,
as specified in the prospectus for the issuance, would
initially receive all principal payments. When that group
of bonds is retired, the next group or groups, in the
sequence, as specified in the prospectus, receive all of
the principal payments until all of the groups are
retired. Aside from market risk, the primary risk involved
in any mortgage security, such as a CMO issuance, is its
exposure to prepayment risk. To the extent a particular
group of bonds is exposed to this risk, the bondholder is
generally compensated in the form of higher yield (see
"Investment Risks"). In order to provide security, in
addition to the underlying collateral, many CMO issues
also include minimum reinvestment rate and minimum
sinking-fund guarantees. Typically, the Portfolio will
invest in those CMOs that most appropriately reflect its
average maturities and market risk profiles. Consequently,
the Short-Term Portfolio invests only in CMOs with highly
predictable short-term average maturities.
9
<PAGE> 12
The maturity of some classes of CMOs may be very difficult
to predict because any such predictions are highly
dependent upon assumptions regarding the prepayments which
CMOs may experience. Deviations in the actual prepayments
experienced may significantly affect the ultimate maturity
of CMOs, and in such an event, the maturity and risk
characteristics of CMOs purchased by the Portfolio may be
significantly greater or less than intended. The
possibility that rising interest rates may cause
prepayments to occur at a slower than expected rate is
known as extension risk. This particular risk may
effectively change a CMO which was considered short- or
intermediate-term at the time of purchase into a long-term
security. Alternatively, there are certain classes of CMOs
that are by design constructed to have highly predictable
average maturities. Such CMOs will retain their relative
predictability over a broad range of prepayment
experience. The Portfolios expect to control extension
risk by purchasing these specific classes of CMOs which,
in the advisers' opinions, are reasonably predictable.
PORTFOLIO TURNOVER Although it generally seek to invest for the long term,
RATES WILL VARY the Portfolio retains the right to sell securities
regardless of how long they have been held. It is
anticipated that the annual portfolio turnover rate for
the Short-Term Corporate Portfolio is expected to be
relatively high, but not exceeding 300%. The relatively
high turnover is due to the short-term maturities of the
securities purchased. A higher portfolio turnover rate
will cause a Portfolio to incur additional brokerage costs
and may cause a Portfolio to realize a higher level of
capital gains or losses.
- --------------------------------------------------------------------------------
INVESTMENT The Portfolio has adopted certain limitations designed to
LIMITATIONS reduce its exposure to specific situations. Some of these
limitations are that the Portfolio will not:
THE PORTFOLIO HAS
ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS
(a) with respect to 75% of its assets, invest more than 5%
of the value of its assets in the securities of any
single company or purchase more than 10% of the voting
securities of any issuer (except for securities issued
or guaranteed by the U.S. Government or any of its
agencies or instrumentalities);
(b) invest more than 5% of its assets in the securities of
companies that have a continuous operating history of
less than three years;
(c) invest more than 25% of its assets in any one
industry, provided that: (i) this limitation does not
apply to obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; (ii)
utility companies will be divided according to their
services (for example, gas, gas transmission,
electric, electric and gas, and telephone will each be
considered a separate industry); and (iii) financial
service companies will be classified according to the
end users of their services (for example, automobile
finance, bank finance, and diversified finance will be
considered as separate industries);
(d) borrow money, except that the Portfolio may borrow
from banks (or through reverse repurchase agreements),
for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which
might otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the
value of the Portfolio's net assets (including the
amount borrowed and the value of any outstanding
reverse repurchase agreements) at the time the
borrowing is made. Whenever borrowings exceed 5% of
the value of the Portfolio's net assets, the Portfolio
will not make any additional investments; and
10
<PAGE> 13
(e) pledge, mortgage or hypothecate its assets to an
extent greater than 5% of the value of its total
assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of the Portfolio's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF The Portfolio is one of nine Portfolios of Vanguard Fixed
THE PORTFOLIO Income Securities Fund, a member of The Vanguard Group of
Investment Companies, a family of more than 30 investment
VANGUARD ADMINISTERS companies with more than 90 distinct portfolios and total
AND DISTRIBUTES THE assets in excess of $260 billion. Through their
PORTFOLIO jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other funds in the Group
obtain at cost virtually all of their corporate
management, administrative, shareholder accounting and
distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard
funds. As a result of Vanguard's unique corporate
structure, the Vanguard funds have costs substantially
lower than those of most competing mutual funds. In 1996,
the average expense ratio (annual costs including advisory
fees divided by total net assets) for the Vanguard funds
amounted to approximately .29% compared to an average of
1.22% for the mutual fund industry (data provided by
Lipper Analytical Services).
The Officers of the Fund oversee its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard also provides distribution and marketing services
to the Vanguard funds. The funds are available on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees). However, each fund bears its share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT The Short-Term Corporate Portfolio receives all investment
ADVISERS advisory services on an at-cost basis from Vanguard's
Fixed Income Group. The Group provides investment advisory
VANGUARD MANAGES services to more than 40 Vanguard money market and bond
THE PORTFOLIO'S portfolios, both taxable and tax-exempt. Total assets
INVESTMENTS under management by Vanguard's Fixed Income Group were $80
billion as of January 31, 1997.
Ian A. MacKinnon, Senior Vice President of Vanguard, has
been in charge of the Fixed Income Group since its
inception in 1981. Mr. MacKinnon is responsible for
setting the broad investment strategies employed by the
Portfolio, and for overseeing the portfolio managers who
implement those strategies on a day-to-day basis. The
Portfolio's portfolio manager is:
Robert F. Auwaerter, a Principal of Vanguard. Mr.
Auwaerter also serves as portfolio manager of the
Short-Term U.S. Treasury, Long-Term U.S. Treasury,
Short-Term
11
<PAGE> 14
Corporate, Intermediate-Term U.S. Treasury, and
Intermediate-Term Corporate Portfolios. Associated with
the Fixed Income Group since 1981, Mr. Auwaerter has
managed the Short-Term Corporate Portfolio since 1983, the
Long-Term U.S. Treasury Portfolio since 1994, the
Short-Term U.S. Treasury Portfolio since 1996 (previously,
the Portfolio was managed by John Hollyer) and each of the
other Portfolios since their respective inceptions.
(Previously, the Long-Term U.S. Treasury Portfolio was
managed by Anthony Jiorle.)
The Fixed Income Group manages the investment and
reinvestment of the assets of the Portfolio and
continuously reviews, supervises and administers the
Portfolio's investment program, subject to the maturity
and quality standards specified in this Prospectus and
supplemental guidelines approved by the Fund's Board of
Directors. The Fixed Income Group's selection of
investments for the Portfolio is based on: (a) continuing
credit analysis of those instruments held in the Portfolio
and those being considered for inclusion therein; (b)
possible disparities in yield relationships between
different money market instruments; and (c) actual or
anticipated movements in the general level of interest
rates.
Vanguard's Fixed Income Group is also responsible for the
placement of portfolio transactions and the negotiation of
commissions for the Portfolio. The purchase and sale of
investment securities will ordinarily be principal
transactions. Portfolio securities will normally be
purchased directly from the issuer or from an underwriter
or market maker for the securities. There usually will be
no brokerage commissions paid by a Portfolio for
securities purchased from an issuer. Purchases from
underwriters of securities will include a commission or
concession paid by the issuer to the underwriter, and
purchases from dealers serving as market makers will
include a dealer's mark-up.
In purchasing and selling securities for the Portfolio, it
is the Portfolio's policy to seek to obtain quality
execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to
execute the securities transactions for the Portfolio,
consideration will be given to such factors as the price
of the security; the rate of the commission; the size and
difficulty of the order; the reliability, integrity,
financial condition, general execution and operational
capabilities of the competing broker-dealer; and the
brokerage and research services provided to the Portfolio.
Vanguard's Fixed Income Group may occasionally make
recommendations to other Vanguard Funds or clients which
result in their purchasing or selling securities
simultaneously with the Portfolio. As a result, the demand
for securities being purchased or the supply of securities
being sold may increase, and this could have an adverse
effect on the price of those securities. It is the policy
of the Fixed Income Group not to favor one client over
another in making recommendations or placing an order. If
two or more clients are purchasing a given security on the
same day from the same broker-dealer, such transactions
may be averaged as to price.
- --------------------------------------------------------------------------------
12
<PAGE> 15
DIVIDENDS, Dividends consisting of virtually all of the ordinary
CAPITAL GAINS income of the Portfolio are declared daily and are payable
AND TAXES to shareholders of record at the time of declaration. Such
dividends are paid on the first business day of each
DIVIDENDS ARE PAID month. Net capital gains distributions, if any, will be
ON THE FIRST BUSINESS made annually.
DAY OF EACH MONTH
The Portfolio's dividend and capital gains distributions
may be reinvested in additional shares or received in
cash. See "Choosing a Distribution Option" for a
description of these distribution methods.
In order to satisfy certain requirements of the Tax Reform
Act of 1986, the Portfolio may declare year-end dividend
and capital gains distributions during December. Such
distributions, if received by shareholders by January 31,
are deemed to have been paid by the Portfolio and received
by shareholders on December 31 of the prior year.
The Portfolio intends to continue to qualify for taxation
as a "regulated investment company" under the Internal
Revenue Code so that the Portfolio will not be subject to
federal income tax to the extent its income is distributed
to shareholders. Dividends paid by the Portfolio from net
investment income, whether received in cash or reinvested
in additional shares, will be taxable to shareholders as
ordinary income. For corporate investors, dividends paid
by the Portfolio from net investment income will generally
not qualify for the intercorporate dividends-received
deduction.
Distributions paid by the Portfolio from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital gains,
regardless of the length of time you have owned shares in
the Portfolio. Capital gains distributions are made when
the Portfolio realizes net capital gains on sales of
portfolio securities during the year. For the Portfolio,
realized capital gains are not expected to be a
significant or predictable part of investment return.
The Portfolio will notify you annually as to the tax
status of dividend and capital gains distributions paid by
the Portfolio. The Portfolio is managed without regard to
tax ramifications.
Dividends and capital gains are calculated and distributed
the same way for each class of shares. The amount of any
income dividends per share will vary, however, generally
due to the differences in marketing and distribution,
account maintenance and shareholder services expenses for
the Portfolio's separate share classes.
A CAPITAL GAIN A sale of shares of the Portfolio is a taxable event and
OR LOSS MAY BE may result in a capital gain or loss. A capital gain or
REALIZED UPON loss may be realized from an ordinary redemption of
EXCHANGE OR shares, a checkwriting redemption, or an exchange of
REDEMPTION shares between two mutual funds (or two portfolios of a
mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes. However, depending on
provisions of your state's tax law, the portion of a
Portfolio's income derived from "full faith and credit"
U.S. Treasury obligations may be exempt from state and
local taxes. The Portfolio will indicate each year the
portion of the Portfolio's income, if any, that may
qualify for this exemption.
The Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with
13
<PAGE> 16
IRS taxpayer identification regulations. You may avoid
this withholding requirement by certifying on your Account
Registration Form your proper Social Security or employer
identification number and by certifying that you are not
subject to backup withholding.
The Portfolio has obtained a Certificate of Authority to
do business as a foreign corporation in Pennsylvania and
does business and maintains an office in that state. In
the opinion of counsel, the shares of the Portfolio are
exempt from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Portfolio.
- --------------------------------------------------------------------------------
THE SHARE PRICE OF The share price or "net asset value" per share of each
THE PORTFOLIO class of the Portfolio equals net assets attributable to a
class divided by shares outstanding of the class. The net
asset value is determined as of the close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each
day that the Exchange is open for trading. Securities
which are traded over-the-counter and on a stock exchange
will be valued according to the broadest and most
representative market, and it is expected that for bonds
and other fixed-income securities this ordinarily will be
the over-the-counter market.
However, 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 but take into account institutional size
trading in similar groups of securities and any
developments related to specific securities. Securities
not priced in this manner are valued at the most recent
quoted bid price, or when stock exchange valuations are
used, at the latest quoted sale price on the date of
valuation. 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. Other assets and securities for which
no quotations are readily available will be valued in good
faith at fair market value using methods determined by the
Board of Directors.
The Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of the Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The Articles of
INFORMATION Incorporation permit the Directors to issue 4,550,000,000
shares of common stock, with a $.001 par value. The Board
of Directors has the power to designate one or more
classes ("Portfolios") of shares of common stock and to
classify or reclassify any unissued shares with respect to
such classes. Currently the Fund is offering shares of
nine Portfolios. The Short-Term Corporate Portfolio offers
two separate classes of shares, Portfolio Shares and
Institutional Shares. The Portfolio Shares are available
to investors who meet the minimum initial investment of
$3,000 ($1,000 for retirement plan accounts) and may
require special employee benefit plan services. The
Institutional Shares are designed for investors who
generally do not require special employee benefit plan
services and meet the minimum initial investment of $50
million.
14
<PAGE> 17
The shares of each Portfolio are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash for the Short-Term Corporate
Portfolio are held by CoreStates Bank, N.A., Philadelphia,
PA. CoreStates Bank, N.A. Philadelphia, PA, holds daily
cash balances that are used by the Portfolio to invest in
repurchase agreements or securities acquired in these
transactions. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Portfolio's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Portfolio and will audit its financial
statements annually. The Portfolio is not involved in any
litigation.
- --------------------------------------------------------------------------------
15
<PAGE> 18
SHAREHOLDER GUIDE
OPENING AN To open an account, complete an Account Registration Form
ACCOUNT AND and mail it to:
PURCHASING
SHARES
VANGUARD FINANCIAL CENTER
VANGUARD FIXED INCOME SECURITIES FUND
SHORT-TERM CORPORATE PORTFOLIO -- INSTITUTIONAL
SHARES
ATTN: INSTITUTIONAL INVESTOR SERVICES
P.O. BOX 1472
VALLEY FORGE, PA 19482
For express or registered mail, send your registration
form to: Vanguard Financial Center, Vanguard Fixed Income
Securities Fund, SHORT-TERM CORPORATE
PORTFOLIO -- INSTITUTIONAL SHARES, Attn: Institutional
Investor Services, 100 Vanguard Boulevard, Malvern, PA
19355.
Once the account has been opened, Vanguard will assign an
Institutional Investor Services Representative for future
account transactions.
Shares of the Portfolio may be purchased by Federal Funds
wire. The minimum initial investment for the Portfolio is
$50 million. Please contact your Institutional Investor
Service Representative or call the Vanguard Group at
1-800-523-8066 to notify the Portfolio of the intended
investment and to receive an account number. Wiring
instructions are provided below.
Subsequent investments of $5 million or more will be
credited to an account on the date of purchase if Vanguard
is notified one business day in advance of the intended
purchase and a Federal Funds wire is received by 4:00 p.m.
(Eastern time) on the date of purchase. See "Trade Date
Policy."
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received in the
form of Federal Funds. See "When Your Account Will Be
Credited." The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees).
