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[LOGO OF VANGUARD APPEARS HERE] A Member of The Vanguard Group
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PROSPECTUS--MARCH 8, 1996
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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 Vanguard Convertible Securities Fund, Inc. (the "Fund") is an
OBJECTIVE AND open-end diversified investment company that seeks to provide
POLICIES current income and long-term growth of capital. The Fund in-
vests 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 as-
sets 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 To open a regular (non-retirement) account, please complete
ACCOUNT and return the Account Registration Form. If you need assis-
tance in completing this Form, please call the Investor In-
formation Department. To open an Individual Retirement Ac-
count (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 $1,000 for Uniform Gifts/Transfers
to Minors Act accounts. The Fund is offered on a no-load ba-
sis (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 This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation you should know about the Fund before you invest. It
should be retained for future reference. A "Statement of Ad-
ditional Information" containing additional information about
the Fund has been filed with the Securities and Exchange Com-
mission. This Statement is dated March 8, 1996, and has been
incorporated by reference into this Prospectus. It may be ob-
tained, without charge, by writing to the Fund or by calling
the Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
Fund Expenses......................................................... 2
Financial Highlights.................................................. 2
Yield and Total Return................................................ 3
FUND INFORMATION
Investment Objective.................................................. 4
Investment Policies................................................... 4
Investment Risks...................................................... 5
Who Should Invest..................................................... 7
Implementation of Policies............................................ 7
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Page
<S> <C>
Investment Limitations................................................ 9
Management of the Fund................................................ 10
Investment Adviser.................................................... 11
Performance Record.................................................... 12
Dividends, Capital Gains and Taxes.................................... 12
The Share Price of the Fund........................................... 14
General Information................................................... 14
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Page
<S> <C>
SHAREHOLDER GUIDE
Opening an Account and Purchasing Shares.............................. 16
When Your Account Will Be Credited.................................... 19
Selling Your Shares................................................... 19
Exchanging Your Shares................................................ 22
Important Information About Telephone Transactions.................... 23
Transferring Registration............................................. 24
Other Vanguard Services............................................... 24
</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 AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
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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 1995 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
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<S> <C> <C>
Sales Load Imposed on Purchases............................. None
Sales Load Imposed on Reinvested Dividends.................. None
Redemption Fees............................................. None
Exchange Fees............................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
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<S> <C> <C>
Management & Administrative Expenses........................ 0.29%
Investment Advisory Fees.................................... 0.39
12b-1 Fees.................................................. None
Other Expenses
Distribution Costs.................................... 0.02%
Miscellaneous Expenses................................ 0.05
----
Total Other Expenses........................................ 0.07
----
TOTAL OPERATING EXPENSES.................................. 0.75%
====
</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>
$8 $24 $42 $93
</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 The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of the
five years in the period ended November 30, 1995, 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, together with the remaining por-
tions of the Fund's 1995 Annual Report to Shareholders, are
incorporated by reference in the Statement of Additional In-
formation and in this Prospectus, and which appear, along
with the report of Price Waterhouse LLP, in the Fund's 1995
Annual Report to Shareholders. For a more complete discussion
of the Fund's performance, please see the Fund's 1995 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
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<TABLE>
<CAPTION>
JUNE 17,
YEAR ENDED NOVEMBER 30, 1986+ TO
--------------------------------------------------------------------- NOV. 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $10.94 $12.89 $11.77 $ 9.82 $8.07 $ 9.64 $8.71 $7.94 $ 9.80 $10.00
------ ------ ------ ------ ----- ------ ----- ----- ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .52 .53 .56 .56 .53 .57 .51 .55 .60 .26
Net Realized and
Unrealized Gain (Loss)
on Investments........ 1.26 (1.04) 1.03 1.92 1.77 (1.58) .99 .90 (1.95) (.29)
------ ------ ------ ------ ----- ------ ----- ----- ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... 1.78 (.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..... (.51) (.53) (.47) (.53) (.55) (.56) (.57) (.56) (.51) (.17)
Distributions from
Realized Capital
Gains................. (.18) (.91) -- -- -- -- -- (.12) -- --
------ ------ ------ ------ ----- ------ ----- ----- ------ ------
TOTAL DISTRIBUTIONS... (.69) (1.44) (.47) (.53) (.55) (.56) (.57) (.68) (.51) (.17)
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NET ASSET VALUE, END OF
PERIOD................. $12.03 $10.94 $12.89 $11.77 $9.82 $ 8.07 $9.64 $8.71 $ 7.94 $ 9.80
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TOTAL RETURN............ 17.10% (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)...... $172 $175 $202 $120 $55 $44 $58 $69 $73 $73
Ratio of Expenses to
Average Net Assets..... .75% .73% .71% .85% .81% .88% .84% .88% .85% .80%*
Ratio of Net Investment
Income to Average Net
Assets................. 4.63% 4.68% 4.44% 4.80% 5.72% 6.35% 5.60% 6.52% 6.13% 6.02%*
Portfolio Turnover Rate. 46% 52% 81% 55% 57% 55% 55% 24% 45% 13%
</TABLE>
*Annualized.
+Commencement of operations.
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YIELD ANDTOTAL From time to time the Fund may advertise its yield and total
RETURN return. Both yield and total return figures are based on his-
torical earnings and are not intended to indicate future per-
formance. The "total return" of the Fund refers to the aver-
age 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 in-
come includes interest and dividend income earned on the
Fund's securities; it is net of all expenses and all recur-
ring 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
3
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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 an investor's account or the
yield reported in the Fund's reports to shareholders.
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INVESTMENT Vanguard Convertible Securities Fund, Inc. (the "Fund") is an
OBJECTIVE open-end diversified investment company. The objective of the
Fund is to provide current income and long-term growth of
THE FUND SEEKS capital by investing primarily in convertible securities.
