<PAGE> 1
CHAIRMAN'S LETTER
DEAR SHAREHOLDER:
The six months ended May 31, the first half of the 1994 fiscal year for the
eleven Portfolios of the Vanguard State Tax-Free Funds, witnessed something
that we have not seen much of since 1987: rising interest rates. As a result,
the prices of long-term municipal bonds declined during the period, while the
income from money market instruments received a nice boost.
This environment, of course, negatively impacted the net asset values
of each of our Insured Long-Term Portfolios, as reflected in the table on page
2. (The net asset values of our Money Market Portfolios, as you would expect,
remained constant, at $1.00 per share.) While fluctuating asset values are part
and parcel of bond investing, our Long-Term Portfolios exceeded the total
returns (capital change plus income) achieved by competitive state tax-free
bond funds. What is more, all of our Portfolios remain virtually peerless in
the mutual fund field with respect to their investment quality, as shown in the
third column of the table on page 2. In summary form, here are the Portfolio
highlights over the past twelve months:
* THE STATE MONEY MARKET PORTFOLIOS--provided total returns ranging from +2.2%
to +2.3% . . . current yields are in the area of 2.6%, about the same as they
were twelve months ago but nicely above their level at the outset of the fiscal
half year . . . net asset values remained at $1.00 per share.
* THE STATE INSURED LONG-TERM PORTFOLIOS--reflecting the rebound in interest
rates, turned in modest total returns ranging from +1.9% to +3.3% . . . current
income yields are running about 5.4%, some 40 basis points (0.40%) higher than
they were twelve months ago.
The detailed results for each of our State Tax-Free Portfolios--
including per share net asset values, dividends, and capital gains
distributions, as well as current yields--are presented on the following page.
To provide some perspective on how our Insured Long-Term Portfolios fared in
the face of rising interest rates, the table that follows summarizes the income
returns and the capital returns for each Portfolio:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
Investment Returns
Twelve Months Ended
May 31, 1994
-----------------------------------------------------
Portfolio* Income Capital Total
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA +5.4% -3.5% +1.9%
NEW YORK +5.4 -3.2 +2.2
PENNSYLVANIA +5.6 -2.3 +3.3
NEW JERSEY +5.3 -3.4 +1.9
OHIO +5.2 -2.8 +2.4
FLORIDA +5.1 -2.2 +2.9
- - -------------------------------------------------------------------------------------------------
</TABLE>
*On March 4, 1994, the California Insured Intermediate-Term Portfolio was
introduced. Since its inception, the Portfolio has achieved an income return
of +1.0%, a capital return of +0.4%, and a total return of +1.4%.
* FIXED-INCOME MARKET REVIEW
The basic benchmark for the bond market is the long-term U.S. Treasury bond.
During the past six months, its yield rose from 6.3% at the start of the period
to 7.4% at its conclusion. This yield change engendered a decline of about -13%
in the Treasury bond's price. I am happy to report that the tax-exempt bond
market fared a good bit better, with the yield on long-term high-grade
municipal bonds rising from 5.5% to 6.1%, resulting in a price decline of some
- - -8%. However painful this decline may be for investors in long-term bonds, it
is worth noting that interest rates had been dropping steadily for some seven
years, and the retracement during the past six months has merely returned rates
to the level prevailing at the end of 1992.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, there is little evidence of it. The
U.S. Consumer Price Index has risen just 2.3% over the past twelve months,
although more sensitive indicators--such as commodity prices--have been rising
at a much higher rate. In an effort to quell these inflationary fears, the
Federal Reserve acted to "tighten" the money supply and slow economic growth
and potential future inflation, raising the
1
<PAGE> 2
Federal funds rate (at which banks borrow from one another) four times--in
February, March, April, and again in May--from 3.00% to 4.25%.
These increases in short-term rates are often seen by market
participants as a restraint on potential inflation, and thus cause long-term
rates to fall. This time around, quite the reverse has been true. In any event,
proving that "it is an ill wind (indeed) that blows no good," the rate increase
has added to the income received by investors in our Money Market Portfolios.
And, because of the "lag" from the date interest rates rise until they are
fully manifested in money market fund yields, further dividend increases in our
Money Market Portfolios likely lie in prospect.
* IN SUMMARY
In my Chairman's letter to you one year ago, I noted that "it is hard to
imagine that the steady trend toward ever-lower interest rates can go much
further." I went on to caution that if rates did reverse their decline in
response to a strengthening economy, the capital rewards enjoyed by our
longer-term Portfolios would turn to capital penalties. While I do not presume
any forecasting ability whatsoever, these observations have proved prescient.
