<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-52698) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [X]
POST-EFFECTIVE AMENDMENT NO. 51 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 53 [X]
VANGUARD MONEY MARKET RESERVES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE:
on January 24, 1997, pursuant to paragraph (b) of Rule 485 of the Securities Act
of 1933.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE PERIOD ENDED NOVEMBER 30, 1995 ON JANUARY 26, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
VANGUARD MONEY MARKET RESERVES, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund........................ Directors and Officers; Management of
the Fund; The Vanguard Group
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of Each Portfolio;
Dividends and Taxes; General
Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objectives and Policies
Item 13. Investment Objective and Policies............. Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares;
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Calculation of Yield.
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
VANGUARD MONEY
MARKET PORTFOLIOS
Institutional Prospectus
January 24, 1997
VANGUARD MONEY
MARKET RESERVES
- - PRIME PORTFOLIO
- - FEDERAL PORTFOLIO
VANGUARD TREASURY FUND
- - TREASURY MONEY MARKET PORTFOLIO
This prospectus contains financial data for the Portfolios through the fiscal
year ended November 30, 1995, and the six months ended May 31, 1996.
A member of
THE VANGUARD GROUP(R)
<PAGE> 4
VANGUARD MONEY MARKET RESERVES
VANGUARD TREASURY MONEY MARKET PORTFOLIO Money Market Mutual Funds
CONTENTS
Portfolio Expenses 3
Financial Highlights 5
A Word About Risk 7
The Portfolios' Objectives 7
Who Should Invest 7
Investment Policies 8
Investment Limitations 11
Investment Performance 11
Share Price 13
Dividends and Taxes 13
The Funds and Vanguard 13
Investment Adviser 14
General Information 14
Investing with Vanguard
- - For Plan Participants 15
- - For Other Institutional Investors 15
Accessing Fund Information by Computer 16
Glossary Inside Back Cover
INVESTMENT OBJECTIVES AND POLICIES
Vanguard Money Market Reserves, Inc. is a diversified, open-end investment
company that consists of two separate Portfolios: Federal and Prime. The
Treasury Money Market Portfolio is part of Vanguard Treasury Fund, which is a
diversified, open-end investment company as well.
Each Portfolio seeks to provide current income and to maintain
liquidity and a stable share price of $1.00. Each Portfolio focuses on specific
high-quality, short-term money market instruments, such as securities backed by
the full faith and credit of the U.S. Government, securities issued by U.S.
Government agencies, or obligations issued by corporations and financial
institutions.
IT IS IMPORTANT TO NOTE THAT EACH PORTFOLIO SEEKS TO MAINTAIN, BUT DOES
NOT GUARANTEE, A STABLE NET ASSET VALUE OF $1.00 PER SHARE. IN ADDITION, NONE OF
THE PORTFOLIOS' SHARES IS GUARANTEED OR INSURED BY THE FDIC, THE U.S.
GOVERNMENT, OR ITS AGENCIES.
FEES AND EXPENSES
The Portfolios are offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in each Portfolio's expense ratio.
IMPORTANT NOTE
This prospectus is intended for institutional clients and for participants in
employer-sponsored retirement or savings plans. Another version--for individuals
who would like to open a personal account--can be obtained by calling Vanguard
at 1-800-662-7447.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS
Statements of Additional Information (dated December 2, 1996) containing more
information about the Portfolios are, by reference, part of this prospectus and
may be obtained without charge by contacting Vanguard (see back cover).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and policies of the three
Portfolios. To highlight terms and concepts important to mutual fund investors,
we have provided "Plain Talk" explanations along the way. Reading the prospectus
will help you to decide whether one or more of the Portfolios is the right
investment for your needs. We suggest that you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 5
PORTFOLIO PROFILE Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
WHO SHOULD INVEST (page 7)
- - Investors seeking a money market mutual fund as part of a balanced and
diversified investment program.
- - Investors uncomfortable with share-price fluctuations.
- - Investors seeking income.
WHO SHOULD NOT INVEST
- - Investors seeking growth of their investment over time.
- - Investors looking for a fund that invests in stocks or bonds.
RISKS OF THE PORTFOLIOS (pages 7-10)
Each Portfolio is subject to income risk (the chance that falling short-term
interest rates will cause the Portfolios' income--and thus the Portfolios'
return--to decline) and manager risk (the chance that poor security selection
will cause a Portfolio to lag similar funds). In addition, while the credit
quality of all three Portfolios is expected to be very high, each Portfolio is
subject to some degree of credit risk (the chance that the issuer of a security
will be unable to pay interest and principal in a timely manner). More detailed
information about risk--including risks specific to each Portfolio--is provided
beginning on page 8.
DIVIDENDS (page 13)
Dividends are declared daily and paid on the first business day of each month.
In participant accounts, all distributions are automatically reinvested.
INVESTMENT ADVISER (page 14)
Vanguard Fixed Income Group manages each of the three Portfolios.
AVERAGE ANNUAL TOTAL RETURNS--PERIODS ENDED MAY 31, 1996
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
-------------------------
<S> <C> <C> <C>
Treasury Money
Market Portfolio* 5.3% 4.2% 5.7%
Lipper U.S. Treasury
Money Market Average 5.0 3.9 5.5
Federal Portfolio 5.5% 4.4% 5.9%
Lipper U.S. Government
Money Market Average 5.0 3.9 5.4
Prime Portfolio 5.5% 4.4% 6.0%
Lipper Non-Government
Money Market Average 5.1 4.0 5.6
- -------------------------------------------------
</TABLE>
- ----------
*Formerly known as Vanguard Money Market Reserves--U.S. Treasury Portfolio.
In evaluating past performance, remember that it is not indicative of future
performance. Performance figures include the reinvestment of any dividends. The
returns shown are net of expenses, but they do not reflect income taxes an
investor would have incurred. 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.
1
<PAGE> 6
PORTFOLIO PROFILE (continued) Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
TREASURY
MONEY MARKET* FEDERAL PRIME
- ------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 12/2/96 7/13/81 6/4/75
NET ASSETS AS OF 5/31/96: $2.76 billion $2.81 billion $19.88 billion
EXPENSE RATIO FOR THE YEAR
ENDED 11/30/95: 0.32% 0.32% 0.32%
NEWSPAPER ABBREVIATION:** VangTrsy VangFdl VangPr
VANGUARD FUND NUMBER: 050 033 030
- ------------------------------------------------------------------------
</TABLE>
* On 12/2/96, Vanguard Money Market Reserves--U.S. Treasury Portfolio was
reorganized as a separate portfolio of the Vanguard Treasury Fund and renamed
the Treasury Money Market Portfolio of Vanguard Treasury Fund.
** Money market portfolios are listed separately from the daily mutual fund
listings.
2
<PAGE> 7
PORTFOLIO EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in one of the Portfolios.
As noted in this table, you do not pay fees of any kind when you buy, sell, or
exchange shares of any Portfolio:
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
The next table illustrates the operating expenses that you would incur as a
shareholder of each Portfolio. These expenses are deducted from the Portfolio's
income before it is paid to you. Expenses include investment advisory fees as
well as the costs of maintaining accounts, administering the Portfolios,
providing shareholder services, and other activities. The expenses shown in the
table are based upon expenses incurred in the fiscal year ended November 30,
1995 (the expenses for the Treasury Money Market Portfolio are based upon those
of Vanguard Money Market Reserves--U.S. Treasury Portfolio for its fiscal year
ended November 30, 1995).
ANNUAL PORTFOLIO OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
TREASURY MONEY FEDERAL PRIME
MARKET PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.26% 0.26% 0.26%
Investment Advisory Expenses: 0.01% 0.01% 0.01%
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Costs: 0.03% 0.03% 0.03%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.02% 0.02% 0.02%
---- ---- ----
Total Other Expenses: 0.05% 0.05% 0.05%
---- ---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.32% 0.32% 0.32%
==== ==== ====
</TABLE>
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income a fund achieves. Even seemingly
small differences in fund expenses can, over time, have a dramatic impact on a
fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the average net
assets of the fund. For instance, the Prime Portfolio's expense ratio in fiscal
year 1995 was 0.32%, or $3.20 per $1,000 of average net assets. The average
money market fund had expenses in 1995 of 0.74%, or $7.40 per $1,000 of average
net assets, according to Lipper Analytical Services, Inc., which reports on the
mutual fund industry.