TO PROVIDE There is no assurance that the Fund will achieve its objec-
CURRENT INCOME tive.
AND LONG-TERM
GROWTH 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 Under normal circumstances, at least 80% of the Fund's assets
POLICIES will be invested in convertible securities. Convertible secu-
rities include corporate bonds and preferred stocks which are
THE FUND convertible into common stock, as well as debt instruments
INVESTS IN with warrants or common stock attached. See "Implementation
CONVERTIBLE of Policies" for a description of convertible securities.
SECURITIES
The remaining 20% of the Fund's assets may be invested in
non-convertible corporate or U.S. Government fixed-income se-
curities, common stocks, and selected money market instru-
ments. 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 po-
sition is warranted.
In seeking to provide both current income and long-term capi-
tal appreciation, the adviser will emphasize the securities
of companies with above-average growth potential whose con-
vertible 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 ad-
dition, 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 securi-
ties 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 se-
curities are deemed by the rating agencies to have specula-
tive 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
4
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issued by foreign companies. See "Implementation of Policies"
for a description of other investment practices of the Fund.
The Fund is responsible for voting the shares of all securi-
ties it holds.
These policies are not fundamental and so may be changed by
the Board of Directors without shareholder approval.
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INVESTMENT Convertible securities are hybrid securities, combining the
RISKS investment characteristics of both bonds and common stocks.
Like a bond (or preferred stock), a convertible security pays
THE FUND IS a fixed interest rate (dividend), but may be converted into
SUBJECT TO common stock at a specific price or conversion rate.
STOCK AND BOND
MARKET RISK 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 in-
versely 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 inter-
est rate risk is in part offset by the income paid by the
convertible securities.
In contrast, when the conversion price of a convertible secu-
rity 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 in-
vested common stock portfolios. Because of these factors and
the hybrid nature of convertibles, investors should recognize
that convertible securities are likely to perform quite dif-
ferently than broadly-based measures of the stock and bond
markets.
CREDIT QUALITY The market for convertible securities includes a larger pro-
MAY BE LOW portion 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 is-
sue 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 conven-
tional debt issues since the convertible is normally a "ju-
nior" security. While the average credit quality of the Fund
is expected to be higher than the universe of convertible se-
curities as a whole, the Fund may invest up to 30% of its as-
sets in B-rated securities, and up to 100% of its assets
could be invested in securities rated Ba (BB) or B. Securi-
ties with such ratings are considered speculative, and thus
pose a greater risk of default than investment grade securi-
ties. If securities held by the Fund are downgraded to a rat-
ing lower than Ba (BB) or B, the Fund will continue to hold
such securities unless the adviser
5
<PAGE>
believes that it is advantageous to sell them. The following
are excerpts from the Moody's and Standard & Poor's defini-
tions 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 safeguard-
ed." B-rated bonds "lack characteristics of a desirable in-
vestment" and the assurance of interest or principal payments
"may be small."
Caa-rated bonds are "of poor standing" and "may be in de-
fault" or may have "elements of danger with respect to prin-
cipal or interest."
Standard & Poor's: BB-rated bonds have "less near-term vul-
nerability to default" than B- or CCC-rated securities but
face "major ongoing uncertainties . . . which may lead to in-
adequate 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 de-
fault" 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 pol-
icy not to rely primarily on ratings issued by established
credit rating agencies, but to utilize such ratings in con-
junction with the Portfolio adviser's own independent and on-
going 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, espe-
cially 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 me-
dium-rated securities may decline in market value due to in-
vestors' 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 deal-
6
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ers in the high-yield market, and purchasers of high-yield
securities are concentrated among a smaller group of securi-
ties dealers and institutional investors.
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WHO SHOULD The Fund is intended for investors who are seeking a higher
INVEST level of income than is normally available from common
stocks, as well as potential long-term capital appreciation.
INVESTORS Since the Fund may own non-investment grade securities of me-
SEEKING dium-to-small-sized companies, greater-than-average invest-
CURRENT INCOME ment risk may be involved. Investors should be able to toler-
AND LONG-TERM ate sharp, sometimes sudden fluctuations in the value of
CAPITAL GROWTH their investment in pursuit of higher investment returns in
the long run.
Although convertible securities exhibit characteristics of
both stocks and bonds, the Fund does not represent a complete
investment program. Most investors should maintain diversi-
fied holdings of securities with different risk characteris-
tics--including common stocks, bonds and money market instru-
ments. The Fund is intended to be a long-term investment ve-
hicle 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 fol-
lowing policies. The Fund reserves the right to reject any
purchase request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be disrup-
tive 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 privi-
lege limitations as described in the section "Exchange Privi-
lege Limitations." Finally, the Fund reserves the right to
suspend the offering of its shares.
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IMPLEMENTATION The Fund uses a number of investment vehicles to achieve its
OF POLICIES objective.
THE FUND The Fund invests primarily in convertible securities. Con-
INVESTS IN vertible securities include corporate bonds, debentures,
CONVERTIBLE notes and preferred stocks which may be converted into the
SECURITIES common stock of the issuer at the holder's option. Convert-
ible 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 gen-
erally 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 ex-
pected to enable the Fund to achieve its current income ob-
jective. Convertible securities are usually priced at a pre-
mium 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 occa-
sionally a subsidiary company, at a specified price, as de-
fined by the corporation when the security is issued. Accord-
ingly, the value of
7
<PAGE>
the convertible obligation may generally be expected to in-
crease (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 is-
suer's capital structure, but are junior to non-convertible
debt securities. As convertible securities are considered ju-
nior 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.
