<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-48783) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 5
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 6
VANGUARD FLORIDA INSURED
TAX-FREE FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600
VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
IT IS HEREBY REQUESTED THAT THIS FILING BECOME EFFECTIVE
on March 28, 1997, pursuant to paragraph (a) of Rule 485.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO RULE
24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. WE FILED OUR RULE 24F-2 NOTICE
FOR THE YEAR ENDED NOVEMBER 30, 1996 ON JANUARY 31, 1997.
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<PAGE> 2
VANGUARD FLORIDA INSURED TAX-FREE FUND
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Not Applicable
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. The Fund's Objectives; Who Should
Invest; Investment Strategies;
Investment Limitations; Investment
Policies; Investment Performance;
General Information
Item 5. Management of the Fund........................ The Fund and Vanguard; Investment
Adviser
Item 6. Capital Stock and Other Securities............ Buying Shares; Redeeming Shares; The
Fund's Share Price; Dividends,
Capital Gains and Taxes; Distribution
Options; General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Buying Shares
Item 8. Redemption or Repurchase...................... Redeeming Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Management of the Fund
Item 13. Investment Objective and Policies............. Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund; Investment
Management
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund; Investment
Management
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statement
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statement
</TABLE>
<PAGE> 3
VANGUARD
FLORIDA INSURED
TAX-FREE FUND
Prospectus
March 28, 1997
This prospectus contains
financial data for the
Fund through the fiscal
year ended November 30, 1996.
[GRAPHIC OF SHIP]
[VANGUARD LOGO]
A member of
THE VANGUARD GROUP
<PAGE> 4
VANGUARD FLORIDA INSURED TAX-FREE FUND An Income Mutual Fund With
Federal and State Tax Advantages
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Fund Expenses 2
Financial Highlights 3
A Word About Risk 4
The Fund's
Objective 4
Who Should Invest 4
Investment Strategies 5
Investment Policies 8
Investment Limitations 9
Investment
Performance 9
Share Price 9
Dividends, Capital
Gains, and Taxes 10
The Fund and
Vanguard 11
Investment Adviser 11
General Information 11
Investing
with Vanguard 12
Services and
Account Features 12
Types of Accounts 13
Distribution Options 13
Buying Shares 13
Redeeming Shares 15
Fund and Account Updates 17
Prospectus Postscript 19
Risk Quiz 20
Glossary Inside Back Cover
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
Vanguard Florida Tax-Free Fund (the "Fund") is a non-diversified,
open-end investment company, or mutual fund.
The Fund, intended for Florida residents only, seeks to provide income that
is exempt from federal income taxes. It is also expected that the Fund's shares
will be exempt from the Florida intangible personal property tax.
IT IS IMPORTANT TO NOTE THAT THE FUND'S SHARES ARE NOT GUARANTEED OR INSURED
BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT OR THE STATE OF FLORIDA.
BECAUSE OF THE FUND'S INSURANCE FEATURE, THE INTEREST AND PRINCIPAL PAYMENTS OF
THE BONDS IN THE FUND ARE GUARANTEED; HOWEVER, THE VALUE OF THE BONDS THEMSELVES
IS NOT GUARANTEED. AS WITH ANY INVESTMENT IN BONDS, WHICH ARE SENSITIVE TO
CHANGES IN INTEREST RATES, YOU COULD LOSE MONEY BY INVESTING IN THE FUND.
FEES AND EXPENSES
The Fund is offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratio.
ADDITIONAL INFORMATION ABOUT THE FUND
A Statement of Additional Information (March 28, 1997) containing more
information about the Fund is, by reference, part of this prospectus and may be
obtained without charge by writing to Vanguard or by calling our Investor
Information Department at 1-800-662-7447.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategies of Florida
Insured Tax-Free Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk" explanations along the way. Reading the
prospectus will help you to decide whether the Fund is the right investment for
you. We suggest that you keep it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 5
FUND PROFILE Vanguard Florida Insured Tax-Free Fund
WHO SHOULD INVEST (page 4)
- - Florida residents seeking a municipal bond mutual fund as part of a balanced
and diversified investment program.
- - Income-oriented Florida residents in a
high tax bracket.
- - Florida residents willing to invest for the long term.
WHO SHOULD NOT INVEST
- - Investors primarily seeking growth of their investment over time.
- - Investors unwilling to accept significant fluctuations in share price.
- - Investors in a retirement account.
RISKS OF THE FUND (pages 4 - 8)
The Fund's total return will fluctuate within a wide range, so an investor could
lose money over short or even extended periods. The Fund is subject to -- among
other things -- interest rate risk (the chance that bond prices will decline
because of rising interest rates), income risk (the chance that falling interest
rates will cause the Fund's income to decline), and objective risk (the chance
that a particular segment of the municipal bond market -- such as long-term or
Florida-issued bonds -- will trail returns from the overall municipal bond
market).
DIVIDENDS AND CAPITAL GAINS (page 10)
Dividends are declared daily and paid on the first business day of each month.
Capital gains, if any, are paid annually in December.
INVESTMENT ADVISER (page 11)
Vanguard Fixed Income Group, Valley Forge, PA
INCEPTION DATE: September 1, 1992
NET ASSETS AS OF 11/30/96: $515 million
FUND'S EXPENSE RATIO FOR THE YEAR ENDED 11/30/96: 0.19%
LOAD, 12b-1 MARKETING FEES: None
SUITABLE FOR IRAS: No
MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for custodial accounts for minors
NEWSPAPER ABBREVIATION: FL Ins
VANGUARD FUND NUMBER: 018
ACCOUNT FEATURES (page 12)
- - Telephone Redemption
- - Checkwriting
- - Vanguard Direct Deposit Service(sm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)
AVERAGE ANNUAL TOTAL RETURNS --
PERIODS ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
1 YEAR 5 YEARS
<S> <C> <C>
Florida Insured Tax-Free Fund 6.5% 8.0%*
Lipper Florida Municipal Bond Average 4.7 6.7*
</TABLE>
*Since Inception (9/1/92)
QUARTERLY RETURNS (%) 1992 - 1996 (intended to show volatility of returns)
[GRAPH]
Florida Insured Tax Free Fund
Lipper Florida Municipal Bond Average
<TABLE>
<CAPTION>
F L F L F L F L
<S> <C> <C> <C> <C> <C> <C> <C> <C>
"1992" 0 0 0 0 0.99 0 3.08 0
"1993" 4.23 0 3.77 0 3.31 0 1.51 0
"1994" -5.75 0 1.74 0 -0.32 0 -0.32 0
"1995" 7.56 0 1.14 0 2.48 0 5.59 0
"1996" -1.77 0 0.73 0 2.33 0 2.88 0
</TABLE>
10-Year Average Annual Returns For Period Ended 12/31/96
In evaluating past performance, remember that it is not indicative of future
performance. Performance figures include the reinvestment of any dividends and
capital gains distributions. The returns shown are net of expenses. Note, too,
that both the return and principal value of an investment will fluctuate so that
investors' shares, when redeemed, may be worth more or less than their original
cost.
1
<PAGE> 6
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Florida Insured Tax-Free Fund's expense ratio in fiscal year
1996 was 0.19%, or $1.90 per $1,000 of average net assets. The average long-term
tax-exempt bond mutual fund (excluding money market funds) had expenses in 1996
of 1.01%, or $10.01 per $1,000 of average net assets, according to Lipper
Analytical Services, Inc., which reports on the mutual fund industry.
FUND EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in the Fund.
As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Fund:
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
The next table illustrates the operating expenses that you would incur as a
shareholder of the Fund. These expenses are deducted from the Fund's income
before it is paid to you. Expenses include investment advisory fees as well as
the costs of maintaining the accounts, administering the Fund, providing
shareholder services, and other activities. The expenses shown in the table are
for the fiscal year ended November 30, 1996.
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<S> <C> <C>
Management and Administrative Expenses: 0.15%
Investment Advisory Expenses: 0.01%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Fund Insurance 0.01%
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.00%
----
Total Other Expenses: 0.03%
----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.19%
====
</TABLE>
The following example illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Fund provides a return of 5% a year and (2) that you redeem your investment
at the end of each period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
$2 $6 $11 $24
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
2
<PAGE> 7
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding for each period since the Fund's inception on September 1, 1992. The
financial highlights were audited by Price Waterhouse LLP, independent
accountants. You should read this information in conjunction with the Fund's
financial statements and accompanying notes, which appear, along with the audit
report from Price Waterhouse, in the Fund's most recent Annual Report to
shareholders. The Annual Report is incorporated by reference in the Statement of
Additional Information and in this prospectus, and contains a more complete
discussion of the Fund's performance. You may have the Report sent to you
without charge by writing to Vanguard or by calling our Investor Information
Department.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------ SEPTEMBER 1+ TO
1996 1995 1994 1993 NOVEMBER 30, 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.94 $ 9.61 $ 10.86 $ 10.16 $ 10.00
---------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .550 .560 .550 .537 .122
Net Realized and
Unrealized Gain (Loss)
on Investments .130 1.330 (1.180) .700 .160
---------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS .680 1.890 (.630) 1.237 .282
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.550) (.560) (.550) (.537) (.122)
Distributions from
Realized Capital Gains -- -- (.070) -- --
---------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.550) (.560) (.620) (.537) (.122)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $ 11.07 $ 10.94 $ 9.61 $ 10.86 $ 10.16
===================================================================================================================
TOTAL RETURN 6.45% 20.05% -6.08% 12.38% 2.84%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $ 515 $ 423 $ 284 $ 269 $ 63
Ratio of Expenses to
Average Net Assets 0.19% 0.21% 0.22% 0.21% 0.24%*
Ratio of Net Investment
Income to Average
Net Assets 5.09% 5.33% 5.31% 5.01% 5.10%
Portfolio Turnover Rate 19% 20% 43% 34% 15%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
+ Inception date.
