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proxy
information
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Important News
for Vanguard
Shareholders
Vanguard Balanced
Index Fund
Vanguard Index Trust
Vanguard Institutional
Index Fund
Vanguard International
Equity Index Fund
Vanguard Municipal
Bond Fund
Vanguard State
Tax-Free Funds:
California,
Florida,
New Jersey,
New York,
Ohio,
Pennsylvania
Please Vote
Immediately!
You can vote by
mail, telephone,
or our website . . .
details can
be found on
the enclosed
proxy insert.
Your Vanguard Fund will host a Special Meeting of Shareholders on July 24, 1998,
at our headquarters in Malvern, Pennsylvania. The purpose is to vote on some
important proposals affecting the Fund.
The first few pages of this booklet summarize Vanguard's proposals and
explain the proxy process--including how to cast your votes. Before you vote,
please read the full text of the proxy statement for a complete understanding of
our proposals.
PROPOSAL 1: Reorganization Into a Delaware Business Trust
We want to reorganize your Fund into a Delaware business trust. Currently, your
Fund is organized as either a Maryland corporation or a Pennsylvania trust.
Why? We expect this administrative change to save most Vanguard Funds (and,
ultimately, their shareholders) a substantial amount of money in state taxes
each year-- $18,000 for Balanced Index Fund, $288,000 for International Equity
Index Fund, and $1,581,000 for Vanguard Municipal Bond Fund. The savings
realized would reduce these Funds' expenses. Index Trust, Institutional Index
Fund, and the State Tax-Free Funds would not realize tax savings as a result of
the change, but they would benefit from the efficiency of being organized the
same way as all other Vanguard Funds.
Key Points: The reorganization would not change your Fund's investment objective
or policies (except for any changes approved by shareholders under Proposal 2).
Your Fund also would keep the same Directors or Trustees, officers, investment
advisers, and auditors.
PROPOSAL 2: Seven Changes to Investment Limitations
We want to make a number of minor changes to the Vanguard
Funds' fundamental investment limitations. Not all of these
(continued on inside front cover)
[LOGO OF VANGUARD GROUP APPEARS HERE]
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changes relate to your Fund; you will have the opportunity to vote separately on
each change that does apply. Proposal 2a is the most important of these. It
concerns an interfund lending program that we would like to establish for all
Funds. This program would permit your Fund to borrow money from other Vanguard
Funds as needed to make redemptions while awaiting payment for securities that
it has sold. In addition, your Fund could lend its cash reserves to other
Vanguard Funds to meet their temporary borrowing needs.
Why? Normally, your Fund has sufficient cash on hand to meet redemption
requests. If not, however, the Fund can either delay paying shareholders for up
to seven days--not an acceptable alternative--or pay them immediately by taking
out a temporary loan. A temporary loan through the interfund lending program
could be cheaper and easier for your Fund than borrowing from a bank. By lending
money to other Funds through this program, your Fund could earn a better rate of
interest on its cash reserves than it might receive from a bank.
Key Points: The interfund lending program would feature a number of safeguards
to make sure it is fair and beneficial to all Vanguard Funds. One especially
important safeguard is this: No Fund could borrow or lend money in the program
unless it would get a more favorable interest rate than a typical bank would
offer.
--Q & A--
Q. I'm a small investor. Why should I bother to vote?
A. Your vote makes a difference. If numerous shareholders just like you fail to
vote their proxies, your Fund may not receive enough votes to go forward with
its meeting. If this happens, we'll need to mail proxies again--a costly
proposition for your Fund!
Q. I've owned shares of Vanguard Funds for several years. Why is this the first
notice I've received about a shareholder meeting?
A. Unlike publicly traded companies, most mutual funds do not hold shareholder
meetings every year. Instead, they undertake this expensive process only when
significant issues requiring shareholder approval come up--such as your Fund's
plan to save on taxes by changing its form of organization. The last time all
Vanguard Funds held shareholder meetings was in 1993.
Q. Who gets to vote?
A. Any person who owned shares of your Fund on the "record date," which was May
11, 1998, gets to vote--even if the investor later sold the shares. Shareholders
are entitled to cast one vote for each Fund share owned on the record date.
Q. How can I vote?
A. You can vote in any one of four ways:
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. Through the Internet at www.proxyvote.com (or by going to www.vanguard.com
and clicking on "Proxy Voting").
. By telephone, with a toll-free call to the number listed on your proxy card.
. By mail, with the enclosed ballot.
. In person at the meeting.
We encourage you to vote by Internet or telephone, using the 12-digit "control"
number that appears on your proxy card. These voting methods will save your Fund
a good deal of money (no return-mail postage!). Whichever method you choose,
please take the time to read the full text of our proxy statement before you
vote.
Q. Is it hard to vote by Internet?
A. Not at all! If you have not yet visited Vanguard's website--at
www.vanguard.com--this is a great opportunity to check it out. Scan our website
and, when you're ready, click on the "Proxy Voting" link on our homepage to
access www.proxyvote.com (the voting location). Problems? Please call us at
1-800-891-5345.
Q. I plan to vote by mail. How should I sign my proxy card?
A. If you are an individual account owner, please sign exactly as your name
appears on the proxy card. Either owner of a joint account may sign the proxy
card, but the signer's name must exactly match one that appears on the card. You
should sign proxy cards for other types of accounts in a way that indicates your
authority (for instance, "John Brown, Custodian").
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<PAGE>
[LOGO OF THE VANGUARD GROUP APPEARS HERE]
Post Office Box 2600
Valley Forge, PA 19482
World Wide Web
www.vanguard.com
E-mail
[email protected]
(C) 1998 Vanguard Marketing
Corporation, Distributor
PROX4 . 0598-X.XMMB
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VANGUARD BALANCED INDEX FUND
VANGUARD INDEX TRUST
VANGUARD INSTITUTIONAL INDEX FUND
VANGUARD INTERNATIONAL EQUITY INDEX FUND
VANGUARD MUNICIPAL BOND FUND
VANGUARD STATE TAX-FREE FUNDS--
CALIFORNIA, FLORIDA, NEW JERSEY,
NEW YORK, OHIO, AND PENNSYLVANIA
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Your Vanguard Fund will host a Special Meeting of Shareholders on FRIDAY,
JULY 24, 1998, AT 9:30 A.M., EASTERN TIME. This will be a joint meeting for
all the Vanguard Funds listed above. It will be held at Vanguard's Malvern,
Pennsylvania headquarters, at 100 Vanguard Boulevard, in the Majestic Build-
ing. At the meeting, we'll ask shareholders to vote on:
1. A proposal to reorganize your Fund into a Delaware business trust.
2. Seven proposed changes to your Fund's fundamental investment limita-
tions (none of which would alter your Fund's current investment
objective).
3. Any other business properly brought before the meeting.
By Order of the Board of Directors/Trustees
Raymond J. Klapinsky, Secretary
100 Vanguard Boulevard
Malvern, PA 19355
May 11, 1998
YOUR VOTE IS IMPORTANT!
YOU CAN VOTE EASILY AND QUICKLY BY TOLL-FREE TELEPHONE CALL, AT OUR
WEBSITE, OR BY MAIL. JUST FOLLOW THE SIMPLE INSTRUCTIONS THAT APPEAR ON
YOUR ENCLOSED PROXY CARD. PLEASE HELP YOUR FUND AVOID THE EXPENSE OF A
FOLLOW-UP MAILING BY VOTING TODAY!