3
<PAGE> 8
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Portfolio provides a return of 5% a year and (2) that you redeem your
investment at the end of each period.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Treasury Money Market $3 $10 $18 $41
Federal $3 $10 $18 $41
Prime $3 $10 $18 $41
- ---------------------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
4
<PAGE> 9
FINANCIAL HIGHLIGHTS
The following financial highlights tables show the results for a share
outstanding for each of the last ten years ended November 30, 1995, and the six
months ended May 31, 1996. The financial highlights for the fiscal years ended
November 30 were audited by Price Waterhouse LLP, independent accountants. The
information for the six-month period ended May 31, 1996, has not been audited by
independent accountants. You should read this information in conjunction with
each Portfolio's financial statements and accompanying notes, which appear in
Vanguard Money Market Reserves' most recent Annual Report (along with the audit
report from Price Waterhouse) and Semi-Annual Report to shareholders. The Annual
Report and Semi-Annual Report (which include information on the U.S. Treasury
Portfolio) are incorporated by reference in the Statement of Additional
Information and in this prospectus, and contain a more complete discussion of
each Portfolio's performance. You may have the Reports sent to you without
charge by writing to or calling Vanguard (see back cover).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
TREASURY MONEY MARKET PORTFOLIO*
------------------------------------------------------------------
SIX MONTHS YEAR ENDED NOVEMBER 30,
ENDED ------------------------------------------------------------------
5/31/96 1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .025 .053 .036 .028 .036 .058 .077
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- -- -- -- -- --
---------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .025 .053 .036 .028 .036 .058 .077
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.025) (.053) (.036) (.028) (.036) (.058) (.077)
Distributions from
Realized Capital Gains -- -- -- -- -- -- --
---------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.025) (.053) (.036) (.028) (.036) (.058) (.077)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
==================================================================================================================
TOTAL RETURN 2.53% 5.47% 3.63% 2.86% 3.68% 5.94% 8.02%
==================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $2,766 $2,527 $2,056 $1,751 $2,321 $2,092 $1,594
Ratio of Expenses to
Average Net Assets 0.32%** 0.32% 0.32% 0.32% 0.30% 0.30% 0.30%
Ratio of Net Investment
Income to Average
Net Assets 4.98%** 5.33% 3.59% 2.83% 3.60% 5.76% 7.74%
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
TREASURY MONEY MARKET PORTFOLIO*
-----------------------------------------
YEAR ENDED NOVEMBER 30,
------------------------------------------
1989 1988 1987 1986
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .085 .068 .058 .060
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- -- --
------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .085 .068 .058 .060
- ---------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.085) (.068) (.058) (.060)
Distributions from
Realized Capital Gains -- -- -- --
------------------------------------------
TOTAL DISTRIBUTIONS (.085) (.068) (.058) (.060)
- ---------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $1.00 $1.00 $1.00 $1.00
===========================================================================
TOTAL RETURN 8.89% 7.02% 5.99% 6.15%
===========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $412 $140 $113 $56
Ratio of Expenses to
Average Net Assets 0.31%+ 0.70%+ 0.79%+ 0.93%+
Ratio of Net Investment
Income to Average
Net Assets 8.44% 6.85% 5.80% 6.00%
</TABLE>
* Formerly known as Vanguard Money Market Reserves--U.S. Treasury Portfolio.
** Annualized.
+ Insurance premiums represent 0.40%, 0.42%, 0.44%, and 0.44%.
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the Treasury Money Market Portfolio as
an example. The Treasury Money Market Portfolio (known as the U.S. Treasury
Portfolio until December 2, 1996) began fiscal 1995 with a net asset value
(price) of $1.00 per share. During the year, the Portfolio earned $0.053 per
share from investment income (interest and dividends). All of these earnings
were returned to shareholders in the form of dividend distributions. The
earnings ($0.053 per share) less distributions ($0.053 per share) resulted in a
share price of $1.00 at the end of the year. Assuming that the shareholder had
reinvested the distribution in the purchase of more shares, total return from
the Portfolio was 5.47% for the year.
As of November 30, 1995, the Portfolio had nearly $2.53 billion in net assets;
an expense ratio of 0.32% ($3.20 per $1,000 of net assets); and net investment
income amounting to 5.33% of its average net assets.
5
<PAGE> 10
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
Refer to the detailed explanation on page 5.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
FEDERAL PORTFOLIO
----------------------------------------------------------------------------
SIX MONTHS YEAR ENDED NOVEMBER 30,
ENDED ----------------------------------------------------------------------------
5/31/96 1995 1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
---------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .026 .056 .038 .029 .038 .060 .078 .088 .070
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- -- -- -- -- -- -- --
---------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .026 .056 .038 .029 .038 .060 .078 .088 .070
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.026) (.056) (.038) (.029) (.038) (.060) (.078) (.088) (.070)
Distributions from
Realized Capital Gains -- -- -- -- -- -- -- -- --
---------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.026) (.056) (.038) (.029) (.038) (.060) (.078) (.088) (.070)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
=======================================================================================================================
TOTAL RETURN 2.61% 5.77% 3.82% 2.98% 3.83% 6.18% 8.14% 9.15% 7.20%
=======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $2,815 $2,637 $2,196 $1,907 $1,986 $2,000 $1,950 $1,531 $1,214
Ratio of Expenses to
Average Net Assets 0.32%* 0.32% 0.32% 0.32% 0.30% 0.30% 0.30% 0.28% 0.33%
Ratio of Net Investment
Income to Average
Net Assets 5.14%* 5.61% 3.78% 2.94% 3.76% 6.01% 7.90% 8.78% 7.00%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------
FEDERAL PORTFOLIO
-----------------------
YEAR ENDED NOVEMBER 30,
-----------------------
1987 1986
- ------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $1.00 $1.00
----------------------
INVESTMENT OPERATIONS
Net Investment Income .061 .064
Net Realized and
Unrealized Gain (Loss)
on Investments -- --
----------------------
TOTAL FROM INVESTMENT
OPERATIONS .061 .064
- ------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.061) (.064)
Distributions from
Realized Capital Gains -- --
----------------------
TOTAL DISTRIBUTIONS (.061) (.064)
- ------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $1.00 $1.00
======================================================
TOTAL RETURN 6.25% 6.56%
======================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $839 $545
Ratio of Expenses to
Average Net Assets 0.37% 0.48%
Ratio of Net Investment
Income to Average
Net Assets 6.10% 6.40%
- ------------------------------------------------------
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PRIME PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR ENDED NOVEMBER 30,
ENDED -----------------------------------------------------------------------------------
5/31/96 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-----------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .026 .057 .038 .030 .038 .062 .080 .090
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .026 .057 .038 .030 .038 .062 .080 .090
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.026) (.057) (.038) (.030) (.038) (.062) (.080) (.090)
Distributions from
Realized Capital Gains -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.026) (.057) (.038) (.030) (.038) (.062) (.080) (.090)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============================================================================================================================
TOTAL RETURN 2.63% 5.82% 3.87% 3.02% 3.89% 6.39% 8.32% 9.40%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $19,880 $18,764 $15,109 $12,367 $12,638 $13,496 $13,579 $11,067
Ratio of Expenses to
Average Net Assets 0.32%* 0.32% 0.32% 0.32% 0.30% 0.30% 0.30% 0.28%
Ratio of Net Investment
Income to Average
Net Assets 5.21%* 5.64% 3.84% 2.98% 3.82% 6.20% 8.06% 9.05%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------
PRIME PORTFOLIO
- -----------------------------------------------------------
YEAR ENDED NOVEMBER 30,
-------------------------------
1988 1987 1986
- -----------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $1.00 $1.00 $1.00
------------------------------
INVESTMENT OPERATIONS
Net Investment Income .072 .063 .066
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- --
------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .072 .063 .066
- -----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.072) (.063) (.066)
Distributions from
Realized Capital Gains -- -- --
------------------------------
TOTAL DISTRIBUTIONS (.072) (.063) (.066)
- -----------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $1.00 $1.00 $1.00
===========================================================
TOTAL RETURN 7.47% 6.49% 6.78%
===========================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $6,863 $4,088 $2,186
Ratio of Expenses to
Average Net Assets 0.33% 0.37% 0.48%
Ratio of Net Investment
Income to Average
Net Assets 7.28% 6.30% 6.60%
- -----------------------------------------------------------
</TABLE>
*Annualized.
6
<PAGE> 11
From time to time, the Vanguard Funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
any capital appreciation. Neither yield nor total return should be used to
predict the future performance of a fund.
================================================================================
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in the Treasury
Money Market, Federal, and Prime Portfolios. It is important to keep in mind one
of the main axioms of investing: the higher the risk of losing money, the higher
the potential reward. The reverse, also, is generally true: the lower the risk,
the lower the potential reward. As you consider an investment in one or more of
the Portfolios, you should weigh your desire for income with your need to
protect your investment.
