VANGUARD MASSACHUSETTS
TAX-EXEMPT FUND
[PHOTO]
SEMIANNUAL
REPORT
MAY 31, 1999
[THE VANGUARD GROUP LOGO]
<PAGE>
AT VANGUARD, WE BELIEVE
THAT TRADITION MATTERS
Our 9,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on
August 1, 1798. HMS Vanguard, the victorious British flagship at the Nile,
is our namesake. And its motto--"Leading the way"--serves as a guiding
principle for our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped
to shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with
clients; and a focus on long-term investing. To our great regret, Mr.
Morgan died on September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of
Vanguard Wellington Fund. It is the nation's oldest balanced mutual fund,
and one of only a handful of funds created in the 1920s that are still in
operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
3
REPORT FROM
THE ADVISER
5
PERFORMANCE SUMMARY
7
FUND PROFILE
8
FINANCIAL STATEMENTS
10
For an update on our Year 2000
preparedness, see page 18.
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE>
DEAR SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
During the six months ended May 31, 1999, municipal bond prices dipped in the
face of rising interest rates. These lower prices offset most of the interest
income earned by tax-exempt securities during the period, and resulted in
relatively modest total returns on municipal bonds.
Vanguard Massachusetts Tax-Exempt Fund, which was in existence for all
but eight days of the six-month period, earned a negative total return (capital
change plus reinvested dividends) of -0.1% from its inception on December 9,
1998, through May 31, 1999. The adjacent table presents the returns for our fund
and its average peer. As you can see, our return matched that of similar mutual
funds.
- -------------------------------------------------
TOTAL RETURNS
DEC. 9, 1998, THROUGH
MAY 31, 1999
- -------------------------------------------------
Vanguard Massachusetts
Tax-Exempt Fund -0.1%
Average Massachusetts
Tax-Exempt Bond Fund -0.1
- -------------------------------------------------
The fund's total return is based on a decrease in net asset value from
$10.00 per share on December 9, 1998, to $9.79 per share on May 31, 1999, and is
adjusted for dividends totaling $0.197 per share paid from net investment
income. On May 31, the fund's yield stood at 4.64%.
For Massachusetts residents, income earned by the fund is exempt from
federal and Massachusetts State income taxes, but may be subject to local taxes
and the Alternative Minimum Tax.
THE PERIOD IN REVIEW
The U.S. economy steamed ahead during the half-year as consumers continued
spending at a breakneck pace and the manufacturing sector showed signs of
recovering from last fall's woes. Economic growth expanded at an annual rate of
4.3% during the first three months of 1999, while both unemployment and
inflation remained low. The Wilshire 5000 Equity Index, which tracks the entire
U.S. stock market, gained +13.2% for the six months.
While the strong growth pace was regarded enthusiastically by the stock
market, it was hardly welcome news in the bond market, where investors feared
that higher inflation would result from an overheated economy. These concerns
drove interest rates higher and bond prices lower. The yield of the benchmark
30-year U.S. Treasury bond climbed from its starting point of 5.06% on November
30, 1998, to 5.83% on May 31--a significant increase of 77 basis points. At the
shorter end of the bond spectrum, the yield of 3-month Treasury bills rose by 15
basis points to close the period at 4.63%.
Though yields of municipal bonds also rose, the climb was not as steep
as for Treasuries. Yields on high-grade long-term municipal bonds ended the
half-year at 5.16%, up from 4.89% when the period began. Yields on top-grade
(MIG-1) 3-month notes rose on balance to 3.15% from 2.95% six months earlier.
Municipal bonds continue to offer excellent value relative to U.S.
Treasuries, although they are not quite as attractive as they were six months
ago. On May 31, the yield of a high-grade, long-term municipal bond was equal to
about 89% of the yield of the 30-year U.S. Treasury, whose interest is subject
to federal income tax. This proportion has historically
1
<PAGE>
been about 84%. Early in the period, however, it was about 97%, largely because
Treasury yields had been driven lower by heavy buying from investors who fled
riskier securities.
PERFORMANCE OVERVIEW
The -0.1% total return registered by Vanguard Massachusetts Tax-Exempt Fund
since its December 1998 inception consisted of a +2.0% income return and a price
decline of -2.1%, which reflected the rise in interest rates. The fund's
performance matched the -0.1% return earned by the average Massachusetts
tax-exempt fund over the same period, but fell short of the +0.5% return of the
Lehman Brothers Municipal Bond Index. This national index, which exists outside
the "real world" of operating expenses and transaction costs, is a tough
standard for all state tax-exempt funds.
Of course, interest rate fluctuations--up and down--are to be expected.
Over time, however, the effects of rate variations tend to be offsetting,
leaving the rate of interest income as the chief source of long-term bond
returns.
A six-month period is too short to provide a complete picture of a bond
fund's return. This is because only half of the year's interest income is
accounted for, while the price changes engendered by shifts in interest rates
are fully reflected.
And while a brief life span of just under six months is also far too
short of a period from which to draw any meaningful conclusions about our
relative performance, we expect that the fund's low costs and the skillful
management of Vanguard Fixed Income Group will play important roles in our quest
to provide long-term returns that are fully competitive with those of similar
funds. Our fund has an annualized expense ratio (expenses as a percentage of
average net assets) of 0.23%, compared with 1.17% charged by the average
Massachusetts tax-exempt fund. Costs matter because they are deducted from the
income earned by the fund. Therefore, lower operating expenses mean that a
higher percentage of the gross interest income is passed along to shareholders.
