<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (N0. 33-1569) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. X
POST-EFFECTIVE AMENDMENT NO. 11
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 14
VANGUARD CALIFORNIA TAX-FREE FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
100 VANGUARD BOULEVARD, MALVERN, PA 19355-0741
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
It is hereby requested that this filing become effective on March 31, 1995,
pursuant to paragraph (b) of Rule 485 of the Securities Act of 1933.
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective*.
Registrant elects to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. Registrant filed
its Rule 24f-2 Notice for the year ended November 30, 1994 on January 30,
1995.
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<PAGE>
VANGUARD CALIFORNIA TAX-FREE FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <C> <S>
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Not Applicable
Item 3. Condensed Financial Information....... Financial Highlights
Item 4. General Description of Registrant..... Investment Objective; In-
vestment Limitations; In-
vestment Policies; General
Information
Item 5. Management of the Fund................ Management of the Fund;
Investment Adviser
Item 6. Capital Stock and Other Securities.... Opening an Account and Pur-
chasing Shares; Selling
Your Shares; The Share
Price of Each Portfolio;
Dividends, Capital Gains
and Taxes; General Informa-
tion
Item 7. Purchase of Securities Being Offered.. Cover Page; Opening an Ac-
count and Purchasing Shares
Item 8. Redemption or Repurchase.............. Selling Your Shares
Item 9. Pending Legal Proceedings............. Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <C> <S>
Item 10. Cover Page............................ Cover Page
Item 11. Table of Contents..................... Cover Page
Item 12. General Information and History....... Management of the Fund
Item 13. Investment Objective and Policies..... Investment Limitations
Item 14. Management of the Fund................ Management of the Fund; In-
vestment Management
Item 15. Control Persons and Principal Holders
of Securities......................... Management of the Fund
Item 16. Investment Advisory and Other Management of the Fund; In-
Services.............................. vestment Manager
Item 17. Brokerage Allocation.................. Not Applicable
Item 18. Capital Stock and Other Securities.... Financial Statements
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered.............. Purchase of Shares;
Redemption of Shares
Item 20. Tax Status............................ Appendix
Item 21. Underwriters.......................... Not Applicable
Item 22. Calculations of Yield Quotations of
Money Market Fund..................... Calculation of Yield
Item 23. Financial Statements.................. Financial Statements
</TABLE>
<PAGE>
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--------------------------------------------------------------------------------
[LOGO OF VANGUARD APPEARS HERE] A Member of The Vanguard Group
--------------------------------------------------------------------------------
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PROSPECTUS--MARCH 31, 1995
--------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
--------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
--------------------------------------------------------------------------------
INVESTMENT Vanguard California Tax-Free Fund (the "Fund") is an open-end
OBJECTIVE AND non-diversified investment company that seeks to provide in-
POLICIES come that is exempt from federal and California personal in-
come taxes. The Fund will invest primarily in securities is-
sued by California state and local governments and public fi-
nancing authorities, but may also invest in securities of is-
suers other than California and its political subdivisions.
Although the Fund invests in high-quality instruments, the
shares of the Fund are not insured or guaranteed by the U.S.
Government. The Fund consists of a Money Market Portfolio, an
Insured Intermediate-Term Portfolio and an Insured Long-Term
Portfolio, each of which has distinct investment objectives
and policies. The Portfolios are available only to California
residents. THE MONEY MARKET PORTFOLIO SEEKS TO MAINTAIN, BUT
DOES NOT GUARANTEE, A CONSTANT NET ASSET VALUE OF $1.00 PER
SHARE.
--------------------------------------------------------------------------------
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, Monday through Friday, from
8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to 4:00
p.m. (Eastern time). The minimum initial investment is $3,000
for each Portfolio or $500 for Uniform Gifts/ Transfers to
Minors Act accounts. The Fund is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees). Howev-
er, the Fund incurs expenses for investment advisory, manage-
ment, administrative, and distribution services.
--------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation that you should know about the Fund before you invest.
It should be retained for future reference. A "Statement of
Additional Information" containing additional information
about the Fund has been filed with the Securities and Ex-
change Commission. This Statement is dated March 31, 1995,
and has been incorporated by reference into this Prospectus.
It may be obtained, without charge, by writing to the Fund or
by calling the Investor Information Department.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
<S> <C>
Highlights............ 2
Fund Expenses......... 5
Financial Highlights.. 6
Yield and Total Re-
turn................. 8
FUND INFORMATION
Investment Objective.. 8
Investment Policies... 9
Investment Risks...... 12
Who Should Invest..... 14
How to Compare Tax-
Free and Taxable
Yields............... 15
<CAPTION>
Page
<S> <C>
Implementation of
Policies............. 16
Investment Limita-
tions................ 21
Management of the
Fund................. 22
Investment Adviser.... 22
Dividends, Capital
Gains and Taxes...... 23
The Share Price of
Each
Portfolio............ 25
General Information... 27
<CAPTION>
Page
<S> <C>
SHAREHOLDER GUIDE
Opening an Account
and
Purchasing Shares.... 28
When Your Account
Will Be Credited..... 31
Selling Your Shares... 32
Exchanging Your
Shares............... 35
Important Information
About Telephone
Transactions......... 36
Transferring Regis-
tration.............. 37
Other Vanguard Serv-
ices................. 37
</TABLE>
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
<PAGE>
HIGHLIGHTS
OBJECTIVE AND Vanguard California Tax-Free Fund (the "Fund") is a no-load,
POLICIES open-end non-diversified investment company whose objective
is to provide investors with income that is exempt from fed-
eral and California personal income taxes. The Fund consists
of three separate Portfolios, each of which invests in Cali-
fornia municipal securities within prescribed maturity and
quality standards. There is no assurance, however, that the
Fund will achieve its stated objective. PAGE 8
--------------------------------------------------------------------------------
THREE SEPARATE Investors may choose from three separate Portfolios of the
PORTFOLIOS Fund:
MONEY MARKET PORTFOLIO--invests in high-quality California
municipal securities with a dollar-weighted average maturity
of 90 days or less and seeks to maintain a stable $1.00 share
price. An investment in the 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.
INSURED INTERMEDIATE-TERM PORTFOLIO--invests in insured Cali-
fornia municipal securities with a dollar-weighted average
maturity of 7 to 12 years.
INSURED LONG-TERM PORTFOLIO--invests in insured California
municipal securities with a dollar-weighted average maturity
of 15 to 25 years. PAGE 9
--------------------------------------------------------------------------------
RISK The three Portfolios of the Fund differ significantly in
CHARACTERISTICS terms of interest rate risk. Interest rate risk is the poten-
tial for fluctuations in the principal value of a bond in-
vestment caused by changes in market interest rates. It de-
pends chiefly on the average maturity of a Portfolio's secu-
rities.
The Money Market Portfolio, which is expected to maintain a
stable $1.00 share price, provides minimal exposure to inter-
est rate risk. In contrast, share prices of the Insured In-
termediate-Term and Insured Long-Term Portfolios will gener-
ally fluctuate as interest rates change. In relative terms,
share price fluctuations are expected to be medium for the
Insured Intermediate-Term Portfolio and high for the Insured
Long-Term Portfolio. PAGE 12
--------------------------------------------------------------------------------
THE VANGUARD The Fund is a member of The Vanguard Group of Investment Com-
GROUP panies, a group of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
in excess of $130 billion. The Vanguard Group, Inc. ("Van-
guard"), a subsidiary jointly owned by the Vanguard Funds,
provides all corporate management, administrative, distribu-
tion and shareholder accounting services on an at-cost basis
to the Funds in the Group. PAGE 22
--------------------------------------------------------------------------------
2
<PAGE>
INVESTMENT The Fund receives investment advisory services on an at-cost
ADVISER basis from an experienced investment management staff em-
ployed directly by Vanguard. As a result, the Fund receives
its investment advisory services at a substantially lower
cost than would be possible if the Fund paid an investment
advisory fee to an external investment adviser. PAGE 22
--------------------------------------------------------------------------------
DIVIDEND Each Portfolio declares a dividend based on its ordinary in-
POLICY come each business day. Dividends are paid monthly and may be
received in cash or reinvested in additional shares. PAGE 23
--------------------------------------------------------------------------------
TAXES Shareholders pay no federal or California personal income
taxes on tax-exempt dividends paid by the Fund's Portfolios.
Capital gains distributions from the Fund are subject to fed-
eral income tax, as well as state and local taxes if applica-
ble. However, part or all of any gain realized by the Fund on
the disposition of securities purchased at a market dis-
counted price above a certain nominal or de minimus amount
will be subject to federal income tax as ordinary income (see
page 17). Although the Fund seeks to avoid taxable income,
shareholders would be responsible for any taxes due if tax-
able income were realized. Also, while not presently the
case, it is possible that a portion of the tax-exempt divi-
dends paid by the Fund may be a tax preference item for pur-
poses of the alternative minimum tax. PAGE 23
--------------------------------------------------------------------------------
PURCHASING If you are a California resident, you may purchase shares by
SHARES mail, wire or exchange from another Vanguard Fund. The mini-
mum initial investment is $3,000 per Portfolio; the minimum
for subsequent investments is $100. There are no sales com-
missions or 12b-1 fees. PAGE 28
--------------------------------------------------------------------------------
SELLING SHARES You may redeem shares of each Portfolio by mail, telephone,
wire or check. There is no charge for redemptions, except for
wire withdrawals under $5,000, which are subject to a $5
charge. (Your bank may also impose a fee upon receipt of a
wire.) Each Portfolio's share price (except the Money Market
Portfolio's) is expected to fluctuate, and may at redemption
be more or less than at the time of initial purchase, result-
ing in a gain or loss. PAGE 32
--------------------------------------------------------------------------------
SERVICES TO The Fund offers free checkwriting services (minimum $250 per
SHAREHOLDERS check) for easy access to your Fund account. PAGE 31
The Fund also offers special services, including Direct De-
posit, for deposit of payroll checks into your Fund account;
Fund Express, for electronic transfers between the Fund and
your bank account; Dividend Express, for electronic transfer
of your Fund dividends to your bank account; and Tele-Ac-
count, for 24-hour telephone access to your Fund account bal-
ance and certain transactions. PAGE 37
--------------------------------------------------------------------------------
3
<PAGE>
SPECIAL (1) The value of a Portfolio's municipal securities is ex-
CONSIDERATIONS pected to fluctuate inversely with interest rates. In gener-
al, if interest rates rise, municipal bond prices fall; if
interest rates fall, bond prices rise. In addition, for a
given change in interest rates, bonds of longer maturities
fluctuate more in value than bonds of shorter maturities.
Thus, you should expect that each Portfolio's share price
(except the Money Market Portfolio's) will vary as interest
rates change, and that a Portfolio with a longer maturity
will fluctuate more than a Portfolio with a shorter
maturity. PAGE 12
(2) From time to time Congress has considered proposals to
restrict or eliminate the tax-exempt status of municipal se-
curities. If such proposals were enacted in the future, each
Portfolio would reconsider its investment objectives and
policies. PAGE 9
(3) Each Portfolio (except the Money Market Portfolio) may
invest a portion of its assets in futures contracts and
options. PAGE 17
(4) The Money Market and Insured Long-term Portfolios may in-
vest up to 20% of their assets in short-term non-California
municipal securities or in taxable short-term securities. The
Intermediate Portfolio may invest up to 35% of its assets in
such securities. PAGE 10
(5) Each Portfolio may purchase municipal obligations on a
when-issued basis. Securities purchased on a when-issued ba-
sis may decline or appreciate in market value prior to their
actual delivery to a Portfolio. PAGE 20
(6) Each Portfolio may lend its investment securities.
PAGE 20
(7) Each Portfolio may invest in municipal lease
obligations. PAGE 21
--------------------------------------------------------------------------------
4
<PAGE>
FUND EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for the 1994 fiscal year
and in the case of the Insured Intermediate-Term Portfolio
are estimates, since that Portfolio had not commenced opera-
tions as of the date of this Prospectus.
<TABLE>
<CAPTION>
MONEY INSURED INSURED
MARKET INTERMEDIATE- LONG-TERM
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO TERM PORTFOLIO PORTFOLIO
---------------------------------------------------------------------
<S> <C> <C> <C>
Sales Load Imposed on Purchases.. None None None
Sales Load Imposed on Reinvested
Dividends....................... None None None
Redemption Fees*................. None None None
Exchange Fees.................... None None None
<CAPTION>
MONEY INSURED INSURED
MARKET INTERMEDIATE- LONG-TERM
ANNUAL FUND OPERATING EXPENSES PORTFOLIO TERM PORTFOLIO PORTFOLIO
---------------------------------------------------------------------
<S> <C> <C> <C>
Management & Administrative Ex-
penses.......................... 0.15% 0.14% 0.15%
Investment Advisory Expenses..... 0.01 0.01 0.01
12b-1 Fees....................... None None None
Other Expenses
Distribution Costs.............. 0.03 0.03 0.02
Miscellaneous Expenses.......... 0.00 0.01 0.01
Fund Insurance.................. None 0.00 0.00
---- ---- ----
Total Other Expenses............. 0.03% 0.04% 0.03%
---- ---- ----
TOTAL OPERATING EXPENSES....... 0.19% 0.19% 0.19%
==== ==== ====
</TABLE>
*Wire redemptions under $5,000 are subject to a $5 processing
fee.
The purpose of this table is to assist you in understanding
the various costs and 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. As noted in the table above, the Fund charges
no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio............ $2 $6 $11 $24
Insured Intermediate-Term Portfo-
lio.............................. $2 $6 $11 $24
Insured Long-Term Portfolio....... $2 $6 $11 $24
</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.
--------------------------------------------------------------------------------
5
<PAGE>
FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of the
five years in the period ended November 30, 1994, have been
audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information should
be read in conjunction with the financial statements and
notes thereto, which are incorporated by reference in the
Statement of Additional Information and this Prospectus, and
which appear, along with the report of Price Waterhouse LLP,
in the Fund's 1994 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see the
Fund's 1994 Annual Report to Shareholders which may be ob-
tained without charge by writing to the Fund or by calling
our Investor Information Department at 1-800-662-7447.
<TABLE>
<CAPTION>
-----------------------------------------------------------
MONEY MARKET PORTFOLIO
-----------------------------------------------------------
JUNE 1**
YEAR ENDED NOVEMBER 30, TO
------------------------------------------------- NOV. 30,
1994 1993 1992 1991 1990 1989 1988 1987
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------ ------ ----- ----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income.. .026 .024 .029 .043 .054 .060 .049 .020
Net Realized and
Unrealized Gain (Loss)
on Investments........ -- -- -- -- -- -- -- --
------ ------ ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT
OPERATIONS........... .026 .024 .029 .043 .054 .060 .049 .020
-------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (.026) (.024) (.029) (.043) (.054) (.060) (.049) (0.20)
Distributions from
Realized Capital
Gains................. -- -- -- -- -- -- -- --
------ ------ ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS... (.026) (.024) (.029) (.043) (.054) (.060) (.049) (.020)
-------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
TOTAL RETURN............ 2.59% 2.40% 2.97% 4.44% 5.59% 6.19% 5.06% 2.23%
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $1,159 $1,006 $794 $759 $723 $540 $290 $71
Ratio of Expenses to
Average Net Assets..... .19% .19% .24% .24% .25% .22% .26% .33%*
Ratio of Net Investment
Income to Average Net
Assets................. 2.57% 2.37% 2.92% 4.32% 5.43% 5.99% 5.02% 4.04%*
Portfolio Turnover Rate. N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
*Annualized.