Look for this "warning flag" symbol [FLAG GRAPHIC] throughout the
prospectus. It is used to mark detailed information about each type of risk
that you, as a shareholder any of the three Portfolios, may confront.
================================================================================
THE PORTFOLIOS' OBJECTIVES
Each Portfolio seeks to provide current income while maintaining liquidity and a
stable net asset value of $1.00 per share. These objectives are fundamental,
which means that they cannot be changed unless a majority of Portfolio
shareholders vote to do so.
WHO SHOULD INVEST
Any of the Portfolios may be a suitable investment for you if:
- - You wish to add a money market portfolio to your existing holdings, which
could include other cash--as well as stock and bond--investments.
- - You want an investment that does not fluctuate in value.
- - You want income.
- - You characterize your investment temperament as "very conservative."
Each Portfolio is intended to serve most investors' short-term needs.
However, investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Portfolio's shareholders. To
minimize such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Portfolios have adopted the following policies:
- - Each of the Portfolios reserves the right to reject any purchase request--
including from other Vanguard Funds--that it regards as disruptive to the
efficient management of the Portfolio. This could be because of the timing of
the investment or because of a history of excessive trading by the investor.
- - The Portfolios reserve the right to stop offering shares at any time.
7
<PAGE> 12
PLAIN TALK ABOUT
CASH RESERVES
Cash reserves are any investment that can be easily converted into cash with
little or no cost or penalty. A money market mutual fund, a checking account or
certificate of deposit (CD) at a bank, and Treasury bills issued by the U.S.
government are examples of cash reserves. Keep in mind, however, that each type
varies in its credit quality and its ability to provide a competitive yield.
If you own shares of one of the Portfolios as an investment option in an
employer-sponsored retirement or savings plan, your plan dictates the rules
governing exchanges. Contact your plan administrator for details.
INVESTMENT POLICIES
This section explains how the Portfolios' investment adviser pursues the
objectives of income, liquidity, and stability. It also explains several
important risks--income risk, manager risk, and credit risk--faced by Portfolio
shareholders. Unlike the Portfolios' objectives, the Portfolio's policies are
not fundamental and can be changed by the Funds' Boards of Directors or Trustees
without shareholder approval. However, before making any important change in its
policies, the Funds will give shareholders 30-days notice, in writing.
MARKET EXPOSURE
Each Portfolio invests in very high-quality money market instruments--also known
as cash reserves--that are considered short term (that is, they mature in 13
months or less). Each Portfolio will maintain a dollar-weighted average maturity
of 90 days or less.
[FLAG GRAPHIC] EACH PORTFOLIO IS SUBJECT TO INCOME RISK, WHICH IS THE
POSSIBILITY THAT A PORTFOLIO'S DIVIDENDS (THAT IS, INCOME) WILL
DECLINE BECAUSE OF FALLING INTEREST RATES. BECAUSE THE
PORTFOLIOS' INCOME IS BASED ON SHORT-TERM INTEREST RATES--WHICH
CAN FLUCTUATE SIGNIFICANTLY OVER SHORT PERIODS--INCOME RISK IS
EXPECTED TO BE HIGH FOR ALL THREE PORTFOLIOS.
To illustrate how the yields of short-term securities can fluctuate as
interest rates rise and fall, the following chart shows month-end yields for
short-term securities (as represented by 90-day Treasury bills) and long-term
securities (as represented by 30-year U.S. Treasury bonds) over the past five
years. Note in this illustration how short-term yields tend to fluctuate more
than longer-term yields.
SHORT-TERM AND LONG-TERM MONTH-END YIELDS
(1991-1995)
[CHART GRAPHIC]
These yields reflect past performance and should not be regarded as an
indication of future returns from either Treasury bills or bonds as a whole or
any of the Portfolios in particular.
8
<PAGE> 13
SECURITY SELECTION
Vanguard Fixed Income Group, adviser to the Portfolios, selects high-quality
money market instruments. Each Portfolio focuses on securities of a particular
class of issuer (for example, the U.S. Government, U.S. Government agencies,
financial institutions).
[FLAG GRAPHIC] EACH PORTFOLIO IS SUBJECT TO MANAGER RISK, WHICH IS THE
POSSIBILITY THAT VANGUARD FIXED INCOME GROUP MAY DO A POOR JOB
OF SELECTING SECURITIES.
The Treasury Money Market Portfolio invests solely in securities whose
interest and principal payments are backed by the full faith and credit of the
U.S. Government. At least 65% of the Portfolio's assets will always be invested
in U.S. Treasury securities. The remainder of the Portfolio's assets may include
securities issued by the U.S. Treasury and other government agencies, such as
the Government National Mortgage Association (GNMA), the Small Business
Administration, and the Federal Financing Bank.
The Federal Portfolio invests in securities whose interest and principal
payments are backed by the full faith and credit of the U.S. Government or by an
agency of the Government (these agency securities are not backed by the full
faith and credit of the U.S. Government). These agencies include, among others,
the Federal Home Loan Bank, the Federal National Mortgage Association (FNMA),
the Tennessee Valley Authority, and the Federal Land Bank.
The Prime Portfolio invests in certificates of deposit, bankers
acceptances, commercial paper, and other money market securities rated Prime-1
by Moody's Investor Service, Inc., or A-1 by Standard & Poor's Corporation.
Securities that are unrated must be issued by a corporation with a debt rating
of Aa3 or better by Moody's or AA- or better by Standard & Poor's. The Prime
Portfolio also invests in short-term corporate, state, and municipal obligations
rated Aa3 or better by Moody's or AA- or better by Standard & Poor's; and
securities that are considered suitable for the Federal Portfolio (see the
previous paragraph).
The Prime Portfolio may also invest in Eurodollar and Yankee obligations,
which are certificates of deposit issued in U.S. dollars by foreign banks and
foreign branches of U.S. banks. Eurodollar and Yankee obligations have the same
risks, such as income risk and credit risk, as U.S. money market instruments.
Other risks of Eurodollar and Yankee obligations include the possibility that a
foreign government will not let U.S. dollar-denominated assets leave the
country; the possibility that the banks that issue Eurodollar obligations may
not be subject to the same regulations as U.S. banks; and the possibility that
adverse political or economic developments will affect investments in a foreign
country. Before the Portfolio's adviser selects a Eurodollar or Yankee
obligation, however, any foreign issuer undergoes the same credit-quality
analysis and tests of financial strength as the issuers of domestic securities.
PLAIN TALK ABOUT
MONEY MARKET INSTRUMENTS
The term "money market instruments" refers to a variety of short-term
investments, usually with a maturity of 13 months or less. Some common types are
Treasury bills and notes, which are securities issued by the U.S. Government;
commercial paper, which is a promissory note issued by a large company or
financial firm; bankers acceptances, which are credit instruments guaranteed by
a bank; and negotiable certificates of deposit, which are issued by banks in
large denominations.
PLAIN TALK ABOUT
CREDIT QUALITY AND RATINGS
A money market instrument's credit quality depends upon the issuer's ability to
pay interest on the security and, ultimately, to repay the debt. The lower the
rating by one of the independent bond-rating agencies (for example, Moody's or
Standard & Poor's), the greater the chance (in the rating agency's opinion) the
security's issuer will default, or fail to meet its payment obligations. Direct
U.S. Treasury obligations (that is, securities backed by the U.S. Government)
carry the highest credit ratings. All things being equal, money market
instruments with greater credit risk offer higher yields.
9
<PAGE> 14
PLAIN TALK ABOUT
REPURCHASE AGREEMENTS
A means of investing money for a short period, repurchase agreements are
contracts in which a U.S. commercial bank or securities dealer sells government
securities and agrees to repurchase the securities on a specific date (normally
the next business day) and at a specific price.
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value, or interest rate, is based on
(or "derived" from) a traditional security (such as a stock or bond), money
market benchmark (such as U.S. Treasury bill rates or Federal Funds Effective
Rate), an asset (such as a commodity like gold), or a market index (such as the
S&P 500 Index).
In addition, each Portfolio may invest up to 10% of its net assets in
restricted or illiquid securities that may not have price quotations immediately
available. Restricted or illiquid securities are not freely marketable or are
subject to sale restrictions according to the Securities Act of 1933.
[FLAG GRAPHIC] EACH PORTFOLIO IS SUBJECT, TO A LIMITED EXTENT, TO CREDIT RISK,
WHICH IS THE POSSIBILITY THAT THE ISSUER OF A SECURITY WILL BE
UNABLE TO REPAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
The three Portfolios differ mainly in terms of credit risk. In absolute
terms, each Portfolio's credit quality is very high.
