<PAGE> 1
VANGUARD
OHIO
TAX-FREE FUND
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked by
exceptional growth. Today, Wellington Fund, with assets of nearly $9 billion,
remains one of the largest mutual funds in the nation. And Vanguard, now
managing 85 mutual fund portfolios, is entrusted with assets of $134 billion,
and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still our
watchword, because the three basic financial asset classes have different--and
usually countervailing--investment characteristics. When it began, Wellington
Fund provided a balanced program in a single investment; in 1994, such a
balance is often achieved by a combination of Vanguard money market, bond, and
stock funds.
"Conservatism," too, remains our standard. Over the years, we have tried
to maintain the discipline to eschew offering funds that lack sound financial
principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But the
investment principles to which we have adhered since Wellington Fund began in
1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(please turn to inside back cover)
VANGUARD OHIO TAX-FREE FUND OFFERS TWO PORTFOLIOS THAT SEEK TO PROVIDE A HIGH
LEVEL OF INCOME THAT IS EXEMPT FROM FEDERAL AS WELL AS OHIO STATE PERSONAL
INCOME TAXES. THE INSURED LONG-TERM PORTFOLIO INVESTS PRIMARILY IN INSURED
LONG-TERM MUNICIPAL BONDS. THE MONEY MARKET PORTFOLIO SEEKS TO MAINTAIN A
CONSTANT NET ASSET VALUE OF $1.00 PER SHARE ALONG WITH REASONABLE CURRENT
INCOME.
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CHAIRMAN'S LETTER
DEAR SHAREHOLDER:
The 1994 fiscal year for Vanguard State Tax-Free Fund, which ended on November
30, 1994, was the most difficult year for bonds since the Fund's inception some
eight years ago, in April 1986. A persistent rise in long-term interest rates
during the twelve-month period sharply reduced the prices of long-term
tax-exempt bonds, and the net asset values of our Insured Long-Term Portfolios
declined accordingly. Rates also increased in the short-term arena, to the
substantial benefit of our Money Market Portfolios, which saw sharply higher
income yields during the year.
In each of our Money Market Portfolios and our Insured Long-Term
Portfolios, our returns exceeded the results of competitive funds with similar
objectives. The detailed fiscal year results for each of our State Tax-Free
Portfolios, including per share net asset values, dividends and capital gains
distributions for the year, as well as current yields, are presented in a table
at the conclusion of this letter.
Over the past twelve months, the STATE MONEY MARKET PORTFOLIOS provided
total returns in the area of +2.6%. As expected, net asset values remained at
$1.00 per share. Yields at the end of the fiscal year were generally about 50%
higher than they were at the beginning of the year, as shown in the following
table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Total Return Seven-Day Annualized Yield
------------------ ----------------------------------------------------
Money Market 12 Months Ended Nov. 30, Nov. 30,
Portfolio Nov. 30, 1994 1993 1994 Increase
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA +2.6% 2.32% 3.44% +1.12%
PENNSYLVANIA +2.6 2.25 3.51 +1.26
NEW JERSEY +2.5 2.23 3.34 +1.11
OHIO +2.6 2.36 3.47 +1.11
- ---------------------------------------------------------------------------------------------------------
</TABLE>
These yields, of course, reflect income that is entirely exempt both from
Federal income taxes and from state and local taxes in the respective states. I
would reemphasize that in each case our yields exceed those available on
comparable state money market portfolios as a group. Indeed, our yield
advantage has persisted with remarkable regularity, year in and year out, such
that the longer-term returns of our Money Market Portfolios have nicely
exceeded the returns of their peer groups. Specifically, the Ohio Money Market
Portfolio has earned an average annual total return of +3.4% since its
inception in June 1990, compared to +3.2% for the average Ohio money market
fund.
The STATE INSURED LONG-TERM PORTFOLIOS suffered through a challenging
year of rising rates, resulting in negative total returns (capital change plus
income) ranging from -5.4% to -6.4%. The good news is that current yields are
considerably more generous than they were one year ago, having risen by an
average of 1.5 percentage points (150 basis points).
In contrast to a year ago, when declining interest rates resulted in a
solid positive capital contribution (in the area of 6%) to our Insured
Long-Term Portfolios' total returns, this year the contribution from capital
return has been decidedly negative. The table on the following page summarizes
the components of return for each of our State Insured Long-Term Portfolios
over the past twelve months. If there is a better example of the "two way
street" of interest rate sensitivity, I am not sure that I have seen it.
(continued)
[FIGURE 1]
1
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[FIGURE 2]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended November 30, 1994
- -----------------------------------------------------------------
Since
1 Year Inception*
- -----------------------------------------------------------------
<S> <C> <C>
VANGUARD OH LONG-TERM PORTFOLIO -6.29% +6.80%
AVERAGE OH MUNICIPAL FUND -6.51 +5.86
LEHMAN MUNICIPAL BOND INDEX -5.23 +6.62
- -----------------------------------------------------------------
</TABLE>
* Inception, June 18, 1990. Performance begins on June 30, 1990, to show
competitive data.
Note: Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Investment Returns
-----------------------------------------
Twelve Months Ended
November 30, 1994
Insured Long-Term -----------------------------------------
Portfolio Income Capital Total
- ----------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA 5.1% -11.0% -5.9%
NEW YORK 5.1 -11.5 -6.4
PENNSYLVANIA 5.3 -10.7 -5.4
NEW JERSEY 5.1 -11.2 -6.1
OHIO 4.9 -11.2 -6.3
FLORIDA 4.9 -11.0 -6.1
- ----------------------------------------------------------------
</TABLE>
Note: The California Insured Intermediate-Term Portfolio began operations on
March 4, 1994. The Portfolio's returns since inception were: Income +3.4%;
Capital -3.6%; Total -0.2%.
In last year's letter, speaking about the remarkable capital returns that had
redounded to long-term bond investors over the prior two years, I cautioned
that "capital returns of the magnitude shown simply cannot be taken for
granted," adding that "should rates reverse direction and move higher, 'capital
reward' will inevitably translate to 'capital penalty' for each of our six
Insured Long-Term Portfolios." That capital penalty has surely come to pass.
