<PAGE> 1
VANGUARD
OHIO
TAX-FREE FUND
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am de-lighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard Ohio Tax-Free Fund and the other Funds in The
Vanguard Group. Mr. Brennan will continue to serve as President of the Funds,
and I will continue to serve as Chairman of the Board.
[FIGURE 1]
John J. Brennan John C. Bogle
As Chairman of all the Vanguard Funds, I want to tell you that I am
enthusiastic and confident that Jack Brennan is exactly the right person to
succeed me as Chief Executive Officer. To use yet another Vanguard nautical
metaphor, he will be the new captain. He has the qualities of leadership,
integrity, intelligence, and vision that must continue to be Vanguard's
hallmark as we move toward, and then into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in
me in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
VANGUARD 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.
<PAGE> 3
CHAIRMAN'S LETTER
DEAR SHAREHOLDER:
The 1995 fiscal year for Vanguard State Tax-Free Funds, which ended on November
30, presented a sharp contrast to fiscal 1994. During our prior fiscal year,
long-term interest rates rose sharply, engendering a commensurate drop in bond
prices; during our most recent fiscal year, long-term interest rates fell
steadily, driving bond prices upward. In the short-term arena, tax-exempt
interest rates moved lower during the 1995 fiscal year, but the yields on our
State Money Market Portfolios actually edged higher.
The net result of the turnabout in the course of long-term interest
rates was greatly enhanced returns to the shareholders of our Insured Long-Term
Portfolios. Given the relatively low interest rate environment that prevailed
during fiscal 1995 in the tax-exempt money markets, shareholders in our various
State Money Market Portfolios earned modest returns. Nonetheless, our Money
Market Portfolios' returns were comfortably above the returns achieved by their
respective competitive benchmarks. The detailed fiscal year results for each of
our State Tax-Free Portfolios, including net asset values and dividends for the
year, as well as current yields, are presented in a table at the conclusion of
this letter.
Over the past twelve months, the STATE MONEY MARKET PORTFOLIOS
provided returns in the area of +3.7%. As we would expect, all of our
Portfolios' net asset values remained at $1.00 per share throughout the year.
The table below provides an overview of each Portfolio's twelve-month total
return, as well as its yield at the beginning and the end of the fiscal year:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL SEVEN-DAY
RETURN ANNUALIZED YIELD
------------- ------------------------
MONEY MARKET YEAR ENDED NOV. 30, NOV. 30,
PORTFOLIO NOV. 30, 1995 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA +3.7% 3.61% 3.44%
PENNSYLVANIA +3.7 3.64 3.51
NEW JERSEY +3.6 3.57 3.34
OHIO +3.8 3.71 3.47
- --------------------------------------------------------------------------------
</TABLE>
Modest though these yields may be, they accrue to investors without taxation at
either the Federal level or the state and local levels in the respective
states. What's more, the yield of each Portfolio represents a nice enhancement
over the yield available from comparable competitive funds. As a result of this
consistent yield premium, our Portfolios' longer-term returns have exceeded
those of competitive standards. In the case of the Ohio Money Market Portfolio,
shareholders have earned an average annual return of +3.5% since the
Portfolio's inception in June 1990, compared to +3.3% for the average Ohio
money market fund.
The STATE INSURED LONGER-TERM PORTFOLIOS recouped all of last year's
capital losses--and then some--turning in their best overall year of
performance since our first Insured Portfolios began operations in April 1986.
The following table summarizes the fiscal year total returns (capital change
plus income) for all of the Insured Longer-Term Portfolios. To provide some
perspective on just how beneficial the falling interest rates of the past
twelve months have been for holders of longer-term bonds, this table breaks
down our Portfolios' total returns into their income and capital components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INVESTMENT RETURNS
--------------------------------------
YEAR ENDED
NOVEMBER 30, 1995
- --------------------------------------------------------------------------------
INSURED LONGER-TERM
PORTFOLIO INCOME CAPITAL TOTAL
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA
INTERMEDIATE-TERM +5.6% + 8.3% +13.9%
CALIFORNIA LONG-TERM +6.5 +13.6 +20.1
NEW YORK LONG-TERM +6.4 +13.5 +19.9
PENNSYLVANIA LONG-TERM +6.5 +12.0 +18.5
NEW JERSEY LONG-TERM +6.4 +13.3 +19.7
OHIO LONG-TERM +6.4 +13.1 +19.5
FLORIDA LONG-TERM +6.3 +13.8 +20.1
- --------------------------------------------------------------------------------
</TABLE>
The generous positive capital returns exhibited in the table present a dramatic
contrast to the sharply negative capital returns of one year ago. It should go
without saying that, for investors in longer-term bond funds, this kind of
year-to-year principal volatility
1
<PAGE> 4
[FIGURE 2]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended November 30, 1995
- -------------------------------------------------------------------
Since
1 Year 5 Years Inception*
- -------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD OH LONG-TERM PORTFOLIO +19.45% +8.74% +9.15%
AVERAGE OH MUNICIPAL FUND +18.56 +8.13 +8.30
LEHMAN MUNICIPAL BOND INDEX +18.90 +8.72 +8.91
</TABLE>
*Inception, June 18, 1990.
