<PAGE>
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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. 6
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 7
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 27, 1998,
pursuant to paragraph(b) of Rule 485 of the Securities Act of 1933.
We have elected to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. We filed our Rule
24f-2 Notice for the year ended November 30, 1997 on February 27, 1998.
===============================================================================
<PAGE>
VANGUARD FLORIDA INSURED TAX-FREE FUND
Prospectus
March 27, 1998
This prospectus contains financial data for the Fund through the fiscal year
ended November 30, 1997.
[GRAPHIC]
[VANGUARD LOGO]
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VANGUARD FLORIDA INSURED TAX-FREE FUND
A Federal and Florida State
Tax-Exempt Income Mutual Fund
CONTENTS
Fund Profile 1
Fund Expenses 2
Financial Highlights 3
A Word About Risk 4
The Fund's Objectives 4
Who Should Invest 4
Investment Strategy 5
Investment Policies 8
Investment Limitations 9
Investment
Performance 9
Share Price 10
Dividends, Capital
Gains, and Taxes 10
The Fund and
Vanguard 11
Investment Adviser 11
General Information 11
Investing
with Vanguard 13
Services and
Account Features 13
Types of Accounts 14
Distribution Options 14
Buying Shares 14
Redeeming Shares 16
Transferring
Registration 19
Fund and Account
Updates 19
Glossary Inside Back Cover
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Vanguard Florida Insured Tax-Free Fund (the "Fund") is a nondiversified,
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 FOR
AT LEAST 80% 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 Fund's expense ratio.
ADDITIONAL INFORMATION ABOUT THE FUND
A Statement of Additional Information (dated March 27, 1998)
containing more information about the Fund is, by reference, part of this
prospectus and may be obtained without charge by writing to Vanguard, calling
our Investor Information Department at 1-800-662-7447, or visiting the
Securities and Exchange Commission's website (www.sec.gov).
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategy of
Vanguard 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, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
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.
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 (pages 10--11)
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 11/30/1997: $617 million
FUND'S EXPENSE RATIO FOR THE
YEAR ENDED 11/30/1997: 0.19%
LOADS, 12b-1 MARKETING FEES: None
SUITABLE FOR IRAS: No
MINIMUM INITIAL INVESTMENT: $3,000; $1,000 for custodial accounts for minors
NEWSPAPER ABBREVIATION: FLInsLT
CUSIP NUMBER: 922033105
QUOTRON SYMBOL: VFLTX.Q
VANGUARD FUND NUMBER: 018
ACCOUNT FEATURES (page 13)
\ \ Telephone Redemption
\ \ Checkwriting
\ \ Vanguard Direct Deposit Service(TM)
\ \ Vanguard Automatic Exchange Servicesm
\ \ Vanguard Fund Express(R)
\ \ Vanguard Dividend Express(SM)
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS--
PERIODS ENDED NOVEMBER 30, 1997
SINCE
1 YEAR 5 YEARS INCEPTION*
- --------------------------------------------------------------------------------
Florida Insured Tax-Free Fund 6.5% 7.5% 7.7%
Lipper Florida Municipal Bond
Fund Averag 6.5 6.6 6.7
*September 1, 1992.
QUARTERLY RETURNS (%) 1992--1997 (intended to show volatility of returns)
- --------------------------------------------------------------------------------
Florida Insured Tax-Free Fund Lipper Florida Municipal Bond Average
1992 0 0
0 0
0 0
3.08 2.33
1993 4.23 3.87
3.77 3.71
3.31 3.59
1.51 1.15
1994 -5.75 -6.95
1.74 0.68
-0.32 0.25
-0.32 -1.59
1995 7.56 7.42
1.14 1.88
2.48 2.32
5.59 5.05
1996 -1.77 -2.25
0.73 0.61
2.33 2.32
2.88 2.29
1997 -0.48 -0.56
3.46 3.25
3.1 2.85
2.62 2.78
- --------------------------------------------------------------------------------
IN EVALUATING PAST PERFORMANCE, REMEMBER THAT IT IS NOT INDICATIVE OF FUTURE
PERFORMANCE. PERFORMANCE FIGURES INCLUDE THE REINVESTMENT OF ANY DIVIDEND 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
INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
1
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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
1997 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 1997
of 1.03%, or $10.30 per $1,000 of average net assets, according to Lipper
Analytical Services, 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
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
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
based upon those incurred in the fiscal year ended November 30, 1997.
ANNUAL FUND OPERATING EXPENSES
Management and Administrative Expenses: 0.14%
Investment Advisory Expenses: 0.02%
12b-1 Marketing Fees: None
Other Expenses
Marketing and Distribution Costs: 0.02%
Fund Insurance: None
Miscellaneous Expenses (e.g., Taxes, Auditing): 0.01%
-----
Total Other Expenses: 0.03%
-----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.19%
=====
The following example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds, by
illustrating the hypothetical expenses that you would incur on a $1,000
investment over various periods. The example assumes that (1) the Fund provides
a return of 5% a year and (2) you redeem your investment at the end of each
period.
-----------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------
$2 $6 $11 $24
-----------------------------------------------
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>
FINANCIAL HIGHLIGHTS
The following financial highlights table shows the results for a share
outstanding of the Fund for each period since the Fund's inception on September
1, 1992. The financial statements that include these 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>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
----------------------------------------- Sep. 1* to
1997 1996 1995 1994 1993 Nov. 30, 1992
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.07 $10.94 $ 9.61 $10.86 $10.16 $10.00
------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .561 .550 .560 .550 .537 .122
Net Realized and Unrealized Gain (Loss) on Investments .140 .130 1.330 (1.180) .700 .160
------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .701 .680 1.890 (.630) 1.237 .282
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.561) (.550) (.560) (.550) (.537) (.122)
Distributions from Realized Capital Gains -- -- (.070) -- -- --
------------------------------------------------------------
TOTAL DISTRIBUTIONS (.561) (.550) (.560) (.620) (.537) (.122)
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.21 $11.07 $10.94 $ 9.61 $10.86 $10.16
====================================================================================================================
TOTAL RETURN 6.54% 6.45 %20.05% -6.08% 12.38% 2.84%
====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $617 $515 $423 $284 $269 $63
Ratio of Total Expenses to Average Net Assets 0.19% 0.19% 0.21% 0.22% 0.21% 0.24%**
Ratio of Net Investment Income to Average Net Assets 5.10% 5.09% 5.33% 5.31% 5.01% 5.10%
Portfolio Turnover Rate 13% 19% 20% 43% 34% 15%
- --------------------------------------------------------------------------------------------------------------------
*Inception date.
**Annualized.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
From time to time, the Vanguard funds advertise yield and total return figures.
Yield is a 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 1997 with a net asset value of $11.07 per share. During
the year, the Fund earned $0.561 per share from investment income (interest) and
$0.140 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
$0.701 per share, $0.561 per share was returned to shareholders in the form of
dividend distributions. The earnings ($0.701 per share) less distributions
($0.561) resulted in a share price of $11.21 at the end of the fiscal year, an
increase of $0.14 per share (from $11.07 at the beginning of the period to
$11.21 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
6.54% for the year.
As of November 30, 1997, the Fund had $617 million in net assets; an
expense ratio of 0.19% ($1.90 per $1,000 of net assets); and net investment
income amounting to 5.10% of its average net assets. It sold and replaced
securities valued at 13% of its total net assets.
3
<PAGE>
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 federal 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 would 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, would confront.
- --------------------------------------------------------------------------------
THE FUND'S OBJECTIVES
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 RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN THE FUND, AS WITH ANY INVESTMENT IN BONDS, COULD
LOSE MONEY.
[FLAG] BECAUSE THEY INVEST PRIMARILY IN SECURITIES ISSUED BY FLORIDA AND ITS
MUNICIPALITIES, THE FUND IS MORE VULNERABLE TO UNFAVORABLE
DEVELOPMENTS IN FLORIDA THAN FUNDS THAT INVEST IN MUNICIPAL BONDS OF
MANY STATES.
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
4
<PAGE>
achieved by you and other shareholders, the Fund adopted the following policies:
/ / The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards 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 STRATEGY
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 strategy is not fundamental and can be
changed by the Fund's Board of Trustees without shareholder approval. However,
before making any important change in its strategy, 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 DECLINE DUE TO FALLING INTEREST
RATES. INCOME RISK IS GENERALLY GREATEST FOR SHORT-TERM BONDS, AND
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%.
PLAN 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.
PLAN 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.
PLAN 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>
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, similar to those bonds held by the Fund on November 30, 1997.
- --------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT INVESTMENT
- --------------------------------------------------------------------------------
VALUE OF A $1,000 INVESTMENT
- --------------------------------------------------------------------------------
YIELD/AVERAGE AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
MATURITY INCREASE DECREASE INCREASE DECREASE
- --------------------------------------------------------------------------------
4.69%/10.9 years $901 $1,071 $829 $1,169
- --------------------------------------------------------------------------------
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 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 and local governments and regional governmental
authorities. Up to 20% of the Fund's assets may be invested in securities that
are subject to the alternative minimum tax (AMT). (See page 7 for a "Plain Talk"
on the "alternative minimum tax.")
[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 BY FLORIDA STATE) WILL TRAIL RETURNS FROM THE
OVERALL BOND MARKET.
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 bondholder
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.
Normally, a fund that concentrates its assets in one state would be exposed
to considerable credit risk. (Details of the risks of investing in Florida can
be found in the Statement of Additional Information.) To provide a 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
insurance
6
<PAGE>
companies, 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.
Normally, the Fund seeks to invest substantially all of its assets in
insured Florida municipal obligations. However, up to 20% of the Fund's assets
may be invested in either:
/ / Uninsured Florida municipal securities with the equivalent of a
minimum-quality rating of AA by a Nationally Recognized Statistical Rating
Organization (NRSRO), or
/ / Uninsured high-quality, short-term Florida municipal securities.
The Fund has no limitations as to the maturities of the securities in which
it invests. However, the Fund is expected to maintain a dollar-weighted average
maturity of between 15 and 25 years.
In unusual circumstances, such as a national financial emergency or a
temporary decline in the availability of Florida obligations, up to 20% of the
Fund's assets may be invested in securities, such as short-term municipal
securities issued outside of Florida or certain taxable fixed-income securities,
that generate income subject to the Florida state intangible personal property
tax or federal personal income taxes.
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).
[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.
The Fund tries to minimize credit risk by purchasing a wide selection of
Florida municipal securities. As a result, there is less chance that the Fund
will be hurt significantly by a particular bond issuer's failure to repay either
principal or interest.
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."
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).
7
<PAGE>
[FLAG] 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.
Shorter-term bonds will mature--and need to be replaced--more frequently than
longer-term bonds. As a result, shorter-term bond portfolios may tend to have
higher portfolio turnover rates than longer-term bond portfolios.
INVESTMENT POLICIES
Besides investing in high quality municipal bonds, the Fund may follow a number
of other investment policies to achieve its objectives.
[FLAG] THE FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES.
The Fund may invest 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.
The Fund will keep separate cash reserves or other liquid portfolio securities
in the amount of the obligation underlying the futures contract. Only a limited
percentage of the Funds assets--5%--may be applied toward the deposits required
on futures contracts, and the value of all futures contracts in which the Fund
acquires an interest cannot exceed 20% of the Fund's total assets.
