<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-4424) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. -- /X/
POST-EFFECTIVE AMENDMENT NO. 13 /X/
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 16 /X/
VANGUARD CONVERTIBLE
SECURITIES FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS HEREBY REQUESTED THAT THIS FILING BECOME EFFECTIVE
on March 3, 1995, pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE PERIOD ENDED NOVEMBER 30, 1994 ON JANUARY 30, 1995.
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<PAGE> 2
VANGUARD CONVERTIBLE 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...................................... Not Applicable
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........................ Management of the Fund; Investment
Adviser; General Information
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of the Fund; 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 Advisory Services; General
Information
Item 13. Investment Objective and Policies............. General Information; Investment
Limitations
Item 14. Management of the Fund........................ Management of the Fund; Investment
Advisory Services
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of the Fund; Investment
Advisory Services
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information; Financial
Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Not Applicable
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of
Money Market Fund............................. Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
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(LOGO) A Member of The Vanguard Group
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PROSPECTUS--MARCH 3, 1995
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT
OBJECTIVE AND
POLICIES Vanguard Convertible Securities Fund, Inc. (the "Fund") is
an open-end diversified investment company that seeks to
provide current income and long-term growth of capital.
The Fund invests primarily in corporate bonds and
preferred stocks that are convertible into shares of
common stock. Although the Fund is designed principally
for equity-oriented investors, investors should be aware
that a majority of the Fund's assets may be invested in
convertible securities rated Ba or B by Moody's Investors
Service or BB or B by Standard & Poor's Corporation.
Corporate bonds with such ratings are commonly referred to
as "junk bonds" and are considered speculative by the
major ratings agencies. There is no assurance that the
Fund will achieve its stated objectives. Shares of the
Fund are neither insured nor guaranteed by any agency of
the U.S. Government, including the FDIC.
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OPENING AN
ACCOUNT To open a regular (non-retirement) account, please
complete and return the Account Registration Form. If you
need assistance in completing this Form, please call the
Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA
Adoption Agreement. To obtain a copy of this form, call
1-800-662-7447, Monday through Friday, from 8:00 a.m. to
9:00 p.m. and Saturday from 9:00 a.m. to 4:00 p.m.
(Eastern time). The minimum initial investment is $3,000,
or $500 for Uniform Gifts/Transfers to Minors Act
accounts. The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees). However,
the Fund incurs expenses for investment advisory,
management, administrative and distribution services.
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ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated March 3, 1995, and has been incorporated by
reference into this Prospectus. It may be obtained,
without charge, by writing to the Fund or by calling the
Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Fund Expenses .....................2 Investment Limitations ..............8 SHAREHOLDER GUIDE
Financial Highlights ..............2 Management of the Fund ..............9 Opening an Account and
Yield and Total Return ............3 Investment Adviser ..................9 Purchasing Shares ................14
FUND INFORMATION Performance Record .................10 When Your Account Will Be
Investment Objective ..............4 Dividends, Capital Gains and Credited .........................17
Investment Policies ...............4 Taxes .............................11 Selling Your Shares ................17
Investment Risks ..................5 The Share Price of the Exchanging Your Shares .............19
Who Should Invest .................6 Fund ............................. 12 Important Information About
Implementation of Policies ........7 General Information ................13 Telephone Transactions ............21
Transferring
Registration .....................21
Other Vanguard Services ........... 22
</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
FUND EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Fund. The expenses
set forth below are for the 1994 fiscal year.
<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
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Sales Load Imposed on Purchases................................. None
Sales Load Imposed on Reinvested Dividends...................... None
Redemption Fees................................................. None
Exchange Fees................................................... None
ANNUAL FUND OPERATING EXPENSES
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Management & Administrative Expenses............................ 0.29%
Investment Advisory Fees........................................ 0.39
12b-1 Fees...................................................... None
Other Expenses
Distribution Costs............................................ 0.02%
Miscellaneous Expenses........................................ 0.03
----
Total Other Expenses............................................ 0.05
------
TOTAL OPERATING EXPENSES............................... 0.73%
------
------
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Fund.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. As noted in the table above,
the Fund charges no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$7 $ 23 $ 41 $ 91
</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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FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of
the five years in the period ended November 30, 1994, have
been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This
information should be read in conjunction with the Fund's
financial statements and notes thereto, which are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear,
along with the report of Price Waterhouse LLP, in the
Fund's 1994 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1994 Annual Report to Shareholders, which may
be obtained without charge by writing to the Fund or by
calling our Investor Information Department at
1-800-662-7447.
2
<PAGE> 5
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------------------------------------------------------JUNE 17, 1986+ TO
1994 1993 1992 1991 1990 1989 1988 1987 NOV. 30, 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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NET ASSET VALUE, BEGINNING OF
PERIOD........................... $12.89 $11.77 $ 9.82 $8.07 $ 9.64 $8.71 $7.94 $ 9.80 $ 10.00
------ ------ ------ ----- ------ ----- ----- ------ -----------
INVESTMENT OPERATIONS
Net Investment Income............ .53 .56 .56 .53 .57 .51 .55 .60 .26
Net Realized and Unrealized Gain
(Loss) on Investments.......... (1.04) 1.03 1.92 1.77 (1.58) .99 .90 (1.95) (.29)
------ ------ ------ ----- ------ ----- ----- ------ -----------
TOTAL FROM INVESTMENT
OPERATIONS................... (.51) 1.59 2.48 2.30 (1.01) 1.50 1.45 (1.35) (.03)
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DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.53) (.47) (.53) (.55) (.56) (.57) (.56) (.51) (.17)
Distributions from Realized
Capital Gains.................. (.91) -- -- -- -- -- (.12) -- --
------ ------ ------ ----- ------ ----- ----- ------ -----------
TOTAL DISTRIBUTIONS............ (1.44) (.47) (.53) (.55) (.56) (.57) (.68) (.51) (.17)
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NET ASSET VALUE, END OF PERIOD..... $10.94 $12.89 $11.77 $9.82 $ 8.07 $9.64 $8.71 $ 7.94 $ 9.80
- --------------------------------------------------------------------------------------------------------------------------------
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TOTAL RETURN....................... (4.35)% 13.87% 26.01% 29.25% (10.95)% 17.70% 18.85% (14.82)% (0.24)%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)....................... $ 175 $ 202 $ 120 $ 55 $ 44 $ 58 $ 69 $ 73 $ 73
Ratio of Expenses to Average
Net Assets....................... .73% .71% .85% .81% .88% .84% .88% .85% .80%*
Ratio of Net Investment Income to
Average Net Assets............... 4.68% 4.44% 4.80% 5.72% 6.35% 5.60% 6.52% 6.13% 6.02%*
Portfolio Turnover Rate............ 52% 81% 55% 57% 55% 55% 24% 45% 13%
</TABLE>
*Annualized.
+Commencement of operations.
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YIELD AND TOTAL
RETURN From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Fund refers to the average annual compounded rates of
return over one-, five- and ten-year periods or the life
of the Fund (as stated in the advertisement) that would
equate an initial amount invested at the beginning of a
stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Fund is calculated by dividing the net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Fund's securities; it is net
of all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder accounts. The
yield calculation assumes that the net investment income
earned over 30 days is compounded monthly for six months
and then annualized. Methods used to calculate advertised
yields are standardized for all stock and bond mutual
funds. However, these methods differ from the accounting
methods used by the Fund to maintain its books and
records, and so the advertised 30-day yield may not fully
reflect the income paid to your own account or the yield
reported in the Fund's reports to shareholders.
