<PAGE>
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[LOGO OF VANGUARD FLORIDA INSURED A Member of The Vanguard Group
TAX-FREE FUND APPEARS HERE]
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PROSPECTUS--MARCH 28, 1995
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT Vanguard Florida Insured Tax-Free Fund (the "Fund") is an
OBJECTIVE & open-end, non-diversified investment company that seeks to
POLICIES provide income that is exempt from federal personal income
taxes. It is also expected that the Fund's shares will be ex-
empt from the Florida intangible personal property tax. The
Fund will invest primarily in securities issued by municipal
Florida state and local governments and public financing au-
thorities, but may also invest in securities of issuers other
than Florida 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 is available only to Florida residents.
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OPENING AN Please complete and return the Account Registration Form. If
ACCOUNT you need assistance in completing this Form, please call the
Investor Information Department, 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/Transfer to Mi-
nors 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.
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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 28, 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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses......... 2
Financial Highlights.. 2
Yield and Total
Return............... 3
FUND INFORMATION
Investment Objective.. 4
Investment Policies... 4
Investment Risks...... 5
Who Should Invest..... 7
How to Compare Tax-
Free and Taxable
Yields............... 8
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Implementation of
Policies............ 9
Investment Limita-
tions............... 13
Management of the
Fund................ 14
Investment Adviser... 15
Dividends, Capital
Gains and Taxes..... 15
The Share Price of
the Fund............ 17
General Information.. 18
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
SHAREHOLDER GUIDE
Opening an Account
and Purchasing
Shares.............. 19
When Your Account
Will Be Credited.... 22
Selling Your Shares.. 22
Exchanging Your
Shares.............. 25
Important Information
About Telephone
Transactions........ 26
Transferring Regis-
tration............. 27
Other Vanguard Serv-
ices................ 27
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
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<PAGE>
FUND EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Fund. The expenses
set forth below are for the 1994 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------
<S> <C> <C>
Sales Load Imposed on Purchases............................ None
Sales Load Imposed on Reinvested Dividends................. None
Redemption Fees*........................................... None
Exchange Fees.............................................. None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------------
<S> <C> <C>
Management & Administrative Expenses....................... 0.17%
Investment Advisory Expenses............................... 0.01
12b-1 Fees................................................. None
Other Expenses
Distribution Costs.................................. 0.03%
Fund Insurance...................................... 0.00
Miscellaneous Expenses.............................. 0.01
-----
Total Other Expenses....................................... 0.04
-----
TOTAL OPERATING EXPENSES................................ 0.22%
=====
</TABLE>
*Wire redemptions of less than $5,000 are subject to a $5
charge.
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.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$2 $7 $12 $28
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE HIGHER OR LOWER THAN THOSE SHOWN.
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FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each of the periods have been audited by Price
Waterhouse LLP, independent accountants, whose report thereon
was unqualified. This information should be read in conjunc-
tion with the financial statements and notes thereto which
are incorporated by reference in the Statement of Additional
Information and in 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 obtained without charge
by writing to the Fund or by calling our Investor Information
Department at 1-800-662-7447.
2
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 1(+)
YEAR ENDED NOVEMBER 30, TO
------------------------- NOVEMBER 30,
1994 1993 1992
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<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD. $ 10.86 $10.16 $10.00
----------- ----------- ------
INVESTMENT OPERATIONS
Net Investment Income............... .550 .537 .122
Net Realized and Unrealized Gain
(Loss) on Investments.............. (1.180) .700 .160
----------- ----------- ------
TOTAL FROM INVESTMENT OPERATIONS... (.630) 1.237 .282
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DISTRIBUTIONS
Dividends from Net Investment In-
come............................... (.550) (.537) (.122)
Distributions from Realized Capital
Gains.............................. (.070) -- --
----------- ----------- ------
TOTAL DISTRIBUTIONS................ (.620) (.537) (.122)
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NET ASSET VALUE, END OF PERIOD....... $ 9.61 $10.86 $10.16
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TOTAL RETURN......................... (6.08)% 12.38% 2.84%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions). $284 $269 $63
Ratio of Expenses to Average Net As-
sets................................ .22% .21% .24%*
Ratio of Net Investment Income to Av-
erage Net Assets.................... 5.31% 5.01% 5.10%*
Portfolio Turnover Rate.............. 43% 34% 15%
</TABLE>
*Annualized.
+Commencement of operations.
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YIELD AND From time to time the Fund may advertise its yield and total
TOTAL RETURN return. Both yield and total return figures are based on his-
torical earnings and are not intended to indicate future per-
formance. The "total return" of the Fund refers to the aver-
age annual compounded rates of return over one-, five- and
ten-year periods or over the life of the Fund (as stated in
the advertisement) that would equate an initial amount in-
vested at the beginning of a stated period to the ending re-
deemable value of the investment, assuming the reinvestment
of all dividend and capital gains distributions.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "30-day yield" of the
Fund 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 in-
come includes interest and dividend income earned on the
Fund's securities; it is net of all expenses and all recur-
ring and nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes that the
net investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used to
calculate advertised yields are standardized for all bond mu-
tual funds. However, these methods differ from the accounting
methods used by the Fund to maintain its books and records,
and so the advertised 30-day yield may not fully reflect the
income paid to your own account or the yield reported in the
Fund's financial statements.
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3
<PAGE>
INVESTMENT The Fund is an open-end, non-diversified investment company.
OBJECTIVE The objective of the Fund is to provide investors with a high
level of income that is exempt from federal personal income
taxes. The Fund is also designed to provide an investment
that is exempt from the Florida intangible personal property
tax.
THE FUND SEEKS The Fund is available only to investors who reside in Flori-
TO PROVIDE da. There is no assurance that the Fund will achieve its
INCOME EXEMPT stated objective.
FROM FEDERAL
INCOME TAXES The investment objective of the Fund is fundamental and so
cannot be changed without the approval of a majority of the
Fund's shareholders.
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INVESTMENT The Fund will invest at least 80% of its net assets in in-
POLICIES sured Florida municipal securities, exclusive of Florida AMT
bonds (see below). Florida municipal securities are debt ob-
ligations issued by Florida state and local governments and
THE FUND public financing authorities (and by certain U.S. territo-
INVESTS IN ries) that provide interest income that is exempt from fed-
INSURED eral personal income taxes. The Florida municipal securities
FLORIDA described above, may include securities in which the tax-ex-
MUNICIPAL empt interest rate is determined by an index, swap or some
SECURITIES other formula. Insured Florida municipal securities are those
EXEMPT FROM in which scheduled payments of interest and principal are
THE FLORIDA guaranteed by a private (non-governmental) insurance company.
INTANGIBLE TAX
THE INSURANCE FEATURE OF THE FUND DOES NOT GUARANTEE THE MAR-
KET VALUE OF THE MUNICIPAL BONDS OR THE VALUE OF THE FUND'S
SHARES. The insurance refers to the face or par value of the
securities in the Fund. See "Implementation of Policies" for
a description of the Fund's insurance feature.
Under normal circumstances, the Fund will only invest in in-
sured Florida municipal securities and other investments
(such as certain short-term cash investments) that are exempt
from the Florida intangible personal property tax. Thus, it
is expected that the Fund's shares will be exempt from the
Florida intangible tax for Florida residents. See "Dividends,
Capital Gains and Taxes" for more information.
The Fund is expected to maintain a dollar-weighted average
maturity between 15 and 25 years. BONDS WITH LONGER MATURI-
TIES USUALLY OFFER HIGHER YIELDS, BUT ARE ALSO SUBJECT TO
GREATER MARKET FLUCTUATIONS AS INTEREST RATES CHANGE. See
"Investment Risks."
Normally, the Fund seeks to invest substantially all of its
assets in insured Florida municipal obligations. However, un-
der certain circumstances, the Fund may invest up to 20% of
its assets in any combination of the following securities:
. Municipal notes and variable rate demand instruments, in-
cluding derivative securities, rated MIG-1 or VMIG-1, or P-
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");
. Municipal securities of non-Florida issuers;
. Uninsured, short-term municipal securities issued in Flor-
ida or in other states;
4
<PAGE>
. Certain taxable securities, including U.S. Government secu-
rities; and
. Certain tax-exempt municipal securities issued by other
states that have similar characteristics to the securities
typically purchased by the Fund.
In such cases, a portion of the Fund's income may be subject
to federal income taxes, and all or a portion of the Fund's
assets may be subject to the Florida intangible personal
property tax, or both. The imposition of the Florida intangi-
ble personal property tax would occur only if the Fund held
such securities on the last day of the year, and it is the
intention of the Fund's adviser to avoid such a situation.
