<PAGE> 1
VANGUARD
CALIFORNIA
TAX-FREE FUND
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard California Tax-Free Fund and the other Funds in
The Vanguard Group. Mr. Brennan will continue to serve as President of the
Funds, and I will continue to serve as Chairman of the Board.
[FIGURE 1]
John J. Brennan John C. Bogle
As Chairman of all the Vanguard Funds, I want to tell you that I am
enthusiastic and confident that Jack Brennan is exactly the right person to
succeed me as Chief Executive Officer. To use yet another Vanguard nautical
metaphor, he will be the new captain. He has the qualities of leadership,
integrity, intelligence, and vision that must continue to be Vanguard's
hallmark as we move toward, and then into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in me
in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
- ------------------------------------------------------------------------------
VANGUARD CALIFORNIA TAX-FREE FUND OFFERS THREE PORTFOLIOS THAT SEEK TO PROVIDE
A HIGH LEVEL OF INCOME THAT IS EXEMPT FROM FEDERAL AS WELL AS CALIFORNIA STATE
PERSONAL INCOME TAXES. THE INSURED LONG-TERM PORTFOLIO AND INSURED
INTERMEDIATE-TERM PORTFOLIO INVEST PRIMARILY IN INSURED LONG-TERM AND
INTERMEDIATE-TERM MUNICIPAL BONDS, RESPECTIVELY. THE MONEY MARKET PORTFOLIO
SEEKS TO MAINTAIN A CONSTANT NET ASSET VALUE OF $1.00 PER SHARE ALONG WITH
REASONABLE CURRENT INCOME.
<PAGE> 3
CHAIRMAN'S LETTER
DEAR SHAREHOLDER:
The 1995 fiscal year for Vanguard State Tax-Free Funds, which ended on November
30, presented a sharp contrast to fiscal 1994. During our prior fiscal year,
long-term interest rates rose sharply, engendering a commensurate drop in bond
prices; during our most recent fiscal year, long-term interest rates fell
steadily, driving bond prices upward. In the short-term arena, tax-exempt
interest rates moved lower during the 1995 fiscal year, but the yields on our
State Money Market Portfolios actually edged higher.
The net result of the turnabout in the course of long-term interest
rates was greatly enhanced returns to the shareholders of our Insured Long-Term
Portfolios. Given the relatively low interest rate environment that prevailed
during fiscal 1995 in the tax-exempt money markets, shareholders in our various
State Money Market Portfolios earned modest returns. Nonetheless, our Money
Market Portfolios' returns were comfortably above the returns achieved by their
respective competitive benchmarks. The detailed fiscal year results for each of
our State Tax-Free Portfolios, including net asset values and dividends for the
year, as well as current yields, are presented in a table at the conclusion of
this letter.
Over the past twelve months, the STATE MONEY MARKET PORTFOLIOS
provided returns in the area of +3.7%. As we would expect, all of our
Portfolios' net asset values remained at $1.00 per share throughout the year.
The table below provides an overview of each Portfolio's twelve-month total
return, as well as its yield at the beginning and the end of the fiscal year:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
TOTAL SEVEN-DAY
PRE-TAX RETURN ANNUALIZED YIELD
--------------- --------------------------
MONEY MARKET 12 MONTHS ENDED NOV. 30, NOV. 30,
PORTFOLIO NOV. 30, 1995 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA +3.7% 3.61% 3.44%
PENNSYLVANIA +3.7 3.64 3.51
NEW JERSEY +3.6 3.57 3.34
OHIO +3.8 3.71 3.47
- --------------------------------------------------------------
</TABLE>
Modest though these yields may be, they accrue to investors without
taxation at either the Federal level or the state and local levels in the
respective states. What's more, the yield of each Portfolio represents a nice
enhancement over the yield available from comparable competitive funds. As a
result of this consistent yield premium, our Portfolios' longer-term returns
have exceeded those of competitive standards. In the case of the California
Money Market Portfolio, shareholders have earned an average annual return of
+4.1% since the Portfolio's inception in June 1987, compared to +3.8% for the
average California money market fund.
The STATE INSURED LONGER-TERM PORTFOLIOS recouped all of last year's
capital losses--and then some--turning in their best overall year of
performance since our first Insured Portfolios began operations in April 1986.
The following table summarizes the fiscal year total returns (capital change
plus income) for all of the Insured Longer-Term Portfolios. To provide some
perspective on just how beneficial the falling interest rates of the past twelve
months have been for holders of longer-term bonds, this table breaks down our
Portfolios' total returns into their income and capital components:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
INVESTMENT RETURNS
----------------------------------------
TWELVE MONTHS ENDED
NOVEMBER 30, 1995
----------------------------------------
INSURED LONGER-TERM
PORTFOLIO INCOME CAPITAL TOTAL
- ----------------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA
INTERMEDIATE-TERM +5.6% + 8.3% +13.9%
CALIFORNIA LONG-TERM +6.5 +13.6 +20.1
NEW YORK LONG-TERM +6.4 +13.5 +19.9
PENNSYLVANIA LONG-TERM +6.5 +12.0 +18.5
NEW JERSEY LONG-TERM +6.4 +13.3 +19.7
OHIO LONG-TERM +6.4 +13.1 +19.5
FLORIDA LONG-TERM +6.3 +13.8 +20.1
- ----------------------------------------------------------------------
</TABLE>
The generous positive capital returns exhibited in the table present a dramatic
contrast to the sharply negative capital returns of one year ago. It should go
without saying that, for investors in longer-term bond funds, this kind of
year-to-year principal volatility
1
<PAGE> 4
[FIGURE 2]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended November 30, 1995
- ------------------------------------------------------------------------
Since
1 Year 5 Years Inception*
- ------------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD CA LONG-TERM PORTFOLIO +20.11% +8.70% +8.11%
AVERAGE CA MUNICIPAL FUND +20.37 +8.21 +7.68
LEHMAN MUNICIPAL BOND INDEX +18.90 +8.72 +8.41
</TABLE>
*Inception, April 7, 1986.
Note: Past performance is not predictive of future performance.
more or less comes with the territory. With that caveat in mind, it would not
be unexpected if the capital reward of fiscal 1995 were to revert to a capital
penalty sooner or later in another fiscal year.
The Portfolios' strong absolute returns of the past year also stack up
pretty well relative to the results of their two most appropriate performance
benchmarks: the unmanaged Lehman Municipal Bond Index and the average
competitive fund in each respective state category. The chart above shows the
cumulative returns earned by the California Insured Long-Term Portfolio since
its inception in April 1986, compared with each of these benchmarks. The
lifetime results for the Insured Intermediate-Term Portfolio are presented on
page 5.
You will note that the +8.1% annualized return for the California
Insured Long-Term Portfolio was a bit ahead of the +7.7% return for the average
California insured municipal fund. Despite our emphasis on high quality and our
reliance on the extra credit safety of insured bonds, our cost advantage
carried the day. However, our return fell shy of the +8.4% return for the
Lehman Municipal Bond Index. The California Insured Intermediate-Term Portfolio
achieved a return of +7.6%, well ahead of the +6.6% return of its average
competitor, but well behind the longer maturity Lehman Municipal Bond Index. As
you know, this Index is a tough standard for all state tax-free funds, given
that it exists in a world devoid of fund operating expenses and transaction
costs. While we endeavor to exceed this Index standard after our expenses,
doing so on a consistent basis may prove to be a large challenge.
THE FISCAL YEAR IN REVIEW
Above all, fiscal 1995 can be viewed as a year of recovery in the bond market.
On balance for the fiscal year, the yield on the long-term U.S. Treasury bond
tumbled from 8.0% to 6.1%, a precipitous drop of 190 basis points, equivalent
to a +26% price increase excluding the generous interest coupon. The yield on
the 90-day U.S. Treasury bill also declined--albeit not nearly as
sharply--beginning the fiscal year at 5.8% and ending at 5.5%.
2
<PAGE> 5
[FIGURE 3]
During this same period, the municipal bond market moved in similar
fashion; however, the decline in long-term municipal bond yields was somewhat
more subdued. On balance for the fiscal year, yields on high-grade municipal
bonds fell from 6.9% to 5.5%, engendering a price increase of +20%. Yields on
top-grade (MIG 1) municipal notes declined from 3.8% to 3.5%.
In my view, the abrupt decline in long-term interest rates over the
past twelve months was related to several contributing factors. Most
importantly, we should not lose sight of the fact that interest rates had risen
virtually without interruption in the months leading up to the commencement of
our 1995 fiscal year, reaching a peak in November 1994. This climb in rates was
engendered largely by investors' fears about a resurgence of inflation. With
the Federal Reserve Board raising the Federal funds rate (the rate at which
banks borrow from one another) an unprecedented seven times in the 13 months
from February 1994 to February 1995, these inflation fears certainly seemed
well-founded.
Although restrictive monetary policy often fails to deliver the
desired result, in this case the Fed's medicine seemed to work as intended.
That is, U.S. economic growth slowed and inflation concerns gradually
dissipated. Reflecting this renewed investor optimism, long-term rates did an
about-face beginning in late January 1995 and began to move steadily lower. By
the time the summer of 1995 began, the Fed felt free to relax its stern
monetary policy and actually reduced the Federal funds rate by 1/4 of 1% to
5 3/4%.*
The chart to the left should place the events of the past two fiscal
years into a somewhat longer run perspective. You will note that the first
three years witnessed a steady downtrend in rates, followed by the abrupt
two-year cycle that I just described. Yet, when all is said and done, yields on
long-term municipal bonds today remain generally below the levels maintained
during fiscal 1991-1992. In other words, despite the "slings and arrows" of the
recent volatile period, the prices of municipal bonds are higher today than
during the early years of the period.