THE FUND MAY Although it normally seeks to remain fully invested in con-
INVEST IN vertible securities, the Fund may invest in certain short-
SHORT-TERM term fixed income securities. Such securities may be used to
FIXED INCOME invest uncommitted cash balances, to maintain liquidity to
SECURITIES meet shareholder redemptions, or to take a temporary defen-
sive position. These securities include: obligations of the
United States Government and its agencies or instrumentali-
ties, commercial paper, bank certificates of deposit, and
bankers' acceptances; and repurchase agreements collateral-
ized by these securities.
THE FUND MAY The Fund may lend its investment securities on a short-term
LEND ITS or a long-term basis to qualified institutional investors for
SECURITIES the purpose of realizing additional income. Loans of securi-
ties by the Fund will be collateralized by cash, letters of
credit, or securities issued or guaranteed by the U.S. Gov-
ernment or its agencies. The collateral will equal at least
100% of the current market value of the loaned securities.
THE FUND MAY The Fund may borrow money, subject to the limits set forth
BORROW MONEY below, for temporary or emergency purposes, including the
meeting of redemption requests which might otherwise require
the untimely disposition of securities.
PORTFOLIO The Fund retains the right to sell securities irrespective of
TURNOVER IS how long they have been held. However, it is anticipated that
NOT EXPECTED the portfolio turnover rate for the Fund will not exceed
TO EXCEED 100% 100%. A turnover rate of 100% would occur, for example, if
all of the Fund's securities were replaced within one year.
DERIVATIVE Derivatives are instruments whose values are linked to or de-
INVESTING rived from an underlying security or index. The most common
and conventional types of derivative securities are futures
and options.
THE FUND MAY The Fund may invest in futures contracts and options, but
INVEST IN only to a limited extent. Specifically, the Fund may enter
DERIVATIVE into futures contracts provided that not more than 5% of its
SECURITIES assets are required as a futures contract deposit; in addi-
tion, the Fund may enter into futures contracts and options
transactions only to the extent that obligations under such
contracts or transactions represent not more than 20% of the
Fund's assets.
Futures contracts and options may be used for several common
fund management strategies: to maintain cash reserves while
simulating full investment, to
8
<PAGE>
facilitate trading, to reduce transaction costs, or to seek
higher investment returns when a specific futures contract is
priced more attractively than other futures contracts or the
underlying security or index.
The Fund may use futures contracts for bona fide "hedging"
purposes. In executing a hedge, a manager sells, for example,
stock index futures to protect against a decline in the stock
market. As such, if the market drops, the value of the
futures position will rise, thereby offsetting the decline in
value of the Fund's stock holdings.
FUTURES The primary risks associated with the use of futures con-
CONTRACTS AND tracts and options are: (i) imperfect correlation between the
OPTIONS POSE change in market value of the stocks held by the Fund and the
CERTAIN RISKS prices of futures contracts and options; and (ii) possible
lack of a liquid secondary market for a futures contract and
the resulting inability to close a futures position prior to
its maturity date. The risk of imperfect correlation will be
minimized by investing in those contracts whose price fluctu-
ations are expected to resemble those of the Fund's under-
lying securities. The risk that the Fund will be unable to
close out a futures position will be minimized by entering
into such transactions on a national exchange with an active
and liquid secondary market.
The risk of loss in trading futures contracts in some strate-
gies can be substantial, due both to the low margin deposits
required and the extremely high degree of leverage involved
in futures pricing. As a result, a relatively small price
movement in a futures contract may result in immediate and
substantial loss (or gain) to the investor. When investing in
futures contracts, the Fund will segregate cash or cash
equivalents in the amount of the underlying obligation.
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INVESTMENT The Fund has adopted certain limitations in an attempt to re-
LIMITATIONS duce its exposure to specific situations. Some of these limi-
tations are that the Fund will not:
THE FUND HAS (a) with respect to 75% of the value of its total assets,
ADOPTED purchase the securities of any issuer (except obligations
CERTAIN of the United States Government and its instrumentali-
FUNDAMENTAL ties) if as a result the Fund would hold more than 10% of
LIMITATIONS 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 re-
quire 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
9
<PAGE>
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.
These investment limitations are considered at the time in-
vestment 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 is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of more than 30 funds, with more than 90
portfolios and total assets in excess of $190 billion.
VANGUARD Through their jointly-owned subsidiary, The Vanguard Group,
ADMINISTERS Inc. ("Vanguard"), the Fund and the other funds in the Group
AND obtain at cost virtually all of their corporate management,
DISTRIBUTES administrative, shareholder accounting and distribution serv-
THE FUND ices. 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 1995, the average expense ratio (annual
costs including advisory fees divided by total net assets)
for the Vanguard funds amounted to approximately .31% com-
pared to an average of 1.11% 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 Direc-
tors set broad policies for the Fund and choose its Officers.
A list of the Directors and Officers of the Fund and a state-
ment 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 admin-
istrative personnel needed to provide the requisite services
to the funds and also furnishes the funds with necessary of-
fice 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 ba-
sis (i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of Vanguard's distribution
costs.
- --------------------------------------------------------------------------------
10
<PAGE>
The Fund employs Desai Capital Management, Inc. ("DCMI"), 540
INVESTMENT Madison Avenue, New York, NY 10022, under an investment advi-
ADVISER sory agreement dated as of March 1, 1988, to manage the in-
vestment and reinvestment of the assets of the Fund and to
DESAI CAPITAL continuously review, supervise and administer the Fund's in-
MANAGEMENT, vestment program. DCMI discharges its responsibilities sub-
INC. MANAGES ject to the control of the Officers and Directors of the
THE FUND'S Fund.
