<PAGE>
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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. /X/
Post-Effective Amendment No. 37 /X/
and
REGISTRATION STATEMENT (NO. 811-2601) UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 41 /X/
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 July 10, 1998,
pursuant to paragraph (3) of Rule 485(a).
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
We have elected to register an indefinite number of shares pursuant to
Rule 24f-2 under the Investment Company Act of 1940. We filed our Rule 24f-2
Notice for the fiscal year ended October 31, 1997 on January 29, 1998.
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<PAGE>
VANGUARD PREFERRED STOCK FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A
Item Number Location in Prospectus
<S> <C> <C>
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 5A. Management's Discussion of Fund
Performance ..................................... Herein incorporated by reference to
Registrant's Annual Report to Shareholders
dated October 31, 1997 filed with the
Securities and Exchange Commission's
EDGAR system on December 22, 1997.
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 Location in Statement
Item Number of Additional Information
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 Registrant .................... 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 Performance Data ................ Not Applicable
Item 23. Financial Statements ............................ Financial Statements
</TABLE>
<PAGE>
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A Member of The Vanguard Group
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PROSPECTUS -- July 10, 1998
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NEW ACCOUNT INFORMATION: Investor Information Department -- 1-800-662-7447
(SHIP)
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SHAREHOLDER ACCOUNT SERVICES: Client Services Department -- 1-800-662-2739
(CREW)
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INVESTMENT Vanguard Preferred Stock Fund (the "Fund") is an open-end
OBJECTIVE AND diversified investment company that seeks to provide the
POLICIES 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 To open a regular (non-retirement) account, please complete
ACCOUNT 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 $1,000 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 This Prospectus is designed to set forth concisely the
PROSPECTUS 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 July 10, 1998, and has been incorporated by
reference into this Prospectus. A copy may be obtained,
without charge, by writing to the Fund, calling the
Investor Information Department at 1-800-662-7447 or
visiting the Securities and Exchange Commission's website
(www.sec.gov).
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C> <C> <C>
Fund Expenses .................... 2 Investment Limitations ........... 8 SHAREHOLDER GUIDE
Financial Highlights ............. 2 Management of the Fund ........... 9 Opening an Account and
Yield and Total Return ........... 3 Investment Adviser ............... 9 Purchasing Shares ............. 15
FUND INFORMATION Performance Record ............... 11 When Your Account Will Be
Investment Objective ............. 4 Dividends, Capital Gains and Credited ...................... 18
Investment Policies .............. 4 Taxes ......................... 11 Selling Your Shares .............. 18
Investment Risks ................. 4 The Share Price of the Fund ...... 13 Exchanging Your Shares ........... 21
Who Should Invest ................ 5 General Information .............. 14 Important Information About
Implementation of Policies ....... 6 Telephone Transactions ........ 23
Transferring Registration ........ 23
Statements and Reports ........... 24
Other Vanguard Services .......... 24
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<PAGE>
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 1997 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
-----------------------------------------------------------
Management & Administrative Expenses .... 0.20%
Investment Advisory Fees ................ 0.13
12b-1 Fees .............................. None
Other Expenses
Distribution Costs ..................... 0.03%
Miscellaneous Expenses ................. 0.01
------
Total Other Expenses .................... 0.04
-----
Total Operating Expenses ............ 0.37%
=====
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) a
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
-------- --------- --------- ---------
$ 4 $12 $21 $ 47
This example should not be considered a representation of
past or future expenses or performance. Actual expenses may
be higher or lower than those shown.
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FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of
the five years in the period ended October 31, 1997, have
been derived from financial statements which were audited
by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. This information should be
read in conjunction with the Fund's financial statements
and notes thereto which, together with the remaining
portions of the Fund's 1997 Annual Report to Shareholders,
are incorporated by reference in the Statement of
Additional Information and in this Prospectus, and which
appear, along with the report of Price Waterhouse LLP, in
the Fund's 1997 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1997 Annual Report to Shareholders, which may
be obtained without charge by writing to the Fund or by
calling our Investor Information Department at
1-800-662-7447.
2
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
-----------------------------------------------------------------
Six
Months
Ended
April 30,
1998 1997 1996 1995 1994
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year ......................... $ 10.17 $ 9.67 $ 9.61 $ 8.35 $ 9.99
------- ------- ------- ------- -------
Investment Operations
Net Investment Income ........... .30 .63 .69 .660 .660
Net Realized and Unrealized
Gain (Loss) on
Investments .................... .20 .53 .04 1.250 (1.460)
------- ------- ------- ------- -------
Total from Investment
Operations .................... .50 1.16 .73 1.910 (.800)
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Distributions
Dividends from Net
Investment Income .............. (.33) (.66) (.67) (.650) (.700)
Distributions from Realized
Capital Gains .................. -- -- -- -- (.140)
------- ------- ------- ------- -------
Total Distributions ............ (.33) (.66) (.67) (.650) (.840)
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Net Asset Value, End of Year...... $ 10.34 $ 10.17 $ 9.67 $ 9.61 $ 8.35
===================================================================================================
Total Return ..................... 4.96% 12.44% 8.04% 23.79% (8.45)%
===================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year
(Millions) ...................... $ 352 $ 320 $ 286 $ 308 $ 305
Ratio of Total Expenses to
Average Net Assets .............. 0.36%* 0.37% 0.39% 0.52% 0.51%
Ratio of Net Investment Income
to Average Net Assets ........... 5.71%* 6.41% 7.23% 7.43% 7.27%
Portfolio Turnover Rate .......... 42%* 34% 31% 20% 27%
Average Commission Rate Paid...... --** $.0600 $ .0600 N/A N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
----------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year ......................... $ 9.32 $ 9.06 $ 8.22 $ 8.62 $ 7.94 $ 8.02
------- ------- ------- ------- ------- -------
Investment Operations
Net Investment Income ........... .690 .749 .765 .695 .691 .765
Net Realized and Unrealized
Gain (Loss) on
Investments .................... .685 .236 .855 (.350) .514 .170
------- ------- ------- ------- ------- -------
Total from Investment
Operations .................... 1.375 .985 1.620 .345 1.205 .935
- ------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net
Investment Income .............. (.705) (.725) (.780) (.745) (.525) (.895)
Distributions from Realized
Capital Gains .................. -- -- -- -- -- (.120)
------- ------- ------- ------- ------- -------
Total Distributions ............ (.705) (.725) (.780) (.745) (.525) (1.015)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year...... $ 9.99 $ 9.32 $ 9.06 $ 8.22 $ 8.62 $ 7.94
============================================================================================================
Total Return ..................... 15.56% 11.34% 20.83% 4.28% 15.82% 12.37%
============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Year
(Millions) ...................... $ 392 $ 187 $ 90 $ 54 $ 64 $ 78
Ratio of Total Expenses to
Average Net Assets .............. 0.53% 0.58% 0.63% 0.65% 0.67% 0.66%
Ratio of Net Investment Income
to Average Net Assets ........... 6.77% 7.43% 7.96% 8.69% 9.11% 9.40%
Portfolio Turnover Rate .......... 45% 33% 18% 15% 42% 52%
Average Commission Rate Paid...... N/A N/A N/A N/A N/A N/A
</TABLE>
- ------------
* Annualized.
