<PAGE> 1
A MESSAGE TO SHAREHOLDERS
DEAR SHAREHOLDER:
The declining interest rate environment that prevailed for most of fiscal 1995
reversed course during the first six months of our current fiscal year.
Short-term tax-exempt yields, after falling through late February, stabilized
and then abruptly rose to end the six-month period slightly higher than where
they began. Long-term tax-exempt yields also moved lower at the outset of the
period, before creeping higher to end above their starting point. This overall
increase in interest rates resulted in lower prices for municipal bonds.
During the past twelve months, the net asset values of our Insured
Longer-Term Portfolios were negatively impacted by rising rates, but each
Portfolio's income component more than compensated for any decrease in
principal. Our Money Market Portfolios all gave good accounts of themselves,
providing returns that fully reflect the current level of interest rates. The
table at the bottom of page 3 of this Report provides detailed results for each
of our State Tax-Free Portfolios, including per share net asset values,
dividend and capital gains distributions, and total returns over the past six
and twelve months, as well as current yields. In summary form, here are the
Portfolio highlights:
THE STATE MONEY MARKET PORTFOLIOS--provided total returns ranging from +3.4% to
+3.6% for the past year. As expected, net asset values remained at $1.00 per
share. As the following table illustrates, current yields are in the area of
3.4%, moderately lower than they were twelve months ago:
<TABLE>
<CAPTION>
- -------------------------------------------------------
SEVEN-DAY
ANNUALIZED YIELD
----------------------------
MONEY MARKET MAY 31, NOV. 30, MAY 31,
PORTFOLIO 1996 1995 1995
- -------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA 3.39% 3.61% 3.80%
PENNSYLVANIA 3.44 3.64 3.80
NEW JERSEY 3.30 3.57 3.71
OHIO 3.43 3.71 3.92
- -------------------------------------------------------
</TABLE>
THE STATE INSURED LONGER-TERM PORTFOLIOS--earned sufficient income to offset
the modest decrease in long-term municipal bond prices, providing total returns
(capital change plus reinvested dividends) ranging from +3.4% to +5.0% for the
twelve months. Despite the swings in interest rates during the period, the
current yields on the Insured Longer-Term Portfolios (roughly 5.2%) are nearly
identical to their levels of twelve months ago.
To provide some perspective on how our Insured Longer-Term Portfolios performed
during the past year, the table below breaks out the two components of total
return--income return and capital return. As you can see, the positive
contribution of each Portfolio's income return was marginally reduced by its
negative capital return.
<TABLE>
<CAPTION>
- -------------------------------------------------------
INVESTMENT RETURNS
----------------------------
TWELVE MONTHS ENDED
MAY 31, 1996
----------------------------
INSURED LONGER-TERM
PORTFOLIO INCOME CAPITAL TOTAL
- -------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA
INTERMEDIATE-TERM +5.1% -0.1% +5.0%
CALIFORNIA LONG-TERM +5.5 -1.7 +3.8
NEW YORK +5.4 -1.6 +3.8
PENNSYLVANIA +5.6 -1.3 +4.3
NEW JERSEY +5.3 -1.9 +3.4
OHIO +5.4 -1.6 +3.8
FLORIDA +5.2 -1.4 +3.8
- -------------------------------------------------------
</TABLE>
FIXED-INCOME MARKET REVIEW
Although the Federal Reserve lowered short-term interest rates in December and
January, the bond market fretted over the apparent strength of the U.S. economy
and the possibility of an increase in inflation. During the past six months,
the yield on the long-term U.S. Treasury bond, the benchmark for the bond
market, rose from 6.1% to 6.9%, engendering a price decline of approximately
- -10% (excluding interest income).
The long-term municipal bond market fared much better. On balance for
the six-month period, yields on high-grade municipal bonds increased less
dramatically (5.5% to 5.9%), resulting in a price
1
<PAGE> 2
decline of only -6%. Yields on top-grade (MIG 1) municipal notes remained
essentially unchanged on balance at 3.7%.
Although the future direction of interest rate movements is virtually
impossible to predict with any level of accuracy and consistency, the relative
performance of bond funds with comparable quality and maturity guidelines is
surprisingly predictable. That is to say, bond funds holding similar types of
securities--say, high-quality, long-term municipal bonds--should, on average,
earn roughly equivalent gross returns. What that absolute return will be,
however, is anyone's guess. On the other hand, what can be predicted with some
semblance of accuracy is the relative performance differential due to the
expense ratios of the funds. The average Vanguard Insured Longer-Term
Portfolio, for example, operates with an annual expense ratio of 0.2%, compared
to 0.9% for our average competitor. Therefore, holding all other factors equal,
a typical Vanguard Insured Longer-Term Portfolio begins with an annual income
advantage of +0.7% over a comparable municipal bond fund.
IN SUMMARY
As you may know, one of the benefits of Vanguard's Insured Longer-Term
Portfolios is their municipal bond insurance, which guarantees the timely
payment of principal and interest. These insurance provisions provide
protection against deteriorating creditworthiness within the various
municipalities and add an important level of enhanced safety.
There are, of course, "costs" associated with insuring our Portfolios
against potential default. First, bonds that are issued with insurance
typically offer slightly lower yields than non-insured bonds. A second cost is
the explicit expense of purchasing insurance on non-insured bonds. Despite
these costs, however, our top-quality Portfolios continue to benefit from our
expense ratio advantage and provide yields that are fully competitive with
those of uninsured municipal bond portfolios.
Over time, given our high-quality, low-cost advantage, Vanguard State
Tax-Free Portfolios should remain attractive relative to our competitors'
funds. We look forward to reporting to you in further detail in our 1996 Annual
Report six months hence.
Sincerely,
/s/ John C. Bogle
- -----------------
John C. Bogle
Chairman of the Board
/s/ John J. Brennan
- -------------------
John J. Brennan
President
June 8, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 3
AVERAGE ANNUAL TOTAL RETURNS
THE CURRENT YIELDS QUOTED IN THE MESSAGE TO SHAREHOLDERS ARE CALCULATED IN
ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED MARCH 31, 1996) 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 +7.60% -- +6.56% +5.08% +1.48%
CALIFORNIA INSURED LONG-TERM 4/7/86 +7.73 +8.17% +7.75 +6.47 +1.28
CALIFORNIA MONEY MARKET 6/1/87 +3.57 +3.12 +4.11 +4.11 0.00
NEW YORK INYRED TAY YREE 4/7/86 +7.50 +8.37 +7.32 +6.44 +0.88
PENNSYLVANIA INSURED LONG-TERM 4/7/86 +7.15 +8.41 +7.95 +6.64 +1.31
PENNSYLVANIA MONEY MARKET 6/13/88 +3.62 +3.12 +4.11 +4.11 0.00
NEW JERSEY INSURED LONG-TERM 2/3/88 +7.13 +8.10 +8.39 +6.43 +1.96
NEW JERSEY MONEY MARKET 2/3/88 +3.50 +3.08 +4.09 +4.09 0.00
OHIO INSURED LONG-TERM 6/18/90 +7.13 +8.08 +8.50 +5.97 +2.53
OHIO MONEY MARKET 6/18/90 +3.72 +3.17 +3.49 +3.49 0.00
FLORIDA INSURED TAX-FREE 9/1/92 +7.50 -- +7.62 +5.43 +2.19
</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.