INVESTMENTS
DCMI is a professional investment counseling firm which spe-
cializes in the management of convertible and equity-linked
securities portfolios for institutional clients. The firm was
founded in June 1984. As of December 31, 1995, DCMI managed
assets with an estimated fair market value of approximately
$1.4 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 incep-
tion 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 0.40%
Next $50 million 0.35%
Next $100 million 0.30%
Over $200 million 0.25%
</TABLE>
During the fiscal year ended November 30, 1995, the total ad-
visory fees paid by the Fund to DCMI represented an effective
annual base rate of .39 of 1% of the Fund's average net as-
sets. This fee was paid under the terms of a previous advi-
sory agreement, which called for a higher rate of fees than
the current agreement.
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 serv-
ices 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 be-
lieves this to be in the best interest of the Fund. Although
the Fund does not market its shares through intermediary bro-
kers 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 in-
vestment adviser pursuant to the terms of a new advisory
agreement, either as a replacement for an existing adviser or
11
<PAGE>
as an additional adviser; (b) a change in the terms of an ad-
visory agreement; and (c) the continued employment of an ex-
isting 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 con-
cerning the adviser that would have normally been included in
a proxy statement.
- --------------------------------------------------------------------------------
PERFORMANCE The table in this section provides investment results for the
RECORD 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 un-
managed Standard & Poor's 500 Composite Stock Price Index, a
widely-used barometer of stock market activity, and the Leh-
man Aggregate Bond Index, a measure of the investment perfor-
mance of the bond market. The table does not make any allow-
ance for federal, state or local income taxes, which share-
holders 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.
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD CONVERTIBLE SECURITIES FUND
<TABLE>
<CAPTION>
LEHMAN
FISCAL PERIODS VANGUARD CONVERTIBLE S&P 500 AGGREGATE BOND
ENDED 11/30/95 SECURITIES FUND INDEX INDEX
-------------- -------------------- ------- --------------
<S> <C> <C> <C>
1 Year +17.1% +37.0% +17.6%
3 Years + 8.4 +15.1 + 8.1
5 Years +15.7 +16.8 + 9.5
Lifetime* + 8.7 +13.6 N/A
</TABLE>
*June 17, 1986 to November 30, 1995.
- --------------------------------------------------------------------------------
DIVIDENDS, The Fund expects to pay quarterly dividends from net invest-
CAPITAL GAINS ment income. Net capital gains distributions, if any, will be
AND TAXES made annually.
THE FUND WILL Dividend and capital gains distributions may be automatically
PAY QUARTERLY reinvested or received in cash. See "Choosing a Distribution
DIVIDENDS Option" for a description of these distribution methods.
In addition, in order to satisfy certain distribution re-
quirements of the Tax Reform Act of 1986, the Fund may de-
clare special year-end dividend and capital gains distribu-
tions 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.
12
<PAGE>
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. Divi-
dends 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 in-
vestors, a portion of dividends from net investment income
will qualify for the intercorporate dividends-received deduc-
tion. However, the portion of the dividends so qualified de-
pends on the aggregate taxable qualifying dividend income re-
ceived 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 capi-
tal 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 management activities. Consequently,
capital gains distributions may be expected to vary consider-
ably from year to year; there will be no capital gains dis-
tributions 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. Al-
so, 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 re-
turned 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 A sale of shares of the Fund is a taxable event and may re-
OR LOSS MAY BE sult in a capital gain or loss. A capital gain or loss may be
REALIZED UPON realized from an ordinary redemption of shares or an exchange
EXCHANGE OR of shares between two mutual funds (or two portfolios of a
REDEMPTION mutual fund).
Dividend distributions, capital gains distributions, and cap-
ital 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 share-
holders who have not complied with IRS taxpayer identifica-
tion regulations. You may avoid this withholding requirement
by certifying on your Account Registration Form your proper
Social Security or Taxpayer Identification Number and by cer-
tifying that you are not subject to backup withholding.
The Fund has obtained a Certificate of Authority to do busi-
ness as a foreign corporation in Pennsylvania and does busi-
ness and maintains an office in that
13
<PAGE>
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 in-
vestment in the Fund. The Fund is managed without regard to
tax ramifications.
- --------------------------------------------------------------------------------
THE SHARE The Fund's share price or "net asset value" per share is de-
PRICE OF THE termined by dividing the total assets of the Fund, less all
FUND 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 mar-
ket, and it is expected that for convertible securities, pre-
ferred stock, bonds, and 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.
Common stocks that are listed on a securities exchange are
valued at the last quoted sales price on the day the valua-
tion 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 mar-
ket value of such securities. The prices provided by a pric-
ing 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
Vanguard.
- --------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The Fund's Articles of
INFORMATION 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 Portfo-
lios. Currently the Fund is offering one class of shares.
14
<PAGE>
The shares of the Fund are fully paid and nonassessable; have
no preferences as to conversion, exchange, dividends, retire-
ment 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 elec-
tion 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 ap-
plicable law. If requested in writing by the holders of not
less than 10% of the outstanding shares of the Fund, an an-
nual meeting will be held to vote on the removal of a Direc-
tor 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.
- --------------------------------------------------------------------------------
15
<PAGE>
SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either by
ACCOUNT AND mail or wire. Simply complete and return an Account Registra-
PURCHASING tion Form and any required legal documentation, indicating
SHARES the amount you wish to invest. Your purchase must be equal to
or greater than the $3,000 minimum initial investment re-
quirement ($1,000 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 Van-
guard IRA Adoption Agreement. Your purchase must be equal to
or greater than the $1,000 minimum initial investment re-
quirement, but no more than $2,000 if you are making a regu-
lar 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 assis-
tance 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 addi-
tional forms you may need.
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 com-
missions or 12b-1 fees).
PURCHASE 1) Because of the risks associated with common stock invest-
RESTRICTIONS ments, 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.