**Commencement of operations.
6
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
INSURED LONG-TERM PORTFOLIO
-------------------------------------------------------------------------------
APRIL 7**
YEAR ENDED NOVEMBER 30, TO
------------------------------------------------------------------- NOV. 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $11.30 $10.89 $10.43 $10.22 $10.19 $ 9.71 $ 9.26 $10.47 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .604 .604 .633 .644 .660 .671 .656 .668 .412
Net Realized and
Unrealized Gain (Loss)
on Investments........ (1.228) .609 .464 .210 .030 .480 .450 (1.210) .481
------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... (.624) 1.213 1.097 .854 .690 1.151 1.106 (.542) .893
----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (.604) (.604) (.633) (.644) (.660) (.671) (.656) (.668) (.412)
Distributions from
Realized Capital
Gains................. (.152) (.199) (.004) -- -- -- -- -- (.011)
------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (.756) (.803) (.637) (.644) (.660) (.671) (.656) (.668) (.423)
----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $ 9.92 $11.30 $10.89 $10.43 $10.22 $10.19 $ 9.71 $ 9.26 $10.47
==========================================================================================================
TOTAL RETURN............ (5.88)% 11.53% 10.81% 8.61% 7.06% 12.16% 12.22% (5.25)% 9.47%
==========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $ 834 $1,074 $ 828 $ 629 $ 385 $ 260 $ 126 $ 89 $ 76
Ratio of Expenses to
Average Net Assets..... .19% .19% .24% .25%+ .26%+ .24%+ .30%+ .31%+ .33%+*
Ratio of Net Investment
Income to Average Net
Assets................. 5.60% 5.38% 5.92% 6.24% 6.57% 6.67% 6.83% 6.86% 6.65%*
Portfolio Turnover Rate. 28% 27% 54% 19% 6% 3% 4% 37% 12%
</TABLE>
*Annualized.
+Insurance Expenses Represent .01%, .01%, .02%, .02%, .03%, and .03%
respectively and/or less than 0.01% in 1992, 1993, and 1994.
**Commencement of operations.
<TABLE>
<CAPTION>
-----------------------------------
INSURED INTERMEDIATE-TERM PORTFOLIO
-----------------------------------
MARCH 4**
TO NOVEMBER 30,
1994
--------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................... $10.00
------
INVESTMENT OPERATIONS
Net Investment Income......................................... .346
Net Realized and Unrealized Gain (Loss) on Investments........ (.360)
------
TOTAL FROM INVESTMENT OPERATIONS............................. (.014)
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.......................... (.346)
Distributions from Realized Capital Gains..................... --
------
TOTAL DISTRIBUTIONS.......................................... (.346)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................. $ 9.64
================================================================================
TOTAL RETURN................................................... (0.19)%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................... $ 100
Ratio of Expenses to Average Net Assets........................ .19%*
Ratio of Net Investment Income to Average Net Assets........... 4.97%*
Portfolio Turnover Rate........................................ 6%
</TABLE>
*Annualized.
**Commencement of operations.
--------------------------------------------------------------------------------
7
<PAGE>
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 dividend and capital gains distribu-
tions.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "30-day yield" of the
Insured Intermediate-Term and Insured Long-Term Portfolios is
calculated by dividing the 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 share-
holder accounts. The yield calculation assumes that the net
investment income earned over 30 days is compounded monthly
for six months and then annualized.
The "seven-day" or "current" yield of the Money Market Port-
folio reflects the income earned by a hypothetical account in
the Portfolio during a seven-day period, expressed as an an-
nual percentage rate. The "effective yield" of the Money Mar-
ket Portfolio assumes that the income over the seven-day pe-
riod is reinvested weekly, resulting in a slightly higher
stated yield through compounding.
Methods used to calculate advertised yields are standardized
for money market and bond funds. However, these methods dif-
fer from the accounting methods used by the Portfolios to
maintain their books and records, and so advertised yields
may not fully reflect the income paid to your own account or
the yield reported in the Fund's Annual Report to Sharehold-
ers.
--------------------------------------------------------------------------------
INVESTMENT The Fund consists of the California Money Market Portfolio,
OBJECTIVE the California Insured Intermediate-Term Portfolio and the
California Insured Long-Term Portfolio, each of which has a
distinct investment objective.
THE FUND SEEKS . The objective of the CALIFORNIA MONEY MARKET PORTFOLIO is
TO PROVIDE to provide investors with income that is exempt from both
INCOME THAT IS federal and California personal income taxes. The Portfolio
EXEMPT FROM also seeks to maintain, but does not guarantee, a constant
FEDERAL AND net asset value of $1.00 per share. Although the Portfolio
CALIFORNIA invests in high quality instruments, the shares of the
INCOME TAXES Portfolio are not insured or guaranteed by the U.S.
Government.
. The objective of the CALIFORNIA INSURED INTERMEDIATE-TERM
AND INSURED LONG-TERM PORTFOLIOS is to provide investors
with a high level of income that is exempt from federal and
California personal income taxes.
8
<PAGE>
The three Portfolios of the Fund are available only to in-
vestors who reside in California. There is no assurance that
the Portfolios will achieve their stated objectives.
The investment objective of each Portfolio is fundamental and
so may not be changed without the approval of a majority of
the Fund's shareholders.
--------------------------------------------------------------------------------
INVESTMENT Each Portfolio of the Fund will invest at least 80% of its
POLICIES net assets in California municipal securities, exclusive of
California AMT bonds (see "Implementation of Policies"). Cal-
ifornia municipal securities are debt obligations issued by
California state and local governments and public financing
authorities that provide interest income that is exempt from
both federal and California personal income taxes. The Cali-
fornia municipal securities described above, may include se-
curities in which the tax-exempt interest rate is determined
by an index, swap or some other formula. Although each Port-
folio invests primarily in California municipal obligations,
the three Portfolios differ in terms of credit quality and
maturity standards.
THE MONEY Under normal circumstances, the California Money Market Port-
MARKET folio will invest at least 80% of its net assets in the fol-
PORTFOLIO WILL lowing high-quality, short-term California municipal
INVEST IN securities:
SHORT-TERM
CALIFORNIA . Municipal notes and variable rate demand instruments, in-
MUNICIPAL cluding derivative securities, rated MIG-1 or VMIG-1, or P-
SECURITIES 1 by Moody's Investors Service, Inc. ("Moody's") or SP-1+,
SP-1, A-1+, or A-1 by Standard & Poor's Corporation ("Stan-
dard & Poor's");
. Tax-exempt commercial paper rated P-1 by Moody's or A-1+ or
A-1 by Standard & Poor's;
. Municipal bonds, including derivative securities, with an
effective maturity of 13 months or less rated a minimum of
Aa by Moody's or AA by Standard & Poor's; and
. Unrated municipal notes considered by the Board of Trustees
to be comparable in credit quality to securities rated MIG-
1 by Moody's or SP-1+ or SP-1 by Standard & Poor's.
In seeking to provide a stable share price of $1.00, the Cal-
ifornia Money Market Portfolio is expected to maintain an
dollar-weighted average maturity of 90 days or less, and will
purchase securities with an effective maturity of 13 months
or less which are eligible for purchase under Rule 2a-7 of
the Investment Company Act of 1940 (the "1940 Act").
Normally, the California Money Market Portfolio will seek to
invest substantially all of its assets in the short-term Cal-
ifornia municipal obligations listed above. However, under
certain circumstances, such as a temporary decline in the is-
suance of California obligations, the Portfolio may invest up
to 20% of its net assets in short-term municipal securities
issued outside of California (the in-
9
<PAGE>
come from which may be subject to California income taxes)
and certain taxable fixed-income securities (the income from
which may be subject to federal and California income taxes).
Subject to the same 20% limit, the Portfolio is also autho-
rized to invest in short-term California AMT bonds. The in-
come from California AMT bonds is exempt from regular federal
and California income taxes, but may be a tax preference item
for purposes of the federal alternative minimum tax (see "Im-
plementation of Policies").
Any non-California securities or California AMT bonds pur-
chased by the Portfolio will be subject to the same ratings
requirements as described above.
Under unusual circumstances, such as a national financial
emergency, the Portfolio reserves the right to invest more
than 20% of its net assets in securities other than Califor-
nia municipal obligations. In most instances, however, the
California Money Market Portfolio will seek to avoid such
holdings in an effort to provide income that is fully exempt
from federal and California personal income taxes.
TWO PORTFOLIOS Under normal circumstances, the California Insured Intermedi-
INVEST IN ate-Term Portfolio will invest at least 65% of its assets in
INSURED insured California municipal securities; while the California
CALIFORNIA Insured Long-Term Portfolio will invest at least 80% of its
MUNICIPAL assets in insured California municipal securities.
SECURITIES
Insured municipal bonds are those for which scheduled pay-
ments of interest and principal are guaranteed by a private
(non-governmental) insurance company. THE INSURANCE FEATURE
DOES NOT GUARANTEE THE MARKET VALUE OF THE MUNICIPAL BONDS OR
THE VALUE OF THE SHARES OF THE CALIFORNIA INSURED INTERMEDI-
ATE-TERM PORTFOLIO OR THE CALIFORNIA INSURED LONG-TERM PORT-
FOLIO. The insurance refers to the face or par value of the
securities in a Portfolio. See "Implementation of Policies"
for a description of the insurance feature of the Portfolios.
Any uninsured securities purchased by the California Insured
Intermediate-Term Portfolio or the California Insured Long-
Term Portfolio will be rated a minimum of "investment grade"
by a nationally recognized statistical rating organization,
or if unrated, will be deemed to be of comparable quality by
the investment adviser.
THE CALIFORNIA INSURED INTERMEDIATE-TERM PORTFOLIO is ex-
pected to maintain a dollar-weighted average maturity between
7 and 12 years.
THE CALIFORNIA INSURED LONG-TERM PORTFOLIO is expected to
maintain a dollar- weighted average maturity between 15 and
25 years. BONDS WITH LONGER MATURITIES USUALLY OFFER HIGHER
YIELDS, BUT ARE ALSO SUBJECT TO GREATER MARKET FLUCTUATIONS
AS INTEREST RATES CHANGE. See the section entitled "Invest-
ment Risks" for further information.
Normally, the Insured Intermediate-Term and Insured Long-Term
Portfolios seek to invest most of their assets in INSURED
California municipal securities. Howev-
10
<PAGE>
er, under certain circumstances, such as a temporary decline
in the issuance of California obligations, the Portfolios may
invest in other types of securities. The Insured Intermedi-
ate-Term Portfolio may invest up to 35% of its assets in any
combination of the securities listed below; while the Insured
Long-Term Portfolio may invest up to 20% of its assets in any
combination of the securities listed below:
. Uninsured, intermediate-term or long-term California munic-
ipal securities, respectively, rated a minimum of Aa by
Moody's or AA by Standard & Poor's;
. Uninsured, short-term municipal securities, issued in Cali-
fornia or in other states, with the same quality standards
that apply for the California Money Market Portfolio; and
. Certain taxable securities, subject to the same quality
standards that apply to the California Money Market Portfo-
lio, including U.S. Government securities.
In such cases, a portion of a Portfolio's income may be sub-
ject to California income taxes, federal income taxes, or
both.
Subject to a 20% of net assets limit, the Portfolios are also
authorized to invest in California AMT bonds. The income from
California AMT bonds is exempt from federal and California
income taxes, but may be a tax preference item for purposes
of the federal alternative minimum tax (see "Implementation
of Policies").
Under unusual circumstances, such as a national financial
emergency, the Portfolios reserve the right to invest more
than 20% of their assets in securities other than California
municipal obligations. In most instances, however, the Cali-
fornia Insured Intermediate-Term and Insured Long-Term Port-
folios will seek to avoid such holdings in an effort to pro-
vide income that is fully exempt from federal and California
personal income taxes.
In the event that a security held by the California Insured
Intermediate-Term Portfolio or the California Insured Long-
Term Portfolio is downgraded, the Portfolio may continue to
hold such security until the investment adviser determines
that it should be sold.
EACH PORTFOLIO Although the Fund is organized as a non-diversified invest-
WILL DIVERSIFY ment company, each Portfolio of the Fund intends to diversify
ITS HOLDINGS its holdings of California municipal securities by complying
with Subchapter M of the Internal Revenue Code. In part,
Subchapter M requires that, at the close of each quarter of
the taxable year, those issues which represent more than 5%
of each Portfolio's assets be limited in aggregate to 50% of
the Portfolio, and that no one issue exceed 25% of the Port-
folio's total assets. As of November 30, 1994, the California
Money Market Portfolio held securities of 44 issuers, with
the largest holding representing 10.48% of the Portfolio's
assets; the California Insured Long-Term Portfolio held secu-
rities of 104 issuers, with the largest holding representing
7.7% of the Portfolio's assets. The California Insured Inter-
mediate-Term Portfolio held securities of 48 issuers, with
the largest holding representing 7.9% of the Portfolio's as-
sets.
11
<PAGE>
Under California law, in order to be eligible to pay divi-
dends to California residents which will be exempt from Cali-
fornia personal income taxes, a mutual fund must, at the
close of each quarter, have at least 50% of the value of its
total assets invested in obligations the interest on which is
exempt from personal income taxation under California law.
The Fund's policy of investing at least 80% of its assets in
California's municipal securities (excluding AMT bonds) under
normal circumstances is fundamental and may not be changed
without shareholder approval. The other investment policies
described above are not fundamental and so may be changed by
the Board of Trustees without shareholder approval.
--------------------------------------------------------------------------------
INVESTMENT As mutual funds investing in municipal securities, the three
RISKS Portfolios of the Fund are subject to interest rate, credit,
call, income and manager risk.
THE FUND IS INTEREST RATE RISK is the potential for fluctuations in bond
SUBJECT TO prices due to changing interest rates. In general, bond
INTEREST RATE, prices vary inversely with interest rates. If interest rates
CREDIT, CALL, rise, bond prices generally decline; if interest rates fall,
INCOME AND bond prices generally rise. In addition, for a given change
MANAGER RISK in interest rates, longer-maturity bonds exhibit greater
price fluctuations than shorter-maturity bonds. To compensate
investors for this risk, longer-maturity bonds generally of-
fer higher yields than shorter-maturity bonds, other factors,
including credit quality, being equal. Interest rate risk may
be increased or decreased when a portfolio initiates or pur-
chases derivative California municipal securities. Such de-
rivative securities rely on sophisticated interest rate cal-
culation mechanisms. For certain types of derivative bonds,
the magnitude of increases and decreases in their price may
be proportionately larger or smaller than, or inverse to, the
price changes that broad market interest rate fluctuations
would produce in long-term bonds.
CREDIT RISK is the possibility that a bond issuer will fail
to make timely payments of interest or principal to a Portfo-
lio. The credit risk of a Portfolio depends on the credit
quality of its underlying securities. In general, the lower
the credit quality of a Portfolio's municipal securities, the
higher a Portfolio's yield, all other factors such as matu-
rity being equal.
CALL RISK is the possibility that, during periods of falling
interest rates, a municipal security with a high stated in-
terest rate will be prepaid (or "called") prior to its ex-
pected maturity date. As a result, a Portfolio will be re-
quired to invest the unanticipated proceeds at lower interest
rates and the Portfolio's income may decline. Call provisions
are most common for intermediate- and long-term municipal
bonds.
INCOME RISK is the potential for a decline in a Portfolio's
income due to falling market interest rates. Because a Port-
folio's income is based on interest rates, which can fluctu-
ate substantially over short periods, income risk is expected
to vary from Portfolio to Portfolio.
12
<PAGE>
THE FUND IS
SUBJECT TO Finally, the investment adviser manages the Fund's Portfolios
MANAGER RISK according to the traditional methods of "active" investment
management, which involve the buying and selling of securi-
ties based upon economic, financial and market analysis and
investment judgment. MANAGER RISK refers to the possibility
that the Fund's investment adviser may fail to execute a
Portfolio's investment strategy effectively. As a result, a
Portfolio may fail to achieve its stated objective.
EXCEPT FOR THE In terms of interest rate risk, you should anticipate that
MONEY MARKET the share prices of the Portfolios will fluctuate inversely
PORTFOLIO, with interest rates. The one exception is the Money Market
SHARE PRICES Portfolio, which is expected to maintain a stable share price
WILL FLUCTUATE of $1.00.
The following chart illustrates the relative interest rate
risk of the California Insured Intermediate-Term and Insured
Long-Term Portfolios. The chart shows the market value of a
$1,000 investment in a single bond with the same yield and
maturity characteristics as the Insured Intermediate-Term and
Insured Long-Term Portfolios on December 29, 1994, assuming a
1% point and 2% point increase or decrease in interest rates.
