<PAGE>
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[ART APPEARS HERE] A Member of The Vanguard Group
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PROSPECTUS--MAY 27, 1994
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT Vanguard Admiral Funds, Inc. (the "Fund") is an open-end di-
OBJECTIVES AND versified investment company. The Fund consists of four Port-
POLICIES folios, each of which invests in U.S. Treasury securities
within prescribed maturity and quality standards:
. Admiral U.S. Treasury Money Market Portfolio
. Admiral Short-Term U.S. Treasury Portfolio
. Admiral Intermediate-Term U.S. Treasury Portfolio
. Admiral Long-Term U.S. Treasury Portfolio
The objective of each of these four Portfolios is to provide
current income consistent with the preservation of capital
and liquidity. The Admiral U.S. Treasury Money Market Portfo-
lio also seeks to maintain a constant net asset value of
$1.00 per share. AN INVESTMENT IN THE MONEY MARKET 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. There
can be no assurance that either of the Fund's Portfolios will
achieve its stated objective.
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OPENING AN Please complete and return the Account Registration Form. If
ACCOUNT you need assistance in completing this Form, please call the
Investor Information Department. The minimum initial invest-
ment is $50,000 per Portfolio. The Fund is offered on a no-
load basis (i.e., there are no sales commissions or 12b-1
fees). However, the Fund incurs expenses for investment advi-
sory, management, administrative and distribution services.
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ABOUT THIS This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation you should know about the Fund before you invest. It
should be retained for future reference. A "Statement of Ad-
ditional Information" containing additional information about
the Fund has been filed with the Securities and Exchange Com-
mission. This Statement is dated May 27, 1994, and has been
incorporated by reference into this Prospectus. A copy may be
obtained without charge by writing to the Fund or by calling
the Investor Information Department.
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TABLE OF
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Highlights....................... 2
Fund Expenses.................... 4
Financial Highlights............. 5
Yield and Total Return........... 6
<CAPTION>
FUND INFORMATION
Investment Objectives............ 7
Investment Policies.............. 7
Investment Risks................. 8
Who Should Invest................ 9
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Implementation of
Policies........................ 10
Investment
Limitations..................... 13
Management of the
Fund............................ 13
Investment Adviser............... 14
Dividends, Capital
Gains and Taxes................. 15
The Share Price of
Each Portfolio.................. 16
General Information.............. 18
</TABLE>
<TABLE>
<CAPTION>
Page
SHAREHOLDER GUIDE
<S> <C>
Opening an Account and
Purchasing Shares............... 19
When Your Account Will Be
Credited........................ 22
Selling Your Shares.............. 23
Exchanging Your Shares........... 25
Important Information About
Telephone Transactions.......... 27
Transferring Registration........ 27
Other Vanguard Services.......... 28
</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 AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
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<PAGE>
HIGHLIGHTS
INVESTMENT Vanguard Admiral Funds, Inc. (the "Fund") is an open-end di-
OBJECTIVES AND versified investment company. The Fund consists of four Port-
POLICIES folios, each of which invests primarily in U.S. Treasury se-
curities within prescribed maturity and quality standards.
The objective of each of the Portfolios is to provide current
income consistent with the preservation of capital and li-
quidity. There is no assurance that any of the Fund's Portfo-
lios will achieve its stated objective. PAGE 7
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FOUR SEPARATE Investors may choose from four separate Portfolios of the
PORTFOLIOS Fund, each of which invests primarily in U.S. Treasury secu-
rities.
ADMIRAL U.S. TREASURY MONEY MARKET PORTFOLIO--expects to
maintain a dollar-weighted average maturity of 90 days or
less and seeks to maintain a stable $1.00 share price. An in-
vestment in the Admiral U.S. Treasury Money Market Portfolio
is neither insured nor guaranteed by the U.S. Government, and
there is no assurance that the Portfolio will be able to
maintain a stable net asset value of $1.00 per share.
ADMIRAL SHORT-TERM U.S. TREASURY PORTFOLIO--expects to main-
tain a dollar-weighted average maturity of 1 to 3 years.
ADMIRAL INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO--expects to
maintain a dollar-weighted average maturity of 5 to 10 years.
ADMIRAL LONG-TERM U.S. TREASURY PORTFOLIOS--expects to main-
tain a dollar-weighted average maturity of 15 to 30
years. PAGE 7
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RISK As mutual funds investing in U.S. Treasury securities, the
CHARACTERISTICS four Portfolios of the Fund are subject primarily to interest
rate risk and income risk. Interest rate risk is the poten-
tial for a decline in bond prices due to rising market inter-
est rates. The Admiral U.S. Treasury Money Market Portfolio,
which is expected to maintain a stable $1.00 share price,
provides minimal exposure to interest rate risk. In contrast,
share prices for the Admiral Short-Term, Intermediate-Term,
and Long-Term U.S. Treasury Portfolios will fluctuate as in-
terest rates change, with longer-maturity Portfolios gener-
ally exhibiting greater price fluctuations than shorter-matu-
rity Portfolios.
INCOME RISK is the potential for a decline in a Portfolio's
income due to falling market interest rates. In relative
terms, income risk will be higher for the Fund's shorter-term
Portfolios and lower for the Fund's longer-term Portfolios.
The following table summarizes both the income and interest
rate risks to which the four Portfolios are subject:
<TABLE>
<CAPTION>
-------------------------------------------------------------
INTEREST INCOME
ADMIRAL PORTFOLIO RATE RISK RISK
-------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Money Market Negligible Very high
Short-Term U.S. Treasury Low to moderate High
Intermediate-Term U.S. Treasury Moderate to high Moderate
Long-Term U.S. Treasury High to very high Low
-------------------------------------------------------------
</TABLE>
PAGE 8
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2
<PAGE>
THE VANGUARD The Fund is a member of The Vanguard Group of Investment Com-
GROUP panies, a group of 32 investment companies with 78 distinct
investment portfolios and total assets in excess of $120 bil-
lion. The Vanguard Group, Inc. ("Vanguard"), a subsidiary
jointly owned by the Vanguard Funds, provides all management,
administrative, distribution and accounting services on an
at-cost basis to the Funds in the Group.
PAGE 13
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INVESTMENT The Fund receives investment advisory services on an at-cost
ADVISER basis from Vanguard's Fixed Income Group. As a result, the
Fund receives its investment advisory services at a substan-
tially lower cost than would be possible if the Fund paid an
investment advisory fee to an external investment adviser.
PAGE 14
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DIVIDEND Each Portfolio declares a dividend each business day based on
POLICY its ordinary income. Dividends are paid monthly and may be
received in cash or reinvested to buy additional shares.
PAGE 15
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TAXES Dividends paid by the Fund's Portfolios are generally subject
to federal income tax. It is expected that most of the income
from the Fund's Portfolios will be attributable to U.S. Trea-
sury and other "direct" Government obligations. Such income
is exempt from state and local income taxes in most states.
Any capital gains distributions from a Portfolio are subject
to federal income tax, as well as applicable state and local
taxes. A sale of shares, whether by outright redemption,
checkwriting redemption, or an exchange, is a taxable event
and may result in a capital gain or loss.
PAGE 15
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PURCHASING You may purchase shares by mail, wire or exchange from an-
SHARES other Vanguard Fund. The minimum initial investment is
$50,000 per Portfolio; the minimum for subsequent investments
is $100. There are no sales commissions or 12b-1 fees.
PAGE 19
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SELLING SHARES You may redeem shares of each Portfolio by mail, telephone,
wire or check. There is no charge for redemption, except for
wire withdrawals under $5,000, which are subject to a $5
charge. Your bank may also assess a fee for incoming wires.
PAGE 23
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SERVICES TO The Fund offers free checkwriting services (minimum $250 per
SHAREHOLDERS check) for easy access to your account balance.
PAGE 23
The Fund also offers other special services: Direct Deposit,
for electronic deposit of most Government and private payroll
checks; Fund Express, for electronic transfers between the
Fund and your bank account; and Tele-Account, for around-the-
clock telephone access to your Fund account.
PAGE 28
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3
<PAGE>
FUND EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Fund. The expenses
set forth below are for the 1994 fiscal year.
<TABLE>
<CAPTION>
INTERMEDIATE- U.S. TREASURY
SHORT-TERM TERM LONG-TERM MONEY
SHAREHOLDER TRANSACTION U.S. TREASURY U.S. TREASURY U.S. TREASURY MARKET
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Load Imposed on
Purchases.............. None None None None
Sales Load Imposed on
Reinvested Dividends... None None None None
Redemption Fees*........ None None None None
Exchange Fees........... None None None None
<CAPTION>
INTERMEDIATE- U.S. TREASURY
SHORT-TERM TERM LONG-TERM MONEY
ANNUAL FUND OPERATING U.S. TREASURY U.S. TREASURY U.S. TREASURY MARKET
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management &
Administrative
Expenses............... 0.10% 0.11% 0.10% 0.11%
Investment Advisory
Fees................... 0.01 0.01 0.01 0.01
12b-1 Fees.............. None None None None
Other Expenses
Distribution Costs..... 0.02 0.02 0.02 0.02
Miscellaneous Expenses. 0.02 0.01 0.02 0.01
---- ---- ---- ----
Total Other Expenses.... 0.04% 0.03% 0.04% 0.03%
---- ---- ---- ----
TOTAL OPERATING
EXPENSES............. 0.15% 0.15% 0.15% 0.15%
==== ==== ==== ====
* Wire redemptions under $5,000 are subject to a $5 charge.
</TABLE>
The purpose of this table is to assist you in understanding
the various expenses that you would bear directly or
indirectly as an investor in the Fund.
The following example illustrates the expenses that you 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.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Admiral U.S. Treasury Money Market
Portfolio........................ $2 $5 $8 $19
Admiral Short-Term U.S. Treasury
Portfolio........................ $2 $5 $8 $19
Admiral Intermediate-Term U.S.
Treasury Portfolio............... $2 $5 $8 $19
Admiral Long-Term U.S. Treasury
Portfolio........................ $2 $5 $8 $19
</TABLE>
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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4
<PAGE>
The following financial highlights for a share outstanding
FINANCIAL throughout the period, have been audited by Price Waterhouse,
HIGHLIGHTS independent accountants, whose report thereon was unquali-
fied. This information should be read in conjunction with the
Fund's financial statements and notes thereto, which are in-
corporated by reference in the Statement of Additional Infor-
mation and this Prospectus, and which appear, along with the
report of Price Waterhouse, in the Fund's 1994 Annual Report
to the Shareholders. For a more complete discussion of the
Fund's performance, please see the Fund's 1994 Annual Report
to Shareholders which may be obtained without charge by writ-
ing to the Fund or calling our Investor Information Depart-
ment at 1-800-662-7447.
<TABLE>
<CAPTION>
U.S. TREASURY MONEY MARKET SHORT-TERM U.S. TREASURY
PORTFOLIO PORTFOLIO
------------------------------- -------------------------------
YEAR ENDED DEC. 14, 1992+ YEAR ENDED DEC. 14, 1992+
JAN. 31, 1994 TO JAN. 31, 1993 JAN. 31, 1994 TO JAN. 31, 1993
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 1.00 $ 1.00 $10.17 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .029 .004 .448 .065
Net Realized and
Unrealized Gain (Loss)
on Investments........ -- -- .101 .170
------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... .029 .004 .549 .235
------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (.029) (.004) (.448) (.065)
Distributions from
Realized Capital
Gains................. -- -- (.011) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS... (.029) (.004) (.459) (.065)
------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $ 1.00 $ 1.00 $10.26 $10.17
==========================================================================================
TOTAL RETURN............ 2.99% 0.41% 5.50% 2.35%
==========================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $860 $149 $252 $63
Ratio of Expenses to
Average Net Assets..... .15% .15%* .15% .15%*
Ratio of Net Investment
Income to Average Net
Assets................. 3.06% 3.12%* 4.38% 4.87%*
Portfolio Turnover Rate. N/A N/A 90% 7%
</TABLE>
*Annualized.
+Commencement of operations.
5
<PAGE>
<TABLE>
<CAPTION>
INTERMEDIATE-TERM U.S. LONG-TERM U.S. TREASURY
TREASURY PORTFOLIO PORTFOLIO
------------------------------ ------------------------------
YEAR ENDED DEC. 14, 1992+ YEAR ENDED DEC. 14, 1992+
JAN. 31, 1994 TO JAN. 31, 1993 JAN. 31, 1994 TO JAN. 31, 1993
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $10.29 $10.00 $10.30 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .578 .084 .709 .096
Net Realized and
Unrealized Gain (Loss)
on Investments........ .418 .290 .881 .300
------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... .996 .374 1.590 .396
---------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (.578) (.084) (.709) (.096)
Distributions from
Realized Capital
Gains................. (.128) -- (.281) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS... (.706) (.084) (.990) (.096)
---------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $10.58 $10.29 $10.90 $10.30
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
TOTAL RETURN............ 9.89% 3.75% 15.90% 3.97%
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $332 $78 $99 $49
Ratio of Expenses to
Average Net Assets..... .15% .15%* .15% .15%*
Ratio of Net Investment
Income to Average Net
Assets................. 5.46% 6.31%* 6.58% 7.22%*
Portfolio Turnover Rate. 102% 0% 51% 17%
</TABLE>
*Annualized.