2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check is
made payable to the Vanguard Group.
ADDITIONAL Subsequent investments to regular accounts may be made by
INVESTMENTS mail ($100 minimum), wire ($1,000 minimum), exchange from an-
other Vanguard Fund account ($100 minimum), or Vanguard Fund
Express. Subsequent investments to Individual Retirement Ac-
counts may be made by mail ($100 minimum) or exchange from
another Vanguard Fund account. In some instances, contribu-
tions may be made by wire or Vanguard Fund Express. Please
call us for more information on these options.
--------------------------------------------------------------
16
<PAGE>
NEW ACCOUNT
PURCHASING BY Please include the amount of your initial investment on
MAIL Complete the registration form, make your check payable to The Vanguard
and sign the Group-82 and mail to:
enclosed
Account VANGUARD FINANCIAL
Registration CENTER
Form P.O. BOX 2600
VALLEY FORGE, PA 19482
For express or VANGUARD FINANCIAL
registered CENTER 455 DEVON PARK
mail,send to: DRIVE WAYNE, PA 19087
ADDITIONAL INVESTMENTS
TO EXISTING ACCOUNTS
Additional investments should include the Invest-by-Mail
remittance form attached to your Fund confirmation statements.
Please make your check payable to The Vanguard Group-82, write
your account number on your check and, using the return
envelope provided, mail to the address indicated on the Invest-
by-Mail Form.
All written requests should be mailed to one of the addresses
indicated for new accounts. Do not send registered or express
mail to the post office box address.
--------------------------------------------------------------
PURCHASING BY CORESTATES BANK, N.A.
WIRE ABA 031000011
Money should CORESTATES NO. 0101 9897
be wired to: ATTN VANGUARD
VANGUARD CONVERTIBLE SECURITIES FUND
BEFORE WIRING ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
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 by
EXCHANGE (from making an exchange from an existing Vanguard account. Please
a Vanguard call our Client Services Department at 1-800-662-2739. The
account) new account will have the same registration as the existing
account. However, the Fund reserves the right to refuse any
exchange purchase request.
--------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move money
FUND EXPRESS from your bank account to your Vanguard account on an "as
needed" basis. Or if you choose the Automatic Investment op-
Special tion, money will be moved automatically from your bank ac-
Purchase and count to your Vanguard account on the schedule (monthly, bi-
Automatic monthly [every other month], quarterly or yearly) you select.
Investment To establish these Fund Express options, please provide the
appropriate information on the
17
<PAGE>
Account Registration Form. We will send you a confirmation of
your Fund Express service; please wait three weeks before us-
ing the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 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 distribu-
tions will be paid in cash.
You may change your option by calling our Client Services De-
partment (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 divi-
dends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund shareholders.
INVESTORS These distributions are made to all shareholders who own Fund
SHOULD ASK shares as of the distribution's record date, regardless of
ABOUT THE how long the shares have been owned. Purchasing shares just
TIMING OF prior to the record date could have a significant impact on
CAPITAL GAINS your tax liability for the year. For example, if you purchase
AND DIVIDEND shares immediately prior to the record date of a sizable cap-
DISTRIBUTIONS ital gain or income dividend distribution, you will be as-
BEFORE sessed taxes on the amount of the capital gain and/or divi-
INVESTING dend 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 in-
vestment 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 implica-
tions the timing of your purchase may have.
Prospective investors should, therefore, inquire about poten-
tial distributions before investing. The Fund's annual capi-
tal gains distribution normally occurs in December, while in-
come dividends are generally paid quarterly in March, June,
September and December. For additional information on distri-
butions and taxes, see the section titled "Dividends, Capital
Gains, and Taxes."
- --------------------------------------------------------------------------------
18
<PAGE>
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO ADD
ESTABLISHING SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
OPTIONAL WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
SERVICES CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FUR-
THER ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature guaran-
GUARANTEES tee 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 certifi-
cate is lost, you may incur an expense to replace it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or ad-
viser may charge a service fee.
CANCELLING The Fund will not cancel any trade (e.g., purchase, exchange
TRADES or redemption) believed to be authentic, received in writing
or by telephone, once the trade request has been received.
- --------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is credit-
ACCOUNT WILL ed. If your purchase is made by check, Federal Funds wire or
BE CREDITED 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 pur-
chase 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.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a for-
eign 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 re-
ject any specific purchase request.
- --------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You generally may initiate a
request by writing or by telephoning. Your redemption pro-
ceeds are normally mailed within two business days after the
receipt of the request in Good Order.
--------------------------------------------------------------
SELLING BY Requests should be mailed to VANGUARD FINANCIAL CENTER, VAN-
MAIL GUARD 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.)
19
<PAGE>
The redemption price of shares will be the Fund's net asset
value next determined after Vanguard has received all re-
quired documents in Good Order.
--------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
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 regis-
tered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be re-
quired, 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 PER-
TAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DE-
PARTMENT AT 1-800-662-2739.
--------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized rep-
TELEPHONE resentative may call our Client Services Department at 1-800-
662-2739. The proceeds will be sent to you by mail. PLEASE
NOTE: As a protection against fraud, your telephone mail re-
demption privilege will be suspended for 10 calendar days
following any expedited address change to your account. An
expedited address change is one that is made by telephone, by
Vanguard Online or, in writing, without the signatures of all
account owners. Please see "Important Information About Tele-
phone Transactions."