It is interesting to trace the relative yields of long and short
municipals over the past five years. You can see in the lower chart that the
difference between the two yields--the "spread," if you will--has come
virtually full circle over the past five years. It stood at 135 basis points
(1.35%) at the beginning of fiscal 1991, climbed to nearly 400 basis points by
the end of fiscal 1992, and has narrowed considerably since then, moving back
to roughly 200 basis points at the close of the past fiscal year. What this
means is that investors who choose to extend the maturity of their bond
holdings earn a much lower risk premium today than they did some three years
ago.
TAX-EXEMPT VERSUS TAXABLE YIELDS
It is perhaps obvious that the reason investors are willing to accept
relatively lower yields from municipal bonds is the tax-exempt status of these
- ---------------
*Another reduction, to 5 1/2%, was implemented shortly after the close of our
fiscal year.
3
<PAGE> 6
securities. While the after-tax advantage of municipals is often taken for
granted, whether municipals represent an appropriate alternative depends
importantly on: (1) the investor's tax bracket; and (2) the yield spread
between taxable and tax-exempt securities.
When I wrote to you one year ago in my 1994 Chairman's letter, I noted
that, for investors in the highest marginal tax bracket, long-term municipal
bonds provided 44% higher after-tax income compared to Federally taxable U.S.
Treasury bonds. Today, that yield advantage has widened to 49%. However, on
the short side of the yield spectrum, the after-tax yield premium of MIG 1
notes over U.S. Treasury bills has shrunk, from 9% to 6%. This table presents a
comparison of the annual income earned on tax-exempt and taxable securities as
of November 30, 1995, assuming a $100,000 investment:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
ILLUSTRATION OF INCOME ON
HYPOTHETICAL $100,000 INVESTMENT
----------------------------------
LONG-TERM SHORT-TERM
- --------------------------------------------------------------
<S> <C> <C>
TAXABLE GROSS INCOME $ 6,100 $ 5,500
LESS TAXES (39.6%) (2,400) (2,200)
--------- ---------
NET AFTER-TAX INCOME 3,700 3,300
- --------------------------------------------------------------
TAX-EXEMPT INCOME $ 5,500 $ 3,500
- --------------------------------------------------------------
INCREASE IN
AFTER-TAX INCOME $ 1,800 $ 200
- --------------------------------------------------------------
PERCENTAGE INCREASE +49% +6%
- --------------------------------------------------------------
</TABLE>
Table assumes current yields (as of November 30, 1995) of 6.1% for U.S.
Treasury bonds, 5.5% for U.S. Treasury bills, 5.5% for long-term municipal
bonds, and 3.5% for short-term municipal notes.
The table provides a good indication of the kind of boost in after-tax income
that a high-tax-bracket investor might receive by investing in a state tax-free
bond fund rather than a Federally taxable U.S. Treasury bond fund. However,
given the speed with which interest rates can fluctuate, the illustration
should not be considered a representation of future results.
In fairness, I should also add that this is not entirely an "apples to
apples" comparison. As you know, U.S. Treasury bonds are backed by the full
faith and credit of the U.S. government; municipal bonds, on the other hand,
are subject to some degree of credit risk. More to the point, state-specific
funds entail an incremental risk engendered by their high concentration of
investments in discrete economic regions of the country. This risk is mitigated
to a tremendous extent in our Insured Longer-Term Portfolios through the use of
private portfolio insurance for virtually all of the bonds held in the
portfolios. This insurance effectively guarantees the full payment of annual
income and, at maturity, principal for all of the insured bonds that we hold.
As a result, each of our Insured Longer-Term Portfolios carries an implied
average quality rating of Aaa, the highest rating accorded by Moody's Investors
Services.
In the case of our State Tax-Free Money Market Portfolios, similar
portfolio insurance generally is not available. Thus, the burden of assuring
the creditworthiness of each individual portfolio holding rests squarely on the
shoulders of the professional money managers in Vanguard's Fixed Income Group.
I am pleased to say that they have handled this task over the years with
considerable diligence, emphasizing high-quality and credit-enhanced
securities. (This "credit enhancement" consists largely of irrevocable letters
of credit from high-quality banks guaranteeing the timely payment of interest
and principal.) Their efforts have resulted in each of the holdings in our
Money Market Portfolios earning Moody's highest rating--or the equivalent--for
shorter-term instruments.
Notwithstanding the quality of our portfolio holdings, investors in
all money market funds should bear in mind that their investments are not
guaranteed by the Federal Deposit Insurance Corporation, as would be the case
for an investment in a bank account or a certificate of deposit. There is also
no assurance that a money market fund will be able to maintain a stable net
asset value of $1.00 per share. However, we believe that our diligent credit
analysis and strict adherence to conservative average maturity guidelines will
go a long way toward protecting the interests of our shareholders.
4
<PAGE> 7
[FIGURE 3]
<TABLE>
<CAPTION>
Periods Ended
Average Annual Total Returns November 30, 1995
- --------------------------------------------------------------------
Since
1 Year Inception*
- --------------------------------------------------------------------
<S> <C> <C>
VANGUARD CA INTERMEDIATE-TERM +13.88% +7.63%
AVERAGE CA INTERMEDIATE FUND +13.84 +6.56
LEHMAN MUNICIPAL BOND INDEX +18.90 +8.91
</TABLE>
*Inception, March 4, 1994.
Note: Past performance is not predictive of future performance.
IN SUMMARY
When I wrote to you in my Annual Report one year ago, near the low point in the
tax-exempt bond market, I was optimistic enough to predict that "during fiscal
1995 the probabilities now favor greater stability in long-term tax-exempt
rates, and somewhat higher short-term rates." As it turns out, short rates
actually slipped a bit lower, and I was not nearly optimistic enough on the
bond side, as a strong rebound in the bond market commenced virtually in
lock-step with the start of the new fiscal year. This recovery--reflecting the
traditional view that the dawn inevitably follows the darkness--provided a
substantive enhancement to shareholders in our Insured Longer-Term Portfolios.
It also reinforced the value of my traditional admonition to shareholders to
"stay the course."
In the coming year, we, too, fully intend to stay the course that has
served our investors so well for so many years. We will continue to focus on
providing returns that exceed those of appropriate competitive standards, but
we will do so with the highest standards of credit quality. While high credit
quality typically comes at a price--i.e., lower gross yields--our shareholders,
thanks to our exceptionally low expense ratios, need not sacrifice income for
quality. Indeed, while the average competitive state tax-free fund charges
annual expenses at the rate of 0.83% of average net assets, our Vanguard State
Tax-Free Portfolios incur an expense ratio of but 0.20%. This remarkable annual
benefit of 63 basis points is available through the Vanguard State Tax-Free
Funds with no sacrifice in quality. The resulting higher yields in a
higher-quality bond fund is as close to the proverbial "free lunch" as you are
likely to see.
Thank you for your continued support and commitment to Vanguard, and I
look forward to reporting to you again six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
December 20, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
A FEW WORDS ABOUT POSSIBLE CHANGES IN THE TAX LAW
In our last Semi-Annual Report, we mentioned that potential changes in the tax
laws had impacted the tax-exempt bond market, resulting in an unusually large
after-tax yield advantage for municipal bonds. Since then, Congress has
continued to debate the merits of a "flat tax," with no definitive resolution
in sight. Given this uncertainty, the current yield on municipal bonds remains
at approximately 90% of the yield on taxable U.S. Treasuries. As a result, an
investor in the highest marginal tax bracket (40%), can earn an after-tax yield
of about 3.7% (60% of 6.1%) on a U.S. Treasury bond, compared to 5.5% on a
high-grade municipal bond--an increase of nearly 50% in after-tax income.
Until the long-term implications of a revised tax code become clearer,
we would caution municipal bond investors to give careful consideration before
making precipitate changes in the allocation of their holdings of municipal
bonds. In the meantime, we will keep you abreast of our views on the possible
effects of any proposed legislation that could materially impact the tax status
of your holdings in Vanguard State Tax-Free Funds.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
TOTAL PER SHARE
NET ASSETS --------------------- TWELVE MONTHS
(MILLIONS) AVERAGE AVERAGE NOV. 30, NOV. 30, ------------------------ CURRENT
PORTFOLIO NOV. 30, 1995 MATURITY QUALITY* 1994 1995 DIVIDENDS TOTAL RETURN YIELD**
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA . . . . $1,202 65 DAYS MIG 1 $ 1.00 $ 1.00 $.036 + 3.7% 3.61%
PENNSYLVANIA . . . 1,200 36 DAYS MIG 1 1.00 1.00 .036 + 3.7 3.64
NEW JERSEY . . . . 859 57 DAYS MIG 1 1.00 1.00 .035 + 3.6 3.57
OHIO . . . . . . . 178 57 DAYS MIG 1 1.00 1.00 .037 + 3.8 3.71
- ----------------------------------------------------------------------------------------------------------------------------------
INSURED INTERMEDIATE-TERM
CALIFORNIA . . . . $ 206 7.1 YEARS Aaa $ 9.64 $10.44 $.511 +13.9% 4.61%
INSURED LONG-TERM
CALIFORNIA . . . . 975 13.1 YEARS Aaa 9.92 11.27 .602 +20.1 5.15
NEW YORK . . . . . 859 10.5 YEARS Aaa 9.70 11.01 .581 +19.9 4.97
PENNSYLVANIA . . . 1,569 10.3 YEARS Aaa 10.07 11.28 .612 +18.5 5.09
NEW JERSEY . . . . 796 10.7 YEARS Aaa 10.40 11.78 .623 +19.7 4.90
OHIO . . . . . . . 197 9.3 YEARS Aaa 10.28 11.63 .610 +19.5 5.01
FLORIDA . . . . . . 423 14.1 YEARS Aaa 9.61 10.94 .560 +20.1 5.08
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* MIG 1 and Aaa are Moody's highest ratings for short-term and long-term
municipal bonds, respectively.
