<PAGE>
VANGUARD PREFERRED STOCK FUND
[PHOTO]
ANNUAL REPORT
October 31, 2000
[THE VANGUARD GROUP LOGO]
<PAGE>
OUR REPORTS TO
THE OWNERS
At Vanguard, we regard our investors not as mere customers but as owners of the
enterprise. For that's exactly what a mutual fund shareholder is--part owner of
an investment company.
In our reports to you on how the company is doing, we have tried to convey
information without hyperbole and in the context of broad market trends and
relevant benchmarks.
We've introduced several changes to this year's annual reports to make them
even more useful. Among the changes:
o Larger type and redesigned graphics to make the reports easier to read.
o An at-a-glance summary of key points about fund performance and the
financial markets.
o A table--included for many funds--in which the investment adviser
highlights significant changes in holdings.
o Comparisons of fund performance and characteristics against both a broad
market index and a "best fit" benchmark.
We hope you'll find that these changes make the reports even more
accessible and informative.
SUMMARY
o Vanguard Preferred Stock Fund's return was flat for the 2000 fiscal year,
as preferred stock prices fell due to heightened concerns about credit
quality.
o Yields on high-quality, long-term bonds generally declined during the 12
months, while short-term yields climbed.
o On December 3, the Preferred Stock Fund passed its first quarter-century.
CONTENTS
1 Letter from the Chairman
6 Report from the Adviser
8 Fund Profile
9 Glossary of Investment Terms
10 Performance Summary
11 Financial Statements
18 Report of Independent Accountants
<PAGE>
LETTER
from the Chairman
Fellow Shareholders,
Fixed income investors shunned riskier securities during the 12 months ended
October 31, 2000, and the prices of many preferred stocks declined sharply. As a
result, vanguard preferred stock fund endured a tough 2000 fiscal year and ended
the period with a flat return.
The adjacent table compares the fund's 12-month total return with the
returns of the average fixed income fund and a broad measure of the preferred
stock market. As you can see, your fund lagged both of its comparative measures.
2000 TOTAL RETURNS Fiscal Year Ended
October 31
---------------------------------------------------------------
Vanguard Preferred Stock Fund 0.0%
Average Fixed Income Fund* 4.4
Merrill Lynch Fixed Rate Preferred Stock Index** 0.4
---------------------------------------------------------------
*Derived from data provided by Lipper Inc.
**Merrill Lynch DRD-Eligible Preferred Index through February
2000; Merrill Lynch Fixed Rate Preferred Stock Index thereafter.
The fund's total return (capital change plus reinvested dividends) is based
on a decline in net asset value from $9.44 per share on October 31, 1999, to
$8.84 per share on October 31, 2000, and is adjusted for the reinvestment of
dividends totaling $0.59 per share paid from net investment income. The fund's
yield on October 31, 2000, was 6.59%, up from 6.14% a year earlier.
As you may recall, Vanguard Preferred Stock Fund's board of trustees
decided last year to broaden the range of securities available to the fund's
investment adviser. Previously, the fund was permitted to invest only in
securities that qualified for the 70% intercorporate dividends-received
deduction (DRD), a special federal tax break available to corporations, but not
to individual investors. The new policy took effect on March 1, 2000, but so far
the fund's adviser, Wellington Management Company, LLP, has not purchased any
non-DRD-eligible securities.
MARKET BAROMETER Average Annual Total Returns
Periods Ended October 31, 2000
--------------------------------------------------------------------------------
One Three Five
Year Years Years
--------------------------------------------------------------------------------
STOCKS
S&P 500 INDEX (Large-caps) 6.1% 17.6% 21.7%
RUSSELL 2000 INDEX (Small-caps) 17.4 5.9 12.4
WILSHIRE 5000 INDEX (Entire market) 8.1 16.0 20.1
MSCI EAFE INDEX (International) -2.7 9.7 8.9
--------------------------------------------------------------------------------
BONDS
LEHMAN AGGREGATE BOND INDEX (Entire market) 7.3% 5.7% 6.3%
LEHMAN 10 YEAR MUNICIPAL BOND INDEX 8.2 5.0 5.7
SALOMON SMITH BARNEY 3-MONTH
U.S. TREASURY BILL INDEX 5.7 5.2 5.2
================================================================================
CPI
CONSUMER PRICE INDEX 3.4% 2.5% 2.5%
--------------------------------------------------------------------------------
Because of its focus on
1
<PAGE>
DRD-eligible securities, Vanguard Preferred Stock Fund may not be an appropriate
investment for individual investors, who cannot use the special corporate tax
deduction and therefore are not compensated for the interest rate and credit
risks faced by the fund.