We thank you for your confidence in our approach and we pledge to
continue to provide Massachusetts residents with a low-cost, high-quality
portfolio of municipal bonds whose interest income is exempt from federal and
state income taxes.
IN SUMMARY
The swift rise in interest rates over the past several months is not an
aberration but rather a normal, if unpleasant, part of the cyclicality of the
financial markets. The variable nature of both bond and stock markets is the
reason we continuously counsel shareholders to hold balanced portfolios suitable
to their goals, time horizon for investing, and tolerance for risk. Building
such a program and then sticking with it through good times and bad is a
prudent, and ultimately rewarding, method of confronting the ever-present
volatility of the financial markets.
We look forward to reporting to you on the full 1999 fiscal year six
months hence.
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
June 14, 1999
2
<PAGE>
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED MAY 31, 1999
[PHOTO]
Sentiment shifted on the world's financial markets during the six months ended
May 31, 1999. The period began amid lingering anxiety over the state of the
world economy. Japan was in recession, economic growth was only sluggish in
Europe, and many developing nations were crisis-ridden. The United States was
just about the sole bright spot.
However, as the period progressed and reports showed rapid growth in
U.S. business activity, there was an evident reduction in anxiety. Midway
through the period, leadership in the U.S. stock market shifted away from a
relatively narrow group of large growth stocks regarded as relatively
recession-proof and toward cyclical stocks that had been depressed by fears of
recession and by falling demand from overseas markets. As confidence in global
economic growth grew, interest rates rose and bond prices declined in the United
States due to expectations that the Federal Reserve Board would raise interest
rates to ward off a potential surge in inflation. Internationally, however, a
growing conviction that the worst was over led to solid gains for stock markets
in Japan and several emerging markets.
U.S. STOCK MARKETS
Stock prices climbed during the half-year, reflecting the healthy domestic
economy and investors' confidence in future growth of corporate profits. The
overall market, as measured by the Wilshire 5000 Index, rose 13.2% during the
period, while the S&P 500 Index, a barometer for large-capitalization stocks,
gained 12.6%.
During the early part of the semiannual period, stock investors favored
large-cap growth stocks-- a group perceived as less subject to harm during an
economic downturn. In the United States, the Federal Reserve had already cut
short-term rates by a total of 0.75 percentage point in the autumn. Foreign
central banks continued cutting rates into the new year to combat sluggish
economic conditions in Europe, Asia, and Latin America. Late in the semiannual
period, U.S. investors were rewarded for their earlier optimism with a series of
surprisingly strong gains in corporate earnings--a record percentage of
companies in the S&P 500 reported earnings that beat analysts' estimates.
- --------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED MAY 31, 1999
------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- --------------------------------------------------------------------------------
STOCKS
S&P 500 Index 12.6% 21.0% 25.9%
Russell 2000 Index 11.0 -2.7 13.6
Wilshire 5000 Index 13.2 17.7 23.8
MSCI EAFE Index 4.2 4.7 8.0
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index -0.8% 4.4% 7.8%
Lehman 10 Year Municipal Bond Index 0.4 4.6 7.2
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.8 5.2
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.3% 2.1% 2.4%
- --------------------------------------------------------------------------------
*Annualized.
3
<PAGE>
Throughout the period, U.S. consumers provided support for the global
economy: Spending by consumers continued to set records, and American households
on average spent nearly every dollar of income they earned. The upbeat mood
stemmed from a bright employment picture (unemployment hovered near 30-year
lows) and rising incomes.
Improved prospects for global economic growth propelled several
formerly lackluster areas of the stock market, particularly commodity-related
companies and "cyclical" companies such as machinery, chemical, and paper
manufacturers. Higher oil prices, boosted by firmer demand and by agreement
among oil-producing nations to limit production, revived the "other energy" and
integrated-oils sectors, which gained about 36% and 16%, respectively.
Technology stocks, up 26% for the six months, were the market's leaders, but
most of the sector's gains came during the first three months of the period.
Consumer-staples companies, beset by tough price competition and hurt by the
stronger U.S. dollar in Europe, were the worst-performing group in the
half-year, down about 7%.
U.S. BOND MARKETS
For bond investors, the powerful economic expansion evident during the half-year
was too much of a good thing. Although the inflation rate did not get out of
hand-- consumer prices rose 1.3% during the six months and were up 2.1% for the
twelve months ended May 31--investors were worried that low unemployment (4.2%
of the labor force in May) would trigger an acceleration in wages and push up
prices.
Yields on U.S. Treasury bonds, which had fallen during the summer and
early fall of 1998 as investors flocked to what they regarded as a haven from
instability in other markets, rose by three-quarters of a percentage point or
more. The yield of the 30-year Treasury bond rose 77 basis points, to 5.83% on
May 31 from 5.06% on November 30, 1998. The yield of the 10-year Treasury rose
91 basis points, to 5.62% from 4.71%. Short-term rates didn't rise as far:
Yields on 3-month T-bills were up on balance by only 15 basis points, to 4.63%
on May 31. Bond prices, which move in the opposite direction from interest
rates, fell. The Lehman Aggregate Bond Index, a benchmark for investment-grade
taxable bonds, declined 0.8% on a total-return basis, as bond prices declined an
average of 3.8%, outweighing the 3.0% in interest income for the period.