<TABLE>
<CAPTION>
NET ASSET VALUE INCOME
TOTAL PER SHARE DIVIDENDS TOTAL RETURN
NET ASSETS ------------------ ---------------- ----------------
(MILLIONS) AVERAGE AVERAGE NOV. 30, MAY 31, SIX TWELVE SIX TWELVE CURRENT
PORTFOLIO MAY 31, 1996 MATURITY QUALITY* 1995 1996 MONTHS MONTHS MONTHS MONTHS YIELD**
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA . . . . . $1,276 42 DAYS MIG 1 $ 1.00 $ 1.00 $.017 $.034 +1.7% +3.5% 3.39%
PENNSYLVANIA . . . . 1,306 32 DAYS MIG 1 1.00 1.00 .017 .035 +1.7 +3.5 3.44
NEW JERSEY . . . . . 888 57 DAYS MIG 1 1.00 1.00 .016 .033 +1.6 +3.4 3.30
OHIO . . . . . . . . 199 60 DAYS MIG 1 1.00 1.00 .017 .035 +1.7 +3.6 3.43
- -----------------------------------------------------------------------------------------------------------------------------------
INSURED INTERMEDIATE-TERM
CALIFORNIA . . . . . $ 264 7.4 YEARS Aaa $10.44 $10.25 $.254 $.512 +0.6% +5.0% 4.77%
INSURED LONG-TERM
CALIFORNIA . . . . . 978 14.1 YEARS Aaa 11.27 10.87 .299 .600 -0.9 +3.8 5.33
NEW YORK . . . . . . 879 11.7 YEARS Aaa 11.01 10.57 .286 .574 -0.8+ +3.8+ 5.23
PENNSYLVANIA . . . . 1,565 11.4 YEARS Aaa 11.28 10.90 .304 .608 -0.4+ +4.3+ 5.28
NEW JERSEY . . . . . 796 11.9 YEARS Aaa 11.78 11.29 .310 .617 -1.1+ +3.4+ 5.23
OHIO . . . . . . . . 203 10.9 YEARS Aaa 11.63 11.25 .302 .605 -0.7 +3.8 5.29
FLORIDA . . . . . . . 453 14.2 YEARS Aaa 10.94 10.60 .275 .554 -0.6 +3.8 5.22
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
+Includes capital gains distributions of $.065 for New York, $.037 for
Pennsylvania, and $.058 for New Jersey.
Note: The shares of each of the Vanguard "single-state" Portfolios are
available for purchase solely by residents of the designated states.
3
<PAGE> 4
REPORT FROM THE INVESTMENT ADVISER
The two major factors affecting the Longer-Term Insured Portfolios over the
last six months were the sharp rise in interest rates and the relatively better
performance of municipal bonds versus their taxable counterparts. The yield on
the 30-year U.S. Treasury bond increased 0.8 percentage points (from 6.1% to
6.9%). This was a decidedly unpleasant turn of events for bondholders and their
total returns. The increase in interest rates was prompted by signs of an
improving economy and investor concerns about inflation. During the same
period, the yield on high-grade, long-term municipal bonds rose 0.4 percentage
points (from 5.5% to 5.9%). The question of tax reform first raised by Senator
Armey (R-TX) and later championed by Steve Forbes in the Republican
Presidential primaries seemed to have been, at least in part, answered. The
reduced intensity of the rhetoric around the question of tax reform was a
contributing factor in explaining why the municipal market performed better
than the Treasury market.
The Federal Reserve Board's last action on January 31, 1996, was to
reduce the Federal funds rate and the discount rate by 0.25 percentage points.
At that time, the economy appeared to be struggling, a situation further
exacerbated by the severity of the winter. Unfortunately for bond investors,
the release of February's economic statistics showed a much stronger than
anticipated economy. Concurrently, an increase in the prices of oil, gasoline,
wheat, and corn prodded some investors to become concerned about the specter of
higher inflation. The combined effects caused the yield on the 30-year U.S.
Treasury bond to increase sharply. The beginning of the Presidential primary
season added an extra degree of uncertainty to the market.
While bear markets are never pleasant, they often offer investment
opportunities that can be exploited to the shareholders' eventual benefit.
First, the Portfolios' dividend distribution can be positively impacted by
swapping bonds with lower yields to maturity for bonds with higher yields to
maturity. Second, capital gains distributions can usually be reduced by
realizing offsetting capital losses. Finally, bear markets are generally the
best time to buy bonds that have superior protection from early redemption. As
interest rates rise, bonds which are noncallable or have long periods before
they are callable are often available at close to the same price as bonds with
less desirable characteristics. When the time comes for interest rates to
reverse course and fall, these bonds will furnish excellent capital returns
while providing a more stable dividend.
The past six months have been a very volatile period of time. The
future remains unknown, but the State Insured Longer-Term Portfolios will
continue to focus on their objectives. It is through this commitment to
high-quality Federal and state tax-exempt municipal bonds and low-cost, prudent
management that superior and durable investment results can be achieved.
MONEY MARKETS
The volatility experienced in the Treasury market over the past six months has
had little impact on yields in the short-term municipal bond market. Yields on
one-year municipal notes ended the period very close to where they began,
despite a 0.3% rise in yields on one-year Treasury bills. Nevertheless, there
were two issues which had a substantial impact on the short-term market.
First, seasonal supply constraints that typically plague the short-term
municipal market in the spring dampened the average weighted maturities of
money market funds. Second, and most notably, the Securities and Exchange
Commission (SEC) announced changes in the regulations governing money market
funds which became effective June 3, 1996.
In April, the SEC adopted amendments to rule 2a-7 under the Investment
Company Act of 1940. Section 2a-7 contains regulations that protect the quality
and safety of money market funds. For the most part, the changes emphasize
higher quality and increased diversification. The new guidelines were designed
to tighten the regulations imposed on tax-exempt money market funds and improve
the likelihood that the funds maintain a stable net asset value. Compliance
with the amendments may prove challenging for the industry. Many of our
competitors operate under somewhat lower quality standards and, as a result,
may be forced to significantly restructure their funds in order to meet the
standards. In contrast, our Money Market Portfolios have
4
<PAGE> 5
always been managed quite conservatively with credit quality our most important
consideration. Consequently, we expect the impact of the changes on Vanguard's
State Tax-Free Money Market Portfolios to be minimal.
The scarcity of new issue supply in the short-term municipal market
contributed to the relative stability in yields over the period. The supply of
short-term municipals tends to be quite seasonal, the timing of which depends
upon an issuer's fiscal year. The vast majority of issuers have fiscal years
beginning July 1 and ending June 30, causing new issue supply to decline in the
months leading up to June and increase dramatically in July. Looking forward,
the glut of new issue supply should provide ample opportunities for us to
extend our average maturities, increase our diversification, and further
enhance our overall quality.
In conclusion, the months ahead should be challenging for the
industry, with tighter regulations governing tax-free money market funds coming
at a time when short-term issuance is at its peak. Hopefully, the new
amendments adopted by the SEC will "level the playing field," bringing
competitors closer to Vanguard's already conservative style of management,
thereby further enhancing the performance advantage that arises from our "rock
bottom" expense ratios.
