<PAGE> 1
VANGUARD
MONEY MARKET RESERVES
ANNUAL REPORT 1993
[PHOTO -- SEE EDGAR APPENDIX]
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital change
plus income) of stocks and bonds averaged only about +6% per year; cash
reserves averaged more than +8% annually. However, high inflation rates,
averaging 8.7% annually, devastated these nominal results. Real returns
(nominal returns less the inflation rate) for each of these three major
asset classes were actually negative.
* During the 1983-1992 decade, quite the opposite situation prevailed.
Nominal returns for stocks and bonds were close to their highest levels
in history and forged well into double-digit territory. To make a good
investment environment even better, inflation was tame (averaging 3.8%
annually), and real returns were solidly positive.
[A TALE OF TWO DECADES CHART -- SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has
had an important relationship to its future return. Yields were low when 1973
began, high when 1983 began, and are again low today. In fact, current income
yields are remarkably close to the levels of 20 years ago, as shown in the
following table.
<TABLE>
<CAPTION>
INCOME YIELDS (January 1)
------------------------------------------------
1973 1983 1993 (11/30)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- ---------------------------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
<TABLE>
<CAPTION>
------------------------------------------------
1973 1981 1993 (11/30)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.7%
- ---------------------------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
VANGUARD MONEY MARKET RESERVES SEEKS MAXIMUM CURRENT INCOME CONSISTENT WITH
PRESERVATION OF CAPITAL AND LIQUIDITY. EACH PORTFOLIO INTENDS TO MAINTAIN A
CONSTANT NET ASSET VALUE OF $1.00 PER SHARE. YOU MAY CHOOSE THE PORTFOLIO THAT
IS MOST SUITED TO YOUR PARTICULAR INVESTMENT OBJECTIVE: PRIME PORTFOLIO,
FEDERAL PORTFOLIO, OR U.S. TREASURY PORTFOLIO.
<PAGE> 3
CHAIRMAN'S LETTER
[PHOTO OF JOHN C. BOGLE -- SEE EDGAR APPENDIX]
FELLOW SHAREHOLDER:
Money market yields remained low--indeed at their lowest levels since the early
1960s--throughout our 1993 fiscal year, which ended on November 30.
Accordingly, each of the three Portfolios of Vanguard Money Market Reserves
provided modest returns, albeit above those of nearly all of the money market
funds in their respective categories: Prime, Federal agency, and U.S. Treasury.
The table below shows the total return (assuming reinvestment of
dividends) of each Portfolio, along with its annualized yield on November 30,
1993. The yields are shown on a "simple interest" basis as well as a "compound
interest" basis, reflecting the reinvestment of dividends.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Fiscal Year Ended November 30, 1993
-----------------------------------------------
Yield at Year-End
Total --------------------------
Portfolio Return Simple Compound
- -------------------------------------------------------------------------
<S> <C> <C> <C>
PRIME +3.0% 3.00% 3.04%
- -------------------------------------------------------------------------
FEDERAL +3.0% 2.95% 2.99%
- -------------------------------------------------------------------------
U.S. TREASURY +2.9% 2.77% 2.81%
- -------------------------------------------------------------------------
</TABLE>
The year-end yields for our Portfolios are virtually identical to--if a hair
lower than--their levels from one year ago. As low as these yields may seem,
they are generally about the same as those available on bank short-term
certificates of deposit.
While there was very little difference in the returns of the three
Portfolios during the year, the Prime Portfolio, as expected, did in fact
provide a higher return than the Federal Portfolio, but by a margin of less
than 0.05%. We would note that normally the "spread" between the Prime
Portfolio and the two government Portfolios is wider, reflecting the somewhat
higher credit risk of corporate and bank issues compared to U.S. Government
issues. However, yield spreads were uncharacteristically low during fiscal
1993, as private issuers borrowed money at rates that approximated those paid
by the U.S. Government.
* THE FISCAL YEAR IN REVIEW
Short-term interest rates fluctuated in a narrow band during the past twelve
months. The 90-day U.S. Treasury bill yielded 3.3% on November 30, 1992, moved
down to 2.9% by April 1993, and held fairly steady in a range of about 3.0% to
3.2% through the close of the fiscal period. At fiscal year end, the rate on
the Treasury bill was 3.2%.
A combination of relatively slow economic growth, restrained inflation,
and accommodative Federal Reserve monetary policy provided the economic
backdrop for this period of low and relatively stable money market rates. The
economy, as measured by gross domestic product (GDP), has grown at an
inflation-adjusted rate of less than 3% over the past twelve months. The first
half was particularly sluggish; more recently, economic growth has picked up.
Perhaps the best news on the economic front has been the continued low
level of inflation, with the consumer price index (CPI) rising only 2.7% during
the past year, the lowest inflation rate in over five years. In this
environment, the Federal Reserve Board has felt comfortable maintaining low
1
<PAGE> 4
[MONTH-END YIELDS 1989-1993 GRAPH -- SEE EDGAR APPENDIX]
short-term interest rates in hopes of stimulating the economy.
While the money market was uneventful in fiscal 1993, the long-term bond
market reacted very favorably to the good news on the inflation front. As our
fiscal year began, the 30-year U.S. Treasury bond yielded 7.5%, or some 4.2
percentage points (420 "basis points") above the 90-day U.S. Treasury bill. As
shown in the chart above, long-term bond rates subsequently declined, breaking
through the 7.0% level in February 1993 and, to the surprise of most bond
market observers, through the 6.0% level in September--the first time since
late 1972 that the Treasury bond yield has dipped below 6.0%. From a trough of
5.9% in mid-October, yields reversed direction, closing our fiscal year at
6.3%, or some 300 basis points above money market rates. Since declining yields
meant higher market values for bonds, whose prices vary widely (up or down)
with changes in interest rates, it was a very good year indeed for long-term
bond investors.
The past twelve months was also note-worthy for the substantial number of
financial restructurings that took place. Lower interest rates and accompanying
higher common stock prices allowed many companies to revitalize their balance
sheets by calling in their bonds. These purchases often were funded by
additional stock offerings in the marketplace. The stronger corporate balance
sheets that resulted led to a general improvement in the creditworthiness of
money market issuers. You should know that our policy in the Prime Portfolio
has always been to invest only in the debt of top-rated companies, and the
general improvement in credit had little impact on us other than to increase
the number of top-rated issues available to us.