The reasons for which the Fund will invest in futures and options are:
/ / To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.
/ / To reduce the Fund's transaction costs by buying futures instead of actual
bonds.
/ / To add value to the Fund by buying futures instead of actual bonds when
futures are cheaper.
Vanguard 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. The Statement of Additional Information offers a
detailed explanation 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.
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 44%.
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 types of derivatives--such as swap agreements and
partnerships or grantor trust-type derivatives. If used for speculation or as
leveraged investments, derivatives can carry considerable risks.
8
<PAGE>
In addition, the Fund may purchase tax-exempt securities on a
"when-issued" basis. With "when-issued" securities, a Fund agrees to buy
securities at a certain price, even if the market price of the securities at the
time of delivery is higher or lower than the agreed-upon purchase price.
INVESTMENT LIMITATIONS
The Fund has adopted limitations on some of its investment policies. Some of
these limitations are that 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 temporary or emergency purposes in an amount not
exceeding 10% of its net assets. Whenever the Fund's outstanding borrowing
is than 5% of its net assets, it will stop making investments.
A complete list of the Fund's investment limitations can be found in the
Statement of Additional Information. These limitations 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, 1997
- --------------------------------------------------------------------------------
Florida Insured Lipper Florida Municipal
Tax-Free Fund Bond Fund Average
1 Year 6.5% 6.5%
5 Years 7.5% 6.6%
Since Inception* 7.7% 6.7%
- --------------------------------------------------------------------------------
*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.
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>
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading (generally 4 p.m. Eastern time) on 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 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 Funds." Different newspapers
use different abbreviations of the Funds name, but the most common is FLInsLT.
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 choose to receive your distributions of income and capital gains (or of
income alone) in cash, or you can have them automatically invested in more
shares of the Fund. In either case, distributions of capital gains (but not
dividends) are taxable to you. It is important to note that distributions of
capital gains (but not dividends) that are declared in December--if paid to you
by the end of January--are taxed as if they had been paid to you in December.
Vanguard will 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 for federal income tax purposes. 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. Long-term capital gains may be taxed at different rates depending
on how long the Fund held the securities. 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 by-products of the ordinary investment
activities of the Fund.
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.
10
<PAGE>
/ / 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 tax adviser about the tax consequences of an investment
in the Fund.
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 30 investment
companies with more than 95 distinct investment portfolios and total net assets
of more than $350 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 five years, can be
found in the 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 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 and trust 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),
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group, Inc., 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.
PLAIN TALK ABOUT
THE FUND'S ADVISER
Vanguard Fixed Income Group currently manages more than $100 billion in assets
and provides investment advisory services on an at-cost basis, to more than 40
Vanguard portfolios.
The managers responsible for the Fund are:
IAN A. MACKINNON, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal
fixed-income policy and strategy since 1981; B.A., Lafayette College, M.B.A.,
Pennsylvania State University.
REID O. SMITH, CFA, Principal of Vanguard and Fund Manager since 1992; has
worked in investment management since 1984; B.A. and M.B.A., University of
Hawaii.
11
<PAGE>
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 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.
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor'(R)"S&P(R)," and "500"
are trademarks of The McGraw-Hill Companies, Inc.
12
<PAGE>
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 unless you notify us otherwise.
(SALES AND EXCHANGES)
CHECKWRITING Method for drawing money from your account by writing a checkwriting draft for $250 or
more.
VANGUARD DIRECT DEPOSIT Automatic method for depositing your paycheck or U.S. government payment (including Social
SERVICE(TM) Security and government pension checks) into your account.
[BOOK GRAPHIC]
VANGUARD AUTOMATIC EXCHANGE Automatic method for moving a fixed amount of money from one Vanguard fund account to
SERVICE(SM) another
[BOOK GRAPHIC]
VANGUARD FUND EXPRESS(R) Electronic method for buying or selling shares. You can transfer money between your
[BOOK GRAPHIC] 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(SM) Electronic method for transferring dividend and/or capital gains distributions
[BOOK GRAPHIC] directly from your Vanguard fund account to your bank, savings and loan, or credit union
account.
VANGUARD BROKERAGE SERVICES A cost-effective way to trade stocks, bonds, and options on major exchanges, Nasdaq, and
(VBS) other domestic over-the-counter markets at reduced rates, and to buy and sell shares of
[BOOK GRAPHIC] 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].
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
13
<PAGE>
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 (Uniform Gifts/Transfers
[BOOK GRAPHIC] to Minors Act). Age 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 trust. $3,000 minimum initial
[BOOK GRAPHIC] 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 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.
Capital Gains in Cash Capital gains distributions are paid by check and mailed to your
account's address of record, and dividends are reinvested in additional
shares of the Fund.
Dividends and Capital Gains Both dividends and capital gains distributions are paid by check and
in Cash 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, see Vanguard Dividend Express under
"Services and Account Features."
If you have elected to receive dividend and/or capital gains distributions in
cash, but the Postal Service is unable to make delivery to your address of
record, your distribution option will be changed to reinvestment. No interest
will accrue on amounts represented by uncashed distribution checks.
BUYING SHARES
If we receive your check (or electronic transfer) by the close of trading on the
New York Stock Exchange (generally 4 p.m. Eastern time) on a regular business
day, your investment in the Fund will be converted to federal funds and credited
to your account at that day's closing price, the next-determined net asset
value. You will begin earning dividends on your investment the following
calendar day. (Federal funds are Federal Reserve deposits that banks and other
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
14
<PAGE>
BUYING SHARES (continued)
financial institutions "borrow" from one another to meet short-term cash needs;
portfolio advisers must use federal funds to pay for the securities they buy.)
The Fund is offered on a no-load basis, meaning that you do not pay sales
commissions or 12b-1 marketing fees.
<TABLE>
<CAPTION>
<S> <C> <C>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
MINIMUM INVESTMENT $3,000 (regular account); $1,000 $100 by mail or exchange; $1,000
(custodial accounts for minors). by wire.
BY MAIL Complete and sign the applica- Mail your check with an Invest-
[LETTER GRAPHIC] tion form. By-Mail form detached from
your confirmation statement to
FIRST-CLASS mail to: the address listed on the form.
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600 Make your check payable to: Make your check payable to:
The Vanguard Group--18 The Vanguard Group--18
EXPRESS or REGISTERED mail to: All purchases must be made in All purchases must be made in
The Vanguard Group U.S. dollars, and checks must be U.S. dollars, and checks must be
455 Devon Park Drive drawn on U.S. banks. drawn on U.S. banks.
Wayne, PA 19087-1815
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made payable to third parties.
BY TELEPHONE Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
[TELEPHONE GRAPHIC] hours a day--or Client Services hours a day--or Client Services
1-800-662-6273 during business hours--to ex- during business hours--to ex-
Vanguard Tele-Account(R) change from another Vanguard change from another Vanguard
fund account with the same reg- fund account with the same reg-
1-800-662-2739 istration (name, address, taxpay- istration (name, address, taxpay-
Client Services er I.D., and account type). er I.D., and account type).
Use Vanguard Fund Express (see
"Services and Account Features")
to transfer assets from your bank
account. Call Client Services be-
fore your first use to verify that
this option is in place.
*You must obtain a Personal Identification Number through Tele-Account at
least seven days before you request your first exchange.
</TABLE>
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.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
BUYING SHARES (continued)
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
BY WIRE Call Client Services to arrange Call Client Services to arrange
(WIRE GRAPHIC) your wire transaction. your wire transaction.
Wire to:
CoreStates Bank, N.A.
ABA 031000011
CoreStates No. 0141 1274
[Temporary Account Number]
Vanguard Florida Insured
Tax-Free Fund
[Account Registration]
Attention: Vanguard
AUTOMATICALLY -- Vanguard offers a variety of ways
(GRAPHIC OF CIRCLE OF ARROWS) 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 calendar days.
IMPORTANT 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:
[CHECK MARK] Fund name.
[CHECK MARK] 10-digit account number.
[CHECK MARK] Name and address exactly as registered on that account.
[CHECK MARK] 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.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
16
<PAGE>
REDEEMING SHARES (continued)
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 completing a Checkwriting Signature Form, which can be
ordered 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 calendar days.
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:
[CHECK MARK] Fund name and account number.
[CHECK MARK] Amount of the transaction (in dollars or shares).
[CHECK MARK] Signatures of all owners exactly as registered on the account.
[CHECK MARK] Signature guarantees (if required).
[CHECK MARK] Any supporting legal documentation that may be required.
[CHECK MARK] 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. No interest will accrue on amounts represented by uncashed
redemption checks. The Fund will not cancel any trade (e.g., purchase,
redemption, or exchange) believed to be authentic, once the trade request has
been received in writing or by telephone.
The Fund reserves the right to close any account in which the balance
falls below the minimum initial investment. The Fund will deduct a $10 annual
fee in either June or December 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 or a series of
movements between Vanguard funds that Vanguard determines, in its sole
discretion, could have an adverse impact on the management of the Fund.
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.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
17
<PAGE>
REDEEMING SHARES (continued)
<TABLE>
<CAPTION>
<S> <C>
SELLING OR EXCHANGING SHARES INSTRUCTIONS
BY TELEPHONE Call Vanguard Tele-Account* 24 hours a day--or Client Services during
[TELEPHONE GRAPHIC] business hours--to sell or exchange shares. You can exchange shares
1-800-662-6273 from the Fund to open an account in another Vanguard fund or to add
Vanguard Tele-Account(R) to an existing fund account with an identical registration.
1-800-662-2739 *You must obtain a Personal Identification Number through Tele-Account at
Client Services least seven days before you request your first redemption.
BY MAIL Send a letter of instruction signed by all registered account holders.
[LETTER GRAPHIC] Include the Fund name and account number and (if you are selling) a
FIRST-CLASS mail to: dollar amount or number of shares OR (if you are exchanging) the
The Vanguard Group name of the fund you want to exchange into and a dollar amount or
Vanguard Florida Insured number of shares. To exchange into an account with a different regis-
Tax-Free Fund tration (including a different name, address, or taxpayer identification
P.O. Box 1120 number), you must provide Vanguard with written instructions that
Valley Forge, PA 19482-1120 include the guaranteed signatures of all current account owners.
EXPRESS or REGISTERED mail to:
The Vanguard Group
Vanguard Florida Insured
Tax-Free Fund
455 Devon Park Drive
Wayne, PA 19087-1815
EXCHANGING SHARES ONLINE You may use your personal computer to exchange shares of most
[COMPUTER GRAPHIC] Vanguard funds by accessing our website (www.vanguard.com). To
establish this service for your account, you must first register through
the website. We will then send to you, by mail, an account access pass-
word that will enable you to make online exchanges.
The Vanguard funds that you cannot purchase or sell through online
exchange are Vanguard Index Trust, Vanguard Balanced Index Fund,
Vanguard International Equity Index Fund, Vanguard REIT Index
Portfolio, Vanguard Total International Portfolio, and Vanguard
Growth and Income Portfolio (formerly known as Vanguard Quan-
titative Portfolios). These funds do permit online exchanges within
IRAs and other retirement accounts.