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized capital appreciation (or depreciation). Neither yield
nor total return should be used to predict the future performance of a fund.
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1996 with a net asset value of $10.94 per share. During
the year, the Fund earned $0.55 per share from investment income (interest) and
$0.13 per share from investments that had appreciated in value or that were sold
for higher prices than the Fund paid for them. Of those total earnings of $0.68
per share, $0.55 per share was returned to shareholders in the form of dividend
distributions. The earnings ($0.68 per share) less distributions ($0.55)
resulted in a share price of $11.07 at the end of the year, an increase of $0.13
per share (from $10.94 at the beginning of the period to $11.07 at the end of
the period). Assuming that the shareholder had reinvested the distributions in
the purchase of more shares, total return from the Fund was 6.45% for the year.
As of November 30, 1996, the Fund had $515 million in net assets; an expense
ratio of 0.19% ($1.90 per $1,000 of net assets); and net investment income
amounting to 5.09% of its average net assets. It sold and replaced securities
valued at 19% of its total net assets.
3
<PAGE> 8
PLAIN TALK ABOUT
INTANGIBLE PERSONAL PROPERTY TAX
While some states, including Florida, do not have a state personal income tax,
they do impose an intangible personal property tax on certain financial assets,
including shares of mutual funds. Unlike other state and local taxes, which are
assessed on income and capital gains from mutual fund shares, the intangible
personal property tax is based on the net asset value of the shares themselves.
In other words, you pay taxes on the shares and not on the income.
PLAIN TALK ABOUT
TAXABLE VERSUS TAX-EXEMPT INVESTMENTS
You may not always profit from a tax-exempt investment; some taxable investments
could serve you better. To determine which is more suitable, figure out the
tax-exempt portfolio's taxable equivalent yield. You do this by dividing the
portfolio's tax-exempt yield by the total of 100% minus your tax bracket. For
example, if you are in the 36% tax bracket, and can earn a tax-exempt yield of
5%, the taxable equivalent yield would be 7.81% (5% divided by 64% [100% -
36%]). In this example, you would choose the tax-exempt portfolio if its taxable
equivalent yield of 7.81% were greater than the yield of a similar, though
taxable, investment.
Remember that we have used an assumed tax bracket in this example. Please
verify your actual tax bracket before calculating taxable equivalent yields of
your own.
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in Vanguard
Florida Insured Tax-Free Fund. It is important to keep in mind one of the main
axioms of investing: the higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: the lower the risk, the
lower the potential reward. As you consider an investment in the Fund, you
should take into account your need to protect your investment, as well as your
desire for current income.
Look for this "warning flag" symbol [FLAG] throughout the prospectus. It is
used to mark detailed information about each type of risk that you, as a
shareholder of the Fund, will confront.
THE FUND'S OBJECTIVE
The Fund seeks to provide a high level of current income that is exempt from
federal income taxes. It is also expected that the Fund's shares will be exempt
from the Florida intangible personal property tax. The Fund's objectives are
fundamental, which means that they cannot be changed unless a majority of
shareholders vote to do so.
[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISKS DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE FUND, AS WITH ANY INVESTMENT IN BONDS, COULD
LOSE MONEY.
WHO SHOULD INVEST
The Fund may be a suitable investment for you if you are a Florida resident
and...
- - You wish to add a municipal bond income fund to your existing holdings, which
could include other tax-exempt -- as well as stock, money market, and taxable
bond -- investments.
- - You seek income that is exempt from federal income taxes.
- - You seek an investment that is exempt from the Florida intangible personal
property tax.
- - You are willing to accept a high level of share-price fluctuation.
- - You are not looking for growth of your investment over time.
The Fund is not an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the Fund's shareholders. To minimize
such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Fund has adopted the following policies:
- - The Fund reserves the right to reject any purchase request -- including
exchanges from other Vanguard funds -- that it regards
4
<PAGE> 9
as disruptive to the efficient management of the Fund. This could be because of
the timing of the investment or because of a history of excessive trading by the
investor.
- - There is a limit on the number of times you can exchange into or out of the
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
INVESTMENT STRATEGIES
This section explains how the Fund's investment adviser seeks to provide income
that is exempt from federal income taxes, and an investment that is exempt from
the Florida intangible personal property tax. It also explains important
risks -- income risk, interest rate risk, call risk, objective risk, credit
risk, and manager risk -- faced by Fund shareholders. Unlike the Fund's
investment objectives, the adviser's investment strategies are not fundamental
and can be changed by the Fund's board of trustees without shareholder approval.
However, before making any important change in its strategies, the Fund will
give shareholders 30-days notice, in writing.
MARKET EXPOSURE
The Fund invests primarily in longer-term municipal bonds.
[FLAG] THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE POSSIBILITY THAT THE
FUND'S DIVIDENDS (INCOME) WILL FALL DUE TO FALLING INTEREST RATES.
INCOME RISK IS GENERALLY THE GREATEST FOR SHORT-TERM BONDS, AND THE
LEAST FOR LONG-TERM BONDS.
Changes in interest rates can affect bond prices as well as bond income.
[FLAG] THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE POSSIBILITY
THAT BOND PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED
PERIODS DUE TO RISING INTEREST RATES. INTEREST RATE RISK SHOULD BE
MODEST FOR SHORTER-TERM BONDS, MODERATE FOR INTERMEDIATE-TERM BONDS,
AND HIGH FOR LONGER-TERM BONDS.
In the past, bond investors have seen the value of their investments rise and
fall -- sometimes significantly -- with changes in interest rates. Between
December 1976 and September 1981, for instance, rising interest rates caused
long-term bond prices to fall by almost 48%.
Because the Fund invests mainly in bonds, changes in interest rates will have
a significant impact on the value of the Fund's assets. To illustrate how much
of an impact, the following table shows the effect of a 1% change and a 2%
change (both up and down) in interest rates on a bond with a face value of
$1,000 and
PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM
Vanguard Florida Insured Tax-Free 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 fluctuations in the bond market.
PLAIN TALK ABOUT
MUNICIPAL BONDS
Municipal bonds are securities issued by state and local governments and
regional government authorities as a way of raising money for public
construction projects (for example, highways, airports, housing); for operating
expenses; or for loans to public institutions and facilities.
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
When interest rates rise, bond prices fall. The opposite is also true: Bond
prices go up when interest rates fall. Why do bond prices and interest rates
move in opposite directions? Let's assume that you hold a bond with a 5% yield.
A year later, interest rates are on the rise and bonds are offered with a 6%
yield. With higher yielding bonds available, you would have trouble selling your
5% bond for the price you paid -- causing you to lower your asking price. On the
other hand, if interest rates were falling and 4% bonds were being offered, you
would be able to sell your 5% bond for more than you paid.
5
<PAGE> 10
PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date -- the date when the bond's
issuer must pay back the bond's initial value (known as its "face value"). Bond
maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise -- but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
PLAIN TALK ABOUT
CALLABLE BONDS
Although bonds are issued with clearly defined maturities, a bond issuer may be
able to redeem, or call, a bond earlier than its maturity date. The bond holder
must now replace the called bond with a bond that may have a lower yield than
the original. One way for bond investors to protect themselves against call risk
is to purchase a bond early in its lifetime, when it is less likely to be
called. Another way is to buy bonds with call protection -- that is, assurance
that a bond will not be called for a specific time period, such as ten years.
the same yield and maturity characteristics as those held by the Fund on
November 30, 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT INVESTMENT
VALUE OF A $1,000 INVESTMENT
- --------------------------------------------------------------------------------
YIELD/AVERAGE INITIAL 1% 1% 2% 2%
MATURITY INVESTMENT INCREASE DECREASE INCREASE DECREASE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4.92%/13.5 years $1,000 $908 $1,104 $826 $1,222
- --------------------------------------------------------------------------------
</TABLE>
These figures are for illustration only and should not be regarded as an
indication of future returns from the municipal bond market as a whole, or any
fund in particular.
Falling interest rates can cause other problems for bond portfolio
shareholders.
[FLAG] THE FUND IS SUBJECT TO CALL RISK, WHICH IS THE POSSIBILITY THAT DURING
PERIODS OF FALLING INTEREST RATES, A BOND ISSUER WILL "CALL" -- OR
REPAY -- ITS HIGH-YIELDING BOND BEFORE ITS MATURITY DATE. FORCED TO
INVEST THE UNANTICIPATED PROCEEDS AT LOWER INTEREST RATES, THE FUND
WOULD EXPERIENCE A DECLINE IN INCOME AND BE SUBJECT TO THE POTENTIAL
FOR TAXABLE CAPITAL GAINS.
Longer-term bonds, like those held by the Fund, generally have "call
protection" -- that is, assurance that a bond will not be called for a specific
period, such as ten years.
SECURITY SELECTION
Vanguard Fixed Income Group, adviser to the Fund, selects longer-term municipal
bonds issued by Florida state its local governments and public financing
authorities (and, possibly, by certain U.S. territories). The adviser may also
buy industrial revenue bonds and bonds issued by hospitals and universities for
the Fund that provide income exempt from federal taxes, and are exempt from the
Florida intangible personal property tax. Although it has no limitations as to
maturity, the Fund is expected to maintain an average weighted maturity of
between 15 and 25 years.