** Money Market Portfolios' yields are 7-day annualized yields; others are
30-day SEC yields.
Note: The shares of each of the Vanguard "single-state" Portfolios are
available for purchase solely by residents of the designated states.
6
<PAGE> 9
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS (PERIODS ENDED SEPTEMBER
30, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
-----------------------------------
INCEPTION TOTAL INCOME CAPITAL
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA INSURED INTERMEDIATE-TERM 3/4/94 + 8.79% -- +6.98% +5.09% +1.89%
CALIFORNIA INSURED LONG-TERM 4/7/86 +10.73 +9.00% +7.79 +6.51 +1.28
CALIFORNIA MONEY MARKET 6/1/87 + 3.62 +3.28 +4.15 +4.15 0.00
NEW YORK INSURED TAX-FREE 4/7/86 +11.06 +9.40 +7.39 +6.50 +0.89
PENNSYLVANIA INSURED LONG-TERM 4/7/86 +10.10 +9.36 +8.05 +6.70 +1.35
PENNSYLVANIA MONEY MARKET 6/13/88 + 3.60 +3.31 +4.16 +4.16 0.00
NEW JERSEY INSURED LONG-TERM 2/3/88 +10.98 +9.21 +8.58 +6.50 +2.08
NEW JERSEY MONEY MARKET 2/3/88 + 3.52 +3.26 +4.14 +4.14 0.00
OHIO INSURED LONG-TERM 6/18/90 +10.78 +9.13 +8.77 +6.03 +2.74
OHIO MONEY MARKET 6/18/90 + 3.70 +3.34 +3.48 +3.48 0.00
FLORIDA INSURED TAX-FREE 9/1/92 +11.14 -- +7.63 +5.45 +2.18
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE NOTE THAT AN INVESTMENT IN A MONEY MARKET FUND, SUCH AS THE MONEY MARKET
PORTFOLIOS OF VANGUARD STATE TAX-FREE FUNDS, IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
7
<PAGE> 10
REPORT FROM THE INVESTMENT ADVISER
STATE INSURED LONG-TERM PORTFOLIOS
It seems hard to believe that just one year ago we experienced the worst
price decline for the fixed-income markets since the 1920s. A powerful market
rally during 1995 has recaptured 1994's "lost ground." In retrospect, we are
reminded of the relevance of our Chairman's advice to "stay the course" in
weathering periods of market volatility.
The Federal Reserve's 1994 tightening of monetary policy helped raise
short-term interest rates, which translated into a slowing of economic activity
this year. Such slowing has diminished inflationary pressure. Fixed-income
investors responded by aggressively buying bonds. During our 1995 fiscal year,
the yield on the 30-year Treasury bond fell 1.9 percentage points (from 8.0% to
6.1%). During the same period, the yield on high-grade, long-term municipal
bonds fell 1.4 percentage points (from 6.9% to 5.5%). Naturally, the decline in
interest rates has positively affected the share prices of the State Insured
Longer-Term Portfolios. This year has provided exceptionally good performance.
Specific to the municipal market, the Orange County bankruptcy and the
rumblings of a new Federal "flat tax" structure were pivotal events. First,
Orange County filed for bankruptcy in December of 1994. During the first six
months of 1995, County officials wrestled with several alternatives to "balance
the books." By the end of our fiscal year, the County appeared to be slowly
making progress through budget cuts, revenue sharing agreements, and the
rollover of short-term credit obligations. Ultimately, we expect that Orange
County will emerge from bankruptcy, but the process will be long and is not yet
clearly defined.
It is important to note again that the Vanguard Portfolios did not and do
not have any direct exposure to Orange County debt. To be sure, this
geographically specific event underscores the advantages of the extra level of
credit protection offered by insured bonds in municipal portfolios.
In contrast, there is very little protection we can offer against the
seemingly all too frequent changes in tax policy proposed by the various
branches of the Federal government. The latest discussions regarding a flat tax
have aroused great concern throughout the municipal market. A flat tax, if
enacted, will eliminate the current system's progression of increasing marginal
tax rates and replace it with a single lower level for all earned income. This
would require the abandonment of all or most tax deductions, exemptions, and
credits.
With some proposals, unearned income (interest, dividends, or capital
gains) will not be taxed. Under this scenario, municipal obligations would lose
their unique tax-exempt status. This would reduce the attractiveness of
municipal issues relative to their taxable brethren. Market participants have
already begun to factor in this potential unattractiveness. The yield on
long-term, high-quality municipal bonds has risen from 86.3% of the 30-year
Treasury bond yield at the beginning of the year to 90.2% at the close.
Certainly, it is far too early to forecast the ultimate outcome of the flat tax
legislative proposals, but without the support of the current administration it
is doubtful that any changes will occur prior to the 1996 Presidential
elections. In the meantime, shareholders can enjoy the very attractive
after-tax yield advantage of municipal bonds.
For the State Insured Portfolios, the past year has held great rewards
for investors who "stayed the course." However, as interest rates have now
returned to historically low levels, we are hesitant to suggest bond prices
will continue on this course through next year. Regardless, investors'
paramount focus should be on long-term objectives. Whatever direction interest
rates move from year to year, Vanguard will continue to combine low expenses
with the conservative management of high-quality Federal and state tax-exempt
portfolios. We believe the outcome is a superior and durable investment.
STATE MONEY MARKET PORTFOLIOS
The beginning of the fiscal year proved to be rocky for the short-term
municipal market. Not long after the Orange County debacle, the Japanese
banking industry came under fire, resulting in the downgrading of several large
Japanese banks. The Daiwa Bank trading scandal further tarnished the reputation
of the Japanese banking industry. We are pleased to report that Vanguard Money
Market Portfolios managed to safely navigate through these
8
<PAGE> 11
murky waters. The Portfolios had no exposure to Orange County notes, nor did we
hold any issues backed by Daiwa Bank.
Notwithstanding the credit problems overshadowing the municipal money
market, prices on short-term municipals moved higher over the fiscal year. One
area of strength came from a phenomenal rally in the Treasury market. Evidence
of slow growth and low inflation pushed yields on one-year Treasury bills lower
by nearly -1.5% to 5.4% for the fiscal year. Similarly, comparable
high-quality, one-year municipal notes posted a -1.0% decline in yields over
the same period. The Federal Reserve Board intervened two times during the
fiscal year. The first was a tightening of monetary policy, the second an
offsetting easing of policy. Since the close of our fiscal year, signs of
continued economic weakness prompted the Fed to again lower the Federal funds
rate (the rate banks charge each other for overnight loans) 25 basis points to
5.50%.
Dividends for the Vanguard State Tax-Free Money Market Portfolios bucked
the trend of overall interest rates by moving dramatically higher during the
fiscal year. The average dividend rose more than +40% over this past year. The
impetus for the change came from widening credit spreads for issues supported
by Japanese banks, which led to a rise in average yields for all variable rate
instruments. Variable rate securities, which account for roughly 50% of the
Portfolios' composition, offset the decline in yields experienced in the
broader market and pushed municipal money market yields higher.
In conclusion, the growing number of risks in the marketplace underscore
the advantage of maintaining high quality standards. Vanguard's conservative
investment style and low expenses combine to provide shareholders with
consistently superior relative returns.
Sincerely,
Ian A. MacKinnon David E. Hamlin
Senior Vice President Principal
Pamela W. Tynan Danine A. Mueller
Principal Principal
Reid O. Smith Jerome J. Jacobs
Principal Principal
Vanguard Fixed Income Group
December 28, 1995
9
<PAGE> 12
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
November 30, 1995
<TABLE>
<CAPTION>
Face Market
INSURED Amount Value
LONG-TERM PORTFOLIO (000) (000)+
- -------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (99.6%)
- -------------------------------------------------------------------------
ISSUER INSURED (84.8%)
Anaheim Convention Center COP
0.00%, 8/1/04 (1) $ 3,120 $ 2,033
0.00%, 8/1/05 (1) 1,250 771
0.00%, 8/1/06 (1) 3,125 1,810
5.50%, 8/1/14 (1) 5,750 5,729
Anaheim Public Improvement Corp.
COP VRDO
3.85%, 12/6/95 (2) (LOC) 500 500
City of Barstow
Redevelopment Agency
6.25%, 9/1/22 (1) 2,225 2,372
California GO
6.00%, 8/1/19 (3) 4,400 4,575
7.00%, 11/1/13 (3) 2,000 2,290
California Health Facilities Auth.
(Adventist Health System)
6.75%, 3/1/11 (1) 5,000 5,474
(Catholic Health Care West)
VRDO 3.60%, 12/6/95 (1) 5,500 5,500
5.75%, 7/1/15 (2) 4,080 4,128
(Centinela Hosp.)