Nonetheless, provided that you own the Vanguard Portfolio (or combination of
Portfolios) that meets your long-term risk-reward objectives, I would urge you
to "stay the course" and avoid the temptation to make precipitate changes in
your fund holdings.
I look forward to reporting on our results for the full 1994 fiscal year
six months hence.
Sincerely,
/S/ JOHN C. BOGLE
- - --------------------------
John C. Bogle
Chairman of the Board
June 17, 1994
<TABLE>
<CAPTION>
Net Asset Value
Total Per Share Dividends Total Return
Net Assets ------------------- ------------------ --------------
(millions) Average Average Nov. 30, May 31, Six Twelve Six Twelve Current
Portfolio May 31, 1994 Maturity Quality* 1993 1994 Months Months Months Months Yield**
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA . . . . . . $1,126 35 days MIG 1 $ 1.00 $ 1.00 $ .011 $.023 +1.1% +2.3% 2.55%
PENNSYLVANIA . . . . 1,041 37 days MIG 1 1.00 1.00 .011 .023 +1.1 +2.3 2.60
NEW JERSEY . . . . . 803 41 days MIG 1 1.00 1.00 .011 .022 +1.1 +2.2 2.46
OHIO . . . . . . . . . 139 47 days MIG 1 1.00 1.00 .011 .023 +1.2 +2.3 2.57
- - ------------------------------------------------------------------------------------------------------------------------------
INSURED LONG-TERM
CALIFORNIA . . . . . . $ 929 12.9 years Aaa $11.30 $10.66 $ .451+ $.753+ -1.8% +1.9% 5.58%
CALIFORNIA
INTERMEDIATE-TERM . . 57 5.3 years Aaa -- 10.04 .101++ -- +1.4++ -- 4.82
NEW YORK . . . . . . . . 760 11.8 years Aaa 10.97 10.49 .306+ .602+ -1.6 +2.2 5.41
PENNSYLVANIA . . . . . . 1,430 11.7 years Aaa 11.36 10.85 .388+ .703+ -1.1 +3.3 5.47
NEW JERSEY . . . . . . . 700 11.5 years Aaa 11.77 11.18 .374+ .690+ -1.9 +1.9 5.41
OHIO . . . . . . . . . . 162 9.7 years Aaa 11.61 11.08 .327+ .630+ -1.8 +2.4 5.48
FLORIDA . . . . . . . . 292 12.1 years Aaa 10.86 10.38 .339+ .611+ -1.3 +2.9 5.39
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* MIG 1 and Aaa are Moody's highest ratings for, respectively,
short-term and long-term municipal bonds.
** Money Market Portfolios' yields are 7-day annualized yields;
others are 30-day SEC yields.
+ Include capital gains distributions of $.152 for California,
$.012 for New York, $.079 for Pennsylvania, $.063 for New
Jersey, $.032 for Ohio, and $.070 for Florida.
++ Since inception, March 4, 1994.
The shares of each of the Vanguard "single state" Portfolios are available
for purchase solely by residents of the designated states.
2
<PAGE> 3
AVERAGE ANNUAL TOTAL RETURNS
THE CURRENT YIELDS NOTED IN THE CHAIRMAN'S LETTER ARE CALCULATED IN ACCORDANCE
WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS
(PERIODS ENDED MARCH 31, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
INCEPTION SINCE
PORTFOLIO DATE 1 YEAR 5 YEARS INCEPTION
- - ------------------------------------ --------- ------ ------- ---------
<S> <C> <C> <C> <C>
CALIFORNIA INSURED LONG-TERM 4/7/86 +1.77% +8.56% +7.70%
CALIFORNIA INSURED INTERMEDIATE-TERM 3/4/94 -- -- -0.64
CALIFORNIA MONEY MARKET 6/1/87 +2.34 +4.05 +4.34
NEW YORK INSURED TAX-FREE 4/7/86 +2.37 +8.97 +7.23
PENNSYLVANIA INSURED LONG-TERM 4/7/86 +3.14 +9.22 +8.11
PENNSYLVANIA MONEY MARKET 6/13/88 +2.31 +4.15 +4.39
NEW JERSEY INSURED LONG-TERM 2/3/88 +2.44 +8.87 +8.65
NEW JERSEY MONEY MARKET 2/3/88 +2.24 +4.12 +4.37
OHIO INSURED LONG-TERM 6/18/90 +2.70 -- +9.12
OHIO MONEY MARKET 6/18/90 +2.31 -- +3.54
FLORIDA INSURED TAX-FREE 9/1/92 +2.56 -- +7.01
</TABLE>
THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL
VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S 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 A MONEY MARKET
PORTFOLIO OF THE 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.