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
June 18, 1996
5
<PAGE> 6
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
May 31, 1996
<TABLE>
<CAPTION>
Face Market
INSURED Amount Value
LONG-TERM PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (98.4%)
- --------------------------------------------------------------------------------
ISSUER INSURED (87.0%)
Anaheim CA Convention Center COP
0.00%, 8/1/04 (1) $ 3,120 $ 2,051
0.00%, 8/1/05 (1) 1,250 774
0.00%, 8/1/06 (1) 3,125 1,798
5.50%, 8/1/14 (1) 5,750 5,410
Anaheim CA Public Improvement
Corp. Lease COP VRDO
(Refunding Projects)
3.30%, 6/5/96 (2) 3,430 3,430
City of Barstow CA
Redevelopment Agency
6.25%, 9/1/22 (1) 2,225 2,268
California Dept. of Water Resources
4.75%, 12/1/29 (1) 22,040 17,814
California GO
6.00%, 8/1/19 (3) 4,400 4,351
7.00%, 11/1/04 (3)(Prere.) 1,935 2,234
7.00%, 11/1/13 (3) 65 71
California Health Facilities Auth.
(Adventist Health System)
6.75%, 3/1/11 (1) 5,000 5,352
(Catholic Health Care West)
VRDO 3.40%, 6/5/96 (1) 7,700 7,700
5.75%, 7/1/15 (2) 4,080 3,969
6.00%, 7/1/17 (1) 21,000 20,850
(Centinela Hosp.)
6.25%, 9/1/15 (1) 22,400 23,214
(Mills Peninsula)
5.75%, 1/15/15 (7) 12,500 12,056
(San Diego Hosp.)
6.20%, 8/1/20 (1) 3,820 3,854
6.625%, 5/1/19 (1) 6,525 6,781
(Unihealth America)
7.625%, 10/1/15 (2) 50 54
California Housing Finance Agency
Multifamily Housing Rev.
8.625%, 8/1/15 (1) 170 176
California Schools Cash
Reserve Program
4.75%, 7/3/96 (1) LOC 10,000 10,007
California Public Works Board
(Univ. of California)
6.25%, 12/1/07 (2) 6,945 7,406
6.50%, 12/1/08 (2) 4,000 4,392
California Public Works Lease Rev.
(Dept. of Corrections)
5.50%, 12/1/12 (1) 2,000 1,956
Chino CA Basin Finance Auth.
Municipal Water Dist.
6.00%, 8/1/16 (2) 5,500 5,436
Contra Costa CA COP
5.50%, 6/1/12 (2) 6,850 6,700
6.70%, 2/1/21 (2) 4,630 4,849
Culver City CA Redevelopment
Finance Auth.
6.75%, 11/1/99 (2) (Prere.) 955 1,012
East Bay CA Municipal Utility
Dist. Waste Water Treatment
System Rev.
6.375%, 6/1/12 (2) 2,000 2,194
6.375%, 6/1/21 (2) 5,750 6,307
6.50%, 6/1/20 (2) 2,000 2,231
Eastern CA Municipal Water Dist.
6.75%, 7/1/12 (3) 8,500 9,469
Elsinore Valley CA Municipal
Water Dist. COP
5.90%, 7/1/06 (3) 1,685 1,778
6.00%, 7/1/12 (3) 2,210 2,277
Encina CA Power Auth. Waste
Water Rev.
6.875%, 8/1/11 (3) 3,650 3,886
Glendale CA Hosp. Rev.
(Adventist Health System)
6.00%, 3/1/14 (1) 3,000 2,993
Indian Wells CA
Redevelopment Agency
5.50%, 12/1/22 (1) 2,000 1,856
Kern CA High School Dist. GO
6.25%, 8/1/11 (1) 1,065 1,138
6.40%, 8/1/14 (1) 1,490 1,609
6.40%, 8/1/15 (1) 1,645 1,780
6.40%, 8/1/16 (1) 1,815 1,968
LaQuinta CA Redevelopment Agency
(Tax Allocation Project)
7.30%, 9/1/10 (1) 1,145 1,337
Long Beach CA Financing
Auth. Rev.
6.00%, 11/1/17 (2) 2,000 2,039
Los Angeles CA Development Auth.
Rev. COP
(Children's Hosp.)
6.00%, 6/1/10 (1) 1,000 1,033
6.00%, 6/1/11 (1) 2,365 2,433
Los Angeles CA Metropolitan
Transportation Auth. VRDO
3.35%, 6/6/96 (1) 600 600
Los Angeles County CA
Transportation Commission
Sales Tax Rev. Refunding VRDO
3.30%, 6/5/96 (3) 1,800 1,800
Los Angeles CA Water Dept.
5.70%, 6/1/13 (1) 5,000 4,968
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
MSR CA Public Power Agency
(San Juan Project)
6.125%, 7/1/13 (2) $ 8,000 $ 8,359
6.625%, 7/1/13 (6) 2,000 2,061
6.75%, 7/1/20 (1) 38,785 42,727
Modesto CA Irrigation Dist.
Finance Auth. Rev.
(Woodland Project)
6.50%, 10/1/11 (2) 8,125 8,861
6.50%, 10/1/22 (2) 9,750 10,458
Mountain View CA Capital
Improvement Finance
Auth. Rev.
6.25%, 8/1/12 (1) 5,000 5,121
North City West CA
School Facilities Financing Auth.
6.00%, 9/1/19 (5) 2,000 1,975
Northern California Power Agency
(Hydro Electric Project)
5.50%, 7/1/23 (1) 5,000 4,636
6.00%, 7/1/09 (1) 7,530 7,885
6.30%, 7/1/18 (1) 10,000 10,477
7.50%, 7/1/21 (2) (Prere.) 1,810 2,114
Oakland CA Redevelopment Agency
(Central Dist. Project)
5.50%, 2/1/14 (2) 5,500 5,348
Orange County CA Local
Transportation Auth.
5.80%, 2/15/05 (3) 6,000 6,219
5.90%, 2/15/06 (3) 8,000 8,309
Orange County CA Sanitation
Dist. VRDO
3.35%, 6/6/96 (2) 9,200 9,200
3.50%, 6/4/96 (2) LOC 4,800 4,800
3.60%, 6/4/96 (3) 3,000 3,000
Oro Loma CA Sanitation Dist.
5.20%, 10/1/16 (2) 4,800 4,362
Pittsburg CA Redevelopment Agency
5.50%, 8/1/07 (3) 2,750 2,775
5.50%, 8/1/15 (3) 12,700 11,926
Placer County CA Water Rev. COP
7.75%, 7/1/18 (6) 3,500 3,820
Pomona CA Unified School Dist. GO
5.50%, 8/1/16 (3) 1,000 959
5.60%, 8/1/14 (1) 1,585 1,558
5.60%, 8/1/15 (1) 2,000 1,945
5.60%, 8/1/16 (1) 1,000 972
7.50%, 8/1/17 (1) 2,540 3,043
Poway CA Redevelopment Agency
7.25%, 12/15/11 (3) 7,500 8,190
Rancho CA Water Dist. Finance
Auth. Rev.
5.875%, 11/1/10 (3) 3,585 3,667
5.90%, 11/1/15 (3) 4,000 3,959
6.25%, 8/1/12 (3) 2,000 2,070
Redding CA Joint Power Finance
Auth. Waste Water Rev.
5.50%, 12/1/18 (3) 5,400 5,037
Redlands CA Water COP
7.00%, 11/1/96 (2) (Prere.) 5,500 5,686
Riverside County CA Public Finance
5.25%, 9/1/04 (1) 2,330 2,366
5.25%, 9/1/05 (1) 2,455 2,478
Riverside County CA
Transportation Comm.