<TABLE>
<CAPTION>
HYPOTHETICAL VALUE OF $1,000
INVESTMENT
AFTER CHANGE IN INTEREST RATES OF:
-----------------------------------
30-DAY AVERAGE 1% POINT 1% POINT 2% POINT 2% POINT
PORTFOLIO YIELD MATURITY INCREASE DECREASE INCREASE DECREASE
--------- ------ ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Intermediate-Term Bond.. 5.76% 7.6 Years $941 $1,063 $887 $1,131
Long-Term Bond.......... 6.27% 17.3 Years $902 $1,113 $818 $1,243
</TABLE>
This chart is intended to provide you with general guidelines
for evaluating the effect of interest rate changes on the
California Insured Intermediate-Term and Insured Long-Term
Portfolios and determining the degree of interest rate risk
you may be willing to assume.
CREDIT RISK IS The California Money Market Portfolio invests primarily in
EXPECTED TO BE high-quality, short-term California municipal securities;
LOW while the California Insured Intermediate-Term and Insured
Long-Term Portfolios invest primarily in bonds insured by
top-rated insurance companies against the possible default of
an issuer as to the timely payment of interest and principal.
As a result, the average credit quality of each Portfolio is
expected to be very high and credit risk is expected to
be minimal.
Ordinarily, an investment company concentrating its invest-
ments in one state, such as the Fund, would be exposed to
greater credit risks than an investment company investing in
a nationally diversified portfolio of municipal securities.
These risks include possible tax law changes, a deterioration
in economic conditions, differing levels of supply and demand
for California municipal obligations, and localized natural
disasters.
To minimize the effects of concentrating its investments in
California obligations, each Portfolio of the Fund intends to
diversify its holdings by complying
13
<PAGE>
with Subchapter M of the Internal Revenue Code. (See "Invest-
ment Policies" for a description of the requirements of
Subchapter M.) In addition, the high-quality instruments held
by the Money Market Portfolio and the use of municipal bond
insurance in the Insured Intermediate-Term and Long-Term
Portfolios should minimize the credit risk associated with
the Fund.
As of November 30, 1994, the top ten portfolio issuers, based
on market value, represented 56.6% of the Money Market Port-
folio's net assets, 36.8% of the Insured Long-Term Portfo-
lio's net assets and 45.2% of the Insured Intermediate-Term
Portfolio's net assets.
The following chart summarizes credit, interest rate, income
and call risks for the Fund's Portfolios.
<TABLE>
<CAPTION>
CREDIT INTEREST INCOME PREPAYMENT/
PORTFOLIO RISK RATE RISK RISK CALL RISK
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Low Low High Very Low
Insured Intermediate-Term Very Low Medium Medium Low
Insured Long-Term Very Low High Low Medium
</TABLE>
--------------------------------------------------------------------------------
WHO SHOULD The Fund is intended for California residents seeking income
INVEST that is exempt from federal and California personal income
taxes. As a rule, tax-free income is attractive to investors
in high federal and California tax brackets. You can deter-
mine whether tax-exempt or taxable income is more attractive
in your own case by comparing a Portfolio's tax-exempt yield
with the yield from a comparable taxable mutual fund invest-
ment. See "How to Compare Tax-Free and Taxable Yields."
CALIFORNIA Assuming that tax-exempt income is attractive in your own tax
RESIDENTS bracket, you should base your selection of a Portfolio (or
SEEKING TAX- Portfolios) on its expected price volatility and yield, and
EXEMPT INCOME your own investment objectives, risk preferences and time ho-
rizon.
The CALIFORNIA MONEY MARKET PORTFOLIO is intended for invest-
ors who are seeking a stable share price and minimal credit
risk. The yield on the Portfolio is expected to fluctuate
from day-to-day and to be lower on average than the yield
from the California Insured Intermediate-Term and Insured
Long-Term Portfolios. The California Money Market Portfolio
is suitable as a short-term investment vehicle, emphasizing
maximum protection of principal.
The CALIFORNIA INSURED INTERMEDIATE-TERM PORTFOLIO is in-
tended for investors who are willing to accept moderate share
price fluctuations in exchange for potentially higher and
more durable yields.
The CALIFORNIA INSURED LONG-TERM PORTFOLIO is intended for
investors who are seeking the highest, most durable streams
of income and who can tolerate sometimes sharp fluctuations
in share price in pursuit of their income objectives. The
yield of the Portfolio is expected to be higher, and the
level of income provided
14
<PAGE>
more stable, than that of the California Money Market and In-
sured Intermediate-Term Portfolios. However, because of the
potential volatility of the Portfolio's shares price, the
California Insured Long-Term Portfolio is appropriate only
for those investors who can hold their investment over the
long term.
The Fund is intended to be a long-term investment vehicle and
is not designed to provide investors with a means of specu-
lating on short-term market movements. Investors who engage
in excessive account activity generate additional costs which
are borne by all of the Fund's shareholders. In order to min-
imize 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 port-
folio management, either because of the timing of the invest-
ment or previous excessive trading by the investor. Addition-
ally, the Fund has adopted exchange privilege limitations as
described in the section "Exchange Privilege Limitations."
Finally, the Fund reserves the right to suspend the offering
of its shares.
--------------------------------------------------------------------------------
HOW TO COMPARE Before choosing a specific tax-exempt investment, such as a
TAX-FREE AND Portfolio of the Fund, you should determine if you would be
TAXABLE YIELDS better off with taxable or tax-exempt income in your tax
bracket. To compare taxable and tax-exempt income, you should
first determine your combined federal, state and local tax
bracket. Then you should calculate the "taxable equivalent
yield" for the Portfolio you are considering, and compare it
with the yield of a taxable investment with similar credit
and maturity characteristics.
1. DETERMINE YOUR COMBINED TAX BRACKET. Your combined tax
bracket depends on whether you itemize state and local taxes
as a deduction on your federal return. If you do not itemize,
then your combined tax bracket is the sum of your federal,
state and local tax brackets.
If you do itemize, then your combined tax bracket is calcu-
lated as follows. First, calculate your effective state and
local tax bracket using the following formula:
Federal Effective
(100% - Tax ) X State & = State &
Bracket Local Bracket Local Bracket
For example, if you are in a 9.3% state and local tax bracket
and a 28%(federal tax bracket, your effective state and local
tax bracket would be 6.7%:
(100% - 28%) X 9.3% = 6.7%
Second, add your effective state and local tax bracket to
your federal tax bracket to determine your combined tax
bracket:
Federal Effective Combined
Tax + State & = Tax
Bracket Local Bracket Bracket
28% + 6.7% = 34.7%
15
<PAGE>
2. CALCULATE YOUR TAXABLE EQUIVALENT YIELD. The taxable
equivalent yield for a Portfolio is based upon the Portfo-
lio's current tax-exempt yield and your combined tax bracket.
The formula is:
Portfolio's Tax-Exempt Yield Your Taxable
-------------------------------- =
100% - Your Combined Tax Bracket Equivalent Yield
For example, if you are in a combined tax bracket of 34.7%,
and a Portfolio's tax-free yield is 6%, the Portfolio's tax-
able equivalent yield would be 9.2%:
6%
------------ = 9.2%
100% - 34.7%
In this example, you would choose the tax-exempt investment
if the 9.2% taxable equivalent yield were greater than the
taxable yield from a comparable investment (e.g., a taxable
bond fund of comparable maturity and credit quality).
--------------------------------------------------------------------------------
IMPLEMENTATION The Fund's adviser uses a variety of investment vehicles to
OF POLICIES achieve the objective of the Fund.
THE FUND Each Portfolio of the Fund invests principally in tax-exempt
INVESTS IN California municipal securities, which are debt obligations
MUNICIPAL issued by state and local governments and public financing
BONDS, NOTES authorities that provide interest income that is exempt from
AND SECURITIES federal and California personal income taxes. Municipal secu-
DERIVED FROM rities include both municipal bonds (those securities with
MUNICIPAL maturities of five years or more) municipal notes (those se-
BONDS AND curities with maturities of less than five years) and deriva-
NOTES tive securities (for example, those securities for which a
maturity may have been shortened by a demand feature).
Municipal bonds are issued for a wide variety of reasons: to
construct public facilities, such as airports, highways,
bridges, schools, hospitals, housing, mass transportation,
streets, water and sewer works; to obtain funds for operating
expenses; to refund outstanding municipal obligations; and to
loan funds to various public institutions and facilities.
Certain industrial development bonds are also considered mu-
nicipal bonds if their interest is exempt from federal income
tax. Industrial development bonds are issued by, or on behalf
of, public authorities to obtain funds for various privately-
operated manufacturing facilities, housing, sports arenas,
convention centers, airports, mass transportation systems,
and water, gas or sewage works.
General obligation municipal bonds are secured by the is-
suer's pledge of full faith, credit and taxing power. Revenue
or special tax bonds are payable from the revenues derived
from a particular facility or, in some cases, from a special
excise or other tax, but not from general tax revenue. Indus-
trial development bonds are ordinarily dependent on the
credit quality of a private authority.
Municipal notes are issued to meet the short-term funding re-
quirements of local, regional and state governments. Munici-
pal notes include tax anticipation notes, bond anticipation
notes, revenue anticipation notes, tax and revenue anticipa-
16
<PAGE>
tion notes, construction loan notes, short-term discount
notes, tax-exempt commercial paper, demand notes, and similar
instruments. Demand notes permit an investor (such as the
Fund) to demand from the issuer payment of principal plus ac-
crued interest upon a specified number of days' notice.
THE FUND MAY Although neither does so at present, each Portfolio of the
INVEST IN AMT Fund is authorized to invest up to 20% of its assets in so-
BONDS called "AMT" bonds. AMT bonds are tax-exempt "private activi-
ty" bonds issued after August 7, 1986, whose proceeds are di-
rected at least in part to a private, for-profit organiza-
tion. While the income from AMT bonds is exempt from regular
federal income tax, it is a tax preference item for purposes
of the alternative minimum tax. The alternative minimum tax
is a special separate tax that applies to a limited number of
taxpayers who have certain adjustments to income or tax pref-
erence items.
THE FUND MAY The Fund may invest in "Market Discount" bonds when, in the
INVEST IN opinion of the Fund's adviser, the investment will be advan-
MARKET tageous to the Fund's shareholders. A Market Discount bond is
DISCOUNT BONDS a bond purchased at a discount from its original issue price
after April 30, 1993 and with a maturity in excess of one
year from its issue date. In certain circumstances, disposi-
tion of a Market Discount bond will result in taxable ordi-
nary income to the extent of any gain realized.
Although the objective of the Fund is to provide income free
of federal income tax, certain market conditions may make
Market Discount bonds desirable investments. The Fund will
purchase Market Discount bonds only if the Fund's adviser ex-
pects that the purchase of these investments on an after-tax
basis will enhance the Fund's total return.
THE INSURED The California Insured Intermediate-Term and Insured Long-
INTERMEDIATE- Term Portfolios may utilize bond futures contracts and op-
TERM AND tions to a limited extent. Specifically, the Portfolios may
INSURED LONG- enter into futures contracts provided that not more than 5%
TERM of a Portfolio's assets are required as a futures contract
PORTFOLIOS MAY deposit; in addition, the Portfolios may enter into futures
USE FUTURES contracts and options transactions only to the extent that
CONTRACTS AND obligations under such contracts or transactions represent
OPTIONS not more than 20% of a Portfolio's assets.
Futures contracts and options may be used for several rea-
sons: to maintain cash reserves while simulating full invest-
ment, to facilitate trading, and to reduce transaction costs,
or to seek higher investment returns when a futures contract
is priced more attractively than the underlying municipal se-
curity or index. The Portfolios may not use futures contracts
or options transactions to leverage their net assets.
For example, in order to simulate full investment in bonds,
while maintaining liquidity to meet potential shareholder re-
demptions, the California Insured Intermediate-Term and In-
sured Long-Term Portfolios may invest a portion of their as-
sets in bond futures contracts. Because futures contracts
only require a small initial margin deposit, the Portfolios
would then be able to maintain a cash reserve to meet poten-
tial redemptions, while at the same time remaining fully
17
<PAGE>
invested. Also, because the transaction costs of futures and
options may be lower than the costs of investing in bonds di-
rectly, it is expected that the use of futures contracts and
options may reduce the Portfolios' total transaction costs.
FUTURES The primary risks associated with the use of futures and op-
CONTRACTS AND tions are: (i) imperfect correlation between the change in
OPTIONS POSE market value of the bonds held by the Portfolio and the
CERTAIN RISKS prices of futures and options; and (ii) possible lack of a
liquid secondary market for a futures contract and the re-
sulting inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be min-
imized by investing in those contracts whose price fluctua-
tions are expected to resemble those of the Portfolios' un-
derlying 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. In general, the futures market
is more liquid than the municipal bond market; therefore, a
Portfolio's liquidity may be improved by investing in
futures.
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, a Portfolio will segregate cash or cash
equivalents in the amount of the underlying obligation.
DERIVATIVE Derivative securities represent the purchaser's right to re-
SECURITIES ceive principal and interest payments from underlying bonds.
A Portfolio may purchase a derivative security from another
portfolio within the Vanguard Group, as permitted by the In-
vestment Company Act of 1940 and applicable rules thereunder,
or from an outside financial institution. There are different
derivative structures. An example of the steps involved in
creating and using a derivative structure follows: 1) a de-
positor places the underlying bond into a trust supervised by
an independent party; 2) a financial institution provides the
purchasers the right, at periodic intervals, to tender the
derivative security; 3) the financial institution receives
the difference between the prevailing short-term interest
rate (which is paid to the Portfolio holding the derivative
security) and the coupon on the underlying bond in considera-
tion for providing the tender option; and 4) the tender op-
tion may be discontinued upon the occurrence of certain
events, in which case, the Portfolio which owns the deriva-
tive security should receive its proportional share of the
underlying bond. The primary risks associated with the use of
derivative securities are the interest rate risks discussed
under "Investment Risks," the possible lack of a liquid sec-
ondary market, the risk that the other party in a contractual
derivative agreement cannot meet its obligations and the po-
tential for greater price volatility relative to the under-
lying security on which the derivative is based.
The Portfolios intend to limit the risk of derivative securi-
ties by purchasing only those derivative securities that are
consistent with a Portfolio's investment ob
18
<PAGE>
jectives and policies. The Portfolios will not use such in-
struments to leverage securities. Hence, derivative securi-
ties' contributions to the overall market risk characteris-
tics of a Portfolio will not materially alter its risk pro-
file and will be fully representative of the Portfolio's ma-
turity guidelines.
THREE TYPES OF To provide an added level of credit protection, the Califor-
INSURANCE MAY nia Insured Intermediate-Term and Insured Long-Term Portfo-
BE USED IN THE lios use three types of insurance: new issue, mutual fund and
INSURED secondary market insurance. A new issue policy is purchased
INTERMEDIATE- by a bond issuer who wishes to increase the credit rating of
TERM AND a security. By paying a premium and meeting the insurer's un-
INSURED LONG- derwriting standards, the bond issuer is able to obtain a
TERM high credit rating for the security (usually Aaa from Moody's
PORTFOLIOS or AAA from Standard & Poor's). New issue insurance policies
are non-cancellable and continue in force as long as the
bonds are outstanding.
A mutual fund insurance policy may be used to guarantee spe-
cific bonds only while owned by a mutual fund. The Insured
Intermediate-Term and Insured Long-Term Portfolios of the
Fund have obtained mutual fund insurance policies from Finan-
cial Guaranty Insurance Company ("Financial Guaranty"), a
AAA-rated insurance company. Based upon the expected composi-
tion of each Portfolio, the annual premiums for the policies
are likely to range from 0.20% to 0.40% of the principal
value of the bonds insured under the policy, thereby reducing
the Portfolios' current yield.
A secondary market insurance policy is purchased by an in-
vestor (such as the Insured Intermediate-Term or Insured
Long-Term Portfolio) subsequent to the bond's original issu-
ance and generally insures a particular bond for the remain-
der of its term. A Portfolio may purchase bonds which have
already been insured under a secondary market insurance pol-
icy by a prior investor, or the Portfolio may itself purchase
such a policy from Financial Guaranty for bonds that are cur-
rently uninsured.
An insured municipal bond in either of the Portfolios will
typically be covered by only one of the three policies. For
instance, if a bond is already covered by a new issue insur-
ance policy or a secondary market insurance policy, then that
security will not be insured under a Portfolio's mutual fund
insurance policy. All of the insurance policies used by the
Portfolios will be obtained only from insurance companies
rated Aaa by Moody's or AAA by Standard & Poor's.
THE INSURED Each Portfolio of the Fund observes strict maturity guide-
INTERMEDIATE- lines as set forth in detail under "Investment Policies."