In relative terms, the Treasury Money Market Portfolio, which invests in
securities backed by the full faith and credit of the U.S. Government, offers
the lowest credit risk--and generally the lowest yield--of the three Portfolios.
Not all of the securities included in the Federal Portfolio are backed by
the full faith and credit of the U.S. Government, and so the Portfolio's
potential credit risk and yield are somewhat higher than the Treasury Money
Market Portfolio.
While the credit quality of its securities is very high, the Prime
Portfolio invests in money market securities of private financial and
nonfinancial corporations; therefore, it offers the highest credit risk and
generally the highest yield of the three Portfolios.
Bear in mind that, while each Portfolio invests in high-quality money
market instruments, the three Portfolios are not insured or guaranteed by the
FDIC or any other agency of the U.S. Government.
[FLAG GRAPHIC] THE PRIME AND FEDERAL PORTFOLIOS RESERVE THE RIGHT TO INVEST IN
REPURCHASE AGREEMENTS, WHICH ARE SUBJECT TO SPECIFIC RISKS.
Repurchase agreements carry several risks. For instance, if the seller is
unable to repurchase the securities as promised, the Portfolio may experience a
loss when trying to sell the securities itself. Or, if the seller becomes
insolvent, a bankruptcy court may determine that the securities do not belong to
the Portfolio and order that the securities be sold to pay off the seller's
debts. The Portfolio's adviser believes that these risks can be controlled
through careful security selection and monitoring.
[FLAG GRAPHIC] THE PORTFOLIOS RESERVE THE RIGHT TO INVEST, TO A LIMITED EXTENT,
IN FLOATING-RATE SECURITIES, WHICH ARE TRADITIONAL TYPES OF
DERIVATIVES.
A floating-rate security's interest rate, as the name implies, is not set;
instead, it fluctuates periodically. Generally, the security's yield is based on
a U.S. dollar-based interest-rate benchmark such as the Federal Funds Rate, the
90-day Treasury bill rate, or the London
10
<PAGE> 15
Interbank Offered Rate (LIBOR). These securities reset their yields on a
periodic basis (for example, daily, weekly, or quarterly) and are closely
correlated to changes in money market interest rates.
The Portfolios will not use derivatives for speculative purposes or as
leveraged investments that magnify the risks of an investment.
PORTFOLIO TURNOVER
Because of the short-term nature of money market instruments, the turnover rate
for each Portfolio is expected to be high. This high turnover rate should not
increase Portfolio costs, however, since brokerage commissions are not usually
charged for the purchase or sale of money market instruments.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolios have adopted limits
on some of their investment policies. Specifically, each Portfolio will not:
- - Invest more than 5% of its assets in the securities of any one issuer,
excluding the U.S. Government.
- - Buy more than 10% of any class of securities of any issuer.
- - Invest more than 25% of its assets in any one industry, excluding obligations
of the U.S. Government, certificates of deposit, and U.S. bankers
acceptances.
- - Borrow money from a bank, except for temporary or emergency purposes. Amounts
borrowed will not exceed 15% of the Portfolio's net assets. When borrowing
exceeds 5% of the Portfolio's total net assets, the Portfolio will not make
additional investments. In borrowing, each Portfolio may be leveraged and may
rise or fall in value more rapidly.
The limitations listed in this prospectus and in the Statement of
Additional Information are fundamental and may be changed only by approval of a
majority of the Funds' shareholders.
INVESTMENT PERFORMANCE
The Portfolios invest in short-term securities; therefore, their
performance is closely correlated to short-term interest rates. Historically,
short-term interest rates' up-and-down fluctuations have been influenced
primarily by Federal Reserve policy and by market supply and demand.
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
11
<PAGE> 16
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED 5/31/96
[THREE CHART GRAPHICS]
*Formerly known as Vanguard Money Market Reserves-U.S. Treasury Portfolio.
The results shown above represent the Portfolios' "average annual total
return" performance, which assumes that any distributions of dividends were
reinvested for the indicated periods. Also included is comparative information
on industry money market averages. The chart does not make any allowance for
Federal, state, or local income taxes that shareholders must pay on a current
basis.
12
<PAGE> 17
SHARE PRICE
Each Portfolio's share price, called its net asset value, is expected to remain
at a constant $1.00. Although the stable share price is not guaranteed, the
Portfolios are managed and securities are purchased to maintain that price.
DIVIDENDS AND TAXES
Each Portfolio's dividends accrue daily. On the first business day of every
month, the Portfolios distribute to shareholders virtually all of their income
from interest as dividend distributions.
If you own shares of a Portfolio as an investment option in an
employer-sponsored retirement or savings plan, these dividends will be
reinvested in additional Portfolio shares and accumulate on a tax-deferred
basis. You will not owe taxes on these distributions until you begin
withdrawals. You should consult your plan administrator, your plan's Summary
Plan document, or your own tax adviser about the tax consequences of an
investment in a Portfolio or of any plan withdrawals.
If your Portfolio investment is not part of an employer-sponsored plan, you
can receive distributions in cash, or you may have them automatically reinvested
in more shares of the Portfolio. Dividend distributions--whether received in
cash or reinvested in additional shares--are subject to Federal (and possibly
state and local) income taxes, no matter how long you have held the shares in
the Portfolio. In addition, if your investment is not part of an
employer-sponsored plan, you may be eligible for other tax considerations:
- - Depending on your tax rules, the portion of a Portfolio's dividends that
comes from U.S. securities and other "direct" U.S. Treasury obligations may
be exempt state and local taxes. The Portfolios will notify you each year
how much, any, of your distribution may qualify for this exemption.
- - As part of a business trust and a portfolio made up of direct U.S. Government
obligations, the Treasury Money Market Portfolio should be exempt from any
intangibles taxes. The Portfolio will notify you each year how much, if any,
of Portfolio's assets qualify for this exemption.
You should consult your own tax adviser about other tax consequences of an
investment in any of the Portfolios.
THE FUNDS AND VANGUARD
Vanguard Treasury Fund and Vanguard Money Market Reserves are members of The
Vanguard Group, a family of more than 30 investment companies with more than 90
distinct investment portfolios and total net assets of more than $230 billion.
All of the Vanguard Funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group, Inc. is the only MUTUAL mutual fund company. It is owned
jointly by the Funds it oversees and by the shareholders in those Funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its Funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to Fund shareholders in
the form of lower operating expenses.
13
<PAGE> 18
PLAIN TALK ABOUT
THE PORTFOLIOS' ADVISER
Vanguard Fixed Income Group provides investment advisory services to some 40
Vanguard Portfolios; as of November 30, 1995, the Group managed some $67 billion
in assets.
The managers responsible for the Portfolios' investments are:
IAN A. MACKINNON, Senior Vice President of Vanguard; 22 years fixed income
investment experience, 16 years primary responsibility for Vanguard's internal
fixed income policy and strategy; B.A. from Lafayette College, M.B.A. from
Pennsylvania State University.
ROBERT F. AUWAERTER, Principal of Vanguard and Portfolio Manager; 18 years
fixed income investment experience; B.S., the University of Pennsylvania,
M.B.A., Northwestern University.
JOHN HOLLYER, Principal of Vanguard and Portfolio Manager; 9 years fixed
income investment experience; B.S. from the University of Pennsylvania.
Mr. Auwaerter and Mr. Hollyer manage the Portfolios on a day-to-day basis.
Mr. MacKinnon is responsible for setting the Portfolios' broad investment
policies and for overseeing the Portfolio managers.
Vanguard also provides marketing services to the Funds. Although
shareholders do not pay sales commissions or 12b-1 marketing fees, each Fund
pays its allocated share of The Vanguard Group's costs.
A list of each Fund's Directors (or Trustees) and Officers, and their
present positions and principal occupations during the past five years, can be
found in each Fund's Statement of Additional Information.
INVESTMENT ADVISER
Vanguard Fixed Income Group, P.O. Box 2600, Valley Forge, PA 19482, provides
advisory services on an at-cost basis to the Treasury Money Market, Federal, and
Prime Portfolios. For the year ended November 30, 1995, the three Portfolios
paid a total of $2,788,000 in investment advisory expenses ($297,000 for the
U.S. Treasury Portfolio, $310,000 for the Federal Portfolio, and $2,181,000 for
the Prime Portfolio). For the six months ended May 31, 1996, the three
Portfolios paid a total of $1,461,000 ($152,000 for the U.S. Treasury Portfolio,
$155,000 for the Federal Portfolio, and $1,154,000 for the Prime Portfolio).
The Group places all orders for purchases and sales for Portfolio
securities, and is directed to get the best available price and most favorable
execution with respect to all transactions.