(See page 16).
Subject to the same 20% limit, the Fund is also authorized to
invest in Florida AMT bonds. The income from Florida AMT
bonds is exempt from federal income taxes but is a tax pref-
erence item for purposes of the federal alternative minimum
tax. Although authorized to invest in AMT bonds, the Fund has
no present intention to do so.
Under unusual circumstances, such as a national financial
emergency, the Fund reserves the right to invest more than
20% of its assets in securities other than Florida municipal
obligations. In most instances, however, the Fund will seek
to avoid such holdings in an effort to provide income that is
fully exempt from federal personal income taxes and an in-
vestment that is exempt from the Florida intangible personal
property tax.
THE FUND WILL Although organized as a non-diversified investment company,
DIVERSIFY ITS the Fund intends to diversify its holdings of Florida munici-
HOLDINGS pal 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 the Fund's assets be limited in ag-
gregate to 50% of the Fund, and that no one issue exceeds 25%
of the Fund's total assets. As of November 30, 1994, the Fund
held securities of 51 issuers, with the largest holding rep-
resenting 8.0% of the Fund's assets. As of November 30, 1994
the Fund's top ten holdings, based on market value, repre-
sented 45.5% of its net assets.
The Fund's policy of investing at least 80% of its assets in
Florida municipal securities under normal circumstances is
fundamental and may not be changed without shareholder ap-
proval. The other investment policies described above are not
fundamental and so may be changed by the Board of Trustees
without shareholder approval. However, shareholders would be
notified of any material change in the Fund's policies.
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INVESTMENT As a mutual fund investing in long-term municipal securities,
RISKS the Fund is subject to interest rate, credit, call and income
risk.
THE FUND IS
SUBJECT TO INTEREST RATE RISK is the potential for bond price fluctua-
INTEREST RATE, tions due to changing interest rates. In general, bond prices
CREDIT, CALL, vary inversely with interest rates. If interest rates rise,
AND INCOME bond prices generally decline; if interest rates fall, bond
RISK prices generally rise. In addition, for a given change in in-
terest rates, longer-maturity
5
<PAGE>
bonds exhibit greater price fluctuations than shorter-matu-
rity bonds. To compensate investors for this risk, longer-ma-
turity bonds generally offer higher yields than shorter-matu-
rity bonds, other factors, including credit quality, being
equal. Interest rate risk may be increased or decreased when
a portfolio initiates or purchases derivative Florida munici-
pal securities. Such derivative securities rely on sophisti-
cated interest rate calculation 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 fund.
The credit risk of a fund depends on the credit quality of
its underlying securities. In general, the lower the credit
quality of a fund's municipal securities, the higher a fund's
yield, all other factors such as maturity 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 fund will be required to
invest the unanticipated proceeds at lower interest rates,
and the fund'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 fund's income
due to falling market interest rates. Because a fund's income
is based on interest rates, which can fluctuate substantially
over short periods, income risk is expected to vary from fund
to fund.
THE FUND IS
SUBJECT TO Finally, the investment adviser manages the Fund according to
MANAGER RISK the traditional methods of "active" investment management,
which involve the buying and selling of securities based upon
economic, financial and market analysis and investment judg-
ment. MANAGER RISK refers to the possibility that the Fund's
investment adviser may fail to execute the Fund's investment
strategy effectively. As a result, the Fund may fail to
achieve its stated objective.
Because the Fund invests in long-term municipal bonds, inter-
est rate risk for the Fund may be high. The average weighted
maturity of the Fund is expected to exceed 15 years, meaning
that the Fund's share price will fluctuate, sometimes sub-
stantially, when interest rates change. The following chart
illustrates the potential interest rate risk of the Fund. The
chart shows the market value of a $1,000 investment in a sin-
gle bond with the same yield and maturity characteristics as
the Fund on December 29, 1994, assuming a 1% and 2% increase
or decrease in interest rates:
6
<PAGE>
<TABLE>
<CAPTION>
HYPOTHETICAL VALUE OF $1,000 INVESTMENT
---------------------------------------
AFTER PERCENTAGE POINT CHANGE OF:
-----------------------------------------
30-DAY AVERAGE 1% 1% 2% 2%
YIELD MATURITY INCREASE DECREASE INCREASE DECREASE
------ ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
5.99% 17.2 years $901 $1,114 $815 $1,247
</TABLE>
This chart is intended to provide you with general guidelines
for evaluating the effect of interest rate changes on the
Fund and determining the degree of interest rate risk you may
be willing to assume. The yield and price changes shown are
purely for illustrative purposes, and should not be taken as
representative of current or future yields or expected
changes in the share price of the Fund.
CREDIT RISK IS Credit risk depends on the average quality of the Fund's un-
EXPECTED TO BE derlying securities and the Fund's degree of diversification.
LOW The Fund invests primarily in bonds insured by top-rated in-
surance companies against the possible default of an issuer
as to the timely payment of interest and principal. As a re-
sult, the average credit quality of the Fund 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, and differing levels of supply and
demand for Florida municipal obligations.
To minimize the effects of concentrating its investments in
Florida obligations, the Fund intends to diversify its hold-
ings by complying with Subchapter M of the Internal Revenue
Code. (See "Investment Policies" for a description of the re-
quirements of Subchapter M.) In addition, the use of munici-
pal bond insurance should minimize the credit risk associated
with the Fund.
<TABLE>
<CAPTION>
CREDIT INTEREST INCOME PREPAYMENT/
RISK RATE RISK RISK CALL RISK
------ --------- ------ -----------
<S> <C> <C> <C>
Very Low High Low Medium
</TABLE>
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WHO SHOULD The Fund is intended for Florida residents seeking income
INVEST that is exempt from federal personal income taxes. The Fund
also provides an investment which is expected to be exempt
FLORIDA from the Florida intangible personal property tax. As a rule,
RESIDENTS tax-free income is attractive to investors in high federal
SEEKING A TAX- tax brackets. You can determine whether tax-exempt or taxable
EXEMPT income is more attractive in your own case by comparing the
INVESTMENT Fund's tax-free yield with the yield from a comparable tax-
able mutual fund investment. See "How to Compare Tax-Free and
Taxable Yields".
Assuming that tax-free income is attractive in your own tax
bracket, you should weigh an investment in the Fund in terms
of its expected yield and price vola-
7
<PAGE>
tility, and your own investment objectives, risk preferences,
and time horizon. The Fund is suitable 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 Fund is
expected to be higher, and the level of income provided more
stable, than that provided by other mutual funds which invest
in short-term securities. However, because of the Fund's po-
tential price volatility, the Fund 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 poli-
cies. The Fund reserves the right to reject any purchase re-
quest (including exchange purchases from other Vanguard port-
folios) that is reasonably deemed to be disruptive to effi-
cient portfolio management, either because of the timing of
the investment or previous excessive trading by the investor.
Additionally, the Fund has adopted exchange privilege limita-
tions as described in the section "Exchange Privilege Limita-
tions." Finally, the Fund reserves the right to suspend the
offering of its shares.
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HOW TO COMPARE Before choosing a specific tax-exempt investment, such as the
TAX-FREE AND Fund, you should determine if you would be better off with
TAXABLE YIELDS taxable or tax-exempt income in your tax bracket. To compare
taxable and tax-free income, you should calculate the "tax-
able equivalent yield" for the Fund you are considering, and
compare it with the yield of a taxable investment with simi-
lar credit and maturity characteristics.
The taxable equivalent yield for a Fund is based upon the
Fund's current tax- exempt yield and your federal tax brack-
et. The formula is:
Fund's Tax-Free Yield
------------------------------- Your Taxable
100% - Your Federal Tax Bracket = Equivalent Yield
For example, if you are in a federal tax bracket of 28%, and
the Fund's tax-free yield is 6%, the Fund's taxable equiva-
lent yield would be 8.33%:
6%
----------
100% - 28% = 8.33%
In this example, you would choose the tax-free investment if
the 8.33% taxable equivalent yield were greater than the tax-
able yield from a comparable investment (e.g., a taxable bond
fund of comparable maturity and credit quality).
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8
<PAGE>
IMPLEMENTATION The Fund's adviser uses a variety of investment vehicles to
OF POLICIES achieve the objective of the Fund.
THE FUND The Fund invests principally in tax-exempt Florida municipal
INVESTS IN securities, which are debt obligations issued by Florida
MUNICIPAL state and local governments and public financing authorities
BONDS, NOTES (and by certain U.S. territories) that provide interest in-
AND SECURITIES come that is exempt from federal income taxes. Such securi-
DERIVED FROM ties are also exempt from the Florida intangible personal
MUNICIPAL property tax. Municipal securities include both municipal
BONDS AND bonds (those securities with maturities of five years or
NOTES more) municipal notes (those securities with maturities of
less than five years) and derivative securities (those secu-
rities in which a maturity may have been shortened by a de-
THE FUND MAY mand feature).