FINANCIAL MARKETS IN REVIEW
During the 12 months ended October 31, the economic environment was generally
favorable for stocks and bonds. Early in the period, production rose rapidly,
unemployment fell below 4% of the workforce, long-term interest rates declined,
and inflation stayed well-behaved, aside from a rise in energy prices.
But as the period progressed, evidence suggested that the economy's
expansion was slowing in the wake of repeated increases in short-term interest
rates engineered by the Federal Reserve Board. And despite solid increases in
corporate earnings, doubts grew about the sustainability of the gains. As a
result, all was not calm in the stock market or in certain segments of the fixed
income markets. Extreme volatility afflicted the U.S. stock market almost daily,
and although the overall bond market fared well, many higher-yielding securities
took it on the chin.
----------------------
The economic back-
drop was favorable,
on balance, for stocks
and bonds.
----------------------
Short-term interest rates rose substantially during the year, with the
yield on 3-month U.S. Treasury bills increasing more than 1.3 percentage points.
The rise essentially matched the 1.25-point hike in the federal funds rate
engineered in four steps by the Fed, which was trying to cool the economy to
stave off inflation. Yields were relatively flat, on balance, for most
longer-term securities. A rising federal budget surplus shrank the supply of
U.S. Treasury securities, and yields of U.S. Treasury bonds declined slightly
for the fiscal year: The 30-year Treasury's yield fell from 6.16% to 5.79%.
Yields on 10-year Treasuries fell by about a quarter-point. The Lehman Brothers
Aggregate Bond Index, a proxy for investment-grade bonds, returned 7.3%,
outpacing the Standard & Poor's 500 Index.
Though interest rate movements always play a big role in the bond market,
concerns about credit quality took center stage in recent months. The
deceleration in economic growth prompted bond investors to shy away from
speculative issues, and prices of high-yield bonds fell; the Lehman Brothers
High Yield Bond Index returned -1.6% due to average price declines exceeding
-10%. Mortgage-backed securities and high-quality corporate bonds performed
well.
---------------------
Many investors shied
away from speculative
issues during the
fiscal year.
---------------------
The U.S. stock market began the fiscal year like a skyrocket, as investors
exhibited extreme enthusiasm for technology-related stocks. But beginning in
early spring, investors seemed to grow wary of the
2
<PAGE>
lofty prices of many tech and telecommunications stocks in relation to their
earnings and other fundamentals. Value stocks--those characterized by relatively
low prices in relation to earnings, book value, and dividends--generally
benefited from the market's increased attention to current earnings.
For the full 12 months, the overall stock market, as measured by the
Wilshire 5000 Total Market Index, returned 8.1%--a decent result but below the
double-digit gains investors have seen in recent years. For a change, small- and
mid-capitalization stocks outpaced their large-cap counterparts. The small-cap
Russell 2000 Index returned 17.4% for the 12 months, 11.3 percentage points
ahead of the return of the large-cap S&P 500 Index, which accounts for roughly
three-fourths of the market value of U.S. stocks.
FISCAL 2000 PERFORMANCE OVERVIEW
Although yields declined and prices rose modestly for long-term U.S. Treasury
and high-quality corporate bonds during the fiscal year, prices declined and
yields rose for securities with less-than-stellar credit quality--including most
preferred stocks. The divergence in yields for higher- and lower-quality
securities stemmed from investor concerns that a slowing economy and rising
corporate debt levels would result in increased defaults. For Vanguard Preferred
Stock Fund, the result was a zero return, as price decreases for our holdings
offset a healthy 6.4% return from interest income.
The fund returned -2.7% during the first half of the fiscal year and
regained that ground--but no more--during the second half.
The market's aversion to lower credit quality hit preferred stocks hard
because preferreds have lower standing than bonds in a corporation's capital
structure. This means that should the corporation have financial trouble,
bondholders are paid before holders of its preferred stock. This distinction
makes the Preferred Stock Fund riskier than the average fixed income fund, and
it largely explains why we trailed our average peer during the fiscal year. We
fared better in relation to our unmanaged index, which eked out a 0.4% return.
The index better reflects activity in the market for preferred stocks. The
Report from the Adviser on page 6 provides more details.
TOTAL RETURNS Ten Years Ended
October 31, 2000
Average Final Value of
Annual a $10,000
Return Initial Investment
--------------------------------------------------------------------------------
Vanguard Preferred Stock Fund 8.5% $22,550
Average Fixed Income Fund 7.3 20,211
Merrill Lynch Fixed Rate
Preferred Stock Index* 8.6 22,845
--------------------------------------------------------------------------------
*Merrill Lynch Perpetual Preferred Index through January 1997; Merrill
Lynch DRD-Eligible Preferred Index through February 2000; Merrill Lynch
Fixed Rate Preferred Stock Index thereafter.