* VANGUARD MONEY MARKET RESERVES IN FISCAL 1993
Our Portfolio returns in fiscal 1993 were low in an absolute sense, but they
were comfortably ahead of those provided by competitive funds, as this table
shows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Total Returns
Twelve Months Ended November 30, 1993
-------------------------------------------------
Industry Vanguard
Portfolio Vanguard Average Advantage
- --------------------------------------------------------------------------
<S> <C> <C> <C>
PRIME +3.0% +2.6% +0.4%
FEDERAL +3.0 +2.6 +0.4
U.S. TREASURY +2.9 +2.6 +0.3
- --------------------------------------------------------------------------
</TABLE>
The performance advantage spelled out in the table is importantly the result of
our durable low costs. The Vanguard Portfolios, solely by virtue of their low
expense ratios (expenses as a percentage of average net assets), provided an
income premium of 0.3 to 0.4 percentage points (or 10% to 15% of income) over
the average competitive fund.
While money market funds are often considered "generic" (i.e., essentially
the same) in nature, I would emphasize that they are in fact similar in only
three of four major areas: (1) virtually all money market funds maintain
2
<PAGE> 5
[RETURNS FOR VMMR--PORTFOLIO RELATIVE TO INFLATION -- SEE EDGAR APPENDIX]
high-quality portfolios, primarily because the Securities and Exchange
Commission requires that at least 95% of the assets of a money market fund be
invested in bank certificates of deposit and commercial paper of the highest
grade; (2) virtually all money market funds limit the average maturity of their
portfolios to 75 days or so, thus reducing the likelihood of any short-term
variations in their stated net asset values of $1.00 per share (neither
guaranteed by the fund sponsor nor insured by an agency of the U.S.
Government); (3) virtually all major money market funds are staffed by
experienced, skilled, professional money managers.
It is in the fourth area that money market funds can be most easily
distinguished: (4) the expenses incurred by money market fund shareholders vary
widely. The table that follows shows the average expense ratios for the ten
lowest-cost money market funds, all money market funds, and the ten
highest-cost money market funds. It also shows the net yield that would result
in each expense category if we assume that money market funds maintain
identical high-quality standards, short maturities, and professional management
skills, while earning a gross yield projected at 3.5%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Assumed Annual Net
Cost Category Gross Yield Expenses Yield
- ----------------------------------------------------------
<S> <C> <C> <C>
LOWEST-COST FUNDS* 3.5% 0.4% 3.1%
AVERAGE-COST FUNDS 3.5 0.7 2.8
HIGHEST-COST FUNDS 3.5 1.3 2.2
- ----------------------------------------------------------
</TABLE>
*Excludes funds temporarily waiving fees.
I hope it goes without saying that Vanguard Money Market Reserves' expense
ratio of 0.32% during the past fiscal year places us among the very lowest-cost
publicly available funds. We think it is our shareholders, not our management,
that should profit from the substantial economies of scale
3
<PAGE> 6
involved in money market fund operations. The net result is that a Vanguard
investor in our assumed portfolio shown in the table on page 3 would earn a
yield of 3.2%, compared to 2.2% for the high-cost fund group. That is some 45%
more income and, unbelievable as it may seem, it is "there for the taking"
without compromising quality, maturity, or professional management.
There is one final intriguing aspect to money market fund cost comparisons.
It is that investors can obtain higher net yields on higher-quality
portfolios--i.e., the rare bargain of earning more return while assuming less
risk. For example, as I read the newspaper financial page this morning, an
investor would receive a net yield of 3.0% on the Vanguard Federal Portfolio
(comprising 100% U.S. Treasury and Federal agency obligations). Yet fully 257
of 309 prime money market portfolios (of good quality, but without the backing
of agencies of the U.S. Government) provide lower yields. It seems, well, silly
for an investor to accept a lower yield on a prime portfolio, when a Federal
portfolio with a higher yield is readily available.
* A LONGER-TERM PERSPECTIVE
The past two years--and in particular 1993--came as something of a rude
awakening to investors who had become accustomed to the relatively high money
market yields and the relatively low inflation which characterized the period
from 1982 to 1991. During that "golden" decade, money market investors enjoyed
not only stable principal values but returns that were well above inflation--a
classic example of "having your cake and eating it, too."
The chart on page 3 shows how unusual that period was by comparing the
return of the Vanguard Prime Portfolio and the inflation rate since the Fund
began operations in 1975. During the Prime Portfolio's first few years,
inflation was moderate and our nominal returns were relatively low, such that
our Portfolio provided a negative "real" return (the nominal return less the
inflation rate). Inflation then "took off" in 1979 and our nominal return moved
sharply upward, but not as high as the inflation rate. However, in each year
thereafter, as shown in the chart, our Prime Portfolio earned returns that more
than compensated investors for the increase in the level of consumer prices.
For the full period, our average annual rate of return was +8.3% compared with
an average inflation rate of 5.6%, a handsome real return by historical
standards.
The fact is, then, that our real return of 0.3% for fiscal 1993 (3.0%
nominal return less the inflation rate of 2.7%), while well below the high real
returns of the past twelve years, is above the negative real returns that
generally characterized our first five years of operations.
* STRATEGIES FOR A LOW-INFLATION ENVIRONMENT
It is possible that a strengthening economy will eventually bring about an
increase in the demand for loans and perhaps an accompanying rise in short-term
interest rates, as well as some renewed inflationary pressure. On the other
hand, it seems equally possible that, in this uncertain world, a period of
sustained low inflation and relatively low interest rates may be in store. If
that proves to be the case, money market funds should continue to adequately
fulfill their traditional role as a safe haven for temporary cash reserves.
Monies set aside for emergency reserves or for short-term savings objectives
fall into this category. So, too, do monies that are part of a balanced
long-term portfolio, placed in short-term reserves to dampen the volatility of
the overall portfolio.
However, the yield "give-up" between a money market fund and a longer-term
bond fund reveals the potential penalty of opting for the principal stability
of a money market fund to meet truly long-term investment objectives. In the
final analysis, even an investor with a relatively limited time horizon can
often afford to incur some modest short-term risk to principal in the pursuit
of higher current income.
What is more, as the chart on page 3 so clearly reflects, there simply is
not very much income stability in a money market fund. An investor who wants to
"lock in" a higher yield can do so only by accepting some principal
instability.
4
<PAGE> 7
Many investors seem to look at risk primarily in terms of the risk to their
capital, much higher in long-term bond funds. But the risk to their income
clearly is substantially higher in money market funds. It is a "trade-off" that
investors should make prudently, and only after a careful examination of their
need for cash reserves and their tolerance for volatility of bond prices (very
high for long-term bond funds and relatively low for short-term bond funds,
with intermediate-term bond funds falling somewhere in between).