+Commencement of operations.
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YIELD AND From time-to-time a Portfolio of the Fund may advertise its
TOTAL RETURN yield and total return. Both yield and total return figures
are based on historical earnings and are not intended to in-
dicate future performance. The "total return" of a Portfolio
refers to the average annual compounded rates of return over
one-, five- and ten-year periods or over the life of a Port-
folio (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 capital gains distribu-
tions.
The Admiral U.S. Treasury Money Market Portfolio's "seven-
day" or "current" yield reflects the income earned by a hypo-
thetical account in the Portfolio during a seven-day period,
expressed as an annual percentage rate. The Portfolio's "ef-
fective yield" assumes the income over the seven-day period
is reinvested weekly, resulting in a slightly higher stated
yield through compounding.
The "30-day yield" of the Admiral Short-Term, Intermediate-
Term, and Long-Term U.S. Treasury Portfolios is calculated by
dividing net investment income per share earned during a 30-
day period by the net asset value per share on the last day
of the period. Net investment income includes interest and
dividend income earned on a Portfolio's securities; it is net
of all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder accounts. The yield
calculation assumes that net investment income earned over 30
days is compounded monthly for six months and then
annualized. Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds. However,
these methods differ from the accounting methods used by
6
<PAGE>
a Portfolio to maintain its books and records, and so the ad-
vertised 30-day yield may not fully reflect the income paid
to your own account or the yield reported in the Fund's re-
ports to shareholders.
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INVESTMENT The Fund is an open-end diversified investment company. The
OBJECTIVES Fund consists of four Portfolios, each of which invests pri-
marily in U.S. Treasury securities within prescribed maturity
THE PORTFOLIOS and quality standards.
SEEK TO
PROVIDECURRENT The objective of each Portfolio is to provide current income
INCOME consistent with the preservation of capital and liquidity.
The Admiral U.S. Treasury Money Market Portfolio also seeks
to maintain, but does not guarantee, a constant net asset
value of $1.00 per share. There is no assurance that any of
the Fund's Portfolios will achieve its stated objective.
The investment objective of each Portfolio is fundamental and
so cannot be changed without the approval of a majority of
the Portfolio's shareholders.
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INVESTMENT The Fund offers a money market Portfolio and three bond Port-
POLICIES folios. All four Portfolios invest primarily in securities
backed by the full faith and credit of the U.S. Government.
THE FOUR Such securities include U.S. Treasury obligations (bills,
PORTFOLIOS notes and bonds), as well as other full faith and credit ob-
INVEST IN U.S. ligations of the U.S. Government. The latter include securi-
TREASURY ties issued by the General Services Administration, Govern-
SECURITIES ment National Mortgage Association, Rural Electrification Ad-
ministration, Small Business Administration, Federal Financ-
ing Bank, and other Governmental agencies. The Fund is man-
aged without regard to tax ramifications.
THE ADMIRAL U.S. TREASURY MONEY MARKET PORTFOLIO invests 100%
of its assets in securities backed by the full faith and
credit of the U.S. Government. Also, at least 65% of the
Portfolio's assets will be invested in U.S. Treasury bills,
notes and bonds. In seeking to provide a stable share price
of $1.00, the Portfolio is expected to maintain a dollar-
weighted average maturity of 90 days or less, and will pur-
chase securities with an effective maturity of 13 months or
less.
THE ADMIRAL SHORT-TERM, INTERMEDIATE-TERM, AND LONG-TERM U.S.
TREASURY PORTFOLIOS each invest at least 85% of their assets
in securities backed by the full faith and credit of the U.S.
Government. Also, at least 65% of each Portfolio's assets
will be invested in U.S. Treasury bills, notes and bonds. The
three Portfolios differ primarily in terms of average maturi-
ty. The Admiral Short-Term U.S. Treasury Portfolio is ex-
pected to maintain a dollar-weighted average maturity of be-
tween 1 and 3 years; the Admiral Intermediate-Term U.S. Trea-
sury Portfolio, a dollar-weighted average maturity of between
5 and 10 years; and the Admiral Long-Term U.S. Treasury Port-
folio, a dollar-weighted average maturity of between 15 and
30 years.
The balance of the assets of Admiral Short-Term, Intermedi-
ate-Term, and Long-Term U.S. Treasury Portfolios may be in-
vested in other U.S. Government agency securities, as well as
repurchase agreements collateralized by such securities. The
three Portfolios may also invest in bond (interest rate)
futures contracts and
7
<PAGE>
options to a limited extent and not for speculative purposes.
See "Implementation of Policies" for a description of these
and other investment practices of the Fund.
The investment policies of each Portfolio are not fundamental
and so may be changed without shareholder approval by the
Board of Directors. However, shareholders would be notified
of any material change in a Portfolio's policies.
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INVESTMENT As mutual funds investing in fixed income securities, the
RISKS four Portfolios of the Fund are subject to interest rate
risk, income risk, credit risk and manager risk.
EXCEPT FOR THE
MONEY MARKET INTEREST RATE RISK is the potential for a decline in bond
PORTFOLIO, prices due to rising market interest rates. In general, bond
SHARE PRICES prices vary inversely with interest rates. If interest rates
WILL FLUCTUATE rise, bond prices generally fall; if interest rates fall,
bond prices generally rise. The change in price depends on
several factors, including the bond's maturity date. In gen-
eral, bonds with longer maturities are more sensitive to in-
terest rates than bonds with shorter maturities.
These principles of interest rate risk also apply to U.S.
Treasury and U.S. Government agency securities. As with other
bond investments, U.S. Government securities will rise and
fall in value as interest rates change. A SECURITY BACKED BY
THE U.S. TREASURY OR A U.S. GOVERNMENT AGENCY IS GUARANTEED
ONLY AS TO THE TIMELY PAYMENT OF INTEREST AND PRINCIPAL WHEN
HELD TO MATURITY. THE CURRENT MARKET PRICES FOR SUCH SECURI-
TIES ARE NOT GUARANTEED AND WILL FLUCTUATE.
The Admiral U.S. Treasury Money Market Portfolio, with a dol-
lar-weighted average maturity of less than 90 days, invests
in short-term instruments and seeks to maintain a stable
$1.00 share price. As a result, the Portfolio is expected to
provide minimal exposure to interest rate risk. In relative
terms, share price fluctuations are expected to be low to
moderate for the Admiral Short-Term U.S. Treasury Portfolio,
moderate to high for the Admiral Intermediate-Term U.S. Trea-
sury Portfolio, and high to very high for the Admiral Long-
Term U.S. Treasury Portfolio, refecting the differing average
maturity characteristics of the three Portfolios. To illus-
trate the relative risk exposure of the Fund's three bond
Portfolios, the chart below depicts the effect of an immedi-
ate 2% change in interest rates on the principal value of
three bonds of varying maturities:
PERCENT CHANGE IN THE PRICE OF A PAR BOND
YIELDING 5.5%
<TABLE>
<CAPTION>
2% INCREASE IN 2% DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
---------------------------- -------------- --------------
<S> <C> <C>
Short-Term (2.5 years) - 4.5% + 4.7%
Intermediate-Term (10 years) -13.9% +16.7%
Long-Term (20 years) -20.5% +28.6%
</TABLE>
Note: By comparison, the Admiral U.S. Treasury Money Market
Portfolio seeks to maintain a stable $1.00 per share price.
8
<PAGE>
This chart is intended to provide you with guidelines for de-
termining the degree of interest rate risk you may be willing
to assume. The yield and price changes shown should not be
taken as representative of a Portfolio's current or future
yield or expected change in a Portfolio's share price.
INCOME RISK is the potential for a decline in a Portfolio's
income due to falling market interest rates. In relative
terms, income risk will be higher for the Fund's shorter-term
Portfolios and lower for the Fund's longer-term Portfolios.
The following table summarizes both the income and interest
rate risks to which the four Portfolios are subject:
<TABLE>
<CAPTION>
INTEREST INCOME
ADMIRAL PORTFOLIO RATE RISK RISK
---------------------------------------------------------
<S> <C> <C>
U.S. Treasury Money Market Negligible Very high
Short-Term U.S. Treasury Low to moderate High
Intermediate-Term U.S. Treasury Moderate to high Moderate
Long-Term U.S. Treasury High to very high Low
</TABLE>
CREDIT RISK is the possibility that an issuer of securities
held by a Portfolio will fail to make timely payment of in-
terest or principal. Because all four Portfolios invest pri-
marily in securities backed by the full faith and credit of
the U.S. Government, credit risk is expected to be negligi-
ble.
Finally, the investment adviser manages the Fund's Portfolios
according to the traditional methods of "active" investment
management, which involves the buying and selling of securi-
ties based upon economic, financial and market analysis and
investment judgement. MANAGER RISK refers to the possibility
that a Portfolio's investment adviser may fail to execute the
Portfolio's investment strategy effectively. As a result, a
Portfolio may fail to achieve its stated objective.
--------------------------------------------------------------------------------
WHO SHOULD The four Portfolios of the Fund are intended for investors
INVEST who are seeking current income from their investments consis-
tent with the preservation of capital and liquidity. The
INVESTORS Portfolios are also suitable for investors with common stock
SEEKING holdings who are seeking a complementary money market or
CURRENT INCOME fixed income investment in order to create a more diversified
and balanced investment mix. Because of the risks associated
with bond investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term bond market move-
ments. Investors who engage in excessive account activity
generate additional costs which are borne by all of the
Fund's shareholders. In order to minimize such costs, the
Fund has adopted the following policies. The Fund reserves
the right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management,
either because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Fund has
adopted exchange privilege limitations
9
<PAGE>
as described in the section "Exchange Privilege Limitations."
Finally, the Fund reserves the right to suspend the offering
of its shares.
You should base your selection of a Portfolio (or Portfolios)
of the Fund on your own objectives, risk preferences, and
time horizon.
THE ADMIRAL U.S. TREASURY MONEY MARKET PORTFOLIO is designed
for investors who are seeking current income and a stable
share price. The yield of the Portfolio is expected to fluc-
tuate from day to day and be lower on average than yields
from the Fund's other Portfolios. The Portfolio is suitable
as a short-term investment vehicle, emphasizing maximum pro-
tection of principal.
THE ADMIRAL SHORT-TERM AND INTERMEDIATE-TERM U.S. TREASURY
PORTFOLIOS are designed for investors who are willing to ac-
cept moderate to high share price fluctuations in exchange
for potentially higher and more durable yields. The choice
between the two is principally one of current yield and expo-
sure to interest rate risk. The Portfolios are intended for
investors with medium-term time horizons (e.g., three to five
years).
THE ADMIRAL LONG-TERM U.S. TREASURY PORTFOLIO is intended for
investors who are seeking the highest, most durable streams
of income and who can tolerate high to very high fluctuations
in share price in pursuit of their income objectives. Invest-
ors in the Portfolio should have a long-term investment hori-
zon (e.g., more than five years).
--------------------------------------------------------------------------------
IMPLEMENTATION The Portfolios of the Fund follow a number of additional in-
OF POLICIES vestment practices in pursuit of their objectives.
THREE The Admiral Short-Term, Intermediate-Term, and Long-Term U.S.
PORTFOLIOS MAY Treasury Portfolios may invest in repurchase agreements ac-
INVEST IN cording to the restrictions and limitations set forth above
REPURCHASE in "Investment Policies." A repurchase agreement is a means
AGREEMENTS 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 a 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 Port-
folio will have a total value equal to or in excess of the
value of the repurchase agreement, and will be held by the
Fund's Custodian Bank until repurchased.
The use of repurchase agreements involves certain risks. For
example, if the seller of the agreement defaults on its obli-
gation 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 re-
organization under the bankruptcy code or other laws, a bank-
ruptcy court may determine that the underlying securities are
collateral not within the control of the Portfolio and there-
fore subject to sale by the trustee in bankruptcy. Finally,
it is possible that the Portfolio may not be able to substan-
tiate its interest in the underlying securities. While the
10
<PAGE>
Fund's management acknowledges these risks, it is expected
that they can be controlled through stringent security selec-
tion and careful monitoring.
THREE The Admiral Short-Term, Intermediate-Term, and Long-Term U.S.
PORTFOLIOS MAY Treasury Portfolios may invest in futures contracts and op-
INVEST IN tions to a limited extent. Specifically, these three Portfo-
FUTURES lios may enter into futures contracts provided that not more
CONTRACTS AND than 5% of each Portfolio's assets are required as a futures
OPTIONS contract margin deposit; in addition, each of the three Port-
folios may enter into futures contracts and options transac-
tions only to the extent that obligations under such con-
tracts or transactions represent not more than 20% of a Port-
folio's assets.
