- -----------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
INSTITUTIONAL INVESTOR SERVICES
Vanguard Financial Center
P.O. Box 2900
Valley Forge, PA 19482
PARTICIPANT SERVICES:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P R O S P E C T U S
MARCH 8, 1994
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A Member of The Vanguard Group
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PROSPECTUS -- MARCH 8, 1994
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NEW ACCOUNT INFORMATION: 1-800-523-1188
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INVESTMENT OBJECTIVE AND POLICIES
Vanguard Institutional Money Market Portfolio (the
"Portfolio") is an open-end diversified investment company.
Designed primarily for institutional investors, the
Portfolio's objective is to provide the maximum current
income that is consistent with the preservation of capital
and liquidity by investing in specified money market
instruments. The Portfolio seeks to maintain a constant net
asset value of $1.00 per share. ALTHOUGH THE PORTFOLIO
INVESTS IN HIGH-QUALITY INSTRUMENTS, AN INVESTMENT IN THE
PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
The Portfolio is an independent series of Vanguard
Institutional Portfolios, Inc. (the Company). The Company is
currently offering shares of one series.
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OPENING AN ACCOUNT
Shares of the Portfolio may be purchased by Federal Funds
wire. The minimum initial investment is $10 million.
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ABOUT THIS PROSPECTUS
This Prospectus is designed to set forth concisely the
information an investor should know about the Portfolio
before investing. It should be retained for future reference.
A "Statement of Additional Information" containing additional
information about the Portfolio has been filed with the
Securities and Exchange Commission. This Statement is dated
March 8, 1994 and has been incorporated by reference into
this Prospectus. A copy may be obtained without charge by
writing to or calling Vanguard at 1-800-523-1188.
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<TABLE>
TABLE OF CONTENTS
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Page Page Page
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Portfolio Expenses.................. 2 Investment Limitations.............. 6 SHAREHOLDER GUIDE
Financial Highlights................ 2 Management of the Portfolio......... 6 Opening an Account and
Yield and Total Return.............. 3 Investment Adviser.................. 7 Purchasing Shares................. 11
PORTFOLIO INFORMATION Dividends and Taxes................. 7 Dividend and Trade Date Policy...... 12
Investment Objective................ 3 Share Price Determination........... 9 Selling Shares...................... 12
Investment Policies................. 4 General Information................. 10 Exchanging Shares................... 13
Implementation of Policies.......... 5 Important Information About
Telephone Transactions............ 13
Other Account Information........... 14
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE>
PORTFOLIO EXPENSES
The following table illustrates ALL expenses and fees that a
shareholder of the Portfolio would incur. The expenses set
forth below are for the 1993 fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
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Sales Load Imposed on Purchases...................None
Sales Load Imposed on Reinvested Dividends........None
Redemption Fees*..................................None
Exchange Fees.....................................None
ANNUAL FUND OPERATING EXPENSES
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Management & Administrative Expenses.............. 0.08%
Investment Advisory Fees.......................... 0.01
12b-1 Fees........................................None
Other Expenses
Distribution Costs....................... 0.03
Miscellaneous Expenses................... 0.03
----
Total Other Expenses.............................. 0.06
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TOTAL OPERATING EXPENSES.................... 0.15%
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*Wire redemptions of less than $5,000 are subject to a
$5 processing fee.
The purpose of this table is to assist an investor in
understanding the various expenses that an investor in the
Portfolio would bear directly or indirectly.
The following example illustrates the expenses that an
investor would incur on a $1,000 investment over various
periods, assuming (1) a 5% annual rate of return and (2)
redemption at the end of each period. As noted in the table
above, the Portfolio charges no redemption fees of any kind.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$2 $5 $8 $19
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE HIGHER OR LOWER THAN THOSE SHOWN.
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FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding
throughout each period presented, have been audited by Price
Waterhouse, independent accountants, whose report thereon was
unqualified. This information should be read in conjunction
with the financial statements and notes thereto, which are
incorporated by reference in the Statement of Additional
Information and this Prospectus, and which appear, along with
the report of Price Waterhouse, in the Vanguard Institutional
Money Market Portfolio's 1993 Annual Report to Shareholders.
For a more complete discussion of the Portfolio's
performance, please see the Portfolio's 1993 Annual Report to
Shareholders, which may be obtained without charge by writing
to the Portfolio or by calling Institutional Participant
Services at 1-800-523-1188.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------ OCT. 3,1989*
1993 1992 1991 1990 TO NOV. 30, 1989
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<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income..................................... .031 .040 .063 .082 .014
Net Realized and Unrealized Gain on Investments........... -- -- -- -- --
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS...................... .031 .040 .063 .082 .014
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DISTRIBUTIONS
Dividends from Net Investment Income...................... (.031) (.040) (.063) (.082) (.014)
Distributions from Realized Capital Gains................. -- -- -- -- --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS................................... (.031) (.040) (.063) (.082) (.014)
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NET ASSET VALUE, END OF PERIOD.............................. $1.00 $1.00 $1.00 $1.00 $1.00
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TOTAL RETURN................................................ 3.19% 4.02% 6.52% 8.49% 1.40%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................ $306 $269 $218 $91 $69
Ratio of Expenses to Average Net Assets..................... .15% .15% .15% .15% .15%**
Ratio of Net Investment Income to Average Net Assets........ 3.14% 3.93% 6.14% 8.24% 8.90%**
<FN>
*Commencement of operations.
**Annualized.
</TABLE>
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YIELD AND TOTAL RETURN
From time-to-time the Portfolio may advertise its yield and
total return. Both yield and total return figures are based
on historical earnings and are not intended to indicate
future performance. The "total return" of the Portfolio
refers to the average annual compounded rates of return over
one-, five- and ten-year periods or over the life of the
Portfolio (as stated in the advertisement) that would equate
an initial amount invested at the beginning of a stated
period to the ending redeemable value of the investment,
assuming the reinvestment of all dividends and distributions.
The "seven-day" or "current" yield of the Portfolio reflects
the income earned by a hypothetical account in the Portfolio
during a seven-day period, expressed as an annual percentage
rate. The "effective yield" of the Portfolio assumes the
income over the seven-day period is reinvested weekly,
resulting in a slightly higher stated yield through
compounding. Methods used to calculate advertised yields are
standardized for all money market funds. However, these
methods differ from the accounting methods used by the
Portfolio to maintain its books and records, and so
advertised yields may not fully reflect the income paid to a
shareholder's account or the yield reported in the
Portfolio's Annual Report.