** The Fund had no transactions on which commissions were charged.
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YIELD AND From time to time the Fund advertises its yield and total
TOTAL RETURN 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 capital
gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day yield"
of the Fund is calculated by dividing the net investment
income per share earned during a 30-day period by the net
asset value per share on the last day of the period. Net
investment income includes interest and dividend income
earned on the Fund's securities; it is net of all expenses
and all recurring and nonrecurring charges that have been
applied to all shareholder accounts. The yield calculation
assumes that the net investment income earned over 30 days
is compounded monthly for six months and then annualized.
Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds. However,
these methods differ from the accounting methods used by
the Fund to maintain its books and records, and so the
adver- tised 30-day yield may not fully reflect the income
paid to an investor's account
3
<PAGE>
or the yield reported in the Fund's reports to
shareholders. Additionally the Fund may compare its
performance to that of the Merrill Lynch Perpetual
Preferred Index.
INVESTMENT The Fund is an open-end diversified investment company.
OBJECTIVE The objective of the Fund is to provide the maximum
dividend income which qualifies for the corporate
The Fund seeks to dividends received deduction (currently 70%) under federal
provide qualified tax law by investing primarily in the preferred stocks of
dividend income 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.
- --------------------------------------------------------------------------------
INVESTMENT Under normal circumstances, the Fund will invest more than
POLICIES 75% of its total assets in preferred stocks of domestic
corporations (including domestic subsidiaries of foreign
The Fund invests in companies) which have been rated Baa or better by Moody's
preferred stocks Investors Service, Inc. or BBB or better by Standard &
Poor's Corporation. The remain der 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. Except for the
qualified dividend income exclusion previously described,
the Fund is managed without regard to tax ramifications.
The Fund may also invest in U.S. dollar denominated
preferred stocks and debt securities issued by foreign
corporations, foreign governments, their agencies and
instrumentalities and supranational entities.
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-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.
The Fund is responsible for voting the shares of all
securities it holds.
These policies are not fundamental and so may be changed by
the Board of Trustees without shareholder approval.
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INVESTMENT As a mutual fund investing primarily in perpetual preferred
RISKS stocks, the Fund is subject to interest rate risk--i.e.,
the possibility that the market value of preferred stocks
The Fund is subject will vary inversely with interest rates. When interest
to interest rate, rates rise, the value of preferred stocks will fall; when
credit and interest rates fall, the value of preferred stocks will
manager risks 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
4
<PAGE>
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).
As an illustration of interest rate risk, the table below
depicts the effect of a one and two percentage point change
in interest rates on long-term bonds:
Percent Change in the Price of a Par Bond Yielding 5.5%
1 Percentage Point 1 Percentage Point
Increase in Decrease in
Interest Rates Interest Rates
---------------------- ----------------------
--11.1% +13.1%
2 Percentage Point 2 Percentage Point
Increase in Decrease in
Interest Rates Interest Rates
---------------------- ----------------------
--20.5% +28.6%
This table is intended to provide you with guidelines for
determining the degree of interest rate risk you may be
willing to assume. The price changes shown should not be
taken as representative of the Fund's current or future
change in share price.
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 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 involve the buying and selling of securities based
upon economic, financial and market analysis and investment
judgment. Manager risk refers to the possibility that the
Fund's investment adviser may fail to execute the Fund's
investment strategy effectively. As a result, an investor
in the Fund may lose money.
- --------------------------------------------------------------------------------
WHO SHOULD The Fund is intended for investors who are seeking income
INVEST from their investments and who can tolerate substantial
price risks in pursuit of their income objectives. The
Investors seeking Fund is suited to investors who are willing to hold their
income which investments over a long time horizon in anticipation of
qualifies for the the income that preferred stocks may provide. Because the
dividends received Fund invests in preferred stocks, investors should be able
deduction to tolerate sharp, sometimes substantial fluctuations in
the value of their investment due to changes in interest
rates.
5
<PAGE>
By minimizing nonqualifying investment income (i.e.,
realized interest income and net realized short-term
capital gains), the Fund is especially suitable for
corporations seeking to benefit from the corporate
dividends received deduction, which is currently 70%.
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 en-gage 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.
- --------------------------------------------------------------------------------
IMPLEMENTATION In addition to investing in preferred stocks, the Fund
OF POLICIES follows a number of additional investment policies.
The Fund may Although it normally seeks to remain substantially invested
invest in in preferred stocks, the Fund may invest temporarily in
short-term certain short-term fixed income securities. Such
fixed income securities may be used to invest uncommitted cash balances
securities or to maintain liquidity to meet shareholder redemptions.
Under normal circumstances, the Fund will invest no more
than 35% of its assets in short-term fixed income
securities. However, the Fund reserves the right to invest
100% of its assets in such securities for temporary
defensive purposes. These short-term fixed income
securities include: obligations of the United States
Government and its agencies or instrumentalities;
commercial paper, bank certificates of deposit, and
bankers' acceptances; and repurchase agreements
collateralized by these securities.
The Fund may lend The Fund may lend its investment securities on a short-term
its securities 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 The Fund may borrow money, subject to the limits set forth
borrow money on page 8, for tem porary or emergency purposes, including
the meeting of redemption requests which might otherwise
require the untimely disposition of securities.
6
<PAGE>
Portfolio turnover Although it generally seeks to invest for the long term,
is not expected to the Fund retains the right to sell securities irrespective
exceed 100% 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.
Derivative Derivatives are instruments whose values are linked to or
Investing derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
The Fund may invest The Fund may invest in futures contracts and options, but
in derivative only to a limited extent. Specifically, the Fund may enter
securities 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 to pursue several
widely accepted management strategies: to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index.
The Fund may use futures contracts for bona fide "hedging"
purposes. In executing a hedge, a manager sells, for
example, stock index futures to protect against a decline
in the stock market. As such, if the market drops, the
value of the futures position will rise, thereby offsetting
the decline in value of the Fund's stock holdings.
The Fund may invest The Fund may also invest modestly in a fairly conservative
in CMOs class of collateralized mortgage obligations (CMOs) which
feature a high degree of cash flow predictability and
moderate vulnerability to mortgage prepayment risk. To
reduce credit risk, the Fund purchases these less risky
classes of collateralized mortgage obligations issued only
by agencies of the U.S. Government or privately-issued
collateralized mortgage obligations that carry
high-quality investment-grade ratings.
Futures contracts The primary risks associated with the use of futures
and options pose contracts and options are: (i) imperfect correlation
certain risks between the change in market value of the stocks or bonds
held by the Fund and the prices of futures contracts and
options; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability
to close a futures position prior to its maturity date.
The risk of imperfect correlation will be minimized by
investing 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.
7
<PAGE>
The Fund may own The Fund may own restricted securities to a limited extent.
restricted Restricted securities are securities which are not freely
securities marketable or which are subject to restrictions upon sale
under the Securities Act of 1933. The Portfolio may invest
up to 15% of its net assets in illiquid securities which
include certain restricted securities. The Fund's Board of
Trustees may from time to time determine certain
restricted securities known as Rule 144A securities to be
liquid. Such securities will not be subject to the 15%
limitation described above.
