<PAGE>
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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.
POST-EFFECTIVE AMENDMENT NO. 58
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 60
VANGUARD MONEY MARKET RESERVES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE:
ON MARCH 24, 2000, PURSUANT TO RULE 485(B) OF THE SECURITIES ACT OF 1933.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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<PAGE>
VANGUARD(R)
MONEY MARKET
FUNDS
Prospectus
March 24, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
November 30, 1999.
VANGUARD PRIME
MONEY MARKET FUND
VANGUARD FEDERAL
MONEY MARKET FUND
VANGUARD TREASURY
MONEY MARKET FUND
[MEMBERS OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD MONEY MARKET FUNDS
Prospectus
March 24, 2000
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CONTENTS
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1 FUND PROFILES 16 FINANCIAL HIGHLIGHTS
1 Vanguard Prime Money Market Fund 18 INVESTING WITH VANGUARD
4 Vanguard Federal Money Market Fund 18 Services and Account Features
7 Vanguard Treasury Money Market Fund 19 Types of Accounts
10 MORE ON THE FUNDS 20 Buying Shares
13 THE FUNDS AND VANGUARD 22 Redeeming Shares
13 INVESTMENT ADVISER 26 Transferring Registration
14 DIVIDENDS AND TAXES 26 Fund and Account Updates
15 SHARE PRICE GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and policies of Vanguard Prime
Money Market, Federal Money Market, and Treasury Money Market Funds. To
highlight terms and concepts important to mutual fund investors, we have
provided "Plain Talk(R)" explanations along the way. Reading the prospectus will
help you to decide which Fund, if any, is the right investment for you. We
suggest that you keep it for future reference.
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IMPORTANT NOTE
The Prime Money Market Fund offers two separate classes of shares: Investor and
Institutional. This prospectus offers the Fund's Investor Shares, which have an
investment minimum of $3,000 ($1,000 for IRAs) and are intended for individual
investors. Please call Vanguard's Institutional Investor Group at 1-800-523-1036
to obtain a separate prospectus that offers the Fund's Institutional Shares,
which have an investment minimum of $10 million and generally are not available
to investors who require special employee benefit plan services.
The Fund's separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INVESTOR SHARES.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE--
VANGUARD PRIME MONEY MARKET FUND
The following profile summarizes key features of Vanguard Prime Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests primarily in high-quality, short-term money market instruments,
including certificates of deposit, banker's acceptances, commercial paper, and
other money market securities. To be considered high quality, a security
generally must be rated in one of the two highest credit-quality categories for
short-term securities by at least two nationally recognized rating services (or
by one, if only one rating service has rated the security). If unrated, the
security must be determined by the Fund's adviser to be of quality equivalent to
those in the two highest credit-quality categories. The Fund will maintain an
average maturity of 90 days or less. For more information, see "Security
Selection" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME--AND THUS ITS TOTAL RETURN--TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR FUNDS THAT INVEST IN SHORT-TERM
SECURITIES. The Fund is also subject to:
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
- - Credit risk, which is the chance that the issuer of a security will fail to
pay interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be low for the Fund.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE
TO LOSE MONEY BY INVESTING IN THE FUND.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based money
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
<PAGE>
2
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 8.27%
1991 6.14%
1992 3.74%
1993 3.01%
1994 4.08%
1995 5.82%
1996 5.29%
1997 5.44%
1998 5.38%
1999 5.01%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.03% (quarter ended June 30, 1990) and the lowest return for a
quarter was 0.72% (quarter ended June 30, 1993).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-----------------------------------------------------------------
Vanguard Prime Money Market Fund 5.01% 5.39% 5.21%
Salomon Smith Barney 3-Month
Treasury Index 4.74 5.20 5.05
Lipper Money Market Fund Average* 4.49 4.88 4.73
-----------------------------------------------------------------
*Derived from data provided by Lipper Inc.
-----------------------------------------------------------------
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended November 30, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.11%
12b-1 Distribution Fee: None
Other Expenses: 0.22%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
<PAGE>
3
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$34 $106 $185 $418
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS MINIMUM INITIAL INVESTMENT
Declared daily and distributed on the $3,000; $1,000 for IRAs and custodial
first business day of each month accounts for minors
INVESTMENT ADVISER NEWSPAPER ABBREVIATION
The Vanguard Group, Valley Forge, VangPr
Pa., since 1981
VANGUARD FUND NUMBER
INCEPTION DATE 030
June 4, 1975
CUSIP NUMBER
NET ASSETS AS OF NOVEMBER 30, 1999 922906201
$41.2 billion
TICKER SYMBOL
SUITABLE FOR IRAS VMMXX
Yes
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<PAGE>
4
FUND PROFILE--
VANGUARD FEDERAL MONEY MARKET FUND
The following profile summarizes key features of Vanguard Federal Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests primarily in high-quality, short-term money market instruments
issued by U.S. government agencies. Most of the securities held by the Fund are
not backed by the full faith and credit of the U.S. government. The Fund will
maintain an average maturity of 90 days or less. For more information, see
"Security Selection" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME--AND THUS ITS TOTAL RETURN--TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR FUNDS THAT INVEST IN SHORT-TERM
SECURITIES. The Fund is also subject to:
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
- - Credit risk, which is the chance that the issuer of a security will fail to
pay interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be very low for the Fund.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE
TO LOSE MONEY BY INVESTING IN THE FUND.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based money
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
<PAGE>
5
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 8.07%
1991 5.96%
1992 3.68%
1993 2.98%
1994 4.03%
1995 5.77%
1996 5.24%
1997 5.38%
1998 5.31%
1999 4.94%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 1.99% (quarter ended June 30, 1990) and the lowest return for a
quarter was 0.72% (quarter ended June 30, 1993).
-----------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-----------------------------------------------------------------
Vanguard Federal Money Market Fund 4.94% 5.33% 5.13%
Salomon Smith Barney 3-Month
Treasury Index 4.74 5.20 5.05
Lipper U.S. Government Money Market
Fund Average* 4.47 4.85 4.68
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*Derived from data provided by Lipper Inc.
-----------------------------------------------------------------
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended November 30, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.13%
12b-1 Distribution Fee: None
Other Expenses: 0.20%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
<PAGE>
6
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$34 $106 $185 $418
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS MINIMUM INITIAL INVESTMENT
Declared daily and distributed on the $3,000; $1,000 for IRAs and custodial
first business day of each month accounts for minors
INVESTMENT ADVISER NEWSPAPER ABBREVIATION
The Vanguard Group, Valley Forge, VangFdl
Pa., since inception
VANGUARD FUND NUMBER
INCEPTION DATE 033
July 13, 1981
CUSIP NUMBER
NET ASSETS AS OF NOVEMBER 30, 1999 922906300
$5.2 billion
TICKER SYMBOL
SUITABLE FOR IRAS VMFXX
Yes
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<PAGE>
7
FUND PROFILE--
VANGUARD TREASURY MONEY MARKET FUND
The following profile summarizes key features of Vanguard Treasury Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests solely in high-quality, short-term money market securities
whose interest and principal payments are backed by the full faith and credit of
the U.S. government. At least 80% of the Fund's assets will always be invested
in U.S. Treasury securities; the remainder of the Fund's assets may be invested
in securities issued by U.S. government agencies or instrumentalities. The Fund
will maintain an average maturity of 90 days or less. For more information, see
"Security Selection" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME--AND THUS ITS TOTAL RETURN--TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR FUNDS THAT INVEST IN SHORT-TERM
SECURITIES. The Fund is also subject to:
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
- - Credit risk, which is the chance that the issuer of a security will fail to
pay interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be negligible for the
Fund.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE
TO LOSE MONEY BY INVESTING IN THE FUND.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based money
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
<PAGE>
8
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 7.94%
1991 5.73%
1992 3.53%
1993 2.86%
1994 3.81%
1995 5.49%
1996 5.09%
1997 5.12%
1998 5.00%
1999 4.55%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 1.96% (quarter ended June 30, 1990) and the lowest return for a
quarter was 0.69% (quarter ended June 30, 1993).
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Treasury Money Market Fund 4.55% 5.05% 4.90%
Salomon Smith Barney 3-Month
Treasury Index 4.74 5.20 5.05
Lipper U.S. Treasury Money Market Fund
Average* 4.23 4.74 4.64
--------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended November 30, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.14%
12b-1 Distribution Fee: None
Other Expenses: 0.19%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
<PAGE>
9
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$34 $106 $185 $418
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS MINIMUM INITIAL INVESTMENT
Declared daily and distributed on the $3,000; $1,000 for IRAs and custodial
first business day of each month accounts for minors
INVESTMENT ADVISER NEWSPAPER ABBREVIATION
The Vanguard Group, Valley Forge, VangTrsy
Pa., since inception
INCEPTION DATE VANGUARD FUND NUMBER
March 9, 1983 050
NET ASSETS AS OF NOVEMBER 30, 1999 CUSIP NUMBER
$4.6 billion 921948105
SUITABLE FOR IRAS TICKER SYMBOL
Yes VMPXX
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<PAGE>
10
MORE ON THE FUNDS
The following sections discuss other important features of the Vanguard Money
Market Funds, including market exposure, security selection, and costs and
market-timing. You will also find detailed risk information about the Funds
throughout these sections.
MARKET EXPOSURE
Each Fund's primary policy is to invest 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 Fund will maintain an average
maturity of 90 days or less.
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PLAIN TALK ABOUT
MONEY MARKET INSTRUMENTS
The term "money market instruments" refers to a variety of short-term liquid
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 are promissory notes issued by large
companies or financial firms; banker's acceptances, which are credit instruments
guaranteed by a bank; and negotiable certificates of deposit, which are issued
by banks in large denominations. Money market securities can pay a fixed,
variable, or floating rate of interest.
- --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT A FUND'S
DIVIDENDS (THAT IS, INCOME) WILL DECLINE BECAUSE OF FALLING INTEREST RATES.
BECAUSE THE FUNDS' 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 FUNDS.
SECURITY SELECTION
The Vanguard Group, adviser to the Funds, selects high-quality money market
instruments. Each Fund focuses on securities of a particular class of issuer
(the U.S. government, U.S. government agencies, or non-government issuers). The
Funds are managed without regard to tax ramifications.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
CREDIT QUALITY
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 issued by the U.S. government)
carry the highest credit ratings. All things being equal, money market
instruments with greater credit risk offer higher yields.
- --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
ADVISER MAY DO A POOR JOB OF SELECTING SECURITIES.
<PAGE>
11
The Prime Money Market Fund invests primarily in certificates of deposit,
banker's acceptances, commercial paper, and other money market securities.
Commercial paper must be rated Prime-1 by Moody's Investors Service or A-1 by
Standard & Poor's Corporation. Securities that are unrated must be issued by a
company with a debt rating of A3 or better by Moody's or A- or better by
Standard & Poor's. The Prime Money Market Fund also invests in short-term
corporate, state, and municipal obligations rated A3 or better by Moody's or A-
or better by Standard & Poor's, and in securities that are considered suitable
for the Federal Money Market Fund (see below).
Among the certificates of deposit typically held by the Prime Money Market
Fund are Eurodollar and Yankee obligations, which are primarily certificates of
deposit issued in U.S. dollars by foreign banks and foreign branches of U.S.
banks. Eurodollar and Yankee obligations have risks similar to U.S. money market
instruments, such as income risk and credit risk. Other risks of Eurodollar and
Yankee obligations include the possibilities that: a foreign government will not
let U.S. dollar-denominated assets leave the country; the banks that issue
Eurodollar obligations may not be subject to the same regulations as U.S. banks;
and adverse political or economic developments will affect investments in a
foreign country. Before the Fund's adviser selects a Eurodollar or Yankee
obligation, however, the foreign issuer undergoes the same credit-quality
analysis and tests of financial strength as an issuer of domestic securities.
The Federal Money Market Fund invests primarily in securities issued by
U.S. government agencies whose interest and principal payments 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,
and the Federal Home Loan Mortgage Corporation. The Fund also may invest in
securities issued by the U.S. Treasury and U.S. government agencies that are
backed by the full faith and credit of the U.S. government.
The Treasury Money Market Fund invests solely in securities whose interest
and principal payments are backed by the full faith and credit of the U.S.
government. At least 80% of the Fund's assets will always be invested in U.S.
Treasury securities. The remainder of the Fund's assets may include securities
issued by U.S. government agencies, such as the Government National Mortgage
Association, the Small Business Administration, and the Federal Financing Bank.
[FLAG] EACH FUND IS SUBJECT, TO A LIMITED EXTENT, TO CREDIT RISK, WHICH IS THE
CHANCE THAT THE ISSUER OF A SECURITY WILL FAIL TO PAY INTEREST AND
PRINCIPAL IN A TIMELY MANNER.
The three Funds differ mainly in terms of credit risk. In absolute terms,
each Fund's credit quality is very high.
In relative terms, the Treasury Money Market Fund, 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 Funds.
Not all of the securities included in the Federal Money Market Fund are
backed by the full faith and credit of the U.S. government, and so the potential
credit risk and yield for the Fund are somewhat higher than for the Treasury
Money Market Fund.
While the credit quality of its securities is very high, the Prime Money
Market Fund faces more risk because it invests in money market securities issued
by private companies. It is possible that one or more of these companies may
experience financial difficulties and, as a result, may fail to pay interest to
the Fund or return the Fund's principal when repayment
<PAGE>
12
is due. Therefore, the Prime Money Market Fund offers the highest credit risk,
and generally the highest yield, of the three Funds.
Bear in mind that, while each Fund invests in high-quality money market
instruments, the three Funds are not insured or guaranteed by the FDIC or any
other agency of the U.S. government.
[FLAG] THE PRIME AND FEDERAL MONEY MARKET FUNDS RESERVE THE RIGHT TO INVEST IN
REPURCHASE AGREEMENTS, WHICH ARE SUBJECT TO SPECIFIC RISKS.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
REPURCHASE AGREEMENTS
A means of investing money for a short period, repurchase agreements are
contracts in which a financial institution sells securities and agrees to
repurchase the securities on a specific date (normally the next business day)
and at a specific price.
- --------------------------------------------------------------------------------
Repurchase agreements carry several risks. For instance, if the seller is
unable to repurchase the securities as promised, the Fund may experience a loss
when trying to sell the securities to another person. Or, if the seller becomes
insolvent, a bankruptcy court may determine that the securities do not belong to
the Fund and order that the securities be sold to pay off the seller's debts.
The Funds' adviser believes that these risks can be controlled through careful
security selection and monitoring.
[FLAG] THE FUNDS RESERVE THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
FLOATING-RATE SECURITIES, WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.
- --------------------------------------------------------------------------------
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), a money
market benchmark (such as U.S. Treasury bill rates or the Federal Funds
Effective Rate), an asset (such as a commodity like gold), or a market index
(such as the S&P 500 Index).
- --------------------------------------------------------------------------------
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 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 Funds will not use derivatives for speculative purposes or as leveraged
investments that magnify the risks of an investment.
In addition, each Fund may invest up to 10% of its net assets in illiquid
securities. These are securities that cannot be readily resold or converted into
cash.
COSTS AND MARKET-TIMING
The Vanguard Money Market Funds serve both short- and long-term investor needs;
however, other Vanguard funds are intended for long-term investors only.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of a fund's shareholders. To minimize
these costs, Vanguard's stock, bond, and balanced funds
<PAGE>
13
have adopted policies to discourage short-term trading--which includes switching
back and forth from the Vanguard Money Market Funds. Please check other Vanguard
funds' prospectuses for specifics on the trading limitations of those funds.
Also, all Vanguard funds, including the Money Market Funds, reserve the right to
stop offering shares at any time or to reject specific purchase requests.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most 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 own the
management company's stock. By contrast, Vanguard provides its services on an
"at cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
THE FUNDS AND VANGUARD
The Funds are members of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $520 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1974, serves as the Funds' adviser through its Fixed Income Group. As of
November 30, 1999, Vanguard served as adviser for about $354 billion in assets
including more than 40 Vanguard funds. Vanguard manages the Funds on an at-cost
basis, subject to the control of the Trustees and officers of the Funds. For the
fiscal year ended November 30, 1999, the investment advisory expenses for each
Fund represented an effective annual rate of 0.01% of each Fund's average net
assets.
The adviser places all orders for the purchase and sale of the Funds'
securities, and seeks out the best available price and most favorable execution
for all transactions.
<PAGE>
14
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The individuals responsible for overseeing the Funds' investments are:
IAN A. MACKINNON, Managing Director of Vanguard and head of Vanguard's Fixed
Income Group; has worked in investment management since 1974; primary
responsibility for Vanguard's internal fixed-income policy and strategy since
1981; B.A., Lafayette College; M.B.A., Pennsylvania State University.
ROBERT F. AUWAERTER, Principal of Vanguard and Fund Manager; has worked in
investment management since 1978; has managed portfolio investments since 1979;
B.S., University of Pennsylvania; M.B.A., Northwestern University.
JOHN HOLLYER, Principal of Vanguard and Fund Manager; has worked in investment
management since 1987; has managed portfolio investments since 1989; B.S.,
University of Pennsylvania.
DAVID R. GLOCKE, Principal of Vanguard and Fund Manager; has worked in
investment management since 1991; has managed portfolio investments since 1997;
B.S., University of Wisconsin.
Mr. Auwaerter, Mr. Hollyer, and Mr. Glocke manage the Funds on a day-to-day
basis. Mr. MacKinnon is responsible for setting the Funds' broad investment
policies and for overseeing the Fund Managers.
- --------------------------------------------------------------------------------
DIVIDENDS AND TAXES
FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net income (interest
less expenses). The Fund's income dividends accrue daily and are distributed on
the first business day of every month. You can receive your income dividends in
cash, or you can have them automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends that you receive are taxable to you as ordinary income for
federal income tax purposes.
- - Dividend distributions that you receive may be subject to state and local
income taxes. Depending on your state's rules, however, any dividends
attributable to interest earned on direct obligations of the U.S. Treasury
may be exempt from state and local taxes. Vanguard will notify you each
year how much, if any, of your dividends may qualify for this exemption.