[FLAG] THE FUND IS SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT
RETURNS FROM A PARTICULAR BOND MARKET SEGMENT (FOR EXAMPLE, LONG-TERM
BONDS OR BONDS ISSUED IN FLORIDA) WILL TRAIL RETURNS FROM THE OVERALL
BOND MARKET.
[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE POSSIBILITY THAT A
BOND ISSUER WILL FAIL TO REPAY INTEREST AND PRINCIPAL IN A TIMELY
MANNER.
Normally, a fund that concentrates its assets in one state would be exposed
to considerable credit risk.(Details of the risks of investing in one state can
be found in The Statement of Additional Information.) To provide an added level
of credit protection, the Fund invests at least 80% of its assets in Florida
municipal bonds whose principal and interest payments are guaranteed by a
private insurance company, which must be
6
<PAGE> 11
rated Aaa by Moody's Investors Service, Inc. or AAA by Standard & Poor's
Corporation at the time of purchase. This insurance coverage may take one of
several forms:
- - A new issue insurance policy, which is purchased by a bond issuer at the
time the security is issued. This insurance is likely to increase the
credit rating of the security, as well as its purchase price and resale
value.
- - A mutual fund insurance policy, which is used to guarantee specific bonds
only while held by a mutual fund. For the Florida Insured Tax-Free Fund
(which has obtained a policy from Financial Guaranty Insurance Company),
the annual premiums for the policy may reduce the Fund's current yield.
- - A secondary market insurance policy, which is purchased by an investor
(such as the Fund) after a bond has been issued and insures the bond until
its maturity date.
Typically, an insured municipal bond in the Fund will be covered by only one
of the three policies. For instance, if a bond is covered by a new issue
insurance policy or a secondary market insurance policy, the security will
probably not be insured under the Fund's mutual fund insurance policy.
The remaining 20% of the Fund's assets may be invested in municipal
securities with a minimum quality rating of Aa by Moody's and AA by Standard and
Poor's.
Although the Fund seeks to invest substantially all of its assets in insured
Florida municipal bonds, the Fund may invest up to 20% of its assets in any
combination of the following: Uninsured, short-term municipal securities
issued in Florida or in other states.
- - Municipal securities of non-Florida issuers.
- - Certain taxable fixed-income securities, including U.S. government
securities.
- - Certain tax-exempt municipal securities issued by other states that have
similar characteristics to the securities typically held by the Fund.
These investments may subject a portion of the Fund's income to federal
income taxes, and all or a portion of the Fund's assets to the Florida
intangible personal property tax. The Florida intangible personal property tax
would be imposed only if the Fund held these securities on the last day of the
year, a situation which the investment adviser intends to avoid.
The Fund may also invest up to 20% of its assets in municipal bonds that are
exempt from federal income taxes, but subject to the federal Alternative Minimum
Tax (AMT).
As a tax-advantaged investment, the Fund is particularly vulnerable to
federal and Florida state tax law changes (for instance, if the Internal Revenue
Service ruled that the income from certain types of state-issued bonds could no
longer be considered tax-exempt).
PLAIN TALK ABOUT
CREDIT QUALITY
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) the bond issuer will
default, or fail to meet its payment obligations. Most bond-rating agencies use
a descending alphabet scale to rate bonds (for example, Aaa is the highest
rating, C among the poorest quality). All things being equal, the lower a bond's
credit quality, the higher the yield the bond seeks to pay (as compensation for
the risks an investor must take).
PLAIN TALK ABOUT
ALTERNATIVE MINIMUM TAX
Certain tax-exempt bonds whose proceeds are used to fund private, for-profit
organizations are subject to the Alternative Minimum Tax (AMT) -- a special tax
system that ensures that individuals pay at least some federal taxes. Although
AMT bond income is exempt from federal income tax, a very limited number of
taxpayers who have many tax deductions may have to pay Alternative Minimum Tax
on the income from bonds considered "tax-preference items."
7
<PAGE> 12
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
actively managed tax-exempt bond funds (excluding money market funds) is 48%.
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or bond), an asset (such as a commodity
like gold), or a market index (such as the S&P 500 Index). Futures and options
are derivatives that have been trading on regulated exchanges for more than two
decades. These "traditional" derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate futures and options from
the relatively new, exotic types of derivatives -- some of which can carry
considerable risks.
[FLAG GRAPHIC] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY
THAT VANGUARD FIXED INCOME GROUP WILL DO A POOR JOB OF
SELECTING SECURITIES.
PORTFOLIO TURNOVER
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long they have been held. The Fund's
average turnover rate since inception has been about 26%. (A portfolio turnover
rate of 100% would occur, for example, if the Fund sold and replaced securities
valued at 100% of its total net assets within a one-year period.)
INVESTMENT POLICIES
Besides investing in longer-term municipal securities whose principal and
interest payments are insured, the Fund may follow a number of investment
policies to achieve its objectives.
[FLAG GRAPHIC] THE FUND MAY INVEST, TO A LIMITED EXTENT, IN BOND (INTEREST
RATE) FUTURES AND OPTIONS CONTRACTS AND OTHER TYPES OF
DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial -- in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a fund. Florida Insured Tax-Free
Fund will not use futures and options for speculative purposes or as leveraged
investments that magnify the gains or losses of an investment. Rather, the Fund
will keep separate cash reserves or short-term cash-equivalent securities in the
amount of the obligation underlying the futures contract. Only a limited
percentage of the Fund's assets -- up to 5% if required for deposit and no more
than 20% of total assets -- may be committed to such contracts.
The reasons for which the Fund may use futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.
- - To make it easier to trade.
- - To reduce costs by buying futures instead of actual bonds when futures are
cheaper.
Please see the Statement of Additional Information for a discussion of the
other types of derivatives in which the Fund may invest.
The Fund will usually hold only a small percentage of its assets in cash
reserves, although if the investment adviser believes that market conditions
warrant a temporary defensive measure, the Fund may hold cash reserves without
limit.
8
<PAGE> 13
INVESTMENT LIMITATIONS
To reduce risk and offer some diversification, the Fund has adopted limits on
some of its investment policies. Specifically, the Fund will not:
- - Invest more than 25% of its assets in the securities of a single issuer,
except the U.S. government and cash reserves.
- - Invest more than 50% of its assets in bonds that make up more than 5% of
the Fund's total assets.
- - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares, and not in amounts to exceed 10% of the Fund's net assets.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Fund's shareholders.
INVESTMENT PERFORMANCE
Vanguard Florida Insured Tax-Free Fund invests in longer-term, insured municipal
bonds so its performance is closely correlated to the performance of the bond
market. Historically, changes in interest rates have been -- and remain -- the
strongest influence on bond market performance.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED NOVEMBER 30, 1996
[BAR GRAPH]
*Since the Fund's inception on September 1, 1992.
The results shown above represent the Fund's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information for the Lipper Florida Municipal Bond Fund Average.
SHARE PRICE
The Fund's share price, called its net asset value, is calculated each business
day after the close of trading (generally 4 p.m. Eastern
PLAIN TALK ABOUT
CASH RESERVES
With mutual funds, holding cash reserves -- "cash" -- does not mean literally
that the fund holds a stack of currency. Rather, cash refers to short-term,
interest-bearing securities that can easily and quickly be converted to cash.
(Most mutual funds keep at least a small percentage of assets in cash to
accommodate shareholder redemptions.) While some funds strive to keep cash
levels at a minimum and to always remain fully invested in bonds, other bond
funds allow investment advisers to hold up to 20% or more of a fund's assets in
cash reserves.
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
9
<PAGE> 14
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either income dividends or capital gains distributions. Income
dividends come from interest the fund earns from its money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term depending on whether the fund held the securities for less than or
more than one year.
PLAIN TALK ABOUT
BUYING A CAPITAL GAIN
It is not to your advantage to buy shares of a fund shortly before it makes a
capital gains distribution, because part of your investment will come back to
you as a taxable distribution. This is known as "buying a capital gain." For
example: on December 15, you invest $5,000, buying 250 shares for $20 each. If
the fund pays a capital gains distribution of $1 per share on December 16, its
share price would drop to $19 (not counting market change). You would still have
only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 =
$250 in capital gains distributions), but you would owe tax on the $250 capital
gain received, even if you had reinvested it in more shares. To avoid "buying a
capital gain," check the fund's distribution schedule before you invest.
time) of the New York Stock Exchange. The net asset value per share is
calculated by adding up the total assets of the Fund, subtracting all of its
liabilities, or debts, and then dividing by the total number of Fund shares
outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
The daily net asset value, or NAV, is useful to you as a shareholder because
the NAV, multiplied by the number of Fund shares you own, gives you the dollar
amount you would have received had you sold all of your shares back to the Fund
that day.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading Vanguard Group. Different newspapers use
different abbreviations of the Fund's name, but the most common is FL INS.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund's dividends accrue daily. On the first business day of every month, the
Fund distributes to shareholders virtually all of its income from interest and
dividends as dividend distributions. These dividend distributions are expected
to be free from federal income taxes (the shares themselves are expected to be
free from the Florida intangible personal property tax). Any capital gains
realized from the sale of securities are distributed annually in December. You
can receive distributions of income or capital gains in cash, or you may have
them automatically reinvested in more shares of the Fund. In either case,
distributions of capital gains that are declared in December -- even if paid in
January -- are taxed as if they had been paid to you in December. Vanguard will
process your dividend distributions and send you a statement each year showing
the tax status of all your distributions.