BY CHECK You can sell shares by writing a checkwriting draft for $250 or more.
[CHECK GRAPHIC]
AUTOMATICALLY Vanguard offers several ways to sell or exchange shares automatically
[GRAPHIC OF CIRCLE OF ARROWS] (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 delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
18
<PAGE>
REDEEMING SHARES (continued)
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 U.S. 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.
TRANSFERRING REGISTRATION
HOW TO TRANSFER SHARES
You may transfer the registration of any of your Fund shares to another owner by
completing a transfer form and sending it to: The Vanguard Group, Attention:
Transfer Department, P.O. Box 1110, Valley Forge, PA 19482-1110.
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, a listing of the Fund's holdings, and other
financial statements.
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CONFIRMATION STATEMENT Sent each time you buy, sell, or exchange shares; confirms the trade
date and the amount of your transaction.
PORTFOLIO SUMMARY Mailed quarterly; shows the market value of your account at the close
[BOOK GRAPHIC] 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 years taxable distribu-
tions and proceeds from the sale of Fund shares.
AVERAGE COST STATEMENT Issued quarterly for most taxable accounts (accompanies your Portfolio
[BOOK GRAPHIC] Summary); shows the average cost of shares that you redeemed during
the calendar year, using the average-cost single-category method.
CHECKWRITING STATEMENT Sent monthly to shareholders using Vanguard's checkwriting option.
Our clear, easy-to-use statement provides images of the front and back
of each checkwriting draft paid in the previous month. This consoli-
dated statement is sent instead of the original canceled drafts, which
will not be returned.
</TABLE>
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
19
<PAGE>
FUND AND ACCOUNT UPDATES (continued)
AUTOMATED TELEPHONE ACCESS
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VANGUARD TELE-ACCOUNT Toll-free access to Vanguard fund and account information--as
1-800-662-6273 well as some transactions--through any Touch-Tone(TM) telephone.
Any time, seven days a week, Tele-Account provides total return, share price, price change, and yield
from anywhere in the continental quotations for all Vanguard funds; gives your account balances and
United States. history (e.g., last transaction, latest dividend distribution, redemptions
[BOOK GRAPHIC] by check during the last three months); and allows you to sell or
exchange fund shares.
COMPUTER ACCESS
VANGUARD ONLINE(R) Use your personal computer to learn more about Vanguard's funds
www.vanguard.com and services; keep in touch with your Vanguard accounts; map out a
long-term investment strategy; initiate certain transactions; and ask
questions, make suggestions, and send messages to Vanguard.
Our education-oriented website provides timely news and informa-
tion about Vanguard's funds and services; an online "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>
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
20
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ALTERNATIVE MINIMUM TAX (AMT)
A separate tax system designed to ensure 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 to 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,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
DIVIDEND INCOME
Payment to shareholders of net income from interest or dividends generated by
the 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 amount to be paid at maturity of a bond; the par value or principal.
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.
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.
<PAGE>
[GRAPHIC OF SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482
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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 www.vanguard.com
fund services, and retirement
accounts; requests for E-mail
literature VANGUARD TELE-ACCOUNT(R) [email protected]
1-800-662-6273 (ON-BOARD)
CLIENT SERVICES DEPARTMENT For 24-hour automated access
1-800-662-2739 (CREW) to price and yield, information
TEXT TELEPHONE: on your account, and certain
1-800-662-2738 transactions
For information on your
account, account transactions,
and account statements
</TABLE>
(C) 1998 Vanguard Marketing
Corporation, Distributor
P018N
<PAGE>
PART B
VANGUARD CALIFORNIA TAX-FREE FUND
VANGUARD FLORIDA INSURED TAX-FREE FUND
VANGUARD NEW JERSEY TAX-FREE FUND
VANGUARD NEW YORK TAX-FREE FUND
VANGUARD OHIO TAX-FREE FUND
VANGUARD PENNSYLVANIA TAX-FREE FUND
(COLLECTIVELY THE "Funds" and Individually the "Fund")
March 27, 1998
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate Fund's current Prospectus dated March
27, 1998. To obtain this Prospectus, please call:
Vanguard's Investor Information Department
1-800-662-7447
TABLE OF CONTENTS
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Investment Limitations ................................................. B-2
Investment Policies .................................................... B-3
Risk Factors ........................................................... B-7
Florida Intangible Personal Property Tax ............................... B-16
Yield and Total Return ................................................. B-16
Calculation of Yield ................................................... B-18
Performance Measures ................................................... B-21
Investment Management .................................................. B-24
Portfolio Transactions ................................................. B-24
Purchase of Shares ..................................................... B-25
Redemption of Shares ................................................... B-25
Share Price ............................................................ B-26
Management of the Fund ................................................. B-27
Description of Shares and Voting Rights ................................ B-34
Financial Statements ................................................... B-35
Appendix A - Description of Municipal Bonds and their Ratings .......... B-36
</TABLE>
Throughout this Statement of Additional Information, "the Fund" is
intended to refer to each Fund listed on the cover page, and "the Portfolio" is
intended to refer to each Portfolio of each Fund, unless otherwise indicated.
B-1
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INVESTMENT LIMITATIONS
The following restrictions supplement the Fund's investment limitations
set forth in the Prospectus. Except as indicated otherwise, these restrictions
are fundamental policies of each Portfolio, which cannot be changed without the
approval of a majority (as defined in the Investment Company Act of 1940 (the
"1940 Act")) of the Portfolio's outstanding voting shares.
1. Each Portfolio will not invest in securities other than Municipal
Securities except that a Portfolio may make temporary investments in
certain short-term taxable securities issued by or on behalf of municipal
or corporate issuers, obligations of the United States Government and its
agencies or instrumentalities, commercial paper, bank certificates of
deposit, and any such items subject to short-term repurchase agreements;
2. Each Portfolio will limit the aggregate value of all holdings (except
U.S. Government and cash items), as defined under Subchapter M of the
Internal Revenue Code (the "Code"), each of which exceeds 5% of the
Portfolio's total assets, to an aggregate amount of 50% of such assets;
3. Each Portfolio will limit the aggregate value of holdings of a single
issuer (except U.S. Government and cash items, as defined in the Code) to a
maximum of 25% of the Portfolio's total assets;
4. Each Portfolio will not borrow money except for temporary or emergency
purposes and then only in an amount not exceeding 10% of the value of the
net assets of that Portfolio. The Portfolio will repay all borrowing before
making additional investments. Interest paid on such borrowings will reduce
income;
5. Each Portfolio will not pledge, mortgage or hypothecate its assets to
any extent greater than 10% of the value of the total assets of the
Portfolio;
6. Each Portfolio will not issue senior securities as defined in the 1940
Act;
7. Each Portfolio will not engage in the business of underwriting
securities issued by other persons, except to the extent that the Portfolio
may technically be deemed an underwriter under the Securities Act of 1933,
as amended, in disposing of portfolio securities;
8. Each Portfolio will not purchase or sell real estate, but this shall
not prevent investments in municipal bonds secured by real estate or
interests therein;
9. Each Portfolio will not make loans to other persons, except by the
purchase of bonds, debentures or similar obligations. In addition, although
the Portfolios have no present intention to do so, each Portfolio reserves
the right to lend its investment securities to qualified institutions in
accordance with guidelines of the Securities and Exchange Commission;
10. Each Portfolio will not purchase on margin or sell short, except as
specified below in Investment Limitation No. 12;
11. Each Portfolio (with the exception of the New York Money Market
Portfolio) will not purchase or retain securities of an issuer if the
Trustees of the Fund who individually own more than 1/2 of 1% of such
securities together own more than 5% of the securities of such issuer;
12. Each Portfolio will not purchase or sell commodities or commodities
contracts, except that the California Insured Intermediate-Term, California
Insured Long-Term, New Jersey Insured Long-Term, New
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York Insured Long-Term, Ohio Insured Long Term, and Pennsylvania Insured
Long-Term Portfolios, and the Vanguard Florida Insured Tax-Free Fund may
invest in bond futures contracts, bond options and options on bond futures
contracts to the extent that not more than 5% of a Portfolio's assets are
required as deposits on futures contracts and (with the exception of the
Florida Insured Tax-Free Fund) not more than 20% of the Portfolio's assets
are invested in futures contracts and/or options transactions at any time;
13. Each Portfolio will not invest its assets in securities of other
investment companies except as they may be part of a merger, consolidation,
reorganization or acquisition of assets or otherwise, to the extent
permitted by Section 12 of the 1940 Act;
14. Each Portfolio 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. Each Portfolio (with the exception of the New York Money Market
Portfolio, and the Portfolios of New Jersey Tax-Free 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. Each Portfolio will not purchase or otherwise acquire any security,
if as a result, more than 15% (10% with respect to the Money Market
Portfolios of the Funds) of its net assets would be invested in securities
that are illiquid (included in this limitation is the Fund's investment in
The Vanguard Group, Inc.).
The investment limitations set forth above are considered at the time that
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction. Notwithstanding these limitations, each Portfolio 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.
INVESTMENT POLICIES
Futures Contracts
Each Portfolio of the Fund (except the Money Market Portfolio) may enter
into futures contracts, options, and options on futures contracts for several
reasons: to simulate full investment in the underlying securities while
retaining a cash balance for Fund management purposes, to facilitate trading,
to reduce transaction costs, or to seek higher investment returns from
intermarket arbitrage opportunities when a futures contract is mispriced
relative to the underlying security or index. Futures contracts provide for the
future sale by one party and purchase by another party of a specified amount of
a specific security at a specified future time and
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<PAGE>
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.
The Fund expects to earn interest income on its initial margin deposit.
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.
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. Under CFTC regulations, the Portfolios
may use futures transactions for bona fide hedging purposes only, except that a
Portfolio may establish non-hedging futures positions if the aggregate initial
margin and premiums for such positions do not exceed 5% of the value of the
Portfolio's assets.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Portfolio's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
Restrictions on the Use of Futures Contracts
A Portfolio will not enter into futures contract transactions to the
extent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of the applicable Fund's total
assets. In addition, a Portfolio will not enter into futures contracts to the
extent that its outstanding obligations to purchase securities under these
contracts would exceed 20% of the Portfolio's total assets.
Risk Factors in Futures Transactions
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any
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<PAGE>
particular futures contract at any specific time. Thus, it may not be possible
to close a futures position. In the event of adverse price movements, a
Portfolio would continue to be required to make daily cash payments to maintain
its required margin. In such situations, if the Portfolio has insufficient
cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition,
the Portfolio 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 Vanguard Florida Insured Tax-Free Fund, the California Insured
Intermediate-Term Portfolio, and the Insured Long-Term Portfolio of each Fund
will minimize the risk that they will be unable to close out a futures contract
by only entering into futures which are traded on national futures exchanges
and for which there appears to be a liquid secondary market.
The 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 Portfolios are engaged in only for hedging purposes
and will not be leveraged, the Adviser does not believe that the Portfolios are
subject to the risks of loss frequently associated with futures transactions.
The Portfolios would presumably have sustained comparable losses if, instead of
the futures contract, they had invested in the underlying financial instrument
and sold it after the decline.
