SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT (NO. 2-54886) UNDER THE
SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 30
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 34
VANGUARD PREFERRED STOCK FUND
(Exact Name of Registrant as Specified in Charter)
P.O. Box 2600, Valley Forge, PA 19482
(Address of Principal Executive Office)
Registrant's Telephone Number (610) 669-1000
Raymond J. Klapinsky, Esquire
P.O. Box 876
Valley Forge, PA 19482
It is proposed that this filing become effective on February 28, 1995,
pursuant to paragraph (b) of Rule 485.
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
Registrant elects to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. Registrant filed
its Rule 24f-2 Notice for the fiscal year ended October 31, 1994 on
December 21, 1994.
<PAGE>
VANGUARD PREFERRED STOCK FUND
CROSS REFERENCE SHEET
Form N-1A
Item Number Location in Prospectus
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Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- Not Applicable
Item 3. Condensed Financial Information -- Financial Highlights; Fund
Expenses; Yield and Total Return Disclosure
Item 4. General Description of Registrant -- Investment Objective;
Investment Policies; Investment Risks; Implementation of Policies;
Investment Limitations; General Information
Item 5. Management of the Fund -- Management of the Fund; Investment
Adviser; Trustees and Officers
Item 6. Capital Stock and Other Securities -- Opening an Account and
Purchasing Shares; The Fund's Share Price; Dividends, Capital
Gains and Distributions
Item 7. Purchase of Securities Being Offered -- Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase -- Selling Your Shares
Item 9. Pending Legal Proceedings -- Not Applicable
Form N-1A
Item Number Location in Statement of Additional Information
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Item 10. Cover Page -- Cover Page
Item 11. Table of Contents -- Cover Page
Item 12. General Information and History -- Investment Objective and
Policies; General Information
Item 13. Investment Objective and Policies -- Investment Objective and
Policies; Investment Limitations
Item 14. Management of the Fund -- Management of the Fund; Investment
Management
Item 15. Control Persons and Principal Holders of Securities -- Management
of the Fund; General Information
Item 16. Investment Advisory and Other Services -- Management of the Fund;
Investment Management
Item 17. Brokerage Allocation -- Not Applicable
Item 18. Capital Stock and Other Securities -- General Information;
Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities Being Offered --
Purchase of Shares; Redemption of Shares
Item 20. Tax Status -- Appendix
Item 21. Underwriters -- Not Applicable
Item 22. Calculations of Yield Quotations of Money Market Fund -- Not
Applicable
Item 23. Financial Statements -- Financial Statements
<PAGE>
The Vanguard Group of Investment Companies
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
Investor Information Department:
1-800-662-7447 (SHIP)
Client Services Department:
1-800-662-2739 (CREW)
Tele-Account for 24-Hour Access:
1-800-662-6273 (ON-BOARD)
Telecommunications Service for the Hearing-Impaired:
1-800-662-2738
Transfer Agent:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
<PAGE>
P R O S P E C T U S
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A Member of The Vanguard Group
===========================================================================
PROSPECTUS-- FEBRUARY 28, 1995
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NEW ACCOUNT INFORMATION: Investor Information Department--
1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: Client Services Department--
1-800-662-2739 (CREW)
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INVESTMENT OBJECTIVE AND POLICIES
Vanguard Preferred Stock Fund (the "Fund") is an open-end
diversified investment company that seeks to provide the maximum
dividend income which qualifies for the 70% corporate dividends
received deduction under federal tax law. The Fund invests
primarily in the preferred stocks of domestic corporations.
There is no assurance that the Fund will achieve its stated
objective. Shares of the Fund are neither insured nor guaranteed
by any agency of the U.S. Government, including the FDIC.
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OPENING AN ACCOUNT
To open a regular (non-retirement) account, please complete and
return the Account Registration Form. If you need assistance in
completing this Form, please call the Investor Information
Department. To open an Individual Retirement Account (IRA),
please use a Vanguard IRA Adoption Agreement. To obtain a copy of
this form, call 1-800-662-7447, Monday through Friday, from 8:00
a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to 4:00
p.m. (Eastern time). The minimum initial investment is $3,000
or $500 for Uniform Gifts/Transfers to Minors Act
accounts. The Fund is offered on a no-load basis (i.e., there
are no sales commissions or 12b-1 fees). However, the Fund incurs
expenses for investment advisory, management,
administrative and distribution services.
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ABOUT THIS PROSPECTUS
This Prospectus is designed to set forth concisely the
information you should know about the Fund before you invest. It
should be retained for future reference. A "Statement of
Additional Information" containing additional information about
the Fund has been filed with the Securities and Exchange
Commission. This Statement is dated February 28, 1995, and
has been incorporated by reference into this Prospectus. A copy
may be obtained, without charge, by writing to the Fund or by
calling the Investor Information Department.
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TABLE OF CONTENTS
Page
Fund Expenses........................................ 2
Financial Highlights................................. 2
Yield and Total Return............................... 3
FUND INFORMATION
Investment Objective................................. 4
Investment Policies.................................. 4
Investment Risks..................................... 4
Who Should Invest.................................... 5
Implementation of Policies........................... 5
Investment Limitations............................... 6
Management of the Fund............................... 7
Investment Adviser................................... 7
Performance Record................................... 8
Dividends, Capital Gains and Taxes................... 9
The Share Price of the Fund.......................... 11
General Information.................................. 11
SHAREHOLDER GUIDE
Opening an Account and Purchasing Shares...... 12
When Your Account Will Be Credited............ 15
Selling Your Shares........................... 5
Exchanging Your Shares........................ 17
Important Information About Telephone Transactions... 19
Transferring Registration..................... 19
Other Vanguard Services....................... 20
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
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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 and fees
set forth in the table are for the 1994 fiscal year.
Shareholder Transaction Expenses
----------------------------------------------------------
Sales Load Imposed on Purchases.................. None
Sales Load Imposed on Reinvested Dividends....... None
Redemption Fees*................................. None
Exchange Fees.................................... None
Annual Fund Operating Expenses
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Management & Administrative Expenses...... 0.22%
Investment Advisory Fees.................. 0.23
12b-1 Fees....................................... None
Other Expenses
Distribution Costs.............. 0.03%
Miscellaneous Expenses.......... 0.03
Total Other Expenses...................... 0.06
Total Fund Operating Expenses.... 0.51%
* Wire redemption of less than $5,000 are subject to a
$5 processing fee.
The purpose of this table is to assist you in understanding the
various costs and expenses that you would bear directly or
indirectly as an investor in the 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.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$5 $16 $29 $64
This example should not be considered a representation of past or
future expenses or performance. Actual expenses may be higher or
lower than those shown.
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FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of the
five years in the period ended October 31, 1994, have been
audited by Price Waterhouse LLP , independent accountants,
whose report thereon was unqualified. This information should be
read in conjunction with the Fund's financial statements and
notes thereto which are incorporated by reference in the
Statement of Additional Information and in this Prospectus, and
which appear, along with the report of Price Waterhouse
LLP , in the Fund's 1994 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1994 Annual Report to
Shareholders, which may be obtained without charge by writing to
the Fund or by calling our Investor Information Department at
1-800-662-7447.
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
---------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year...................... $ 9.99 $9.32 $9.06 $8.22 $8.62 $7.94 $8.02 $9.76 $8.13 $7.41
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Investment Operations
Net Investment Income........ .660 .690 .749 .765 .695 .691 .765 .765 .80 .89
Net Realized and Unrealized
Gain (Loss) on Investments. (1.460) .685 .236 .855 (.350) .514 .170 (1.730) 1.72 .76
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from Investment
Operations............... (.800) 1.375 .985 1.620 .345 1.205 .935 (.965) 2.52 1.65
- ----------------------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment
Income..................... (.700) (.705) (.725) (.780) (.745) (.525) (.895) (.775) (.84) (.93)
Distributions from Realized
Capital Gains.............. (.140) -- -- -- -- -- (.120) -- (.05) --
Total Distributions........ (.840) (.705) (.725) (.780) (.745) (.525) (1.015) (.775) (.89) (.93)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year... $8.35 $9.99 $9.32 $9.06 $8.22 $8.62 $7.94 $8.02 $9.76 $8.13
==================================================================================================================================
Total Return................... (8.45)% 15.56% 11.34% 20.83% 4.28% 15.82% 12.37% (10.64)% 32.61% 23.91%
==================================================================================================================================
Ratios/Supplemental Data
Net Assets, End
of Year (Millions)........... $305 $392 $187 $90 $54 $604 $78 $84 $154 $86
Ratio of Expenses to Average
Net Assets................... .51% .53% .58% .63% .65% .67% .66% .64% .58% .59%
Ratio of Net Investment Income
to Average Net Assets........ 7.27% 6.77% 7.43% 7.96% 8.69% 9.11% 9.40% 8.60% 9.07% 11.01%
Portfolio Turnover Rate........ 27% 45% 33% 18% 15% 42% 52% 67% 48% 34%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
YIELD AND TOTAL RETURN
From time to time the Fund advertises its yield and total return.
Both yield and total return figures are based on historical
earnings and are not intended to indicate future performance. The
"total return" of the Fund refers to the average annual
compounded rates of return over one-, five- and ten-year periods
or over 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 distributions.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "30-day yield" of the
Fund is calculated by dividing the net investment income per
share earned during a 30-day period by the net asset value per
share on the last day of the period. Net investment income
includes interest and dividend income earned on the Fund's
securities; it is net of all expenses and all recurring and
nonrecurring charges that have been applied to all shareholder
accounts. The yield calculation assumes that the net investment
income earned over 30 days is compounded monthly for six months
and then annualized. Methods used to calculate advertised yields
are standardized for all stock and bond mutual funds. However,
these methods differ from the accounting methods used by the Fund
to maintain its books and records, and so the advertised 30-day
yield may not fully reflect the income paid to your own account
or the yield reported in the Fund's reports to shareholders.
Additionally the Fund may compare its performance to that of the
Merrill Lynch Preferred Perpetual Index.
<PAGE>
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INVESTMENT OBJECTIVE
The Fund seeks to provide qualified dividend income
The Fund is an open-end diversified investment company. The
objective of the Fund is to provide the maximum dividend income
which qualifies for the 70% corporate dividends received
deduction under federal tax law by investing primarily in the
preferred stocks of domestic corporations. There is no assurance
that the Fund will achieve its stated objective.
The investment objective of the Fund is not fundamental and so
may be changed by the Board of Trustees without shareholder
approval.
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INVESTMENT POLICIES
The Fund invests in preferred stocks
Under normal circumstances, the Fund will invest more than 75% of
its total assets in cumulative preferred stocks of domestic
corporations which have been rated Baa or better by Moody's
Investors Service, Inc. or BBB or better by Standard & Poor's
Corporation. The remainder of the Fund's assets may be invested
in (i) similarly rated fixed-income securities, including
convertible preferred stocks and bonds, and money market
instruments, and (ii) preferred stocks with lower ratings. The
Fund will not sell any of the securities that it holds solely on
account of such securities having been downgraded. The Fund is
managed without regard to tax ramifications.