5.75%, 6/1/09 (2) 3,800 3,884
Sacramento CA Finance Auth. Rev.
5.375%, 11/1/14 (2) 4,000 3,838
5.40%, 11/1/20 (2) 9,785 9,132
Sacramento CA Municipal Utility
Dist. Rev.
6.25%, 8/15/10 (1) 33,800 36,066
6.30%, 8/15/18 (1) 14,000 14,267
Sacramento CA
Redevelopment Agency
(Tax Allocation Project)
6.50%, 11/1/13 (1) 4,500 4,671
San Bernardino County CA COP
(Medical Center Financing Project)
6.50%, 8/1/17 (1) 17,915 19,135
San Diego CA Unified School
Dist. COP
5.00%, 8/1/07 (1) 4,400 4,246
5.00%, 8/1/08 (1) 4,630 4,407
5.00%, 8/1/09 (1) 4,875 4,583
San Francisco CA Airport Comm.
6.00%, 5/1/10 (1) 2,000 2,057
6.00%, 5/1/11 (1) 2,100 2,152
6.00%, 5/1/20 (1) 6,500 6,394
6.20%, 5/1/06 (2) 5,000 5,331
6.20%, 5/1/08 (2) 1,000 1,053
San Francisco CA Bay Area
Rapid Transit
6.75%, 7/1/10 (2) 6,370 7,103
6.75%, 7/1/11 (2) 7,455 8,312
San Francisco CA City & County
Airport Rev.
6.30%, 5/1/11 (2) 5,000 5,166
6.50%, 5/1/06 (1) 3,280 3,579
6.60%, 5/1/07 (1) 2,490 2,701
6.625%, 5/1/08 (1) 3,720 4,052
6.70%, 5/1/09 (1) 3,970 4,303
</TABLE>
7
<PAGE> 8
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
INSURED LONG-TERM Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
San Francisco CA City & County Sewer
6.00%, 10/1/11 (2) $ 2,500 $ 2,559
San Jose CA Merged Area
Redevelopment Rev. Project
5.00%, 8/1/20 (1) 4,600 4,006
6.00%, 8/1/11 (1) 8,845 9,230
San Mateo County CA Finance Auth.
6.50%, 7/1/13 (1) 14,560 15,803
San Mateo CA Sewer
6.60%, 8/1/14 (1) 2,500 2,630
Santa Ana CA Community
Redevelopment Auth.
7.375%, 12/1/96 (3) (Prere.) 1,695 1,760
7.40%, 12/1/96 (3) (Prere.) 270 280
Santa Ana CA Finance Auth.
Lease Rev.
6.25%, 7/1/16 (1) 5,345 5,608
6.25%, 7/1/17 (1) 2,000 2,101
Santa Clara County CA Financing
Auth. Lease Rev.
(Replacement Project)
6.75%, 11/15/20 (2) 11,500 12,413
Santa Clara CA
Redevelopment Agency
(Bayshore Project)
7.00%, 7/1/10 (2) 7,000 7,960
Santa Clara CA Valley Water
Dist. COP
6.00%, 2/1/24 (3) 20,000 19,759
Santa Fe Springs CA
Redevelopment Agency
6.00%, 9/1/14 (1) 5,350 5,343
Santa Margarita/Dana
Point CA Improvement Dist.
5.75%, 8/1/20 (1) 28,500 27,594
Santa Rosa CA Waste Water Rev.
6.00%, 7/2/15 (2) 7,000 7,127
6.00%, 9/1/15 (3) 5,580 5,682
6.25%, 9/1/12 (3) 7,075 7,722
South Coast CA Air Quality
Management Dist. Rev.
5.50%, 8/1/14 (1) 8,000 7,569
6.00%, 8/1/11 (2) 3,200 3,326
South County CA Waste Water Auth.
5.50%, 8/1/22 (3) 8,625 8,005
South Orange County CA Public
Finance Auth.
7.00%, 9/1/11 (1) 3,000 3,417
9.50%, 8/15/04 (1) 3,000 3,898
Southern California Public
Power Auth.
(Palo Verde Project)
6.60%, 7/1/08 (2) 4,280 4,376
7.00%, 7/1/07 (2) 1,600 1,689
7.00%, 7/1/10 (2) 2,500 2,638
(Transmission Project)
VRDO 3.30%, 6/5/96 (2) 5,900 5,900
Sweetwater CA Water Rev.
7.00%, 4/1/99 (2) (Prere.) 3,050 3,318
Three Valley CA Municipal
Water Dist. COP
5.25%, 11/1/10 (3) 4,220 4,027
7.30%, 11/1/96 (1) (Prere.) 3,200 3,344
Tri-City CA Hosp. Dist.
(Oceanside Hosp.)
7.00%, 2/1/12 (1) 5,950 6,155
Tulare County CA COP
5.875%, 11/15/05 (1) 1,000 1,056
Turlock CA Irrigation Dist. COP
6.75%, 1/1/97 (3) (Prere.) 3,020 3,164
Ukiah CA Electric Rev.
6.00%, 6/1/08 (1) 4,565 4,801
6.25%, 6/1/18 (1) 6,000 6,249
Univ. of California
(Multiple Purpose Project)
6.25%, 9/1/13 (1) 10,000 10,330
Univ. of California
Board of Regents
6.00%, 9/1/08 (1) 2,515 2,607
6.375%, 9/1/19 (1) 6,500 6,652
Walnut CA Public Finance Auth.
6.00%, 9/1/15 (1) 5,000 4,966
Walnut Valley CA Unified
School Dist.
6.00%, 8/1/12 (2) 1,790 1,854
6.00%, 8/1/13 (2) 1,980 2,042
6.00%, 8/1/14 (2) 2,205 2,264
6.00%, 8/1/15 (2) 2,470 2,515
6.00%, 8/1/16 (2) 2,690 2,736
6.20%, 8/1/09 (2) 1,270 1,354
West Sacramento CA Financing
Auth. Rev.
(Water System Improvement
Project)
5.25%, 8/1/08 (3) 2,160 2,122
West Sacramento CA Tax Allocation
Redevelopment Project
6.25%, 9/1/21 (1) 8,250 8,359
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Whittier CA Insurance Health
Facility Rev.
(Presbyterian Hosp.)
6.00%, 6/1/05 (1) $ 3,675 $ 3,892
6.25%, 6/1/07 (1) 4,260 4,583
6.25%, 6/1/08 (1) 1,750 1,874
---------
GROUP TOTAL 851,115
---------
- --------------------------------------------------------------------------------
PORTFOLIO INSURED
Sacramento CA Municipal
Utility Dist.
8.00%, 11/15/10 205 205
---------
- --------------------------------------------------------------------------------
SECONDARY MARKET INSURED (4.9%)
California GO
6.25%, 9/1/12 (3) 9,000 9,618
California Housing Finance Agency
(Single Family Mortgage)
6.90%, 8/1/16 (6) 5,750 5,859
California Public Works Board
(Dept. of Corrections)
6.50%, 9/1/17 (2) 30,000 32,236
---------
GROUP TOTAL 47,713
---------
- --------------------------------------------------------------------------------
NON-INSURED (6.5%)
California Dept. of Water Resources
(Central Valley Project)
6.40%, 12/1/26 20,400 20,862
California Educational
Facilities Auth. Rev. VRDO
(Institute of Technology)
3.40%, 6/6/96 4,400 4,400
California Health Facilities
Financing Auth. Rev. VRDO
(Adventist Health System West
& Sutter Health)
3.20%, 6/6/96 4,800 4,800
(Kaiser Permanente)
3.40%, 6/5/96 1,100 1,100
Irvine CA Ranch Water Dist. VRDO
3.50%, 6/4/96 LOC 400 400
3.55%, 6/4/96 LOC 1,300 1,300
3.70%, 6/4/96 LOC 1,200 1,200
Kern County CA Public
Facilities Project VRDO
3.40%, 6/5/96 LOC 4,050 4,050
Los Angeles CA Dept. of
Water & Power
6.50%, 4/1/10 3,950 4,301
Metropolitan Water Dist. of
Southern California
8.00%, 7/1/08 2,000 2,455
Orange County CA Sanitation Dist.