Despite a difficult 1994, the long-term returns of each of our Insured
Long-Term Portfolios remain exemplary, particularly when considered in the
context of what we would regard as our two most appropriate benchmarks: the
unmanaged Lehman Municipal Bond Index and the average competitive fund in each
respective state category. The chart above shows the cumulative returns earned
by the Ohio Insured Long-Term Portfolio since its inception in June 1990,
compared with each of these benchmarks.
You can see in the chart that the Portfolio achieved a nice margin
over the average Ohio municipal fund and the unmanaged Lehman Municipal Bond
Index. This Index, I would remind you, represents a challenging hurdle for all
state tax-free funds, existing, as it does, outside of the "real world" of
operating expenses and transaction costs. Given that transaction costs in the
bond market are normally quite substantial, our ability to eke out a positive
annual performance margin is exceptional.
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[FIGURE 3]
THE FISCAL YEAR IN REVIEW
The declining interest rate environment that had persisted with striking
consistency since October 1987 came to an end in mid-October 1993. By November
30, 1993, the yield on the long-term U.S. Treasury bond had fallen to 6.3%; by
the end of the Fund's fiscal year on November 30, 1994, the long Treasury yield
had jumped back to the 8.0% level. In all, the prices of long-term U.S.
Treasury bonds fell nearly -20% over the fiscal period. In the short-term
arena, the yield on the U.S. Treasury bill rose from 3.2% to 5.8% over the same
period. Because of the bill's short maturity, its price remained virtually flat
during the entire period.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little evidence of it. The CPI has risen just 2.7% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve has
acted to "tighten" the money supply in order to slow economic growth and rein
in potential future inflation. Fully six rate increases--in February, March,
April, May, August, and again in November--combined to raise the federal funds
rate (at which banks borrow from one another) from 3.00% to 5.50%. Still, the
specter of inflation remains, and further rate increases may well lie in
prospect.
Yields on long-term municipal bonds followed the lead of U.S. Treasury
bonds, although the prices of long municipals provided slightly better
resistance than their taxable cousins to the overall decline in the bond
market. This resistance was based largely on the fact that tax-exempt bonds
began the fiscal year with yields that were extremely attractive relative to
taxable bonds. Indeed, as I mentioned a year ago in our Annual Report for
fiscal 1993, "relative values in tax-exempt bonds are as great on a sustained
basis as they have been for two decades." The result was that municipal bond
prices pretty much held their own through January, declined slightly less than
long Treasuries through the end of August, only to fall more sharply in the
final months of the Fund's fiscal year. On balance, for the full period, the
yield on high-grade, 30-year tax-exempt bonds rose from 5.5% to 6.9%,
reflected in a price decline of about -18%.
The chart to the left shows the changing pattern of long-term and
short-term tax-exempt yields during our past five fiscal years. It provides
some perspective on the recent increase in yields, which, on the long-term
side, have merely returned to their level in mid-1991, about the same as the
yield level at the beginning of 1990. The 3.8% yield on short-term tax-exempt
notes is now approximately at the level reached in late 1991, but is well below
the 5.8% yield that prevailed when 1990 began.
The interplay of short-term and long-term rates has resulted in
dramatic changes over time in the yield "spread" (the difference between the
two yields, as shown in the lower chart). At the start of the period, the
spread amounted to only 110 "basis points" (1.1%) with 30-year municipal bonds
yielding 7.0% and 90-day notes yielding 5.9%. By early 1992 the
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spread had risen to nearly 400 basis points, and investors who decided to
choose short-term notes over long-term bonds had to relinquish nearly
two-thirds of their yield. Today, the spread has narrowed to about 300 basis
points, but fixed-income investors who are willing to extend the maturity of
their bond holdings still earn a solid premium in return for the additional
price volatility that they incur.
TAX-EXEMPT VERSUS TAXABLE YIELDS
One of the (too often) unsung advantages of tax-exempt income is the sharp
increase in spendable income compared to the income that would be garnered,
after taxes, on a taxable bond. In the lower rate environment of a year ago, as
I mentioned earlier in this letter, this advantage--for investors in the
highest marginal Federal tax bracket (now 39.6%)--was well above historical
norms, with tax-exempt securities providing net spendable income 45% higher
than that available on taxable U.S. Treasury bonds, and 26% higher than that
available on U.S. Treasury bills.
One year later, this "spread" remains virtually unchanged on the
long-term side (a +44% premium) but has been more than halved on the short-term
side (a +9% premium). This table presents a comparison of the income earned on
tax-exempt and taxable securities as of November 30, 1994, assuming a $100,000
investment.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Illustration of Income on
Hypothetical $100,000 Investment
--------------------------------
Long-Term Short-Term
- --------------------------------------------------------------
<S> <C> <C>
TAXABLE GROSS INCOME $ 8,000 $ 5,800
LESS TAXES (39.6%) (3,200) (2,300)
-------- --------
NET AFTER-TAX INCOME 4,800 3,500
- --------------------------------------------------------------
TAX-EXEMPT INCOME $ 6,900 $ 3,800
- --------------------------------------------------------------
INCREASE IN AFTER-TAX INCOME $ 2,100 $ 300
- --------------------------------------------------------------
</TABLE>
Table assumes current yields (as of November 30, 1994) of 8.0% for U.S.
Treasury bonds, 5.8% for U.S. Treasury bills, 6.9% for long-term municipals,
and 3.8% for short-term municipals. The illustration is not intended to
represent future results.
The table provides a clear illustration of the yield improvement available
today to an investor in the top tax bracket. Of course, the comparison is
hardly perfect, since the "full faith and credit" of the U.S. Treasury remains
peerless, while municipal bonds engender some degree of risk. Perhaps nothing
could have made this risk clearer than the recent debacle in Orange County,
California, in which an investment pool managed by the County suffered huge
losses resulting from its leveraged strategy and derivative securities
holdings. This event serves as an important reminder that "state-specific"
portfolios engender an additional level of risk due to their highly
concentrated investments in particular economic regions.