PURCHASE 1) Because of the risks associated with bond investments,
RESTRICTIONS the Portfolio is intended to be a long-term investment
vehicle and is not designed to provide investors with a
means of speculating on short-term market movements.
Consequently, the Portfolio reserves the right to
reject any specific purchase (and exchange purchase)
request. The Fund also reserves the right to suspend
the offering of shares for a period of time.
2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable to The Vanguard Group.
ADDITIONAL Additional investments may be made at any time by wiring
INVESTMENTS monies to Vanguard. As noted above, investments of $5
PLEASE CONTACT YOUR million or more require prior-day notification to qualify
SERVICE for credit on the date of purchase. To ensure prompt
REPRESENTATIVE investment, please notify your Institutional Investor
Services Representative in advance of the wire.
----------------------------------------------------------
16
<PAGE> 19
<TABLE>
<S> <C>
PURCHASING BY WIRE CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO 0101 9897
ATTN VANGUARD
BEFORE WIRING VANGUARD FIXED INCOME SECURITIES FUND --
Please contact your VANGUARD SHORT-TERM CORPORATE PORTFOLIO -- INSTITUTIONAL SHARES
Service Representative ACCOUNT NUMBER
ACCOUNT REGISTRATION
</TABLE>
To assure proper receipt, please be sure your bank
includes the Portfolio name, the account number Vanguard
has assigned to you and the eight-digit CoreStates number.
If you are opening a new account, complete the Account
Registration Form and mail it to the "New Account" address
above after completing your wire arrangement. NOTE:
Federal Funds wire purchase orders will be accepted only
when the Portfolio and Custodian Bank are open for
business.
----------------------------------------------------------
PURCHASING BY You may open an account or purchase additional shares by
EXCHANGE (from a making an exchange from an existing Vanguard Fund account.
Vanguard account) However, the Portfolio reserves the right to refuse any
exchange purchase request. Call our Service Representative
or call Participant Services (1-800-523-8066.)
DISTRIBUTION Dividend and capital gains distributions paid by the
OPTIONS Portfolio will be automatically reinvested in additional
shares of the same class of shares of the Fund that you
own. A cash dividend option is also available. Please
contact your Service Representative for further
information.
CERTIFICATES Share certificates will not be issued for the Portfolio.
ELECTRONIC You may receive a prospectus for the Fund or any of the
PROSPECTUS Vanguard Funds in an electronic format. Please call
DELIVERY 1-800-231-7870 for additional information. If you elect to
do so, you may also receive a paper copy of the
prospectus, by calling 1-800-523-8066.
- --------------------------------------------------------------------------------
TRADE DATE Investments will be credited on the date of purchase under
POLICY the following conditions:
- FOR INVESTMENTS OF $5 MILLION OR MORE: The Fund must
be notified of the intended purchase by the close of
the New York Stock Exchange, (generally 4:00 p.m.
Eastern time) on the prior business day and the Federal
Funds wire must be received by Vanguard by the close of
the Exchange on the date of purchase.
- FOR INVESTMENTS OF LESS THAN $5 MILLION: The Fund must
be notified of the intended purchase by 10:45 a.m.
Eastern time) on the day of purchase and the Federal
Funds wire must be received by the close of the
Exchange.
Generally, if these requirements are not met, an
investment will be credited to the account on the business
day following receipt of a Federal Funds wire.
The trade date, the day on which an account is credited,
is generally the day on which the Fund receives an
investment in the form of Federal Funds. For purchases by
Federal Funds wire or by exchange, the Fund is credited
immediately with Federal Funds. If a purchase by Federal
Funds wire or exchange is received by the
17
<PAGE> 20
close of the New York Stock Exchange, (generally 4:00 p.m.
Eastern time), the trade date is the day of receipt
assuming proper notification has been given, as described
above. If a purchase is received after the close of the
Exchange, the trade date is the business day following the
receipt of the wire or exchange.
- --------------------------------------------------------------------------------
SELLING Any portion of an account may be withdrawn by contacting
SHARES your Institutional Investor Services Representative. The
redemption proceeds will be wired to the bank account
WIRE PROCEEDS indicated on the Account Registration Form on the business
day following receipt of a request.
For a redemption of an entire account balance, accrued
dividends will not be included in the initial redemption
wire, but will be sent separately by check or wire.
Wire redemptions of less than $5,000 are subject to a $5
charge deducted from the principal in your account. There
is no charge for wire redemptions of $5,000 or more, or
for subsequent dividend wires.
For our mutual protection, wiring instructions must be on
file at Vanguard prior to executing any redemption
request. A request to change the bank account associated
with the wire redemption feature or a request to wire
funds to a bank other than that on file must be received
in writing. A signature guarantee of an authorized officer
is required if the bank registration is not identical to
the Vanguard Fund account registration.
SELLING BY
EXCHANGE Shares may also be sold by making an exchange to another
Vanguard Fund account. For further information, please
contact your Institutional Investor Services
Representative.
- --------------------------------------------------------------------------------
OTHER REDEMPTION The Portfolio may suspend the redemption rights or
INFORMATION postpone payment at times when the New York Stock Exchange
is closed or under any emergency circumstances as
determined by the United States Securities and Exchange
Commission.
The Portfolio reserves the right to redeem shares of any
account with a balance of less than $50 million. This
action will be taken when the balance of the account falls
below $50 million due to account redemptions. Reductions
in account balances due to market depreciation will not be
considered until the account balance declines to less than
$- million. Investors will be provided with 60 days'
notice before any such action is taken.
- --------------------------------------------------------------------------------
REQUIRED The Portfolio reserves the right to convert an investor's
CONVERSION Institutional Shares into Portfolio Shares if the
TO INDIVIDUAL investor's account balance falls below $50 million. Any
SHARE CLASS such conversion will be preceded by written notice to the
investor and will be effected on the basis of the relative
net asset values of the Portfolio's Portfolio Shares and
Institutional Shares. There will be no loads, fees or
other charges imposed on required conversions.
- --------------------------------------------------------------------------------
EXCHANGING
SHARES Shares of the Portfolio may be exchanged for those of
other available Vanguard Portfolios or classes of
Portfolios either by telephone or mail. Contact your
Institutional Investor Services Representative for further
information. Telephone exchange requests must ordinarily
be received by the close of trading on the New
18
<PAGE> 21
York Stock Exchange (generally 4:00 p.m. Eastern time) in
order to be processed on the date of receipt. The new Fund
account will bear the identical registration of the
Vanguard Short-Term Corporate Portfolio Institutional
Shares account.
Telephone exchanges are not permitted for several Vanguard
Funds, and there also may be restrictions on new
investments in certain Funds. Large exchange requests
(i.e., those over $250,000) require prior approval by
Vanguard on behalf of the Fund. Contact your Institutional
Investor Services Representative for full information,
including a prospectus.
Neither the Portfolio nor Vanguard is responsible for the
authenticity of exchange instructions received by
telephone. Every effort will be made to maintain the
exchange privilege. However, the Portfolio reserves the
right to revise or terminate its provisions, limit the
amount of or reject any exchange, as deemed necessary, at
any time.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire
INFORMATION redemptions) and exchanges by telephone is automatically
ABOUT TELEPHONE established on your account unless you request in writing
TRANSACTIONS that telephone transactions on your account not be
permitted. The ability to initiate wire redemptions by
telephone will be established on your account only if you
specifically elect this option in writing.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must know (i) the name of the
Portfolio; (ii) the 10-digit account number, (iii) the
exact name and address used in the registration; and
(iv) the Social Security or Employer Identification
number listed on the account.
2. PAYMENT POLICY. The proceeds or any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only. In the case of a telephone redemption by
wire, the wire transfer will be made only in
accordance with the shareowner's prior written
instructions.
Neither the Portfolio nor Vanguard will be responsible for
the authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
OTHER For corporate investors, a current corporate resolution
ACCOUNT must be maintained on file at Vanguard at all times. The
INFORMATION initial application serves as a corporate resolution. Any
revisions to a corporate resolution must be submitted to
your Institutional Investor Services Representative at
Vanguard.
19
<PAGE> 22
To change the registration of an account, a request must
be submitted in writing to Vanguard and include the
following information: the account number and portfolio
name; authorized signatures; any applicable signature
guarantees; and other supporting legal documents as
necessary.
All requests should be mailed to the following address:
VANGUARD FINANCIAL CENTER
ATTN: INSTITUTIONAL INVESTOR SERVICES
P.O. BOX 1472
VALLEY FORGE, PA 19482
----------------------------------------------------------
20
<PAGE> 23
<TABLE>
<S> <C> <C>
-------- [FLAG LOGO]
[VANGUARD FIXED INCOME SECURITIES FUND LOGO] [VANGUARD FIXED INCOME SECURITIES FUND LOGO]
-------------------------------------------- P R O S P E C T U S
THE VANGUARD GROUP
Vanguard Financial Center JULY 21, 1997
P.O. Box 2600 LOGO
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
</TABLE>
A Member of
[THE VANGUARD GROUP LOGO]
- --------------------------------------------------------------------------------
<PAGE> 24
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE INSTITUTIONAL SHARES OF THESE
SECURITIES MAY NOT BE SOLD NOR MAY ANY OFFERS TO BUY BE ACCEPTED PRIOR TO
THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF
ADDITIONAL INFORMATION DOES NOT CONSTITUTE A PROSPECTUS. TO OBTAIN A
CURRENTLY EFFECTIVE PROSPECTUS FOR THE PORTFOLIO SHARES OF VANGUARD FIXED
INCOME SECURITIES FUND, PLEASE CONTACT VANGUARD INSTITUTIONAL INVESTOR
SERVICES AT 1-800-523-1036.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 22, 1997
PART B
VANGUARD FIXED INCOME SECURITIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
JULY 21, 1997
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated July 21, 1997). To obtain this Prospectus,
please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund.................................................................................. 1
Investment Objective and Policies......................................................... 1
Purchase of Shares........................................................................ 5
Redemption of Shares...................................................................... 6
Shareholder Services...................................................................... 6
Investment Limitations.................................................................... 7
Management of the Fund.................................................................... 9
Investment Advisory Services.............................................................. 12
Portfolio Transactions.................................................................... 14
Yield and Total Return.................................................................... 15
Financial Statements...................................................................... 16
Performance Measures...................................................................... 16
Other Definitions......................................................................... 17
Appendix -- Description of Securities and Ratings......................................... 18
</TABLE>
THE FUND
Vanguard Fixed Income Securities Fund, Inc. (the "Fund") is an open-end,
diversified, management investment company whose shares are currently offered in
nine distinct Portfolios. Each Portfolio of the Fund in effect represents a
separate mutual fund with its own investment objective and policies.
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the investment objective and policies set
forth in the Fund's Prospectus:
REPURCHASE AGREEMENTS Each Portfolio may invest in repurchase agreements
with commercial banks, brokers or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Portfolio acquires a money
market instrument (generally a security issued by the U.S. Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
commercial bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Portfolio and is unrelated to the interest rate on the underlying
instrument. In these transactions, the securities acquired by the Portfolio
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by a custodian bank until
repurchased. In addition, the Fund's Board of Directors will monitor a
Portfolio's repurchase agreement transactions generally and will establish
guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker or dealer party to a repurchase agreement
with the Portfolio. No more than an aggregate of 15% of a Portfolio's assets, at
the time of investment, will be invested in repurchase
<PAGE> 25
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale for which there are no readily
available market quotations. See "Illiquid Securities" below.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the realization by the Portfolio on such
collateral may be automatically stayed. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other party to the
agreement. While each Portfolio's management acknowledges these risks, it is
expected that they can be controlled through careful monitoring procedures.
LENDING OF SECURITIES Each Portfolio of the Fund may lend its investment
securities to qualified brokers, dealers, banks or other financial institutions,
so long as the terms and the structure of such loans are not inconsistent with
the Investment Company Act of 1940, as amended, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission thereunder, which
currently require that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, an irrevocable letter of credit or securities
issued or guaranteed by the United States Government having a value at all times
not less than 100 percent of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Portfolio at any time and (d) the
Portfolio receive reasonable interest on the loan (which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments), and distributions on the loaned securities and any increase in
their market value. Each Portfolio of the Fund will not lend securities if, as a
result, the aggregate of such loans exceeds 33 1/3% of the value of the
Portfolio's total assets. Loan arrangements made by the Fund will comply with
all other applicable regulatory requirements, including the rules of the New
York Stock Exchange, which rules presently require the borrower, after notice,
to redeliver the securities within the normal settlement time of three business
days.
RESTRICTED SECURITIES Each Portfolio may invest in restricted securities
(privately placed debt securities) and other securities which are not readily
marketable, but will not acquire such securities if as a result they, together
with the aggregate of other securities for which no quotations are readily
available, would comprise more than 15% of the value of the Portfolio's net
assets. Pursuant to Section 4(2) of the Securities Act of 1933 and Rule 144A
under the Securities Act of 1933, as amended, if a substantial market among
qualified institutional buyers develops for restricted securities held by any
Portfolio, the Fund intends to treat such securities as liquid securities, in
accordance with procedures approved by the Fund's Board of Directors.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933. Where registration is required, a
Portfolio may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Portfolio may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Portfolio might obtain a less favorable price than prevailed
when it decided to sell. Restricted securities will be priced at fair value as
determined in good faith by the Board of Directors. If through the appreciation
of restricted securities or the depreciation of unrestricted securities, a
Portfolio should be in a position where more than 15% of the value of its net
assets are invested in illiquid assets, including restricted securities, the
Portfolio will take appropriate steps to protect liquidity.
ILLIQUID SECURITIES Illiquid securities are securities that may not be
sold or disposed of in the ordinary course of business within seven business
days at approximately the value at which they are being carried on a Fund's
books. An illiquid security includes repurchase agreements which have a maturity
of longer than seven days, securities which are illiquid by virtue of the
absence of a readily available market, and demand instruments with a demand
notice exceeding seven days. Illiquid securities may include securities that are
not registered under the Securities Act of 1933 (the "1933 Act"); however,
unregistered securities that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act will not be considered
2
<PAGE> 26
illiquid so long as it is determined by the Fund's advisor that an adequate
trading market exists for the security. From time to time, the Fund's Board of
Directors may determine that certain restricted securities known as Rule 144A
securities are liquid and not subject to the 15% limitation described above.
FOREIGN INVESTMENTS As indicated in the prospectus, the Fund may include
foreign securities to a certain extent. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies.
Country Risk As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Fund's foreign securities will be somewhat greater than the
expenses for the custodial arrangement for handling U.S. securities of equal
value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments.