Note: Past performance is not predictive of future performance.
more or less comes with the territory. With that caveat in mind, it would not
be unexpected if the capital reward of fiscal 1995 were to revert to a capital
penalty sooner or later in another fiscal year.
The Portfolios' strong absolute returns of the past year also stack up
pretty well relative to the results of their two most appropriate performance
benchmarks: the unmanaged Lehman Municipal Bond Index and the average
competitive fund in each respective state category. The chart above shows the
cumulative returns earned by the Ohio Insured Long-Term Portfolio since its
inception in June 1990, compared with each of these benchmarks.
You will note that the +9.2% annualized return for the Ohio Insured
Long-Term Portfolio was significantly ahead of the +8.3% annualized return for
the average Ohio municipal fund. Despite our emphasis on high quality and our
reliance on the extra credit safety of insured bonds, our cost advantage
carried the day. Our return also outpaced the +8.9% return for the Lehman
Municipal Bond Index. As you know, the Lehman Index is a tough standard for all
state tax-free funds, given that it exists in a world devoid of fund operating
expenses and transaction costs. While we endeavor to exceed this Index standard
after our expenses, doing so on a consistent basis may prove to be a large
challenge.
THE FISCAL YEAR IN REVIEW
Above all, fiscal 1995 can be viewed as a year of recovery in the bond market.
On balance for the fiscal year, the yield on the long-term U.S. Treasury bond
tumbled from 8.0% to 6.1%, a precipitous drop of 190 basis points, equivalent
to a +26% price increase excluding the generous interest coupon. The yield on
the 90-day U.S. Treasury bill also declined--albeit not nearly as
sharply--beginning the fiscal year at 5.8% and ending at 5.5%.
During this same period, the municipal bond market moved in similar
fashion; however, the decline in long-term municipal bond yields was somewhat
more subdued. On balance for the fiscal year, yields on high-grade municipal
bonds fell from 6.9% to 5.5%, engendering a price increase of +20%.
2
<PAGE> 5
[FIGURE 3]
Yields on top-grade (MIG 1) municipal notes declined from 3.8% to 3.5%.
In my view, the abrupt decline in long-term interest rates over the
past twelve months was related to several contributing factors. Most
importantly, we should not lose sight of the fact that interest rates had risen
virtually without interruption in the months leading up to the commencement of
our 1995 fiscal year, reaching a peak in November 1994. This climb in rates was
engendered largely by investors' fears about a resurgence of inflation. With
the Federal Reserve Board raising the Federal funds rate (the rate at which
banks borrow from one another) an unprecedented seven times in the 13 months
from February 1994 to February 1995, these inflation fears certainly seemed
well-founded.
Although restrictive monetary policy often fails to deliver the
desired result, in this case the Fed's medicine seemed to work as intended.
That is, U.S. economic growth slowed and inflation concerns gradually
dissipated. Reflecting this renewed investor optimism, long-term rates did an
about-face beginning in late January 1995 and began to move steadily lower. By
the time the summer of 1995 began, the Fed felt free to relax its stern
monetary policy and actually reduced the Federal funds rate by 1/4 of 1% to
5 3/4%.*
The chart to the left should place the events of the past two fiscal
years into a somewhat longer run perspective. You will note that the first
three years witnessed a steady downtrend in rates, followed by the abrupt
two-year cycle that I just described. Yet, when all is said and done, yields
on long-term municipal bonds today remain generally below the levels maintained
during fiscal 1991-1992. In other words, despite the "slings and arrows" of the
recent volatile period, the prices of municipal bonds are higher today than
during the early years of the period.
It is interesting to trace the relative yields of long and short
municipals over the past five years. You can see in the lower chart that the
difference between the two yields--the "spread," if you will--has come
virtually full circle over the past five years. It stood at 135 basis points
(1.35%) at the beginning of fiscal 1991, climbed to nearly 400 basis points by
the end of fiscal 1992, and has narrowed considerably since then, moving back
to roughly 200 basis points at the close of the past fiscal year. What this
means is that investors who choose to extend the maturity of their bond
holdings earn a much lower risk premium today than they did some three years
ago.
TAX-EXEMPT VERSUS TAXABLE YIELDS
It is perhaps obvious that the reason investors are willing to accept
relatively lower yields from municipal bonds is the tax-exempt status of these
securities. While the after-tax advantage of municipals is often taken for
granted, whether municipals represent an appropriate alternative depends
importantly on: (1) the investor's tax bracket; and (2) the yield spread
between taxable and tax-exempt securities.
- -----------------
*Another reduction, to 5 1/2%, was implemented shortly after *the close of our
fiscal year.
(continued)
3
<PAGE> 6
When I wrote to you one year ago in my 1994 Chairman's letter, I noted
that, for investors in the highest marginal tax bracket, long-term municipal
bonds provided 44% higher after-tax income compared to Federally taxable U.S.