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INVESTMENT OBJECTIVE
The Portfolio is designed primarily for institutional
investors. The Portfolio's objective is to provide the
maximum current income that is consistent with the
preservation of capital and liquidity by investing in
specified money market instruments. The Portfolio also seeks
to maintain a constant net asset value of $1.00 per share.
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<PAGE>
INVESTMENT POLICIES
THE PORTFOLIO INVESTS IN HIGH QUALITY MONEY MARKET SECURITIES
The Portfolio will invest in the following high-quality money
market obligations issued by financial institutions, non-
financial corporations, the U.S. Government, its agencies and
instrumentalities and state and municipal governments and
their agencies or instrumentalities:
(1) Negotiable certificates of deposit and bankers'
acceptances of U.S. banks having total assets in excess
of $1 billion.
(2) Commercial paper (including variable amount master demand
notes) rated Prime-1 by Moody's Investors Services, Inc.
or A-1 by Standard & Poor's Corporation or, if unrated,
issued by a corporation having an outstanding debt issue
rated Aa3 or better by Moody's or AA- or better by
Standard & Poor's.
(3) Short-term corporate obligations rated Aa3 or better by
Moody's or AA- or better by Standard & Poor's.
(4) Eurodollar and Yankee bank obligations. Eurodollar bank
obligations are dollar-denominated certificates of
deposit or time deposits issued outside the U.S. by the
foreign branches of U.S. banks and by foreign banks;
Yankee bank obligations are dollar-denominated
obligations issued in the U.S. by foreign banks.
(5) United States Treasury obligations including bills,
notes, bonds, and other debt obligations issued by the
United States Treasury. These securities are backed by
the full faith and credit of the U.S. Government.
(6) Securities issued or guaranteed by agencies and
instrumentalities of the U.S. Government. These include
securities issued by the Federal Home Loan Bank, Federal
Land Bank, Farmers Home Administration, Farm Credit Bank,
Federal Intermediate Credit Bank, Federal National
Mortgage Association, Federal Financing Bank, Tennessee
Valley Authority, and others. Such "agency" securities
may not be backed by the full faith and credit of the
U.S. Government.
(7) Repurchase agreements collateralized by the securities
listed in (5) and (6) above.
In addition, up to 10% of the Portfolio's net assets may be
invested in "restricted" money market securities, which are
not freely marketable or which are subject to restrictions on
disposition under the Securities Act of 1933. As an
operational policy, the Portfolio will not, in the aggregate,
enter into repurchase agreements maturing in more than seven
days, purchase restricted securities, or invest in any other
illiquid securities if, as a result, more than 10% of the net
assets of the Portfolio would be invested in such assets.
The Portfolio invests in money market instruments that mature
in 13 months or less. The Portfolio will also maintain an
average weighted maturity of 90 days or less.
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<PAGE>
IMPLEMENTATION OF POLICIES
THE PORTFOLIO MAY INVEST IN REPURCHASE AGREEMENTS
The Portfolio may invest in repurchase agreements according
to the restrictions and limitations set forth above in
"Investment Policies." A repurchase agreement is a means of
investing monies for a short period. In a repurchase
agreement, a seller -- a U.S. commercial bank or recognized
U.S. securities dealer -- sells securities to the Portfolio
and agrees to repurchase the securities at the Portfolio's
cost plus interest within a specified period (normally one
day). In these transactions, the securities purchased by the
Portfolio will have a total value equal to or in excess of
the value of the repurchase agreement, and will be held by
the Portfolio's Custodian Bank until repurchased.
The use of repurchase agreements involves certain risks. For
example, if the seller of the agreement defaults on its
obligation to repurchase the underlying securities at a time
when the value of these securities has declined, the
Portfolio may incur a loss upon disposition of them. If the
seller of the agreement becomes insolvent and subject to
liquidation or reorganization under the bankruptcy code or
other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control
of the Portfolio and therefore subject to sale by the trustee
in bankruptcy. Finally, it is possible that the Portfolio may
not be able to substantiate its interest in the underlying
securities. While the Portfolio's management acknowledges
these risks, it is expected that they can be controlled
through stringent security selection and careful monitoring.
THE PORTFOLIO MAY INVEST IN EURODOLLAR OR YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated
certificates of deposit or time deposits issued outside the
U.S. capital markets by the foreign branches of U.S. 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 foreign government might prevent dollar-denominated
funds from flowing across its borders. Other risks include:
adverse political and economic developments in a foreign
country; 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 Portfolio invests, and foreign issuers will be
required to meet the same tests of financial strength as the
domestic issuers approved for the Portfolio.
PORTFOLIO TURNOVER WILL BE HIGH
The Portfolio is expected to have a high portfolio turnover
rate due to the short maturities of the securities purchased.
However, this high turnover rate should not increase the
Portfolio's costs since brokerage commissions are not
normally charged on the purchase or sale of money market
instruments.
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<PAGE>
INVESTMENT LIMITATIONS
The Portfolio has adopted certain limitations designed to
reduce its risk exposure. These limitations include the
following:
THE PORTFOLIO HAS ADOPTED CERTAIN FUNDAMENTAL LIMITATIONS
(a) The Portfolio will not invest more than 5% of its assets
in the securities of any single company, excluding
obligations of the United States Government.
(b) The Portfolio will not purchase more than 10% of any
class of securities of any issuer.
(c) The Portfolio will not invest more than 25% of its assets
in any one industry, excluding obligations of the United
States Government or certificates of deposit or banker's
acceptances of domestic institutions.
(d) The Portfolio will not borrow money except for emergency
purposes and then not in excess of 15% of total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed only with the approval of a
majority of the Portfolio's shareholders.
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MANAGEMENT OF THE PORTFOLIO
VANGUARD ADMINISTERS AND DISTRIBUTES THE PORTFOLIO
The Portfolio is a member of The Vanguard Group of Investment
Companies, a family of 32 investment companies with 77
distinct investment portfolios and total assets in excess of
$120 billion. Through their jointly owned subsidiary, The
Vanguard Group, Inc. ("Vanguard"), the Fund and the other
funds in the Group obtain at cost virtually all of their
corporate management, administrative, shareholder accounting
and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard
funds. As a result of Vanguard's unique corporate structure,
the Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1993, the average expense
ratio (annual costs including advisory fees divided by total
net assets) for the Vanguard funds amounted to approximately
.30% compared to an average of 1.02% for the mutual fund
industry (data provided by Lipper Analytical Services).