TERM AND These maturity standards are specified in terms of a Portfo-
INSURED LONG- lio's average dollar-weighted maturity. From time to time,
TERM however, the Fund may also report an effective average dol-
PORTFOLIOS MAY lar-weighted maturity for the Insured Intermediate-Term or
REPORT AN Insured Long-Term Portfolio, which reflects, among other
EFFECTIVE items, the likelihood that a municipal bond or note held by
AVERAGE the Portfolio may be redeemed or "called" prior to its stated
DOLLAR- maturity date. For example, if the Insured Long-Term Portfo-
WEIGHTED lio consists entirely of 20-year bonds,
MATURITY
19
<PAGE>
some of which may be "called" prior to their stated maturity
in 20 years, the Portfolio's average weighted maturity will
be 20 years, while its effective average maturity will be
shorter.
A Portfolio's effective average weighted maturity will be in-
fluenced by bond market conditions, and so may vary from day
to day, even if no change has been made to the Portfolio's
underlying investment securities. For example, if interest
rates decline, a greater proportion of a Portfolio's securi-
ties may be subject to call (redemption) prior to their
stated maturity. As a result, reflecting this increased call
risk, the effective average maturity of a Portfolio will
shorten, independent of actual purchases or sales of portfo-
lio securities.
TEMPORARY Except as described on page 10, each Portfolio will not in-
INVESTMENTS vest in securities other than municipal bonds, except that
each Portfolio may make temporary investments for temporary
defensive purposes (and subject to the quality standards de-
scribed on page 10) in (a) notes issued by or on behalf of
municipal or corporate issuers, obligations of the U.S. Gov-
ernment and its agencies, commercial paper and bank certifi-
cates of deposit; (b) investment companies investing in such
securities which have investment objectives consistent with
those of the Portfolio to the extent permitted by the Invest-
ment Company Act of 1940; and (c) any such securities or mu-
nicipal bonds subject to repurchase agreements.
THE FUND MAY Each Portfolio may purchase tax-exempt securities on a "when-
PURCHASE WHEN- issued" basis. In buying "when-issued" securities, a Portfo-
ISSUED lio commits to buy securities at a certain price even though
SECURITIES the securities may not be delivered for up to 45 days. The
Portfolio pays for the securities and begins earning interest
when the securities are actually delivered. As a consequence,
it is possible that the market price of the securities at the
time of delivery may be higher or lower than the purchase
price.
THE FUND MAY Each Portfolio may lend its investment securities for either
LEND ITS short-term or long-term purposes to qualified institutional
SECURITIES investors for the purpose of realizing additional net invest-
ment income. Loans of securities by a Portfolio will be col-
lateralized by cash, letters of credit, or securities issued
or guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current market
value of the loaned securities. Income derived from the lend-
ing of securities is not tax-exempt, and a portion of the
tax-exempt interest earned when a municipal security is on
loan must be characterized as taxable income.
Therefore, each Portfolio will limit such activity in accor-
dance with its investment objective.
THE FUND MAY Each Portfolio may purchase municipal lease obligations,
INVEST IN which are securities issued by state and local governments to
MUNICIPAL acquire land, equipment and facilities. These obligations
LEASE typically are not backed by the issuing municipality's full
OBLIGATIONS authority to assess taxes to meet its debt obligations. If
the issuing authority fails to make the appropriations neces-
sary to cover lease payments, then the
20
<PAGE>
lease may terminate, with the possibility of default on the
lease obligation and loss to investors.
--------------------------------------------------------------------------------
INVESTMENT The Fund has adopted certain limitations designed to reduce
LIMITATIONS its exposure to specific situations. These limitations in-
clude the following:
THE FUND HAS (a) The California Insured Intermediate-Term Portfolio will
ADOPTED invest a minimum of 65% of its net assets in insured mu-
CERTAIN nicipal bonds, the interest on which is exempt from fed-
FUNDAMENTAL eral and California personal income taxes, except that it
LIMITATIONS may make temporary investments as described in "Implemen-
tation of Policies."
(b) The California Insured Long-Term Portfolio will invest a
minimum of 80% of its net assets in insured municipal
bonds, the interest on which is exempt from federal and
California personal income taxes, except that it may make
temporary investments as described in "Implementation of
Policies."
(c) The California Money Market Portfolio will invest a mini-
mum of 80% of its net assets in short-term municipal se-
curities, the interest on which is exempt from federal
and California personal income taxes, except that it may
make temporary investments as described in "Implementa-
tion of Policies."
(d) At the close of each quarter of the taxable year, those
issues which represent more than 5% of a Portfolio's as-
sets will be limited in aggregate to 50% of the assets of
that Portfolio (except U.S. Government and cash items, as
defined in the Internal Revenue Code (the "Code")).
(e) Each Portfolio will limit the aggregate value of holdings
of a single issuer (except U.S. Government and cash items
as defined in the Code) to a maximum of 25% of the Port-
folio's total assets. For the purposes of this limita-
tion, identification of the issuer will be based on a de-
termination of the source of assets and revenues commit-
ted to meeting interest and principal payments on each
security.
(f) A Portfolio will not borrow money except for temporary or
emergency purposes, and then not in excess of 10% of the
Portfolio's total assets. The Portfolio will repay all
borrowings before making additional investments, and the
interest paid on such borrowings will reduce income.
(g) A Portfolio will not pledge, mortgage, or hypothecate
more than 10% 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.
--------------------------------------------------------------------------------
21
<PAGE>
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
VANGUARD in excess of $130 billion. Through their jointly-owned sub-
ADMINISTERS sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and
AND the other funds in the Group obtain at cost virtually all of
DISTRIBUTES their corporate management, administrative, shareholder ac-
THE FUND counting and distribution services. Vanguard also provides
investment advisory services on an at-cost basis to certain
Vanguard funds. As a result of Vanguard's unique corporate
structure, the Vanguard funds have costs substantially lower
than those of most competing mutual funds. In 1994, the aver-
age expense ratio (annual costs including advisory fees di-
vided by total net assets) for the Vanguard funds amounted to
approximately .30% compared to an average of 1.05% 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 Trustees (Directors).
The Trustees (Directors) set broad policies for each Fund and
choose its Officers. A list of the Trustees and Officers of
the Fund and a statement of their present positions and prin-
cipal occupations during the past five years can be found in
the Statement 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 Trustees of
each fund. In addition, each fund bears its own direct ex-
penses, such as legal, auditing and custodian fees.
Vanguard also provides distribution and marketing services to
the Vanguard funds. The funds are available on a no-load ba-
sis (i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's distribu-
tion costs.
--------------------------------------------------------------------------------
INVESTMENT The three 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 also provides investment advisory serv-
VANGUARD ices to more than 40 other Vanguard money market and bond
MANAGES THE portfolios, both taxable and tax-exempt. Total assets under
FUND'S management by Vanguard's Fixed Income Group were $55 billion
INVESTMENTS as of December 31, 1994. 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 Group since
its inception in 1981. Mr. MacKinnon is responsible for set-
ting the broad investment strategies employed by the Fund,
and for overseeing the portfolio managers who implement these
strategies on a day-to-day basis.
22
<PAGE>
. Reid Smith, Assistant Vice President of Vanguard, serves as
portfolio manager of the California Insured Intermediate-
Term and Insured Long-Term Portfolios. Mr. Smith has man-
aged the Insured Intermediate-Term Portfolio since its in-
ception in 1994, and began managing the Insured Long-Term
Portfolio in 1992. (Previously, the Insured Long-Term Port-
folio was managed by David Hamlin of the Fixed Income
Group.) For 3 years prior to joining Vanguard, Mr. Smith
was associated with another mutual fund advisory firm as a
fixed-income portfolio manager.
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 Trustees. 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) possible disparities in yield relationships be-
tween different fixed-income securities and money market in-
struments; and (c) actual or anticipated movements in the
general level of interest rates.
Vanguard's Fixed Income Group places all orders for purchases
and sales of portfolio securities. Purchases of portfolio se-
curities are made either directly from the issuer or from mu-
nicipal securities dealers. The Fixed Income Group may sell
portfolio securities prior to their maturity if circumstances
and considerations warrant and if it believes such disposi-
tions advisable. The Fund's policy of investing in short-term
instruments in the California Money Market Portfolio will
likely result in significant portfolio turnover. The Fixed
Income Group seeks to obtain the best available net price and
most favorable execution for all portfolio transactions.
--------------------------------------------------------------------------------
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
THE FUND PAYS each month. Capital gains distributions, if any, will be made
MONTH-END annually.
DIVIDENDS
Dividend and capital gains distributions may be automatically
reinvested or received in cash. See "Choosing a Distribution
Option" for a description of these distribution methods.
In addition, in order to satisfy certain distribution re-
quirements of the Tax Reform Act of 1986, each Portfolio may
declare special year-end dividend and capital gains distribu-
tions during December. Such distributions, if received by
shareholders by January 31, are deemed to have been paid by
the Portfolio and received by shareholders by December 31 of
the prior year.
23
<PAGE>
DIVIDENDS WILL Each Portfolio of the Fund intends to continue to qualify for
BE EXEMPT FROM taxation as a "regulated investment company" under the Inter-
FEDERAL AND nal Revenue Code so that each Portfolio will not be subject
CALIFORNIA to federal income tax to the extent that its income is dis-
INCOME TAXES tributed to shareholders. In addition, each Portfolio intends
to invest a sufficient portion of its assets in municipal
bonds and notes so that it will qualify to pay "exempt-inter-
est dividends" to shareholders. Such exempt-interest divi-
dends are excluded from a shareholder's gross income for fed-
eral tax purposes. The Revenue Reconciliation Act enacted
during 1993 provides that market discount on tax-exempt bonds
purchased after April 30, 1993 must be taxed as ordinary in-
come. Accordingly, to the extent that the Fund purchases such
discounted securities, taxable income may result. Further-
more, each Portfolio expects to invest substantially all of
its assets in California municipal securities. As a result,
each Portfolio will be eligible to pay dividends to Califor-
nia residents that will be exempt from California personal
income taxes.
Net long-term capital gains realized by a Portfolio from the
sale of securities will be distributed as taxable capital
gains distributions. Any short-term capital gains or any tax-
able interest income will be distributed as a taxable ordi-
nary dividend distribution. In general, such taxable income
distributions from a Portfolio are expected to be negligible
in comparison with tax-exempt dividends. However, under unu-
sual circumstances, a Portfolio may invest in securities
other than California municipal obligations. In such cases, a
portion of the Portfolio's income may be subject to Califor-
nia income taxes, federal income taxes, or both.
At present, none of the Portfolios invests in AMT bonds. How-
ever, were a Portfolio to invest in such bonds, a portion of
the Portfolio's dividends, while exempt from the regular fed-
eral income tax, would be a tax preference item for purposes
of the federal alternative minimum tax.
A CAPITAL GAIN A sale of shares in the Insured Intermediate-Term or Insured
OR LOSS MAY BE Long-Term Portfolio is a taxable event and may result in a
REALIZED UPON capital gain or loss. A capital gain or loss may be realized
EXCHANGE OR from an ordinary redemption of shares, a check-writing re-
REDEMPTION demption, or an exchange of shares between two mutual funds
(or two portfolios of a mutual fund). In addition, if you
held shares in the Insured Intermediate-Term or Insured Long-
Term Portfolio for six months or less, any capital loss real-
ized upon redemption is disallowed to the extent of the tax-
exempt dividend income you received.
Capital gains distributions from a Portfolio and any capital
gains or losses realized from the sale or exchange of shares
may also be subject to state and local taxes.
The Fund is required to withhold 31% of any taxable divi-
dends, capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer identi-
fication regulations. You may avoid this withholding require-
ment by indicating your proper Social Security or Employer
Identification
24
<PAGE>
Number on your Account Registration Form and by certifying
that you are not subject to backup withholding.
Up to 85% of an individual's Social Security benefits may be
subject to federal income tax. Along with other factors, to-
tal tax-exempt income, including any tax-exempt dividend in-
come from Portfolios of the Fund, is used to calculate the
taxable portion of Social Security benefits.
The Fund is organized as a Pennsylvania business trust and,
in the opinion of counsel, is not liable for any income or
franchise tax in the Commonwealth of Pennsylvania. The Fund
will be subject to Pennsylvania county personal property tax
in the county which is the site of its principal office.
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
PRICE OF EACH The share price or "net asset value" per share of each Port-
PORTFOLIO folio is calculated daily by dividing the total value of the
investments and other assets of each Portfolio, less any lia-
bilities, by the total outstanding shares of such Portfolio.
CALIFORNIA MONEY MARKET PORTFOLIO. For the purpose of calcu-
lating the California Money Market Portfolio's net asset
value per share, securities are valued by the "amortized
cost" method of valuation, which does not take into account
unrealized gains or losses. This involves valuing an instru-
ment at its cost and thereafter assuming a constant amortiza-
tion 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 Califor-
nia Money Market Portfolio's per share net asset value at
$1.00 is based on its election to operate under the provi-
sions of Rule 2a-7 under the Investment Company Act of 1940.
As a condition of operating under that rule, the California
Money Market Portfolio must maintain a dollar-weighted aver-
age portfolio maturity of 90 days or less, purchase only in-
struments having remaining maturities of 13 months or less,
and invest only in securities that are determined by the
Trustees 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, considered by the Trust-
ees to be of comparable quality.
The Trustees have established procedures designed to stabi-
lize the net asset value per share as computed for the pur-
poses of sales and redemptions at $1.00. These procedures in-
clude periodic review, as the Trustees deem appropriate and
at such intervals as are reasonable in light of current mar-
ket conditions, of the relationship between the amortized
cost value per share and a net asset value
25
<PAGE>
per share based upon available indications of market value.
In such a review, investments for which market quotations are
readily available are valued at the most recent bid price or
quoted yield equivalent for such securities or for securities
of comparable maturity, quality and type as obtained from one
or more of the major market makers for the securities to be
valued. Other investments and assets are valued at fair val-
ue, as determined in good faith by the Trustees.
In the event of a deviation of over 1/2 of 1% between a Port-
folio's net asset value based upon available market quota-
tions or market equivalents and $1.00 per share based on am-
ortized cost, the Trustees will promptly consider what ac-
tion, if any, should be taken. The Trustees 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 to investors or existing
shareholders which might arise from differences between the
two. Such action may include redeeming shares in kind, sell-
ing instruments prior to maturity to realize capital gains or
losses or to shorten average maturity, withholding dividends,
paying distributions from capital or capital gains, or util-
izing a net asset value per share based upon available market
quotations.
CALIFORNIA INSURED INTERMEDIATE-TERM AND INSURED LONG-TERM
PORTFOLIOS. The net asset value per share of the California
Insured Intermediate-Term and Insured Long-Term Portfolios is
determined as of the close of regular trading on the Exchange
on each day that the Exchange is open for business. When ap-
proved by the Board of Trustees, bonds and other 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
pricing services are generally determined without regard to
bid or last sale prices. Because of the large number of out-
standing municipal bonds, the majority of issues do not trade
each day; therefore, last sale prices are not normally avail-
able. In valuing such securities, the pricing services gener-
ally take into account institutional size trading in similar
groups of securities and any developments related to specific
securities.) The methods used by the pricing service and the
valuations so established are reviewed by the Officers of the
Fund under the general supervision of the Trustees. There are
a number of pricing services available and the Trustees, on
the basis of ongoing evaluation of these services, may use
other pricing services or discontinue the use of any pricing
service.
Securities not priced in this manner are priced at the most
recent quoted bid price provided by investment dealers.
Short-term instruments maturing within 60 days of the valua-
tion date may be valued at cost, plus or minus any amortized
discount or premium. Other assets and securities for which no
quotations are readily available will be valued in good faith
at their fair value using methods determined by the Trustees.
26
<PAGE>
The price per share of the Insured Intermediate-Term and In-
sured Long-Term Portfolios can be found daily in the mutual
fund section of most major newspapers under the heading of
The Vanguard Group.
--------------------------------------------------------------------------------
GENERAL Vanguard California Tax-Free Fund is a Pennsylvania business
INFORMATION trust. The Declaration of Trust permits the Trustees to issue
an unlimited number of shares of beneficial interest, without
par value, from an unlimited number of classes of shares.
Currently the Fund is offering three classes of shares (known
as "Portfolios").