The Orange County bankruptcy reinforces the substantial value of
private portfolio insurance, which is provided--by high-quality insurance
companies--for virtually all of the bonds held in our Insured Portfolios. This
insurance, in effect, guarantees the full payment of annual income and, at
maturity, principal for the municipal bonds that we hold. (It does not, of
course, protect against price volatility.) The result is that each of our
Insured Long-Term Portfolios carries an implied average quality rating of
Aaa--the highest rating accorded by Moody's Investor Services. This insurance
provides credit quality enhancement that virtually eliminates the extra risk
that would otherwise be engendered by the concentration of investments that is
inevitably part and parcel of investing in single-state municipal bond funds.
We believe such protection is critical.
Portfolio insurance is generally not available for money market
portfolios, although the same state-specific risks exist. In the absence of
portfolio insurance, our professional money managers must be even more diligent
in their scrutiny of the credit quality of our portfolio holdings. Their
efforts here include purchasing as many high-quality and "credit-enhanced"
securities as they can. The enhancements for these securities consist of
irrevocable letters of credit from high-quality banks guaranteeing each
issuer's timely payments of principal and interest. This credit support, in
conjunction with our diligent credit analysis, has earned each of the holdings
in our Money Market Portfolios Moody's highest quality rating (or the
equivalent) for shorter-term instruments. As far as we know, our Portfolios are
unsurpassed with respect to credit quality by any competitor.
On this point, I would stress that no state money market portfolio is
exempt from credit and
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<PAGE> 7
maturity risk. That is to say, there is no principal guarantee such as that
provided through bank savings accounts and certificates of deposit insured by
the Federal Deposit Insurance Corporation. However, we believe that the $1.00
net asset value will be preserved by state money market funds that maintain
diligent credit analysis, secure letters of credit to the degree possible, and
maintain their average portfolio maturities within the statutory maximum of 90
days.
LOOKING AHEAD
A year ago in my 1993 letter to shareholders, I cautioned that "with rates
having come down so far and so fast, there is always the risk of a sharp
rebound." That risk "came home to roost" during fiscal 1994. However, I believe
that during fiscal 1995 the probabilities now favor greater stability in
long-term tax-exempt rates, and somewhat higher short-term rates. While there
are some recent signals of higher inflation in the economy, it would not be
unusual if the financial markets' expectations are already, at least in part,
manifested in higher yields.
Whatever the future course of interest rates, I urge you to consider
the risk-reward pattern of your investment in the Vanguard State Tax-Free Fund
in terms of your own needs and circumstances. In our Insured Long-Term
Portfolios, that means balancing the need for income stability with a
commensurate level of principal volatility. Our Money Market Portfolios seek to
maintain a $1.00 per share net asset value, but this capital stability comes at
the expense of substantial income volatility.
In the final analysis, the best course of action is almost always to
"stay the course" with the long-term objectives that you have established. We,
too, intend to stay the course with the consistent objectives and policies that
we have established for our Portfolios. In doing so, we are confident that the
Vanguard State Tax-Free Portfolios will continue to provide returns that
generally exceed those of their respective competitors.
In a very real sense, this is no idle boast, since our durable cost
advantage gives us a "leg up" in performance before the year has even begun.
Indeed, while the average competitive state tax-free fund charges annual fees
at the rate of 0.78% of average net assets, the expense ratio for the Vanguard
State Tax-Free Portfolios, at 0.20%, is only about one-quarter of this amount.
In the case of a municipal money market portfolio earning a current gross yield
of, say, 3.8%, the expenses for the average state tax-free fund would consume
about 20% of their income; Vanguard's expenses, on the other hand, would
consume but 5%. This remarkable income advantage--available with no sacrifice
whatsoever in credit quality-- is there for the taking.
I look forward to writing to you again six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -------------------------
John C. Bogle
Chairman of the Board December 20, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
Total Per Share
Net Assets ---------------------- Twelve Months
(millions) Average Average Nov. 30, Nov. 30, ------------------------ Current
Portfolio Nov. 30, 1994 Maturity Quality* 1993 1994 Dividends Total Return Yield**
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA . . . . . . . . . $1,159 51 DAYS MIG 1 $ 1.00 $ 1.00 $ .026 + 2.6% 3.44%
PENNSYLVANIA . . . . . . . . 1,105 45 DAYS MIG 1 1.00 1.00 .025 + 2.6 3.51
NEW JERSEY . . . . . . . . . 792 48 DAYS MIG 1 1.00 1.00 .025 + 2.5 3.34
OHIO . . . . . . . . . . . . 147 50 DAYS MIG 1 1.00 1.00 .026 + 2.6 3.47
- ----------------------------------------------------------------------------------------------------------------------------------
INSURED LONG-TERM
CALIFORNIA . . . . . . . . . $ 834 18.7 YEARS Aaa $ 11.30 $ 9.92 $ .756+ - 5.9% 6.49%
CALIFORNIA INTERMEDIATE-
TERM . . . . . . . . . . . 100 8.2 YEARS Aaa -- 9.64 .346++ - 0.2++ 5.80
NEW YORK . . . . . . . . . . 695 16.1 YEARS Aaa 10.97 9.70 .600+ - 6.4 6.32
PENNSYLVANIA . . . . . . . . 1,299 18.4 YEARS Aaa 11.36 10.07 .704+ - 5.4 6.41
NEW JERSEY . . . . . . . . . 645 17.2 YEARS Aaa 11.77 10.40 .685+ - 6.1 6.28
OHIO . . . . . . . . . . . . 149 17.6 YEARS Aaa 11.61 10.28 .631+ - 6.3 6.31
FLORIDA . . . . . . . . . . . 284 18.5 YEARS Aaa 10.86 9.61 .620+ - 6.1 6.31
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
+ Include capital gains distributions of $.152 for California, $.012 for New
York, $.079 for Pennsylvania, $.063 for New Jersey, and $.032 for Ohio,
and $.070 for Florida.
++ Since inception, March 4, 1994.
Note: The shares of each of the Vanguard "single state" Portfolios are
available for purchase solely by residents of the designated states.