Treasury bonds. Today, that yield advantage has widened to 49%. However, on the
short side of the yield spectrum, the after-tax yield premium of MIG 1 notes
over U.S. Treasury bills has shrunk, from 9% to 6%. This table presents a
comparison of the annual income earned on tax-exempt and taxable securities as
of November 30, 1995, assuming a $100,000 investment:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
ILLUSTRATION OF INCOME ON
HYPOTHETICAL $100,000 INVESTMENT
--------------------------------
LONG-TERM SHORT-TERM
- -------------------------------------------------------------------
<S> <C> <C>
TAXABLE GROSS INCOME $ 6,100 $ 5,500
LESS TAXES (39.6%) (2,400) (2,200)
-------- --------
NET AFTER-TAX INCOME 3,700 3,300
- -------------------------------------------------------------------
TAX-EXEMPT INCOME $ 5,500 $ 3,500
- -------------------------------------------------------------------
INCREASE IN
AFTER-TAX INCOME $ 1,800 $ 200
- -------------------------------------------------------------------
PERCENTAGE INCREASE +49% +6%
- -------------------------------------------------------------------
</TABLE>
Table assumes current yields (as of November 30, 1995) of 6.1% for U.S.
Treasury bonds, 5.5% for U.S. Treasury bills, 5.5% for long-term municipal
bonds, and 3.5% for short-term municipal notes.
The table provides a good indication of the kind of boost in after-tax income
that a high-tax-bracket investor might receive by investing in a state tax-
free bond fund rather than a Federally taxable U.S. Treasury bond fund.
However, given the speed with which interest rates can fluctuate, the
illustration should not be considered a representation of future results. In
fairness, I should also add that this is not entirely an "apples to apples"
comparison. As you know, U.S. Treasury bonds are backed by the full faith and
credit of the U.S. government; municipal bonds, on the other hand, are subject
to some degree of credit risk. More to the point, state-specific funds entail
an incremental risk engendered by their high concentration of investments in
discrete economic regions of the country. This risk is mitigated to a
tremendous extent in our Insured Longer-Term Portfolios through the use of
private portfolio insurance for virtually all of the bonds held in the
portfolios. This insurance effectively guarantees the full payment of annual
income and, at maturity, principal for all of the insured bonds that we hold.
As a result, each of our Insured Longer-Term Portfolios carries an implied
average quality rating of Aaa, the highest rating accorded by Moody's Investors
Services.
In the case of our State Tax-Free Money Market Portfolios, similar
portfolio insurance generally is not available. Thus, the burden of assuring
the creditworthiness of each individual portfolio holding rests squarely on the
shoulders of the professional money managers in Vanguard's Fixed Income Group.
I am pleased to say that they have handled this task over the years with
considerable diligence, emphasizing high-quality and credit-enhanced
securities. (This "credit enhancement" consists largely of irrevocable letters
of credit from high-quality banks guaranteeing the timely payment of interest
and principal.) Their efforts have resulted in each of the holdings in our
Money Market Portfolios earning Moody's highest rating--or the equivalent--for
shorter-term instruments.
Notwithstanding the quality of our portfolio holdings, investors in
all money market funds should bear in mind that their investments are not
guaranteed by the Federal Deposit Insurance Corporation, as would be the case
for an investment in a bank account or a certificate of deposit. There is also
no assurance that a money market fund will be able to maintain a stable net
asset value of $1.00 per share. However, we believe that our diligent credit
analysis and strict adherence to conservative average maturity guidelines will
go a long way toward protecting the interests of our shareholders.
IN SUMMARY
When I wrote to you in my Annual Report one year ago, near the low point in the
tax-exempt bond market, I was optimistic enough to predict that "during fiscal
1995 the probabilities now favor greater stability in long-term tax-exempt
rates, and
4
<PAGE> 7
somewhat higher short-term rates." As it turns out, short rates actually
slipped a bit lower, and I was not nearly optimistic enough on the bond side,
as a strong rebound in the bond market commenced virtually in lock-step with
the start of the new fiscal year. This recovery--reflecting the traditional
view that the dawn inevitably follows the darkness--provided a substantive
enhancement to shareholders in our Insured Longer-Term Portfolios. It also
reinforced the value of my traditional admonition to shareholders to "stay the
course."
In the coming year, we, too, fully intend to stay the course that has
served our investors so well for so many years. We will continue to focus on
providing returns that exceed those of appropriate competitive standards, but
we will do so with the highest standards of credit quality. While high credit
quality typically comes at a price--i.e., lower gross yields--our shareholders,
thanks to our exceptionally low expense ratios, need not sacrifice income for
quality. Indeed, while the average competitive state tax-free fund charges
annual expenses at the rate of 0.83% of average net assets, our Vanguard State
Tax-Free Portfolios incur an expense ratio of but 0.20%. This remarkable annual
benefit of 63 basis points is available through the Vanguard State Tax-Free
Funds with no sacrifice in quality. The resulting higher yields in a
higher-quality bond fund is as close to the proverbial "free lunch" as you are
likely to see.
Thank you for your continued support and commitment to Vanguard, and I
look forward to reporting to you again six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
December 20, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
A FEW WORDS ABOUT POSSIBLE CHANGES IN THE TAX LAW
In our last Semi-Annual Report, we mentioned that potential changes in the tax
laws had impacted the tax-exempt bond market, resulting in an unusually large
after-tax yield advantage for municipal bonds. Since then, Congress has
continued to debate the merits of a "flat tax," with no definitive resolution
in sight. Given this uncertainty, the current yield on municipal bonds remains
at approximately 90% of the yield on taxable U.S. Treasuries. As a result, an
investor in the highest marginal tax bracket (40%), can earn an after-tax yield
of about 3.7% (60% of 6.1%) on a U.S. Treasury bond, compared to 5.5% on a
high-grade municipal bond--an increase of nearly 50% in after-tax income.