<PAGE>
VANGUARD BALANCED INDEX FUND
VANGUARD INDEX TRUST
VANGUARD INSTITUTIONAL INDEX FUND
VANGUARD INTERNATIONAL EQUITY INDEX FUND
VANGUARD MUNICIPAL BOND FUND
VANGUARD STATE TAX-FREE FUNDS--
CALIFORNIA, FLORIDA, NEW JERSEY,
NEW YORK, OHIO, AND PENNSYLVANIA
SPECIAL MEETING OF SHAREHOLDERS
JULY 24, 1998
PROXY STATEMENT
INTRODUCTION
This is a combined proxy statement for the Vanguard Funds listed at the
top of this page. We've divided the proxy statement into five parts:
Part 1--An Overview begins on page 2.
Part 2--Your Fund's Proposals--the longest part--also begins on
page 3.
Part 3--More on Proxy Voting and Shareholder Meetings begins on
page 15.
Part 4--Fund Information begins on page 17.
Part 5--Director/Trustee Information begins on page 21.
Please be sure to read the entire proxy statement before casting your
vote. Questions? Call us at 1-800-891-5345 (individual investors) or
1-800-523-1188 (participants in company-sponsored retirement plans admin-
istered by Vanguard). This proxy statement was first mailed to sharehold-
ers the week of May 11, 1998.
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PART 1--AN OVERVIEW
The Board of Directors/Trustees has sent you this proxy statement to ask for
your vote on several proposals affecting your Fund. This table summarizes the
proposals and how they apply to the eleven Vanguard Funds that have scheduled
a shareholder meeting for July 24, 1998.
<TABLE>
<CAPTION>
PROPOSAL FUNDS AFFECTED
- -------- --------------
<S> <C>
1. Reorganization into a Delaware Business Trust All Funds
2. Investment Limitation Changes
a.Interfund lending program All Funds
b.Borrowing money and pledging assets All Funds
Municipal Bond Fund, State
c.Investments in securities owned by affiliates Tax-Free Funds
Municipal Bond Fund, State
d.Bonds secured by oil, gas, or mineral programs Tax-Free Funds
Municipal Bond Fund, State
e.Investing in companies for control Tax-Free Funds
f.Investments in a single state Municipal Bond Fund
All State Tax-Free Funds
g.Investments in industrial revenue bonds (except New Jersey)
</TABLE>
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PART 2--YOUR FUND'S PROPOSALS
PROPOSAL 1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST (ALL FUNDS)
The Board of Directors/Trustees has approved a plan to reorganize your Fund
into a Delaware business trust. THE PURPOSE OF THE REORGANIZATION IS TO REDUCE
THE AMOUNT OF STATE TAXES THAT THE VANGUARD FUNDS PAY ANNUALLY. To proceed
with the reorganization plan, we need shareholder approval. The next few pages
of this proxy statement discuss important details of the reorganization plan,
including the following:
. Why we want to reorganize your Fund.
. How we plan to accomplish the reorganization.
. How the reorganization will affect your Fund.
. How a Delaware business trust compares to your Fund's current legal
structure.
. How many shareholder votes we need to approve the reorganization.
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A. WHY WE WANT TO REORGANIZE YOUR FUND
MOST VANGUARD FUNDS WILL PAY LESS TAXES AS BUSINESS TRUSTS. This is true of
Balanced Index Fund, International Equity Index Fund, and Municipal Bond Fund.
Each of these Funds currently pays foreign franchise taxes to the Commonwealth
of Pennsylvania. This tax applies to these Funds because they are headquar-
tered in Pennsylvania and are "foreign" corporations--that is, organized as
corporations under the laws of a different state, Maryland. If these Funds
were instead organized in the form of a business trust (as many mutual funds
are), they would be exempt from the Pennsylvania foreign franchise tax. As
business trusts, these Funds would be subject to a different tax, the Pennsyl-
vania county personal property tax. However, Pennsylvania counties generally
have stopped assessing personal property taxes. This is because the Pennsylva-
nia courts are expected to declare the personal property tax unconstitutional.
(The U.S. Supreme Court declared a similar North Carolina tax unconstitutional
in 1996.) We believe it unlikely that the Vanguard Funds, as reorganized,
would become subject to the personal property tax in the foreseeable future.
If the personal property tax were reinstated, or any similar state tax were
imposed, we would reevaluate the Funds' options at that time.
The following table shows (i) the amount of Pennsylvania foreign franchise
taxes paid by your Fund for its last fiscal year; and (ii) the amount of Penn-
sylvania personal property taxes that your Fund would have paid if it had been
organized as a business trust for the last fiscal year.
<TABLE>
<CAPTION>
LAST YEAR'S SAME BILL AS A
FUND PENNSYLVANIA TAX BILL BUSINESS TRUST
- ---- --------------------- --------------
<S> <C> <C>
Balanced Index Fund $ 78,000 $ 0
Index Trust $ 0 $ 0
Institutional Index Fund $ 0 $ 0
International Equity Index Fund $ 288,000 $ 0
Municipal Bond Fund $1,581,000 $ 0
State Tax-Free Funds $ 0 $ 0
</TABLE>
"Last Year's Pennsylvania Tax Bill" is the approximate amount that we expect
to save your Fund ANNUALLY by reorganizing it into a Delaware business trust.
These anticipated savings are based on the size of your Fund during its last
fiscal year. If your Fund grows, so will the amount of its tax savings as a
business trust. Of course, the ONE-TIME costs of reorganizing will offset your
Fund's tax savings to a limited extent. These costs, which mostly relate to
the printing, mailing, and tabulation of proxies, are estimated at $31,000 for
Balanced Index Fund; $1,558,000 for Index Trust; $16,000 for Institutional In-
dex Fund; $113,000 for International Equity Index Fund; 268,000 for Municipal
Bond Fund; $37,000 for California Tax-Free Fund; $7,000 for Florida Insured
Tax-Free Fund; $24,000 for New Jersey Tax-Free Fund; $18,000 for New York Tax-
Free Fund $6,000 for Ohio Tax-Free Fund; and $38,000 for Pennsylvania Tax-Free
Fund.
SOME FUNDS ARE ALREADY ORGANIZED AS TRUSTS. This is true of Index Trust, In-
stitutional Index Fund, and the State-Tax Free Funds. Each of these Funds is
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currently organized as either a PENNSYLVANIA business trust or a Pennsylvania
common law trust, and therefore pays no Pennsylvania foreign franchise taxes.
We propose to reorganize these Funds into DELAWARE business trusts to take ad-
vantage of that state's more favorable mutual fund climate, and to gain the
administrative convenience of having them organized the same way as all other
Vanguard Funds. The change will not increase or decrease these Funds' tax lia-
bility.
DELAWARE LAW IS FAVORABLE TO MUTUAL FUNDS. We have proposed to reorganize
your Fund as a DELAWARE business trust because that state's business trust law
contains provisions that are well suited to mutual funds. The "move" to Dela-
ware will be largely on paper; your Fund will continue to operate out of Penn-
sylvania, just as it does now.
B. HOW WE PLAN TO ACCOMPLISH THE REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION. The Board of Directors/Trustees has
approved a written Agreement and Plan of Reorganization for your Fund. This
document spells out the terms and conditions that will apply to your Fund's
reorganization into a Delaware business trust.
THREE STEPS TO REORGANIZE. In essence, the reorganization will be a three-
step process. The first step is already taken: We have established a Delaware
business trust especially for your Fund. Prior to the reorganization, this
trust will issue a single share--to your Fund. Second, if this proposal is ap-
proved, your Fund will transfer all of its assets and liabilities to the
trust. As part of this second step, the trust will open an account for each
Fund shareholder. The trust will then credit these accounts with the exact
number of full and fractional shares that each shareholder owned in the Fund
on the reorganization date. And third, we will dissolve your Fund's Maryland
corporate entity or Pennsylvania trust entity.