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3
<PAGE> 6
INVESTMENT
OBJECTIVE
THE FUND SEEKS TO
PROVIDE CURRENT
INCOME AND
LONG-TERM GROWTH Vanguard Convertible Securities Fund, Inc. (the "Fund") is
an open-end diversified investment company. The objective
of the Fund is to provide current income and long-term
growth of capital by investing primarily in convertible
securities. There is no assurance that the Fund will
achieve its objective.
The investment objective of the Fund is fundamental and so
cannot be changed without the approval of a majority of
the Fund's shareholders.
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INVESTMENT
POLICIES
THE FUND INVESTS IN
CONVERTIBLE SECURITIES
Under normal circumstances, at least 80% of the Fund's
assets will be invested in convertible securities.
Convertible securities include corporate bonds and
preferred stocks which are convertible into common stock,
as well as debt instruments with warrants or common stock
attached. See "Implementation of Policies" for a
description of convertible securities.
The remaining 20% of the Fund's assets may be invested in
non-convertible corporate or U.S. Government fixed-income
securities, common stocks, and selected money market
instruments. Within this 20% limit, the Fund is authorized
to write covered call options on its investments, although
it does not presently intend to do so. The Fund may also
invest more than 20% of its assets in money market
instruments when the Fund's investment adviser determines
that a temporary defensive position is warranted.
In seeking to provide both current income and long-term
capital appreciation, the adviser will emphasize the
securities of companies with above-average growth
potential whose convertible securities offer attractive
yields. In general, each security selected for the Fund
will, in the opinion of the adviser, be priced at a
reasonable premium relative to the price at which it can
be converted into common stock. In addition, the
underlying common stock will tend to be priced
attractively on a relative price-to-earnings ratio basis.
The Fund will invest in convertible obligations which have
been assigned a rating of B or better by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Corporation
("Standard & Poor's"). The Fund may also invest in
non-rated securities which, in the opinion of the Fund's
adviser, are equivalent in quality to a B rating or
better. In addition, at least 70% of the Fund's assets
will be invested in securities rated a minimum of Ba by
Moody's, BB by Standard & Poor's, or the equivalent as
determined by the adviser. It is therefore possible that a
majority of the Fund's assets could be invested in
securities with Ba (BB) or B ratings; such securities are
deemed by the rating agencies to have speculative
characteristics.
While the Fund will invest predominately in securities of
U.S.-based companies, up to 15% of the Fund's assets may
be invested in dollar-denominated securities issued by
foreign companies. See "Implementation of Policies" for a
description of other investment practices of the Fund.
These policies are not fundamental and so may be changed
by the Board of Directors without shareholder approval.
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4
<PAGE> 7
INVESTMENT RISKS
THE FUND IS SUBJECT
TO STOCK AND BOND
MARKET RISK
Convertible securities are hybrid securities, combining
the investment characteristics of both bonds and common
stocks. Like a bond (or preferred stock), a convertible
security pays a fixed interest rate (dividend), but may be
converted into common stock at a specific price or
conversion rate.
When the convertible's conversion price is significantly
above the price of the issuer's common stock, a
convertible security takes on the risk characteristics of
a bond. At such times, the price of a convertible security
will vary inversely with changes in the level of interest
rates. In other words, when interest rates rise,
convertible securities prices will generally fall;
conversely, when interest rates fall, convertible
securities will generally rise. This interest rate risk is
in part offset by the income paid by the convertible
securities.
In contrast, when the conversion price of a convertible
security and the common stock price are close to one
another, a convertible security will behave like a common
stock. In such cases, the prices of convertible securities
may exhibit the short-term price volatility characteristic
of common stocks.
For these reasons, investors in the Fund must be willing
to accept the market risks of both bonds and stocks.
However, because convertible securities have
characteristics of both stocks and bonds, they tend to be
less sensitive to interest rate changes than bonds of
comparable maturity and quality, and less sensitive to
stock market changes than fully invested common stock
portfolios. Because of these factors and the hybrid nature
of convertibles, investors should recognize that
convertible securities are likely to perform quite
differently than broadly-based measures of the stock and
bond markets.
CREDIT QUALITY MAY
BE LOW
The market for convertible securities includes a larger
proportion of small-to-medium size companies than the
broad stock market (as measured by such indices as the
Standard & Poor's 500 Composite Stock Price Index).
Companies which issue convertible securities are often
lower in credit quality. Moreover, the credit rating of a
company's convertible issue is generally lower than the
rating of the company's conventional debt issues since the
convertible is normally a "junior" security. While the
average credit quality of the Fund is expected to be
higher than the universe of convertible securities as a
whole, the Fund may invest up to 30% of its assets in
B-rated securities, and up to 100% of its assets could be
invested in securities rated Ba (BB) or B. Securities with
such ratings are considered speculative, and thus pose a
greater risk of default than investment grade securities.
If securities held by the Fund are downgraded to a rating
lower than Ba (BB) or B, the Fund will continue to hold
such securities unless the adviser believes that it is
advantageous to sell them. The following are excerpts from
the Moody's and Standard & Poor's definitions for
speculative debt obligations:
Moody's: Ba-rated bonds have "speculative elements," their
future "cannot be considered assured," and protection of
principal and interest is "moderate" and "not well
safeguarded." B-rated bonds "lack characteristics of a
desirable investment" and the assurance of interest or
principal payments "may be small."
5
<PAGE> 8
Caa-rated bonds are "of poor standing" and "may be in
default" or may have "elements of danger with respect to
principal or interest."
Standard & Poor's: BB-rated bonds have "less near-term
vulnerability to default" than B- or CCC-rated securities
but face "major ongoing uncertainties . . . which may lead
to inadequate capacity" to pay interest or principal.
B-rated bonds have a "greater vulnerability to default"
than BB-rated bonds and the ability to pay interest or
principal will likely be impaired by adverse business
conditions. CCC-rated bonds have a "currently identifiable
vulnerability to default" and, without favorable business
conditions, will be unable to repay interest and
principal.
Securities rated Ba or lower are considered to be
"high-risk" securities and the credit quality of such
securities can change suddenly and unexpectedly, and even
recently-issued credit ratings may not fully reflect the
actual risks of a particular security. For these reasons,
it is the Fund's policy not to rely primarily on ratings
issued by established credit rating agencies, but to
utilize such ratings in conjunction with the Portfolio
adviser's own independent and ongoing review of the
companies represented in the Fund.
In the past, the high yields from a portfolio of low-grade
securities have more than compensated for the higher
default rates on such securities. However, there can be no
assurance that diversification will protect the Fund from
widespread defaults brought about by a sustained economic
downturn, or that yields will continue to offset default
rates on high-yield securities in the future. A long-term
track record on default rates, such as that for investment
grade corporate bonds, does not exist for the high-yield
securities market. It may be that future default rates on
high-yield securities will be more widespread and higher
than in the past, especially during periods of
deteriorating economic conditions.
The share price of the Fund will be influenced not only by
changing interest rates, but also by the market's
perception of credit quality and the outlook for economic
growth. When economic conditions appear to be
deteriorating, low- and medium-rated securities may
decline in market value due to investors' heightened
concern over credit quality, regardless of prevailing
interest rates.