In straightforward terms, our advice to investors with truly short-term
objectives, or with the most conservative of inclinations, is to stick with
money market funds in spite of their low current yields. For those with
longer-term objectives, a diversified portfolio of stocks, bonds, and cash
reserves--allocated to reflect their personal investment horizons and risk
preferences--seems to make the most sense. And, for investors just venturing
into the world of longer-term bonds and stocks, we would mention two
often-overlooked opportunities: (1) the existence of short- and
intermediate-term bond funds with risks somewhere between those of money market
and long-term bond funds; and (2) the appeal of dollar-cost averaging (i.e.,
investing in stocks and bonds on a regular, gradual basis, rather than jumping
in "feet first").
* IN SUMMARY
One decade ago, Vanguard Money Market Reserves had total assets of $1.4
billion. As I write this letter, the Fund's assets exceed $16 billion. This
growth reflects, in essence, an eleven-fold increase in your management's
trusteeship responsibilities, along with the substantial economies of scale
that enable us to maximize your net yield.
Vanguard remains committed to providing you with the highest-quality
management and servicing of your Portfolios, at virtually the lowest expense
ratios available in the industry. As this table shows, our focus on low costs
has resulted in consistently higher returns compared to competitive money
market funds:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Average Annual Total Returns--Periods Ended November 30, 1993
- -------------------------------------------------------------
1 Year 5 Years 10 Years
- -------------------------------------------------------------
<S> <C> <C> <C>
VMMR-PRIME PORTFOLIO +3.02% +6.18% +7.03%
AVERAGE MONEY MARKET FUND +2.62 +5.70 +6.59
- -------------------------------------------------------------
VMMR-FEDERAL PORTFOLIO +2.98% +6.03% +6.83%
AVERAGE GOV'T MM FUND +2.57 +5.57 +6.40
- -------------------------------------------------------------
</TABLE>
Note: U.S. Treasury Money Market Portfolio began operations March 13, 1989.
Past performance is not predictive of future performance.
While it would be unwise to forecast the course of nominal yields--to say
nothing of real yields--in 1994 and beyond, we believe that, whatever interest
rate scenario is unveiled, the three Portfolios of Vanguard Money Market
Reserves will continue to provide you with returns that are at or near the top
of the entire money market fund field.
Sincerely,
/S/ JOHN C. BOGLE
- -------------------
John C. Bogle
Chairman of the Board December 10, 1993
Note: Mutual fund data from Lipper Analytical Services, Inc.
A MESSAGE ABOUT TREASURY INCOME
Investors should carefully consider the value of the U.S. Treasury "pass
through" exemption from state and local income taxes. In some states, the tax
on investment income may be 10% or more, meaning that many investors will earn
a higher net after-tax return in our U.S. Treasury Portfolio than in our Prime
Portfolio. Late in 1993, Pennsylvania became the final state in the Union to
codify this pass-through exemption. Given this rare opportunity to increase
after-tax returns while reducing credit risk, we urge shareholders to take into
account their state and local tax rates in comparing the yields of the two
Portfolios.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
AVERAGE ANNUAL TOTAL RETURNS--THE CURRENT YIELDS PROVIDED IN THE CHAIRMAN'S
LETTER ARE CALCULATED IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL
TOTAL RETURNS FOR THE PORTFOLIOS (PERIODS ENDED SEPTEMBER 30, 1993) ARE AS
FOLLOWS:
<TABLE>
<CAPTION>
PORTFOLIO (INCEPTION DATE) 1 YEAR 5 YEARS 10 YEARS
- ---------------------------------- ------ ------- --------
<S> <C> <C> <C>
PRIME PORTFOLIO (6/4/75) +3.04% +6.36% +7.14%
FEDERAL PORTFOLIO (7/13/81) +3.00 +6.20 +6.93
U.S. TREASURY PORTFOLIO (3/13/89)* +2.87 +6.03 +6.66
</TABLE>
THESE DATA REPRESENT PAST PERFORMANCE; FUTURE RETURNS WILL FLUCTUATE.
* TOTAL RETURNS PROVIDED PRIOR TO MARCH 13, 1989, ARE FOR THE INSURED PORTFOLIO,
WHICH BEGAN OPERATIONS ON MARCH 9, 1983.
PLEASE NOTE THAT AN INVESTMENT IN A MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE FUND WILL
BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
6
<PAGE> 9
REPORT FROM THE INVESTMENT ADVISER
During the fiscal year ended November 30, 1993, short-term interest rates were
relatively stable. The Federal Reserve, a powerful arbiter of short-term rates
through its control of the Federal Funds Rate (the rate at which member banks
borrow and lend among themselves), did not change its reserve policy throughout
the year. In prior years, the Fed lowered short-term rates dramatically (from
nearly 10% in 1989 to 3% in 1992) to offset the effects of economic recession.
Lower interest rates, of course, stimulate economic activity by encouraging
businesses to borrow. Unfortunately, among the lenders to businesses are the
shareholders of money market funds, who have seen their annual returns dwindle
to +3% (or even less in funds with high expense charges). These returns do
little better than offset the effects of inflation. Indeed, current after-tax
money market fund returns are probably below the rate of inflation, depending
on the individual shareholder's tax bracket. At best, prevailing after-tax
money market returns are at "break-even" relative to inflation.
In 1993, the Fed has deemphasized its role as stimulator of economic
activity, and has been content to watch the economic statistics for signs of
whether its previous interest rate reductions are in fact fostering economic
growth. A qualified "yes" is the answer at this point. The housing sector, in
particular, has benefited from low mortgage rates and high affordability. The
job market has been slower to respond, but has finally developed a distinct
uptrend in hiring. Of special importance is recent marginal growth in
higher-paying manufacturing jobs.
Consumer confidence, sapped by the "anemia" of the recent recovery, has
been slower to respond, and will be crucial to sustaining economic expansion.
If such expansion is sustained, the Fed will shift into its role of inflation
fighter. Typically, in a fast-growing economy, the Fed raises short-term rates
to increase the cost of borrowing for business and consumers, thereby slowing
the growth of the economy and controlling the threat of inflation. Under this
scenario, money market investors could expect somewhat higher returns.
In contrast to the emerging recovery in the United States, the major
European economies have spent the year mired in recession. High interest rates,
currency instability, and high labor costs have substantially reduced economic
activity. Our capital markets do not operate in a vacuum. High-quality European
banks that typically raise large sums of money in the U.S. money market have
cut back on their funding needs. This has reduced the available supply of
short-term non-government securities.