- - The short-term capital gains that you receive are taxable to you as
ordinary dividend income. Any distributions of net long-term capital gains
by the Fund are taxable to you as long-term capital gains, no matter how
long you've owned shares in the Fund. Capital gains distributions are
taxable to you whether received in cash or reinvested in additional shares.
Although the Fund does not seek to realize any particular amount of capital
gains during a year, such gains are realized from time to time as
byproducts of the ordinary investment activities of the Fund.
- - If you sell or exchange shares, any gain or loss you have is a taxable
event, which means that you may have a capital gain to report as income, or
a capital loss to report as a deduction, when you complete your federal
income tax return.
The tax information in this prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences of an
investment in the Fund.
10
<PAGE> 15
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 90 distinct investment portfolios and total net assets
of more than $250 billion. All of the Vanguard funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.
A list of Florida Insured Tax-Free Fund's trustees and officers, and their
present positions and principal occupations during the last four years, can be
found in the Fund's Statement of Additional Information.
INVESTMENT ADVISER
Vanguard Fixed Income Group (the "Group") P.O. Box 2600, Valley Forge, PA 19482,
provides investment advisory services to the Fund on an at-cost basis, subject
to the control of the trustees and officers of the Fund. The Group currently
manages more than $78 billion invested in some 40 Vanguard Portfolios.
The managers responsible for the Fund are:
IAN A. MACKINNON, Senior Vice President of Vanguard; 22 years fixed income
investment experience, 16 years primary responsibility for Vanguard's internal
fixed income policy and strategy; B.A. from Lafayette College, M.B.A. from
Pennsylvania State University.
REID O. SMITH, CFA, Principal of Vanguard; 12 years investment experience;
B.A. and M.B.A. from the University of Hawaii; Fund Manager since its inception
in September 1992.
The Fixed Income Group chooses brokers or dealers to handle the purchase and
sale of the Fund's securities, and is responsible for getting the best available
price and most favorable execution for all transactions. When the Fund
purchases a newly issued security at a fixed price, the Group may designate
certain members of the underwriting syndicate to receive compensation
associated with that transaction. Certain dealers have agreed to rebate a
portion of such compensation directly to the Fund to offset its management
expenses.
GENERAL INFORMATION
Vanguard Florida Insured Tax-Free Fund is a Pennsylvania business trust.
Shareholders of the Fund have rights and privileges similar to those enjoyed by
other corporate shareholders. If any matters are to be voted on by shareholders
(such as a change in a fundamental investment objective or the election of
trustees), each share outstanding at that point would be entitled to one vote.
Annual meetings will not be held by the Fund except as required by the
Investment Company Act of 1940. A meeting will be scheduled (for example, to
vote on the removal of a trustee) if the holders of at least 10% of the Fund's
shares request a meeting in writing.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is the only MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and by the shareholders in those funds. Other mutual
funds are operated by for-profit management companies that may be owned by one
person, by a group of individuals, or by investors who bought the management
company's publicly traded stock. Because of its structure, Vanguard operates its
funds at cost. Instead of distributing profits from operations to a separate
management company, Vanguard returns profits to fund shareholders in the form of
lower operating expenses.
11
<PAGE> 16
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer you as a shareholder of Vanguard Florida Insured Tax-Free Fund. Booklets
providing detailed information are available on the services marked with a [BOOK
GRAPHIC]. Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.
<TABLE>
<CAPTION>
<S> <C>
TELEPHONE REDEMPTIONS Automatically set up for this Fund
(SALES AND EXCHANGES) unless you notify us otherwise.
CHECKWRITING Method for drawing money from your
account by writing a check for $250 or
more.
VANGUARD DIRECT DEPOSIT Automatic method for depositing your
SERVICE paycheck or U.S. government payment
[BOOK GRAPHIC] (including Social Security and
government pension checks) into your
account.
VANGUARD AUTOMATIC EXCHANGE Automatic method for moving a fixed
SERVICE amount of money from one Vanguard fund
[BOOK GRAPHIC] account to another.*
VANGUARD FUND EXPRESS Electronic method for buying or selling
[BOOK GRAPHIC] shares. You can transfer money between
your Vanguard fund account and an
account at your bank, savings and loan,
or credit union on a systematic schedule
or whenever you wish.*
VANGUARD DIVIDEND EXPRESS Electronic method for transferring
[BOOK GRAPHIC] dividend and/or capital gains
distributions directly from your
Vanguard fund account to your bank,
savings and loan, or credit union
account, or to another Vanguard fund
account.
VANGUARD BROKERAGE SERVICES A cost-effective way to trade stocks,
(VBS) bonds, and options on major exchanges,
[BOOK GRAPHIC] Nasdaq, and other domestic
over-the-counter markets at reduced
rates, and to buy and sell shares of
non-Vanguard mutual funds. Call VBS
(1-800-992-8327) for additional
information and the appropriate forms.
</TABLE>
*Can be used to "dollar-cost average" [BOOK GRAPHIC].
12
<PAGE> 17
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
accounts.
<TABLE>
<CAPTION>
<S> <C>
FOR ONE OR MORE PEOPLE To open an account in the name of one
(individual) or more (joint tenants)
people. $3,000 minimum initial
investment.
FOR A MINOR CHILD To open an account as an UGMA/UTMA
[BOOK GRAPHIC] (Uniform Gifts/Transfers to Minors Act).
Age of majority and other requirements
are set by state law. $1,000 minimum
initial investment.
FOR HOLDING TRUST ASSETS To invest assets held in an existing
[BOOK GRAPHIC] trust. $3,000 minimum initial
investment.
FOR AN ORGANIZATION To open an account as a corporation,
partnership, or other entity. These
accounts may require a corporate
resolution or other documents to name
the individuals authorized to act.
$3,000 minimum initial investment.
</TABLE>
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number of
ways:
<TABLE>
<CAPTION>
<S> <C>
REINVESTMENT Dividends and capital gains are
automatically reinvested in additional
shares of the Fund unless you request a
different distribution method.
DIVIDENDS IN CASH Dividends are paid by check and mailed to
your account's address of record, and
capital gains are reinvested in
additional shares of the Fund.
DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains are paid
IN CASH by check and mailed to your account's
address of record.
</TABLE>
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard fund account,
see Vanguard Dividend Express under "Services and Account Features."
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request, provided we receive your request before 4 p.m. Eastern
time (the close of trading on the New York Stock Exchange). You begin earning
dividends the calendar day after your account is credited. The Fund is offered
on a no-load basis, meaning that you do not pay sales commissions or 12b-1
marketing fees.
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
TELE-ACCOUNT 1-800-662-6273
13
<PAGE> 18
BUYING SHARES (CONTINUED)
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
MINIMUM INVESTMENT $3,000 (regular account); $1,000 $100 by mail or exchange;
(custodial accounts for minors). $1,000 by wire.
BY MAIL Complete and sign the application form. Mail your check with an Invest-
[ENVELOPE] By-Mail form detached from your
FIRST-CLASS mail to: confirmation statement to the
The Vanguard Group address listed on the form.
P.O. Box 2600 Make your check payable to:
Valley Forge, PA 19482-2600 The Vanguard Group - 18 Make your check payable to:
The Vanguard Group - 18
EXPRESS or REGISTERED mail to:
The Vanguard Group All purchases must be made All purchases must be made in
455 Devon Park Drive in U.S. dollars, and checks U.S. dollars, and checks must
Wayne, PA 19087-1815 must be drawn on U.S. banks. be drawn on U.S. banks.
</TABLE>
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
<TABLE>
<CAPTION>
<S> <C> <C>
BY TELEPHONE Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
[TELEPHONE RECEIVER] hours a day -- or Client Services hours a day -- or Client Services
during business hours -- to during business hours -- to
1-800-662-6273 exchange from another Vanguard fund exchange from another Vanguard fund
Vanguard Tele-Account account with the same registration account with the same registration
1-800-662-2739 (name, address, taxpayer I.D., and (name, address, taxpayer I.D., and
Client Services account type). account type).
Use Vanguard Fund Express (see
"Services and Account Features") to
transfer assets from your bank
account. Call Client Services
before your first use to verify
that this option is in place.
</TABLE>
*You must obtain a Personal Identification
Number through Tele-Account at least seven
days before you request your first exchange.
IMPORTANT NOTE: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.
<TABLE>
<CAPTION>
<S> <C> <C>
BY WIRE Call Client Services to arrange Call Client Services to arrange
[WIRE] your wire transaction. your wire transaction.
Wire to:
CoreStates Bank, N.A.
ABA 031000011
CoreStates No 0141-1274
[Temporary Account Number]
Vanguard Florida Tax-Free Fund
[Portfolio Name]
[Account Registration]
Attention: Vanguard
</TABLE>
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
TELE-ACCOUNT 1-800-662-6273
14
<PAGE> 19
BUYING SHARES (CONTINUED)
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
AUTOMATICALLY -- Vanguard offers a variety of ways
[GRAPHIC OF ARROWS IN A CIRCLE] that you can add to your account
automatically. See "Services and
Account Features."
</TABLE>
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected,which may take up to ten days.
NOTE: If you buy Fund shares through a registered broker-dealer or investment
adviser, the broker-dealer or adviser may charge you a service fee.
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. We must consider the interests of all Fund shareholders
and so reserve the right to delay or refuse any purchase that will disrupt the
Fund's operation or performance.
REDEEMING SHARES
IMPORTANT TAX NOTE: Any sale or exchange of Fund shares could result in a
taxable gain or a loss.
The ability to redeem (that is, sell or exchange) Fund shares by telephone is
automatically established for your account unless you tell us in writing that
you do not want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
- Fund name.
- 10-digit account number.