6.25%, 9/1/15 (1) 22,400 23,696
(Mills Peninsula)
5.75%, 1/15/15 (7) 12,500 12,643
(San Diego Hosp.)
6.20%, 8/1/20 (1) 3,820 3,986
6.625%, 5/1/19 (1) 6,525 6,941
(Unihealth America)
7.625%, 10/1/15 (2) 50 55
California Housing Finance Agency
Multifamily Housing Rev.
8.625%, 8/1/15 (1) 170 181
California Public Works Board
(Univ. of California)
6.25%, 12/1/07 (2) 6,945 7,598
6.50%, 12/1/08 (2) 4,000 4,552
Chino Basin Finance Auth.
Municipal Water Dist.
6.00%, 8/1/16 (2) 5,500 5,728
Contra Costa COP
5.50%, 6/1/12 (2) 6,850 6,915
5.60%, 6/1/19 (2) 9,395 9,358
6.70%, 2/1/21 (2) 4,630 4,945
Contra Costa Transportation Auth.
Sales Tax Rev. VRDO
3.45%, 12/6/95 (3) 2,400 2,400
Contra Costa Water Dist. Rev.
5.00%, 10/1/24 (1) 24,000 22,404
Culver City Redevelopment
Finance Auth.
6.75%, 11/1/99 (2) (Prere.) 955 1,042
East Bay Municipal Utility
Dist. Waste Water Treatment
System Rev.
6.375%, 6/1/12 (2) 2,000 2,144
6.375%, 6/1/21 (2) 5,750 6,099
6.50%, 6/1/20 (2) 2,000 2,175
Eastern Municipal Water Dist.
6.75%, 7/1/12 (3) 8,500 9,879
Elsinore Valley Municipal
Water Dist. COP
5.90%, 7/1/06 (3) 1,685 1,832
6.00%, 7/1/12 (3) 2,210 2,382
Encina Power Auth. Waste
Water Rev.
6.875%, 8/1/11 (3) 3,650 3,991
Glendale Hosp. Rev.
(Adventist Health System)
6.00%, 3/1/14 (1) 3,000 3,076
Indian Wells Redevelopment Agency
5.50%, 12/1/22 (1) 2,000 1,953
Kern High School Dist. GO
6.25%, 8/1/11 (1) 1,065 1,185
6.40%, 8/1/14 (1) 1,490 1,685
6.40%, 8/1/15 (1) 1,645 1,860
6.40%, 8/1/16 (1) 1,815 2,061
LaQuinta Redevelopment Agency
(Tax Allocation Project)
7.30%, 9/1/10 (1) 1,145 1,394
Long Beach Financing Auth. Rev.
6.00%, 11/1/10 (2) 3,860 4,190
6.00%, 11/1/17 (2) 2,000 2,175
Los Angeles Development Auth.
Rev. COP
(Children's Hosp.)
6.00%, 6/1/10 (1) 1,000 1,082
6.00%, 6/1/11 (1) 2,365 2,554
Los Angeles Metropolitan
Transportation Auth. VRDO
3.80%, 12/6/95 (3) 100 100
MSR Public Power Agency
(San Juan Project)
6.125%, 7/1/13 (2) 8,000 8,778
6.625%, 7/1/13 (6) 2,000 2,087
6.75%, 7/1/20 (1) 38,785 46,220
Modesto Irrigation Dist.
Finance Auth. Rev.
(Woodland Project)
6.50%, 10/1/11 (2) 8,125 9,217
6.50%, 10/1/22 (2) 9,750 11,337
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------
<S> <C> <C>
Mountain View Capital
Improvement Finance Auth. Rev.
6.25%, 8/1/12 (1) $ 5,000 $ 5,309
North City West School Facilities
Financing Auth.
6.00%, 9/1/19 (5) 2,000 2,091
Northern California Power Agency
(Hydro Electric Project)
5.50%, 7/1/23 (1) 5,000 4,882
6.00%, 7/1/09 (1) 7,530 8,196
6.30%, 7/1/18 (1) 10,000 11,279
7.50%, 7/1/21 (2) (Prere.) 1,810 2,249
Oakland Redevelopment Agency
(Central Dist. Project)
5.50%, 2/1/14 (2) 5,500 5,614
Orange County Local
Transportation Auth.
5.80%, 2/15/05 (3) 6,000 6,382
5.90%, 2/15/06 (3) 8,000 8,564
Orange County Sanitation Dist.
VRDO 3.80%, 12/4/95 (3) 1,700 1,700
Oro Loma Sanitation Dist.
5.20%, 10/1/16 (2) 4,800 4,634
Pittsburg Redevelopment Agency
5.50%, 8/1/07 (3) 2,750 2,844
5.50%, 8/1/15 (3) 12,700 12,578
Placer County Water Rev. COP
7.75%, 7/1/18 (6) 3,500 3,884
Pomona Unified School Dist.
5.50%, 8/1/16 (3) 1,000 1,025
GO 5.60%, 8/1/14 (1) 1,585 1,639
GO 5.60%, 8/1/15 (1) 2,000 2,070
GO 5.60%, 8/1/16 (1) 1,000 1,036
GO 7.50%, 8/1/17 (1) 2,540 3,251
Poway Redevelopment Agency
7.25%, 12/15/11 (3) 7,500 8,418
Rancho Water Dist.
6.25%, 8/1/12 (3) 2,000 2,123
Rancho Water Dist. Finance
Auth. Rev.
5.875%, 11/1/10 (3) 3,585 3,795
5.90%, 11/1/15 (3) 4,000 4,117
Redding Joint Power Finance Auth.
Waste Water Rev.
5.50%, 12/1/18 (3) 5,400 5,290
Redlands Water COP
7.00%, 11/1/96 (2) (Prere.) 5,500 5,781
Riverside County Public Facilities
5.25%, 9/1/04 (1) 2,330 2,426
5.25%, 9/1/05 (1) 2,455 2,546
Riverside County
Transportation Comm.
5.75%, 6/1/09 (2) 3,800 4,016
Riverside Sewer Rev.
5.00%, 8/1/11 (3) 4,520 4,405
5.00%, 8/1/12 (3) 4,745 4,593
Sacramento County Public Facilities
(Main Detention Facility Project)
COP 5.50%, 6/1/10 (1) 5,500 5,684
Sacramento Finance Auth. Rev.
5.375%, 11/1/14 (2) 4,000 4,033
Sacramento Municipal Utility
Dist. Rev. 6.00%, 1/1/24 (1) 2,250 2,336
6.25%, 8/15/10 (1) 33,800 37,525
6.30%, 8/15/18 (1) 14,000 14,774
Sacramento Redevelopment Agency
(Tax Allocation Project)
6.50%, 11/1/13 (1) 4,500 4,798
San Bernadino County COP
(Medical Center Financing Project)
6.50%, 8/1/17 (1) 17,915 20,412
San Francisco Airport Comm.
6.00%, 5/1/10 (1) 2,000 2,121
6.00%, 5/1/11 (1) 2,100 2,211
6.00%, 5/1/20 (1) 6,500 6,741
6.20%, 5/1/06 (2) 5,000 5,451
6.20%, 5/1/08 (2) 1,000 1,082
San Francisco Bay Area Rapid Transit
6.75%, 7/1/10 (2) 6,370 7,413
6.75%, 7/1/11 (2) 7,455 8,687
San Francisco City & County
Airport Rev.
6.30%, 5/1/11 (2) 5,000 5,369
6.50%, 5/1/06 (1) 3,280 3,737
6.60%, 5/1/07 (1) 2,490 2,820
6.625%, 5/1/08 (1) 3,720 4,197
6.70%, 5/1/09 (1) 3,970 4,476
San Jose Merged Area
Redevelopment Rev.
6.00%, 8/1/11 (1) 8,845 9,606
San Mateo County Finance Auth.
6.50%, 7/1/13 (1) 14,560 16,596
San Mateo Sewer
6.60%, 8/1/14 (1) 2,500 2,633
Santa Ana Community
Redevelopment Auth.
7.375%, 12/1/96 (3) (Prere.) 1,695 1,792
7.40%, 12/1/96 (3) (Prere.) 270 286
Santa Ana Finance Auth. Lease Rev.
6.25%, 7/1/16 (1) 5,345 5,969
6.25%, 7/1/17 (1) 2,000 2,240
Santa Clara County Financing Auth.
Lease Rev.
(Replacement Project)
6.75%, 11/15/20 (2) 11,500 12,760
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------
<S> <C> <C>
Santa Clara Redevelopment Agency
(Bayshore Project)
7.00%, 7/1/10 (2) $ 7,000 $ 8,300
Santa Clara Valley Water
Dist. COP
6.00%, 2/1/24 (3) 20,000 20,659
Santa Fe Springs
Redevelopment Agency
6.00%, 9/1/14 (1) 5,350 5,582
Santa Margarita/Dana
Point Improvement Dist.
5.75%, 8/1/20 (1) 28,500 28,678
Santa Rosa Waste Water Rev.
6.00%, 7/2/15 (2) 7,000 7,574
6.00%, 9/1/15 (3) 5,580 6,047
6.25%, 9/1/12 (3) 7,075 7,543
South Coast Air Quality
Management Dist. Rev.
5.50%, 8/1/14 (1) 8,000 7,953
6.00%, 8/1/11 (2) 3,200 3,465
South County Waste Water Auth.