Especially at such times, trading in the secondary market
for high-yield securities may become thin and market
liquidity may be significantly reduced. Even under normal
conditions, the market of high-yield securities may be
less liquid than the market for investment grade
securities. There are fewer securities dealers in the
high-yield market, and purchasers of high-yield securities
are concentrated among a smaller group of securities
dealers and institutional investors.
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WHO SHOULD INVEST The Fund is intended for investors who are seeking a
higher level of income than is normally available from
INVESTORS SEEKING common stocks, as well as potential long-term capital
CURRENT INCOME AND appreciation. Since the Fund may own non-investment grade
LONG-TERM CAPITAL securities of medium-to-small-sized companies,
GROWTH greater-than-average investment risk may be involved.
Investors should be able to tolerate sharp, sometimes
sudden fluctuations in the value of their investment in
pursuit of higher investment returns in the long run.
6
<PAGE> 9
Although convertible securities exhibit characteristics of
both stocks and bonds, the Fund does not represent a
complete investment program. Most investors should
maintain diversified holdings of securities with different
risk characteristics-- including common stocks, bonds and
money market instruments. The Fund is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term market movements. Investors who engage in
excessive account activity generate additional costs which
are borne by all of the Fund's shareholders. In order to
minimize such costs, the Fund has adopted the following
policies. The Fund reserves the right to reject any
purchase request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management, either
because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Fund
has adopted exchange privilege limitations as described in
the section "Exchange Privilege Limitations." Finally, the
Fund reserves the right to suspend the offering of its
shares.
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IMPLEMENTATION
OF POLICIES
THE FUND INVESTS
IN CONVERTIBLE
SECURITIES
The Fund uses a number of investment vehicles to achieve
its objective.
The Fund invests primarily in convertible securities.
Convertible securities include corporate bonds,
debentures, notes and preferred stocks which may be
converted into the common stock of the issuer at the
holder's option. Convertible securities obligate the
issuing company to pay a stated annual rate of interest
(or a stated dividend in the case of convertible preferred
stock) and to return the principal amount after a
specified period. Convertible securities generally offer
income yields that are higher than the dividend yield, if
any, of the underlying common stock, but lower than the
yield of non-convertible debt securities issued by the
corporation or corporations of similar investment quality.
This fixed-income feature of convertible securities is
expected to enable the Fund to achieve its current income
objective. Convertible securities are usually priced at a
premium to their conversion value-- i.e., the value of the
common stock received if the holder were to exchange the
convertible security.
The holder of the convertible security may choose at any
time to exchange the convertible security for a specified
number of shares of the common stock of the corporation,
or occasionally a subsidiary company, at a specified
price, as defined by the corporation when the security is
issued. Accordingly, the value of the convertible
obligation may generally be expected to increase
(decrease) as the price of the associated common stock
increases (decreases). Also, the market value of
convertible securities tends to be influenced by the level
of interest rates and tends to decline as interest rates
increase and, conversely, to increase as interest rates
decline.
Convertible securities rank senior to common stocks in an
issuer's capital structure, but are junior to
non-convertible debt securities. As convertible securities
are considered junior to any non-convertible debt
securities issued by the corporation, convertible
securities are typically rated by established credit
rating services at one level below the corporation's
non-convertible debt.
7
<PAGE> 10
THE FUND MAY INVEST
IN SHORT-TERM FIXED
INCOME SECURITIES Although it normally seeks to remain fully invested in
convertible securities, the Fund may invest in certain
short-term fixed income securities. Such securities may be
used to invest uncommitted cash balances, to maintain
liquidity to meet shareholder redemptions, or to take a
temporary defensive position. These securities include:
obligations of the United States Government and its
agencies or instrumentalities, commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
THE FUND MAY LEND
ITS SECURITIES
The Fund may lend its investment securities on a
short-term or a long-term basis to qualified institutional
investors for the purpose of realizing additional income.
Loans of securities by the Fund will be collateralized by
cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market
value of the loaned securities.
THE FUND MAY BORROW
MONEY
The Fund may borrow money, subject to the limits set forth
below, for temporary or emergency purposes, including the
meeting of redemption requests which might otherwise
require the untimely disposition of securities.
PORTFOLIO TURNOVER IS
NOT EXPECTED TO
EXCEED 100% The Fund retains the right to sell securities irrespective
of how long they have been held. However, it is
anticipated that the portfolio turnover rate for the Fund
will not exceed 100%. A turnover rate of 100% would occur,
for example, if all of the Fund's securities were replaced
within one year.
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INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS
The Fund has adopted certain limitations in an attempt to
reduce its exposure to specific situations. Some of these
limitations are that the Fund will not:
(a) with respect to 75% of the value of its total assets,
purchase the securities of any issuer (except
obligations of the United States Government and its
instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of
the issuer, or more than 5% of the value of the
Fund's total assets would be invested in the
securities of such issuer;
(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;
(d) borrow money, except that the Fund may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which
might otherwise require the untimely disposition of
securities, in an amount not exceeding 10% of the
value of the Fund's total assets (including the amount
borrowed) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any additional
investments;
(e) pledge, mortgage or hypothecate any of its assets to
an extent greater than 5% of its total assets.
8
<PAGE> 11
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 Fund's shareholders.
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MANAGEMENT OF
THE FUND
VANGUARD
ADMINISTERS AND
DISTRIBUTES THE FUND
The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 funds, with more than
80 portfolios and total assets in excess of $130 billion.
Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other funds in
the Group obtain at cost virtually all of their corporate
management, administrative, 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 1994,
the average expense ratio (annual costs including advisory
fees divided by total net assets) for the Vanguard funds
amounted to approximately .30% compared to an average of
1.05% for other mutual funds (data provided by Lipper
Analytical Services).
The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel 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 total 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 service
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
Vanguard's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER
DESAI CAPITAL
MANAGEMENT, INC.
MANAGES THE FUND'S
INVESTMENTS The Fund employs Desai Capital Management, Inc. ("DCMI"),
540 Madison Avenue, New York, NY 10022, under an
investment advisory agreement dated as of March 1, 1988,
to manage the investment and reinvestment of the assets of
the Fund and to continuously review, supervise and
administer the Fund's investment program. DCMI discharges
its responsibilities subject to the control of the
Officers and Directors of the Fund.
DCMI is a professional investment counseling firm which
specializes in the management of convertible and
equity-linked securities portfolios for institutional
clients. The firm was founded in June 1984. As of December
31, 1994, DCMI managed assets with an estimated fair
market value of approximately $1.3 billion. Rohit M. Desai
is the President, Chairman and sole stockholder of Desai
Capital Management, Inc. Mr. Desai has served as portfolio
manager of the Fund since its
9
<PAGE> 12
inception and, along with a team of investment
professionals at DCMI, oversees the Fund's investment
program.
The Fund pays DCMI an advisory fee at the end of each
fiscal quarter, calculated by applying a quarterly rate,
based on the following annual percentage rates, to the
Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
-------------------- -----
<S> <C>
First $50 million 0.45%
Next $50 million 0.40%
Next $100 million 0.35%
Over $200 million 0.30%
</TABLE>
During the fiscal year ended November 30, 1994, the total
advisory fees paid by the Fund to DCMI represented an
effective annual base rate of .39 of 1% of the Fund's
average net assets.