In addition, the U.S. Treasury has begun to issue more short-term debt in
order to lower the average maturity of the national debt. The Treasury's goal
is to lower the government's cost of borrowing by taking advantage of the same
low short-term interest rates that have reduced money market fund yields. It
remains to be seen whether this strategy will work in the long run. These two
phenomena--less supply of non-government securities and greater supply of
Treasury securities--have caused the present situation, in which there is a
very small reward (in the form of higher yields) for taking greater credit
risk. That is to say, prime commercial paper provides only a marginally higher
yield than U.S. Treasury bills.
In an environment where additional credit risk offers little or no
additional yield, the creditworthiness of the Vanguard Money Market
Reserves-Prime Portfolio remains high. Of course, the Treasury and Federal
Portfolios continue to invest in the U.S. Government and its various agencies,
literally the benchmarks of creditworthiness. Our Portfolios' low expenses
allow us topursue high-quality investments, and distribute as net income nearly
90% of their gross earnings at current yield levels. In the coming year, we
will remain vigilant over the credit quality of issuers. Our low costs should
ensure that our shareholders will continue to benefit from a fair exchange of
risk, return, and cost.
Sincerely,
Ian A. MacKinnon, Senior Vice President
Robert F. Auwaerter, Vice President
John Hollyer, Assistant Vice President
Vanguard Fixed Income Group December 7, 1993
7
<PAGE> 10
STATEMENT OF NET ASSETS NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1993
<TABLE>
<CAPTION>
Face Market
Amount Value
PRIME PORTFOLIO (000) (000)+
- -----------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY
OBLIGATIONS (6.8%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank
3.38%, 2/23/94 $ 10,000 $ 9,923
Federal Home Loan Mortgage Corp.
3.37%, 4/25/94 5,150 5,082
Federal National Mortgage Assn.
Discount Notes
3.17%-7.65%,
12/1/93-7/6/94 837,185 830,847
- -----------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND
AGENCY OBLIGATIONS
(Cost $845,852) 845,852
- -----------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (71.4%)
- -----------------------------------------------------------------------------------------------------
BANK HOLDING COMPANIES (5.1%)
Bankers Trust New York Corp.
3.37%, 1/14/94 150,000 149,384
J.P. Morgan & Co., Inc.
3.07%-3.23%,
12/21/93-3/21/94 129,000 128,388
NationsBank Corp.
3.36%, 1/26/94 180,000 179,064
Norwest Corp.
3.39%, 1/24/94 45,000 44,772
PNC Funding Corp.
3.11%-3.13%,
12/3/93-12/22/93 68,000 67,914
Republic New York Corp.
3.36%, 1/14/94 60,000 59,754
----------
GROUP TOTAL 629,276
----------
- -----------------------------------------------------------------------------------------------------
FINANCE--AUTO (2.4%)
Ford Credit Receivables Corp.
3.21%, 1/28/94 50,000 49,743
Ford Motor Credit Corp.
3.09%-3.35%,
12/16/93-2/4/94 250,000 249,175
----------
GROUP TOTAL 298,918
----------
- -----------------------------------------------------------------------------------------------------
FINANCE--SECURITIES DEALERS (9.3%)
Bear Stearns Co.
3.39%, 1/11/94-1/25/94 120,000 119,440
Credit Suisse First Boston
3.11%-3.13%,
12/2/93-12/14/93 116,000 115,927
Goldman Sachs & Co.
3.37%-3.39%,
2/25/94-3/1/94 300,000 297,578
Merrill Lynch & Co.
3.37%-3.40%,
1/6/94-2/2/94 305,000 303,774
Morgan Stanley Co.
3.39%-3.40%,
1/10/94-2/24/94 $300,000 $ 298,615
Smith Barney Harris Upham & Co.
3.12%, 12/3/93 15,000 14,997
----------
GROUP TOTAL 1,150,331
----------
- -----------------------------------------------------------------------------------------------------
FINANCE--OTHER (20.2%)
A.I. Credit Corp.
3.10%-3.21%,
12/1/93-2/11/94 40,019 39,892
American Express Credit Corp.
3.10%-3.11%,
12/13/93-12/21/93 185,000 184,753
Asset Securitization
Cooperative Corp.
3.12%-3.37%,
12/10/93-2/14/94 287,500 286,620
Associates Corp. of N.A.
3.09%-3.13%,
12/3/93-12/16/93 95,000 94,928
Banc One Diversified Services Corp.
3.09%, 12/2/93-12/17/93 73,200 73,149
Barclays U.S. Funding Corp.
3.21%-3.37%,
1/25/94-2/11/94 140,000 139,245
CIT Group Holdings Inc.
3.09%-3.12%,
12/13/93-12/17/93 90,000 89,895
Ciesco L.P.
3.10%-3.37%,
12/1/93-2/17/94 303,600 302,108
Commercial Credit Co.
3.11%, 12/8/93 50,000 49,970
Corporate Asset Funding Corp.
3.10%-3.37%,
12/2/93-2/8/94 288,873 287,771
Eiger Capital Corp.
3.09%, 12/2/93-12/17/93 18,969 18,960
General Electric Capital Corp.
3.18%-3.41%,
12/17/93-3/3/94 540,000 536,602
Household Finance Corp.
3.09%, 12/17/93 75,000 74,897
MCA Funding Corp.
3.23%-3.39%,
1/18/94-4/5/94 129,700 128,785
Matterhorn Capital Corp.
3.12%-3.36%,
12/6/93-1/27/94 94,152 93,729
Motorola Credit Corp.
3.09%, 12/7/93 21,120 21,109
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Norwest Financial
3.32%, 2/10/94 $ 50,000 $ 49,675
Panasonic Finance
3.25%-3.32%,
1/18/94-3/15/94 20,000 19,863
----------
GROUP TOTAL 2,491,951
----------
- -----------------------------------------------------------------------------------------------------
INDUSTRIAL (5.4%)
Chevron Oil Finance Co.
3.09%-3.11%,
12/9/93-12/30/93 250,000 249,580
Chevron Transport Corp.
3.37%, 2/16/94 25,000 24,821
Coca-Cola Co.
3.22%-3.26%,
2/4/94-3/14/94 74,000 73,458
Daimler-Benz N.A. Co.
3.09%, 12/6/93-12/8/93 64,502 64,470
Hewlett Packard Co.
3.08%, 12/30/93 37,536 37,443
Merck & Co.