Futures contracts and options may be used for several rea-
sons: to maintain cash reserves while remaining fully invest-
ed, to facilitate trading, to reduce transaction costs, or to
seek higher investment returns when a specific futures con-
tract is priced more attractively than other futures con-
tracts or the underlying security or index. The Portfolios
intend to use futures contracts only for bonafide hedging
purposes and will not use futures contracts or options for
speculative purposes.
FUTURES The primary risks associated with the use of futures con-
CONTRACTS AND tracts and options are: (i) imperfect correlation between the
OPTIONS POSE change in market value of the bonds held by a Portfolio and
CERTAIN RISKS the prices of futures contracts and options; and (ii) possi-
ble lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures position prior
to its maturity date. The risk of imperfect correlation will
be minimized by investing only in those contracts whose price
fluctuations are expected to resemble those of the Portfo-
lio's underlying securities. The risk that a Portfolio will
be unable to close out a futures position will be minimized
by entering into such transactions on a national exchange
with an active and liquid secondary market.
The risk of loss in trading futures contracts in some strate-
gies can be substantial, due both to the low margin deposits
required and the extremely high degree of leverage involved
in futures pricing. As a result, a relatively small price
movement in a futures contract may result in immediate and
substantial loss (or gain) to the investor. When investing in
futures contracts, the Fund will segregate cash or cash
equivalents in the amount of the underlying obligation.
THREE The Admiral Short-Term, Intermediate-Term, and Long-Term U.S.
PORTFOLIOS MAY Treasury Portfolios of the Fund may lend their investment se-
LEND THEIR curities to qualified institutional investors for either
SECURITIES short-term or long-term purposes of realizing additional in-
come. Loans of securities by a Portfolio will be collateral-
ized by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The col-
lateral will equal at least 100% of the current market value
of the loaned securities, and such loans may not exceed 33
1/3% of the value of the Portfolio's securities.
11
<PAGE>
THREE The Admiral Short-Term, Intermediate-Term, and Long-Term U.S.
PORTFOLIOS MAY Treasury Portfolios may invest up to 15% of their net assets
INVEST IN in restricted or illiquid securities. Restricted securities
RESTRICTED are securities which are not freely marketable or which are
SECURITIES subject to restrictions upon sale under the Securities Act of
1933. (Included within this limit are restricted securities
and other securities for which price quotations are not read-
ily available.) Pursuant to Rule 144A under the Securities
Act of 1933, as amended, if a substantial market among quali-
fied institutional buyers develops for such securities held
by any of these three Portfolios, the Fund intends to treat
such securities as liquid securities, in accordance with pro-
cedures approved by the Fund's Board of Directors.
THREE The Admiral Short-Term, Intermediate-Term, and Long-Term U.S.
PORTFOLIOS MAY Treasury Portfolios may invest in collateralized mortgage ob-
INVEST IN CMOS ligations (CMOs), bonds that are collateralized by whole loan
mortgages or mortgage pass-through securities. Generally, the
three Portfolios will purchase CMOs which are collateralized
by mortgage securities issued or guaranteed by the U.S. Gov-
ernment or its agencies. The bonds issued under a CMO struc-
ture are divided into groups (or tranches) with varying matu-
rities, and the cash flows generated by the mortgages or
mortgage pass-through securities in the collateral pool are
used to first pay interest and then principal to CMO invest-
ors (such as the Fund's Portfolios).
Under a CMO structure, the repayment of principal among the
different groups in prioritized in accordance with the terms
of the particular CMO issuance. The "fastest-pay" group of
bonds would initially receive all principal payments. When
that group of bonds is retired, the next group or groups, in
the sequence specified in the prospectus, receive all princi-
pal payments until all of the groups are retired. Many CMO
issues also include minimum reinvestments rate and minimum
sinking-fund guarantees.
Aside from market risk, the primary risk involved in any
mortgage security, such as a CMO, is exposure to prepayment
risk. Prepayment risk is the possibility that, as interest
rates fall, homeowners are more likely to refinance their
home mortgages. When home mortgages are refinanced, the prin-
cipal on CMO bonds held by the Portfolios are "prepaid" ear-
lier than expected. The Portfolios must then reinvest the un-
anticipated principal in new bond issuances, just at a time
when interest rates on new mortgage investments are falling.
To the extent a particular group of bonds is exposed to this
risk, the bondholder is generally compensated in the form of
enhanced yield.
Typically, the Portfolios will invest in CMOs that most ap-
propriately reflect their average maturity characteristics
and market risk profiles. Consequently, the Admiral Short-
Term U.S. Treasury Portfolio invests only in CMOs with short-
term average maturities that are believed to be highly pre-
dictable. Similarly, the Admiral Intermediate- and Long-Term
U.S. Treasury Portfolios will invest in those CMOs that carry
market risks and expected maturities commensurate with inter-
mediate- and long-term bonds.
12
<PAGE>
PORTFOLIO Although they generally seek to invest for the long term, the
TURNOVER RATES Admiral Short-Term, Intermediate-Term and Long-Term U.S.
WILL VARY Treasury Portfolios retain the right to sell securities re-
gardless of how long they have been held. It is anticipated
that the annual portfolio turnover rate for the Admiral In-
termediate-Term and Long-Term U.S. Treasury Portfolios will
generally not exceed 200%. A 200% turnover rate would occur,
for example, if all of the securities in a Portfolio were re-
placed two times within one year. For the Admiral Short-Term
U.S. Treasury Portfolio, the portfolio turnover rate will be
higher due to the short-term maturities of the securities
purchased, but is not expected to exceed 300%. A higher Port-
folio turnover rate will cause a Portfolio to incur addi-
tional brokerage costs and may cause a Portfolio to realize a
higher level of capital gains or losses.
--------------------------------------------------------------------------------
INVESTMENT Each Portfolio of the Fund has adopted certain limitations
LIMITATIONS designed to reduce its risk exposure. These limitations in-
clude the following:
THE FUND HAS (a) A Portfolio will not, with respect to 75% of its assets
ADOPTED (100% for the Admiral U.S. Treasury Money Market Portfo-
CERTAIN lio), invest more than 5% of the value of its assets in
FUNDAMENTAL the securities of any single company, excluding obliga-
LIMITATIONS tions of the United States Government and its agencies
and instrumentalities.
(b) A Portfolio will not borrow money except for emergency
purposes and then not in excess of 15% of total assets.
(c) A Portfolio will not pledge, mortgage or hypothecate its
assets to an extent greater than 15% of the value of its
total assets.
These investment limitations are considered at the time in-
vestment 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 Fund's
shareholders.
--------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of 32 investment companies with 78 distinct
investment portfolios and total assets in excess of $120 bil-
VANGUARD lion. Through their jointly owned subsidiary, The Vanguard
ADMINISTERS Group, Inc. ("Vanguard"), the Fund and the other funds in the
AND Group obtain at cost virtually all of their corporate manage-
DISTRIBUTES ment, administrative, shareholder accounting and distribution
THE FUND 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% com-
pared to an average of 1.02% for the mutual fund industry
(data provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations and
are responsible to the Fund's Board of Directors. The Direc-
tors set broad policies for the Fund and choose its Officers.
A list of the Directors and Officers of the Fund and a
13
<PAGE>
statement of their present positions and principal occupa-
tions during the past five years can be found in the State-
ment of Additional Information.
Vanguard employs a supporting staff of management and admin-
istrative personnel needed to provide the requisite services
to the funds and also furnishes the funds with necessary of-
fice 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 made available to investors
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.
--------------------------------------------------------------------------------
INVESTMENT The four Portfolios of the Fund receive all investment advi-
ADVISER sory services on an at-cost basis from Vanguard's Fixed In-
come Group. The Group provides investment advisory services
VANGUARD to 35 Vanguard money market and bond portfolios, both taxable
MANAGES THE and tax-exempt. Total assets under management by Vanguard's
FUND'S Fixed Income Group were approximately $52 billion as of De-
INVESTMENTS cember 31, 1993. The Fixed Income Group is supervised by the
Officers of the Fund.
Ian A. MacKinnon, Senior Vice President of Vanguard, has been
in charge of the Fixed Income Group since its inception in
1981. Mr. MacKinnon is responsible for setting the broad in-
vestment strategies employed by the Fund, and for overseeing
the portfolio managers who implement those strategies on a
day-to-day basis. The portfolio managers are as follows:
. Robert F. Auwaerter, Vice President of Vanguard, serves as
portfolio manager of the Admiral Intermediate-Term and
Long-Term U.S. Treasury Portfolios. Associated with the
Fixed Income Group since 1981, Mr. Auwaerter has managed
these Portfolios since their inception.
. John Hollyer, Assistant Vice President of Vanguard, serves
as portfolio manager of the Admiral Money Market and Short-
Term U.S. Treasury Portfolios. Associated with the Fixed
Income Group since 1989, Mr. Hollyer began managing the
Portfolios in 1993. (Previously, the Portfolios were man-
aged by Mr. Auwaerter.) Prior to joining Vanguard, Mr.
Hollyer traded U.S. Government bonds for an international
investment bank.
The Fixed Income Group manages the investment and reinvest-
ment of the assets of the Fund's Portfolios and continuously
reviews, supervises and administers each Portfolio's invest-
ment program, subject to the maturity and quality standards
specified in this Prospectus and supplemental guidelines ap-
proved by the Fund's Board of Directors. The Fixed Income
Group's selection of investments for the Portfolios is based
on: (a) continuing credit analysis of those instruments held
in the Portfolios and those being considered for inclusion
therein; (b) possi-
14
<PAGE>
ble disparities in yield relationships between different
fixed income securities; and (c) actual or anticipated move-
ments 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 negoti-
ation of commissions. The purchase and sale of investment se-
curities by the Fund will ordinarily be principal transac-
tions. Portfolio securities will normally be purchased di-
rectly from the issuer or from an underwriter or market maker
for the securities. There usually will be no brokerage com-
missions paid by a Portfolio for securities purchased from an
issuer. Purchases from underwriters of securities will in-
clude a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market
makers will include a dealer's mark-up.
In purchasing and selling securities for each of the Portfo-
lios, it is the Fund's policy to seek to obtain quality exe-
cution at the most favorable prices through issuers or re-
sponsible broker-dealers. In selecting broker-dealers to exe-
cute the securities transactions for the Portfolios, consid-
eration 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 condi-
tion, general execution and operational capabilities of com-
peting broker-dealers; and the overall brokerage and research
services provided to the Fund.
--------------------------------------------------------------------------------
DIVIDENDS, Dividends consisting of virtually all of the ordinary income
CAPITAL GAINS of each Portfolio are declared daily and are payable to
AND TAXES shareholders of record at the close of the previous business
day. Such dividends are paid on the first business day of
DIVIDENDS ARE each month. Capital gains distributions, if any, will be made
PAID ON THE annually.
FIRST BUSINESS
DAY OF EACH The Fund's dividend and capital gains distributions may be
MONTH reinvested in additional shares or received in cash. See
"Choosing a Distribution Option" for a description of these
distribution methods.
In order to satisfy certain requirements of the Tax Reform
Act of 1986, the Fund may declare year-end dividend and capi-
tal 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 Decem-
ber 31 of the prior year.
DIVIDENDS WILL Each Portfolio of the Fund intends to continue to qualify for
BE SUBJECT TO taxation as a "regulated investment company" under the Inter-
FEDERAL INCOME nal Revenue Code so that each Portfolio will not be subject
TAX to federal income tax to the extent its income is distributed
to shareholders. Dividends paid by each Portfolio from net
investment income and net short-term capital gains, whether
received in cash or reinvested in additional shares, will be
taxable to shareholders as ordinary income. For corporate in-
vestors, dividends paid by the Fund from net investment in-
come will generally not qualify for the intercorporate divi-
dends-received deduction.
Distributions paid by the Fund from net long-term capital
gains (excess of long and short-term capital gains over capi-
tal losses), if any, whether received in
15
<PAGE>
cash or reinvested in additional shares, are taxable as long-
term capital gains, regardless of the length of time you have
owned shares in the Fund. Capital gains distributions are
made when the Fund realizes net capital gains on sales of
portfolio securities during the year. For the Fund, realized
capital gains are not expected to be a significant or pre-
dictable part of investment return.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
A CAPITAL GAIN A sale of a Portfolio's shares is a taxable event and may re-
OR LOSS MAY BE sult in a capital gain or loss. A capital gain or loss may be
REALIZED UPON realized from an ordinary redemption of shares, a check-writ-
EXCHANGE OR ing redemption, or an exchange of shares between two mutual
REDEMPTION funds (or two portfolios of a mutual fund). Since the Admiral
U.S. Treasury Money Market Portfolio seeks to maintain a con-
stant $1.00 share price for both purchases and redemptions,
shareholders are not expected to realize a capital gain or
loss upon sale.
Dividend distributions, capital gains distributions, and cap-
ital gains or losses from redemption and exchanges may be
subject to state and local taxes. The portion of a Portfo-
lio's income derived from "full faith and credit" U.S. Gov-
ernment obligations is exempt from state and local taxes in
most states. The Fund will indicate each year the portion of
a Portfolio's income, if any, that may qualify for this ex-
emption.