Currency Risk Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Fund permit it to enter into
forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
FUTURES CONTRACTS AND OPTIONS Each Portfolio except the Short-Term Federal
Portfolio may enter into futures contracts, options, and options on futures
contracts for several reasons: to simulate full investment in the underlying
securities while retaining a cash balance for Fund management purposes, to
facilitate trading, to reduce transaction costs, or to seek higher investment
returns when a futures contract is priced more attractively than the underlying
equity security or index. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific security
at a specified future time and at a specified price. Futures contracts which are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"),
a U.S. Government agency. Assets committed to futures contracts will be
segregated at the Fund's custodian bank to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures
3
<PAGE> 27
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 deposits which may range upward from less than 5%
of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Portfolios
expect to earn interest income on their margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Portfolios intend 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. A Portfolio 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.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS A Portfolio of 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 each Portfolio's total assets. In addition, a Portfolio
of 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 Portfolio's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Portfolio may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to hedge it effectively.
A Portfolio 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. Additionally, a Portfolio incurs
the risk that the adviser will incorrectly predict future interest rate
4
<PAGE> 28
trends. However, because the futures strategies of the Portfolio are engaged in
only for hedging purposes, the Adviser does not believe that the Portfolio is
subject to the risks of loss frequently associated with futures transactions.
The Portfolio would presumably have sustained comparable losses if, instead of
the futures contract, it had invested in the underlying financial instrument and
sold it after the decline.
Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS The Portfolio is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts held as of the end of
the year as well as those actually realized during the year. In most cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Furthermore, sales of
futures contracts which are intended to hedge against a change in the value of
securities held by the Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition. A Portfolio 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 Portfolio.
In order for the Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to the
Portfolio's business of investing in securities or currencies. In addition,
gains realized on the sale or other disposition of securities held for less than
three months must be limited to less than 30% of the Portfolio's annual gross
income. It is anticipated that any net gain realized from the closing out of
futures contracts will be considered gain from the sale of securities and
therefore be qualifying income for purposes of the 90% requirement. In order to
avoid realizing excessive gains on securities held less than three months, the
Portfolio may be required to defer the closing out of futures contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on futures contracts, which have been open for less than
three months as of the end of the Portfolio's fiscal year and which are
recognized for tax purposes, will not be considered gains on sales of securities
held less than three months for the purpose of the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Portfolio's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Portfolio's other investments and shareholders will be advised on the nature
of the transactions.
PURCHASE OF SHARES
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent
5
<PAGE> 29
investments for certain fiduciary accounts such as employee benefit plans or
under circumstances where certain economies can be achieved in sales of the
Portfolio's shares.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is not
reasonably practicable for a Portfolio to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in readily marketable investment securities or in
cash, as the Directors may deem advisable; however, payment will be made wholly
in cash unless the Directors believe that economic or market conditions exist
which would make such a practice detrimental to the best interests of the Fund.
If redemptions are paid in investment securities, such securities will be valued
as set forth in the Prospectus under "The Share Price of Each Portfolio" and a
redeeming shareholder would normally incur brokerage expenses if he converted
these securities to cash.
No charge is made by a Portfolio for redemptions. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.
SIGNATURE GUARANTEES
To protect your account, the Fund and Vanguard from fraud, signature
guarantees are required for certain redemptions. Signature guarantees enable the
Fund to verify the identity of the person who has authorized a redemption from
your account. Signature guarantees are required in connection with: (1) all
redemptions, regardless of the amount involved, when the proceeds are to be paid
to someone other than the registered owner(s), and/or to an address other than
the address of record; and (2) share transfer requests. These requirements are
not applicable to redemptions in Vanguard's prototype retirement plans, except
in connection with: (1) distributions made when the proceeds are to be paid to
someone other than the plan participant; (2) certain authorizations to effect
exchanges by telephone; and (3) when proceeds are to be wired. These
requirements may be waived by the Fund in certain instances.
A guarantor must be a bank, broker or any other guarantor that Vanguard
deems acceptable. Notaries public are not acceptable guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
Each Portfolio's shares may be exchanged without cost for shares of any
other Portfolio, or for the shares of any open-end Fund currently offering its
shares to new investors in The Vanguard Group ("Vanguard"). A shareholder of any
other open-end Fund in Vanguard may likewise exchange his shares for shares of
any of the Fund's Portfolios. Exchange requests may be made either by mail,
telephone or telegraph.
6
<PAGE> 30
Telephone and telegraph exchanges (referred to as "expedited exchanges")
will be accepted only if the account of the shareholder and the registration of
the two accounts is identical. Requests for expedited exchanges received prior
to the close of the New York Stock Exchange (generally 4:00 p.m. Eastern time)
will be processed at the next determined net asset value after such request is
received. Requests received after the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) will be processed on the next business day.
No expedited exchanges will be accepted into, or from, Vanguard Balanced Index
Fund, Vanguard Index Trust Fund, Vanguard International Equity Index Fund and
Vanguard Quantitative Portfolios. Neither the Fund nor Vanguard will be
responsible for the authenticity of exchange instructions received by telephone
or telegraph, provided that reasonable security procedures are observed.
Expedited exchanges may also be subject to limitations as to amounts and
frequency, and to other restrictions established by the Board of Directors to
assure that such exchanges do not disadvantage the Fund and its shareholders.
Shareholders may obtain the terms of these limitations, which may be revised at
any time, from Vanguard.
Any such exchange will be based on the respective net asset values of the
shares involved. There are no sales commissions or charges of any kind. Before
making an exchange, a shareholder should consider the investment objectives and
policies of the Portfolio or fund to be purchased, and other relevant
information (including the minimum initial investment), which can be found in
the prospectus relating to that particular Portfolio or fund. A prospectus for
any of the Vanguard funds or Portfolios may be obtained from Vanguard.
For Federal income tax purposes an exchange between funds or Portfolios is
a taxable event and, accordingly, a capital gain or loss may be realized. The
exchange privilege may be modified or terminated at any time, and any of the
Portfolios or Vanguard funds may limit or discontinue the offering of its shares
without notice to shareholders.
TRANSFER OF SHARES
Fund shares may be transferred to another person by sending appropriate
written instructions to Vanguard. The account must be clearly identified and
include the number of shares to be transferred and the signatures of all
registered owners. The signature on the letter of instructions or any stock
power must be guaranteed. As in the case of withdrawals, the written request
must be received in "Good Order" before any transfer can be made.
INFORMATION FOR SHAREHOLDERS
Following any purchase or redemption, a shareholder will receive a
statement which reflects all activity during the current calendar year. Each
shareholder will also receive a quarterly statement, which includes valuation as
of the day the statement is prepared.
Shareholders will receive semiannual financial statements audited at least
annually by independent accountants whose selection is ratified by shareholders.
INVESTMENT LIMITATIONS
The Fund is subject to the following limitations which may not be changed
with respect to a particular Portfolio without the approval of at least a
majority of the outstanding voting securities (as defined in the Investment
Company Act of 1940) of that Portfolio. A Portfolio will not:
1) Invest in commodities or commodity contracts or purchase or sell real
estate, although it may purchase and sell marketable securities of
companies which deal in real estate or interests therein; except that
each Portfolio except the Short-Term Federal Portfolio may invest in
bond futures
contracts, bond options and options on bond futures contracts to the
extent that not more than 5% of its assets is required as margin
deposit for futures contracts and not more than 20% of its assets is
invested in such instruments at any time;
7
<PAGE> 31
2) Write, purchase or sell warrants, put or call options, or combinations
thereof, except as specified above in (1);
3) Invest in interests in oil, gas, or other mineral exploration or
development programs;
4) Make loans to other persons (except by (i) the purchase of the debt
obligations in which the Portfolio is authorized to invest in
accordance with its investment policies, and (ii) as provided under
"Lending of Securities");
5) Purchase securities on margin or sell securities short, except as
specified above in (1);
6) With respect to 75% of assets, purchase for the Portfolio more than 10%
of the outstanding voting securities of any issuer, except securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities or purchase securities of any issuer (except
obligations of the U.S. Government and its agencies and
instrumentalities) if as a result more than 5% of the value of the
Portfolio's total assets would be invested in the securities of such
issuer;
7) Borrow money, except that the Portfolio may borrow from banks (or
through reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
which might otherwise require the untimely disposition of securities,
in an amount not exceeding 15% of the value of the Portfolio's net
assets (including the amount borrowed and the value of any outstanding
reverse repurchase agreements) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the Portfolio's net
assets, the Portfolio will not make any additional investments;
8) Pledge, mortgage or hypothecate the Portfolio's assets to an extent
greater than 5% of the value of its total assets;
9) Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(included in this limitation is the Fund's investment in The Vanguard
Group, Inc.);
10) Invest for the purpose of controlling management of any company;
11) Invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
or otherwise to the extent permitted by Section 12 of the Investment
Company Act of 1940. The Portfolio will invest only in investment
companies which have investment objectives and investment policies
consistent with those of the Portfolio;
12) Invest more than 5% of the value of the Portfolio's total assets in
securities of companies which have (with predecessors) a record of less
than three years' continuous operation, except investments in
obligations guaranteed by the U.S. Government, or issued by its
agencies or instrumentalities;
13) Concentrate its investments in a particular industry, although it may
invest up to 25% of the Portfolio's total assets (taken at value) in
the securities of issuers, all of which conduct their principal
business activities in the same industry, provided that (i) this
limitation does not apply to obligations issued or guaranteed by the
U.S. Government, or its agencies or instrumentalities, and (ii) 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, and (iii) financial service
companies will be classified according to the end users of their
services, as follows: Finance-Automobiles, Finance-Banks,
Finance-Consumers and Finance-Diversified; and
14) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed
to be an underwriter under the Securities Act of 1933, as amended, in
disposing of investment securities.
The above-referenced investment limitations are considered at the time that
portfolio securities are purchased. Notwithstanding these limitations, the Fund
may own all or any portion of the securities of, or make loans to, or contribute
to the costs or other financial requirements of any company which will be wholly
owned by the Fund and one or more other investment companies and is primarily
engaged in the business of providing, at cost, management, administrative or
related services to the Fund and other investment companies. See "MANAGEMENT OF
THE FUND."
8
<PAGE> 32
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of the Directors
and Officers of the Fund and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman and Director* ALFRED M. RANKIN, JR., Director
Chairman and Director of The Vanguard Group, Chairman, President, and Chief Executive
Inc., and of each of the investment Officer of NACCO Industries, Inc.; Director of
companies in The Vanguard Group; Director of The BFGoodrich Company, and The Standard
The Mead Corporation, General Accident Products Company.
Insurance and Chris-Craft Industries, Inc. JOHN C. SAWHILL, Director
JOHN J. BRENNAN, President, Chief Executive President and Chief Executive Officer, The
Officer and Director* Nature Conservancy; formerly, Director and
President, Chief Executive Officer and Senior Partner, McKinsey & Co., President,
Director of The Vanguard Group, Inc., and of New York University; Director of Pacific Gas
each of the other investment companies in and Electric Company, Procter & Gamble
The Vanguard Group. Company and NACCO Industries.
ROBERT E. CAWTHORN, Director JAMES O. WELCH, JR., Director
Chairman Emeritus and Director of Retired Chairman of Nabisco Brands, Inc.,
Rhone-Poulenc Rorer, Inc.; Director of Sun retired Vice Chairman and Director of RJR
Company, Inc., Westinghouse Electric Nabisco; Director of TECO Energy, Inc. and
Corporation and Global Health Care Kmart Corporation.
Partners/DLJ Merchant Banking Partners. J. LAWRENCE WILSON, Director
BARBARA BARNES HAUPTFUHRER, Director Chairman and Chief Executive Officer of Rohm &
Director of The Great Atlantic and Pacific Haas Company; Director of Cummins Engine
Tea Company, Ikon Business Solutions, Inc., Company; and Trustee of Vanderbilt
Raytheon Company, Knight-Ridder, Inc. and University.
Massachusetts Mutual Life Insurance Co. and
Trustee Emerita of Wellesley College. RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The
BRUCE K. MACLAURY, Director Vanguard Group, Inc.; Secretary of each of the
President Emeritus of The Brookings investment companies in The Vanguard Group.
Institution; Director of American Express
Bank, Ltd., The St. Paul Companies, Inc. and RICHARD F. HYLAND, Treasurer*
National Steel Corporation. Treasurer of The Vanguard Group, Inc. and of
each of the investment companies in The
BURTON G. MALKIEL, Director Vanguard Group.
Chemical Bank Chairman's Professor of
Economics, Princeton University; Director of KAREN E. WEST, Controller*
Prudential Insurance Co. of America, Amdahl Principal of The Vanguard Group, Inc.;
Corporation, Baker Fentress & Co., The Controller of each of the investment companies
Jeffrey Co. and Southern New England in The Vanguard Group.
Communications Company. ---------------
*Officers of the Fund are "interested persons"
as defined in the Investment Company Act of
1940.
</TABLE>
THE VANGUARD GROUP Vanguard Fixed Income Securities Fund is a member of
The Vanguard Group of Investment Companies. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and the other funds
in the Group obtain at cost virtually all of their corporate management,
administrative and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain of the Vanguard funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses which are allocated among the
funds under methods approved by the Board of Directors (Trustees) of each fund.
In addition, each fund bears its own direct expenses, such as legal, auditing
and custodian fees.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions.
9
<PAGE> 33
However, such transactions are subject to procedures and guidelines
substantially similar to those recommended by the mutual fund industry and
approved by the U.S. Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds has 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 January 31, 1997, the
Fund had contributed capital of $2,133,000 to Vanguard, representing 10.7% of
Vanguard's capitalization. The Funds' Service Agreement provides for the
following arrangement: (1) each Vanguard Fund may invest a maximum of 0.40% of
its assets in Vanguard and (2) there is no restriction on the maximum cash
investment that the Vanguard Funds may make in Vanguard.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended January 31, 1997, the Fund's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $46,469,000.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for shares of the
Funds, in connection with any sales made directly to investors in the states of
Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for the Group, and
that no Fund shall incur annual distribution expenses in excess of 20/100 of 1%
of its average month-end net assets. During the fiscal year ended January 31,
1997, the Fund paid approximately $5,413,000 of the Group's distribution and
marketing expenses, which represented an effective annual rate of .03% of 1% of
the Fund's average net assets.
INVESTMENT ADVISORY SERVICES Vanguard also provides investment advisory
services to the Short-Term Corporate, Short-Term Federal, Short-Term U.S.