5.50%, 8/1/22 (3) 8,625 8,424
South Orange County Public
Finance Auth.
7.00%, 9/1/10 (1) 3,300 3,910
7.00%, 9/1/11 (1) 3,000 3,561
9.50%, 8/15/04 (1) 3,000 4,022
Southern California Public
Power Auth.
(Palo Verde)
6.60%, 7/1/08 (2) 4,280 4,432
7.00%, 7/1/07 (2) 1,600 1,727
7.00%, 7/1/10 (2) 2,500 2,698
(Transmission Project)
VRDO 3.30%, 12/6/95 (2) 1,100 1,100
Sweetwater Water Rev.
7.00%, 4/1/99 (2) (Prere.) 3,050 3,378
Three Valley Municipal
Water Dist. COP
5.25%, 11/1/10 (3) 4,220 4,215
7.30%, 11/1/96 (1) (Prere.) 3,200 3,403
Torrance COP
7.20%, 4/1/16 (2) 4,050 4,180
Tri-City Hosp. Dist.
(Oceanside Hosp.)
7.00%, 2/1/12 (1) 5,950 6,243
Tulare County COP
5.875%, 11/15/05 (1) 1,000 1,087
Turlock Irrigation Dist. COP
6.75%, 1/1/12 (3) 2,060 2,127
6.75%, 1/1/13 (3) 3,100 3,273
Ukiah Electric Rev.
6.00%, 6/1/08 (1) 4,565 4,977
6.25%, 6/1/18 (1) 6,000 6,736
Univ. of California
(Multiple Purpose Project)
6.25%, 9/1/13 (1) 10,000 10,650
Univ. of California
Board of Regents
6.00%, 9/1/08 (1) 2,515 2,697
6.375%, 9/1/19 (1) 6,500 6,923
Walnut Public Finance Auth.
6.00%, 9/1/15 (1) 5,000 5,171
Walnut Valley Unified School Dist.
6.00%, 8/1/12 (2) 1,790 1,940
6.00%, 8/1/13 (2) 1,980 2,152
6.00%, 8/1/14 (2) 2,205 2,389
6.00%, 8/1/15 (2) 2,470 2,673
6.00%, 8/1/16 (2) 2,690 2,917
6.20%, 8/1/09 (2) 1,270 1,408
West Sacramento Financing Auth. Rev.
(Water System Improvement Project)
5.25%, 8/1/08 (3) 2,160 2,181
Whittier Insurance Health Facility Rev.
(Presbyterian Hosp.)
6.00%, 6/1/05 (1)++ 3,675 4,005
6.25%, 6/1/07 (1)++ 4,260 4,722
6.25%, 6/1/08 (1)++ 1,750 1,933
---------
GROUP TOTAL 826,623
---------
- -------------------------------------------------------------------------
PORTFOLIO INSURED
Riverside Hosp. Dist.
(Kaiser Permanente Medical Center)
9.00%, 12/1/15 300 306
Sacramento Municipal Utility Dist.
8.00%, 11/15/10 205 206
---------
GROUP TOTAL 512
---------
- -------------------------------------------------------------------------
SECONDARY MARKET INSURED (5.2%)
California GO
6.25%, 9/1/12 (3) 9,000 9,972
California Housing Finance Agency
(Single Family Mortgage)
6.90%, 8/1/16 (6) 5,750 5,906
California Public Works Board
(Department of Corrections)
6.50%, 9/1/17 (2) 30,000 34,443
---------
GROUP TOTAL 50,321
---------
- -------------------------------------------------------------------------
NON-INSURED (9.6%)
California Dept. of Water Resources
(Central Valley Project)
6.40%, 12/1/26 20,400 21,589
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------
<S> <C> <C>
California Educational
Facilities Auth. Rev. VRDO
(Institute of Technology)
3.15%, 12/7/95 $ 4,400 $ 4.400
California Health Facilities
Auth. VRDO
(Adventist Health System West
& Sutter Health)
3.40%, 12/7/95 (LOC) 1,900 1,900
(Kaiser Permanente)
3.45%, 12/6/95 5,000 5,000
California School
Cash Reserve Notes
4.75%, 7/3/96 (LOC) 10,000 10,072
Irvine Ranch Water Dist. VRDO
3.70%, 12/4/95 (LOC) 1,000 1,000
3.85%, 12/4/95 (LOC) 600 600
Kern County Public
Facilities Project VRDO
3.45%, 12/6/95 (LOC) 3,600 3,600
Los Angeles Dept. of Water & Power
6.50%, 4/1/10 3,950 4,429
Orange County Sanitation Dist. VRDO
3.55%, 12/4/95 (LOC) 1,400 1,400
Pasadena Electric Works Rev.
5.37%, 8/1/12 7,040 7,005
Riverside County Public
Facilities Project VRDO
3.40%, 12/5/95 (LOC) 975 975
3.45%, 12/5/95 (LOC) 2,500 2,500
3.85%, 12/5/95 (LOC) 880 880
Sacramento County TRAN
4.75%, 10/4/96 8,100 8,189
Sacramento County VRDO
(Administrative Center &
Courthouse Project)
3.35%, 12/7/95 (LOC) 890 890
San Diego County TRAN
4.50%, 9/30/96 1,650 1,664
San Diego Local Govt. Certificates
4.75%, 10/18/96 (LOC) 12,500 12,633
Santa Clara County Finance
Auth. Lease Rev. VRDO
3.45%, 12/6/95 3,200 3,200
Santa Clara VRDO
(El Camino Hosp.-Valley Medical)
3.50%, 12/5/95 (LOC) 1,400 1,400
---------
GROUP TOTAL 93,326
---------
- -------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $897,573) 970,782
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
- -------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (.4%)
- -------------------------------------------------------------------------
Other Assets--Note B $ 17,372
Liabilities (13,483)
---------
3,889
- -------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------
Applicable to 86,485,403 outstanding shares
of beneficial interest
(unlimited authorization--no par value) $974,671
- -------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.27
=========================================================================
</TABLE>
+ See Note A to Financial Statements.
For explanations of abbreviations and other references, see page 18.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
AT NOVEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital $907,233 $10.49
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses--Note E (3,400) (.04)
Unrealized Appreciation
(Depreciation)--Note F:
Investment Securities 73,209 .85
Futures Contracts (2,371) (.03)
- -------------------------------------------------------------------------
NET ASSETS $974,671 $11.27
- -------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
INSURED INTERMEDIATE- Amount Value
TERM PORTFOLIO (000) (000)+
- -------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (104.1%)
- -------------------------------------------------------------------------
ISSUER INSURED (99.1%)
Anaheim Electric System COP
6.80%, 10/1/98 (2) $ 1,000 $ 1,076
Anaheim Public Improvement Corp.
COP VRDO
3.85%, 12/6/95 (2) (LOC) 600 600
California GO
6.50%, 3/1/02 (2) 5,570 6,180
California Health Facilities Auth.
(Catholic Health Care West)
VRDO 3.60%, 12/6/95 (1) 500 500
7.00%, 7/1/05 (2) 3,410 3,989
7.00%, 7/1/06 (2) 3,395 3,998
(Centinela Hosp.)
6.50%, 9/1/08 (1) 5,000 5,536
(Mills Peninsula)
6.00%, 1/15/00 (7) 1,080 1,150
California Public Works Board
(Dept. of Corrections)
6.40%, 11/1/10 (1) 5,000 5,494
6.60%, 12/1/09 (2) 3,500 3,926
(Univ. of California Regents)
6.25%, 12/1/07 (2) 1,000 1,094
Central Coast Water Auth.
6.05%, 10/1/04 (2) 1,800 1,970
6.25%, 10/1/06 (2) 2,000 2,190
Chino Basin Finance Auth.
Municipal Water Dist.
6.50%, 8/1/10 (2) 3,095 3,514
City of Corona Redevelopment Project
7.50%, 9/1/04 (3) 970 1,165
7.50%, 9/1/05 (3) 1,040 1,255
Contra Costa Transportation Auth.
Sales Tax Rev.
VRDO 3.45%, 12/6/95 (3) 1,000 1,000
Culver City Redevelopment
Finance Auth.
6.75%, 11/1/99 (2) (Prere.) 2,500 2,782
East Bay Municipal Utility Dist. Waste
Water Treatment System Rev.
6.375%, 6/1/12 (2) 2,000 2,144
Elsinore Valley Municipal Water Dist.
6.00%, 7/1/07 (3) 1,650 1,803
LaQuinta Redevelopment Agency
8.00%, 9/1/03 (1) 1,325 1,619
Long Beach Financing Auth.
5.85%, 11/1/05 (2) 3,630 3,937
Los Angeles City Waste Water
6.50%, 6/1/07 (1) 1,695 1,897
8.70%, 11/1/02 (3) 2,535 3,147
Los Angeles County Metropolitan
Transportation Auth. VRDO
3.80%, 12/6/95 (3) 1,700 1,700
4.00%, 12/7/95 (1) 600 600
MSR Public Power Agency Rev.
(San Juan Project)
5.85%, 7/1/06 (2) 1,500 1,616
North City West Community Dist.
5.75%, 9/1/15 (5) 2,000 2,021
6.00%, 9/1/05 (5) 1,510 1,645
6.00%, 9/1/06 (5) 1,600 1,742
6.00%, 9/1/07 (5) 1,695 1,838
Oakland Redevelopment Agency
(Central Dist. Project)
6.00%, 2/1/06 (2) 5,125 5,606
Orange County Sanitation Dist.