INVEST IN AMT
BONDS 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-
tion notes, construction loan notes, short-term discount
notes, tax-exempt commercial paper, and demand notes. Demand
notes permit an investor (such as the Fund) to demand from
the issuer payment of principal plus accrued interest upon a
specified number of days' notice.
The Fund is authorized to invest up to 20% of its assets in
so-called "AMT" bonds. AMT bonds are tax-exempt "private ac-
tivity" bonds issued after August 7, 1986, whose proceeds are
directed 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.
9
<PAGE>
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 FUND MAY The Fund may utilize bond futures contracts and options to a
USE FUTURES limited extent. Specifically, the Fund may enter into futures
CONTRACTS AND contracts provided that not more than 5% of its assets are
OPTIONS required as a futures contract deposit; in addition, the Fund
may enter into futures contracts and options transactions
only to the extent that obligations under such contracts or
transactions represent not more than 20% of the Fund's as-
sets.
Futures contracts and options may be used for several rea-
sons: to maintain cash reserves while simulating full invest-
ment, to facilitate trading, to reduce transaction costs, or
to seek higher investment returns when a futures contract is
priced more attractively than the underlying municipal secu-
rity or index. The Fund may not use futures contracts or op-
tions transactions to leverage its assets.
For example, in order to simulate full investment in bonds
while maintaining liquidity to meet potential shareholder re-
demptions, the Fund may invest a portion of its assets in a
bond futures contract. Because futures contracts only require
a small initial margin deposit, the Fund would then be able
to maintain a cash reserve to meet potential redemptions,
while at the same time remaining fully invested. Also, be-
cause the transaction costs of futures and options may be
lower than the costs of investing in bonds directly, it is
expected that the use of futures contracts and options may
reduce the Fund's 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 Fund and the prices of
CERTAIN RISKS futures and options; and (ii) possible lack of a liquid sec-
ondary market for a futures contract and the resulting in-
ability to close a futures position prior to its maturity
date. The risk of imperfect correlation will be minimized by
investing in those contracts whose price fluctuations are ex-
pected to resemble those of the Fund's underlying securities.
The risk that the Fund 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, the Fund's liquidity
may be improved by investing in futures.
10
<PAGE>
The risk of loss in trading futures contracts in some strate-
gies can be substantial, due both to the low margin deposits
required, and the extremely high degree of leverage involved
in futures pricing. As a result, a relatively small price
movement in a futures contract may result in immediate and
substantial loss (or gain) to the investor. When investing in
futures contracts, the Fund will segregate cash or cash
equivalents in the amount of the underlying obligation.
DERIVATIVE
SECURITIES Derivative securities represent the purchaser's right to re-
ceive principal and interest payments from underlying bonds.
A Fund may purchase a derivative security from another port-
folio within the Vanguard Group, as permitted by the Invest-
ment 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 Fund holding the derivative secu-
rity) and the coupon on the underlying bond in consideration
for providing the tender option; and 4) the tender option may
be discontinued upon the occurrence of certain events, in
which case, the Fund which owns the derivative security
should receive its proportional share of the underlying bond.
The primary risks associated with the use of derivative secu-
rities are the interest rate risks discussed under "Invest-
ment Risks," the possible lack of a liquid secondary market,
the risk that the other party in a contractual derivative
agreement cannot meet its obligations and the potential for
greater price volatility relative to the underlying security
on which the derivative is based.
The Fund intends to limit the risk of derivative securities
by purchasing only those derivative securities that are con-
sistent with the Fund's investment objectives and policies.
The Fund will not use such instruments to leverage securi-
ties. Hence, derivative securities' contributions to the
overall market risk characteristics of a Fund will not mate-
rially alter its risk profile and will be fully representa-
tive of the Fund's maturity guidelines.
THREE TYPES OF To provide an added level of credit protection, the Fund pur-
INSURANCE MAY chases securities which have one of the following types of
BE USED BY THE insurance: new issue, mutual fund and secondary market insur-
FUND ance. A new issue insurance policy is purchased by a bond is-
suer who wishes to increase the credit rating of a security.
By paying a premium and meeting the insurer's underwriting
standards, the bond issuer is able to obtain a high credit
rating for the security (usually Aaa from Moody's 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 Fund has
obtained a mutual fund insurance
11
<PAGE>
policy from Financial Guaranty Insurance Company ("Financial
Guaranty"), a AAA-rated insurance company. Based upon the ex-
pected composition of the Fund, the annual premiums for the
policy are likely to range from 0.10% to 0.40% of the princi-
pal value of the bonds insured under the policy, thereby re-
ducing the Fund's current yield.
A secondary market insurance policy is purchased by an in-
vestor (such as the Fund) subsequent to the bond's original
issuance and generally insures a particular bond for the re-
mainder of its term. The Fund may purchase bonds which have
already been insured under a secondary market insurance pol-
icy by a prior investor, or the Fund may itself purchase such
a policy from Financial Guaranty for bonds that are currently
uninsured.
An insured municipal bond in the Fund will typically be cov-
ered by only one of the three policies. For instance, if a
bond is already covered by a new issue insurance policy or a
secondary market insurance policy, then that security will
not be insured under the Fund's mutual fund insurance policy.
All of the insurance policies used by the Fund will be ob-
tained only from companies whose insurance claims-paying
ability is rated Aaa by Moody's or AAA by Standard & Poor's.
THE FUND MAY The Fund observes strict maturity guidelines as set forth in
REPORT AN detail under "Investment Policies." These maturity standards
EFFECTIVE are specified in terms of the Fund's average weighted maturi-
AVERAGE ty. From time to time, however, the Fund may also report an
WEIGHTED effective average weighted maturity, which reflects, among
MATURITY other items, the likelihood that a municipal bond or note
held by the Fund may be redeemed or "called" prior to its
stated maturity date. For example, if the Fund consists en-
tirely of 20-year bonds, some of which may be "called" prior
to their stated maturity in 20 years, the Fund's average
weighted maturity will be 20 years, while its effective aver-
age maturity will be shorter.
The Fund's effective average weighted maturity will be influ-
enced by bond market conditions, and so may vary from day to
day, even if no change has been made to the Fund's underlying
investment securities. For example, if interest rates de-
cline, a greater proportion of the Fund's securities may be
subject to call (redemption) prior to their stated maturity.
As a result, reflecting this increased call risk, the effec-
tive average maturity of the Fund will shorten, independent
of actual purchases or sales of portfolio securities.
TEMPORARY
INVESTMENTS Except as described on page 5, the Fund will not invest in
securities other than municipal bonds except that the Fund
may make investments for temporary defensive purposes in (a)
notes issued by or on behalf of municipal or corporate is-
suers, obligations of the U.S. Government and its agencies,
commercial paper, bank certificates of deposit; (b) invest-
ment companies investing in such securities which have in-
vestment objectives consistent with those of the Portfolio to
the extent permitted by the Investment Company Act of 1940;
and (c) any such securities or municipal bonds subject to re-
purchase agreements.
12
<PAGE>
THE FUND MAY The Fund may invest up to 20% of its assets under normal cir-
PURCHASE WHEN- cumstances in tax-exempt securities that are purchased on a
ISSUED "when-issued" basis. In buying "when-issued" securities, the
SECURITIES Fund commits to buy securities at a certain price even though
the securities may not be delivered for up to 45 days. The
Fund 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 The Fund may lend its investment securities for either short-
LEND ITS term or long-term purposes to qualified institutional invest-
SECURITIES ors for the purpose of realizing additional net investment
income. Loans of securities by a Fund will be collateralized
by cash, letters of credit, or securities issued or guaran-
teed 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 lending of securi-
ties is not tax-exempt, and a portion of the tax-exempt in-
terest earned when a municipal security is on loan must be
characterized as taxable income. Therefore, the Fund will
limit such activity in accordance with its investment objec-
tive.
THE FUND MAY The Fund may purchase municipal lease obligations, which are
INVEST IN securities issued by state and local governments to acquire
MUNICIPAL land, equipment and facilities. These obligations typically
LEASE are not backed by the issuing municipality's full authority
OBLIGATIONS to assess taxes to meet its debt obligations. If the issuing
authority fails to make the appropriations necessary to cover
lease payments, then the lease may terminate, with the possi-
bility of default on the lease obligation and loss to
investors.