The investment advisory agreement authorizes DCMI to
select the brokers or dealers that will execute the
purchases and sales of portfolio securities for the Fund
and directs DCMI to use its best efforts to obtain the
best available price and most favorable execution with
respect to all transactions for the Fund. The full range
and quality of brokerage services are considered in making
these determinations.
The Fund has authorized DCMI to pay higher commissions in
recognition of brokerage services felt necessary for the
achievement of better execution, provided the adviser
believes this to be in the best interest of the Fund.
Although the Fund does not market its shares through
intermediary brokers or dealers, the Fund may place
portfolio orders with qualified broker-dealers who
recommend the Fund to clients if the Officers of the Fund
believe that the quality of the transaction and the
commission are comparable to what they would be with other
qualified brokerage firms.
The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new
investment adviser pursuant to the terms of a new advisory
agreement, either as a replacement for an existing adviser
or as an additional adviser; (b) a change in the terms of
an advisory agreement; and (c) the continued employment of
an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in
control of the adviser. Any such change will only be made
upon not less than 30 days prior written notice to
shareholders of the Fund, which shall include
substantially the information concerning the adviser that
would have normally been included in a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE
RECORD The table in this section provides investment results for
the Fund for several periods throughout the Fund's
lifetime. The results shown represent the Fund's "total
return" investment performance, which assumes the
reinvestment of all capital gains and income dividends for
the indicated periods. Also included is comparative
information with respect to the unmanaged Standard &
Poor's 500 Composite Stock Price Index, a widely-used
barometer of stock market activity, and the Salomon
Brothers Broad Investment Grade Bond Index, a measure of
the investment
10
<PAGE> 13
performance of the bond market. The table does not make
any allowance for federal, state or local income taxes,
which shareholders must pay on a current basis.
The results should not be considered a representation of
the total return from an investment made in the Fund
today. This information is provided to help investors
better understand the Fund and may not provide a basis for
comparison with other investments or mutual funds which
use a different method to calculate performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD CONVERTIBLE SECURITIES FUND
-------------------------------------------
LEHMAN
FISCAL PERIODS VANGUARD CONVERTIBLE S&P 500 AGGREGATE BOND
ENDED 11/30/94 SECURITIES FUND INDEX INDEX
--------------- -------------------- ------- --------------
<S> <C> <C> <C>
1 Year - 4.4% + 1.0% -3.1%
3 Years +11.1% + 9.6% +5.4%
5 Years + 9.6% + 8.9% +7.6%
Lifetime* + 7.7% +11.1% N/A
</TABLE>
*June 17, 1986 to November 30, 1994.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL
GAINS AND TAXES
THE FUND WILL PAY
QUARTERLY DIVIDENDS The Fund expects to pay quarterly dividends from net
investment income. Net capital gains distributions, if
any, will be made annually.
Dividend and capital gains distributions may be
automatically reinvested or received in cash. See
"Choosing a Distribution Option" for a description of
these distribution methods.
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the Fund may
declare special year-end dividend and capital gains
distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on
December 31 of the prior year.
The Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax
to the extent its income is distributed to shareholders.
Dividends paid by the Fund from net investment income,
whether received in cash or reinvested in additional
shares, will be taxable to shareholders as ordinary
income. For corporate investors, a portion of dividends
from net investment income will qualify for the
intercorporate dividends-received deduction. However, the
portion of the dividends so qualified depends on the
aggregate taxable qualifying dividend income received by
the Fund from domestic (U.S.) sources.
Distributions paid by the Fund from net long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital gains,
regardless of the length of time you have owned shares in
the Fund. Capital gains distributions are made when the
Fund realizes net capital gains on sales of portfolio
securities during the year. The Fund does not seek to
realize any particular amount of capital gains during a
year; rather, realized gains are a by-product of portfolio
11
<PAGE> 14
management activities. Consequently, capital gains
distributions may be expected to vary considerably from
year to year; there will be no capital gains distributions
in years when the Fund realizes net capital losses.
Note that if you accept capital gains distributions in
cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in
the Fund. Also, keep in mind that if you purchase shares
in the Fund shortly before the record date for a dividend
or capital gains distribution, a portion of your
investment will be returned to you as a taxable
distribution, regardless of whether you are reinvesting
your distributions or receiving them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
A CAPITAL GAIN
OR LOSS MAY BE
REALIZED UPON
EXCHANGE
OR REDEMPTION A sale of shares of the Fund is a taxable event and may
result in a capital gain or loss. A capital gain or loss
may be realized from an ordinary redemption of shares or
an exchange of shares between two mutual funds (or two
portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration
Form your proper Social Security or Taxpayer
Identification Number and by certifying that you are not
subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund will be exempt
from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Fund. The Fund is managed without
regard to tax ramifications.
- --------------------------------------------------------------------------------
THE SHARE
PRICE OF THE
FUND
The Fund's share price or "net asset value" per share is
determined by dividing the total assets of the Fund, less
all liabilities, by the total number of shares
outstanding. The net asset value is calculated at the
close of regular trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day that the
Exchange is open for business.
The Fund's net asset value includes interest on
fixed-income securities which is accrued daily. Fund
securities which are traded both 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 convertible securities, preferred stock, bonds, and
12
<PAGE> 15
other fixed-income securities this ordinarily will be the
over-the-counter market. Valuation of such securities will
be at the latest quoted bid price.
When stock exchange valuations are used, the valuation
will also be the latest quoted bid price on the day of
valuation. Common stocks that are listed on a securities
exchange are valued at the last quoted sales price on the
day the valuation is made. Common stocks which are listed
on an exchange but which are not traded on the valuation
date are valued at the mean between the bid and the asked
prices.
Convertible bonds and other debt instruments may be valued
on the basis of prices provided by a pricing service when
such prices are believed by the Directors 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.
Short-term instruments maturing within 60 days of the
valuation date may be valued at cost, plus or minus any
amortized discount or premium. Other assets and securities
for which no quotations are readily available will be
valued in good faith using methods determined by the Board
of Directors.
The Fund's price per share can be found daily in the
mutual fund section of most major newspapers under the
heading of The Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION The Fund is a Maryland corporation. The Fund's Articles of
Incorporation permit the Directors to issue 1,000,000,000
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 Portfolios. Currently the Fund is offering one class
of shares.
The shares of the Fund are fully paid and nonassessable;
have no preferences 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. A shareholder is entitled to
one vote for each full share held (and a fractional vote
for each fractional share held).
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. If requested in writing by the holders of
not less than 10% of the outstanding shares of the Fund,
an annual meeting will be held to vote on the removal of a
Director or Directors of the Fund.
All securities and cash are held by CoreStates Bank, N.A.,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge,
PA, serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.
- --------------------------------------------------------------------------------
13
<PAGE> 16
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement ($500 for Uniform
Gifts/Transfers to Minors Act accounts and IRAs). You must
open a new Individual Retirement Account by mail (IRAs may
not be opened by wire) using a Vanguard IRA Adoption
Agreement. Your purchase must be equal to or greater than
the $500 minimum initial investment requirement, but no
more than $2,000 if you are making a regular IRA
contribution. Rollover contributions are generally limited
to the amount withdrawn within the past 60 days from an
IRA or other qualified retirement plan. If you need
assistance with the form or have any questions about this
Fund, please call our Investor Information Department at
1-800-662-7447. NOTE: For other types of account
registrations (e.g., corporations, associations, other
organizations, trusts or powers of attorney), please call
us to determine which additional forms you may need.