The Fund may invest The Fund may hold securities of foreign issuers, but all
in securities of such securities must be denominated in U.S. dollars.
foreign issuers Securities of foreign issuers may trade in U.S. or for
eign securities markets. Securities of foreign issuers may
involve investment risks that are different from those of
domestic issuers. Such risks include the effect of foreign
economic policies and conditions, future political and
economic developments, and the possible imposition of
exchange controls or other foreign governmental
restrictions on foreign debt issuers. There may also be
less publicly available information about a foreign issuer
than a domestic issuer of securities. Foreign issuers are
generally not subject to the uniform accounting, auditing
and financial reporting standards that apply to domestic
issuers. Also, foreign debt markets may be characterized
by lower liquidity, greater price volatility and higher
transaction costs. Additionally, it may be difficult to
obtain or enforce a legal judgment in a foreign court.
- --------------------------------------------------------------------------------
INVESTMENT The Fund has adopted limitations on some of its investment
LIMITATIONS policies. Some of these limitations are that the Fund will
not:
The Fund has (a) With respect to 75% of the value of its total assets,
adopted certain purchase the securities of any issuer (except
fundamental obligations of the United States Government and its
limitations 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,
except that the Fund will invest more than 25% of its
assets in the utilities industry and more than 25% of
its assets in the financial services industry; 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.
A complete list of the Fund's investment limitations can be
found in the Statement of Additional Information. These
limitations are fundamental and may be changed only by
approval of a majority of the Fund's shareholders.
- --------------------------------------------------------------------------------
8
<PAGE>
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment
THE FUND Companies, a fam ily of more than 30 investment companies
with more than 95 distinct investment portfolios and total
assets in excess of $370 billion. Through their
jointly-owned Vanguard subsidiary, The Vanguard Group,
Inc. ("Vanguard"), the Fund and the other funds
administers and in the Group obtain at cost virtually all
of their corporate management, adminisdistributes the Fund
trative, 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 1997, the average expense ratio
(annual costs including advisory fees divided by total net
assets) for the Vanguard funds amounted to approximately
0.28% compared to an average of 1.24% 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.
- --------------------------------------------------------------------------------
INVESTMENT The Fund has entered into an investment advisory agreement
ADVISER with Wellington Management Company, LLP ("WMC"), 75 State
Street, Boston, MA 02109, under which WMC manages the
Wellington investment and reinvestment of the Fund's assets and
Management continuously reviews, supervises and administers the
Company, LLP Fund's investment program. WMC discharges its
manages the Fund's responsibilities subject to the control of the Fund's
investments 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 April 30, 1998, WMC held investment management authority
with respect to more than $196 billion of assets. WMC and
its predecessor organizations have provided investment
advisory services to investment companies since 1928 and to
investment counseling clients since 1960.
9
<PAGE>
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 also manages the Long-Term
Corporate and High Yield Corporate Portfolios of Vanguard
Fixed Income Securities Fund, as well as the High Yield
Bond Portfolio of the Vanguard Variable Insurance Fund and
the bond components of Vanguard/Wellesley Income Fund and
the Utilities Income Portfolio of the Vanguard Specialized
Portfolios. Mr. McEvoy has been associated with Wellington
Management Company for 20 years. Mr. McEvoy is supported by
research and other investment services provided by the
professional staff of WMC.
The Fund pays WMC 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 $200 million .150%
Next $200 million .100%
Assets in excess of $400 million .075%
For the six months ended April 30, 1998, the total advisory
fees paid by the Fund to WMC represented an annual
effective rate of .13 of 1% of the Fund's total average net
assets. This fee was paid under a previous fee schedule
that provided for a higher rate of fees.
The adviser is authorized to choose brokers or dealers to
handle the purchase and sale of the Fund's securities, and
is directed to get the best available price and most
favorable execution from these brokers with respect to all
transactions. At times, the adviser may choose brokers who
charge higher commissions in the interests of obtaining
better execution of a transaction. If more than one broker
can obtain the best available price and favorable execution
of a transaction, then the adviser is authorized to choose
a broker who, in addition to executing the transaction,
will provide research services to the adviser or the Fund.
However, the adviser will not pay higher commissions
specifically for the purpose of obtaining research
services. The Fund may direct the adviser to use a
particular broker for certain transactions in exchange for
commission rebates or research services provided to the
Fund.
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.
- --------------------------------------------------------------------------------
10
<PAGE>
PERFORMANCE The table below provides investment results for the Fund
RECORD 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
Merrill Lynch Perpetual Preferred 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 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 10/31/97 Stock Fund Index**
---------------- -------------------- --------------------
1 Year +12.4% + 9.4%
3 Years +14.6 +11.5
5 Years + 9.7 + 7.8
10 Years +11.3 + 9.6
Lifetime* +10.1 + 9.4
*December 3, 1975, to October 31, 1997.
**Standard & Poor's Preferred Stock Index through March 1989;
Merrill Lynch Perpetual Preferred Index through January 1997;
Merrill Lynch Perpetual Preferred DRD-Eligible Index thereafter.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL The Fund expects to pay dividends quarterly from ordinary
GAINS AND TAXES income. Net capital gains distributions, if any, will be
made annually.
The Fund pays In addition, in order to satisfy certain distribution
quarterly dividends 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.
11
<PAGE>
Dividends will For corporate investors, if the Fund qualifies for taxation
qualify for the as a regulated investment company and satisfies certain
dividends received requirements, a portion of the dividends paid by the Fund
deduction will be eligible, whether received in cash or reinvested
in additional shares, for the corporate dividends received
deduction, which is currently 70%. 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 current 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 corporate dividends received deduction.
In fiscal year 1997, 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 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. Long-term capital gains may be taxed at
different rates depending on how long the Fund held the
securities. 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. Except for
qualification for the corporate dividends received
deduction, the Fund is managed without regard to tax
ramifications.
A capital gain or A sale of shares of the Fund is a taxable event and may
loss may be result in a capital gain or loss. A capital gain or loss
realized upon may be realized from an ordinary redemption of shares or
exchange or an exchange of shares between two mutual funds (or two
redemption 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.
12
<PAGE>
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.
- --------------------------------------------------------------------------------
THE SHARE PRICE The Fund's share price, or "net asset value" per share, is
OF THE FUND calculated by dividing the total assets of the Fund, less
all liabilities, by the total number of shares
outstanding. The net asset value is determined as of the
close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time) on each day that the Exchange is open for
trading.
Fund securities for which market quotations are readily
available (including those securities listed on national
securities exchanges, as well as those quoted on the NASDAQ
Stock Market) will be valued at the last quoted sales price
on the day the valuation is made. Such securities which are
not traded on the valuation date are valued at the mean of
the bid and ask prices. Price information on exchange-listed
securities is taken from the exchange where the security is
primarily traded. Any foreign securities are valued at the
latest quoted sales price available before the time when
assets are valued. Securities may be valued on the basis of
prices provided by a pricing service when such prices are
believed to reflect the fair market value of such
securities.
Short-term instruments (those with remaining maturities of
60 days or less) may be valued at cost, plus or minus any
amortized discount or premium, which approximates market
value.
Bonds and other fixed income securities may be valued on
the basis of prices provided by a pricing service when such
prices are believed to reflect the fair market value of
such securities. The prices provided by a pricing service
may be determined without regard to bid or last sale prices
of each security, but take into account institutional-size
transactions in similar groups of securities as well as any
developments related to specific securities.
13
<PAGE>
Other assets and securities for which no quotations are
readily available or which are restricted as to sale (or
resale) are valued by such methods as the Board of
Directors deems in good faith to reflect fair value.
The share price for the Fund can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard Funds.