VRDO 3.50%, 6/4/96 LOC 800 800
Orange County CA Water Dist. VRDO
3.60%, 6/4/96 300 300
Pasadena CA Electric Works Rev.
5.37%, 8/1/12 7,040 6,644
Riverside County CA Public
Facilities Project VRDO
3.10%, 6/4/96 LOC 1,800 1,800
3.50%, 6/4/96 LOC 2,900 2,900
Sacramento County CA VRDO
(Administrative Center &
Courthouse Project)
3.20%, 6/6/96 LOC 875 875
San Diego County CA TRAN
4.50%, 9/30/96 550 552
San Diego CA Local Govt.
Pooled TRAN
4.75%, 10/18/96 LOC 1,000 1,004
Santa Clara CA El Camino Hosp. Dist.
Facilities Auth. Rev. Lease VRDO
(Valley Medical Center Project)
3.35%, 6/4/96 LOC 4,000 4,000
---------
GROUP TOTAL 63,743
---------
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $928,908) 962,776
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.6%)
- --------------------------------------------------------------------------------
Other Assets--Note B 18,988
Liabilities (3,577)
---------
15,411
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 89,985,535 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $ 978,187
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.87
================================================================================
</TABLE>
+See Note A to Financial Statements.
For explanations of abbreviations and other references, see page 14.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MAY 31, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL $946,080 $10.51
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES (1,012) (.01)
UNREALIZED APPRECIATION
(DEPRECIATION)--NOTE F:
INVESTMENT SECURITIES 33,868 .38
FUTURES CONTRACTS (749) (.01)
- --------------------------------------------------------------------------------
NET ASSETS $978,187 $10.87
- --------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
INSURED INTERMEDIATE- Amount Value
TERM PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (98.6%)
- --------------------------------------------------------------------------------
ISSUER INSURED (96.0%)
Anaheim CA Electric System COP
6.80%, 10/1/98 (2) $ 1,000 $ 1,056
California GO
6.50%, 3/1/02 (2) 5,570 6,040
California Health Facilities Auth.
(Catholic Health Care West)
VRDO 3.40%, 6/5/96 (1) 300 300
5.75%, 7/1/10 (1) 7,000 7,012
7.00%, 7/1/05 (2) 3,410 3,860
7.00%, 7/1/06 (2) 3,395 3,853
(Centinela Hosp.)
6.50%, 9/1/08 (1) 5,000 5,354
(Children's Hosp.)
6.00%, 7/1/01 (1) 1,600 1,691
6.00%, 7/1/02 (1) 1,280 1,355
6.00%, 7/1/04 (1) 1,645 1,745
6.00%, 7/1/06 (1) 1,000 1,056
(Mills Peninsula)
6.00%, 1/15/00 (7) 1,080 1,123
(Sisters of Providence)
6.00%, 10/1/09 (2) 4,490 4,665
California Public Works Board
(Community College)
5.375%, 3/1/09 (2) 4,000 3,917
(Dept. of Corrections)
6.40%, 11/1/10 (1) 5,000 5,333
6.60%, 12/1/09 (2) 3,500 3,773
(Univ. of CA Regents)
6.25%, 12/1/07 (2) 1,000 1,066
Central Coast Water Auth. of CA
6.05%, 10/1/04 (2) 1,800 1,925
6.25%, 10/1/06 (2) 2,000 2,138
Chino Basin Finance Auth. Municipal
Water Dist. of CA
6.50%, 8/1/10 (2) 3,095 3,377
City of Corona CA
Redevelopment Project
7.50%, 9/1/04 (3) 970 1,128
7.50%, 9/1/05 (3) 1,040 1,215
Culver City CA Redevelopment
Finance Auth.
6.75%, 11/1/99 (2) (Prere.) 2,500 2,727
East Bay CA Municipal Utility Dist.
Waste Water Treatment System Rev.
6.00%, 6/1/99 (3) 4,300 4,491
6.00%, 6/1/00 (3) 1,890 1,986
6.375%, 6/1/12 (2) (Prere.) 2,000 2,194
La Quinta CA Redevelopment Agency
8.00%, 9/1/03 (1) 1,325 1,567
Long Beach CA Financing Auth.
6.00%, 11/1/10 (2) 3,860 4,027
Los Angeles CA Dept. of Water,
Power & Electric
5.625%, 9/1/09 (3) 7,000 7,042
Los Angeles CA Transportation Rev.
6.25%, 7/1/13 (1) 1,500 1,539
Los Angeles CA Waste Water
6.50%, 6/1/07 (1) 1,695 1,838
8.70%, 11/1/02 (3) 2,535 3,053
MSR CA Public Power Agency
(San Juan Project)
5.85%, 7/1/06 (2) 1,500 1,568
North City West CA Community Dist.
5.75%, 9/1/15 (5) 2,000 1,954
6.00%, 9/1/05 (5) 1,510 1,601
6.00%, 9/1/06 (5) 1,600 1,690
6.00%, 9/1/07 (5) 1,695 1,781
Oakland CA Redevelopment Agency
(Central Dist. Project)
6.00%, 2/1/06 (2) 5,125 5,457
Orange County CA Municipal Water
COP (Allen McColloch Pipeline)
4.625%, 7/1/02 (1) 4,380 4,310
4.80%, 7/1/03 (1) 2,000 1,975
4.90%, 7/1/04 (1) 2,445 2,411
Orange County CA Sanitation Dist.
VRDO 3.35%, 6/6/96 (2) 900 900
VRDO 3.50%, 6/4/96 (2) LOC 800 800
VRDO 3.60%, 6/4/96 (3) 2,900 2,900
COP 6.00%, 8/1/16 (3) 1,500 1,614
COP 6.40%, 8/1/07 (3) 1,415 1,491
Orange County CA
Transportation Auth.
9.50%, 2/15/03 (3) 5,765 7,171
Rancho CA Water Dist. Finance
Auth. Rev.
6.25%, 8/1/12 (3) 1,950 2,018
6.50%, 11/1/01 (3) 1,590 1,727
Redding CA Electric System Rev. COP
7.125%, 7/1/97 (1) (Prere.) 1,000 1,056
Riverside County CA Public Finance
5.25%, 9/1/02 (1) 2,090 2,138
5.25%, 9/1/03 (1) 2,210 2,254
Sacramento CA Municipal Utility Dist.
6.25%, 8/15/07 (1) 8,000 8,516
Sacramento CA
Redevelopment Agency
(Merged Downtown Project)
6.50%, 11/1/13 (1) 2,000 2,076
6.75%, 11/1/05 (1) 1,000 1,083
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Sacramento County CA Public
Facilities Finance Corp. COP
(Main Detention Facility Project)
5.50%, 6/1/10 (1) $ 5,500 $ 5,458
San Diego County CA Regional
Transportation Comm.