The Officers of the Portfolio manage its day-to-day
operations and are responsible to the Portfolio's Board of
Directors. The Directors set broad policies for the Portfolio
and choose its Officers. A list of Directors and Officers of
the Portfolio and a statement of their present positions and
principal occupations during the past five years can be found
in the Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each fund
pays its share of Vanguard's total expenses, which are
allocated among the funds under methods approved by the Board
of Directors (Trustees) of each fund. In addition, each fund
bears its own direct expenses, such as legal, auditing and
custodian fees.
Vanguard also provides distribution and marketing services to
the Vanguard funds. The funds are available on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
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<PAGE>
INVESTMENT ADVISER
VANGUARD MANAGES THE PORTFOLIO'S INVESTMENTS
The Portfolio receives all investment advisory services on an
at-cost basis from Vanguard's Fixed Income Group. The Group
also provides investment advisory services to 34 other
Vanguard money market and bond portfolios, both taxable and
tax-exempt. Total assets under management by Vanguard's Fixed
Income Group were $52 billion as of December 31, 1993. The
Fixed Income Group is supervised by the Officers of the
Portfolio. Ian A. MacKinnon, Senior Vice President of
Vanguard, has been in charge of the Group since its inception
in 1981.
The Fixed Income Group manages the investment and
reinvestment of the assets of the Portfolio and continuously
reviews, supervises and administers the Portfolio's
investment program, subject to the maturity and quality
standards specified in this Prospectus and supplemental
guidelines approved by the Board of Directors. The Fixed
Income Group's selection of investments for the Portfolio is
based on: (a) continuing credit analysis of those instruments
held in the Portfolio and those being considered for
inclusion therein; (b) possible disparities in yield
relationships between different money market instruments; and
(c) actual or anticipated movements in the general level of
interest rates.
The Fixed Income Group is also responsible for the allocation
of principal business and portfolio brokerage and the
negotiation of commissions. The purchase and sale of
investment securities will ordinarily be principal
transactions. Portfolio securities will normally be purchased
directly from the issuer or from an underwriter or
market maker for the securities. There usually will be no
brokerage commissions paid by the Portfolio for securities
purchased directly from an issuer. Purchases from
underwriters of securities will include a commission or
concession paid by the issuer to the underwriter. Purchases
from dealers serving as market makers will include a dealer's
mark-up.
In purchasing and selling securities, it is the Portfolio's
policy to seek to obtain quality execution at the most
favorable prices through responsible broker-dealers. In
selecting broker-dealers to execute the securities
transactions for the Portfolio, consideration will be given
to such factors as: the price of the security; the rate of
the commission; the size and difficulty of the order; the
reliability, integrity, financial condition, general
execution and operational capabilities of competing broker-
dealers; and the brokerage and research services provided to
the Portfolio.
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DIVIDENDS AND TAXES
DIVIDENDS ARE PAID ON THE FIRST BUSINESS DAY OF EACH MONTH
The Portfolio's dividends are accrued daily and are
distributed on the first business day of the month. The
Portfolio's dividends will be automatically reinvested in
additional shares unless the Portfolio is notified otherwise.
The Portfolio's dividends are computed and declared as of the
regular close of the New York Stock Exchange (generally 4:00
p.m. Eastern time) each day, and are payable to shareholders
of record as of 12:00 noon (Eastern time) on that day. In
other words, shareholders whose purchases of shares are
effective as of 12:00 noon will receive the dividend for that
day. See "Dividend and Trade Date Policy" for more
information about the crediting of dividends.
<PAGE>
Net realized short-term capital gains of the Portfolio, if
any, will be distributed whenever the Directors determine
that such distributions would be in the best interest of
shareholders, but in any event at least once a year. The
Portfolio does not expect to realize any long-term capital
gains. Should any such gains be realized, they will be
distributed annually.
In addition, in order to satisfy certain distribution
requirements of the Tax Reform Act of 1986, the Fund may
declare special or regular year-end dividend and capital
gains distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to have
been paid by the Fund and received by shareholders on
December 31 of the prior year.
DIVIDENDS WILL BE SUBJECT TO FEDERAL INCOME TAX
The Portfolio intends to continue to qualify for taxation as
a "regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax to
the extent its income is distributed to shareholders.
Dividends paid by the Portfolio from net investment income,
whether received in cash or reinvested in additional shares,
will be taxable to shareholders as ordinary income. For
corporate investors, dividends from net investment income
will not qualify for the intercorporate dividends-received
deduction.
Although the Portfolio does not expect to distribute any
long-term capital gains, any capital gains distribution made
by the Portfolio would be subject to federal income tax. Such
distributions would not qualify for the intercorporate
dividends-received deduction.
A sale of shares of the Portfolio, either by redemption or
exchange, is a taxable event, and may result in a capital
gain or loss. However, since the Portfolio seeks to maintain
a constant $1.00 share price for both purchases and
redemptions, shareholders are not expected to realize a
capital gain or loss upon sale.
Dividend distributions, any capital gains distributions, and
any capital gains or losses from redemptions and exchanges
may be subject to state and local taxes. However, depending
on a state's tax rules, the portion of the Portfolio's income
derived from direct U.S. Treasury obligations may be exempt
from state and local taxes. Vanguard will indicate each year
the portion of the Portfolio's income, if any, that may
qualify for this exemption.
The Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions paid
to shareholders who have not complied with IRS taxpayer
identification regulations. This withholding requirement may
be avoided by certifying on the Account Registration Form the
appropriate Taxpayer Identification Number and by certifying
that backup withholding does not apply.
The Portfolio has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania, and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Portfolio will be
exempt from Pennsylvania personal property taxes.
<PAGE>
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an
investment in the Portfolio. The Portfolio is managed without
regard to tax ramifications.
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SHARE PRICE DETERMINATION
The Portfolio's share price or "net asset value" per share
is calculated daily at the regular close of trading on the
New York Stock Exchange (generally 4:00 p.m. Eastern time.)
The Portfolio determines its net asset value per share by
subtracting the Portfolio's liabilities (including accrued
expenses and dividends payable) from the total value of the
Portfolio's investments and other assets and dividing the
result by the total outstanding shares of the Portfolio.
For the purpose of calculating the Portfolio's net asset
value per share, securities are valued by the "amortized
cost" method of valuation, which does not take into account
unrealized 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 valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower
than the price the Portfolio would receive if it sold the
instrument.