3
<PAGE> 4
REPORT FROM THE INVESTMENT ADVISER
STATE INSURED
LONG-TERM PORTFOLIOS
Over the past six months, the pace of domestic economic activity accelerated
sharply. Strong improvements in the rate of growth in Gross Domestic Product
(GDP), and a host of related statistics such as home sales, automobile sales,
and consumer confidence, provided ample evidence of renewed vigor. Bond markets
seldom react well to strong economic signals and this period was no exception.
The yield on the 30-year Treasury bond rose 1.1 percentage points (from 6.3% to
7.4%). During the same period, municipal bonds performed slightly better, with
the yield on long-term high-grades rising 0.6% (from 5.5% to 6.1%), producing
an 8.3% loss of value.
As one would expect, the sharp rise in interest rates negatively
impacted the share price of the State Insured Long-Term Portfolios. To be sure,
a decline of this nature can be disconcerting to even the most resolute
long-term investor. However, following more than a decade of exceptional
returns of longer-term fixed-income assets, the poor six-month period
represents only a partial "give back" of previous prosperity. Looking beyond
the short-term share price volatility, a shareholder of the State Insured
Long-Term Portfolios can expect to receive an attractive, consistent, and
durable stream of tax-exempt dividend income.
* SUCCESSFUL STRATEGIES . . .
For the recent period, two of several core strategies stand out for enhancing
the relative returns of the State Insured Long-Term Portfolios. First, a
reduction in average maturity over the past year improved relative market
performance and moderated some of the "sting" of a bear market. Some of this
was accomplished by focusing on municipals maturing in 15 to 20 years, rather
than the slightly higher yielding but more volatile 30-year maturities. This
modest reduction in average maturity effectively "locked-in" a portion of the
gains in share price achieved in the previous bull market.
Second, the prudent maintenance of reserve positions of about 10%
of fund assets added to our relative stability. What is more, these reserves
provided a liquidity cushion to meet shareholder redemptions. In good times,
reserves (which normally yield less than longer-term assets) forego a small
amount of yield potential. In difficult market conditions, such as prevailed
during the past six months, the additional reserves allow the portfolio to meet
redemption requests without the inopportune (and sometimes "distressed") sale
of securities.
* LOOKING FORWARD . . .
The issuance of new municipal bonds has fallen dramatically. Issuance for the
first six months in fiscal 1994 was 26% below the pace of a year earlier. Early
indications show forward supply even lower compared to the "mad dash" of 1993.
Municipalities appear to have completed the process of refinancing older,
higher coupon debt of the 1980's and early 1990's. At the same time, a record
number of previously mentioned high coupon bonds are approaching their call
dates, and a huge amount of principal will be returned to owners of individual
bonds. All things being equal, this should continue to provide more attractive
returns for municipal bonds than their taxable brethren.
In conclusion, it would be reassuring to believe that the recent
increase in interest rates is sufficient to "rein in" the rapidly expanding
U.S. economy and dampen any inflationary expectations. Yet, that observation
might be premature. If history serves as any guide, the process may take longer
than the recent six months of "pain." If so, there could be more share price
unpleasantness ahead before the markets resume their positive return pattern of
the past decade. However, attempting to "time" the turnaround--getting out at
the highs and then getting back in at the lows--tends to be equally futile for
the institutional and individual investor alike. The best advice we know is to
endure the swings and allow the powerful tax exempt compounding of interest to
continue.
4
<PAGE> 5
STATE MONEY MARKET PORTFOLIOS
The past six months ushered in a change in the Federal Reserve Board's
previously accommodative monetary policy. Since February 4, 1994, market
participants watched anxiously as the Federal Reserve Board, in four separate
instances, pushed the Federal funds rate up 125 basis points (1.25%) to 4.25%
and tightened the discount rate 50 basis points (0.50%) to 3.50%. This series
of moves by the Fed has signaled the end of stimulative policy (maintained
throughout 1993) and the initiation of a policy of "neutrality."
The effect of the tightening on the short-term municipal market was
surprisingly mild. While yields on "first tier" taxable money market funds rose
approximately 70 basis points over the six-month period, yields on
state-specific and general purpose tax-free money funds rose a mere 35 basis
points. The primary contributor to the unresponsive municipal market was the
scarcity of new issue supply. Supply of short-term municipal securities is
quite cyclical, and depends on an issuer's fiscal year, which generally runs
from July 1 to June 30. As a result, supply typically remains light in the
months leading up to June and dramatically increases in the summer months, as
issuers prepare to fund their upcoming budgetary needs in the new fiscal year.