PORTFOLIO Although it generally seeks to invest for the long term, the
TURNOVER IS Fund retains the right to sell securities irrespective of how
NOT EXPECTED long they have been held. It is anticipated that the annual
TO EXCEED 150% portfolio turnover of the Fund will not exceed 150%. A turn-
over rate of 150% would occur, for example, if all of the se-
curities of the Fund were replaced within eight months.
--------------------------------------------------------------------------------
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 Fund will invest a minimum of 80% of its net assets in
ADOPTED insured Florida municipal bonds. The interest on such
CERTAIN bonds is exempt from federal personal income, and such
FUNDAMENTAL bonds are also exempt from the Florida intangible personal
LIMITATIONS property tax, except that the Fund may make temporary in-
vestments as described above.
b) At the close of each quarter of the taxable year, the Fund
will limit the aggregate value of all holdings, except
U.S. Government and cash items, as defined in the Internal
Revenue Code (the "Code"), each of which exceeds 5% of the
Fund's total assets, to an aggregate amount of 50% of such
assets.
13
<PAGE>
c) The Fund 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 Fund'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 on
each security.
d) The Fund will not borrow money except for temporary or
emergency purposes, and then not in excess of 10% of the
Fund's total assets. The Fund will repay all borrowings
before making additional investments, and the interest
paid on such borrowings will reduce income.
e) The Fund 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.
--------------------------------------------------------------------------------
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 Trustees. The Trustees set
broad policies for the fund and choose its Officers. A list
of Trustees and Officers of the fund and a statement of their
present positions and principal occupations during the past
five years can be found in the Statement of Additional Infor-
mation.
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
(Directors) of each fund. In addition, each fund bears its
own direct expenses, such as legal, auditing and custodian
fees.
14
<PAGE>
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 Fund receives all investment advisory services on an at-
ADVISER cost basis from Vanguard's Fixed Income Group. The Group also
provides investment advisory services to more than 40 Van-
guard money market and bond portfolios, both taxable and tax-
exempt. Total assets under management by Vanguard's Fixed In-
come Group were $55 billion 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.
VANGUARD
MANAGES THE
FUND'S
INVESTMENTS
. Reid Smith, Assistant Vice President of Vanguard, serves as
portfolio manager of the Florida Insured Tax-Free Fund. Mr.
Smith has managed the Fund since its inception in 1992. 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 and continuously reviews, su-
pervises and administers the Fund's investment program, sub-
ject to the maturity and quality standards specified in this
Prospectus and supplemental guidelines approved by the Fund's
Board of Trustees. The Fixed Income Group's selection of in-
vestments is based on: (a) continuing credit analysis of
those instruments held in the Fund and those being considered
for inclusion therein; (b) possible disparities in yield re-
lationships between different fixed-income securities; 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 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 the Fund are declared daily and are payable to sharehold-
AND TAXES ers of record at the close of the previous business day. Such
dividends are paid on the first business day of each month.
Net capital gains distributions, if any, will be made annual-
ly.
THE FUND PAYS
MONTH-END
DIVIDENDS
Dividend and capital gains distributions may be automatically
reinvested or received in cash. See "Choosing a Distribution
Option" for a description of these distributions methods.
15
<PAGE>
In addition, in order to satisfy certain distribution re-
quirements of the Tax Reform Act of 1986, the Fund may de-
clare 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 Fund and received by shareholders by December 31 of the
prior year.
DIVIDENDS WILL The Fund intends to continue to qualify for taxation as a
BE EXEMPT FROM "regulated investment company" under the Internal Revenue
FEDERAL INCOME Code so that it will not be subject to federal income tax to
TAXES the extent its income is distributed to shareholders. In ad-
dition, the Fund intends to invest a sufficient portion of
its assets in municipal bonds and notes so that it will qual-
ify to pay "exempt-interest dividends" to shareholders. Such
exempt-interest dividends are excluded from a shareholder's
gross income for federal income 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 income. Accordingly, to the extent
that the Fund purchases such discounted securities, taxable
income may result.
FUND SHARES Although Florida does not have a state personal income tax,
WILL BE EXEMPT it does impose an intangible personal property tax on certain
FROM THE financial assets, including shares of mutual funds. Unlike
FLORIDA other state and local taxes, which are assessed on ordinary
INTANGIBLE TAX income and capital gains derived from mutual fund shares, the
Florida intangible personal property tax is based on the net
asset value of shares owned as of December 31.
Under Florida law, shares of a mutual fund will be exempt
from the intangible personal property tax to the extent that,
on the annual assessment date (January 1), its assets are
solely invested in certain exempt Florida securities, U.S.
Government securities, certain short-term cash investments,
or other exempt securities. If, on the annual assessment date
(January 1), the Fund's assets are invested in both tax-ex-
empt and non-tax-exempt securities, only that portion of a
share's net asset value represented by U.S. Government secu-
rities (including qualifying obligations of U.S. territories
and possessions) will be exempt from the intangibles tax. Be-
cause the Fund is expected to invest only in exempt Florida
municipal obligations (and certain short-term cash invest-
ments), shares of the Fund will be exempt from the Florida
intangible personal property tax for Florida residents.
However, under certain circumstances, the Fund may invest in
securities other than Florida municipal obligations. In such
cases, all or a portion of the value of the Fund's shares may
be subject to the Florida intangible personal property tax,
and a portion of the Fund's income may be subject to federal
income taxes.
Net long-term capital gains realized by the Fund 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 the Fund are expected to be negligible in
comparison with tax-exempt dividends.
16
<PAGE>
At present, the Fund does not invest in AMT bonds. (See "In-
vestment Policies.") However, were the Fund to invest in such
bonds, a portion of the Fund's dividends, while exempt from
the regular federal income tax, would be a tax preference
item for purposes of the federal alternative minimum tax.
A CAPITAL GAIN A sale of the Fund's shares is a taxable event and may result
OR LOSS MAY BE in a capital gain or loss. A capital gain or loss may be re-
REALIZED UPON alized from an ordinary redemption of shares, a checkwriting
EXCHANGE OR redemption, or an exchange of shares between two mutual funds
REDEMPTION (or two portfolios of a mutual fund). In addition, if you
held shares in the Fund for six months or less, any capital
loss realized upon redemption is disallowed to the extent of
the tax-exempt dividend income you received.
Capital gains distributions from the Fund 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 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 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 The share price or "net asset value" per share of the Fund is
PRICE OF THE computed daily by dividing the total value of the investments
FUND and other assets of the Fund, less any liabilities, by the
total outstanding shares of the Fund. The net asset value per
share of the Fund is determined as of the close of regular
trading on The New York Stock Exchange (generally 4:00 p.m.
Eastern time) on each day the Exchange is open.
When approved by the Board of Trustees, bonds and other
fixed-income securities of the Fund may be valued on the ba-
sis of prices provided by a pricing service when such prices
are believed to reflect the fair market value of such securi-
ties. (The prices provided by pricing services are generally
determined without regard to bid or last sale prices. Because
of the large number of outstanding municipal bonds, the ma-
jority of issues do not trade each day; there-
17
<PAGE>
fore, last sale prices are not normally available. In valuing
such securities, the pricing services generally take into ac-
count institutional size trading in similar groups of securi-
ties 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 pric-
ing 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.
The price per share of the Fund can be found daily in the mu-
tual fund section of most major newspapers under the heading
of The Vanguard Group.
--------------------------------------------------------------------------------
GENERAL Vanguard Florida Insured Tax-Free Fund is a Pennsylvania
INFORMATION business trust. The Declaration of Trust permits the Trustees
to issue an unlimited number of shares of beneficial inter-
est, without par value, from an unlimited number of classes
of shares. Currently, the Fund is offering one class of
shares.
Shares of the Fund when issued are fully paid and non-assess-
able; 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 voting 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 to vote 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 outstand-
ing 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.
--------------------------------------------------------------------------------
18
<PAGE>
SHAREHOLDER GUIDE
OPENING AN To open a new account, either by mail or by wire, simply com-
ACCOUNT AND plete and return an Account Registration Form and any re-
PURCHASING quired legal documentation. Please indicate the amount you
SHARES wish to invest. Your purchase must be equal to or greater
than the $3,000 minimum initial investment requirement ($500
for Uniform Gifts/Transfers to Minors Act accounts). In addi-
tion, you must be a Florida resident to invest in the Fund.
If you need assistance with the Account Registration Form or
have any questions about this Fund, please call our Investor
Information Department at 1-800-662-7447. NOTE: For other
types of account registrations (e.g. corporations, associa-
tions, other organizations, trusts or powers of attorney),
please call us to determine which additional forms you may
need.
Because of the risks associated with bond investments, the
Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating
on short-term 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.