The use of amortized cost and the maintenance of the
Portfolio's per share net asset value at $1.00 is based on
its election to operate under the provisions of Rule 2a-7
under the Investment Company Act of 1940. As a condition of
operating under that rule, the Portfolio must maintain a
dollar-weighted average portfolio maturity of 90 days or
less, purchase only instruments having remaining maturities
of 13 months or less, and invest only in securities which are
determined by the Directors to present minimal credit risks
and which are of high-quality as determined by any major
rating service, or in the case of any instrument not so
rated, considered by the Directors to be of comparable
quality.
The Directors have also agreed to establish procedures
reasonably designed, taking into account current market
conditions and the Portfolio's investment objective, to
stabilize the net asset value per share as computed for the
purposes of sales and redemptions at $1.00. These procedures
include periodic review, as the Directors deem appropriate
and at such intervals as are reasonable in light of current
market conditions, of the relationship between the amortized
cost value per share and a net asset value per share based
upon available indications of market value. In such
a review, investments for which market quotations are readily
available are valued at the most recent bid price or quoted
yield equivalent for such securities or for securities of
comparable maturity, quality and type as obtained from one or
more of the major market makers for the securities to be
valued. Other investments and assets are valued at fair
value, as determined in good faith by the Directors.
In the event of a deviation of over 1/2 of 1% between the
Portfolio's net asset value based upon available market
quotations or market equivalents and $1.00 per share based on
amortized cost, the Directors will promptly consider what
action, if any, should be taken. The Directors will also take
such action as they deem appropriate to eliminate or to
reduce to the extent reasonably practicable any material
<PAGE>
dilution or other unfair results which might arise from
differences between the two. Such action may include
redeeming shares in kind, selling instruments prior to
maturity to realize capital gains or losses or to shorten
average maturity, withholding dividends, paying distributions
from capital or capital gains, or utilizing a net asset value
per share based upon available market quotations.
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GENERAL INFORMATION
The Portfolio, Vanguard Institutional Money Market Portfolio,
is a class of shares offered by Vanguard Institutional
Portfolios, Inc., a Maryland corporation established under
Articles of Incorporation dated December 15, 1988. The
Articles of Incorporation permit the Directors to issue
20,000,000,000 shares of common stock, with a $.001 par
value. The Board of Directors has the power to designate one
or more classes ("Portfolios") of shares of common stock and
to classify or reclassify any unissued shares with respect to
such Portfolios. Currently, the Company is offering shares of
one Portfolio.
The shares of the Portfolio are fully paid and non-
assessable; have no preference as to conversion, exchange,
dividends, retirement or other features; and have no pre-
emptive rights. The shares of the Portfolio have non-
cumulative voting rights, meaning that the holders of more
than 50% of the shares voting for the election of Directors
can elect 100% of the Directors if they choose to do so.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on the
removal of a Director or Directors of the Portfolio if
requested in writing by holders of not less than 10% of the
outstanding shares of the Portfolio.
CoreStates Bank, N.A., Philadelphia, PA, has been retained to
act as Custodian of the assets of the Portfolio. The Vanguard
Group, Inc., Valley Forge, PA, serves as the Portfolio's
Transfer and Dividend Disbursing Agent. Price Waterhouse
serves as independent accountants for the Portfolio and will
audit its financial statements annually. The Portfolio is not
involved in any litigation.
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<PAGE>
SHAREHOLDER GUIDE
OPENING AN ACCOUNT AND PURCHASING SHARES
To open a new account, complete an Account Registration Form
and mail it to:
VANGUARD FINANCIAL CENTER
VANGUARD INSTITUTIONAL MONEY MARKET PORTFOLIO
ATTN: INSTITUTIONAL INVESTOR SERVICES
P.O. BOX 1472
VALLEY FORGE, PA 19482
For express or registered mail, send your registration form
to: Vanguard Financial Center, Vanguard Institutional Money
Market Portfolio, Attn: Institutional Investor Services, 100
Vanguard Boulevard, Malvern, PA 19355.
Once the account has been opened, Vanguard will assign an
Institutional Investor Services Representative for future
account transactions.
Shares of the Portfolio may be purchased by Federal Funds
wire. The minimum initial investment for the Portfolio is $10
million. Please contact your Institutional Investor Services
Representative or call the Vanguard Group at 1-800-523-1188
to notify the Portfolio of the intended investment and to
receive an account number. Wiring instructions are provided
below.
Subsequent investments of $5 million or more will qualify for
dividends on the date of purchase if Vanguard is notified one
business day in advance of the intended purchase, and a
Federal Funds wire is received by the close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on the date
of purchase. See "Dividend and Trade Date Policy".
ADDITIONAL INVESTMENTS
Please contact your Institutional Investor Services Representative
Additional investments may be made at any time by wiring
monies to Vanguard. As noted above, subsequent investments of
$5 million or more require prior day notification to qualify
for dividends on the date of purchase. To ensure prompt
investment, please notify your Institutional Investor
Services Representative in advance of the wire.
-------------------------------------------------------------
PURCHASING BY WIRE Monies should be wired to:
BEFORE WIRING CORESTATES BANM, N.A.
Please contact ABA 031000011
your Institutional CORESTATES NO 0144 6936
Investor Services ATTN VANGUARD
Representative VANGUARD INSTITUTIONAL MONEY MARKET PORTFOLIO
ACCOUNT NUMBER
ACCOUNT REGISTRATION
To ensure proper receipt, please be sure to include in the
wiring instructions the complete Portfolio name and the
account number Vanguard has assigned. NOTE: Federal Funds
wire purchase orders will be accepted only when the Portfolio
and Custodian Bank are open for business.
-------------------------------------------------------------
<PAGE>
PURCHASING BY EXCHANGE (from a Vanguard account)
Purchases may also be made by exchange from an existing
Vanguard Fund account. However, the Portfolio reserves the
right to refuse any exchange purchase request. Please call
your Institutional Investor Services Representative or call
Participant Services at 1-800-523-1188 for more information.
DIVIDEND DISTRIBUTIONS
Dividend distributions paid by the Portfolio will be
automatically reinvested in additional Portfolio shares. A
cash dividend option is also available from the Portfolio.
Please contact your Institutional Investor Services
Representative for further information.
CERTIFICATES
Share certificates will not be issued for the Portfolio.
- ------------------------------------------------------------------------------
DIVIDEND AND TRADE DATE POLICY
Investments will qualify for dividends on the date of
purchase under the following conditions:
* FOR INVESTMENTS OF $5 MILLION OR MORE: The Portfolio must
be notified of the intended purchase by 4:00 p.m. (Eastern
time) on the prior business day and the Federal Funds wire
must be received by Vanguard by 4:00 p.m. (Eastern time) on
the day of purchase.