Because of the risks associated with common stock
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term stock
market movements. Consequently the Fund reserves the right
to reject any specific purchase (and exchange purchase)
request. The Fund also reserves the right to suspend the
offering of shares for a period of time.
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received. The
Fund is offered on a no-load basis (i.e., there are no
sales commissions or 12b-1 fees).
ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made by
mail ($100 minimum), wire ($1,000 minimum), exchange from
another Vanguard Fund account ($100 minimum), or Vanguard
Fund Express. Subsequent investments to Individual
Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some
instances, contributions may be made by wire or Vanguard
Fund Express. Please call us for more information on these
options.
- --------------------------------------------------------------------------------
14
<PAGE> 17
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment on the include the Invest-by-Mail
Complete and sign the registration form, make your remittance form attached to your
enclosed Account check payable to The Vanguard Fund confirmation statements.
Registration Form Group-82 and Please make your check payable
mail to: to The Vanguard Group-82, write
your account number on your
VANGUARD FINANCIAL CENTER check and, using the return
P.O. BOX 2600 envelope provided, mail to the
VALLEY FORGE, PA 19482 address indicated on the Invest-
by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
</TABLE>
------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES NO. 0101 9897
wired to: ATTN VANGUARD
VANGUARD CONVERTIBLE SECURITIES FUND
BEFORE WIRING ACCOUNT NUMBER
ACCOUNT REGISTRATION
Please contact
Client Services
(1-800-662-2739) To assure proper receipt, please be sure your bank
includes the name of the Fund selected, the account number
Vanguard has assigned to you and the eight-digit
CoreStates number. If you are opening a new account,
please complete the Account Registration Form and mail it
to the "New Account" address above after completing your
wire arrangement. Note: Federal Funds wire purchase orders
will be accepted only when the Fund and Custodian Bank are
open for business.
----------------------------------------------------------
PURCHASING BY You may open a new account or purchase additional shares
EXCHANGE (from a by making an exchange from an existing Vanguard account.
Vanguard account) Please call our Client Services Department at
1-800-662-2739. The new account will have the same
registration as the existing account. However, the Fund
reserves the right to refuse any exchange purchase
request.
----------------------------------------------------------
15
<PAGE> 18
PURCHASING BY FUND
EXPRESS
Special Purchase and
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic
Investment option, money will be moved automatically from
your bank account to your Vanguard account on the schedule
(monthly, bimonthly [every other month], quarterly or
yearly) you select. To establish these Fund Express
options, please provide the appropriate information on the
Account Registration Form. We will send you a confirmation
of your Fund Express service; please wait three weeks
before using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION
You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION--Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION--Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION--Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS
AND DIVIDEND
DISTRIBUTIONS BEFORE
INVESTING
Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund
shareholders. These distributions are made to all
shareholders who own Fund shares as of the distribution's
record date, regardless of how long the shares have been
owned. Purchasing shares just prior to the record date
could have a significant impact on your tax liability for
the year. For example, if you purchase shares immediately
prior to the record date of a sizable capital gain or
income dividend distribution, you will be assessed taxes
on the amount of the capital gain and/or dividend
distribution later paid even though you owned the Fund
shares for just a short period of time. (Taxes are due on
the distributions even if the dividend or gain is
reinvested in additional Fund shares.) While the total
value of your investment will be the same after the
distribution--the amount of the distribution will offset
the drop in the net asset value of the shares--you should
be aware of the tax implications the timing of your
purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's
annual capital gains distribution normally occurs in
December, while income dividends are generally paid
quarterly in March, June, September
16
<PAGE> 19
and December. For additional information on distributions
and taxes, see the section titled "Dividends, Capital
Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES
The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO
ADD SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE
VANGUARD WITH ADDITIONAL INFORMATION AND A SIGNATURE
GUARANTEE. PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature, and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES
Share certificates will be issued upon request. If a
certificate is lost, you may incur an expense to replace
it.
BROKER-DEALER
PURCHASES
If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL BE
CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire or exchange and is received by the close of regular
trading on the New York Stock Exchange (generally 4:00
p.m. Eastern time), your trade date is the day of receipt.
If your purchase is received after the close of regular
trading on the Exchange, your trade date is the next
business day. Your shares are purchased at the net asset
value determined on your trade date. Vanguard will not
accept third-party checks to open an account. Please be
sure your purchase check is made payable to the Vanguard
Group.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
The Fund reserves the right to suspend the offering of
shares for a period of time. The Fund also reserves the
right to reject any specific purchase request.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. You may initiate a
request by writing or by telephoning. Your redemption
proceeds are normally mailed within two business days
after the receipt of the request in Good Order.
- --------------------------------------------------------------------------------
17
<PAGE> 20
SELLING BY MAIL
Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD CONVERTIBLE SECURITIES FUND, P.O. BOX 1120,
VALLEY FORGE, PA 19482. (For express or registered mail,
send your request to Vanguard Financial Center, Vanguard
Convertible Securities Fund, 455 Devon Park Drive, Wayne,
PA 19087.)
The redemption price of shares will be the Fund's net
asset value next determined after Vanguard has received
all required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations, trusts,
and certain other accounts.
6. Any certificates that you are holding for the account.
IF YOU HAVE ANY QUESTIONS ABOUT THIS DEFINITION AS IT
PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT AT 1-800-662-2739.
- --------------------------------------------------------------------------------
SELLING BY TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
Please see "Important Information About Telephone
Transactions."
- --------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option lets you move money from your Vanguard account to
your bank account on an "as needed" basis. To establish
these Fund Express options, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express service; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares of the Fund by making an exchange to
another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
- --------------------------------------------------------------------------------
IMPORTANT
REDEMPTION
INFORMATION
Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calender days.
- --------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION PROCEEDS Redemption requests received by telephone prior to the
close of regular trading on the New York Stock Exchange
are processed on the day of receipt and the redemption
proceeds are normally sent on the following business day.
Redemption requests received by telephone after the close
of the Exchange (generally 4:00 p.m., Eastern time) are
processed on the business day following receipt and the
proceeds are normally sent on the second business day
following receipt.
18
<PAGE> 21
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in excess of $250,000 in whole or in
part by a distribution in kind of readily marketable
securities.
- --------------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Other Vanguard Services" for
additional information.
- --------------------------------------------------------------------------------
MINIMUM ACCOUNT
BALANCE
REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares in
any account that is below the minimum initial investment
amount of $3,000. If at any time the total investment does
not have a value of at least $3,000, you may be notified
that your account is below the Fund's minimum account
balance requirement. You would then be allowed 60 days to
make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the
registered shareholder. (This minimum requirement does not
apply to IRAs, other retirement accounts, and Uniform
Gifts/Transfers to Minors Act accounts.)
The Fund's minimum account balance requirement will not
apply if your account falls below $3,000 solely as a
result of declining markets (i.e., a decline in a Fund's
net asset value).