The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to share-
holders who have not complied with IRS taxpayer identifica-
tion regulations. You may avoid this withholding requirement
by certifying on your Account Registration Form your proper
Social Security or Taxpayer Identification Number and by cer-
tifying that you are not subject to backup withholding.
The Fund has obtained a Certificate of Authority to do busi-
ness as a foreign corporation in Pennsylvania, and does busi-
ness and maintains an office in that state. In the opinion of
counsel, the shares of the Fund will be exempt from Pennsyl-
vania personal property taxes.
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 in-
vestment in the Fund.
--------------------------------------------------------------------------------
THE SHARE Each Portfolio's net asset value (or price per share) is com-
PRICE OF EACH puted daily by dividing the Portfolio's total value of in-
PORTFOLIO vestments and other assets, less any liabilities, by the num-
ber of outstanding shares of the Portfolio. Each Portfolio's
net asset value is determined as of the regular close of the
New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Exchange is open for trading.
ADMIRAL U.S. TREASURY MONEY MARKET PORTFOLIO. It is the pol-
icy of the Portfolio to attempt to maintain a net asset value
of $1.00 per share for purposes of sales and redemptions. The
instruments held by the Portfolio are valued on the basis
16
<PAGE>
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 am-
ortization 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 Portfo-
lio'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 operat-
ing under that rule, the Portfolio must maintain a dollar-
weighted average portfolio maturity of 90 days or less, pur-
chase only instruments having remaining maturities of 13
months or less, and invest only in securities that are deter-
mined by the Directors to present minimal credit risks and
that are of high quality as determined by any major rating
service, or in the case of any instrument not so rated, con-
sidered by the Directors to be of comparable quality.
The Directors have also agreed to establish procedures rea-
sonably designed, taking into account current market condi-
tions 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 pe-
riodic review, as the Directors deem appropriate and at such
intervals as are reasonable in light of current market condi-
tions, of the relationship between the amortized cost value
per share and a net asset value per share based upon avail-
able indications of market value. In such a review, invest-
ments for which market quotations are readily available are
valued at the most recent bid price or quoted yield equiva-
lent for such securities or for securities of comparable ma-
turity, 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 deter-
mined 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 quo-
tations or market equivalents and $1.00 per share based on
amortized cost, the Directors will promptly consider what ac-
tion, if any, should be taken. The Directors will also take
such action as they deem appropriate to eliminate or to re-
duce, to the extent reasonably practicable, any material di-
lution or other unfair results which might arise from differ-
ences between the two. Such action may include redeeming
shares in kind, selling instruments prior to maturity to re-
alize 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.
ADMIRAL SHORT-TERM, INTERMEDIATE-TERM, AND LONG-TERM U.S.
TREASURY PORTFOLIOS. Net asset value includes interest on
fixed income securities, which is accrued daily. Securities
which are traded on a stock exchange and over-the-
17
<PAGE>
counter will be valued according to the broadest and most
representative market, and it is expected that for bonds and
other fixed income securities this ordinarily will be the
over-the-counter market.
However, bonds and the fixed income securities may be valued
on the basis of prices provided by a pricing service when
such prices are believed to reflect the fair market value of
such securities. The prices provided by a pricing service may
be determined without regard to bid or last sale prices but
take into account institutional size trading in similar
groups of securities and any developments related to specific
securities. Securities not priced in this manner are valued
at the most recent quoted bid price. Other assets and securi-
ties for which no quotations are readily available will be
valued in good faith at fair market value using methods de-
termined by the Board of Directors.
Share prices for the Admiral Short-Term, Intermediate-Term,
and Long-Term U.S. Treasury Portfolios can be found daily in
the mutual fund listings of most major newspapers under the
heading of The Vanguard Group.
--------------------------------------------------------------------------------
The Fund is a Maryland corporation. The Fund's Articles of
GENERAL Incorporation permit the Directors to issue 21,500,000,000
INFORMATION 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 Portfo-
lios. Currently the Fund is offering shares of four Portfo-
lios.
The shares of each Portfolio are fully paid and non-assessa-
ble; have no preference as to conversion, exchange, divi-
dends, retirement or other features; and have no pre-emptive
rights. The shares of each Portfolio have non-cumulative vot-
ing 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 ap-
plicable law. An annual meeting will be held on the removal
of a Director or Directors of the Fund if requested in writ-
ing by holders of not less than 10% of the outstanding shares
of the Fund.
State Street Bank and Trust Company, Boston, MA, has been re-
tained to act as custodian of the assets of the Admiral
Short-Term, Intermediate-Term, and Long-Term U.S. Treasury
Portfolios. CoreStates Bank, N.A., Philadelphia, PA has been
retained as the custodian of the assets of the Admiral U.S.
Treasury Money Market Portfolio.
The Vanguard Group, Inc., Valley Forge, PA, serves as the
Fund's Transfer and Dividend Disbursing Agent. Price
Waterhouse serves as independent accountants for the Fund and
will audit its financial statements annually. The Fund is not
involved in any litigation.
--------------------------------------------------------------------------------
18
<PAGE>
SHAREHOLDER GUIDE
OPENING AN To open a new account, either by mail or by wire, simply com-
ACCOUNT AND plete and return an Account Registration Form and any re-
PURCHASING quired legal documentation. Please indicate the Portfolio you
SHARES have chosen and the amount you wish to invest. Your purchase
must be equal to or greater than the $50,000 minimum initial
investment requirement in any Portfolio. (This minimum ini-
tial requirement also applies to Individual Retirement Ac-
counts and Uniform Gifts/Transfers to Minors Act accounts.)
If you need assistance with the Account Registration Form or
have any questions about this Fund, please call our Investor
Information Department at 1-800-662-7447. NOTE: For other
types of account registrations (e.g., corporations, associa-
tions, other organizations, trusts, or powers of attorney),
please call us to determine which additional forms you may
need.
Because of the risks associated with bond investments, the
Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating
on short-term bond market movements. Consequently, the Fund
reserves the right to reject any specific purchase (and ex-
change purchase) request. The Fund also reserves the right to
suspend the offering of shares for a period of time.
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received in the
form of Federal Funds. See "When Your Account Will Be Credit-
ed". The Fund is offered on a no-load basis (i.e., there are
no sales commissions or 12b-1 fees).
ADDITIONAL Subsequent investments may be made by mail ($100 minimum per
INVESTMENTS Portfolio), wire ($1,000 minimum per Portfolio), exchange
from another Vanguard Fund account ($100 minimum per Portfo-
lio), or Vanguard Fund Express.
--------------------------------------------------------------
ADDITIONAL INVESTMENTS TO
NEW ACCOUNT EXISTING ACCOUNTS
PURCHASING BY Please include the Additional investments should
MAIL amount of your initial include the Invest-by-Mail
Complete and investment and the remittance form attached to
sign the name of the Portfolios your Fund confirmation state-
enclosed you have selected on ments. Please make your check
Account the registration form, payable to The Vanguard Group
Registration make your check pay- (Portfolio Number), see page
Form able to The Vanguard 20 for the appropriate number.
Group (Portfolio Num- Write your account number on
ber), see page 20 for your check and, using the
the appropriate number return envelope provided,
and mail to: mail to the address indicated
on the Invest-by-Mail Form.
VANGUARD FINANCIAL CENTER
P.O. BOX 2600
VALLEY FORGE, PA 19482
19
<PAGE>
For express or VANGUARD FINANCIAL CENTER All written requests
registered mail, 455 DEVON PARK DRIVE should be mailed to
send to: WAYNE, PA 19087 one of the addresses
indicated for new ac-
counts. Do not send
registered or express
mail to the post of-
fice box address.
VANGUARD ADMIRAL FUNDS:
Admiral U.S. Treasury Money Market Portfolio--11
Admiral Short-Term U.S. Treasury Portfolio--12
Admiral Intermediate-Term U.S. Treasury Portfolio--19
Admiral Long-Term U.S. Treasury Portfolio--20
--------------------------------------------------------------
PURCHASING BY CORESTATES BANK, N.A.
WIRE ABA 031000011
Money should be wired to: CORESTATES NO 0144 6936 (for Admiral U.S. Treasury
Money Market Portfolio)
BEFORE WIRING CORESTATES NO 0101 9897 (for Admiral Short-Term,
Please contact Intermediate-Term, and Long-Term U.S. Treasury
Client Services Portfolios)
(1-800-662-2739) ATTN VANGUARD
VANGUARD ADMIRAL FUNDS
NAME OF PORTFOLIO
ACCOUNT NUMBER
ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank includes
the Portfolio name, the account number Vanguard has assigned
to you and the eight digit Corestates number. If you are
opening a new account, please complete the Account Registra-
tion Form and mail it to the "New Account" address after com-
pleting your wire arrangement. NOTE: Federal Funds wire pur-
chase orders will be accepted only when the Fund and Custo-
dian Bank are open for business.
--------------------------------------------------------------
PURCHASING BY You may open an account or purchase additional shares by mak-
EXCHANGE (from ing an exchange from an existing Vanguard Fund account. How-
a Vanguard ever, the Fund reserves the right to refuse any exchange pur-
account) chase request. Call our Client Services Department at 1-800-
662-2739. The new account will have the same registration as
the existing account.
--------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move money
FUND EXPRESS from your bank account to your Vanguard account at your re-
Special Purchase quest. Or if you choose the Automatic Investment option,
and Automatic money will be moved from your bank account to your Vanguard
Investment account on the schedule (monthly, bimonthly [every other
month], quarterly or yearly) you select. To establish these
Fund Express options, please provide the appropriate informa-
tion on the Account Registration Form. We will send you a
confirmation of your Fund Express service; please wait three
weeks before using the service.
--------------------------------------------------------------------------------
20
<PAGE>
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital
gains distributions will be reinvested in additional Fund
shares. This option will be selected for you automatically
unless you specify another option.
2. CASH DIVIDEND OPTION--Your dividends will be paid in cash
and your capital gains will be reinvested in additional
Fund shares.
3. ALL CASH OPTION--Both dividend and capital gains distri-
butions will be paid in cash.
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department (1-
800-662-2739) for information. You may also elect Vanguard
Dividend Express which allows you to transfer your cash divi-
dends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
--------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund shareholders.
INVESTORS These distributions are made to all shareholders who own Fund
SHOULD ASK shares as of the distribution's record date, regardless of
ABOUT THE how long the shares have been owned. Purchasing shares just
TIMING OF prior to the record date could have a significant impact on
CAPITAL GAINS your tax liability for the year. For example, if you purchase
AND DIVIDEND shares immediately prior to the record date of a sizable cap-
DISTRIBUTIONS ital gain or income dividend distribution, you will be as-
BEFORE sessed taxes on the amount of the capital gain and/or divi-
INVESTING dend distribution later paid even though you owned the Fund
shares for just a short period of time. (Taxes are due on the
distributions even if the dividend or gain is reinvested in
additional Fund shares.) While the total value of your in-
vestment will be the same after the distribution--the amount
of the distribution will offset the drop in the net asset
value of the shares--you should be aware of the tax implica-
tions the timing of your purchase may have.
Prospective investors should, therefore, inquire about poten-
tial distributions before investing. The Fund's annual capi-
tal gains distribution normally occurs in December, while in-
come dividends are generally paid on the first business day
of each month. For additional information on distributions
and taxes, see the section titled "Dividends, Capital Gains,
and Taxes."
--------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
complete your Account Registration Form. If you wish to add
ESTABLISHING shareholder options later, you may need to provide Vanguard
OPTIONAL with additional information and a signature guarantee. Please
SERVICES call our Client Services Department (1-800-662-2739) for fur-
ther assistance.
21
<PAGE>
SIGNATURE For our mutual protection, we may require a signature guaran-
GUARANTEES tee on certain written transaction requests. A signature
guarantee verifies the authenticity of your signature, and
may be obtained from banks, brokers and any other guarantor
that Vanguard deems acceptable. A SIGNATURE GUARANTEE CANNOT
BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will not be issued for the Fund.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or ad-
viser may charge a service fee.
CANCELLING The Fund will not cancel any trade (e.g., a purchase, ex-
TRADES change or redemption) believed to be authentic, received in
writing or by telephone, once the trade has been received.
--------------------------------------------------------------------------------
WHEN YOUR The trade date is the date on which your account is credited.
ACCOUNT WILL It is generally the day on which the Fund receives your in-
BE CREDITED vestment in the form of Federal Funds (monies credited to the
Fund's Custodian Bank by a Federal Reserve Bank). Your trade
date varies according to your method of payment for your
shares.
For purchases by check, the Fund is ordinarily credited with
Federal Funds within one business day. Thus, if your purchase
by check is received by the regular close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time), your trade
date is the business day following receipt of your check. If
your purchase is received after the close of the Exchange,
your trade date is the second business day following receipt
of your check.