Municipal bonds suffered only modest price declines and outperformed
Treasury securities during the period--a switch from the previous six months,
when Treasuries were the strongest segment of the bond market.
INTERNATIONAL STOCK MARKETS
Most overseas stock markets generated positive returns during the six months,
despite lingering economic weakness in Asia and sluggish growth in most of
Europe's developed economies. However, the strong rise in the value of the U.S.
dollar against European currencies negated most of the advances in that region
for U.S. investors. Emerging markets generally rebounded strongly, having
suffered steep losses in 1997 and 1998.
Overall, the developed markets outside the United States gained 4.2% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The biggest increases were in the
Pacific region and in emerging markets, where investors saw hopeful signs of
economic recovery. The MSCI Pacific Index rose 14.2% in U.S.-dollar terms,
despite a continuing recession in Japan. The MSCI Select Emerging Markets Free
Index climbed 19.0%. European stocks were up a scant 0.3% in dollar terms, as
gains of about 8% in local currencies were diminished by the dollar's rise
against the euro--a common currency adopted by 11 nations--and other regional
currencies.
4
<PAGE>
REPORT FROM THE ADVISER
[PHOTO]
During the fiscal half-year ended May 31, 1999, interest rates rose as investors
became worried that the strong growth of the U.S. economy might lead to an
acceleration in the inflation rate. As the period progressed, the U.S. economy's
growth rate slowed, but remained strong.
On the inflation front, investors' fears seemed misplaced until May, when
the Consumer Price Index came in above expectations. Soon after, the Federal
Reserve Board announced that it had adopted a bias toward a tighter monetary
policy, meaning that it was more likely to raise interest rates in the coming
months than to lower them. A decision to raise short-term interest rates would,
if taken, be aimed at slowing growth and heading off increases in inflation. The
Fed's announcement marked the first time the agency had told the public
immediately about its adoption of a policy bias, rather than releasing the
information at a later date. As we reached the midpoint of our fiscal year,
interest rates were hovering around their highest levels of the period, and
market participants were waiting to see whether inflation and growth statistics
would prompt the Fed to act on its tightening bias.
Municipal bonds outperformed U.S. Treasury bonds with equivalent maturities
during the half-year. The benchmark 30-year U.S. Treasury bond's yield increased
by 77 basis points, from 5.06% on November 30, 1998, to 5.83% on May 31, 1999.
The yield of a 30-year AAA-rated general obligation municipal bond increased 27
basis points, from 4.89% to 5.16%, over the same period.
The municipal bond market's strong relative performance can be explained by
two factors. First, municipal bond yields at the start of the 1999 fiscal year
were very attractive compared with Treasury yields. The global forces that had
compelled investors to seek the safety of Treasuries during summer 1998 did not
carry over to the municipal market, which consequently underperformed Treasuries
last fiscal year. This set the stage for municipals' superior performance in the
ensuing six months. Second, there was a 24% decline in the issuance of municipal
bonds during the first five months of calendar year 1999 compared with the same
period a year earlier.
The supply of newly issued municipals varied widely by state. In
Massachusetts, there was only a modest decline in new bond issuance compared
with 1998. The supply of new bonds declined for two reasons, both related to
higher interest rates. First, as rates rose, many issuers were no longer able to
refinance older, higher-coupon bonds by issuing new bonds at lower rates.
Second, higher interest rates made borrowing less attractive to bond issuers.
All in all, municipal bonds had a strong half-year compared with other
types of bonds. Even so, high-quality, long-term municipals continue to be
attractive investments, with yields as of May 31, 1999, equivalent to a
relatively high 89% of the yield on long-term U.S. Treasury bonds. Given that
interest on municipal bonds is generally exempt from federal income tax, while
interest on Treasuries and corporate bonds is
INVESTMENT PHILOSOPHY
The adviser believes that the fund, while operating within stated maturity and
stringent quality targets, can achieve a high level of current income that is
exempt from federal and Massachusetts income taxes by investing in high-quality
securities issued by Massachusetts state, county, and municipal governments.
5
<PAGE>
not, municipals provide a better after-tax yield than any taxable bond of
similar credit quality.
Going forward, new municipal bond issuance is expected to remain low
through year-end. Also, as the outlook for growth and inflation becomes clearer,
the Fed should give more direction to the market. At the least, this should
reduce uncertainty and bring some comfort to the bond markets.
The Vanguard Massachusetts Tax-Exempt Fund's low operating costs and
high credit quality should stand our shareholders in good stead during this
year's turbulent bond markets.
Ian A. MacKinnon, Managing Director
Pamela Wisehaupt Tynan, Principal
Reid O. Smith, Principal
John M. Carbone, Principal
Danine A. Mueller, Principal
Christopher M. Ryon, Principal
Kathryn Allen, Principal
Vanguard Fixed Income Group
June 11, 1999
6
<PAGE>
PERFORMANCE SUMMARY
MASSACHUSETTS TAX-EXEMPT FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the fund could
lose money.