Utilization of futures transactions by a Portfolio 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 a Portfolio could both lose
money on futures contracts and also experience a decline in value of its
portfolio securities. There is also the risk of loss by a Portfolio of margin
deposits in the event of bankruptcy of a broker with whom the Portfolio has an
open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of 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, each Portfolio may invest in other
types of derivatives, including warrants, swap agreements and partnerships or
grantor trust derivative products. Derivatives are instruments
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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 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 take advantage of
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 Portfolios 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
Except for transactions they have identified as hedging transactions, the
California Insured Intermediate-Term Portfolio, the Insured Long-Term Portfolio
of each Fund, and Vanguard Florida Insured Tax-Free Fund are required for
federal income tax purposes to recognize as income for each taxable year their
net unrealized gains and losses on certain futures contracts held as of the end
of the year as well as those actually 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 a Portfolio may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. A Portfolio may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Portfolio.
In order for each Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities, or of foreign currencies or other income derived with respect to
the Portfolio's business of investing in securities. 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.
Each Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the transactions.
Municipal Lease Obligations
Each Portfolio of the Fund may invest in municipal lease obligations.
These securities are sometimes considered illiquid because of the inefficiency
and thinness of the market in which they are traded. Under the
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supervision of the Fund's Board of Trustees, the Fixed Income Group may
determine to treat certain municipal lease obligations as liquid, and therefore
not subject to the Fund's 15% limit on illiquid securities (10% for the Money
Market Portfolios). The factors that the Group may consider in making these
liquidity determinations include: (1) the frequency of trades and quotations
for the security; (2) the number of dealers willing to purchase or sell the
security and the number of other potential buyers; (3) the willingness of
dealers to underwrite and make a market in the security; (4) the nature of the
marketplace trades, including the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer; and (5) factors
unique to a particular security, including general credit worthiness of the
issuer, the importance to the issuer of the property covered by the lease and
the likelihood that the marketability of the securities will be maintained
throughout the time the security is held by the Portfolio.
RISK FACTORS
California Risk Factors
Vanguard California Tax-Free Fund invests primarily in the obligations of
California state and various local governments, including counties, cities,
special districts, agencies and authorities. In general, the credit quality and
credit risk of any issuer's debt depend on the state and local economy, the
health of the issuer's finances, the amount of the issuer's debt, the quality
of management, and the strength of legal provisions in debt documents that
protect debt holders. Credit risk is usually lower wherever the economy is
strong, growing and diversified; financial operations are sound; and the debt
burden is reasonable.
The credit risk associated with direct obligations of the State of
California and State agencies, including general obligation and revenue bonds,
lease debt, and notes, is now average. For most of the last two decades, the
State's general obligation bonds had enjoyed the highest rating by either
Moody's Investors Service, Inc. or Standard & Poor's Corporation. California's
high credit quality reflected the growth of its strong and diversified economy,
a low debt position, wealth levels higher than the national average, and a
generally sound and stable financial position. However, California's credit
quality has declined since the onset of the national recession in 1990.
California's economy, largest among the states, is also one of the largest
in the world. The State's population, nearly 30 million in 1990, has doubled
since 1960 and constitutes over 12% of the U.S. total. Rapid growth is
continuing, with rates more than twice that of the national average during the
1980s. Personal income growth lagged behind U.S. growth in the 1980s, but per
capita income was still 10% above the national average in 1990. A growing,
young population, a strong higher education system, and excellent ports
continue to bolster California's economic prospects. Employment and income are
not concentrated in any one sector. In fact, California's economy closely
mirrors that of the U.S. One caveat to this observation concerns the defense
industry. For many years, California has led the Nation in receipt of total
direct U.S. military expenditures. However, as the State's economy expanded,
the concentration in defense has lessened. Nonetheless, a U.S. policy has
resulted in lower defense spending, parts of California, especially the Los
Angeles Region, have been adversely affected, and these trends might continue.
The economy and financial operations of California are exposed to the risk
of cyclical national recessions. In a recession, credit quality can drop if
debt issuers do not maintain a balance between revenues and expenditures. This
occurred in the early 1980s when Moody's and Standard & Poor's downgraded the
State. Subsequently, State finances were restored to sound levels, and credit
ratings were upgraded. California was especially hard hit by the recent
national recession and experienced three credit-rating downgrades by each
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of the two major rating agencies. The effects of recession were not strongly
felt in California until 1991. Led by declines in defense-related activities
and construction (especially commercial real estate), the State lost over
800,000 jobs between 1990-1993, or about 6% of non-agricultural employment. The
recession resulted in a failure by State government to realize revenue and
spending targets. The State budget was chronically imbalanced in 1991 and 1992.
State aid was reduced, spreading fiscal stress to local governments, including
schools.
California has recently emerged from the depths of the recession,
recovering most of the jobs lost earlier in the decade. Job growth has been
prevalent in the high technology, entertainment, and foreign trade sectors.
Despite the recent economic expansion, both State and local governments
continue to be vulnerable to fiscal stress.
Despite the overall strength of California credit quality, there are a
number of additional risks. The adoption by voters of revenue and expenditure
limitations, commencing with Articles XIIIA and XIIIB of the California
Constitution in the late 1970s and Articles XIIIC and XIIID in 1996, have
placed many local governments under a degree of fiscal stress which continues.
Court decisions and the adoption of subsequent propositions have softened many
of the effects of these limitations. However, it should be noted that
California voters have demonstrated a willingness to utilize the statutory
initiative process to curtail the financial operations of state and local
government, as well as to increase public debt. This willingness is a
continuing risk to debt holders.
Another risk resulting from Article XIIIA concerns the security provisions
for debt repayment. Since 1986, general obligation debt issued by local
governments has required voter approval by a two-thirds majority. As a result,
most tax-backed debt now issued by California local governments is not general
obligation debt, does not have "full faith and credit" backing, and has higher
credit risk and more limited bondholder rights.
Some risks in California apply more to local issuers than to state
government. In areas of very rapid population growth, the costs of building
public infrastructure are very high, large amounts of municipal bonds are being
sold, and debt burden is increasing. In some parts of southern California,
there is also a fear that population growth may possibly limit future economic
growth due to transportation and air pollution problems.
Finally, California is subject to unique natural hazard risks. Earthquakes
and wildfires can cause localized economic harm which could limit the ability
of governments to repay debt. Cycles of drought and flooding are also concerns
insofar as they affect agricultural production, power generation, and the
supply of drinking water. In addition, drought can limit the ability of certain
public utilities to repay debt.
Florida Risk Factors
Vanguard Florida Insured Tax-Free Fund invests primarily in the debt
obligations of 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.
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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
in the AA category 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. In 1997,
Standard & Poor's upgraded the State of Florida's rating to AA+ reflecting
healthy finances and a strong economy.
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 of 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 declined during the late '80s,
reducing cyclical risk. The outlook for the Florida economy at the end of the
1990's is continued expansion fueled by population growth, a diversifying
services and manufacturing economy, and a robust tourism sector.
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
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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 suffered for a
period in the early 1990's 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. More recently the Florida municipal lease market has performed well
with strong liquidity.
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 projections and
controlling spending. Such responsible fiscal management enhances overall
credit quality in the State of Florida.
During the mid to late 1990's State finances have been particularly strong
with large surpluses and strong reserves. 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.
New Jersey Risk Factors
Vanguard New Jersey Tax-Free Fund invests primarily in the obligations of
New Jersey State government and various local governments, including counties,
cities, special districts, agencies and authorities. In general, the credit
quality and credit risk of any issuer's debt depend on the state and local
economy, the health of the issuer's finances, the amount of the issuer's debt,
the quality of management, and the strength of legal provisions in debt
documents that protect debt holders. Credit risk is usually lower wherever the
economy is strong, growing and diversified; financial operations are sound; and
the debt burden is reasonable.
The average rating among American states for full faith and credit state
debt is "Aa" and "AA" by Moody's Investors Service, Inc. and Standard & Poor's
Corporation, respectively. Against this measure and the criteria listed above,
the credit risk associated with direct obligations of the State of New Jersey
and state agencies, including general obligation and revenue bonds, and lease
debt, compares very favorably. For most of the last two decades, the State's
general obligation bonds have enjoyed the highest rating by either Moody's
Investors Service, Inc. or Standard & Poor's. In the early 1990s, however, both
Moody's and Standard & Poor's slightly downgraded the State's credit rating to
the high "AA" level due to an economy and state finances weakened by recession.
In general, New Jersey's high credit quality over time reflects the strong
growth and diversification of its economy, a moderate debt position, wealth
levels much higher than the national average, and a historically sound and
stable financial position.
New Jersey's economy continues to gradually emerge from the depths of the
1990-92 national recession. Between 1989 and 1992, the State lost 8.7% of its
employment total or about one job in twelve. Significant job losses occurred in
the construction, manufacturing, wholesale and retail trades, and in financial
and real
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estate services. The only sectors to experience growth during the period were
the healthcare and government sectors. Unemployment rates exceeded the national
average and reached a high of 9.8% in July of 1992. Economic variables indicate
a slowly improving New Jersey economy, as evidenced by a decrease in the
unemployment rate since 1993. However, this progress could be mitigated by
layoffs in the pharmaceutical industry and AT&T, New Jersey's largest employer.
The most recent cyclical weakening of the New Jersey economy follows an
unprecedented period of diversification and growth for the State in the 1980s.
Like many other northeastern and "rust-belt" states, New Jersey's economy
declined during the 1970s. This set the stage for a remarkable period of
transformation in the 1980s. The State economy changed from a
manufacturing-dominated base to an economy balanced among manufacturing, trade
and services, closely mirroring the U.S. economy. Population growth exceeded
the regional average during this time, and growth in employment and income
outpaced the U.S. average. This growth occurred not only in the developed
northeastern and Delaware River Valley areas, but also in central New Jersey
around Princeton and the Atlantic coastal region. Despite the recession of 1990
to 1992, New Jersey remains a wealthy state, and continues to be the second
wealthiest after Connecticut. Per capita state income is over a third higher
than the U.S. average.
New Jersey's debt burden is moderate in relation to the State's wealth and
resources, but has increased significantly since 1991 as the State has financed
capital outlays previously funded out of current revenues and stepped up debt
issuance to stimulate a weakened economy. Tax-supported debt as measured
against income and population is close to average levels among the states. Debt
retirement is rapid even though debt service has a modest claim on State
revenues. New debt issuance is expected to be manageable.
After a decade of sound financial operations in the 1980s, characterized
by robust increases in revenues and fund balances, New Jersey faced several
years of budgetary distress in the early 1990s. Declining tax revenues and
swelling expenditures for Medicaid, public assistance, and corrections
generated repeated budget gaps that the State was able to close only by
utilizing non-recurring revenue sources. Continued high credit quality will
depend on the resolve of State leaders and taxpayers to maintain fiscal balance
while diminishing a reliance on one-time revenue sources. Most recently an
improving State and national economy has resulted in increased revenues and
some moderation in budgeting strain. However, the significant income tax cuts
recently enacted in the State may prove to strain state finances if an economic
slowdown were to occur.