LONG-TERM PERFORMANCE OVERVIEW
The true measure of any investment is best taken over the long term. The
adjacent table presents the
3
<PAGE>
average annual returns of Vanguard Preferred Stock Fund and its comparative
benchmarks for the past ten years. It also shows the results of hypothetical
$10,000 investments made a decade ago in each.
As you can see, the fund measured up well against the average fixed income
fund and came up just a hair short of our benchmark index, which is a hard
target to beat because its returns reflect no operating expenses or
administrative costs. Both our absolute and relative results were aided by a
general decline in long-term interest rates during the past decade.
Our average return for the decade may suggest a smoother path than our
shareholders actually experienced. There was considerable year-to-year
volatility, with fiscal-year returns ranging from a low of -8.5% in 1994--a
period of rapidly rising interest rates--to a high of 23.8% in fiscal 1995, when
rates fell sharply. We offer this brief history lesson as a reminder that
preferred stock returns are subject to considerable short-term fluctuations. To
earn solid long-term returns, investors must ride out the short-term swings. For
this reason, we urge investors in Vanguard Preferred Stock Fund to take the long
view and be prepared for interim turbulence.
---------------------
Preferred Stock Fund
investors should be
prepared for interim
turbulence.
---------------------
Our constant goal is to provide long-term returns that exceed those of our
competitive measures. Our low costs are a significant aid as we pursue this
objective. Your fund has an expense ratio (annual expenses as a percentage of
average net assets) of 0.39%, a fraction of the 1.04% charged by the average
fixed income fund. That means that for every $1,000 invested in your fund, $3.90
goes toward expenses. For every $1,000 invested in our average peer, $10.40 is
consumed by expenses. Because fund operating and administrative costs directly
reduce the returns investors receive, our significant cost advantage provides us
with a head start versus funds that charge higher expenses.
We understand that the past 24 months have been a difficult period for the
preferred stock market, and we are grateful for the trust you have placed in
Vanguard and the Preferred Stock Fund. We are confident that our investment
approach is a sound way to capture the returns available from preferred stocks.
We pledge to continue to provide an attractive level of after-tax income at a
cost far lower than that of similar funds.
IN SUMMARY
Though some investors will always be tempted to chase the hottest-performing
segment of the financial markets--whether it's technology stocks, small-caps, or
long-term bonds--market movements over the past 12 months have proven just how
difficult and treacherous that pursuit can be.
Sectors fall in and out of favor, asset classes shift from leader to
laggard, and securities rise and fall in unpredictable patterns. We suggest that
rather
4
<PAGE>
than fighting these truths of investing, you use them to your advantage by
constructing a diversified, portfolio of stock funds, fixed income funds, and
short-term investments that strikes a reasonable balance between the risk and
rewards of the financial markets.
Sincerely,
/S/
JOHN J. BRENNAN
[PHOTO]
JOHN J. BRENNAN
Chairman and
Chief Executive Officer
November 15, 2000
5
<PAGE>
REPORT
from the Adviser WELLINGTON MANAGEMENT COMPANY, LLP
For the 6- and 12-month periods ended October 31, 2000, VANGUARD PREFERRED STOCK
FUND posted total returns of 2.8% and 0.0%, respectively. Our returns reflect
the decline in the prices of many preferred stocks during the fiscal year.
THE INVESTMENT ENVIRONMENT
The fiscal year began on November 1, 1999, with the yield of the 30-year U.S.
Treasury bond at 6.16% and the yield of a representative preferred stock at
6.63%. Twelve months later, the long-term Treasury bond's yield was 37 basis
points lower, while preferred stock yields were 47 basis points higher. Thus,
the yield differential between riskless Treasuries and preferred stocks expanded
by 84 basis points (or just under one percentage point), reflecting an
unfavorable environment for preferred stocks. This unusual split in the
direction of yields occurred during a time when the supplies of both preferreds
and Treasuries were shrinking. The current difference between the yields of
a-rated utilities' perpetual preferreds and 30-year Treasuries is 259 basis
points, up from 239 basis points six months ago. The ten-year average spread is
196 basis points. The upshot is that, on a historical basis, preferreds are now
inexpensive versus Treasuries. Compared with municipal bonds, preferreds today
offer 90 basis points of additional after-tax yield, well above the ten-year
average of 59 basis points.
--------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY
The adviser believes that the fund can provide a relatively high and sustainable
level of income by investing primarily in dividend-paying, high-quality,
preferred stocks.
--------------------------------------------------------------------------------
A positive factor for preferred securities during the fiscal year was the
absence of discussion in Congress about lowering the corporate
dividends-received deduction (DRD). Proposals to lower the DRD have surfaced in
the past, but we know of no current proposals to change it from the existing
level of 70%. As discussed in the last annual report, the fund's board of
trustees has broadened our investment guidelines to allow us to purchase
non-DRD-eligible securities when attractively priced DRD preferreds are not
available. So far, we have not exercised this option.