GENERAL INFORMATION
Vanguard Money Market Reserves, Inc. is organized as a corporation under the
laws of the State of Maryland. Until December 2, 1996, the Treasury Money Market
Portfolio was a Portfolio of Vanguard Money Market Reserves, known as the U.S.
Treasury Portfolio. On that date, the Treasury Money Market Portfolio was
reorganized--through a transfer of assets into a Portfolio of Vanguard Treasury
Fund, a Delaware business trust.
Shareholders of the Funds have rights and privileges similar to those
enjoyed by other corporate shareholders. For example, shareholders will not be
responsible for any liabilities of the trust or corporation. If any matters are
to be voted on by shareholders (such as a change in a fundamental investment
objective or the election of directors or trustees), each share outstanding at
that point would be entitled to one vote.
14
<PAGE> 19
INVESTING WITH VANGUARD
FOR PLAN PARTICIPANTS
One or more of the three Portfolios described in this prospectus is an
investment option in your retirement or savings plan. Your plan administrator or
your employee benefits office can provide you with detailed information on how
to participate in your plan and how to elect a Portfolio as an investment
option.
- - If you have any questions about a Portfolio or Vanguard, including the
Portfolio's investment objective, strategies, or risks, contact Vanguard's
Participant Services Department, toll-free, at 1-800-523-1188.
- - If you have about your account, contact your plan administrator or the
organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of a Portfolio's shares are processed
as soon as they have been received by Vanguard in good order. Good order means
that your request includes complete information on your contribution, exchange,
or redemption, and that Vanguard has received the appropriate assets.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. However,
because excessive exchanges can potentially disrupt the management of a
Portfolio and increase its transaction costs, Vanguard reserves the right to
refuse any exchange request. In addition, certain investment options,
particularly funds made up of company stock or investment contracts, may be
subject to unique restrictions. Contact your plan administrator for details on
the exchange policies that apply to your plan.
Before making an exchange, you should consider the following:
- - Before you exchange to another Vanguard Fund available in your plan, you
should read Fund's prospectus. Contact Participant Services, toll-free, at
1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.
FOR OTHER INSTITUTIONAL INVESTORS
If you have questions about the Treasury Money Market, Federal, or Prime
Portfolios, including how to establish an account, call Vanguard, toll-free, at
1-800-523-1036.
If you have questions about an existing account, contact your Vanguard
account administrator.
TRANSACTIONS
Purchases, exchanges, or redemptions of a Portfolio's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request
15
<PAGE> 20
includes complete information on your purchase, exchange, or redemption, and
that Vanguard has received the appropriate assets.
Vanguard must consider the interests of all Portfolio shareholders and so
reserves the right to . . .
- - Delay or reject any purchase or exchange request that may disrupt the
Portfolio's or performance.
- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at anytime, without notice.
- - Take up to seven days to deliver your redemption proceeds.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ONLINE(sm) Use your personal computer to learn more about
KEYWORD: Vanguard Vanguard Funds and services; map out a long-term
investment strategy; and ask questions, make
suggestions, and send messages to Vanguard. Vanguard
is offered through America Online(R) (AOL). To
establish an AOL account, call 1-800-238-6336.
VANGUARD ON THE Use your personal computer to visit Vanguard's
WORLD WIDE WEB education-oriented website, which provides timely
http://www.vanguard.com news and information about Vanguard Funds and
services; an online that offers a variety of mutual
fund classes; and easy-to-use, tools to help you
create your own investment and retirement strategies.
SHARES OF THE PORTFOLIOS MAY ONLY BE SOLD IN THOSE STATES IN WHICH THEY ARE
REGISTERED. THE PORTFOLIOS' SHARES ARE CURRENTLY REGISTERED FOR SALE IN ALL 50
STATES, AND THE PORTFOLIOS INTENDS TO MAINTAIN SUCH REGISTRATION.
16
<PAGE> 21
GLOSSARY OF INVESTMENT TERMS
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments, and
U.S. Treasury bills.
DIVERSIFICATION
Spreading your investments among many issuers (that is, organizations that sell
securities).
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by the
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FIXED INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
LIQUIDITY
The degree of a security's marketability (that is, how quickly the security can
be sold at a fair price and converted to cash).
MONEY MARKET FUND
A mutual fund that seeks to provide income, liquidity, and a stable share price
by investing in very short-term, liquid investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 22
[VANGUARD GROUP LOGO]
THE VANGUARD GROUP(R)
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482
FOR PARTICIPANTS IN EMPLOYER-SPONSORED PLANS
PARTICIPANT SERVICES DEPARTMENT
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
For information on the Vanguard Funds in your plan, Monday through Friday
8:30 a.m. to 7:00 p.m., Eastern time
FOR OTHER INSTITUTIONAL INVESTORS
1-800-523-1036
For information on Vanguard Funds and services
ELECTRONIC ACCESS TO THE VANGUARD MUTUAL FUND EDUCATION AND INFORMATION
On America Online(R)
Keyword: Vanguard
On the World Wide Web
http://www.vanguard.com
To send e-mail to Vanguard
[email protected]
(C) 1997 Vanguard Marketing CENTER Corporation, Distributor
I030N
<PAGE> 23
PART B
VANGUARD MONEY MARKET RESERVES
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 24, 1997
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated December 2, 1996 for the Retail version and
January 24, 1997 for the Institutional version). To obtain the Prospectus please
call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies........................................................ 1
Investment Limitations.................................................................... 2
Yield and Total Return.................................................................... 4
Calculation of Yield...................................................................... 4
Purchase of Shares........................................................................ 5
Redemption of Shares...................................................................... 5
Shareholder Services...................................................................... 5
Performance Measures...................................................................... 6
Management of the Fund.................................................................... 9
Description of Shares and Voting Rights................................................... 12
Financial Statements...................................................................... 12
Appendix--Description of Securities and Ratings........................................... 12
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the investment objective and policies set
forth in the Fund's Prospectus:
REPURCHASE AGREEMENTS The Prime and Federal Portfolios may invest in
repurchase agreements with commercial banks, brokers or dealers either for
defensive purposes due to market conditions or to generate income from its
excess cash balances. A repurchase agreement is an agreement under which the
Portfolio acquires a money market instrument (generally a security issued by the
U.S. Government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed upon price and date (normally, the next business day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the Portfolio and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Portfolio (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held by a custodian bank
until repurchased. In addition, the Fund's Board of Trustees will monitor a
Portfolio's repurchase agreement transactions generally and will establish
guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker or dealer party to a repurchase agreement
with the Portfolio. No more than an aggregate of 10% of a Portfolio's net
assets, at the time of investment, will be invested in repurchase agreements
having maturities longer than seven days and securities subject to legal or
contractual restrictions on resale for which there are no readily available
market quotations. See "Illiquid Securities" below.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control
1
<PAGE> 24
of the Portfolio and therefore the realization by the Portfolio on such
collateral may be automatically stayed. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other party to the
agreement. While each Portfolio's management acknowledges these risks, it is
expected that they can be controlled through careful monitoring procedures.
RESTRICTED SECURITIES Each Portfolio may invest in restricted securities
(privately placed debt securities) and other securities which are not readily
marketable, but will not acquire such securities if as a result they, together
with the aggregate of other securities for which no quotations are readily
available, would comprise more than 10% of the value of the Portfolio's net
assets. Pursuant to Section 4(2) of the Securities Act of 1933 and Rule 144A
under the Securities Act of 1933, as amended, if a substantial market among
qualified institutional buyers develops for restricted securities held by any
Portfolio, the Fund intends to treat such securities as liquid securities, in
accordance with procedures approved by the Fund's Board of Trustees.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933. Where registration is required, a
Portfolio may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Portfolio may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Portfolio might obtain a less favorable price than prevailed
when it decided to sell. Restricted securities will be priced at fair value as
determined in good faith by the Board of Trustees. If through the appreciation
of restricted securities or the depreciation of unrestricted securities, a
Portfolio should be in a position where more than 10% of the value of its net
assets are invested in illiquid assets, including restricted securities, the
Portfolio will take appropriate steps to protect liquidity.
ILLIQUID SECURITIES Illiquid securities are securities that may not be
sold or disposed of in the ordinary course of business within seven business
days at approximately the value at which they are being carried on a Fund's
books. An illiquid security includes repurchase agreements which have a maturity
of longer than seven days, securities which are illiquid by virtue of the
absence of a readily available market, and demand instruments with a demand
notice exceeding seven days. Illiquid securities may include securities that are
not registered under the Securities Act of 1933 (the "1933 Act"); however,
unregistered securities that can be sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act will not be considered illiquid so
long as it is determined by the Fund's adviser that an adequate trading market
exists for the security. From time to time, the Fund's Board of Trustees may
determine that certain restricted securities known as Rule 144A securities are
liquid and not subject to the 10% limitation described above.