Treasury, Intermediate-Term Corporate, Intermediate-Term U.S. Treasury and
Long-Term U.S. Treasury Portfolios of the Fund, Vanguard Money Market Reserves,
Vanguard Admiral Funds, Vanguard Institutional Index Fund, Vanguard Index Trust,
Vanguard International Equity Index Fund, Vanguard Balanced Index Fund, Vanguard
Tax-Managed Fund, the Aggressive Growth Portfolio of Vanguard Horizon Fund, the
Total International Portfolio of Vanguard STAR Fund, the REIT Index Portfolio of
Vanguard Specialized Portfolio, Vanguard Bond Index Fund, Vanguard Municipal
Bond Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard California Tax-Free
Fund, Vanguard New Jersey Tax-Free Fund, Vanguard New York Insured Tax-Free
Fund, Vanguard Ohio Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund, several
Portfolios of Vanguard Variable Insurance Fund, a portion of Vanguard/Windsor
II, a portion of Vanguard/Morgan Growth Fund as well as several indexed separate
accounts. These services are provided on an at-cost basis from a money
management staff employed directly by Vanguard. The compensation and other
expenses of this staff are paid by the Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's Officers and
10
<PAGE> 34
employees are paid by Vanguard which, in turn, is reimbursed by the Fund, and
each other Fund in the Group, for its proportionate share of Officers' and
employees' salaries and retirement benefits.
The following information is furnished with respect to the Directors and
Officers of the Fund for whom the Fund's proportionate shares of remuneration
exceeded $60,000 for the fiscal year ended January 31, 1997 and for all
Directors and Officers as a group:
<TABLE>
<CAPTION>
DIRECT
NAMES IN CAPACITIES IN WHICH REMUNERATION WAS RECEIVED REMUNERATION
-------------------------------------------------------------------------- ---------------
<S> <C>
John C. Bogle, Chairman................................................... $ 348,563
John J. Brennan, President and Chief Executive Officer.................... $ 214,111
All Directors and Officers as a group..................................... $ 678,496(1)
</TABLE>
- ---------------
(1) Includes, in the aggregate, $67,000 of fees and expenses paid by the Fund,
to its "non-interested" Directors, and the Fund's proportionate share of
remuneration paid by Vanguard to all Officers of the Fund, as a group.
VANGUARD FIXED INCOME SECURITIES FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- --------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $7,543 $ 1,171 $15,000 $65,000
Robert E. Cawthorn $7,543 $ 976 $13,000 $65,000
Bruce K. MacLaury $8,173 $ 1,146 $12,000 $60,000
Burton G. Malkiel $7,543 $ 781 $15,000 $65,000
Alfred M. Rankin, Jr. $7,543 $ 616 $15,000 $65,000
John C. Sawhill $7,543 $ 732 $15,000 $65,000
James O. Welch, Jr. $7,543 $ 901 $15,000 $65,000
J. Lawrence Wilson $7,543 $ 651 $15,000 $65,000
</TABLE>
- ---------------
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to
each Director for his or her service as Director or Trustee of 34 Vanguard
Funds (33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).
Directors who are not Officers are paid an annual fee based on the number
of years of service on the Board, up to fifteen years of service, upon
retirement. The fee is equal to $1,000 for each year of service and each
investment company member of The Vanguard Group contributes a proportionate
amount to this fee based on its relative net assets. This fee is paid,
subsequent to a Director's retirement, for a period of ten years or until the
death of a retired Director. Under its retirement plan, Vanguard contributes
annually an amount equal to 10% of each Officer's annual compensation plus 5.7%
of that part of the Officer's compensation during the year that exceeds the
Social Security Taxable Wage Base then in effect. The Fund's proportionate share
of retirement contributions made by Vanguard under its Retirement and Thrift
Plans on behalf of all eligible Officers of the Fund, as a group, during the
fiscal year ended January 31, 1997 was approximately $16,050.
11
<PAGE> 35
INVESTMENT ADVISORY SERVICES
GNMA, LONG-TERM CORPORATE AND HIGH YIELD CORPORATE PORTFOLIOS
The Fund employs Wellington Management Company, LLP (the "Adviser") under
an investment advisory agreement dated May 1, 1996 to manage the investment and
reinvestment of the assets of the Fund's GNMA, Long-Term Corporate and High
Yield Corporate Portfolios and to continuously review, supervise and administer
the investment program for each such Portfolio. The Adviser discharges its
responsibilities subject to the control of the Officers and Directors of the
Fund.
The GNMA, Long-Term Corporate, and High Yield Corporate Portfolios pay the
Adviser an aggregate fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the aggregate average month-end net assets of the three Portfolios for the
quarter:
GNMA PORTFOLIO
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------------------------------------- ------
<S> <C>
First $3 billion................................................................. .020%
Next $3 billion.................................................................. .010%
Over $6 billion.................................................................. .008%
</TABLE>
LONG-TERM CORPORATE PORTFOLIO
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------------------------------------- ------
<S> <C>
First $1 billion................................................................. .040%
Next $1 billion.................................................................. .030%
Next $1 billion.................................................................. .020%
Over $3 billion.................................................................. .015%
</TABLE>
HIGH-YIELD CORPORATE PORTFOLIO
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------------------------------------- ------
<S> <C>
First $1 billion................................................................. .060%
Next $1 billion.................................................................. .040%
Next $1 billion.................................................................. .030%
Over $3 billion.................................................................. .025%
</TABLE>
The fee, as determined above, is allocated to each Portfolio based on the
relative net assets of each.
During the fiscal years ended January 30, 1995, 1996 and 1997, the three
Portfolios paid the following advisory fees to WMC:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
--------------------------------------
PORTFOLIO 1995 1996 1997
---------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
GNMA................................................ $1,286,000 $1,181,000 $ 992,000
Long-Term Corporate................................. $1,131,000 $1,118,000 $ 951,000
High Yield Corporate................................ $1,389,000 $1,444,000 $1,370,000
</TABLE>
The fees set forth above were paid under the terms of a previous advisory
agreement that called for a higher rate of fees. The present agreement continues
until April 30, 1998, and may be continued thereafter for successive one-year
periods, as long as such continuance is specifically approved at least annually
(a) by a vote of a majority of those members of the Board of Directors of the
Fund who are not parties to the agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting such
approval, and (b) by the Board of Directors of the Fund or by vote of a majority
of the outstanding shares of each of the GNMA, Long-Term Corporate and High
Yield Corporate Portfolios; provided, however, that if the holders of any one of
these Portfolios fail to approve the agreement, the Adviser may continue to
serve as investment adviser to the Portfolio which approved the agreement, and
to the Portfolio which did not approve the agreement until new arrangements have
been made. The agreement may be terminated by any Portfolio at any time, without
penalty, by vote of the Board of Directors of the Fund or by vote of a majority
of the
12
<PAGE> 36
outstanding shares of the Portfolio on 60 days' written notice to the Adviser,
or by the Adviser on 90 days' written notice to the Fund. The agreement will
automatically terminate in the event of its assignment.
The Fund's Board of Directors may, without the approval of shareholders,
provide for:
A. The employment of a new investment adviser pursuant to the terms of
a new advisory agreement, either as a replacement for an existing
adviser or as an additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned because
of a change in control of the adviser.
Any such change will only be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the
adviser that would have normally been included in a proxy statement.
Because the Adviser provides only investment advisory services to the Fund
and has no control over the Fund's expenses, the Adviser has not undertaken to
guarantee expenses of the Fund. The Officers of the Fund have worked out
alternative arrangements with state authorities which require an expense
guarantee.
DESCRIPTION OF THE ADVISER Wellington Management Company, LLP, 75 State
Street, Boston, MA 02109, is a Massachusetts limited liability partnership, of
which the following persons are managing partners: Robert W. Doran, Duncan M.
McFarland, and John R. Ryan.
SHORT-TERM CORPORATE, SHORT-TERM FEDERAL,
SHORT-TERM U.S. TREASURY, INTERMEDIATE-TERM CORPORATE,
INTERMEDIATE-TERM U.S. TREASURY AND LONG-TERM U.S. TREASURY PORTFOLIOS
The Short-Term Corporate, Short-Term Federal, Short-Term U.S. Treasury,
Intermediate-Term Corporate, Intermediate-Term U.S. Treasury and Long-Term U.S.
Treasury Portfolios receive all investment advisory services on an
"internalized," at-cost, basis from an experienced investment management staff
employed directly by Vanguard. This staff also provides investment advisory
services to Vanguard Money Market Reserves, Vanguard Bond Index Fund, Vanguard
Municipal Bond Fund, Vanguard Balanced Index Fund, Vanguard Admiral Funds, the
Balanced Portfolio of Vanguard Tax-Managed Fund, Vanguard California Tax-Free
Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund,
Vanguard Ohio Tax-Free Fund, Vanguard New York Insured Tax-Free Fund, Vanguard
Pennsylvania Tax-Free Fund and the Money Market and High-Grade Bond Portfolios
of Vanguard Variable Insurance Fund. The compensation and other expenses of the
staff are allocated among the Portfolios of the Fund and the other Funds listed
above. During the fiscal years ended January 31, 1995, 1996 and 1997, the
Short-Term Corporate Portfolio's share of these expenses totaled approximately
$391,000, $408,000 and $543,000, respectively. During the fiscal years ended
January 31, 1995, 1996 and 1997, the Intermediate-Term Corporate Portfolio's
share of these expenses totaled approximately $10,000, $28,000 and $63,000,
respectively. During the fiscal years ended January 31, 1995, 1996 and 1997, the
Long-Term U.S. Treasury Portfolio's share of these expenses totaled
approximately $82,000, $94,000 and $122,000, respectively. During the fiscal
years ended January 31, 1995, 1996 and 1997, the Short-Term Federal Portfolio's
shares of these expenses totaled approximately $204,000, $193,000 and $185,000,
respectively. During the fiscal years ended January 31, 1995, 1996 and 1997 the
Short-Term and Intermediate-Term U.S. Treasury Portfolios' share of these
expenses totaled approximately $186,000, $230,000 and $288,000 respectively.
The investment management staff is supervised by the senior Officers of the
Fund. The senior Officers, who are also Officers of Vanguard, Vanguard Money
Market Reserves, Vanguard Institutional Portfolios, Vanguard Bond Index Fund,
Vanguard Municipal Bond Fund, Vanguard State Tax-Exempt Funds, and Vanguard
Variable Insurance Fund, are directly responsible to the Board of Directors of
the Fund. The Board of Directors, elected annually by shareholders, sets broad
policies for the Fund and chooses its Officers.
13
<PAGE> 37
PORTFOLIO TRANSACTIONS
GNMA, LONG-TERM CORPORATE AND HIGH YIELD CORPORATE PORTFOLIOS
The investment advisory agreement authorizes Wellington Management Company,
LLP (the "Adviser") (with the approval of the Fund's Board of Directors) to
select the brokers or dealers that will execute the purchases and sales of
portfolio securities for the Fund and directs the Adviser to use its best
efforts to obtain the best available price and most favorable execution as to
all transactions for the Fund. The Adviser has undertaken to execute each
investment transaction at a price and commission which provides the most
favorable total cost or proceeds reasonably obtainable under the circumstances.
In placing portfolio transactions, the Adviser will use its best judgment
to choose the broker most capable of providing the brokerage services necessary
to obtain best available price and most favorable execution. The full range and
quality of brokerage services available will be considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information and
provide other services in addition to execution services to the Fund and/or the
Adviser. The Adviser considers such information useful in the performance of its
obligations under the agreement but is unable to determine the amount by which
such services may reduce its expenses.
The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, the Adviser may cause the Fund to pay
a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the Adviser to the Fund and the other Funds in the Group.
Currently, it is the Fund's policy that the Adviser may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Adviser will only pay such higher
commissions if it believes this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Adviser and/or the Fund. However, the
Adviser has informed the Fund that it will not pay higher commission rates
specifically for the purpose of obtaining research services.
Some securities considered for investment by the Fund may also be
appropriate for other Funds and/or clients served by the Adviser. If purchase or
sale of securities consistent with the investment policies of the Fund and one
or more of these other Funds or clients served by the Adviser are considered at
or about the same time, transactions in such securities will be allocated among
the several Funds and clients in a manner deemed equitable by the Adviser.
SHORT-TERM CORPORATE, SHORT-TERM FEDERAL,
SHORT-TERM U.S. TREASURY, INTERMEDIATE-TERM CORPORATE,
INTERMEDIATE-TERM U.S. TREASURY, AND LONG-TERM U.S. TREASURY PORTFOLIOS
Brokers or dealers who execute transactions for the Short-Term Corporate,
Short-Term Federal, Short-
Term U.S. Treasury, Intermediate-Term Corporate, Intermediate-Term U.S.
Treasury, and Long-Term U.S.
Treasury Portfolios are selected by Vanguard's investment management staff,
which is responsible for using its best efforts to obtain the best available
price and most favorable execution for each transaction. Principal transactions
are made directly with issuers, underwriters and market makers and usually do
not involve brokerage commissions, although underwriting commissions and dealer
mark-ups may be involved. Brokerage transactions are placed with brokers deemed
most capable of providing favorable terms; where more than one broker can offer
such terms, consideration may be given to brokers who provide the staff with
research and statistical information.
Vanguard's investment management staff may occasionally make
recommendations to other Vanguard Funds or clients which result in their
purchasing or selling securities simultaneously with the Portfolios. As a
result, the demand for securities being purchased or the supply of securities
being sold may increase, and this
14
<PAGE> 38
could have an adverse effect on the price of those securities. It is the staff's
policy not to favor one client over another in making recommendations or placing
an order. If two or more clients are purchasing a given security on the same day
from the same broker-dealer, such transactions may be averaged as to price.
ALL PORTFOLIOS
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified brokers or
dealers who recommend the shares of the Fund to their clients and may, when a
number of brokers and dealers can provide comparable best price and execution on
a particular transaction, consider the sale of shares by a broker or dealer in
selecting among qualified brokers or dealers.
The Fund did not incur any brokerage commissions in the 1994 and 1995
fiscal years. The total brokerage commission paid by the Fund for the fiscal
year ended January 31, 1996 was $4,500. The Fund did not incur any brokerage
commissions for the fiscal year ended January 31, 1997.
YIELD AND TOTAL RETURN
The yield* of each portfolio of the Fund for the 30-day period ended
January 31, 1997 is set forth below:
<TABLE>
<S> <C>
Short-Term U.S. Treasury Portfolio.............................................. 5.91%
Short-Term Federal Portfolio.................................................... 5.93%
Short-Term Corporate Portfolio.................................................. 6.18%
Intermediate-Term U.S. Treasury Portfolio....................................... 6.42%
GNMA Portfolio.................................................................. 6.98%
Long-Term U.S. Treasury Portfolio............................................... 6.72%
Long-Term Corporate Portfolio................................................... 7.24%
High Yield Corporate Portfolio.................................................. 8.69%(1)
Intermediate-Term Corporate..................................................... 6.84%
</TABLE>
The Institutional Shares of the Short-Term Corporate Portfolio was not
offered prior to July 21, 1997.
- ---------------
* The yield for each portfolio of the Fund is calculated daily. Further,
in calculating the yield, the premiums and discounts on asset-backed
securities are not amortized.
(1) Yield for the High Yield Corporate Portfolio reflects a premium based
on the possibility that interest payments on some bonds may be reduced
or eliminated. Also, since bonds with higher interest coupons may be
replaced by bonds with lower coupons, income dividends are subject to
reduction.