No investments will be made in common stocks. In the case of
convertible securities, the conversion privilege may be
exercised, but the common stocks received will be sold. The Fund
will not ordinarily invest in non-cumulative or non-rated
preferred stocks, but reserves the right to do so should market
conditions dictate that it be in the best interests of the Fund
and its shareholders. The Fund will not purchase warrants or
rights directly and will not in any event hold rights or warrants
to an extent greater than 5% of its total assets. See
"Implementation of Policies" for other investment practices of
the Fund.
These policies are not fundamental and so may be changed by the
Board of Trustees without shareholder approval.
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INVESTMENT RISKS
The Fund is subject to interest rate, credit and manager risks
As a mutual fund investing primarily in perpetual preferred
stocks, the Fund is subject to interest rate risk--i.e., the
possibility that the market value of preferred stocks will vary
inversely with interest rates. When interest rates rise, the
value of preferred stocks will fall; when interest rates fall,
the value of preferred stocks will rise.
Perpetual preferred stocks are similar in many ways to corporate
fixed-income securities; they provide investors with a
fixed stream of income that is generated from corporate earnings.
However, perpetual preferred stocks, unlike corporate bonds, do
not have a stated maturity date. Because they lack a fixed
maturity date, the prices of preferred stocks are extremely
sensitive to changes in interest rates. Investors should
anticipate that the fluctuations in market value of preferred
stocks will generally exceed those of long-term government or
corporate bonds (those with maturities of 15 to 30 years).
In addition to interest rate risk, the Fund is also subject to a
limited degree to credit risk--i.e., the likelihood that the
issuing corporation will be unable to make the dividend payments
<PAGE>
due on its preferred stock. Credit risk in the Fund will be
minimized by investing chiefly in investment grade preferred
stocks, and by diversifying preferred stock investments among
many companies and industries.
The investment adviser manages the Fund according to the
traditional methods of "active" investment management, which
involves the buying and selling of securities based upon
economic, financial and market analysis and investment judgement.
Manager risk refers to the possibility that the Fund's investment
advisers may fail to execute the Fund's investment strategy
effectively. As a result, the Fund may fail to achieve its stated
objective.
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WHO SHOULD INVEST
Investors seeking income which qualifies for
the dividends received deduction
The Fund is intended for investors who are seeking income from
their investments and who can tolerate substantial price risks in
pursuit of their income objectives. The Fund is suited to
investors who are willing to hold their investments over a long
time horizon in anticipation of the income that preferred stocks
may provide. Because the Fund invests in preferred stocks,
investors should be able to tolerate sharp, sometimes substantial
fluctuations in the value of their investment due to changes in
interest rates.
By minimizing nonqualifying investment income (i.e., realized
interest income and net realized short-term capital gains), the
Fund may be especially suitable for corporations seeking to
benefit from the 70% dividends received deduction. Because of the
tax considerations involved, the Fund may not be as suitable an
investment for individuals, who, unlike corporations, are not
permitted to exclude qualified dividends received from their
taxable income.
Because of the risks associated with stock investments, the Fund
is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on
short-term stock market movements. Investors who engage in
excessive account activity generate additional costs which are
borne by all of the Fund's shareholders. In order to minimize
such costs, the Fund has adopted the following policies. The Fund
reserves the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that is
reasonably deemed to be disruptive to efficient portfolio
management, either because of the timing of the investment
or previous excessive trading by the investor. Additionally, the
Fund has adopted exchange privilege limitations as described in
the section "Exchange Privilege Limitations." Finally, the Fund
reserves the right to suspend the offering of its shares.
Given its objectives and risks, the Fund is not intended as a
complete investment program. Most investors should maintain
diversified holdings of securities with different risk
characteristics--including common stocks, bonds and money market
instruments.
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IMPLEMENTATION OF POLICIES
In addition to investing in preferred stocks, the Fund follows a
number of additional investment policies.
The Fund may invest in short-term fixed income securities
Although it normally seeks to remain substantially invested in
preferred stocks, the Fund may invest temporarily in certain
short-term fixed income securities. Such securities may be used
<PAGE>
to invest uncommitted cash balances or to maintain liquidity to
meet shareholder redemptions. No more than 35% of the Fund's
assets will be invested in short-term investments for purposes
other than temporary defensive purposes. These short-term fixed
income securities include: obligations of United States
Government and its agencies or instrumentalities; commercial
paper, bank certificates of deposit, and bankers' acceptances;
and repurchase agreements collateralized by these securities.
The Fund may lend its securities
The Fund may lend its investment securities on a short-term or a
long-term basis to qualified institutional investors for the
purpose of realizing additional income. Loans of securities by
the Fund will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the current
market value of the loaned securities.
The Fund may borrow money
The Fund may borrow money, subject to the limits set forth below,
for temporary or emergency purposes, including the meeting of
redemption requests which might otherwise require the untimely
disposition of securities .
Portfolio turnover is not expected to exceed 100%
Although it generally seeks to invest for the long term, the Fund
retains the right to sell securities irrespective of how long
they have been held. It is anticipated that the Fund's annual
turnover rate will not exceed 100%. A turnover rate of 100% would
occur, for example, if all of the securities of the Fund were
replaced within one year.
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INVESTMENT LIMITATIONS
The Fund has adopted certain fundamental limitations
The Fund has adopted certain limitations on its investment
practices. Specifically, the Funds will not:
(a) With respect to 75% of the value of its total assets,
purchase the securities of any issuer (except obligations of
the United States Government and its instrumentalities) if,
as a result, the Fund would hold more than 10% of the
outstanding voting securities of the issuer, or more than 5%
of the value of the Fund's total assets would be invested in
the securities of such issuer.
(b) Invest more than 25% of its assets in any one industry, with
the exception of the electric and/or gas industries; and
(c) Borrow money, except from banks (or through reverse
repurchase agreements) for temporary or emergency (not
leveraging) purposes, and then not in an amount exceeding 15%
of the value of the Fund's net assets (including the amount
borrowed and the value of any outstanding reverse repurchase
agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Fund's net assets,
the Fund will not make any additional investments.
These investment limitations are considered at the time
investment securities are purchased. The limitations described
here and in the Statement of Additional Information may be
changed only with the approval of a majority of the Fund's
shareholders.
<PAGE>
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MANAGEMENT OF THE FUND
Vanguard administers and distributes the Fund
The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 80 distinct investment portfolios and total
assets in excess of $130 billion. Through their jointly-
owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund
and the other funds in the Group obtain at cost virtually all of
their corporate management, administrative, shareholder
accounting and distribution services. Vanguard also provides
investment advisory services on an at-cost basis to certain
Vanguard funds. As a result of Vanguard's unique corporate
structure, the Vanguard funds have costs substantially lower than
those of most competing mutual funds. In 1994 , the average
expense ratio (annual costs including advisory fees divided by
total net assets) for the Vanguard funds amounted to
approximately .30% compared to an average of 1.05%
for the mutual fund industry (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 Trustees. The Trustees set
broad policies for the Fund and choose its Officers. A list of
the Trustees and Officers of the Fund and a statement
of their present positions and principal occupations during the
past five years can be found in the Statement of Additional
Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite services
to the funds and also furnishes the funds with necessary office
space, furnishings and equipment. Each fund pays its share of
Vanguard's total expenses, which are allocated among the funds
under methods approved by the Board of Trustees (Directors) of
each fund. In addition, each fund bears its own direct expenses,
such as legal, auditing and custodian fees.
Vanguard also provides distribution and marketing services to the
Vanguard funds. The funds are available on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees). However, each fund
bears its share of the Group's distribution costs.
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INVESTMENT ADVISER
Wellington Management Company manages the Fund's investments
The Fund has entered into an investment advisory agreement with
Wellington Management Company ("WMC"), 75 State Street, Boston,
MA 02109, under which WMC manages the investment and reinvestment
of the Fund's assets and continuously reviews, supervises and
administers the Fund's investment program. WMC discharges its
responsibilities subject to the control of the Fund's Officers
and Trustees.
WMC is a professional investment advisory firm which globally
provides services to investment companies, other institutions and
individuals. Among the clients of WMC are more than 10
investment companies of The Vanguard Group. As of October 31,
1994, WMC held discretionary management authority with
respect to more than $80 billion of assets. WMC and its
predecessor organizations have provided investment advisory
services to investment companies since 1933 and to investment
counseling clients since 1960.
Earl E. McEvoy, Senior Vice President of WMC, serves as portfolio
manager of the Fund, a position he has held since October 1982.
Mr. McEvoy has been associated with Wellington Management Company
for 17 years. Mr. McEvoy is supported by research and other
investment services provided by the professional staff of WMC.
<PAGE>
The Fund pays WMC a basic advisory fee calculated by applying
varying percentage rates to the average net assets of the Fund as
follows:
Net Assets Rate
-------------------------------- -----
First $50 million .325%
Next $100 million .275%
Next $100 million .225%
Assets in excess of $250 million .150%
During the fiscal year which ended on October 31, 1994,
the total advisory fees paid by the Fund to WMC represented an
annual effective rate of .23 of 1% of the Fund's total
average net assets.
The investment advisory agreement with WMC authorizes the adviser
to select brokers or dealers to execute purchases and sales of
the Fund's portfolio securities, and directs the adviser to use
its best efforts to obtain the best available price and most
favorable execution with respect to all transactions. The full
range and quality of brokerage services available are considered
in making these determinations.
The Fund has authorized WMC to pay higher commissions in
recognition of brokerage services felt necessary for the
achievement of better execution, provided the adviser believes
this to be in the best interest of the Fund. Although the Fund
does not market its shares through intermediary brokers or
dealers, the Fund may place 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 Trustees may, without the approval of
shareholders, provide for: (a) the employment of a new investment
adviser pursuant to the terms of a new advisory agreement, either
as a replacement for an existing adviser or as an additional
adviser; (b) a change in the terms of an advisory agreement; and
(c) the continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned
because of a change in control of the adviser. Any such change
will only be made upon not less than 30 days' prior
written notice to shareholders of the Fund which shall include
substantially the information concerning the adviser that would
have normally been included in a proxy
statement.
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PERFORMANCE RECORD
The table on page 9 provides investment results for the Fund for
several periods over the Fund's lifetime. The results 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
on the unmanaged Standard & Poor's Preferred Stock Index, a
measure of the investment performance of preferred stocks. The
table does not make any allowance for federal, state or local
income taxes, which shareholders must pay on a current basis.
The results shown 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
<PAGE>
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 Return for Vanguard Preferred Stock Fund
-----------------------------------------------------------------
Merrill Lynch
Fiscal Years Vanguard Preferred Perpetual Preferred
Ended 10/31/94 Stock Fund Index**
-------------- ------------------ -------------------
1 Year - 8.5 % - 5.0 %
3 Years + 5.6 + 6.0
5 Years + 8.2 + 8.2
10 Years + 11.0 + 11.6
Lifetime* + 9.5 + 9.2
*December 3, 1975, to October 31, 1994 .
**Standard & Poor's Preferred Stock Index through February
1989; Merrill Lynch Perpetual Preferred Index thereafter.
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DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund pays quarterly dividends
The Fund expects to pay dividends quarterly from ordinary income.
Net capital gains distributions, if any, will be made annually.
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the Fund may declare
special year-end dividend and capital gains distributions during
December. Such distributions, if received by shareholders by
January 31, are deemed to have been paid by the Fund and received
by shareholders on December 31 of the prior year.