Until the long-term implications of a revised tax code become clearer,
we would caution municipal bond investors to give careful consideration before
making precipitate changes in the allocation of their holdings of municipal
bonds. In the meantime, we will keep you abreast of our views on the possible
effects of any proposed legislation that could materially impact the tax status
of your holdings in Vanguard State Tax-Free Funds.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value
Total Per Share
Net Assets ------------------- Twelve Months
(millions) Average Average Nov. 30, Nov. 30, ---------------------- Current
Portfolio Nov. 30, 1995 Maturity Quality* 1994 1995 Dividends Total Return Yield**
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA . . . . $1,202 65 DAYS MIG 1 $ 1.00 $ 1.00 $.036 + 3.7% 3.61%
PENNSYLVANIA . . . 1,200 36 DAYS MIG 1 1.00 1.00 .036 + 3.7 3.64
NEW JERSEY . . . . 859 57 DAYS MIG 1 1.00 1.00 .035 + 3.6 3.57
OHIO . . . . . . . 178 57 DAYS MIG 1 1.00 1.00 .037 + 3.8 3.71
- ------------------------------------------------------------------------------------------------------------------------
INSURED INTERMEDIATE-TERM
CALIFORNIA . . . . $ 206 7.1 YEARS Aaa $ 9.64 $10.44 $.511 +13.9% 4.61%
INSURED LONG-TERM
CALIFORNIA . . . . 975 13.1 YEARS Aaa 9.92 11.27 .602 +20.1 5.15
NEW YORK . . . . . 859 10.5 YEARS Aaa 9.70 11.01 .581 +19.9 4.97
PENNSYLVANIA . . . 1,569 10.3 YEARS Aaa 10.07 11.28 .612 +18.5 5.09
NEW JERSEY . . . . 796 10.7 YEARS Aaa 10.40 11.78 .623 +19.7 4.90
OHIO . . . . . . . 197 9.3 YEARS Aaa 10.28 11.63 .610 +19.5 5.01
FLORIDA. . . . . . 423 14.1 YEARS Aaa 9.61 10.94 .560 +20.1 5.08
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* MIG 1 and Aaa are Moody's highest ratings for short-term and long-term
municipal bonds, respectively.
** Money Market Portfolios' yields are 7-day annualized yields; others
are 30-day SEC yields.
Note: The shares of each of the Vanguard "single-state" Portfolios are
available for purchase solely by residents of the designated states.
6
<PAGE> 9
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS (PERIODS ENDED SEPTEMBER
30, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
----------------------------
INCEPTION TOTAL INCOME CAPITAL
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- ------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA INSURED INTERMEDIATE-TERM 3/4/94 + 8.79% -- +6.98% +5.09% +1.89%
CALIFORNIA INSURED LONG-TERM 4/7/86 +10.73 +9.00% +7.79 +6.51 +1.28
CALIFORNIA MONEY MARKET 6/1/87 + 3.62 +3.28 +4.15 +4.15 0.00
NEW YORK INSURED TAX-FREE 4/7/86 +11.06 +9.40 +7.39 +6.50 +0.89
PENNSYLVANIA INSURED LONG-TERM 4/7/86 +10.10 +9.36 +8.05 +6.70 +1.35
PENNSYLVANIA MONEY MARKET 6/13/88 + 3.60 +3.31 +4.16 +4.16 0.00
NEW JERSEY INSURED LONG-TERM 2/3/88 +10.98 +9.21 +8.58 +6.50 +2.08
NEW JERSEY MONEY MARKET 2/3/88 + 3.52 +3.26 +4.14 +4.14 0.00
OHIO INSURED LONG-TERM 6/18/90 +10.78 +9.13 +8.77 +6.03 +2.74
OHIO MONEY MARKET 6/18/90 + 3.70 +3.34 +3.48 +3.48 0.00
FLORIDA INSURED TAX-FREE 9/1/92 +11.14 -- +7.63 +5.45 +2.18
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE NOTE THAT AN INVESTMENT IN A MONEY MARKET FUND, SUCH AS THE MONEY MARKET
PORTFOLIOS OF VANGUARD STATE TAX-FREE FUNDS, IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
7
<PAGE> 10
REPORT FROM THE INVESTMENT ADVISER
STATE INSURED LONG-TERM PORTFOLIOS
It seems hard to believe that just one year ago we experienced the worst price
decline for the fixed-income markets since the 1920s. A powerful market rally
during 1995 has recaptured 1994's "lost ground." In retrospect, we are
reminded of the relevance of our Chairman's advice to "stay the course" in
weathering periods of market volatility.
The Federal Reserve's 1994 tightening of monetary policy helped raise
short-term interest rates, which translated into a slowing of economic activity
this year. Such slowing has diminished inflationary pressure. Fixed-income
investors responded by aggressively buying bonds. During our 1995 fiscal year,
the yield on the 30-year Treasury bond fell 1.9 percentage points (from 8.0% to
6.1%). During the same period, the yield on high-grade, long-term municipal
bonds fell 1.4 percentage points (from 6.9% to 5.5%). Naturally, the decline
in interest rates has positively affected the share prices of the State Insured
Longer-Term Portfolios. This year has provided exceptionally good performance.