The average annual total return of each Portfolio of the Fund for the one-,
five- and ten-year periods ending January 31, 1997 is set forth below:
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
1/31/97 1/31/97 1/31/97
------------ ------------- --------------
<S> <C> <C> <C>
Short-Term U.S. Treasury Portfolio.............. 3.89% 5.92% 6.13%*
Short-Term Federal Portfolio.................... 4.51% 6.02% 7.46%*
Short-Term Corporate Portfolio.................. 4.52% 6.42% 7.57%
GNMA Portfolio.................................. 5.15% 7.22% 8.47%
Intermediate-Term U.S. Treasury Portfolio....... 1.28% 7.60% 7.93*
Intermediate-Term Corporate Portfolio........... 2.29% 5.79%* N/A
Long-Term U.S. Treasury Portfolio............... -1.85% 8.99% 8.59%
Long-Term Corporate Portfolio................... 0.86% 9.16% 9.17%
High Yield Corporate Portfolio.................. 9.01% 11.26% 9.28%
</TABLE>
The Institutional Shares of the Short-Term Corporate Portfolio was not
offered prior to July 21, 1997.
- ---------------
* Since inception: Short-Term Federal Portfolio -- December 31, 1987
Short-Term U.S. Treasury and Intermediate-Term U.S.
Treasury Portfolios -- began operations October 28, 1991
Intermediate-Term Corporate -- November 1, 1993
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<PAGE> 39
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended January 31, 1997,
including the financial highlights for each of the five years in the period
ended January 31, 1997, appearing in the Fund's 1997 Annual Report to
Shareholders, and the reports thereon of Price Waterhouse LLP, independent
accountants, also appearing in the Annual Report, are incorporated by reference
in this Statement of Additional Information. The Fund's 1997 Annual Report to
Shareholders does not include information for the Institutional Shares of the
Short-Term Corporate Portfolio because such class of shares was not offered
during the Fund's 1997 fiscal year.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of the Vanguard Group, including
each Portfolio of Vanguard Fixed Income Securities Fund, Inc., may, from time to
time, use one or more of the following unmanaged indices for comparative
performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies
representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND INDEX -- is a market-weighted index
that contains approximately 4700 individually priced investment-grade corporate
bonds rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.
LEHMAN LONG-TERM TREASURY BOND INDEX -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX -- consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
16
<PAGE> 40
BOND BUYER MUNICIPAL BOND INDEX -- is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 25% Standard & Poor's Utilities Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LEHMAN BROTHERS INTERMEDIATE-TERM CORPORATE BOND INDEX -- consists of all
investment grade corporate debt with maturities of 5 to 10 years.
LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
OTHER DEFINITIONS
Marketing literature for the Portfolios of Vanguard Fixed Income Securities
Fund, Inc., may from time to time refer to or discuss a Portfolio's DURATION.
Duration is the weighted average life of a Portfolio's debt instruments measured
on a present-value basis; it is generally superior to average weighted maturity
as a measure of a Portfolio's potential volatility due to changes in interest
rates.
Unlike a Portfolio's average weighted maturity, which takes into account
only the stated maturity date of the Portfolio's debt instruments, duration
represents a weighted average of both interest and principal payments,
discounted by the current yield-to-maturity of the securities held. For example,
a four-year, zero-coupon bond, which pays interest only upon maturity (along
with principal), has both a maturity and duration of 4 years. However, a
four-year bond priced at par with an 8% coupon has a maturity of 4 years but a
duration of 3.6 years (at an 8% yield), reflecting the bond's earlier payment of
interest.
17
<PAGE> 41
In general, a bond with a longer duration will fluctuate more in price than
a bond with a shorter duration. Also, for small changes in interest rates,
duration serves to approximate the resulting change in a bond's price. For
example, a 1% change in interest rates will cause roughly a 4% move in the price
of a zero-coupon bond with a 4-year duration, while an 8% coupon bond (with a
3.6 year duration) will change by approximately 3.6%.
APPENDIX -- DESCRIPTION OF SECURITIES AND RATINGS
I. DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc., ("Moody's") description of
its four highest bond ratings: AAA -- judged to be the best quality. They carry
the smallest degree of investment risk; AA -- judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds; A -- possess many favorable investment attributes and
are to be considered as "upper medium grade obligations"; BAA -- considered as
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. BA -- judged to
have speculative elements; their future cannot be considered as well assured;
B -- generally lack characteristics of the desirable investment; CAA -- are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest; CA -- speculative in a high
degree; often in default; C -- lowest rated class of bonds; regarded as having
extremely poor prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and 3 indicates a
ranking toward the lower end of the category.
Excerpts from Standard & Poor's Corporation ("S&P") description of its five
highest bond ratings: AAA -- highest grade obligations. Capacity to pay interest
and repay principal is extremely strong; AA -- also qualify as high grade
obligations. A very strong capacity to pay interest and repay principal and
differs from AAA issues only in small degree; A -- regarded as upper medium
grade. They have a strong capacity to pay interest and repay principal although
they are somewhat susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories; BBB -- regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC -- predominately speculative with respect to capacity
to pay interest and repay principal in accordance with terms of the obligation;
BB indicates the lowest degree of speculation and CC the highest.
S&P applies indicators "+," no character, and "-" to its rating categories.
The indicators show relative standing within the major rating categories.
II. DESCRIPTION OF GNMA MORTGAGE-BACKED CERTIFICATES
GNMA (Government National Mortgage Association) Certificates are
mortgage-backed securities. The Certificates evidence part ownership of a pool
of mortgage loans. The Certificates which the GNMA Portfolio will purchase are
of the "modified pass-through" type. "Modified pass-through" Certificates
entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
THE GNMA GUARANTEE The National Housing Act authorizes GNMA to guarantee
the timely payment of principal of and interest on securities backed by a group
(or pool) of mortgages insured by FHA or FHMA, or guaranteed by VA. The GNMA
guarantee is backed by the full faith and credit of the U.S. Government. GNMA is
also empowered to borrow without limitation from the U.S. Treasury if necessary
to make any payments required under its guarantee.
18
<PAGE> 42
THE LIFE OF GNMA CERTIFICATES The average life of GNMA Certificates is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greatest part of principal
invested well before the maturity of the mortgages in the pool. (Note: Due to
the GNMA guarantee, foreclosures impose no risk to principal investment.) As
prepayment rates of individual mortgage pools will vary widely, it is not
possible to accurately predict the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA are normally used as an
indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities, the type of mortgages backing the vast majority of GNMA
Certificates, is approximately 12 years. For this reason, it is standard
practice to treat GNMA Certificates as 30-year mortgage-backed securities which
prepay fully in the twelfth year.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the issuer. For the most common type of mortgage pool,
containing single-family dwelling mortgages. GNMA receives an annual fee of 0.06
of 1% of the outstanding principal for providing its guarantee, and the issuer
is paid an annual fee of 0.44 of 1% for assembling the mortgage pool and for
passing through monthly payments of interest and principal to Certificate
holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates may be issued at a premium or discount, rather than at par.
2. After issuance, Certificates may trade in the secondary market at a
premium or discount.
3. Interest is earned monthly, rather than semiannually as for traditional
bonds. Monthly compounding has the effect of raising the effective yield
earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate.
That is, if mortgagors pay off their mortgages early, the principal
returned to Certificate holders may be reinvested at more or less
favorable rates.
In quoting yields for GNMA Certificates, the standard practice is to assume
that the Certificates will have a 12-year life. Compared on this basis, GNMA
Certificates have historically yielded roughly .25 of 1% more than high-grade
corporate bonds and .50 of 1% more than U.S. Government and U.S. Government
Agency bonds. As the life of individual pools may vary widely, however, the
actual yield earned on any issue of GNMA Certificates may differ significantly
from the yield estimated on the assumption of a 12-year life.
MARKET FOR GNMA CERTIFICATES Since the inception of the GNMA
Mortgage-Backed Securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make the GNMA Certificates a highly liquid instrument. Prices of GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
"WHEN ISSUED" SECURITIES GNMA securities may be purchased and sold on a
when issued and delayed delivery basis. Delayed delivery or when issued
transactions arise when securities are purchased or sold by a Portfolio with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Portfolio at the time of
entering into the transaction. When the Portfolio engages in "when issued" and
delayed delivery transactions, the Portfolio relies on the buyer or seller, as
the case may be, to consummate the sale. Failure to do so may result in the
Portfolio missing the opportunity of obtaining a price or yield considered to be
advantageous. When issued and delayed delivery transactions may be expected to
occur a month or more before delivery is due. However, no payment or delivery is
made by the Portfolio until it receives payment or delivery from the other party
to the transaction. A separate account of liquid assets equal to the value of
such purchase commitments will be maintained until payment is made. To the
extent the Portfolio engages in "when issued" and delayed delivery transactions,
it will do so for the
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<PAGE> 43
purpose of acquiring securities consistent with its investment objective and
policies and not for the purpose of investment leverage.
III. COMMERCIAL PAPER
A Portfolio may invest in commercial paper (including variable amount
master demand notes) rated A-1 or better by Standard & Poor's or Prime-1 by
Moody's, or, if unrated, issued by a corporation having an outstanding unsecured
debt issue rated A or better by Moody's or by Standard & Poor's. Commercial
paper refers to short-term, unsecured promissory notes issued by corporations to
finance short-term credit needs. Commercial paper is usually sold on a discount
basis and has a maturity at the time of issuance not exceeding nine months.
Variable amount master demand notes are demand obligations that permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to arrangement between the issuer and a commercial bank acting as agent for the
payees of such notes, whereby both parties have the right to vary the amount of
the outstanding indebtedness on the notes. Because variable amount master demand
notes are direct lending arrangements between a lender and a borrower, it is not
generally contemplated that such instruments will be traded, and there is no
secondary market for these notes, although they are redeemable (and thus
immediately repayable by the borrower) at face value, plus accrued interest, at
any time. In connection with the Portfolio's investment in variable amount
master demand notes, Vanguard's investment management staff will monitor, on an
ongoing basis, the earning power, cash flow and other liquidity ratios of the
issuer, and the borrower's ability to pay principal and interest on demand.
Commercial paper rated A-1 by Standard & Poor's has the following
characteristics: (1) liquidity ratios are adequate to meet cash requirements;
(2) long-term senior debt is rated "A" or better; (3) the issuer has access to
at least two additional channels of borrowing; (4) basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances; (5)
typically, the issuer's industry is well established and the issuer has a strong
position within the industry; (6) the reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is A-1, A-2 or A-3. The rating Prime-1 is
the highest commercial paper rating assigned by Moody's. Among the factors
considered by Moody's in assigning ratings are the following: (1) evaluation of
the management of the issuer; (2) economic evaluation of the issuer's industry
or industries and the appraisal of speculative-type risks which may be inherent
in certain areas; (3) evaluation of the issuer's products in relation to
completion and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer,
and (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations.
IV. U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the United States Treasury, by various
agencies of the United States Government, and by various instrumentalities which
have been established or sponsored by the United States Government. The term
also refers to "repurchase agreements" collateralized by such securities.
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government-sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a government agency organized
under Federal charter with government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal
20
<PAGE> 44
Home Loan Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, and the Federal National Mortgage Association.
V. BANK OBLIGATIONS
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate.
Certificates of deposit are negotiable short-term obligations of commercial
banks. Variable rate certificates of deposit are certificates of deposit on
which the interest rate is periodically adjusted prior to their stated maturity
based upon a specified market rate. As a result of these adjustments, the
interest rate on these obligations may be increased or decreased periodically.
Frequently, dealers selling variable rate certificates of deposit to a Portfolio
will agree to repurchase such instruments, at the Portfolio's option, at par on
or near the coupon dates. The dealers' obligations to repurchase these
instruments are subject to conditions imposed by various dealers; such
conditions typically are the continued credit standing of the issuer and the
existence of reasonably orderly market conditions. The Portfolio is also able to
sell variable rate certificates of deposit in the secondary market. Variable
rate certificates of deposit normally carry a higher interest rate than
comparable fixed-rate certificates of deposit. A bankers' acceptance is a time
draft drawn on a commercial bank by a borrower usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
the secondary markets prior to maturity.
VI. SHORT AND INTERMEDIATE TERM CORPORATE DEBT SECURITIES
Outstanding non-convertible corporate debt securities (e.g. bonds and
debentures) which are rated Baa3 or better either by Moody's Investors Service,
Inc. ("Moody's") or BBB- or better by Standard & Poor's Corporation ("Standard &
Poor's") are considered investment grade.
VII. FOREIGN INVESTMENTS
The Short-Term Corporate, Intermediate-Term Corporate, High Yield Corporate
and Long-Term Corporate Portfolios may invest in the securities (payable in U.S.
dollars) of foreign issues and in the securities of foreign branches of U.S.
banks such as negotiable certificates of deposit (Eurodollars). Because the
Portfolios invest in such securities, investment in the Portfolios involves
investment risks that are different in some respects from an investment in a
fund which invests only in debt obligations of U.S. issuers. Such risks may
include future political and economic developments, the possible imposition of
withholding taxes on interest income payable on the securities held, possible
seizure or nationalization of foreign deposits, the possible establishment of
exchange controls or the adoption of other restrictions by foreign governments
which may adversely affect the payment of principal and interest on securities
held by the Portfolios, difficulty in obtaining and enforcing court judgments
abroad, the possibility of restrictions on investments in other jurisdictions,
reduced levels of government regulation of securities markets in foreign
countries, and difficulties in effecting the repatriation of capital invested
abroad. The Short-Term Corporate and Intermediate-Term Corporate Portfolios will
not purchase any such foreign security if, as a result, more than 20% of the
value of the Portfolio's total assets would be invested in such securities.
VIII. ZERO COUPON TREASURY BONDS
All Portfolios may invest in zero coupon Treasury bonds, a term used to
describe U.S. Treasury notes
and bonds which have been stripped of their unmatured interest coupons, or the
coupons themselves, and also receipts or certificates representing interest in
such stripped debt obligations and coupons. The timely payment of coupon
interest and principal on these instruments remains guaranteed by the "full
faith and credit" of the United States Government.
A zero coupon bond does not pay interest. Instead, it is issued at a
substantial discount to its "face value" -- what it will be worth at maturity.
The difference between a security's issue or purchase price and its face value
represents the imputed interest an investor will earn if the security is held
until maturity. For tax
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<PAGE> 45
purposes, a portion of this imputed interest is deemed as income received by
zero coupon bondholders each year. The Fund, which expects to qualify as a
regulated investment company, intends to pass along such interest as a component
of a Portfolio's distributions of net investment income.
Zero coupon bonds may offer investors the opportunity to earn higher yields
than those available on U.S. Treasury bonds of similar maturity. However, zero
coupon bond prices may also exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest is
returned to the investor.