THE FISCAL YEAR IN REVIEW
The fund experienced no interruptions in dividend payments, and income remained
reasonably stable. The fund's investments continue to be well- diversified, with
holdings from nearly 50 issuers.
As yields of long-term Treasury bonds declined, yields of preferred stocks
did not follow suit, as one might have expected from securities with
6
<PAGE>
long average durations. This is because risk premiums widened across all
domestic fixed income sectors, including preferreds. (Typically, longer-maturity
fixed income securities such as bonds and preferred stocks benefit more from
declines in interest rates, just as they suffer more when rates rise.) As the
Federal Reserve Board attempted to curtail credit to slow the domestic economy,
the marginal borrower--any issuer that ranked relatively low in the capital
structure--had to pay a relatively steeper price to obtain credit. Preferred
stock issuers were no exception, because preferred stock ranks below ordinary
bonds in corporations' capital structure; that is, preferred dividends are paid
only after other debt obligations are met.
We believe that the Fed has accomplished its goal of slowing the domestic
economy to a less-inflationary rate of growth and that, as a consequence, risk
premiums should remain stable or even contract slightly. Thus, we expect to see
the fund earn back some of the ground it lost due to the widening of yield
spreads in fiscal 2000.
THE FUND'S POSITION
The investment goals and strategy of the fund are consistent with those put in
place at its inception a quarter-century ago. We purchase relatively
high-quality preferred stocks with the goal of providing sustainable and
attractive after-tax income. We attempt to control income risk and variability
by investing in securities with call protection that are issued by highly
creditworthy companies. We attempt to maintain income stability through broad
diversification; securities from 46 issuers were in the fund on October 31.
The risk to the fund's net asset value from a reduction in the DRD is
always present, as is the risk of price declines for our holdings due to rising
long-term interest rates. These risks cannot be hedged over the long term.
Lacking a stated maturity, preferreds perform poorly when rates are rising and
well when rates are falling. We expect rates to fall slightly because the
domestic economy is slowing. We also believe that the next change in short-term
rates by the Federal Reserve could be to cut them.
As of October 31, the fund's credit-quality breakdown (based on Moody's
Investors Service ratings) was cash/Treasuries, 4%; aa-rated securities, 27%; a,
47%; and baa, 22%. The electric utility sector is the fund's largest industry
exposure, representing about half of total assets. High-quality financial
services companies accounted for the next-largest industry exposure.
Earl E. McEvoy, Senior Vice President and Portfolio Manager
November 10, 2000
7
<PAGE>
FUND PROFILE As of October 31, 2000
for Preferred Stock Fund
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate to both an unmanaged index that we consider a "best fit" for the
fund and a broad market index. Key terms are defined on page 9.
----------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Lehman
Fund Best Fit* Index**
----------------------------------------------------------
Number of Securities 49 152 6,044
Yield 6.6% 8.5% 7.0%
Average Coupon 6.5% 8.3% 6.9%
Average Quality a2 a3 Aaa
Turnover Rate 6% -- --
Expense Ratio 0.39% -- --
Cash Investments 3.6% -- --
----------------------------------------------------------
*Merrill Lynch Fixed Rate Preferred Stock Index.
**Lehman Aggregate Bond Index.
---------------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
Federal Home Loan Mortgage Corp. 11.5%
USA Education 4.7
Florida Power & Light Co. 3.9
Alabama Power Co. 3.8
PacifiCorp 3.8
Citigroup, Inc. 3.8
South Carolina Electric & Gas Co. 3.1
Indianapolis Power & Light 3.1
Virginia Electric & Power Co. 2.9
PPL Electric Utilities Corp. 2.8
---------------------------------------------
Top Ten 43.4%
---------------------------------------------
-----------------------------
DISTRIBUTION BY COUPON
(% of portfolio)
Under 4% 2.7%
4%-5% 1.4
5%-6% 25.6
6%-7% 39.9
7%-8% 30.4
8%-9% 0.0
9%-10% 0.0
Over 10% 0.0
-----------------------------
Total 100.0%
-----------------------------
-------------------------------------------------
SECTOR DIVERSIFICATION
(% of preferred stocks)
Auto & Transportation 0.0%
Consumer Discretionary 0.0
Consumer Staples 0.3
Financial Services 43.4
Health Care 0.0
Integrated Oils 0.0
Other Energy 1.1
Materials & Processing 3.4
Producer Durables 0.0
Technology 0.8
Utilities 51.0
Other 0.0
-------------------------------------------------
-------------------------
DISTRIBUTION BY
CREDIT QUALITY
(% of preferred stocks)
Treasury/Agency 1.5%
aaa 0.0
aa 27.4
a 47.4
baa 22.1
ba 0.0
b 0.0
Not Rated 1.6
-------------------------
Total 100.0%
-------------------------
8
<PAGE>
GLOSSARY
of Investment Terms
AVERAGE COUPON. The average interest rate paid on the securities held by a fund.