Specific to the municipal market, the Orange County bankruptcy and the
rumblings of a new Federal "flat tax" structure were pivotal events. First,
Orange County filed for bankruptcy in December of 1994. During the first six
months of 1995, County officials wrestled with several alternatives to "balance
the books." By the end of our fiscal year, the County appeared to be slowly
making progress through budget cuts, revenue sharing agreements, and the
rollover of short-term credit obligations. Ultimately, we expect that Orange
County will emerge from bankruptcy, but the process will be long and is not yet
clearly defined.
It is important to note again that the Vanguard Portfolios did not and
do not have any direct exposure to Orange County debt. To be sure, this
geographically specific event underscores the advantages of the extra level of
credit protection offered by insured bonds in municipal portfolios.
In contrast, there is very little protection we can offer against the
seemingly all too frequent changes in tax policy proposed by the various
branches of the Federal government. The latest discussions regarding a flat tax
have aroused great concern throughout the municipal market. A flat tax, if
enacted, will eliminate the current system's progression of increasing marginal
tax rates and replace it with a single lower level for all earned income. This
would require the abandonment of all or most tax deductions, exemptions, and
credits.
With some proposals, unearned income (interest, dividends, or capital
gains) will not be taxed. Under this scenario, municipal obligations would lose
their unique tax-exempt status. This would reduce the attractiveness of
municipal issues relative to their taxable brethren. Market participants have
already begun to factor in this potential unattractiveness. The yield on
long-term, high-quality municipal bonds has risen from 86.3% of the 30-year
Treasury bond yield at the beginning of the year to 90.2% at the close.
Certainly, it is far too early to forecast the ultimate outcome of the flat tax
legislative proposals, but without the support of the current administration it
is doubtful that any changes will occur prior to the 1996 Presidential
elections. In the meantime, shareholders can enjoy the very attractive
after-tax yield advantage of municipal bonds. For the State Insured
Portfolios, the past year has held great rewards for investors who "stayed the
course." However, as interest rates have now returned to historically low
levels, we are hesitant to suggest bond prices will continue on this course
through next year. Regardless, investors' paramount focus should be on
long-term objectives. Whatever direction interest rates move from year to year,
Vanguard will continue to combine low expenses with the conservative management
of high-quality Federal and state tax-exempt portfolios. We believe the outcome
is a superior and durable investment.
STATE MONEY MARKET PORTFOLIOS
The beginning of the fiscal year proved to be rocky for the short-term
municipal market. Not long after the Orange County debacle, the Japanese
banking industry came under fire, resulting in the downgrading of several large
Japanese banks. The Daiwa Bank trading scandal further tarnished the reputation
of the Japanese banking industry. We are pleased to report that Vanguard Money
Market Portfolios managed to safely navigate through these
8
<PAGE> 11
murky waters. The Portfolios had no exposure to Orange County notes, nor did we
hold any issues backed by Daiwa Bank.
Notwithstanding the credit problems overshadowing the municipal money
market, prices on short-term municipals moved higher over the fiscal year. One
area of strength came from a phenomenal rally in the Treasury market. Evidence
of slow growth and low inflation pushed yields on one-year Treasury bills lower
by nearly -1.5% to 5.4% for the fiscal year. Similarly, comparable
high-quality, one-year municipal notes posted a -1.0% decline in yields over
the same period. The Federal Reserve Board intervened two times during the
fiscal year. The first was a tightening of monetary policy, the second an
offsetting easing of policy. Since the close of our fiscal year, signs of
continued economic weakness prompted the Fed to again lower the Federal funds
rate (the rate banks charge each other for overnight loans) 25 basis points to
5.50%.
Dividends for the Vanguard State Tax-Free Money Market Portfolios
bucked the trend of overall interest rates by moving dramatically higher during
the fiscal year. The average dividend rose more than +40% over this past year.
The impetus for the change came from widening credit spreads for issues
supported by Japanese banks, which led to a rise in average yields for all
variable rate instruments. Variable rate securities, which account for roughly
50% of the Portfolios' composition, offset the decline in yields experienced in
the broader market and pushed municipal money market yields higher.
In conclusion, the growing number of risks in the marketplace
underscore the advantage of maintaining high quality standards. Vanguard's
conservative investment style and low expenses combine to provide shareholders
with consistently superior relative returns.
Sincerely,
Ian A. MacKinnon David E. Hamlin
Senior Vice President Principal
Pamela W. Tynan Danine A. Mueller
Principal Principal
Reid O. Smith Jerome J. Jacobs
Principal Principal
Vanguard Fixed Income Group
December 28, 1995
9
<PAGE> 12
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
November 30, 1995
<TABLE>
<CAPTION>
Face Market
INSURED Amount Value
LONG-TERM PORTFOLIO (000) (000)+
- ------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (98.1%)
- ------------------------------------------------------------------------------------
ISSUER INSURED (87.1%)
Adams County School Dist. GO
5.55%, 12/1/09 (1) $ 1,000 $ 1,037
Akron Bath & Copley
Joint Township
(Children's Hosp. Medical Center)
5.50%, 1/1/08 (2) 1,000 1,028
Allen County GO
5.30%, 12/1/15 (2) 1,250 1,241
Aurora County School Dist.