- Name and address exactly as registered on that account.
- Social Security or Employer Identification number as registered on that
account.
If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.
If we follow reasonable security procedures, neither the Fund nor Vanguard
will be responsible for the authenticity of transaction instructions received by
telephone. We believe that these procedures are reasonable and that, if we
follow them, you bear the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares.
One way to sell shares is the checkwriting option (established when you set
up your account or by calling Client Services). Your personalized Vanguard
checks work in much the same way as bank checks, except that Vanguard checks are
considered drafts and cannot be cashed immediately like a bank check. You cannot
write a Vanguard check to redeem shares that you purchased by check within the
previous ten days.
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
TELE-ACCOUNT 1-800-662-6273
15
<PAGE> 20
REDEEMING SHARES (CONTINUED)
When you sell shares by telephone or mail, sale proceeds are normally mailed
within two business days after Vanguard receives your request. The sale price of
your shares will be the Fund's next-determined net asset value after Vanguard
receives your request in good order. Good order means that the request includes:
- Fund name and account number.
- Amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account.
- Signature guarantees (if required).
- Any supporting legal documentation that may be required.
- Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4 p.m. Eastern time) are processed the next
business day.
The Fund reserves the right to close any account whose balance falls below
the minimum initial investment. The Fund will deduct a $10 annual fee if your
account balance falls below $2,500 or if your UGMA/UTMA account balance falls
below $500. The fee is waived if your total Vanguard account assets are $50,000
or more.
Some written requests require a signature guarantee from a bank, broker, or
other acceptable financial institution. A notary public cannot provide a
signature guarantee.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard fund to purchase shares of
another.
Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate the exchange privilege, limit the
amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of the
Fund and increase transaction costs, Vanguard limits exchange activity to TWO
SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30 days apart) from the Fund during
any 12-month period. "Substantive" means either a dollar amount large enough to
have a negative impact on the Fund or a series of movements between Vanguard
funds.
Before you exchange into a new Vanguard fund, be sure to read its prospectus.
For a copy and for answers to questions you might have, call Investor
Information.
<TABLE>
<CAPTION>
SELLING OR EXCHANGING SHARES INSTRUCTIONS
<S> <C>
BY TELEPHONE Call Vanguard Tele-Account* 24
[TELEPHONE RECEIVER] hours a day -- or Client Services
1-800-662-6273 during business hours -- to sell or
Vanguard Tele-Account exchange shares. You can exchange
shares from the Fund to open an
1-800-662-2739 account in another Vanguard fund or
Client Services to add to an existing Vanguard fund
account with an identical
registration.
*You must obtain a Personal Identification
Number through Tele-Account at least seven
days before you request your first
redemption.
</TABLE>
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
TELE-ACCOUNT 1-800-662-6273
16
<PAGE> 21
Redeeming Shares (continued)
<TABLE>
<CAPTION>
<S> <C>
BY MAIL Send a letter of instruction signed
[ENVELOPE] by all registered account holders.
FIRST-CLASS mail to: Include the fund name and account
The Vanguard Group number and (if you are selling) a
Vanguard Florida Tax-Free Fund dollar amount or number of shares
P.O. Box 1120 OR (if you are exchanging) the name
Valley Forge, PA 19482 of the fund you want to exchange
into and a dollar amount or number
EXPRESS or REGISTERED mail to: of shares.
The Vanguard Group
Vanguard Florida Tax-Free Fund
455 Devon Park Drive
Wayne, PA 19087-1815
BY CHECK You can sell shares by writing a
[GRAPHIC OF CHECK] check for $250 or more.
AUTOMATICALLY Vanguard offers several ways to
[GRAPAHIC OF ARROWS sell or exchange shares
IN A CIRCLE] automatically (see "Services and
Account Features"). Call Investor
Information for the appropriate
booklet and application if you did
not elect a feature when you opened
your account.
</TABLE>
It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Fund shareholders and so reserve
the right to delay your redemption proceeds -- up to seven days -- if the amount
will disrupt the Fund's operation or performance.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the United States
Securities and Exchange Commission. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions on
selling or exchanging shares by mail in the "Redeeming Shares" section.
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you clear, concise account and tax statements to help you keep
track of your Fund account throughout the year as well as when you are preparing
your income tax returns.
In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison with its industry benchmark), an overview of the markets, a report
from the adviser, as well as a listing of its holdings and other financial
statements.
17
<PAGE> 22
FUND AND ACCOUNT UPDATES (continued)
<TABLE>
<CAPTION>
<S> <C>
CONFIRMATION STATEMENT Sent each time you buy, sell, or
exchange shares; confirms the date
and the amount of your transaction.
PORTFOLIO SUMMARY Mailed quarterly; shows the market value of
your account at the close of the statement
period, as well as distributions, purchases,
sales, and exchanges for the current
calendar year.
FUND FINANCIAL REPORTS Mailed in January and July for this Fund.
TAX STATEMENTS Generally mailed in January; report previous
year's taxable distributions and proceeds
from the sale of Fund shares.
AVERAGE COST STATEMENT Issued quarterly (accompanies your
[BOOK GRAPHIC] Fund Summary); shows the average
cost of shares that you redeemed
during the calendar year, using the
average cost single category
method.
AUTOMATED TELEPHONE ACCESS
VANGUARD TELE-ACCOUNT Toll-free access to Vanguard fund and account
information -- as well as some transactions
1-800-662-6273 -- through any TouchTone(TM) telephone.
Any time, seven days a week, Tele-Account provides total return, share
from anywhere in the continental price, price change, and yield quotations
United States and Canada. for all Vanguard funds; gives your account
[BOOK GRAPHIC] balances and history (e.g., last transaction,
latest dividend distribution, redemptions by
check during the last three months); and
allows you to sell or exchange fund shares.
COMPUTER ACCESS
VANGUARD ONLINE(SM) Use your personal computer to learn more
KEYWORD: Vanguard about Vanguard funds and services; keep in
touch with your Vanguard accounts; map out a
long-term investment strategy; and ask
questions, make suggestions, and send
messages to Vanguard. Vanguard Online is
offered through America Online(R) (AOL). To
establish an AOL account, call
1-800-238-6336.
VANGUARD ON THE Use your personal computer to visit
WORLD WIDE WEB Vanguard's education-tion-oriented website,
http://www.vanguard.com which provides timely news and information
about Vanguard funds and services; an on-line
"university" that offers a variety of mutual
fund classes; and easy-to-use, interactive
tools to help you create your own investment
and retirement strategies.
</TABLE>
18
<PAGE> 23
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether the Fund is suitable for
your investment goals. If you decide to invest, don't throw the prospectus out;
you will no doubt need it for future reference.
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about the
Vanguard Florida Insured Tax-Free Fund, including its investment objective,
risks, strategies, and expenses, as well as services available to you as a
shareholder.
It is important that you understand these facts so that you can decide
whether an investment in this Fund is right for you. The following questions
offer a quick review of some of the subjects covered by this prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
/ / The Fund's objective? (page 4)
/ / The Fund's investment strategies? (page 5)
/ / Who should invest in the Fund? (page 4)
/ / The risks associated with the Fund? (pages 4 - 8)
/ / Whether the Fund is federally insured?
(inside front cover)
/ / The Fund's expenses? (page 2)
/ / The background of the Fund's investment managers?
(page 11)
/ / How to open an account? (page 14)
/ / How to sell or exchange shares? (page 15)
/ / How often you'll receive statements and financial reports?
(page 17)
19
<PAGE> 24
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to accurately gauge your risk
tolerance. Scoring for the quiz is below.
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: If you chose answer #1
or #2 to Question C, subtract five points from your total score.)
- - If you scored between 0 and 25 points, you are considered a
conservative investor.
- - If you scored between 26 and 32 points, you are considered a
moderate investor.
- - If you scored between 33 and 35 points, you are considered an
aggressive investor.
A SIMPLE RISK QUIZ
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN
INDIVIDUAL STOCKS OR BONDS) FOR . . .
1. Less than a year
2. 1 - 2 years
3. 3 - 4 years
4. 5 - 9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR
INDIVIDUAL STOCKS OR BONDS), I WOULD SAY I'M . . .
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO
TIME IF THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER
THE COURSE OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS
EQUAL TO ____ MONTHS OF MY TAKE-HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
20
<PAGE> 25
GLOSSARY OF INVESTMENT TERMS
ALTERNATIVE MINIMUM TAX (AMT)
A separate tax system designed to assure that individuals pay at least a minimum
amount of federal income taxes. Certain securities used to fund private,
for-profit activities are subject to AMT.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
bank CDs, repurchase agreements and U.S. Treasury bills.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FACE VALUE
The value of a bond at the time it was issued (that is, initially sold).
FIXED INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
INSURED BONDS
Bonds whose payments of both principal and interest are guaranteed. The
insurance does not guarantee the value of the bonds, only that bond payments
will be made in a timely fashion.
INTANGIBLE PERSONAL PROPERTY TAX
A tax imposed by some states on certain financial assets, including mutual fund
shares. Rather than assessing taxes on income and capital gains from the shares,
the intangible personal property tax is based on the net asset value of the
shares themselves.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MATURITY
The date when a bond issuer agrees to return the bond's principal, or face
value, to the bond's buyer.