<PAGE>
15
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do
not offer their shares for sale outside of the United States. Foreign investors
should be aware that U.S. withholding and estate taxes may apply to any
investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains
distribution check mailed to your address of record is returned as
undeliverable, Vanguard will automatically reinvest all future distributions
until you provide us with a valid mailing address.
TAX CONSEQUENCES. This
prospectus provides general tax information only. If you are investing through a
tax-deferred retirement account, such as an IRA, special tax rules apply. Please
consult your tax adviser for detailed information about a fund's tax
consequences for you.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Each Fund's NAV is expected to remain at a constant $1. Although the
stable share price is not guaranteed, the Funds are managed and securities are
purchased to maintain that price.
The instruments held by the Funds are valued on the basis of amortized
cost, which does not take into account unrealized capital gains or losses.
Newspapers typically list money market fund yields weekly, separately from
listings for other mutual funds. Different newspapers use different
abbreviations for the Funds, but the most common are VANGPR, VANGFDL, and
VANGTRSY.
<PAGE>
16
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years, and certain
information reflects financial results for a single Fund share in each case. The
total returns in each table represent the rate that an investor would have
earned or lost each year on an investment in the Fund (assuming reinvestment of
all dividend distributions). This information has been derived from the
financial statements audited by PricewaterhouseCoopers LLP, independent
accountants, whose report--along with each Fund's financial statements--is
included in the Funds' most recent annual report to shareholders. You may have
the annual report sent to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES
This explanation uses the Prime Money Market Fund Investor Shares as an example.
The Fund began fiscal 1999 with a net asset value (price) of $1.00 per share.
During the year, the Fund earned $0.049 per share from investment income
(interest and dividends).
Shareholders received $0.049 per share in the form of dividend distributions.
The earnings ($0.049 per share) minus the distributions ($0.049 per share)
resulted in a share price of $1.00 at the end of the year. For a shareholder who
reinvested the distributions in the purchase of more shares, the total return
from the Fund was 4.97% for the year.
As of November 30, 1999, the Fund had $39.4 billion in net assets. For the year,
its expense ratio was 0.33% ($3.30 per $1,000 of net assets), and its net
investment income amounted to 4.85% of its average net assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VANGUARD PRIME MONEY MARKET FUND
INVESTOR SHARES
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .049 .053 .053 .052 .057
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- -- -- --
--------------------------------------------------------
Total from Investment
Operations .049 .053 .053 .052 .057
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.049) (.053) (.053) (.052) (.057)
Distributions from
Realized Capital
Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.049) (.053) (.053) (.052) (.057)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
================================================================================
TOTAL RETURN 4.97% 5.42% 5.41% 5.31% 5.82%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $39,430 $33,732 $26,480 $22,218 $18,764
Ratio of Total
Expenses to Average
Net Assets 0.33% 0.33% 0.32% 0.32% 0.32%
Ratio of Net
Investment Income to
Average Net Assets 4.85% 5.28% 5.28% 5.18% 5.64%
================================================================================
<PAGE>
17
- --------------------------------------------------------------------------------
VANGUARD FEDERAL MONEY MARKET FUND
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .048 .052 .052 .051 .056
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- -- -- --
--------------------------------------------------------
Total from Investment
Operations .048 .052 .052 .051 .056
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.048) (.052) (.052) (.051) (.056)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.048) (.052) (.052) (.051) (.056)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
================================================================================
TOTAL RETURN 4.89% 5.35% 5.35% 5.26% 5.77%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $5,243 $4,263 $3,495 $3,100 $2,637
Ratio of Total
Expenses to Average
Net Assets 0.33% 0.33% 0.32% 0.32% 0.32%
Ratio of Net
Investment Income to
Average Net Assets 4.79% 5.21% 5.22% 5.13% 5.61%
================================================================================
- --------------------------------------------------------------------------------
VANGUARD TREASURY MONEY MARKET FUND
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .044 .050 .050 .050 .053
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- -- -- --
--------------------------------------------------------
Total from Investment
Operations .044 .050 .050 .050 .053
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.044) (.050) (.050) (.050) (.053)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.044) (.050) (.050) (.050) (.053)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
================================================================================
TOTAL RETURN 4.51% 5.06% 5.10% 5.11% 5.47%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $4,593 $3,942 $3,237 $2,917 $2,527
Ratio of Total
Expenses to Average
Net Assets 0.33% 0.33% 0.32% 0.32% 0.32%
Ratio of Net
Investment Income to
Average Net Assets 4.41% 4.94% 4.98% 4.99% 5.33%
================================================================================
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
18
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for each Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
CHECKWRITING [CHECK]
Method for drawing money from your account by writing a check for $250 or more.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOK]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOK]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOK]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS(TM) [BOOK]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>
19
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOK]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
<PAGE>
20
BUYING SHARES
You buy your shares at the Fund's next-determined share price (net asset value)
after Vanguard receives your request, which should be $1 per share. Before your
contribution to a money market fund can be invested, it must be converted to
"federal funds," which are Federal Reserve deposits that banks and other
financial institutions draw upon to meet short-term cash needs--and which fund
advisers must use to pay for the securities they buy. Vanguard converts your
money market investment to federal funds, which usually takes one business day.
Because of this conversion period, your money market account will be credited on
the business day following the day your investment is received. You will begin
earning dividends on your investment on the next calendar day. For example, if
your check is received on a Thursday before the close of trading on the New York
Stock Exchange, your account will be credited the next business day (Friday) and
you will begin earning dividends on Saturday.
Each of the Funds is offered on a no-load basis, meaning that you do not
pay sales commissions or 12b-1 distribution fees.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
Vanguard Prime Money Market Fund-30
Vanguard Federal Money Market Fund-33
Vanguard Treasury Money Market Fund-50
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
21
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Prime Money Market Fund-30
Vanguard Federal Money Market Fund-33
Vanguard Treasury Money Market Fund-50
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
<PAGE>
22
If you buy fund shares through a federal funds wire, your investment begins
earning dividends the next calendar day. You can begin earning dividends
immediately if you notify Vanguard by 10:45 a.m. Eastern time that you intend to
make a wire purchase that day.
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--a Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 23.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail. You can also sell shares by check.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and some other retirement accounts. If you sell shares of these
funds online, a redemption check will be sent to your address of record.
- --------------------------------------------------------------------------------
<PAGE>
23
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from a Fund to open
an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number, if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or
<PAGE>
24
number of shares. To exchange into an account with a different registration
(including a different name, address, taxpayer identification number, or account
type), you must provide Vanguard with written instructions that include the
guaranteed signatures of all current owners of the fund from which you wish to
redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
CHECK REQUESTS [CHECK]
You can sell shares by writing a check for $250 or more.
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of four ways: check, wire (money
market funds and other daily dividend funds only), exchange to another Vanguard
fund, or Fund Express Redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
WIRE REDEMPTIONS [WIRE]
The wire redemption option is not automatic; you must establish it by completing
a special form or the appropriate section of your account application. Wire
redemptions can be initiated by mail or by telephone during Vanguard's business
hours, but not online.
<PAGE>
25
For Money Market Funds:
For telephone requests made by 10:30 a.m. Eastern time, the wire will arrive at
your bank by the close of business that same day. Requests made by 4 p.m.
Eastern time will arrive at your bank by the close of business on the following
business day.
For Other Daily Dividend Funds:
For telephone requests made by 4 p.m. Eastern time, the wire will arrive at your
bank by the close of business on the following business day.
- --------------------------------------------------------------------------------
NOTE: Wire redemptions of less than $5,000 are subject to a $5 processing fee.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
<PAGE>
26
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about your Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the financial markets, a
report from the adviser, and the Fund's financial statements which include a
listing of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in January and July for these Funds.
- --------------------------------------------------------------------------------
<PAGE>
27
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend distributions,
proceeds from the sale of shares, and distributions from IRAs or other
retirement accounts.
- --------------------------------------------------------------------------------
CHECKWRITING STATEMENT
Sent monthly to shareholders using Vanguard's checkwriting option. Our statement
provides images of the front and back of each checkwriting draft paid in the
previous month. This consolidated statement is sent instead of the original
canceled drafts, which will not be returned.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
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
distribution fees.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund'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.
MONEY MARKET INSTRUMENTS
Short-term, liquid investments (usually with a maturity of 13 months or less),
which include U.S. Treasury bills, bank certificates of deposit (CDs),
repurchase agreements, commercial paper, and banker's acceptances.
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.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and interests in 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
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP(R) LOGO]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Money Market Funds, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORT
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Funds
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by writing the Public
Reference Section, Securities and
Exchange Commission, Washington,
DC 20549-0102.
Vanguard Prime and Federal Money
Market Funds' Investment Company
Act file number: 811-2554
Vanguard Treasury Money Market
Fund's Investment Company Act file
number: 811-7803
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P030N-03/24/2000
<PAGE>
VANGUARD(R)
MONEY MARKET
FUNDS
Participant Prospectus
March 24, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
November 30, 1999.
VANGUARD PRIME
MONEY MARKET FUND
VANGUARD FEDERAL
MONEY MARKET FUND
VANGUARD TREASURY
MONEY MARKET FUND
[MEMBERS OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD MONEY MARKET FUNDS
Participant Prospectus
March 24, 2000
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 FUND PROFILES 14 DIVIDENDS AND TAXES
1 Vanguard Prime Money Market Fund 14 SHARE PRICE
4 Vanguard Federal Money Market Fund 15 FINANCIAL HIGHLIGHTS
7 Vanguard Treasury Money Market Fund 17 INVESTING WITH VANGUARD
10 MORE ON THE FUNDS 17 ACCESSING FUND INFORMATION BY
COMPUTER
13 THE FUNDS AND VANGUARD GLOSSARY (inside back cover)
13 INVESTMENT ADVISER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and policies of Vanguard Prime
Money Market Fund, Vanguard Federal Money Market Fund, and Vanguard Treasury
Money Market Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way. Reading
the prospectus will help you to decide which Fund, if any, is the right
investment for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
The Prime Money Market Fund offers two separate classes of shares: Investor and
Institutional. This prospectus offers the Fund's Investor Shares to participants
in employer-sponsored retirement or savings plans. Please call Vanguard to
obtain separate prospectuses that offer:
- - Investor Shares for private investors ($3,000 minimum)--1-800-662-7447
- - Institutional Shares for very large investors ($10 million
minimum)--1-800-523-1036
The Fund's separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INVESTOR SHARES.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE--
VANGUARD PRIME MONEY MARKET FUND
The following profile summarizes key features of Vanguard Prime Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests primarily in high-quality, short-term money market instruments,
including certificates of deposit, banker's acceptances, commercial paper, and
other money market securities. To be considered high quality, a security
generally must be rated in one of the two highest credit-quality categories for
short-term securities by at least two nationally recognized rating services (or
by one, if only one rating service has rated the security). If unrated, the
security must be determined by the Fund's adviser to be of quality equivalent to
those in the two highest credit-quality categories. The Fund will maintain an
average maturity of 90 days or less. For more information, see "Security
Selection" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME--AND THUS ITS TOTAL RETURN--TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR FUNDS THAT INVEST IN SHORT-TERM
SECURITIES. The Fund is also subject to:
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
- - Credit risk, which is the chance that the issuer of a security will fail to
pay interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be low for the Fund.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE
TO LOSE MONEY BY INVESTING IN THE FUND.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based money
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
<PAGE>
2
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 8.27%
1991 6.14%
1992 3.74%
1993 3.01%
1994 4.08%
1995 5.82%
1996 5.29%
1997 5.44%
1998 5.38%
1999 5.01%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.03% (quarter ended June 30, 1990) and the lowest return for a
quarter was 0.72% (quarter ended June 30, 1993).
-----------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-----------------------------------------------------------------
Vanguard Prime Money Market Fund 5.01% 5.39% 5.21%
Salomon Smith Barney 3-Month
Treasury Index 4.74 5.20 5.05
Lipper Money Market Fund Average* 4.49 4.88 4.73
-----------------------------------------------------------------
*Derived from data provided by Lipper Inc.
-----------------------------------------------------------------
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended November 30, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.11%
12b-1 Distribution Fee: None
Other Expenses: 0.22%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
<PAGE>
3
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$34 $106 $185 $418
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS NEWSPAPER ABBREVIATION
Declared daily and distributed on the VangPr
first business day of each month
VANGUARD FUND NUMBER
INVESTMENT ADVISER 030
The Vanguard Group, Valley Forge,
Pa., since 1981 CUSIP NUMBER
922906201
INCEPTION DATE
June 4, 1975 TICKER SYMBOL
VMMXX
NET ASSETS AS OF NOVEMBER 30, 1999
$41.2 billion
- --------------------------------------------------------------------------------
<PAGE>
4
FUND PROFILE--
VANGUARD FEDERAL MONEY MARKET FUND
The following profile summarizes key features of Vanguard Federal Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests primarily in high-quality, short-term money market instruments
issued by U.S. government agencies. Most of the securities held by the Fund are
not backed by the full faith and credit of the U.S. government. The Fund will
maintain an average maturity of 90 days or less. For more information, see
"Security Selection" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME--AND THUS ITS TOTAL RETURN--TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR FUNDS THAT INVEST IN SHORT-TERM
SECURITIES. The Fund is also subject to:
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
- - Credit risk, which is the chance that the issuer of a security will fail to
pay interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be very low for the Fund.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE
TO LOSE MONEY BY INVESTING IN THE FUND.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based money
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
<PAGE>
5
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 8.07%
1991 5.96%
1992 3.68%
1993 2.98%
1994 4.03%
1995 5.77%
1996 5.24%
1997 5.38%
1998 5.31%
1999 4.94%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 1.99% (quarter ended June 30, 1990) and the lowest return for a
quarter was 0.72% (quarter ended June 30, 1993).
-----------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-----------------------------------------------------------------
Vanguard Federal Money Market Fund 4.94% 5.33% 5.13%
Salomon Smith Barney 3-Month
Treasury Index 4.74 5.20 5.05
Lipper U.S. Government Money Market
Fund Average* 4.47 4.85 4.68
-----------------------------------------------------------------
*Derived from data provided by Lipper Inc.
-----------------------------------------------------------------
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended November 30, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.13%
12b-1 Distribution Fee: None
Other Expenses: 0.20%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
<PAGE>
6
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$34 $106 $185 $418
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS NEWSPAPER ABBREVIATION
Declared daily and distributed on the VangFdl
first business day of each month
VANGUARD FUND NUMBER
INVESTMENT ADVISER 033
The Vanguard Group, Valley Forge,
Pa., since inception CUSIP NUMBER
922906300
INCEPTION DATE
July 13, 1981 TICKER SYMBOL
VMFXX
NET ASSETS AS OF NOVEMBER 30, 1999
$5.2 billion
- --------------------------------------------------------------------------------
<PAGE>
7
FUND PROFILE--
VANGUARD TREASURY MONEY MARKET FUND
The following profile summarizes key features of Vanguard Treasury Money Market
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests solely in high-quality, short-term money market securities
whose interest and principal payments are backed by the full faith and credit of
the U.S. government. At least 80% of the Fund's assets will always be invested
in U.S. Treasury securities; the remainder of the Fund's assets may be invested
in securities issued by U.S. government agencies or instrumentalities. The Fund
will maintain an average maturity of 90 days or less. For more information, see
"Security Selection" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME--AND THUS ITS TOTAL RETURN--TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR FUNDS THAT INVEST IN SHORT-TERM
SECURITIES. The Fund is also subject to:
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
- - Credit risk, which is the chance that the issuer of a security will fail to
pay interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be negligible for the
Fund.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE
TO LOSE MONEY BY INVESTING IN THE FUND.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based money
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
<PAGE>
8
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 7.94%
1991 5.73%
1992 3.53%
1993 2.86%
1994 3.81%
1995 5.49%
1996 5.09%
1997 5.12%
1998 5.00%
1999 4.55%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 1.96% (quarter ended June 30, 1990) and the lowest return for a
quarter was 0.69% (quarter ended June 30, 1993).
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Treasury Money Market Fund 4.55% 5.05% 4.90%
Salomon Smith Barney 3-Month
Treasury Index 4.74 5.20 5.05
Lipper U.S. Treasury Money Market Fund
Average* 4.23 4.74 4.64
--------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended November 30, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.14%
12b-1 Distribution Fee: None
Other Expenses: 0.19%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
<PAGE>
9
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$34 $106 $185 $418
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS NEWSPAPER ABBREVIATION
Declared daily and distributed on the VangTrsy
first business day of each month
VANGUARD FUND NUMBER
INVESTMENT ADVISER 050
The Vanguard Group, Valley Forge,
Pa., since inception CUSIP NUMBER
921948105
INCEPTION DATE
March 9, 1983 TICKER SYMBOL
VMPXX
NET ASSETS AS OF NOVEMBER 30, 1999
$4.6 billion
- --------------------------------------------------------------------------------
<PAGE>
10
MORE ON THE FUNDS
The following sections discuss other important features of the Vanguard Money
Market Funds, including market exposure, security selection, and costs and
market-timing. You will also find detailed risk information about the Funds
throughout these sections.
MARKET EXPOSURE
Each Fund's primary policy is to invest 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 Fund will maintain an average
maturity of 90 days or less.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
MONEY MARKET INSTRUMENTS
The term "money market instruments" refers to a variety of short-term liquid
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 are promissory notes issued by large
companies or financial firms; banker's acceptances, which are credit instruments
guaranteed by a bank; and negotiable certificates of deposit, which are issued
by banks in large denominations. Money market securities can pay a fixed,
variable, or floating rate of interest.
- --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT A FUND'S
DIVIDENDS (THAT IS, INCOME) WILL DECLINE BECAUSE OF FALLING INTEREST RATES.
BECAUSE THE FUNDS' 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 FUNDS.
SECURITY SELECTION
The Vanguard Group, adviser to the Funds, selects high-quality money market
instruments. Each Fund focuses on securities of a particular class of issuer
(the U.S. government, U.S. government agencies, or non-government issuers). The
Funds are managed without regard to tax ramifications.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
CREDIT QUALITY
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 issued by the U.S. government)
carry the highest credit ratings. All things being equal, money market
instruments with greater credit risk offer higher yields.
- --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
ADVISER MAY DO A POOR JOB OF SELECTING SECURITIES.