--------------------------------------------------------------
SELLING BY If you select the Fund Express Automatic Withdrawal option,
FUND EXPRESS money will be automatically moved from your Vanguard Fund ac-
count to your bank account according to the schedule you have
Automatic selected. The Special Redemption option lets you move money
Withdrawal & from your Vanguard account to your bank account on an "as
Special needed" basis. To establish these Fund Express options,
Redemption 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 You may sell shares of the Fund by making an exchange to an-
EXCHANGE other Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
--------------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may be redeemed at
REDEMPTION any time. However, your redemption proceeds will not be paid
INFORMATION until payment for the purchase is collected, which may take
up to ten calender days.
--------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the close
REDEMPTION of regular trading on the New York Stock Exchange are proc-
PROCEEDS essed on the day of receipt and the redemption proceeds are
normally sent on the following business day.
20
<PAGE>
Redemption requests received by telephone after the close of
the Exchange (generally 4:00 p.m., Eastern time) are proc-
essed on the business day following receipt and the proceeds
are normally sent on the second business day following re-
ceipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order except as described on
page 20 in Important Redemption Information.
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 Or-
der. 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 detri-
mental to the best interests of the Fund's remaining share-
holders to make payment in cash, the Fund may pay redemption
proceeds in excess of $250,000 in whole or in part by a dis-
tribution in kind of readily marketable securities.
--------------------------------------------------------------
VANGUARD'S If you make a redemption from a qualifying account, Vanguard
AVERAGE COST will send you an Average Cost Statement which provides you
STATEMENT with the tax basis of the shares you redeemed. Please see
"Statements and Reports" for additional information.
--------------------------------------------------------------
LOW BALANCE Due to the relatively high cost of maintaining smaller ac-
FEE AND counts, the Fund will automatically deduct a $10 annual fee
MINIMUM from non-retirement accounts with balances falling below
ACCOUNT $2,500 ($1,000 for Uniform Gifts/Transfers to Minors Act ac-
BALANCE counts). This fee deduction will occur mid-year, beginning in
REQUIREMENT 1996. The fee generally will be waived for investors whose
aggregate Vanguard assets exceed $50,000.
In addition, the Fund reserves the right to liquidate any
non-retirement account that is below the minimum initial in-
vestment amount of $3,000. If at any time the total invest-
ment does not have a value of at least $3,000, you may be no-
tified 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 liquidat-
ed. Proceeds would be promptly paid to the registered share-
holder.
Vanguard will not liquidate your account if it has fallen be-
low $3,000 solely as a result of declining markets (i.e., a
decline in a Fund's net asset value).
- --------------------------------------------------------------------------------
21
<PAGE>
EXCHANGING Should your investment goals change, you may exchange your
YOUR SHARES shares of Vanguard Convertible Securities Fund for those of
other available Vanguard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Fund name, account number, Social Security Number or Employer
Identification Number listed on the account, and the exact
Call Client name and address in which the account is registered. Requests
Services (1- for telephone exchanges received prior to the close of trad-
800-662-2739) ing on the New York Stock Exchange (generally 4:00 p.m. East-
ern 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 diffi-
culty in making a telephone exchange, your exchange request
may be made by regular or express mail, and it will be imple-
mented at the closing net asset value on the date received by
Vanguard provided the request is received in Good Order.
--------------------------------------------------------------
EXCHANGING BY Please be sure to include on your exchange request the name
MAIL 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 CONVERT-
IBLE SECURITIES FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to Van-
guard Financial Center, Vanguard Convertible Securities Fund,
455 Devon Park Drive, Wayne, PA 19087.)
--------------------------------------------------------------
IMPORTANT Before you make an exchange, you should consider the follow-
EXCHANGE ing:
INFORMATION
. Please read the Fund's prospectus before making an ex-
change. 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 or Vanguard/PRIMECAP 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.
22
<PAGE>
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 The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the man-
agement of the Fund and increase transaction costs, the Fund
has established a policy of limiting excessive exchange ac-
tivity.
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
right to reject any purchase request (including exchange pur-
chases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions)
INFORMATION and exchanges by telephone is automatically established on
ABOUT your account unless you request in writing that telephone
TELEPHONE transactions on your account not be permitted.
TRANSACTIONS
To protect your account from losses resulting from unautho-
rized 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 Iden-
tification 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 au-
thenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been fol-
lowed. Vanguard believes that the security procedures de-
scribed 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 ac-
count. If Vanguard fails to follow reasonable security proce-
dures, it may be liable for any losses resulting from unau-
thorized or fraudulent telephone transactions on your ac-
count.
- --------------------------------------------------------------------------------
23
<PAGE>
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION 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 Vanguard will send you a confirmation statement each time you
REPORTS initiate a transaction in your account (except for
checkwriting redemptions from Vanguard money market ac-
counts). You will also receive a comprehensive account state-
ment at the end of each calendar quarter. The fourth-quarter
statement will be a year-end statement, listing all transac-
tion activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the aver-
age cost of shares redeemed from your account, using the av-
erage 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 Van-
guard account may expect to receive their Average Cost State-
ment in February of the following year. Please call our Cli-
ent Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-an-
nually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call
SERVICES our Investor Information Department at 1-800-662-7447.
VANGUARD With Vanguard's Direct Deposit Service, most U.S. Government
DIRECT DEPOSIT checks (including Social Security and military pension
SERVICE checks) and private payroll checks may be automatically de-
posited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
VANGUARD Vanguard's Automatic Exchange Service allows you to move
AUTOMATIC money automatically among your Vanguard Fund accounts. For
EXCHANGE instance, the service can be used to "dollar cost average"
SERVICE 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 addi-
tional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS 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.
Special rules govern how your Fund Express purchases or re-
demptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific Van-
guard Funds. For more information, please refer to the Van-
guard Fund Express brochure.
24
<PAGE>
VANGUARD Vanguard's Dividend Express allows you to transfer your divi-
DIVIDEND dends and/or capital gains distributions automatically from
EXPRESS your Fund account, one business day after the Fund's payable
date, to your account at a bank, savings and loan associa-
tion, 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 Informa-
tion Department (1-800-662-7447) for a Vanguard Dividend Ex-
press application.