TOTAL INVESTMENT RETURNS:
DECEMBER 9, 1998-MAY 31, 1999
- ---------------------------------------------------------------
MASSACHUSETTS TAX-EXEMPT FUND LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
PERIOD RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------
1999 -2.1% 2.0% -0.1% 0.5%
- ---------------------------------------------------------------
*Lehman Municipal Bond Index.
See Financial Highlights table on page 15 for dividend
information since the fund's inception.
TOTAL RETURN: PERIOD ENDED MARCH 31, 1999*
- --------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Massachusetts Tax-Exempt Fund 12/9/1998 -0.80% 1.25% 0.45%
- --------------------------------------------------------------------------------
*SEC rules require that we provide this total return information through the
latest calendar quarter.
7
<PAGE>
FUND PROFILE
MASSACHUSETTS TAX-EXEMPT FUND
This Profile provides a snapshot of the fund's characteristics as of May 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------------
MASSACHUSETTS LEHMAN
TAX-EXEMPT INDEX*
- ----------------------------------------------------------------
Number of Issues 78 49,905
Yield 4.6% --
Yield to Maturity 4.9% --
Average Coupon 5.1% 5.5%
Average Maturity 13.6 years 13.2 years
Average Quality AA+ AA+
Average Duration 8.8 years 7.2 years
Expense Ratio 0.23%** --
Cash Reserves 1.7% --
*Lehman Municipal Bond Index.
**Annualized.
INVESTMENT FOCUS
- -----------------------------------------------
[GRID]
Average Maturity Long
Credit Quality High
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
AAA 75.7%
AA 19.0
A 1.2
BBB 4.1
BB 0.0
B 0.0
- -----------------------------------------------
Total 100.0%
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------------
Under 1 Year 6.4%
1-5 Years 3.3
5-10 Years 13.5
10-20 Years 56.0
20-30 Years 20.8
Over 30 Years 0.0
- -----------------------------------------------
Total 100.0%
8
<PAGE>
AVERAGE COUPON. The average interest rate paid on the securities held by a fund.
It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the fund's duration by the change in rates. If interest rates
rise by one percentage point, the share price of a fund with an average duration
of five years would decline by about 5%. If rates decrease by a percentage
point, the fund's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a fund reach
maturity (or are called) and are repaid. In general, the longer the average
maturity, the more a fund's share price will fluctuate in response to changes in
market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a fund's securities holdings by credit-rating agencies. The
agencies make their judgment after appraising an issuer's ability to meet its
obligations. Quality is graded on a scale, with Aaa or AAA indicating the most
creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy
issuers of money market securities.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate bond
investment.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a fund's securities by credit
rating can help in gauging the risk that returns could be affected by defaults
or other credit problems. Distribution by Maturity. An indicator of
interest-rate risk. In general, the higher the concentration of longer-maturity
issues, the more a fund's share price will fluctuate in response to changes in
interest rates.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors. Investment Focus. This grid indicates the focus of a fund
in terms of two attributes: average maturity (short, medium, or long) and
average credit quality (high, medium, or low).
NUMBER OF ISSUES. An indicator of diversification. The more separate issues a
fund holds, the less susceptible it is to a price decline stemming from the
problems of a particular issue.
YIELD. A snapshot of a fund's interest income. The yield, expressed as a
percentage of the fund's net asset value, is based on income earned over the
past 30 days and is annualized, or projected forward for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a fund were held to their maturity dates.
9
<PAGE>
FINANCIAL STATEMENTS
MAY 31, 1999 (UNAUDITED)
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's municipal bond holdings,
including each security's market value on the last day of the reporting period
and information on credit enhancements (insurance or letters of credit).
Securities are grouped and subtotaled according to their insured or noninsured
status. Other assets are added to, and liabilities are subtracted from, the
value of Total Municipal Bonds to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Undistributed Net Investment Income is usually zero because the fund distributes
its net income to shareholders as a dividend each day. Any realized gains must
be distributed annually, so the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The balance shown for Accumulated Net Realized
Gains usually approximates the amount available to distribute to shareholders as
taxable capital gains as of the statement date, but may differ because certain
investments or transactions may be treated differently for financial statement
and tax purposes. Any Accumulated Net Realized Losses, and any cumulative excess
of distributions over net realized gains, will appear as negative balances.