<PAGE>
11
The Prime Money Market Fund invests primarily in certificates of deposit,
banker's acceptances, commercial paper, and other money market securities.
Commercial paper must be rated Prime-1 by Moody's Investors Service or A-1 by
Standard & Poor's Corporation. Securities that are unrated must be issued by a
company with a debt rating of A3 or better by Moody's or A- or better by
Standard & Poor's. The Prime Money Market Fund also invests in short-term
corporate, state, and municipal obligations rated A3 or better by Moody's or A-
or better by Standard & Poor's, and in securities that are considered suitable
for the Federal Money Market Fund (see below).
Among the certificates of deposit typically held by the Prime Money Market
Fund are Eurodollar and Yankee obligations, which are primarily certificates of
deposit issued in U.S. dollars by foreign banks and foreign branches of U.S.
banks. Eurodollar and Yankee obligations have risks similar to U.S. money market
instruments, such as income risk and credit risk. Other risks of Eurodollar and
Yankee obligations include the possibilities that: a foreign government will not
let U.S. dollar-denominated assets leave the country; the banks that issue
Eurodollar obligations may not be subject to the same regulations as U.S. banks;
and adverse political or economic developments will affect investments in a
foreign country. Before the Fund's adviser selects a Eurodollar or Yankee
obligation, however, the foreign issuer undergoes the same credit-quality
analysis and tests of financial strength as an issuer of domestic securities.
The Federal Money Market Fund invests primarily in securities issued by
U.S. government agencies whose interest and principal payments 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,
and the Federal Home Loan Mortgage Corporation. The Fund also may invest in
securities issued by the U.S. Treasury and U.S. government agencies that are
backed by the full faith and credit of the U.S. government.
The Treasury Money Market Fund invests solely in securities whose interest
and principal payments are backed by the full faith and credit of the U.S.
government. At least 80% of the Fund's assets will always be invested in U.S.
Treasury securities. The remainder of the Fund's assets may include securities
issued by U.S. government agencies, such as the Government National Mortgage
Association, the Small Business Administration, and the Federal Financing Bank.
[FLAG] EACH FUND IS SUBJECT, TO A LIMITED EXTENT, TO CREDIT RISK, WHICH IS THE
CHANCE THAT THE ISSUER OF A SECURITY WILL FAIL TO PAY INTEREST AND
PRINCIPAL IN A TIMELY MANNER.
The three Funds differ mainly in terms of credit risk. In absolute terms,
each Fund's credit quality is very high.
In relative terms, the Treasury Money Market Fund, 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 Funds.
Not all of the securities included in the Federal Money Market Fund are
backed by the full faith and credit of the U.S. government, and so the potential
credit risk and yield for the Fund are somewhat higher than for the Treasury
Money Market Fund.
While the credit quality of its securities is very high, the Prime Money
Market Fund faces more risk because it invests in money market securities issued
by private companies. It is possible that one or more of these companies may
experience financial difficulties and, as a result, may fail to pay interest to
the Fund or return the Fund's principal when repayment
<PAGE>
12
is due. Therefore, the Prime Money Market Fund offers the highest credit risk,
and generally the highest yield, of the three Funds.
Bear in mind that, while each Fund invests in high-quality money market
instruments, the three Funds are not insured or guaranteed by the FDIC or any
other agency of the U.S. government.
[FLAG] THE PRIME AND FEDERAL MONEY MARKET FUNDS RESERVE THE RIGHT TO INVEST IN
REPURCHASE AGREEMENTS, WHICH ARE SUBJECT TO SPECIFIC RISKS.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
REPURCHASE AGREEMENTS
A means of investing money for a short period, repurchase agreements are
contracts in which a financial institution sells securities and agrees to
repurchase the securities on a specific date (normally the next business day)
and at a specific price.
- --------------------------------------------------------------------------------
Repurchase agreements carry several risks. For instance, if the seller is
unable to repurchase the securities as promised, the Fund may experience a loss
when trying to sell the securities to another person. Or, if the seller becomes
insolvent, a bankruptcy court may determine that the securities do not belong to
the Fund and order that the securities be sold to pay off the seller's debts.
The Funds' adviser believes that these risks can be controlled through careful
security selection and monitoring.
[FLAG] THE FUNDS RESERVE THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
FLOATING-RATE SECURITIES, WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.
- --------------------------------------------------------------------------------
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), a money
market benchmark (such as U.S. Treasury bill rates or the Federal Funds
Effective Rate), an asset (such as a commodity like gold), or a market index
(such as the S&P 500 Index).
- --------------------------------------------------------------------------------
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 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 Funds will not use derivatives for speculative purposes or as leveraged
investments that magnify the risks of an investment.
In addition, each Fund may invest up to 10% of its net assets in illiquid
securities. These are securities that cannot be readily resold or converted into
cash.
COSTS AND MARKET-TIMING
The Vanguard Money Market Funds serve both short- and long-term investor needs;
however, other Vanguard funds are intended for long-term investors only.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of a fund's shareholders. To minimize
these costs, Vanguard's stock, bond, and balanced funds
<PAGE>
13
have adopted policies to discourage short-term trading--which includes switching
back and forth from the Vanguard Money Market Funds. Please check other Vanguard
funds' prospectuses for specifics on the trading limitations of those funds.
Also, all Vanguard funds, including the Money Market Funds, reserve the right to
stop offering shares at any time or to reject specific purchase requests.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most 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 own the
management company's stock. By contrast, Vanguard provides its services on an
"at cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
THE FUNDS AND VANGUARD
The Funds are members of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $520 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1974, serves as the Funds' adviser through its Fixed Income Group. As of
November 30, 1999, Vanguard served as adviser for about $354 billion in assets
including more than 40 Vanguard funds. Vanguard manages the Funds on an at-cost
basis, subject to the control of the Trustees and officers of the Funds. For the
fiscal year ended November 30, 1999, the investment advisory expenses for each
Fund represented an effective annual rate of 0.01% of each Fund's average net
assets.
The adviser places all orders for the purchase and sale of the Funds'
securities, and seeks out the best available price and most favorable execution
for all transactions.
<PAGE>
14
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The individuals responsible for overseeing the Funds' investments are:
IAN A. MACKINNON, Managing Director of Vanguard and head of Vanguard's Fixed
Income Group; has worked in investment management since 1974; primary
responsibility for Vanguard's internal fixed-income policy and strategy since
1981; B.A., Lafayette College; M.B.A., Pennsylvania State University.
ROBERT F. AUWAERTER, Principal of Vanguard and Fund Manager; has worked in
investment management since 1978; has managed portfolio investments since 1979;
B.S., University of Pennsylvania; M.B.A., Northwestern University.
JOHN HOLLYER, Principal of Vanguard and Fund Manager; has worked in investment
management since 1987; has managed portfolio investments since 1989; B.S.,
University of Pennsylvania.
DAVID R. GLOCKE, Principal of Vanguard and Fund Manager; has worked in
investment management since 1991; has managed portfolio investments since 1997;
B.S., University of Wisconsin.
Mr. Auwaerter, Mr. Hollyer, and Mr. Glocke manage the Funds on a day-to-day
basis. Mr. MacKinnon is responsible for setting the Funds' broad investment
policies and for overseeing the Fund Managers.
- --------------------------------------------------------------------------------
DIVIDENDS AND TAXES
Each Fund distributes to shareholders virtually all of its net income (interest
less expenses). The Fund's income dividends accrue daily, and are distributed on
the first business day of every month.
Your dividend distributions will be reinvested in additional Fund shares
and accumulate on a tax-deferred basis if you are investing through an
employer-sponsored retirement or savings plan. You will not owe taxes on these
distributions until you begin withdrawals from the plan. You should consult your
plan administrator, your plan's Summary Plan Description, or your tax adviser
about the tax consequences of plan withdrawals.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Each Fund's NAV is expected to remain at a constant $1. Although the
stable share price is not guaranteed, the Funds are managed and securities are
purchased to maintain that price.
The instruments held by the Funds are valued on the basis of amortized
cost, which does not take into account unrealized capital gains or losses.
Newspapers typically list money market fund yields weekly, separately from
listings for other mutual funds. Different newspapers use different
abbreviations for the Funds, but the most common are VANGPR, VANGFDL, and
VANGTRSY.
<PAGE>
15
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years, and certain
information reflects financial results for a single Fund share in each case. The
total returns in each table represent the rate that an investor would have
earned or lost each year on an investment in the Fund (assuming reinvestment of
all dividend distributions). This information has been derived from the
financial statements audited by PricewaterhouseCoopers LLP, independent
accountants, whose report--along with each Fund's financial statements--is
included in the Funds' most recent annual report to shareholders. You may have
the annual report sent to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES
This explanation uses the Prime Money Market Fund Investor Shares as an example.
The Fund began fiscal 1999 with a net asset value (price) of $1.00 per share.
During the year, the Fund earned $0.049 per share from investment income
(interest and dividends).
Shareholders received $0.049 per share in the form of dividend distributions.
The earnings ($0.049 per share) minus the distributions ($0.049 per share)
resulted in a share price of $1.00 at the end of the year. For a shareholder who
reinvested the distributions in the purchase of more shares, the total return
from the Fund was 4.97% for the year.
As of November 30, 1999, the Fund had $39.4 billion in net assets. For the year,
its expense ratio was 0.33% ($3.30 per $1,000 of net assets), and its net
investment income amounted to 4.85% of its average net assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VANGUARD PRIME MONEY MARKET FUND
INVESTOR SHARES
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .049 .053 .053 .052 .057
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- -- -- --
--------------------------------------------------------
Total from Investment
Operations .049 .053 .053 .052 .057
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.049) (.053) (.053) (.052) (.057)
Distributions from
Realized Capital
Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.049) (.053) (.053) (.052) (.057)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
================================================================================
TOTAL RETURN 4.97% 5.42% 5.41% 5.31% 5.82%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $39,430 $33,732 $26,480 $22,218 $18,764
Ratio of Total
Expenses to Average
Net Assets 0.33% 0.33% 0.32% 0.32% 0.32%
Ratio of Net
Investment Income to
Average Net Assets 4.85% 5.28% 5.28% 5.18% 5.64%
================================================================================
<PAGE>
16
- --------------------------------------------------------------------------------
VANGUARD FEDERAL MONEY MARKET FUND
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .048 .052 .052 .051 .056
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- -- -- --
--------------------------------------------------------
Total from Investment
Operations .048 .052 .052 .051 .056
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.048) (.052) (.052) (.051) (.056)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.048) (.052) (.052) (.051) (.056)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
================================================================================
TOTAL RETURN 4.89% 5.35% 5.35% 5.26% 5.77%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $5,243 $4,263 $3,495 $3,100 $2,637
Ratio of Total
Expenses to Average
Net Assets 0.33% 0.33% 0.32% 0.32% 0.32%
Ratio of Net
Investment Income to
Average Net Assets 4.79% 5.21% 5.22% 5.13% 5.61%
================================================================================
- --------------------------------------------------------------------------------
VANGUARD TREASURY MONEY MARKET FUND
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .044 .050 .050 .050 .053
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- -- -- --
--------------------------------------------------------
Total from Investment
Operations .044 .050 .050 .050 .053
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.044) (.050) (.050) (.050) (.053)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.044) (.050) (.050) (.050) (.053)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
================================================================================
TOTAL RETURN 4.51% 5.06% 5.10% 5.11% 5.47%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $4,593 $3,942 $3,237 $2,917 $2,527
Ratio of Total
Expenses to Average
Net Assets 0.33% 0.33% 0.32% 0.32% 0.32%
Ratio of Net
Investment Income to
Average Net Assets 4.41% 4.94% 4.98% 4.99% 5.33%
================================================================================
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
17
INVESTING WITH VANGUARD
One or more of the Funds 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
Fund as an investment option.
- - If you have any questions about a Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Services Center, toll-free, at 1-800-523-1188.
- - If you have questions 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 Fund'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. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice.
ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
GLOSSARY OF INVESTMENT TERMS
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
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
distribution fees.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund'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.
MONEY MARKET INSTRUMENTS
Short-term, liquid investments (usually with a maturity of 13 months or less),
which include U.S. Treasury bills, bank certificates of deposit (CDs),
repurchase agreements, commercial paper, and banker's acceptances.
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.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and interests in 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
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP(R) LOGO]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Money Market Funds, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORT
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT SERVICES CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Funds
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by writing the Public
Reference Section, Securities and
Exchange Commission, Washington,
DC 20549-0102.
Vanguard Prime and Federal Money
Market Funds' Investment Company
Act file number: 811-2554
Vanguard Treasury Money Market
Fund's Investment Company Act file
number: 811-7803
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I030N-03/24/2000
<PAGE>
VANGUARD(R) PRIME
MONEY MARKET FUND
INSTITUTIONAL SHARES
Prospectus
March 24, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
November 30, 1999.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD PRIME MONEY MARKET FUND
INSTITUTIONAL SHARES
Prospectus
March 24, 2000
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 FUND PROFILE 11 INVESTING WITH VANGUARD
4 ADDITIONAL INFORMATION 11 Services and Account Features
4 A WORD ABOUT RISK 12 Types of Accounts
4 WHO SHOULD INVEST 12 Buying Shares
5 PRIMARY INVESTMENT POLICIES 14 Redeeming Shares
7 THE FUND AND VANGUARD 17 Transferring Registration
8 INVESTMENT ADVISER 17 Fund and Account Updates
8 DIVIDENDS AND TAXES 18 Mandatory Conversion to
Investor Shares
9 SHARE PRICE
GLOSSARY (inside back cover)
10 FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and policies of Vanguard Prime
Money Market Fund Institutional Shares. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk(R)"
explanations along the way. Reading the prospectus will help you to decide
whether the Fund is the right investment for you. We suggest that you keep it
for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
The Prime Money Market Fund offers two separate classes of shares: Investor and
Institutional. This prospectus offers the Fund's Institutional Shares, which
have an investment minimum of $10 million and generally are not available to
investors who require special employee benefit plan services. Please call
Vanguard at 1-800-662-7447 to obtain a separate prospectus that offers the
Fund's Investor Shares, which have an investment minimum of $3,000 ($1,000 for
IRA's).
The Fund's separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INSTITUTIONAL SHARES.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Prime Money Market
Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income while maintaining liquidity and a
stable share price of $1.
INVESTMENT POLICIES
The Fund invests primarily in high-quality, short-term money market instruments,
including certificates of deposit, banker's acceptances, commercial paper, and
other money market securities. To be considered high quality, a security
generally must be rated in one of the two highest credit-quality categories for
short-term securities by at least two nationally recognized rating services (or
by one, if only one rating service has rated the security). If unrated, the
security must be determined by the Fund's adviser to be of quality equivalent to
those in the two highest credit-quality categories. The Fund will maintain an
average maturity of 90 days or less. For more information, see "Security
Selection" under PRIMARY INVESTMENT POLICIES.
PRIMARY RISKS
THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT FALLING SHORT-TERM
INTEREST RATES WILL CAUSE THE FUND'S INCOME--AND THUS ITS TOTAL RETURN--TO
DECLINE. INCOME RISK IS GENERALLY HIGH FOR FUNDS THAT INVEST IN SHORT-TERM
SECURITIES. The Fund is also subject to:
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
- - Credit risk, which is the chance that the issuer of a security will fail to
pay interest and principal in a timely manner. Credit risk, which has the
potential to hurt the Fund's performance, should be low for the Fund.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1 PER SHARE, IT IS POSSIBLE
TO LOSE MONEY BY INVESTING IN THE FUND.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of a broad-based money
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.
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2
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 8.43%
1991 6.26%
1992 3.88%
1993 3.18%
1994 4.27%
1995 6.01%
1996 5.46%
1997 5.61%
1998 5.57%
1999 5.20%
----------------------------------------------------
NOTE: Prior to October 28, 1995, total returns are
for Vanguard Institutional Money Market Portfolio.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 2.08% (quarter ended June 30, 1990) and the lowest return for a
quarter was 0.77% (quarter ended June 30, 1993).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-----------------------------------------------------------------
Vanguard Prime Money Market Fund
Institutional Shares 5.20% 5.57% 5.38%
Salomon Smith Barney 3-Month
Treasury Index 4.74 5.20 5.05
Average Institutional Money
Market Fund* 4.92 5.29 5.11
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*Derived from data provided by Lipper Inc.
-----------------------------------------------------------------
If you would like to know the current seven-day yield for the Fund, call
Vanguard's Investor Information Department at 1-800-662-7447 (SHIP).
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended November 30, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.11%
12b-1 Distribution Fee: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.15%
<PAGE>
3
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$15 $48 $85 $192
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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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 net assets of
the fund. Vanguard Prime Money Market Fund Institutional Shares' expense ratio
in fiscal year 1999 was 0.15%, or $1.50 per $1,000 of average net assets. The
average institutional taxable money market mutual fund had expenses in 1999 of
0.41%, or $4.10 per $1,000 of average net assets (derived from data provided by
Lipper Inc., which reports on the mutual fund industry). Management expenses,
which comprise one part of operating expenses, include investment advisory fees
as well as other costs of managing a fund--such as account maintenance,
reporting, accounting, legal, and other administrative expenses.
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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 the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
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<PAGE>
4
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ADDITIONAL INFORMATION
DIVIDENDS MINIMUM INITIAL INVESTMENT
Declared daily and distributed on $10 million
the first business day of each month
NEWSPAPER ABBREVIATION
INVESTMENT ADVISER VangPrInst
The Vanguard Group, Valley Forge,
Pa., since inception VANGUARD FUND NUMBER
066
INCEPTION DATE*
October 3, 1989 CUSIP NUMBER
922906508
NET ASSETS AS OF NOVEMBER 30, 1999
$41.2 billion TICKER SYMBOL
VMRXX
SUITABLE FOR IRAS
Yes *The Institutional Shares were originally
created as a separate fund. On October
28, 1995, they became a separate share
class of the Prime Money Market Fund.
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A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard Prime
Money Market Fund Institutional Shares. 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.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
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WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a money market fund to your existing holdings, which could
include other cash--as well as stock, bond, and tax-exempt--investments.
- - You want an investment that does not fluctuate in value.
- - You want current income.