Shares of each Portfolio when issued are fully paid and non-
assessable; participate equally in dividends, distributions
and net assets; are entitled to one vote per share; have pro
rata liquidation rights; and do not have pre-emptive rights.
Also, shares of the Fund have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares vot-
ing for the election of the Trustees can elect all of the
Trustees if they so choose.
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 Trustee or Trustees of the Fund if requested in writing
by the holders of not less than 10% of the outstanding shares
of the Fund.
All securities and cash are held by CoreStates Bank, N.A.,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing Agent.
Price Waterhouse LLP serves as independent accountants for
the Fund and audits its financial statements annually. The
Fund is not involved in any litigation.
--------------------------------------------------------------------------------
27
<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 $3,000 minimum initial
investment requirement in any Portfolio ($500 for Uniform
Gifts/Transfers to Minors Act accounts). In addition, you
must be a California resident to invest in the Fund. If you
need assistance with the Account Registration Form or have
any questions, please call our Investor Information Depart-
ment at 1-800-662-7447. NOTE: For other types of account reg-
istrations (e.g. corporations, associations, other organiza-
tions, trusts or powers of attorney), please call us to de-
termine 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 market movements. Consequently the Fund re-
serves 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.
Each Portfolio'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
Credited". 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
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY Please include the Additional investments
MAIL Complete amount of your initial should include the In-
and sign the investment and the vest-by-Mail remit-
enclosed name of the Portfolios tance form attached to
Account you have selected on your Fund confirmation
Registration the registration form, statements. Please
Form make your check pay- make your check pay-
able to The Vanguard able to The Vanguard
Group- (Portfolio Num- Group- (Portfolio Num-
ber). See page 29 for ber). See page 29 for
the appropriate Port- the appropriate Port-
folio number, and mail folio number. Write
to: your account number on
your check and, using
VANGUARD FINANCIAL CENTER the return envelope
P.O. BOX 2600 provided, mail to the
VALLEY FORGE, PA 19482 address indicated on
the Invest-by-Mail
Form.
28
<PAGE>
For express or VANGUARD FINANCIAL CENTER All written requests
registered 455 DEVON PARK DRIVE should be mailed to
mail, 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 CALIFORNIA TAX-FREE PORTFOLIOS:
California Money Market Portfolio-62
California Insured Intermediate-Term Portfolio-100
California Insured Long-Term Portfolio-75
--------------------------------------------------------------
PURCHASING BY CORESTATES BANK, N.A.
WIRE Money ABA 031000011
should be CORESTATES NO. 0141 1274
wired to: ATTN VANGUARD
VANGUARD CALIFORNIA TAX-FREE FUND
BEFORE WIRING NAME OF PORTFOLIO
Please contact ACCOUNT NUMBER
Client ACCOUNT REGISTRATION
Services (1-
800-662-2739)
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 of the
EXCHANGE (from Fund by making an exchange from an existing Vanguard Fund ac-
a Vanguard count. Accounts opened by exchange will have the same regis-
account) tration as the existing account. Please note: the Fund re-
serves the right to reject any exchange purchase request. For
more information, please call our Client Services Department
at 1-800-662-2739.
--------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move money
FUND EXPRESS from your bank account to your Vanguard account on an "as
needed" basis. Or if you choose the Automatic Investment op-
Special tion, money will be moved automatically from your bank ac-
Purchase and count to your Vanguard account on the schedule (monthly, bi-
Automatic monthly [every other month], quarterly or yearly) you select.
Investment To establish these Fund Express options, please provide the
appropriate information on the Account Registration Form. We
will send you a confirmation of your Fund Express service;
please wait three weeks before using the service.
--------------------------------------------------------------------------------
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 one of the other options.
29
<PAGE>
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 distribu-
tions will be paid in cash.
You may change your option by calling our Client Services De-
partment (1-800-662-2739).
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 investment 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, you will be assessed taxes on the amount of the
BEFORE capital gain distribution later paid even though you owned
INVESTING the Fund shares for just a short period of time. (Taxes are
due on the distributions even if the capital gain is rein-
vested in additional Fund shares.) While the total value of
your investment will be the same after the capital gain dis-
tribution--the amount of the capital gain distribution will
offset the drop in the net asset value of the shares--you
should be aware of the tax implications 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
ACCOUNT your account is to select the options you desire when you
INFORMATION complete your Account Registration Form. IF YOU WISH TO ADD
SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
ESTABLISHING WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
OPTIONAL CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FUR-
SERVICES THER ASSISTANCE.
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
institutions that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
30
<PAGE>
CERTIFICATES With the exception of the Money Market Portfolio, share cer-
tificates will be issued upon request. If a certificate is
lost, you may incur an expense to replace it.
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 request has been re-
ceived.
ELECTRONIC If you would prefer to receive a prospectus for the Fund or
PROSPECTUS any of the Vanguard Funds in an electronic format, please
DELIVERY call 1-800-231-7870 for additional information. If you elect
to do so, you may also receive a paper copy of the prospec-
tus, by calling 1-800-662-7447.
--------------------------------------------------------------------------------
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.
Purchases of Fund shares by check (except the Money Market
Portfolio) will receive a trade date the day the funds are
received in good order by Vanguard. Thus if your purchase by
check is received by the close of regular trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time), your
trade date is the business day your check is received in good
order. If your purchase is received after the close of the
exchange your trade date is the business day following re-
ceipt of your check. Vanguard will not accept third-party
checks to open an account. Please be sure your purchase check
is made payable to the Vanguard Group.
For purchases by check for the Money Market Portfolio the
Fund is ordinarily credited with Federal Funds within one
business day. Thus, if your purchase by check is received by
the 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, the Fund is
credited immediately with Federal Funds. Thus, if your pur-
chase by Federal Funds wire or exchange is received by the
close of the Exchange your trade date is the day of receipt.
If your purchase is received after the close of the Exchange,
your trade date is the business day following receipt of your
wire or exchange.
Your shares are purchased at the net asset value determined
on your trade date. You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.) For a
purchase of the Money Market Portfolio by Federal Funds wire,
you may qualify for a dividend on the date of purchase if you
have notified the Fund of your
31
<PAGE>
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.
Each Portfolio reserves the right to suspend the offering of
shares for a period of time. Each Portfolio also reserves the
right to reject any specific purchase request.
--------------------------------------------------------------------------------
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 OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739)
BEFORE SUBMITTING SIGNATURE CARDS, AS ADDITIONAL 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 any check. If
you wish to reverse a stop payment order, you must do so in
writing.
4. Shares held in certificate form cannot be redeemed using
the checkwriting option.
5. 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 CALIFORNIA TAX-FREE FUND, P.O. BOX 1120, VALLEY FORGE,
PA 19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard California Tax-Free
Fund, 455 Devon Park Drive, Wayne, PA 19087.)
32
<PAGE>
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 OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners EXACTLY as they are registered 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.
6. Any certificates that you hold for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO
YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT AT
1-800-662-2739.
--------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized rep-
TELEPHONE resentative 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 Services Department.
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 to accept 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 slips. A signature guarantee is required
if your bank registration is not identical to your Vanguard
Fund account registration.
--------------------------------------------------------------
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 on an "as
Special needed" basis. To establish these Fund Express options,
Redemption please provide the
33
<PAGE>
appropriate information on the Account Registration Form. We
will send you a confirmation of your Fund Express service;
please wait three weeks before using the service.
--------------------------------------------------------------
SELLING BY You may sell shares of a Portfolio by making an exchange to
EXCHANGE another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
--------------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may be redeemed at
REDEMPTION any time. However, your redemption proceeds will not be paid
INFORMATION until payment for the purchase is collected, which may take
up to ten calendar days.
--------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the close
REDEMPTION of the New York Stock Exchange (generally 4:00 p.m. Eastern
PROCEEDS time) are processed on the day of receipt and the redemption
proceeds are normally sent on the following business day.
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.
All unpaid dividends credited to your account up to the date
of redemption will be included in the redemption check. Re-
demption 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.
--------------------------------------------------------------
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 $3,000. If at any time your total investment does not have
a value of at least $3,000, you may be notified that your ac-
count is below the Fund's minimum account balance require-
ment. You would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds would
be promptly paid to the registered shareholder. (This minimum
does not apply to Uniform Gift/Transfers to Minors Act ac-
counts.)
34
<PAGE>
The Fund's minimum account balance requirement will not apply
if your account falls below $3,000 solely as a result of de-
clining market (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 California Tax-Free Fund 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 Em-
ployer Identification Number listed on the account, and the
Call Client exact name and address in which the account is registered.
Services (1- Only the registered shareholder may complete such an ex-
800-662-2739) change. Requests for telephone exchanges received prior to
the close of trading on the New York Stock Exchange (gener-
ally 4:00 p.m. Eastern time) are processed at the close of
business that same day. Requests received after the close of
the Exchange are processed the next business day. TELEPHONE
EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD BALANCED IN-
DEX, VANGUARD INDEX TRUST, VANGUARD INTERNATIONAL EQUITY IN-
DEX FUND AND VANGUARD QUANTITATIVE PORTFOLIOS. 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 the name and account number of your
MAIL current Fund, and 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 CALIFORNIA TAX-FREE FUND, P.O. BOX
1120, VALLEY FORGE, PA 19482. (For express or registered
mail, send your request to Vanguard Financial Center, Van-
guard California Tax-Free Fund, 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 the
Taxpayer Identification numbers of the two accounts are
identical.
. The shares to be exchanged must be on deposit and not held
in certificate form.
. New accounts are not currently accepted in Vanguard/Windsor
Fund or Vanguard/PRIMECAP Fund.
35
<PAGE>
. The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
the required documentation in Good Order.
. When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
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.
The Fund's exchange privilege is only available in Califor-
nia, the only state in which the Fund's shares are registered
for sale.
--------------------------------------------------------------------------------
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.
Exchange activity generally will not be deemed excessive if
limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (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. Notwithstanding 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 port-
folio 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. The ability to
TRANSACTIONS initiate wire redemptions by telephone will be established on
your account only if you specifically elect this option in
writing.
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 and address used
in the registration; and (iv) the Social Security or Employer
Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption
made by mail will be made payable to the registered
shareowner and mailed to the address of record, only. In the
case of a telephone redemption by wire, the wire transfer
will be made only in accordance with the shareowner's prior
written instructions.
Neither the Fund nor Vanguard will be responsible for the au-
thenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been fol-
lowed. Vanguard believes that the security procedures
36
<PAGE>
described above are reasonable, and that if such procedures
are followed, you will bear the risk of any losses resulting
from unauthorized or fraudulent telephone transactions on
your account.
--------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY
FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT. The request
must be in Good Order. BEFORE MAILING YOUR REQUEST, PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FULL
INSTRUCTIONS.
--------------------------------------------------------------------------------
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 accounts.
You will also receive a comprehensive account statement at
the end of each calendar quarter. The fourth-quarter state-
ment will be a year-end statement, listing all transaction
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.
--------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call
SERVICES our Investor Information Department at 1-800-662-7447.
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 Vanguard's Automatic Exchange Service allows you to move
AUTOMATIC money automatically among your Vanguard Fund accounts. For
EXCHANGE instance, the service can be used to "dollar cost average"
SERVICE from a money market portfolio into a stock or bond fund or to
contribute to an IRA or other retirement plan. Please contact
our Client Services Department at 1-800-662-2739.
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.
37
<PAGE>
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) system. 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.
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
service also lets you obtain information about your account
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 brochure of-
fering detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
--------------------------------------------------------------------------------
38
<PAGE>
[LOGO OF VANGUARD
CALIFORNIA [LOGO OF VANGUARD
TAX-FREE FUND CALIFORNIA
APPEARS HERE] TAX-FREE FUND
APPEARS HERE]
---------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center P R O S P E C T U S
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION MARCH 31, 1995
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]
PO75
<PAGE>
PART B
VANGUARD CALIFORNIA TAX-FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 31, 1995
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus dated March 31, 1995. To obtain this Prospectus,
please call:
Vanguard's Investor Information Department 1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Limitations..................................................... B-1
Risk Factors............................................................... B-6
Yield and Total Return..................................................... B-7
Calculation of Yield....................................................... B-8
Comparative Indexes........................................................ B-8
Investment Management...................................................... B-10
Purchase of Shares......................................................... B-11
Redemption of Shares....................................................... B-11
Valuation of Shares........................................................ B-12
Management of the Fund..................................................... B-13
Description of Shares and Voting Rights.................................... B-16
Financial Statements....................................................... B-17
Appendix A--Description of Municipal Bonds and their Ratings............... B-17
Appendix B--Municipal Lease Obligations.................................... B-20
</TABLE>
INVESTMENT LIMITATIONS
The following limitations cannot be changed without the consent of the hold-
ers of a majority of the Fund's outstanding shares (as defined in the Invest-
ment Company Act of 1940 (the "1940 Act")), including a majority of the shares
of each Portfolio.
1. Each Portfolio will limit the aggregate value of all holdings (except
U.S. Government and cash items. as defined under Subchapter M of the Inter-
nal Revenue Code (the "Code")), each of which exceeds 5% of the Portfolio's
total assets, to an aggregate amount of 50% of such assets;
2. Each Portfolio will limit the aggregate value of holdings of a single
issuer (except U.S. government and cash items, as defined in the Code) to a
maximum of 25% of the Portfolio's total assets. For the purposes of this
limitation, identification of the issuer will be based on a determination
of the source of assets and revenues committed to meeting interest and
principal payments of each security;
3. Each Portfolio will not borrow money except for temporary or emergency
purposes and then only in an amount not exceeding 10% of the value of the
total assets of that Portfolio. The Portfolio will repay all borrowing be-
fore making additional investments. Interest paid on such borrowings will
reduce income;
4. Each Portfolio will not pledge, mortgage or hypothecate its assets to
any extent greater than 10% of the value of the total assets of the Portfo-
lio;
5. Each Portfolio will not issue senior securities as defined in the 1940
Act;
B-1
<PAGE>
6. Each Portfolio will not engage in the business of underwriting securi-
ties issued by other persons, except to the extent that the Portfolio may
technically be deemed an underwriter under the Securities Act of 1933, as
amended, in disposing of portfolio securities;
7. Each Portfolio will not purchase or otherwise acquire any security, if
as a result, more than 15% (10% with respect to the Money Market Portfolio)
of its net assets would be invested in securities that are illiquid (in-
cluded in this limitation is the Fund's investment in the Vanguard Group,
Inc.);
8. Each Portfolio will not purchase or sell real estate, but this shall
not prevent investments in Municipal Bonds secured by real estate or inter-
ests therein;
9. Each Portfolio will not make loans to other persons, except by the
purchase of bonds, debentures or similar obligations which are publicly
distributed and as provided under "Lending of Securities";
10. Each Portfolio will not purchase on margin or sell short, except as
specified below in Investment Limitation No. 12;
11. Each Portfolio will not purchase or retain securities of an issuer if
those Trustees of the Fund, each of whom owns more than 1/2 of 1% of such
securities, together own more than 5% of the securities of such issuer;
12. Each Portfolio will not purchase or sell commodities or commodities
contracts, except that the California Insured Intermediate-Term and Long-
Term Portfolios may invest in bond futures contracts, bond options and op-
tions on bond futures contracts to the extent that not more than 5% of a
Portfolio's assets are required as deposit on futures contracts and not
more than 20% of the Portfolio's assets are invested in futures contracts
and/or options transactions at any time;
13. Each Portfolio will not invest its assets in securities of other in-
vestment companies except as they may be part of a merger, consolidation,
reorganization or acquisition of assets or otherwise, to the extent permit-
ted by Section 12 of the 1940 Act;
14. Each Portfolio will not invest in securities other than municipal
bonds except that each Portfolio may make temporary investments in (a)
notes issued by or on behalf of municipal or corporate issuers, obligations
of the U.S. Government and its agencies, commercial paper, bank certifi-
cates of deposit; (b) investment companies investing in such securities
which have investment objectives consistent with those of the Portfolio to
the extent permitted by the 1940 Act; and (c) any such securities or munic-
ipal bonds subject to repurchase agreements;
15. Each Portfolio will not invest in put, call, straddle or spread op-
tions (except as described above in investment limitation No. 12) or inter-
ests in oil, gas or other mineral exploration or development programs;
16. Each Portfolio will not purchase an industrial revenue bond if as a
result of such purchase (i) more than 5% of the Portfolio's total assets,
determined at market value at the time of the proposed investment, would be
invested in industrial revenue bonds where the payment of principal and in-
terest is the responsibility of a company with less than three (3) years'
operating history, or (ii) more than 20% of the Portfolio's total assets,
determined at market value at the time of the proposed investment, would be
invested in industrial development bonds. These restrictions do not apply
to municipal obligations where the payment of principal and interest is the
responsibility of a government or the political subdivision of a govern-
ment.