3.40%, 5/23/94 99,000 97,406
Mobil Australia Finance
3.37%-3.41%,
1/11/94-1/18/94 45,000 44,811
Norfolk Southern Corp.
3.11%, 12/6/93-12/20/93 26,218 26,186
Raytheon Co.
3.08%, 12/6/93 49,565 49,544
----------
GROUP TOTAL 667,719
----------
- -----------------------------------------------------------------------------------------------------
INSURANCE (3.9%)
AIG Funding Inc.
3.25%, 3/1/94 42,000 41,664
MetLife Funding Corp.
3.10%-3.37%,
12/3/93-3/3/94 123,000 122,186
Prudential Funding Corp.
3.10%-3.23%,
12/9/93-2/8/94 175,000 174,260
Safeco Credit Corp.
3.21%-3.37%,
2/9/94-2/17/94 14,000 13,907
St. Paul Co.
3.36%, 1/21/94 20,000 19,905
USAA Capital Corp.
3.10%-3.27%,
12/7/93-2/22/94 114,400 113,722
----------
GROUP TOTAL 485,644
----------
- -----------------------------------------------------------------------------------------------------
UTILITIES (3.6%)
American Telephone &
Telegraph Co.
3.21%-3.34%,
2/3/94-3/28/94 $279,500 $277,266
Ameritech Corp.
3.09%, 12/10/93-12/13/93 80,000 79,931
Columbia Fuels, Inc.
3.12%, 12/3/93 10,000 9,998
Consolidated Natural Gas Co.
3.34%, 2/9/94 33,000 32,787
GTE California
3.39%, 2/9/94 4,000 3,974
Pacific Energy Fuels Co.
3.13%-3.37%,
12/16/93-1/19/94 16,970 16,915
Pacific Gas & Electric Co.
3.12%, 12/2/93 25,000 24,998
----------
GROUP TOTAL 445,869
----------
- -----------------------------------------------------------------------------------------------------
FOREIGN BANKS (2.8%)
ABN AMRO N.A. Finance Inc.
3.22%, 1/18/94-1/19/94 51,000 50,780
Abbey National N.A.
3.36%, 1/5/94 37,000 36,879
Canadian Imperial Holdings Inc.
3.22%-3.33%,
1/21/94-2/4/94 129,000 128,273
Commerzbank U.S. Finance Inc.
3.10%, 12/9/93 18,500 18,487
Hypo U.S. Finance Inc.
3.13%-3.28%,
12/22/93-1/21/94 57,000 56,793
Rabobank Nederlanden
3.23%-3.25%,
2/22/94-3/23/94 45,000 44,590
Societe Generale N.A. Inc.
3.356%, 12/15/93 15,000 14,981
----------
GROUP TOTAL 350,783
----------
- -----------------------------------------------------------------------------------------------------
CANADIAN GOVERNMENT (6.2%)
Canada Bills
3.22%-3.25%,
2/8/94-4/11/94 304,000 301,040
Canadian Wheat Board
3.24%-3.37%,
12/3/93-4/18/94 316,800 314,129
Province of Alberta
3.18%-3.45%,
12/13/93-5/10/94 65,000 64,563
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Province of British Columbia
3.18%-3.36%,
12/13/93-3/25/94 $ 77,107 $ 76,599
Province of Ontario
3.33%, 12/22/93 10,000 9,981
----------
GROUP TOTAL 766,312
----------
- -----------------------------------------------------------------------------------------------------
OTHER FOREIGN GOVERNMENT (11.8%)
Australian Wool
Realisation Corp.
3.22%-3.37%,
12/10/93-2/23/94 95,000 94,482
Caisse des Depots
et Consignations
3.13%-3.29%,
12/16/93-1/28/94 299,000 297,675
European Investment Bank
3.37%, 2/24/94 40,000 39,684
KFW International Finance Inc.
3.21%-3.25%,
2/3/94-3/28/94 35,000 34,687
New South Wales Treasury Corp.
3.22%-3.38%,
12/3/93-3/2/94 337,500 335,622
Oesterreichische Kontrollbank
3.11%-3.34%,
12/31/93-3/21/94 143,400 142,323
Queensland Treasury Corp.
3.23%-3.36%,
1/28/94-2/24/94 33,000 32,803
Kingdom of Sweden
3.24%-3.36%,
12/6/93-3/22/94 370,400 367,808
Western Australia Treasury Corp.
3.24%-3.40%,
1/12/94-4/26/94 118,000 116,955
----------
GROUP TOTAL 1,462,039
----------
- -----------------------------------------------------------------------------------------------------
FOREIGN INDUSTRIAL (.7%)
Siemens Corp.
3.33%-3.37%,
1/19/94-1/28/94 81,000 80,586
----------
- -----------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $8,829,428) 8,829,428
- -----------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (13.9%)
- -----------------------------------------------------------------------------------------------------
YANKEE CERTIFICATES OF DEPOSIT--
CANADIAN BRANCHES (.9%)
ABN AMRO
3.11%-3.39%,
12/16/93-2/15/94 70,000 69,579
Barclays Bank
3.11%-3.33%,
12/10/93-1/31/94 $ 37,487 $ 37,337
----------
GROUP TOTAL 106,916
----------
- -----------------------------------------------------------------------------------------------------
YANKEE CERTIFICATES OF DEPOSIT--
U.S. BRANCHES (13.0%)
ABN AMRO
3.22%-3.32%,
1/20/94-2/2/94 79,000 78,995
Barclays Bank
3.37%, 2/11/94 60,000 60,000
Bayerische Landesbank
3.48%, 2/9/94 10,000 10,001
Canadian Imperial
Bank of Commerce
3.22%-3.37%,
1/6/94-2/3/94 99,000 98,997
Commerzbank
3.25%-3.33%,
1/12/94-1/27/94 114,000 113,998
Credit Suisse
3.20%-3.54%,
12/1/93-4/12/94 112,000 111,989
Deutsche Bank
3.42%, 12/7/93 44,000 44,001
Dresdner Bank
3.52%, 2/16/94 10,000 10,003
Lloyds Bank
3.25%, 4/4/94 16,000 15,991
Rabobank Nederlanden
3.20%-3.36%,
12/14/93-4/15/94 337,000 336,969
Societe Generale
3.30%-3.45%,
12/1/93-3/3/94 247,000 247,000
Union Bank of Switzerland
3.23%-3.25%,
2/25/94-3/16/94 83,000 82,991
Westdeutsche Landesbank
3.23%-4.12%,
12/3/93-4/4/94 395,000 395,001
----------
GROUP TOTAL 1,605,936
----------
- -----------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(Cost $1,712,852) 1,712,852
- -----------------------------------------------------------------------------------------------------
EURODOLLAR CERTIFICATES OF DEPOSIT (2.0%)
- -----------------------------------------------------------------------------------------------------
ABN AMRO
3.21%, 1/24/94 24,000 23,996
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Bayerische Hypotheken und
Wechselbank
3.22%, 1/24/94 $ 27,000 $ 26,998
Deutsche Bank
3.25%-3.37%,
12/2/93-3/23/94 112,000 111,999
Dresdner Bank
3.33%, 12/15/93 10,000 10,000
Rabobank Nederlanden
3.22%-3.28%,
3/17/94-4/27/94 55,000 54,977
Union Bank of Switzerland
4.00%, 1/4/94 15,000 15,002
- -----------------------------------------------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES
OF DEPOSIT
(Cost $242,972) 242,972
- -----------------------------------------------------------------------------------------------------
BANKERS ACCEPTANCE (.5%)
- -----------------------------------------------------------------------------------------------------
Union Bank of Switzerland
3.09%-3.30%,
12/7/93-12/29/93
(Cost $65,415) 65,500 65,415
- -----------------------------------------------------------------------------------------------------
OTHER NOTES (2.6%)
- -----------------------------------------------------------------------------------------------------
Ciesco L.P. MTN
3.128%, 12/15/93(1) 50,000 50,000
Corporate Asset Funding Corp. MTN
3.14%, 12/10/93(1) 50,000 49,995
Morgan Guarantee Trust Co.