COSTS AND MARKET-TIMING
The Vanguard Prime Money Market Fund serves both short- and long-term investor
needs; however, other Vanguard funds are intended for long-term investors only.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of a fund's shareholders. To minimize
these costs, Vanguard's stock, bond, and balanced funds have adopted policies to
discourage short-term trading--which includes switching back and forth from the
Prime Money Market Fund. Please check other Vanguard funds' prospectuses for
specifics on the trading limitations of those funds. Also, all Vanguard funds,
including this Fund, reserve the right to stop offering shares at any time or to
reject specific purchase requests.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
<PAGE>
5
PRIMARY INVESTMENT POLICIES
This section explains the policies that the investment adviser uses in pursuit
of the Fund's objectives--income, liquidity, and stability of principal. It also
explains how the adviser implements these policies. In addition, this section
discusses several important risks--income risk, manager risk, and credit
risk--faced by investors in the Fund. The Fund's Board of Trustees oversees the
management of the Fund, and may change the investment strategies in the interest
of shareholders.
MARKET EXPOSURE
The Fund's primary policy is to invest 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). The Fund will maintain an average
maturity of 90 days or less.
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PLAIN TALK ABOUT
MONEY MARKET INSTRUMENTS
The term "money market instruments" refers to a variety of short-term liquid
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 are promissory notes issued by large
companies or financial firms; banker's acceptances, which are credit instruments
guaranteed by a bank; and negotiable certificates of deposit, which are issued
by banks in large denominations. Money market securities can pay a fixed,
variable, or floating rate of interest.
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[FLAG] THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT THE FUND'S
DIVIDENDS (THAT IS, INCOME) WILL DECLINE BECAUSE OF FALLING INTEREST RATES.
BECAUSE THE FUND'S INCOME IS BASED ON SHORT-TERM INTEREST RATES--WHICH CAN
FLUCTUATE SIGNIFICANTLY OVER SHORT PERIODS--INCOME RISK IS EXPECTED TO BE
HIGH.
SECURITY SELECTION
The Vanguard Group, adviser to the Fund, selects high-quality money market
instruments. The Fund focuses on securities of a particular class of issuer (the
U.S. government, U.S. government agencies, or non government issuers). The Fund
is managed without regard to tax ramifications.
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PLAIN TALK ABOUT
CREDIT QUALITY
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 issued by the U.S. government)
carry the highest credit ratings. All things being equal, money market
instruments with greater credit risk offer higher yields.
- --------------------------------------------------------------------------------
<PAGE>
6
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
MAY DO A POOR JOB OF SELECTING SECURITIES.
The Prime Money Market Fund invests primarily in certificates of deposit,
banker's acceptances, commercial paper, and other money market securities.
Commercial paper must be rated Prime-1 by Moody's Investors Service or A-1 by
Standard & Poor's Corporation. Securities that are unrated must be issued by a
company with a debt rating of A3 or better by Moody's or A- or better by
Standard & Poor's. The Fund also invests in short-term corporate, state, and
municipal obligations rated A3 or better by Moody's or A- or better by Standard
& Poor's.
Among the certificates of deposit typically held by the Fund are Eurodollar
and Yankee obligations, which are primarily certificates of deposit issued in
U.S. dollars by foreign banks and foreign branches of U.S. banks. Eurodollar and
Yankee obligations have risks similar to U.S. money market instruments, such as
income risk and credit risk. Other risks of Eurodollar and Yankee obligations
include the possibilities that: a foreign government will not let U.S.
dollar-denominated assets leave the country; the banks that issue Eurodollar
obligations may not be subject to the same regulations as U.S. banks; and
adverse political or economic developments will affect investments in a foreign
country. Before the Fund's adviser selects a Eurodollar or Yankee obligation,
however, the foreign issuer undergoes the same credit-quality analysis and tests
of financial strength as an issuer of domestic securities.
The Fund also invests in securities issued by U.S. government agencies
whose interest and principal payments typically 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, and the
Federal Home Loan Mortgage Corporation.
[FLAG] THE FUND IS SUBJECT, TO A LIMITED EXTENT, TO CREDIT RISK, WHICH IS THE
CHANCE THAT THE ISSUER OF A SECURITY WILL FAIL TO PAY INTEREST AND
PRINCIPAL IN A TIMELY MANNER.
While the credit quality of the Fund's portfolio securities is very high,
the Fund faces credit risk because it invests in money market securities issued
by private companies. It is possible that one or more of these companies may
experience financial difficulties and, as a result, may fail to pay interest to
the Fund or return the Fund's principal when repayment is due.
Also, bear in mind that, while the Fund invests in high-quality money
market instruments, the Fund is not insured or guaranteed by the FDIC or any
other agency of the U.S. government.
[FLAG] THE FUND RESERVES THE RIGHT TO INVEST IN REPURCHASE AGREEMENTS, WHICH ARE
SUBJECT TO SPECIFIC RISKS.
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PLAIN TALK ABOUT
REPURCHASE AGREEMENTS
A means of investing money for a short period, repurchase agreements are
contracts in which a financial institution sells securities and agrees to
repurchase the securities on a specific date (normally the next business day)
and at a specific price.
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<PAGE>
7
Repurchase agreements carry several risks. For instance, if the seller is
unable to repurchase the securities as promised, the Fund may experience a loss
when trying to sell the securities to another person. Or, if the seller becomes
insolvent, a bankruptcy court may determine that the securities do not belong to
the Fund and order that the securities be sold to pay off the seller's debts.
The Fund's adviser believes that these risks can be controlled through careful
security selection and monitoring.
[FLAG] THE FUND RESERVES THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
FLOATING-RATE SECURITIES, WHICH ARE TRADITIONAL TYPES OF DERIVATIVES.
- --------------------------------------------------------------------------------
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), a money
market benchmark (such as U.S. Treasury bill rates or the Federal Funds
Effective Rate), an asset (such as a commodity like gold), or a market index
(such as the S&P 500 Index).
- --------------------------------------------------------------------------------
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 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 Fund will not use derivatives for speculative purposes or as leveraged
investments that magnify the risks of an investment.
In addition, the Fund may invest up to 10% of its net assets in illiquid
securities. These are securities that cannot be readily resold or converted into
cash.
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most 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 own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
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THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $520 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
<PAGE>
8
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1974, serves as the Funds' adviser through its Fixed Income Group. As of
November 30, 1999, Vanguard served as adviser for about $354 billion in assets.
Vanguard manages the Fund on an at-cost basis, subject to the control of the
Trustees and officers of the Fund. For the fiscal year ended November 30, 1999,
the investment advisory expenses for the Fund represented an effective annual
rate of 0.01% of its average net assets.
The adviser places all orders for the purchase and sale of the Fund's
securities, and seeks out the best available price and most favorable execution
for all transactions.
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PLAIN TALK ABOUT
THE FUND'S ADVISER
The individuals responsible for overseeing the Fund's investments are:
IAN A. MACKINNON, Managing Director of Vanguard and head of Vanguard's Fixed
Income Group; has worked in investment management since 1974; primary
responsibility for Vanguard's internal fixed-income policy and strategy since
1981; B.A., Lafayette College; M.B.A., Pennsylvania State University.
ROBERT F. AUWAERTER, Principal of Vanguard and Fund Manager; has worked in
investment management since 1978; has managed portfolio investments since 1979;
B.S., University of Pennsylvania; M.B.A., Northwestern University.
JOHN HOLLYER, Principal of Vanguard and Fund Manager; has worked in investment
management since 1987; has managed portfolio investments since 1989; B.S.,
University of Pennsylvania.
DAVID R. GLOCKE, Principal of Vanguard and Fund Manager; has worked in
investment management since 1991; has managed portfolio investments since 1997;
B.S., University of Wisconsin.
Mr. Auwaerter, Mr. Hollyer, and Mr. Glocke manage the Fund on a day-to-day
basis. Mr. MacKinnon is responsible for setting the Fund's broad investment
policies and for overseeing the Fund Managers.
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DIVIDENDS AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
less expenses). The Fund's income dividends accrue daily and are distributed on
the first business day of every month. You can receive your income dividends in
cash, or you can have them automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
<PAGE>
9
- - Any dividends that you receive are taxable to you as ordinary income for
federal income tax purposes.
- - Dividend distributions that you receive may be subject to state and local
income taxes. Depending on your state's rules, however, any dividends
attributable to interest earned on direct obligations of the U.S. Treasury
may be exempt from state and local taxes. Vanguard will notify you each
year how much, if any, of your dividends may qualify for this exemption.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). The Fund's NAV is expected to remain at a constant $1. Although the
stable share price is not guaranteed, the Fund is managed and securities are
purchased to maintain that price.
The instruments held by the Fund are valued on the basis of amortized cost,
which does not take into account unrealized capital gains or losses.
Newspapers typically list money market fund yields weekly, separately from
listings for other mutual funds. Different newspapers use different
abbreviations for the Fund, but the most common is VANGPRINST.
<PAGE>
10
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance since inception, and certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost each year on an
investment in the Fund (assuming reinvestment of all dividend distributions).
This information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, whose report--along with
the Fund's financial statements--is included in the Fund's most recent annual
report to shareholders. You may have the annual report sent to you without
charge by contacting Vanguard.
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PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $1.00 per share.
During the year, the Fund earned $0.050 per share from investment income
(interest and dividends).
Shareholders received $0.050 per share in the form of dividend distributions.
The earnings ($0.050 per share) minus the distributions ($0.050 per share)
resulted in a share price of $1.00 at the end of the year. For a shareholder who
reinvested the distributions in the purchase of more shares, the total return
from the Fund's Institutional Shares was 5.15% for the year.
As of November 30, 1999, the Fund's Institutional Shares had $1.8 billion in net
assets. For the year, its expense ratio was 0.15% ($1.50 per $1,000 of net
assets); and its net investment income amounted to 5.04% of its average net
assets.
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VANGUARD PRIME MONEY MARKET FUND
INSTITUTIONAL SHARES
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1999 1998 1997 1996 1995*
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .050 .055 .054 .054 .005
Net Realized and
Unrealized Gain (Loss)
on Investments -- -- -- -- --
--------------------------------------------------------
Total from Investment
Operations .050 .055 .054 .054 .005
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.050) (.055) (.054) (.054) (.005)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.050) (.055) (.054) (.054) (.005)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
================================================================================
TOTAL RETURN 5.15% 5.61% 5.59% 5.49% 0.53%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $1,776 $1,143 $951 $910 $793
Ratio of Total
Expenses to Average
Net Assets 0.15% 0.15% 0.15% 0.15% 0.15%**
Ratio of Net Investment
Income to Average
Net Assets 5.04% 5.46% 5.44% 5.35% 5.65%**
================================================================================
*Period began on the Fund's inception date, October 28, 1995.
**Annualized.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
11
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INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK]. Please call us to request copies.
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SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
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TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
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VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOK]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
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VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
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ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
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SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks.
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<PAGE>
12
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
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FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
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FOR HOLDING PERSONAL TRUST ASSETS [BOOK]
Invest assets held in an existing personal trust.
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FOR AN ORGANIZATION [BOOK]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
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A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
BUYING SHARES
You buy your shares at the Fund's next-determined share price (net asset value)
after Vanguard receives your request, which should be $1 per share. Before your
contribution to a money market fund can be invested, it must be converted to
"federal funds," which are Federal Reserve deposits that banks and other
financial institutions draw upon to meet short-term cash needs--and which fund
advisers must use to pay for the securities they buy. Vanguard converts your
money market investment to federal funds, which usually takes one business day.
Because of this conversion period, your money market account will be credited on
the business day following the day your investment is received. You will begin
earning dividends on your investment on the next calendar day. For example, if
your check is received on a Thursday before the close of trading on the New York
Stock exchange, your account will be credited the next business day (Friday) and
you will begin earning dividends on Saturday.
You may convert Investor Shares of the Fund into Institutional Shares
provided that you meet the minimum initial investment requirements for
Institutional Shares.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$10 million
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call your assigned Service Associate to arrange your wire transaction.
Wire to:
FRB ABA 021001088
HSBC Bank USA
<PAGE>
13
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Prime Money Market Fund Institutional Shares-66
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
If you buy fund shares through a federal funds wire, your investment begins
earning dividends the next calendar day. You can begin earning dividends
immediately if you notify Vanguard by 10:45 a.m. Eastern time that you intend to
make a wire purchase that day.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-66
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355-2331
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or your assigned Service Associate
during business hours--to exchange from another Vanguard fund account with the
same registration (name, address, taxpayer identification number, and account
type). (Note that some restrictions apply to index fund accounts.)
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or your assigned Service Associate
during business hours--to exchange from another Vanguard fund account with the
same registration (name, address, taxpayer identification number, and account
type). (Note that some restrictions apply to index fund accounts.)
Vanguard Tele-Account
1-800-662-6273
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
<PAGE>
14
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check. However,
while your redemption request will be processed at the next-determined net asset
value after it is received, your redemption proceeds will not be available until
payment for your purchase is collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 17.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and some other retirement accounts. If you sell shares of these
funds online, a redemption check will be sent to your address of record.
- --------------------------------------------------------------------------------
<PAGE>
15
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
Call Vanguard Tele-Account 24 hours a day--or your assigned Service Associate
during business hours--to sell or exchange shares. You can exchange shares from
this Fund to open an account in another Vanguard fund or to add to an existing
Vanguard fund account with an identical registration.
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
<PAGE>
16
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355-2331
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, wire
(money market funds and other daily dividend funds only), or exchange to another
Vanguard fund.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
WIRE REDEMPTIONS [WIRE]
The wire redemption option is not automatic; you must establish it by completing
a special form or the appropriate section of your account application. Wire
redemptions can be initiated by mail or by telephone during Vanguard's business
hours, but not online.
For Money Market Funds:
For telephone requests made by 10:30 a.m. Eastern time, the wire will arrive at
your bank by the close of business that same day. Requests made by 4 p.m.
Eastern time will arrive at your bank by the close of business on the following
business day.
For Other Daily Dividend Funds:
For telephone requests made by 4 p.m. Eastern time, the wire will arrive at your
bank by the close of business on the following business day.
- --------------------------------------------------------------------------------
NOTE: Wire redemptions of less than $5,000 are subject to a $5 processing fee.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
<PAGE>
17
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355-2331
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the adviser, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Institutional Division at
1-888-809-8102.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
<PAGE>
18
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in January and July for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend distributions, and
proceeds from the sale of shares.
- --------------------------------------------------------------------------------
MANDATORY CONVERSION TO INVESTOR SHARES
The Fund reserves the right to convert an investor's Institutional Shares into
Investor Shares of the Fund if the investor's account balance falls below $10
million. Any such conversion will be preceded by written notice to the investor.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
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
distribution fees.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund'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.
MONEY MARKET INSTRUMENTS
Short-term, liquid investments (usually with a maturity of 13 months or less),
which include U.S. Treasury bills, bank certificates of deposit (CDs),
repurchase agreements, commercial paper, and banker's acceptances.
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.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and interests in 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
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP(R) LOGO]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Prime Money Market
Fund Institutional Shares, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Vanguard Money Market Funds'
annual and semiannual reports
to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI (for Vanguard Money
Market Funds) provides more
detailed information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
If you are an Individual Investor:
THE VANGUARD GROUP
INVESTOR INFORMATION DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
If you are a client of Vanguard's
Institutional Division:
THE VANGUARD GROUP
INSTITUTIONAL INVESTOR
INFORMATION
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-888-809-8102
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-6009.
Fund's Investment Company Act file
number: 811-2554
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I066N-03/24/2000
<PAGE>
PART B
VANGUARD(R) MONEY MARKET RESERVES
VANGUARD TREASURY FUND
(ALSO KNOWN AS THE VANGUARD MONEY MARKET FUNDS)
(INDIVIDUALLY THE TRUST; COLLECTIVELY THE TRUSTS)
STATEMENT OF ADDITIONAL INFORMATION
MARCH 24, 2000
This Statement is not a prospectus but should be read in conjunction with
the Trusts' current Prospectus (dated March 24, 2000). To obtain, without
charge, the Prospectus or the most recent Annual Report to Shareholders, which
contains the Funds' financial statements as hereby incorporated by reference,
please call the Investor Information Department:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
PAGE
----
DESCRIPTION OF THE FUNDS.....................................................B-1
INVESTMENT POLICIES..........................................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS...........................................B-4
CALCULATION OF TOTAL RETURN..................................................B-5
CALCULATION OF YIELD.........................................................B-6
SHARE PRICE..................................................................B-7
PURCHASE OF SHARES...........................................................B-8
REDEMPTION OF SHARES.........................................................B-8
MANAGEMENT OF THE FUNDS......................................................B-8
FINANCIAL STATEMENTS........................................................B-12
DESCRIPTION OF SECURITIES AND RATINGS.......................................B-12
COMPARATIVE INDEXES.........................................................B-14
DESCRIPTION OF THE FUNDS
ORGANIZATION
Vanguard Money Market Reserves was organized as Whitehall Money Market
Trust in 1974 before becoming a Maryland corporation in 1985. It then
reorganized as a Delaware business trust in May, 1998. Prior to its
reorganization as a Delaware business trust, the Trust was known as Vanguard
Money Market Reserves, Inc. Vanguard Treasury Fund was organized as a Delaware
business trust in August, 1996. Prior to its organization as a Delaware business
trust, the Trust operated as the U.S. Treasury Portfolio of Vanguard Money
Market Reserves. Each Trust is registered with the United States Securities and
Exchange Commission (the Commission) under the Investment Company Act of 1940
(the 1940 Act) as an open-end, diversified management investment company. The
Trusts currently offer the following Funds and classes of shares:
VANGUARD MONEY MARKET RESERVES
Vanguard Prime Money Market Fund: Investor Shares and Institutional Shares
Vanguard Federal Money Market Fund (Investor Shares only)
VANGUARD TREASURY FUND
Vanguard Treasury Money Market Fund (Investor Shares only)
(individually, the Fund; collectively, the Funds)
B-1
<PAGE>
Each Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that a Trust may
issue for a single fund or class of shares.
SERVICE PROVIDERS
CUSTODIAN. The Bank of New York, One Wall Street, New York, NY 10286,
serves as the Funds' custodian. The custodian is responsible for maintaining the
Funds' assets and keeping all necessary accounts and records of Fund assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Funds' independent accountants.