For purchases by Federal Funds wire or exchange from another
Vanguard Fund, the Fund is credited immediately with Federal
Funds. Thus, if your purchase by Federal Funds wire or ex-
change is received by the close of the Exchange, your trade
date is the day of receipt. If your purchase is received af-
ter the close of the Exchange, your trade date is the busi-
ness day following receipt of your wire or exchange.
Your shares are purchased at the next determined net asset
value after your investment has been received in the form of
Federal Funds. You will begin to earn dividends on the calen-
dar day following the trade date. (For a Friday trade date,
you will begin earning dividends on Saturday.) For a purchase
by Federal Funds wire into Admiral U.S. Treasury Money Market
Portfolio, you may qualify for a dividend on the date of pur-
chase if you have notified the Fund of your intention to make
the purchase by 10:45 a.m. (Eastern time) on the business day
of the wire.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a for-
eign check which has been drawn in U.S. dollars and has been
issued by a foreign bank with a U.S. correspondent bank. The
name of the U.S. correspondent bank must be printed on the
face of the foreign check.
--------------------------------------------------------------------------------
22
<PAGE>
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are nor-
mally mailed, credited or wired--depending upon the method of
withdrawal you have previously chosen--within two business
days after the receipt of the request in Good Order.
SELLING BY You may withdraw funds from your account by writing a check
WRITING A payable in the amount of $250 or more. When a check is pre-
CHECK sented for payment to the Fund's agent, CoreStates Bank, the
Fund will redeem sufficient shares in your account at the net
asset value next determined to cover the amount of the check.
In order to establish the checkwriting option on your ac-
count, all registered shareholders must sign a signature
card. After your completed signature card is received by the
Fund, an initial supply of checks will be mailed within 10
business days. There is no charge for checks or for their
clearance. CORPORATIONS, TRUSTS AND OTHER ORGANIZATIONS
SHOULD CALL OR WRITE VANGUARD'S CLIENT SERVICES DEPARTMENT
(1-800-662-2739) BEFORE SUBMITTING SIGNATURE CARDS, AS ADDI-
TIONAL DOCUMENTS MAY BE REQUIRED TO ESTABLISH THE
CHECKWRITING SERVICE.
Before establishing the checkwriting option, you should be
aware that:
1. Writing a check (a redemption of shares) is a taxable
event.
2. The Fund does not allow an account to be closed through
the checkwriting option.
3. Vanguard cannot guarantee a stop payment on the
checkwriting option. If you wish to reverse a stop payment
order, you must do so in writing.
4. The Fund reserves the right to terminate or alter this
service at any time.
--------------------------------------------------------------------------------
SELLING BY Requests should be mailed to VANGUARD FINANCIAL CENTER, VAN-
MAIL GUARD ADMIRAL FUNDS, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to Van-
guard Financial Center, Vanguard Admiral Funds, 455 Devon
Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
--------------------------------------------------------------
DEFINITION GOOD ORDER means that the request includes the following:
OFGOOD ORDER
1. The account number and portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are regis-
tered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be re-
quired in the case of estates, corporations, trusts, and
certain other accounts.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO
YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT AT
1-800-662-2739.
--------------------------------------------------------------
23
<PAGE>
SELLING BY To sell shares by telephone you or your pre-authorized repre-
TELEPHONE sentative may call our Client Services Department at 1-800-
662-2739. For telephone redemptions, you may have the pro-
ceeds sent to you by mail or by wire. In addition to the de-
tails below, please see "Important Information About Tele-
phone Transactions".
BY MAIL: Telephone mail redemption is automatically estab-
lished on your account unless you indicate otherwise on your
Account Registration Form. You may redeem any amount by call-
ing Vanguard. The proceeds will be paid to the registered
shareholders and mailed to the address of record.
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect telephone
wire redemption is at the time you complete your Account Reg-
istration Form. If you do not presently have telephone wire
redemption and wish to establish it, please contact our Cli-
ent ServicesDepartment.
With the wire redemption option, you may withdraw a minimum
of $1,000 and have the amount wired directly to your bank ac-
count. Wire redemptions less than $5,000 are subject to a $5
charge deducted by Vanguard. There is no Vanguard charge for
wire redemptions of $5,000 or more. However, your bank may
assess a separate fee for incoming wires.
A request to change the bank associated with your wire re-
demption option must be received in writing, signed by each
registered shareholder, and accompanied by a voided check or
preprinted deposit slip. A signature guarantee is required if
your bank registration is not identical to your Vanguard Fund
accountregistration.
--------------------------------------------------------------
SELLING BY If you select the Fund Express Automatic Withdrawal option,
FUND EXPRESS money will be automatically moved from your Vanguard Fund ac-
count to your bank account according to the schedule you have
Automatic selected. The Special Redemption option lets you move money
Withdrawal & from your Vanguard account to your bank account upon your re-
Special quest. You may elect Fund Express on the Account Registration
Redemption Form or call our Investor Information Department at 1-800-
662-7447 for a Fund Express application.
--------------------------------------------------------------
SELLING BY You may sell shares of a Portfolio by making an exchange into
EXCHANGE another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
--------------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may not be redeemed
REDEMPTION until payment for the purchase is collected, which may take
INFORMATION up to ten calendar days. Your money is invested and earns
dividends during the holding period.
--------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the close
REDEMPTION of the New York Stock Exchange (generally 4:00 p.m. Eastern
PROCESS time) are processed on the day of receipt and the redemption
proceeds are normally sent on the following business day.
24
<PAGE>
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following re-
ceipt and the proceeds are normally sent on the second busi-
ness day following receipt. Redemption proceeds must be sent
to you within seven days of receipt of your request in Good
Order.
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It
will be implemented at the net asset value next determined
after your request has been received by Vanguard in Good Or-
der. The Fund reserves the right to revise or terminate the
telephone redemption privilege at any time.
The Fund may suspend the redemption right 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. If the Board of
Directors determines that it would be detrimental to the best
interest of the Fund's remaining shareholders to make payment
in cash, the Fund may pay redemption proceeds in amounts in
excess of $250,000 in whole or in part by a distribution in
kind of readily marketable securities.
--------------------------------------------------------------
VANGUARD'S If you make a redemption from a qualifying account, Vanguard
AVERAGE COST will send you an Average Cost Statement which provides you
STATEMENT with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
--------------------------------------------------------------
MINIMUM Due to the relatively high cost of maintaining smaller ac-
ACCOUNT counts, the Fund reserves the right to redeem shares in any
BALANCE account that is below the minimum initial investment amount
REQUIREMENT of $50,000. In addition, if at any time the total investment
does not have a value of at least $50,000, you may be noti-
fied that the value of your account is below the Fund's mini-
mum account balance requirement. You would then be allowed 60
days to make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the sharehold-
er. This minimum requirement also applies to IRAs, other re-
tirement accounts and Uniform Gifts/Transfers to Minors Act
accounts.
The Fund's $50,000 minimum account balance requirement will
not apply if your account falls below $50,000 solely as a re-
sult of declining bond market prices (i.e., a decline in a
Portfolio's net asset value).
--------------------------------------------------------------------------------
EXCHANGING Should your investment goals change, you may exchange your
YOUR SHARES shares of Vanguard Admiral Funds for those of other available
Vanguard Funds.
In addition to the details below, please see "Important In-
formation About Telephone Transactions."
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Portfolio name, account number, Social Security Number or
Taxpayer Identification Number listed on the account, and ac-
Call Client count address. Requests for telephone exchanges received
Services at prior to close of trading on the New York Stock Exchange
1-800-662-2739 (generally 4:00 p.m. Eastern time) are processed at the close
of business that same day.
25
<PAGE>
Requests received after close of the Exchange are processed
the next business day. TELEPHONE EXCHANGES ARE NOT ACCEPTED
INTO OR FROM VANGUARD BALANCED INDEX FUND, VANGUARD INDEX
TRUST, VANGUARD QUANTITATIVE PORTFOLIOS, VANGUARD INTERNA-
TIONAL EQUITY INDEX FUND--EUROPEAN, PACIFIC AND EMERGING MAR-
KETS PORTFOLIOS, AND VANGUARD EXPLORER FUND. If you experi-
ence difficulty in making a telephone exchange, your exchange
request may be made by regular or express mail, and it will
be implemented at the closing net asset value on the date re-
ceived by Vanguard provided the request is received in Good
Order.
--------------------------------------------------------------
EXCHANGING BY Please be sure to include on your exchange request the name
MAIL and account number of your current Fund, the name of the Fund
you wish to exchange into, the amount you wish to exchange,
and the signatures of all registered account holders. Send
your request to VANGUARD FINANCIAL CENTER, VANGUARD ADMIRAL
FUNDS, P.O. BOX 1120, VALLEY FORGE, PA 19482. (For express or
registered mail, send your request to Vanguard Financial Cen-
ter, Vanguard Admiral Funds, 455 Devon Park Drive, Wayne, PA
19087.)
--------------------------------------------------------------
IMPORTANT Before you make an exchange, you should consider the follow-
EXCHANGE ing:
INFORMATION
. Please read the Fund's prospectus before making an ex-
change. For a copy and for answers to any questions you may
have, call our Investor Information Department (1-800-662-
7447).
. An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
. Exchanges are accepted only if the registrations and Tax-
payer Identification numbers of the two accounts are
identical.
. New accounts are not currently accepted in Vanguard/Windsor
Fund.
. The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
all required documents in Good Order.
. When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
. Exchanges can only be made in states where a Fund's shares
are legally registered. Each investment company member of
the Vanguard Group (except the Vanguard State Tax-Free
Funds) is registered in all fifty states.
Every effort will be made to maintain the exchange privilege.
However, the Fund reserves the right to revise or terminate
its provisions, limit the amount of or reject any exchange,
as deemed necessary, at any time.
--------------------------------------------------------------------------------
26
<PAGE>
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the man-
agement of the Fund and increase transaction costs, the Fund
has established a policy of limiting excessive exchange ac-
tivity.
For the Admiral Short-Term, Intermediate-Term and Long-Term
U.S. Treasury Portfolios, exchange activity will not be
deemed excessive if limited to two substantive exchange re-
demptions (at least 30 days apart) from a Portfolio during
any twelve month period. These limitations do not apply to
exchanges from Vanguard's money market portfolios, including
the Admiral U.S. Treasury Money Market Portfolio. Notwith-
standing these limitations, the Fund reserves the right to
reject any purchase request (including exchange purchases
from other Vanguard portfolios) that is reasonably deemed to
be disruptive to efficient portfolio management.
--------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions)
INFORMATION and exchanges by telephone is automatically established on
ABOUT your account unless you request in writing that telephone
TELEPHONE transactions on your account not be permitted.
TRANSACTIONS
To protect your account from losses resulting from unautho-
rized 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 ac-
count is registered; and (iv) the Social Security or Tax
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.
Neither the Fund nor Vanguard will be responsible for the au-
thenticity of transaction instructions received by telephone,
provided that these or other reasonable security procedures
have been followed. Vanguard believes that the security pro-
cedures described above are reasonable and that if such pro-
cedures are followed, you will bear the risk of any losses
resulting from unauthorized or fraudulent telephone transac-
tions on your account. If Vanguard fails to follow reasonable
security procedures, it may be liable for any losses result-
ing from unauthorized or fraudulent telephone transactions on
your account.
--------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person by writing: Vanguard Financial Center, P.O.
Box 1110, Valley Forge, PA 19482, Attention: Transfer Depart-
ment. The request must be in Good Order. Before mailing your
request, please call our Client Services Department (1-800-
662-2739) for full instructions.
--------------------------------------------------------------------------------
27
<PAGE>
OTHER VANGUARD For more information about any of these services, please call
SERVICES our Investor Information Department at 1-800-662-7447.
STATEMENTS AND Vanguard will send you a confirmation statement each time you
REPORTS initiate a transaction in your account (except for
checkwriting redemptions from Vanguard money market ac-
counts). You will also receive a comprehensive account state-
ment at the end of each calendar quarter. The fourth-quarter
statement will be a year-end statement, listing all transac-
tion activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the aver-
age cost of shares redeemed from your account, using the av-
erage cost single category method. This service is available
for most taxable accounts opened since January 1, 1986. In
general, investors who redeemed shares from a qualifying Van-
guard account may expect to receive their Average Cost State-
ment in February of the following year. Please call our Cli-
ent Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-an-
nually, according to the Fund's fiscal year-end.
VANGUARD With Vanguard's Direct Deposit Service, most U.S. Government
DIRECT DEPOSIT checks (including Social Security and military pension
SERVICE checks) and private payroll checks may be automatically de-
posited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund Express
application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or re-
demptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific Van-
guard Funds. For more information, please refer to the Van-
guard Fund Express brochure.
VANGUARD Vanguard's Dividend Express allows you to transfer your divi-
DIVIDEND dends and/or capital gains distributions automatically from
EXPRESS your Fund account, one business day after the Fund's payable
date, to your account at a bank, savings and loan associa-
tion, or a credit union that is a member of the Automated
Clearing House (ACH) network. You may elect this service on
the Account Registration Form or call our Investor Informa-
tion Department (1-800-662-7447) for a Vanguard Dividend Ex-
press application.