3.45%-4.00%,
12/8/93-2/23/94 175,000 174,964
State Street Bank & Trust
3.12%, 12/13/93 50,000 50,000
- -----------------------------------------------------------------------------------------------------
TOTAL OTHER NOTES
(Cost $324,959) 324,959
- -----------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (2.8%)
- -----------------------------------------------------------------------------------------------------
Kidder Peabody & Co. Inc.
3.10%, 12/17/93*
(Collateralized by Federal
National Mortgage Assn.
5.10%-5.62%,
2/23/98-5/28/98) 100,000 100,000
3.09%, 12/20/93*
(Collateralized by Federal
National Mortgage Assn.
5.70%-6.20%,
1/10/97-9/11/97) 40,000 40,000
Lehman Government Securities Inc.
3.10%, 12/6/93*
(Collateralized by Federal
National Mortgage Assn.
7.00%-8.00%,
2/1/07-1/1/08) $93,340 $ 93,340
3.10%, 12/7/93*
(Collateralized by Federal
National Mortgage Assn.
7.00%-8.00%,
7/1/02-1/1/08) 60,640 60,640
J.P. Morgan Securities Inc.
3.10%, 12/22/93*
(Collateralized by Federal
National Mortgage Assn.
12.65%, 3/10/14) 50,000 50,000
- -----------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost $343,980) 343,980
- -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $12,365,458) 12,365,458
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
Other Assets--Note B 114,200
Liabilities (112,421)
----------
1,779
- -----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------
Applicable to 12,366,952,957
outstanding
$.001 par value shares
(authorized 25,000,000,000
shares) $12,367,237
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
=====================================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Put Option Obligation.
(1) Floating Rate Notes.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AT NOVEMBER 30, 1993, NET ASSETS
CONSISTED OF:
- -----------------------------------------------------------------------------------------------------
Amount Per
(000) Share
------- -----
<S> <C> <C>
Paid in Capital $12,366,952 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Gains 285 --
Unrealized Appreciation
of Investments -- --
- -----------------------------------------------------------------------------------------------------
NET ASSETS $12,367,237 $1.00
- -----------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
FEDERAL PORTFOLIO (000) (000)+
- -----------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY
OBLIGATIONS (84.6%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank
3.14%-14.0%,
12/23/93-3/16/94 $411,995 $ 411,572
Federal Home Loan
Mortgage Corp.
2.88%-3.175%,
12/15/93-1/26/94(1) 120,000 119,844
3.16%-3.21%,
1/24/94-3/11/94 59,440 59,074
Federal National Mortgage Assn.
3.05%-3.49%,
12/1/93-5/12/94 884,355 878,904
Government Trust Certificates
3.38%, 5/15/94 9,807 9,659
Overseas Private Investment Corp.
(U.S. Government Guaranteed)
3.34%-3.85%,
12/7/93-2/25/94*(1) 115,341 115,341
U.S. Treasury Note
5.375%, 2/28/94 19,000 19,100
- -----------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND
AGENCY OBLIGATIONS
(Cost $1,613,494) 1,613,494
- -----------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (14.9%)
- -----------------------------------------------------------------------------------------------------
Donaldson, Lufkin &
Jenrette Securities Inc.
3.30%, 1/7/94*
(Collateralized
by Federal Home Loan
Mortgage Corp. 7.00%, 9/1/97
and Federal National Mortgage
Assn. 9.00%-10.00%,
10/1/20-10/1/21) 50,000 50,000
Eastbridge Capital Inc.
3.20%, 12/1/93
(Collateralized
by U.S. Treasury Bill
3.28%, 5/26/94) 30,860 30,860
Goldman Sachs & Co.
3.10%, 12/3/93*
(Collateralized by Federal
National Mortgage
Assn. 7.00%-8.50%,
3/1/08-11/1/11) 10,145 10,145
3.125%, 12/13/93*
(Collateralized by
Federal Home Loan
Mortgage Corp. 7.00%, 10/1/07
and Federal National Mortgage
Assn. 8.50%, 11/1/06) 23,248 23,248
Kidder Peabody & Co. Inc.
3.10%, 12/20/93*
(Collateralized by
Federal National Mortgage
Assn. 5.62%, 2/23/98) $25,000 $25,000
3.25%, 1/7/94*
(Collateralized by
U.S. Treasury Bond
7.25%, 8/15/22) 25,000 25,000
Lehman Government Securities Inc.
3.375%, 1/7/94*
(Collateralized by Federal
National Mortgage
Assn. 8.50%, 1/1/08) 50,000 50,000
Yamaiichi International
(America) Inc.
3.27%, 12/1/93
(Collateralized by
U.S. Treasury Bonds
7.50%-7.625%,
11/15/16-11/15/22) 70,000 70,000
- -----------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost $284,253) 284,253
- -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(Cost $1,897,747) 1,897,747
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.5%)
- -----------------------------------------------------------------------------------------------------
Other Assets--Note B 15,691
Liabilities (6,376)
----------
9,315
- -----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------
Applicable to 1,906,900,661 outstanding
$.001 par value shares
(authorized 5,000,000,000 shares) $1,907,062
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
=====================================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Put option obligation.