The accountants audit the Funds' financial statements and provide other related
services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
CHARACTERISTICS OF THE FUNDS' SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Funds' shares, other
than the possible future termination of either of the Trusts or any of their
Funds. The Funds may be terminated by reorganization into another mutual fund or
by liquidation and distribution of the assets of the affected fund. Unless
terminated by reorganization or liquidation, the Funds will continue
indefinitely.
SHAREHOLDER LIABILITY. The Funds are organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of a Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of a Fund's net assets, and to change any fundamental
policy of the Fund. Shareholders of the Funds receive one vote for each dollar
of net asset value owned on the record date, and a fractional vote for each
fractional dollar of net asset value owned on the record date. However, only the
shares of the fund affected by a particular matter are entitled to vote on that
matter. Voting rights are noncumulative and cannot be modified without a
majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of the applicable Fund.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares of
the Funds.
CONVERSION RIGHTS. Shareholders of the Funds may convert their shares into
another class of shares of the same series upon the satisfaction of any then
applicable eligibility requirements.
REDEMPTION PROVISIONS. The Funds' redemption provisions are described in
their current prospectuses and elsewhere in this Statement of Additional
Information.
B-2
<PAGE>
SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.
CALLS OR ASSESSMENT. The Funds' shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE FUNDS
Each Fund intends to continue to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. This special tax
status means that a fund will not be liable for federal tax on income and
capital gains distributed to shareholders. In order to preserve its tax status,
a fund must comply with certain requirements. If a fund fails to meet these
requirements in any taxable year, it will be subject to tax on its taxable
income at corporate rates, and all distributions from earnings and profits,
including any distributions of net tax-exempt income and net long-term capital
gains, will be taxable to shareholders as ordinary income. In addition, a fund
could be required to recognize unrealized gains, pay substantial taxes and
interest, and make substantial distributions before regaining its tax status as
a regulated investment company.
INVESTMENT POLICIES
The following policies supplement the investment objective and policies set
forth in the Funds' Prospectus:
REPURCHASE AGREEMENTS. The Prime and Federal Money Market Funds may invest
in repurchase agreements with commercial banks, brokers or dealers either for
defensive purposes due to market conditions or to generate income from their
excess cash balances. A repurchase agreement is an agreement under which the
Fund acquires a fixed-income security (generally a security issued by the U.S.
Government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed upon price and date (normally, the next business day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the Fund and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Fund (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held by a custodian bank
until repurchased. In addition, the Funds' Board of Trustees will monitor a
Fund's repurchase agreement transactions generally and will establish guidelines
and standards for review by the investment adviser of the creditworthiness of
any bank, broker or dealer party to a repurchase agreement with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by the Fund not within the control of the Fund
and therefore the realization by the Fund on such collateral may be indefinitely
delayed. Finally, it is possible that the Fund may not be able to substantiate
its interest in the underlying security and may be deemed an unsecured creditor
of the other party to the agreement. While the adviser acknowledges these risks,
it is expected that they can be controlled through careful monitoring
procedures.
LENDING OF SECURITIES. Each Fund may lend its investment securities to
qualified institutional investors (typically brokers, dealers, banks or other
financial institutions) who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The terms and the structure and the aggregate amount of
such loans must be consistent with the 1940 Act, and the Rules and Regulations
or interpretations of the Commission thereunder. These provisions limit the
amount of securities a fund may lend to 33 1/3% of the Fund's total assets, and
require that (a) the borrower pledge and maintain with the Fund collateral
consisting of cash, an irrevocable letter of credit or securities issued or
guaranteed by the United States Government having at all times not less than
100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time, and (d) the Fund receive reasonable
interest on the loan (which may include the Fund's investing any cash collateral
in interest bearing
B-3
<PAGE>
short-term investments), any distribution on the loaned securities and any
increase in their market value. Loan arrangements made by the Fund will comply
with all other applicable regulatory requirements, including the rules of the
New York Stock Exchange, which presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of three business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Funds' Board of
Trustees.
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Funds to participate in Vanguard's interfund lending
program. This program allows the Vanguard funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions, including the requirement that no fund may borrow or
lend money through the program unless it receives a more favorable interest rate
than is available from a typical bank for a comparable transaction. In addition,
a fund may participate in the program only if and to the extent that such
participation is consistent with the fund's investment objective and other
investment policies. The Boards of Trustees of the Vanguard funds are
responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the Commission's exemptive order.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on the Fund's books.
Each Fund may invest in restricted, privately placed securities that, under
securities laws, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers, they may
be considered illiquid securities---meaning that they could be difficult for the
Fund to convert to cash if needed.
If a substantial market develops for a restricted security held by a Fund,
it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933. While the
Funds' investment adviser determines the liquidity of restricted securities on a
daily basis, the Board oversees and retains ultimate responsibility for the
adviser's decisions. Several factors that the Board considers in monitoring
these decisions include the valuation of a security, the availability of
qualified institutional buyers, and the availability of information about the
security's issuer.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund is subject to the following fundamental investment limitations,
which cannot be changed in any material way without the approval of the holders
of a majority of the affected Fund's shares. For these purposes, a "majority" of
shares means shares representing the lesser of: (i) 67% or more of the votes
cast to approve a change, so long as shares representing more than 50% of the
Fund's net asset value are present or represented by proxy; or (ii) more than
50% of the Fund's net asset value.
BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, reverse repurchase agreements (Prime and Federal
Money Market Funds only), or Vanguard's interfund lending program only, and must
comply with all applicable regulatory conditions. The Fund may not borrow to
increase income (leveraging), but only to facilitate redemption requests which
might otherwise require untimely dispositions of portfolio securities. When
borrowing exceeds 5% of the Fund's net assets, the Fund will repay all
borrowings before making additional investments, and interest paid on such
borrowings will reduce net income.
COMMODITIES. The Fund may not invest in commodities or commodity contracts.
DIVERSIFICATION. The Fund may not purchase securities of any issuer if, as
a result, more than 5% of the Fund's total assets would be invested in that
issuer's securities. This limitation does not apply to obligations of the United
States Government, its agencies, or instrumentalities. The Fund may, however,
invest in a single issuer as permitted by the Commission (which currently
permits a money market fund to invest up to 25% of its total assets in the
highest-quality securities of a single issuer for a period of up to three
business days).
B-4
<PAGE>
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 10% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one 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 banker's acceptances of domestic institutions.
INVESTING FOR CONTROL. The Fund may not invest in a company for purposes of
controlling its management.
INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not make loans to other persons, except by the purchase
of obligations in which the Fund is authorized to invest, or through Vanguard's
interfund lending program; provided, however, that the Fund may not enter into
repurchase agreements if, as a result thereof, more than 10% of the net assets
of any Fund (taken at current value) would be subject to repurchase agreements
maturing in more than seven days.
MARGIN. The Fund may not purchase securities on margin or sell securities
short.
OIL, GAS, MINERALS. The Fund may not invest in interests in oil, gas or
other mineral exploration or development programs.
PLEDGING ASSETS. The Fund may pledge, mortgage or hypothecate its assets in
an amount up to 15% of its net assets, but only to secure borrowings for
temporary or emergency purposes.
PUT, CALL, STRADDLE, SPREAD OPTIONS. The Fund may not write or invest in
put, call, straddle, or spread options.
REAL ESTATE. The Fund may not invest directly in real estate, or real
estate investment trust securities.
SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
The above mentioned investment limitations are considered at the time
investment securities are purchased.
None of these limitations prevents a Fund from participating in The
Vanguard Group (Vanguard). Because the Funds are a member of the Group, the
Funds may own securities issued by Vanguard, make loans to Vanguard, and
contribute to Vanguard's costs or other financial requirement. See "Management
of the Funds" for more information.
CALCULATION OF TOTAL RETURN
The average annual total return of each Fund for the one-, five-, and
ten-year periods ended November 30, 1999 is set forth below:
ONE YEAR ENDED FIVE YEARS ENDED TEN YEARS ENDED
FUND 11/30/1999 11/30/1999 11/30/1999
---- ---------- ---------- ----------
Prime Money Market
Fund Investor Shares 4.97% 5.39% 5.24%
Prime Money Market
Fund Institutional
Shares* 5.15% 5.57% 5.40%**
Federal Money Market
Fund 4.89% 5.33% 5.15%
Treasury Money Market
Fund 4.51% 5.05% 4.93%
- ---------
*Prior to October 28, 1995, total returns are for Vanguard Institutional Money
Market Portfolio.
**Since inception of Vanguard Institutional Money Market Portfolio on October 3,
1989.
B-5
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years, or the life of each Portfolio,
all ended on the last day of a recent month. Average annual total return
quotations will reflect changes in the price of the Portfolios' shares and
assume that all dividends and capital gains distributions during the respective
periods were reinvested in Portfolio shares. Average annual total return is
calculated by finding the average annual compounded rates of return of a
hypothetical investment over such periods according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)1/N - 1
Where:
T =average annual total return
P =a hypothetical initial investment of $1,000
n =number of years
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of each Portfolios' shares and assume
that all dividends and capital gains distributions during the period were
reinvested in Portfolio shares. Cumulative total return is calculated by finding
the cumulative rates of a return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C =cumulative total return
P =a hypothetical initial investment of $1,000
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
CALCULATION OF YIELD
The current yield of each Fund 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 Fund, 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 Fund 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 Funds for the 7-day
base period ended November 30, 1999.
B-6
<PAGE>
PRIME MONEY PRIME MONEY
MARKET FUND MARKET FUND
INVESTOR SHARES INSTITUTIONAL SHARES
11/30/1999 11/30/1999
---------- ----------
Value of account at beginning
of period. . . . . . . . . . . . . $1.00000 $1.00000
Value of same account at end of
period*. . . . . . . . . . . . . . 1.00103 1.00106
-------- --------
Net change in account value . . . . $ .00103 $ .00106
Annualized current net yield
(Net change X 365/7)
-/- average net asset value. . . . 5.36% 5.54%
===== =====
Effective Yield
[(Net change) + 1]365/7 - 1. . . . 5.50% 5.66%
===== =====
Average weighted maturity of
investments. . . . . . . . . . . . 69 days 69 days
======= =======
- ---------
* Exclusive of any capital changes and income other than investment income.
FEDERAL MONEY TREASURY MONEY
MARKET FUND MARKET FUND
11/30/1999 11/30/1999
---------- ----------
Value of account at beginning
of period. . . . . . . . . . . . . $1.00000 $1.00000
Value of same account at end of
period*. . . . . . . . . . . . . . 1.00100 1.00092
-------- --------
Net change in account value . . . . $ .00100 $ .00092
Annualized current net yield
(Net change X 365/7)
-/- average net asset value. . . . 5.21% 4.77%
===== =====
Effective Yield
[(Net change) + 1]365/7 - 1. . . . 5.33% 4.90%
===== =====
Average weighted maturity of
investments. . . . . . . . . . . . 70 days 77 days
======= =======
- ---------
* Exclusive of any capital changes and income other than investment income.
Each Fund seeks to maintain, but does not guarantee, a constant net asset
value of $1.00. The yield of each Fund will fluctuate. The Funds have obtained
private insurance that partially protects the Prime Money Market Fund against
default of principal or interest payments on the instruments it holds, and
against bankruptcy by issuers and credit enhancers of these instruments.
Treasury and other U.S. Government securities held by the Fund are excluded from
this coverage. The annualization of a week's dividend is not a representation by
the Fund as to what an investment in the Fund will actually yield in the future.
Actual yields will depend on such variables as investment quality, average
maturity, the type of instruments the Fund invests in, changes in interest rates
on instruments, changes in the expenses of the Funds and other factors. Yields
are one basis investors may use to analyze the Funds, 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.
SHARE PRICE
Each Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding, except for the Prime Money Market Fund whereby net asset
value is calculated by dividing the net assets attributed to each share class by
the total number of shares outstanding for that share class. The net asset value
is determined as of the close of regular trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Exchange is open for trading.
It is the policy of each Fund to attempt to maintain a net asset value of
$1.00 per share for sales and redemptions. The instruments held by the Fund are
valued on the basis of amortized cost, which does not take into account
unrealized capital gains or losses. This involves valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in
B-7
<PAGE>
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price which the Fund would receive
if it sold the instrument. Such procedures will include a review of the Funds'
holdings by the Trustees, at such intervals as they may deem appropriate, to
determine whether the Funds' net asset value calculated by using available
market quotations deviates from $1.00 per share based on amortized cost. The
extent of any deviation will be examined by the Trustees. If such deviation
exceeds 1/2 of 1%, the Trustees will promptly consider what action, if any, will
be initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, they have agreed to take such corrective action as they regard as
necessary and appropriate, including the sale of fund instruments prior to
maturity to realize capital gains or losses or to shorten average fund maturity;
withholding dividends; making a special capital distribution; redemptions of
shares in kind; or establishing a net asset value per share by using available
market quotations.
The use of amortized cost and the maintenance of the Fund's net asset value
at $1.00 is based on its election to operate under Rule 2a-7 under the 1940 Act.
As a condition of operating under that rule, the Fund must maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of 397 days or less, and invest only in
securities that are determined by methods approved by the Trustees to present
minimal credit risks and that are of high quality as determined by the requisite
rating services, or in the case of an instrument not so rated, determined by
methods approved by the Trustees to be of comparable quality.
PURCHASE OF SHARES
Each 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
Each Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the Commission as a result of
which it is not reasonably practicable for a Fund to dispose of securities owned
by it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.
Each Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
No charge is made by a Fund for redemptions; except for wire withdrawals in
amounts less than $5,000 which will be subject to a maximum charge of $5.00.
Shares redeemed may be worth more or less than what was paid for them, depending
on the market value of the securities held by each Fund.
MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The officers of each Fund manage its day-to-day operations and are
responsible to the Fund's Board of Trustees. The Trustees set broad policies for
the Funds and choose their officers. The following is a list of the Trustees and
officers of the Funds and a statement of their present positions and principal
occupations during the past five years. As a group, the Funds' Trustees and
officers own less than 1% of the outstanding shares of each Fund. Each Trustee
also serves as a Director of The Vanguard Group, Inc., and as a Trustee of each
of the 103 funds administered by Vanguard (102 in the case of Mr. Malkiel and 93
in the case of Mr. MacLaury). The mailing address of the Trustees and officers
of the Funds is Post Office Box 876, Valley Forge, PA 19482.
B-8
<PAGE>
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer, and
Trustee* Chairman, Chief Executive Officer and Director of The Vanguard Group,
Inc., and Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee Vice President, Chief
Information Officer, and member of the Executive Committee of Johnson and
Johnson (Pharmaceuticals/Consumer Products), Director of Johnson & Johnson
Consumer Pharmaceuticals Co., The Medical Center at Princeton, and Women's
Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee President Emeritus of The Brookings
Institution (Independent Non-Partisan Research Organization); Director of
American Express Bank, Ltd., The St. Paul Companies, Inc. (Insurance and
Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee Chemical Bank Chairman's Professor
of Economics, Princeton University; Director of Prudential Insurance Co. of
America, Banco Bilbao Gestinova, Baker Fentress & Co. (Investment Management),
The Jeffrey Co. (Holding Company), and Select Sector SPDR Trust (Exchange-Traded
Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee Chairman, President, Chief
Executive Officer, and Director of NACCO Industries, Inc. (Machinery/Coal/
Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee President and Chief Executive Officer
of The Nature Conservancy (Non-Profit Conservation Group); Director of Pacific
Gas and Electric Co., Procter & Gamble Co., NACCO Industries
(Machinery/Coal/Appliances), and Newfield Exploration Co. (Energy); formerly
Director and Senior Partner of McKinsey & Co., and President of New York
University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee Retired Chairman of Nabisco
Brands, Inc. (Food Products); retired Vice Chairman and Director of RJR Nabisco
(Food and Tobacco Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee Retired Chairman of Rohm & Haas Co.
(Chemicals); Director of Cummins Engine Co. (Diesel Engine Company), The Mead
Corp. (Paper Products), and AmeriSource Health Corp.; and Trustee of Vanderbilt
University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary* Managing Director of The
Vanguard Group, Inc.; Secretary of The Vanguard Group, Inc. and of each of the
investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer* Principal of The Vanguard Group,
Inc.; Treasurer of each of the investment companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller* Principal of The Vanguard Group,
Inc.; Controller of each of the investment companies in The Vanguard Group.
- ---------
*Officers of the Funds are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
Each Fund is a member of The Vanguard Group of Investment Companies, which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Funds and the other funds in The Vanguard
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 Vanguard funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings, and equipment.
Each fund pays its share of Vanguard's total expenses which are allocated among
the funds under methods approved by the Board of Trustees of each fund. In
addition, each fund bears its own direct expenses such as legal, auditing, and
custodian fees.
B-9
<PAGE>
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.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the 1940 Act. 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 similar to, and in many cases more restrictive than, those
recommended by a blue ribbon panel of mutual fund industry executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The amounts which each of the funds has invested are adjusted from time to time
in order to maintain the proportionate relationship between each fund's relative
net assets and its contribution to Vanguard's capital. At November 30, 1999,
each Fund had contributed capital to Vanguard (included in other assets)
representing 0.02% of each Fund's net assets. The total amount contributed by
the Funds was $10,547,000, which represented 10.6% of Vanguard's capitalization.
The Amended and Restated Funds' Service Agreement provides as follows: (a) each
Vanguard fund may invest up to 0.40% of its current net assets in Vanguard, and
(b) there is no other limitation on the dollar 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.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the funds in the Group. 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 Vanguard. The Trustees 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 Vanguard Group, and that no fund shall
incur annual distribution expenses in excess of 20/100 of 1% of its average
month-end net assets.
During the fiscal years ended November 30, 1997, 1998, and 1999, the Funds
incurred the following approximate amounts of Vanguard's management (including
transfer agency), distribution, and marketing expenses:
FUND 1997 1998 1999
---- ---- ---- ----
Prime Money Market Fund $73,028,000 $92,226,000 $117,556,000
Federal Money Market Fund 9,567,000 11,651,000 14,996,000
Treasury Money Market Fund 9,310,000 11,151,000 13,619,000
INVESTMENT ADVISORY SERVICES. Vanguard also provides the Funds and several
other Vanguard funds 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 fiscal years ended November 30, 1997, 1998, and 1999, the Funds
incurred the following approximate amounts of The Vanguard Group's expenses
relating to investment advisory services.