- --------------------------------------------------------------------------------
EXCHANGING
YOUR SHARES Should your investment goals change, you may exchange your
shares of Vanguard Convertible Securities Fund for those
of other available Vanguard Funds.
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) When exchanging shares by telephone, please have ready the
Fund name, account number, Social Security Number or
Employer Identification Number listed on the account, and
the exact name and address in which the account is
registered. Requests for telephone exchanges received
prior to the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) are processed
at the close of business that same day. Requests received
after the close of the Exchange are processed the next
business day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR
FROM VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may be
made by regular or express mail,
19
<PAGE> 22
and it will be implemented at the closing net asset value
on the date received by Vanguard provided the request is
received in Good Order.
- --------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, the name of
the Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD CONVERTIBLE SECURITIES FUND, P.O. BOX 1120,
VALLEY FORGE, PA 19482. (For express or registered mail,
send your request to Vanguard Financial Center, Vanguard
Convertible Securities Fund, 455 Devon Park Drive, Wayne,
PA 19087.)
- --------------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION
Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in
Vanguard/Windsor Fund.
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received the required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise
or terminate its provisions, limit the amount of or reject
any exchange, as deemed necessary, at any time.
The exchange privilege is only available in states in
which shares of the Fund are registered for sale. The
Fund's shares are currently registered for sale in all 50
states and the Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive
exchange activity.
Exchange activity generally will not be deemed excessive
if limited to two substantive exchange redemptions (at
least 30 days apart) from the Fund during any twelve month
period. Notwithstanding these limitations, the Fund
reserves the
20
<PAGE> 23
right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is
reasonably deemed to be disruptive to efficient portfolio
management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION ABOUT
TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
that telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Fund; (ii) the
10-digit account number; (iii) the exact name and
address used in the registration; and (iv) the Social
Security or Employer Identification number listed on
the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption made by mail will be made payable to the
registered shareowner and mailed to the address of
record, only.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482. ATTENTION: TRANSFER DEPARTMENT.
The request must be in Good Order. BEFORE MAILING YOUR
REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) FOR FULL INSTRUCTIONS.
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time
you initiate a transaction in your account (except for
checkwriting redemptions from Vanguard money market
accounts). You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement in February of the following year.
Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
21
<PAGE> 24
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE
With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
VANGUARD FUND
EXPRESS
Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the
automatic options, the minimum amount is $50. The maximum
amount that can be transferred using any of the options is
$100,000.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS
Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any TouchToneTM
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. To
contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
22
<PAGE> 25
(THIS PAGE INTENTIONALLY LEFT BLANK.)
23
<PAGE> 26
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
(LOGO) (LOGO)
(LOGO)
[VANGUARD CONVERTIBLE [VANGUARD CONVERTIBLE
SECURITIES FUND LOGO] SECURITIES FUND LOGO]
--------------------------- P R O S P E C T U S
THE VANGUARD GROUP
OF INVESTMENT MARCH 3, 1995
COMPANIES
Vanguard Financial Center
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739
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
[THE VANGUARD GROUP LOGO]
(LOGO)
P082
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 27
PART B
VANGUARD CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
MARCH 3, 1995
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus dated March 3, 1995. To obtain the Prospectus please
call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Limitations.................................................................... B-1
Purchase of Shares........................................................................ B-2
Redemption of Shares...................................................................... B-3
Management of the Fund.................................................................... B-3
Directors and Officers.................................................................... B-5
Investment Advisory Services.............................................................. B-7
Portfolio Transactions.................................................................... B-8
General Information....................................................................... B-9
Yield and Total Return.................................................................... B-9
Comparative Indexes....................................................................... B-9
Financial Statements...................................................................... B-11
Appendix--Description of Securities and Ratings........................................... B-12
</TABLE>
INVESTMENT LIMITATIONS
The following restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority of the outstanding shares of the
Fund or, if less, 67% of the shares represented at a meeting of shareholders at
which the holders of 50% or more of the shares are represented. The Fund may not
under any circumstances:
1. Borrow money, except that the Fund may borrow from banks (or
through reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests which
might otherwise require the untimely disposition of securities, in an
amount not exceeding 10% of the value of the Fund's total assets (including
the amount borrowed) at the time the borrowing is made. Whenever borrowings
exceed 5% of the value of the Fund's total assets, the Fund will not make
any additional investments;
2. With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of the issuer, or more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer;
3. Invest for the purpose of exercising control of management of any
company;
B-1
<PAGE> 28
4. Invest in securities of other investment companies, except as they
may be acquired as part of a merger, consolidation or acquisition of assets
and except to the extent permitted by Section 12 of the Investment Company
Act of 1940 (the "1940 Act"). The Fund will invest only in investment
companies which have investment objectives and investment policies
consistent with those of the Fund;
5. 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;
6. Purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that are
illiquid (including the Fund's investment in the Vanguard Group, Inc.);
7. Invest in commodities or real estate, although the Fund may
purchase and sell securities of companies which deal in real estate, or
interests therein, and the Fund may purchase covered call options as
described in the prospectus;
8. Purchase securities on margin or sell any securities short;
9. Invest more than 5% of the assets of the Fund, at the time of
investment, in the securities of any issuers which have (with predecessors)
a record of less than three years' continuous operation;
10. Purchase or retain any security if (i) one or more officers,
trustees or partners of the Fund or its investment adviser individually own
or would own, directly or beneficially, more than 1/2 of 1 per cent of the
securities of such issuer, and (ii) in the aggregate such persons own or
would own more than 5% of such securities;
11. Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (6) above, which are publicly distributed, and (ii) by lending
its securities to banks, brokers, dealers and other financial institutions
so long as such loans are not inconsistent with the Investment Company Act
or the Rules and Regulations or interpretations of the Securities and
Exchange Commission (the "Commission") thereunder;
12. Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 5% of its total assets;
13. Invest directly in interests in oil, gas or other mineral
exploration or development programs; and
14. Invest more than 25% of the value of its total assets in any one
industry.
The above mentioned investment limitations are considered at the time investment
securities are purchased. Notwithstanding these limitations, the Fund may own
all or any portion of the securities of, or make loans to, or contribute to the
costs or other financial requirements of any company which will be wholly-owned
by the Fund and one or more other investment companies and is primarily engaged
in the business of providing, at-cost, management, administrative, distribution
or related services to the Fund and other investment companies. See "The
Vanguard Group."
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offering
of its shares, (ii) to reject purchase orders when in the judgement of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts or under circumstances where certain economies can be
achieved in sales of the Fund's shares.
B-2
<PAGE> 29
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment for
redeemed shares (i) during any period that the New York Stock Exchange is
closed, or trading on the Exchange is restricted, as determined by the
Commission; (ii) during any period when an emergency exists, as defined by the
rules of the Commission, as a result of which it is not reasonably practicable
for the Fund to dispose of securities owned by it or fairly determine the value
of its assets; and (iii) for such other periods as the Commission may permit.
No charge is made by the Fund for redemptions. Any redemption may be more or
less than the shareholder's cost, depending on the current market value of the
securities held by the Fund.
The Fund has made an election with the Commission to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "The Fund's Share Price," and a redeeming shareholder would
normally incur brokerage expenses if he converted these securities to cash.
MANAGEMENT OF THE FUND
THE VANGUARD GROUP
Vanguard Convertible 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 several 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 total
expenses, which are allocated among the Funds under methods approved by the
Board of Directors (Trustees) of each Fund. In addition, each Fund bears its own
direct expenses such as legal, auditing and custodian fees.