The Fund's shares are purchased at the next-determined net
asset value after your investment has been received in the
form of Federal Funds. See "When Your Account Will Be Credit-
ed". The Fund is offered on a no-load basis (i.e., there are
no sales commissions or 12b-1 fees).
ADDITIONAL Subsequent investments may be made by mail ($100 minimum),
INVESTMENTS wire ($1,000), exchange from another Vanguard Fund account
($100 minimum), or Vanguard Fund Express.
--------------------------------------------------------------
NEW ACCOUNT ADDITIONAL INVESTMENTS
TO EXISTING ACCOUNTS
PURCHASING BY Please include the Additional investments should
MAIL Complete amount of your initial include the Invest-by-Mail re-
and sign the investment on the reg- mittance form attached to your
enclosed istration form, make Fund confirmation statements.
Account your check payable to Please make your check payable
Registration The Vanguard Group-18, to The Vanguard Group-18, write
Form and mail to: your account number on your
check and, using the return en-
velope provided, mail to the
address indicated on the In-
vest-by-Mail Form.
VANGUARD FINANCIAL CENTER
P.O. BOX 2600
VALLEY FORGE, PA 19482
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered 455 DEVON PARK DRIVE mailed to one of the addresses
mail, send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
--------------------------------------------------------------
19
<PAGE>
PURCHASING BY CORESTATES BANK, N.A.
WIRE Money ABA 031000011
should be CORESTATES NO. 0141 1274
wired to: ATTN VANGUARD
VANGUARD FLORIDA INSURED TAX-FREE FUND
BEFORE WIRING ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client
Services (1-
800-662-2739)
To assure proper receipt, please be sure your bank includes
the name of the Fund, the account number Vanguard has as-
signed to you and the eight digit CoreStates number. If you
are opening a new account, please complete the Account Regis-
tration Form and mail it to the "New Account" address above
after completing your wire arrangement. Note: Federal Funds
wire purchase orders will be accepted only when the Fund and
Custodian Bank are open for business.
--------------------------------------------------------------
PURCHASING BY You may open an account or purchase additional shares by mak-
EXCHANGE (from ing an exchange from an existing Vanguard Fund account. Ac-
a Vanguard counts opened by exchange will have the same registration as
account) the existing account. Please note: the Fund reserves the
right to reject any exchange purchase request. For more in-
formation, 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.
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
20
<PAGE>
Vanguard Dividend Express which allows you to transfer your
cash dividends and/or capital gains distributions automati-
cally to your bank account. Please see "Other Vanguard Serv-
ices" for more information.
--------------------------------------------------------------------------------
TAX CAUTION
Under Federal tax laws, the Fund is required to distribute
INVESTORS net capital gains and investment income to Fund shareholders.
SHOULD ASK These distributions are made to all shareholders who own Fund
ABOUT THE shares as of the distribution's record date, regardless of
TIMING OF how long the shares have been owned. Purchasing shares just
CAPITAL GAINS prior to the record date could have a significant impact on
AND DIVIDEND your tax liability for the year. For example, if you purchase
DISTRIBUTIONS shares immediately prior to the record date of a sizable cap-
BEFORE ital gain distribution, you will be assessed taxes on the
INVESTING amount of the capital gain distribution later paid even
though you owned the Fund shares for just a short period of
time. (Taxes are due on the distributions even if the capital
gain is reinvested in additional Fund shares.) While the to-
tal value of your investment will be the same after the capi-
tal gain distribution--the amount of the capital gain distri-
bution will offset the drop in the net asset value of the
shares--you should be aware of the tax implications the tim-
ing of your purchase may have.
Prospective investors should, therefore, inquire about poten-
tial distributions before investing. The Fund's annual capi-
tal gains distribution normally occurs in December, while in-
come dividends are generally paid on the first business day
of each month. For additional information on distributions
and taxes, see the section titled "Dividends, Capital Gains,
and Taxes."
--------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO ADD
SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR
FURTHER ASSISTANCE.
ESTABLISHING
OPTIONAL
SERVICES
SIGNATURE For our mutual protection, we may require a signature guaran-
GUARANTEES tee on certain written transaction requests. A signature
guarantee verifies the authenticity of your signature, and
may be obtained from banks, brokers and any other guarantor
that Vanguard deems acceptable. A SIGNATURE GUARANTEE CANNOT
BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will not be issued for the Fund.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or ad-
viser may charge a service fee.
CANCELLING The Fund will not cancel any trade (e.g., a purchase, ex-
TRADES change or redemption) believed to be authentic, received in
writing or by telephone, once the trade request has been re-
ceived.
21
<PAGE>
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 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 re-
ceived after the close of the Exchange, your trade date is
the business day following receipt 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 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.)
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.
--------------------------------------------------------------------------------
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
next determined net asset value 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
22
<PAGE>
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 ORGA-
NIZATIONS SHOULD CALL OR WRITE OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) BEFORE SUBMITTING SIGNATURE CARDS, AS ADDI-
TIONAL DOCUMENTS MAY BE REQUIRED TO ESTABLISH THE CHECK-
WRITING 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. 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 FLORIDA INSURED TAX-FREE FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Florida In-
sured Tax-Free Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Fund's net asset
value next determined after Vanguard has received all re-
quired documents in Good Order.
--------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Fund 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.
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
TELEPHONE representative may call our Client Services Department at 1-
800-662-2739. For telephone redemptions, you may have the
proceeds sent to you either by mail or by wire. In addition
to the details below, please see "Important Information About
Telephone 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 tele-
23
<PAGE>
phone wire redemption and wish to establish it, please con-
tact our Client 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
redemption option must be received in writing, signed by each
registered shareholder, and accompanied by a voided check or
preprinted deposit slip. A signature guarantee is required if
your bank registration is not identical to your Vanguard Fund
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 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 the Fund by making an exchange to an-
EXCHANGE other 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 regular trading on the New York Stock Exchange (generally
PROCEEDS 4:00 p.m. Eastern time) are processed on the day of receipt
and the redemption proceeds are normally sent on the follow-
ing 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.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It
will be implemented at the net asset value next determined
after your request has been received by Vanguard in Good Or-
der. The Fund reserves the right to revise or terminate the
telephone redemption privilege at any time.
24
<PAGE>
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.
The Fund's minimum account balance requirement will not apply
if your account falls below $3,000 solely as a result of de-
clining markets (i.e., a decline in a Fund's net asset val-
ue).
--------------------------------------------------------------------------------
EXCHANGING Should your investment goals change, you may exchange your
YOUR SHARES shares of Vanguard Florida Insured Tax-Free Fund for those of
other available Vanguard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Fund name, account number, Social Security Number or Employer
Identification Number listed on the account, and the exact
Call Client name and address in which the account is registered. Only the
Services registered shareholder may complete such an exchange. Re-
(1-800-662- quests for telephone exchanges received prior to the close of
2739) trading on the New York Stock Exchange (generally 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 INDEX, VANGUARD
INDEX TRUST, VANGUARD INTERNATIONAL EQUITY INDEX FUND, AND
VANGUARD QUANTITATIVE PORTFOLIOS. If you experience diffi-
culty in making a telephone exchange, your exchange request
may be made by regular or express mail, and it will be imple-
mented at the closing net asset value on the date received by
Vanguard provided the request is received in Good Order.
--------------------------------------------------------------
EXCHANGING BY Please be sure to include on your exchange request the name
MAIL and account number of your current Fund, the name of the Fund
you wish to exchange into, the account you wish to exchange,
and the signatures of all registered account holders. Send
your request to VANGUARD FINANCIAL CENTER, VANGUARD FLORIDA
INSURED TAX-FREE FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to Van-
guard Financial Center, Vanguard Florida Insured Tax-Free
Fund, 455 Devon Park Drive, Wayne, PA 19087.)
--------------------------------------------------------------
25
<PAGE>
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.
. The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
the required documents 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 exchange privilege is only available in Florida, 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 the Fund during any twelve month period.
Notwithstanding these limitations, the Fund reserves the
right to reject any purchase request (including exchange pur-
chases from other Vanguard Portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
Additionally, the Fund has limited exchange privileges at
calendar year-end in the past for tax reasons, and is ex-
pected to do so in the future.
--------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions)
INFORMATION and exchanges by telephone is automatically established on
ABOUT TELEPHONE your account unless you request in writing that telephone
TRANSACTIONS transactions on your account not be permitted. The ability to
initiate wire redemptions by telephone will be established on
your account only if you specifically elect this option in
writing.
26
<PAGE>
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 Fund; (ii) the 10-
digit account number; (iii) the exact name and address used
in the registration; and (iv) the Social Security or Em-
ployer Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner
and mailed to the address of record, only. In the case of a
telephone redemption by wire, the wire transfer will be
made only in accordance with the shareowner's prior written
instructions.