B-10
<PAGE>
FUND 1997 1998 1999
---- ---- ---- ----
Prime Money Market Fund $3,782,000 $3,811,000 $4,718,000
Federal Money Market Fund 489,000 475,000 584,000
Treasury Money Market Fund 466,000 453,000 535,000
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted in the table on page B-14), and each fund pays a
proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by The
Vanguard Group, Inc., not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the funds--in three ways:
- - The independent Trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled Board
meetings.
- - The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
- - Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEES. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Funds for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds.
VANGUARD MONEY MARKET FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR TOTAL
AGGREGATE RETIREMENT COMPENSATION
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL FROM ALL VANGUARD
FROM THESE AS PART OF THESE BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUNDS(1) FUNDS' EXPENSES(1) RETIREMENT TRUSTEES(2)
John C. Bogle(3) None None None None
John J. Brennan None None None None
Barbara Barnes
Hauptfuhrer(3) $748 $95 $15,000 $0
JoAnn Heffernan Heisen $8,978 $494 $15,000 $80,000
Bruce K. MacLaury $9,299 $840 $12,000 $75,000
Burton G. Malkiel $9,043 $819 $15,000 $80,000
Alfred M. Rankin, Jr. $8,978 $599 $15,000 $80,000
John C. Sawhill $8,978 $759 $15,000 $80,000
James O. Welch, Jr. $8,978 $875 $15,000 $80,000
J. Lawrence Wilson $8,978 $632 $15,000 $80,000
</TABLE>
- ---------
(1) The amounts shown in this column are based on the Funds' fiscal year ended
November 30, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999
calendar year.
(3) Mrs. Hauptfuhrer and Mr. Bogle have retired from the Funds' Board,
effective December 31, 1998 and December 31, 1999, respectively.
B-11
<PAGE>
FINANCIAL STATEMENTS
Each Fund's financial statements as of and for the year ended November 30,
1999, including the financial highlights for each of the five fiscal years in
the period ended November 30, 1999, appearing in the Funds' 1999 Annual Report
to Shareholders, and the report thereon of PricewaterhouseCoopers LLP,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. For a more complete discussion of
the performance, please see the Funds' Annual Report to Shareholders, which may
be obtained without charge.
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.
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 differ 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 Fund'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.
B-12
<PAGE>
DESCRIPTION OF U.S. GOVERNMENT SECURITIES
As used in the Funds' 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 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 Fund 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 Fund and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that the Fund may not be able to substantiate its interest in the underlying
securities. While the Funds' 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 Money Market Fund invests, and will have at least the same
financial strength as the domestic issuers approved for the Prime Money Market
Fund.
B-13
<PAGE>
COMPARATIVE INDEXES
Each of the investment company members of The Vanguard Group, including
Vanguard Money Market Funds, may from time to time use one or more of the
following unmanaged indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
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 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
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.
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, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index that
contains individually priced U.S. Treasury securities with maturities of 10
years or greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN BROTHERS 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 $100 million outstanding. This index
includes over 1,500 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 $100 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade
general obligation municipal bonds.
B-14
<PAGE>
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 Brothers
Long-Term Corporate AA or Better Bond Index.
COMPOSITE INDEX--65% Lehman Brothers Long-Term Corporate AA or Better Bond Index
and a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN BROTHERS 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
$5 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 $1.6 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 $800 billion.
LEHMAN BROTHERS 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 $1.1 trillion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper 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 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 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 Inc.
LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
LIPPER FIXED INCOME FUND AVERAGE--an industry benchmark of average fixed income
funds with similar investment objectives and policies, as measured by Lipper
Inc.
B-15
<PAGE>
SAI030-03/24/2000
<PAGE>
PART C
VANGUARD MONEY MARKET RESERVES
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust**
(b) By-Laws**
(c) Reference is made to Articles III and V of the Registrant's Declaration
of Trust
(d) Investment Advisory Contract**
(e) Not applicable
(f) Reference is made to the section entitled "Management of the Funds" in
the Registrant's Statement of Additional Information
(g) Custodian Agreement*
(h) Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants*
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
- ------------------
* Filed herewith
** Filed previously
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability to
which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Vanguard Group, Inc. (Vanguard) is an investment adviser registered under
the Advisers Act. The list required by this Item 26 of officers and directors of
Vanguard, together with any information as to any business profession, vocation,
or employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated herein by reference from Schedules B
and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No.
801-11953).
C-1
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts, and other documents required to be maintained by Section 31
(a) of the Investment Company Act and the rules promulgated thereunder will be
maintained at the offices of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; and
the Registrant's Custodian, The Bank of New York, One Wall Street, New York, New
York 10286.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part B of
this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on
the 8th day of March, 2000.
VANGUARD MONEY MARKET RESERVES
BY:_________________________________
(signature)
(HEIDI STAM)
JOHN J. BRENNAN*
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
By:/S/ JOHN J. BRENNAN President, Chairman, Chief March 8, 2000
--------------------------- Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ JOANN HEFFERNAN HEISEN Trustee March 8, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee March 8, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee March 8, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee March 8, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JOHN C. SAWHILL Trustee March 8, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*
By:/S/ JAMES O. WELCH, JR. Trustee March 8, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee March 8, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer, Principal Financial March 8, 2000
--------------------------- Officer and Principal
(Heidi Stam) Accounting Officer
Thomas J. Higgins*
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
INDEX TO EXHIBITS
Custodian Agreement ................................................... Ex-99.BG
Consent of Independent Accountants .................................... Ex-99.BJ
EX-99.BG
CUSTODY AGREEMENT
AGREEMENT, dated as of October 22, 1999 between each open-end management
investment company listed on Appendix A hereto as amended from time to time
(each such investment company, a "Fund") organized and existing under the laws
of the State of Delaware and registered with the U.S. Securities and Exchange
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"), on behalf of certain of their series (each such series, a "Series") and
The Bank of New York Company, Inc., a New York corporation authorized to do a
banking business ("Custodian"). The Funds' principal office and place of
business is P.O. Box 2600, Valley Forge, PA 19482. The Custodian's principal
office and place of business is One Wall Street, New York, New York 10286.
WITNESSETH:
that for and in consideration of the mutual premises hereinafter set forth, each
Fund and Custodian agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words shall have the
meanings set forth below:
1. "AUTHORIZED PERSON" shall be any person duly authorized by a Fund's
Board of Trustees to execute any Certificate or to give Oral Instructions with
respect to one or more Accounts, such persons to be designated in a Certificate
annexed hereto as Appendix B or such other Certificate as may be received by
Custodian from time to time.
2. "AUTOFAX" shall mean an unsigned hard copy facsimile generated by a
Fund's computer system and transmitted to Custodian.
3. "BNY AFFILIATE" shall mean any office, branch or subsidiary of The Bank
of New York Company, Inc.
4. "BOOK-ENTRY SYSTEM" shall mean the Federal Reserve/Treasury book-entry
system for receiving and delivering securities, its successors and nominees.
5. "BUSINESS DAY" shall mean any day on which Custodian, Book-Entry System
and relevant Depositories are open for business.
6. "CERTIFICATE" shall mean any notice, instruction, or other instrument in
writing, authorized or required by this Agreement to be given to Custodian,
which is actually received by Custodian by letter or facsimile transmission and
signed on behalf of a Fund by an Authorized Person of the Fund or a person
reasonably believed by Custodian to be an Authorized Person.
7. "DEPOSITORY" shall include the Book-Entry System, the Depository Trust
Company, the Participants Trust Company, and any other securities depository,
book-entry system or clearing agency (and their respective successors and
nominees) authorized to act as a securities depository, book-entry system or
clearing agency pursuant to applicable law and identified to a Fund.
8. "INSTRUCTIONS" shall mean communications and facsimiles transmitted by a
Fund by electronic or telecommunications media, including S.W.I.F.T.,
computer-to-computer interface, dedicated transmission lines, telex or Autofax,
none of which are manually signed by a representative of a Fund.
9. "ORAL INSTRUCTIONS" shall mean verbal instructions received by Custodian
from an Authorized Person or from a person reasonably believed by Custodian to
be an Authorized Person.
10. "SECURITIES" shall include, without limitation, any common stock and
other equity securities, bonds, debentures and other debt securities, notes,
mortgages or other obligations, and any instruments representing rights to
receive, purchase, or subscribe for the same, or representing
<PAGE>
any other rights or interests therein (whether represented by a certificate or
held in a Depository or by a Subcustodian).
11. "SERIES" shall mean such of the various portfolios, if any, of a Fund,
as are listed on Appendix A hereto.
12. "SHARES" shall mean the shares of beneficial interest of a Fund, each
of which is, in the case of a Fund having Series, allocated to a particular
Series.
13. "SUBCUSTODIAN" shall mean a "bank" as defined in Section 2(a)(5) of the
1940 Act, which is identified to a Fund and which Custodian is required to use
to hold Securities purchased by a Fund from time to time.
ARTICLE II
APPOINTMENT OF CUSTODIAN; ACCOUNTS
1. (a) The Fund hereby appoints Custodian as custodian of all Securities
and cash at any time delivered to Custodian during the term of this Agreement,
and authorizes Custodian to hold Securities in registered form in its name or
the name of its nominees. Custodian hereby accepts such appointment and agrees
to establish and maintain one or more securities accounts and cash accounts for
each Series in which Custodian will hold Securities and cash as provided herein.
Custodian shall maintain books and records segregating the assets of each Series
from the assets of any other Series. Such accounts (each, an "Account";
collectively, the "Accounts") shall be in the name of the Series.
(b) Custodian may from time to time establish on its books and records such
sub-accounts within each Account as a Fund may reasonably request in a
Certificate or Instructions (each, a "Special Account") and Custodian shall find
reasonably acceptable, and shall reflect therein such assets as the Fund may
specify in a Certificate or Instructions.
(c) Custodian may from time to time establish pursuant to a written
agreement with and for the benefit of a broker, dealer, futures commission
merchant or other third party identified in a Certificate or Instructions such
accounts on such terms and conditions as a Fund may reasonably request and
Custodian shall find reasonably acceptable, and shall hold in such accounts such
Securities and cash as the Fund may specify in a Certificate or Instructions.
2. Except as otherwise provided by law, a cash account shall constitute one
single and indivisible current Account.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
1. Each Fund hereby represents and warrants, which representations and
warranties shall be continuing and shall be deemed to be reaffirmed upon each
delivery of a Certificate or each giving of Oral Instructions or Instructions by
such Fund, that
(a) It is duly organized and existing under the laws of the jurisdiction of
its organization, with full power to carry on its business as now conducted, to
enter into this Agreement and to perform its obligations hereunder;
(b) This Agreement has been duly authorized, executed and delivered by such
Fund, approved by a resolution of its Board of Trustees, constitutes a valid and
legally binding obligation of such Fund, enforceable in accordance with its
terms, except as may be limited by bankruptcy, insolvency or other laws
affecting generally the enforceability of creditors' rights or by equitable
principles generally applied, and no statute, regulation or rule, applicable
solely to a Fund and not to Custodian, nor any order, judgment or contract
binding on such Fund prohibits such Fund's execution or performance of this
Agreement;
(c) It is conducting its business in substantial compliance with all
applicable laws and requirements, both state and federal, and has obtained all
regulatory licenses, approvals and consents necessary to carry on its business
as now conducted; there is no provision of its charter or by-laws, nor of any
mortgage, indenture, credit agreement or other contract binding on it or
affecting its property which would prohibit its execution or performance of this
Agreement;
<PAGE>
(d) It will not use the services provided by Custodian hereunder in any
manner that is, or will result in, a violation of any law, rule or regulation
applicable solely to such Fund, and not to Custodian;
(e) It is fully informed of the protections and risks associated with
various methods of transmitting Instructions and Oral Instructions and
delivering Certificates to Custodian, understands that there may be more secure
methods of transmitting Instructions and Oral Instructions and delivering
Certificates than the methods selected by Custodian, agrees that the security
procedures (if any) to be utilized provide a commercially reasonable degree of
protection in light of its particular needs and circumstances, and will cause
each person transmitting Instructions to treat applicable user and authorization
codes, passwords and authentication keys with extreme care, and has established
internal control and safekeeping procedures to restrict the availability of the
same to persons duly authorized to give Instructions;
(f) It shall insure, and agrees it is solely its responsibility, that only
persons(s) duly authorized by such Fund transmit Instructions and agrees that
Custodian may presume that an Instruction including an Account number of a Fund
has been given by person(s) duly authorized to transmit Instructions and need
not review any Instruction other than an Autofax;
(g) It shall manage its borrowings, including, without limitation, any
advance or overdraft (including any day-light overdraft) in the Accounts, so
that the aggregate of its total borrowings for each Series does not exceed the
amount such Series is permitted to borrow under the 1940 Act;
(h) Its transmission or giving of Instructions pursuant to this Agreement
shall at all times comply with the 1940 Act;
(i) It shall only instruct Custodian, whether by a Certificate, Instruction
or Oral Instruction, to disburse cash (i) as hereinafter provided, (ii) for the
payment of dividends or distributions on, or redemptions of, Shares or (iii) for
other proper purposes;
(j) It shall impose and maintain limitations on the destinations to which
cash may be disbursed by Instructions to ensure that each disbursement is in
accordance with the immediately preceding representation and warranty; and
(k) It has the right to make the pledge and grant the security interest and
security entitlement to Custodian contained in paragraph 1 of Article VII
hereof, free of any right or prior claim of any other person or entity (except
as otherwise provided by law), such pledge and grants shall have a first
priority subject to no setoffs, counterclaims, or other liens or grants prior to
or on a parity therewith (except as otherwise provided by law).
2. Custodian hereby represents and warrants, which representations and
warranties shall be continuing and shall be deemed to be reaffirmed upon each
receipt of a Certificate or each receipt of Oral Instructions or Instructions by
the Custodian, that:
(a) It is duly organized and existing under the laws of the jurisdiction of
its organization, with full power to carry on its business as now conducted, to
enter into this Agreement and to perform its obligations hereunder;
(b) This Agreement has been duly authorized, executed and delivered by
Custodian, constitutes a valid and legally binding obligation of Custodian,
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency or other laws affecting generally the enforceability of
creditors' rights or by equitable principles generally applied, and no statute,
regulation or rule, applicable solely to Custodian, and not to any Fund, nor any
order, judgment or contract binding on Custodian prohibits Custodian's execution
or performance of this Agreement;
(c) Custodian is conducting its business in substantial compliance with all
applicable laws and requirements, both state and federal, and has obtained all
regulatory licenses, approvals and consents necessary to carry on its business
as now conducted; there is no provision of its charter or by-laws, nor of any
mortgage, indenture, credit agreement or other contract binding on it or
affecting its property which would prohibit its execution or performance of this
Agreement;
(d) Custodian will not provide services hereunder in any manner that is, or
will result in, a violation of any law, rule or regulation applicable solely to
Custodian, and not to the Funds;
<PAGE>
(e) Custodian will submit to the Funds on an annual basis a copy of its
report prepared in compliance with the requirements of Statement of Auditing
Standards No. 70 issued by the American Institute of Certified Public
Accountants, as it may be amended from time to time; and
(f) Custodian shall maintain, directly or through a third-party selected
with reasonable care, adequate back-up computer and communication lines.
ARTICLE IV
CUSTODY AND RELATED SERVICES
1. (a) Subject to the terms hereof, each Fund hereby authorizes Custodian
to hold any Securities received by it from time to time for such Fund's account.
Custodian shall be entitled to utilize Depositories to the extent possible in
connection with its performance hereunder, and Subcustodians as defined in
Article I of this Agreement. Securities and cash held in a Depository will be
held subject to the rules, terms and conditions of such entity. Securities and
cash held through Subcustodians shall be held subject to the terms and
conditions of Custodian's agreements with such Subcustodians. Subcustodians may
be authorized to hold Securities in Depositories in which such Subcustodians
participate. Unless otherwise required by local law or practice or a particular
subcustodian agreement, Securities deposited with Subcustodians will be held in
a commingled account in the name of Custodian as custodian for the Funds.
Custodian shall identify on its books and records the Securities and cash
belonging to each Fund and Series, whether held directly or indirectly through
Depositories or Subcustodians.
(b) Unless Custodian has received a Certificate or Instructions to the
contrary or applicable law or the rules of a particular Depository otherwise
require, Custodian shall hold Securities indirectly through a Subcustodian or a
Depository only if (i) the Securities are not subject to any right, charge,
security interest, lien or claim of any kind in favor of such Subcustodian or
such Depository or the creditors or operators of any of them, including a
receiver or trustee in bankruptcy or similar authority, except for a claim of
payment for the safe custody or administration of Securities or for funds
advanced on behalf of a Fund by such Subcustodian or Depository, and (ii)
beneficial ownership of the Securities is freely transferable without the
payment of cash or value other than for safe custody or administration.
2. Promptly after the close of business on each Business Day, Custodian
shall furnish each Fund with confirmations and a summary, on a per Series basis,
of all transfers to or from the Accounts, either hereunder or with any
Subcustodian appointed in accordance with this Agreement during said day. Where
Securities are transferred to an Account for a Series, Custodian shall also by
book-entry or otherwise identify as belonging to such Series a quantity of
Securities in a fungible bulk of Securities registered in the name of Custodian
(or its nominee) or shown on Custodian's account on the books of the Book-Entry
System or a Depository. At least monthly and from time to time, Custodian shall
furnish each Fund with a detailed statement, on a per Series basis, of the
Securities and cash held by Custodian for such Fund.