SECURITIES OF OTHER INVESTMENT COMPANIES Each Portfolio may invest in
securities of other investment companies if the securities are acquired as part
of a merger, consolidation of acquisition of assets approved by the Portfolio's
shareholders or otherwise to the extent permitted by Section 12 of the
Investment Company Act of 1940. The Portfolio will invest only in investment
companies which have investment objectives and policies consistent with those of
the Portfolio. When investing in the securities of other investment companies,
the Portfolio may incur fees and expenses of the underlying fund in addition to
the Portfolio's own fees and expenses.
INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of the
Fund (as defined in the Investment Company Act of 1940), including a majority of
the shares of each Portfolio. The Fund may not under any circumstances:
1) purchase securities for any Portfolio of the Fund other than the
securities in which the Portfolio is authorized to invest as set forth
in the Prospectus under "Investment Objectives" and "Investment
Policies";
2) borrow money in excess of 15% of the total assets of any Portfolio
taken at market value and then only from banks as a temporary measure
for extraordinary or emergency purposes; the Fund will not
2
<PAGE> 25
borrow to increase income (leveraging) but only to facilitate
redemption requests which might otherwise require untimely dispositions
of portfolio securities; the Fund will repay all borrowings before
making additional investments and interest paid on such borrowings will
reduce net income;
3) make loans to other persons (except by the purchase of obligations in
which the Fund is authorized to invest); provided, however, that the
Fund will not enter into repurchase agreements if, as a result thereof,
more than 10% of the net assets of any Portfolio (taken at current
value) would be subject to repurchase agreements maturing in more than
seven days;
4) purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the Government of the United
States, its agencies or instrumentalities) if, as a result, (a) more
than 5% of a Portfolio's total assets (taken at current value) would be
invested in the securities of such issuer, or (b) any Portfolio would
hold more than 10% of any class of securities of such issuer (for this
purpose, all debt obligations of an issuer maturing in less than one
year are treated as a single class of securities);
5) write, or invest in, put, call, straddle or spread options or invest in
interests in oil, gas or other mineral exploration or development
programs;
6) purchase securities on margin or sell any securities short;
7) purchase or retain securities of an issuer if an officer or director of
such issuer is an officer or Director of the Fund or its investment
adviser and one or more of such officers or directors (trustees) of the
Fund or its investment adviser owns beneficially more than 1/2% of the
shares of securities of such issuer and all such directors and officers
owning more than 1/2% of such shares or securities together own more
than 5% of such shares or securities;
8) purchase any securities which could cause more than 25% of the value of
a Portfolio's total net assets at the time of such purchase to be
invested in the securities of one or more issuers conducting their
principal business activities in the same industry, provided that there
is no limitation with respect to investments in United States Treasury
Bills, other obligations issued or guaranteed by the Federal
Government, its agencies and instrumentalities or certificates of
deposit or bankers' acceptances of domestic institutions;
9) mortgage, pledge or hypothecate its assets except in an amount up to
15% (10% as long as the Fund's shares are registered for sale in
certain states) of the value of a Portfolio's total assets but only to
secure borrowings for temporary or emergency purposes;
10) engage in the business of underwriting securities issued by other
persons, except to the extent that the Portfolio may technically be
deemed to be an underwriter under the Securities Act of 1933, as
amended, in disposing of investment securities;
11) purchase or otherwise acquire any security if, as a result, more than
10% of its net assets (including any investment in The Vanguard Group
Inc.) would be invested in securities that are illiquid;
12) purchase or sell real estate, real estate investment trust securities,
commodities, or commodity contracts;
13) invest in companies for the purpose of exercising control;
14) invest in securities of other investment companies, except as they may
be acquired as part of a merger, consolidation or acquisition of
assets; and
15) issue senior securities.
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, or make loans to, or contribute to the costs or other
financial requirements of, any company which will be: (1) wholly owned by the
Fund and one or more other investment companies, and is (2) primarily engaged in
the business of providing, at-cost, management, administrative, distribution or
related services to the Fund and other investment companies. See "Management of
the Fund."
3
<PAGE> 26
As an operational policy of the Fund, the Fund will not in the aggregate,
enter into repurchase agreements maturing in more than seven days, purchase
restricted securities or invest in any other illiquid securities if, as a result
thereof, more than 10% of the net assets of the Fund would be invested in such
assets.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
YIELD AND TOTAL RETURN
The yield of each Portfolio of the Fund for the 7-day period ended May 31,
1996 is set forth below. Yields are calculated daily for each Portfolio.
<TABLE>
<S> <C>
Prime Portfolio.................................................................. 5.08%
Federal Portfolio................................................................ 5.04%
Prime Portfolio-Institutional Class.............................................. 5.25%
</TABLE>
The average annual total return of each Portfolio of the Fund for the one-,
five- and ten-year periods ended May 31, 1996 is set forth below:
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
5/31/96 5/31/96 5/31/96
------------ ------------- --------------
<S> <C> <C> <C>
Prime Portfolio.......................... + 5.55% +4.42% + 6.03%
Federal Portfolio........................ + 5.50% +4.37% + 5.88%
Prime Portfolio-Institutional Class...... + 5.72% +4.59% + 5.47%*
</TABLE>
- ---------------
*Since inception of Vanguard Institutional Money Market Portfolio on October
3,1989.
Total return is computed by finding the average compounded rates of return
over the periods set forth above that would equate an initial amount invested at
the beginning of the periods to the ending redeemable value of the investment.
CALCULATION OF YIELD
The current yield of each of the Fund's Portfolios is calculated daily on a
base period return of a hypothetical account having a beginning balance of one
share for a particular period of time (generally 7 days). The return is
determined by dividing the net change (exclusive of any capital changes) in such
account by its average net asset value for the period, and then multiplying it
by 365/7 to get the annualized current yield. The calculation of net change
reflects the value of additional shares purchased with the dividends by the
Portfolio, including dividends on both the original share and on such additional
shares. An effective yield, which reflects the effects of compounding and
represents an annualization of the current yield with all dividends reinvested,
may also be calculated for the Portfolio by adding 1 to the net change, raising
the sum to the 365/7 power, and subtracting 1 from the result.
Set forth below is an example, for purposes of illustration only, of the
current and effective yield calculations for each of the Portfolios for the
7-day base period ended May 31, 1996.
<TABLE>
<CAPTION>
PRIME INSTITUTIONAL
PRIME PORTFOLIO PORTFOLIO FEDERAL PORTFOLIO
--------------- ------------------- -----------------
5/31/96 5/31/96 5/31/96
--------------- ------------------- -----------------
<S> <C> <C> <C>
Value of account at beginning of period............. $ 1.00000 $ 1.00000 $ 1.00000
Value of same account at end of period*............. 1.00097 1.00100 1.00097
--------------- ------------------- -----------------
Net Change in account value......................... $ .00097 $ .00100 $ .00097
Annualized Current Net Yield (Net
Change X 365/7) average net asset value........... 5.08% 5.25% 5.04%
Effective Yield [(Net Change)+1]365/7-1............. 5.19% 5.35% 5.19%
Average Weighted Maturity of Investments............ 43 Days 43 Days 44 Days
</TABLE>
- ---------------
*Exclusive of any capital changes.
4
<PAGE> 27
The net asset value of a share of each Portfolio is $1.00 and it is not
expected to fluctuate. However, the yield of each Portfolio will fluctuate. The
annualization of a week's dividend is not a representation by the Portfolio as
to what an investment in the Portfolio will actually yield in the future. Actual
yields will depend on such variables as investment quality, average maturity,
the type of instruments the Portfolio invests in, changes in interest rates on
instruments, changes in the expenses of the Fund and other factors. Yields are
one basis investors may use to analyze the Portfolios of the Fund, and other
investment vehicles; however, yields of other investment vehicles may not be
comparable because of the factors set forth in the preceding sentence,
differences in the time periods compared, and differences in the methods used in
valuing portfolio instruments, computing net asset values and calculating
yields.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts or under circumstances
where certain economies can be achieved in sales of the Fund's shares.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges for each Portfolio or postpone
the date of payment (i) during any period that the New York Stock Exchange is
closed, or trading on the Exchange is restricted as determined by the Securities
and Exchange Commission (the "Commission"), (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for a Portfolio to dispose of securities owned
by it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or l% of the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment readily marketable securities or in
cash, as the Directors may deem advisable; however, payment will be made wholly
in cash unless the Directors believe that economic or market conditions exist
which would make such a practice detrimental to the best interests of the Fund.