Unrealized Appreciation (Depreciation) is the difference between the value of
the fund's investments and their cost, and reflects the gains (losses) that
would be realized if the fund were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MASSACHUSETTS TAX-EXEMPT FUND COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (98.3%)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ISSUER INSURED (69.0%)
Beverly MA GO 4.75% 9/1/2016 (2) $1,025 $ 984
Beverly MA GO 4.80% 9/1/2017 (2) 1,080 1,035
Boston MA GO 4.50% 1/1/2000 (3) 2,000 2,016
Boston MA GO 5.25% 4/1/2012 (3) 480 492
Boston MA Water & Sewer Comm. Rev. 5.20% 11/1/2021 (3) 1,950 1,927
Chelsea MA GO 5.50% 6/15/2009 (2) 90 96
Easton MA GO 5.00% 10/1/2017 (1) 1,205 1,185
Lynn MA GO 5.25% 2/15/2008 (1) 2,270 2,388
Lynn MA GO 5.25% 6/1/2013 (2) 1,530 1,571
Lynn MA Water & Sewer Rev. 5.125% 12/1/2017 (4) 2,000 1,987
Malden MA GO 5.00% 10/1/2011 (2) 1,820 1,843
Malden MA GO 5.00% 10/1/2015 (2) 500 496
Massachusetts Dev. Finance Agency Rev. (Brooks School) 5.125% 7/1/2015 (1) 560 562
Massachusetts Dev. Finance Agency Rev. (Brooks School) 5.125% 7/1/2016 (1) 585 585
Massachusetts Dev. Finance Agency Rev. (Emerson College) 5.25% 1/1/2007 (2) 2,000 2,106
Massachusetts Dev. Finance Agency Rev. VRDO (Brooks School) 3.25% 6/3/1999 (1) 2,900 2,900
Massachusetts Educ. Financing Auth. Educ. Loan Rev. 4.55% 7/1/2009 (2) 2,000 1,962
Massachusetts Educ. Financing Auth. Educ. Loan Rev. 4.65% 7/1/2010 (2) 1,500 1,465
Massachusetts Frontier Regional School Dist. GO 5.00% 6/15/2017 (2) 1,000 981
Massachusetts GO 5.25% 6/1/2014 (3) 80 82
Massachusetts Health & Educ. Fac. Auth. Rev. (Bentley College) 5.00% 7/1/2023 (1) 2,500 2,405
Massachusetts Health & Educ. Fac. Auth. Rev.
(Berklee College of Music) 5.00% 10/1/2017 (1) 1,250 1,229
Massachusetts Health & Educ. Fac. Auth. Rev.
(Boston Medical Center) 5.00% 7/1/2019 (1) 50 48
Massachusetts Health & Educ. Fac. Auth. Rev.
(Boston Medical Center) 5.25% 7/1/2012 (1) 150 153
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Massachusetts Health & Educ. Fac. Auth. Rev. (Brandeis Univ.) 5.25% 10/1/2016 (1) 550 554
Massachusetts Health & Educ. Fac. Auth. Rev.
(Harvard Pilgram Health) 4.75% 7/1/2022 (4) 1,000 915
Massachusetts Health & Educ. Fac. Auth. Rev.
(Harvard Pilgram Health) 5.00% 7/1/2018 (4) 80 77
Massachusetts Health & Educ. Fac. Auth. Rev. (Lahey Clinic) 7.85% 7/1/2003 (1) 360 409
Massachusetts Health & Educ. Fac. Auth. Rev.
(Massachusetts General Hosp.) 6.25% 7/1/2012 (2) 500 570
Massachusetts Health & Educ. Fac. Auth. Rev. (Northeastern Univ.) 5.00% 10/1/2017 (1) 970 952
Massachusetts Health & Educ. Fac. Auth. Rev. (Northeastern Univ.) 5.00% 10/1/2019 (1) 1,250 1,211
Massachusetts Health & Educ. Fac. Auth. Rev. (Northeastern Univ.) 5.00% 10/1/2022 (1) 1,750 1,685
Massachusetts Health & Educ. Fac. Auth. Rev.
(Partners Healthcare System) 5.25% 7/1/2003 (4) 80 83
Massachusetts Health & Educ. Fac. Auth. Rev.
(Partners Healthcare System) 5.25% 7/1/2015 (1) 390 392
Massachusetts Health & Educ. Fac. Auth. Rev.
(Univ. of Massachusetts Memorial) 5.00% 7/1/2018 (2) 550 528
Massachusetts Housing Finance Agency Single Family Housing Rev. 5.15% 12/1/2012 (2) 3,300 3,320
Massachusetts Ind. Finance Agency Rev. (Babson College) 5.00% 10/1/2018 (1) 750 733
Massachusetts Ind. Finance Agency Rev. (College of the Holy Cross) 5.00% 9/1/2023 (1) 3,575 3,439
Massachusetts Ind. Finance Agency Rev. (Tufts Univ.) 5.00% 2/15/2018 (1)+ 1,500 1,466
Massachusetts Turnpike Auth. Rev. (Metro. Highway System) 5.125% 1/1/2010 (2) 2,530 2,610
Massachusetts Turnpike Auth. Rev. (Metro. Highway System) 5.125% 1/1/2023 (1) 500 488
Massachusetts Turnpike Auth. Rev. (Metro. Highway System) 5.25% 1/1/2029 (1) 60 60
Massachusetts Water Resources Auth. Rev. 5.50% 11/1/2006 (3)(Prere.) 120 130
Massachusetts Water Resources Auth. Rev. 5.50% 8/1/2014 (4) 3,250 3,464
Methuen MA GO 4.875% 5/15/2017 (3) 2,080 2,009
Methuen MA GO 5.00% 11/1/2014 (3) 450 448
Plymouth County MA COP (Correctional Fac.) 5.00% 10/1/2007 (2) 1,595 1,654
Plymouth County MA COP (Correctional Fac.) 5.00% 10/1/2015 (2) 1,000 987
Springfield MA GO 5.00% 11/15/2018 (4) 1,975 1,918
Worcester MA GO 5.00% 8/1/2017 (1) 1,920 1,884
OUTSIDE MASSACHUSETTS:
Puerto Rico Govt. Dev. Bank VRDO 3.00% 6/2/1999 (1) 1,200 1,200
-----------
63,684
-----------
NONINSURED (29.3%)
Boston MA Water & Sewer Comm. Rev. 5.75% 11/1/2013 540 584
Massachusetts Bay Transp. Auth. 5.125% 3/1/2014 80 80
Massachusetts Bay Transp. Auth. 7.00% 3/1/2009 2,000 2,365
Massachusetts GO 5.25% 4/1/2011 80 83
Massachusetts GO 5.25% 4/1/2012 80 82
Massachusetts Grant Anticipation Notes 5.125% 12/15/2010 1,480 1,523
Massachusetts Grant Anticipation Notes 5.125% 6/15/2014 300 301
Massachusetts Grant Anticipation Notes 5.25% 12/15/2008 2,000 2,111
Massachusetts Grant Anticipation Notes 5.25% 12/15/2011 180 186
Massachusetts Health & Educ. Fac. Auth. Rev. (Amherst College) 5.00% 11/1/2023 1,500 1,437
Massachusetts Health & Educ. Fac. Auth. Rev. (Boston College) 5.00% 6/1/2018 200 194
Massachusetts Health & Educ. Fac. Auth. Rev.