EFFECTIVE AS SOON AS PRACTICABLE. If approved by shareholders, the reorgani-
zation will take place as soon as feasible after your Fund receives the neces-
sary regulatory approvals and legal opinions. We think this could be accom-
plished by October of 1998. However, at any time prior to the reorganization,
the Board of Directors may decide that it is in the best interest of your Fund
and its shareholders not to go forward with this project. If that happens,
your Fund will continue to operate as it is currently organized.
C. HOW THE REORGANIZATION WILL AFFECT YOUR FUND
YOUR FUND'S INVESTMENT OBJECTIVE, POLICIES, INVESTMENT ADVISERS, AND FISCAL
YEAR WILL STAY THE SAME. The reorganization will not change any of these. How-
ever, we are asking shareholders to waive temporarily any existing investment
restrictions that would otherwise prohibit the reorganization. (For instance,
many mutual funds are prohibited from acquiring control of any company. As
part of the reorganization, however, your Fund would be acquiring control of
the newly formed trust.) Your vote in favor of the reorganization will operate
as a temporary waiver of any such restrictions.
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THE REORGANIZATION WILL HAVE NO IMPACT ON YOUR FUND'S SHARE PRICE. On the
day of the reorganization, the newly formed trust's share price will be the
same as that of your Fund. The reorganization will not cause your Fund's share
price to go up or down, and you will own the same number of shares. Any de-
clared but undistributed dividends or capital gains for your Fund will carry
over in the reorganization.
YOUR FUND'S EXISTING DIRECTORS/TRUSTEES WILL BE REELECTED. Federal securi-
ties laws require that at least one-half of your Fund's Directors/Trustees be
elected by shareholders. While your Fund more than meets this standard now,
that technically will not be true once it reorganizes as a trust. Rather than
call another shareholder meeting to vote on Trustees after the reorganization,
we will treat shareholder approval of this proposal as authorization to elect
your Fund's current Board members to the same positions with the trust. This
approach will avoid the considerable expense of printing, mailing, and tabu-
lating more proxies after the reorganization. (Please refer to Part 5 of this
proxy statement for detailed information concerning your Directors/Trustees.)
YOUR FUND'S EXISTING INDEPENDENT AUDITORS WILL BE RATIFIED. We will treat
shareholder approval of the reorganization as ratification of your Fund's ex-
isting independent auditors, Price Waterhouse LLP.
Price Waterhouse is the independent auditor for all Vanguard Funds. In this
role, Price Waterhouse audits and certifies the Funds' financial statements.
Price Waterhouse also reviews the Funds' Annual Reports to Shareholders and
their filings with the U.S. Securities and Exchange Commission. Neither Price
Waterhouse nor any of its partners have any direct or material indirect finan-
cial interest in the Vanguard Funds. If you wish to request the attendance of
a Price Waterhouse representative at the shareholder meeting, you should con-
tact the Fund's Secretary at 100 Vanguard Boulevard, Malvern, PA 19355.
THE REORGANIZATION IS CONDITIONED ON TAX-FREE TREATMENT AT THE FEDERAL
LEVEL. We fully expect that the reorganization will have no federal income tax
consequences for you or your Fund. We will not proceed with the reorganization
until this point is confirmed by an IRS ruling or opinion of counsel. Follow-
ing the reorganization, from a tax standpoint, the adjusted basis of your Fund
shares will be the same as before. We do not expect shareholders to incur any
personal state or local taxes as a result of the reorganization, but you
should consult your own tax adviser to be sure.
VOTING RIGHTS WILL BE BASED ON THE DOLLAR AMOUNT OF YOUR INVESTMENT. After
the reorganization, your voting rights will become "dollar-based"--which is a
different voting rights system than your Fund uses now. Currently, all Van-
guard Funds provide shareholders with one vote for each share that they own.
This share-based system treats shareholders equitably so long as all shares of
a particular Fund have the same share price. However, fairness tends to erode
when a Fund offers more than one series of shares (we often refer to these as
"portfolios") or more
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than one class of shares. The share prices of a Fund's different portfolios
inevitably diverge over time due to their different investment programs. Simi-
larly, the share prices of a Fund's different share classes will deviate over
time because of their different expense structures. As a result, when issues
are voted at the Fund level, the owners of lower-priced shares have relatively
greater voting clout than the owners of higher-priced shares. The change to
dollar-based voting will ensure that shareholders' voting rights remain pro-
portionate to their financial interests. Many Vanguard Funds currently offer
only one portfolio or class of shares; however, dollar-based voting rights
would apply to any additional portfolios or share classes that these Funds
might offer in the future.
YOUR FUND WILL STOP ISSUING SHARE CERTIFICATES AND WILL CONVERT ANY OUT-
STANDING SHARE CERTIFICATES TO RECORD ENTRY FORM. In today's financial world,
very few investors hold share certificates as physical evidence of their mu-
tual fund investments. Instead, investors' mutual fund holdings are maintained
and accounted for as "record entries" on the fund's computer system. The main
problems with share certificates are that:
. They present opportunities for theft, loss and fraud--and therefore of-
fer less protection to shareholders, rather than more.
. They're especially inconvenient--you must return your certificates to
the fund before your shares can be redeemed or exchanged.
In light of these downsides and the minimal demand for share certificates,
your Fund will stop issuing them after the reorganization. In addition, your
Fund will convert any outstanding share certificates to record entry form.
This will not happen automatically; we will arrange conversion details sepa-
rately with the Fund's certificate holders. (This change will have no effect
on Variable Insurance Fund, which doesn't issue share certificates.)
D. HOW A DELAWARE BUSINESS TRUST COMPARES TO YOUR FUND'S CURRENT LEGAL
STRUCTURE
Federal securities laws have much to say about the way that mutual funds op-
erate, but they do not cover every aspect of a fund's existence. State law and
each fund's governing documents fill in most of the gaps. The following dis-
cussion compares the state law and documents currently governing your Fund
with the state law and documents that will apply if it reorganizes as a Dela-
ware business trust. This discussion is not a comprehensive review of all
technical distinctions between the different legal structures. (You or your
attorney would need to review the laws and Fund documents first hand for that
sort of analysis.) We simply want you to know how a Delaware business trust
compares in certain key areas to a Maryland corporation or Pennsylvania busi-
ness or common law trust--your Fund's present legal structure.
SHAREHOLDER LIABILITY. Shareholders of a Fund organized as a Maryland corpo-
ration or Delaware business trust generally have no personal liability for the
Fund's obligations. By contrast, shareholders of a Fund organized as a
Pennsylva-
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nia trust theoretically could have this type of liability if the Fund had no
remaining assets to pay its obligations.
DIRECTOR/TRUSTEE LIABILITY AND INDEMNIFICATION. With a Maryland corporation,
Directors cannot be held liable for their activities in that role so long as
they perform their duties in good faith, prudently, and in the Fund's best in-
terests. The same is generally true for the Trustees of a Pennsylvania or Del-
aware business trust, if so provided in the Fund's governing documents. Under
each legal structure, the Fund can indemnify its Directors/Trustees from
claims and expenses arising out of their service to the Fund--unless, that is,
a Director/Trustee has acted improperly in a particular matter.
SHAREHOLDER VOTING RIGHTS AND MEETINGS. Under a Fund organized as a Maryland
corporation or a Pennsylvania trust, shareholders' voting rights currently are
based on the number of shares that they own. As we explained on page 6, as a
Delaware business trust, your Fund would shift to a dollar-based voting rights
system. As a Maryland corporation, a Fund generally must call a shareholder
meeting if one is requested in writing by investors entitled to cast 25% or
more of the Fund's votes. For a Pennsylvania trust, 20% is the required per-
centage. As Delaware business trusts, the Funds will adopt a 25% standard.