A positive credit factor for local government in New Jersey is the strong
State oversight of local government operations. The State can and has seized
control of mismanaged jurisdictions. In general, the high level of wealth and
the strong economic base in the State have resulted in credit quality for local
government that is among the highest in the U.S. In addition, the State
guarantees the debt service of many local government bond issues. As State
finances remain under pressure, however, local governments may see levels of
state aid reduced, a development that could result in a dilution of local
credit quality. Successful tax appeals by property owners in many
municipalities have also reduced revenues for some local governments.
Despite the strengths of New Jersey credit quality, there are risks. New
Jersey has a number of older urban centers, including Newark and Camden, that
present a continuing vulnerability with respect to economic and social
problems. The State is facing educational finance reforms which could affect
the credit quality of certain school districts as well as State financial
operations. State taxes were increased in 1990 to balance the State's budget
and then reduced in 1992 after a "taxpayer revolt" reversed the political power
balance in the State legislature. Finally, overbuilding in the residential and
commercial real estate sector has weakened property values as well as the
general health of the construction industry and related financial institutions.
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New York Risk Factors
Vanguard New York Tax-Free Fund invests primarily in the obligations of
New York state government, state agencies, state 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.
The average rating among American states for full faith and credit state
debt is "Aa" and "AA" by Moody's Investors Service, Inc. and Standard & Poor's
Corporation, respectively. Against this measure and the criteria listed above,
the credit risk associated with direct obligations of the State of New York and
State agencies and authorities, including general obligation and revenue bonds,
"moral obligation" bonds, lease debt, appropriation debt, and notes, compares
somewhat unfavorably. During most of the last two decades, the State's general
obligation bonds have been rated just below this average by both rating
agencies. Additionally, the State's credit quality could be characterized as
more volatile than that of other states, since the State's credit rating has
been upgraded and downgraded much more often than usual. This rating has
fluctuated between "Aa" and "A" since the early 1970s. Nonetheless, during this
period the State's obligations could still be characterized as providing upper
medium grade security, with a strong capacity for timely repayment of debt.
The wealth of New York State, as well as the size and diversity of its
economy, serve to limit the credit risk of its securities. New York ranks third
among the states in per capita personal income, which is 19% above the U.S.
average. During most of the 1980s, economic indicators for New York, including
income and employment growth and unemployment rates, outperformed the nation as
a whole. The engine of growth for the State in the past decade was the surge in
financial and other services, especially in New York City. Manufacturing
centers in upstate New York, which more closely parallels the Midwestern
economy, suffered during the 1970s and early 1980s. The upstate economy
continues to be characterized by cities with aging populations and aging
manufacturing plants.
Credit risk in New York State is heightened by a large and increasing debt
burden, historically marginal financial operations, limited revenue-raising
flexibility, and the uncertainty of the future credit quality of New York City,
which comprises 40% of the State's population and economy. Combined State and
local debt per capita is about 50% above the U.S. average, and debt service
expenditures have been growing as a claim on the State and City budget. New
York's debt structure is also complicated. To circumvent voter approval, most
State debt is issued by agencies, is not backed by the State's full faith and
credit and, therefore, has lower credit ratings. In the past, the State had to
rely on short-term borrowing to meet its obligations, but this practice has
ended.
Buoyed by rapid economic growth in the mid-1980s, the State's financial
operations generated surpluses. Beginning in 1988, however, unforeseen
consequences of federal tax reform, combined with a weakening economy, resulted
in a series of State budget deficits. New York's heavy commitment to local aid
and social welfare programs allowed expenditure growth to exceed available
revenues. This lack of budgetary discipline caused the State's credit ratings
to fall. Moreover, New York's ability to raise revenues is limited, since
combined state and local taxes are among the highest in the nation as a percent
of personal income. Recent state budgets have been balanced, and consistent
operating surpluses have been recorded although the State continues to have a
nearly $3 billion GAAP accumulated deficit. State personal income tax cuts have
been offset by strong revenue performance emanating from Wall Street and by
solid expenditure restraint.
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New York State's future credit quality will be heavily influenced by the
future of New York City. As the City's economic boom in the 1980s lifted the
State, the severe downturn in the financial services and real estate sectors,
which are concentrated in the City, has been serving as a drag on the State's
economy. Stabilization or recovery in these areas is crucial to the economic
and fiscal health of the City and the State. Moreover, the City faces daunting
challenges in combating deteriorating infrastructure and serious social
problems of housing, health, education and public safety. So far, City
government has demonstrated an ability to keep abreast of these problems, but
the City's and the State's ability to meet these challenges will be a
continuing risk factor. Buoyed by Wall Street, the addition of 140,000 private
sector jobs over the 1994-97 period and public sector workforce attrition, the
City has posted recurring operating surpluses. The largest, $856 million, is
projected for fiscal year 1997. The City will shortly be creating a new vehicle
to access the debt markets, called the Transitional Finance Authority, as G.O.
capacity is limited due to archaic statutory issuing formulas.
Major areas of credit strength continue to exist in localities in Long
Island, and north of New York City where affluent population bases continue to
exist.
Ohio Risk Factors
Ohio Tax-Free Fund will invest most of its net assets in securities issued
by or on behalf of (or in certificates of participation in lease-purchase
obligations of) the State of Ohio, political subdivisions of the State, or
agencies or instrumentalities of the State or its political subdivisions ("Ohio
Obligations"). The Fund is therefore susceptible to general or particular
political, economic or regulatory factors that may affect issuers of Ohio
Obligations. The following information constitutes only a brief summary of some
of the many complex factors that may affect the Fund. The information does not
apply to "conduit" obligations on which the public issuer itself has no
financial responsibility. This information is derived from official statements
of certain Ohio issuers published in connection with their issuance of
securities and from other publicly available documents, and is believed to be
accurate. No independent verification has been made of any of the following
information.
The timely payment of principal of and interest on Ohio Obligations has
been guaranteed by bond insurance purchased by the issuers, the Fund or other
parties. The timely payment of debt service on Ohio Obligations that are so
insured may not be subject to the factors referred to in this section of the
Prospectus.
Ohio is the seventh most populous state. Its 1990 Census count of
10,847,000 indicates a 0.5% population increase from 1980.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture is
an important segment of the economy, with over half the State's area devoted to
farming and approximately 15% of total employment in agribusiness. The State's
economy has also benefited by improved manufacturing productivity and a strong
export position which helped shield the State's economy from domestic recession
in the early 1990s.
There can be no assurance that future national, regional or statewide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
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Ohio's debt burden is moderate, and the State and most local governments
observe prudent debt management practices. The State government maintained
positive year-end balances in its general revenue account during the 1980s,
achieved through timely revisions in tax and spending plans. During the
economic recovery of the mid-1980s, the State accumulated sizable fund balances
in its general revenue fund and maintained a healthy budget stabilization (or
"rainy day") fund. This strong financial position provided the State with far
more flexibility than most states to weather the revenue shortfalls and
increased human services expenditures generated by the most recent recession.
The State's finances remain sound and poised to generate enhanced balances as
the national economy affects a sustained recovery from the recession of the
early 1990s. Current cash and fund balance levels are exceptionally strong
today. Cash balances at 6/30/97 were $1.4 billion.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year ("FY") or fiscal biennium in a deficit position. Most
State operations are financed through the General Revenue Fund ("GRF"), for
which personal income and sales-use taxes are the major sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the ending FY balance reduced during less
favorable and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
These procedures include general and selected reductions in appropriations
spending.
The Ohio Constitution also authorizes the issuance of State obligations
for certain purposes, the owners of which do not have the right to have excises
or taxes levied to pay debt service. Such State obligations are generally
secured by biennial appropriation lease agreements with the State.
In general, payment obligations under lease-purchase agreements of Ohio
public agencies (in which certificates of participation may be issued) are
limited in duration to the agencies' fiscal periods, and are dependent upon
appropriations being made available for the subsequent fiscal period.
Additionally, State and local agencies issue revenue obligations that are
payable from revenues from or relating to certain facilities (but not from
taxes). By judicial interpretation, these obligations are not "debt" within
constitutional provisions.
Local school districts in Ohio receive a major portion (on a statewide
basis, recent approximately 46%) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 98 districts from
voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, is pending questioning the
constitutionality of Ohio's system of school funding. A small number of the
State's 612 local school districts have in any year required special assistance
to avoid year-end deficits. A current program provides for school district cash
need borrowing directly from commercial lenders, with diversion of State
subsidy distributions to repayment if needed.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations, and, with other local governments,
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced significant
financial problems, there are statutory procedures for a joint state/local
commission to monitor the municipality's fiscal affairs and for development of
a financial plan to eliminate deficits and cure any defaults. Since inception
in 1979, these procedures have been applied to 23 cities and villages; for 18
of them the fiscal situation was resolved and the procedures terminated.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions
and other local taxing districts. The Ohio Constitution has since
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1934 limited the amount of the aggregate levy (including a levy for un-voted
general obligations) of property taxes by all overlapping subdivisions, without
a vote of the electors or a municipal charter provision, to 1% of true value in
money, and statutes limit the amount of that aggregate levy to 10 mills per $1
of assessed valuation (commonly referred to as the "ten-mill limitation").
Voted general obligations of subdivisions are payable from property taxes that
are unlimited as to amount or rate.
Pennsylvania Risk Factors
Vanguard Pennsylvania Tax-Free Fund invests primarily in the obligations
of Pennsylvania state government, state agencies and various local governments,
including counties, cities, townships, 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.
The average rating among American states for full faith and credit state
debt is "Aa" and "AA" by Moody's Investors Service, Inc. and Standard & Poor's
Corporation, respectively. Against this measure and the criteria listed above,
the credit risk associated with direct obligations of Pennsylvania and state
agencies, including general obligation and revenue bonds, lease debt, and
notes, compares slightly unfavorably. During most of the last two decades,
Pennsylvania's general obligation bonds have been rated just below this average
by both rating agencies. Nonetheless, during this period Pennsylvania's
obligations could still be characterized as providing upper medium grade
security, with a strong capacity for timely repayment of debt. Recently, the
State's rating was upgraded by Moody's Investors Service and the State now has
ratings of "Aa3"/"AA-".
Factors contributing positively to credit quality in Pennsylvania include
a favorable debt structure, a diversifying economic base, and conservatively
managed financial operations on the part of state government. Tax-supported
debt is only slightly above average state levels on a per capita basis and as a
percent of state personal income. Over the past two decades, this debt burden
has improved considerably in Pennsylvania, and debt continues to be rapidly
retired, while state borrowing plans are modest.
In the past twenty years, Pennsylvania's economy has undergone a healthy,
though traumatic, transformation. Manufacturing employment has declined from
35% of total state employment in 1970 to 17.9% of total employment in 1995,
only slightly above the U.S. average. Growth in service sector jobs offset the
loss of manufacturing jobs, and Pennsylvania's economy is now much more closely
aligned with the national economy. In the future, economic booms and busts
should be milder than in the past and more closely follow national averages.
The positive change in the economy has not been without costs. Growth levels in
employment, population and personal income lagged behind U.S. averages in the
1980s. During this period, per capita personal income slipped to about the U.S.
average. Many communities dominated by a single industry were particularly
hurt, and recent growth in the state economy has bypassed much of the state
outside of the immediate Philadelphia and Pittsburgh metropolitan areas. As a
result, the credit quality of these areas is often marginal.