MUNICIPAL BOND
A bond issued by a state or local government. Dividend income from municipal
bonds is generally free from federal income taxes, as well as taxes in the state
in which it was issued.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
5
<PAGE> 26
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTOR INFORMATION VANGUARD BROKERAGE ELECTRONIC ACCESS TO THE
DEPARTMENT SERVICES VANGUARD MUTUAL FUND
1-800-662-7447 (SHIP) 1-800-992-8327 EDUCATION AND INFORMATION
TEXT TELEPHONE: For information on trading CENTER
1-800-952-3335 stocks, bonds, and options World Wide Web
For information on our funds, at reduced commissions http://www.vanguard.com
fund services, and retirement
accounts; requests for VANGUARD TELE-ACCOUNT(R) E-mail
literature 1-800-662-6273 (ON-BOARD) [email protected]
For 24-hour automated access
CLIENT SERVICES DEPARTMENT to price and yield, information
1-800-662-2739 (CREW) on your account, certain
TEXT TELEPHONE: transactions
1-800-662-2738
For information on your
account, account transactions,
account statements
</TABLE>
(C) 1997 Vanguard Marketing
Corporation, Distributor
2
<PAGE> 27
PART B
VANGUARD FLORIDA INSURED TAX-FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 28, 1997
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus dated March 28, 1997. 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
Florida Risk Factors..................................................................... B-5
Florida Intangible Personal Property Tax................................................. B-7
Yield and Total Return................................................................... B-7
Performance Measures..................................................................... B-8
Investment Management.................................................................... B-9
Portfolio Transactions................................................................... 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-18
</TABLE>
INVESTMENT LIMITATIONS
The following limitations cannot be changed without the consent of the
holders of a majority of the Fund's outstanding shares (as defined in the
Investment Company Act of 1940 (the "1940 Act")).
1. The Fund will not invest in securities other than municipal bonds,
except 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, and
bank certificates of deposit, (b) any investment companies investing in
such securities 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 issuers (except
U.S. Government and cash items, as defined under Subchapter M of the
Internal Revenue Code (the "Code")), 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
maximum of 25% of the Fund's total assets;
4. The Fund will not borrow money except for temporary or emergency
purposes and then only in an amount not exceeding 10% of the value of the
total assets of the Fund. The Fund will repay 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;
B-1
<PAGE> 28
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 Fund may
technically 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. In addition, although the Fund has no present intention to do
so, it reserves the right to lend its investment securities to qualified
institutions in accordance with guidelines of the Securities and Exchange
Commission;
10. The Fund will not purchase on margin or sell short, except as
specified 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
securities, together own more than 5% of the securities of such issuer;
12. The Fund will not purchase or sell commodities or commodities
contracts, except that the Fund may invest in bond futures contracts, bond
options 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,
consolidation, 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,
determined at market value at the time of the proposed investment, would be
invested in industrial revenue bonds where the payment of principal and
interest 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
government; and
16. The Fund will not purchase or otherwise acquire any security
(including 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
investment securities are purchased. Notwithstanding these limitations, the Fund
may own all or any portion of the securities of, or make loans to, or contribute
to the costs or other financial requirements of, any company which will be (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,
administrative, distribution and/or related services to the Fund and such other
investment companies. Additionally, under normal circumstances the Fund may
invest up to 20% of its assets in when-issued securities. Please see the
Prospectus for a description of such securities.
B-2
<PAGE> 29
INVESTMENT POLICIES
FUTURES CONTRACTS AND OPTIONS
The Fund may enter into futures contracts, options, and options on futures
contracts for several reasons: to maintain cash reserves while simulating full
investment, to facilitate trading, to reduce transactions costs or to seek
higher investment returns when a futures contract is priced more attractively
than the underlying municipal security or index. Futures contracts provide for
the future sale by one party and purchase by another party of a specified amount
of a specific security at a specified future time and at a specified price.
Futures 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. Assets committed
to futures contracts will be segregated at the Fund's custodian bank to the
extent required by law.
Most futures contracts are closed out before the settlement date without
the making or taking of delivery. Closing out an open futures position is done
by taking an opposite position ("buying" a contract which has previously been
"sold," or "selling" a contract previously purchased) in an identical contract
to terminate the position. Brokerage 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
securities with a broker or custodian to initiate and maintain open positions in
futures contracts. A margin deposit is intended to assure completion 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. Brokers
may establish deposit requirements which are higher than the exchange minimums.
Futures contracts are customarily purchased and sold with margin at prices which
may range upward from less than 5% of the value of the contract being traded.
The Fund expects to earn interest income on its margin deposits.
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
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Fund intends to use futures contracts
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 declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase.
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.
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.
B-3
<PAGE> 30
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 insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In
addition, the 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 the Fund.
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
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 (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 initial margin requirement for 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 associated 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
imperfect or no correlation where the securities underlying futures contracts
have different maturities or other characteristics than the portfolio securities
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 securities.
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 unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
OTHER TYPES OF DERIVATIVES
In addition to futures and options, the Fund may invest in other types of
derivatives, including warrants, swap agreements and partnerships or grantor
trust derivative products. Derivatives are instruments whose value is linked to
or derived from an underlying security. Derivatives may be traded separately on
exchanges or in the over-the-counter market, or they may be imbedded in
securities. The most common imbedded derivative is the call option attached to
or imbedded in a callable bond. The owner of a traditional callable
B-4
<PAGE> 31
bond holds a combination of a long position in a non-callable bond and a short
position in a call option on that bond.
Derivative instruments may be used individually or in combination to hedge
against unfavorable changes in interest rates, or to speculate on anticipated
changes in interest rates. Derivatives may be structured with no or a high
degree of leverage. When derivatives are used as hedges, the risk incurred is
that the derivative instrument's value may change differently than the value of
the security being hedged. This "basis risk" is generally lower than the risk
associated with an unhedged position in the security being hedged. Some
derivatives may entail liquidity risk, i.e., the risk that the instrument cannot
be sold at a reasonable price in highly volatile markets. Leveraged derivatives
used for speculation are very volatile, and therefore, very risky. However, the
Fund will only utilize derivatives for hedging or arbitrage purposes, and not
for speculative purposes. Over-the-counter derivatives involve a counterparty
risk, i.e., the risk that the individual or institution on the other side of the
agreement will not or cannot meet its obligations under the derivative
agreement.
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 securities 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
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities 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 anticipated
that any net gain realized from the closing out of futures contracts will be
considered gain from the sale of securities and therefore be qualifying income
for purposes of the 90% requirement. In order to avoid realizing excessive gains
on securities held less than three months, the Fund may be required 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 purposes, 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 transactions. 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.
FLORIDA RISK FACTORS
Vanguard Florida Insured Tax-Free Fund invests primarily in the debt
obligations of the Florida state government, the State's agencies and
authorities, and various local governments, including counties, cities, towns,
special districts, and authorities. In general, the credit quality and credit
risk of any issuer's debt depend on the state and local economy, the health of
the issuer's finances, the amount of the issuer's debt, the quality of
management, and the strength of legal provisions in debt documents that protect
debt holders. Credit risk is usually lower wherever the economy is strong,
growing and diversified, financial operations are sound, and the debt burden is
reasonable.
B-5
<PAGE> 32
The average credit rating among American states for full "faith and credit"
state debt is Aa as determined by Moody's Investors Service Inc. and AA as
determined 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
obligation 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
and AA by both rating agencies for over two decades, during which period the
State's obligations could be characterized as providing high-grade security with
a very strong capacity for timely repayment of debt.
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. While attracting many senior citizens, Florida also
offers a favorable business environment and growing employment 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
economic indicators as employment growth and income levels. Florida's job
creation 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 impact tourism. An economic recession reached Florida in
1991 and impacted the service sector considerably, causing the State to
experience an actual job loss for the first time in decades. While Florida's
aerospace and defense contracting industries are now in decline, the State's
manufacturing 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
expansion 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
continue to grow at a faster rate. These levels in Florida are also less
sensitive 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 municipalities
and authorities have a more narrow pledge of security, such as a sales tax
stream, special assessment revenue, user fees, utility taxes, or fuel taxes.
Credit quality of such debt instruments tends to be somewhat lower than that of
general obligation debt. The State of Florida issues general obligation 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
(although 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. The State's
dependence on the sales tax as a primary source of revenue compounded the
recession's impact. State officials acted quickly and responsibly to maintain a
balanced budget by revising revenue
B-6
<PAGE> 33
projections and controlling spending. Such responsible fiscal management
enhances overall credit quality in the State of Florida.
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 pressures
due to the growth that will continue to strain the State's narrow revenue base.
Future budgets may require a wider revenue base to meet such demands; the most
likely candidate for such revenue enhancement is a tax on consumer 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
mutual 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 intangibles
tax to the extent that, on the annual assessment date (December 31), its assets
are solely invested in exempt Florida securities, exempt U.S. Government
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 possessions) 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, 1996 was
4.92%.
The total return of the Fund for the year ended November 30, 1996 was
+6.45%. The average annual total return for the Fund since inception on
September 1, 1992 was +8.01%.
B-7
<PAGE> 34
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
The Fund may use one or more of the following unmanaged indexes for
comparative 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 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.
RUSSELL 2000 STOCK INDEX -- a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000; a widely-used benchmark for small
capitalization common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and
29 preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly
issued, non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
LEHMAN LONG-TERM TREASURY BOND INDEX -- is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued fixed-rate,
non-convertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL BOND INDEX (20 YEAR) -- is a yield index on current
coupon high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the
average yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial
issues. It is a value-weighted index calculated on price change only and does
not include income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ
Industrial Index.
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<PAGE> 35
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index,
and a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all
publicly issued, fixed-rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE
INDEX -- is a market weighted index that contains individually priced U.S.