5.80%, 12/1/16 (3) 3,000 3,065
Bedford Heights GO
5.65%, 12/1/14 (2) 500 525
Big Walnut School Dist. GO
5.70%, 6/1/14 (2) 1,000 1,015
Butler County Sewer System Rev.
6.25%, 12/1/12 (2) 2,925 3,129
City of Canton GO
5.375%, 12/1/07 (2) 1,000 1,034
(Waterworks System)
5.75%, 12/1/10 (2) 1,000 1,049
5.85%, 12/1/15 (2) 1,000 1,039
Chillicothe GO
6.05%, 12/1/12 (2) 675 711
Clermont County
(Mercy Health System)
5.40%, 9/1/05 (2) 2,500 2,611
5.50%, 9/1/06 (2) 2,500 2,613
Cleveland Airport System Rev.
0.00%, 1/1/05 (1) 3,975 2,579
7.25%, 1/1/20 (1) 750 835
Cleveland GO
5.30%, 9/1/08 (2) 4,500 4,613
5.375%, 9/1/09 (2) 2,000 2,048
5.375%, 9/1/10 (2) 1,000 1,021
5.375%, 9/1/12 (2) 1,000 1,011
6.25%, 10/1/11 (1) 2,500 2,684
Cleveland Public Power System Rev.
7.00%, 11/15/24 (1) 2,500 2,874
Cleveland School Dist. GO
0.00%, 12/1/05 (3) 700 441
0.00%, 12/1/06 (3) 700 414
0.00%, 12/1/07 (3) 500 279
0.00%, 12/1/08 (3) 400 209
5.875%, 12/1/11 (3) 1,500 1,565
Cleveland Water Works Rev.
5.50%, 1/1/13 (1) 3,125 3,223
5.50%, 1/1/21 (1) 1,500 1,541
6.25%, 1/1/15 (2) 4,500 4,769
Columbus City School Dist. GO
7.00%, 12/1/00 (3) (Prere.) 1,750 1,993
Cuyahoga County Hosp. Rev.
(Metro Health System)
6.00%, 2/15/19 (1) 1,000 1,016
(Univ. Hosp. Health System)
6.875%, 1/15/19 (6) 1,825 1,985
Dayton Water System Rev.
6.75%, 12/1/10 (1) 1,000 1,068
Delaware City School Dist. GO
5.20%, 12/1/16 (3) 1,500 1,474
Delaware Sewer System Rev.
5.95%, 11/15/12 (2) 1,500 1,562
Dublin School Dist. GO
0.00%, 12/1/05 (3) 1,220 768
0.00%, 12/1/06 (3) 1,220 722
Fairfield County Hosp. Rev. GO
5.375%, 6/15/15 (1) 3,000 2,995
Franklin County Convention
Center Rev.
0.00%, 12/1/07 (1) 4,355 2,427
7.00%, 12/1/00 (1)(Prere.) 675 769
Franklin County Hosp. Facilities Rev.
(Riverside United Methodist)
7.25%, 5/15/20 (1) 750 840
Hamilton County
(Children's Hosp.)
5.20%, 5/15/09 (1) 2,000 1,998
Hamilton County Sewer System Rev.
5.25%, 12/1/16 (3) 2,000 1,963
5.40%, 12/1/08 (3) 5,700 5,894
5.45%, 12/1/09 (3) 3,250 3,350
Hamilton Water System Rev.
6.30%, 10/15/21 (1) 2,000 2,118
Hilliard County School Dist. GO
5.75%, 12/1/19 (3) 2,000 2,036
6.55%, 12/1/05 (3) 500 569
Kettering City School Dist. GO
5.30%, 12/1/14 (3) 1,350 1,342
Lima Sewer Rev.
6.30%, 12/1/12 (2) 5,000 5,401
Lima Water Rev.
6.30%, 12/1/12 (2) 3,400 3,673
Lisbon School Dist.
6.25%, 12/1/17 (2) 1,000 1,068
Lucas County GO
6.95%, 12/1/11 (1) 1,800 2,018
Mahoning County Hosp. Rev.
Improvement Project (YHA Inc.)
6.50%, 10/15/14 (1) 2,500 2,664
Marietta City School Dist.
5.75%, 12/1/07 (2) 1,500 1,585
Marysville GO
5.55%, 12/1/13 (2) 1,400 1,428
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------
<S> <C> <C>
Marysville Water System Rev.
7.05%, 12/1/01 (1)(Prere.) $ 1,250 $ 1,436
Medina City School Dist. GO
6.20%, 12/1/18 (3) 2,100 2,226
Montgomery County Sewer
System Rev.
5.60%, 9/1/11 (3) 1,000 1,026
Mount Vernon Sewer System Rev.
6.00%, 12/1/12 (2) 750 787
New Philadelphia City School Dist.
6.25%, 12/1/17 (2) 2,300 2,443
North Canton GO
5.90%, 12/1/14 (2) 2,000 2,087
Northeast Ohio Sewer Dist. Rev.
5.60%, 11/15/13 (2) 1,880 1,926
5.60%, 11/15/14 (2) 1,500 1,508
6.50%, 11/15/16 (2) 2,500 2,799
Ohio Air Quality Development Auth.
(Ohio Edison)
7.10%, 6/1/18 (3) 1,000 1,116
7.45%, 3/1/16 (3) 500 562
Ohio Building Auth.