SHARE CERTIFICATES. Funds organized as Maryland corporations generally issue
share certificates to their investors upon request. Funds organized as Penn-
sylvania or Delaware business trusts are not required to issue share certifi-
cates. As explained on page 7, following the reorganization, your Fund will
stop issuing share certificates and will convert any outstanding certificates
to record entry form.
E. HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE THE REORGANIZATION
To go forward with the reorganization, a majority of your Fund's outstanding
shares on May 11, 1998, must vote in favor of this proposal. YOUR FUND'S BOARD
OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU APPROVE THE REORGANIZATION.
PROPOSAL 2. SEVEN CHANGES TO FUNDAMENTAL INVESTMENT LIMITATIONS
2A. INTERFUND LENDING PROGRAM (ALL FUNDS)
We want to establish an interfund lending program for all Vanguard Funds,
including the ones that are not covered in this proxy statement. The program
will allow the Vanguard Funds to loan money to each other if--and only if--it
makes good financial sense to do so on both sides of the transaction. THE
FUNDS WILL NOT USE THIS PROGRAM TO LEVERAGE THEIR INVESTMENTS. The U.S. Secu-
rities and Exchange Commission has granted permission for the Vanguard Funds
to participate in this program, subject to several conditions. We need share-
holder approval, as well. In the following paragraphs we explain these impor-
tant points:
. Why your Fund would want to borrow money.
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. Why your Fund would want to lend money.
. How the interfund lending program will work.
. What safeguards will ensure fair and beneficial treatment of your Fund.
. What your Fund's new investment limitation will say.
. How many shareholder votes we need to approve the interfund lending pro-
gram.
YOUR FUND WOULD BORROW MONEY TO MEET REDEMPTION REQUESTS WHILE AWAITING THE
PROCEEDS OF SECURITIES SALES. Normally, your Fund has sufficient cash on hand
to satisfy all redemption requests. However, at times your Fund could be short
on cash while awaiting settlement of its securities trades (typically a three
business-day process). While the law permits your Fund to defer redemption
payments for up to seven days, we know that shareholders prefer to be paid im-
mediately. This is the sole circumstance--and an unusual one, at that--under
which your Fund would want to borrow money.
YOUR FUND ROUTINELY LENDS MONEY TO BANKS--THROUGH REPURCHASE AGREEMENTS--TO
GENERATE INCOME ON ITS CASH RESERVES. All Funds--including your own--maintain
cash reserves to satisfy day-to-day redemption requests. Funds put their cash
reserves to work by entering into repurchase agreements with banks (and other
institutions, as well). In essence, these transactions are loans from the Fund
to a bank. The Fund acquires a short-term, high-quality security from the
bank, which, in turn, agrees to buy that same security back from the Fund the
next day--at a higher price. The difference between the purchase and resale
prices represents the Fund's "interest" on the loan.
THE NEW PROGRAM WILL LET VANGUARD MATCH THE BORROWING AND LENDING NEEDS OF
DIFFERENT FUNDS--TO EVERYONE'S BENEFIT. On a given day, some Vanguard Funds
may wish to meet redemptions by borrowing money from banks, and other Vanguard
Funds may wish to generate additional income by lending money to banks. Under
the interfund lending program, Vanguard could match borrowing Funds with lend-
ing Funds. Vanguard would then arrange loans between the matched Funds, in
keeping with a master loan agreement and the SEC's conditions for this pro-
gram. By dealing with each other instead of banks, the Funds will be able to
borrow money more cheaply and lend money more profitably. This is because (i)
there will be no bank fees for these transactions, and (ii) we will have elim-
inated the banks' spread--that is, the difference between the rates that they
typically charge borrowers and pay lenders. In addition, the interfund lending
program will allow the Funds to forego the otherwise prudent--but expensive--
step of maintaining a committed line of credit with a bank to cover any emer-
gency borrowing needs. (We estimate that, altogether, the Vanguard Funds will
save more than $800,000 annually by eliminating the need for a committed line
of credit.)
INTERFUND LOANS WILL PRESENT VERY LITTLE CREDIT RISK. When it lends money to
another Fund, your Fund would be subject to credit risk--the possibility that
the other Fund might fail to repay the loan. But your Fund faces this same
type of risk
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<PAGE>
when it lends money to a bank, through a repurchase agreement. And we believe
that the risk is extremely small in both cases. Below we describe various
safeguards designed to minimize the credit risk of interfund loans.
THESE SAFEGUARDS ARE IN PLACE TO ENSURE FAIR AND BENEFICIAL TREATMENT OF ALL
VANGUARD FUNDS. No Vanguard Fund will be permitted to borrow or lend through
the program unless it gets a more favorable interest rate than is available
from a typical bank. Other important protections for your Fund include these
points:
(i) Interfund loan rates will be determined by a pre-established formula
based on quotations from independent banks.
(ii) Funds that borrow money must fully secure their interfund loans OR
have total assets at least 10 times greater than the amount of the
loan.
(iii) Equity Funds will be permitted to loan no more than 5% of their net
assets through the interfund lending program; bond Funds could lend
no more than 7.5%; and money market Funds could lend no more than
10%.
(iv) All interfund loans will be very short-term. They must be repaid
within the time it takes for securities trades to settle, not to ex-
ceed seven days.
(v) No Fund can use the interfund lending program to borrow an amount
larger than 125% of its total net cash redemptions for the preceding
seven calendar days.
(vi) A lending Fund may call in its loans on one business day's notice to
the borrowing Fund.
(vii) Each Fund will continue to maintain noncommitted loan arrangements
with banks to provide for situations where an interfund loan is not
possible or beneficial.
(viii) Each Fund's Board of Directors/Trustees will monitor the interfund
lending program to make sure that the interfund loan rate formula
and the Fund's participation in the program continue to be appro-
priate.
YOUR FUND WILL ADOPT A NEW INVESTMENT POLICY TO PROVIDE FOR INTERFUND LOANS.
Your Fund's existing investment policies on borrowing and lending do not allow
for interfund loans. If shareholders approve this proposal, we'll adopt a new
investment policy which states that your Fund can borrow and lend money
through the interfund loan program so long as it complies with SEC conditions.
We'll designate this new policy as "fundamental," meaning that your Fund will
not be able to change it in the future without shareholder approval.
HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE INTERFUND LENDING. Share-
holders of each Fund's separate portfolios (if any) will vote separately on
this proposal. Each Fund's or portfolio's participation in the interfund lend-
ing program must be approved by the lesser of (i) a majority of the Fund's or
portfolio's outstanding shares on May 11, 1998, or (ii) 67% of the shares vot-
ed, so long as
9
<PAGE>
more than 50% of the shares actually vote. YOUR FUND'S BOARD OF
DIRECTORS/TRUSTEES RECOMMENDS THAT YOU APPROVE THE INTERFUND LENDING PROGRAM.