- --------------------------------------------------------------------------------
GENERAL The Fund is a Delaware business trust and is authorized to
INFORMATION issue an unlimited number of shares of beneficial
interest, with a par value of $.001 per share. 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. CoreStates Bank, N.A., holds
daily cash balances that are used by the Fund to invest in
repurchase agreements or securities acquired in these
transactions. 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.
- --------------------------------------------------------------------------------
14
<PAGE>
SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either by
ACCOUNT AND mail or wire. Simply complete and return an Account
PURCHASING Registration Form and any required legal docu mentation,
SHARES indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement ($1,000 for Uniform
Gifts/Transfers to Minors Act accounts, $500 minimum for
an Education IRA). If you wish to open a Vanguard
Individual Retirement Account, you must open the 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 $1,000, but no more than $2,000 if you are
making a regular IRA contribution. (Rollover IRA
contributions may be made in greater amounts.) 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. 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.
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).
Purchase 1) Because of the risks associated with stock
Restrictions 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.
2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable to The Vanguard Group.
Additional Subsequent investments to regular accounts may be made by
Investments mail ($100 minimum), wire ($1,000 minimum), exchange from
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 IRA account. In some instances,
contributions may be made by wire or Vanguard Fund
Express. Please call us for more information on these
options.
------------------------------------------------------------
15
<PAGE>
<TABLE>
<CAPTION>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
<S> <C> <C>
Please include the amount of your Additional investments should
Purchasing By Mail initial investment on the registration include the Invest-by-Mail remittance
Complete and sign the form, make your check pay form attached to your Fund
enclosed Account able to The Vanguard Group-38 confirmation statements. Please
Registration Form and mail to: make your check payable
to The Vanguard Group-38, write your
The Vanguard Group account number on your check
P.O. Box 2600 and, using the return
Valley Forge, PA 19482-2600 envelope provided, mail to the
address indicated on the
Invest-by-Mail Form.
For express The Vanguard Group All written requests should be
or registered mail, 455 Devon Park Drive mailed to one of the addresses indicated
send to: Wayne, PA 19087 for new accounts. Do not send registered
or express mail to the post office box address.
</TABLE>
------------------------------------------------------
Purchasing By Wire CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO. 0101 9897
ATTN: VANGUARD
Before Wiring
Please contact VANGUARD PREFERRED STOCK FUND
Client Services ACCOUNT NUMBER
(1-800-662-2739) ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank includes
the name of the Fund selected, the account number Vanguard
has assigned to you and the eight-digit CoreStates number.
If you are opening a new account, please complete the
Account Registration Form and mail it to the "New Account"
address above after completing your wire arrangement. Note:
Federal Funds wire purchase orders will be accepted only
when the Fund and Custodian Bank are open for business.
- --------------------------------------------------------------------------------
Purchasing By You may open an account or purchase additional shares by
Exchange (from a making an exchange from an existing Vanguard Fund account.
Vanguard 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 The Fund Express Special Purchase option lets you move
Express money from your bank account to your Vanguard account at
your request. Or if you choose the Automatic Investment
Special Purchase option, money will be moved from your bank account to your
and Automatic Vanguard account on the schedule (monthly, bimonthly
Investment [i.e., every other month],
16
<PAGE>
quarterly, semiannually or annually) 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 two weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of four distribution options:
DISTRIBUTION
OPTION 1. Automatic Reinvestment Option--Both dividend and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. Cash Dividend Option--Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. Cash Capital Gain Option--Your capital gains
distributions will be paid in cash and your dividends
will be reinvested in additional Fund shares.
4. 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).
If a shareholder has chosen to receive dividend and/or
capital gains distributions in cash, and the postal or
other delivery service is unable to deliver checks to the
shareholder's address of record, we will change the
distribution option so that all dividends and other
distributions are automatically reinvested in additional
shares. We will not pay interest on uncashed distribution
checks.
In addition, an option to invest your cash dividend 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 dividend and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund
Investors should shareholders. These distributions are made to all share
ask about the holders who own Fund shares as of the distribution's
timing of capital record date, regardless of how long the shares have been
gain and dividend owned. Purchasing shares just prior to the record date
distributions could have a significant impact on your tax liability for
before investing 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.
17
<PAGE>
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's annual
capital gains distribution normally occurs in December,
while income dividends are generally paid quarterly in
March, June, September and December. In addition, the Fund
may occasionally be required to make supplemental dividend
or capital gains distributions at some other time during
the year. For additional information on distributions and
taxes, see the section titled "Dividends, Capital Gains,
and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
ACCOUNT your account is to select the options you desire when you
INFORMATION complete your Account Registration Form.
Establishing If you wish to add shareholder options later, you may need
Optional Services to provide Vanguard with additional information and a
signature guarantee. Please call our Client Services
Department (1-800-662-2739) for further assistance.
Signature For our mutual protection, we may require a signature
Guarantees 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.
Broker/Dealer If you purchase shares in Vanguard Funds through a
Purchases 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, once the
trade request has been received in writing or by telephone.
Electronic You may receive a prospectus for the Fund or any of the
Prospectus Vanguard Funds in an electronic format through Vanguard's
Delivery website at www.vanguard.com. For additional information
please see "Other Vanguard Services -- Computer Access."
- --------------------------------------------------------------------------------
WHEN YOUR ACCOUNT The trade date is the date on which your account is
WILL BE CREDITED credited. If your purchase is made by check, Federal Funds
wire, or exchange, and is received by the close of trading
on the New York Stock Exchange (generally 4:00 p.m.
Eastern time), your trade date is the day of receipt. If
your purchase is received after the close of the Exchange,
your trade date is the next business day. Your shares are
purchased at the net asset value determined on your trade
date.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
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.
- --------------------------------------------------------------------------------
18
<PAGE>
SELLING YOUR You may withdraw any portion of the funds in your account
by redeeming shares SHARES at any time. (Please see
"Important Redemption Information.") You generally may
initiate a redemption request by writing or by telephone.
Your redemption proceeds are normally mailed within two
business days after the receipt of the request in Good
Order. No interest will accrue on amounts represented by
uncashed redemption checks.
------------------------------------------------------------
Selling By Mail Requests should be mailed to The Vanguard Group, Vanguard
Preferred Stock Fund, P.O. Box 1120, Valley Forge, PA
19482-1120. (For express or registered mail, send your
request to The Vanguard Group, Vanguard Preferred Stock
Fund, 455 Devon Park Drive, Wayne, PA 19087-1815.)
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 means that the request includes the following:
Good Order 1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners exactly as they are registered
on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that may 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.
------------------------------------------------------------
Selling By To sell shares by telephone, you or your pre-authorized
Telephone 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. Please Note: As a protection
against fraud, your telephone mail redemption privilege
will be suspended for 15 calendar days following any
expedited address change to your account. An expedited
address change is one that is made by telephone or in
writing without the signatures of all account owners.
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.
19
<PAGE>
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 If you select the Fund Express Automatic Withdrawal
Express 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 Automatic Withdrawal you move money from your
Vanguard account to your bank account on an "as & Special
Redemption 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 two weeks before
using the service.
------------------------------------------------------------
Selling By You may sell shares of the Fund by making an exchange to
Exchange another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
------------------------------------------------------------
Important Shares purchased by check or Fund Express may be redeemed
Redemption at any time. How ever, your redemption proceeds will not
Information be paid until payment for the purchase is collected, which
may take up to ten calendar days.