* FOR INVESTMENTS OF LESS THAN $5 MILLION: The Portfolio must
be notified of the intended purchase by 10:45 a.m. (Eastern
time) on the day of purchase and the Federal Funds wire
must be received by 4:00 p.m. (Eastern time).
Generally, if these requirements are not met, an investment
will begin to earn dividends on the business day following
receipt of a Federal Funds wire.
The trade date, the day on which an account is credited, is
generally the day on which the Portfolio receives an
investment in the form of Federal Funds. For purchases by
Federal Funds wire or by exchange, the Portfolio is credited
immediately with Federal Funds. If a purchase by Federal
Funds wire or exchange is received by the close of the
Exchange, the trade date is the day of receipt. If a purchase
is received after the close of the Exchange, the trade date
is the business day following the receipt of the wire or
exchange.
The Portfolio reserves the right to suspend the offering of
shares for a period of time. The Portfolio also reserves the
right to reject any specific purchase request.
- ------------------------------------------------------------------------------
SELLING SHARES
WIRE PROCEEDS
Any portion of an account may be withdrawn by contacting your
Institutional Investor Services Representative. The
redemption proceeds will be wired to the bank account
indicated on the Account Registration Form on the business
day following receipt of a request.
For a redemption of an entire account balance, accrued
dividends will not be included in the initial redemption
wire, but will be sent separately by check or wire.
Wire redemptions of less than $5,000 are subject to a $5
charge deducted from the principal in your account. There is
no charge for wire redemptions of $5,000 or more, or for
subsequent dividend wires.
<PAGE>
For our mutual protection, wiring instructions must be on
file at Vanguard prior to executing any redemption request. A
request to change the bank account associated with the wire
redemption feature or a request to wire funds to a bank other
than that on file must be received in writing. A signature
guarantee of an authorized officer is required if the bank
registration is not identical to the Vanguard Fund account
registration.
-------------------------------------------------------------
SELLING BY EXCHANGE
Shares may also be sold by making an exchange to another
Vanguard Fund account. For further information, please
contact your Institutional Investor Services Representative.
-------------------------------------------------------------
OTHER REDEMPTION INFORMATION
The Portfolio may suspend the redemption rights or postpone
payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the
United States Securities and Exchange Commission.
The Portfolio reserves the right, for any account with a
balance of less than $5 million, either to redeem shares or
to transfer the account balance to another identically
registered Vanguard money market portfolio. Shareholders will
be provided with 60 days notice before any action is taken.
- ------------------------------------------------------------------------------
EXCHANGING SHARES
Shares of the Portfolio may be exchanged for those of other
available Vanguard Funds either by telephone or mail. Contact
your Institutional Investor Services Representative for
further information. Telephone exchange requests must
ordinarily be received by the close of the New York Stock
Exchange (generally 4:00 p.m. Eastern time) in order to be
processed on the date of receipt. The new Fund account will
bear the identical registration of the Vanguard Institutional
Money Market Portfolio account.
Telephone exchanges are not permitted for several Vanguard
Funds, and there also may be restrictions on new investments
in certain Funds. Large exchange requests (i.e., those over
$250,000) require prior approval by Vanguard on behalf of the
Fund. Contact your Institutional Investor Services
Representative for full information, including a prospectus.
Neither the Portfolio nor Vanguard is responsible for the
authenticity of exchange instructions received by telephone.
Every effort will be made to maintain the exchange privilege.
However, the Portfolio reserves the right to revise or
terminate its provisions, limit the amount of or reject any
exchange, as deemed necessary, at any time.
- ------------------------------------------------------------------------------
IMPORTANT INFORMATION ABOUT TELEPHONE TRANSACTIONS
The ability to initiate redemptions (except wire redemptions)
and exchanges by telephone is automatically established on
your account unless you request in writing that telephone
transactions on your account not be permitted. The ability to
initiate wire redemptions by telephone will be established on
your account only if you specifically elect this option in
writing.
<PAGE>
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio; (ii)
the 10-digit account number; (iii) the exact name in which
the account is registered; and (iv) the Social Security or
Taxpayer Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner
and mailed to the address of record, only. In the case of
a telephone redemption by wire, the wire transfer will be
made only in accordance with the shareowner's prior
written instructions.
Neither the Portfolio nor Vanguard will be responsible for
the authenticity of transaction instructions received by
telephone, provided that reasonable security procedures have
been followed. Vanguard believes that the security procedures
described above are reasonable and that if such procedures
are followed, you will bear the risk of any losses resulting
from unauthorized or fraudulent telephone transactions on
your account. If Vanguard fails to follow reasonable security
procedures, it may be liable for any losses resulting from
unauthorized or fraudulent telephone transactions on your
account.
- ------------------------------------------------------------------------------
OTHER ACCOUNT INFORMATION
A current corporate resolution must be maintained on file at
Vanguard at all times. The initial application serves as a
corporate resolution. Any revisions to a corporate resolution
must be submitted to your Institutional Investor Services
Representative at Vanguard.
To change the registration of an account, a request must be
submitted in writing to Vanguard and include the following
information: the account number and portfolio name;
authorized signatures; any applicable signature guarantees;
and other supporting legal documents as necessary.
All requests should be mailed to the following address:
VANGUARD FINANCIAL CENTER
ATTN: INSTITUTIONAL INVESTOR SERVICES
P.O. BOX 1472
VALLEY FORGE, PA 19482
- ------------------------------------------------------------------------------
<PAGE>
(This page intentionally left blank.)