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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 SEPTEMBER 30, 1994) 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 LONG-TERM 4/7/86 -3.33% +7.74% +7.44% +6.55% +0.89%
CALIFORNIA INSURED INTERMEDIATE-TERM 3/4/94 -- -- +2.23 +2.63 -0.40
CALIFORNIA MONEY MARKET 6/1/87 +2.46 +3.69 +4.22 +4.22 0.00
NEW YORK INSURED TAX-FREE 4/7/86 -3.25 +8.04 +6.96 +6.54 +0.42
PENNSYLVANIA INSURED LONG-TERM 4/7/86 -2.23 +8.36 +7.81 +6.77 +1.04
PENNSYLVANIA MONEY MARKET 6/13/88 +2.44 +3.77 +4.25 +4.25 0.00
NEW JERSEY INSURED LONG-TERM 2/3/88 -3.30 +8.10 +8.22 +6.56 +1.66
NEW JERSEY MONEY MARKET 2/3/88 +2.36 +3.73 +4.23 +4.23 0.00
OHIO INSURED LONG-TERM 6/18/90 -3.32 -- +8.31 +6.05 +2.26
OHIO MONEY MARKET 6/18/90 +2.44 -- +3.43 +3.43 0.00
FLORIDA INSURED TAX-FREE 9/1/92 -2.98 -- +5.99 +5.25 +0.74
</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 THE MONEY MARKET
PORTFOLIO OF VANGUARD OHIO TAX-FREE FUND, IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
7
<PAGE> 10
REPORT FROM THE INVESTMENT ADVISER
STATE INSURED LONG-TERM PORTFOLIOS
LOOK TO THE LONG TERM
It has been a volatile fiscal year for fixed-income investors. The economy
continued down the path of robust expansion, raising fears of a pick-up in
inflation and resulting in a broadbased decline in bond prices. For example,
the Bond Buyer 40 Municipal Bond Index lost -18% of its principal value over
the period as its yield rose from 5.7% to 7.2%.
Considering this hostile economic environment, the State Insured
Long-Term Portfolios performed somewhat better than one might expect. On a
total return basis, each Portfolio performed competitively relative to similar
long-term bond funds. It is particularly important in difficult markets to
remain focused on long-term objectives. While share price volatility is far
easier to endure when prices rise than when they fall, the long-term reward of
a period of falling prices is ultimately a higher and more durable level of
tax-exempt income.
LIQUIDITY "CRISIS"
Municipal bonds fell sharply in price during the spring, leveled off briefly
during the early summer, and then resumed falling sharply after August.
Shareholder redemptions created periods of distressed municipal bond fund
selling; for many portfolios, maintaining liquidity was a key factor in
weathering the downturn. Our Portfolios carry a high percentage of cash
reserves (8%-10%) to meet shareholder transactions, a policy which proved
especially helpful during the recent price declines. At no time were the State
Insured Long-Term Portfolios forced to sell securities at "distressed" levels.
On the plus side, the higher yields in the marketplace have greatly
reduced the issuance of new municipal bonds. The total issuance of tax-exempt
securities has declined 37% during the fiscal year. Rising yields increased
municipal issuers' cost of funds, eliminating the economic rationale for
refundings that bloated supply last year. Other factors held equal, the drop in
new supply enhances the value of existing tax-exempt securities, particularly
in higher tax states where investor demand is greater.
PURSUING THE DIVIDEND
As we mentioned in our last Semi-Annual Report, a reduction in average maturity
prior to the recent bear market enhanced our relative fund performance. The
State Insured Long-Term Portfolios focused on the slightly lower-yielding but
less volatile securities maturing in the 15- to 20-year range. This strategy
provided a moderate amount of insulation as bond prices fell. Over the next six
months, the Portfolios will pursue 25- to 30-year securities, effecting a
gradual extension of average maturity to a more normal historical range. The
commensurate benefit will be an anticipated increase in dividend, as current
yields on longer securities have reached substantially higher levels.
Looking forward at year end, various market sources estimate that
anywhere from $45 to $60 billion in proceeds will be received by tax-exempt
participants by January 1, 1995. Barring a significant increase in new
issuance, this bodes well for adequate liquidity and should continue to provide
more attractive returns for municipal bonds than their taxable brethren.
STATE MONEY MARKET PORTFOLIOS
WEATHERING THE STORM...
The fiscal year can be characterized as one of protracted economic strength. In
an attempt to curb inflation and target a moderate economic growth rate, the
Federal Reserve Board tightened money supply. During 1994, the Federal Reserve
was forced to raise the Federal funds rate (the rate banks charge each other
for overnight loans) six times, for a total increase of 2.50%. The most recent
change occurred on November 15, when the Fed increased rates 0.75%, the largest
single move by the Fed since 1981. The markets reacted accordingly, with yields
on 1-year U.S. Treasury bills rising 3.3 percentage points over the fiscal
year, to 6.9%, and yields on comparable 1-year municipal notes rising 2.1
percentage points, to 4.5%.
The relative underperformance of municipal versus taxable yields can
be attributed to the dwindling supply of short-term municipal securities. The
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<PAGE> 11
reduction was a result of municipalities extending issuance beyond one year,
and economic strength reducing the amount of borrowing necessary to finance
their cash needs. This filtered down to the fund level, as yields on state
tax-exempt money market funds increased a mere 1.0% over the fiscal year, while
taxable money fund yields increased 2.0%. For investors in lower tax brackets,
this differential meant that taxable money market funds became a viable
alternative.
The Vanguard State Tax-Free Money Market Portfolios were prepared for
the rise in interest rates early in the year, as we positioned average weighted
maturities in a bearish range of 45-60 days. This strategy enabled us to take
advantage of rising rates while further assuring our $1.00 net asset value. Our
low expense ratios also helped us to outperform our competitors on a net yield
basis, despite the fact that many of them continue to inflate their gross
yields through quality differentials and securities subject to the alternative
minimum tax (AMT).
HISTORICAL EVENT???
Much has been written this past year about the risks of "derivative securities"
in taxable money market funds. Most notably, Community Banker's U.S. Government
Money Market Fund went down in history as being the first money fund to "break
the buck." The fund sacrificed its net asset value in exchange for higher
returns by investing in certain types of exotic and inappropriate derivative
securities. While it is true that some derivatives can be dangerous when used
inappropriately, not all derivatives are "evil." In fact, certain derivatives
can be used safely and may even improve the total quality of one's portfolio.