This lack of supply experienced during a period of rising rates in the broader
taxable markets enabled short-term municipal yields to maintain relative
stability. As technical supply factors temporarily have been depressing yields
on short-term municipal securities, we have been targeting a low average
weighted maturity for the tax-exempt money funds of 45 to 60 days. Our
Portfolios should be commensurately more responsive when new issue supply
surges and interest rates rise. We expect the shift from scarcity to abundance
will occur within weeks.
While the market focused on an accelerating economy and the rise in
interest rates, the Securities and Exchange Commission quietly launched its own
initiative to ensure the net asset value safety of tax-exempt money funds,
consistent with those already applicable to taxable money funds. In fact, the
SEC has proposed regulations that coincide with (or in some cases are less
restrictive than) our conservative approach to managing money market funds.
Thus, they will have little impact on the Vanguard Money Market Portfolios. We
believe that the Commission's proposals, if adopted, will be a positive force
in elevating industrywide portfolio standards.
In conclusion, the upcoming months could potentially bring about
significant regulatory and economic changes in our market. While keeping a
watchful eye on the actions of the Federal Reserve Board and maintaining our
conservative investment approach, we look forward to capitalizing on any
opportunities that may result.
Sincerely,
Ian A. MacKinnon
Senior Vice President
Jerome J. Jacobs
Vice President
Pamela E. Wisehaupt
Vice President
David E. Hamlin
Assistant Vice President
Reid O. Smith
Assistant Vice President
Danine A. Mueller
Portfolio Manager
Vanguard Fixed Income Group
June 13, 1994
5
<PAGE> 6
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS (unaudited)
May 31, 1994
<TABLE>
<CAPTION>
Face Market
Amount Value
INSURED LONG-TERM PORTFOLIO (000) (000)+
- - -----------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (97.8%)
- - -----------------------------------------------------------------------
ISSUER INSURED (86.3%)
Akron Bath & Copley Joint Township
(Children's Hosp. Medical Center)
5.50%, 1/1/08 (2) $1,000 $ 988
Akron Water System Rev.
6.00%, 3/1/14 (3) 1,000 990
Allen County GO
5.30%, 12/1/15 (2) 1,250 1,127
Bedford Heights GO
5.65%, 12/1/14 (2) 500 481
Big Walnut Local School Dist. GO
5.70%, 6/1/14 (2) 1,000 963
Butler County Sewer System
6.25%, 12/1/12 (2) 2,925 2,984
City of Canton GO
5.375%, 12/1/07 (2) 1,000 981
Chillicothe GO
6.05%, 12/1/12 (2) 675 686
Clermont County
(Mercy Health System)
5.40%, 9/1/05 (2) 2,500 2,458
5.50%, 9/1/06 (2) 2,500 2,456
Cleveland Airport System Rev.
7.25%, 1/1/20 (1) 750 817
Cleveland GO
5.30%, 9/1/08 (2) 4,500 4,355
5.375%, 9/1/09 (2) 2,000 1,926
5.375%, 9/1/10 (2) 1,000 953
5.375%, 9/1/12 (2) 1,000 939
Cleveland School Dist. GO
0.00%, 12/1/05 (3) 700 358
0.00%, 12/1/06 (3) 700 333
0.00%, 12/1/07 (3) 500 223
0.00%, 12/1/08 (3) 400 166
5.875%, 12/1/11 (3) 1,500 1,488
Cleveland Water Works Rev.
5.50%, 1/1/13 (1) 2,125 2,009
6.25%, 1/1/15 (2) 4,500 4,574
5.50%, 1/1/21 (1) 1,500 1,386
Columbus City School Dist.
7.00%, 12/1/00 (3) (Prere.) 1,750 1,958
Cuyahoga County Hosp. Rev.
(Metro Health System)
6.00%, 2/15/19 (1) 1,000 980
(Univ. Hosp. Health System)
6.875%, 1/15/19 (6) 1,825 1,904
Dayton Water System Rev.
6.75%, 12/1/10 (1) 1,000 1,059
Delaware County GO
5.20%, 12/1/16 (3) 2,200 1,957
Delaware Ohio Sewer System
5.95%, 11/15/12 (2) 1,500 1,506
Dublin School Dist. GO
0.00%, 12/1/05 (3) 1,220 624
0.00%, 12/1/06 (3) 1,220 581
Fairfield County Hosp.
5.375%, 6/15/15 (1) 3,000 2,734
5.50%, 6/15/21 (1) 1,000 910
Franklin County Convention
Center Rev.
7.00%, 12/1/00 (1) (Prere.) 675 756
0.00%, 12/1/07 (1) 4,355 1,931
Franklin County Hosp. Facilities Rev.
(Riverside United Methodist)
7.25%, 5/15/20 (1) 750 821
Hamilton County
(Children's Hosp.)