------------------------------------------------------------
Delivery of Redemption requests received by telephone prior to the
Redemption close of trading on the New York Stock Exchange (generally
Proceeds 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.
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, except as
described above in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset value
next determined after your request has been received by
Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.
20
<PAGE>
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 If you make a redemption from a qualifying account,
Average Cost Vanguard will send you an Average Cost Statement which
Statement provides you with the cost and tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
------------------------------------------------------------
Low Balance Fee Due to the relatively high cost of maintaining smaller
and Minimum accounts, the Fund will automatically deduct a $10 annual
Account Balance fee in either June or December from non- retirement
Requirement accounts with balances falling below $2,500 ($500 for
Uniform Gifts/Transfers to Minors Act accounts). The fee
generally will be waived for investors whose aggregate
Vanguard assets exceed $50,000.
In addition, the Fund reserves the right to liquidate any
non-retirement account that is below the minimum initial
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.
Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets (i.e.,
a decline in a Fund's net asset value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange
SHARES shares of Vanguard Preferred Stock Fund for those of other
available Vanguard Funds.
Exchanging By
Telephone
When exchanging shares by telephone, please have ready
Call Client your Fund name, account number, Social Security or
Services employer identification number listed on the account and
(1-800-662-2739) the exact name and address in which the account is
registered. Only the registered shareholder may complete
such an exchange. Requests for tele phone 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 non-retirement investments in
Vanguard Index Trust, Vanguard Balanced Index Fund,
Vanguard International Equity Index Fund, Vanguard REIT
Index Portfolio, Vanguard Total International Portfolio,
and Vanguard Growth and Income Portfolio (formerly known as
Vanguard Quantitative Portfolios). If you
21
<PAGE>
experience difficulty in making a telephone exchange, your
exchange request 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 The Vanguard Group, Vanguard
Preferred Stock Fund, P.O. Box 1120, Valley Forge, PA
19482-1120. (For express or registered mail, send your
request to The Vanguard Group, Vanguard Preferred Stock
Fund, 455 Devon Park Drive, Wayne, PA 19087-1815.)
------------------------------------------------------------
Exchanging Online You may use your personal computer to exchange shares of
most Vanguard funds by accessing Vanguard's website
(www.vanguard.com). To establish this service on your
account, you must first register through our website. We
will then send to you by mail an account access password
that will enable you to make online exchanges.
The Vanguard funds that you cannot purchase or sell through
online exchange are Vanguard Index Trust, Vanguard Balanced
Index Fund, Vanguard International Equity Index Fund,
Vanguard REIT Index Portfolio, Vanguard Total International
Portfolio, and Vanguard Growth and Income Portfolio
(formerly known as Vanguard Quantitative Portfolios). These
funds do permit online exchanges within Vanguard IRAs and
other Vanguard retirement accounts.
------------------------------------------------------------
Important Exchange Before you make an exchange, you should consider the
Information following:
o 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).
o An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
o Exchanges by telephone are accepted only if the
registrations and the taxpayer identification numbers of
the two accounts are identical.
o In order to exchange into an account with a different
registration (including a different name, address, or
taxpayer identification number), you must provide Vanguard
with written instructions that include the guaranteed
signatures of all current account owners.
o The shares to be exchanged must be on deposit and not
held in certificate form.
o New accounts are not currently accepted in
Vanguard/Windsor Fund.
o 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.
22
<PAGE>
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise
or terminate the exchange privilege and limit the amount
of, or reject any exchange, as deemed necessary, at any
time.
- --------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to pre vent 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. "Substantive" means either a dollar amount or a
series of movements between Vanguard funds that Vanguard
determines, in its sole discretion, could have an adverse
impact on the management of the Fund. Notwithstanding these
limitations, 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.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire or Fund
INFORMATION Express redemptions) and exchanges by telephone is
ABOUT TELEPHONE automatically established on your account unless you
TRANSACTIONS 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.
- --------------------------------------------------------------------------------
23
<PAGE>
TRANSFERRING You may transfer the registration of any of your Fund
REGISTRATION shares to another person by completing a transfer form and
sending it to: The Vanguard Group, Attention: Transfer
Department, P.O. Box 1110, Valley Forge, PA 19482-1110.
The request must be in Good Order. Before mailing your
request, please call our Client Services Department
(1-800-662-2739) for full instructions.
- --------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time
REPORTS 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 during
the calendar year, using the average cost single category
method. This service is available for most taxable accounts
opened since January 1, 1986. In general, investors who
redeemed shares from a qualifying Vanguard account may
expect to receive their Average Cost Statement along with
their Portfolio Summary Statement. 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. To
keep the Fund's costs as low as possible (so that you and
other shareholders can keep more of the Fund's investment
earnings), Vanguard attempts to eliminate duplicate
mailings to the same address. When we find that two or more
Fund shareholders have the same last name and address, we
send just one Fund report to that address--instead of
mailing separate reports to each shareholder. If you want
us to send separate reports, however, you may notify our
Investor Information Department at 1-800-662-7447.
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please
SERVICES call our Investor Infor mation Department at
1-800-662-7447.
Vanguard Direct With Vanguard's Direct Deposit Service, most U.S.
Deposit Service 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 Vanguard's Automatic Exchange Service allows you to move
Automatic money automatically among your Vanguard Fund accounts. For
Exchange Service 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.
24
<PAGE>
Vanguard Fund Vanguard's Fund Express allows you to transfer money
Express 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.
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 Vanguard's Dividend Express allows you to transfer your
Express dividend and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.
Vanguard Vanguard's Tele-Account is a convenient, automated service
Tele-Account(R) that provides share price, price change and yield
quotations on Vanguard Funds through any Touch-ToneTM
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains distribution.
In addition, you may make investment exchanges of Vanguard
Fund shares and redemptions by check using Tele-Account.
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).
Computer Access Use your personal computer to learn more about Vanguard
funds and services; keep in touch with your Vanguard
Vanguard Online accounts; map out a long-term investment strategy;
www.vanguard.com initiate certain transactions; and ask questions, make
suggestions, and send messages to Vanguard.
Our education-oriented website provides timely news and
information about Vanguard's funds and services; an online
"university" that offers a variety of mutual fund classes;
and easy-to-use, interactive tools to help you create your
own investment and retirement strategies.
- --------------------------------------------------------------------------------
25
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<PAGE>
-----------------
The Vanguard Group
P.O. Box 2600 Vanguard
Valley Forge, PA 19482
PREFERRED
Investor Information STOCK FUND
Department:
1-800-662-7447 (SHIP)
Client Services
Department: P R O S P E C T U S
1-800-662-2739 (CREW)
JULY 10, 1998
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.
P.O. Box 2600
Valley Forge, PA 19482
a member of
THE VANGUARD GROUP
PO38
<PAGE>
PART B
VANGUARD PREFERRED STOCK FUND
STATEMENT OF ADDITIONAL INFORMATION
July 10, 1998
This Statement is not a prospectus, but should be read in conjunction with
the Fund's current Prospectus (dated July 10, 1998). 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 .................................... 7
Purchase of Shares ........................................ 7
Redemption of Shares ...................................... 7
Investment Limitations .................................... 8
Management of the Fund .................................... 10
Investment Advisory Services .............................. 12
Portfolio Transactions .................................... 14
General Information ....................................... 16
Financial Statements ...................................... 17
Performance Measures ...................................... 17
Appendix--Description of Preferred Stock Ratings .......... 19
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 a custodian bank until repurchased. In
addition, the
B-1
<PAGE>
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. See "Illiquid Securities" below.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
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.