It is expressed as a percentage of face value.
--------------------------------------------------------------------------------
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a fund's securities holdings by credit-rating agencies. The
agencies make their judgment after appraising an issuer's ability to meet its
obligations. Quality is graded on a scale, with aaa indicating the most
creditworthy issuers of preferred stocks.
--------------------------------------------------------------------------------
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities.
--------------------------------------------------------------------------------
DISTRIBUTION BY COUPON. A breakdown of the securities in a fund according to
coupon rate--the interest rate that an issuer promises to pay, expressed as an
annual percentage of face value. Securities with unusually high coupon rates may
be subject to call risk, the possibility that they will be redeemed (or
"called") early by the issuer.
--------------------------------------------------------------------------------
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
--------------------------------------------------------------------------------
TURNOVER RATE. An indication of trading activity during the past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
--------------------------------------------------------------------------------
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is the rate of return an investor would receive if
the securities were held to their maturity dates.
--------------------------------------------------------------------------------
9
<PAGE>
PERFORMANCE SUMMARY
for Preferred Stock Fund
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) October 31, 1990-October 31, 2000
--------------------------------------------------------------------------------
PREFERRED STOCK FUND MERRILL LYNCH
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
--------------------------------------------------------------------------------
1991 10.2% 10.6% 20.8% 28.8%
1992 2.9 8.4 11.3 13.5
1993 7.2 8.4 15.6 10.4
1994 -15.2 6.7 -8.5 -5.0
1995 15.1 8.7 23.8 18.0
1996 0.6 7.4 8.0 7.4
1997 5.2 7.2 12.4 8.8
1998 1.9 6.1 8.0 6.4
1999 -7.8 5.3 -2.5 1.2
2000 -6.4 6.4 0.0 0.4
--------------------------------------------------------------------------------
*Merrill Lynch Perpetual Preferred Index through January 1997; Merrill Lynch
DRD-Eligible Preferred Index through February 2000; Merrill Lynch Fixed Rate
Preferred Stock Index thereafter.
See Financial Highlights table on page 15 for dividend and capital gains
information for the past five years.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE October 31, 1990-October 31, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER PREFERRED AVERAGE FIXED MERRILL LYNCH LEHMAM AGGREGATE
ENDED STOCK FUND INCOME FUND FIXED RATE BOND INDEX
PREFERRED STOCK
199010 $ 10000 $ 10000 $ 10000 $ 10000
199101 10575 10416 10830 10503
199104 11132 10931 11689 10781
199107 11296 11193 11917 10988
199110 12083 11789 12877 11581
199201 12673 12114 13456 11871
199204 12694 12273 13639 11966
199207 13382 12883 14258 12612
199210 13454 12958 14620 12719
199301 13903 13377 14825 13174
199304 14492 13765 15371 13553
199307 14940 14138 15739 13894
199310 15547 14440 16141 14229
199401 15617 14603 16426 14378
199404 14540 13959 15325 13668
199407 14655 14118 15563 13907
199410 14233 13979 15336 13707
199501 14670 14133 15835 14045
199504 15826 14679 16757 14667
199507 16730 15264 17454 15313
199510 17619 15721 18088 15852
199601 18066 16259 18602 16426
199604 17730 15830 18475 15935
199607 18211 16078 18772 16161
199610 19035 16640 19427 16779
199701 19430 16914 19787 16962
199704 19853 16900 20144 17064
199707 20985 17736 20692 17900
199710 21402 18040 21129 18271
199801 22228 18536 21642 18780
199804 22464 18605 21773 18926
199807 23007 18950 22310 19309
199810 23114 19099 22486 19978
199901 23486 19511 22885 20297
199904 23716 19396 23166 20113
199907 23041 19182 23004 19790
199910 22542 19364 22746 20084
200001 21722 19341 21888 19922
200004 21939 19425 22065 20366
200007 21969 19886 22799 20971
200010 22550 20211 22845 21550
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 2000 FINAL VALUE
-------------------------------- OF A $10,000
1 YEAR 5 YEARS 10 YEARS INVESTMENT
--------------------------------------------------------------------------------
Preferred Stock Fund 0.03% 5.06% 8.47% $22,550
Average Fixed Income Fund* 4.37 5.15 7.29 20,211
Merrill Lynch Fixed Rate
Preferred Stock Index** 0.44 4.78 8.61 22,845
Lehman Aggregate Bond Index 7.30 6.33 7.98 21,550
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
**Merrill Lynch Perpetual Preferred Index through January 1997; Merrill Lynch
DRD-Eligible Preferred Index through February 2000; Merrill Lynch Fixed Rate
Preferred Stock Index thereafter.