Dividend and capital gains distributions may be automatically
reinvested or received in cash. See "Choosing a Distribution
Option" for a description of these methods.
The Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue Code so
that it will not be subject to federal income tax to the extent
its income is distributed to shareholders. Dividends paid
by the Fund from net investment income, whether received in cash
or reinvested in additional shares, will be taxable to
shareholders as ordinary income.
Dividends will qualify for the dividends received deduction
For corporate investors, if the Fund qualifies for taxation as a
regulated investment company and satisfies certain requirements,
a portion of the dividends paid by the Fund will be eligible,
whether received in cash or reinvested in additional shares, for
the 70% corporate dividends received deduction. After such a
deduction, the qualifying portion of the Fund's dividends
would be subject to a maximum federal tax rate of 10.2%, in
contrast to the maximum federal corporate tax rate of 34%.
In keeping with the policies and objectives of the Fund, the Fund
will seek to maximize dividend income which qualifies for the 70%
corporate dividends received deduction. In fiscal year
1994 , all of the Fund's dividend distributions qualified
for the dividends received deduction.
In order to qualify for the corporate dividends received
deduction, corporate shareholders must satisfy certain holding
period requirements for the Fund's shares. Specifically, the
<PAGE>
deduction is only permitted when the Fund's shares have been held
for more than 45 days. The holding period requirements apply to
each block of Fund shares acquired, including each block of
shares received in payment of the Fund's quarterly dividends.
Corporate investors are advised to consult with their tax
advisers on their eligibility for the dividends received
deduction.
Distributions paid by the Fund from long-term capital gains,
whether received in cash or reinvested in additional shares, are
taxable to shareholders, as long-term capital gains, regardless
of the length of time the shareholder has owned the shares.
Capital gains distributions result when the Fund realizes net
capital gains on sales of portfolio securities. For the Fund,
realized capital gains are not expected to be a significant or
predictable part of investment return.
Keep in mind that if you purchase shares shortly before the
record date of a dividend or capital gains distribution, you will
pay the full price for the shares and then receive some portion
of the price back as a taxable dividend or capital gains
distribution.
The Fund notifies shareholders annually as to the tax status of
distributions paid by the Fund. The Fund is managed without
regard to tax ramifications.
A capital gain or loss may be realized upon exchange or redemption
A sale of shares of the Fund is a taxable event and may result in
a capital gain or loss. A capital gain or loss may be realized
from an ordinary redemption of shares or an exchange of shares
between two mutual funds (or two portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and capital
gains or losses from redemptions and exchanges may be subject to
state and local taxes.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to shareholders
who have not complied with IRS taxpayer identification
regulations. You may avoid this withholding requirement by
certifying on your Account Registration Form your proper Social
Security or Employer Identification number and by
certifying that you are not subject to backup withholding.
The Fund is organized as a Pennsylvania business trust and, in
the opinion of counsel, is not liable for any income or franchise
tax in the Commonwealth of Pennsylvania. The Fund will be subject
to Pennsylvania county personal property tax in the county which
is the site of its principal office. Shareholders who are
residents of Pennsylvania will be exempt from county personal
property taxes, except for shareholders who are residents of the
City and School District of Pittsburgh.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their own
tax advisers concerning the tax consequences of an investment in
the Fund.
<PAGE>
- ---------------------------------------------------------------------------
THE SHARE PRICE OF THE FUND
The Fund's share price or "net asset value" per share is
determined by dividing the total assets of the Fund, less all
liabilities, by the total number of shares outstanding. The net
asset value is calculated at the close of the time of trading on
the New York Stock Exchange on each day that the Exchange is open
for business.
Net asset value includes interest on fixed-income
securities which is accrued daily. Portfolio securities which are
traded over-the-counter and on a stock exchange will be valued
according to the broadest and most representative market, and it
is expected that for bonds and other fixed-income securities
(including preferred stocks) this market will ordinarily be the
over-the-counter market. Valuation of such securities will be at
the currently quoted bid price. When stock exchange valuations
are used, the valuation will also be the latest quoted bid price
on the day of valuation.
Securities may be valued on the basis of prices provided by a
pricing service when such prices are believed to better reflect
the fair market value of such securities. The prices provided by
a pricing service may be determined without regard to bid or last
sale prices of each security but take into account institutional
size trading in similar groups of securities and developments
related to specific securities. Temporary cash investments are
valued at cost which approximates market value. Other assets and
securities, including securities for which no quotations are
readily available, will be valued in good faith using methods
determined by the Board of Trustees.
The Fund's share price can be found daily in the mutual fund
listings of most major newspapers under the heading of The
Vanguard Group.
- ---------------------------------------------------------------------------
GENERAL INFORMATION
The Fund is a Pennsylvania business trust and is authorized to
issue an unlimited number of shares of beneficial interest,
without par value. Annual meetings of shareholders will not be
held except as required by the Investment Company Act of 1940 and
other applicable law. An annual meeting will be held to vote on
the removal of a Trustee or Trustees of the Fund if requested in
writing by the holders of not less than 10% of the outstanding
shares of the Fund.
The shares of the Fund are fully paid and non-assessable; have no
preference as to conversion, exchange, dividends, retirement or
other features; and have no pre-emptive rights. The shares of the
Fund have non-cumulative voting rights, meaning that the holders
of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees if they so choose.
All securities and cash are held by State Street Bank and Trust
Company, Boston, MA. 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.
<PAGE>
- ----------------------------------------------------------------------------
SHAREHOLDER GUIDE
OPENING AN ACCOUNT AND PURCHASING SHARES
You may open a regular (non-retirement) account, either by mail
or wire. Simply complete and return an Account Registration Form
and any required legal documentation, indicating the amount you
wish to invest. Your purchase must be equal to or greater than
the $3,000 minimum initial investment requirement ($500 for
Uniform Gifts/Transfers to Minors Act accounts). You must open a
new Individual Retirement Account by mail (IRAs may not be opened
by wire) using a Vanguard IRA Adoption Agreement. Your purchase
must be equal to or greater than the $500 minimum initial
investment requirement, but no more than $2,000 if you are making
a regular IRA contribution. Rollover contributions are generally
limited to the amount withdrawn within the past 60 days from an
IRA or other qualified Retirement Plan. If you need assistance
with the forms or have any questions about this Fund, please call
our Investor Information Department at 1-800-662-7447. <Bk$>Note:
For other types of account registrations (e.g. corporations,
associations, other organizations, trusts or powers of attorney),
please call us to determine which additional forms you may need.
Because of the risks associated with stock investments, the Fund
is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on
short-term stock market movements. Consequently the Fund reserves
the right to reject any specific purchase (and exchange purchase)
request. The Fund also reserves the right to suspend the offering
of shares for a period of time.
The Fund's shares are purchased at the next-determined net asset
value after your investment has been received. The Fund is
offered on a no-load basis (i.e., there are no sales commissions
or 12b-1 fees).
Additional Investments
Subsequent investments to regular accounts may be made by mail
($100 minimum), wire ($1,000 minimum), exchange from another
Vanguard Fund account, or Vanguard Fund Express. Subsequent
investments to Individual Retirement Accounts may be made by mail
($100 minimum) or exchange from another Vanguard Fund account. In
some instances, contributions may be made by wire or Vanguard
Fund Express. Please call us for more information on these
options.
Purchasing by Mail
Complete and sign the enclosed Account Registration Form
NEW ACCOUNT
Please include the amount of your initial investment on the
registration form, make your check payable to The Vanguard
Group-38, and mail to:
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
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-38, write
your account number on your check and, using the return envelope
provided, mail to the address indicated on the Invest-by-Mail
Form.
<PAGE>
For express or registered mail, send to:
Vanguard Financial Center
455 Devon Park Drive
Wayne, PA 19087
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 Wire Money should be wired to:
CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 0101 9897
ATTN VANGUARD
VANGUARD PREFERRED STOCK FUND
ACCOUNT NUMBER
ACCOUNT REGISTRATION
Before Wiring Please contact Client Services (1-800-662-2739)
To assure proper receipt, please be sure your bank includes the
name of the Fund selected, the account number Vanguard has
assigned to you and the eight digit CoreStates number. If you are
opening a new account, please complete the Account Registration
Form and mail it to the "New Account" address above after
completing your wire arrangement. Note: Federal Funds wire
purchase orders will be accepted only when the Fund and Custodian
Bank are open for business.
Purchasing By Exchange (from a Vanguard account)
You may open an account or purchase additional shares by making
an exchange from an existing Vanguard Fund account. However, the
Fund reserves the right to refuse any exchange purchase request.
Call our Client Services Department at 1-800-662-2739. The new
account will have the same registration as the existing account.
Purchasing By Fund Express
Special Purchase and Automatic Investment
The Fund Express Special Purchase option lets you move money from
your bank account to your Vanguard account at your request. Or if
you choose the Automatic Investment option, money will be moved
from your bank account to your Vanguard account on the schedule
(monthly, bimonthly [every other month], quarterly or yearly) you
select. To establish these Fund Express options, please provide
the appropriate information on the Account Registration Form. We
will send you a confirmation of your Fund Express service; please
wait three weeks before using the service.
- ---------------------------------------------------------------------------
CHOOSING A DISTRIBUTION OPTION
You must select one of three distribution options:
1. Automatic Reinvestment Option--Both dividends and capital
gains distributions will be reinvested in additional Fund
shares. This option will be selected for you automatically
unless you specify one of the other options.
2. Cash Dividend Option--Your dividends will be paid in cash and
your capital gains will be reinvested in additional Fund
shares.
<PAGE>
3. All Cash Option--Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account is
available. Please call our Client Services Department (1-800-662-
2739) for information. You may also elect Vanguard Dividend
Express which allows you to transfer your cash dividends and/or
capital gains distributions automatically to your bank account.
Please see "Other Vanguard Services" for more information.
- ---------------------------------------------------------------------------
TAX CAUTION
Investors should ask about the timing of capital gains and dividend
distributions before investing
Under Federal tax laws, the Fund is required to distribute net
capital gains and dividend income to Fund shareholders. These
distributions are made to all shareholders who own Fund shares as
of the distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to the
record date could have a significant impact on your tax liability
for the year. For example, if you purchase shares immediately
prior to the record date of a sizable capital gain or income
dividend distribution, you will be assessed taxes on the amount
of the capital gain and/or dividend distribution later paid even
though you owned the Fund shares for just a short period of time.
(Taxes are due on the distributions even if the dividend or gain
is reinvested in additional Fund shares.) While the total value
of your investment will be the same after the distribution--the
amount of the distribution will offset the drop in the net
asset value of the shares--you should be aware of the tax
implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about potential
distributions before investing. The Fund's annual capital gains
distributions normally occurs in December, while income dividends
are generally paid quarterly in March, June, September and
December. For additional information on distributions and taxes,
see the section titled "Dividends, Capital Gains, and Taxes."
- ---------------------------------------------------------------------------
IMPORTANT ACCOUNT INFORMATION
Establishing Optional Services
The easiest way to establish optional Vanguard services on your
account is to select the options you desire when you complete
your Account Registration Form. If you wish to add shareholder
options later, you may need to provide Vanguard with additional
information and a signature guarantee. Please call our Client
Services Department (1-800-662-2739) for further assistance.