5.00%, 4/1/98 (3) 4,500 4,572
6.25%, 4/1/02 (3) 5,000 5,359
San Francisco CA Airport Comm. Rev.
6.20%, 5/1/07 (2) 1,615 1,711
6.50%, 5/1/13 (2) 2,160 2,258
San Francisco CA City & County
Airport Rev.
6.00%, 10/1/11 (2) 2,000 2,047
6.40%, 5/1/05 (1) 2,800 3,061
6.60%, 5/1/07 (1) 1,000 1,085
San Joaquin County CA COP
(Human Services Project)
6.70%, 5/15/99 (6) (Prere.) 5,300 5,738
San Jose CA Merged Area
Redevelopment Project
6.00%, 8/1/06 (1) 1,000 1,067
7.50%, 8/1/96 (1) (Prere.) 1,000 1,026
San Jose/Santa Clara CA Clean
Water Finance Auth.
7.00%, 10/1/04 (1) 5,615 5,956
7.25%, 10/1/02 (1) 1,500 1,580
Santa Barbara CA Redevelopment
Agency (Central City Project)
5.50%, 3/1/99 (2) 1,645 1,694
5.50%, 3/1/00 (2) 2,075 2,140
5.50%, 3/1/01 (2) 2,215 2,291
Santa Rosa CA Waste Water Service
Facilities Dist.
6.20%, 7/2/09 (2) 2,450 2,564
South Orange County CA Public
Finance Auth.
6.25%, 8/15/99 (3) 2,000 2,112
7.00%, 9/1/05 (1) 3,440 3,887
7.00%, 9/1/07 (1) 1,000 1,143
7.00%, 9/1/10 (1) 3,300 3,756
9.50%, 8/15/04 (1) 4,395 5,711
Southern California Public
Power Auth.
(Palo Verde)
7.00%, 7/1/07 (2) 1,300 1,372
Southern CA Rapid Transit Dist.
6.00%, 9/1/08 (2) 2,650 2,747
Sweetwater CA Water Rev.
7.00%, 4/1/10 (2) 1,950 2,084
Three Valley Municipal Water CA
Dist. COP
7.30%, 11/1/96 (1) (Prere.) 1,000 1,045
Tri-City CA Hosp. Dist.
(Oceanside Hosp.)
7.00%, 2/1/05 (1) 915 947
Tulare County CA COP
5.70%, 11/15/03 (1) 1,000 1,048
5.80%, 11/15/04 (1) 1,000 1,053
Univ. of California Board of Regents
6.00%, 9/1/08 (1) 1,500 1,555
10.00%, 9/1/02 (1) 2,950 3,746
12.00%, 9/1/03 (2) 2,000 2,830
Univ. of California
(Multiple Purpose Project)
10.00%, 9/1/02 (2) 1,000 1,267
10.00%, 9/1/03 (2) 2,000 2,590
Visalia Waste Water System
Rev. of CA
6.00%, 12/1/07 (1) 1,000 1,061
West Basin CA Water Dist.
6.80%, 8/1/00 (2) (Prere.) 2,000 2,201
Whittier CA Insurance Health
Facilities Rev.
(Presbyterian Hosp.)
6.00%, 6/1/00 (1) 1,895 1,989
6.00%, 6/1/03 (1) 3,380 3,584
6.00%, 6/1/04 (1) 3,580 3,797
---------
GROUP TOTAL 253,069
---------
- --------------------------------------------------------------------------------
NON-INSURED (2.6%)
California Health Facilities Finance
Auth. Rev. VRDO
(Adventist Health System West
Sutter Health)
3.20%, 6/6/96 LOC 200 200
Kern County CA Public Facilities
Project VRDO
3.40%, 6/5/96 LOC 300 300
Riverside County CA Public
Facilities Project VRDO
3.10%, 6/4/96 LOC 2,525 2,525
3.50%, 6/4/96 LOC 1,400 1,400
San Diego CA Local Govt.
Pooled TRAN
4.75%, 10/18/96 2,500 2,510
---------
GROUP TOTAL 6,935
---------
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $256,443) 260,004
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.4%)
- --------------------------------------------------------------------------------
Other Assets--Note B 4,757
Liabilities (1,004)
---------
3,753
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
INSURED INTERMEDIATE-TERM Value
PORTFOLIO (continued) (000)+
- --------------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 25,725,344 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $263,757
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.25
================================================================================
</TABLE>
+See Note A to Financial Statements.
For explanations of abbreviations and other references, see page 14.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MAY 31, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
-------- ------
<S> <C> <C>
PAID IN CAPITAL $260,087 $10.11
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED GAINS 257 .01
UNREALIZED APPRECIATION
(DEPRECIATION)--NOTE F:
INVESTMENT SECURITIES 3,561 .14
FUTURES CONTRACTS (148) (.01)
- --------------------------------------------------------------------------------
NET ASSETS $263,757 $10.25
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
MONEY MARKET Amount Value
PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (100.3%)
- --------------------------------------------------------------------------------
Alameda County CA TRAN
4.75%, 7/25/96 LOC $ 9,900 $ 9,912
Anaheim CA Public Improvement
Corp. Lease COP VRDO
(Refunding Projects)
3.30%, 6/5/96 (2) 45,750 45,750
California Health Facilities Finance
Auth. Rev. VRDO
(Adventist Health System West
Sutter Health)
3.20%-3.30%, 6/6/96 LOC 27,300 27,300
(Catholic Health Care West)
3.40%, 6/5/96 (1) 31,200 31,200
(Kaiser Permanente)
3.40%, 6/5/96 39,100 39,100
(Pooled Program)
3.20%, 6/5/96 LOC 6,300 6,300
(St. Francis Medical Center)
3.40%, 6/5/96 (1) 49,600 49,600
(St. Joseph Health)
3.40%, 6/4/96 6,400 6,400
California PCR Finance Auth. CP
(Pacific Gas & Electric)
3.15%-3.60%,
7/10/96-10/21/96 LOC 123,800 123,800
California PCR Finance Auth. PUT
(San Diego Gas & Electric)
4.00%, 9/1/96 10,000 10,000
California PCR Finance Auth. VRDO
(Exxon Project)
3.70%, 6/4/96 4,100 4,100
(Pacific Gas & Electric)
3.75%, 6/4/96 LOC 3,700 3,700
California RAN
4.25%, 6/28/96 38,500 38,515
California School Cash Reserve Auth.
(Pooled Program)
4.75%, 7/3/96 (1) LOC 25,000 25,018
California Statewide Communities
Development Auth.
VRDO (Kaiser Permanente)
3.40%, 6/5/96 2,500 2,500
Contra Costa County CA TRAN
4.50%, 7/3/96 12,000 12,009
East Bay CA Municipal Utility
Dist. CP
3.40%-3.60%, 7/8/96-8/8/96 34,650 34,650
Foothill CA Eastern Transportation
Corridor Agency Toll Road
Rev. VRDO
3.35%, 6/6/96 LOC 25,000 25,000
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Fresno County CA TRAN
4.50%, 7/2/96 $ 15,000 $ 15,009
Irvine CA Assessment Dist. CP
(Irvine County)
3.60%-3.90%,
6/4/96-6/10/96 LOC 61,844 61,844
Kern County CA Public Facilities
Project VRDO
3.40%, 6/5/96 LOC 28,850 28,850
Kern County CA TRAN
4.50%, 7/2/96 10,000 10,005
Los Angeles CA Community
College TRAN
4.50%, 7/31/96 LOC 13,000 13,011
Los Angeles CA Dept. of Water &
Power CP
3.45%, 7/8/96 7,950 7,950
3.70%, 8/8/96 5,850 5,850
Los Angeles County CA Metropolitan
Transit Auth. VRDO
(Union St. Gateway Project)
3.60%, 6/6/96 (4) 5,400 5,400
Los Angeles County CA Metropolitan
Transportation Auth.