(1) Floating Rate Notes.
12
<PAGE> 15
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AT NOVEMBER 30, 1993, NET ASSETS
CONSISTED OF:
- -----------------------------------------------------------------------------------------------------
Amount Per
(000) Share
------ -----
<S> <C> <C>
Paid in Capital $1,906,853 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Gains 209 --
Unrealized Appreciation
of Investments -- --
- -----------------------------------------------------------------------------------------------------
NET ASSETS $1,907,062 $1.00
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
- -----------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (100.5%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILLS
2.85%-3.19%,
12/2/93-4/7/94 $1,593,083 $1,585,340
U.S. TREASURY NOTES
5.00%-8.875%,
12/31/93-4/30/94 173,200 174,559
- -----------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $1,759,899) 1,759,899
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.5%)
- -----------------------------------------------------------------------------------------------------
Other Assets--Note B 13,708
Liabilities (22,380)
----------
(8,672)
- -----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------
Applicable to 1,751,011,442 outstanding
$.001 par value shares
(authorized 5,000,000,000 shares) $1,751,227
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
=====================================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AT NOVEMBER 30, 1993, NET ASSETS
CONSISTED OF:
- -----------------------------------------------------------------------------------------------------
Amount Per
(000) Share
------ -----
<S> <C> <C>
Paid in Capital $1,751,030 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Gains 197 --
Unrealized Appreciation
of Investments -- --
- -----------------------------------------------------------------------------------------------------
NET ASSETS $1,751,227 $1.00
- -----------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PRIME FEDERAL U.S. TREASURY
PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
November 30, 1993 November 30, 1993 November 30, 1993
(000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . $407,197 $62,233 $59,309
- ------------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . 407,197 62,233 59,309
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory
Services . . . . . . . . . . $ 1,217 $ 190 $ 196
Management and
Administrative . . . . . . . 30,990 4,762 4,698
Marketing and Distribution . . 4,426 36,633 688 5,640 731 5,625
-------- -------- --------
Custodian's Fees . . . . . . . . 403 79 60
Taxes (other than income
taxes)--Note A . . . . . . . . . 986 153 149
Auditing Fees . . . . . . . . . . 24 9 9
Shareholders' Reports . . . . . . 855 140 95
Annual Meeting and Proxy Costs 181 26 20
Directors' Fees and Expenses . . 41 6 6
- ------------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . 39,123 6,053 5,964
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income . 368,074 56,180 53,345
- ------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON
INVESTMENT SECURITIES
SOLD--Note A . . . . . . . . . . . . 37 121 (50)
- ------------------------------------------------------------------------------------------------------------------------------
UNREALIZED APPRECIATION
(DEPRECIATION) OF
INVESTMENT SECURITIES . . . . . . . -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net
Assets Resulting
from Operations . . . $368,111 $56,301 $53,295
==============================================================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PRIME FEDERAL U.S. TREASURY
PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended YEAR ENDED Year Ended
NOVEMBER 30, November 30, NOVEMBER 30, November 30, NOVEMBER 30, November 30,
1993 1992 1993 1992 1993 1992
(000) (000) (000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
OPERATIONS
Net Investment Income . . . . . . $ 368,074 $ 495,660 $ 56,180 $ 73,766 $ 53,345 $ 80,571
Realized Net
Gain (Loss)--Note A . . . . . . 37 (39) 121 (44) (50) (13)
Unrealized Appreciation
(Depreciation) . . . . . . . . -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase in
Net Assets
Resulting from
Operations . . . . . . 368,111 495,621 56,301 73,722 53,295 80,558
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . (368,074) (495,660) (56,180) (73,766) (53,345) (80,571)
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
(AT $1.00 PER SHARE)
Issued -- Regular . . . . . . 12,433,362 11,249,483 1,384,996 1,355,998 1,392,485 1,931,117
-- In Lieu of Cash
Distributions . . . 354,746 475,753 53,652 69,923 50,552 74,655
-- Exchange . . . . . 3,266,455 3,313,976 372,470 490,527 406,070 540,483
Redeemed -- Regular . . . . . . (11,774,422) (11,535,851) (1,244,605) (1,374,360) (1,226,276) (1,606,690)
-- Exchange . . . . . (4,551,214) (4,361,141) (646,049) (555,530) (1,192,291) (710,648)
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease)
from Capital Share
Transactions . . . . . . . . . (271,073) (857,780) (79,536) (13,442) (569,460) 228,917
- --------------------------------------------------------------------------------------------------------------------------------
Total Increase
(Decrease) . . . . . . . . . . (271,036) (857,819) (79,415) (13,486) (569,510) 228,904
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . 12,638,273 13,496,092 1,986,477 1,999,963 2,320,737 2,091,833
- --------------------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . $12,367,237 $12,638,273 $1,907,062 $1,986,477 $1,751,227 $2,320,737
================================================================================================================================
(1) Income Dividends
Per Share . . . . . . . . . . $.030 $.038 $.029 $.038 $.028 $.036
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PRIME PORTFOLIO
- --------------------------------------------------------------------------------------------------------
Year Ended November 30,
-------------------------------------------------------
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . .030 .038 .062 .080 .090
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . -- -- -- -- --
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS .030 .038 .062 .080 .090
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . (.030) (.038) (.062) (.080) (.090)
Distributions from Realized Capital
Gains . . . . . . . . . . . . . . . . -- -- -- -- --
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . (.030) (.038) (.062) (.080) (.090)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
========================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . +3.02% +3.89% +6.39% +8.32% +9.40%
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . $12,367 $12,638 $13,496 $13,579 $11,067
Ratio of Expenses to Average Net Assets . . .32% .30% .30% .30% .28%
Ratio of Net Investment Income to Average
Net Asset . . . . . . . . . . . . . . . . 2.98% 3.82% 6.20% 8.06% 9.05%
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FEDERAL PORTFOLIO
- --------------------------------------------------------------------------------------------------------
Year Ended November 30,
------------------------------------------------------
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . .029 .038 .060 .078 .088
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . -- -- -- -- --
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS .029 .038 .060 .078 .088
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . (.029) (.038) (.060) (.078) (.088)
Distributions from Realized Capital Gains -- -- -- -- --
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . (.029) (.038) (.060) (.078) (.088)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
========================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . +2.98% +3.83% +6.18% +8.14% +9.15%
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . $1,907 $1,986 $2,000 $1,950 $1,531
Ratio of Expenses to Average Net Assets . . .32% .30% .30% .30% .28%
Ratio of Net Investment Income to Average
Net Assets . . . . . . . . . . . . . . 2.94% 3.76% 6.01% 7.90% 8.78%
- --------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
U.S. TREASURY PORTFOLIO
- --------------------------------------------------------------------------------------------------------
Year Ended November 30,
------------------------------------------------------
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . .028 .036 .058 .077 .085
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . -- -- -- -- --
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS .028 .036 .058 .077 .085
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . (.028) (.036) (.058) (.077) (.085)
Distributions from Realized Capital
Gains . . . . . . . . . . . . . . . . -- -- -- -- --
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . (.028) (.036) (.058) (.077) (.085)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
========================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . +2.86% +3.68% +5.94% +8.02% +8.89%
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . $1,751 $2,321 $2,092 $1,594 $412
Ratio of Expenses to Average Net Assets . . .32% .30% .30% .30% .31%+
Ratio of Net Investment Income to Average
Net AssetS . . . . . . . . . . . . . . . 2.83% 3.60% 5.76% 7.74% 8.44%
- --------------------------------------------------------------------------------------------------------
</TABLE>
+ Insurance premiums represent .03%.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
Vanguard Money Market Reserves is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and consists of the Prime,
Federal, and U.S. Treasury Portfolios. The Prime Portfolio invests in
short-term debt instruments of companies primarily operating in specific
industries; the issuers' abilities to meet their obligations may be affected by
economic developments in such industries. The Federal Portfolio invests in
short-term debt instruments issued by the U.S. Government or its agencies and
instrumentalities. The U.S. Treasury Portfolio invests in short-term debt
instruments backed by the full faith and credit of the U.S. Government.