Signature Guarantees
For our mutual protection, we may require a signature guarantee
on certain written transaction requests. A signature guarantee
verifies the authenticity of your signature and may be obtained
from banks, brokers and any other guarantors that Vanguard deems
acceptable. A signature guarantee cannot be provided by a notary
public.
Certificates
Share certificates will be issued upon request. If a certificate
is lost, you may incur an expense to replace it.
<PAGE>
Broker/Dealer Purchases
If you purchase shares in Vanguard Funds through a registered
broker-dealer or investment adviser, the broker-dealer or adviser
may charge a service fee.
Cancelling Trades
The Fund will not cancel any trade (e.g., a purchase, exchange or
redemption) believed to be authentic, received in writing or by
telephone, once the trade request has been received.
- ---------------------------------------------------------------------------
WHEN YOUR ACCOUNT WILL BE CREDITED
The trade date is the date on which your account is credited. If
your purchase is made by check, Federal Funds wire, or exchange,
and is received by the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time), your trade date is the day of
receipt. If your purchase is received after the close of the
Exchange, your trade date is the next business day. Your shares
are purchased at the net asset value determined on your trade
date. Vanguard will not accept third-party checks to open an
account. Please be sure your purchase check is made payable to
the Vanguard Group.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a foreign
check which has been drawn in U.S. dollars and has been issued by
a foreign bank with a U.S. correspondent bank. The name of the
U.S. correspondent bank must be printed on the face of the
foreign check.
- ---------------------------------------------------------------------------
SELLING YOUR SHARES
You may withdraw any portion of the funds in your account by
redeeming shares at any time. You may initiate a redemption
request by writing or by telephoning. Your redemption proceeds
are normally mailed within two business days after the receipt of
the request in Good Order.
Selling By Mail
Requests should be mailed to Vanguard Financial Center, Vanguard
Preferred Stock Fund, P.O. Box 1120, Valley Forge, PA 19482. (For
express or registered mail, send your request to Vanguard
Financial Center, Vanguard Preferred Stock Fund, 455 Devon Park
Drive, Wayne, PA 19087.)
The redemption price of shares will be the Fund's net asset value
next determined after Vanguard has received all required
documents in Good Order.
Definition of Good Order
Good Order means that the request includes the following:
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners exactly as they are registered on
the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be required
in the case of estates, corporations, trusts, and certain
other accounts.
6. Any certificates that you hold for the account.
If you have questions about this definition as it pertains to
your request, please call our Client Services Department at
1-800-662-2739.
<PAGE>
Selling By Telephone
To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at 1-800-
662-2739. The proceeds will be sent to you by mail or by wire. In
addition to the details below, please see "Important Information
About Telephone Transactions."
By Mail: Telephone mail redemption is automatically established
on your account unless you indicate otherwise on your Account
Registration Form. You may redeem any amount by calling Vanguard.
The proceeds will be paid to the registered shareholders.
By Wire: Telephone wire redemption must be specifically elected
for your account. The best time to elect telephone wire
redemption is at the time you complete your Account Registration
Form. If you do not presently have telephone wire redemption and
wish to establish it, please contact our Client Services
Department.
With the wire redemption option, you may withdraw a minimum of
$1,000 and have the amount wired directly to your bank account.
Wire redemptions less than $5,000 are subject to a $5 charge
deducted by Vanguard. There is no Vanguard charge for wire
redemptions of $5,000 or more. However, your bank may assess a
separate fee to accept incoming wires.
A request to change the bank associated with your wire redemption
option must be received in writing, signed by each registered
shareholder, and accompanied by a voided check or preprinted
deposit slip. A signature guarantee is required if your bank
registration is not identical to your Vanguard Fund account
registration.
Selling By Fund Express
Automatic Withdrawal & Special Redemption
If you select the Fund Express Automatic Withdrawal option, money
will be automatically moved from your Vanguard Fund account to
your bank account according to the schedule you have selected.
The Special Redemption option lets you move money from your
Vanguard account to your bank account on an "as needed" basis.
To establish these Fund Express options, please provide the
appropriate information on the Account Registration Form. We will
send you a confirmation of your Fund Express service; please wait
three weeks before using the service.
Selling By Exchange
You may sell shares of the Fund by making an exchange to another
Vanguard Fund account. Please see "Exchanging Your Shares" for
details.
Important Redemption Information
Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which may
take up to ten calendar days.
Delivery of Redemption Proceeds
Redemption requests received by telephone prior to the close of
regular trading on the New York Stock Exchange (generally 4:00
p.m. Eastern time) are processed on the day of receipt and the
redemption proceeds are normally sent on the following business
day.
<PAGE>
Redemption requests received by telephone after the close of the
Exchange are processed on the business day following receipt and
the proceeds are normally sent on the second business day
following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It
will be implemented at the net asset value next determined after
your request has been received by Vanguard in Good Order. The
Fund reserves the right to revise or terminate the telephone
redemption privilege at any time.
The Fund may suspend the redemption right or postpone payment at
times when the New York Stock Exchange is closed or under any
emergency circumstances as determined by the United States
Securities and Exchange Commission.
If the Board of Trustees determines that it would be detrimental
to the best interests of the Fund's remaining shareholders to
make payment in cash, the Fund may pay redemption proceeds in
whole or in part by a distribution in kind of readily marketable
securities.
Vanguard's Average Cost Statement
If you make a redemption from a qualifying account, Vanguard will
send you an Average Cost Statement which provides you with the
tax basis of the shares you redeemed. Please see "Other Vanguard
Services" for additional information.
Minimum Account Balance Requirement
Due to the relatively high cost of maintaining smaller accounts,
the Fund reserves the right to redeem shares in any account that
is below the minimum initial investment amount of $3,000. If at
any time your total investment does not have a value of at least
$3,000, you may be notified that your account is below the Fund's
minimum account balance requirement. You would then be allowed
60 days to make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the registered
shareholder. (This minimum does not apply to IRAs, other retirement
accounts and Uniform Gifts/Transfers to Minors Act accounts.)
The Fund's minimum account balance requirement will not apply if
your account falls below $3,000 solely as a result of declining
markets (i.e., a decline in a Fund's net asset value).
EXCHANGING YOUR SHARES
Should your investment goals change, you may exchange shares of
Vanguard Preferred Stock Fund for those of other available
Vanguard Funds.
Exchanging By Telephone
Call Client Services (1-800-662-2739)
When exchanging shares by telephone, please have ready your Fund
name, account number, Social Security or Employer
Identification number listed on the account and the exact name
and address in which the account is registered. Only the
registered shareholder may complete such an exchange.
Requests for telephone exchanges received prior to the close of
trading on the New York Stock Exchange (generally 4:00 p.m.
Eastern time) are processed at the close of business that same
day. Requests received after the close of the Exchange are
processed the next business day. Telephone exchanges are not
accepted into or from Vanguard Balanced Index Fund,
Vanguard Index Trust, Vanguard Quantitative Portfolios, and
Vanguard International Equity Fund. If you experience
difficulty in making a telephone exchange, your exchange request
<PAGE>
may be made by regular or express mail, and it will be
implemented at the closing net asset value on the date received
by Vanguard provided the request is received in Good Order.
Exchanging By Mail
Please be sure to include on your exchange request the name and
account number of your current Fund, the name of the Fund you
wish to exchange into, the amount you wish to exchange, and the
signatures of all registered account holders. Send your request
to Vanguard Financial Center, Vanguard Preferred Stock Fund, P.O.
Box 1120, Valley Forge, PA 19482. (For express or registered
mail, send your request to Vanguard Financial Center, Vanguard
Preferred Stock Fund, 455 Devon Park Drive, Wayne, PA 19087.)
Important Exchange Information
Before you make an exchange, you should consider the following:
* Please read the Fund's prospectus before making an exchange.
For a copy and for answers to any questions you may have,
call our Investor Information Department (1-800-662-7447).
* An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
* Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
* The shares to be exchanged must be on deposit and not held in
certificate form.
* New accounts are not currently accepted in Vanguard/Windsor
Fund.
* The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
any required documents in Good Order.
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
the shares of the Fund are registered for sale. The Fund's shares
are currently registered for sale in all 50 states and the Fund
intends to maintain such registration.
- ---------------------------------------------------------------------------
EXCHANGE PRIVILEGE LIMITATIONS
The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in the
market. Accordingly, in order to prevent excessive use of the
exchange privilege that may potentially disrupt the management of
the Fund and increase transaction costs, the Fund has established
a policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed excessive if
limited to two substantive exchange redemptions (at least 30 days
apart) from the Fund during any twelve month period.
Notwithstanding these limitations, the Fund reserves the right to
reject any purchase request (including exchange purchases from
<PAGE>
other Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management.
- ---------------------------------------------------------------------------
IMPORTANT INFORMATION ABOUT TELEPHONE TRANSACTIONS
The ability to initiate redemptions (except wire redemptions) and
exchanges by telephone is automatically established on your
account unless you request in writing that telephone transactions
on your account not be permitted. The ability to initiate wire
redemptions by telephone will be established on your account only
if you specifically elect this option in writing.
To protect your account from losses resulting from unauthorized
or fraudulent
telephone instructions, Vanguard adheres to the following
security procedures:
1. Security Check. To request a transaction by telephone, the
caller must know (i) the name of the Portfolio; (ii) the 10-
digit account number; (iii) the exact name and address
used in the registration ; and (iv) the Social Security or
Employer Identification number listed on the account.
2. Payment Policy. The proceeds of any telephone redemption by
mail will be made payable to the registered shareowner and
mailed to the address of record, only. In the case of a
telephone redemption by wire, the wire transfer will be made
only in accordance with the shareowner's prior written
instructions.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been followed.
Vanguard believes that the security procedures described above
are reasonable, and that if such procedures are followed,
you will bear the risk of any losses resulting from unauthorized
or fraudulent telephone transactions on your account.
- ---------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You may transfer the registration of any of your Fund shares to
another person by completing a transfer form and sending it to:
Vanguard Financial Center, P.O. Box 1110, Valley Forge, PA 19482.
The request must be in Good Order. Before mailing your request,
please call our Client Services Department (1-800-662-2739) for
full instructions.
Statements and Reports
Vanguard will send you a confirmation statement each time you
initiate a transaction in your account (except for
checkwriting redemptions from Vanguard money market
accounts). You will also receive a comprehensive account
statement at the end of each calendar quarter. The fourth-quarter
statement will be a year-end statement, listing all transaction
activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the average
cost of shares redeemed from your account, using the average cost
single category method. This service is available for most
<PAGE>
taxable accounts opened since January 1, 1986. In general,
investors who redeemed shares from a qualifying Vanguard account
may expect to receive their Average Cost Statement in February of
the following year. Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-
annually, according to the Fund's fiscal year-end.
- ---------------------------------------------------------------------------
OTHER VANGUARD SERVICES
For more information about any of these services, please call our
Investor Information Department at 1-800-662-7447.
Vanguard Direct Deposit Service
With Vanguard's Direct Deposit Service, most U.S. Government
checks (including Social Security and military pension checks)
and private payroll checks may be automatically deposited into
your Vanguard Fund account. Separate brochures and forms are
available for direct deposit of U.S. Government and private
payroll checks.