The Fund's Officers are also Officers and employees of Vanguard. No Officer or
employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1 under
the Investment Company Act of 1940. The Code is designed to prevent unlawful
practices in connection with the purchase or sale of securities by persons
associated with Vanguard. Under Vanguard's Code of Ethics, certain officers and
employees of Vanguard who are considered access persons are permitted to engage
in personal securities transactions. However, such transactions are subject to
procedures and guidelines substantially similar to those recommended by the
mutual fund industry and approved by the U.S. Securities and Exchange
Commission.
Vanguard was established and operates under a Fund's 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 November 30, 1994, the Fund had
contributed capital of $28,000 to Vanguard, representing .1% of Vanguard's
capitalization. The Fund's Service Agreement, which was amended
B-3
<PAGE> 30
on May 10, 1993, 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 aggregate cash investment that the Vanguard Funds may
make in Vanguard.
MANAGEMENT. Corporate management and administrative services provided by
Vanguard to the Fund 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 November 30, 1994 the Fund's share of actual net
costs of operation relating to management and administrative services provided
by Vanguard totaled approximately $564,000.
DISTRIBUTION. Vanguard provides all distribution and marketing activities for
the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of Vanguard, acts as Sales Agent for the shares of the Funds, in
connection with any sales made directly to investors in the states of Florida,
Missouri, New York, Ohio, Texas and such other states as it may be required.
The principal distribution expenses are for advertising, promotional materials
and marketing personnel. Distribution services may also include organizing and
offering to the public, from time to time, one or more new investment companies
which will become members of the Group. The Directors and officers of Vanguard
determine the amount to be spent annually on distribution activities, the manner
and amount to be spent on each Fund, and whether to organize new investment
companies.
One-half of the distribution expenses of a marketing and promotional nature is
allocated among the Funds based upon relative net assets. The remaining one-half
of those expenses is allocated among the Funds based upon each Fund's sales for
the preceding 24 months relative to the total sales of the Funds as a Group,
provided, however, that no Fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for the Group, and that no Fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets. During the fiscal year ended November 30, 1994 the Fund paid
approximately $41,000 of the group's distribution and marketing expenses, or
approximately .02 of 1% of its average month-end assets.
INVESTMENT ADVISORY SERVICES. Vanguard provides investment advisory services to
Vanguard Money Market Reserves, Vanguard Institutional Money Market Portfolio,
Vanguard Bond Index Fund, Vanguard Index Trust, Vanguard Balanced Index Fund,
Vanguard International Equity Index Fund, Vanguard Municipal Bond Fund, several
portfolios of Vanguard Fixed Income Securities Fund, Vanguard Admiral Funds,
Vanguard Institutional Index Fund, several Portfolios of Vanguard Variable
Insurance Fund, Vanguard California Tax-Free Fund, Vanguard New York Insured
Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard Ohio Tax-Free Fund,
Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund,
Vanguard Tax-Managed Fund, a portion of Vanguard/Windsor II and 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.
B-4
<PAGE> 31
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are responsible to
the Fund's Board of Directors. The Directors set broad policies for the Fund and
choose its Officers. The following is a list of Directors and Officers of the
Fund and a statement of their present positions and principal occupations
during the past five years. The mailing address of the Fund's Directors and
Officers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, Chief Executive Officer and Director*
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and each of the investment companies in The Vanguard Group; Director of The
Mead Corporation and General Accident Insurance.
JOHN J. BRENNAN, President & Director*
President and Director of The Vanguard Group, Inc. and each of the investment
companies in The Vanguard Group.
ROBERT E. CAWTHORN, Director
Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director
Director of The Great Atlantic and Pacific Tea Company, Raytheon Company,
Knight-Ridder, Inc., and Massachusetts Mutual Life Insurance Co. and Trustee
Emerita of Wellesley College.
BRUCE K. MACLAURY, Director
President, The Brookings Institution; Director of American Express Bank, Ltd.,
The St. Paul Companies, Inc., and Scott Paper Company.
BURTON G. MALKIEL, Director
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co. and Southern New England Communications
Company.
ALFRED M. RANKIN, JR., Director
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company, The Standard Products Company and The
Reliance Electric Company.
JOHN C. SAWHILL, Director
President and Chief Executive Officer, The Nature Conservacy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York University;
Director, Pacific Gas and Electric Company and NACCO Industries.
JAMES O. WELCH, JR., Director
Retired Chairman of Nabisco Brands Inc. and retired Vice Chairman and Director
of RJR Nabisco; Director, TECO Energy, Inc.
J. LAWRENCE WILSON, Director
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Energy Company; and Trustee of Vanderbilt University and the Culver
Educational Foundation.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment companies
in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group. Inc.; Controller of each of the
investment companies in The Vanguard Group.
- ------------
* Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
B-5
<PAGE> 32
REMUNERATION OF DIRECTORS AND OFFICERS
The Fund pays each Director who is not also an Officer an annual fee plus travel
and other expenses incurred in attending Board meetings. The Fund's Officers and
employees are paid by Vanguard which, in turn, is reimbursed by the Fund, and
each other Fund in the Group, for its proportionate share of Officers' and
employees' salaries and retirement benefits. During the fiscal year ended
November 30, 1994 the Fund paid approximately $1,000 in Directors fees and
expenses to its "non interested" directors. The Fund's proportionate share of
remuneration paid by Vanguard (and reimbursed by the Fund) during the fiscal
year was $7,863.
Directors who are not Officers are paid an annual fee upon retirement equal to
$1,000 for each year of service on the Board, up to a maximum of $15,000. This
fee is paid for a period of ten years or until the death of a retired Director,
and each Vanguard Fund contributes a proportionate amount of this fee based on
its relative net assets. 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 eligible Officer's compensation during the year, if any,
that exceeds the Social Security Taxable Wage Base then in effect. Under its
thrift plan, all eligible Officers are permitted to make pre-tax contributions
in an amount equal to 4% of total compensation which are matched by Vanguard on
a 100% basis. The Fund's proportionate share of retirement contributions made by
Vanguard under its retirement and thrift plans on behalf of all eligible
Officers of the Fund as a group during the 1994 fiscal year was approximately
$600.
The following table provides detailed information with respect to the amounts
paid or accrued for the Directors for the fiscal year ended November 30, 1994.
VANGUARD CONVERTIBLE 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 $111 $22 $15,000 $50,000
Robert E. Cawthorn $111 $19 $13,000 $50,000
Bruce K. MacLaury $100 $19 $12,000 $45,000
Burton G. Malkiel $111 $15 $15,000 $50,000
Alfred M. Rankin, Jr. $111 $12 $15,000 $50,000
John C. Sawhill $111 $14 $15,000 $50,000
James O. Welch, Jr. $106 $17 $15,000 $48,000
J. Lawrence Wilson $109 $12 $15,000 $49,000
</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 their service as Director or Trustee of 33 Vanguard Funds
(32 in the case of Mr. MacLaury).
B-6
<PAGE> 33
INVESTMENT ADVISORY SERVICES
The Fund employs Desai Capital Management, Inc. ("the Adviser") under an
investment advisory agreement dated March 1, 1988 to manage the investment and
reinvestment of the assets of the Fund and to continuously review, supervise and
administer the Fund's investment program. The Adviser discharges its
responsibilities subject to the control of the Officers and Directors of the
Fund.