Treasury, agency, and corporate securities rated BBB- or better with maturities
between 5 and 10 years. The index has a market value of over $700 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of
small company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average
general equity funds with similar investment objectives and policies, as
measured by Lipper Analytical Services, Inc.
LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income 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.
B-9
<PAGE> 36
The investment management staff is responsible for: maintaining the
specified 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
commissions and other transaction costs on the sales of securities as well as on
the reinvestment of the proceeds in other securities. The annual portfolio
turnover rate for 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
impossible to predict whether or not the portfolio turnover rate in future years
will vary significantly from the rates in recent years.
PORTFOLIO TRANSACTIONS
HOW TRANSACTIONS ARE AFFECTED
The types of securities in which the Portfolios invest are generally
purchased and sold through principal transactions, meaning that the Portfolios
normally purchase securities directly from the issuer or a primary market-maker
acting as principal for the securities on a net basis. Brokerage commissions are
not paid on these transactions, although the purchase price for securities
usually includes an undisclosed compensation. Purchases from underwriters of
securities typically include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers typically
include a dealer's mark-up (i.e., a spread between the bid and the asked
prices). During the fiscal years ended November 30, 1994, 1995 and 1996, the
Portfolios did not pay any brokerage commissions.
HOW BROKERS AND DEALERS ARE SELECTED
Vanguard's Fixed Income Group chooses brokers or dealers to handle the
purchase and sale of the Portfolios' securities, and is responsible for getting
the best available price and most favorable execution for all transactions. When
the Portfolios purchase a newly issued security at a fixed price, the Group may
designate certain members of the underwriting syndicate to receive compensation
associated with that transaction. Certain dealers have agreed to rebate a
portion of such compensation directly to the Portfolios to offset their
management expenses. The Group is required to seek best execution of all
transactions and is not authorized to pay a brokerage commission in excess of
that which another broker might have charged for effecting the same transaction
solely on account of the receipt of research or other services.
HOW THE REASONABLENESS OF BROKERAGE COMMISSIONS IS EVALUATED
As previously explained, the types of securities that the Portfolios
purchase do not normally involve the payment of brokerage commissions. If any
brokerage commissions are paid, however, the Fixed Income Group will evaluate
their reasonableness by considering: (a) historical commission rates; (b) rates
which other institutional investors are paying, based upon publicly available
information; (c) rates quoted by brokers and dealers; (d) the size of a
particular transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular transaction in
terms of both execution and settlement; (f) the level and type of business done
with a particular firm over a period of time; and (g) the extent to which the
broker or dealer has capital at risk in the transaction.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments under circumstances where certain economies can be
achieved in sales of the Fund's shares.
B-10
<PAGE> 37
STOCK CERTIFICATES. Your purchase will be made in full and fractional
shares of the Fund calculated 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. This saves the
shareholders the trouble of safekeeping the certificates and saves the Fund the
cost of issuing certificates. 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
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
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
conformity 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) ALL REDEMPTIONS, REGARDLESS OF THE AMOUNT INVOLVED, WHEN
THE PROCEEDS ARE TO BE PAID TO SOMEONE OTHER THAN THE REGISTERED OWNERS; AND (2)
SHARE TRANSFER REQUESTS.
A signature guarantee may be obtained from a bank, broker or any other
guarantor 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> 38
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 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 and Trustee*
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group. Director of The Mead
Corporation, General Accident Insurance and Chris-Craft Industries, Inc.
JOHN J. BRENNAN, President, Chief Executive Officer & Trustee*
President, Chief Executive Officer and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Trustee
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Director of
Sun Company, Inc. and Westinghouse Electric Corporation.
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;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications
Company.
ALFRED M. RANKIN, Trustee
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company and The Standard Products Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co., President, New York
University; Director of Pacific Gas and Electric Company, Proctor & Gamble
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. and Kmart Corporation.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company; and Trustee of Vanderbilt University.
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*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- ---------------
* Mr. Bogle and the Officers of the Fund are "interested persons" as defined in
the Investment Company Act of 1940.
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<PAGE> 39
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.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's 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 adviser
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 prevent
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
permitted to engage in personal securities transactions. However, such
transactions 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 relative
net assets and its contribution to Vanguard's capital. At November 30, 1996, the
Fund had contributed $45,000, representing .2% of 1% of Vanguard's
capitalization. The Funds' Service Agreement provides for the following
arrangement: (1) each Vanguard Fund may invest a maximum of 0.40% of its assets
in Vanguard and (2) there is no restriction on the maximum cash investment that
the Vanguard Funds may make in Vanguard.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
year ended November 30, 1996, the Fund's share of Vanguard's actual net costs of
operations relating to management and administrative services (including
transfer agency) totaled approximately $689,000.
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
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The 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 organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remaining
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 nature
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, 1996,
the Fund paid approximately $107,000 of the Group's
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<PAGE> 40
distribution and marketing expenses, which represented an effective annual rate
of .02 of 1% of the Fund's average net assets.
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to the Fund, Vanguard Municipal Bond Fund, Vanguard Money Market
Reserves, Vanguard Treasury Fund, 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, the Aggressive Growth Portfolio
of Vanguard Horizon 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, Vanguard REIT Index, a portion of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as well as several
indexed separate accounts. These services are provided on an at-cost basis from
a money management staff employed directly by Vanguard. The compensation and
other expenses of this staff are paid by the Funds utilizing these services.
During the years ended November 30, 1994, 1995 and 1996 the Fund paid
approximately $33,000, $46,000 and $58,000, respectively, of Vanguard's
investment advisory expenses.
REMUNERATION OF TRUSTEES AND OFFICERS. The Fund pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. During the year ended November 30, 1996, 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, 1996, the Fund's
proportionate share of remuneration paid to all Officers of the Fund as a group
was approximately $14,925.
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 during the
year, if any, that exceeds 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, 1996, the Fund's proportionate share of retirement benefits paid to all
Officers of the Fund as a group, was approximately $300.
The following table provides detailed information with respect to the
amounts paid or accrued for the Trustees for the fiscal year ended November 30,
1996.
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 $163 $26 $15,000 $65,000
Robert E. Cawthorn $163 $19 $13,000 $65,000
Burton G. Malkiel $163 $17 $15,000 $65,000
Alfred M. Rankin, Jr. $163 $14 $15,000 $65,000
John C. Sawhill $163 $16 $15,000 $65,000
James O. Welch, Jr. $163 $20 $15,000 $65,000
J. Lawrence Wilson $163 $15 $15,000 $65,000
</TABLE>
- ---------------
(1) As "Interested Trustees," Messrs. Bogle and Brennan receive no compensation
for their service as Trustees.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Director or Trustee of 34 Vanguard
Funds (33 in the case of Mr. Malkiel).
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<PAGE> 41
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Pennsylvania business 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
conversion, 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
shareholders, all shares of the Fund then issued and outstanding and entitled to
vote, irrespective of the class, shall be voted in the aggregate and not by
class: except (i) when required by the Investment Company Act of 1940, shares
shall be voted by individual class; and (ii) when the matter does not affect any
interest of a particular class, then only shareholders of the affected class or
classes shall be entitled to vote thereon.
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
outstanding, the Trustees may sell or convert the assets of the Fund to
another 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
distribute such assets ratably among the shareholders of the Fund.
Upon completion of the distribution of the remaining proceeds or the
remaining 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
parties shall be cancelled and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Pennsylvania law shareholders of
such a Trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Fund. Therefore, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Fund and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Fund or the
Trustees. The Declaration of Trust provides for indemnification out of the Fund
property of any shareholder held personally liable for the obligations of the
Fund. The Declaration of Trust also provides that the Fund shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended November 30, 1996,
including the financial highlights, appearing in the Fund's 1996 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 1996 Annual Report to
Shareholders is available upon request.
B-15
<PAGE> 42
APPENDIX A -- DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS
MUNICIPAL BONDS -- GENERAL. Municipal Bonds generally include debt
obligations issued by states and their political subdivisions, and duly
constituted authorities, not for-profit corporations, and corporations to obtain
funds to construct, repair or improve various public facilities such as
airports, bridges, highways, hospitals, housing, schools, streets and water and
sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loan to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured 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 payable
only from the revenues derived from a particular facility or class of facilities
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+ or SP-1 by
Standard & Poor's Corp. or MIG1 or MIG2 by Moody's Investors Service Inc.),
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 Inc.). The Fund may
invest in unrated notes if considered by the Board of Trustees to be of credit
quality comparable to that required for rated notes.
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 ability
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
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal 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 normally 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
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Corporation 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
absolute standards of quality. Consequently, Municipal Bonds with the same
maturity, 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 issuance
date can be a month or more. It is possible that the securities will never be
issued and the commitment canceled.
B-16
<PAGE> 43
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
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 each Portfolio to achieve its respective 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. (For more information please refer to "Florida Risk
Factors" on page B-6.)
Ratings. Excerpts from Moody's Investors Service, Inc.'s Municipal Bond
ratings: Aaa -- judged to be of the "best quality" and are referred to as "gilt
edge"; interest payments are protected by a large or by an exceptionally stable
margin and principal is secure; Aa -- judged to be of "high quality by all
standards" but as to which margins of protection or other elements make
long-term risks appear somewhat larger than Aaa-rated Municipal Bonds; together
with Aaa group they comprise what are generally known as "high grade bonds";
A -- possess many favorable investment attributes and are considered "upper
medium grade obligations." Factors giving security to principal and interest
A-rated Municipal Bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future; Baa --
considered as medium grade obligations; i.e., they are neither highly protected
nor poorly secured; interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time; Ba -- protection of
principal and interest payments may be very moderate; judged to have speculative
elements; their future cannot be considered as well-assured; B -- lack
characteristics of a desirable investment; assurance of interest and principal
payments over any long period of time may be small; Caa -- poor standing; may be
in default or there may be present elements of danger with respect to principal
and interest; Ca -- speculative in a high degree; often in default; C -- lowest
rated class of bonds; issues so rated can be regarded as having extremely poor
prospects for ever attaining any real investment standing.