VANGUARD TELE- Vanguard's Tele-Account is a convenient, automated service
ACCOUNT 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 of-
fering detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
25
<PAGE>
PART B
VANGUARD CONVERTIBLE SECURITIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
MARCH 8, 1996
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus dated March 8, 1996. 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-2
Management of the Fund..................................................... B-3
Directors and Officers..................................................... B-5
Investment Advisory Services............................................... B-6
Portfolio Transactions..................................................... B-7
General Information........................................................ B-8
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 other-
wise require the untimely disposition of securities, in an amount not ex-
ceeding 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 addi-
tional investments;
2. With respect to 75% of the value of its total assets, purchase the se-
curities 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 com-
pany;
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;
B-1
<PAGE>
5. Engage in the business of underwriting securities issued by other per-
sons, 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 invest-
ment, 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, direc-
tors 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 se-
curities 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 ob-
ligations (including repurchase agreements, subject to the limitation de-
scribed 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 Ex-
change 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 in-
dustry.
The above mentioned investment limitations are considered at the time in-
vestment securities are purchased. Notwithstanding these limitations, the Fund
may own all or any portion of the securities of, or make loans to, or contrib-
ute 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, adminis-
trative, 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 offer-
ing 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 investment for or any other restrictions on ini-
tial and subsequent investments for certain fiduciary accounts or under cir-
cumstances where certain economies can be achieved in sales of the Fund's
shares.
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
B-2
<PAGE>
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 redemp-
tions 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 distribu-
tion 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 requi-
site 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 ad-
viser for the Funds.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1 un-
der the Investment Company Act of 1940. The Code is designed to prevent unlaw-
ful 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 recom-
mended by the mutual fund industry and approved by the U.S. Securities and Ex-
change Commission.
Vanguard was established and operates under a Funds' Service Agreement which
was approved by the shareholders of each of the Funds. The amounts which each
of the Funds has invested are adjusted from time to time in order to maintain
the proportionate relationship between each Fund's relative net assets and its
contribution to Vanguard's capital. At November 30, 1995, the Fund had con-
tributed capital of $21,000 to Vanguard, representing .1% of Vanguard's capi-
talization. The Funds' Service Agreement, provides for the following arrange-
ment: (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 in-
vestment that the Vanguard Funds may make in Vanguard.
B-3
<PAGE>
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended November 30, 1995 the Fund's share of actual net costs of
operation relating to management and administrative services provided by
Vanguard totaled approximately $504,000.
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 materi-
als and marketing personnel. Distribution services may also include organizing
and offering to the public, from time to time, one or more new investment com-
panies 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 in-
vestment 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 contribu-
tion for distribution expenses of a marketing and promotional nature shall ex-
ceed 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 aver-
age month-end net assets. During the fiscal year ended November 30, 1995 the
Fund paid approximately $35,000 of the group's distribution and marketing ex-
penses, 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 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, Aggressive
Growth Portfolio of Vanguard Horizon 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>
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are responsi-
ble 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 Offi-
cers of the Fund and a statement of their present positions and principal oc-
cupations during the past five years. The mailing address of the Fund's Direc-
tors and Officers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman and Direc- JOHN C. SAWHILL, Director
tor* President and Chief Executive Offi-
Chairman and Director of The Van- cer, The Nature Conservacy; former-
guard Group, Inc., and each of the ly, Director and Senior Partner,
investment companies in The Van- McKinsey & Co.; President, New York
guard Group; Director of The Mead University; Director, Pacific Gas
Corporation and General Accident and Electric Company and NACCO In-
Insurance. dustries.
JOHN J. BRENNAN, President, Chief JAMES O. WELCH, JR., Director
Executive Officer & Director* Retired Chairman of Nabisco Brands
President, Chief Executive Officer Inc. and retired Vice Chairman and
and Director of The Vanguard Director of RJR Nabisco; Director,
Group, Inc. and each of the in- TECO Energy, Inc.; and Director of
vestment companies in The Vanguard Kmart Corporation.
Group.
J. LAWRENCE WILSON, Director
ROBERT E. CAWTHORN, Director Chairman and Chief Executive Offi-
Chairman of Rhone-Poulenc Rorer, cer of Rohm & Haas Company; Direc-
Inc.; Director of Sun Company, tor of Cummins Energy Company; and
Inc. Trustee of Vanderbilt University.
BARBARA BARNES HAUPTFUHRER, Director RAYMOND J. KLAPINSKY, Secretary*
Director of The Great Atlantic and Senior Vice President and Secretary
Pacific Tea Company, Raytheon Com- of The Vanguard Group, Inc.; Secre-
pany, Knight-Ridder, Inc., and tary of each of the investment com-
Massachusetts Mutual Life Insur- panies in The Vanguard Group.
ance Co. and Trustee Emerita of
Wellesley College. RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group,
BRUCE K. MACLAURY, Director Inc. and of each of the investment
President, The Brookings Institu- companies in The Vanguard Group.
tion; Director of American Express
Bank, Ltd., The St. Paul Compa- KAREN E. WEST, Controller*
nies, Inc., and Scott Paper Compa- Vice President of The Vanguard
ny. Group. Inc.; Controller of each of
the investment companies in The
BURTON G. MALKIEL, Director Vanguard Group.
Chemical Bank Chairman's Professor --------
of Economics, Princeton Universi- * Officers of the Fund are "inter-
ty; Director of Prudential Insur- ested persons" as defined in the
ance Co. of America, Amdahl Corpo- Investment Company Act of 1940.
ration, Baker Fentress & Co., The
Jeffrey Co. and Southern New En-
gland Communications Company.