(Transportation Facilities)
7.00%, 9/1/07 (1) 850 949
Ohio Higher Education Facilities Rev.
(Univ. of Dayton)
5.80%, 12/1/14 (3) 1,000 1,031
6.60%, 12/1/17 (3) 1,000 1,103
6.75%, 12/1/15 (3) 1,000 1,113
Ohio Public Facilities Comm.
5.00%, 11/1/97 (1) 8,800 8,974
Ohio Univ. General Receipts
5.00%, 12/1/13 (3) 2,000 1,933
Ohio Water Development Auth.
5.50%, 12/1/11 (2) 1,000 1,018
5.50%, 12/1/14 (1) 1,595 1,607
Olmsted Falls City School Dist. GO
5.85%, 12/15/17 (3) 2,000 2,062
6.85%, 12/15/11 (3) 565 650
Omega Municipal Electric
5.375%, 2/15/13 (2) 2,000 2,005
Ottowa GO
7.00%, 9/1/11 (2) 500 564
Pickerington GO
5.80%, 12/1/09 (3) 500 535
Revere School Dist. GO
6.00%, 12/1/16 (2) 3,850 4,024
Reynoldsburg School Dist. GO
6.55%, 12/1/17 (3) 1,600 1,745
Springfield GO
6.875%, 9/1/10 (2) 1,000 1,128
Summit County GO
6.90%, 8/1/12 (2) 2,500 2,812
Sylvania City School Dist. GO
5.80%, 12/1/15 (3) 2,000 2,051
Trumbull County GO
5.30%, 12/1/14 (2) 1,500 1,491
Trumbull County Rev.
(Trumbull Memorial Hosp.)
6.25%, 11/15/12 (3) 2,000 2,122
Univ. of Toledo
5.75%, 12/1/12 (3) 1,000 1,031
Wood County Justice Center GO
5.95%, 12/1/07 (2) 1,750 1,884
Woodridge School Dist. GO
6.00%, 12/1/19 (2) 1,000 1,049
6.80%, 12/1/14 (2) 2,000 2,375
Wooster City School Dist. GO
6.50%, 12/1/17 (2) 2,500 2,721
OUTSIDE OHIO:
Puerto Rico Public Building
Auth. Rev.
0.00%, 7/1/01 (3) 850 671
---------
GROUP TOTAL 171,493
---------
- ------------------------------------------------------------------------------------
SECONDARY MARKET INSURED (1.1%)
Franklin (Mount Carmel Health)
6.75%, 6/1/19 (1) 2,000 2,190
---------
- ------------------------------------------------------------------------------------
NON-INSURED (9.9%)
Cincinnati Student Loan VRDO
3.90%, 12/6/95 (LOC) 1,400 1,400
Columbus Electric System Rev. VRDO
3.80%, 1/2/96 (LOC) 300 300
Columbus City GO
VRDO
3.40%, 12/7/95 1,100 1,100
4.00%, 6/15/97 1,645 1,652
Columbus Sewer Rev.
VRDO
3.60%, 12/7/95 400 400
Cuyahoga County Hosp.
Improvement VRDO
(St. Luke's Hosp.)
3.75%, 12/6/95 (LOC) 400 400
Hamilton County GO BAN
4.50%, 12/31/97 1,375 1,390
Ohio Air Quality Development
Auth. VRDO
(Cincinnati Gas & Electric)
3.80%, 12/4/95 (LOC) 300 300
(Mead Corp.)
3.80%, 12/4/95 (LOC) 100 100
Ohio GO
7.625%, 8/1/10 3,510 4,455
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------
<S> <C> <C>
Ohio Higher Education
Facilities Auth. Rev.
(Case Western Reserve Univ.)
6.50%, 10/1/20 $ 250 $ 287
(Oberlin College)
5.375%, 10/1/15 1,500 1,497
Ohio Public Facilities Comm.
(Mental Health Facilities)
4.25%, 6/1/96 3,000 3,011
Ohio Water Development
Auth. VRDO (Mead Corp.)
3.80%, 12/4/95 (LOC) 200 200
Scioto County VRDO
(Norfolk Southern Corp.)
3.65%, 12/6/95 100 100
Toledo City Special Assessment Notes
5.25%, 5/2/96 (LOC) 3,000 3,021
---------
GROUP TOTAL 19,613
---------
- ------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $182,395) 193,296
- ------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.9%)
- ------------------------------------------------------------------------------------
Other Assets--Note B 4,043
Liabilities (383)
---------
3,660
- ------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------
Applicable to 16,930,358 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $196,956
- ------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.63
====================================================================================
</TABLE>
+ See Note A to Financial Statements. For explanations of abbreviations and
other references, see page 13.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
AT NOVEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital $186,511 $11.02
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses--Note D (309) (.02)
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 10,901 .64
Futures Contracts (147) (.01)
- ------------------------------------------------------------------------------------
NET ASSETS $196,956 $11.63
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
- ------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (99.2%)
- ------------------------------------------------------------------------------------
Adams County School Dist. GO
4.10%, 12/1/95 (1) $ 1,500 $ 1,500
Akron Sewer System VRDO
3.80%, 12/6/95 (LOC) 300 300
Anthony Wayne Local
School Dist. BAN
4.00%, 12/14/95 2,500 2,500
Avon City GO BAN
4.14%, 7/3/96 870 871
Bay Village GO BAN
3.98%, 7/3/96 1,000 1,001
Berea City BAN
4.07%, 10/24/96 1,500 1,502
Butler County GO BAN
4.88%-5.07%, 3/15/96-4/19/96 5,570 5,578
Butler County Sewer BAN
4.74%, 4/19/96 1,700 1,703
Cincinnati Student Loan VRDO
3.90%, 12/6/95 (LOC) 7,000 7,000
Cleveland-Cuyahoga County Port
Auth. VRDO
(Rock & Roll Hall of Fame)
3.80%, 12/6/95 (LOC) 5,000 5,000
Cleveland Waterworks
Improvement TOB VRDO
3.65%, 12/7/95 (1) 9,560 9,560
Columbus City GO VRDO
3.40%, 12/7/95 3,300 3,300
Columbus Electric System Rev. VRDO
3.80%, 1/2/96 (LOC) 2,200 2,200
Columbus Sewer Rev. VRDO
3.60%, 12/7/95 6,500 6,500
Cuyahoga County Hosp.