Neither the 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 de-
scribed 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 ac-
count.
--------------------------------------------------------------------------------
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.
27
<PAGE>
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Government
DEPOSIT SERVICE checks (including Social Security and military pension
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 SERVICE instance, the service can be used to "dollar cost average"
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 for addi-
tional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund Express
application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or re-
demptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific Van-
guard Funds. For more information, please refer to the Van-
guard Fund Express brochure.
VANGUARD
DIVIDEND EXPRESS Vanguard's Dividend Express allows you to transfer your divi-
dends and/or capital gains distributions automatically from
your Fund account, one business day after the Fund's payable
date, to your account at a bank, savings and loan associa-
tion, or 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).
--------------------------------------------------------------------------------
28
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[LOGO OF VANGUARD
FLORIDA INSURED
TAX-FREE FUND
APPEARS HERE]
-------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE FOR THE
HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
[LOGO OF
VANGUARD FLORIDA INSURED
TAX-FREE FUND APPEARS HERE]
P R O S P E C T U S
MARCH 28, 1995
[LOGO OF VANGUARD GROUP
APPEARS HERE]
PO18
<PAGE>
PART B
VANGUARD FLORIDA INSURED TAX-FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 28, 1995
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus dated March 28, 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
Investment Policies........................................................ B-3
Risk Factors............................................................... B-6
Florida Intangible Personal Property Tax................................... B-8
Yield and Total Return..................................................... B-8
Performance Measures....................................................... B-8
Investment Management...................................................... B-10
Purchase of Shares......................................................... B-10
Redemption of Shares....................................................... B-11
Management of the Fund..................................................... B-12
Description of Shares and Voting Rights.................................... B-15
Financial Statements....................................................... B-15
Appendix A--Description of Municipal Bonds and their Ratings............... B-16
Appendix B--Municipal Lease Obligations.................................... B-19
</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 the Fund.
1. The Fund will not invest in securities other than municipal bonds, ex-
cept that it may make temporary investments in (a) notes issued by or on
behalf of municipal or corporate issuers, obligations of the United States
Government and its agencies or instrumentalities, commercial paper, bank
certificates of deposit, (b) any investment companies investing in such se-
curities which have investment objectives and policies consistent with
those of the Fund to the extent permitted by the 1940 Act; and (c) any such
securities or Municipal Bonds subject to short-term repurchase agreements;
2. The Fund will limit the aggregate value of all holdings (except U.S.
Government and cash items, as defined under Subchapter M of the Internal
Revenue Code (the "1940 Act")), each of which exceeds 5% of the Portfolio's
total assets, to an aggregate amount of 50% of such assets;
3. The Fund 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 maxi-
mum of 25% of the Fund'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;
4. The Fund will not borrow money except for temporary emergency purposes
and then only in an amount not exceeding 10% of the value of the total as-
sets of that Fund. The Fund will repay
B-1
<PAGE>
all borrowing before making additional investments. Interest paid on such
borrowings will reduce income;
5. The Fund will not pledge, mortgage or hypothecate its assets to any
extent greater than 10% of the value of the total assets of the Fund;
6. The Fund will not issue senior securities as defined in the 1940 Act;
7. The Fund will not engage in the business of underwriting securities
issued by other persons except to the extent that the Portfolio may techni-
cally be deemed to be an underwriter under the Securities Act of 1933, as
amended, in disposing of investment securities;
8. The Fund will not purchase or sell real estate, but this shall not
prevent investments in Municipal Bonds secured by real estate or interests
therein;
9. The Fund 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. The Fund will not purchase on margin or sell short, except as speci-
fied below in Investment Limitation No. 12;
11. The Fund 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 securi-
ties, together own more than 5% of the securities of such issuer;
12. The Fund will not purchase or sell commodities or commodities con-
tracts, except that the Fund may invest in bond futures contracts, bond op-
tions and options on bond futures contracts to the extent that not more
than 5% of the Fund's assets are required as deposit on futures contracts;
13. The Fund will not invest its assets in securities of other investment
companies except as they may be acquired as part of a merger, consolida-
tion, reorganization or purchase of assets approved by the Portfolio's
shareholders or otherwise to the extent permitted by Section 12 of the 1940
Act;
14. The Fund will not invest in put, call, straddle or spread options
(except as described above in investment limitation No. 12) or interests in
oil, gas or other mineral exploration or development programs;
15. The Fund will not purchase an industrial revenue bond if as a result
of such purchase (i) more than 5% of the Portfolio's total assets, deter-
mined at market value at the time of the proposed investment, would be in-
vested 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; and
16. The Fund will not purchase or otherwise acquire any security (includ-
ing the Fund's investment in The Vanguard Group, Inc.) if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.
The above-mentioned investment limitations are considered at the time in-
vestment securities are purchased. Notwithstanding these limitations, the Fund
may own all or any portion of the securities of, or make loans to, or contrib-
ute to the costs or other financial requirements of, any company which will be
(1) wholly owned by the Fund and one or more other investment companies and
(2) primarily engaged in the business of providing, at cost, management, ad-
ministrative, 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. Please see the pro-
spectus for a description of such securities.
B-2
<PAGE>
INVESTMENT POLICIES
REPURCHASE AGREEMENTS The Fund may invest in repurchase agreements with com-
mercial banks, brokers or dealers either for defensive purposes due to market
conditions or to generate income from its excess cash balances. A repurchase
agreement is an agreement under which the Fund acquires a money market instru-
ment (generally a security issued by the U.S. Government or an agency thereof,
a banker's acceptance or a certificate of deposit) from a commercial bank,
broker or dealer, subject to resale to the seller at an agreed upon price and
date (normally, the next business day). A repurchase agreement may be consid-
ered a loan collateralized by securities. The resale price reflects an agreed
upon interest rate effective for the period the instrument is held by the Fund
and is unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Fund (including accrued interest
earned thereon) must have a total value in excess of the value of the repur-
chase agreement and are held by the Fund's custodian bank until repurchased.
In addition, the Fund's Board of Trustees will monitor the Fund's repurchase
agreement transactions generally and will establish guidelines and standards
for review by the investment adviser of the creditworthiness of any bank, bro-
ker or dealer party to a repurchase agreement with the Fund. No more than an
aggregate of 15% of a Fund's assets, at the time of investment, will be in-
vested in repurchase agreements having maturities longer than seven days and
securities subject to legal or contractual restrictions on resale, or for
which there are no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligations to repurchase the un-
derlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
an agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the under-
lying security is collateral for a loan by the Fund not within the control of
the Fund and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Fund's man-
agement acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES The Fund may lend its investment securities to quali-
fied institutions who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver secu-
rities or completing arbitrage operations. By lending its investment securi-
ties, the Fund 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
Fund. The Fund may lend its investment securities to qualified brokers, deal-
ers, banks or other financial institutions, so long as the terms and the
structure of such loans are not inconsistent with the Investment Company Act
of 1940, 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 Fund 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 Fund at any time and (d) the
Fund receive reasonable interest on the loan (which may include the Fund in-
vesting any cash collateral in interest bearing short-term investments), any
distribution on the loaned securities and any increase in their market value.
The Fund will not lend its investment securities, if as a result, the aggre-
gate of such loans exceeds 10% of the value of its total assets. Loan arrange-
ments made by the Fund will comply with all other applicable regulatory re-
quirements, including the rules of the New York Stock Exchange, which rules
presently require the borrower, after notice, to redeliver the securities
within the normal settlement time of five business days. All relevant facts
and circumstances, including the creditworthiness of the broker, dealer or in-
stitution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Trustees. Income de-
rived
B-3
<PAGE>
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 Fund may enter into futures contracts,
options, and options on futures contracts for the purpose of simulating full
investment and reducing transactions costs. Futures contracts provide for the
future sale by one party and purchase by another party of a specified amount
of a specific security at a specified future time and at a specified price.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures
exchanges and trading 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 security) if it
is not terminated prior to the specified delivery date. Minimal initial margin
requirements are established by the futures exchange and may be changed. Bro-
kers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold 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 Fund will
only sell futures contracts to protect securities it owns against price de-
clines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, the
Fund 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 Fund upon sale of open futures con-
tracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While the Fund 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.