During the 1991-1992 national economic recession, Pennsylvania fared a bit
worse than the U.S. average, but better than many neighboring Northeastern and
Mid-Atlantic states. Led by continuing declines in manufacturing, employment
decreased about 4%, or double the U.S. loss rate. Pennsylvania has subsequently
experienced economic recovery in line with the U.S. More recently, the State's
economy has shown some growth with current unemployment rates approximating
those of the nation.
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Fiscally, Pennsylvania has historically maintained balanced budgets, a
result of sound and conservative budgeting policies. During the period of
economic growth in the late 1980s, operating surpluses were recorded, and a
"rainy day" fund was established. That recent recession tested these policies,
but the Commonwealth emerged from the recession with its finances and credit
quality intact. In 1990 and 1991, as the recession worsened, budget balances
were eliminated, and the Commonwealth ended fiscal 1991 in a deficit position.
However, a combination of expenditure restraint and broad-based tax increases
enabled the Commonwealth to end 1992 with a surplus. Finances are now stable
and healthy, and the Commonwealth has a comfortable accumulated surplus. Due to
this improvement, cash flow borrowing has been substantially reduced. Tax
revenue is coming in above forecasted levels.
The risk factors in Pennsylvania's credit quality may be summarized as
slow growth, an aging population, average income, and a continuing challenge to
maintain balanced budgets. In addition, a number of local governments in the
Commonwealth, most notably Philadelphia, face continuing fiscal stress, and
were unable to address serious economic, social and healthcare problems within
revenue constraints. Philadelphia's credit prospects have recently
significantly improved but remain a challenge to the credit quality of
Pennsylvania, longer term.
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 (January
1), its assets are solely invested in exempt Florida securities, exempt U.S.
government securities, or other exempt securities. If, on the annual assessment
date, Vanguard Florida Insured Tax-Free 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
California Tax-Free Fund
The yields of the California Insured Long-Term Portfolio, the California
Insured Intermediate-Term Portfolio and the California Money Market Portfolio
for the 30-day period ending November 30, 1997 were +4.81%, +4.37%, and +3.55%,
respectively.
The average annual total returns of the California Insured Long-Term
Portfolio for the one-, five-, and ten-year periods ended November 30, 1997,
were +6.52%, +7.50% and +8.83%, respectively. The average annual total returns
of the California Insured Intermediate-Term Portfolio for the one-year period
and the period from inception (March 4, 1994) to November 30, 1997 were +5.91%
and +6.84%, respectively. The average annual total returns of the California
Money Market Portfolio for the one-, five- and ten-year periods
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<PAGE>
ended November 30, 1997, were +3.41%, +3.08% and +3.96%, respectively. Total
return is computed by finding the average compounded rates of return over the
one-year period set forth above that would equate an initial amount invested at
the beginning of the period to the ending redeemable value of the investment.
Florida Insured Tax-Free Fund
The yield of the Florida Insured Tax-Free Fund for the 30-day period ended
November 30, 1997 was +4.69%.
The average annual total returns of Florida Insured Tax-Free Fund for the
one- and five-year periods ended November 30, 1997 were +6.54% and +7.52%,
respectively. The average annual total return for the Fund since its inception
on September 1, 1992 was +7.73%.
New Jersey Tax-Free Fund
The yield of the New Jersey Insured Long-Term Portfolio and the New Jersey
Money Market Portfolio for the 30-day period ended November 30, 1997 was +4.73%
and +3.51%, respectively.
The average annual total returns of the New Jersey Insured Long-Term
Portfolio for the one- and five-year periods ended November 30, 1997, and since
its inception on February 3, 1988, were +6.40%, +7.10% and +8.19%,
respectively. The average annual total return of the New Jersey Money Market
Portfolio for the one- and five-year periods ended November 30, 1997, and since
its inception on February 3, 1988, were +3.32%, +2.99% and +3.95%,
respectively. Total return is computed by finding the average compounded rates
of return over the period set forth above that would equate an initial amount
invested at the beginning of the period to the ending redeemable value of the
investment.
New York Tax-Free Fund
The yield of the New York Insured Long-Term Portfolio and the New York
Money Market Portfolio for the 30-day period ended November 30, 1997 was +4.73%
and +0.8%, respectively.
The average annual total returns of the New York Insured Long-Term
Portfolio for the one-, five-, and ten-year periods ended November 30, 1997
were +6.36%, +7.28% and +8.76%, respectively. The average annual total return
of the New York Money Market Portfolio since its inception on September 3, 1997
was +0.8%. Total return is computed by finding the average compounded rates of
return over the period set forth above that would equate an initial amount
invested at the beginning of the period to the ending redeemable value of the
investment.
Ohio Tax-Free Fund
The yield of the Ohio Insured Long-Term Portfolio and the Ohio Money
Market Portfolio for the 30-day period ended November 30, 1997 was +4.70% and
+3.64%, respectively.
The average annual total returns of the Ohio Insured Long-Term Portfolio
for the one- and five-year periods ended November 30, 1997, and since its
inception on June 18, 1990, were +6.30%, +7.11% and +8.30%, respectively. The
average annual total returns of the Ohio Money Market Portfolio for the one-
and five-year periods ended November 30, 1997, and since its inception on June
18, 1990, were +3.49%, +3.13% and +3.48%, respectively.
B-17
<PAGE>
Pennsylvania Tax-Free Fund
The yield of the Pennsylvania Insured Long-Term Portfolio and the
Pennsylvania Money Market Portfolio for the 30-day period ended November 30,
1997 was +4.77% and +3.67%, respectively. Yield is calculated daily and premium
and discounts on asset-backed securities are not amortized.
The average annual total returns of the Pennsylvania Insured Long-Term
Portfolio for the one-, five-, and ten-year periods ended November 30, 1997
were +6.21%, +7.09% and +8.80%, respectively. The average total returns of the
Pennsylvania Money Market Portfolio for the one- and five-year periods ended
November 30, 1997, and since its inception on June 13, 1988, were +3.49%,
+3.10% and +3.99%, respectively. Total return is computed by determining the
average compounded rates of return over the period set forth above that would
equate an initial amount invested at the beginning of the period to the ending
redeemable value of the investment.
CALCULATION OF YIELD
The current yield of the Money Market Portfolio of each Fund is calculated
daily on a base period return of a hypothetical account having a beginning
balance of one share for a particular period of time (generally 7 days). The
return is determined by dividing the net change (exclusive of any capital
changes) in such account by its average net asset value for the period, and
then multiplying it by 365/7 to get annualized current yield. The calculation
of net change reflects the value of additional shares purchased with the
dividends by the Portfolio, including dividends on both the original share and
on such additional shares. An effective yield, which reflects the effects of
compounding and represents an annualization of the current yield with all
dividends reinvested, may also be calculated for the Portfolio by addition 1 to
the net change, raising the sum to the 365/7 power, and subtracting 1 from the
result.
Set forth below is an example, for purposes of illustration only, of the
current and effective yield calculations for the Money Market Portfolio of each
applicable Fund for the 7-day base period ended November 30, 1997:
California Tax-Free Fund
Money Market Portfolio
-----------------------
11/30/97
-----------------------
Value of account at beginning of period .......... $ 1.00000
Value of same account at end of period* .......... $ 1.00068
---------
Net Change in account value ...................... $ .00068
Annualized Current Net Yield
(Net Change x 365/7) / average net asset value .. 3.55%
Effective Yield
[(Net Change) + 1]365/7 -- 1 .................... 3.61%
Average Weighted Maturity of Investments ......... 65 days
* Exclusive of any capital changes.
B-18
<PAGE>
New Jersey Tax-Free
Money Market Portfolio
-----------------------
11/30/97
-----------------------
Value of account at beginning of period ............ $ 1.00000
Value of same account at end of period* ............ 1.00067
---------
Net Change in account value ........................ $ .00067
Annualized Current Net Yield
(Net Change x 365/7) /- average net asset value ... 3.51%
Effective Yield
[(Net Change) + 1]365/7 -- 1 ...................... 3.56%
Average Weighted Maturity of Investments ........... 56 days
* Exclusive of any capital changes
New York Tax-Free Fund
Money Market Portfolio
-----------------------
11/30/97
-----------------------
Value of account at beginning of period ............. $ 1.00000
Value of same account at end of period* ............. $ 1.00069
---------
Net Change in account value ......................... $ .00069
Annualized Current Net Yield
(Net Change x 365/7) / average net asset value ..... 3.63%
Effective Yield
[(Net Change) + 1]365/7 -- 1 ....................... 3.67%
Average Weighted Maturity of Investments ............ 53 days
* Exclusive of any capital changes.
Ohio Tax-Free Fund
Money Market Portfolio
-----------------------
11/30/97
-----------------------
Value of account at beginning of period ............. $ 1.00000
Value of same account at end of period* ............. $ 1.00070
---------
Net Change in account value ......................... $ .00070
Annualized Current Net Yield
(Net Change x 365/7) / average net asset value ..... 3.64%
Effective Yield
[(Net Change) + 1]365/7) -- 1 ..................... 3.70%
Average Weighted Maturity of Investments ............ 60 days
* Exclusive of any capital changes.
B-19
<PAGE>
Pennsylvania Tax-Free Fund
Money Market Portfolio
-----------------------
11/30/97
-----------------------
Value of account at beginning of period ............ $ 1.00000
Value of same account at end of period* ............ $ 1.00070
---------
Net Change in account value ........................ $ .00070
Annualized Current Net Yield
(Net Change x 365/7) / average net asset value .... 3.67%
Effective Yield
[(Net Change) + 1]365/7 -- 1 ...................... 3.73%
Average Weighted Maturity of Investments ........... 43 days
* Exclusive of any capital changes.
Each Money Market Portfolio seeks to maintain, but does not guarantee, a
constant net asset value of $1.00 per share. The yield of the Portfolio will
fluctuate. Although the Money Market Portfolios invest in high-quality
instruments, the shares of the Portfolios are not insured or guaranteed by the
U.S. Government. Each Fund has obtained private insurance that partially
protects its Money Market Portfolio against default of principal or interest
payments on the instruments it holds, and against bankruptcy by issuers and
credit enhances of these instruments. Treasury and other U.S. Government
securities held by the Portfolios are excluded from this coverage. The
annualization of a week's dividend is not a representation by the Portfolio as
to what an investment in the Portfolio will actually yield in the future.
Actual yields will depend on such variables as investment quality, average
maturity, the type of instruments the Portfolio invests in, changes in interest
rates on instruments, changes in the expenses of the Fund and other factors.
Yields are one basis investors may use to analyze the Portfolios of the Fund,
and other investment vehicles; however, yields of other investment vehicles may
not be comparable because of the factors set forth in the preceding sentence,
differences in the time periods compared, and differences in the methods used
in valuing portfolio instruments, computing net asset value and calculating
yield.
B-20
<PAGE>
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 and Poor's 500 Composite Stock Price Index--is a well diversified list
of 500 companies representing the U.S. Stock Market.
Standard & Poor's MidCap 400 Index--is composed of 400 medium sized domestic
stocks.
Standard & Poor's/SmallCap 600/BARRA Value Index--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
Standard & Poor's/SmallCap 600/BARRA Growth Index--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
Russell 1000 Value Index--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
Wilshire 5000 Equity Index--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.