2B. BORROWING MONEY AND PLEDGING ASSETS (ALL FUNDS)
We want to establish standard limits on (i) the total amount of money that
each Vanguard Fund can borrow from all sources and (ii) the assets that each
Fund can pledge to secure any loans. This proposal ties in with proposal 2a.,
concerning the interfund lending program. BY STANDARDIZING THE FUNDS' BORROW-
ING AND PLEDGE LIMITS, WE EXPECT TO SIMPLIFY VANGUARD'S ADMINISTRATION OF THE
INTERFUND LENDING PROGRAM. As you can see from the following table, currently
there is a good deal of variation in the Funds' stated borrowing and pledge
limitations:
<TABLE>
<CAPTION>
FUND BORROWING LIMIT PLEDGE LIMIT
- ---- --------------- ------------
<S> <C> <C>
Balanced Index Fund 15% of net 5% of total
assets assets
Index Trust 15% of net 5% of total
assets assets
Institutional Index Fund 15% of net 5% of total
assets assets
International Equity Index Fund 15% of total 5% of total
assets, taken assets
at the lower
of their value
or cost
Municipal Bond Fund 10% of total 10% of total
assets assets
State Tax-Free Funds 10% of total 10% of total
assets assets
</TABLE>
The Funds' different investment objectives do not explain the variations in
their borrowing and pledge limits. Rather, these variations arise from the
fact that many different attorneys and regulators have worked with the Funds
over the years. We would like to realign these Funds' limits with the other
Vanguard Funds by establishing a uniform 15% OF NET ASSETS limitation on any
money borrowed or assets pledged. Any future changes to this policy would re-
quire shareholder approval. Keep in mind that borrowing money and pledging as-
sets are not integral parts of your Fund's investment program. As we explained
in the interfund lending discussion, your Fund would borrow money only to meet
redemptions while awaiting the proceeds of securities sales.
HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE THE 15% BORROWING AND PLEDGE
LIMIT. Shareholders of each Fund's separate portfolios (if any) will vote sep-
arately on this proposal. Each Fund's or portfolio's adoption of the 15% bor-
rowing and pledge limit must be approved by the lesser of (i) a majority of
the Fund's or portfolio's outstanding shares on May 11, 1998, or (ii) 67% of
the shares voted, so long as more than 50% of the shares actually vote. YOUR
FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU APPROVE THE STANDARD
BORROWING AND PLEDGE LIMITS.
10
<PAGE>
2C. INVESTMENTS IN SECURITIES OWNED BY AFFILIATES (MUNICIPAL BOND FUND,
STATE TAX-FREE FUNDS)
We want to eliminate your Fund's policy of avoiding investments in securi-
ties issued by companies whose securities are owned in certain amounts by
Directors/Trustees, officers, and key advisory personnel. THIS POLICY IS WELL-
INTENTIONED, BUT WRONGLY FOCUSED AND UNNECESSARY FOR YOUR FUND. Having origi-
nated many years ago with now obsolete state securities laws, which were in-
tended to prevent conflicts of interest in the management of mutual funds, the
policy generally states that your Fund will not:
Purchase or retain securities of an issuer if an officer or
director 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 together own more than 5%
of such shares or securities.
Confused? You're not alone. Preventing conflicts of interest in fund manage-
ment is, of course, a critically important objective. However, we believe that
your Fund's Code of Ethics is the best way to accomplish this objective. The
Code of Ethics, which has been adopted in accordance with SEC rules, restricts
the private investment activities of Directors/Trustees, officers, key advi-
sory personnel and a wide range of Vanguard employees. Our Code of Ethics sup-
plements management's separate fiduciary obligation to act with the Fund's
best interests at heart. It places the burden of avoiding potential conflicts
squarely on those who would stand to gain by inappropriately influencing or
benefiting from your Fund's investment program. The current policy takes the
opposite approach--it potentially restricts your Fund's investments. In other
words, the current policy subordinates your Fund's investment interests to
those of its Directors/Trustees, officers and key advisory personnel. We be-
lieve that this is wrong.
HOW MANY SHAREHOLDER VOTES WE NEED TO ELIMINATE THE POLICY CONCERNING IN-
VESTMENTS IN SECURITIES OWNED BY AFFILIATES. Shareholders of each Fund's sepa-
rate portfolios (if any) will vote separately on this proposal. Each Fund's or
portfolio's elimination of this policy will require approval by the lesser of
(i) a majority of the Fund's or portfolio's outstanding shares on May 11,
1998, or (ii) 67% of the shares voted, so long as more than 50% of the shares
actually vote. YOUR FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU
VOTE TO ELIMINATE THIS POLICY.
2D. BONDS SECURED BY OIL, GAS, OR MINERAL PROGRAMS (MUNICIPAL BOND FUND,
STATE TAX-FREE FUNDS)
We want to amend your Fund's current policy that prohibits investments in
interests in oil, gas, or other mineral exploration or development programs.
OUR GOAL IS TO CLARIFY THAT WHILE YOUR FUND CANNOT INVEST DIRECTLY IN OIL, GAS
OR MINERAL PROGRAMS, IT CAN INVEST IN BONDS AND MONEY MARKET INSTRUMENTS SE-
11
<PAGE>
CURED BY INTERESTS IN THESE PROGRAMS. We expect this clarification to increase
your Fund's investment options, without increasing its risk. The reason there
should be no increase in risk is that your Fund will stick to its existing
credit quality guidelines for bond and money market investments. Shareholder
approval of this proposal will not alter your Fund's investment objective or
any of its other policies--this includes any policies targeted at generating
only Federal or state tax-exempt income.
Like proposal 2c. above, this proposal deals with a policy that originated
many years ago with now obsolete state securities laws. Some might argue that
your Fund's current policy on investments in oil, gas or mineral programs does
not prohibit investments in bonds and money market instruments secured by
these programs. However, we believe that it's best to clarify the scope of the
policy through a shareholder vote.
HOW MANY SHAREHOLDER VOTES WE NEED TO CLARIFY THAT INVESTMENTS IN BONDS AND
MONEY MARKET INSTRUMENTS SECURED BY INTERESTS IN OIL, GAS, OR MINERAL PROGRAMS
ARE PERMITTED. Shareholders of each Fund's separate portfolios will vote sepa-
rately on this proposal. Each portfolio's revision of the policy will require
approval by the lesser of (i) a majority of the portfolio's outstanding shares
on May 11, 1998, or (ii) 67% of the shares voted, so long as more than 50% of
the shares actually vote. YOUR FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS
THAT YOU VOTE TO REVISE THIS POLICY.
2E. INVESTING IN COMPANIES FOR CONTROL (MUNICIPAL BOND FUND)
We want to eliminate your Fund's current policy that prohibits "investing in
companies for control." THIS POLICY HAS NO RELEVANCE TO YOUR FUND'S INVESTMENT
PROGRAM; ITS ELIMINATION WOULD HAVE NO EFFECT ON THE WAY YOUR FUND OPERATES.
As a tax-exempt income fund, your Fund does not invest in "companies." Rather,
it invests in fixed income securities issued by state and local governments
and government authorities. The existing policy is essentially a boilerplate
legal provision that misses the mark with your Fund.
HOW MANY SHAREHOLDER VOTES WE NEED TO ELIMINATE THIS POLICY. Shareholders of
the Fund's separate portfolios will vote separately on this proposal. Elimi-
nating the policy will require approval by the lesser of (i) a majority of the
portfolio's outstanding shares on May 11, 1998, or (ii) 67% of the shares vot-
ed, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD OF
TRUSTEES RECOMMENDS THAT YOU VOTE TO ELIMINATE THIS POLICY.
2F. INVESTMENTS IN A SINGLE STATE (MUNICIPAL BOND FUND)
We want to reclassify your Fund's current policy on investments in a single
state. OUR GOAL IS TO GIVE YOUR FUND THE FLEXIBILITY TO INVEST MORE THAN 25%
OF ITS ASSETS IN A SINGLE STATE. As a fundamental policy, your Fund currently
may invest no more than 25% of its total assets in securities issued by enti-
ties con-
12
<PAGE>
ducting their principal activities in the same state. (This limitation ex-
cludes securities issued by the Federal government, its agencies and instru-
mentalities and certificates of deposit.) By reclassifying this policy as
"non-fundamental," we could increase--or even eliminate--the 25% single state
limit in the future without further shareholder approval.