The definition of a derivative (a security whose return is derived
from another security) is broad, and encompasses instruments that are "exotic"
as well as "plain vanilla." The Vanguard State Tax-Free Money Market Portfolios
do invest in securities which fall under the derivative definitional
"umbrella," but those securities do not even remotely resemble the exotic
instruments used in the now defunct Community Banker's Fund. The derivative
structures held in our Portfolios are floating rate or "put" securities, with
minimum ratings of AA or better. In addition, all of our derivatives have
coupons that reset frequently to ensure that their market prices remain close
to par (100), and they contain the option to tender or sell them at par (100).
These securities, more commonly referred to as tender option bonds, are
designed to imitate the same characteristics of non-derivative variable rate
securities. The indexes used to determine the coupon reset are the same as
those used to determine non-derivative variable rate securities.
In contrast, the derivatives responsible for the recent taxable money
fund problems utilized indexes not directly related to short-term money market
rates. This is a dangerous game to play, particularly in the rising interest
rate environment experienced in 1994. The U.S. Securities and Exchange
Commission (SEC) has clearly outlined the types of derivative securities that
are inappropriate for money market funds. We affirm to our investors that at
no time has any Vanguard Portfolio invested in securities deemed inappropriate
by the SEC.
It is unfortunate that all derivatives are being branded as
speculative, when indeed many are used to enhance the overall quality of a
portfolio. Unlike Vanguard, some money market funds may engage in investments
that fail to adhere to conservative guidelines. Consequently, investors should
remember that there is no such thing as a "free lunch." When money market funds
are offering yields too good to be true, they probably are too good to be true,
unless a fund has the advantage of low expenses. We have this advantage. Our
extremely low expense ratios permit us to take and maintain the "high ground"
with respect to both liquidity and quality.
Sincerely,
Ian A. MacKinnon Jerome J. Jacobs
Senior Vice President Vice President
Pamela W. Tynan David E. Hamlin
Vice President Assistant Vice President
Reid O. Smith Danine A. Mueller
Assistant Vice President Portfolio Manager
December 12, 1994
9
<PAGE> 12
FINANCIAL STATEMENTS
November 30, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
Amount Value
INSURED LONG-TERM PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
MUNICIPAL BONDS (96.9%)
- --------------------------------------------------------------------------------
<S> <C> <C>
ISSUER INSURED (85.4%)
Akron Bath & Copley Joint Township
(Children's Hosp. Medical Center)
5.50%, 1/1/08 (2) $ 1,000 $ 884
Allen County GO
5.30%, 12/1/15 (2) 1,250 1,031
Bedford Heights GO
5.65%, 12/1/14 (2) 500 433
Big Walnut School Dist. GO
5.70%, 6/1/14 (2) 1,000 876
Butler County Sewer System Rev.
6.25%, 12/1/12 (2) 2,925 2,771
City of Canton GO
5.375%, 12/1/07 (2) 1,000 885
Chillicothe GO
6.05%, 12/1/12 (2) 675 627
Clermont County
(Mercy Health System)
5.40%, 9/1/05 (2) 2,500 2,262
5.50%, 9/1/06 (2) 2,500 2,258
Cleveland Airport System Rev.
7.25%, 1/1/20 (1) 750 761
Cleveland GO
5.30%, 9/1/08 (2) 4,500 3,892
5.375%, 9/1/09 (2) 2,000 1,719
5.375%, 9/1/10 (2) 1,000 848
5.375%, 9/1/12 (2) 1,000 844
Cleveland Public Power System Rev.
7.00%, 11/15/24 (1) 2,500 2,508
Cleveland School Dist. GO
0.00%, 12/1/05 (3) 700 348
0.00%, 12/1/06 (3) 700 322
0.00%, 12/1/07 (3) 500 212
0.00%, 12/1/08 (3) 400 156
5.875%, 12/1/11 (3) 1,500 1,351
Cleveland Water Works Rev.
5.50%, 1/1/13 (1) 2,125 1,814
5.50%, 1/1/21 (1) 1,500 1,233
6.25%, 1/1/15 (2) 4,500 4,259
Columbus City School Dist. GO
7.00%, 12/1/00 (3) (Prere.) 1,750 1,879
Cuyahoga County Hosp. Rev.
(Metro Health System)
6.00%, 2/15/19 (1) 1,000 885
(Univ. Hosp. Health System)
6.875%, 1/15/19 (6) 1,825 1,798
Dayton Water System Rev.
6.75%, 12/1/10 (1) 1,000 1,003
Delaware County GO
5.20%, 12/1/16 (3) 1,500 1,211
Delaware Ohio Sewer System Rev.
5.95%, 11/15/12 (2) 1,500 1,366
Dublin School Dist. GO
0.00%, 12/1/05 (3) 1,220 606
0.00%, 12/1/06 (3) 1,220 561
Fairfield County Hosp. Rev.
5.375%, 6/15/15 (1) 3,000 2,470
Franklin County Convention
Center Rev.
0.00%, 12/1/07 (1) 4,355 1,846
7.00%, 12/1/00 (1)(Prere.) 675 727
Franklin County Hosp. Facilities Rev.
(Riverside United Methodist)
7.25%, 5/15/20 (1) 750 761
Hamilton County
(Children's Hosp.)
5.20%, 5/15/09 (1) 2,000 1,681
Hamilton County Sewer System Rev.
5.25%, 12/1/16 (3) 2,000 1,618
5.40%, 12/1/08 (3) 5,700 4,949
5.45%, 12/1/09 (3) 3,250 2,808
Hamilton Gas System Rev.
5.15%, 10/15/13 (1) 2,750 2,261
Hamilton Water System Rev.
6.30%, 10/15/21 (1) 2,000 1,877
Hilliard County School Dist. GO
6.55%, 12/1/05 (3) 500 511
Kettering City GO
5.30%, 12/1/14 (3) 1,350 1,124
Lima Sewer Rev.
6.30%, 12/1/12 (2) 5,000 4,758
Lima Water Rev.
6.30%, 12/1/12 (2) 3,400 3,235
Lisbon School Dist.
6.25%, 12/1/17 (2) 1,000 935
Lucas County GO
6.95%, 12/1/11 (1) 1,800 1,831
Mahoning County Hosp. Rev.