3. With respect to all Securities held hereunder, Custodian shall, unless
otherwise instructed to the contrary:
(a) Collect and receive all income, dividends, distributions and other
payments and promptly advise each Fund of any such amounts due but not paid;
(b) Give notice to each Fund and present payment and collect the amount
payable upon such Securities which are called, but only if either (i) the
Custodian receives a written notice of such call, or (ii) notice of such call
appears in or is received from a nationally or internationally recognized bond
or corporate action service to which Custodian subscribes;
(c) Unless otherwise instructed by a Fund, Custodian shall retain in the
appropriate account any stock dividends, subscription rights and other non-cash
distributions on the Securities, or the proceeds from the sale of any
distributions. Custodian shall notify a Fund upon the receipt of any non-cash
item;
(d) Present for payment and collect the amount payable upon all Securities
which mature, promptly deposit or withdraw such proceeds as designated therein
and advise each Fund as promptly as practicable of any such amounts due but not
paid;
(e) Surrender Securities in temporary form for definitive Securities;
<PAGE>
(f) Promptly forward to each Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation, notices of tender offers and exchange offers, pendency of calls,
maturities of Securities and expiration of rights) relating to Securities held
pursuant to this Agreement which are actually received by the Custodian, but
without indicating the manner in which such proxies or consents are to be voted;
(g) Execute, as custodian, any certificates of ownership, affidavits,
declarations or other certificates under any tax laws now or hereafter in
effect;
(h) Hold directly or through the Book-Entry System or a Depository or
through a Subcustodian for the account of a Series, all rights and similar
Securities issued with respect to any Securities credited to an Account
hereunder; and
(i) Endorse for collection checks, drafts or other negotiable instruments.
4. (a) Whenever Securities (including, but not limited to, warrants,
options, tenders, options to tender or non-mandatory puts or calls) confer
optional rights on a Fund or provide for discretionary action or alternative
courses of action by a Fund, such Fund shall be responsible for making any
decisions relating thereto and for directing Custodian to act. In order for
Custodian to act, it must receive such Fund's Certificate or Instructions at
Custodian's offices, addressed as Custodian may from time to time request, not
later than noon (New York time) at least two (2) Business Days prior to the last
scheduled date to act with respect to such Securities (or such earlier date or
time as Custodian may notify such Fund). Absent Custodian's timely receipt of
such Certificate or Instructions, Custodian shall not be liable for failure to
take any action relating to or to exercise any rights conferred by such
Securities, unless Custodian has failed to act under sub-paragraph (b) of this
paragraph 4 and such failure constitutes negligence, bad faith or willful
misconduct.
(b) Custodian shall notify each Fund of such rights or discretionary
actions or of the date or dates by when such rights must be exercised or such
action must be taken provided that Custodian has actually received, from the
issuer or the relevant Depository (with respect to Securities issued in the
United States) or from the relevant Subcustodian, Depository or from a
nationally or internationally recognized bond or corporate action service to
which Custodian subscribes, timely notice of such rights or discretionary
corporate action or of the date or dates such rights must be exercised or such
action must be taken. Absent actual receipt of such notice, Custodian shall have
no liability for failing to so notify a Fund.
5. Upon receipt of a Certificate and not otherwise, the Custodian, directly
or through the use of the Book-Entry System or a Depository shall:
(a) Execute and deliver to such persons as may be designated in a
Certificate proxies, consents, authorizations, and any other instruments whereby
the authority of a Fund as owner of any Securities held by the Custodian
hereunder for the Series specified in the Certificate may be exercised;
(b) Deliver any Securities held by the Custodian hereunder for the Series
specified in such Certificate in exchange for other Securities or cash issued or
paid in connection with the liquidation, reorganization, refinancing, merger,
consolidation or recapitalization of any corporation, or the exercise of any
conversion privilege and receive and hold hereunder specifically allocated to
such Series any cash or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian hereunder for the Series
specified in such Certificate to any protective committee, reorganization
committee or other person in connection with the reorganization, refinancing,
merger, consolidation, recapitalization or sale of assets of any corporation,
and receive and hold hereunder specifically allocated to such Series such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;
(d) Make such transfers or exchanges of the assets of the Series specified
in such Certificate, and take such other steps as shall be stated in such
Certificate to be for the purpose of effectuating any duly authorized plan of
liquidation, reorganization, merger, consolidation or recapitalization of a
Fund; and
(e) Present for payment and collect the amount payable upon Securities not
described elsewhere in this Agreement which may be called as specified in the
Certificate.
<PAGE>
6. All voting rights with respect to Securities, however registered, shall
be exercised by a Fund or its designee. For Securities issued in the United
States, Custodian's only duty shall be to mail to the Funds any documents
(including proxy statements, annual reports and signed proxies) actually
received by Custodian relating to the exercise of such voting rights. With
respect to Securities issued outside of the United States, Custodian's only duty
shall be to provide the appropriate Fund with access to a provider of global
proxy services at such Fund's request. The Fund shall be responsible for all
costs associated with its use of such services.
7. Custodian shall promptly advise a Fund upon Custodian's actual receipt
of notification of the partial redemption, partial payment or other action
affecting less than all Securities of the relevant class. If Custodian, any
Subcustodian, or any Depository holds any Securities in which a Fund has an
interest as part of a fungible mass, Custodian, such Subcustodian or Depository
may select the Securities to participate in such partial redemption, partial
payment or other action in any non-discriminatory manner that it customarily
uses to make such selection.
8. Custodian shall not under any circumstances accept bearer interest
coupons which have been stripped from United States federal, state or local
government or agency securities unless explicitly agreed to by Custodian in
writing.
9. Each Fund shall be liable for all taxes, assessments, duties and other
governmental charges, including any interest or penalty thereto, with respect to
any cash or Securities held on behalf of such Fund or any transaction related
thereto.
ARTICLE V
SETTLEMENT OF SECURITIES TRANSACTIONS
1. For the purpose of settling Securities and transactions, a Fund shall
provide Custodian with sufficient immediately available funds for all
transactions by such time and date as conditions in the relevant market dictate.
As used herein, "sufficient immediately available funds" shall mean sufficient
cash. Custodian shall provide each Fund with immediately available funds each
day which result from the actual settlement of all sale transactions, based upon
advices received by Custodian from its Subcustodians and Depositories. Such
funds shall be in U.S. dollars.
ARTICLE VI
PURCHASE AND SALE OF SECURITIES;
CREDITS TO ACCOUNT
1. Promptly after each purchase or sale of Securities by a Fund, such Fund
shall deliver to Custodian a Certificate or Instructions, or with respect to a
purchase or sale of a Security generally required to be settled on the same day
the purchase or sale is made, Oral Instructions, specifying all information
Custodian may reasonably request to settle such purchase or sale. Custodian
shall account for all purchases and sales of Securities on the actual settlement
date unless otherwise agreed by Custodian.
2. Each Fund understands that when Custodian is instructed to deliver
Securities against payment, delivery of such Securities and receipt of payment
therefor may not be completed simultaneously. Notwithstanding any provision in
this Agreement to the contrary, settlements, payments and deliveries of
Securities may be effected by Custodian or any Subcustodian in accordance with
the customary or established securities trading or securities processing
practices and procedures in the jurisdiction in which the transaction occurs,
including, without limitations, delivery to a purchaser or dealer therefor (or
agent) against receipt with the expectation of receiving later payment for such
Securities. Each Fund assumes full responsibility for all risks, including,
without limitation, credit risks, involved in connection with such delivery of
Securities by Custodian, except the foregoing shall not excuse Custodian's
acting in accordance with such practices or procedures in a manner which
constitutes negligence, bad faith or willful misconduct.
3. Custodian may, as a matter of bookkeeping convenience or by separate
agreement with a Fund, credit the Account with the proceeds from the sale,
redemption or other disposition of Securities or interest, dividends or other
distributions payable on Securities prior to its actual receipt of final payment
therefor. All such credits shall be conditional until Custodian's actual receipt
of final payment and may be reversed by Custodian to the extent that final
payment is not received. Custodian shall notify the appropriate Fund at least 48
hours prior to any such reversal,
<PAGE>
but such reversal shall be made as of the date Custodian determines it has not
received final payment. Payment with respect to a transaction will not be
"final" until Custodian shall have received immediately available funds which
under applicable local law, rule and/or practice are irreversible and not
subject to any security interest, levy or other encumbrance, and which are
specifically applicable to such transaction.
ARTICLE VII
OVERDRAFTS OR INDEBTEDNESS
1. If Custodian should in its sole discretion advance funds on behalf of
any Series which results in an overdraft (including, without any limitations,
any day-light overdraft) because the cash held by Custodian in an Account for
such Series shall be insufficient to pay the total amount payable upon the
purchase of Securities specifically allocated to such Series, as set forth in a
Certificate, Instructions or Oral Instructions, or if an overdraft arises in the
separate Account of a Series for some other reason, including, without
limitation, because of a reversal of a conditional credit, Custodian shall
promptly notify the appropriate Fund of any such advance and the time at which
such advance or overdraft must be paid. Such advance, overdraft or indebtedness
shall be deemed to be a loan made by Custodian to such Fund for such Series
payable on demand and shall bear interest from the date incurred at a rate per
annum agreed by such Fund and Custodian from time to time, or, in the absence of
an agreement, at the rate ordinarily charged by Custodian to its institutional
customers. In addition, each Fund hereby agrees that Custodian shall, to the
maximum extent permitted by law, have a continuing lien, security interest and
security entitlement in and to such Securities of such Series as shall from time
to time have a fair market value equal to the aggregate amount of all overdrafts
of, and advances to, such Series, together with accrued interest, such lien,
security interest and security entitlement to be effective only as long as such
advance, overdraft, or accrued interest thereon remains outstanding. Each Fund
authorizes Custodian to charge any such overdraft or indebtedness, together with
interest due thereon, against any balance of account standing to such Series'
credit on Custodian's books.
ARTICLE VIII
SALE AND REDEMPTION OF SHARES
1. Whenever a Fund shall sell any Shares, it shall deliver to Custodian a
Certificate, Oral Instructions, or Instructions specifying the amount of cash to
be received by Custodian for the sale of such Shares and specifically allocated
to an Account for such Series.
2. Upon receipt of such cash from such Fund's transfer agent, Custodian
shall credit such cash to the Account in the name of the Series for which such
cash was received.
3. Except as provided hereinafter, whenever a Fund desires Custodian to
make payment out of the cash held by Custodian hereunder in connection with a
redemption of any Shares, it shall furnish to Custodian a Certificate, Oral
Instructions, or Instructions specifying the amount to be paid for such Shares,
and Custodian shall make payment to the transfer agent out of the cash held in
the Account of the Series the total amount specified in such Certificate, Oral
Instructions, or Instructions.
4. Notwithstanding the above provisions regarding the redemption of any
Shares, whenever any Shares are redeemed pursuant to any check redemption
privilege which may from time to time be offered by a Fund, Custodian, unless
otherwise instructed by a Certificate, Oral Instructions or Instructions, shall,
upon request of such Fund's transfer agent, charge the amount thereof against
the cash held in the Account of the Series of the Shares being redeemed.
ARTICLE IX
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. Each Fund shall furnish to Custodian a Certificate, Oral Instructions,
or Instructions setting forth with respect to the Series specified therein the
date of the declaration of a dividend or distribution, the total amount payable
and the payable date.
2. Upon the payment date specified in such Certificate, Oral Instructions
or Instructions, Custodian shall pay out of the cash held for the account of
each Series the total amount payable to
<PAGE>
the dividend agent and any sub-dividend agent or co-dividend agent of the
appropriate Fund with respect to such Series specified therein.
ARTICLE X
CONCERNING CUSTODIAN
1. (a) Except as otherwise expressly provided herein, Custodian shall not
be liable for any costs, expenses, damages, liabilities or claims, including
attorneys' and accountants' fees (collectively, "Losses"), incurred by or
asserted against a Fund, except those Losses arising out of the negligence, bad
faith or willful misconduct of Custodian.
(b) With respect to any Losses incurred by a Fund as a result of the acts
or the failure to act by any Depository or any Subcustodian (other than a BNY
Affiliate), Custodian shall take appropriate action to recover such Losses from
such Depository or such Subcustodian; and Custodian's sole responsibility and
liability to such Fund shall be limited to amounts so received from such
Depository or such Subcustodian (exclusive of costs and expenses incurred by
Custodian), except to the extent that (A) any such Subcustodian is a parent,
subsidiary or otherwise affiliated with Custodian, (B) Custodian's negligence,
bad faith or willful misconduct is the direct cause of such Depository or such
Subcustodian's act or omission (it being agreed that Custodian's decision to use
any Subcustodian or any Depository shall not constitute negligence, bad faith,
or willful misconduct), or (C) a transaction or other matter between Custodian
and such Depository or such Subcustodian unrelated to the Funds was the cause of
the loss or damage, in each of which events, Custodian shall be liable for such
Losses.
(c) Custodian shall not be liable to a Fund or any third party for special,
indirect or consequential damages, or lost profits or loss of business, arising
in connection with this Agreement, nor shall BNY or any Subcustodian be liable:
(i) for acting in accordance with any Certificate or Oral Instructions from a
Fund, or any Authorized Person of a Fund, or any Instructions; (ii) for the acts
or omissions of its nominees, correspondents, agents (other than as specified
herein), any brokers or dealers, except to the extent that (A) any such nominee,
correspondent, agent, broker or dealer is a parent, subsidiary or otherwise
affiliated with Custodian, (B) Custodian's negligence, bad faith or willful
misconduct is the direct cause of such nominee's, correspondent's, agent's,
broker's or dealer's act or omission or (C) a transaction or other matter
between Custodian and such nominee, correspondent, agent, broker or dealer
unrelated to the Funds was the cause of the loss or damage, in each of which
events, Custodian shall be liable; (iii) for holding property in any particular
country, including, but not limited to, Losses resulting from nationalization,
expropriation or other governmental actions; regulation of the banking or
securities industry; availability of cash or Securities or market conditions
which prevent the transfer of property or execution of Securities transactions
or affect the value of property; or (iv) for any Losses due to forces beyond the
control of Custodian, including without limitation strikes, work stoppages, acts
of war or terrorism, insurrection, revolution, nuclear or natural catastrophes
or acts of God, or interruptions, loss or malfunctions of utilities,
communications or computer (hardware and software) services caused by any of the
foregoing, or the insolvency of any Subcustodian or of any Depository. Custodian
shall endeavor to promptly notify the Funds when it becomes aware of any
situation outlined above, but shall not be liable for a failure to do so. The
Funds shall not be responsible for temporary delays in the performance of their
duties and obligations hereunder and correspondingly shall not be liable for any
Losses attributable to such delay in consequence of an event as described above
affecting the Funds' principal place of business operations or administration.
For the avoidance of doubt, Custodian shall have no liability for any Losses
arising from the applicability of any law or regulation now or hereafter in
effect, or from the occurrence of any event, which may affect, limit or prevent
the transferability or availability of any cash in the countries in which such
cash is held, except that the foregoing shall not excuse Custodian's acting or
not acting in accordance with any Certificate, Oral Instructions, or
Instructions in a manner which constitutes negligence, bad-faith, or willful
misconduct.
(d) Custodian may enter into subcontracts, agreements and understandings
with any BNY Affiliate, whenever and on such terms and conditions as it deems
necessary or appropriate to perform its services hereunder. No such subcontract,
agreement or understanding shall discharge Custodian from its obligations and
liabilities hereunder.
<PAGE>
(e) Each Fund agrees to indemnify Custodian against and hold Custodian
harmless from any and all Losses sustained or incurred because of or in
connection with this Agreement, including reasonable fees and expenses of
counsel incurred by Custodian in a successful defense of claims by such Fund;
provided, however, that the Funds shall not indemnify Custodian for those Losses
- -------- -------
arising out of Custodian's negligence, bad faith or willful misconduct. This
indemnity shall be a continuing obligation of each Fund, its respective
successors and assigns, notwithstanding the termination of this Agreement.
(f) Custodian agrees to indemnify each Fund against and hold each Fund
harmless from any and all Losses sustained or incurred because of or in
connection with this Agreement, including reasonable fees and expenses of
counsel incurred by the Funds in a successful defense of claims by Custodian,
provided, however, that Custodian shall only indemnify the Funds for those
- -------- -------
Losses arising out of Custodian's negligence, bad faith or willful misconduct,
and provided further, that Custodian shall not be liable to any Fund for
-------- -------
special, indirect or consequential damages, lost profits or loss of business.
This indemnity shall be a continuing obligation of Custodian, its successors and
assigns, notwithstanding the termination of this Agreement.
2. Without limiting the generality of the foregoing, Custodian shall be
under no obligation to inquire into, and shall not be liable (except to the
extent that either of (a) or (b) involves Custodian's negligence, bad faith or
willful misconduct) for:
(a) Any Losses incurred by a Fund or any other person as a result of the
receipt or acceptance of fraudulent, forged or invalid Securities, or Securities
which are otherwise not freely transferable or deliverable without encumbrance
in any relevant market;
(b) The validity of the issue of any Securities purchased or sold by or for
a Fund;
(c) The legality of the purchase, sale or writing of Securities by or for a
Fund, or the propriety of the amount paid or received therefor;
(d) The legality of the sale or redemption of any Shares, or the propriety
of the amount to be received or paid therefor;
(e) The legality of the declaration or payment of any dividend by a Fund;
(f) The legality of any borrowing by a Fund using Securities as collateral;
(g) The legality of any loan of portfolio Securities, nor shall Custodian
be under any duty or obligation to see to it that any cash collateral delivered
to it by a broker, dealer, or financial institution or held by it at any time as
a result of such loan of portfolio Securities of a Fund is adequate collateral
for such Fund against any loss it might sustain as a result of such loan.
Custodian specifically, but not by way of limitation, shall not be under any
duty or obligation periodically to check or notify a Fund that the amount of
such cash collateral held by it for such Fund is sufficient collateral for such
Fund, but such duty or obligation shall be the sole responsibility of such Fund.
In addition, Custodian shall be under no duty or obligation to see that any
broker, dealer or financial institution to which portfolio Securities of a Fund
are lent makes payment to it of any dividends or interest which are payable to
or for the account of such Fund during the period of such loan or at the
termination of such loan, provided, however that Custodian shall promptly notify
such Fund in the event that such dividends or interest are not paid and received
when due;
(h) The sufficiency or value of any amounts of cash and/or Securities held
in any Special Account in connection with transactions by a Fund; whether any
broker, dealer, futures commission merchant or clearing member makes payment to
a Fund of any variation margin payment or similar payment which such Fund may be
entitled to receive from such broker, dealer, futures commission merchant or
clearing member, or whether any payment received by Custodian from any broker,
dealer, futures commission merchant or clearing member is the amount a Fund is
entitled to receive, or to notify such Fund of Custodian's receipt or
non-receipt of any such payment; or
(i) Whether any Securities at any time delivered to, or held by it or by
any Subcustodian, for the account of a Fund and specifically allocated to a
Series are such as properly may be held by such Fund or such Series under the
provisions of its then current prospectus and statement of additional
information or (b) to ascertain whether any transactions by a Fund, whether or
not involving the Custodian, are such transactions as may properly be engaged in
by such Fund.