IX. COLLATERALIZED MORTGAGE OBLIGATIONS
The Short-Term Federal, Short-Term Corporate, Intermediate-Term Corporate
and the Short-, Intermediate- and Long-Term U.S. Treasury Portfolios may
invest in collateralized mortgage obligations (CMOs), bonds that are
collateralized by whole loan mortgages or mortgage pass-through securities.
The bonds issued in a CMO deal are divided into groups, and each group of bonds
is referred to as a "tranche". Under the CMO structure, the cash flows
generated by the mortgages or mortgage pass-through securities in the collateral
pool are used to first pay interest and then pay principal to the CMO
bondholders. The bonds issued under a CMO structure are retired sequentially as
opposed to the pro rata return of principal found in traditional pass-through
obligations. Subject to the various provisions of individual CMO issues, the
cash flow generated by the underlying collateral (to the extent it exceeds the
amount required to pay the stated interest) is used to retire the bonds. Under
the CMO structure, the repayment of principal among the different tranches is
prioritized in accordance with the terms of the particular CMO issuance. The
"fastest-pay" tranche of bonds, as specified in the prospectus for the issuance,
would initially receive all principal payments. When that tranche of bonds is
retired, the next tranche, or tranches, in the sequence, as specified in the
prospectus, receive all of the principal payments until they are retired. The
sequential retirement of bond groups continues until the last tranche, or group
of bonds, is retired. Accordingly, the CMO structure allows the issuer to use
cash flows of long maturity, monthly-pay collateral to formulate securities with
short, intermediate and long final maturities and expected average lives. The
primary risks involved in any mortgage security, such as a CMO issuance, is its
exposure to prepayment risk. To the extent a particular tranche is exposed to
this risk, the bondholder is generally compensated in the form of higher yield.
In order to provide security, in addition to the underlying collateral, many CMO
issues also include minimum reinvestment rate and minimum sinking-fund
guarantees. Typically, the Portfolios will invest in those CMOs that most
appropriately reflect their average maturities and market risk profiles.
Consequently, the Short-Term Portfolios invest only in CMOs with highly
predictable short-term average maturities. Similarly, the Intermediate- and
Long-Term Treasury Portfolios will invest in those CMOs that carry market risks
consistent with intermediate- and long-term bonds.
X. REAL ESTATE
The GNMA Portfolio may invest in real estate investment conduits
("REMICs"). REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. A REMIC is a CMO that qualifies for
special tax treatment under the Internal Revenue Code and invests in certain
mortgages principally secured by interests in real property. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests,
or "residual" interests. Guaranteed REMIC pass-through certificates ("REMIC
Certificates") issued by FNMA or FHLMC represent beneficial ownership interests
in a REMIC trust consisting principally of mortgage loans or FNMA, FHLMC or
GNMA-guaranteed mortgage pass-through certificates. For FHLMC REMIC
Certificates, FHLMC guarantees the timely payment of interest, and also
guarantees the payment of principal as payments are required to be made on the
underlying mortgage participation certificates. FNMA REMIC Certificates are
issued and guaranteed as to timely distribution of principal and interest by
FNMA.
22
<PAGE> 46
PART C
VANGUARD FIXED INCOME SECURITIES FUND, INC.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Registrant's financial statements for the year ended January 31, 1997,
including Price Waterhouse LLP's reports thereon, are incorporated by reference,
in the Statement of Additional Information, from the Registrant's 1997 Annual
Report to Shareholders which has been filed with the Commission. The financial
statements, for each of the Registrant's Portfolios, included in the Annual
Report respectively are:
1. Statements of Net Assets as of January 31, 1997.
2. Statements of Operations for the period ended January 31, 1997.
3. Statement of Changes of Net Assets for the periods ended January 31,
1996 and January 31, 1997.
4. Financial Highlights for each of the periods ended January 31, 1997 as
indicated in the annual report.
5. Notes to Financial Statements.
6. Reports of Independent Accountants.
(B) EXHIBITS
1. Articles of Incorporation.**
2. By-Laws of Registrant.**
3. Not Applicable.
4. Not Applicable.
5. Not Applicable.
6. Not Applicable.
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information.
8. Form of Custody Agreement.**
9. Form of Vanguard Service Agreement.**
10. Opinion of Counsel.**
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. Not Applicable.
16. Schedules for Computation of Performance Quotations.*
18. Registrant's Form of Multiple Class Plan pursuant to Rule 18f-3 under
the Investment Company Act of 1940.*
19. Powers-of-Attorney.**
27. Financial Data Schedules.*
- ---------------
* Filed herewith.
** Previously filed.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The Officers of the Registrant, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are
identical. Reference is made to the caption "Management of the Fund" in the
Prospectus constituting Part A and in the Statement of Additional Information
constituting Part B of this Registration Statement.
<PAGE> 47
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
On January 31, 1997 the number of shareholders of each Portfolio of the
Fund was:
<TABLE>
<S> <C>
Long-Term Corporate Portfolio.......................................... 100,812
High Yield Corporate Portfolio......................................... 113,902
GNMA Portfolio......................................................... 245,278
Short-Term Corporate Portfolio......................................... 113,338
Long-Term U.S. Treasury Portfolio...................................... 39,716
Short-Term Federal Portfolio........................................... 55,933
Intermediate-Term U.S. Treasury Portfolio.............................. 48,042
Short-Term U.S. Treasury Portfolio..................................... 38,956
Intermediate-Term Corporate Portfolio.................................. 16,104
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the caption "Investment Advisers" in the prospectus
constituting Part "A" of this Registration Statement and "Investment Advisory
Services" in Part "B" of this Registration Statement.
Wellington Management Company, LLP ("Wellington Management") is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). The list required by this Item 28 of officers and
partners of Wellington Management, together with any information as to any
business profession, vocation or employment of a substantial nature engaged in
by such officers and partners during the past two years, is incorporated herein
by reference to Schedules A and D of Form ADV filed by Wellington Management
pursuant to the Advisers Act (SEC File No. 801-159089).
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company
Act and the rules promulgated thereunder will be maintained in the physical
possession of Registrant;
Registrant's Transfer Agent, The Vanguard Group, Inc. c/o The Vanguard Financial
Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodians, CoreStates Bank, N.A.,
Philadelphia, Pa., State Street Bank and Trust Company, Boston, MA. and Morgan
Guaranty Trust Company, New York, N.Y.
<PAGE> 48
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described in
Part B hereof under "Management of the Fund," the Registrant is not a party to
any management-related service contract.
ITEM 32. UNDERTAKINGS
Annual meetings of shareholders will not be held except as required by the
Investment Company Act of 1940 ("1940 Act") or other applicable law. Registrant
hereby undertakes to comply with the provisions of Section 16(c) of the 1940 Act
in regard to shareholders' rights to call a meeting of shareholders for the
purpose of voting on the removal of Directors and to assist in shareholder
communications in such matters, to the extent required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
<PAGE> 49
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940,
the Registrant has duly caused this Post-Effective Amendment to this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Town of Valley Forge and the Commonwealth of
Pennsylvania, on the 22nd day of May, 1997.
VANGUARD FIXED INCOME SECURITIES FUND, INC.
BY: (Raymond J. Klapinsky) John J. Brennan*, President & Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
BY: (Raymond J. Klapinsky)
John C. Bogle*, Chairman of the Board and Director
May 22, 1997
BY: (Raymond J. Klapinsky)
John J. Brennan*, President, Director
and Chief Executive Officer
May 22, 1997
BY: (Raymond J. Klapinsky)
Robert E. Cawthorn*, Director
May 22, 1997
BY: (Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*, Director
May 22, 1997
BY: (Raymond J. Klapinsky)
Burton G. Malkiel*, Director
May 22, 1997
BY: (Raymond J. Klapinsky)
Bruce K. MacLaury*, Director
May 22, 1997
BY: (Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*, Director
May 22, 1997
BY: (Raymond J. Klapinsky)
John C. Sawhill*, Director
May 22, 1997
BY: (Raymond J. Klapinsky)
James O. Welch, Jr.*, Director
May 22, 1997
BY: (Raymond J. Klapinsky)
J. Lawrence Wilson*, Director
May 22, 1997
BY: (Raymond J. Klapinsky)
Richard F. Hyland*, Treasurer and Principal
Financial Officer and Accounting Officer
May 22, 1997
- ---------------
*As Attorney-in-Fact, pursuant to Power-of-Attorney. See Form SE filed for the
Windsor Funds, Inc. (File Number 2-14336), as filed with the Commission on or
about January 23, 1990, incorporated by reference.
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants................................................... EX-99.B11
Schedule for Computation of Performance Quotations................................... EX-99.B16
Form of Multiple Class Plan.......................................................... EX-99.B18
Financial Data Schedule.............................................................. EX-27
</TABLE>
<PAGE> 1
EX-99-B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 45 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated February 28, 1997, relating to the financial
statements and financial highlights appearing in the January 31, 1997 Annual
Report to Shareholders of Vanguard Fixed Income Securities Fund, Inc. (comprised
of GNMA Portfolio, Short-Term Federal Portfolio, Short-Term U.S. Treasury
Portfolio, Intermediate-Term U.S. Treasury Portfolio, Long-Term U.S. Treasury
Portfolio, Short-Term Corporate Portfolio, Intermediate-Term Corporate
Portfolio, Long-Term Corporate Portfolio and High Yield Corporate Portfolio),
which are also incorporated by reference into the Registration Statement. We
also consent to the references to us under the headings "Financial Highlights"
and "General Information" in the Prospectus and under the heading "Financial
Statements" in the Statement of Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
May 21, 1997
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
SHORT-TERM CORPORATE PORTFOLIO
1. Average Annual Total Return (As of January 31, 1997)
P (1 + T)(n) = ERV
<TABLE>
<S> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +4.52%
N = 1
ERV = $1,045.19
Five Year
P = $1,000
T = +6.42%
N = 5
ERV = $1,365.20
Ten Year
P = $1,000
T = +7.57%
N = 10
ERV = $2,074.94
</TABLE>
2. YIELD (30 Days Ended January 31, 1997)
Yield = 2[(a - b +1)(6)-1]
-----
c X d
<TABLE>
<S> <C>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $24,140,962.33
b = $936,488.98
c = 424,447,453.817
d = $10.75
Yield = 6.18%
</TABLE>
<PAGE> 2
SHORT-TERM FEDERAL PORTFOLIO
1. Average Annual Total Return (As of January 31, 1997)
P (1 + T)(n) = ERV
<TABLE>
<S> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +4.51%
N = 1
ERV = $1,045.07
Five Years
P = $1,000
T = +6.02%
N = 5
ERV = $1,339.29
Since Inception-December 28, 1987
P = $1,000
T = +7.46%
N = since inception
ERV = $1,922.34
</TABLE>
2. YIELD (30 Days Ended January 31, 1997)
Yield = 2[(a - b +1)(6)-1]
-----
c X d
<TABLE>
<S> <C>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $6,827,069.84
b = $275,247.25
c = 132,808,871.25
d = $10.11
Yield = 5.93%
</TABLE>
<PAGE> 3
LONG-TERM U.S. TREASURY PORTFOLIO
1. Average Annual Total Return (As of January 31, 1997)
P (1 + T)(n) = ERV
<TABLE>
<S> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = -1.85%
N = 1
ERV = $981.52
Five Year
P = $1,000
T = +8.99%
N = 5
ERV = $1,537.78
Since Inception-May 19, 1986
P = $1,000
T = +8.59%
N = since inception
ERV = $2,280.64
</TABLE>
2. YIELD (30 Days Ended January 31, 1997)
Yield = 2[(a - b +1)(6)-1]
-----
c X d
<TABLE>
<S> <C>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $5,179,099.93
b = $185,080.74
c = 91,851,001.730
d = $9.84
Yield = 6.72%
</TABLE>
<PAGE> 4
GNMA PORTFOLIO
1. Average Annual Total Return (As of January 31, 1997)
P (1 + T)(n) = ERV
<TABLE>
<S> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +5.15%
N = 1
ERV = $1,051.51
Five Year
P = $1,000
T = +7.22%
N = 5
ERV = $1,417.17
Ten Year
P = $1,000
T = +8.47%
N = 10
ERV = $2,254.49
</TABLE>
2. YIELD (30 Days Ended January 31, 1997)
Yield = 2[(a - b +1)(6)-1]
-----
c X d
<TABLE>
<S> <C>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $44,024,115.00
b = $1,596,485.78
c = 723,308,819.408
d = $10.23
Yield = 6.98%
</TABLE>
<PAGE> 5
LONG-TERM CORPORATE PORTFOLIO
1. Average Annual Total Return (As of January 31, 1997)
P (1 + T)(n) = ERV
<TABLE>
<S> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +0.86%
N = 1
ERV = $1,008.57
Five Year
P = $1,000
T = +9.16%
N = 5
ERV = $1,549.60
Ten Year
P = $1,000
T = +9.17%
N = 10
ERV = $2,403.73
</TABLE>
2. YIELD (30 Days Ended January 31, 1997)
Yield = 2[(a - b +1)(6)-1]
-----
c X d
<TABLE>
<S> <C>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $20,740,320.00
b = $769,330.40
c = 385,937,808.760
d = $8.71
Yield = 7.24%
</TABLE>
<PAGE> 6
HIGH YIELD CORPORATE PORTFOLIO
1. Average Annual Total Return (As of January 31, 1997)
P (1 + T)(n) = ERV
<TABLE>
<S> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +9.01%
N = 1
ERV = $1,090.12
Five Year
P = $1,000
T = +11.26%
N = 5
ERV = $1,704.71
Ten Year
P = $1,000
T = +9.28%
N = 10
ERV = $2,429.64
</TABLE>
2. YIELD (30 Days Ended January 31, 1997)
Yield = 2[(a - b +1)(6)-1]
-----
c X d
<TABLE>
<S> <C>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $26,556,725.02
b = $858,488.48
c = 459,242,470.642
d = $7.87
Yield = 8.69%
</TABLE>
<PAGE> 7
SHORT-TERM U.S. TREASURY PORTFOLIO
1. Average Annual Total Return (As of January 31, 1997)
P (1 + T)(n) = ERV
<TABLE>
<S> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +3.89%
N = 1
ERV = $1,038.89
Five Years
P = $1,000
T = +5.92%
N = since inception
ERV = $1,333.02
Since Inception October 28, 1991
P = $1,000
T = +6.13%
N = since inception
ERV = $1,367.72
</TABLE>
2. YIELD (30 Days Ended January 31, 1997)
Yield = 2[(a - b +1)(6)-1]
-----
c X d
<TABLE>
<S> <C>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $4,922,009.23
b = $199,201.55
c = 95,570,473.775
d = $10.16
Yield = 5.91%
</TABLE>
<PAGE> 8
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
1. Average Annual Total Return (As of January 31, 1997)
P (1 + T)(n) = ERV
<TABLE>
<S> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +1.28%
N = 1
ERV = $1,012,77
Five Years
P = $1,000
T = +7.60%
N = 5
ERV = $1,442,28
Since Inception-October 28, 1991
P = $1,000
T = +7.93%
N = since inception
ERV = $1,494.12
</TABLE>
2. YIELD (30 Days Ended January 31, 1997)
Yield = 2[(a - b +1)(6)-1]
-----
c X d
<TABLE>
<S> <C>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $6,962,141.99
b = $260,299.24
c = 122,436,643.962
d = $10.37
Yield = 6.42%
</TABLE>
<PAGE> 9
INTERMEDIATE-TERM CORPORATE PORTFOLIO
1. Average Annual Total Return (As of January 31, 1997)
P (1 + T)(n) = ERV
<TABLE>
<S> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +2.29%
N = 1
ERV = $1,022.92
* Since Inception November 1, 1993
P = $1,000
T = +5.79%
N = *
ERV = $1,200.74
</TABLE>
2. YIELD (30 Days Ended January 31, 1997)
Yield = 2[(a - b +1)(6)-1]
-----
c X d
<TABLE>
<S> <C>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $3,499,797.64
b = $123,336.72
c = 61,824,992.093
d = $9.72
Yield = 6.84%
</TABLE>
<PAGE> 1
EX-99.B18
VANGUARD FIXED INCOME SECURITIES FUND, INC.