(Caritas Christi Obligated Group) 5.70% 7/1/2015 3,000 3,007
Massachusetts Health & Educ. Fac. Auth. Rev.
(Partners Healthcare System) 5.25% 7/1/2014 1,000 1,002
Massachusetts Health & Educ. Fac. Auth. Rev.
(Partners Healthcare System) 5.25% 7/1/2015 1,000 998
Massachusetts Health & Educ. Fac. Auth. Rev. VRDO (Harvard Univ.) 3.15% 6/3/1999 1,000 1,000
Massachusetts Ind. Finance Agency Resource Recovery Rev.
(Refusetech Inc. Project) 6.15% 7/1/2002 480 501
Massachusetts Ind. Finance Agency Rev. (BioMed Research Corp.) 0.00% 8/1/2004 520 415
Massachusetts Muni. Wholesale Electric Co. Power Supply
System Rev. 6.75% 7/1/2002 (Prere.) 1,570 1,730
Massachusetts Port Auth. Rev. 5.00% 7/1/2018 500 487
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MASSACHUSETTS TAX-EXEMPT FUND COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Massachusetts Port Auth. Rev. 5.00% 7/1/2027 2,500 2,367
Massachusetts Port Auth. Rev. 5.375% 7/1/2027 2,000 1,973
Massachusetts Turnpike Auth. BAN 5.00% 6/1/1999 490 490
Massachusetts Turnpike Auth. BAN 5.00% 6/1/1999 (ETM) 1,300 1,300
Massachusetts Water Pollution Abatement Trust 5.125% 8/1/2014 500 504
Massachusetts Water Resources Auth. Rev. 5.50% 7/15/2002 (Prere.) 80 84
Massachusetts Water Resources Auth. Rev. 7.50% 4/1/2000 (Prere.) 1,000 1,054
Univ. of Massachusetts Building Auth. Refunding Rev. 6.875% 5/1/2014 1,000 1,197
-----------
27,055
-----------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $92,357) 90,739
- -----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.7%)
- -----------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 1,814
Liabilities (212)
-----------
1,602
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------------------
Applicable to 9,433,365 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $92,341
=======================================================================================================================
NET ASSET VALUE PER SHARE $9.79
=======================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
+Security segregated as initial margin for open futures contracts.
For key to abbreviations and other references, see below.
- --------------------------------------------------------------------------------
AT MAY 31, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
Paid in Capital $93,970 $9.96
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (83) (.01)
Unrealized Appreciation (Depreciation)--Note E
Investment Securities (1,618) (.17)
Futures Contracts 72 .01
- --------------------------------------------------------------------------------
NET ASSETS $92,341 $9.79
================================================================================
KEY TO ABBREVIATIONS
BAN--Bond Anticipation Note.
COP--Certificate of Participation.
GO--General Obligation Bond.
VRDO--Variable Rate Demand Obligation.
(ETM)--Escrowed to Maturity.
(Prere.)--Prerefunded.
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association).
(2) AMBAC (Ambac Assurance Corporation).
(3) FGIC (Financial Guaranty Insurance Company).
(4) FSA (Financial Security Assurance).
The insurance does not guarantee the market value of the municipal bonds.
LOC--Scheduled principal and interest payments are guaranteed by bank letter of
credit.
12
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows interest earned by the fund during the reporting period,
and details the operating expenses charged to the fund. These expenses directly
reduce the amount of investment income available to pay to shareholders as
tax-exempt income dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If a
fund invested in futures contracts during the period, the results of these
investments are shown separately.