B-4
<PAGE>
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS The Fund 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 addition, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market
will exist for any particular futures contract at any specific time. Thus, it
may not be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if the Fund has insuffi-
cient cash, it may have to sell portfolio securities to meet daily margin re-
quirements at a time when it may be disadvantageous to do so. In addition, the
Fund 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.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The 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 Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Fund is subject to the risks of loss frequently as-
sociated with futures transactions. The Fund 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 Fund does involve the risk of im-
perfect or no correlation where the securities underlying futures contracts
have different maturities or other characteristics than the portfolio securi-
ties being hedged. It is also possible that the Fund could both lose money on
futures contracts and also experience a decline in value of its portfolio se-
curities. There is also the risk of loss by the Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund 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.
B-5
<PAGE>
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS The Fund is required for federal
income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts held as of the end of
the year as well as those actually realized during the year. In most cases,
any gain or loss recognized with respect to a futures contract is considered
to be 60% long-term capital gain or loss and 40% short-term capital gain or
loss, without regard to the holding period of the contract. Furthermore, sales
of futures contracts which are intended to hedge against a change in the value
of securities held by the Fund may affect the holding period of such securi-
ties and, consequently, the nature of the gain or loss on such securities upon
disposition. The Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains or related positions
held by the Fund.
In order for the Fund to continue to qualify for federal income tax treat-
ment 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, inter-
est, income derived from loans of securities, gains from the sale of securi-
ties or of foreign currencies or other income derived with respect to the
Fund's business 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 Fund's annual gross income. It is antici-
pated that any net gain realized from the closing out of futures contracts
will be considered gain from the sale of securities and therefore be qualify-
ing income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, the Fund 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 the Fund's fiscal year and which are recognized for tax purpos-
es, will not be considered gains on sales of securities held less than three
months for the purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Fund's fiscal year) on futures transac-
tions. Such distributions will be combined with distributions of capital gains
realized on the Fund's other investments and shareholders will be advised on
the nature of the transactions.
RISK FACTORS VANGUARD FLORIDA INSURED TAX-FREE FUND
Vanguard Florida Insured Tax-Free Fund invests primarily in the debt obliga-
tions of Florida State government, the State's agencies and authorities, and
various local governments, including counties, cities, towns, special dis-
tricts, 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 is-
suer'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 hold-
ers. Credit risk is usually lower wherever the economy is strong, growing and
diversified, financial operations are sound, and the debt burden is reason-
able.
The average credit rating among American states for full "faith and credit"
state debt is Aa as determined by Moody's Investors Service and AA as deter-
mined by Standard & Poor's Corporation. Against this measure and the criteria
listed above, the credit risk associated with direct obligations of the State
of Florida and the State's agencies and authorities, including general obliga-
tion and revenue bonds, lease debt, and notes, is comparable with the average
for U.S. states. Florida's general obligation bonds have been rated Aa/AA by
both rating agencies for over two decades, during which period the State's ob-
ligations could be characterized as providing high-grade security with a very
strong capacity for timely repayment of debt.
B-6
<PAGE>
The State of Florida's economy is characterized by a large service sector, a
dependence on the tourism and construction industries, and a large retirement
population. The management of rapid growth has been the major challenge facing
state and local governments. In 1980, Florida was ranked seventh among the
states, in terms of population, with 9.7 million people; by 1991, Florida was
ranked fourth with a population of 13.2 million. While attracting many senior
citizens, Florida also offers a favorable business environment and growing em-
ployment opportunities that have continued to generate working-age population
in-migration. As this growth continues, particularly within the retirement
population, the demand for both public and private services will increase,
which may strain the service sector's capacity and impede the State's budget
balancing efforts.
During the 1980s, Florida outperformed the nation as measured by such eco-
nomic indicators as employment growth and income levels. Florida's job crea-
tion rate in the non-agriculture sector was the highest of the eleven most
populous states. Fueling this growth in jobs were the continued boom in the
tourism industry and related service sectors and a dynamic construction and
construction- related manufacturing sector. Florida's economy did not suffer
the dislocation and restructuring of the more manufacturing-based economies of
the Midwest and the North during the 1980s and was less exposed to the decline
of the textile industry besieging much of the Southeast.
The primary vulnerability in the Florida economy is exposure to the business
cycle affecting both the tourism and construction industries. Gasoline prices
and supply can also impact tourism. An economic recession reached Florida in
1991 and impacted the service sector considerably, causing the State to expe-
rience an actual job loss for the first time in decades. While Florida's aero-
space and defense contracting industries are now in decline, the State's manu-
facturing economy has diversified into high-tech and electronic equipment and
has been strengthened by a growth in exports. Furthermore, construction jobs
as a percent of total jobs in the State have declined during the late '80s,
reducing cyclical risk. The outlook for the Florida economy is continued ex-
pansion fueled by population growth--but at a slower rate than that of the
1980s.
Personal income levels in Florida are greater than the U.S. average and con-
tinue to grow at a faster rate. These levels in Florida are also less sensi-
tive to economic downturns than in the U.S., as a whole, since Florida is home
to a greater concentration of senior citizens who rely on dividends, interest,
Social Security, and pension benefits, which fluctuate less with the business
cycle than does employment income.
Debt levels in the State of Florida are moderate to high, reflecting the
tremendous capital demands associated with rapid population growth. Florida is
unusual among states in that all general obligation "full faith and credit"
debt issues of municipalities must be approved by public referendum and are,
therefore, relatively rare. Most debt instruments issued by local municipali-
ties and authorities have a more narrow pledge of security, such as a sales
tax stream, special assessment revenue, user fees, utility taxes, or fuel tax-
es. Credit quality of such debt instruments tends to be somewhat lower than
that of general obligation debt. The State of Florida issues general obliga-
tion debt for a variety of purposes; however, the State constitution requires
a specific revenue stream to be pledged to State general obligation bonds as
well.
The market for Florida bonds secured by municipal leases has suffered due to
the default of the State of Florida on a private placement lease financing of
an office building in 1989 and several episodes of public consideration (al-
though never carried out) by Brevard County to not appropriate funds to meet
its obligation under a tax-exempt lease financing.
The State of Florida generated steadily increasing fund balances during the
1980s as the State experienced record growth. However, the State experienced
budget strain during the early 1990s due to an economic recession. Compounding
the recession the State's dependence on the sales tax as a primary source of
revenue. State officials acted quickly and responsibly to maintain a balanced
budget by revising revenue projections and controlling spending. Such respon-
sible fiscal management enhances overall credit quality in the State of Flori-
da.
B-7
<PAGE>
The state's economic and financial condition is showing signs of strength as
the state and national economies emerge from recession in the mid-1990's.
State officials, however, still face tremendous capital and operating pres-
sures due to the growth that will continue to strain the State's narrow reve-
nue base. Future budgets may require a wider revenue base to meet such de-
mands; the most likely candidate for such revenue enhancement is a tax on con-
sumer services. The creation of a Florida personal income tax is a very remote
possibility, since it would require an amendment to the State's Constitution
and a higher level of political support than has currently been generated.
FLORIDA INTANGIBLE PERSONAL PROPERTY TAX
Although Florida does not have a state personal income tax, it does impose
an intangible personal property tax on certain financial assets, including mu-
tual fund shares. The most common examples of personal property subject to the
tax are shares of stock issued by corporations, bonds issued by corporations
or state, county or municipal governments outside the State of Florida, and
shares of ownership in mutual funds. Unlike most state and local taxes which
are assessed on ordinary income and capital gains derived from mutual fund
shares, the Florida intangible tax is based on the net asset value of these
shares. Under Florida law, shares of a mutual fund will be exempt from the in-
tangibles tax to the extent that, on the annual assessment date (December 31),
its assets are solely invested in exempt Florida securities, exempt U.S. Gov-
ernment securities, or other exempt securities. If, on the annual assessment
date, the Fund's assets are invested in both exempt and non-exempt securities,
only that portion of a share's net asset value represented by U.S. Government
securities (including qualifying obligations of U.S. territories and posses-
sions) will be exempt from the intangibles tax. Under this rule, shares of the
Vanguard Florida Insured Tax-Free Fund are expected to be exempt from the
Florida intangible personal property tax.
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended November 30, 1994 was
6.31%. The total return of the Fund for the year ended November 30, 1994 was -
6.08%. The average annual total return for the Fund since inception on Septem-
ber 1, 1992 was +3.72%.
PERFORMANCE MEASURES
The Fund may use one or more of the following unmanaged indexes for compara-
tive performance purposes:
STANDARD & 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 secu-
rities, 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 com-
mon 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.
B-8
<PAGE>
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.
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.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-
through securities corporate rated BBB- or better. The index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a mar-
ket weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities be-
tween 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is
a market weighted index that contains individually priced U.S. Treasury, agen-
cy, and corporate securities rated BBB- or better with maturities between 5
and 10 years. The index has a market value of over $600 billion.
B-9
<PAGE>
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper de-
fines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average perfor-
mance and/or the average expense ratio of the small company growth funds.