28
<PAGE>
VANGUARD TELE- Vanguard's Tele-Account is a convenient, automated service
ACCOUNT that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone (TM) telephone. This
free service also lets you obtain information about your ac-
count balance, your last transaction, and your most recent
dividend or capital gains payment. To contact Vanguard's
Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273). A
free brochure offering detailed operating instructions is
available from our Investor Information Department
(1-800-662-7447).
--------------------------------------------------------------------------------
29
<PAGE>
[LOGO APPEARS HERE]
-----------------------------
THE VANGUARD GROUP
OF INVESTMENT [LOGO APPEARS HERE]
COMPANIES
Vanguard Financial Center P R O S P E C T U S
P.O. Box 2600
Valley Forge, PA 19482 MAY 27, 1994
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[LOGO OF THE VANGUARD
GROUP APPEARS HERE]
P012
<PAGE>
PART B
VANGUARD ADMIRAL FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
MAY 27, 1994
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated May 27, 1994). To obtain this Prospectus,
please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 1
Purchase of Shares......................................................... 5
Redemption of Shares....................................................... 5
Shareholder Services....................................................... 6
Investment Limitations..................................................... 7
Management of the Fund..................................................... 9
Investment Advisory Services............................................... 11
Portfolio Transactions..................................................... 11
Performance Measures....................................................... 12
Other Definitions.......................................................... 14
Financial Statements....................................................... 14
Appendix--Description of Securities and Ratings............................ 15
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the investment objective and policies set
forth in the Fund's Prospectus:
REPURCHASE AGREEMENTS The Admiral Short-Term, Intermediate-Term, and Long-
Term U.S. Treasury Portfolios may invest in repurchase agreements with commer-
cial banks, brokers or dealers either for defensive purposes due to market
conditions or to generate income from its excess cash balances. A repurchase
agreement is an agreement under which the Portfolio acquires a money market
instrument (generally a security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of deposit) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed upon
price and date (normally, the next business day). A repurchase agreement may
be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held
by the Portfolio and is unrelated to the interest rate on the underlying in-
strument. In these transactions, the securities acquired by the Portfolio (in-
cluding accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by the Fund's custodian
bank(s) until repurchased. In addition, the Fund's Board of Directors will
monitor a Portfolio's repurchase agreement transactions generally and will es-
tablish guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker or dealer party to a repurchase agreement
with the Portfolio. No more than an aggregate of 15% of the Admiral Short-
Term, Intermediate-Term, and Long-Term U.S. Treasury Portfolios' net assets,
at the time of investment, will be invested in repurchase agreements having
maturities longer than seven days and securities subject to legal or contrac-
tual restrictions on resale, or for which there are no readily available mar-
ket quotations.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the un-
derlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other
party to the agreement becomes insolvent and subject to liquidation or reorga-
nization under
B-1
<PAGE>
the Bankruptcy Code or other laws, a court may determine that the underlying
security is collateral for a loan by the Portfolio not within the control of
the Portfolio and therefore the realization by the Portfolio on such collat-
eral may be automatically stayed. Finally, it is possible that the Portfolio
may not be able to substantiate its interest in the underlying security and
may be deemed an unsecured creditor of the other party to the agreement. While
each Portfolio's management acknowledges these risks, it is expected that they
can be controlled through careful monitoring procedures.
LENDING OF SECURITIES The Admiral Short-Term, Intermediate-Term, and Long-
Term U.S. Treasury Portfolios may lend its investment securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms
and the structure of such loans are not inconsistent with the Investment Com-
pany Act of 1940, as amended, or the Rules and Regulations or interpretations
of the Securities and Exchange Commission thereunder, which currently require
that (a) the borrower pledge and maintain with the Portfolio collateral con-
sisting of cash, and irrevocable letter of credit or securities issued or
guaranteed by the United States Government having a value at all times not
less than 100 percent 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 Portfolio at any time and (d) the Portfolio
receive reasonable interest on the loan (which may include the Portfolio's in-
vesting any cash collateral in interest bearing short-term investments), and
distributions on the loaned securities and any increase in their market value.
Each Portfolio of the Fund will not lend securities if, as a result, the ag-
gregate of such loans exceeds 33 1/3% of the value of the Portfolio's total
assets. Loan arrangements made by the Fund will comply with all other applica-
ble regulatory requirements, including the rules of the New York Stock Ex-
change, which rules presently require the borrower, after notice, to redeliver
the securities within the normal settlement time of five business days.
RESTRICTED SECURITIES Each Portfolio except Admiral U.S. Treasury Money Mar-
ket Portfolio may invest in restricted securities (privately placed debt secu-
rities) and other securities which are not readily marketable, but will not
acquire such securities if as a result they, together with the aggregate of
other securities for which no quotations are readily available, would comprise
more than 15% of the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933. Where registration is required, a
Portfolio may be obligated to pay all or part of the registration expenses and
a considerable period may elapse between the time of the decision to sell and
the time the Portfolio may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions
were to develop, the Portfolio might obtain a less favorable price than pre-
vailed when it decided to sell. Restricted securities will be priced at fair
value as determined in good faith by the Board of Directors. If through the
appreciation of restricted securities or the depreciation of unrestricted se-
curities, a Portfolio should be in a position where more than 10% of the value
of its net assets are invested in illiquid assets, including restricted secu-
rities, the Portfolio will take appropriate steps to protect liquidity.
The Admiral Short-Term, Intermediate-Term, and Long-Term U.S. Treasury Port-
folios may own restricted securities to a limited extent. Restricted securi-
ties are securities which are not freely marketable or which are subject to
restrictions upon sale under the Securities Act of 1933. These three Portfo-
lios may invest up to 15% of their assets in restricted securities. (Included
within this limit are restricted securities and other securities for which
price quotations are not readily available). Pursuant to Rule 144A under the
Securities Act of 1933, as amended, if a substantial market among qualified
institutional buyers develops for such securities held by any of these three
Portfolios, the Fund intends to treat such securities as liquid securities, in
accordance with procedures approved by the Fund's Board of Directors.
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<PAGE>
FUTURES CONTRACTS AND OPTIONS Each Portfolio except Admiral U.S. Treasury
Money Market Portfolio may enter into futures contracts, options, and options
on futures contracts for several reasons: to stimulate full investment in the
underlying securities while retaining a cash balance for Fund management pur-
poses, to facilitate trading, to reduce transaction costs, or to seek higher
investment returns when a futures contract is priced more attractively than
other futures contracts or the underlying security or index. Futures contracts
provide for the future sale by one party and purchase by another party of a
specified amount of a specific security at a specified future time and at a
specified price. Futures contracts which are standardized as to maturity date
and underlying financial instrument or index are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity Ex-
change Act by the Commodity Futures Trading Commission ("CFIC"), a U.S. Gov-
ernment Agency.
Although futures contracts by their terms call for actual delivery or ac-
ceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Clos-
ing out an open futures position is done by taking an opposite position ("buy-
ing" a contract which has previously been "sold," or "selling" a contract pre-
viously purchased) in an identical contract to terminate the position. Broker-
age commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure comple-
tion of the contract (delivery or acceptance of the underlying security) if it
is not terminated prior to the specified delivery date. Minimal initial margin
requirements are established by the futures exchange and may be changed. Bro-
kers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin de-
posits which may range upward from less than 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the con-
tract value may reduce the required margin, resulting in a repayment of excess
margin to the contract holder. Variation margin payments are made to and from
the futures broker for as long as the contract remains open. The Portfolios
expect to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset unfavor-
able changes in the value of securities otherwise held for investment purposes
or expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
prices of underlying securities. The Portfolios intend to use futures con-
tracts only for bonafide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bonafide hedging transactions. A Portfolio
will only sell futures contracts to protect securities or other futures con-
tracts it owns against price declines or purchase contracts to protect against
an increase in the price of securities or other futures contracts it intends
to purchase. As evidence of this hedging interest, the Portfolios expect that
approximately 75% of its futures contract purchases will be "completed," that
is, equivalent amounts of related securities will have been purchased or are
being purchased by a Portfolio upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this expo-
sure. While a Portfolio will incur commission expenses in both
B-3
<PAGE>
opening and closing out futures positions, these costs are lower than transac-
tional costs incurred in the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS The Admiral Short-Term, Inter-
mediate-Term, and Long-Term U.S. Treasury Portfolios will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of each Portfolio's total assets. In addition these three Admiral Port-
folios will not enter into futures contracts to the extent that its outstand-
ing obligations to purchase securities under these contracts would exceed 20%
of the Portfolio's total assets. The Fund will maintain 100% of the amount of
any obligations under any futures transactions in cash or cash equivalence in
a segregated account at its custodian bank.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market
will exist for any particular futures contract at any specific time. Thus, it
may not be possible to close a futures position. In the event of adverse price
movements, a Portfolio would continue to be required to make daily cash pay-
ments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In ad-
dition, the Portfolio may be required to make delivery of the instruments un-
derlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to effec-
tively hedge it.
A Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be sub-
stantial, due both to the low margin deposits required, and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and sub-
stantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin,
a subsequent 10% decrease in the value of the futures contract would result in
a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Portfolio are engaged in only for hedging purposes, the Ad-
viser does not believe that the Portfolio is subject to the risks of loss fre-
quently associated with futures transactions. The Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying futures con-
tracts have different maturities than the portfolio securities being hedged.
It is also possible that the Portfolio could both lose money on futures con-
tracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by the Portfolio of margin deposits in the
event of bankruptcy of a broker with whom the Portfolio has an open position
in a futures contract or related option. Additionally, investments in futures
and options involve the risk that the investment adviser will incorrectly pre-
dict stock market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures
B-4
<PAGE>
contract may vary either up or down from the previous day's settlement price
at the end of a trading session. Once the daily limit has been reached n a
particular type of contract, no trades may be made on that day at a price be-
yond that limit. The daily limit governs only price movement during a particu-
lar trading day and therefore does not limit potential losses, because the
limit may prevent the liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation
of future positions and subjecting some futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Except for transactions a Portfo-
lio had identified as hedging transactions, the Portfolio is required for Fed-
eral income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts held as of the end of
the year as well as those actually realized during the year. In most cases,
any gain or loss recognized with respect to a futures contract is considered
to be 60% long-term capital gain or loss and 40% short-term capital gain or
loss, without regard to the holding period of the contract. Furthermore, sales
of futures contracts which are intended to hedge against a change in the value
of securities held by the Portfolio may affect the holding period of such se-
curities and, consequently, the nature of the gain or loss on such securities
upon disposition.
In order for the Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of se-
curities or of foreign currencies or other income derived with respect to the
Portfolio's business of investing in securities or currencies. In addition,
gains realized on the sale or other disposition of securities held for less
than three months must be limited to less than 30% of the Portfolio's annual
gross income. It is anticipated that any net gain realized from the closing
out of futures contracts will be considered gain from the sale of securities
and therefore be qualifying income for purposes of the 90% requirement. In or-
der to avoid realizing excessive gains on securities held less than three
months, the Portfolio may be required to defer the closing out of futures con-
tracts beyond the time when it would otherwise be advantageous to do so. It is
anticipated that unrealized gains on futures contracts, which have been open
for less than three months as of the end of the Portfolio's fiscal year and
which are recognized for tax purposes, will not be considered gains on sales
of securities held less than three months for the purpose of the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures trans-
actions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the transactions.
PURCHASE OF SHARES
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering 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 such as employee benefit plans or under circumstances where
certain economies can be achieved in sales of the Portfolio's shares.
REDEMPTION OF SHARES
Each Portfolio 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 Securities and Ex-
change Commission (the "Commission"), (ii) during any period
B-5
<PAGE>
when an emergency exists as defined by the rules of the Commission as a result
of which it is not reasonably practicable for a Portfolio to dispose of secu-
rities 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 redemp-
tions 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. 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 readily marketable investment securities or in
cash, as the Directors may deem advisable; however, payment will be made
wholly in cash unless the Directors believe that economic or market conditions
exist which would make such a practice detrimental to the best interests of
the Fund. If redemptions are paid in investment securities, such securities
will be valued as set forth in the Prospectus under "The Share Price of Each
Portfolio" and a redeeming shareholder would normally incur brokerage expenses
if he converted these securities to cash.
No charge is made by a Portfolio for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the secu-
rities held by the Portfolio.
SIGNATURE GUARANTEES To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Fund to verify the identity of the person who has autho-
rized a redemption from your account. SIGNATURE GUARANTEES ARE REQUIRED IN
CONNECTION WITH: (1) REDEMPTIONS INVOLVING MORE THAN $25,000 ON THE DATE OF
RECEIPT BY VANGUARD OF ALL NECESSARY DOCUMENTS; (2) ALL REDEMPTIONS, REGARD-
LESS OF THE AMOUNT INVOLVED, WHEN THE PROCEEDS ARE TO BE PAID TO SOMEONE OTHER
THAN THE REGISTERED OWNER(S), AND/OR TO AN ADDRESS OTHER THAN THE ADDRESS OF
RECORD; AND (3) SHARE TRANSFER REQUESTS. These requirements are not applicable
to redemptions in Vanguard's prototype retirement plans, except in connection
with: (1) distributions made when the proceeds are to be paid to someone other
than the plan participant; (2) certain authorizations to effect exchanges by
telephone; and (3) when proceeds are to be wired. These requirements may be
waived by the Fund in certain instances.