Improvement Project (YHA Inc.)
6.50%, 10/15/14 (1) 2,500 2,435
Marietta City School Dist.
5.75%, 12/1/07 (2) 1,500 1,392
Marysville GO
5.55%, 12/1/13 (2) 1,400 1,211
Marysville Water System Rev.
7.05%, 12/1/01 (1)(Prere.) 1,250 1,338
Medina City School Dist. GO
6.20%, 12/1/18 (3) 2,100 1,947
Montgomery County Rev.
(Sisters of Charity)
6.625%, 5/15/21 (1) 1,500 1,464
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Montgomery County Sewer
System Rev.
5.60%, 9/1/11 (3) $ 1,000 $ 878
Mount Vernon Sewer System Rev.
6.00%, 12/1/12 (2) 750 693
New Philadelphia City School Dist.
6.25%, 12/1/17 (2) 2,300 2,144
North Canton GO
5.90%, 12/1/14 (2) 2,000 1,815
Northeast Ohio Sewer Dist. Rev.
6.50%, 11/15/16 (2) 2,500 2,423
Ohio Air Quality Development
(Ohio Edison)
7.10%, 6/1/18 (3) 1,000 1,008
PCR 7.45%, 3/1/16 (3) 500 516
Ohio Building Auth.
(Transportation Facilities)
7.00%, 9/1/07 (1) 850 878
Ohio Higher Education Facilities Rev.
(Univ. of Dayton)
5.80%, 12/1/14 (3) 1,000 888
6.60%, 12/1/17 (3) 1,000 975
6.75%, 12/1/15 (3) 1,000 993
Ohio Univ.
5.00%, 12/1/13 (3) 2,000 1,615
Ohio Water Development Auth.
5.50%, 12/1/11 (2) 1,000 871
Omega Municipal Electric
5.375%, 2/15/13 (2) 2,000 1,690
Ottowa GO
7.00%, 9/1/11 (2) 1,500 1,531
Pickerington GO
5.80%, 12/1/09 (3) 500 451
Pickerington Local School Dist.
GO 3.20%, 12/1/94 (2) 780 780
7.00%, 12/1/00 (2) (Prere.) 1,500 1,615
Revere School Dist. GO
6.00%, 12/1/16 (2) 3,850 3,517
Reynoldsburg School Dist. GO
6.55%, 12/1/17 (3) 1,600 1,557
Springfield GO
6.875%, 9/1/10 (2) 1,000 1,016
Summit County GO
6.90%, 8/1/12 (2) 2,500 2,537
Trumbull County Rev.
(Trumbull Memorial Hosp.)
6.25%, 11/15/12 (3) 2,000 1,897
Trumbull County GO
5.30%, 12/1/14 (2) 1,500 1,243
Univ. of Toledo
5.75%, 12/1/12 (3) 1,000 891
Wood County Justice Center GO
5.95%, 12/1/07 (2) 1,750 1,674
Woodridge School Dist. GO
6.00%, 12/1/19 (2) 1,000 907
6.80%, 12/1/14 (2) 2,000 2,022
Wooster City School Dist. GO
6.50%, 12/1/17 (2) 2,500 2,428
OUTSIDE OHIO:
Puerto Rico Public Building
Auth. Rev.
0.00%, 7/1/01 (3) 850 576
--------
GROUP TOTAL 126,811
--------
- --------------------------------------------------------------------------------
SECONDARY MARKET INSURED (1.3%)
Franklin (Mount Carmel Health)
6.75%, 6/1/19 (1) 2,000 1,969
--------
- --------------------------------------------------------------------------------
NON-INSURED (10.2%)
Columbus Electric VRDO
3.40%, 12/1/94 (LOC) 100 100
Columbus Sewer VRDO
3.60%, 12/1/94 900 900
Cuyahoga County Hosp.
Improvement VRDO
(St. Luke's Hosp.)
3.65%, 12/1/94 (LOC) 600 600
Franklin County Solid Waste
4.10%, 8/25/95 2,000 1,998
Hamilton County BAN
3.25%, 4/14/95 2,000 1,991
Independence Ohio BAN
4.25%, 9/8/95 2,100 2,099
Ohio GO
7.625%, 8/1/10 3,510 3,872
Ohio Higher Education
Facilities Auth. Rev.
(Case Western Reserve Univ.)
6.50%, 10/1/20 250 237
(Oberlin College)
5.375%, 10/1/15 1,500 1,239
Student Loan Corp.
Cincinnati, OH VRDO
3.45%, 1/1/95 (LOC) 1,100 1,100
Univ. of Cincinnati BAN
4.75%, 8/30/95 1,000 1,004
--------
GROUP TOTAL 15,140
--------
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $153,590) 143,920
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
(000)+
- --------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (3.1%)
- --------------------------------------------------------------------------------
Other Assets--Note B $ 5,201
Liabilities (601)
--------
4,600
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 14,442,563 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $148,520
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.28
================================================================================
</TABLE>
+ See Note A to Financial Statements.
For explanations of abbreviations and other references, see page 13.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT NOVEMBER 30, 1994, NET ASSETS
CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
Paid in Capital $158,295 $10.96
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Gains--Note C 180 .01
Unrealized Depreciation
of Investments--Note D (9,955) (.69)
- --------------------------------------------------------------------------------
NET ASSETS $148,520 $10.28
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
MUNICIPAL BONDS (98.5%)
- --------------------------------------------------------------------------------
<S> <C> <C>
Akron Sewer System VRDO
3.75%, 12/7/94 (LOC) $ 3,000 $ 3,000
Beechwood BAN
4.50%, 1/20/95 2,000 2,003
Butler County Sewer BAN
4.50%, 5/29/95 1,700 1,705
Cincinnati GO
6.70%, 12/1/94 400 400
Clark County BAN
4.37%, 10/5/95 1,800 1,802
City of Cleveland GO BAN
3.66%, 12/1/94 2,000 2,000
Cleveland--Cuyahoga County Port
Auth. VRDO
(Rock & Roll Hall of Fame)
3.75%, 12/7/94 (LOC) 5,000 5,000
Cleveland Heights BAN
4.15%, 9/1/95 2,000 2,002
Cleveland School Dist. TRAN
4.50%, 12/30/94 (LOC) 5,000 5,005
Cleveland Waterworks
Improvement TOB VRDO
3.85%, 12/8/94 (1) 7,560 7,560
Columbus Electric VRDO
3.35%, 1/3/95 (LOC) 10,140 10,140
Columbus Sewer Rev. VRDO
3.60%, 12/8/94 7,000 7,000
Cuyahoga County Hosp.