Salomon Brothers Broad Investment-Grade Bond Index--is a market-weighted index
that contains over 4,800 individually priced investment-grade corporate bonds
rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.
B-21
<PAGE>
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 Index--consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
Lehman Corporate (Baa) Bond Index--all publicly offered fixed-rate,
non-convertible 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--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.
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, non-convertible 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 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.
B-22
<PAGE>
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.
B-23
<PAGE>
INVESTMENT MANAGEMENT
The Fund receives all investment advisory services on an "internalized,"
at-cost basis from an experienced investment management staff employed directly
by The Vanguard Group, Inc. ("Vanguard"), a subsidiary jointly owned by the
Fund and the other Funds in The Vanguard Group of Investment Companies. The
investment management staff is supervised by the Senior Officers of the Fund.
The investment management staff is responsible for: maintaining the
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 by 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 each of the Fund's Portfolios 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 Effected
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, 1995, 1996 and 1997, the
Fund 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 Fund purchases
do not normally involve the payment of brokerage commissions. If any brokerage
commissions are paid, however, the Fixed Income
B-24
<PAGE>
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.
Stock Certificates. Your purchase will be made in full and fractional
shares of the Fund calculated to three decimal places. Shares are normally held
on deposit for shareholders by the Fund, which will send to shareholders a
statement of shares owned at the time of each transaction. This saves the
shareholders the trouble of safekeeping the certificates and saves the Fund the
cost of issuing certificates. Share certificates for the California Insured
Intermediate-Term Portfolio, and the Insured Long-Term Portfolios of each Fund
are available upon written request at no additional cost to shareholders. No
certificates will be issued for fractional shares of these Portfolios, for any
shares of the Money Market Portfolios, or for shares of the Florida Insured
Tax-Free 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 $5,000 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.
B-25
<PAGE>
A signature guarantee may be obtained from banks, brokers and any other
financial institution that Vanguard deems acceptable.
The signature guarantees must appear either: (1) on the written request
for redemption, (2) on a separate instrument for assignment ("stock power")
which should specify the total number of shares to be redeemed, or (3) on all
stock certificates tendered for redemption and, if shares held by the Fund are
also being redeemed, on the letter or stock power.
SHARE PRICE
Each Portfolio's share price, or "net asset value" per share, is
calculated by dividing the total assets of the Portfolio, less all liabilities,
by the total number of shares outstanding. The net asset value is determined as
of the close of the New York Stock Exchange, (the "Exchange"), generally 4:00
p.m. Eastern time, on each day that the Exchange is open for trading.
Short term instruments (those with remaining maturities of 60 days or
less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific
securities.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as
the Board of Directors deems in good faith to reflect fair value.
It is the policy of each Money Market Portfolio to attempt to maintain a
net asset value of $1.00 per share for sales and redemptions. The instruments
held by each Money Market Portfolio are valued on the basis of amortized cost,
which does not take into account unrealized capital gains or losses. This
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price which
each Money Market Portfolio would receive it if sold the instrument.
The use of amortized cost and the maintenance of each Money Market
Portfolio's net asset value at $1.00 is based on its election to operate under
Rule 2a-7 under the Investment Company Act of 1940. As a condition of operating
under that rule, each Money Market Portfolio must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days or less, and invest only in securities that
are determined by methods approved by the Trustees to present minimal credit
risks and that are of high quality as determined by the requisite rating
services, or in the case of an instrument not so rated, determined by methods
approved by the Trustees to be of comparable quality. The Trustees have also
agreed to establish procedures reasonably designed, taking into account current
market conditions and each Money Market Portfolio's investment objective, to
stabilize the net asset value per share as computed for purposes of sales and
redemptions at $1.00.
The share price for each Portfolio can be found daily in the mutual fund
listings of most major newspapers under the heading of Vanguard Funds.
B-26
<PAGE>
MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The Fund's Officers, under the supervision of the Board of Trustees,
manage the day-to-day operations of the Fund. The Trustees 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 five years is set forth below. As of November 30,
1997, the Trustees owned less than 1% of the Fund's outstanding shares. The
mailing address of the Fund's Trustees and Officers is Post Office Box 876,
Valley Forge, PA 19482.
JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee*
Senior 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, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, (DOB: 9/28/1935) Trustee
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing
Director of Global Health Care Partners/DLJ Merchant Banking Partners;
Director of Sun Company, Inc., and Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, (DOB: 10/11/1928) Trustee
Director of The Great Atlantic and Pacific Tea Company, IKON Office
Solutions, Inc., Raytheon Company, Knight-Ridder, Inc., Massachusetts
Mutual Life Insurance Co., and Ladies Professional Golf Association; and
Trustee Emerita of Wellesley College.
BURTON G. MALKIEL, (DOB: 8/28/1932) 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
Telecommunications Company.
ALFRED M. RANKIN, (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO
Industries, Inc.; Director of The BF Goodrich Company, and The Standard
Products Company.
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co., President of New York
University; Director of Pacific Gas and Electric Company, Procter and
Gamble Company, and NACCO Industries.
JAMES O. WELCH, JR., (DOB: 5/13/1931) 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, (DOB: 3/2/1936) Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company, and The Mead Corporation; and Trustee of Vanderbilt
University.
RICHARD F. HYLAND, (DOB: 3/22/1937)
Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938)
Secretary*
Managing Director and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, (DOB: 9/13/1946) 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.
B-27
<PAGE>
The Vanguard Group
The Fund is a member of The Vanguard Group of Investment Companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc., the Fund and
the other funds (the "Vanguard Funds") in the Group obtain at-cost virtually
all of their corporate management, administrative and distribution services.
Vanguard also provides investment advisory services on an at-cost basis to
several of the Vanguard Funds, including the Fund.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Vanguard Funds and
also furnishes the Vanguard Funds with necessary office space, furnishings and
equipment. Each Vanguard Fund pays its share of Vanguard's net expenses which
are allocated among the Vanguard Funds under methods approved by the Board of
Trustees (Directors) of each Vanguard Fund. In addition, each Vanguard Fund
bears its own direct expenses such as legal, auditing and custodian fees. In
order to generate additional revenues for Vanguard and thereby reduce the
Vanguard Fund's expenses, Vanguard also provides certain administrative
services to other organizations.
The Fund's Officers are also Officers and employees of Vanguard. No
Officer or employee owns, or is permitted to own, any securities of any
external adviser for the Vanguard 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, Inc. was established and operates under a Funds'
Service Agreement which was approved by the shareholders of each of the
Vanguard Funds. The Funds' Service Agreement provides for the following
arrangement: (a) each Vanguard Fund may invest up to 0.40% of its current net
assets in Vanguard, and (b) there is no restriction on the maximum aggregate
cash investment that the Vanguard Funds may make in Vanguard. The amounts which
each of the Vanguard Funds has 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, 1997, the
Funds' capital contribution was as follows: Vanguard California Tax-Free Fund
had contributed capital of $242,000 to Vanguard representing 1.2% of Vanguard's
capitalization. Vanguard Florida Insured Tax-Free Fund had contributed $41,000
to Vanguard, representing 0.2% of Vanguard's capitalization. Vanguard New
Jersey Tax-Free Fund had contributed $131,000 to Vanguard, representing 0.7% of
Vanguard's capitalization. Vanguard New York Tax-Free Fund had contributed
$83,000 to Vanguard, representing 0.4% of Vanguard's capitalization. Vanguard
Ohio Tax-Free Fund had contributed $37,000 to Vanguard, representing 0.2% of
Vanguard's capitalization. Vanguard Pennsylvania Tax-Free Fund had contributed
$224,000 to Vanguard, representing 1.1% of Vanguard's capitalization.
Management. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended November 30, 1997, each of the Funds' share of Vanguard's
actual net costs of operations relating to management and administrative
B-28
<PAGE>
services (including transfer agency) were as follows: Vanguard California
Tax-Free Fund totaled approximately $4,089,000. Vanguard Florida Insured
Tax-Free Fund totaled approximately $785,000. Vanguard New Jersey Tax-Free Fund
totaled approximately $2,580. Vanguard New York Tax-Free Fund totaled
approximately $1,593,000. Vanguard Ohio Tax-Free Fund totaled approximately
$676,000. Vanguard Pennsylvania Tax-Free Fund totaled approximately $4,382,000.
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 a 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 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, 1997, the Group's distribution and marketing expenses attributable
to the Funds were as follows: Vanguard California Tax-Free Fund paid
approximately $883,000. Vanguard Florida Insured Tax-Free Fund paid
approximately $137,000. Vanguard New Jersey Tax-Free Fund paid approximately
$509,000. Vanguard New York Tax-Free Fund paid approximately $241,000. Vanguard
Ohio Tax-Free Fund paid approximately $142,000. Vanguard Pennsylvania Tax-Free
Fund paid approximately $826,000.
Investment Advisory Services. Vanguard also provides investment advisory
services to: Vanguard Municipal Bond Fund; Vanguard Money Market Reserves;
Vanguard Admiral Funds; the several Portfolios of Vanguard Fixed Income
Securities Fund; Vanguard Institutional Index Fund; Vanguard Bond Index Fund;
Vanguard California Tax-Free Fund; Vanguard Florida Insured Tax-Free Fund;
Vanguard New Jersey Tax-Free Fund; Vanguard New York Tax-Free Fund; Vanguard
Ohio Tax-Free Fund; Vanguard Pennsylvania Tax-Free Fund; Vanguard Tax-Managed
Fund; the Aggressive Growth Portfolio of Vanguard Horizon Fund; the Total
International Portfolio of Vanguard STAR Fund; the REIT Index Portfolio of
Vanguard Specialized Portfolios; Vanguard Balanced Index Fund; Vanguard Index
Trust; Vanguard International Equity Index Fund; a secured Portfolio of
Vanguard Variable Insurance Fund; a portion of Vanguard/Windsor II; a portion
of Vanguard/Morgan Growth Fund; a portion of Vanguard Explorer 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. The following table shows, for the years ended November 30,
1995, 1996 and 1997, approximately how much the Funds paid of Vanguard's
investment advisory expenses.
B-29
<PAGE>
<TABLE>
<CAPTION>
Fund Year Ended 11/30/95 Year Ended 11/30/96 Year Ended 11/30/97
- ------------------------------------------------ --------------------- --------------------- ---------------------
<S> <C> <C> <C>
Vanguard California Tax-Free Fund .............. $286,000 $313,000 $470,000
Vanguard Florida Insured Tax-Free Fund ......... $ 46,000 $ 58,000 $ 82,000
Vanguard New Jersey Tax-Free Fund .............. $201,000 $211,000 $274,000
Vanguard New York Tax-Free Fund ................ $101,000 $110,000 $150,000
Vanguard Ohio Tax-Free Fund .................... $ 43,000 $ 49,000 $ 77,000
Vanguard Pennsylvania Tax-Free Fund ............ $339,000 $357,000 $466,000
</TABLE>
Director/Trustee Compensation
The individuals in the tables below serve as Directors/Trustees of all
Vanguard Funds, and each Fund pays a proportionate share of the
Directors'/Trustees' compensation. The Funds employ their officers on a shared
basis, as well. However, officers are compensated by The Vanguard Group, Inc.,
not the Funds.