- --------------------------------------------------------------------------------
MASSACHUSETTS
TAX-EXEMPT FUND
--------------------
DEC. 9, 1998* TO
MAY 31, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Interest $ 1,231
--------------------
Total Income 1,231
--------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 3
Management and Administrative 46
Marketing and Distribution 1
Custodian Fees 2
Auditing Fees 4
Shareholders' Reports 7
--------------------
Total Expenses 63
Expenses Paid Indirectly--Note C (8)
--------------------
Net Expenses 55
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,176
- --------------------------------------------------------------------------------
REALIZED NET LOSS
Investment Securities Sold (83)
Futures Contracts --
- --------------------------------------------------------------------------------
REALIZED NET LOSS (83)
- --------------------------------------------------------------------------------
UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (1,618)
Futures Contracts 72
- --------------------------------------------------------------------------------
UNREALIZED DEPRECIATION (1,546)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (453)
================================================================================
*Commencement of operations.
13
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the period.
The Operations section summarizes information detailed in the Statement of
Operations. Because the fund distributes its income to shareholders each day,
the amounts of Distributions--Net Investment Income generally equal the net
income earned as shown under the Operations section. The amounts of
Distributions--Realized Capital Gain may not match the capital gains shown in
the Operations section, because distributions are determined on a tax basis and
may be made in a period different from the one in which the gains were realized
on the financial statements. The Capital Share Transactions section shows the
amount shareholders invested in the fund, either by purchasing shares or by
reinvesting distributions, and the amounts redeemed. The corresponding numbers
of Shares Issued and Redeemed are shown at the end of the Statement.
- --------------------------------------------------------------------------------
MASSACHUSETTS
TAX-EXEMPT FUND
--------------------
DEC. 9, 1998* TO
MAY 31, 1999
(000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,176
Realized Net Loss (83)
Unrealized Depreciation (1,546)
--------------------
Net Decrease in Net Assets Resulting from
Operations (453)
--------------------
DISTRIBUTIONS
Net Investment Income (1,176)
Realized Capital Gain --
--------------------
Total Distributions (1,176)
--------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 100,581
Issued in Lieu of Cash Distributions 965
Redeemed (7,721)
--------------------
Net Increase from Capital Share Transactions 93,825
- --------------------------------------------------------------------------------
Total Increase 92,196
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period--Note F 145
--------------------
End of Period $ 92,341
================================================================================
(1)Shares Issued (Redeemed)
Issued 10,099
Issued in Lieu of Cash Distributions 97
Redeemed (777)
--------------------
Net Increase in Shares Outstanding 9,419
================================================================================
*Commencement of operations.
14
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
- --------------------------------------------------------------------------------
MASSACHUSETTS TAX-EXEMPT FUND
-----------------------------
DEC. 9, 1998* TO
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD MAY 31, 1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .197
Net Realized and Unrealized Gain (Loss) on Investments (.210)
-----------------
Total from Investment Operations (.013)
-----------------
DISTRIBUTIONS
Dividends from Net Investment Income (.197)
Distributions from Realized Capital Gains --
-----------------
Total Distributions (.197)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.79
================================================================================
TOTAL RETURN -0.14%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $92
Ratio of Total Expenses to Average Net Assets 0.23%**
Ratio of Net Investment Income to Average Net Assets 4.25%**
Portfolio Turnover Rate 21%
================================================================================
*Commencement of operations.
**Annualized.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Massachusetts Tax-Exempt Fund is registered under the Investment
Company Act of 1940 as an open-end investment company, or mutual fund. The fund
invests in debt instruments of municipal issuers whose ability to meet their
obligations may be affected by economic and political developments in the state
of Massachusetts.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Bonds, and temporary cash investments acquired over
60 days to maturity, are valued using the latest bid prices or using valuations
based on a matrix system (which considers such factors as security prices,
yields, maturities, and ratings), both as furnished by independent pricing
services. Other temporary cash investments are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to qualify as a regulated
investment company and distribute all of its income. Accordingly, no provision
for federal income taxes is required in the financial statements.
3. FUTURES CONTRACTS: The fund may use Municipal Bond Index, U.S. Treasury
Bond, and U.S. Treasury Note futures contracts, with the objectives of enhancing
returns, managing interest rate risk, maintaining liquidity, diversifying credit
risk, and minimizing transaction costs. The fund may purchase or sell futures
contracts instead of bonds to take advantage of pricing differentials between
the futures contracts and the underlying bonds. The fund may also seek to take
advantage of price differences among bond market sectors by simultaneously
buying futures (or bonds) of one market sector and selling futures (or bonds) of
another sector.Futures contracts may also be used to simulate a fully invested
position in the underlying bonds while maintaining a cash balance for liquidity.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of bonds held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued based upon their quoted daily settlement
prices. The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
4. DISTRIBUTIONS: Distributions from net investment income are declared
daily and paid on the first business day of the following month. Annual
distributions from realized capital gains, if any, are recorded on the
ex-dividend date.
5. OTHER: Security transactions are accounted for on the date securities
are bought or sold. Costs used to determine realized gains (losses) on the sale
of investment securities are those of the specific securities sold. Premiums and
original issue discounts are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. The Vanguard Group furnishes at cost investment advisory, corporate
management, administrative, marketing, and distribution services. The costs
of such services are allocated to the fund under methods approved by the
Board of Trustees. The fund has committed to provide up to 0.40% of its net
assets in capital contributions to Vanguard. At May 31, 1999, the fund had
contributed capital of $14,000 to Vanguard (included in Other Assets),
representing 0.02% of the fund's net assets and 0.02% of Vanguard's
capitalization. The fund's Trustees and officers are also Directors and
officers of Vanguard.