Improvement VRDO
(St. Luke's Hosp.)
3.65%, 12/7/94 (LOC) 15,100 15,100
Franklin County Solid Waste
4.10%, 8/25/95 4,000 4,003
Hamilton County Metropolitan
Sewer TOB VRDO
3.85%, 12/8/94 (3) 2,260 2,260
Lake County BAN
4.15%, 7/27/95 1,000 1,001
Medina County GO BAN
4.75%, 10/12/95 2,220 2,227
Ohio Air Quality Development Auth.
(Cincinnati G&E)
PCR CP 3.65%, 2/1/95 (LOC) 18,700 18,700
(Mead Corp.)
VRDO 3.45%, 12/2/94 (LOC) 4,700 4,700
Ohio Higher Education
Facilities TOB VRDO
3.751%, 12/8/94 (2) 6,000 6,000
Ohio State Univ. VRDO
3.70%, 12/8/94 5,550 5,550
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Ohio Water Development
Auth. VRDO
TOB 3.85%, 12/8/94 (2) $ 5,320 $ 5,320
(Mead Corp.)
3.45%, 12/2/94 (LOC) 6,620 6,620
(Timpken)
3.50%, 12/7/94 (LOC) 5,000 5,000
Scioto County VRDO
(Norfolk Southern Corp.)
3.50%, 12/7/94 7,000 7,000
Student Loan Corp.
Cincinnati, OH VRDO
3.45%, 12/7/94 (LOC) 5,000 5,000
Univ. of Cincinnati BAN
4.00%, 3/23/95 2,300 2,305
GO 4.75%, 8/30/95 4,000 4,020
OUTSIDE OHIO:
Puerto Rico Govt. Development
Bank VRDO
3.45%, 12/7/94 (LOC) 2,600 2,600
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $145,023) 145,023
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.5%)
- --------------------------------------------------------------------------------
Other Assets--Note B 2,749
Liabilities (513)
--------
2,236
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 147,263,262 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $147,259
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT NOVEMBER 30, 1994, NET ASSETS
CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
--------- ---------
<S> <C> <C>
Paid in Capital $147,267 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses (8) --
Unrealized Appreciation of
Investments -- --
- --------------------------------------------------------------------------------
NET ASSETS $147,259 $1.00
- --------------------------------------------------------------------------------
</TABLE>
COP=Certificate of Participation
CP=Commercial Paper
GO=General Obligation
PCR=Pollution Control Revenue
RAN=Revenue Anticipation Note
RAW=Revenue Anticipation Warrant
TAN=Tax Anticipation Note
TOB=Tender Option Bond
TRAN=Tax Revenue Anticipation Note
VRDO=Variable Rate Demand Obligation
(Prere.)=Prerefunded
*Put Option Obligation.
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.
13
<PAGE> 16
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INSURED MONEY
LONG-TERM PORTFOLIO MARKET PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
November 30, 1994 November 30, 1994
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,256 $ 3,840
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . 9,256 3,840
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . . . . . . $ 19 $ 15
Management and Administrative . . . . . . . . . . . . . . . . 295 244
Marketing and Distribution . . . . . . . . . . . . . . . . . . 40 354 37 296
----- -----
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . 6 7
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . 16 8
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . 3 5
Trustee's Fees and Expenses . . . . . . . . . . . . . . . . . . . 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . 380 317
- -----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . 8,876 3,523
- -----------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . . . . . . . (783) (5)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . 1,680 --
- -----------------------------------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) . . . . . . . . . . . . . 897 (5)
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . (20,163) --
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . (424) --
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . (20,587) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . $(10,814) $ 3,518
===================================================================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INSURED MONEY
LONG-TERM PORTFOLIO MARKET PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
NOVEMBER 30, November 30, NOVEMBER 30, November 30,
1994 1993 1994 1993
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . $ 8,876 $ 7,319 $ 3,523 $ 2,551
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . 897 (82) (5) (3)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . . . (20,587) 7,265 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . (10,814) 14,502 3,518 2,548
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . (8,876) (7,319) (3,523) (2,551)
Realized Net Gain . . . . . . . . . . . . . . . . . . . (462) (1,350) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . (9,338) (8,669) (3,523) (2,551)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . 35,213 66,822 105,947 106,837
-- In Lieu of Cash Distributions . . . . . . 6,873 6,863 3,286 2,389
-- Exchange . . . . . . . . . . . . . . . . 17,949 22,533 41,136 30,312
Redeemed -- Regular . . . . . . . . . . . . . . . . . (27,595) (17,048) (94,221) (68,436)
-- Exchange . . . . . . . . . . . . . . . . (30,244) (19,131) (40,486) (31,681)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . . . . . . . . 2,196 60,039 15,662 39,421
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . (17,956) 65,872 15,657 39,418
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . 166,476 100,604 131,602 92,184
- -----------------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . . . . . . $ 148,520 $ 166,476 $ 147,259 $ 131,602
=============================================================================================================================
(1)Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . $.599 $.608 $.026 $.023
Realized Net Gain . . . . . . . . . . . . . . . . . . $.032 $.145 -- --
- -----------------------------------------------------------------------------------------------------------------------------
(2)Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . 4,731 7,799 147,083 137,149
Issued in Lieu of Cash Distributions . . . . . . . . 619 601 3,286 2,389
Redeemed . . . . . . . . . . . . . . . . . . . (5,248) (3,149) (134,707) (100,117)
- -----------------------------------------------------------------------------------------------------------------------------
102 5,251 15,662 39,421
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INSURED LONG-TERM PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30, June 18 to
-------------------------------------------- Nov. 30,
For a Share Outstanding Throughout Each Period . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . .599 .608 .630 .650 .295
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . . . . . . . . (1.298) .685 .474 .300 .300
------- ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . . . . . (.699) 1.293 1.104 .950 .595
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . . . . . (.599) (.608) (.630) (.650) (.295)
Disibutions from Realized Capital Gains . . . . . . . . . . . . . . . (.032) (.145) (.004) -- --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . (.631) (.753) (.634) (.650) (.295)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . . . . $10.28 $11.61 $11.07 $10.60 $10.30
===================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2% +12.03% +10.69% +9.50% +6.04%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . . . . . $149 $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 . . . . . . . . . 5.38% 5.29% 5.77% 6.20% 6.55%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . . 16% 10% 27% 20% 2%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
16
<PAGE> 19
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30, June 18 to
-------------------------------------------- Nov. 30,
For a Share Outstanding Throughout Each Period 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 . . . . . . . . . . . . . . . . . . . . . . . . .026 .023 .030 .045 .027
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- -- --
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . . . . . . . .026 .023 .030 .045 .027
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . . . . . (.026) (.023) (.030) (.045) (.027)
Distributions from Realized Capital Gains . . . . . . . . . . . . . . -- -- -- -- --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . (.026) (.023) (.030) (.045) (.027)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
===================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +2.58% +2.37% +3.01% +4.64% +2.59%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . . . . . $147 $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 . . . . . . . . . 2.56% 2.34% 2.95% 4.45% 5.65%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . . N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
17
<PAGE> 20
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 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 Portfolio may purchase futures
contracts instead of municipal bonds when futures contracts are
believed to be priced more attractively than municipal bonds. The
Portfolio 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 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 values
of futures contracts are recorded as unrealized appreciation
(depreciation) until terminated at which time realized gains (losses)
are recognized. Unrealized appreciation (depreciation) related to open
futures contracts is required to be treated as realized gain (loss)
for Federal income tax purposes.