ALFRED M. RANKIN, JR., Director
Chairman, President, and Chief Ex-
ecutive Officer of NACCO Indus-
tries, Inc.; Director of The
BFGoodrich Company, The Standard
Products Company.
B-5
<PAGE>
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 Of-
ficers 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 Offi-
cers' and employees' salaries and retirement benefits. During the fiscal year
ended November 30, 1995 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 fis-
cal year was $5,827.
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 Di-
rector, and each Vanguard Fund contributes a proportionate amount of this fee
based on its relative net assets. Under its retirement plan, Vanguard contrib-
utes 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. Un-
der its thrift plan, all eligible Officers are permitted to make pre-tax con-
tributions 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 contri-
butions made by Vanguard under its retirement and thrift plans on behalf of
all eligible Officers of the Fund as a group during the 1995 fiscal year was
approximately $1,500.
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors for the fiscal year ended November
30, 1995.
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(3)
- ------------------ ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1), (2)... -- -- -- --
John J. Brennan(2)...... -- -- -- --
Barbara Barnes
Hauptfuhrer............ $84 $14 $15,000 $60,000
Robert E. Cawthorn...... $84 $12 $13,000 $60,000
Bruce K. MacLaury....... $91 $14 $12,000 $55,000
Burton G. Malkiel....... $84 $ 9 $15,000 $60,000
Alfred M. Rankin, Jr. .. $84 $ 7 $15,000 $60,000
John C. Sawhill......... $84 $ 9 $15,000 $60,000
James O. Welch, Jr. .... $84 $11 $15,000 $60,000
J. Lawrence Wilson...... $84 $ 8 $15,000 $60,000
</TABLE>
(1) For the period reported in this table, Mr. Bogle was the Fund's Chief Ex-
ecutive Officer, and therefore an "Interested Director."
(2) As "Interested Directors," Messrs. Bogle and Brennan receive no compensa-
tion for their service as Directors.
(3) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard
Funds (27 in the case of Mr. MacLaury).
INVESTMENT ADVISORY SERVICES
The Fund employs Desai Capital Management, Inc. ("the Adviser") under an in-
vestment 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 re-
sponsibilities subject to the control of the Officers and Directors of the
Fund.
B-6
<PAGE>
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 per-
centage rates, to the Fund's average month-end net assets for the quarter:
<TABLE>
<CAPTION>
NET ASSETS RATE
---------- -----
<S> <C>
First $50 million...................................................... 0.40%
Next $50 million....................................................... 0.35%
Next $100 million...................................................... 0.30%
Over $200 million...................................................... 0.25%
</TABLE>
During the fiscal years ended November 30, 1993, 1994, and 1995, the Fund
paid investment advisory fees of approximately $716,000, $749,000, and
$674,000 respectively. These fees were paid pursuant to the terms of a previ-
ous investment advisory agreement, which called for a higher rate of fees.
The agreement will continue until June 15, 1996 and will be renewable there-
after 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 ad-
viser 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,
1995, the Adviser managed assets with an estimated fair market value of ap-
proximately $1.4 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.
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 di-
rects 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 commis-
sion which provides the most favorable total cost or proceeds reasonably ob-
tainable under the circumstances.
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In placing portfolio transactions, the Adviser will use its best judgement
to choose the broker most capable of providing the brokerage services neces-
sary 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 infor-
mation 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 ef-
fecting the same transaction; provided that such commission is deemed reason-
able in terms of either that particular transaction or the overall responsi-
bilities 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 other-
wise 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 trans-
action, consider the sale of the Fund shares by a broker or dealer in select-
ing among qualified broker-dealers.
Some securities considered for investment by the Fund may also be appropri-
ate 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, 1993, 1994 and 1995 the Fund paid $61,413,
$58,489, and $38,822 in brokerage commissions.
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 desig-
nate one or more classes ("Portfolios") of shares of common stock and to clas-
sify or reclassify any unissued shares with respect to such Portfolios. Cur-
rently the Fund is offering shares of one portfolio.
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The shares of the Fund are fully paid and non-assessable, and have no pref-
erence 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, irrespec-
tive 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, 1995 was
+4.38%.
The average annual total return of the Fund for the one- and five-year peri-
ods ended November 30, 1995 was +17.10% and +15.74%, respectively. The average
annual total return of the Fund for the period since its inception on June 17,
1986 was +8.69%.
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of the Vanguard Group of Investment Companies.
Each of the investment company members of the Vanguard Group, including Van-
guard 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 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years
or greater.
THE LEHMAN AGGREGATE BOND INDEX is composed of the Lehman Brothers
Government/Corporate Bond Index and the Lehman Brothers Mortgage-Backed Secu-
rities Index and includes treasury issues,
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agency issues, corporate bond issues and mortgage-backed securities. All secu-
rities are rated investment grade or higher by Moody's Investors Service,
Standard & Poor's Corporation, or Fitch Investor's Service, in that order. All
issues have at least one year to maturity and an outstanding par value of at
least $100 million.
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.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
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% Lehman Long-term
Corporate 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 Baa--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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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).
LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
LIPPER FIXED INCOME FUND AVERAGE--an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
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 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, 1995, in-
cluding the financial highlights for each of the five fiscal years in the pe-
riod ended November 30, 1995, appearing in the Fund's 1995 Annual Report to
Shareholders, and the report thereon of Price Waterhouse LLP, independent ac-
countants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Fund's 1995 Annual Report to Share-
holders 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 characteris-
tically unreliable over any great length of time. BA--judged to have specula-
tive 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 obli-
gations. A very strong capacity to pay interest and repay principal and dif-
fers 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 obliga-
tion; 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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