VRDO 3.80%, 12/4/95 (3) 1,700 1,700
COP 6.00%, 8/1/01 (3) (Prere.) 1,500 1,652
COP 6.40%, 8/1/07 (3) 1,415 1,537
Orange County
Transportation Auth.
9.50%, 2/15/03 (3) 5,015 6,437
Rancho Water Dist. COP
6.25%, 8/1/12 (3) 1,950 2,070
6.50%, 11/1/96 (3) 1,105 1,135
6.50%, 11/1/01 (3) 1,590 1,765
Redding Electric System Rev. COP
7.125%, 7/1/97 (1) (Prere.) 1,000 1,069
Riverside County Public Finance
5.25%, 9/1/02 (1) 2,090 2,184
5.25%, 9/1/03 (1) 2,210 2,307
Sacramento Municipal Utility Dist.
6.25%, 8/15/07 (1) 8,000 8,731
6.25%, 8/15/10 (1) 1,280 1,421
Sacramento Redevelopment Agency
(Merged Downtown Project)
6.50%, 11/1/13 (1) 2,000 2,133
6.75%, 11/1/05 (1) 1,000 1,112
San Diego County Regional
Transportation Comm.
VRDO 3.40%, 12/6/95 (3) 730 730
5.00%, 4/1/98 (3) 2,500 2,560
5.00%, 4/1/98 (3) 2,000 2,039
5.20%, 4/1/06 (3) 3,625 3,715
6.25%, 4/1/02 (3) 5,000 5,486
San Francisco Airport Comm. Rev.
6.20%, 5/1/07 (2) 1,615 1,752
6.50%, 5/1/13 (2) 2,160 2,344
San Francisco City and County
Airport Rev.
6.40%, 5/1/05 (1) 2,800 3,173
6.60%, 5/1/07 (1) 1,000 1,133
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------
<S> <C> <C>
San Joaquin County COP
(Human Services Project)
6.70%, 5/15/99 (6) (Prere.) $ 5,300 $ 5,836
San Jose Merged Area
Redevelopment Project
6.00%, 8/1/06 (1) 1,000 1,100
6.00%, 8/1/08 (1) 1,000 1,094
7.50%, 8/1/96 (1) (Prere.) 1,000 1,046
San Jose Santa Clara Clean
Water Finance Auth.
7.00%, 10/1/04 (1) 5,615 6,032
7.25%, 10/1/02 (1) 1,500 1,605
South Orange County Public
Finance Auth.
6.25%, 8/15/99 (3) 2,000 2,148
7.00%, 9/1/05 (1) 3,440 4,009
7.00%, 9/1/07 (1) 1,000 1,182
9.50%, 8/15/04 (1) 4,395 5,892
Southern California Public
Power Auth.
(Palo Verde)
7.00%, 7/1/07 (2) 1,300 1,403
(Transmission Project)
VRDO 3.30%, 12/6/95 (2) 1,100 1,100
Southern California Rapid
Transit Dist.
6.00%, 9/1/08 (2) 2,650 2,807
Sweetwater Water Rev.
7.00%, 4/1/10 (2) 1,950 2,128
Three Valley Municipal Water Dist.
COP 7.30%, 11/1/96 (1) (Prere.) 1,000 1,063
Tri-City Hosp. Dist.
(Oceanside Care)
7.00%, 2/1/05 (1) 915 960
Tulare County COP
5.70%, 11/15/03 (1) 1,000 1,075
5.80%, 11/15/04 (1) 1,000 1,082
Univ. of California
Board of Regents
6.00%, 9/1/08 (1) 1,500 1,608
10.00%, 9/1/02 (1) 2,950 3,871
12.00%, 9/1/03 (2) 2,000 2,944
Univ. of California Rev.
(Multi Purpose Project)
10.00%, 9/1/02 (2) 1,000 1,312
10.00%, 9/1/03 (2) 2,000 2,686
Visalia Waste Water System Rev.
6.00%, 12/1/07 (1) 1,000 1,097
West Basin Water Dist.
6.80%, 8/1/00 (2) (Prere.) 2,000 2,253
Whittier Insurance
Health Facilities Rev.
(Presbyterian Hosp.)
6.00%, 6/1/00 (1)++ 1,895 2,030
6.00%, 6/1/03 (1)++ 3,380 3,675
6.00%, 6/1/04 (1)++ 3,580 3,901
---------
GROUP TOTAL 203,858
---------
- -------------------------------------------------------------------------
NON-INSURED (5.0%)
California Health Facilities Auth. VRDO
(Adventist Health System West
and Sutter Health)
3.40%, 12/7/95 (LOC) 700 700
(Kaiser Permanente Medical Center)
3.45%, 12/6/95 1,100 1,100
Irvine City Assessment Dist. VRDO
3.85%, 12/4/95 (LOC) 75 75
Irvine Ranch Water Dist. VRDO
3.65%, 12/4/95 (LOC) 400 400
Kern County Public Facilities Project
VRDO 3.45%, 12/6/95 (LOC) 1,050 1,050
Metropolitan Water Dist. of
Southern California
8.00%, 7/1/08 2,000 2,543
Orange County Dist. VRDO
(Irvine Coast Assessment)
4.50%, 12/4/95 (LOC) 352 352
Riverside County Public Facilities
Project VRDO
3.45%, 12/5/95 (LOC) 600 600
3.85%, 12/5/95 (LOC) 685 685
San Diego Area Local Govt.
Certificates
4.75%, 10/18/96 2,500 2,527
Santa Clara County Finance
Auth. Lease Rev. VRDO
3.45%, 12/6/95 300 300
---------
GROUP TOTAL 10,332
---------
- -------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $205,357) 214,190
- -------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
(000)+
- -------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-4.1%)
- -------------------------------------------------------------------------
Other Assets--Note B $ 3,508
Payables for Securities Purchased (11,512)
Other Liabilities (502)
---------
(8,506)
- -------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------
Applicable to 19,707,527 outstanding shares
of beneficial interest
(unlimited authorization--no par value) $205,684
- -------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.44
=========================================================================
</TABLE>
+See Note A to Financial Statements.
For explanations of abbreviations and other references, see page 18.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
AT NOVEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital $197,634 $10.03
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses--Note E (517) (.03)
Unrealized Appreciation
(Depreciation)--Note F:
Investment Securities 8,833 .45
Futures Contracts (266) (.01)
- -------------------------------------------------------------------------
NET ASSETS $205,684 $10.44
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
- -------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (99.4%)
- -------------------------------------------------------------------------
Alameda County TRAN
4.75%, 7/25/96 (LOC) $ 9,900 $ 9,950
Anaheim Public Improvement
Corp. COP VRDO
3.85%, 12/6/95 (2) (LOC) 30,500 30,500
California Dept. Water Resource
CP 3.50%, 12/21/95 2,036 2,036
(Central Valley Project)
VRDO 3.45%-3.50%,
12/6/95 (LOC) 27,700 27,700
California Health Facilities
Auth. VRDO
(Adventist Health System West
& Sutter Health)
3.40%, 12/7/95 (LOC) 29,200 29,200
(Catholic Health Care West)
3.60%, 12/6/95 (1) 38,200 38,200
(Kaiser Permanente)
3.45%, 12/6/95 34,100 34,100
(Pooled Program)
3.40%, 12/6/95 (LOC) 6,300 6,300
(St. Francis Medical Center)
3.60%, 12/6/95 (1) 49,800 49,800
California PCR Finance Auth.
(Pacific Gas & Electric)
CP 3.60%-3.70%,
1/12/96-2/22/96 (LOC) 57,800 57,800
(San Diego Gas & Electric)
4.00%, 9/1/96* 10,000 10,000
California School Cash Reserve Notes
4.75%, 7/3/96 (1) (LOC) 10,000 10,057
California State RAW
5.75%, 4/25/96 (LOC) 54,000 54,396
Contra Costa County TRAN
4.50%, 7/3/96 12,000 12,058
Contra Costa Transportation
Auth. Sales Tax Rev. VRDO
3.45%, 12/6/95 (3) 16,500 16,500
East Bay Municipal Utility Dist. CP
3.75%, 2/22/96 13,000 13,000
Foothill/Eastern Transport
Corridor Agency VRDO
3.45%, 12/7/95 (LOC) 25,000 25,000
Fresno County TRAN
4.50%, 7/2/96 15,000 15,060
Irvine Assessment Dist. VRDO
3.85%, 12/4/95 (LOC) 11,025 11,025
Irvine Ranch Water Dist. VRDO
3.50%-3.95%, 12/4/95 (LOC) 79,700 79,700
Kern County Public Facilities Project
VRDO 3.45%, 12/6/95 (LOC) 29,650 29,650
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------------
<S> <C> <C>
Kern County TRAN
4.50%, 7/2/96 $10,000 $ 10,033
Los Angeles City Waste Water CP
3.60%, 12/11/95 6,300 6,300
Los Angeles Community College TRAN
4.50%, 7/31/96 (LOC) 13,000 13,046
Los Angeles County
Metropolitan Transportation Auth.