The Fund pays the Adviser an advisory fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------------- ----
<S> <C>
First $50 million........................................ 0.45%
Next $50 million......................................... 0.40%
Next $100 million........................................ 0.35%
Over $200 million........................................ 0.30%
</TABLE>
During the fiscal years ended November 30, 1992, 1993, and 1994, the Fund paid
investment advisory fees of approximately $348,000, $716,000, and $749,000
respectively.
The agreement will continue until June 15, 1993 and will be renewable thereafter
for successive one-year periods, only if each renewal is specifically approved
by a vote of the Fund's Board of Directors, including the affirmative votes of a
majority of the Directors who are not parties to the contract or "interested
persons" (as defined in the Investment Company Act of 1940) of any such party,
cast in person at a meeting called for the purpose of considering such approval.
In addition, the question of continuance of the agreement may be presented to
the shareholders of the Fund; in such event, continuation must be approved by
the affirmative vote of a majority of the outstanding voting securities of the
Fund. The agreement is automatically terminated if assigned, and may be
terminated without penalty at any time (1) either by vote of the Board of
Directors of the Fund or by vote of its outstanding voting securities on 60
days' written notice to the Adviser, or (2) by the Adviser upon 90 days' written
notice to the Fund.
The Fund's Board of Directors may, without the approval of shareholders, provide
for:
A. The employment of a new investment adviser pursuant to the terms of
a new advisory agreement, either as a replacement for an existing adviser
or as an additional adviser;
B. A change in the terms of an advisory agreement; and
C. The continued employment of an existing adviser, on the same
advisory contract terms, where a contract has been assigned because of a
change in control of the adviser.
Any such change will only be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the
adviser that would have normally been included in a proxy statement.
The Adviser is a professional investment counseling firm which specializes in
the management of convertible and equity-linked securities portfolios for
institutional clients. The firm was founded in June 1984. As of December 31,
1994, the Adviser managed assets with an estimated fair market value of
approximately $1.3 billion. Rohit M. Desai is the President, Chairman and sole
stockholder of the Adviser. Mr. Desai has served as portfolio manager of the
Fund since its inception and, along with a team of investment professionals,
oversees the Fund's investment program.
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PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the Adviser (with the approval of
the Fund's Board of Directors) to select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the Fund and directs
the Adviser to use its best efforts to obtain the best available price and most
favorable execution as to all transactions for the Fund. The Adviser has
undertaken to execute each investment transaction at a price and commission
which provides the most favorable total cost or proceeds reasonably obtainable
under the circumstances.
In placing portfolio transactions, the Adviser will use its best judgement 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.
Currently, it is the Fund's policy that the Adviser may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Adviser will only pay such higher
commissions if it believes this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Adviser and/or the Fund. However, the
Adviser has informed the Fund that it will not pay higher commission rates
specifically for the purpose of obtaining research services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, the Fund may place portfolio orders with qualified broker-dealers who
recommend the Fund to other clients, or who act as agent in the purchase of the
Fund's shares for their clients, and may, when a number of brokers and dealers
can provide comparable best price and execution on a particular transaction,
consider the sale of the Fund shares by a broker or dealer in selecting among
qualified broker-dealers.
Some securities considered for investment by the Fund may also be appropriate
for other 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 clients services by the Adviser are considered at or about the same time,
transactions in such securities will be allocated among the Fund and such other
clients in a manner deemed equitable by the Adviser. During the fiscal years
ended November 30, 1992, 1993 and 1994 the Fund paid $26,459, $61,413, and
$58,489 in brokerage commissions.
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GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund is a diversified open-ended investment company established under
Maryland law. The Fund's Amended and Restated Articles of Incorporation dated
April 8, 1986 permit the Directors to issue 1,000,000,000 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 Portfolios. Currently the
Fund is offering shares of one portfolio.
The shares of the Fund are fully paid and non-assessable, and have no preference
as to conversion, exchange, dividends, retirement or other features. The shares
have no pre-emptive rights. The shares have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they choose to do so. A shareholder
is entitled to one vote for each full shares held (and a fractional vote for
each fractional share held), then standing in his name on the books of the Fund.
On any matter submitted to a vote of shareholders, all shares of the Fund then
issued and outstanding and entitled to vote, irrespective of the class, shall be
voted in the aggregate and not by class except (i) when required by the
Investment Company Act of 1940, shares shall be voted by individual class, and
(ii) when the matter does not affect any interest of a particular class, then
only shareholders of the affected class or classes shall be entitled to vote
thereon.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended November 30, 1994 was + 5.41%.
The average annual total return of the Fund for the one- and five-year periods
ended November 30, 1994 was - 4.35% and + 9.57%, respectively. The average
annual total return of the Fund for the period since its inception on June 17,
1986 was + 7.74%.
COMPARATIVE INDEXES
Each of the investment company members of the Vanguard Group, including Vanguard
Convertible Securities Fund, may, from time to time, use one or more of the
following unmanaged indices for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and
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.
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SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consist 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.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current-coupon
high grade general-obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of four high grade, noncallable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers High
Grade Bond Index.
COMPOSITE INDEX -- 65% Standard Poor's Index and 35% Salomon Brothers High Grade
Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
over 4,000 individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The Index has a market
value of approximately $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 approximately $1.4
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 approximately $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 of ten or more years.
The index has a market value of approximately $800 billion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) INVESTMENT GRADE DEBT INDEX -- is a
market weighted index that contains all investment grade corporate debt
securities with maturities of one to five years. The index has a market value of
approximately $175 billion.
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<PAGE> 37
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) U.S. TREASURY INDEX -- is a market
weighted index that contains all U.S. Treasury securities with maturities of one
to five years. The index has a market value of approximately $1.1 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) U.S. GOVERNMENT INDEX -- is a market
weighted index that contains all U.S. Government agency and Treasury securities
with maturities of one to five years. The index has a market value of
approximately $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) U.S. TREASURY INDEX -- is a
market weighted index that contains all U.S. Treasury securities with maturities
of five to ten years. The index has a market value of approximately $300
billion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) INVESTMENT GRADE DEBT
INDEX -- is a market weighted index that contains all investment grade debt
securities with maturities of five to ten years. The index has a market value of
approximately $225 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception).
RUSSELL 3000 INDEX -- consists of approximately the 3,000 largest stocks of
U.S.-domiciled companies commonly traded on the New York and American Stock
Exchanges or the NASDAQ over-the-counter market, accounting for over 90% of the
market value of publicly traded Stocks in the U.S.
RUSSELL 2000 SMALL COMPANY STOCK INDEX -- consists of the smallest 2,000 stocks
within the Russell 3000; a widely used benchmark for small capitalization common
stocks.
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended November 30, 1994, including
the financial highlights for each of the five fiscal years in the period ended
November 30, 1994, appearing in the Fund's 1994 Annual Report to Shareholders,
and the report thereon of Price Waterhouse LLP, independent accountants, also
appearing therein, are incorporated by reference in this Statement of Additional
Information. The Fund's 1994 Annual Report to Shareholders is enclosed with this
Statement of Additional Information.
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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 it is
somewhat susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB--regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment. 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.
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