YOUR FUND HAS NO CURRENT PLANS TO INCREASE ITS SINGLE STATE INVESTMENTS BE-
YOND 25%. However, there can be wide variation in the attractiveness of the
municipal securities markets of different states. From time to time, your
Fund's portfolio managers may determine that a particular state offers the
most favorable investment opportunities. In such a case, we believe that your
Fund should have the flexibility to invest more than 25% of its assets in that
state. By obtaining this flexibility now, your Fund will be able to react
quickly to future state developments--without the expense and delay of a fu-
ture shareholder vote.
STATE CONCENTRATION CARRIES RISK. State concentration is a two-edged sword.
By investing more than 25% of its assets in a booming state, your Fund could
participate more fully in that state's good financial fortunes. At the same
time, if the portfolio managers misjudge the overall attractiveness of a par-
ticular state, your Fund could end up magnifying its exposure to that state's
financial woes. Keep in mind, however, that shareholder approval of this pro-
posal will not alter your Fund's investment objective or any of its other pol-
icies. The credit quality and maturity guidelines used by your Fund would re-
main the same.
HOW MANY SHAREHOLDER VOTES WE NEED TO ELIMINATE THIS POLICY. Shareholders of
the Fund's separate portfolios will vote separately on this proposal. Elimi-
nating the policy will require approval by the lesser of (i) a majority of the
portfolio's outstanding shares on April 13, 1998, or (ii) 67% of the shares
voted, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD
OF TRUSTEES RECOMMENDS THAT YOU VOTE TO ELIMINATE THIS POLICY.
2G. INVESTMENTS IN INDUSTRIAL REVENUE BONDS (ALL STATE TAX-FREE FUNDS,
EXCEPT NEW JERSEY)
We want to eliminate your Fund's current policy that imposes special re-
strictions on investments in industrial revenue bonds. THESE SPECIAL RESTRIC-
TIONS ARE UNWARRANTED, SINCE THE RISKS ASSOCIATED WITH INDUSTRIAL REVENUE
BONDS ARE NOT MARKEDLY DIFFERENT THAN THE RISKS ASSOCIATED WITH OTHER SECURI-
TIES IN WHICH THE FUND INVESTS. Your Fund's current policy generally states
that it will not:
.. Invest more than 5% of the Fund's total assets in industrial revenue bonds
where the payment of principal and interest is the responsibility of a
company with less than three years operating history.
.. Invest more than 20% of its assets in industrial development bonds.
Elimination of these restrictions wouldn't alter your Fund's investment ob-
jective or other policies. The credit quality and maturity guidelines used by
your Fund in evaluating all securities would remain the same.
13
<PAGE>
HOW MANY SHAREHOLDER VOTES WE NEED TO ELIMINATE THIS POLICY. Shareholders of
each Fund's separate portfolios will vote separately on this proposal. Elimi-
nating the policy will require approval by the lesser of (i) a majority of the
portfolio's outstanding shares on May 11, 1998, or (ii) 67% of the shares vot-
ed, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD OF
TRUSTEES RECOMMENDS THAT YOU VOTE TO ELIMINATE THIS POLICY.
- -------------------------------------------------------------------------------
PART 3--MORE ON PROXY VOTING AND SHAREHOLDER MEETINGS
This section provides information on a number of topics relating to proxy
voting and shareholder meetings.
PROXY SOLICITATION METHODS. Your Fund will solicit shareholder proxies in a
variety of ways. All shareholders who are entitled to vote will receive these
proxy materials by mail. In addition, Vanguard employees and officers may so-
licit shareholder proxies in person, by telephone, or through the Internet. We
may also arrange for an outside firm, Shareholder Communications Corporation,
to solicit shareholder votes by telephone on the Fund's behalf. This proce-
dure, which is expected to cost the Fund approximately $4 per shareholder
vote, will be employed only after all more cost-effective means of soliciting
shareholder votes have been exhausted.
PROXY SOLICITATION COSTS. Your Fund will pay all costs of soliciting proxies
from its own shareholders, including costs relating to the printing, mailing,
and tabulation of proxies. By voting immediately, you can help your Fund avoid
the considerable expense of a second solicitation.
QUORUM. In order for the shareholder meeting to go forward, your Fund must
achieve a quorum. This means that a majority of your Fund's shares must be
represented at the meeting--either in person or by proxy. All returned proxies
count towards a quorum, regardless of how they are voted ("For," "Against," or
"Abstain"). Your Fund will count broker non-votes toward a quorum, but not to-
ward the approval of any proposals. (Broker non-votes are shares for which (i)
the underlying owner has not voted and (ii) the broker holding the shares does
not have discretionary authority to vote on the particular matter.)
REVOKING YOUR PROXY. You may revoke your proxy at any time up until voting
results are announced at the shareholder meeting. You can do this by writing
to your Fund's Secretary, Raymond J. Klapinsky, at 100 Vanguard Boulevard,
Malvern, PA 19355, or by voting in person at the meeting. In addition, you can
revoke a prior proxy simply by voting again--using your original proxy card,
by toll-free telephone call, or at our website.
SHAREHOLDER PROPOSALS. Any shareholder proposals to be included in the proxy
statement for your Fund's next annual or special meeting must be received by
the Fund within a reasonable period of time prior to that meeting. Your Fund
has no current plans to hold an annual or special meeting in 1999.
14
<PAGE>
NOMINEE ACCOUNTS. Upon request, the Vanguard Funds will reimburse nominees
for their reasonable expenses in forwarding proxy materials to beneficial own-
ers of the Funds' shares. Please submit invoices for our review to Vanguard
Legal Department, P.O. Box 2600, Valley Forge, PA 19482.
ANNUAL/SEMIANNUAL REPORTS. Your Fund's most recent annual and semi annual
reports to shareholders are available at no cost. To request a report, please
call us toll-free at 1-800-891-5345 or write us at P.O. Box 2600, Valley
Forge, PA 194822600.
LITIGATION. Your Fund is not involved in any litigation.
OTHER MATTERS. At this point, we know of no other business to be brought be-
fore the shareholder meeting. However, if any other matters do come up, we
will use our best judgment to vote on your behalf. If you object to our voting
other matters on your behalf, please tell us so in writing before the meeting.
THE VANGUARD GROUP, INC. Your Fund is a member of The Vanguard Group, Inc.,
the only mutual mutual fund company. Vanguard is owned jointly by the Funds it
oversees (and therefore by the shareholders of those Funds). Vanguard provides
the Funds--more than 95 distinct investment portfolios--with their corporate
management, administrative, and distribution services on an at-cost basis.
- -------------------------------------------------------------------------------
PART 4--FUND INFORMATION
This section contains background information about your Fund and its invest-
ment adviser(s).
A. YOUR FUND (AS OF MARCH 30, 1998)
<TABLE>
<CAPTION>
FUND NET ASSETS OUTSTANDING 5%
FUND/PORTFOLIO INCEPTION ($000) SHARES OWNERS*
- -------------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C>
BALANCED INDEX FUND 1992
INDEX TRUST
Extended Market 1987
500 1976
Growth 1992
MidCap Stock 1998
Total Stock Market 1992
SmallCap Growth 1998
SmallCap Stock 1960
SmallCap Value 1998
Value 1992
INSTITUTIONAL INDEX FUND 1990
INTERNATIONAL EQUITY INDEX FUND
Emerging Markets 1994
European 1990
Pacific 1990
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
FUND NET ASSETS OUTSTANDING 5%
FUND/PORTFOLIO INCEPTION ($000) SHARES OWNERS*
- -------------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C>
MUNICIPAL BOND FUND
Money Market 1980
Short-Term 1977
Limited-Term 1987
Intermediate-Term 1977
Long-Term 1977
Insured Long-Term 1984
High-Yield 1978
CALIFORNIA TAX-FREE FUND
Money Market 1987
Insured Intermediate-Term 1994
Insured Long-Term 1986
FLORIDA INSURED TAX-FREE FUND 1992
NEW JERSEY TAX-FREE FUND
Money Market 1988
Insured Long-Term 1988
NEW YORK TAX-FREE FUND
Money Market 1997
Insured Long-Term 1986
OHIO TAX-FREE FUND
Money Market 1990
Insured Long-Term 1990
PENNSYLVANIA TAX-FREE FUND
Money Market 1988
Insured Long-Term 1986
</TABLE>
- ---------------------------------------
*SEC rules require each Fund to tell you the name and address of any person
known to be the beneficial owner of more than 5% of any class of the Fund's
outstanding shares. The Fund must also tell you how many shares such persons
own and what percentage of the class these shares represent.