5.20%, 5/15/09 (1) 2,000 1,877
Hamilton County Sewer System
5.40%, 12/1/08 (3) 5,700 5,544
5.45%, 12/1/09 (3) 3,250 3,138
5.25%, 12/1/16 (3) 2,000 1,788
Hamilton Gas System Rev.
5.15%, 10/15/13 (1) 2,750 2,478
Hamilton Water System Rev.
6.30%, 10/15/21 (1) 2,000 2,034
Hilliard County School Dist. GO
6.55%, 12/1/05 (3) 500 546
Kettering City GO
5.30%, 12/1/14 (3) 1,350 1,226
Lakota GO
7.00%, 12/1/09 (2) 1,740 1,950
Lima Sewer Rev.
6.30%, 12/1/12 (2) 5,000 5,127
Lima Water Rev.
6.30%, 12/1/12 (2) 3,400 3,487
Lisbon School Dist.
6.25%, 12/1/17 (2) 1,500 1,520
Lucas County GO
6.95%, 12/1/11 (1) 1,800 1,931
Mahoning County Hosp.
Improvement Project (YHA Inc.)
6.50%, 10/15/14 (1) 2,500 2,579
Marietta City School Dist.
5.75%, 12/1/07 (2) 1,500 1,509
Marysville GO
5.55%, 12/1/13 (2) 1,400 1,325
Marysville Water System
7.05%, 12/1/21 (1) 1,250 1,354
Medina City School Dist. GO
6.20%, 12/1/18 (3) 2,100 2,114
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- - -----------------------------------------------------------------------
<S> <C> <C>
Montgomery County
(Sisters of Charity)
6.625%, 5/15/21 (1) $1,500 $1,551
Montgomery County Sewer System
5.60%, 9/1/11 (3) 1,000 962
Mount Vernon Sewer System
6.00%, 12/1/12 (2) 750 749
New Philadelphia City School Dist.
6.25%, 12/1/17 (2) 2,400 2,443
Newark Water System GO
6.00%, 12/1/18 (2) 1,250 1,239
Northeast Ohio Sewer Dist.
6.50%, 11/15/16 (2) 2,500 2,578
Ohio Air Quality Development
Auth. PCR
5.45%, 1/1/24 (1) 4,000 3,585
(Ohio Edison)
7.45%, 3/1/16 (3) 500 553
7.10%, 6/1/18 (3) 1,000 1,081
Ohio Building Auth.
(Transportation Facilities)
7.00%, 9/1/07 (1) 850 924
Ohio Higher Education Facilities
(Univ. of Dayton)
6.75%, 12/1/15 (3) 1,000 1,062
6.60%, 12/1/17 (3) 1,000 1,045
Ohio Univ.
5.00%, 12/1/13 (3) 2,000 1,774
Ohio Water Development Auth.
5.50%, 12/1/11 (2) 1,000 946
Olentangy School Dist. GO
6.35%, 12/1/17 (1) 500 510
Omega Municipal Electric
5.375%, 2/15/13 (2) 2,000 1,852
Ottowa GO
7.00%, 9/1/11 (2) 1,500 1,623
Oxford Water Supply System
6.00%, 12/1/14 (2) 1,000 999
Pickerington GO
5.80%, 12/1/09 (3) 500 501
Pickerington Local School Dist.
3.20%, 12/1/94 (2) 780 778
7.00%, 12/1/00 (2) (Prere.) 1,500 1,679
Revere School Dist. GO
6.00%, 12/1/16 (2) 1,600 1,590
Reynoldsburg School Dist. GO
6.55%, 12/1/17 (3) 1,600 1,659
Springfield GO
6.875%, 9/1/10 (2) 1,000 1,068
Summit County GO
6.90%, 8/1/12 (2) 2,500 2,669
Trumbull County
(Trumbull Memorial Hosp.)
6.25%, 11/15/12 (3) 2,000 2,033
Trumbull County GO
5.30%, 12/1/14 (2) 1,500 1,370
Univ. of Cincinnati COP
2.70%, 6/1/94 (1) 845 845
Univ. of Toledo
5.75%, 12/1/12 (3) 1,000 974
Wilmington School Dist. GO
6.30%, 12/1/14 (3) 500 509
Wood County Justice Center GO
5.95%, 12/1/07 (2) 1,750 1,794
Wooster City School Dist. GO
6.50%, 12/1/17 (2) 3,000 3,101
Youngstown GO
6.125%, 12/1/14 (1) 300 302
OUTSIDE OHIO:
Puerto Rico Public Building
Auth. Rev.