<PAGE>
VANGUARD INSTITUTIONAL PORTFOLIOS
PART B
STATEMENT OF ADDITIONAL INFORMATION
MARCH 8, 1994
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus for Vanguard Institutional Portfolios, Inc. (the "Fund")
(dated March 8, 1994). To obtain the Prospectus please call the Investor
Information Department:
1-800-662-7447
TABLE OF CONTENTS PAGE
Investment Limitations................................................. 1
Yield and Total Return................................................. 2
Calculation of Yield................................................... 2
Purchase of Shares..................................................... 3
Redemption of Shares................................................... 3
Performance Measures................................................... 4
Management of the Fund................................................. 6
Description of Shares and Voting Rights................................ 8
Appendix-Description of Securities and Ratings......................... 8
Financial Statements................................................... 10
INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of the
Fund (as defined in the Investment Company Act of 1940), including a majority
of the shares of the Fund. The Fund may not under any circumstances:
1) purchase securities for the Fund other than the securities in which the
Fund is authorized to invest as set forth in the Prospectus under
"Investment Objectives and Policies";
2) borrow money in excess of 15% of the total assets of the Fund taken at
market value and then only from banks as a temporary measure for
extraordinary or emergency purposes; the Fund will not borrow to
increase income (leveraging) but only to facilitate redemption requests
which might otherwise require untimely dispositions of portfolio
securities; the Fund will repay all borrowings before making additional
investments and interest paid on such borrowings will reduce net income;
3) make loans to other persons (except by the purchase of obligations in
which the Fund is authorized to invest); provided, however, that the
Fund will not enter into repurchase agreements if, as a result thereof,
more than 10% of the net assets of the Fund (taken at current value)
would be subject to repurchase agreements maturing in more than seven
days;
4) purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the Government of the United
States, its agencies or instrumentalities) if, as a result, (a) more
than 5% of the Fund's total assets (taken at current value) would be
invested in the securities of such issuer, or (b) the Fund would hold
more than 10% of any class of securities of such issuer (for this
purpose, all debt obligations of an issuer maturing in less than one
year are treated as a single class of securities);
5) write, or invest in, put, call, straddle or spread options or invest in
interests in oil, gas or other mineral exploration or development
programs;
6) purchase securities on margin or sell any securities short;
<PAGE>
7) purchase or retain securities of an issuer if an officer or director of
such issuer is an officer or Director of the Fund or its investment
adviser and one or more of such officers or directors (trustees) of the
Fund or its investment adviser owns beneficially more than 1/2% of the
shares of securities of such issuer and all such directors and officers
owning more than 1/2% of such shares or securities together own more
than 5% of such shares or securities;
8) purchase any securities which could cause more than 25% of the value of
the Fund's total net assets at the time of such purchase to be invested
in the securities of one or more issuers conducting their principal
business activities in the same industry, provided that there is no
limitation with respect to investments in United States Treasury Bills,
other obligations issued or guaranteed by the Federal Government, its
agencies and instrumentalities or certificates of deposit or bankers'
acceptances of domestic institutions;
9) mortgage, pledge or hypothecate its assets except in an amount up to 15%
(10% as long as the Fund's shares are registered for sale in certain
states) of the value of the Fund's total assets but only to secure
borrowings for temporary or emergency purposes;
10) engage in the business of underwriting securities issued by other
persons, except to the extent that the Portfolio may technically be
deemed to be an underwriter under the Securities Act of 1933, as
amended, in disposing of investment securities;
11) purchase or otherwise acquire any security if, as a result, more than
10% of its net assets (including any investment in The Vanguard Group
Inc.) would be invested in securities that are illiquid;
12) purchase or sell real estate, real estate investment trust securities,
commodities, or commodity contracts;
13) invest in companies for the purpose of exercising control;
14) invest in securities of other investment companies, except as they may
be acquired as part of a merger, consolidation or acquisition of assets;
and
15) issue senior securities.
Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, or make loans to, or contribute to the costs or other
financial requirements of, any company which will be: (1) wholly owned by the
Fund and one or more other investment companies, and is (2) primarily engaged
in the business of providing, at-cost, management, administrative,
distribution or related services to the Fund and other investment companies.
See "Management of the Fund."
As an operational policy of the Fund, the Fund will not in the aggregate,
enter into repurchase agreements aturing in more than seven days, purchase
restricted securities or invest in any other illiquid securities if, as a
result thereof, more than 10% of the net assets of the Fund would be invested
in such assets.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
YIELD AND TOTAL RETURN
The yield of the Fund for the 7 day period ended November 30, 1993 was
3.16%.
The average annual total return of the Fund for the year ended November 30,
1993 and the period since inception (October 3, 1989) ending November 30, 1993
was +3.19% and 5.67%, respectively. Total return is computed by finding the
average compounded rate of return over the periods set forth above that would
equate an initial amount invested at the beginning of each period to the
ending redeemable value of the investment.
CALCULATION OF YIELD
The current yield of the 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
<PAGE>
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 the Institutional Money Market
Portfolio for the 7 day base period ended November 30, 1993.
MONEY MARKET PORTFOLIO
----------------------
11/30/93
--------
Value of account at beginning of period.......... $1.00000
Value of same account at end of period*.......... 1.00060
--------
Net Change in account value...................... .00060
Annualized Current Net Yield (Net Change X
365/7) average net asset value.................. 3.16%
Effective Yield ((Net Change) + 1)365/7 - 1....... 3.18%
Average Weighted Maturity of Investments.......... 58 Days
*Exclusive of any capital changes.
It is intended that the net asset value of a share of the Fund will remain
at $1.00. The yield of the Fund will fluctuate. 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 Fund and other factors. Yields are one basis investors may use
to analyze the Fund, and other investment vehicles; however, yields of other
investment vehicles may not be comparable because of the factors set forth in
the preceding sentence, differences in the time periods compared, and
differences in the methods used in valuing portfolio instruments, computing
net asset value and calculating yield.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment
of management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts or under circumstances where certain economies can be
achieved in sales of the Fund's shares.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges for the Fund or postpone the date
of payment (i) during any period that the New York Stock Exchange is closed,
or trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of
which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or fairly to determine the value of its assets, and (iii) for
such other periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or l% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Commission. Redemptions in excess of the above
limits may be paid in whole or in part, in investment readily marketable
securities or in cash, as the Directors may deem advisable; however, payment
will be made wholly in cash unless the Directors believe that economic or
market conditions exist which would make such a practice detrimental to the
best interests of the Fund. If redemptions are paid in investment securities,
such securities will be valued as set forth in the Prospectus under "Share
Price Determination" and a redeeming shareholder would normally incur brokerage
expenses if he converted these securities to cash.
No charge is made by the Fund for redemptions; except for wire withdrawals
in amounts less than $5,000 which will be subject to a maximum charge of $5.00
which will be deducted from the principal in your account. Any redemption may
be more or less than the shareholder's cost depending on the market value of
the securities held by each Portfolio.
<PAGE>
PERFORMANCE MEASURES
Vanguard Institutional Money Market Portfolio may use one or more, either
singularly or in a composite, of the following unmanaged indexes for
comparative performance purposes:
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 INDEX -- consists of nearly 5,000 common equity securities,
covering all stocks in the U.S. for which daily pricing is available.