The above-mentioned investment limitations are considered at the time in-
vestment securities purchased. Notwithstanding these limitations, each Portfo-
lio may own all or any portion of the securities of, or make loans to, or con-
tribute to the costs or other financial requirements of, any company which
will be (1) wholly owned by the Fund and one or more other investment compa-
nies
B-2
<PAGE>
and (2) primarily engaged in the business of providing, at cost, management,
administrative, distribution and/or related services to the Fund and such
other investment companies. Additionally, under normal circumstances, the Fund
may invest up to 20% of its assets in when-issued securities without limita-
tion. Please see the prospectus for a description of securities.
LENDING OF SECURITIES. Each Portfolio may lend its investment securities to
qualified institutions who need to borrow securities in order to complete cer-
tain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment secu-
rities, the Portfolio attempts to increase its income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account
of the Portfolio. The Portfolio may lend its investment securities to quali-
fied brokers, dealers, banks or other financial institutions, so long as the
terms and the structure of such loans are not inconsistent with the 1940 Act,
or the Rules and Regulations or interpretations of the Securities and Exchange
Commission (the "Commission") thereunder, which currently require that (a) the
borrower pledge and maintain with the Portfolio collateral having a value at
all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the
loan be made subject to termination by the Portfolio at any time and (d) the
Portfolio receive reasonable interest on the loan (which may include the Port-
folio investing any cash collateral in interest bearing short-term invest-
ments), any distribution on the loaned securities and any increase in their
market value. A Portfolio will not lend its investment securities, if as a re-
sult, the aggregate of such loans exceeds 10% of the value of its total as-
sets. Loan arrangements made by the Portfolio will comply with all other ap-
plicable regulatory requirements, including the rules of the New York Stock
Exchange, which rules presently require the borrower, after notice, to rede-
liver the securities within the normal settlement time of five business days.
All relevant facts and circumstances, including the creditworthiness of the
broker, dealer or institution, will be considered in making decisions with re-
spect to the lending of securities, subject to review by the Fund's Board of
Trustees. Income derived from lending of securities is not tax-exempt, and,
thus, a portfolio will limit such activity in accordance with its investment
objective.
FUTURES CONTRACTS AND OPTIONS
The Insured Intermediate-Term and Insured Long-Term Portfolios may enter
into futures contracts, options, and options on futures contracts for several
reasons: to maintain cash reserves while simulating full investment, to facil-
itate trading, to reduce transactions costs, or to seek higher investment re-
turns when a futures contract is priced more attractively than the underlying
municipal 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 con-
tracts which are standardized as to maturity date and underlying financial in-
strument are traded on national futures exchanges. Futures exchanges and trad-
ing are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"), a U.S. Government 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
B-3
<PAGE>
security) if it is not terminated prior to the specified delivery date. Mini-
mal initial margin requirements are established by the futures exchange and
may be changed. Brokers may establish deposit requirements which are higher
than the exchange minimums. Futures contracts are customarily purchased and
sold at prices 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, changes in the
contract value may reduce the required margin, resulting in a repayment of ex-
cess 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 Fund ex-
pects 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
interest rates of underlying securities. The Fund intends to use futures con-
tracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. The Portfolio
will only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, the
Portfolio expects 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 the 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 the Portfolio will incur commission expenses in both opening and
closing out futures positions, these costs are lower than transaction costs
incurred in the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
A Portfolio 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 the Fund's total assets. In addi-
tion, a Portfolio will not enter into futures contracts to the extent that its
outstanding obligations to purchase securities under these contracts would ex-
ceed 20% of the Portfolio's total assets. Assets committed to futures con-
tracts or options will be held in a segregated account at the Fund's 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 assur-
ance that a liquid secondary market will exist for any particular futures con-
tract 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 payments 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 addition, the Portfolios may be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the ability to effectively hedge it.
B-4
<PAGE>
The Portfolios will minimize the risk that they 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 principal interest rate futures exchanges in the United States are the
Board of Trade of the City of Chicago and the Chicago Mercantile Exchange.
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 Portfolios does involve the risk
of imperfect or no correlation where the securities underlying futures con-
tracts have different maturities or other characteristics than the portfolio
securities being hedged. It is also possible that the Portfolios could both
lose money on futures contracts and also experience a decline in value of its
portfolio securities. There is also the risk of loss by a 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.
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 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 in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of unfa-
vorable 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
The Portfolios are required for federal income tax purposes to recognize as
income for each taxable year their net unrealized gains and losses on certain
futures contracts held as of the end of the year as well as those actually re-
alized during the year. In most cases, any gain or loss recognized with re-
spect 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 in-
tended to hedge against a change in the value of securities held by the Port-
folios may affect the holding period of such securities and, consequently, the
nature of the gain or loss on such securities upon disposition. A Portfolio
may be required to defer the recognition of losses on futures contracts to the
extent of any unrecognized gains on related positions held by the Portfolio.
In order for each 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
B-5
<PAGE>
of investing in securities. 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 con-
sidered gain from the sale of securities and therefore be qualifying income
for purposes of the 90% requirement. In order to avoid realizing excessive
gains on securities held less than three months, the Portfolios may be re-
quired to defer the closing out of futures contracts 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 each 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.
The Portfolios will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at each 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.
RISK FACTORS
VANGUARD CALIFORNIA TAX-FREE FUND
The Vanguard California Tax-Free Fund invests primarily in the obligations
of California state government and various local governments, including coun-
ties, cities, special districts, agencies and authorities. In general, the
credit quality and credit risk of any issuer's debt depend on the state and
local economy, the health of the issuer's finances, the amount of the issuer's
debt, the quality of management, and the strength of legal provisions in debt
documents that protect debt holders. Credit risk is usually lower wherever the
economy is strong, growing and diversified; financial operations are sound;
and the debt burden is reasonable.
The credit risk associated with direct obligations of the State of Califor-
nia and State agencies, including general obligation and revenue bonds, lease
debt, and notes, is now average. For most of the last two decades, the State's
general obligation bonds had enjoyed the highest rating by either Moody's In-
vestors Service or Standard & Poor's. California's high credit quality re-
flected the growth of its strong and diversified economy, a low debt position,
wealth levels higher than the national average, and a generally sound and sta-
ble financial position. However, California's credit quality has declined
since the onset of the national recession in 1990.
California's economy, largest among the states, is also one of the largest
in the world. The State's population, nearly 30 million in 1990, has doubled
since 1960 and constitutes about 12% of the U.S. total. Rapid growth is con-
tinuing, with rates more than twice that of the national average during the
1980s. Personal income growth lagged U.S. growth in the 1980s, but per capita
income was still 10% above the national average in 1990. A growing, young pop-
ulation, a strong higher education system, and excellent ports continue to
bolster California's economic prospects. Employment and income are not concen-
trated in any one sector. In fact, California's economy closely mirrors that
of the U.S. One caveat to this observation concerns the defense industry. For
many years, California has led the Nation in receipt of total direct U.S. mil-
itary expenditures. However, as the State's economy expanded, the concentra-
tion in defense has lessened. Nonetheless, as U.S. policy has resulted in
lower defense spending, parts of California, especially the Los Angeles Re-
gion, have been adversely affected, and these trends might continue.
The State economy and State financial operations are exposed to the risk of
cyclical national recessions. In recession, credit quality can drop if debt
issuers do not maintain a balance between revenues and expenditures. This oc-
curred in the early 1980s when Moody's and Standard & Poor's
B-6
<PAGE>
downgraded the State. Subsequently, State finances were restored to sound lev-
els, and credit ratings were upgraded. California was especially hard hit by
the recent national recession and experienced three credit-rating downgrades
by each of the two major rating agencies. The effects of recession were not
strongly felt in California until 1991 and the state has recently begun to
emerge from the depths of recession. Led by declines in defense-related activ-
ities and construction (especially commercial real estate), the State lost
over 800,000 jobs between 1990-1993, or about 6% of non-agricultural employ-
ment. The recession resulted in a failure by State government to realize reve-
nue and spending targets. The State budget was chronically imbalanced in 1991
and 1992. State aid was reduced, spreading fiscal stress to local governments,
including schools. Severe fiscal stress continues in State government and many
local governments, and additional credit-rating downgrades are possible.
Despite the overall strength of California credit quality, there are a num-
ber of additional risks. The adoption of revenue and expenditure limitations
(articles XIIIA and XIIIB of the California Constitution) by voters in the
late 1970s placed many local governments under a degree of fiscal stress which
continues. Court decisions and the adoption of subsequent propositions soft-
ened many of the effects of these limitations. However, it should be noted
that California voters have demonstrated a willingness to utilize the statu-
tory initiative process to curtail the financial operations of state and local
government, as well as to increase public debt. This willingness is a continu-
ing risk to debt holders.
Another risk resulting from Proposition 13 concerns the security provisions
for debt repayment. Since 1978, general obligation debt issuance has required
voter approval by a two-thirds majority. As a result, most tax-backed debt now
issued by California local governments is not general obligation debt, does
not have "full faith and credit" backing, and has higher credit risk and more
limited bondholder rights.
Some risks in California apply more to local issuers than to state govern-
ment. In areas of very rapid population growth, the costs of building public
infrastructure are very high, large amounts of municipal bonds are being sold,
and debt burden is increasing. In some parts of southern California, there is
also a fear that population growth may possibly limit future economic growth
due to transportation and air pollution problems.
Finally, California is subject to unique natural hazard risks. Earthquakes
and wildfires can cause localized economic harm which could limit the ability
of governments to repay debt. Drought is also a concern insofar as it affects
agricultural production, power generation, and the supply of drinking water.
Drought not only places stress on the economy generally; it can limit the
ability of certain public utilities to repay debt.
A WORD ABOUT THE ORANGE COUNTY BANKRUPTCY. On December 6, 1994, officials of
Orange County, California filed for bankruptcy under Chapter 9 of the federal
Bankruptcy Code. This was the first municipal bankruptcy filing by a major
government since the Great Depression. As of March 31, 1995, there have been
no major defaults on bonds by the county or the other 187 California
government participants (mainly from Orange County) whose cash was invested on
a pooled basis with Orange County. However, if plans for a financial rescue of
the county are not completed before the end of June, 1995, a series of major
defaults could occur. Importantly, the Fund has no direct exposures to losses
stemming from Orange County. However, if Orange County defaults on its debts,
interest rates on some municipal securities in California, especially
municipal notes, are likely to rise.
YIELD AND TOTAL RETURN
The yield of the California Insured Long-Term Portfolio for the 30-day pe-
riod ended November 30, 1994 was 6.49%.
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<PAGE>
The average annual total return of the California Insured Long-Term Portfolio
for the one- and five-year periods ended November 30, 1994, and the period
since (inception April 7, 1986) to November 30, 1994, was -5.88%, +6.23 and
+6.80%, respectively. The total return of the California Insured Intermediate-
Term Portfolio from inception (March 4, 1994) to November 30, 1994 was -0.19%.
The average annual total return of the California Money Market Portfolio for
the one- year and five-year periods ended November 30, 1994, and the period
from inception (June 1, 1987) to November 30, 1994, was +2.59%, +3.59% and
+4.20%, respectively. Total return is computed by finding the average com-
pounded rates of return over the one-year period set forth above that would
equate an initial amount invested at the beginning of the period to the ending
redeemable value of the investment.
CALCULATION OF YIELD
The current yield of the California Money Market Portfolio is calculated
daily on a base period return of a hypothetical account having a beginning bal-
ance of one share for a particular period of time (generally 7 days). The re-
turn is determined by dividing the net change (exclusive of any capital
changes) in such account by its average net asset value for the period, and
then multiplying it by 365/7 to get the annualized current yield. The calcula-
tion of net change reflects the value of additional shares purchased with the
dividends by the Portfolio, including dividends on both the original share and
on such additional shares. An effective yield, which reflects the effects of
compounding and represents an annualization of the current yield with all divi-
dends reinvested, may also be calculated for the Portfolio by adding 1 to the
net change, raising the sum to the 365/7 power, and subtracting 1 from the re-
sult.
Set forth below is an example, for purposes of illustration only, of the cur-
rent and effective yield calculations for the California Money Market Portfolio
for the 7-day base period ended November 30, 1994.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
----------------------
11/30/94
--------
<S> <C>
Value of account at beginning of period.................. $1.00000
Value of same account at end of period*.................. $1.00066
--------
Net Change in account value.............................. $ .00066
Annualized Current Net Yield (Net Change X 365/7)/average
net asset value......................................... 3.44%
Effective Yield [(Net Change) + 1] (365 divided
by the 7th power) - 1................................ 3.50%
Average Weighted Maturity of Investments................. 51 Days
</TABLE>
--------
* Exclusive of any capital changes.
The net asset value of the California Money Market Portfolio is $1.00 and it
is not expected to fluctuate. The Money Market Portfolio seeks to maintain, but
does not guarantee, a constant net asset value of $1.00 per share. Although the
Money Market Portfolio invests in high-quality instruments, the shares of the
Portfolio are not insured or guaranteed by the U.S. Government. The yield of
the Portfolio will fluctuate. The annualization of a week's dividend is not a
representation by the Portfolio as to what an investment in the Portfolio will
actually yield in the future. Actual yields will depend on such variables as
investment quality, average maturity, the type of instruments the Portfolio in-
vests in, changes in interest rates on instruments, changes in the expenses of
the Fund and other factors. Yields are one basis investors may use to analyze
the Portfolios of the Fund, and other investment vehicles, however, yields of
other investment vehicles may not be comparable because of the factors set
forth in the preceding sentence, differences in the time periods compared, and
differences in the methods used in valuing portfolio instruments, computing net
asset value and calculating yield.
B-8
<PAGE>
COMPARATIVE INDEXES
Each of the investment company members of the Vanguard Group, including Van-
guard Variable Insurance Fund, may from time to time, use one or more of the
following unmanaged indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--is a well diversified list
of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES--consists of more than 6,000 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.
RUSSELL 3000 STOCK INDEX--a diversified portfolio of approximately 3,000 common
stocks accounting for over 90% of the market value of publicly traded stocks in
the U.S.
RUSSELL 2000 STOCK INDEX--a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000; a widely-used benchmark for small capi-
talization common stocks.
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.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND--is a market-weighted index that
contains over 4,800 individually priced investment-grade corporate bonds rated
BBB or better, U.S. Treasury/agency issues and mortgage pass-through securi-
ties.
LEHMAN LONG-TERM TREASURY BOND--is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND--consists of over 4,500 U.S. Trea-
sury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX--all publicly offered fixed-rate, nonconvert-
ible domestic corporate bonds rated Baa by Moody's, with a maturity longer than
1 year and with more than $25 million outstanding. This index includes over
1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND--is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average
yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial 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.
B-9
<PAGE>
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 market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate investment grade bonds rated BBB- or better with maturities between 1
and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is
a market weighted index that contains individually priced U.S. Treasury, 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 com-
pany growth funds as defined by Lipper Analytical Services, Inc. Lipper defines
a small company growth fund as a fund that by prospectus or portfolio practice,
limits its investments to companies on the basis of the size of the company.
From time to time, Vanguard may advertise using the average performance and/or
the average expense ratio of the small company growth funds. (This fund cate-
gory was first established in 1982. For years prior to 1982, the results of the
Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE--An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Analyti-
cal Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--An industry benchmark of aver-
age non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--An industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
INVESTMENT MANAGEMENT
The Fund receives all investment advisory services on an "internalized," at-
cost basis from an experienced investment management staff employed directly by
The Vanguard Group, Inc. ("Vanguard"), a subsidiary jointly owned by the Fund
and the other Funds in The Vanguard Group of Investment Companies. The invest-
ment management staff is supervised by the senior officers of the Fund.