0.00%, 7/1/01 (3) 850 586
-------
GROUP TOTAL 139,823
-------
- - -----------------------------------------------------------------------
SECONDARY MARKET INSURED (1.3%)
Franklin (Mount Carmel Health)
6.75%, 6/1/19 (1) 2,000 2,084
-------
- - -----------------------------------------------------------------------
NON-INSURED (10.2%)
Cincinnati GO
6.70%, 12/1/94 400 406
Columbus Electric VRDO
2.90%, 6/1/94 300 300
Hamilton County BAN
3.25%, 4/14/95 2,000 1,992
Ohio Air Quality
Development Auth. VRDO
2.85%, 6/1/94 1,300 1,300
Ohio GO
7.625%, 8/1/10 3,510 4,139
Ohio Higher Education
Facilities Auth.
(Case Western Reserve Univ.)
6.50%, 10/1/20 250 263
(Oberlin College)
5.375%, 10/1/15 1,500 1,361
Ohio State Univ. VRDO
2.85%, 6/1/94 200 200
Ohio Student Loan VRDO
2.80%, 7/1/94 4,400 4,400
Ohio Water Development
Auth. VRDO
(Timpkin Co.)
2.65%, 6/1/94 1,300 1,300
</TABLE>
7
<PAGE> 8
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- - -----------------------------------------------------------------------
<S> <C> <C>
Scioto County VRDO
(Norfolk Southern Corp.)
2.90%, 6/1/94 $100 $ 100
OUTSIDE OHIO:
Puerto Rico Development
Bank VRDO
2.60%, 6/1/94 700 700
--------
GROUP TOTAL 16,461
--------
- - -----------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $157,792) 158,368
- - -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.2%)
Other Assets--Note B 5,020
Liabilities (1,437)
--------
3,583
- - -----------------------------------------------------------------------
NET ASSETS (100%)
- - -----------------------------------------------------------------------
Applicable to 14,619,130 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $161,951
- - -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.08
=======================================================================
</TABLE>
+See Note A to Financial Statements.
For explanations of abbreviations and other references, see
page 9.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------
AT MAY 31, 1994, NET ASSETS CONSISTED OF:
- - -----------------------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $159,741 $10.93
Undistributed Net Investment
Income -- --
Accumulated Net Realized Gains 762 .05
Unrealized Appreciation of
Investments--Note D 1,448 .10
- - -----------------------------------------------------------------------
NET ASSETS $161,951 $11.08
- - -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
- - -----------------------------------------------------------------------
MUNICIPAL BONDS (96.6%)
- - -----------------------------------------------------------------------
<S> <C> <C>
City of Akron Sewer GO BAN
2.80%, 6/15/94 $ 3,500 $ 3,500
Cleveland--Cuyahoga County Port
Auth. VRDO
(Rock & Roll Hall of Fame)
3.05%, 6/1/94 5,000 5,000
Cleveland School Dist. TRAN
4.50%, 12/30/94 5,000 5,040
Cleveland School RAN
9.00%, 6/1/94 2,000 2,000
Cleveland Waterworks
Improvement VRDO
2.95%, 6/2/94 (1) 2,000 2,000
Columbus Electric TOB VRDO
2.90%, 6/1/94 4,840 4,840
Cuyahoga County Hosp.
Improvement Rev. VRDO
(St. Luke's Hosp.)
2.95%, 6/1/94 10,800 10,800
Cuyahoga GO
2.75%, 10/1/94 2,040 2,041
Euclid City BAN
2.58%, 9/29/94 1,100 1,101
Franklin County BAN
3.00%, 8/30/94 6,400 6,405
Hamilton County Metropolitan
Sewer TOB VRDO
2.95%, 6/2/94 (3) 3,000 3,000
Lake County Water & Sewer BAN
2.93%, 10/13/94 1,700 1,701
Montgomery County BAN
4.00%, 10/27/94 5,955 5,976
North Royalton School Dist.
Improvement BAN
3.70%, 9/29/94 3,000 3,003
Ohio Air Quality Development Auth.
(Cincinnati G&E)
PCR CP 2.70%, 6/10/94 5,800 5,800
PCR CP 2.75%, 6/10/94 7,200 7,200
(Mead Corp.)
VRDO 2.85%, 6/1/94 4,100 4,100
Ohio GO
TOB VRDO 2.95%, 6/2/94 2,080 2,080
6.50%, 8/1/94 1,580 1,590
Ohio Higher Education
Facilities TOB VRDO
2.89%, 6/2/94 (2) 1,900 1,900
Ohio State Univ. VRDO
2.85%, 6/2/94 5,650 5,650
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- - -----------------------------------------------------------------------
<S> <C> <C>
Ohio Water Development
Auth. TOB VRDO
2.95%, 6/2/94 (2) $ 5,320 $ 5,320
(Mead Corp.)