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
UNDER THE INVESTMENT COMPANY ACT OF 1940
This Multiple Class Plan has been adopted by a majority of the Board of
Directors of Vanguard Fixed Income Securities Fund, Inc. (the "Fund"), including
a majority of the Directors who are not interested persons of the Fund, on
behalf of the Short-Term Corporate Portfolio (the "Portfolio").
I. SHARE CLASSES
The Portfolio will offer two classes of shares: Short-Term Corporate
Portfolio shares (referred to herein as "Class A Shares") and Short-Term
Corporate Portfolio Institutional Shares (referred to herein as "Class C
Shares").
II. DISTRIBUTION ARRANGEMENTS
The distribution arrangements will differ between Class A Shares and
Class C Shares of the Portfolio as follows:
A. CLASS A SHARES
Class A Shares will be available to all investors, but will be
marketed primarily to individual investors and smaller institutional investors.
Class A Shares also will be marketed to employee benefit plans that require
participant recordkeeping services provided by The Vanguard Group, Inc.
("Vanguard"). At present, the minimum initial investment requirement for Class A
Shares is expected to be $3,000 for non-retirement accounts and $1,000 for most
retirement accounts and Uniform Gifts/Transfers to Minors Act accounts.
B. CLASS C SHARES
Class C Shares will be available only to investors who, due to
the substantial size of their investments, are expected to afford the Fund
certain economies of scale with respect to the servicing of their accounts. It
is expected that most investors eligible for Class C Shares will be
institutional entities, such as employee benefit plans, foundations, endowments,
trusts, bank nominees and corporations. At present, the minimum initial
investment requirement for Class C Shares is expected to be at least $10
million.
<PAGE> 2
III. SERVICE ARRANGEMENTS
Service arrangements will differ between Class A Shares and Class C
Shares of the Portfolio as follows:
A. CLASS A SHARES
Class A Shares will be serviced primarily through Vanguard's
Individual Investor Services Group. Employee benefit plan investors utilizing
Vanguard's participant recordkeeping system (VISTA) will be serviced through
Vanguard's Institutional Investor Services Group. Due to the lower minimum
initial investment requirement, it is expected that Class A Shares will be held
by more investors than Class C Shares. It is anticipated that the aggregate
amount of account-based services1 that are provided to Class A Shares will
materially exceed the amount of such services for Class C Shares.
B. CLASS C SHARES
Class C Shares will be serviced primarily through Vanguard's
Institutional Investor Services Group. Due to the higher minimum initial
investment requirement, it is expected that Class C Shares will be held by fewer
investors than Class A Shares. It is anticipated that the aggregate amount of
account-based services that are provided to Class C Shares will be materially
less than the amount of such services provided to Class A Shares.
IV. EXCHANGES AND CONVERSIONS
A. EXCHANGES
1. CLASS A SHARES
Through December 31, 1997, Class A Shares may be
exchanged for Class C Shares of the Portfolio
provided that all purchase eligibility requirements
for Class C Shares are satisfied by the holder of
Class A Shares. Effective January 1, 1998, Class A
Shares of the Portfolio may not be exchanged for
Class C Shares of the Portfolio. Class A Shares of
the Portfolio may be exchanged into a class of shares
of one or more of the other investment companies for
which Vanguard provides administrative services
(including any other portfolio of the Fund)
("Vanguard Fund"); provided that (a) exchanges into
the class of shares of the Vanguard Fund are
permitted by such Vanguard Fund; (b) all purchase
eligibility requirements for such class of shares of
the Vanguard
- --------
1 "Account-based services" for purposes of the Multiple Class Plan relating to
the Portfolio are defined as services provided by Vanguard on a per account
basis to the Fund. Such services include transaction processing, shareholder
recordkeeping and the mailing of shareholder reports, proxy materials and other
items.
-2-
<PAGE> 3
Fund are satisfied by the investor; and (c) any such
exchanges are permitted by the Investment Company Act
of 1940, as amended ("1940 Act") and the rules,
regulations and interpretations thereunder.
2. CLASS C SHARES
Class C Shares of the Portfolio may not be exchanged
for Class A Shares of the Portfolio. Class C Shares
of the Portfolio may be exchanged into a class of
shares of a Vanguard Fund; provided that (a)
exchanges into the class of shares of the Vanguard
Fund are permitted by such Vanguard Fund; (b) all
purchase eligibility requirements (including the
then-applicable minimum initial investment amount)
for such class of shares of the Vanguard Fund are
satisfied by the investor; and (c) any such exchanges
are permitted by the 1940 Act and the rules,
regulations and interpretations thereunder.
B. CONVERSIONS OF CLASS C SHARES INTO CLASS A SHARES
The Fund may convert an investor's Class C Shares into Class A
Shares of the Portfolio if such investor's account falls below the
then-applicable minimum initial investment amount for Class C Shares. Any such
conversion will be preceded by written notice to the investor and will be
effected on the basis of the relative net asset values of Class A Shares and
Class C Shares of the Portfolio without the imposition of any sales load, fee or
other charge.
V. EXPENSE ALLOCATION BETWEEN CLASSES
A. BACKGROUND
The Fund is a member of The Vanguard Group of Investment
Companies (the "Group"). Through their jointly-owned subsidiary, Vanguard, the
Fund and the other funds in the Group obtain at cost virtually all of their
corporate management, administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost basis to the Fund. Vanguard
was established and operates pursuant to a Funds' Service Agreement
("Agreement") between itself and the Vanguard funds, and pursuant to an
exemptive order granted by the U.S. Securities and Exchange Commission.
Vanguard's direct and indirect expenses of providing corporate management,
administrative and distribution services to the Vanguard funds are allocated
among the funds in the Group in accordance with methods specified in the
Agreement.
-3-
<PAGE> 4
B. CLASS SPECIFIC EXPENSES
1. MARKETING AND DISTRIBUTION EXPENSES
Expenses associated with Vanguard's marketing and
distribution activities will be allocated to the
share class of the Portfolio on behalf of which the
expenses were incurred by making such allocations to
Class A Shares and Class C Shares as if each such
share class were a separate Vanguard fund under the
Agreement.
2. EXPENSES FOR ACCOUNT-BASED SERVICES
Expenses associated with Vanguard's provision of
account-based services to the Portfolio will be
allocated between Class A Shares and Class C Shares
of the Portfolio on the basis of the amount incurred
by each such share class as follows:
(A) ACCOUNT MAINTENANCE EXPENSES
Expenses associated with the maintenance of
investor accounts will be proportionately
allocated between Class A Shares and Class C
Shares based upon a monthly determination of
(i) the percentage of total shareholder
accounts represented by each class, and (ii)
the percentage of total account transactions
performed by Vanguard for each class. In
allocating account maintenance expenses
between the classes, (i) above will be given
a 75% weighting and (ii) above will be given
a 25% weighting.
(B) LITERATURE PRODUCTION AND MAILING EXPENSES
Expenses associated with shareholder
reports, proxy materials and other
literature will be allocated between Class A
Shares and Class C Shares based upon the
number of such items produced and mailed for
each class of shares.
3. OTHER CLASS SPECIFIC EXPENSES
Expenses for the primary benefit of a particular
share class will be allocated to that share class.
Such expenses include the following: each class'
share of Vanguard's operating expenses (not including
expenses related to management of the Fund's assets
allocated under subparagraph (C) below); blue sky
fees; and legal fees attributable to a particular
class.
-4-
<PAGE> 5
C. FUND EXPENSES
1. ASSET MANAGEMENT EXPENSES
Expenses associated with management of the
Portfolio's assets (including all advisory, tax
preparation and custody fees) will be allocated
between Class A Shares and Class C Shares on the
basis of their relative net assets.
2. OTHER FUND EXPENSES
Any other expenses not described above will be
allocated between Class A Shares and Class C Shares
of the Portfolio on the basis of their relative net
assets.
VI. ALLOCATION OF INCOME, GAINS AND LOSSES
Income, gains and losses will be allocated between Class A Shares and
Class C Shares of the Portfolio on the basis of their relative net assets. As a
result of differences in allocated expenses, it is expected that the net income
of, and dividends payable to, each class of shares will vary. Dividends and
distributions paid to each class of shares of the Portfolio will be calculated
in the same manner, on the same day and at the same time.
VII. VOTING AND OTHER RIGHTS
Class A Shares and Class C Shares of the Portfolio will each have: (i)
exclusive voting rights on any matter submitted to shareholders that relates
solely to its service or distribution arrangements; (ii) separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of the other class; and (iii) in all other respects
the same rights, obligations and privileges as each other, except as described
in this Multiple Class Plan.
VIII. AMENDMENTS
All material amendments to this Multiple Class Plan must be approved by
a majority of the Board of Directors of the Fund, including a majority of the
Directors who are not interested persons of the Fund.
-5-
<PAGE> 6
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
VANGUARD FIXED INCOME SECURITIES FUND, INC.
VANGUARD FIXED INCOME SECURITIES FUND, INC., a Maryland
corporation having its principal office in Maryland in Baltimore, Maryland
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland, in accordance with the requirements of
Section 2-208 and 2-208.1 of the Maryland General Corporation Law, that:
FIRST: The Corporation is registered as an open-end,
management investment company under the Investment Company Act of 1940, as
amended.
SECOND: The total number of shares that the Corporation
currently has authority to issue is four billion five hundred fifty million
(4,550,000,000), with a par value of one tenth of one cent ($.001) per share,
and an aggregate par value of Four Million Five Hundred Fifty Thousand Dollars
($4,550,000), known as Common Stock and allocated and classified as follows:
<TABLE>
<CAPTION>
Total Number of
Name of Class Shares Allocated
- ------------- ----------------
<S> <C>
Long-Term Corporate Portfolio 700,000,000
High-Yield Corporate Portfolio 700,000,000
Short-Term Corporate Portfolio 700,000,000
GNMA Portfolio 1,100,000,000
Long-Term U.S. Treasury Portfolio 300,000,000
Short-Term Federal Portfolio 300,000,000
Short-Term U.S. Treasury Portfolio 250,000,000
Intermediate-Term U.S. Treasury Portfolio 250,000,000
Intermediate-Term Corporate Portfolio 250,000,000
-------------
4,550,000,000
</TABLE>
THIRD: The Board of Directors of the Corporation, at a
meeting duly convened and held on May 16, 1997, adopted resolutions increasing
the authorized capital of the Corporation by ten billion (10,000,000,000) shares
to fourteen billion five hundred fifty million (14,550,000,000) shares, with a
par value of one-tenth of one cent ($.001) per share, and an aggregate par value
of Fourteen
<PAGE> 7
Million Five Hundred Fifty Thousand Dollars ($14,550,000). The Board of
Directors further reclassified all of the unissued shares of Common Stock of the
Corporation, as herein increased, such that the authorized Common Stock of the
Corporation as increased is allocated and classified as follows:
<TABLE>
<CAPTION>
Total Number of
Name of Class Shares Allocated
- ------------- ----------------
<S> <C>
Long-Term Corporate Portfolio 1,700,000,000
High-Yield Corporate Portfolio 1,700,000,000
Short-Term Corporate Portfolio 1,700,000,000
Short-Term Corporate Portfolio Institutional Shares 1,000,000,000
GNMA Portfolio 2,100,000,000
Long-Term U.S. Treasury Portfolio 1,300,000,000
Short-Term Federal Portfolio 1,300,000,000
Short-Term U.S. Treasury Portfolio 1,250,000,000
Intermediate-Term U.S. Treasury Portfolio 1,250,000,000
Intermediate-Term Corporate Portfolio 1,250,000,000
---------------
14,550,000,000
</TABLE>
FOURTH: The additional shares classified for each of the
preexisting classes of shares listed in Article SECOND shall have the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption currently set forth in the charter of the Corporation with respect to
each such class, respectively. The Short-Term Corporate Portfolio Institutional
Shares shall have, and be subject to, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption set forth in the charter of
the Corporation with respect to its shares generally and to the following.
(i) The Short-Term Corporate Portfolio Institutional
Shares will be invested in a common investment portfolio with the shares
classified as Short-Term Corporate Portfolio shares without further designation
and except for the differences set forth below or elsewhere in the charter of
the Corporation or required by law, the two classes shall have the same
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption.
(ii) The investment income, capital gains and losses,
and expenses and liabilities of the common investment portfolio shall be
allocated between the classes invested in the common investment portfolio in
such manner as may be determined by the Board of Directors in accordance with
law and the Corporation's
-2-
<PAGE> 8
Multiple Class Plan, as amended from time to time (the "Plan"), adopted in
accordance with Rule 18f-3 under the Investment Company Act of 1940, as amended.
(iii) The liabilities and expenses attributable to
the respective classes invested in the common investment portfolio shall be
determined separately from those of each other and, accordingly, the net asset
values, the dividends and distributions payable to holders, and the amounts
distributable in the event of liquidation of the Corporation to holders of
shares invested in the common investment portfolio may vary between the classes.
(iv) Except as may otherwise be provided in the Plan
or by law, the holders of shares of the Short-Term Corporate Portfolio without
further designation and the holders of Short-Term Corporate Portfolio
Institutional Shares shall have, respectively, exclusive voting rights with
respect to any matter submitted to a vote of stockholders that only affects the
holders of the respective class of shares and no voting rights with respect to
any matter submitted to a vote of stockholders that does not affect holders of
the respective class of shares.