B. YOUR FUND'S INVESTMENT ADVISER(S)
The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, PA 19355, serves
as the sole investment adviser to each of the Vanguard Funds covered in this
proxy statement.
- -------------------------------------------------------------------------------
PART 5--DIRECTOR/TRUSTEE INFORMATION
Your "yes" vote on the reorganization proposal (see page 2) will be treated
as a vote to elect each of your Fund's current Directors/Trustees to the posi-
tion of Trustee with the newly organized Delaware business trust. Following
the reorganization, the Trustees will serve until the next election or until
their terms are for some reason terminated.
16
<PAGE>
This section provides detailed information about the individual Directors/
Trustees. The information presented includes:
. The backgrounds and qualifications of the Directors/Trustees.
. The identity of your Fund's principal executive officers.
. How many Fund shares are owned by management.
. How often the Board and its committees meet.
. How Directors/Trustees are compensated.
A. THE BACKGROUNDS AND QUALIFICATIONS OF DIRECTORS/TRUSTEES
Except as otherwise noted, the individuals listed below currently serve as
Directors/Trustees of The Vanguard Group, Inc. and all Vanguard Funds. The
mailing address of the Directors/Trustees is P.O. Box 876, Valley Forge, PA
19482.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING THE
NAME AGE LAST FIVE YEARS AND OTHER DIRECTORSHIPS
---- --- ---------------------------------------
<C> <C> <S>
John C. Bogle(1) 68 Senior Chairman of the Board and Director of The
Vanguard Group, Inc., and all Vanguard Funds;
Director of The Mead Corporation, General Accident
Insurance Company, and Chris-Craft Industries, Inc.
John J. Brennan(1) 43 Chairman of the Board, Director, President, and Chief
Executive Officer of The Vanguard Group, Inc., and
all Vanguard Funds
Robert E. Cawthorn 62 Chairman Emeritus and Director of Rhone-Poulenc Rorer,
Inc.; Managing Director of Global Health Care
Partners/DLJ Merchant Banking Partners; Director of
Sun Company, Inc., and Westinghouse Electric Corp.
Barbara Barnes Hauptfuhrer 69 Director of The Great Atlantic and Pacific Tea Co.,
IKON Office Solutions, Inc., Raytheon Co., Knight-
Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association;
Trustee Emerita of Wellesley College
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING THE
NAME AGE LAST FIVE YEARS AND OTHER DIRECTORSHIPS
---- --- ---------------------------------------
<C> <C> <S>
Bruce K. MacLaury(2) 66 President Emeritus of The Brookings Institution; Director
of American Express Bank Ltd., The St. Paul Companies,
Inc., and National Steel Corp.
Burton G. Malkiel(3) 65 Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of
America, Amdahl Corp., Baker Fentress & Co., The Jeffrey
Co., and Southern New England Telecommunications Co.
Alfred M. Rankin, Jr. 56 Chairman, President, and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The
BFGoodrich Co., and The Standard Products Co.
John C. Sawhill 61 President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of
McKinsey & Co. and President of New York University;
Director of Pacific Gas and Electric Co., Procter &
Gamble Co., and NACCO Industries
James O. Welch, Jr. 66 Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO
Energy, Inc., and Kmart Corp.
J. Lawrence Wilson 61 Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co. and The Mead Corporation;
Trustee of Vanderbilt University
</TABLE>
- --------------
(1) Messrs. Bogle and Brennan are considered "interested persons" because they
serve as Fund officers, as well as Directors/Trustees.
(2) Mr. MacLaury does not serve as a Director/Trustee of Vanguard Municipal
Bond Fund or the Vanguard State Tax-Free Funds.
(3) Mr. Malkiel does not serve as a Director of Vanguard Equity Income Fund.
18
<PAGE>
B. PRINCIPAL EXECUTIVE OFFICERS
The following individuals are the principal executive officers of The Van-
guard Group, Inc., and all Vanguard Funds. Each principal executive officer
has held substantially the same position with the Funds for the last five
years or more (except that Mr. Brennan succeeded Mr. Bogle as Chairman of the
Board on January 31, 1998). Their mailing address is P.O. Box 876, Valley
Forge, PA 19482.
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<C> <C> <S>
John C. Bogle 68 Senior Chairman of the Board
John J. Brennan 43 Chairman of the Board, President, and Chief Executive
Officer
Raymond J. Klapinsky 59 Secretary
Richard F. Hyland 60 Treasurer
Karen E. West 51 Controller
</TABLE>
C. FUND SHARES OWNED BY DIRECTORS/TRUSTEES
Messrs. Bogle and Brennan each have invested substantially all of their as-
sets in the Vanguard Funds. The independent Directors/Trustees are also com-
mitted to investing a significant portion of their assets in the Funds. All
Directors/Trustees allocate their investments among more than 95 Vanguard
Funds based on their own investment needs. Their aggregate Vanguard invest-
ments totaled over $ million as of March 31, 1998. The total amount of Fund
shares beneficially owned by each Director/Trustee as of that date, along with
the year in which each individual became a Director/Trustee of the Vanguard
Funds, appears below. As of March 31, 1998, the Directors/Trustees and offi-
cers owned less than 1% of each Fund's total outstanding shares.
JOHN C. BOGLE (1966)
All Vanguard Funds--1,655,037 shares [701,163 shares] NOTE: The bracketed
amounts represent shares held by charitable and related trusts created by Mr.
Bogle, in which he disclaims ownership, control or voting power.
JOHN J. BRENNAN (1987)
All Vanguard Funds--684,779 shares.
ROBERT E. CAWTHORN (1992)
All Vanguard Funds--8,369,629 shares.
BARBARA B. HAUPTFUHRER (1972)
All Vanguard Funds--1,910,269 shares.
BRUCE K. MACLAURY (1989)
All Vanguard Funds--20,373 shares.
19
<PAGE>
BURTON G. MALKIEL (1977)
All Vanguard Funds--520,104 shares.
ALFRED M. RANKIN, JR. (1992)
All Vanguard Funds--436,834 shares.
JOHN C. SAWHILL (1991)
All Vanguard Funds--790,828 shares.
JAMES O. WELCH, JR. (1971)
All Vanguard Funds--144,797 shares.
J. LAWRENCE WILSON (1985)
All Vanguard Funds--311,590 shares.
D. BOARD AND COMMITTEE MEETINGS
During 1997, your Fund's Board of Directors/Trustees held eleven meetings.
Your Board has a standing Compensation, Nomination, and Audit Committee,
which consists of all Directors/Trustees who are not "interested persons" of
the Fund (that is, all but Messrs. Bogle and Brennan). During 1997, the Com-
mittee held five meetings. The Committee's role is to:
1. Evaluate the performance of your Fund's officers and employees.
2. Develop and approve the compensation arrangements for your Fund's offi-
cers and employees.