CP 3.40%-3.65%,
8/14/96-8/23/96 LOC 19,200 19,200
VRDO 3.35%, 6/6/96 (1) 5,000 5,000
Los Angeles County CA Pension
Obligations VRDO
3.40%, 6/5/96 (2) 57,000 57,000
Los Angeles County CA TRAN
4.50%, 7/1/96 LOC 69,500 69,539
Los Angeles County CA
Transportation Commission
Sales Tax Rev. Refunding VRDO
3.30%, 6/5/96 (3) 6,200 6,200
Metropolitan Water Dist. of
Southern CA CP
3.45%, 7/8/96 5,000 5,000
Orange County CA Sanitation
Dist. VRDO
3.35%, 6/6/96 (2) 18,900 18,900
3.50%, 6/4/96 LOC 13,000 13,000
3.50%, 6/4/96 (2) LOC 25,750 25,750
Pittsburg CA Redevelopment Agency
(Los Medanos Community
Development Project)
7.75%, 8/1/96 (Prere.) 7,050 7,237
Rancho Water Dist. Finance
Auth. CA
6.50%, 11/1/96 (3) 1,105 1,118
Riverside County CA Public
Facilities Project VRDO
3.10%-3.50%, 6/4/96 LOC 29,605 29,605
Riverside County CA TRAN
4.75%, 7/1/96 10,000 10,007
Sacramento CA Municipal Utility
Dist. Prerefunded TOB VRDO
3.60%, 6/6/96 (1) 12,185 12,185
Sacramento City CA TRAN
4.75%, 12/27/96 1,800 1,810
Sacramento County CA
Administration Center &
Courthouse Project VRDO
3.20%, 6/6/96 LOC 26,650 26,650
Sacramento County CA TRAN
4.75%, 10/4/96 38,800 38,908
San Bernardino CA Transportation
Auth. Sales Tax Rev. VRDO
3.40%, 6/6/96 LOC 38,690 38,690
San Bernardino County CA TRAN
4.50%, 7/5/96 LOC 17,500 17,509
San Diego CA Local Govt.
Pooled TRAN
4.75%, 10/18/96 24,000 24,093
San Diego City CA TRAN
4.75%, 7/3/96 10,000 10,006
San Diego CA Unified School
Dist. TRAN
4.75%, 10/10/96 LOC 47,500 47,671
San Diego County CA TRAN
4.50%, 9/30/96 46,000 46,101
San Diego County CA Water Auth.
3.60%, 7/19/96 1,400 1,400
San Francisco City CA TRAN
4.75%, 9/19/96 10,000 10,024
San Jose/Santa Clara CA Clean
Water Finance Auth. VRDO
3.35%, 6/5/96 (3) 3,700 3,700
San Mateo County CA COP VRDO
3.25%, 6/4/96 LOC 995 995
San Mateo County CA TRAN
4.50%, 7/1/96 5,000 5,004
Santa Clara CA El Camino Hosp. Dist.
Facilities Auth. Rev. Lease VRDO
(Valley Medical Center Project)
3.35%, 6/4/96 LOC 33,900 33,900
Sonoma County CA TRAN
4.25%, 11/1/96 9,680 9,698
</TABLE>
13
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
MONEY MARKET Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Southern California Public Power
Auth. VRDO
(Palo Verde Project)
3.30%, 6/5/96 (2) $ 9,600 $ 9,600
(Transmission Project)
3.30%, 6/5/96 (2) 28,200 28,200
Turlock CA Irrigation Dist. COP
(Transmission Project)
VRDO 3.25%, 6/5/96 LOC 3,000 3,000
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $1,279,473) 1,279,473
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.3%)
- --------------------------------------------------------------------------------
Other Assets--Note B 23,062
Liabilities (26,710)
---------
(3,648)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 1,275,783,142 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $1,275,825
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MAY 31, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- ------
<S> <C> <C>
PAID IN CAPITAL $1,275,923 $1.00
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES (98) --
UNREALIZED APPRECIATION
OF INVESTMENTS -- --
- --------------------------------------------------------------------------------
NET ASSETS $1,275,825 $1.00
- --------------------------------------------------------------------------------
</TABLE>
BAN=Bond Anticipation Note
COP=Certificate of Participation
CP=Commercial Paper
GO=General Obligation Bond
IDA=Industrial Development Authority Bond
IDR=Industrial Development Revenue Bond
PCR=Pollution Control Revenue Bond
PUT=Put Option Obligation
RAN=Revenue Anticipation Note
RAW=Revenue Anticipation Warrant
Rev.=Revenue Bond
TAN=Tax Anticipation Note
TOB=Tender Option Bond
TRAN=Tax Revenue Anticipation Note
VRDO=Variable Rate Demand Obligation
(ETM)=Escrowed to Maturity
(Prere.)=Prerefunded
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association)
(2) AMBAC (AMBAC 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.