Illiquid Securities
The Fund may not invest more than 15% of its net assets in illiquid
securities. Illiquid securities are securities that may not be sold or disposed
of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on a Fund's books. An
illiquid security includes repurchase agreements which have a maturity of
longer than seven days, securities which are illiquid by virtue of the absence
of a readily available market, and demand instruments with a demand notice
exceeding seven days. Illiquid securities may include securities that are not
registered under the Securities Act of 1933 (the "1933 Act"), however,
unregistered securities that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act will not be considered illiquid so
long as it is determined by the Fund's adviser that an adequate trading market
exists for the security.
Foreign Investments
As indicated in the Prospectus, the Fund may include foreign securities to
a certain extent. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investment in U.S. companies.
Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more
volatile than securities of comparable domestic companies. There is generally
less government supervision and regulation of stock exchanges, brokers and
listed companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions in foreign securities, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on
U.S. exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Fund's foreign securities will be somewhat greater than the
expenses for the custodian arrangement for handling U.S. securities of equal
value.
B-2
<PAGE>
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments.
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 transaction
costs. Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts which are standardized
as to maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a
U.S. Government Agency. Assets committed to futures contracts will be
segregated at the Fund's custodian bank to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery.
Closing out an open futures position is done by taking an opposite position
("buying" a contract which has previously been "sold" or "selling" a contract
previously "purchased") in an identical contract to terminate the position.
Brokerage commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash
or government securities with a broker or custodian to initiate and maintain
open positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin 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 transaction 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 transaction costs.
B-3
<PAGE>
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 the 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 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 except to the
extent that the aggregate initial margins and premiums required to establish
any non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. The Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an
increase in the price of securities it intends to purchase. As evidence of this
hedging interest, the Fund expects that approximately 75% of its futures
contract purchases will be "completed;" that is, equivalent amounts of related
securities will have been purchased or are being purchased by the Fund upon
sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
Restrictions on the Use of Futures Contracts
The Fund will not enter into futures contract transactions to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of the Fund's total assets. In
addition, the Fund will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts would
exceed 20% of the Fund's total assets.
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
B-4
<PAGE>
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.
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
B-5
<PAGE>
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. 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.
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, after notice, to redeliver the securities within the
normal settlement time of three 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.
B-6
<PAGE>
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).
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended April 30, 1998 was
+5.18%.
The average annual total return of the Fund for the one-, five-, ten-year
periods ending October 31, 1997 and the six months ended April 30, 1998 was
+12.44%, +9.73%, +11.25% and +4.96%, 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 investment for or any other restrictions on 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 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 Share Price of the Fund" and a redeeming shareholder
would normally incur brokerage expenses if he converted these securities to
cash.
B-7
<PAGE>
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 withdrawal payment. Any redemption may be more or less than
the shareholder's cost depending on the market value of the Fund's portfolio
securities.
The Fund has authorized Charles Schwab & Co., Inc. ("Schwab") to accept on
its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on the Fund's behalf subject to those terms and
conditions. Under this arrangement, the Fund will be deemed to have received a
purchase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with the Fund's instructions.
Customer orders that are properly transmitted to the Fund by Schwab, or if
applicable, Schwab's authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Fund's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on the Fund's net
asset value calculated at the close of trading that day.
Signature Guarantees -- To protect your account, the Fund and Vanguard
from fraud, signature guarantees are required for certain redemptions.
Signature guarantees enable the Fund to verify the identity of the person who
has authorized a redemption from your account. Signature guarantees are
required in connection with: (1) all redemptions, regardless of the amount
involved, when the proceeds are to be paid to someone other than the registered
owner(s) and/or registered address; and (2) share transfer requests. These
requirements are not applicable to redemptions in Vanguard's prototype
retirement plans except in connection with: (1) distributions made when the
proceeds are to be paid to someone other than the plan participant; (2) certain
authorizations to effect exchanges by telephone; and (3) when proceeds are to
be wired. These requirements may be waived by the Fund in certain instances.
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;
B-8
<PAGE>
(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 (including the Fund's
investment in The Vanguard Group, Inc.) 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
(12) Invest more than 25% of the value of its total assets taken at
market value in any one industry, except that the Fund will invest more
than 25% of its assets in the utilities industry and more than 25% of its
assets in the financial services 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" on page
11.
B-9
<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 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 1, 1998, the
Trustees and Officers of the Fund owned less than 1% of the Fund's outstanding
shares. The mailing address of the Trustees and Officers of the Fund is Post
Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee* Senior
Chairman and Director of The Vanguard Group, Inc., and each of the
investment companies in The Vanguard Group; Director of The Mead
Corporation, General Accident Insurance, and Chris-Craft Industries,
Inc.
JOHN J. BRENNAN, (DOB: 7/29/1954) 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.
ROBERT E. CAWTHORN, (DOB: 9/28/1935) Trustee Chairman Emeritus and Director
of Rhone-Poulenc Rorer, Inc.; Managing Director of Global Health
Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, (DOB: 10/11/1928) Trustee Director of The Great
Atlantic and Pacific Tea Company, IKON Office Solutions, Inc.,
Raytheon Company, Knight-Ridder, Inc., Massachusetts Mutual Life
Insurance Co., and Ladies Professional Golf Association; and Trustee
Emerita of Wellesley College.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee President Emeritus of The
Brookings Institution; Director of American Express Bank, Ltd., The
St. Paul Companies, Inc., and National Steel Corporation.
BURTON G. MALKIEL, (DOB: 8/28/1932) 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 Telecommunications
Company.
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee Chairman, President and
Chief Executive Officer of NACCO Industries, Inc.; Director of NACCO
Industries, Inc.; Director of The BFGoodrich Company and The
Standard Products Company.
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee President and Chief Executive
Officer of The Nature Conservancy; formerly, Director and Senior
Partner of McKinsey & Co., and President of New York University;
Director of Pacific Gas and Electric Company, Procter & Gamble
Company, and NACCO Industries.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee Retired Chairman of Nabisco
Brands, Inc.; retired Vice Chairman and Director of RJR Nabisco;
Director of TECO Energy, Inc. and Kmart Corporation.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee Chairman and Chief
Executive Officer of Rohm & Haas Company; Director of Cummins Engine
Company, and The Mead Corporation; and Trustee of Vanderbilt
University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary* Managing Director and
Secretary of The Vanguard Group, Inc.; Secretary of each of the
investment companies in The Vanguard Group.
RICHARD F. HYLAND, (DOB: 3/22/1937) Treasurer* Treasurer of The Vanguard
Group, Inc. and of each of the investment companies in The Vanguard
Group.
KAREN E. WEST, (DOB: 9/13/1946) Controller* Principal of The Vanguard
Group, Inc.; Controller of each of the investment companies in The
Vanguard Group.
------------------------
*Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
B-10
<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-1 under the Investment Company Act of 1940. The Code is designed to
prevent unlawful practices in connection with the purchase or sale of
securities by persons associated with Vanguard. Under Vanguard's Code of Ethics
certain Officers and employees of Vanguard who are considered access persons
are permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds has invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. 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 April 30, 1998, the Fund had contributed capital of $20,000 to
Vanguard, representing 0.1% 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, 1997 and the six months ended April 30, 1998, the Fund's share of
Vanguard's actual net costs of operation relating to management and
administrative services (including transfer agency) totaled approximately
$591,000 and $310,000.