11
<PAGE>
FINANCIAL STATEMENTS
October 31, 2000
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (preferred stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the fund's investments and their cost, and reflects
the gains (losses) that would be realized if the fund were to sell all of its
investments at their statement-date values.
--------------------------------------------------------------------------------
MARKET
VALUE*
PREFERRED STOCK FUND SHARES (000)
--------------------------------------------------------------------------------
PREFERRED STOCKS (94.9%)
--------------------------------------------------------------------------------
CONSUMER STAPLES (0.3%)
Stokely-Van Camp Corp. 5.00% 45,000 $ 631
----------
FINANCIAL SERVICES (41.1%)
BANKS--NEW YORK CITY (4.0%)
The Chase Manhattan Corp.
4.96% 25,000 1,128
HSBC USA, Inc. $2.858 50,000 2,038
J. P. Morgan & Co., Inc. 6.625% 100,000 5,081
BANKS--OUTSIDE NEW YORK CITY (7.4 %)
(1)ABN-AMRO North America 6.59% 4,000 3,775
Comerica, Inc. 6.84% 50,000 2,487
FleetBoston Financial
Corp. 6.75% 100,000 5,175
PNC Financial Services
Group 6.05% 25,000 1,250
Wells Fargo & Co 6.59% 50,000 2,518
DIVERSIFIED FINANCIAL SERVICES (3.8%)
Citigroup, Inc. 6.365% 170,000 7,682
FINANCE COMPANIES (5.4%)
Heller Financial, Inc. 6.687% 15,000 1,328
USA Education 6.97% 200,000 9,600
FINANCIAL--MISCELLANEOUS (15.7%)
Federal Home Loan Mortgage
Corp. 5.00% 250,000 $ 9,938
Federal Home Loan Mortgage
Corp. 5.10% 100,000 4,228
Federal Home Loan Mortgage
Corp. 5.79% 198,400 9,325
Federal National Mortgage
Assn. 6.45% 100,000 4,912
MBNA Corp. 7.50% 150,000 3,675
INSURANCE--PROPERTY-CASUALTY (2.3%)
(1)Hillbrook Insurance Co. 5.90% 55 4,785
SECURITIES BROKERS & SERVICES (2.5%)
Morgan Stanley Dean Witter
Co. 7.75% 100,000 5,081
----------
84,006
----------
OTHER ENERGY (1.0%)
Apache Corp. 5.68% 25,000 2,074
----------
MATERIALS & PROCESSING (3.3%)
Alcoa, Inc. $3.75 77,490 4,301
E.I. du Pont de Nemours &
Co. 3.50% 15,600 831
E.I. du Pont de Nemours &
Co. $4.50 22,925 1,536
----------
6,668
----------
11
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
PREFERRED STOCK FUND SHARES (000)
--------------------------------------------------------------------------------
TECHNOLOGY (0.7%)
International Business Machines
Corp. 7.50% 57,500 $ 1,455
----------
UTILITIES--ELECTRICAL (48.5%)
Alabama Power Co. 5.20% 400,000 7,800
Baltimore Gas & Electric
Co. 7.125% 52,000 5,458
Boston Edison Co. 4.78% 2,000 136
Carolina Power & Light Co. 5.44% 4,319 332
Duke Energy Corp. 7.85% 20,544 2,160
Duquesne Light Co. 3.75% 4,200 118
Florida Power & Light Co. 6.98% 80,000 7,998
Idaho Power Co. 7.07% 25,000 2,401
Indianapolis Power & Light 5.65% 75,000 6,253
Monongahela Power Co. 7.73% 50,000 5,091
PECO Energy Co. $7.48 50,000 4,907
PPL Electric Utilities Corp. 6.75% 60,000 5,760
PSI Energy Inc. 6.875% 25,000 2,416
Pacific Gas & Electric Co. 7.04% 176,650 4,240
PacifiCorp 7.48% 75,000 7,716
Puget Sound Energy 7.45% 200,000 5,113
San Diego Gas & Electric
Co. $1.70 140,000 3,525
Sierra Pacific Power Co. 7.80% 200,000 5,425
South Carolina Electric & Gas
Co. 6.52% 65,000 6,320
TXU Electric Co. $7.98 45,000 4,545
Union Electric Co. $7.64 25,000 2,536
Virginia Electric & Power
Co. $6.98 60,000 5,990
Wisconsin Power & Light
Co. 6.20% 18,500 1,667
Wisconsin Public Service
Corp. 6.88% 10,000 1,013
----------
98,920
----------
--------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $209,071) 193,754
--------------------------------------------------------------------------------
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION (1.5%)
--------------------------------------------------------------------------------
U.S. TREASURY NOTE
5.75%, 8/15/2010
(Cost $3,008) $3,000 2,997
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.5%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.56%, 11/1/2000
(Cost $7,170) $7,170 $ 7,170
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(Cost $219,249) 203,921
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
--------------------------------------------------------------------------------
Other Assets--Note C 760
Liabilities (570)
----------
190
----------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 23,093,213 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $204,111
================================================================================
NET ASSET VALUE PER SHARE $8.84
================================================================================
*See Note A in Notes to Financial Statements.