Vanguard Automatic Exchange Service
Vanguard's Automatic Exchange Service allows you to move money
automatically among your Vanguard Fund accounts. For instance,
the service can be used to "dollar cost average" from a money
market portfolio into a stock or bond fund or to contribute to an
IRA or other retirement plan. Please contact our Client
Services Department at 1-800-662-2739 for additional
information.
Vanguard Fund Express
Vanguard's Fund Express allows you to transfer money between your
Fund account and your account at a bank, savings and loan
association, or a credit union that is a member of the Automated
Clearing House (ACH) system. You may elect this service on the
Account Registration Form or call our Investor Information
Department (1-800-662-7447) for a Fund Express application.
The minimum amount that can be transferred by telephone is $100.
However, if you have established one of the automatic options,
the minimum amount is $50. The maximum amount that can be
transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific Vanguard
Funds. For more information, please refer to the Vanguard Fund
Express brochure.
Vanguard Dividend Express
Vanguard's Dividend Express allows you to transfer your dividends
and/or capital gains distributions automatically from your Fund
account, one business day after the Fund's payable date, to your
account at a bank, savings and loan association, or a credit
union that is a member of the Automated Clearing House (ACH)
network. You may elect this service on the Account Registration
Form or call our Investor Information Department (1-800-662-7447)
for a Vanguard Dividend Express application.
<PAGE>
Vanguard Tele-Account
Vanguard's Tele-Account is a convenient, automated service that
provides share price, price change and yield quotations on
Vanguard Funds through any Touch-Tone(TM) telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent dividend or
capital gains payment. To contact Vanguard's Tele-Account
service, dial 1-800-ON-BOARD (1-800-662-6273). A brochure
offering detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
<PAGE>
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<PAGE>
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<PAGE>
PART B
VANGUARD PREFERRED STOCK FUND
STATEMENT OF ADDITIONAL INFORMATION February 28, 1995
This Statement is not a prospectus, but should be read in conjunction
with the Fund's current Prospectus (dated February 28, 1995 ). To
obtain the Prospectus please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS Page
Investment Objective and Policies............................. 1
Yield and Total Return........................................ 5
Purchase of Shares............................................ 5
Redemption of Shares.......................................... 5
Investment Limitations........................................ 6
Management of the Fund................................. 8
Investment Advisory Services........................... 11
Portfolio Transactions................................. 11
General Information.................................... 12
Financial Statements................................... 13
Appendix -- Description of Preferred Stock Ratings..... 13
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the Fund's investment objective and
policies set forth in the Prospectus.
Repurchase Agreements
The Fund may invest in repurchase agreements with commercial banks,
brokers or dealers either for defensive purposes due to market conditions
or to generate income from its excess cash balances. A repurchase agreement
is an agreement under which the Fund acquires a money market instrument
(generally a security issued by the U.S. Government or an agency thereof, a
banker's acceptance or a certificate of deposit) from a commercial bank,
broker or dealer, subject to resale to the seller at an agreed upon price
and date (normally, the next business day). A repurchase agreement may be
considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is
held by the Fund and is unrelated to the interest rate on the underlying
instrument. In these transactions, the securities acquired by the Fund
(including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held by the Fund's
custodian bank until repurchased. In addition, the Fund's Board of Trustees
will monitor the Fund's repurchase agreement transactions generally and
will establish guidelines and standards for review by the investment
adviser of the creditworthiness of any bank, broker or dealer party to a
repurchase agreement with the Fund. No more than an aggregate of 15% of the
Fund's assets, at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject
to legal or contractual restrictions on resale, or for which there are no
readily available market quotations.
The use of repurchase agreements involves certain risks. For example,
if the other party to the agreement defaults on its obligation to
repurchase the underlying security at a time when the value of the security
has declined, the Fund may incur a loss upon disposition of the security.
If the other party to the agreement becomes insolvent and subject to
liquidation or reorganization under the Bankruptcy Code or other laws, a
court may determine that the underlying security is collateral for a loan
by the Fund not within the control of the Fund and therefore the
realization by the Fund on such collateral may be automatically stayed.
Finally, it is possible that the Fund may not be able to substantiate its
interest in the underlying security and may be deemed an unsecured creditor
of the other party to the agreement. While the Fund's management
acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
<PAGE>
Futures Contracts and Options
The Fund may enter into futures contracts, options, and options on
futures contracts for the purpose of remaining fully invested and reducing
transactions costs. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures
contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures
exchanges and trading are regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission ("CFTC"), a U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are
closed out before the settlement date without the making or taking of
delivery. Closing out an open futures position is done by taking an
opposite position ("buying" a contract which has previously been "sold" or
"selling" a contract previously "purchased") in an identical contract to
terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.
Futures traders are required to make a good faith margin deposit in
cash or government securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is intended
to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified
delivery date. Minimal initial margin requirements are established by the
futures exchange and may be changed. Brokers may establish deposit
requirements which are higher than the exchange minimums. Futures contracts
are customarily purchased and sold that may range upward from less than 5%
of the value of the contract being traded.
The Fund may invest in futures contracts and options
Although it has no present intention to do so, the Fund may utilize
equity futures contracts and options to a limited extent. Specifically, the
Fund may enter into futures contracts provided that not more than 5% of its
assets are required as a futures contract deposit; in addition, 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 reasons: to
maintain cash reserves while simulating full investment, to facilitate
trading, to reduce transactions costs, or to seek higher investment returns
when a futures contract is priced more attractively than the underlying
equity security or index. Although Futures contracts and options may be
used as leveraged instruments, the Fund will not use futures contracts or
options transactions to leverage its assets.
For example, in order to remain fully invested in stocks, while
maintaining liquidity to meet potential shareholder redemptions, the Fund
may invest a portion of its assets in a stock index futures contract.
Because futures contracts only require a small initial margin deposit, the
Fund would then be able to maintain a cash reserve to meet potential
redemptions, while at the same time remaining fully invested. Also,
because the transactions costs of futures contracts and options may be
lower than the costs of investing in stocks directly, it is expected that
the use of futures contracts and options may reduce the Fund's total
transactions costs.
Futures contracts and options pose certain risks
The primary risks associated with the use of futures contracts and
options are: (i) imperfect correlation between the change in market value
of the stocks held by the Fund and the prices of futures and options; and
(ii) possible lack of a liquid secondary market for a futures contract and
the resulting inability to close a futures position prior to its maturity
date. The risk of imperfect correlation will be minimized by investing only
in those contracts whose price fluctuations are expected to resemble those
of the Fund's underlying 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.
After a futures contract position is opened, the value of the contract
is marked to market daily. If the futures contract price changes to the
extent that the margin on deposit does not satisfy margin requirements,
payment of additional "variation" margin will be required. Conversely,
change in the contract value may reduce the required margin, resulting in a
repayment of excess margin to the contract holder. Variation margin
payments are made to and from the futures broker for as long as the
contract remains open. The Fund expects to earn interest income on its
margin deposits.
Traders in futures contracts may be broadly classified as either
"hedgers" or "speculators." Hedgers use the futures markets primarily to
offset unfavorable changes in the value of securities otherwise held for
investment purposes or expected to be acquired by them. Speculators are
<PAGE>
less inclined to own the securities underlying the futures contracts which
they trade, and use futures contracts with the expectation of realizing
profits from fluctuations in the value of the underlying securities. The
Fund intends to use futures contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. The Fund
will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the
price of securities it intends to purchase. As evidence of this hedging
interest, the Fund expects that approximately 75% of its futures contract
purchases will be "completed;" that is, equivalent amounts of related
securities will have been purchased or are being purchased by the Fund upon
sale of open futures contracts.
Although techniques other than the sale and purchase of futures
contracts could be used to control the Fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While the Fund will incur commission expenses in
both opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of the underlying
securities .
Restrictions on the Use of Futures Contracts
The Fund will not enter into futures contract transactions to the
extent that, immediately thereafter, the sum of its initial margin deposits
on open contracts exceeds 5% of the market value of the Fund's total
assets. In addition, the Fund will not enter into futures contracts to the
extent that its outstanding obligations to purchase securities under these
contracts would exceed 20% of the Fund's total assets.
Risk Factors in Futures Transactions
Positions in futures contracts may be closed out only on an Exchange
which provides a secondary market for such futures. However, there can be
no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to
close a futures position. In the event of adverse price movements, the Fund
would continue to be required to make daily cash payments to maintain its
required margin. In such situations, if the Fund has insufficient cash, it
may have to sell portfolio securities to meet daily margin requirements at
a time when it may be disadvantageous to do so. In addition, the Fund may
be required to make delivery of the instruments underlying interest rate
futures contracts it holds. The inability to close options and futures
positions also could have an adverse impact on the Fund's ability to
effectively hedge. It is also possible that the Fund could both lose money
on futures contracts and also experience a decline in value of its
portfolio securities. There is also the risk of loss by the Fund of margin
deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a futures contract or related option. Additionally,
investments in futures contracts and options involve the risk that the
investment advisers will incorrectly predict stock market and interest rate
trends.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary
market.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the
extremely high degree of leverage involved in futures pricing. As a result,
a relatively small price movement in a futures contract may result in
immediate and substantial loss (as well as gain) to the investor. For
example, if at the time of purchase, 10% of the value of the futures
contract is deposited as margin, a subsequent 10% decrease in the value of
the futures contract would result in a total loss of the margin deposit,
before any deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150% of the
original margin deposit if the contract were closed out. Thus, a purchase
or sale of a futures contract may result in losses in excess of the amount
invested in the contract. However, because the futures strategies of the
Fund are engaged in only for hedging purposes, the Adviser does not believe
that the Fund is subject to the risks of loss frequently associated with
futures transactions. The Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Fund does involve the risk
of imperfect or no correlation where the securities underlying futures
contracts have different maturities than the portfolio securities being
hedged. It is also possible that the Fund could both lose money on futures
contracts and also experience a decline in value of its portfolio
securities. There is also the risk of loss by the Fund of margin deposits
in the event of bankruptcy of a broker with whom the Fund has an open
position in a futures contract or related option.
<PAGE>
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end
of a trading session. Once the daily limit has been reached in a particular
type of contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the
limit may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing
prompt liquidation of future positions and subjecting some futures traders
to substantial losses.
Federal Tax Treatment of Futures Contracts
The Fund is required for Federal income tax purposes to
recognize as income for each taxable year its net unrealized gains and
losses on futures contracts held as of the end of the year as well as those
actually realized during the year. In most cases, any gain or loss
recognized with respect to a futures contract is considered to be 60% long-
term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by the Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such
securities upon disposition. The Fund may be required to defer the
recognition of losses on futures contracts to the extent of any
unrecognized gains on related positions held by the Fund.
In order for the Fund to continue to qualify for Federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income; i.e.,
dividends, interest, income derived from loans of securities, and gains
from the sale of securities or foreign currencies, or other income derived
with respect to its business of investing in such securities or currencies.