(v) At such times as may be determined by the Board
of Directors or, with the authorization of the Board of Directors, by the
officers of the corporation in accordance with the Investment Company Act of
1940, as amended, applicable rules and regulations thereunder, applicable rules
and regulations of the National Association of Securities Dealers, and the Plan,
and reflected in the Corporation's registration statement as filed with the
Securities and Exchange Commission, Short-Term Corporate Portfolio Institutional
Shares may, at the option of the Corporation, be converted into Short-Term
Corporate Portfolio shares without further designation based on the relative net
asset values of such classes at the time of conversion in the event that the
aggregate value of a holder's Short-Term Corporate Portfolio Institutional
Shares falls below a then applicable minimum investment amount as so determined
and reflected, subject, in any event, to any conditions of conversion that may
be imposed by the Board of Directors or, with the authorization of the Board of
Directors, by the officers of the Corporation and reflected in the Corporation's
registration statement. The terms and conditions of such conversion may vary
among the holders of the Short-Term Corporate Portfolio Institutional Shares to
the extent determined by the Board of Directors or, with the authorization of
the Board of Directors, by the officers of the Corporation and reflected in the
Corporation's Registration Statement.
FIFTH: The total number of shares of stock that the
Corporation has authority to issue has been increased by the Board of Directors
in accordance with Section 2-105(c) of the Maryland General Corporation Law. The
shares of the Corporation have been classified and reclassified by the Board of
Directors as set forth herein pursuant to authority contained in the
Corporation's Articles of Incorporation, as amended.
-3-
<PAGE> 9
IN WITNESS WHEREOF, VANGUARD FIXED INCOME SECURITIES FUND,
INC. has caused these presents to be signed in its name and on its behalf by its
President and witnessed by its Secretary as of ___________ __, 1997.
VANGUARD FIXED INCOME
SECURITIES FUND, INC.
By:______________________________
John J. Brennan, President
WITNESSED:
- -----------------------------
Raymond J. Klapinsky, Secretary
-4-
<PAGE> 10
THE UNDERSIGNED, President of VANGUARD FIXED INCOME
SECURITIES FUND, INC. who executed on behalf of said Corporation the foregoing
Articles Supplementary to the Articles of Incorporation, of which this
certificate is made a party, hereby acknowledges, in the name and on behalf of
said Corporation, the foregoing Articles Supplementary to the Articles of
Incorporation to be the corporate act of said Corporation and further certifies
that, to the best of his knowledge, information and belief, the matters set
forth therein with respect to the approval thereof are true in all material
respects, under the penalties of perjury.
----------------------------
John J. Brennan
-5-
<PAGE> 11
VANGUARD FIXED INCOME SECURITIES FUND, INC.
ARTICLES OF AMENDMENT
VANGUARD FIXED INCOME SECURITIES FUND, INC., a Maryland
corporation (hereinafter called the "Corporation"), hereby certifies to the
State Department of Assessments and Taxation that:
FIRST: In order to confirm the names of each of the
Corporation's classes of authorized shares, the charter of the Corporation is
amended so that the names of the classes of authorized shares of common stock of
the Corporation are as follows:
Long-Term Corporate Portfolio
High-Yield Corporate Portfolio
Short-Term Corporate Portfolio
Short-Term Corporate Portfolio Institutional Shares
GNMA Portfolio
Long-Term U.S. Treasury Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury Portfolio
Intermediate-Term U.S. Treasury Portfolio
Intermediate-Term Corporate Portfolio
SECOND: The foregoing amendment to the charter of the
Corporation was approved by a majority of the entire Board of Directors of the
Corporation; the charter amendment is limited to changes expressly permitted by
Section 2-605 of the Maryland General Corporation Law to be made without action
by stockholders; and the Corporation is registered as an open-end investment
company under the Investment Company Act of 1940, as amended.
THIRD: The undersigned president acknowledges these Articles
of Amendment to be the corporate act of the Corporation and as to all matters or
facts required to be verified under oath, the undersigned president acknowledges
that to the best of his knowledge, information and belief, these matters and
facts are true in all material respects and that this statement is made under
the penalties for perjury.
IN WITNESS WHEREOF, VANGUARD FIXED INCOME SECURITIES
-1-
<PAGE> 12
FUND, INC. has caused these Articles of Amendment to be signed in its name and
on its behalf by its president and attested to by its secretary as of May __,
1997.
ATTEST: VANGUARD FIXED INCOME SECURITIES
FUND, INC.
_________________________ By:___________________________
Raymond J. Klapinsky John J. Brennan
Secretary President
-2-
<PAGE> 13
VFISF
VANGUARD FIXED INCOME SECURITIES FUND, INC.
RESOLUTIONS RELATING TO APPROVAL OF MULTIPLE CLASS PLAN;
INCREASE IN AUTHORIZED CAPITAL; CREATION OF ADDITIONAL
CLASS OF SHARES; AND APPROVAL OF
ARTICLES OF AMENDMENT TO CONFIRM NAMES OF PORTFOLIOS
Approval of Multiple Class Plan
WHEREAS, the Board of Directors of Vanguard Fixed Income Securities
Fund, Inc. (the "Fund"), has previously approved the establishment of a multiple
class system for the Fund and management has recommended to this Board of
Directors that an additional class of shares of the Fund, to be called
"Short-Term Corporate Portfolio Institutional Shares," be established as
hereinafter described;
WHEREAS, the Directors have determined that the terms of the Multiple
Class Plan (the "Plan") presented at this meeting relating to the Short-Term
Corporate Portfolio, including the expense allocations set forth in the Plan,
are in the best interest of each class of shares described in the Plan, the Fund
and its shareholders;
NOW, THEREFORE, BE IT:
RESOLVED, that the Multiple Class Plan, in the form presented at this
meeting, be, and it hereby is, approved.
Increase in Authorized Capital and Creation of Additional Class
RESOLVED, that the proposed increase in the authorized capital of the
Fund by ten billion (10,000,000,000) shares of Common Stock, with a par value of
one-tenth of one cent ($0.001) per share, to fourteen billion five hundred fifty
million (14,550,000,000) shares of Common Stock, with a par value of one-tenth
of one cent ($0.001) per share, and with an aggregate par value of fourteen
million five hundred fifty thousand dollars ($14,550,000), in accordance with
Section 2-105(c) of the Maryland General Corporation Law, be, and it is hereby
approved; and
FURTHER RESOLVED, that all of the unissued shares of Common Stock of
the Fund, as increased by the preceding resolution, be, and hereby are,
reclassified such that the authorized Common Stock of the Fund, as increased, is
allocated and classified as follows:
<PAGE> 14
<TABLE>
<CAPTION>
Total Number of
Name of Class Shares Allocated
------------- ----------------
<S> <C>
Long-Term Corporate Portfolio 1,700,000,000
High-Yield Corporate Portfolio 1,700,000,000
Short-Term Corporate Portfolio 1,700,000,000
Short-Term Corporate Portfolio
Institutional Shares 1,000,000,000
GNMA Portfolio 2,100,000,000
Long-Term U.S. Treasury Portfolio 1,300,000,000
Short-Term Federal Portfolio 1,300,000,000
Short-Term U.S. Treasury Portfolio 1,250,000,000
Intermediate-Term U.S. Treasury
Portfolio 1,250,000,000
Intermediate-Term Corporate
Portfolio 1,250,000,000
--------------
14,550,000,000;
</TABLE>
and
FURTHER RESOLVED, that the additional shares classified for each of the
preexisting classes of shares listed in the foregoing resolution shall have the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption currently set forth in the charter of the Fund with respect to each
such class, respectively; and
FURTHER RESOLVED, that the Short-Term Corporate Portfolio Institutional
Shares shall have, and be subject to, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption set forth in the charter of
the Fund with respect to its shares generally and to the following: the
Short-Term Corporate Portfolio Institutional Shares are to be invested in a
common investment portfolio with the shares classified as Short-Term Corporate
Portfolio shares without further designation, and except for the differences (1)
set forth in the Articles Supplementary presented at this meeting; (2) set forth
elsewhere in the charter of the Fund; (3) set forth in the Multiple Class Plan,
as amended from time to time (the "Plan"), adopted in accordance with Rule 18f-3
under the Investment Company Act of 1940, as amended (the "1940 Act"); or (4)
required by law, the two classes shall have the same preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption; and
FURTHER RESOLVED, that the proper officers of the Fund in accordance
with the 1940 Act, applicable rules and regulations thereunder, applicable rules
and regulations of the National Association of Securities Dealers, and the Plan,
be, and hereby
-2-
<PAGE> 15
are, authorized to (1) determine the time, terms and conditions, including any
applicable minimum investment amount, pursuant to which the Short-Term
Institutional Portfolio Shares may be converted into Short-Term Corporate
Portfolio shares without further designation based on the relative net asset
values of such classes at the time of conversion; and (2) vary the terms and
conditions of such conversion among the holders of the Short-Term Portfolio
Institutional Shares; provided however, that all such terms and conditions are
reflected in the Fund's Registration Statement; and
FURTHER RESOLVED, that the Short-Term Corporate Portfolio Institutional
Shares are authorized to be issued for the consideration and on the terms set
forth in the Fund's Registration Statement, as amended from time to time;
provided however, that such shares shall be issued at not less than either their
net asset value or par value, whichever is greater; and
FURTHER RESOLVED, that when issued and paid for in accordance with the
foregoing resolution, the Short-Term Corporate Portfolio Institutional Shares
shall be validly issued, fully paid and non-assessable shares of Common Stock of
the Fund; and
FURTHER RESOLVED, that the proper officers of the Fund are hereby
authorized and empowered to: (1) prepare, execute and file with the State
Department of Assessments and Taxation of Maryland, Articles Supplementary to
the Fund's Articles of Incorporation substantially as presented to this meeting;
and (2) do all other things necessary to carry these resolutions into effect,
including the filing with the Securities and Exchange Commission of
Post-Effective Amendments to the Registration Statement of the Fund relating to
the issuance of the Short-Term Institutional Portfolio Shares.
Approval of Articles of Amendment
RESOLVED, that the Articles of Amendment to the Articles of
Incorporation which confirm the names of the classes of authorized shares of
Common Stock of the Fund, as set forth below, be, and hereby are, approved:
Long-Term Corporate Portfolio
High-Yield Corporate Portfolio
Short-Term Corporate Portfolio
Short-Term Corporate Portfolio Institutional Shares
GNMA Portfolio
Long-Term U.S. Treasury Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury Portfolio
Intermediate-Term U.S. Treasury Portfolio
Intermediate-Term Corporate Portfolio; and
-3-
<PAGE> 16
FURTHER RESOLVED, that the proper officers of the Fund are hereby
authorized and empowered to prepare, execute and file with the State Department
of Assessments and Taxation of Maryland, Articles of Amendment to the Fund's
Articles of Incorporation to confirm the names of the classes of authorized
Common Stock of the Fund; and (2) to do all other things necessary to carry
these resolutions into effect.
-4-
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000106444
<NAME> VANGUARD FIXED INCOME SECURITIES FUND, INC.
<SERIES>
<NUMBER> 01
<NAME> LONG-TERM CORPORATE PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 3244938
<INVESTMENTS-AT-VALUE> 3308192
<RECEIVABLES> 80359
<ASSETS-OTHER> 305
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3388856
<PAYABLE-FOR-SECURITIES> 55251
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10066
<TOTAL-LIABILITIES> 65317
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3258803
<SHARES-COMMON-STOCK> 381439
<SHARES-COMMON-PRIOR> 357852
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1482
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 63254
<NET-ASSETS> 3323539
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 244521
<OTHER-INCOME> 0
<EXPENSES-NET> 9354
<NET-INVESTMENT-INCOME> 235167
<REALIZED-GAINS-CURRENT> 36899
<APPREC-INCREASE-CURRENT> (242281)
<NET-CHANGE-FROM-OPS> 29785
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 235167
<DISTRIBUTIONS-OF-GAINS> 58376
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 91142
<NUMBER-OF-SHARES-REDEEMED> 95201
<SHARES-REINVESTED> 27646
<NET-CHANGE-IN-ASSETS> (52550)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 27692
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 951
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9354
<AVERAGE-NET-ASSETS> 3344343
<PER-SHARE-NAV-BEGIN> 9.43
<PER-SHARE-NII> 0.619
<PER-SHARE-GAIN-APPREC> (0.566)
<PER-SHARE-DIVIDEND> 0.619
<PER-SHARE-DISTRIBUTIONS> 0.154
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.71
<EXPENSE-RATIO> 0.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000106444
<NAME> VANGUARD FIXED INCOME SECURITIES FUND, INC.
<SERIES>
<NUMBER> 02
<NAME> HIGH YIELD CORPORATE PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 3503727
<INVESTMENTS-AT-VALUE> 3591798
<RECEIVABLES> 203181
<ASSETS-OTHER> 25661
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3820640
<PAYABLE-FOR-SECURITIES> 33094
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 113604
<TOTAL-LIABILITIES> 146698
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3671203
<SHARES-COMMON-STOCK> 467011
<SHARES-COMMON-PRIOR> 380865
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (85332)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 88071
<NET-ASSETS> 3673942
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 298799
<OTHER-INCOME> 0
<EXPENSES-NET> 9516
<NET-INVESTMENT-INCOME> 289283
<REALIZED-GAINS-CURRENT> 19951
<APPREC-INCREASE-CURRENT> (20017)
<NET-CHANGE-FROM-OPS> 289217
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 289283
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 138649
<NUMBER-OF-SHARES-REDEEMED> 78406
<SHARES-REINVESTED> 25903
<NET-CHANGE-IN-ASSETS> 667363
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (105283)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1370
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9516
<AVERAGE-NET-ASSETS> 3257784
<PER-SHARE-NAV-BEGIN> 7.89
<PER-SHARE-NII> 0.688
<PER-SHARE-GAIN-APPREC> (0.020)
<PER-SHARE-DIVIDEND> 0.688
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.87
<EXPENSE-RATIO> 0.29
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000106444
<NAME> VANGUARD FIXED INCOME SECURITIES FUND, INC.
<SERIES>
<NUMBER> 03
<NAME> GNMA PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 7297942
<INVESTMENTS-AT-VALUE> 7400254
<RECEIVABLES> 164397
<ASSETS-OTHER> 2073
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7566724
<PAYABLE-FOR-SECURITIES> 140517
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 26127
<TOTAL-LIABILITIES> 166644
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7295984
<SHARES-COMMON-STOCK> 723371
<SHARES-COMMON-PRIOR> 669791
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1784
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 102312
<NET-ASSETS> 7400080
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 529200
<OTHER-INCOME> 0
<EXPENSES-NET> 18951
<NET-INVESTMENT-INCOME> 510249
<REALIZED-GAINS-CURRENT> 7036
<APPREC-INCREASE-CURRENT> (151270)
<NET-CHANGE-FROM-OPS> 366015
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 510249
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 155134
<NUMBER-OF-SHARES-REDEEMED> 139855
<SHARES-REINVESTED> 38301
<NET-CHANGE-IN-ASSETS> 401940
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3473)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 992
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 18951
<AVERAGE-NET-ASSETS> 7144553
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