Description of Moody's ratings of state and municipal notes: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used will be as follows:
MIG-1 -- Best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both; MIG-2 -- High quality with margins of
protection ample 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 degree;
A -- has a strong capacity to pay principal and interest, although somewhat more
susceptible to the adverse changes in circumstances and economic conditions;
BBB -- regarded as having an adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters but adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest than for bonds in A category;
BB -- B -- CCC -- CC -- predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with terms of obligation; BB is
being paid; D -- in 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
issues: SP-1+ -- very strong capacity to pay principal and interest;
SP-1 -- strong capacity to pay principal and interest.
B-17
<PAGE> 44
Description of S&P's highest commercial paper ratings: A-1+ -- This
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1 -- This designation indicates the degree of safety regarding
timely payment is very strong.
APPENDIX B -- MUNICIPAL LEASE OBLIGATIONS
Each Portfolio may invest in municipal lease obligations. Such securities
will be treated as liquid under the following guidelines 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
investors.
4. The investment adviser has determined that the obligation, or a
comparable lessee security, trades in the institutional marketplace at least
periodically, with a bid/offer spread of 20 basis points or less.
5. The governmental lessee has a full faith and credit general obligation
rating of at least "A-" as published by at least one NRSRO or as determined by
the investment adviser. If the lessee is a state government, the general
obligation rating must be at least BAA1, BBB+, or equivalent, as determined
above.
6. The projects to be financed by the obligation are determined to be
critical to the lessee's ability to deliver essential services.
7. Specific legal features such as covenants to maintain the tax-exempt
status of the obligation, covenants to make lease payments without the right of
offset or counterclaim, covenants to return leased property to the lessor in the
event of non-appropriation, insurance policies, debt service reserve fund, are
present.
8. The lease must be "triple net" (i.e. -- lease payments are net of
property maintenance, taxes and insurance).
9. If the lessor is a private entity, there must be a sale and absolute
assignment of rental payments to the trustee, accompanied by a legal opinion
from recognized bond counsel that lease payments would not be considered
property of the lessor's estate in the event of lessor's bankruptcy.
B-18
<PAGE> 45
PART C
VANGUARD FLORIDA INSURED TAX-FREE FUND
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Registrant's audited Financial Statements for the year ended November
30, 1996, including Price Waterhouse LLP's report thereon, are incorporated by
reference, in the Statement of Additional Information, from the Registrant's
1996 Annual Report to Shareholders which has been filed with the Commission. The
financial statements included in the Annual Report are:
1. Statement of Net Assets as of November 30, 1996
2. Statement of Operations for the year ended November 30, 1996
3. Statement of Changes in Net Assets for the years ended November 30, 1995
and November 30, 1996
4. Financial Highlights for each of the four years ended November 30, 1996,
November 30, 1995, November 30, 1994, November 30, 1993 and for the
period September 1, 1992 to November 30, 1992
5. Notes to Financial Statements
6. Report of Independent Accountants
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------------------- -----------------------------------------------------
<S> <C>
1........................ Consent of Independent Accountants*
Financial Statements -- reference is made to (a)
2........................ above
3........................ Schedule for computation of performance quotations*
27........................ Financial Data Schedule*
</TABLE>
- ---------------
* Filed Herewith
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The officers of the Registrant, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management of the Fund" in the Prospectus constituting Part
A and in the Statement of Additional Information constituting Part B of this
Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of November 30, 1996, the number of shareholders of the Fund was 7,909.
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Declaration of Trust.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to Trustees, Officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Trustee, Officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, Officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
C-1
<PAGE> 46
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodian, CoreStates Bank, N.A.,
Philadelphia, PA.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described in
Part B hereof under "Management of the Fund," the Registrant is not a party to
any management-related service contract.
ITEM 32. UNDERTAKINGS
Annual meetings of shareholders will not be held except as required by the
Investment Company Act of 1940 ("1940 Act") or other applicable law. Registrant
undertakes to comply with the provisions of Section 16(c) of the 1940 Act in
regard to shareholders' rights to call a meeting of shareholders for the purpose
of voting on the removal of Trustees and to assist in shareholder communications
in such matters, to the extent required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
C-2
<PAGE> 47
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on
the 21st day of March, 1997.
VANGUARD FLORIDA INSURED TAX-FREE FUND
By: /s/ JOHN J. BRENNAN
---------------------------------------
(Raymond J. Klapinsky)
John J. Brennan*,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURES
---------- TITLE DATE
----------------------- ---------------
<C> <S> <C>
By: /s/ JOHN C. BOGLE Chairman and Trustee March 21, 1997
- -------------------------------------------------------
(Raymond J. Klapinsky)
John C. Bogle*
By: /s/ JOHN J. BRENNAN President, Chief March 21, 1997
- ------------------------------------------------------- Executive Officer
(Raymond J. Klapinsky) and Trustee
John J. Brennan*
By: /s/ BARBARA B. HAUPTFUHRER Trustee March 21, 1997
- -------------------------------------------------------
(Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*
By: /s/ BURTON G. MALKIEL Trustee March 21, 1997
- -------------------------------------------------------
(Raymond J. Klapinsky)
Burton G. Malkiel*
By: /s/ JAMES O. WELCH, JR. Trustee March 21, 1997
- -------------------------------------------------------
(Raymond J. Klapinsky)
James O. Welch, Jr.*
By: /s/ J. LAWRENCE WILSON Trustee March 21, 1997
- -------------------------------------------------------
(Raymond J. Klapinsky)
J. Lawrence Wilson*
By: /s/ ROBERT E. CAWTHORN Trustee March 21, 1997
- -------------------------------------------------------
(Raymond J. Klapinsky)
Robert E. Cawthorn*
By: /s/ ALFRED M. RANKIN, JR. Trustee March 21, 1997
- -------------------------------------------------------
(Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*
By: /s/ JOHN C. SAWHILL Trustee March 21, 1997
- -------------------------------------------------------
(Raymond J. Klapinsky)
John C. Sawhill*
By: /s/ RICHARD F. HYLAND Treasurer and Principal March 21, 1997
- ------------------------------------------------------- Financial Officer and
(Raymond J. Klapinsky) Accounting Officer
Richard F. Hyland*
</TABLE>
* By Power of Attorney -- See File Number 2-14336, January 23, 1990.
Incorporated by Reference.
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<S> <C>
CONSENT OF INDEPENDENT ACCOUNTANTS................................................... EX-99.B11
SCHEDULE FOR CALCULATION OF PERFORMANCE DATA......................................... EX-99.B16
FINANCIAL DATA SCHEDULE.............................................................. EX-27
</TABLE>
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 5 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated December 31, 1996, relating to the financial
statements and financial highlights appearing in the November 30, 1996 Annual
Report to Shareholders of Vanguard Florida Insured Tax-Free Fund, which are
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the Prospectus
and under the heading "Financial Statements" in the Statement of Additional
Information.
Price Waterhouse LLP
Philadelphia, Pennsylvania
March 20, 1997
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD FLORIDA INSURED TAX-FREE FUND
1. AVERAGE ANNUAL TOTAL RETURN (As of November 30, 1996)
P (1 + T)(n) = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
EXAMPLE:
One Year
<TABLE>
<S> <C> <C>
P = 1,000
T = +6.45%
N = 1
ERV = $1,064.50
Five Year
P = 1,000
T = +8.01%*
N = *
ERV = $1,387.18*
</TABLE>
- ---------------
* Since Inception September 1, 1992
2. YIELD (30 Days Ended December 31, 1996)
<TABLE>
<S> <C>
a - b
-----
Yield = 2 [ ( + 1)(6) - 1]
c X d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example: a = $2,113,131.47
b = $74,556.84
c = 45,486,813.24
d = $11.05
Yield = 4.92%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000888451
<NAME> VANGUARD FLORIDA INSURED TAX-FREE FUND
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 485,874
<INVESTMENTS-AT-VALUE> 512,168
<RECEIVABLES> 7,172
<ASSETS-OTHER> 133
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 519,473
<PAYABLE-FOR-SECURITIES> 3,011
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,413
<TOTAL-LIABILITIES> 4,424
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 492,284
<SHARES-COMMON-STOCK> 46,521
<SHARES-COMMON-PRIOR> 38,698
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,529)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 26,294
<NET-ASSETS> 515,049
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 24,598
<OTHER-INCOME> 0
<EXPENSES-NET> 888
<NET-INVESTMENT-INCOME> 23,710
<REALIZED-GAINS-CURRENT> 1,876
<APPREC-INCREASE-CURRENT> 4,311
<NET-CHANGE-FROM-OPS> 29,897
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 23,710
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19,106
<NUMBER-OF-SHARES-REDEEMED> 12,696
<SHARES-REINVESTED> 1,413
<NET-CHANGE-IN-ASSETS> 91,732
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (5,424)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 58
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 901
<AVERAGE-NET-ASSETS> 468,483
<PER-SHARE-NAV-BEGIN> 10.94
<PER-SHARE-NII> 0.550
<PER-SHARE-GAIN-APPREC> 0.130
<PER-SHARE-DIVIDEND> 0.550
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.07
<EXPENSE-RATIO> 0.19
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