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
B-11
<PAGE>
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 of 1% of its average month-end net assets. During the fiscal year ended
October 31, 1997, the Fund paid approximately $67,000 of the Group's
distribution and marketing expenses, which represented an effective annual rate
of .03 of 1% of the Fund's average net assets.
Investment Advisory Services
Vanguard provides investment advisory services to Vanguard Money Market
Reserves, Vanguard Treasury Fund, 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, Aggressive Growth Portfolio of Vanguard Horizon Fund,
Vanguard REIT Index Portfolio, the Total International Portfolio of Vanguard
STAR 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 Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund, a portion of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund, a portion of
Vanguard Explorer 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.
Director/Trustee Compensation
The individuals in the table below serve as Directors/Trustees of all
Vanguard Funds, and each Fund pays a proportionate share of the
Directors'/Trustees' compensation. The Funds employ their Officers on a shared
basis, as well. However, Officers are compensated by The Vanguard Group, Inc.,
not the Funds.
Independent Directors/Trustees The Funds compensate their independent
Directors/Trustees -- that is, the ones who are not also officers of the Fund
- -- in three ways:
o The independent Directors/Trustees receive an annual fee for their
service to the Funds, which is subject to reduction based on absences from
scheduled Board meetings.
o The independent Directors/Trustees are reimbursed for the travel and
other expenses that they incur in attending Board meetings.
o Upon retirement, the independent Directors/Trustees receive an aggregate
annual fee of $1,000 for each year served on the Board, up to fifteen
years of service. This annual fee is paid for ten years following
retirement, or until the Directors'/Trustees' death.
B-12
<PAGE>
"Interested" Directors/Trustees The Funds' interested Directors/Trustees
- -- Messrs. Bogle and Brennan -- receive no compensation for their service in
that capacity. However, they are paid in their role as officers of The Vanguard
Group, Inc.
Compensation Table The following table provides compensation details for
each of the Trustees. For the Fund, we list the amounts paid as compensation
and accrued as retirement benefits by the Fund for each Trustee. In addition,
the table shows the total amount of benefits that we expect each
Director/Trustee to receive from all Vanguard Funds upon retirement, and the
total amount of compensation paid to each Director/Trustee by all Vanguard
Funds. All information shown is for the fiscal year ended October 31, 1997.
VANGUARD PREFERRED STOCK FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued As Annual Benefits From All Vanguard Funds
Names of Trustees From Fund Part of Fund Expenses Upon Retirement Paid to Trustees(2)
- -------------------------------- -------------- ----------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) ............... None None None None
John J. Brennan(1) ............. None None None None
Barbara Barnes Hauptfuhrer ..... $ 84 $ 12 $ 15,000 $ 70,000
Robert E. Cawthorn(3) .......... $ 84 $ 10 $ 13,000 $ 70,000
Bruce K. MacLaury .............. $ 88 $ 12 $ 12,000 $ 65,000
Burton G. Malkiel .............. $ 85 $ 8 $ 15,000 $ 70,000
Alfred M. Rankin, Jr. .......... $ 84 $ 6 $ 15,000 $ 70,000
John C. Sawhill ................ $ 84 $ 8 $ 15,000 $ 70,000
James O. Welch, Jr. ............ $ 84 $ 9 $ 15,000 $ 70,000
J. Lawrence Wilson ............. $ 84 $ 7 $ 15,000 $ 70,000
</TABLE>
(1) As "Interested Trustees," 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 35 Vanguard Funds
(34 in the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).
(3) Mr. Cawthorn has retired from the Fund's Board, effective May 31, 1998.
B-13
<PAGE>
INVESTMENT ADVISORY SERVICES
The Fund employs Wellington Management Company, LLP (the "Adviser") under
an investment advisory agreement dated August 1, 1996 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 $200 million........................ .150%
Next $200 million......................... .100%
Assets in excess of $400 million.......... .075%
During the fiscal years ended October 31, 1995, 1996, 1997, and the six
months ended April 30, 1998, the Fund paid advisory fees of $706,669, $394,000,
$406,000, and $221,000 respectively. In 1995, and through July 31, 1996, fees
were paid under an advisory agreement that provided for a higher rate of fees.
The present agreement continues until July 31, 1998 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
Wellington Management Company LLP, 75 State Street, Boston, MA 02109, is a
Massachusetts limited liability partnership, of which the following persons are
managing partners: Robert W. Doran, Duncan M. McFarland and John R. Ryan.
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
B-14
<PAGE>
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 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, 1995, 1996 and 1997 the Fund
paid $509, $7,554 and $516 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.
B-15
<PAGE>
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, and on May 29, 1998, the Fund was
further reorganized into a Delaware business trust. The Declaration of Trust
permits the Trustees to issue an unlimited number of shares of beneficial
interest, with a par value of $.001 per share.
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 dollar of net asset value held
(and a fractional vote for each fractional dollar of net asset value 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.
Shareholder and Trustee Liability
Under Delaware law, shareholders of a trust have no liability for the
obligations of the Trust unless otherwise provided in the Declaration of Trust.
The Fund's Declaration of Trust provides that neither the Trust nor the
Trustees, nor any officer, employee or agent of the Trust shall have any power
to bind personally any shareholder, or to call upon any shareholder for the
payment of any sum of money or assessment what-soever other than such as the
shareholder may at any time agree to pay.
The Declaration of Trust further provides that the Trust, out of its
assets, may indemnify and hold harmless such Trustee from and against any
liability arising out of, or related to, his or her services as Trustee.
However, 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.
B-16
<PAGE>
FINANCIAL STATEMENTS
The Fund's Financial Statements as of and for the year ended October 31,
1997, including the financial highlights for each of the five fiscal years in
the period ended October 31, 1997, appearing in the Vanguard Preferred Stock
Fund 1997 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 1997 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 1997 Annual Report to Shareholders, which
may be obtained without charge.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group, including
Vanguard Preferred Stock Fund, may, from time to time, use one or more of the
following unmanaged indices for comparative performance purposes.
Standard and Poor's 500 Composite Stock Price Index--is a well diversified list
of 500 companies representing the U.S. Stock Market.
Standard & Poor's MidCap 400 Index--is composed of 400 medium sized domestic
stocks.
Standard & Poor's SmallCap 600/BARRA Value Index--contains stocks for the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
Standard & Poor's Small Cap 600/BARRA Growth Index--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
Russell 1000 Value Index--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
Wilshire 5000 Equity Index--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
Wilshire 4500 Equity Index--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
Morgan Stanley Capital International EAFE Index--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia and the Far East.
Goldman Sachs 100 Convertible Bond Index--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
Salomon Brothers GNMA Index--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
B-17
<PAGE>
Salomon Brothers High-Grade Corporate Bond Index--consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
Lehman Brothers Aggregate Bond Index--is a market weighted index that contains
over 4,000 individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB-- or better. The Index has a market
value of over $4 trillion.
Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index--is a market
weighted index that contains over 1,500 individually priced U.S. Treasury,
agency, and corporate investment grade bonds rated BBB-- or better with
maturities between 1 and 5 years. The index has a market value of over $1.6
trillion.
Lehman Brothers Mutual Fund Intermediate (5-10) Government/Corporate Index--is
a market weighted index that contains over 1,500 individually priced U.S.