If redemptions are paid in investment securities, such securities will be valued
as set forth in the Prospectus under "The Share Price of Each Portfolio" and a
redeeming shareholder would normally incur brokerage expenses if he converted
these securities to cash.
No charge is made by the Fund for redemptions; except for wire withdrawals
in amounts less than $5,000 which will be subject to a maximum charge of $5.00
which will be deducted from the principal in your account. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by each Portfolio.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE Each Portfolio's shares may be exchanged without cost
for shares of any other Portfolio, or for the shares of any open-end Fund
currently offering its shares to new investors in The Vanguard Group
("Vanguard"). A shareholder of any other open-end Fund in Vanguard may likewise
exchange his shares for shares of any of the Fund's Portfolios. Exchange
requests may be made either by mail, telephone or telegraph.
Telephone and telegraph exchanges (referred to as "expedited exchanges")
will be accepted only if the account of the shareholder and the registration of
the two accounts is identical. Requests for expedited exchanges received prior
to the close of the New York Stock Exchange (generally 4:00 P.M. Eastern time)
will be processed at the next determined net asset value after such request is
received. Requests received after the
5
<PAGE> 28
close of the New York Stock Exchange (generally 4:00 P.M. Eastern time), will be
processed on the next business day. NO EXPEDITED EXCHANGES WILL BE ACCEPTED
INTO, OR FROM, VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST, VANGUARD
QUANTITATIVE PORTFOLIOS AND VANGUARD INTERNATIONAL EQUITY INDEX FUND. Neither
the Fund nor Vanguard will be responsible for the authenticity of exchange
instructions received by telephone or telegraph. Expedited exchanges may also be
subject to limitations as to amounts and frequency, and to other restrictions
established by the Board of Directors to assure that such exchanges do not
disadvantage the Fund and its shareholders. Shareholders may obtain the terms of
these limitations, which may be revised at any time, from Vanguard.
Any such exchange will be based on the respective net asset values of the
shares involved. There are no sales commissions or charges of any kind. Before
making an exchange, a shareholder should consider the investment objectives and
policies of the Portfolio or Fund to be purchased, and other relevant
information (including the minimum initial investment), which can be found in
the prospectus relating to that particular Portfolio or Fund. A prospectus for
any of the Vanguard Funds or Portfolios may be obtained from Vanguard.
For Federal income tax purposes an exchange between Funds is a taxable
event and, accordingly, a capital gain or loss may be realized. In a revenue
ruling relating to circumstances similar to the Fund's, an exchange between
series of a Fund was also deemed to be a taxable event. It is likely, therefore,
that a capital gain or loss would be realized on an exchange between Portfolios;
you may want to consult your tax adviser for further information in this regard.
The exchange privilege may be modified or terminated at any time, and any of the
Portfolios or Vanguard Funds may limit or discontinue the offering of its shares
without notice to shareholders.
TRANSFER OF SHARES Fund shares may be transferred to another person by
sending appropriate written instructions to Vanguard. The account must be
clearly identified and include the number of shares to be transferred and the
signatures of all registered owners. The signature on the letter of instructions
or any stock power must be guaranteed. As in the case of withdrawals, the
written request must be received in "Good Order" before any transfer can be
made.
INFORMATION FOR SHAREHOLDERS Following any purchase or redemption, a
shareholder will receive a statement which reflects all activity during the
current calendar year. Each shareholder will also receive a monthly statement,
which includes a valuation as of the day the statement is prepared.
Shareholders will receive semi-annual financial statements audited at least
annually by independent accountants whose selection is ratified by shareholders.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing the Vanguard Group, Inc. or
any of the member funds of the Vanguard Group of Investment Companies.
Vanguard Money Market Reserves may use one or more of the following
unmanaged indexes for comparative performance purposes:
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.
RUSSELL 2000 STOCK INDEX -- composed of the 2,000 smallest stocks contained in
the Russell 3000, representing approximately 7% of the Russell 3000 total market
capitalization.
6
<PAGE> 29
RUSSELL 2000(R) VALUE INDEX -- contains stocks from the Russell 2000 Index with
a less-than-average growth orientation.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Austraasia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 25% Standard & Poor's Utilities Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
7
<PAGE> 30
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
8
<PAGE> 31
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The Fund's Officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Directors set broad policies
for the Fund and choose its Officers. A list of the Directors and Officers of
the Fund and a brief statement of their present positions and principal
occupations during the past 5 years is set forth below. The mailing address of
the Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
JOHN C. BOGLE, Chairman and Director*
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group. Director of The Mead
Corporation, General Accident Insurance and Chris-Craft Industries, Inc.
JOHN J. BRENNAN, President, Chief Executive Officer & Director*
President, Chief Executive Officer and Director of The Vanguard Group, Inc.
and each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Director
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Director of
Sun Company, Inc.; Director of Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, Director
Director of The Great Atlantic and Pacific Tea Company, Alco Standard
Corp., Raytheon Company, Knight-Ridder Inc., and Massachusetts Mutual Life
Insurance Co. and Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, Director
President Emeritus of The Brookings Institution; Director of American
Express Bank, Ltd., The St. Paul Companies, Inc., and National Steel
Corporation.
BURTON G. MALKIEL, Director
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications
Company.
ALFRED M. RANKIN, JR., Director
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company and The Standard Products Company.
JOHN C. SAWHILL, Director
President and Chief Executive Officer, of The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York
University; Director of Pacific Gas and Electric Company, Procter & Gamble
Company and NACCO Industries.
JAMES O. WELCH, JR., Director
Retired Chairman of Nabisco Brands Inc., retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc. and Director of Kmart
Corporation.
J. LAWRENCE WILSON, Director
Chairman and Chief Executive Officer, Rohm & Haas Company; Director of
Cummins Engine Company and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary
of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- ---------------
*Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
9
<PAGE> 32
THE VANGUARD GROUP
The Fund is a member of The Vanguard Group of Investment Companies. Through
their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund
and the other Funds in the Group obtain at cost virtually all of their corporate
management, administrative and distribution services. Vanguard also provides
investment advisory services on an at-cost basis to certain of the Vanguard
Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's total expenses which are allocated among the
Funds under methods approved by the Board of Directors (Trustees) of each Fund.
In addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees.
The Fund's Officers are also Officers and employees of Vanguard. No Officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-I under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group, Inc. ("Vanguard") was established and operates under a
Funds' Service Agreement which was approved by the shareholders of each of the
Funds. The amounts of which each of the Funds has invested are adjusted from
time to time in order to maintain the proportionate relationship between each
Fund's relative net assets and its contribution to Vanguard's capital. At
November 30, 1995, the Fund had contributed capital of $2,887,000 to Vanguard,
representing 14.4% of Vanguard's capitalization. The Fund's Service Agreement
provides as follows: (a) each Vanguard Fund may invest up to 0.40% of its
current assets in Vanguard and (b) there is no other limitation on the amount
that each Vanguard Fund may contribute to Vanguard's Capitalization.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended November 30, 1995 and the six months ended May 31, 1996, the
Fund's share of Vanguard's actual net costs of operation relating to management
and administrative services (including transfer agency) totaled approximately
$20,714,000 and $12,695,000.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds, in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's sales
for the preceding 24 months relative to the total sales of the Funds as a Group,
provided, however, that no Fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for the Group, and
10
<PAGE> 33
that no Fund shall incur annual distribution expenses in excess of 20/100 of 1%
of its average month-end net assets. During the fiscal year ended November 30,
1995 and the six months ended May 31, 1996, the Fund paid approximately
$5,896,000 and $3,895,000 of the Group's distribution and marketing expenses or
.03 of 1% and .03 of 1% of the Fund's average month-end net assets.
INVESTMENT ADVISORY SERVICES Vanguard also provides the Fund, Vanguard
Municipal Bond Fund, Vanguard Bond Index Fund, several Portfolios of Vanguard
Fixed Income Securities Fund, Vanguard Admiral Funds, Vanguard California
Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard Ohio Tax-Free Fund,
Vanguard New York Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund,
Vanguard Florida Insured Tax-Free Fund, Vanguard Index Trust, Vanguard Balanced
Index Fund, Vanguard Institutional Index Fund, Vanguard Tax-Managed Fund,
several Portfolios of Vanguard Variable Insurance Fund, Vanguard International
Equity Index Fund, Aggressive Growth Portfolio of Vanguard Horizon Fund, the
Total International Portfolio of Vanguard STAR Fund, a portion of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as well as several
indexed separate accounts with investment advisory services. These services are
provided on an at-cost basis from a money management staff employed directly by
Vanguard. The compensation and other expenses of this staff are paid by the
Funds utilizing these services. During the years ended November 30, 1993, 1994,
1995 and the six months ended May 31, 1996, the Fund paid approximately
$1,603,000, $1,896,000, $2,788,000, and $1,461,000 respectively, of Vanguard's
expenses relating to investment advisory services.