VRDO 2.85%, 6/1/94 5,620 5,620
(Timpken)
VRDO 2.65%, 6/1/94 3,100 3,100
Scioto County VRDO
(Norfolk Southern Corp.)
2.90%, 6/1/94 6,700 6,700
Ohio Student Loan VRDO
2.80%, 6/1/94 12,500 12,500
Univ. of Cincinnati
COP 2.70%, 6/1/94 (1) 2,600 2,600
BAN 3.02%, 9/1/94 8,800 8,806
BAN 4.00%, 3/23/95 2,300 2,314
Warren County Water System
GO Notes
3.35%, 9/23/94 2,600 2,602
- - -----------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $134,289) 134,289
- - -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (3.4%)
- - -----------------------------------------------------------------------
Other Assets--Note B 8,492
Liabilities (3,783)
--------
4,709
- - -----------------------------------------------------------------------
NET ASSETS (100%)
- - -----------------------------------------------------------------------
Applicable to 138,997,154 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $138,998
- - -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
=======================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------
AT MAY 31, 1994, NET ASSETS CONSISTED OF:
- - -----------------------------------------------------------------------
Amount Per
(000) Share
-------- -----
<S> <C> <C>
Paid in Capital $139,001 $1.00
Undistributed Net Investment
Income -- --
Accumulated Net Realized Losses (3) --
Unrealized Appreciation of
Investments -- --
- - -----------------------------------------------------------------------
NET ASSETS $138,998 $1.00
- - -----------------------------------------------------------------------
</TABLE>
(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 Company)
(7) Connie Lee Inc.
(8) FHA (Federal Housing Authority)
BAN--Bond Anticipation Note
COP--Certificate of Participation
CP --Commercial Paper
GO --General Obligation
IDR--Industrial Development Revenue
PCR--Pollution Control Revenue
RAN--Revenue Anticipation Note
TAN--Tax Anticipation Note
TOB--Tender Option Bond
TRAN--Tax Revenue Anticipation Note
VRDO--Variable Rate Demand Obligation
(ETM)--Escrowed to Maturity
(Prere.)--Prerefunded
*Put Option Obligation.
9
<PAGE> 10
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INSURED MONEY
LONG-TERM PORTFOLIO MARKET PORTFOLIO
- - -------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
May 31, 1994 May 31, 1994
(000) (000)
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $4,569 $1,687
- - -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . 4,569 1,687
- - -------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . . . $ 9 $ 7
Management and Administrative . . . . . . . . . . . . . . 142 112
Marketing and Distribution . . . . . . . . . . . . . . . 21 172 18 137
----- -----
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . 4 4
Shareholders' Reports . . . . . . . . . . . . . . . . . . . 19 11
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . 1 4
- - -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 196 156
- - -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . 4,373 1,531
- - -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . 687 --
Futures Contracts . . . . . . . . . . . . . . . . . . . . . 793 --
- - -------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . 1,480 --
- - -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . (9,918) --
Futures Contracts . . . . . . . . . . . . . . . . . . . . . 734 --
- - -------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . . . (9,184) --
- - -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations . . . . . . . . . . . . . . . . . . . . $(3,331) $1,531
===================================================================================================================
</TABLE>
10
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INSURED MONEY
LONG-TERM PORTFOLIO MARKET PORTFOLIO
- - -------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year Ended SIX MONTHS Year Ended
ENDED November 30, ENDED November 30,
MAY 31, 1994 1993 MAY 31, 1994 1993
(000) (000) (000) (000)
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . $ 4,373 $ 7,319 $ 1,531 $ 2,551
Realized Net Gain (Loss) . . . . . . . . . . . . . 1,480 (82) -- (3)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . (9,184) 7,265 -- --
- - -------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . (3,331) 14,502 1,531 2,548
- - -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . (4,373) (7,319) (1,531) (2,551)
Realized Net Gain . . . . . . . . . . . . . . . . . (463) (1,350) -- --
- - -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . (4,836) (8,669) (1,531) (2,551)
- - -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . 22,420 66,822 53,030 106,837
-- In Lieu of Cash Distributions . . . . 3,633 6,863 1,422 2,389
-- Exchange. . . . . . . . . . . . . . . 10,758 22,533 23,830 30,312
Redeemed -- Regular . . . . . . . . . . . . . . . (16,662) (17,048) (51,300) (68,436)
-- Exchange. . . . . . . . . . . . . . . (16,507) (19,131) (19,586) (31,681)
- - -------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . . . . . 3,642 60,039 7,396 39,421
- - -------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . (4,525) 65,872 7,396 39,418
- - -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . 166,476 100,604 131,602 92,184
- - -------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . $161,951 $166,476 $138,998 $131,602
===================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . $.295 $.608 $.011 $.023
Realized Net Gain . . . . . . . . . . . . . . . $.032 $.145 -- --
- - -------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . 2,890 7,799 76,860 137,149