In addition, gains realized on the sale or other disposition of securities
held for less than three months must be limited to less than 30% of the
Fund's annual gross income. It is anticipated that any net gain realized
from the closing out of futures contracts will be considered gain from the
sale of securities and therefore be qualifying income for purposes of the
90% requirement. In order to avoid realizing excessive gains on securities
held less than three months, the Fund may be required to defer the closing
out of futures contracts beyond the time when it would otherwise be
advantageous to do so. It is anticipated that unrealized gains on futures
contracts, which have been open for less than three months as of the end of
the Fund's fiscal year and which are recognized for tax purposes, will not
be considered gains on securities held less than three months for the
purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital
gains which have been recognized for Federal income tax purposes (including
unrealized gains at the end of the Fund's fiscal year) on futures
transactions. Such distributions will be combined with distributions of
capital gains realized on the Fund's other investments and shareholders
will be advised on the nature of the payments.
Lending of Securities
The Fund may lend its portfolio securities on a short-term or a long-
term basis to qualified institutional investors who need to borrow
securities in order to complete certain transactions, such as covering
short sales, avoiding failures to deliver securities or completing
arbitrage operations. By lending its portfolio securities, the Fund
attempts to increase its income through the receipt of interest on the
loan. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the account of the
Fund. The Fund may lend its portfolio securities to qualified brokers,
dealers, banks or other financial institutions, so long as the terms and
the structure of such loans are not inconsistent with the Investment
Company Act of 1940, or the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder, which
currently require that (a) the borrower pledge and maintain with the Fund
collateral consisting of cash, an irrevocable letter of credit, or
securities issued or guaranteed by the United States Government having a
value at all times not less than 100% of the value of the securities
loaned, (b) the borrower add to such collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis), (c) the loan be made subject to termination by the Fund at
any time, and (d) the Fund receive reasonable interest on the loan (which
may include the Fund's investing any cash collateral in interest bearing
short-term investments), any distributions on the loaned securities and any
increase in their market value. The Fund will accept only cash as
collateral for its loaned securities and will not lend portfolio securities
if, as a result, the aggregate of such loans exceeds 10% of the value of
the Fund's total assets. Loan arrangements made by the Fund will comply
with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange, which rules presently require the borrower,
<PAGE>
after notice, to redeliver the securities within the normal settlement time
of five business days. All relevant facts and circumstances, including the
credit worthiness of the broker, dealer or institution, will be considered
in making decisions with respect to the lending of securities, subject to
review by the Fund's Board of Trustees. Since income derived from lending
portfolio securities is not qualifying income for the purpose of the 70%
intercorporate dividends received deduction under Federal tax laws, the
Fund will limit such activity in accordance with its objective of
maximizing dividend income which qualifies for the dividends deduction.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with
loaned securities, so long as such fees are set forth in a written contract
and approved by the investment company's Trustees (Directors). In addition,
voting rights may pass with the loaned securities, but if a material event
will occur affecting an investment on loan, the loan must be called and the
securities voted.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended October 31,
1994 was +7.95%.
The average annual total return of the Fund for the one-, five- and
ten-year periods ending October 31, 1994 was -8.45%, +8.22% and
+10.99%, respectively. Total return is computed by finding the average
compounded rates of return over the one-, five- and ten-year periods
set forth above that would equate an initial amount invested at the
beginning of the periods to the ending redeemable value of the investment.
PURCHASE OF SHARES
The purchase price of shares of the Fund is the net asset value next
determined after the order is received. The net asset value is calculated
as of the close of the New York Stock Exchange on each day the Exchange is
open for business. An order received prior to the close of the Exchange
will be executed at the price computed on the date of receipt; and an order
received after the close of the Exchange will be executed at the price
computed on the next day the Exchange is open.
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment
of management such rejection is in the best interest of the Fund, and (iii)
to reduce or waive the minimum for initial and subsequent investments for
certain fiduciary accounts such as employee benefit plans or under
circumstances 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 (i) during any period that the New York Stock Exchange is closed,
or trading on the Exchange is restricted as determined by the Securities
and Exchange Commission (the "Commission"), (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of
which it is not reasonably practicable for the Fund to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable
without the prior approval of the Commission. Redemptions in excess of the
above limits may be paid in whole or in part, in investment securities or
in cash, as the Trustees may deem advisable; however, payment will be made
wholly in cash unless the Trustees 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.
No charge is made by the Fund for redemptions, except for wire
withdrawals in amounts less than $5,000 which are subject to a $5.00 charge
which will be deducted from the payment issued to you. Any redemption may
be more or less than the shareholder's cost depending on the market value
of the Fund's portfolio securities.
Signature Guarantees -- To protect your account, the Fund and Vanguard
from fraud, signature guarantees are required for certain redemptions.
Signature guarantees enable the Fund to verify the identity of the person
who has authorized a redemption from your account. Signature guarantees are
required in connection with: (1) redemptions involving more than $25,000 on
<PAGE>
the date of receipt by Vanguard of all necessary documents; (2) all
redemptions, regardless of the amount involved, when the proceeds are to be
paid to someone other than the registered owner(s) and/or registered
address; and (3) share transfer requests. These requirements are not
applicable to redemptions in Vanguard's prototype retirement plans except
in connection with: (1) distributions made when the proceeds are to be paid
to someone other than the plan participant; (2) certain authorizations to
effect exchanges by telephone; and (3) when proceeds are to be wired. These
requirements may be waived by the Fund in certain instances.
Signature guarantees may be obtained from a bank, broker or any other
guarantor institution that Vanguard deems acceptable. Notaries public are
not acceptable guarantors.
The signature guarantees must appear either: (1) on the written
request for redemption; (2) on a separate instrument for assignment ("stock
power") which should specify the total number of shares to be redeemed; or
(3) on all stock certificates tendered for redemption and, if shares held
by the Fund are also being redeemed, on the letter or stock power.
INVESTMENT LIMITATIONS
The Fund is subject to the following limitations which may not be
changed without the approval of at least a majority of the outstanding
voting securities of the Fund. The Fund will not:
(1) Borrow money, except that the Fund may borrow from banks (or
through reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests which
might otherwise require the untimely disposition of securities, in an
amount not exceeding 15% of the value of the Fund's net assets (including
the amount borrowed and the value of any outstanding reverse repurchase
agreements) at the time the borrowing is made. Whenever borrowings exceed
5% of the value of the Fund's net assets, the Fund will not make any
additional investments;
(2) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of the issuer, or more
than 5% of the value of the Fund's total assets would be invested in the
securities of such issuer;
(3) Invest in companies for the purpose of exercising control;
(4) Invest in securities of other investment companies, except as they
may be acquired as a part of a merger, consolidation or acquisition of
assets or otherwise to the extent permitted by Section 12 of the 1940 Act.
The Fund will invest only in investment companies which have investment
objectives and investment policies consistent with those of the Fund;
(5) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in disposing
of portfolio 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;
(7) Purchase or sell real estate although it may purchase and sell
securities of companies which deal in real estate or interests therein;
(8) Purchase or sell commodities or commodity contracts, except that
the Fund may invest in stock futures contracts, stock options and options
on stock futures contracts to the extent that not more than 5% of its
assets are required as deposit to secure obligations under such contracts
and not more than 20% of the Funds assets are invested in futures contracts
and options at any time;
(9) Write, or invest in, put, call, straddle or spread option
contracts (except as described above in investment limitation No. 8) or
invest in interests in oil, gas, or other mineral exploration or
development programs;
(10) Purchase securities on margin or sell any securities short
(except as described above in investment limitation No. 8);
(11) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements) which are either publicly
distributed or customarily purchased by institutional investors, and (ii)
as provided under "Lending of Securities" (page 4); and
<PAGE>
(12) The Fund, with the exception of the electric and/or gas
industries in which it may invest a majority of its assets, will not
concentrate its investments in any other particular industry, by investing
more than 25% of the value of its total assets taken at market value in
securities of issuers all of which conduct their principal business
activities in the same industry.
These limitations are considered at the time investment securities are
purchased. Notwithstanding these limitations the Fund may own all or any
portion of the securities of, or make loans to, or contribute to the costs
or other financial requirements of any company which will be wholly owned
by the Fund and one or more other investment companies and is primarily
engaged in the business of providing, at-cost, management, administrative
or related services to the Fund and other investment companies. See "The
Vanguard Group" below.
Although not fundamental policies subject to shareholder vote, as long
as the Fund's shares are registered for sale in certain states, it will not
(1) Invest more than 5% of the value of the total assets of the Fund
at the time of investment in the securities of any issuers which have
records of less than three years' continuous operation, including the
operation of any predecessor, but this limitation does not apply to
securities issued or guaranteed as to interest and principal by the United
States Government or its agencies or instrumentalities; or
(2) Purchase or retain any security of an issuer if an officer or
director of such issuer is an officer or director of the Fund, or its
investment adviser owns beneficially more than 1/2% of the shares or
securities of such issuer and all such directors and officers owning more
than 1/2% of such shares or securities together own more than 5% of such
shares or securities.
<PAGE>
MANAGEMENT OF THE FUND
Officers and Trustees
The Fund's Officers, under the supervision of the Board of Trustees,
manage the day-to-day operations of the Fund. The Trustees, who are
elected annually by shareholders, set broad policies for the Fund and
choose its Officers. Following is a list of the Trustees and
Officers of the Fund and a brief statement of their present positions and
principal occupations during the past 5 years. As of January 31,
1995 , the Trustees and Officers of the Fund owned less than 1% of
the Fund's outstanding shares.
JOHN C. BOGLE, Chairman, Chief Executive Officer and Trustee *
Chairman, Chief Executive Officer, and Director of The Vanguard Group,
Inc., and of each of the investment companies in The Vanguard
Group; Director of The Mead Corporation and General Accident
Insurance.
JOHN J. BRENNAN, President & Trustee *
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Trustee
Chairman of Rhone-Poulenc Rorer, Inc.; Director
of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and Pacific Tea Company, ALCO Standard,
Corp., Raytheon Company, Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co. and Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY, Trustee
President, The Brookings Institution; Director of American
Express Bank, Ltd., The St. Paul Companies, Inc. and Scott Paper
Company.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., The Jeffrey Co.,
and Southern New England Communications Company.
ALFRED M. RANKIN, Jr., Trustee
Chairman, Pres. and Chief Executive Officer of NACCO
Industries, Inc.; Director of The BFGoodrich Company, The Standard
Products Company and The Reliance Electric Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, The Nature Conservancy;
formerly, Director and Senior Partner, McKinsey & Co.; and
President, New York University; Director of Pacific Gas and
Electric Company and NACCO Industries.
JAMES O. WELCH, Jr., Trustee
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company;
Director of Cummins Engine Company; Trustee of Vanderbilt
University and the Culver Educational Foundation.
RAYMOND J. KLAPINSKY, Secretary *
Senior Vice President and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard
Group.
RICHARD F. HYLAND, Treasurer *
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller *
Vice President of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
- ------------------------
*Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
<PAGE>
The Vanguard Group
Vanguard Preferred Stock Fund is a member of The Vanguard Group of
Investment Companies. Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group obtain
at-cost virtually all of their corporate management, administrative and
distribution services. Vanguard also provides investment advisory services
on an at-cost basis to a number of the Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment.
Each Fund pays its share of Vanguard's total expenses which are allocated
among the Funds under methods approved by the Board of Trustees (Directors)
of each Fund. In addition, each Fund bears its own direct expenses, such as
legal, auditing and custodian fees.