CP 3.65%-3.75%,
12/8/95-3/19/96 (LOC) 28,100 28,100
VRDO 3.80%, 12/6/95 (3) 6,200 6,200
VRDO 4.00%, 12/7/95 (1) 5,000 5,000
Los Angeles County TRAN
4.50%, 7/1/96 (LOC) 44,500 44,676
Los Angeles Dept. of Water
& Power CP
3.70%-3.80%, 12/12/95-2/26/96 21,450 21,450
Metropolitan Water Dist.
of Southern California
CP 3.60%-3.80%,
12/11/95-2/26/96 11,200 11,200
Oakland Health Facilities VRDO
(Children's Hosp.)
3.50%, 12/6/95 (LOC) 10,415 10,415
Orange County Sanitation
Dist. VRDO
3.55%, 12/4/95 (2) 39,950 39,950
3.55%, 12/4/95 (LOC) 21,490 21,490
3.80%, 12/4/95 (3) 57,800 57,800
Orange County VRDO
(Irvine Coast Assessment)
4.50%, 12/4/95 (LOC) 43,464 43,464
Orange County Water Dist. VRDO
3.85%, 12/4/95 (LOC) 23,100 23,100
Pittsburg Redevelopment Agency
7.75%, 8/1/96 (Prere.) 7,050 7,372
Riverside County Public
Facilities Project VRDO
3.45%-3.85%, 12/5/95 (LOC) 16,705 16,705
Riverside County TRAN
4.75%, 7/1/96 10,000 10,046
Sacramento County Municipal
Utility Dist. TOB VRDO
3.75%, 12/7/95 (1) 12,185 12,185
Sacramento County TRAN
4.75%, 10/4/96-12/27/96 26,300 26,457
Sacramento County VRDO
(Administration Center
& Courthouse)
3.35%, 12/7/95 (LOC) 27,120 27,120
San Bernadino County TRAN
4.50%, 7/5/96 (LOC) 17,500 17,555
San Bernadino Transportation
Auth. VRDO
3.40%, 12/7/95 (LOC) 26,900 26,900
San Diego City TRAN
4.75%, 7/3/96 10,000 10,048
San Diego County Regional
Transportation Comm. VRDO
3.40%, 12/6/95 (3) 32,170 32,170
San Diego County TRAN
4.50%, 9/30/96 19,900 19,989
San Diego County Water Auth. CP
3.65%, 12/6/95 5,700 5,700
San Diego Unified School
Dist. TRAN
4.75%, 10/10/96 (LOC) 10,000 10,065
San Francisco TRAN
4.75%, 9/19/96 10,000 10,065
San Jose/Santa Clara Clear Water
Finance Auth. VRDO
3.35%, 12/6/95 (3) 3,700 3,700
San Mateo County COP VRDO
3.45%, 12/5/95 (LOC) 995 995
Santa Clara County Finance
Auth. Lease Rev.
VRDO 3.45%, 12/6/95 3,000 3,000
Santa Clara VRDO
(El Camino Hosp.-Valley Medical)
3.50%, 12/5/95 (LOC) 23,500 23,500
Sonoma County TRAN
4.25%, 11/1/96 9,680 9,720
Southern California Public
Power Auth. VRDO
(Transmission Project)
3.30%, 12/6/95 (2) 16,600 16,600
- -------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $1,194,148) 1,194,148
- -------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
(000)+
- ---------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (.6%)
- ---------------------------------------------------------
Other Assets--Note B $ 15,288
Liabilities (7,508)
-----------
7,780
- ---------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------
Applicable to 1,201,887,677 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $1,201,928
- ---------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
=========================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
AT NOVEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------
Amount Per
(000) Share
---------- ------
<S> <C> <C>
Paid in Capital $1,202,028 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses (100) --
Unrealized Appreciation
of Investments -- --
- ------------------------------------------------------------------------
NET ASSETS $1,201,928 $1.00
- ------------------------------------------------------------------------
</TABLE>
COP=Certificate of Participation
CP=Commercial Paper
GO=General Obligation
PCR=Pollution Control Revenue
RAN=Revenue Anticipation Note
RAW=Revenue Anticipation Warrant
TAN=Tax Anticipation Note
TOB=Tender Option Bond
TRAN=Tax Revenue Anticipation Note
VRDO=Variable Rate Demand Obligation
(Prere.)=Prerefunded
*Put Option Obligation
++Security purchased on a when-issued or delayed delivery basis for which the
Fund has not taken delivery as of November 30, 1995.
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association)
(2) AMBAC (AMBAC Indemnity Corporation)
(3) FGIC (Financial Guaranty Insurance Company)
(4) FSA (Financial Security Assurance)
(5) CGI (Capital Guaranty Insurance)
(6) BIGI (Bond Investors Guaranty Insurance)
(7) Connie Lee Inc.
(8) FHA (Federal Housing Authority)
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.
18
<PAGE> 21
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INSURED
INSURED INTERMEDIATE-
LONG-TERM TERM MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
November 30, 1995 November 30, 1995 November 30, 1995
(000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . $ 52,627 $ 8,374 $42,742
- ----------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . 52,627 8,374 42,742
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . $ 119 $ 19 $ 148
Management and Administrative . . . . . . . 1,453 255 1,679
Marketing and Distribution . . . . . . . . 188 1,760 32 306 314 2,141
Insurance Expense . . . . . . . . . . . . . . . ------ 2 ---- -- ------ --
Custodians' Fee . . . . . . . . . . . . . . . . 25 7 38
Auditing Fees . . . . . . . . . . . . . . . . . 6 7 8
Shareholders' Reports . . . . . . . . . . . . . 32 5 33
Annual Meeting and Proxy Costs . . . . . . . . 7 1 7
Trustees' Fees and Expenses . . . . . . . . . . 3 1 4
- ----------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . 1,835 327 2,231
Expenses Paid Indirectly--Note C . . . . . (42) (15) (38)
- ----------------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . 1,793 312 2,193
- ----------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . 50,834 8,062 40,549
- ----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . 847 (72) 60
Futures Contracts . . . . . . . . . . . . . . . (4,291) (250) --
- ----------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . (3,444) (322) 60
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . 118,478 12,355 --
Futures Contracts . . . . . . . . . . . . . . . (1,568) (266) --
- ----------------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . 116,910 12,089 --
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . $164,300 $19,829 $40,609
============================================================================================================================
</TABLE>
19
<PAGE> 22
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INSURED INSURED
LONG-TERM PORTFOLIO INTERMEDIATE-TERM PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED March 4 to
NOVEMBER 30, November 30, NOVEMBER 30, November 30,
1995 1994 1995 1994
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . $ 50,834 $ 53,859 $ 8,062 $ 2,450
Realized Net Gain (Loss) . . . . . . . . (3,444) 11,083 (322) (195)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . 116,910 (122,206) 12,089 (3,522)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . 164,300 (57,264) 19,829 (1,267)
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . (50,834) (53,859) (8,062) (2,450)
Realized Net Gain . . . . . . . . . . . . -- (14,386) -- --
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . (50,834) (68,245) (8,062) (2,450)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . 115,989 130,423 68,983 39,289
--In Lieu of Cash Distributions 34,047 48,886 5,947 1,878
--Exchange . . . . . . . . . 87,476 92,591 73,591 96,497
Redeemed --Regular . . . . . . . . . . (100,570) (153,499) (18,551) (11,946)
--Exchange . . . . . . . . . (109,827) (233,230) (36,327) (21,727)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . 27,115 (114,829) 93,643 103,991
- -----------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . 140,581 (240,338) 105,410 100,274
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . 834,090 1,074,428 100,274 --
- -----------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . $ 974,671 $ 834,090 $205,684 $100,274
=================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . $.602 $.604 $.511 $.346
Realized Net Gain . . . . . . . . . . -- $.152 -- --
- -----------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . 19,004 20,735 14,150 13,645
Issued in Lieu of Cash Distributions 3,152 4,508 584 189
Redeemed . . . . . . . . . . . . . (19,770) (36,222) (5,429) (3,432)
- ------------------------------------------------------------------------------------------------------------------
2,386 (10,979) 9,305 10,402
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
MONEY MARKET
PORTFOLIO
- ---------------------------------------------------------------------------------------------
YEAR ENDED Year Ended
NOVEMBER 30, November 30,
1995 1994
(000) (000)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . $ 40,549 $ 27,867
Realized Net Gain (Loss) . . . . . . . . . . . . . . 60 20
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . -- --
- ---------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . 40,609 27,887
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . (40,549) (27,867)
Realized Net Gain . . . . . . . . . . . . . . . . . . -- --
- ---------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . (40,549) (27,867)
- ---------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . 925,119 868,227
--In Lieu of Cash Distributions . . . . . 37,820 26,198
--Exchange . . . . . . . . . . . . . . . 193,700 333,192
Redeemed --Regular . . . . . . . . . . . . . . . . (832,046) (833,429)
--Exchange . . . . . . . . . . . . . . . (281,543) (241,116)
- ---------------------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions . . . . . . . . . 43,050 153,072
- ---------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . 43,110 153,092
- ---------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . 1,158,818 1,005,726
- ---------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . $ 1,201,928 $ 1,158,818
=============================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . $.036 $.026
Realized Net Gain . . . . . . . . . . . . . . . . -- --
- ---------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . 1,118,819 1,201,419
Issued in Lieu of Cash Distributions . . . . . . 37,820 26,198
Redeemed . . . . . . . . . . . . . . . . . . . (1,113,589) (1,074,545)
- ---------------------------------------------------------------------------------------------
43,050 153,072
- ---------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INSURED LONG-TERM PORTFOLIO
- -----------------------------------------------------------------------------------------------------------
Year Ended November 30,
-------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $9.92 $11.30 $10.89 $10.43 $10.22
-------- ------- -------- -------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . .602 .604 .604 .633 .644
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . 1.350 (1.228) .609 .464 .210
-------- ------- -------- -------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.952 (.624) 1.213 1.097 .854
- -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.602) (.604) (.604) (.633) (.644)
Distributions from Realized Capital Gains . . . . . . -- (.152) (.199) (.004) --
-------- ------- -------- -------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.602) (.756) (.803) (.637) (.644)
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $11.27 $9.92 $11.30 $10.89 $10.43
===========================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . +20.11% -5.88% +11.53% +10.81% +8.61%
- -----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . $975 $834 $1,074 $828 $629
Ratio of Expenses to Average Net Assets . . . . . . . . .20%* .19% .19% .24% .25%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 5.59% 5.60% 5.38% 5.92% 6.24%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 23% 28% 27% 54% 19%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
+Insurance expense represents .01%.