C. The fund's investment adviser may direct new issue purchases, subject to
obtaining the best price and execution, to underwriters who have agreed to
rebate or credit to the fund part of the
16
<PAGE>
underwriting fees generated. Such rebates or credits are used solely to
reduce the fund's management and administrative expenses. The fund's custodian
bank has also agreed to reduce its fees when the fund maintains cash on deposit
in the non-interest-bearing custody account. For the period ended May 31, 1999,
these arrangements reduced expenses by:
----------------------------------------------------------------------
EXPENSE REDUCTION
(000) TOTAL EXPENSE
--------------------------------------- REDUCTION AS A
MANAGEMENT AND CUSTODIAN PERCENTAGE OF
ADMINISTRATIVE FEES AVERAGE NET ASSETS
----------------------------------------------------------------------
$6 $2 0.03%*
----------------------------------------------------------------------
*Annualized.
D. During the period ended May 31, 1999, the fund purchased $93,577,000 of
investment securities and sold $9,973,000 of investment securities, other
than temporary cash investments.
E. At May 31, 1999, net unrealized depreciation of investment securities
for federal income tax purposes was $1,618,000, consisting of unrealized gains
of $7,000 on securities that had risen in value since their purchase and
$1,625,000 in unrealized losses on securities that had fallen in value since
their purchase.
At May 31, 1999, the aggregate settlement value of open futures contracts
expiring through September 1999 and the related unrealized appreciation were:
----------------------------------------------------------------------
(000)
------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS SHORT CONTRACTS VALUE APPRECIATION
----------------------------------------------------------------------
U.S. Treasury Bond 44 $5,180 $72
----------------------------------------------------------------------
F. The fund was organized on August 17, 1998, and its operations up to
December 9, 1998, were limited to the sale and issuance of 14,479 shares of its
common stock, at $10 per share, to a family member of an officer of the fund.
17
<PAGE>
NOTICE TO SHAREHOLDERS ABOUT Y2K
As is well known by now, the approaching calendar change to 2000 has posed a
challenge to many computer systems worldwide. Computers that are not modified
could interpret "00" as 1900 rather than 2000 and produce errors in
date-dependent calculations, including bond interest payments, stock trade
settlements, retirement benefits, and other financial transactions.
OUR APPROACH
Vanguard has taken this challenge seriously. We have had a Year 2000 Project
under way since 1996 to fulfill our responsibility to safeguard our business
relationships and the security of our investors' accounts.
Our internal systems are Year 2000-compliant. They have been renovated
and thoroughly tested and are ready for the date change. As for the external
systems that connect with ours, we have been working for many months with
clients, business partners, and providers of products and services to assess
their compliance. We have analyzed the external services we require and have
developed contingency plans-- including provision for alternative providers
where appropriate.
On New Year's Day, our telephone centers will be staffed and ready for
shareholder calls. However, we expect the volume of inquiries over the New
Year's weekend to be high, and we encourage shareholders to check their accounts
via our website or automated telephone systems, which offer much greater service
capacity and efficiency. This will also help our live representatives to provide
a higher level of service to those with specific transaction or other
service-related needs.
WHAT YOU CAN DO
We assure you we will protect our shareholders' records, so account records will
not be lost. Nevertheless, keeping copies of current records is always
advisable. You should keep at least your third-quarter statement and any
confirmations you receive from us between October 1, 1999, and year-end.
If you are a registered user of Access Vanguard(TM) (www.vanguard.com),
you can retrieve this information through the secure "Your Accounts" section and
print copies for your files. If you are not registered for Access Vanguard and
wish to have this flexibility, you should register as soon as possible so that
you can receive your password and become familiar with this service before the
New Year's weekend. Likewise, you may need personal identification numbers to
use our automated telephone services: Vanguard Tele-Account(R) for individual
investors (1-800-662-6273) and The VOICE(TM) Network for participants in
employer-sponsored retirement plans (1-800-523-1188).
Our Year 2000 Project's primary goal from the start has been to prepare
our systems for business as usual on behalf of our shareholders into 2000 and
beyond. We remain confident we will meet that goal, and we look forward to
serving you in the years to come.
18
<PAGE>
THE VANGUARD FAMILY OF FUNDS
STOCK FUNDS
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital Appreciation Fund*
Tax-Managed Growth and Income Fund*
Tax-Managed Small-Cap Fund*
Total International Stock Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor Fund Windsor II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy Conservative Growth Fund
LifeStrategy Growth Fund
LifeStrategy Income Fund
LifeStrategy Moderate Growth Fund
STAR Fund
Tax-Managed Balanced Fund
Wellesley Income Fund
Wellington Fund
BOND FUNDS
Admiral Intermediate-Term Treasury Fund
Admiral Long-Term Treasury Fund
Admiral Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds (California, Florida, Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
Admiral Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds (California, New Jersey, New York, Ohio,
Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
19
<PAGE>
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & JohnsonoMerck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE>
VANGUARD MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.
Q1682-07/21/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