<PAGE>
3. Custodian may, with respect to questions of law specifically regarding
an Account, obtain the advice of counsel and shall be fully protected with
respect to anything done or omitted by it in good faith in conformity with such
advice.
4. Custodian shall be under no obligation to take action to collect any
amount payable on Securities in default, or if payment is refused after due
demand and presentment, unless and until (i) it shall be directed to take such
action by a Certificate or Instructions and (ii) it shall be assured to its
satisfaction of reimbursement of its reasonable costs and expenses in connection
with any such action.
5. Custodian shall have no duty or responsibility to inquire into, make
recommendations, supervise, or determine the suitability of any transactions
affecting any Account.
6. The Funds shall pay to Custodian the fees and charges as may be
specifically agreed upon from time to time and such other fees and charges at
agreed rates for such services as may be applicable.
7. Custodian has the right to debit a cash Account (or any subaccount
thereof) as agreed upon by Custodian and each Fund in advance for any amount
payable by a Fund in connection with any and all obligations of such Fund to
Custodian.
8. Custodian shall be entitled to rely upon any Certificate or Oral
Instructions actually received by Custodian and reasonably believed by Custodian
to be duly authorized and delivered by an Authorized Person. Each Fund agrees to
forward to Custodian a Certificate or Instructions confirming Oral Instructions
by the close of business of the same day that such Oral Instructions are given
to Custodian. Each Fund agrees that the fact that such confirming Certificate or
Instructions are not received or that a contrary Certificate or contrary
Instructions are received by Custodian shall in no way affect the validity or
enforceability of transactions authorized by such Oral Instructions and effected
by Custodian and under either of the two foregoing circumstances, Custodian
shall promptly notify the Funds. If a Fund elects to transmit Instructions
through an on-line communications system offered by Custodian, such Fund's use
thereof shall be subject to the Terms and Conditions attached hereto as Appendix
I.
9. The books and records pertaining to a Fund which are in possession of
Custodian shall be the property of such Fund. Such books and records shall be
prepared and maintained as required by the 1940 Act and the rules thereunder and
other applicable securities laws and rules and regulations. Such Fund, or such
Fund's authorized representatives, shall have access to such books and records
during Custodian's normal business hours. Upon the reasonable request of a Fund,
copies of any such books and records shall be provided by Custodian to such Fund
or such Fund's authorized representative free of charge. Upon the reasonable
request of a Fund, Custodian shall provide in hard copy or on computer disc, any
records included in any such delivery which are maintained by Custodian on a
computer disc, or are similarly maintained.
10. It is understood that Custodian is authorized to supply any information
regarding the Accounts which is required by any law, regulation or rule now or
hereafter in effect. The Custodian shall provide each Fund with any report
obtained by the Custodian on the system of internal accounting control of a
Depository or OCC, and with such reports on its own systems of internal
accounting control as the Fund may reasonably request from time to time.
11. Neither Custodian nor any Fund shall have any duties or
responsibilities whatsoever except such duties and responsibilities as are
specifically set forth in this Agreement.
ARTICLE XI
TERMINATION
Either party may terminate this Agreement by giving to the other party a
notice in writing specifying the date of such termination, which shall be not
less than ninety (90) days after the date of such notice. In the event such
notice is given by a Fund, it shall be accompanied by a copy of the resolution
of the Board of Trustees of such Fund, certified by the Secretary or any
Assistant Secretary, electing to terminate this Agreement and designating a
successor custodian or custodians, each of which shall be a bank or trust
company having not less than $2,000,000 aggregate capital, surplus and undivided
profits. In the event such notice is given by Custodian, the Fund shall, on or
before the termination date, deliver to Custodian a copy of a resolution of the
<PAGE>
Boards of Trustees of the Fund, certified by the Secretary or any Assistant
Secretary, designating a successor custodian or custodians. In the absence of
such designation by the Fund, Custodian shall designate a successor custodian
which shall be a bank or trust company having not less than $2,000,000 aggregate
capital, surplus and undivided profits, and which shall be satisfactory to the
Funds. Upon the date set forth in such notice, this Agreement shall terminate
with respect to the affected Fund(s), and the Custodian shall upon receipt of a
notice of acceptance by the successor custodian on that date deliver directly to
the successor custodian all Securities and cash then owned by the Fund(s) and
held by it as custodian, after deducting all agreed upon fees, expenses and
other amounts for the payment of reimbursement of which it shall then be
entitled.
If a successor custodian is not designated by the Fund or Custodian in
accordance with the preceding paragraph, the Fund shall upon the date specified
in the notice of termination of this Agreement and upon the delivery by
Custodian of all Securities (other than Securities which cannot be delivered to
the Fund) and cash then owned by the Fund be deemed to be its own custodian and
Custodian shall thereby be relieved of all duties and responsibilities pursuant
to this Agreement, other than the duty with respect to Securities which cannot
be delivered to the Fund to hold such Securities hereunder in accordance with
this Agreement.
ARTICLE XII
MISCELLANEOUS
1. Each Fund agrees to furnish to Custodian a new Certificate of Authorized
Persons in the event of any change in the then present Authorized Persons. Until
such new Certificate is received, Custodian shall be fully protected in acting
upon Certificates or Oral Instructions of such present Authorized Persons.
2. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to Custodian, shall be sufficiently given if
addressed to Custodian and received by it at its offices at One Wall Street, New
York, New York 10286, or at such other place as Custodian may from time to time
designate in writing.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to a Fund shall be sufficiently given if addressed to
the Fund and received by it at its offices at P.O. Box 2600, Valley Forge, PA
19482, Attn.: Controller, or at such other place as the Fund may from time to
time designate in writing.
4. Each and every right granted to either party hereunder or under any
other document delivered hereunder or in connection herewith, or allowed it by
law or equity, shall be cumulative and may be exercised from time to time. No
failure on the part of any party to exercise, and no delay in exercising, any
right will operate as a waiver thereof, nor will any single or partial exercise
by either party of any right preclude any other or future exercise thereof or
the exercise of any other right.
5. In case any provision in or obligation under this Agreement shall be
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
thereby. This Agreement, other than the Appendix B hereto, may not be amended or
modified in any manner except by a written agreement executed by both parties.
This Agreement shall extend to and shall be binding upon the parties hereto, and
their respective successors and assigns; provided, however, that this Agreement
-------- -------
shall not be assignable by either party without the written consent of the
other.
6. This Agreement shall be construed in accordance with the substantive
laws of the State of New York, without regard to conflicts of laws principles
thereof. Each Fund and Custodian hereby consent to the jurisdiction of a federal
court situated in New York City, New York in connection with any dispute arising
hereunder. Each Fund hereby irrevocably waives, to the fullest extent permitted
by applicable law, any objection which it may now or hereafter have to the
laying of venue of any such proceeding brought in such a court and any claim
that such proceeding brought in such a court has been brought in an inconvenient
forum. Each Fund and Custodian hereby each irrevocably waives any and all rights
to trial by jury in any legal proceeding arising out of or relating to this
Agreement.
7. Notwithstanding the fact that Custodian may from time to time maintain
an Account in the name of a third party, the parties hereto agree that in
performing hereunder, Custodian is acting
<PAGE>
solely on behalf of the Funds and no contractual or service relationship shall
be deemed to be established hereby between Custodian and any such third party or
any other person.
8. This Agreement is executed on behalf of the Board of Trustees of each
Fund as Trustees and not individually and the obligations of this Agreement are
not binding upon any of the Trustees or shareholders individually but are
binding only upon the assets and property of such Funds; further, the assets of
a particular Series of such Fund shall under no circumstances be charged with
liabilities attributable to any other Series of such Fund and that all persons
extending credit to, or contracting with or having any claim against a
particular Series of such Fund shall look only to the assets of that particular
Series for payment of such credit, contract or claim.
9. The parties hereto agree that each shall treat confidentially the terms
and conditions of this Agreement and all information provided by each party to
the other regarding its business and operations. All confidential information
provided by a party hereto shall be used by any other party hereto solely for
the purpose of rendering or obtaining services pursuant to this Agreement and,
except as may be required in carrying out this Agreement, shall not be disclosed
to any third party without the prior consent of such providing party. The
foregoing shall not be applicable to any information that is publicly available
when provided or thereafter becomes publicly available other than through a
breach of this Agreement, or that is required to be disclosed by or to any
regulatory authority, any external or internal accountant, auditor or counsels
of the parties hereto, by judicial or administration process or otherwise by
applicable law, or to any disclosure made by a party if such party's counsel has
advised that such party could be liable under any applicable law or any judicial
or administrative order or process for a failure to make such disclosure.
10. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
<PAGE>
IN WITNESS WHEREOF, each Fund and Custodian have caused this Agreement to
be executed by their respective officers, thereunto duly authorized, as of the
day and year first above written.
Each Fund Listed on Appendix A
________________________________
By:_____________________________
Title:__________________________
THE BANK OF NEW YORK COMPANY, INC.
By:______________________________
Title:___________________________
<PAGE>
APPENDIX I
THE BANK OF NEW YORK
ON-LINE COMMUNICATIONS SYSTEM (THE "SYSTEM")
TERMS AND CONDITIONS
1. License; Use. Upon delivery to the Funds of software enabling the Funds
-------------
to obtain access to the System (the "Software"), Custodian grants to each Fund a
personal, nontransferable and nonexclusive license to use the Software solely
for the purpose of transmitting Instructions, receiving reports, making
inquiries or otherwise communicating with Custodian in connection with the
Account(s). Each Fund shall use the Software solely for its own internal and
proper business purposes and not in the operation of a service bureau. Except as
set forth herein, no license or right of any kind is granted to a Fund with
respect to the Software. Each Fund acknowledges that Custodian and its suppliers
retain and have title and exclusive proprietary rights to the Software,
including any trade secrets or other ideas, concepts, know-how, methodologies or
information incorporated therein and the exclusive rights to any copyrights,
trademarks and patents (including registrations and applications for
registration of either), or other statutory or legal protections available in
respect thereof. Each Fund further acknowledges that all or a part of the
Software may be copyrighted or trademarked (or a registration or claim made
therefor) by Custodian or its suppliers. No Fund shall take any action with
respect to the Software inconsistent with the foregoing acknowledgements, nor
shall any Fund attempt to decompile, reverse engineer or modify the Software. No
Fund may copy, sell, lease or provide, directly or indirectly, any of the
Software or any portion thereof to any other person or entity without
Custodian's prior written consent. No Fund may remove any statutory copyright
notice or other notice included in the Software or on any media containing the
Software. Each Fund shall reproduce any such notice on any reproduction of the
Software and shall add statutory copyright notice or other notice to the
Software or media upon Custodian's request. Custodian agrees to provide
reasonable training, instruction manuals and access to Custodian's "help desk"
in connection with each Fund's user support necessary to use the Software. At a
Fund's request, Custodian agrees to permit reasonable testing of the Software by
any Fund.
2. Proprietary Information. The Software, any data base (other than
------------------------
databases relating solely to the assets of a Fund and transactions with respect
thereto) and any proprietary data, processes, information and documentation made
available to the Fund (other than which are or become part of the public domain
or are legally required to be made available to the public) (collectively, the
"Information"), are the exclusive and confidential property of Custodian or its
suppliers. The Fund shall keep the Information confidential by using the same
care and discretion that the Fund uses with respect to its own confidential
property and trade secrets, but not less than reasonable care. Upon termination
of the Agreement or the Software license granted herein for any reason, the Fund
shall return to Custodian any and all copies of the Information which are in its
possession or under its control.
3. Indemnification. Custodian will indemnify and hold harmless the Funds
---------------
with respect to any liability, damages, loss or claim incurred by or brought
against any Fund by reason of any claim or infringement against any patent,
copyright, license or other property right arising out or by reason of a Fund's
use of the Software in the form provided under this Appendix. Custodian at its
own expense will defend such action or claim brought against a Fund to the
extent that it is based on a claim that the Software in the form provided by
Custodian infringes any patents, copyrights, license or other property right,
provided that Custodian is provided with reasonable notice of such claim,
provided that the Fund has not settled, compromised or confessed any such claim
without the Custodian's written consent, in which event Custodian shall have no
liability or obligation hereunder, and provided Fund cooperates with and assists
Custodian in the defense of such claim. Custodian shall have the right to
control the defense of all such claims, lawsuits and other proceedings. If, as a
result of any claim of infringement against any patent, copyright, license or
other property right, Custodian is enjoined from using the Software, or if
Custodian believes that the System is likely to become the subject of a claim of
infringement, Custodian may in its sole discretion either (a) at its expense
procure the right for the Funds to continue to use the Software, or
<PAGE>
(b) replace or modify the Software so as to make it non-infringing, or (c) may
discontinue the license granted herein upon written notice to the Funds.
4. Modifications. Custodian reserves the right to modify the Software at
-------------
its own expense from time to time and a Fund shall install new releases of the
Software as Custodian may direct. Each Fund agrees not to modify or attempt to
modify the Software without Custodian's prior written consent. Each Fund
acknowledges that any modifications to the Software, whether by a Fund or
Custodian and whether with or without Custodian's consent, shall become the
property of Custodian.
5. NO REPRESENTATIONS OR WARRANTIES. CUSTODIAN AND ITS MANUFACTURERS AND
----------------------------------
SUPPLIERS MAKE NO WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE SOFTWARE,
SERVICES OR ANY DATABASE, EXPRESS OR IMPLIED, IN FACT OR IN LAW, INCLUDING BUT
NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE. EACH FUND ACKNOWLEDGES THAT THE SOFTWARE, SERVICES AND ANY DATABASE ARE
PROVIDED "AS IS." IN NO EVENT SHALL CUSTODIAN OR ANY SUPPLIER BE LIABLE FOR ANY
DAMAGES, WHETHER DIRECT, INDIRECT, SPECIAL OR CONSEQUENTIAL, WHICH A FUND MAY
INCUR IN CONNECTION WITH THE SOFTWARE, SERVICES OR ANY DATABASE, EVEN IF
CUSTODIAN OR SUCH SUPPLIER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
IN NO EVENT SHALL CUSTODIAN OR ANY SUPPLIER BE LIABLE FOR ACTS OF GOD, MACHINE
OR COMPUTER BREAKDOWN OR MALFUNCTION, INTERRUPTION OR MALFUNCTION OF
COMMUNICATION FACILITIES, LABOR DIFFICULTIES OR ANY OTHER SIMILAR OR DISSIMILAR
CAUSE BEYOND THEIR REASONABLE CONTROL.
6. Security; Reliance; Unauthorized Use. Each Fund will cause all persons
--------------------------------------
utilizing the Software and System to treat all applicable user and authorization
codes, passwords and authentication keys with extreme care. Custodian is hereby
irrevocably authorized to act in accordance with and rely on Instructions
received by it through the System. Each Fund acknowledges that it is its sole
responsibility to assure that only persons duly authorized by such Fund use the
System and that Custodian shall not be responsible or liable for any
unauthorized use thereof.
7. System Acknowledgements. Custodian shall acknowledge through the System
-----------------------
its receipt of each transmission communicated through the System, and in the
absence of such acknowledgement Custodian shall not be liable for any failure to
act in accordance with such transmission and the Fund may not claim that such
transmission was received by Custodian.
8. EXPORT RESTRICTIONS. EXPORT OF THE SOFTWARE IS PROHIBITED BY UNITED
--------------------
STATES LAW. THE FUNDS MAY NOT UNDER ANY CIRCUMSTANCES RESELL, DIVERT, TRANSFER,
TRANSSHIP OR OTHERWISE DISPOSE OF THE SOFTWARE (IN ANY FORM) IN OR TO ANY OTHER
COUNTRY. IF CUSTODIAN DELIVERED THE SOFTWARE TO THE FUND OUTSIDE OF THE UNITED
STATES, THE SOFTWARE WAS EXPORTED FROM THE UNITED STATES IN ACCORDANCE WITH THE
EXPORTER ADMINISTRATION REGULATIONS. DIVERSION CONTRARY TO U.S. LAW IS
PROHIBITED. Each Fund hereby authorizes Custodian to report its name and address
to government agencies to which Custodian is required to provide such
information by law.
9. ENCRYPTION. Each Fund acknowledges and agrees that encryption may not be
----------
available for every communication through the System, or for all data. Each Fund
agrees that Custodian may deactivate any encryption features at any time,
without prior or contemporaneous notice, or liability, to such Fund, for the
purpose of repairing or troubleshooting the System or the Software. Custodian
shall promptly advise each Fund whenever Custodian has deactivated any
encryption features. Custodian also may deactivate any encryption features,
without liability to a Fund, for the purpose of scheduled maintenance, so long
as it provides reasonable advance notice to the Fund.
<PAGE>
APPENDIX A
FUND: Vanguard Admiral Funds
SERIES/TAX IDENTIFICATION NO.: Vanguard Admiral Treasury Money Market
Fund/23-2696041
FUND: Vanguard Money Market Reserves
SERIES/TAX IDENTIFICATION NO.: Vanguard Prime Money Market Fund/23-6607979
Vanguard Federal Money Market Fund/23-2439136
FUND: Vanguard Treasury Fund
SERIES/TAX IDENTIFICATION NO.: Vanguard Treasury Money Market Fund/23-2439140
FUND: Vanguard Variable Insurance Funds
SERIES/TAX IDENTIFICATION NO.: Money Market Portfolio/23-2585135
Exhibit EX-99.BJ
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 58 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated January 6, 2000, relating to the financial
statements and financial highlights appearing in the November 30, 1999 Annual
Report to Shareholders of Vanguard Money Market Reserves, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the
Prospectuses and under the headings "Financial Statements" and "Service
Providers--Independent Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 2, 2000