WILSHIRE 4500 INDEX -- consists of all stocks in the Wilshire 5000 except for
the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
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.
SHEARSON LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
SHEARSON LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current
coupon high grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of four high grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers
High Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers
High Grade Bond Index.
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 BBB- or better. The Index has a market
value of over $4 trillion.
<PAGE>
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX --
is a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between
5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average
performance and/or the average expense ratio of the small company growth
funds. (This fund category was first established in 1982. For years prior to
1982, the results of the Lipper Small Company Growth category were estimated
using the returns of the Funds that constituted the Group at its inception.)
RUSSELL 3000 INDEX -- consists of the 3,000 largest stocks of U.S. domiciled
companies commonly traded on the New York and American Stock Exchanges or the
NASDAQ over-the-counter market, accounting for over 90% of the market value of
publicly traded Stocks in the U.S.
RUSSELL 2000 SMALL COMPANY STOCK INDEX -- consists of the smallest 2,000
stocks within the Russell 3000; a widely used benchmark for small
capitalization common stocks.
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives
and policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
Advertisements which refer to the use of the Fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no federal income tax
applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's Portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield. In addition there can be no assurance that the
Fund will continue its performance as compared to such other averages.
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Officers of the Portfolio manage its day to day operations and are
responsible to the Portfolio's Board of Directors. The Directors set broad
policies for each Fund and choose its Officers. Following is a list of
Directors and Officers of the Funds and a statement of their present positions
and principal occupations during the past five years. The mailing address of
the Directors and Officers of the Portfolio is Post Office Box 876, Valley
Forge, PA 19482.
<TABLE>
<CAPTION>
<C> <S>
JOHN C. BOGLE, Chairman, Chief Executive JOHN C. SAWHILL, Director
Officer and Director* President and Chief Executive Officer of The Nature
Chairman, Chief Executive Officer, and Director of The Conservancy; formerly, Director and Senior Partner,
Vanguard Group, Inc., and each of the investment companies McKinsey & Co., and President, New York University;
in The Vanguard Group; Director of The Mead Corporation Director of Pacific Gas and Electric Company and NACCO
and General Accident Insurance. Industries.
JOHN J. BRENNAN, President & Director* JAMES O. WELCH, JR., Director
President and Director of The Vanguard Group, Inc. and Retired Chairman of Nabisco Brands, Inc., retired Vice
each of the investment companies in The Vanguard Group. Chairman and Director of RJR Nabisco; Director of TECO
ROBERT E. CAWTHORN, Director Energy, Inc.
Chairman and Chief Executive Officer, Rhone-Poulenc Rorer, J. LAWRENCE WILSON, Director
Inc.; Director of Immune Response Corp. and Sun Company, Chairman and Director of Rohm & Haas Company; Director
Inc.; Trustee, Universal Health Realty Income Trust. Cummins Engine Company, Vanderbilt University, and Trustee
BARBARA BARNES HAUPTFUHRER, Director of the Culver Educational Foundation.
Director of The Great Atlantic and Pacific Tea Company, RAYMOND J. KLAPINSKY, Secretary*
Raytheon Company, Knight-Ridder, Inc., Massachusetts Senior Vice President and Secretary of The Vanguard Group,
Mutual Life Insurance Co., and ALCO Standard Corp. Inc.; Secretary of each of the investment companies in The
BRUCE K. MACLAURY, Director Vanguard Group.
President, The Brookings Institution; Director of Dayton RICHARD F. HYLAND, Treasurer*
Hudson Corporation, American Express Bank, Ltd. and The Treasurer of The Vanguard Group, Inc. and of each of the
St. Paul Companies, Inc. investment companies in The Vanguard Group.
BURTON G. MALKIEL, Director KAREN E. WEST, Controller*
Chemical Bank Chairmen's Professor of Economics, Princeton Vice President of The Vanguard Group, Inc.; Controller of
University; Director of Prudential Insurance Co. of each of the investment companies in The Vanguard Group.
America, Amdahl Corporation, Baker Fentress & Co., Jeffrey
Co., and The Southern New England Telephone Company and
Armstrong Rubber Co.; Governor, American Stock Exchange,
Inc.
ALFRED M. RANKIN, JR., Director
President, Chief Executive Officer and Director of NACCO
Industries, Inc.; Director of The BFGoodrich Company, The
Standard Products Company, and The Reliance Electric
Company.
<FN>
- ---------
*Officers of the Portfolio are "interested persons" as defined in the Investment Company Act of 1940.
</TABLE>
THE VANGUARD GROUP
The Fund is a member of The Vanguard Group of Investment Companies. Through
their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Fund and the other Funds in the Group obtain at cost virtually all of their
corporate management, administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost basis to certain of the
Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment.
Each Fund pays its share of Vanguard's total expenses which are allocated
among the Funds under methods approved by the Board of Directors (Trustees) of
each Fund. In addition, each Fund bears its own direct expenses such as legal,
auditing and custodian fees.
The Fund's Officers are also Officers and employees of Vanguard. No Officer
or employee owns, or is permitted to own, any securities of any external
adviser for the Funds.
<PAGE>
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts of which each of the Funds have 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, 1993, the Fund had contributed capital of $50,000 to Vanguard,
representing .3% of Vanguard's capitalization. The Fund's service agreement
was amended on May 10, 1993, to provide 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 amount that each Vanguard Fund may contribute to
Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
year ended November 30, 1993, the Fund's share of Vanguard's actual net costs
of operation relating to management and administrative services, (including
transfer agency) totaled approximately $227,000.
DISTRIBUTION. Vanguard provides all distribution and marketing activities for
the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds, in connection with any sales made directly to investors in the
states of Florida, Missouri, New York, Ohio, Texas and such other states as it
may be required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as
a Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of average distribution expense rate for the Group, and that
no Fund shall incur annual distribution expenses in excess of 20/100 of 1% of
its average month-end net assets. The Group's marketing and distribution
expenses allocated to the Fund for the year ended November 30, 1993 was
$99,000 or approximately 3/100 of 1% of its average month-end net assets.