Issued in Lieu of Cash Distributions . . . . . 319 601 1,422 2,389
Redeemed . . . . . . . . . . . . . . . . . . . (2,930) (3,149) (70,886) (100,117)
- - -------------------------------------------------------------------------------------------------------------------
279 5,251 7,396 39,421
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INSURED LONG-TERM PORTFOLIO
- - -------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year Ended November 30, June 18 to
ENDED ----------------------------- Nov. 30,
For a Share Outstanding Throughout Each Period MAY 31, 1994 1993 1992 1991 1990
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $11.61 $11.07 $10.60 $10.30 $10.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .295 .608 .630 .650 .295
Net Realized and Unrealized Gain (Loss) on Investments (.498) .685 .474 .300 .300
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . (.203) 1.293 1.104 .950 .595
- - -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.295) (.608) (.630) (.650) (.295)
Distributions from Realized Capital Gains . . . . . . (.032) (.145) (.004) -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.327) (.753) (.634) (.650) (.295)
- - -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $11.08 $11.61 $11.07 $10.60 $10.30
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . -1.79% +12.03% +10.69% +9.50% +6.04%
- - -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- - ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . $162 $166 $101 $61 $17
Ratio of Expenses to Average Net Assets . . . . . . . . .23%* .21% .31% .27% .22%*
Ratio of Net Investment Income to Average Net Assets . 5.18%* 5.29% 5.77% 6.20% 6.55%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 15%* 10% 27% 20% 2%
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
12
<PAGE> 13
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
- - -------------------------------------------------------------------------------------------------------------------
SIX MONTHS Year Ended November 30, June 18 to
ENDED ----------------------------- Nov. 30,
For a Share Outstanding Throughout Each Period MAY 31, 1994 1993 1992 1991 1990
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .011 .023 .030 .045 .027
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . .011 .023 .030 .045 .027
- - -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.011) (.023) (.030) (.045) (.027)
Distributions from Realized Capital Gains . . . . . . -- -- -- -- --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . (.011) (.023) (.030) (.045) (.027)
- - -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . +1.15% +2.37% +3.01% +4.64% +2.59%
- - -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- - ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . $139 $132 $92 $79 $37
Ratio of Expenses to Average Net Assets . . . . . . . . .23%* .21% .31% .26% .23%*
Ratio of Net Investment Income to Average Net Assets. . 2.29%* 2.34% 2.95% 4.45% 5.65%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . N/A N/A N/A N/A N/A
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
Vanguard Ohio 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
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 Ohio.
* 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 valued at amortized cost which approximates market value. Insured
Long-Term Portfolio: 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 Portfolio utilizes futures contracts
to a limited extent. The primary risks associated with the use of futures
contracts are imperfect correlation between the change in market value of the
bonds held by the Portfolio 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 value 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. The Fund has contributed capital of $48,000 to Vanguard (included in
Other Assets), representing .2% of Vanguard's capitalization. The Fund's
officers and trustees are also officers and directors of Vanguard.
* C. During the six months ended May 31, 1994, the Insured Long-Term Portfolio
made purchases of $18,391,000 and sales of $11,636,000 of investment securities
other than temporary cash investments.
14
<PAGE> 15
* D. At May 31, 1994, unrealized appreciation of investment securities of the
Insured Long-Term Portfolio for financial reporting and Federal income tax
purposes aggregated $576,000, of which $3,709,000 related to appreciated
securities and $3,133,000 related to depreciated securities.
At May 31, 1994, the Insured Long-Term Portfolio had short positions in U.S.
Treasury Bond futures contracts expiring through September 1994, with an
aggregate settlement value and net unrealized appreciation of $19,011,000 and
$872,000, respectively. The market value of securities deposited as initial
margin for open futures contracts was $534,000.
15
<PAGE> 16
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund-Money Market Portfolio
Vanguard State Tax-Free Funds (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund-U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund-International Portfolio
The Vanguard Group * Vanguard Financial Center
Valley Forge, PA 19482
New Account Information: 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
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.
Q962-05/94
VANGUARD
OHIO
TAX-FREE FUND
[PHOTO -- SEE EDGAR APPENDIX]
SEMI-ANNUAL REPORT
MAY 31, 1994
<PAGE> 17
EDGAR APPENDIX
The back cover of the printed version of this report features the flags
of the United States of America and Vanguard flying from a halyard.