A guarantor must be a bank, broker, or any other guarantor that Vanguard
deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE GUARANTORS.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE Each Portfolio's shares may be exchanged without cost for
shares of any other Portfolio, or for the shares of any open-end Fund cur-
rently offering its shares to new investors in The Vanguard Group ("Van-
guard"). A shareholder of any other open-end Fund in Vanguard may likewise ex-
change his shares for shares of any of the Fund's Portfolios. Exchange re-
quests may be made either by mail, telephone or telegraph.
Telephone and telegraph exchanges (referred to as "expedited exchanges")
will be accepted only if the account of the shareholder and the registration
of the two accounts is identical. Requests for expedited exchanges received
prior to the close of the New York Stock Exchange (generally 4:00 p.m. Eastern
time) will be processed at the next determined net asset value after such re-
quest is received. Requests received after the close of the New York Stock Ex-
change (generally 4:00 p.m. Eastern time)
B-6
<PAGE>
will be processed on the next business day. NO EXPEDITED EXCHANGES WILL BE AC-
CEPTED INTO, OR FROM, VANGUARD EXPLORER FUND, VANGUARD INDEX TRUST FUND --
500, EXTENDED MARKET, VALUE, GROWTH, AND TOTAL STOCK MARKET PORTFOLIOS, VAN-
GUARD INTERNATIONAL EQUITY INDEX FUND -- EUROPEAN, PACIFIC AND EMERGING MAR-
KETS PORTFOLIOS, AND VANGUARD QUANTITATIVE PORTFOLIOS. Neither the Fund nor
Vanguard will be responsible for the authenticity of exchange instructions re-
ceived by telephone or telegraph. Expedited exchanges may also be subject to
limitations as to amounts and frequency, and to other restrictions established
by the board of directors to assure that such exchanges do not disadvantage
the Fund and its shareholders. Shareholders may obtain the terms of these lim-
itations, which may be revised at any time, from Vanguard.
Any such exchange will be based on the respective net asset values of the
shares involved. There are no sales commissions or charges of any kind. Before
making an exchange, a shareholder should consider the investment objectives
and policies of the Portfolio or Fund to be purchased, and other relevant in-
formation (including the minimum initial investment), which can be found in
the prospectus relating to that particular Portfolio or Fund. A prospectus for
any of the Vanguard Funds or Portfolios may be obtained from Vanguard.
For Federal income tax purposes an exchange between Funds is a taxable event
and, accordingly, a capital gain or loss may be realized. In a revenue ruling
relating to circumstances similar to the Fund's, an exchange between series of
a Fund was also deemed to be a taxable event. It is likely, therefore, that a
capital gain or loss would be realized on an exchange between Portfolios; you
may want to consult your tax adviser for further information in this regard.
The exchange privilege may be modified or terminated at any time, and any of
the Portfolios or Vanguard Funds may limit or discontinue the offering of its
shares without notice to shareholders.
TRANSFER OF SHARES Fund shares may be transferred to another person by send-
ing appropriate written instructions to Vanguard. The account must be clearly
identified and include the number of shares to be transferred and the signa-
tures of all registered owners. The signature on the letter of instructions or
any stock power must be guaranteed. As in the case of withdrawals, the written
request must be received in "Good Order" before any transfer can be made.
INFORMATION FOR SHAREHOLDERS Following any purchase or redemption, a share-
holder will receive a statement which reflects all activity during the current
calendar year. Each shareholder will also receive a monthly statement, which
includes valuation as of the day the statement is prepared.
Shareholders will receive semi-annual financial statements audited at least
annually by independent accountants whose selection is ratified by sharehold-
ers.
INVESTMENT LIMITATIONS
The Fund is subject to the following limitations which may not be changed
with respect to a particular Portfolio without the approval of at least a ma-
jority of the outstanding voting securities (as defined in the Investment Com-
pany Act of 1940) of that Portfolio. A Portfolio will not:
(1) Invest in commodities or commodity contracts or purchase or sell real
estate, although it may purchase and sell marketable securities of compa-
nies which deal in real estate or interests therein; except that Admiral
Short-Term, Intermediate-Term, and Long-Term U.S. Treasury Portfolios may
invest in bond futures contracts, bond options and options on bond futures
contracts to the extent that not more than 5% of its assets are required as
deposit margin for futures contracts and not more than 20% of its assets
are invested in such instruments at any time;
B-7
<PAGE>
(2) Write, purchase or sell warrants, put or call options, or combina-
tions thereof, except as specified above in (1);
(3) invest in interests in oil, gas, or other mineral exploration or de-
velopment programs;
(4) Make loans to other persons (except by (i) the purchase of the debt
obligations in which the Portfolio is authorized to invest in accordance
with its investment policies, and (ii) as provided under "Lending of Secu-
rities");
(5) Purchase securities on margin or sell securities short, except as
specified above in (1);
(6) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States govern-
ment and its instrumentalities) if as a result the Portfolio would hold
more than 10% of the outstanding voting securities of the issuer, or more
than 5% of the value of the Portfolio's total assets would be invested in
the securities of such issuer;
(7) Borrow money, except for temporary or emergency purposes not in ex-
cess of 15% of the value of the total of the Portfolio taken at the lower
of their market value or cost;
(8) Pledge, mortgage or hypothecate the Portfolio's assets to an extent
greater than 15% of the value of its total assets;
(9) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in disposing
of investment securities;
(10) Purchase a security which is subject to legal or contractual re-
strictions on resale or for which there is no readily available market or
engage in a repurchase agreement maturing in more than seven days with re-
spect to any security if, as a result thereof, more than 15% of the Portfo-
lio's net assets (any of the Portfolio's net assets in the case of Admiral
U.S. Treasury Money Market Portfolio) (taken at current value) would be in-
vested in such securities;
(11) Invest for the purpose of controlling management of any company;
(12) Invest in securities of other investment companies except by pur-
chase in the open market involving only customary broker's commissions or
as part of a merger, consolidation, reorganization or purchase of assets
approved by the Portfolio's shareholders. The Fund will not purchase shares
of other investment companies for investment purposes;
(13) Concentrate its investments in a particular industry, although it
may invest up to 25% of the Portfolio's total assets (taken at value) in
the securities of issuers, all of which conduct their principal business
activities in the same industry, provided that (i) this limitation does not
apply to obligations issued or guaranteed by the U.S. Government, or its
agencies or instrumentalities, and (ii) utility companies will be divided
according to their services; for example, gas, gas transmission, electric
and gas, electric, and telephone will each be considered a separate indus-
try; and
(14) Issue senior securities.
The above-referenced investment limitations are considered at the time that
portfolio securities are purchased. 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 wholly-owned by the Fund and one or more other investment companies
and is primarily engaged in the business of providing, at cost, management,
administrative 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 maturing in more than seven days, purchase
restricted securities or invest in any other illiquid securities if, as a re-
sult thereof, more than 15% of the net assets of the Fund would be invested
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<PAGE>
in such assets. As a non-fundamental policy each Portfolio may not 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 of the Fund or its investment adviser owns benefi-
cially more than 1/2% of the shares or securities of such issuer and all such
directors and officers owning more than 1/2% of such shares or securities to-
gether own more than 5% of such shares or securities. Additionally, the Admi-
ral U.S. Treasury Money Market Portfolio has no present intention to borrow
money in excess of 5% of the value of the Portfolio's total assets in the next
year.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS The Officers of the Fund manage its day to day
operations and are responsible to the Fund's Board of Directors. The Directors
set broad policies for each Fund and choose its Officers. The following is a
list of the 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 Fund is Post Office Box
876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, Chief Exec- ALFRED M. RANKIN, JR., Director
utive Officer and Director* President, Chief Executive Officer
Chairman, Chief Executive Officer, and Director of NACCO Industries;
and Director of the Vanguard Director of The BFGoodrich Company,
Group, Inc., and each of the in- The Standard Products Company and
vestment companies in The Vanguard The Reliance Electric Company.
Group; Director of the Mead Corpo-
ration and General Accident JOHN C. SAWHILL, Director
Insurance. President and Chief Executive Offi-
cer, The Nature Conservancy; for-
JOHN J. BRENNAN, President & Direc- merly, Director and Senior Partner,
tor* McKinsey & Co.; Director of Pacific
President of the Fund, The Van- Gas and Electric Company and NACCO
guard Group, Inc. and each of the Industries.
other investment companies in The
Vanguard Group. JAMES O. WELCH, JR., Director
Retired Chairman of Nabisco Brands,
ROBERT E. CAWTHORN, Director Inc. and retired Vice Chairman and
Chairman and Chief Executive Offi- Director of RJR Nabisco; Director
cer, Rhone-Poulenc Rorer, Inc.; of TECO Energy, Inc.
Director of Immune Response Corp.
and Sun Company, Inc.; Trustee, J. LAWRENCE WILSON, Director
Universal Health Realty Income Chairman and Director of Rohm &
Trust. Haas Company, Director of Cummins
Engine Company, Vanderbilt Univer-
BARBARA BARNES HAUPTFUHRER, Director sity and Trustee of the Culver Edu-
Director of The Great Atlantic and cational Foundation.
Pacific Tea Company, Raytheon Com-
pany, Knight-Ridder, Inc., Massa- RAYMOND J. KLAPINSKY, Secretary*
chusetts Mutual Life Insurance Senior Vice President and Secretary
Co., and ALCO Standard, Corp. of The Vanguard Group, Inc.; Secre-
tary of each of the investment com-
BRUCE K. MACLAURY, Director panies in The Vanguard Group.
President, The Brookings Institu-
tion; Director of Dayton Hudson RICHARD F. HYLAND, Treasurer*
Corporation, American Express Treasurer of The Vanguard Group,
Bank, Ltd. and The St. Paul Compa- Inc. and of each of the investment
nies, Inc. companies in The Vanguard Group.
BURTON G. MALKIEL, Director KAREN E. WEST, Controller*
Chemical Bank Chairmen's Professor Vice President of The Vanguard
of Economics, Princeton Universi- Group, Inc.; Controller of each of
ty; Director of Prudential Insur- the Investment companies in The
ance Co. of America, Amdahl Corpo- Vanguard Group.
ration, Baker Fentress & Co.,
Jeffrey Co., and The Southern New
England Telephone Company; Gover-
nor, American Stock Exchange, Inc.
--------
* Officers of the Fund are "inter-
ested persons" as defined in the
Investment Company Act of 1940.
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<PAGE>
THE VANGUARD GROUP Vanguard Fixed Income Securities Fund is a member of The
Vanguard Group of Investment Companies. Through their jointly owned subsidi-
ary, The Vanguard Group, Inc. ("Vanguard"), the Fund and the other Funds in
the group obtain at cost virtually all of their corporate management, adminis-
trative 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 per-
sonnel needed to provide the requisite services to the Funds and also fur-
nishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's net 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, au-
diting and custodian fees.
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 which each of the Funds have invested are adjusted from time to time
in order to maintain the proportionate relationship between each Fund's rela-
tive net assets and its contribution to Vanguard's capital. At January 31,
1994, the Fund had contributed capital of $242,000 to Vanguard representing
1.2% of Vanguard's capitalization. The Funds' Service Agreement provides for
the following arrangement : (1) each Vanguard Fund may invest a maximum of
0.40% of its assets in Vanguard and (2) there is no restriction on the maximum
cash investment that the Vanguard Funds may make in Vanguard.
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 rela-
tionships; (6) shareholder reporting; and (7) review and evaluation of advi-
sory and other services provided to the Funds by third parties. The Fund's
share of Vanguard's actual net costs of operation relating to management and
administrative services (including transfer agency) for the fiscal year ended
January 31, 1994, totaled approximately $1,185,000.
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 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 materi-
als and marketing personnel. Distribution services may also include organizing
and offering to the public, from time to time, one or more new investment com-
panies 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 their relative net assets. The remain-
ing one half of these 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 na-
ture shall exceed 125% of the average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100
1% of its average month-end net assets. During the fiscal year ended January
31, 1994, the Fund paid approximately $174,000 of the Groups distribution and
marketing expenses, which represented an effective annual rate of .02 of 1% of
the Fund's average net assets.
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to the Fund; Vanguard Municipal Bond Fund; Vanguard Money Market Re-
serves; Vanguard Institutional Portfolios; Vanguard Admiral Funds; the several
Portfolios of Vanguard Fixed Income Securities Fund; Vanguard Institutional
Index Fund; Vanguard Bond Index Fund; the Vanguard State Tax-Free Funds;
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<PAGE>
Vanguard Balanced Index Fund; Vanguard Index Trust and Vanguard International
Equity Index Fund. 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 year ended January 31, 1994, the Fund paid approximately $78,000 of
Vanguard's investment advisory expenses.