INVESTMENT ADVISORY SERVICES. Vanguard also provides the Fund, Vanguard Money
Market Reserves, Vanguard Municipal Bond Fund, Vanguard Bond Index Fund,
several Portfolios of the Vanguard Fixed Income Securities Fund, Vanguard
Admiral Funds, Vanguard Index Trust, Vanguard Institutional Index Fund,
Vanguard International Equity Index Fund, Vanguard Balanced Index Fund, the
Vanguard California Tax-Free Fund, the Vanguard Pennsylvania Tax-Free Fund,
the Vanguard New York Insured Tax-Free Fund, Vanguard Ohio Tax-Free Fund,
Vanguard Florida Tax-Free Fund and Vanguard New Jersey Tax-Free Fund with
investment advisory services. These services are provided on an at-cost basis
from a money management staff employed directly by Vanguard. The compensation
and other expenses of this staff are paid by the Funds utilizing these
services. During the years ended November 30, 1991, 1992 and 1993, the Fund
paid approximately $8,000, $18,000 and $28,000, respectively, of Vanguard's
expenses relating to investment advisory services.
REMUNERATION OF DIRECTORS. The Fund pays each Director (Trustee), who is not
also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's Officers and employees are paid by
Vanguard which, in turn, is reimbursed by the Fund and each other Fund in the
Group, for its proportionate share of Officers' and employees' salaries and
retirement benefits. During the year ended November 30, 1993, the remuneration
paid by Vanguard to all officers as a group and allocated to the Fund, was
approximately $13,189.
Under its retirement plan, Vanguard contributes annually an amount equal to
10% of each Officer's annual compensation plus 5.7% of that part of an
eligible officer's compensation during the year, if any, that exceeds the
Social Security Taxable Wage Base then in effect. Under its thrift plan, all
employees are permitted to make pre-tax basic contributions in a maximum
amount equal to 4% of total compensation. Vanguard matches the basic
contributions on a 100% basis. Directors who are not officers are paid an
annual fee based on the number of years of service on the board, up to 15
years of service, upon retirement. The fee is equal to $1,000 for each year of
service and each investment company member of The Vanguard Group contributes a
proportionate amount to this
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fee based on its relative net assets. This fee is paid, subsequent to a
Director's retirement, for a period of ten years or until the death of a
retired Director. During the year ended November 30, 1993, the Fund's
proportionate share of retirement benefits paid to all officers of the Fund
was approximately $1,851.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Articles of Incorporation, as amended and restated, permit the Directors
to issue 20,000,000,000 shares of common stock, with a $.001 par value. The
Board of Directors has the power to designate one more classes ("Portfolios")
of shares of common stock and to classify or reclassify any unissued shares
with respect to such Portfolios. Currently the Fund is offering shares of one
Portfolio.
The shares are fully paid and nonassessable, and have no preference as to
conversion, exchange, dividends, retirement or other features. The shares have
no pre-emptive rights. The shares have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election
of Directors can elect 100% of the Directors if they choose to do so. A
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), then standing in his name on the books
of the Fund. On any matter submitted to a vote of shareholders, all shares of
the Fund then issued and outstanding and entitled to vote, irrespective of the
class, shall be voted in the aggregate and not by class: except (i) when
required by the Investment Company Act of 1940, shares shall be voted by
individual class; and (ii) when the matter does not affect any interest of a
particular class, then only shareholders of the affected class or classes
shall be entitled to vote thereon.
APPENDIX -- DESCRIPTION OF SECURITIES AND RATINGS
A-1 AND PRIME-1 COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by Standard & Poor's has the following
characteristics: (1) liquidity ratios are adequate to meet cash requirements;
(2) long-term senior debt is rated "A" or better; (3) the issuer has access to
at least two additional channels of borrowing; (4) basic earnings and cash
flow have an upward trend with allowance made for unusual circumstances; (5)
typically, the issuer's industry is well established and the issuer has a
strong position within the industry; and (6) the reliability and quality of
management are unquestioned. Relative strength or weakness of the above
factors determine whether the issuer's commercial paper is A-1, A-2, or A-3.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and the appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations.
BOND RATINGS
Bonds rated AA by Standard & Poor's are judged by S&P to be high-grade
obligations, and in the majority of instances differs only in small degrees
from issues rated AAA (the AA rating may be modified by the addition of a plus
or minus sign to show relative standing with the AA category). Bonds rated AAA
are considered by S&P to be the highest grade obligations and possess the
ultimate degree of protection as to principal and interest. Bonds rated Aa by
Moody's are judged by Moody's to be of high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than Aaa bonds because margins of protection may
not be as large or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger. Moody's also supplies numerical indicators, 1, 2
and 3 to the Aa rating category. The modifier 1 indicates that the security is
in the higher end of its rating category; the modifier 2 indicates a mid-range
ranking and 3 indicates a ranking toward the lower end of the category.
VARIABLE AMOUNT MASTER DEMAND NOTES
Variable amount master demand notes are demand obligations that permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to an arrangement between the issuer and a commercial bank acting as agent for
the payees of such notes, whereby both parties have the right to vary the
amount of the outstanding
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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 different periods, for varying amounts. In connection with a Portfolio's
investment in variable amount master demand notes, Vanguard's investment
management staff will monitor, on an ongoing basis, the earning power, cash
flow and other liquidity ratios of the issuer, and the borrower's ability to
pay principal and interest on demand.
DESCRIPTION OF U.S. GOVERNMENT SECURITIES
As used in this prospectus, the term "U.S. Government Securities" refers to
a variety of securities which are issued or guaranteed by the United States
Treasury, by various agencies of the United States Government, and by various
instrumentalities which have been established or sponsored by the United
States Government. The term also refers to "repurchase agreements"
collateralized by such United States Government 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 Portfolio may incur a loss upon disposition of them. If the
seller of the agreement becomes insolvent and subject to liquidation or
reorganization under the Bankruptcy Code or other laws, a bankruptcy court may
determine that the underlying securities are collateral not within the control
of the Portfolio and therefore subject to sale by the trustee in bankruptcy.
Finally, it is possible that the Portfolio may not be able to substantiate its
interest in the underlying securities. While the Fund's management
acknowledges these risks, it is expected that they can be controlled through
stringent security selection criteria and careful monitoring procedures.
EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit
or time deposits issued outside the U.S. capital markets by foreign branches
of U.S. 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
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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 Portfolio invests, and will
have at least the same financial strength as the domestic issuers approved for
the Portfolio.
FINANCIAL STATEMENTS
The Portfolio's Financial Statements for the year ended November 30, 1993,
including the financial highlights, appearing in the Vanguard Institutional
Money Market Portfolio 1993 Annual Report to Shareholders, and the report
thereon of Price Waterhouse, independent accountants, also appearing therein,
are incorporated by reference in this Statement of Additional Information. The
Portfolio's 1993 Annual Report to Shareholders is enclosed with this Statement
of Additional Information.