(1)Security exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be sold in transactions exempt
from registration, normally to qualified institutional buyers. At
October 31, 2000, the aggregate value of these securities was
$8,560,000, representing 4.2% of net assets.
--------------------------------------------------------------------------------
AT OCTOBER 31, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Amount Per
(000) Share
--------------------------------------------------------------------------------
Paid in Capital $ 230,304 $9.97
Undistributed Net
Investment Income 966 .04
Accumulated Net
Realized Loss--Note D (11,831) (.51)
Unrealized Depreciation--
Note E (15,328) (.66)
--------------------------------------------------------------------------------
NET ASSETS $204,111 $8.84
================================================================================
12
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.
--------------------------------------------------------------------------------
PREFERRED STOCK FUND
YEAR ENDED OCTOBER 31, 2000
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $16,358
Interest 258
--------------------------------------------------------------------------------
Total Income 16,616
--------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fee --Note B 337
The Vanguard Group--Note C
Management and Administrative 515
Marketing and Distribution 43
Custodian Fees 15
Auditing Fees 9
Shareholders' Reports 18
--------------------------------------------------------------------------------
Total Expenses 937
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 15,679
--------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD (11,638)
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES (6,972)
--------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,931)
================================================================================
13
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
PREFERRED STOCK FUND
YEAR ENDED OCTOBER 31,
-----------------------------------
2000 1999
(000) (000)
-------------------------------------------------------------------------------------------------
<S> <C> <C>
-------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 15,679 $ 20,619
Realized Net Gain (11,638) (110)
Change in Unrealized Appreciation (Depreciation) (6,972) (28,274)
-------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations (2,931) (7,765)
-------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (15,890) (19,870)
Realized Capital Gain - (4,518)
-------------------------------------------------------------------------------------------------
Total Distributions (15,890) (24,388)
-------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 23,063 86,045
Issued in Lieu of Cash Distributions 11,381 18,858
Redeemed (126,064) (138,952)
-------------------------------------------------------------------------------------------------
Net Decrease from Capital Share Transactions (91,620) (34,049)
-------------------------------------------------------------------------------------------------
Total Decrease (110,441) (66,202)
-------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 314,552 380,754
-------------------------------------------------------------------------------------------------
End of Year $204,111 $314,552
=================================================================================================
1Shares Issued (Redeemed)
Issued 2,578 8,516
Issued in Lieu of Cash Distributions 1,280 1,886
Redeemed (14,085) (13,836)
-------------------------------------------------------------------------------------------------
Net Decrease in Shares Outstanding (10,227) (3,434)
=================================================================================================
</TABLE>
14
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
PREFERRED STOCK FUND
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING -------------------------------------------------------
THROUGHOUT EACH PERIOD 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $9.44 $10.36 $10.17 $9.67 $9.61
-----------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .59 .590 .58 .63 .69
Net Realized and Unrealized Gain (Loss)
on Investments (.60) (.825) .22 .53 .04
-----------------------------------------------------------------------------------------------------
Total from Investment Operations (.01) (.235) .80 1.16 .73
-----------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.59) (.560) (.61) (.66) (.67)
Distributions from Realized Capital Gains - (.125) - - -
-----------------------------------------------------------------------------------------------------
Total Distributions (.59) (.685) (.61) (.66) (.67)
-----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $8.84 $9.44 $10.36 $10.17 $9.67
=====================================================================================================
TOTAL RETURN 0.03% -2.47% 8.00% 12.44% 8.04%
=====================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $204 $315 $381 $320 $286
Ratio of Total Expenses to
Average Net Assets 0.39% 0.36% 0.36% 0.37% 0.39%
Ratio of Net Investment Income to
Average Net Assets 6.47% 5.76% 5.60% 6.41% 7.23%
Portfolio Turnover Rate 6% 11% 39% 34% 31%
=====================================================================================================
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Preferred Stock Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Bonds are valued using the lastest bid prices or using valuations based
on a matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Temporary cash investments are valued at cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the board of trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Wellington Management Company, llp, provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. For the year ended October 31, 2000, the advisory fee represented an
effective annual rate of 0.14% of the fund's average net assets.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At October 31, 2000, the fund had contributed capital of $38,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.04% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
D. During the year ended October 31, 2000, the fund purchased $13,159,000 of
investment securities and sold $115,331,000 of investment securities, other than
U.S. government securities and temporary cash investments.