REMUNERATION OF DIRECTORS AND OFFICERS. The Fund pays each Director, who is
not also an officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. During the fiscal year ended January 31, 1994, the
Fund paid approximately $6,000 in Directors fees and expenses to its "non-in-
terested" Directors. 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 retire-
ment benefits. During the year ended January 31, 1994, the Fund's proportion-
ate share of remuneration paid to all officers of the Fund, as a group, was
approximately $45,981.
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 the offi-
cer's compensation during the year that exceeds the Social Security Taxable
Wage Base then in effect. Under the Thrift Plan, all officers are permitted to
make pre-tax basic contributions in a maximum amount equal to 4% of total com-
pensation. 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 fifteen years of service, upon retirement. The fee
is equal to $1,000 for each year of service and each investment company member
of The Vanguard Group contributes a proportionate amount to this fee based on
its relative net assets. This fee is paid, subsequent to a Director's retire-
ment, for a period of ten years or until the death of a retired Director. The
Fund's proportionate shares of retirement contributions made by Vanguard under
its retirement and thrift plans on behalf of all officers of the Fund, as a
group, during the 1994 fiscal year was approximately $7,366.
INVESTMENT ADVISORY SERVICES
The four Admiral Portfolios receive all investment advisory services on an
"internalized," at-cost, basis from an experienced investment management staff
employed directly by Vanguard. This staff also provides investment advisory
services to Vanguard Money Market Reserves, several Portfolios of Vanguard
Fixed Income Securities Fund, Vanguard Institutional Portfolios, Vanguard Bond
Index Fund, Vanguard Municipal Bond Fund, Vanguard California Tax-Free Fund,
Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund,
Vanguard Ohio Tax-Free Fund, Vanguard New York Insured Tax-Free Fund, Vanguard
Pennsylvania Tax-Free Fund and several Portfolios of Vanguard Variable Insur-
ance Fund. The compensation and other expenses of the staff are allocated
among the Portfolios of the Fund and the other Funds listed above.
The investment management staff is supervised by the senior officers of the
Fund. The senior officers, who are also officers of Vanguard, Vanguard Money
Market Reserves, Vanguard Institutional Portfolios, Vanguard Bond Index Fund,
Vanguard Municipal Bond Fund, Vanguard State's Tax-Exempt Funds, and Vanguard
Variable Insurance Fund, are directly responsible to the Board of Directors of
the Fund. The Board of Directors, elected annually by shareholders, sets broad
policies for the Fund and chooses its officers.
PORTFOLIO TRANSACTIONS
Brokers or dealers who execute transactions for the four Portfolios are se-
lected by Vanguard's investment management staff which is responsible for us-
ing its best efforts to obtain the best available price and most favorable ex-
ecution for each transaction. Principal transactions are made directly with
issuers, underwriters and market makers and usually do not involve brokerage
commissions,
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<PAGE>
although underwriting commissions and dealer markups may be involved. Broker-
age transactions are placed with brokers deemed most capable of providing fa-
vorable terms; where more than one broker can offer such terms, consideration
may be given to brokers who provide the staff with research and statistical
information.
Vanguard's investment management staff may occasionally make recommendations
to other Vanguard Funds or clients which result in their purchasing or selling
securities simultaneously with the Portfolios. As a result, the demand for se-
curities being purchased or the supply of securities being sold may increase,
and this could have an adverse effect on the price of those securities. It is
the staff's policy not to favor one client over another in making recommenda-
tions or placing an order. If two or more clients are purchasing a given secu-
rity on the same day from the same broker-dealer, such transactions may be av-
eraged as to price.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified brokers or
dealers who recommend the shares of the Fund to their clients and may, when a
number of brokers and dealers can provide comparable best price and execution
on a particular transaction, consider the sale of shares by a broker or dealer
in selecting among qualified brokers or dealers. The Fund paid no brokerage
commissions during the fiscal year ended January 31, 1994.
PERFORMANCE MEASURES
Each of the investment company members of The Vanguard Group, including each
Portfolio of Vanguard Admiral Funds, Inc., may, from time to time, use one or
more of the following unmanaged indices for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES--consists of nearly 5,000 common equity securi-
ties, 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.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market val-
ue-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 convert-
ible 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 Mort-
gage 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.
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<PAGE>
MERRILL LYNCH CORPORATE & GOVERNMENT BOND--consists of over 4,500 U.S. Trea-
sury, 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 in-
cludes 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 for 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 In-
dex.
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.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a mar-
ket weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB--or better with maturities be-
tween 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, agen-
cy, 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 de-
fines 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 perfor-
mance 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 constitute 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 Analyt-
ical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--An industry benchmark of av-
erage non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
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<PAGE>
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.
TAX ADVANTAGE OF U.S. TREASURY INCOME
<TABLE>
<CAPTION>
CURRENT PORTFOLIO YIELD
-----------------------------
NET EFFECTIVE 3.00% 4.00% 5.00% 6.00% 7.00%
STATE INCOME ----- ----- ----- ----- -----
TAX RATE* TAXABLE EQUIVALENT YIELD
------------- -----------------------------
<S> <C> <C> <C> <C> <C>
3.00%............................................. 3.09% 4.12% 5.15% 6.19% 7.22%
6.00%............................................. 3.19% 4.26% 5.32% 6.38% 7.45%
9.00%............................................. 3.30% 4.40% 5.49% 6.59% 7.69%
</TABLE>
--------
* Assumes state income tax taken as a deduction on Federal tax return (31% tax
bracket). Yields are not indicative of current or future performance. This
chart is for illustrative purposes only.
OTHER DEFINITIONS
Marketing literature for the Portfolios of Vanguard Admiral Funds, Inc., may
from time to time refer to or discuss a Portfolio's DURATION. Duration is the
weighted average life of a Portfolio's debt instruments measured on a present-
value basis; it is generally superior to dollar-weighted average maturity as a
measure of a Portfolio's potential volatility due to changes in interest
rates.
Unlike a Portfolio's dollar-weighted average maturity, which takes into ac-
count only the stated maturity date of the Portfolio's debt instruments, dura-
tion represents a weighted average of both interest and principal payments,
discounted by the current yield-to-maturity of the securities held. For exam-
ple, a four-year, zero-coupon bond, which pays interest only upon maturity
(along with principal), has both a maturity and duration of 4 years. However,
a four-year bond priced at par with an 8% coupon has a maturity of 4 years but
a duration of 3.6 years (at an 8% yield), reflecting the bond's earlier pay-
ment of interest.
In general, a bond with a longer duration will fluctuate more in price than
a bond with a shorter duration. Also, for small changes in interest rates, du-
ration serves to approximate the resulting change in a bond's price. For exam-
ple, a 1% change in interest rates will cause roughly a 4% move in the price
of a zero-coupon bond with a 4 year duration, while an 8% coupon bond (with a
3.6 year duration) will change by approximately 3.6%.
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended January 31, 1994,
including the financial highlights, appearing in the Fund's Annual Report to
shareholders, and the report thereon of Price Waterhouse, independent accoun-
tants, also appearing therein, are incorporated by reference in this Statement
of Additional Information. The Fund's Annual Report to Shareholders is en-
closed with this Statement of Additional Information.
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<PAGE>
APPENDIX--DESCRIPTION OF SECURITIES AND RATINGS
I. DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc., ("Moody's") description of
its four highest bond ratings: AAA--judged to be the best quality. They carry
the smallest degree of investment risk; AA--judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds: A--possess many favorable investment attributes and
are to be considered as "upper medium grade obligations"; BAA--considered as
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be characteris-
tically unreliable over any great length of time. BA judged to have specula-
tive elements; their future cannot be considered as well assured; B--generally
lack characteristics of the desirable investment; CAA--are of poor standing.
Such issues may be in default or there may be present elements of danger with
respect to principal or interest; CA--speculative in a high degree; often in
default; C--lowest rated class of bonds; regarded as having extremely poor
prospects.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
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.
Excerpts from Standard & Poor's Corporation ("S&P") description of its five
highest bond ratings: AAA--highest grade obligations. Capacity to pay interest
and repay principal is extremely strong; AA--also qualify as high grade obli-
gations. A very strong capacity to pay interest and repay principal and dif-
fers from AAA issues only in small degree; A--regarded as upper medium grade.
They have a strong capacity to pay interest and repay principal although it is
somewhat susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB--regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to
pay interest and repay principal for debt in this category than in higher
rated categories. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC--predominately speculative with respect to capacity
to pay interest and repay principal in accordance with terms of the obliga-
tion; BB indicates the lowest degree of speculation and CC the highest.
S&P applies indicators "+," no character and "-" to its rating categories.
The indicators show relative standing within the major rating categories.
II. U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the United States Treasury, by various agen-
cies 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 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 princi-
pally 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.
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<PAGE>
Some of the U.S. Government agencies that issue or guarantee securities in-
clude the Export- Import Bank of the United States. Farmers Home Administra-
tion, 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 Cooperative, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.
III. ZERO COUPON TREASURY BONDS
Admiral Short- and Intermediate-Term U.S. Treasury Portfolios may invest in
zero coupon Treasury bonds, a term used to describe U.S. Treasury notes and
bonds which have been stripped of their unmatured interest coupons, or the
coupons themselves, and also receipts or certificates representing interest in
such stripped debt obligations and coupons. The timely payment of coupon in-
terest and principal on these instruments remains guaranteed by the "full
faith and credit" of the United States Government.
A zero coupon bond does not pay interest. Instead, it is issued at a sub-
stantial discount to its "'face value"--what it will be worth at maturity. The
difference between a security's issue or purchase price and its face value
represents the imputed interest an investor will earn if the security is held
until maturity. For tax purposes, a portion of this imputed interest is deemed
as income received by zero coupon bondholders each year. The Fund, which ex-
pects to qualify as a regulated investment company, intends to pass along such
interest as a component of a Portfolio's distributions of net investment in-
come.
Zero coupon bonds may offer investors the opportunity to earn higher yields
than those available on U.S. Treasury bonds of similar maturity. However, zero
coupon bond prices may also exhibit greater price volatility than ordinary
debt securities because of the manner in which their principal and interest is
returned to the investor.
The Fund has no present intention to invest 5% or more of its assets in zero
coupon bonds.
IV. COLLATERALIZED MORTGAGE OBLIGATION
The Admiral Short-, Intermediate- and Long-Term U.S. Treasury Portfolios may
invest in collateralized mortgage obligations (CMOs), bonds that are collater-
alized by whole loan mortgages or mortgage pass-through securities. Generally,
the three Portfolios will purchase CMOs which are collateralized by mortgage
securities issued or guaranteed by the U.S. Government or its agencies. The
bonds issued in a CMO deal are divided into groups, and each group of bonds is
referred to as a "tranche". Under the CMO structure, the cash flows generated
by the mortgages or mortgage pass-through securities in the collateral pool
are used to first pay interest and then pay principal to the CMO bondholders.
The bonds issued under a CMO structure are retired sequentially as opposed to
the pro rata return of principal found in traditional pass-through obliga-
tions. Subject to the various provisions of individual CMO issues, the cash
flow generated by the underlying collateral (to the extent it exceeds the
amount required to pay the stated interest) is used to retire the bonds. Under
the CMO structure, the repayment of principal among the different tranches is
prioritized in accordance with the terms of the particular CMO Issuance. The
"fastest-pay" tranches of bonds, as specified in the prospectus for the issu-
ance, would initially receive all principal payments. When that tranche of
bonds is retired, the next tranche, or tranches, in the sequence, as specified
in the prospectus, receive all of the principal payments until they are re-
tired. The sequential retirement of bond groups continues until the last
tranche, or group of bonds, is retired. Accordingly, the CMO structure allows
the issuer to use cash flows of long maturity, monthly-pay collateral to for-
mulate securities with short,
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<PAGE>
intermediate and long final maturities and expected average lives. Aside from
market risk, the primary risk involved in any mortgage security, such as a CMO
issuance, is its exposure to prepayment risk. To the extent a particular
tranche is exposed to this risk, the bondholder is generally compensated in
the form of higher yield. In order to provide security, in addition to the un-
derlying collateral, many CMO issues also include minimum reinvestment rate
and minimum sinking-fund guarantees. Typically, the Portfolios will invest in
those CMOs that most appropriately reflect their average maturities and market
risk profiles. Consequently, the Short-Term Portfolios invest only in CMOs
with short-term average maturities believed to be highly predictable. Similar-
ly, Admiral Intermediate- and Long-Term Treasury Portfolios will invest in
those CMOs that carry market risks and expected average maturities consistent
with intermediate- and long-term bonds.
Subject to the applicable limits set forth above, in the Funds' Prospectus
and in the Funds' investment limitations, the Admiral Short-, Intermediate-
and Long-Term U.S. Treasury Portfolios have no specific limitation on the
amount of assets they may invest in CMOs.
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