3. Interview, evaluate and recommend to shareholders candidates for elec-
tion to your Fund's Board of Directors/Trustees. (The Committee will
consider shareholder nominations for Director/Trustee; please write to
Mr. Wilson, Chairman of the Committee.)
4. Select your Fund's independent accountants and review their fees.
5. Oversee your Fund's internal controls.
Following the reorganization, your Fund's Board of Trustees will form a sim-
ilar committee.
E. DIRECTOR/TRUSTEE COMPENSATION
The same individuals serve as Directors/Trustees of all Vanguard Funds, and
each Fund pays a proportionate share of the Directors'/Trustees' compensation.
The Funds employ their officers on a shared basis, as well. However, officers
are compensated by The Vanguard Group, Inc., not the Funds. The reorganization
(Proposal 1) will not change the compensation arrangements described in this
section.
20
<PAGE>
INDEPENDENT DIRECTORS/TRUSTEES. The Funds compensate their independent
Directors/Trustees--that is, the ones who are not also officers of the Fund--
in three ways:
. The independent Directors/Trustees receive an annual fee for their serv-
ice to the Funds, which is subject to reduction based on absences from
scheduled Board meetings.
. The independent Directors/Trustees are reimbursed for the travel and
other expenses that they incur in attending Board meetings.
. Upon retirement, the independent Directors/Trustees receive an aggregate
annual fee of $1,000 for each year served on the Board, up to fifteen
years of service. This annual fee is paid for ten years following re-
tirement, or until the Director's/Trustee's death.
"INTERESTED" DIRECTORS/TRUSTEES. The Funds' interested Directors/Trustees--
Messrs. Bogle and Brennan--receive no compensation for their service in that
capacity. However, they are paid by The Vanguard Group, Inc., for services
that include their role as officers of the Funds.
COMPENSATION TABLES. The following tables provide compensation details for
each of the Directors/Trustees. For each Fund covered in this proxy statement,
we list the amounts paid as compensation and accrued as retirement benefits by
that Fund for each Director/Trustee. In addition, the last table shows the to-
tal amount of benefits that we expect each Director/Trustee to receive from
all Vanguard Funds upon retirement, and the total amount of compensation paid
to each Director/Trustee by all Vanguard Funds. All information shown in this
section relates to each Fund's most recent fiscal year.
<TABLE>
<CAPTION>
BALANCED INDEX
FUND INDEX TRUST
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
- ---------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn
Hauptfuhrer
MacLaury
Malkiel
Rankin
Sawhill
Welch
Wilson
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
INSTITUTIONAL INDEX INTERNATIONAL EQUITY
FUND INDEX FUND
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
- ---------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn
Hauptfuhrer
MacLaury
Malkiel
Rankin
Sawhill
Welch
Wilson
</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL BOND FUND CALIFORNIA TAX-FREE FUND
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
- ---------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn
Hauptfuhrer
MacLaury
Malkiel
Rankin
Sawhill
Welch
Wilson
</TABLE>
<TABLE>
<CAPTION>
FLORIDA INSURED
TAX-FREE FUND NEW JERSEY TAX-FREE FUND
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
- ---------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn
Hauptfuhrer
MacLaury
Malkiel
Rankin
Sawhill
Welch
Wilson
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
NEW YORK TAX-FREE FUND OHIO TAX-FREE FUND
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
- ---------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn
Hauptfuhrer
MacLaury
Malkiel
Rankin
Sawhill
Welch
Wilson
</TABLE>
<TABLE>
<CAPTION>
PENNSYLVANIA
TAX-FREE FUND ALL VANGUARD FUNDS (1)
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
- ---------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn $70,000 $13,000
Hauptfuhrer $70,000 $15,000
MacLaury $65,000 $12,000
Malkiel $70,000 $15,000
Rankin $70,000 $15,000
Sawhill $70,000 $15,000
Welch $70,000 $15,000
Wilson $70,000 $15,000
</TABLE>
- --------------
(1) All Directors/Trustees serve as such for 35 Vanguard Funds, except for
Messrs. Malkiel and MacLaury, who serve on the Boards of 34 and 28
Vanguard Funds, respectively.
23
<PAGE>
Please refer to the Proxy Statement discussion of these proposals. THE PROXY
WILL BE VOTED FOR THE PROPOSALS IF YOU DO NOT SPECIFY OTHERWISE.
---
Your appointed attorneys will vote any other matters that arise at the meeting
in accordance with their best judgment.
THE BOARD OF DIRECTORS/TRUSTEES RECOMMENDS A VOTE FOR EACH OF THE FOLLOWING:
---
- Please detach at perforation before mailing -
PLEASE VOTE BY CHECKING THE APPROPRIATE BOX(ES) BELOW.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. To reorganize the Fund into a Delaware business trust. (All Funds) [ ] [ ] [ ] 1.
2. To change the Fund's fundamental investment limitations with regards to: [ ] [ ] [ ] 2.
(a) The interfund lending program. (All Funds) [ ] [ ] [ ] 2a.
(b) Borrowing money and pledging assets (All Funds) [ ] [ ] [ ] 2b.
(c) Investments in securities owned by affiliates. (Municipal Bond Fund,
State Tax-Free Funds) [ ] [ ] [ ] 2c.
(d) Bonds secured by oil, gas or mineral programs. (Municipal Bond Fund,
State Tax-Free Funds) [ ] [ ] [ ] 2d.
(e) Investing in Companies for control. (Municipal Bond Fund) [ ] [ ] [ ] 2e.
(f) Investments in a single state. (Municipal Bond Fund) [ ] [ ] [ ] 2f.
(g) Investments in industrial revenue bonds. (All State Tax-Free Funds,
except New Jersey) [ ] [ ] [ ] 3.
</TABLE>
VAN-REG
<PAGE>
VOTE BY TOUCH-TONE PHONE OR THE INTERNET
- ---- -- ----- ---- ----- -- --- --------
[SHIP LOGO]
The VANGUARD Group (R)
CALL TOLL-FREE: 1-800-690-6903 OR VISIT OUR WEBSITE
WWW.VANGUARD.COM OR WWW.PROXYVOTE.COM
12-DIGIT CONTROL NUMBER:
(See enclosed insert for further instructions to vote by phone/internet)
Please detach at perforation before mailing
("FUND")
PROXY SOLICITED BY THE BOARD OF DIRECTORS
By my signature below, I appoint John J. Brennan, J. Lawrence Wilson and Raymond
J. Klapinsky as my attorneys to vote all Fund shares that I am entitled to vote
at the Special Meeting of Shareholders to be held in the Majestic Building, Room
118A, Vanguard Financial Center, 100 Vanguard Boulevard, Malvern, PA on July 24,
1998 at 9:30 A.M., E.T. and at any adjournments of the meeting. Any one or more
of Messrs. Brennan, Wilson and Klapinsky may vote my shares, and they may
appoint substitutes to vote my shares on their behalf. I instruct Messrs.
Brennan, Wilson and Klapinsky to vote this proxy as specified on the reverse
side, and I revoke any previous proxies that I have executed. I acknowledge
receipt of the Fund's Notice of Special Meeting of Shareholders and proxy
statement.
PLEASE SIGN, DATE AND RETURN PROMPTLY
IN ENCLOSED ENVELOPE IF YOU ARE NOT
VOTING BY PHONE OR INTERNET
Date
--------------------------------
Note: Please sign exactly as your name
appears on this proxy. When signing in a
fiduciary capacity, such as executor,
administrator, trustee, attorney,
guardian, etc., please so indicate.
Corporate and partnership proxies should
be signed by an authorized person
indicating the person's title.
----------------------------------------
Signature(s) (and Title(s), if applicable)
CONTINUED ON REVERSE SIDE
VAN-PH3