Treasury, agency, and corporate securities rated BBB-- or better with
maturities between 5 and 10 years. The index has a market value of over $700
billion.
Lehman Brothers Long (10+) Government/Corporate Index--is a market weighted
index that contains over 1,900 individually priced U.S. Treasury, agency, and
corporate securities rated BBB-- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
Lehman Long-Term Treasury Bond Index--is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
Merrill Lynch Corporate & Government Bond Index--consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
Lehman Corporate (Baa) Bond Index--all publicly offered fixed rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
Lehman Brothers Long-Term Corporate Bond Index--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
Bond Buyer Municipal Bond Index--is a yield index on current coupon high grade
general obligation municipal bonds.
Standard & Poor's Preferred Index--is a yield index based upon the average
yield of four high grade, noncallable preferred stock issues.
NASDAQ Industrial Index--is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
Composite Index--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
Composite Index--65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
B-18
<PAGE>
Composite Index--65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
Lehman Long-Term Corporate AA or Better Bond Index--consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
APPENDIX -- DESCRIPTION OF PREFERRED STOCK RATINGS
Excerpts from Moody's Investors Service, 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.
B-19
<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, 1997,
including Price Waterhouse LLP's report thereon, and the six months ended April
30, 1998 which are unaudited, are incorporated by reference in the Statement of
Additional Information, from the Registrant's 1997 Annual Report to
Shareholders which has been filed with the Commission.
(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.
C-1
<PAGE>
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 April 30, 1998 was 10,766.
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, LLP ("Wellington Management") is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). The list required by this Item 28 of officers and
partners of Wellington Management, together with any information as to any
business profession, vocation or employment of a substantial nature engaged in
by such officers and partners during the past two years, is incorporated herein
by reference to Schedules A and D of Form ADV filed by Wellington Management
pursuant to the Advisers Act (SEC File No. 801-159089).
Item 29. Principal Underwriters
(a) None
(b) Not Applicable
Item 30. Location of Accounts and Records
The books, accounts and other documents required by Section 31(a) under
the Investment Company Act and the rules promulgated thereunder will be
maintained in the physical possession of Registrant; Registrant's Transfer
Agent, The Vanguard Group, Inc. c/o Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02105.
C-2
<PAGE>
Item 31. Management Services
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described
in Part B hereof under "Management of the Fund"; the Registrant is not a party
to any management-related service contract.
Item 32. Undertakings
Registrant hereby undertakes to provide an Annual Report to Shareholders
or prospective investors, free of charge, upon request.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and Rule 485(a)
thereunder, and the Investment Company Act of 1940, the Registrant has duly
caused this Post-Effective Amendment to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Valley Forge and the Commonwealth of Pennsylvania, on this 26th day of June,
1998.
VANGUARD PREFERRED STOCK FUND
By RAYMOND J. KLAPINSKY
---------------------------------------
John J. Brennan*
Chairman of the Board,
President 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:
<TABLE>
<CAPTION>
Signatures Title Date
- --------------------------------- ------------------------------ --------------
<S> <C> <C>
RAYMOND J. KLAPINSKY Senior Chairman of the Board June 26, 1998
- ------------------------------ and Trustee
John C. Bogle*
RAYMOND J. KLAPINSKY Chairman of the Board, June 26, 1998
- ------------------------------ President, and Chief
John J. Brennan* Executive Officer
Trustee
RAYMOND J. KLAPINSKY June 26, 1998
- ------------------------------
Robert E. Cawthorn*
RAYMOND J. KLAPINSKY Trustee June 26, 1998
- ------------------------------
Barbara B. Hauptfuhrer*
RAYMOND J. KLAPINSKY Trustee June 26, 1998
- ------------------------------
Burton G. Malkiel*
RAYMOND J. KLAPINSKY Trustee June 26, 1998
- ------------------------------
Bruce K. MacLaury*
RAYMOND J. KLAPINSKY Trustee June 26, 1998
- ------------------------------
Alfred M. Rankin, Jr.*
RAYMOND J. KLAPINSKY Trustee June 26, 1998
- ------------------------------
John C. Sawhill*
RAYMOND J. KLAPINSKY Trustee June 26, 1998
- ------------------------------
James O. Welch, Jr.*
RAYMOND J. KLAPINSKY Trustee June 26, 1998
- ------------------------------
J. Lawrence Wilson*
RAYMOND J. KLAPINSKY Treasurer and Principal June 26, 1998
- ------------------------------ Financial and
Richard F. Hyland* Accounting Officer
</TABLE>
- ------------
* By Power of Attorney. See File Number 2-14336. January 23, 1990. Incorporated
by Reference.
C-4
<PAGE>
INDEX TO EXHIBITS
Consent of Independent Accountants ......................... EX-99.B11
Schedule for Computation of Performance Quotations ......... EX-99.B16
Financial Data Schedule .................................... EX-27
C-5
<PAGE>
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 37 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated December 3, 1997 relating to the financial
statements and financial highlights appearing in the October 31, 1997 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 under the heading "Financial Statements" in
the Statement of Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
June 25, 1998
EX-99.B16
<PAGE>
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD PREFERRED STOCK FUND, INC.
1. Average Annual Total Return (As of October 31, 1997)
P (1 + T)(n) = 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 = +12.44%
N = 1
ERV = $1,124.36
Five Years
----------
P = $1,000
T = +9.73%
N = 5
ERV = $1,590.79
Ten Years
---------
P = $1,000
T = +11.25%
N = 10
ERV = $2,904.51
2. YIELD (30 Days Ended October 31, 1997)
Yield = 2 [( a - b + 1)(6) - 1]
----
c x d
<PAGE>
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 = $1,657,644.18
b = $78,037.43
c = $31,484,796.64
d = $10.17
Yield = 5.99%
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000081391
<NAME> VANGUARD PREFERRED STOCK FUND
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 330,134
<INVESTMENTS-AT-VALUE> 350,991
<RECEIVABLES> 1,686
<ASSETS-OTHER> 20
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 352,697
<PAYABLE-FOR-SECURITIES> 500
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 628
<TOTAL-LIABILITIES> 1,128
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 326,956
<SHARES-COMMON-STOCK> 34,015
<SHARES-COMMON-PRIOR> 31,473
<ACCUMULATED-NII-CURRENT> 240
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,516
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,857
<NET-ASSETS> 351,569
<DIVIDEND-INCOME> 9,830
<INTEREST-INCOME> 421
<OTHER-INCOME> 0
<EXPENSES-NET> 597
<NET-INVESTMENT-INCOME> 9,654
<REALIZED-GAINS-CURRENT> 5,346
<APPREC-INCREASE-CURRENT> 992
<NET-CHANGE-FROM-OPS> 15,992
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,807
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,520
<NUMBER-OF-SHARES-REDEEMED> 3,764
<SHARES-REINVESTED> 786
<NET-CHANGE-IN-ASSETS> 31,450
<ACCUMULATED-NII-PRIOR> 1,393
<ACCUMULATED-GAINS-PRIOR> (1,830)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 221
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 597
<AVERAGE-NET-ASSETS> 338,268
<PER-SHARE-NAV-BEGIN> 10.17
<PER-SHARE-NII> 0.30
<PER-SHARE-GAIN-APPREC> 0.20
<PER-SHARE-DIVIDEND> 0.33
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.34
<EXPENSE-RATIO> 0.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