16
<PAGE>
At October 31, 2000, the fund had available a capital loss carryforward of
$11,748,000 to offset future net capital gains of $110,000 through October 31,
2007, and $11,638,000 through October 31, 2008.
E. At October 31, 2000, net unrealized depreciation of investment securities for
financial reporting and federal income tax purposes was $15,328,000, consisting
of unrealized gains of $673,000 on securities that had risen in value since
their purchase and $16,001,000 in unrealized losses on securities that had
fallen in value since their purchase.
17
<PAGE>
REPORT
of Independent Accountants
To the Shareholders and Trustees of Vanguard Preferred Stock Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Preferred Stock Fund (the "Fund") at October 31, 2000, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at October 31, 2000 by correspondence with the custodian, provide
a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 29, 2000
--------------------------------------------------------------------------------
SPECIAL 2000 TAX INFORMATION (UNAUDITED) FOR
VANGUARD PREFERRED STOCK FUND
This information for the fiscal year ended October 31, 2000, is included
pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
18
<PAGE>
THE VANGUARD(R)
Family of Funds
STOCK FUNDS
500 Index Fund
Calvert Social Index(TM) Fund
Capital Opportunity Fund
Convertible Securities Fund
Developed Markets Index Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Equity Fund
Growth Index Fund
Health Care Fund
Institutional Developed Markets
Index Fund
Institutional Index Fund
International Growth Fund
International Value Fund
Mid-Cap Index Fund
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund
Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital
Appreciation Fund
Tax-Managed Growth and
Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock
Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Utilities Income Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative
Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate
Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
Admiral(TM) Intermediate-Term
Treasury Fund
Admiral(TM) Long-Term
Treasury Fund
Admiral(TM) Short-Term
Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Inflation-Protected Securities Fund
Insured Long-Term
Tax-Exempt Fund
Intermediate-Term Bond
Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term
Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida, Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund
MONEY MARKET FUNDS
Admiral(TM) Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund
State Tax-Exempt Money Market Funds
(California, New Jersey,
New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send
money.
19
<PAGE>
THE PEOPLE
Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Six of Vanguard's seven board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/ directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. The year in which the trustee joined the Vanguard board is noted
in parentheses.
--------------------------------------------------------------------------------
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Argentaria, Gestion, BKF Capital, The Jeffrey Co., NeuVis, Inc., and
Select Sector SPDR Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc. (Food
Products); retired Vice Chairman and Director of RJR Nabisco (Food and Tobacco
Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman and Chief Executive Officer of Rohm &
Haas Co.; Director of AmeriSource Health Corporation, Cummins Engine Co., and
The Mead Corp.; Trustee of Vanderbilt University.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Managing Director and Secretary of The Vanguard
Group, Inc.; Secretary of each of the investment companies in The Vanguard
Group.
THOMAS J. HIGGINS, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON, Legal Department.
ROBERT A. DISTEFANO, Information Technology.
JAMES H. GATELY, Direct Investor Services.
KATHLEEN C. GUBANICH, Human Resources.
IAN A. MACKINNON, Fixed Income Group.
F. WILLIAM MCNABB, III, Institutional Investor Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Chief Financial Officer.
GEORGE U. SAUTER, Quantitative Equity Group.
--------------------------------------------------------------------------------
JOHN C. BOGLE
Founder; Chairman and Chief Executive, 1974-1996.
<PAGE>
[SHIP LOGO]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
About Our Cover
Our cover art evokes both Vanguard's
rich past and the course we've set
for the future--our determination
to provide superior investment
performance and top-notch service.
The image is based on two works:
a painting titled The First Journey
of 'Victory,' by the English artist
W.L. Wyllie (1851-1931), and a
sculpture of a compass rose on
Vanguard's campus near Valley Forge,
Pennsylvania.
All comparative mutual fund data are
from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
Standard & Poor's(R), S&P(R),
S&P 500(R), Standard & Poor's 500,
500, S&P MidCap 400, and S&P
SmallCap 600 are trademarks of
The McGraw-Hill Companies, Inc.
All other index names may contain
trademarks and are the exclusive
property of their respective owners.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the
fund's shareholders. It may not be
distributed to prospective investors
unless it is preceded or accompanied
by the current fund prospectus.
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q380 122000