Independent Directors/Trustees. The Funds compensate their independent
Directors/Trustees--that is, the ones who are not also officers of the Fund--in
three ways:
o The independent Directors/Trustees receive an annual fee for their service to
the Funds, which is subject to reduction based on absences from scheduled
Board meetings.
o The independent Directors/Trustees are reimbursed for the travel and other
expenses that they incur in attending Board meetings.
o Upon retirement, the independent Directors/Trustees receive an aggregate
annual fee of $1,000 for each year served on the Board, up to fifteen years
of service. This annual fee is paid for ten years following retirement, or
until the Directors'/Trustees' death.
"Interested" Directors/Trustees. The Funds' interested
Directors/Trustees--Messrs. Bogle and Brennan--receive no compensation for
their service in that capacity. However, they are paid in their role as
officers of The Vanguard Group, Inc.
Compensation Table. The following tables provide compensation details for
each of the Trustees. For the Funds, we list the amount paid as compensation
and accrued as retirement benefits by the Fund for each Trustee. In addition,
the table shows the total amount of benefits that we expect each
Director/Trustee to receive from all Vanguard Funds upon retirement, and the
total amount of compensation paid to each Director/Trustee by all Vanguard
Funds. All information shown is for the fiscal year ended November 30, 1997.
B-30
<PAGE>
VANGUARD CALIFORNIA TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued as Annual Benefits From All Vanguard Funds
Name of Trustees From Fund Part of Fund Expenses Upon Retirement Paid to Trustees (2)
- ------------------------------- -------------- ----------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) .............. None None None None
John J. Brennan(1) ............ None None None None
Barbara Barnes Hauptfuhrer..... $ 859 $ 128 $15,000 $70,000
Robert E. Cawthorn ............ $ 859 $ 107 $13,000 $70,000
Burton G. Malkiel ............. $ 861 $ 86 $15,000 $70,000
Alfred M. Rankin, Jr. ......... $ 859 $ 67 $15,000 $70,000
John C. Sawhill ............... $ 859 $ 80 $15,000 $70,000
James O. Welch, Jr. ........... $ 859 $ 99 $15,000 $70,000
J. Lawrence Wilson ............ $ 859 $ 71 $15,000 $70,000
</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 their service as Director or Trustee of 35 Vanguard Funds
(34 in the case of Mr. Malkiel).
VANGUARD FLORIDA INSURED TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued as Annual Benefits From All Vanguard Funds
Name of Trustees From Fund Part of Fund Expenses Upon Retirement Paid to Trustees (2)
- ------------------------------- -------------- ----------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) .............. None None None None
John J. Brennan(1) ............ None None None None
Barbara Barnes Hauptfuhrer..... $ 151 $ 23 $15,000 $70,000
Robert E. Cawthorn ............ $ 151 $ 19 $13,000 $70,000
Burton G. Malkiel ............. $ 155 $ 15 $15,000 $70,000
Alfred M. Rankin, Jr. ......... $ 151 $ 12 $15,000 $70,000
John C. Sawhill ............... $ 151 $ 14 $15,000 $70,000
James O. Welch, Jr. ........... $ 151 $ 17 $15,000 $70,000
J. Lawrence Wilson ............ $ 151 $ 13 $15,000 $70,000
</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 their service as Director or Trustee of 35 Vanguard Funds
(34 in the case of Mr. Malkiel).
B-31
<PAGE>
VANGUARD NEW JERSEY TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued as Annual Benefits From All Vanguard Funds
Name of Trustees From Fund Part of Fund Expenses Upon Retirement Paid to Trustees (2)
- ------------------------------- -------------- ----------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) .............. None None None None
John J. Brennan(1) ............ None None None None
Barbara Barnes Hauptfuhrer..... $ 514 $ 77 $15,000 $70,000
Robert E. Cawthorn ............ $ 514 $ 64 $13,000 $70,000
Burton G. Malkiel ............. $ 514 $ 51 $15,000 $70,000
Alfred M. Rankin, Jr. ......... $ 514 $ 40 $15,000 $70,000
John C. Sawhill ............... $ 514 $ 48 $15,000 $70,000
James O. Welch, Jr. ........... $ 514 $ 59 $15,000 $70,000
J. Lawrence Wilson ............ $ 514 $ 43 $15,000 $70,000
</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 their service as Director or Trustee of 35 Vanguard Funds
(34 in the case of Mr. Malkiel).
VANGUARD NEW YORK TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued as Annual Benefits From All Vanguard Funds
Name of Trustees From Fund Part of Fund Expenses Upon Retirement Paid to Trustees (2)
- ------------------------------- -------------- ----------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) .............. None None None None
John J. Brennan(1) ............ None None None None
Barbara Barnes Hauptfuhrer..... $ 287 $ 43 $15,000 $70,000
Robert E. Cawthorn ............ $ 287 $ 36 $13,000 $70,000
Burton G. Malkiel ............. $ 291 $ 28 $15,000 $70,000
Alfred M. Rankin, Jr. ......... $ 287 $ 23 $15,000 $70,000
John C. Sawhill ............... $ 287 $ 27 $15,000 $70,000
James O. Welch, Jr. ........... $ 287 $ 33 $15,000 $70,000
J. Lawrence Wilson ............ $ 287 $ 24 $15,000 $70,000
</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 their service as Director or Trustee of 35 Vanguard Funds
(34 in the case of Mr. Malkiel).
B-32
<PAGE>
VANGUARD OHIO TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued as Annual Benefits From All Vanguard Funds
Name of Trustees From Fund Part of Fund Expenses Upon Retirement Paid to Trustees(2)
- ------------------------------- -------------- ----------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) .............. None None None None
John J. Brennan(1) ............ None None None None
Barbara Barnes Hauptfuhrer..... $ 140 $ 21 $15,000 $70,000
Robert E. Cawthorn ............ $ 140 $ 18 $13,000 $70,000
Burton G. Malkiel ............. $ 145 $ 14 $15,000 $70,000
Alfred M. Rankin, Jr. ......... $ 140 $ 11 $15,000 $70,000
John C. Sawhill ............... $ 140 $ 13 $15,000 $70,000
James O. Welch, Jr. ........... $ 140 $ 16 $15,000 $70,000
J. Lawrence Wilson ............ $ 140 $ 12 $15,000 $70,000
</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 their service as Director or Trustee of 35 Vanguard Funds
(34 in the case of Mr. Malkiel).
VANGUARD PENNSYLVANIA TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued as Annual Benefits From All Vanguard Funds
Name of Trustees From Fund Part of Fund Expenses Upon Retirement Paid to Trustees (2)
- ------------------------------- -------------- ----------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) .............. None None None None
John J. Brennan(1) ............ None None None None
Barbara Barnes Hauptfuhrer..... $ 867 $ 129 $15,000 $70,000
Robert E. Cawthorn ............ $ 867 $ 108 $13,000 $70,000
Burton G. Malkiel ............. $ 871 $ 87 $15,000 $70,000
Alfred M. Rankin, Jr. ......... $ 867 $ 68 $15,000 $70,000
John C. Sawhill ............... $ 867 $ 81 $15,000 $70,000
James O. Welch, Jr. ........... $ 867 $ 99 $15,000 $70,000
J. Lawrence Wilson ............ $ 867 $ 72 $15,000 $70,000
</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 their service as Director or Trustee of 35 Vanguard Funds
(34 in the case of Mr. Malkiel).
B-33
<PAGE>
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Funds were organized as Pennsylvania business trusts on the following
dates: Vanguard California Tax-Free Fund - October 16, 1985; Vanguard Florida
Insured Tax-Free Fund - May 22, 1992; Vanguard New Jersey Tax-Free Fund -
September 25, 1987; Vanguard New York Tax-Free Fund - October 16, 1985;
Vanguard Ohio Tax-Free Fund - March 16, 1990; Vanguard Pennsylvania Tax-Free
Fund - January 15, 1986.
The Declaration of Trust (as amended and restated on January 15, 1986 for
Vanguard California Tax-Free Fund, and for Vanguard New York Tax-Free Fund)
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 California Tax-Free Fund is offering
shares of three Portfolios, the Florida Insured Tax-Free Fund is offering
shares of one Portfolio, and the New Jersey, New York, Ohio and Pennsylvania
Tax-Free Funds are offering shares of two Portfolios.
The shares of the Fund are fully paid and non-assessable, 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 preemptive 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 canceled 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
B-34
<PAGE>
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 Funds' respective financial statements as of and for the year ended
November 30, 1997, appearing in the Funds' respective 1997 Annual Reports to
Shareholders, and the respective reports thereon of Price Waterhouse LLP,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. The Funds' respective 1997 Annual
Reports to Shareholders are available upon request.
B-35
<PAGE>
APPENDIX A -- DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS
Municipal Bonds -- General. Municipal Bonds generally include debt
obligations issued by states and their political subdivisions, and duly
constituted authorities and corporations, to obtain funds to construct, repair
or improve various public facilities such as airports, bridges, highways,
hospitals, housing, schools, streets and water and sewer works. Municipal Bonds
may also be issued to refinance outstanding obligations as well as to obtain
funds for general operating expenses and for loan to other public institutions
and facilities.
The two principal classifications of Municipal Bonds are "general
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, demand notes
and tax-exempt commercial papers.
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.
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 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 397 days' 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 stands 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.
The Portfolios may purchase Municipal Bonds subject to so-called "demand
features." In such cases the Portfolio may purchase a security that is
nominally long-term but has many of the features of shorter-term securities. By
virtue of this demand feature, the security will be deemed to have a maturity
date that is earlier than its stated maturity date.
B-36
<PAGE>
From time to time proposals have been introduced before Congress to
restrict or eliminate the Federal income tax exemption for interest on
Municipal Bonds. Similar proposals may be introduced in the future. If any such
proposal were enacted, it might restrict or eliminate the ability of the Fund
to achieve its investment objective. In that event, the Fund's Trustees and
Officers would reevaluate its investment objective and policies and consider
recommending to its shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State
and local legislatures to restrict or eliminate the State and local income tax
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
"Risk Factors" on page B-7.)
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 know as "high grade bonds"; A
- -- possess many favorable investment attributes and are considered "upper
medium grade obligations." Factors giving security to principal and interest of
A-rated Municipal Bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future; Baa --
considered as medium grade obligations; i.e., they are neither highly protected
nor poorly secured; interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time; Ba -- protection
of principal and interest payments may be very moderate; judged to have
speculative elements; their future cannot be considered as well-assured; B --
lack characteristics of a desirable investment; assurance of interest and
principal payments over any long period of time may be small; Caa -- poor
standing; may be in default or there may be present elements of danger with
respect to principal and interest; Ca -- speculative in a high degree; often in
default; C -- lowest rated class of bonds; issues so rated can be regarded as
having extremely poor prospects for ever attaining any real investment
standing.
Description of Moody's ratings of state and municipal notes: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used will be as follows:
MIG-1 -- Best quality, enjoying strong protection from established cash flows
of funds for their servicing or from established and broad-based access to the
market for refinancing, or both; MIG-2 -- High quality with margins of
protection ample 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
B-37
<PAGE>
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.
Description of S&P's highest commercial papers 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.
B-38