(This fund category was first established in 1982. For years prior to 1982,
the results of the Lipper Small Company Growth category were estimated using
the returns of the Funds that 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 Analyt-
ical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--An industry benchmark of av-
erage non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
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
investment management staff is supervised by the senior officers of the Fund.
The investment management staff is responsible for: maintaining the speci-
fied standards; making changes in specific issues in light of changes in the
fundamental 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 income.
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 turn-
over rate for the Fund is set forth under the heading "Financial Highlights"
in the Fund's prospectus. The portfolio turnover rate is not a limiting factor
when management deems it desirable to sell or purchase securities. It is im-
possible to predict whether or not the portfolio turnover rate in future years
will vary significantly from the rates in recent years.
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.
B-10
<PAGE>
Your purchase will be made in full and fractional shares of the Fund calcu-
lated to three decimal places. Shares are held on deposit for shareholders by
the Fund, which will send to shareholders a statement of shares owned at the
time of each transaction. Share certificates will not be issued for the Fund.
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
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 a bank broker or any other guar-
antor that Vanguard deems to be acceptable.
The signature guarantees must appear either: (1) on the written request for
redemption or (2) on a separate instrument for assignment ("stock power")
which should specify the total number of shares to be redeemed.
B-11
<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 annu-
ally by shareholders, set broad policies for the Fund and choose its Officers.
A list of the Trustees and Officers of the Fund and a brief statement of
their present positions and principal occupations during the past 5 years is
set forth below.
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 Vanguard Group. Director
of The Mead Corporation and General Accident Insurance.
JOHN J. BRENNAN, President & Trustee*
President and Director of The Vanguard Group, Inc. and of each of the invest-
ment 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 College.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Direc-
tor of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications Com-
pany.
ALFRED M. RANKIN, Trustee
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company, The Standard Products Company and The Re-
liance Electric Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, The Nature Conservancy; formerly, Di-
rector and Senior Partner, McKinsey & Co.; President, New York University;
Director of Pacific Gas and Electric Company and NACCO Industries.
JAMES O. WELCH, JR., Trustee
Retired Chairman of Nabisco Brands Inc., retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver Edu-
cational Foundation.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment companies
in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of each of the invest-
ment companies in The Vanguard Group.
--------
* Officers of the Trust are "interested persons" as defined in the Investment
Company Act of 1940.
THE VANGUARD GROUP
The Fund is a member of The Vanguard Group of Investment Companies. Through
their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Fund and the other Funds in the Group obtain at-cost virtually all of their
corporate management, administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost basis to several other
Vanguard Funds, including the Vanguard Florida Insured Tax-Free Fund.
B-12
<PAGE>
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.
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 was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time
in order to maintain the proportionate relationship between each Fund's rela-
tive net assets and its contribution to Vanguard's capital. At November 30,
1994, the Fund had contributed $45,000 representing .2 of 1% of Vanguard's
Capitalization. The Funds' Service Agreement provides for the following ar-
rangement: (1) each Vanguard Fund may invest a maximum of 0.40% of its assets
in Vanguard and (2) there is no restriction on the maximum cash investment
that the Vanguard Funds may make in Vanguard.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian rela-
tionships; (6) shareholder reporting; and (7) review and evaluation of advi-
sory and other services provided to the Funds by third parties. During the
year ended November 30, 1994, the Fund's share of Vanguard's actual net costs
of operations relating to management and administrative services (including
transfer agency) totaled approximately $490,000.
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.
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 $73,000 of the Group's distribution and mar-
keting expenses, which represented an effective annual rate of .03 of 1% of
the Fund's average net assets.
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<PAGE>
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to the Fund, Vanguard Municipal Bond Fund, Vanguard Money Market Re-
serves, Vanguard California Tax-Free Fund, Vanguard Pennsylvania Tax-Free
Fund, Vanguard New Jersey Tax-Free Fund, Vanguard New York Insured Tax-Free
Fund, Vanguard Ohio Tax-Free Fund, Vanguard Admiral Funds, Vanguard Index
Trust, Vanguard Tax-Managed Fund, Vanguard International Equity Index Fund,
Vanguard Balanced Index Fund, Vanguard Institutional Index Fund, Vanguard Bond
Index Fund, several Portfolios of Vanguard Variable Insurance Fund, several
Portfolios of Vanguard Fixed Income Securities Fund, a portion of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as well as sev-
eral indexed separate accounts. These services are provided on an at-cost ba-
sis from a money management staff employed directly by Vanguard. The compensa-
tion and other expenses of this staff are paid by the Funds utilizing these
services. During the years ended November 30, 1993 and 1994 the Fund paid ap-
proximately $15,000, and $33,000, respectively, of Vanguard's investment advi-
sory 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 $1,000 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 $11,997.
Upon retirement, Trustees who are not Officers are paid an annual fee based
upon the number of years of service on the Board. The fee is equal to $1,000
for each year of service up to a maximum of $15,000. Under its retirement
plan, Vanguard contributes annually an amount equal to 10% of each officer's
annual compensation plus 5.7% of that part of the officer's compensation dur-
ing the year, if any, that exceed the Social Security Taxable Wage Base then
in effect. Under Vanguard's thrift plan, all employees are permitted to make
pre-tax contributions in a maximum amount equal to 4% of total compensation.
Vanguard matches the basic contribution on a 100% basis. During the year ended
November 30, 1994, the Fund's proportionate share of retirement benefits paid
to all officers of the Fund as a group, was approximately $1,206.
VANGUARD FLORIDA INSURED TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
BENEFITS ESTIMATED COMPENSATION
AGGREGATE ACCRUED ANNUAL FROM ALL
COMPENSATION AS PART OF BENEFITS UPON VANGUARD FUNDS
NAMES OF TRUSTEES FROM FUND FUND EXPENSES RETIREMENT PAID TO TRUSTEES(2)
----------------- ------------ ------------- ------------- -------------------
<S> <C> <C> <C> <C>
John C. Bogle(1)........ -- -- -- --
John J. Brennan(1)...... -- -- -- --
Barbara Barnes
Hauptfuhrer............ $126 $26 $15,000 $50,000
Robert E. Cawthorn...... $126 $21 $13,000 $50,000
Burton G. Malkiel....... $126 $17 $15,000 $50,000
Alfred M. Rankin, Jr.... $126 $13 $15,000 $50,000
John C. Sawhill......... $126 $16 $15,000 $50,000
James O. Welch, Jr...... $121 $20 $15,000 $48,000
J. Lawrence Wilson...... $123 $14 $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.
B-14
<PAGE>
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Pennsylvania Trust on May 22, 1992.
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 separate classes ("Portfolios") of shares. Currently, the Fund is offering
shares of one Portfolio.
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 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 obliga-
tions 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 re-
quest, 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, appearing in the Fund's 1994 Annual Report
to Shareholders, and the report thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Fund's 1994 Annual Report to Share-
holders is enclosed with this Statement of Additional Information.
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<PAGE>
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 au-
thorities 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 fa-
cilities.
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 the proceeds of a special excise or other
tax, but not from general tax revenues. 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. Project Notes are instruments issued by
the Department of Housing and Urban Development but issued by a state or local
housing agency. While the issuing agency has the primary obligation on such
Project notes, they are also secured by the full faith and credit of the
United States.
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.
B-16
<PAGE>
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 recommending to its shareholders
changes in such objective and policies. (For more information please refer to
"Risk Factors" on page 5.)
RATINGS. Excerpts from Moody's Investors Service, Inc.'s Municipal Bond rat-
ings: 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 sta-
ble 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
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 pro-
tected nor poorly secured; interest payments and principal security appear ad-
equate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length or time; Ba --protec-
tion 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
although 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
principal 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 de-
gree; A -- has a strong capacity to pay principal and interest, although some-
what 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 eco-
nomic conditions or changing circumstances are more likely to lead to a weak-
ened 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
B-17
<PAGE>
with terms of obligation; BB is being paid; D -- in default, 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 rating: 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 pay-
ment is very strong.
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<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 institutional invest-
ors.
4. The investment adviser has determined that the obligation, or a compara-
ble lessee security, trades in the institutional marketplace at least periodi-
cally, 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 obli-
gation 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 criti-
cal to the lessee's ability to deliver essential services.
7. Specific legal features such as covenants to maintain the tax-exempt sta-
tus 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 property
maintenance, taxes and insurance).
9. If the lessor is a private entity, there must be a sale and absolute as-
signment of rental payments to the trustee, accompanied by a legal opinion
from recognized bond counsel that lease payments would not be considered prop-
erty of the lessor's estate in the event of lessor's bankruptcy.
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