The investment management staff is responsible for: maintaining the specified
standards; making changes in specific issues in light of changes in the funda-
mental basis for purchasing such securities; and adjusting the Fund to meet
cash inflow (or outflow), which reflects net purchases and exchanges of shares
by investors (or net redemptions of shares) and reinvestment of the Fund's in-
come.
A change in securities held by the Fund is known as "portfolio turnover" and
may involve the payment of the Fund of dealer mark-ups, underwriting commis-
sions and other transaction costs on the sales of securities as well as on the
reinvestment of the proceeds in other securities. The annual portfolio turnover
rate for each of the Fund's portfolios is set forth under the heading "Finan-
cial Highlights" in the California Tax-Free Fund prospectus. The portfolio
turnover rate is not a limiting factor when management deems it desirable to
sell or purchase securities. It is impossible to predict whether or not the
portfolio turnover rate in future years will vary significantly from the rates
in recent years.
B-10
<PAGE>
During the fiscal years ended November 30, 1992, 1993 and 1994, the Fund did
not pay any brokerage commissions.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offer-
ing of its shares, (ii) to reject purchase orders when in the judgment of man-
agement such rejection is in the best interest of the Fund, and (iii) to re-
duce or waive the minimum for initial and subsequent investments under circum-
stances where certain economies can be achieved in sales of the Fund's shares.
STOCK CERTIFICATES. Your purchase will be made in full and fractional shares
of the Fund calculated to three decimal places. Shares are normally held on
deposit for shareholders by the Fund, which will send to shareholders a
statement of shares owned at the time of each transaction. This saves the
shareholders the trouble of safekeeping the certificates and saves the Fund
the cost of issuing certificates. Share certificates for the California
Insured Intermediate-Term and Insured Long-Term Portfolios are, available upon
written request at no additional cost to shareholders. No certificates will be
issued for fractional shares of these Portfolios, or any shares of the Money
Market Portfolio.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading
on the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not rea-
sonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods
as the Commission may permit.
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities held by the Fund in lieu of cash in confor-
mity with applicable rules of the Commission. Investors may incur brokerage
charges on the sale of such securities so received in payment of redemptions.
No charge is made by the Fund for redemptions except for wire redemptions of
under $5000 which may be charged a maximum fee of $5.00. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Fund.
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 who
has authorized 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, regardless of the amount involved, when the proceeds are to be
paid to someone other than the registered owners; and (3) share transfer
requests.
A signature guarantee may be obtained from banks, brokers and any other
guarantor institution 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
B-11
<PAGE>
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.
VALUATION OF SHARES
The valuation of shares of the California Insured Intermediate-Term and In-
sured Long-Term Portfolios is described in detail in the Prospectus.
CALIFORNIA MONEY MARKET PORTFOLIO. The net asset value per share of the
California Money Market Portfolio is determined on each day that the New York
Stock Exchange is open and on any other day on which there is sufficient
trading in the Fund's securities to materially affect the Fund's net asset
value per share.
It is the policy of the California Money Market Portfolio to attempt to
maintain a net asset value of $1.00 per share for purposes of sales and re-
demptions. The Money Market Portfolio seeks to maintain, but does not guaran-
tee, a constant net asset value of $1.00 per share. Although the Money Market
Portfolio invests in high-quality instruments, the shares of the Portfolio are
not insured or guaranteed by the U.S. Government. The instruments held by the
California Money Market Portfolio are valued on the basis of amortized cost
which does not take into account unrealized capital gains or losses. This in-
volves valuing an instrument at-cost and thereafter assuming a constant amor-
tization 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. During periods of declining
interest rates, the daily yield on shares of the Portfolio computed as de-
scribed above may tend to be higher than a like computation made by a fund
with identical investments utilizing a method of valuation based upon market
prices and estimates of market prices for all of its portfolio instruments.
Thus, if the use of amortized cost by the Portfolio resulted in a lower aggre-
gate portfolio value on a particular day, a prospective investor in the Port-
folio would be able to obtain a somewhat higher yield than would result from
investment in a fund utilizing solely market values, and existing investors in
the Portfolio would receive less investment income. The converse would apply
in a period of rising interest rates.
The valuation of the California Money Market Portfolio's instruments based
upon their amortized cost and the commitment to maintain the Portfolio's per
share net asset value of $1.00 is based on the conditions set forth in Rule
2a-7 under the Investment Company Act of 1940. The Portfolio will maintain a
dollar-weighted average portfolio maturity of 90 days or less, will purchase
instruments having remaining maturities of thirteen months or less only, and
will invest only in securities determined by the Board of Trustees to be of
high quality with minimal credit risks.
It is a fundamental objective of management to maintain the Portfolio's
price per share as computed for the purpose of sales and redemptions at $1.00.
The Trustees have established procedures designed to achieve this objective.
Such procedures will include a review of the Portfolio's holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
the Portfolio's net asset value calculated by using available market quota-
tions deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Trustees. If such deviation exceeds 1/2 of
1%, the Trustees will promptly consider what action, if any, will be initiat-
ed. In the event the Trustees determine that a deviation exists which may re-
sult in material dilution or other unfair results to investors or existing
shareholders, they have agreed to take such corrective action as they regard
as necessary and appropriate, including the sale of portfolio instruments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity; withholding dividends; making a special capital distribu-
tion; redemptions of shares in kind; or establishing a net asset value per
share by using available market quotations.
B-12
<PAGE>
MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The Fund's Officers, under the supervision of the Board of Trustees, manage
the day-to-day operations of the Fund. The Trustees, which are elected annually
by shareholders, set broad policies for the Fund and choose its Officers. The
following is a list of Trustees and Officers of the Fund and a statement of
their present positions and principal occupations during the past five years is
set forth below. As of November 30, 1994, the Trustees owned less than 1% of
the Fund's outstanding shares. The mailing address of the Fund's Trustees and
Officers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, Chief
Executive Officer and Trustee*
Chairman, Chief Executive Officer,
and Director of The Vanguard
Group, Inc., and of each of the
investment companies in The Van-
guard Group; Director of The Mead
Corporation and General Accident
Insurance.
JOHN J. BRENNAN, President &
Trustee*
President and Director of The Van-
guard Group, Inc., and of each of
the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Trustee
Chairman of Rhone-Poulenc Rorer,
Inc.; Director of Sun Company,
Inc.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and
Pacific Tea Company, Alco Standard
Corp., Raytheon Company, Knight-
Ridder, Inc., and Massachusetts
Mutual Life Insurance Co and
Trustee Emerita of Wellesley Col-
lege.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor
of Economics, Princeton Universi-
ty; Director of Prudential Insur-
ance Co. of America, Amdahl Corpo-
ration, Baker Fentress & Co., The
Jeffrey Co., and Southern New En-
gland Communications Company.
ALFRED M. RANKIN, Trustee
Chairman, President, and Chief Ex-
ecutive Officer of NACCO Indus-
tries, Inc.; Director of The
BFGoodrich Company, The Standard
Products Company and The Reliance
Electric Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Of-
ficer, The Nature Conservancy;
formerly, Director and Senior
Partner, McKinsey & Co.; Presi-
dent, New York University; Direc-
tor of Pacific Gas and Electric
Company and NACCO Industries.
JAMES O. WELCH, JR., Trustee
Retired Chairman of Nabisco
Brands, Inc., retired Vice Chair-
man and Director of RJR Nabisco;
Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Offi-
cer of Rohm & Haas Company; Direc-
tor of Cummins Engine Company;
Trustee of Vanderbilt University
and the Culver Educational Founda-
tion.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group,
Inc. and of each of the investment
companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secre-
tary of The Vanguard Group, Inc.;
Secretary of each of the invest-
ment companies in The Vanguard
Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard
Group, Inc.; Controller of each of
the investment companies in The
Vanguard Group.
--------
* Officers of Fund are "interested
persons" as defined in the
Investment Company Act of 1940.
THE VANGUARD GROUP
Vanguard California Tax-Free Fund is a member of The Vanguard Group of In-
vestment Companies. Through their jointly-owned subsidiary, The Vanguard Group,
Inc. ("Vanguard"), the Fund and
B-13
<PAGE>
the other Funds in the Group obtain at-cost virtually all of their corporate
management, administrative and distribution services. Vanguard also provides
investment advisory services on an at-cost basis to several of the Vanguard
Funds, including the Vanguard California Tax-Free Fund.
Vanguard employs a supporting staff of management and administrative person-
nel needed to provide the requisite services to the Funds and also furnishes
the Funds with necessary office space, furnishings and equipment. Each Fund
pays its share of Vanguard's net expenses which are allocated among the Funds
under methods approved by the Board of Trustees (Directors) of each Fund. In
addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees. In order to generate additional revenues for Vanguard and
thereby reduce the Fund's expenses, Vanguard also provides certain administra-
tive services to other organizations.
The Fund's Officers are also Officers and employees of Vanguard. No Officer
or employee owns, or is permitted to own, any securities of any external ad-
viser for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to pre-
vent unlawful practices in connection with the purchase or sale of securities
by persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are per-
mitted to engage in personal securities transactions. However, such transac-
tions are subject to procedures and guidelines substantially similar to those
recommended by the mutual fund industry and approved by the U.S. Securities
and Exchange Commission.
The Vanguard Group Inc. ("Vanguard") was established and operates under a
Funds' Service Agreement which was approved by the shareholders of each of the
Funds. The amounts which each of the Funds have invested are adjusted from
time to time in order to maintain the proportionate relationship between each
Fund's relative net assets and its contribution to Vanguard's capital. At No-
vember 30, 1994 Vanguard California Tax-Free Fund had contributed capital of
$321,000 to Vanguard representing 1.6% of Vanguard's capitalization. The
Fund's Service Agreement provides as follows: (a) each Vanguard Fund may in-
vest up to 0.40% of its current net assets in Vanguard and (b) there is no re-
striction or 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
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended November 30, 1994, the Funds' share of Vanguard's actual net
costs of operations relating to management and administrative services
(including transfer agency) totaled approximately $3,108,000.
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 Trustees (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 or-
ganize new investment companies.
B-14
<PAGE>
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
of 1% of its average month-end net assets. During the year ended November 30,
1994 the Fund paid approximately $515,000 of the Group's distribution and mar-
keting expenses.
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to the Fund, Vanguard Municipal Bond Fund, Vanguard Money Market
Reserves, Vanguard Institutional Money Market Portfolio; Vanguard Admiral
Funds; the several Portfolios of Vanguard Fixed Income Securities Fund;
Vanguard Institutional Index Fund; Vanguard Bond Index Fund; the Vanguard
Florida Insured Tax-Free Fund; Vanguard New Jersey Tax-Free Fund; Vanguard New
York Insured Tax-Free Fund; Vanguard Ohio Tax-Free Fund; Vanguard Pennsylvania
Tax-Free Fund; Vanguard Tax-Managed Fund; Vanguard Balanced Index Fund;
Vanguard Index Trust; Vanguard International Equity Index Fund; secured
Portfolio of Vanguard Variable Insurance Fund; a portion of Vanguard/Windsor
II, a portion of Vanguard/Morgen Growth Fund as well as several indexed
separate accounts. These services are provided on an at-cost basis from a
money management staff employed directly by Vanguard. The compensation and
other expenses of this staff are paid by the Funds utilizing these services.
During the years ended November 30, 1992, 1993 and 1994, the Fund paid
approximately $143,000, $174,000 and $238,000, respectively, of Vanguard's
investment advisory expenses.
REMUNERATION OF TRUSTEES AND OFFICERS. The Fund pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. During the year ended November 30, 1994 the Fund
paid $10,000 in Trustees' expenses. The Fund's Officers and employees are paid
by Vanguard which, in turn, is reimbursed by the Fund, and each other Fund in
the Group, for its proportionate share of Officers' and employees' salaries
and retirement benefits. During the year ended November 30, 1994 the Fund's
proportionate share of remuneration paid to all Officers of the Fund, as a
group, was approximately $85,117.
Trustees who are not Officers are paid an annual fee based on the number of
years of service on the Board upon retirement. The fee is equal to $1,000 for
each year of service (up to fifteen years) and each investment company member
of the Vanguard Group contributes a proportionate amount to this fee based on
its relative net assets. Under its Retirement Plan, Vanguard contributes annu-
ally an amount equal to 10% of each eligible officer's annual compensation
plus 5.7% of that part of an eligible officer's compensation during the year,
if any, that exceeds the Social Security Taxable Wage Base then in effect. Un-
der its Thrift Plan, all eligible Officers are permitted to make pre-tax con-
tributions in an amount up to 4% of total compensation, subject to federal tax
limitations, which are matched by Vanguard on a 100% basis. The Fund's propor-
tionate share of retirement contributions made by Vanguard under its retire-
ment and thrift plans on behalf of all Officers of the Fund, as a group, dur-
ing the 1994 fiscal year was approximately $9,600.
B-15
<PAGE>
The following table provides detailed information with respect to the
amounts paid or accrued for the Trustees for the fiscal year ended November
30, 1994.
VANGUARD CALIFORNIA TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ESTIMATED ANNUAL FROM ALL
COMPENSATION ACCRUED AS PART OF BENEFITS VANGUARD FUNDS PAID TO
NAMES OF TRUSTEES FROM FUND FUND EXPENSES UPON RETIREMENT TRUSTEES(2)
----------------- ------------ ------------------ ---------------- ----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1)........ -- -- -- --
John J. Brennan(1)...... -- -- -- --
Barbara Barnes
Hauptfuhrer............ $1,258 $255 $15,000 $50,000
Robert E. Cawthorn...... $1,258 $213 $13,000 $50,000
Burton G. Malkiel....... $1,258 $170 $15,000 $50,000
Alfred M. Rankin, Jr. .. $1,258 $134 $15,000 $50,000
John C. Sawhill......... $1,258 $159 $15,000 $50,000
James O. Welch, Jr. .... $1,208 $196 $15,000 $48,000
J. Lawrence Wilson...... $1,233 $142 $15,000 $49,000
</TABLE>
--------
(1) As "Interested Trustees," Messrs. Bogle and Brennan receive no compensa-
tion for their service as Trustees.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Director or Trustee of 33 Vanguard
Funds.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Pennsylvania Trust on October 16, 1985.
The Declaration of Trust, as amended and restated on January 15, 1986, per-
mits the Trustees to issue an unlimited number of shares of beneficial inter-
est, without par value, from an unlimited number of separate classes ("Portfo-
lios") of shares. Currently, the Fund is offering shares of three Portfolios.
The shares of the Fund are fully paid and nonassessable, except as set forth
under "Shareholder and Trustee Liability," and have no preference as to con-
version, exchange, dividends, retirement or other features. The shares of the
Fund have no pre-emptive rights. The shares of the Fund have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held), then standing in
his name on the books of the Fund. On any matter submitted to a vote of share-
holders, all shares of the Fund then issued and outstanding and entitled to
vote, irrespective of the class, shall be voted in the aggregate and not by
class: except (i) when required by the Investment Company Act of 1940, shares
shall be voted by individual class; and (ii) when the matter does not affect
any interest of a particular class, then only shareholders of the affected
class or classes shall be entitled to vote thereon.
The Fund will continue without limitation of time, provided, however that:
1) Subject to the majority vote of the holders of shares of the Fund out-
standing, the Trustees may sell or convert the assets of the Fund to an-
other investment company in exchange for shares
B-16
<PAGE>
of such investment company, and distribute such shares, ratably among the
shareholders of the Fund.
2) Subject to the majority vote of shares of the Fund outstanding, the
Trustees may sell and convert into money the assets of the Fund and dis-
tribute such assets ratably among the shareholders of the Fund; and
Upon completion of the distribution of the remaining proceeds or the remain-
ing assets of any Portfolio as provided in paragraphs 1) and 2) above the Fund
shall terminate and the Trustees shall be discharged of any and all further
liabilities and duties hereunder and the right, title and interest of all par-
ties shall be cancelled and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Pennsylvania law shareholders of
such a Trust may under certain circumstances, be held personally liable as
partners for the obligations of the Fund. Therefore, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Fund or the Trustees. The Declaration of Trust provides for indemnification
out of the Fund property of any shareholder held personally liable for the
obligations of the Fund. The Declaration of Trust also provides that the Fund
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be lia-
ble for errors of judgment or mistakes of fact or law, but nothing in the Dec-
laration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross negli-
gence, or reckless disregard of the duties involved in the conduct of his of-
fice.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended November 30, 1994, in-
cluding the financial highlights for each of the five years in the period
ended November 30, 1994, appearing in the Fund's 1994 Annual Report to Share-
holders, and the report thereon of Price Waterhouse LLP, independent accoun-
tants, also appearing therein, are incorporated by reference in this Statement
of Additional Information. The Fund's 1994 Annual Report to Shareholders is
enclosed with this Statement of Additional Information. 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.