4. DISTRIBUTIONS: Distributions from net investment income are declared
on a daily basis payable on the first business day of the following
month. Annual distributions from realized gains, if any, are recorded
on the ex-dividend date. Capital gain distributions are determined on
a tax basis and may differ from realized capital gains for financial
reporting purposes due to differences in the timing of realization of
gains.
5. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized
gains and losses on the sale of investment securities are those of
specific securities sold. Premiums and original issue discounts are
amortized and accreted, respectively, to interest income over the
lives of the respective securities.
B. The Vanguard Group, Inc. furnishes at cost investment advisory,
corporate management, administrative, marketing and distribution services. The
costs of such services are allocated to the Fund under methods approved by the
Board of Trustees. At November 30, 1994, the Fund had contributed capital of
$46,000 to Vanguard (included in Other Assets),
18
<PAGE> 21
representing .2% of Vanguard's capitalization. The Fund's officers and trustees
are also officers and directors of Vanguard.
C. During the year ended November 30, 1994, the Insured Long-Term
Portfolio made purchases of $29,031,000 and sales of $24,663,000 of investment
securities other than temporary cash investments.
At November 30, 1994, the Insured Long-Term Portfolio had available a capital
loss carryforward of $105,000 to offset future net capital gains through
November 30, 2002.
D. At November 30, 1994, unrealized depreciation of investment securities
of the Insured Long-Term Portfolio for financial reporting and Federal income
tax purposes aggregated $9,670,000, of which $784,000 related to appreciated
securities and $10,454,000 related to depreciated securities.
At November 30, 1994, the aggregate settlement value of the Insured Long-Term
Portfolio's long positions in Municipal Bond Index futures contracts expiring
through December 1994, and the market value of securities deposited as initial
margin for open futures contracts were $7,319,000 and $519,000, respectively.
Net unrealized depreciation on open futures contracts of $285,000 was required
to be treated as realized loss for Federal income tax purposes, and accordingly
was included in the Portfolio's capital loss carryforward.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard Ohio Tax-Free Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Insured Long-Term Portfolio and the Money Market Portfolio (constituting
the Vanguard Ohio Tax-Free Fund, hereafter referred to as the "Fund") at
November 30, 1994, the results of each of their operations, the changes in each
of their net assets and the financial highlights for each of the respective
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities by correspondence with the custodian and brokers and the application
of alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 30, 1994
19
<PAGE> 22
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive
Officer of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great
Atlantic and Pacific Tea Company, Alco Standard Corp.,
Raytheon Company, 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
Corporation, Baker Fentress & Co., The Jeffrey Co.,
and Southern New England Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and
Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich
Company, Reliance Electric Company, and The Standard
Products Company.
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 Company 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.
J. LAWRENCE WILSON, Chairman and Chief Executive
Officer of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt
University and the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The
Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
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.
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
JEREMY G. DUFFIELD VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
20
<PAGE> 23
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of risk)
to prospective investors, and in our description to shareholders of
each Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for its
low costs, which we believe are just as essential a consideration in investing
in mutual funds as risk potential and total return. We call this relationship
between risk, return, and cost the "eternal triangle" of mutual fund investing.
We take special pride in our position as (by far) the lowest-cost provider
of financial services in the world. Under our "no- load" offering structure,
shareholders begin their Vanguard investment program with $1,000 of assets
(not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with sound
and durable goals to investors with long-term time horizons, and doing so at
the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships, and
Vanguard surely is in the first wave of the battle for investment survival. As
we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<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/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
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 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
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
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.
Q960-11/94
<PAGE> 25
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through six.
A photograph of John C. Bogle appears at the lower-right of page one.
A cumulative performance line chart for the period June 30, 1990, to
November 30, 1994 appears at the top of page two.
Two line charts appear at the upper-left of page three--the top chart
depicts the month-end yields of a 30-Year Prime Municipal Bond and a 90-Day
MIG 1 Note for the fiscal years 1990 through 1994, and the bottom chart
indicates the yield spread for the same periods.
A running head featuring a coiled rope appears on page seven.
A running head featuring a map and telescope appears on pages eight
and nine.
A running head featuring a log book and pen appears on pages ten
through nineteen.
A running head featuring a compass appears on page twenty.
At the bottom of the back cover there appears a triangle with the
sides labeled "risk," "cost," and "return."
A seagull in flight is featured at the top of the outside back cover
of the report.