REMUNERATION OF DIRECTORS The Fund pays each Director (Trustee), who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's Officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund and each other Fund in the Group, for
its proportionate share of Officers' and employees' salaries and retirement
benefits.
The following information is furnished with respect to the Directors and
Officers of the Fund for whom the Fund's proportionate shares of remuneration
exceeded $60,000 for the fiscal year ended November 30, 1995, and for all
Directors:
VANGUARD MONEY MARKET RESERVES
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(3)
- --------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1),(2) $408,820 $ 4,320 -- --
John J. Brennan(2) $205,080 $ 4,320 -- --
Barbara Barnes Hauptfuhrer $ 9,344 $ 1,571 $15,000 $60,000
Robert E. Cawthorn $ 9,344 $ 1,309 $13,000 $60,000
Bruce K. MacLaury $ 10,131 $ 1,549 $12,000 $55,000
Burton G. Malkiel $ 9,344 $ 1,047 $15,000 $60,000
Alfred M. Rankin, Jr. $ 9,344 $ 827 $15,000 $60,000
John C. Sawhill $ 9,344 $ 982 $15,000 $60,000
James O. Welch, Jr. $ 9,344 $ 1,209 $15,000 $60,000
J. Lawrence Wilson $ 9,344 $ 873 $15,000 $60,000
</TABLE>
(1)()For the period December 1, 1995 -- January 31, 1996 included in this table,
Mr. Bogle was the Fund's Chief Executive Officer, and therefore an
"Interested Director" under Federal securities laws. Mr. Bogle receives no
compensation for his service as Director.
(2)As an "Interested Director," Mr. Brennan receives no compensation for his
service as Director.
(3)The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard Funds
(33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).
Under its retirement plan, Vanguard contributes annually an amount equal to
10% of each eligible Officer's annual compensation plus 5.7% of that part of an
eligible Officer's compensation during the year, if any, that exceeds the Social
Security Taxable Wage Base then in effect. Under the Thrift Plan, all eligible
Officers are permitted to make pre-tax basic contributions in a maximum amount
equal to 4% of total
11
<PAGE> 34
compensation which are matched by Vanguard on a 100% basis. Directors who are
not Officers are paid an annual fee based on the number of years of service on
the board, up to fifteen years of service, upon retirement. The fee is equal to
$1,000 for each year of service and each investment company member of The
Vanguard Group contributes a proportionate amount of this fee based on its
relative net assets. This fee is paid, subsequent to a Director's retirement,
for a period of ten years or until the death of a retired Director.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Articles of Incorporation, as amended and restated, permit the
Directors to issue 37,000,000,000 shares of common stock, with a $.001 par
value. The Board of Directors has the power to designate one or more classes
("Portfolios") of shares of common stock and to classify or reclassify any
unissued shares with respect to such Portfolios. Currently the Fund is offering
shares of three Portfolios.
The shares of each Portfolio are fully paid and nonassessable, and have no
preference as to conversion, exchange, dividends, retirement or other features.
The shares of each Portfolio have no pre-emptive rights. The shares of each
Portfolio have non-cumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of Directors can elect 100%
of the Directors if they choose to do so. A shareholder is entitled to one vote
for each full share held (and a fractional vote for each fractional share held),
then standing in his name on the books of the Fund. On any matter submitted to a
vote of shareholders, all shares of the Fund then issued and outstanding and
entitled to vote, irrespective of the class, shall be voted in the aggregate and
not by class: except (i) when required by the Investment Company Act of 1940,
shares shall be voted by individual class; and (ii) when the matter does not
affect any interest of a particular class, then only shareholders of the
affected class or classes shall be entitled to vote thereon.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended November 30, 1995,
including the financial highlights for each of the five fiscal years in the
period ended November 30, 1995, appearing in the Fund's 1995 Annual Report to
Shareholders, and the report thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The unaudited financial statements and
financial highlights of the Fund for the six months ended May 31, 1996, as set
forth in the Vanguard Money Market Reserves Semi-Annual Report to Shareholders,
are incorporated herein by reference. The Fund's Annual Report and Semi-Annual
Report to Shareholders are enclosed with this Statement of Additional
Information.
APPENDIX -- DESCRIPTION OF SECURITIES AND RATINGS
A-1 AND PRIME-1 COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by Standard & Poor's has the following
characteristics: (1) liquidity ratios are adequate to meet cash requirements;
(2) long-term senior debt is rated "A" or better; (3) the issuer has access to
at least two additional channels of borrowing; (4) basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances; (5)
typically, the issuer's industry is well established and the issuer has a strong
position within the industry; and (6) the reliability and quality of management
are unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is A-1, A-2, or A-3. The rating Prime-1 is
the highest commercial paper rating assigned by Moody's. Among the factors
considered by Moody's in assigning ratings are the following: (1) evaluation of
the management of the issuer; (2) economic evaluation of the issuer's industry
or industries and the appraisal of speculative-type risks which may be inherent
in certain areas; (3) evaluation of the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer;
and (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations.
12
<PAGE> 35
BOND RATINGS
Bonds rated AA by Standard & Poor's are judged by S&P to be high-grade
obligations, and in the majority of instances differs only in small degrees from
issues rated AAA (the AA rating may be modified by the addition of a plus or
minus sign to show relative standing with the AA category). Bonds rated AAA are
considered by S&P to be the highest grade obligations and possess the ultimate
degree of protection as to principal and interest. Bonds rated Aa by Moody's are
judged by Moody's to be of high quality by all standards. Together with the Aaa
group, they comprise what are generally known as high-grade bonds. They are
rated lower than Aaa bonds because margins of protection may not be as large or
fluctuations of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger.
Moody's also supplies numerical indicators, 1, 2 and 3 to the Aa rating
category. The modifier 1 indicates that the security is in the higher end of its
rating category; the modifier 2 indicates a mid-range ranking and 3 indicates a
ranking toward the lower end of the category.
VARIABLE AMOUNT MASTER DEMAND NOTES
Variable amount master demand notes are demand obligations that permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to an arrangement between the issuer and a commercial bank acting as agent for
the payees of such notes, whereby both parties have the right to vary the amount
of the outstanding indebtedness on the notes. Because variable amount master
demand notes are direct lending arrangements between a lender and a borrower, it
is not generally contemplated that such instruments will be traded, and there is
no secondary market for these notes, although they are redeemable (and thus
immediately repayable by the borrower) at face value, plus accrued interest, at
any time. In connection with a Portfolio's investment in variable amount master
demand notes, Vanguard's investment management staff will monitor, on an ongoing
basis, the earning power, cash flow and other liquidity ratios of the issuer,
and the borrower's ability to pay principal and interest on demand.
DESCRIPTION OF U.S. GOVERNMENT SECURITIES
As used in this prospectus, the term "U.S. Government Securities" refers to
a variety of securities which are issued or guaranteed by the United States
Treasury, by various agencies of the United States Government, and by various
instrumentalities which have been established or sponsored by the United States
Government. The term also refers to "repurchase agreements" collateralized by
such securities.
U.S. Treasury Securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and the U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a government agency organized
under Federal charter with government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.
DESCRIPTION OF REPURCHASE AGREEMENTS
Repurchase agreements are transactions by which a person purchases a
security and simultaneously commits to resell that security to the seller (a
member bank of the Federal Reserve System or recognized securities dealer) at an
agreed upon price on an agreed upon date within a number of days (usually not
more than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or maturity of the purchased security. A repurchase
13
<PAGE> 36
agreement involves the obligation of the seller to pay the agreed upon price,
which obligation is in effect secured by the value of the underlying security.
The use of repurchase agreements involves certain risks. For example, if
the seller of the agreement defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has declined,
the Portfolio may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of the Portfolio and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that the Portfolio may not be able to substantiate its interest in the
underlying securities. While the Fund's management acknowledges these risks, it
is expected that they can be controlled through stringent security selection
criteria and careful monitoring procedures.
EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit
and time deposits issued outside the U.S. capital markets by foreign branches of
banks and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across their borders. Other risks include: adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes; and
expropriation or nationalization of foreign issuers. However, Eurodollar and
Yankee obligations will undergo the same credit analysis as domestic issues in
which the Prime Portfolio invests, and will have at least the same financial
strength as the domestic issuers approved for the Prime Portfolio.
14