APPENDIX A--DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS
MUNICIPAL BONDS--GENERAL. Municipal Bonds generally include debt obligations
issued by states and their political subdivisions, and duly constituted
authorities and corporations, to obtain funds to construct, repair or improve
various public facilities such as airports, bridges, highways, hospitals,
housing, schools, streets and water and sewer works. Municipal Bonds may also
be issued to refinance outstanding obligations as well as to obtain funds for
general operating expenses and for loan to other public institutions and
facilities.
The two principal classifications of Municipal Bonds are "general obliga-
tion" and "revenue" or "special tax" bonds. General obligation bonds are se-
cured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are pay-
able only from the revenues derived from a particular facility or class of fa-
cilities or, in some cases, from
B-17
<PAGE>
the proceeds of a special excise or other tax, but not from general tax reve-
nues. The Fund may also invest in tax-exempt industrial development bonds,
short-term municipal obligations (rated SP-1+ of SP-1 by Standard & Poor's
Corp. or MIG. by Moody's Investors Service), project notes, demand notes and
tax-exempt commercial papers (rated A-1 by Standard & Poor's Corp. or P-1 by
Moody's Investors Service).
Industrial revenue bonds in most cases are revenue bonds and generally do
not have the pledge of the credit of the issuer. The payment of the principal
and interest on such industrial revenue bonds is dependent solely on the abil-
ity of the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed
as security for such payment. Short-term municipal obligations issued by
states, cities, municipalities or municipal agencies, include Tax Anticipation
Notes, Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan
Notes and Short-Term Discount Notes.
Note obligations with demand or put options may have a stated maturity in
excess of one year, but permit any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such ob-
ligations are secured by letters of credit or other credit support arrange-
ments provided by banks. The issuer of such notes normally has a corresponding
right, after a given period, to repay in its discretion the outstanding prin-
cipal of the note plus accrued interest upon a specific number of days' notice
to the bondholders. The interest rate on a demand note may be based upon a
known lending rate, such as a bank's prime rate, and be adjusted when such
rate changes, or the interest rate on a demand note may be a market rate that
is adjusted at specified intervals. The demand notes in which the Fund will
invest are payable on not more than one year's notice. Each note purchased by
the Fund will meet the quality criteria set out above for the Fund.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a par-
ticular offering, the maturity of the obligation, and the rating of the issue.
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Corpora-
tion represent their opinions of the quality of the Municipal Bonds rated by
them. It should be emphasized that such ratings are general and are not abso-
lute standards of quality. Consequently, Municipal Bonds with the same maturi-
ty, coupon and rating may have different yields, while Municipal Bonds of the
same maturity and coupon, but with different ratings may have the same yield.
It will be the responsibility of the investment management staff to appraise
independently the fundamental quality of the bonds held by the Fund.
Municipal Bonds are sometimes purchased on a "when-issued" basis meaning the
Fund has committed to purchasing certain specified securities at an agreed
upon price when they are issued. The period between commitment date and issu-
ance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.
From time to time proposals have been introduced before Congress to restrict
or eliminate the Federal income tax exemption for interest on Municipal Bonds.
Similar proposals may be introduced in the future. If any such proposal were
enacted, it might restrict or eliminate the ability of the Fund to achieve its
investment objective. In that event, the Fund's Trustees and officers would
reevaluate its investment objective and policies and consider recommending to
its shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State and
local legislatures to restrict or eliminate the State and local income tax ex-
emption for interest on Municipal Bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or elimi-
nate the ability of each Portfolio to achieve its respective investment objec-
tive. In that event, the Fund's trustees and officers would reevaluate its in-
vestment objective and policies and consider
B-18
<PAGE>
recommending to its shareholders changes in such objective and policies. (For
more information please refer to "Risk Factors" on page 6.)
RATINGS. Excerpts from Moody's Investors Service, Inc.'s Municipal Bond
ratings: Aaa--judged to be of the "best quality" and are referred to as "gilt
edge"; interest payments are protected by a large or by an exceptionally
stable margin and principal is secure; Aa--judged to be of "high quality by
all standards" but as to which margins of protection or other elements make
long-term risks appear somewhat larger than Aaa-rated Municipal Bonds;
together with Aaa group they comprise what are generally known as "high grade
bonds"; A--possess many favorable investment attributes and are considered
"upper medium grade obligations." Factors giving security to principal and
interest of A-rated Municipal Bonds are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future; 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 characteristically unreliable over any great length of time; Ba--
protection of principal and interest payments may be very moderate; judged to
have speculative elements; their future cannot be considered as well-assured;
B--lack characteristics of a desirable investment; assurance of interest and
principal payments over any long period of time may be small; Caa--poor
standing; may be in default or there may be present elements of danger with
respect to principal and interest; Ca--speculative in a high degree; often in
default; C--lowest rated class of bonds; issues so rated can be regarded as
having extremely poor prospects for ever attaining any real investment
standing.
Description of Moody's ratings of state and municipal notes: Moody's ratings
for state and municipal notes and other short-term obligations are designated
Moody's Investment Grade ("MIG"). Symbols used will be as follows: MIG-1--Best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both; MIG-2--High quality with margins of protection ample al-
though not so large as in the preceding group.
Description of Moody's highest commercial paper rating: PRIME-1 ("P-1")--
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
Excerpts from Standard & Poor's Corporation's Municipal Bond ratings: AAA--
has the highest rating assigned by S&P; extremely strong capacity to pay prin-
cipal and interest; AA--has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree; A--
has a strong capacity to pay principal and interest, although somewhat more
susceptible to the adverse changes in circumstances and economic conditions;
BBB--regarded as having an adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters but adverse economic condi-
tions or changing circumstances are more likely to lead to a weakened capacity
to pay principal and interest than for bonds in A category; BB--B--CCC--CC--
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with terms of obligation; BB is being paid; D--in de-
fault, and payment of principal and/or interest is in arrears.
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Excerpt from Standard & Poor's Corporation's rating of municipal note is-
sues: SP-1+--very strong capacity to pay principal and interest; SP-1--strong
capacity to pay principal and interest.
Description of S&P's highest commercial papers ratings: A-1+--This designa-
tion indicates the degree of safety regarding timely payment is overwhelming.
A-1--This designation indicates the degree of safety regarding timely payment
is very strong.
B-19
<PAGE>
APPENDIX B--MUNICIPAL LEASE OBLIGATIONS
Each Portfolio may invest in municipal lease obligations. Such securities
will be treated as liquid under the following guidelines have been established
by the Board of Trustees:
1. The obligation has been rated "investment grade" by at least one NRSRO
and is considered to be investment grade by the investment adviser.
2. The obligation is secured by payments from a governmental lessee which
is generally recognized and has debt obligations which are actively traded
by a minimum of five broker/dealers.
3. At least $25 million of the lessee debt is outstanding either in a
single transaction or on parity, and owned by a minimum of five institu-
tional investors.
4. The investment adviser has determined that the obligation, or a compa-
rable lessee security, trades in the institutional marketplace at least pe-
riodically, with a bid/offer spread of 20 basis points or less.
5. The governmental lessee has a full faith and credit general obligation
rating of at least "A-" as published by at least one NRSRO or as determined
by the investment adviser. If the lessee is a state government, the general
obligation rating must be at least BAA1, BBB+, or equivalent, as determined
above.
6. The projects to be financed by the obligation are determined to be
critical to the lessee's ability to deliver essential services.
7. Specific legal features such as covenants to maintain the tax-exempt
status of the obligation, covenants to make lease payments without the
right of offset or counterclaim, covenants to return leased property to the
lessor in the event of non-appropriation, insurance policies, debt service
reserve fund, are present.
8. The lease must be "triple net" (i.e.--lease payments are net of prop-
erty maintenance, taxes and insurance).
9. If the lessor is a private entity, there must be a sale and absolute
assignment of rental payments to the trustee, accompanied by a legal opin-
ion from recognized bond counsel that lease payments would not be consid-
ered property of the lessor's estate in the event of lessor's bankruptcy.
20
<PAGE>
PART C
VANGUARD CALIFORNIA TAX-FREE FUND
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Registrant's audited Financial Statements for the year ended November
30, 1994, including Price Waterhouse LLP's report thereon, are incorporated by
reference in the Statement of Additional Information, from the Registrant's
1994 Annual Report to Shareholders which has been filed with the Commission.
The financial statements of each Portfolio included in the Annual Report are:
1. Statement of Net Assets as of November 30, 1994
2. Statement of Operations for the year ended November 30, 1994
3. Statement of Changes in Net Assets for the years ended November 30,
1993 and 1994
*4. Financial Highlights for each of the five years in the period ended
November 30, 1994
5. Notes to Financial Statements
6. Report of Independent Accountants
--------
* In addition, the Financial Highlights for each of the respective peri-
ods presented is included in Part A of this Registration Statement.
(B) EXHIBITS
1. Articles of Incorporation
2. By-Laws of Registrant**
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Not Applicable
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
8. Form of Custody Agreement**
9. Form of Vanguard Service Agreement**
10. Opinion of Counsel**
11. Consent of Independent Accountants*
12. Financial Statements--reference is made to (a) above
13. Not Applicable
14. Not Applicable
15. Not Applicable
16. Schedule for Computation of Performance Quotations*
27. Financial Data Schedule*
--------
* Filed herewith.
** Previously filed.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person. The
officers of the Registrant, the investment companies in The Vanguard Group of
Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management of the Fund" in the Prospectus constituting
Part A and in the Statement of Additional Information constituting Part B of
this Registration Statement.
C-1
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of November 30, 1994 the number of shareholders of each portfolio of the
Fund was as follows:
<TABLE>
<S> <C>
Money Market Portfolio................................................... 19,064
Long-Term Insured Portfolio.............................................. 18,245
Insured intermediate-Term Portfolio...................................... 2,664
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the regis-
trant in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the securi-
ties being registered, the registrant will, unless in the opinion of its coun-
sel the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the fi-
nal adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Investment advisory services are provided to the Registrant on an at-cost
basis by The Vanguard Group, Inc., a jointly-owned subsidiary of the Regis-
trant and the other Funds in the Group. See the information concerning The
Vanguard Group set forth in Parts A and B.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge, Pennsyl-
vania 19482; and the Registrant's Custodian, CoreStates Bank, N.A., Phil-
adelphia, PA.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The Van-
guard Group, Inc. which was previously filed as Exhibit 9(c) and described in
Part B hereof under "Management of the Fund;" the Registrant is not a party of
any management-related service contract.
ITEM 32. UNDERTAKINGS
Annual meetings of shareholders will not be held except as required by the
Investment Company Act of 1940 ("1940 Act") or other applicable law. Regis-
trant undertakes to comply with the provisions of Section 16(c) of the 1940
Act in regard to shareholders' rights to call a meeting of shareholders for
the purpose of voting on the removal of Directors and to assist in shareholder
communications in such matters, to the extent required by law.
Registrant herby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
C-2
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO RULE
485(B) UNDER THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS POST-
EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF VALLEY FORGE AND
THE COMMONWEALTH OF PENNSYLVANIA, ON THE 27 DAY OF MARCH, 1995.
Vanguard California Tax-Free Fund
(signature)
By __________________________________
(RAYMOND J. KLAPINSKY)
JOHN C. BOGLE*,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-
EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
(signature) John C. Bogle*, March 27, 1995
By: _________________________________ Chairman of the
(RAYMOND J. KLAPINSKY) Board, Trustee, and
Chief Executive
Officer
(signature) John J. Brennan*, March 27, 1995
By: _________________________________ Trustee and
(RAYMOND J. KLAPINSKY) President
(signature) Robert E. Cawthorn*, March 27, 1995
By: _________________________________ Trustee
(RAYMOND J. KLAPINSKY)
(signature) Barbara B. March 27, 1995
By: _________________________________ Hauptfuhrer*,
(RAYMOND J. KLAPINSKY) Trustee
(signature) Burton G. Malkiel*, March 27, 1995
By: _________________________________ Trustee
(RAYMOND J. KLAPINSKY)
(signature) Alfred M. Rankin, March 27, 1995
By: _________________________________ Jr.*, Trustee
(RAYMOND J. KLAPINSKY)
(signature) John C. Sawhill*, March 27, 1995
By: _________________________________ Trustee
(RAYMOND J. KLAPINSKY)
(signature) James O. Welch, March 27, 1995
By: _________________________________ Jr.*, Trustee
(RAYMOND J. KLAPINSKY)
(signature) J. Lawrence Wilson*, March 27, 1995
By: _________________________________ Trustee
(RAYMOND J. KLAPINSKY)
(signature) Richard F. Hyland*, March 27, 1995
By: _________________________________ Treasurer and
(RAYMOND J. KLAPINSKY) Principal Financial
Officer and
Accounting Officer
Raymond J. Klapinsky Raymond J. March 27, 1995
By: _________________________________ Klapinsky*
RAYMOND J. KLAPINSKY Secretary
</TABLE>
--------
* By Power of Attorney--See File Number 2-14336, January 23, 1990. Incorpo-
rated by Reference.
C-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants.................................... EX-99.B11
Schedule for Computation of Performance Quotations.................... EX-99.B16
Financial Data Schedule............................................... EX-27
</TABLE>
<PAGE>
EX-99-B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this amended Regis-
tration Statement on Form N-1A, of our report dated December 30, 1994, relat-
ing to the financial statements and financial highlights appearing in the No-
vember 30, 1994 Annual Report to Shareholders of Vanguard California Tax-Free
Fund. We also consent to the references to us under the headings "Financial
Highlights" and "General Information" in the Prospectus and "Financial State-
ments" in the Statement of Additional Information.
Price Waterhouse LLP
Philadelphia, PA
March 24, 1995
<PAGE>
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD CALIFORNIA TAX-FREE FUND
INSURED LONG-TERM PORTFOLIO
1.AVERAGE ANNUAL TOTAL RETURN (As of November 30, 1994)
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE: One Year
-----------------
P = $1,000
T = -5.88%
N = 1
ERV = $941.25
Five Year
---------
P = $1,000
T = +6.23%
N = 5
ERV = $1,352.73
Ten Year
--------
P = $1,000
T = +6.80%*
N = 10
ERV = $1,766.83*
--------
* Since inception (4/7/86)
2.YIELD (30 Days Ended November 30, 1994)
a
Yield = 2 [( ----- + 1)/6/ - 1] - b X 100
c X d
Where: a = dividends and interest paid during the period
b = expense ratios during the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period
d = the maximum offering price per share on the last day of the
period
Example a = $4,513,885.43
b = 0.14
c = 84,403,847.674
d = $9.92
Yield = 6.42%
<PAGE>
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD CALIFORNIA TAX-FREE FUND
MONEY MARKET PORTFOLIO
1.Average Annual Total Return (As of November 30, 1994)
P (1 + T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE: One Year
-----------------
P = $1,000
T = +2.59%
N = 1
ERV = $1,025.92
Five Year
---------
P = $1,000
T = +3.59%
N = 5
ERV = $1,193.09
Ten Year
--------
P = $1,000
T = +4.20%*
N = 10
ERV = $1,360.97*
--------
* Since inception (6/1/87)
<PAGE>
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD CALIFORNIA TAX-FREE FUND
INSURED INTERMEDIATE-TERM PORTFOLIO
1.AVERAGE ANNUAL TOTAL RETURN (As of November 30, 1994)
P (1 + T)/n/ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
-------
P = $1,000
T = -0.19%
N = *
ERV = $998.10*
--------
* Since inception (3/4/94)
2.YIELD (30 Days Ended November 30, 1994)
a
Yield = 2 [( ----- + 1)/6/ - 1] - b X 100
c X d
Where: a = dividends and interest paid during the period
b = expense ratios during the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period
d = the maximum offering price per share on the last day of the
period
Example a = $480,001.60
b = 0.14
c = 10,238,017.896
d = $9.64
Yield = 5.77%
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