* A. The following significant accounting policies are in conformity
with generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities are stated at amortized cost which
approximates market value.
2. FEDERAL INCOME TAXES: Each Portfolio of 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. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized
gains and losses on the sale of investment securities are those of
specific securities sold. Discounts and premiums are accreted and
amortized, respectively, to interest income over the lives of the
respective securities. Distributions from net investment income are
declared on a daily basis payable on the first business day of the
following month.
4. REPURCHASE AGREEMENTS: Securities pledged as collateral for repurchase
agreements are held by the Fund's custodian bank until maturity of the
repurchase agreement. Provisions of each agreement ensure that the
market value of the collateral is sufficient in the event of default;
however, in the event of default or bankruptcy by the other party to
the agreement, realization and/or retention of the collateral may be
subject to legal proceedings.
* B. The Vanguard Group, Inc. furnishes at cost investment advisory,
corporate management, administrative, marketing, and distribution services. The
costs of such services are allocated to the Fund under methods approved by the
Board of Directors. At November 30, 1993, the Fund had contributed capital of
$2,592,000 to Vanguard (included in Other Assets), representing 13.0% of
Vanguard's capitalization. The directors and officers of the Fund are also
directors and officers of Vanguard.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Money Market Reserves
In our opinion, the accompanying statements 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
the Prime Portfolio, Federal Portfolio, and U.S. Treasury Portfolio of
Vanguard Money Market Reserves (the "Fund") at November 30, 1993, the results
of each of their operations, the changes in each of their net assets and the
financial highlights for each of the respective periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereinafter 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 generally accepted auditing standards 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 November 30, 1993, by correspondence with the custodian and
brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 27, 1993
19
<PAGE> 22
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of Dayton
Hudson Corporation, American Express Bank Ltd., The St. Paul Companies, Inc.,
and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
JOHN C. SAWHILL, 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
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
20
<PAGE> 23
(continued from inside front cover)
toward those of the 1970s. However, the current level of inflation suggests
that future real returns may prove to be satisfactory. Looking forward, the
main risks to the investor are two: (1) that yields on financial assets will
rise sharply, reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these
two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
* For long-term investors who have built a substantial balanced portfolio of
stock, bond, and money market funds, stay the course. Even if withdrawing
from the stock market proves to be justified, the next decision--when to
return--will one day be required. "Being right twice" is no mean challenge.
* For long-term investors gradually accumulating assets for, say, retirement,
stay your present course. Continue to invest regularly. By doing so, you buy
more shares of a mutual fund when its price falls, and fewer shares when its
price rises, virtually assuring a reasonable average cost.
* For risk-averse investors who are highly confident that stock prices are "too
high," make only marginal--not "all or nothing"--changes in your portfolio
balance. Given the perils of predicting the future, any changes should be
limited to, say, 15 percentage points. That is, if your normal portfolio
allocation is 60% in stock funds, it might be reduced to 45%; if 85%, to 70%.
* For investors who simply must have more income, never lose sight of the added
principal risk involved in shifting from money market funds to bond funds.
Long-term bond funds provide a generous and durable income stream, but their
prices are highly volatile. Short-term and intermediate-term bond funds offer
a "middle way" of increasing income with more modest risk to principal.
* For investors who are tempted to find an "easy way" to higher returns, never
forget that risk and reward go hand in hand. Precipitously replacing
certificates of deposit with broad-based common stock funds verges on the
irrational. Funds investing in other securities markets--emerging nations,
international stocks and bonds, and small U.S. companies--carry their own
special risks. Generally, limit such alternative investments to, say, 20% of
your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing
today, it seems highly unlikely that the returns enjoyed by investors in
the past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money market
funds. Each asset class has its own risk and reward characteristics. By
allocating your resources among the three asset classes according to your
own requirements, you can build a portfolio providing appropriate
elements of capital appreciation, capital conservation, and current
income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put
another way, high-cost funds must select investments with higher
prospective gross returns--which entail higher risks--to match the net
returns earned by low- cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Long-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Small Capitalization Stock Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
[VANGUARD LOGO]
Vanguard Financial Center * Valley Forge, Pennsylvania 19482
<TABLE>
<C> <C>
New Account Information 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q300-11/93
<PAGE> 25
EDGAR Appendix
This appendix describes components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of
The United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 20.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of the Month-End Yields (30-Year U.S. Treasury Bond and
90-Day U.S. Treasury Bill) of the Money Market Reserves for the Fiscal Years
1989 through 1993 appears at the upper-left of page two.
Bar graphs illustrating returns for Vanguard Money Market Reserves
Prime Portfolio compared to Consumer Price Index for the Fiscal Years 1975
through 1993.