*Effective in fiscal 1995, does not include reductions from directed brokerage
and custodian fee offset arrangements. See Note C.
22
<PAGE> 25
<TABLE>
<CAPTION>
INSURED INTERMEDIATE-TERM PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED March 4 to
For a Share Outstanding Throughout Each Period NOVEMBER 30,1995 November 30, 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . $9.64 $10.00
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . .511 .346
Net Realized and Unrealized Gain (Loss) on Investments .800 (.360)
TOTAL FROM INVESTMENT OPERATIONS . . . . . 1.311 (.014)
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.511) (.346)
Distributions from Realized Capital Gains . . . . . . -- --
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.511) (.346)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . $10.44 $9.64
============================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . +13.88% -0.19%
- -------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . $206 $100
Ratio of Expenses to Average Net Assets . . . . . . . . .21%* .19%**
Ratio of Net Investment Income to Average Net Assets . 5.05% 4.97%**
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 11% 6%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Effective in fiscal 1995, does not include reductions from directed brokerage
and custodian fee offset arrangements. See Note C.
**Annualized.
23
<PAGE> 26
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------
Year Ended November 30,
------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------ ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . .036 .026 .024 .029 .043
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . -- -- -- -- --
------- ------- ------ ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . .036 .026 .024 .029 .043
- ----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.036) (.026) (.024) (.029) (.043)
Distributions from Realized Capital Gains . . . . . . -- -- -- -- --
------- ------- ------ ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.036) (.026) (.024) (.029) (.043)
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +3.69% +2.59% +2.40% +2.97% +4.44%
- ----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . $1,202 $1,159 $1,006 $794 $759
Ratio of Expenses to Average Net Assets . . . . . . . . .20%* .19% .19% .24% .24%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 3.61% 2.57% 2.37% 2.92% 4.32%
Portfolio Turnover Rate . . . . . . . . . . . . . . . N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
*Effective in fiscal 1995, does not include reductions from directed brokerage
and custodian fee offset arrangements. See Note C.
24
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
Vanguard California Tax-Free Fund is registered under the Investment Company
Act of 1940 as an open-end investment company and consists of the Insured
Long-Term, Insured Intermediate-Term and Money Market Portfolios. Each
Portfolio 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 California.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Money Market Portfolio: investment securities are
stated at amortized cost which approximates market value. Other
Portfolios: municipal bonds are valued utilizing primarily the latest bid
prices or, if bid prices are not available, on the basis of valuations
based on a matrix system (which considers such factors as security
prices, yields, maturities and ratings), both as furnished by an
independent pricing service.
2. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to continue 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: The Insured Long-Term and Insured Intermediate-Term Portfolios
utilize Municipal Bond Index, U.S. Treasury Bond, and U.S. Treasury Note
futures contracts to a limited extent, with the objectives of enhancing
returns, managing interest rate risk, maintaining liquidity, diversifying
credit risk and minimizing transaction costs. The Portfolios may purchase
futures contracts instead of municipal bonds when futures contracts are
believed to be priced more attractively than municipal bonds. The
Portfolios 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 Portfolios and the prices of futures contracts, and the possibility
of an illiquid market. Futures contracts are valued based upon their
quoted daily settlement prices. Fluctuations in the values of futures
contracts are recorded as unrealized appreciation (depreciation) until
terminated at which time realized gains (losses) are recognized.
Unrealized appreciation (depreciation) related to open futures contracts
is required to be treated as realized gain (loss) for Federal income tax
purposes.
4. DISTRIBUTIONS: Distributions from net investment income are declared on a
daily basis payable on the first business day of the following month.
Annual distributions from realized gains, if any, are recorded on the
ex-dividend date. Capital gain distributions are determined on a tax
basis and may differ from realized capital gains for financial reporting
purposes due to differences in the timing of realization of gains.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and
losses on the sale of investment securities are those of 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, Inc. 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. At November 30, 1995, the Fund had contributed
25
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (continued)
capital aggregating $285,000 to Vanguard (included in Other Assets),
representing 1.4% of Vanguard's capitalization. The Fund's officers and
trustees are also officers and directors of Vanguard.
C. The Fund's investment adviser may direct new issue portfolio purchases,
subject to obtaining the best price and execution, to underwriters who have
agreed to rebate or credit to the Fund a portion of the underwriting fees
generated. Such rebates or credits are used solely to reduce the Fund's
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
custodian account. For the year ended November 30, 1995, directed brokerage and
custodian fee offset arrangements reduced expenses by:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Expense Reduction
(000) Total Expense
------------------------------ Reduction as a
Directed Custodian's Percent of Average
Portfolio Brokerage Fees Net Assets
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
INSURED LONG-TERM $17 $25 --
INSURED
INTERMEDIATE-TERM 8 7 .01%
MONEY MARKET -- 38 --
- ----------------------------------------------------------------------------
</TABLE>
D. During the year ended November 30, 1995, purchases and sales of
investment securities, other than temporary cash investments, were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(000)
-------------------------------
Portfolio Purchases Sales
- --------------------------------------------------------------
<S> <C> <C>
INSURED LONG-TERM $232,863 $192,691
INSURED INTERMEDIATE-TERM 110,270 15,395
- --------------------------------------------------------------
</TABLE>
E. At November 30, 1995, capital loss carryforwards available to offset
future net capital gains were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Expiration
Fiscal Year(s) Ending Amount
Portfolio November 30 (000)
- ----------------------------------------------------------------------
<S> <C> <C>
INSURED LONG-TERM 2002-2003 $1,098
INSURED INTERMEDIATE-TERM 2002-2003 418
- ---------------------------------------------------------------------
</TABLE>
F. At November 30, 1995, unrealized appreciation of investment securities
for financial reporting and Federal income tax purposes was:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(000)
---------------------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Appreciation
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
INSURED LONG-TERM $73,209 -- $73,209
INSURED INTERMEDIATE-TERM 8,833 -- 8,833
- -----------------------------------------------------------------------------------
</TABLE>
At November 30, 1995, the aggregate settlement value of open futures contracts
expiring through March 1996, and the related unrealized appreciation
(depreciation) were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(000)
---------------------------
Aggregate Unrealized
Settlement Appreciation
Portfolio/Futures Contracts Value (Depreciation)
- ------------------------------------------------------------
<S> <C> <C>
INSURED LONG-TERM
SHORT U.S. TREASURY BOND $52,778 $(2,255)
SHORT MUNICIPAL BOND INDEX 10,733 (116)
INSURED INTERMEDIATE-TERM
LONG MUNICIPAL BOND INDEX 4,329 165
SHORT U.S. TREASURY BOND 10,985 (431)
- ------------------------------------------------------------
</TABLE>
The market values of securities deposited as initial margin for open futures
contracts by the Insured Long-Term and Insured Intermediate-Term Portfolios
were $3,265,000 and $220,000, respectively.
26
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard California Tax-Free Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Insured Long-Term Portfolio, the Insured Intermediate-Term Portfolio and
the Money Market Portfolio (constituting the Vanguard California Tax-Free Fund,
hereafter referred to as the "Fund") at November 30, 1995, and the results of
each of their operations, the changes in each of their net assets and the
financial highlights for each of the respective periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards whic h require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities by correspondence with the custodian and brokers and the application
of alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 29, 1995
27
<PAGE> 30
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
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. and
NACCO Industries.
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.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
28
<PAGE> 31
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP LOGO]
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q750-11/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter,
the British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 32
VANGUARD CALIFORNIA TAX-FREE FUND
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through five.
Line charts illustrating cumulative performance between Vanguard California
Insured Long-Term Portfolio, Lehman Municipal Bond Index and Average California
Insured Municipal Fund, average Annual Total Returns for the period April 7,
1986, to November 30, 1995 appears at the top of page two,
A line chart of the Month-End Yields of 30-Year Prime Municipal Bond and 90-Day
MIG 1 Note for the fiscal years 1991 through 1995 appears at the upper left of
page three.
A line chart illustrating cumulative performance between Vanguard California
Insured Intermediate-Term Portfolio, Lehman Municipal Bond Index and Average
California Intermediate Fund, average Annual Total Returns for the period March
4, 1994, to November 30, 1995 appears at the upper left of page five.
A running head featuring an hour glass, compass & telescope, and battleships in
the background appears at the top of page seven.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages eight & nine.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages ten through twenty seven.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page twenty eight.
A running head featuring birds flying and ship in the background appears at the
top of the inside cover.