The Vanguard Group adheres to a Code of Ethics established pursuant
to Rule 17j-I under the Investment Company Act of 1940. The Code is
designed to prevent unlawful practices in connection with the purchase or
sale of securities by persons associated with Vanguard. Under Vanguard's
Code of Ethics certain officers and employees of Vanguard who are
considered access persons are permitted to engage in personal securities
transactions. However, such transactions are subject to procedures and
guidelines substantially similar to those recommended by the mutual fund
industry and approved by the U.S. Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds'
Service Agreement which was approved by the shareholders of each of the
Funds. The amounts which each of the Funds have invested are adjusted from
time to time in order to maintain the proportionate relationship between
each Fund's relative net assets and its contribution to Vanguard's capital.
The Funds' Service Agreement provides as follows: (1) each Vanguard
Fund may invest a maximum of .40% of its current net assets in Vanguard,
and (2) there are no restrictions on the maximum aggregate cash investment
that the Vanguard Funds may make in Vanguard. At October 31, 1994,
the Fund had contributed capital of $48,000 to Vanguard,
representing .2% of Vanguard's capitalization.
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 October 31, 1994 , the Fund's
share of Vanguard's actual net costs of operation relating to management
and administrative services (including transfer agency) totaled
approximately $776,000.
Distribution
Vanguard provides all distribution and marketing activities for the
Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for shares of
the Funds, in connection with any sales made directly to investors in the
states of Florida, Missouri, New York, Ohio, Texas and such other states as
it may be required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors
and officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each Fund,
and whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional
nature is allocated among the Funds based upon their relative net assets.
The remaining one half of these expenses is allocated among the Funds based
upon each Fund's sales for the preceding 24 months relative to the total
sales of the Funds as a Group, provided, however, that no Fund's aggregate
quarterly rate of contribution for distribution expenses of a marketing and
promotional nature shall exceed 125% of the average distribution expense
rate for the Group, and that no Fund shall incur annual distribution
expenses in excess of 20/100 of 1% of its average month-end net assets.
During the fiscal year ended October 31, 1994 , the Fund paid
approximately $92,000 of the Group's distribution and marketing
expenses, which represented an effective annual rate of .03 of 1% of
the Fund's average net assets.
<PAGE>
Investment Advisory Services
Vanguard provides investment advisory services to Vanguard Money
Market Reserves, Vanguard Institutional Money Market Portfolio ,
Vanguard Bond Index Fund, Vanguard Index Trust, Vanguard Admiral Funds,
Vanguard Balanced Index Fund, Vanguard International Equity Index Fund,
Vanguard Institutional Index Fund, Vanguard Tax-Managed Fund, Vanguard
Horizon Fund, Vanguard Municipal Bond Fund; several Portfolios of
Vanguard Fixed Income Securities Fund, several Portfolios of Vanguard
Variable Insurance Fund, Vanguard California Tax-Free Fund, Vanguard
Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, Vanguard
Ohio Tax-Free Fund, Vanguard New York Insured Tax-Free Fund,
Vanguard Pennsylvania Tax-Free Fund a portion of Vanguard/Windsor
II, a portion of Vanguard/Morgan Growth Fund as well as several indexed
separate accounts. These services are provided on an at-cost basis from
a money management staff employed directly by Vanguard. The compensation
and other expenses of this staff are paid by the Funds utilizing these
services.
Remuneration of Trustees and Officers
The Fund pays each Trustee who is not also an Officer an annual
fee plus travel and other expenses incurred in attending Board meetings.
The Fund's Officers and employees are paid by Vanguard which, in turn, is
reimbursed by the Fund, and each other Fund in the Group, for its
proportionate share of Officers' and employees' salaries and retirement
benefits. The Fund's proportionate share of remuneration paid by Vanguard
(and reimbursed by the Fund) during the 1994 fiscal year to all Officers of
the Fund, as a group, was approximately $14,060.
Upon retirement, Trustees who are not Officers are paid an annual
fee based upon the number of years of service on the Board. The fee is
equal to $1,000 for each year of service on the Board up to a maximum of
fifteen years. Under its retirement plan, Vanguard contributes annually an
amount equal to 10% of each eligible Officer's annual compensation plus
5.7% of that part of the eligible officer's compensation during the year,
if any, that exceeds the Social Security Taxable Wage Base then in effect.
Under its thrift plan, all eligible Officers are permitted to make pre-tax
contributions in an amount equal to 4% of total compensation which are
matched by Vanguard on a 100% basis. The Fund's proportionate share of
retirement contributions made by Vanguard under its retirement and thrift
plans on behalf of all eligible Officers of the Fund, as a group, during
the 1994 fiscal year was approximately $1,200. The following table provides
detailed information with respect to the amounts paid or accrued for the
Trustees, and the Officers of the Fund, for the fiscal year ended October
31, 1994.
<TABLE>
<CAPTION>
VANGUARD PREFERRED STOCK FUND
COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation Pension or Retirement Estimated Annual Benefits Total Compensation From
Names of Trustees From Fund Benefits Accrued As Part of Upon Retirement All Vanguard Funds Paid to
Fund Expenses Trustees (2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John C. Bogle (1) -- -- -- --
John J. Brennan (1) -- -- -- --
Barbara Barnes
Hauptfuhrer $222 $45 $15,000 $50,000
Robert E. Cawthorn $222 $37 $13,000 $50,000
Bruce K. MacLaury $200 $37 $12,000 $45,000
Burton G. Malkiel $222 $30 $15,000 $50,000
Alfred M. Rankin, Jr. $222 $24 $15,000 $50,000
John C. Sawhill $222 $28 $15,000 $50,000
James O. Welch, Jr. $213 $35 $15,000 $48,000
J. Lawrence Wilson $217 $25 $15,000 $49,000
- ------------------------------------------------------------------------------------------------------------------------------------
(1) As "Interested Trustee," Messrs. Bogle and Brennan receive no compensation for their service.
(2) The amounts reported in this column reflect the total compensation paid to each Trustee for their service as Director or Trustee
of 33 Vanguard Funds (32 in the case of Mr. MacLaury).
</TABLE>
<PAGE>
INVESTMENT ADVISORY SERVICES
The Fund employs Wellington Management Company (the "Adviser") under
an investment advisory agreement dated June 1, 1980 to manage the
investment and reinvestment of the assets of the Fund and to continuously
review, supervise and administer the Fund's investment program. The Adviser
discharges its responsibilities subject to the control of the officers and
Trustees of the Fund.
The Fund pays the Adviser an advisory fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the following
annual percentage rates, to the Fund's average month-end net assets for the
quarter:
Net Assets Rate
------------------------------------------------------------
First $50 million.................................... 0.325%
Next $100 million.................................... 0.275%
Next $100 million.................................... 0.225%
Over $250 million.................................... 0.150%
During the fiscal years ended October 31, 1992, 1993 and 1994 ,
the Fund paid advisory fees of $449,000, $684,000 and $817,000,
respectively.
The present agreement continues until May 31, 1995 and is
renewable thereafter, for successive one-year periods, only if
each renewal is specifically approved by a vote of the Fund's Board of
Trustees, including the affirmative votes of a majority of the Trustees 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.
The Fund's Board of Trustees may, without the approval of
shareholders, provide for:
A. The employment of a new investment adviser pursuant to the terms of
a new advisory agreement, either as a replacement for an existing
adviser or as an additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned because
of a change in control of the adviser.
Any such change will only be made upon not less than 30 days' prior
written notice to shareholders, which shall include the information
concerning the adviser that would have normally been included in a proxy
statement.
Description of the Adviser
The Adviser is a Massachusetts partnership, the managing partners of
which are Duncan M. McFarland, John B. Neff and Robert W. Doran.
PORTFOLIO TRANSACTIONS
The investment advisory agreement authorizes the Adviser (with the
approval of the Fund's Board of Trustees) to select the brokers or dealers
that will execute the purchases and sales of portfolio securities for the
Fund and directs the Adviser to use its best efforts to obtain the best
available price and most favorable execution as to all transactions for the
Fund. The Adviser has undertaken to execute each investment transaction at
a price and commission which provides the most favorable total cost or
proceeds reasonably obtainable under the circumstances.
In placing portfolio transactions, the Adviser will use its best
judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable
execution. The full range and quality of brokerage services available will
be considered in making these determinations. In those instances where it
is reasonably determined that more than one broker can offer the brokerage
services needed to obtain the best available price and most favorable
execution, consideration may be given to those brokers which supply
investment research and statistical information and provide other services
in addition to execution services to the Fund and/or the Adviser. The
Adviser considers such information useful in the performance of its
obligations under the agreement but is unable to determine the amount by
which such services may reduce its expenses.
The investment advisory agreement also incorporates the concepts of
Section 28(e) of the Securities Exchange Act of 1934 by providing that,
subject to the approval of the Fund's Board of Trustees, the Adviser may
<PAGE>
cause the Fund to pay a broker-dealer which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker-dealer for effecting the same transaction; provided that
such commission is deemed reasonable in terms of either that particular
transaction or the overall responsibilities of the Adviser to the Fund and
the other Funds in the Group.
Currently, it is the Fund's policy that the Adviser may at times pay
higher commissions in recognition of brokerage services felt necessary for
the achievement of better execution of certain securities transactions that
otherwise might not be available. The Adviser will only pay such higher
commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in
recognition of brokerage services related to execution of securities
transactions are also providers of research information to the Adviser
and/or the Fund. However, the Adviser has informed the Fund that it will
not pay higher commission rates specifically for the purpose of obtaining
research services.
Since the Fund does not market its shares through intermediary brokers
or dealers, it is not the Fund's practice to allocate brokerage or
principal business on the basis of sales of its shares which may be through
such firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the Fund to other clients, or who act as agent
in the purchase of the Fund's shares for their clients, and may, when a
number of brokers and dealers can provide comparable best price and
execution on a particular transaction, consider the sale of Fund shares by
a broker or dealer in selecting among qualified broker-dealers.
During the fiscal years ended October 31, 1992, 1993 and 1994
the Fund paid $12,736, $8,143 and $6,726 in brokerage commissions,
respectively.
Some securities considered for investment by the Fund may also be
appropriate for other Funds and/or clients served by the Adviser. If
purchase or sale of securities consistent with the investment policies of
the Fund and one or more of these other Funds or clients served by the
Adviser are considered at or about the same time, transactions in such
securities will be allocated among the several Funds and clients in a
manner deemed equitable by the Adviser.
GENERAL INFORMATION
Description of Shares and Voting Rights
The Fund was originally organized as a Maryland corporation in 1975.
On November 12, 1984 the Fund was reorganized into a Pennsylvania business
trust which was created solely for that purpose. The Declaration of Trust
permits the Trustees to issue an unlimited number of shares of beneficial
interest, without par value.