14
<PAGE> 15
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INSURED
INSURED INTERMEDIATE-
LONG-TERM TERM MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended Six Months Ended
May 31, 1996 May 31, 1996 May 31, 1996
(000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . $ 27,193 $ 5,923 $21,823
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . 27,193 5,923 21,823
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . $ 58 $ 13 $ 72
Management and Administrative . . . . . . . 735 178 893
Marketing and Distribution . . . . . . . . 104 897 32 223 190 1,155
----- ----- -----
Insurance Expense . . . . . . . . . . . . . . . 1 -- --
Custodian Fees . . . . . . . . . . . . . . . . 12 4 18
Auditing Fees . . . . . . . . . . . . . . . . 5 3 4
Shareholders' Reports . . . . . . . . . . . . 16 3 17
Annual Meeting and Proxy Costs . . . . . . . . 3 1 3
Trustees' Fees and Expenses . . . . . . . . . 1 -- 2
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . 935 234 1,199
Expenses Paid Indirectly--Note C . . . . . (12) (14) (18)
- --------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . 923 220 1,181
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . 26,270 5,703 20,642
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . 4,070 920 2
Futures Contracts . . . . . . . . . . . . . . . (1,682) (146) --
- --------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . 2,388 774 2
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . (39,341) (5,272) --
Futures Contracts . . . . . . . . . . . . . . . 1,622 118 --
- --------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . (37,719) (5,154) --
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . $ (9,061) $ 1,323 $20,644
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INSURED INSURED
LONG-TERM INTERMEDIATE-TERM
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED Year Ended SIX MONTHS ENDED Year Ended
MAY 31, November 30, MAY 31, November 30,
1996 1995 1996 1995
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . $ 26,270 $ 50,834 $ 5,703 $ 8,062
Realized Net Gain (Loss) . . . . . . . . . . . . 2,388 (3,444) 774 (322)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . (37,719) 116,910 (5,154) 12,089
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . (9,061) 164,300 1,323 19,829
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . (26,270) (50,834) (5,703) (8,062)
Realized Net Gain . . . . . . . . . . . . . . . . -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . (26,270) (50,834) (5,703) (8,062)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . 104,130 203,465 94,198 142,574
Issued in Lieu of Cash Distributions . . . . . . 17,586 34,047 4,276 5,947
Redeemed . . . . . . . . . . . . . . . . . . . . . (82,869) (210,397) (36,021) (54,878)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . 38,847 27,115 62,453 93,643
- ---------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . 3,516 140,581 58,073 105,410
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . 974,671 834,090 205,684 100,274
- ---------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . $978,187 $974,671 $263,757 $205,684
=====================================================================================================================
(1)Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . 9,363 19,004 9,077 14,150
Issued in Lieu of Cash Distributions . . . . . 1,580 3,152 412 584
Redeemed . . . . . . . . . . . . . . . . . . . (7,443) (19,770) (3,471) (5,429)
- ---------------------------------------------------------------------------------------------------------------------
3,500 2,386 6,018 9,305
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
MONEY MARKET
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED Year Ended
MAY 31, November 30,
1996 1995
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,642 $ 40,549
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . 2 60
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . . . . . . . 20,644 40,609
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,642) (40,549)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,642) (40,549)
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689,503 1,118,819
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . . . 19,199 37,820
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (634,807) (1,113,589)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . . . . . . . 73,895 43,050
- ---------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,897 43,110
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,201,928 1,158,818
- ---------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,275,825 $ 1,201,928
=====================================================================================================================
(1)Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689,503 1,118,819
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . . 19,199 37,820
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (634,807) (1,113,589)
- ---------------------------------------------------------------------------------------------------------------------
73,895 43,050
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INSURED LONG-TERM PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
SIX MONTHS ENDED ---------------------------------------------------------
For a Share Outstanding Throughout Each Period MAY 31, 1996 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $11.27 $ 9.92 $11.30 $10.89 $10.43 $10.22
------ ------- ------ ------- ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .299 .602 .604 .604 .633 .644
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . (.400) 1.350 (1.228) .609 .464 .210
------ ------- ------ ------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . (.101) 1.952 (.624) 1.213 1.097 .854
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . (.299) (.602) (.604) (.604) (.633) (.644)
Distributions from Realized Capital Gains . . -- -- (.152) (.199) (.004) --
------ ------- ------ ------- ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . (.299) (.602) (.756) (.803) (.637) (.644)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $10.87 $11.27 $ 9.92 $11.30 $10.89 $10.43
=========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . -0.93% +20.11% -5.88% +11.53% +10.81% +8.61%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------------
Net Assets, End of Period (Millions) . . . . . . $978 $975 $834 $1,074 $828 $629
Ratio of Total Expenses to Average Net Assets . . .19%* .20% .19% .19% .24% .25%+
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 5.35%* 5.59% 5.60% 5.38% 5.92% 6.24%
Portfolio Turnover Rate . . . . . . . . . . . . . 18%* 23% 28% 27% 54% 19%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
+Insurance expense represents .01%.
*Annualized.
18
<PAGE> 19
<TABLE>
<CAPTION>
INSURED INTERMEDIATE-TERM PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED Year Ended March 4 to
For a Share Outstanding Throughout Each Period MAY 31, 1996 November 30, 1995 November 30, 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . $10.44 $ 9.64 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .254 .511 .346
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . (.190) .800 (.360)
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . .064 1.311 (.014)
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . (.254) (.511) (.346)
Distributions from Realized Capital Gains . -- -- --
------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . (.254) (.511) (.346)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . $10.25 $10.44 $ 9.64
=============================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . +0.61% +13.88% -0.19%
- -------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . $264 $206 $100
Ratio of Total Expenses to Average Net
Assets--Note C . . . . . . . . . . . . . . . .20%* .21% .19%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . 4.88%* 5.05% 4.97%*
Portfolio Turnover Rate . . . . . . . . . . . . 14%* 11% 6%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
19
<PAGE> 20
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
SIX MONTHS ENDED -------------------------------------------------------
For a Share Outstanding Throughout Each Period MAY 31, 1996 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00 $1.00
------- ------ ------ ------ ----- -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . .017 .036 .026 .024 .029 .043
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . -- -- -- -- -- --
------- ------ ------ ------ ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . .017 .036 .026 .024 .029 .043
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . (.017) (.036) (.026) (.024) (.029) (.043)
Distributions from Realized Capital Gains . . -- -- -- -- -- --
------- ------ ------ ------ ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . (.017) (.036) (.026) (.024) (.029) (.043)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00 $1.00
=========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +1.66% +3.69% +2.59% +2.40% +2.97% +4.44%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) . . . . . . $1,276 $1,202 $1,159 $1,006 $ 794 $ 759
Ratio of Total Expenses to Average Net Assets . . .19%* .20% .19% .19% .24% .24%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 3.28%* 3.61% 2.57% 2.37% 2.92% 4.32%
Portfolio Turnover Rate . . . . . . . . . . . . . N/A N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
20
<PAGE> 21
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 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 May 31, 1996, the Fund had contributed capital aggregating
$259,000 to Vanguard (included in Other Assets),
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS (continued)
representing 1.3% 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 six months ended May 31, 1996, directed brokerage
and custodian fee offset arrangements reduced expenses by:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
EXPENSE REDUCTION
(000) Total Expense
---------------------- Reduction as a
Directed Custodian Percent of Average
Portfolio Brokerage Fees Net Assets
- ------------------------------------------------------------------
<S> <C> <C> <C>
INSURED LONG-TERM -- $12 --
INSURED
INTERMEDIATE-TERM $10 4 .01%
MONEY MARKET -- 18 --
- ------------------------------------------------------------------
</TABLE>
D. During the six months ended May 31, 1996, purchases and sales of
investment securities, other than temporary cash investments, were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(000)
-------------------------
Portfolio Purchases Sales
- -------------------------------------------------------------
<S> <C> <C>
INSURED LONG-TERM $94,217 $80,611
INSURED INTERMEDIATE-TERM 70,612 15,742
- -------------------------------------------------------------
</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 May 31, 1996, 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 $37,285 $(3,417) $33,868
INSURED INTERMEDIATE-TERM 4,442 (881) 3,561
- ---------------------------------------------------------------
</TABLE>
At May 31, 1996, the aggregate settlement value of open futures contracts
expiring in September 1996, and the related unrealized depreciation were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(000)
------------------------
Aggregate
Settlement Unrealized
Portfolio/Futures Contracts Value Depreciation
- ------------------------------------------------------------
<S> <C> <C>
INSURED LONG-TERM
LONG U.S. TREASURY BOND $48,389 $(749)
INSURED INTERMEDIATE-TERM
LONG U.S. TREASURY NOTE 12,515 (148)
- ------------------------------------------------------------
</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 $3,141,000 and $430,000, respectively.
22
<PAGE> 23
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman of the Board
Chairman and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President and Chief Executive Officer
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.; Director of
Westinghouse Electric Corporation.
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 F. WILLIAM McNABB III
Senior Vice President Senior Vice President
Information Technology Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
IAN A. MacKINNON
Senior Vice President
Fixed Income Group
23
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
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 Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
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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.
Q752-5/96
VANGUARD
CALIFORNIA
TAX-FREE FUND
SEMI-ANNUAL REPORT
May 31, 1996