The shares of the Fund are fully paid and non-assessable, except as
set forth under "Shareholder and Trustee Liability," and have no preference
as to conversion, exchange, dividends, retirement or other features. The
shares have no pre-emptive rights. The shares have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting
for the election of Trustees can elect 100% of the Trustees if they choose
to do so. A shareholder is entitled to one vote for each full share held
(and a fractional vote for each fractional share held), then standing in
his name on the books of the Fund. On any matter submitted to a vote of
shareholders, all shares of the Fund then issued and outstanding and
entitled to vote, irrespective of the class, shall be voted in the
aggregate and not by class: except (i) when required by the Investment
Company Act of 1940, shares shall be voted by individual class; and (ii)
when the matter does not affect any interest of a particular class, then
only shareholders of the affected class or classes shall be entitled to
vote thereon.
The Fund will continue without limitation of time, provided however
that:
1) Subject to the majority vote of the holders of shares of the Fund
outstanding, the Trustees may sell or convert the assets of the
Fund to another investment company in exchange for shares of such
investment company, and distribute such shares, ratably among the
shareholders of the Fund; and
2) Subject to the majority vote of shares of the Fund outstanding, the
Trustees may sell and convert into money the assets of the Fund and
distribute such assets ratably among the shareholders of the Fund.
Upon completion of the distribution of the remaining proceeds or the
remaining assets of the Fund as provided in paragraphs 1) and 2) above, the
Fund shall terminate and the Trustees shall be discharged of any and all
further liabilities and duties hereunder and the right, title and interest
of all parties shall be cancelled and discharged.
<PAGE>
Shareholder and Trustee Liability
Under Pennsylvania law, shareholders of a trust may, under certain
circumstances, be held personally liable as partners for the obligations of
the Trust. Therefore, the Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund and
requires that notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by the Fund or the
Trustees. The Declaration of Trust provides for indemnification out of the
Fund property of any shareholder held personally liable for the obligations
of the Fund. The Declaration of Trust also provides that the Fund shall,
upon request, assume the defense of any claim made against any shareholder
for any act or obligation of the Fund and satisfy any judgment thereon.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations. The Trustees and officers of the
Fund believe that, in view of the above, the risk of personal liability to
shareholders is remote.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in
the Declaration of Trust protects a Trustee against any liability to which
he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the
conduct of his office.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended October 31,
1994 , including the financial highlights for each of the five fiscal
years in the period ended October 31, 1994 , appearing in the
Vanguard Preferred Stock Fund 1994 Annual Report to Shareholders,
and the report thereon of Price Waterhouse LLP , independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Fund's 1994 Annual Report
to Shareholders is enclosed with this Statement of Additional Information.
For a more complete discussion of the Fund's performance, please see the
Fund's 1994 Annual Report to Shareholders, which may be obtained
without charge.
APPENDIX -- DESCRIPTION OF PREFERRED STOCK RATINGS
Excerpts from Moody's Investor Services, Inc. description of its four
highest preferred stock ratings: aaa -- considered to be a top-
quality preferred stock. This rating indicates good asset protection and
the least risk of dividend impairment within the universe of preferred
stocks; aa -- considered a high-grade preferred stock. This rating
indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable
future; a -- considered to be an upper-medium grade preferred stock. While
risks are judged to be somewhat greater than in the aaa and aa
classifications, earning and asset protection are, nevertheless, expected
to be maintained at adequate levels; baa -- considered to be lower-medium
grade, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
Excerpts from Standard & Poor's Corporation description of its four
highest preferred stock ratings:
Quality ratings are expressed by symbols like those rating bonds. They
are independent of Standard & Poor's bond ratings, however, in the sense
that they are not necessarily graduated downward from the rankings accorded
the issuing company's debt. They represent a considered judgment of the
relative security of dividends, and -- what is thereby implied -- the
prospective yield stability of the stock. The four highest ratings are AAA
- -- Prime; AA -- High Grade; A -- Sound; BBB -- Medium Grade.
<PAGE>
PART C
VANGUARD PREFERRED STOCK FUND
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
The Registrant's Financial Statements for the year ended October 31,
1994 , including Price Waterhouse LLP's report thereon, are
incorporated by reference in the Statement of Additional
Information, from the Registrant's 1994 Annual Report to
Shareholders which has been filed with the Commission. The Financial
Statements included in the Annual Report are:
1. Statement of Net Assets as of October 31, 1994 .
2. Statement of Operations for the fiscal year ended October 31,
1994 .
3. Statement of Changes in Net Assets for the fiscal years ended October
31, 1994 and October 31, 1993 .
4. Financial Highlights for each of the five years in the period ended
October 31, 1994 .
5. Notes to Financial Statements
6. Report of Independent Accountants
(b) Exhibits
(1) Declaration of Trust
(2) By-Laws of Registrant
(3) Not Applicable
(4) Not Applicable
(5) Not Applicable
(6) Not Applicable
(7) Reference is made to the section entitled "Management of the
Fund" in the Registrant's Statement of Additional Information
(8) Form of Custody Agreement
(9) Form of Vanguard Service Agreement
(10) Opinion of Counsel
(11) Consent of Independent Accountants*
(12) Financial Statements -- reference is made to (a) above
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Schedule for Computation of Performance Quotations*
(27) Financial Data Schedule*
- -------------------
*Filed herewith
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant is not controlled by or under common control with any
person. The officers of the Registrant, the investment companies in
The Vanguard Group of Investment Companies and The Vanguard Group, Inc. are
identical. Reference is made to the caption "Management of the Fund" in the
Prospectus constituting Part A and "Management of the Fund" in the
Statement of Additional Information constituting Part B of this
Registration Statement.
Item 26. Number of Holders of Securities
The number of record holders of the one class of shares of beneficial
interest (no par value) at October 31, 1994 was 14,926 .
<PAGE>
Item 27. Indemnification
Reference is made to Article XI of Registrant's Declaration of Trust.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons
of the registrant pursuant to the foregoing provision, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a trustee, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser
Wellington Management Company is a Massachusetts partnership, the
managing partners of which are Duncan M. McFarland, John B. Neff and Robert
W. Doran. The business address of each partner is 75 State St., Boston,
Mass., 02109.
Item 29. Principal Underwriters
(a) None
(b) Not Applicable
Item 30. Location of Accounts and Records
The books, accounts and other documents required by Section 31(a)
under the Investment Company Act and the rules promulgated thereunder will
be maintained in the physical possession of Registrant; Registrant's
Transfer Agent, The Vanguard Group, Inc. c/o The Vanguard Financial Center,
Valley Forge, Pennsylvania 19482; and the Registrant's Custodian, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02105.
Item 31. Management Services
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and
described in Part B hereof under "Management of the Fund;" the Registrant
is not a party of any management-related service contract.
Item 32. Undertakings
Registrant hereby undertakes to comply with the provisions of Section
16(c) of the 1940 Act with regard to shareholders' rights to call a meeting
of shareholders for the purpose of voting on the removal of trustees and to
assist in shareholder communications in such matters, to the extent
required by law.
Registrant hereby undertakes to provide an Annual Report to
Shareholders or prospective investors, free of charge, upon request.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
the requirements for effectiveness of this Registration Statement pursuant
to Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Valley
Forge and the Commonwealth of Pennsylvania, on this 22th day of
February, 1995 .
VANGUARD PREFERRED STOCK FUND
BY: (Raymond J. Klapinsky)
John C. Bogle*, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
BY: (Raymond J. Klapinsky)
John C. Bogle*, Chairman of the Board, Trustee,
and Chief Executive Officer
February 22, 1995
BY: (Raymond J. Klapinsky)
John J. Brennan*, President and Trustee
February 22, 1995
BY: (Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*, Trustee
February 22, 1995
BY: (Raymond J. Klapinsky)
Burton G. Malkiel*, Trustee
February 22, 1995
BY: (Raymond J. Klapinsky)
Bruce K. MacLaury*, Trustee
February 22, 1995
BY: (Raymond J. Klapinsky)
James O. Welch, Jr.*, Trustee
February 22, 1995
BY: (Raymond J. Klapinsky)
J. Lawrence Wilson*, Trustee
February 22, 1995
BY: (Raymond J. Klapinsky)
Richard F. Hyland*, Treasurer and Principal Financial
and Accounting Officer
February 22, 1995
*By Power of Attorney. See File Number 2-14336. January 23, 1990.
Incorporated by Reference.
INDEX TO EXHIBITS
Consent of Independent Accountants....................... EX-99.B11
Schedule for Computation of Performance Quotations....... EX-99.B16
Financial Data Schedule............................... EX-27
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
the Statement of Additional Information constituting parts of this amended
Registration Statement on Form N-1A, of our report dated November 29,
1994 relating to the financial statements, including the financial
highlights, appearing in the October 31, 1994 Annual Report
to Shareholders of Vanguard Preferred Stock Fund, which are also
incorporated by reference into the Registration Statement. We also consent
to the references to us under the headings "Financial Highlights" and
"General Information" in the Prospectus and "Financial Statements" in the
Statement of Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
February 21, 1995
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD PREFERRED STOCK FUND, INC.
1. Average Annual Total Return (As of October 31, 1994 )
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = -8.45%
N = 1
ERV = $915.47
Five Year
P = $1,000
T = +8.22%
N = 5
ERV = $1,484.15
Ten Year
P = $1,000
T = +10.99%
N = 10
ERV = $2,836.26
2. YIELD (30 Days Ended October 31, 1994 )
6
Yield = 2 [( a + 1) -1] -B x 100
-------
c x d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during the
period
d = the maximum offering price per share on the last day of the
period
Example a = $2,160,650.90
b = $144,422.98
c = 37,065,212.029
d = $8.35
Yield = 7.95%
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 000081391
<NAME> VANGUARD PREFERRED STOCK FUND
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-START> NOV-01-1993
<PERIOD-END> OCT-31-1994
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 336007
<INVESTMENTS-AT-VALUE> 297825
<RECEIVABLES> 16730
<ASSETS-OTHER> 48
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 314603
<PAYABLE-FOR-SECURITIES> 7231
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2229
<TOTAL-LIABILITIES> 9460
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 341077
<SHARES-COMMON-STOCK> 36539
<SHARES-COMMON-PRIOR> 29215
<ACCUMULATED-NII-CURRENT> 3951
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1703)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (38182)
<NET-ASSETS> 305143
<DIVIDEND-INCOME> 27223
<INTEREST-INCOME> 437
<OTHER-INCOME> 0
<EXPENSES-NET> 1813
<NET-INVESTMENT-INCOME> 25847
<REALIZED-GAINS-CURRENT> (1657)
<APPREC-INCREASE-CURRENT> (56384)
<NET-CHANGE-FROM-OPS> (32188)
<EQUALIZATION> (419)
<DISTRIBUTIONS-OF-INCOME> 27337
<DISTRIBUTIONS-OF-GAINS> 5497
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16241
<NUMBER-OF-SHARES-REDEEMED> 21553
<SHARES-REINVESTED> 2636
<NET-CHANGE-IN-ASSETS> (86777)
<ACCUMULATED-NII-PRIOR> 5860
<ACCUMULATED-GAINS-PRIOR> 5445
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 817
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1813
<AVERAGE-NET-ASSETS> 355782
<PER-SHARE-NAV-BEGIN> 9.990
<PER-SHARE-NII> 0.660
<PER-SHARE-GAIN-APPREC> (1.460)
<PER-SHARE-DIVIDEND> 0.700
<PER-SHARE-DISTRIBUTIONS> 0.140
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 8.350
<EXPENSE-RATIO> 0.005
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