Improvement VRDO
(St. Luke's Hosp.)
3.75%, 12/6/95 (LOC) 10,290 10,290
Dublin City BAN
4.25%, 3/20/96 3,000 3,004
Franklin County Hosp. Rev. VRDO
(Holy Cross Health System)
3.70%, 12/7/95 7,700 7,700
Franklin County Solid Waste BAN
4.10%, 8/23/96 5,000 5,007
Hancock County GO BAN
4.40%, 4/15/96 1,300 1,303
Hamilton County GO BAN
5.00%, 5/10/96 2,459 2,464
Huber Heights GO BAN
5.00%, 4/1/96 1,600 1,603
Lake County BAN
4.07%, 10/10/96 1,680 1,682
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------
<S> <C> <C>
Mason City BAN
4.25%, 7/2/96 $ 3,300 $ 3,307
Mason City School Dist. BAN
4.33%, 12/19/95 3,700 3,701
Ohio Air Quality Development
Auth. VRDO
(Cincinnati Gas & Electric)
3.70%-3.80%, 12/4/95 (LOC) 13,300 13,300
(Mead Corp.)
3.80%, 12/4/95 (LOC) 5,300 5,300
Ohio Higher Education
Facilities VRDO
TOB 3.75%, 12/7/95 (2) 6,000 6,000
(Mt. Union College)
3.853%, 12/7/95 (LOC) 1,000 1,000
Ohio Highway GO
3.75%-4.40%, 5/15/96 3,640 3,645
Ohio Pollution Control Rev. VRDO
(British Petroleum)
3.70%, 12/4/95 2,500 2,500
Ohio School Dist. COP RAN
4.52%, 6/28/96 5,000 5,017
Ohio State Univ. VRDO
3.50%, 12/7/95 5,200 5,200
Ohio Water Development
Auth. VRDO
TOB 3.70%, 12/7/95 (2) 5,000 5,000
(Mead Corp.)
3.80%, 12/4/95 (LOC) 6,420 6,420
(Timpken)
3.65%, 12/6/95 (LOC) 5,000 5,000
Ross County Hosp. Rev. VRDO
(Medical Center)
3.80%, 12/7/95 (LOC) 1,250 1,250
Scioto County VRDO
(Norfolk Southern Corp.)
3.65%, 12/6/95 10,200 10,200
Summit County GO BAN
5.00%, 3/7/96 1,580 1,582
Sylvania City School Dist. BAN
4.125%, 12/28/95 5,000 5,001
Toledo City Special Assessment Notes
4.52%, 12/1/95 (LOC) 1,800 1,800
5.25%, 5/2/96 (LOC) 1,000 1,004
Univ. of Cincinnati GO BAN
4.25%-5.00%, 3/21/96-8/28/96 7,400 7,412
Warren County GO BAN
4.58%, 9/5/96 1,000 1,006
- ------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $176,213) 176,213
- ------------------------------------------------------------------------------------
<CAPTION>
Market
Value
(000)+
- ------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.8%)
- ------------------------------------------------------------------------------------
<S> <C>
Other Assets--Note B $ 2,982
Liabilities (1,611)
---------
1,371
- ------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------
Applicable to 177,588,842 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $177,584
- ------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
====================================================================================
</TABLE>
See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
AT NOVEMBER 30, 1995,
NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $177,592 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses (8) --
Unrealized Appreciation of
Investments -- --
- ------------------------------------------------------------------------------------
NET ASSETS $177,584 $1.00
- ------------------------------------------------------------------------------------
</TABLE>
BAN=Bond Anticipation Note
COP=Certificate of Participation
GO=General Obligation
RAN=Revenue Anticipation Note
TOB=Tender Option Bond
VRDO=Variable Rate Demand Obligation
(Prere.)=Prerefunded
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association)
(2) AMBAC (AMBAC Indemnity Corporation)
(3) FGIC (Financial Guaranty Insurance Company)
(4) FSA (Financial Security Assurance)
(5) CGI (Capital Guaranty Insurance)
(6) BIGI (Bond Investors Guaranty Insurance)
(7) Connie Lee Inc.
(8) FHA (Federal Housing Authority)
The insurance does not guarantee the market value of the municipal bonds.
(LOC)=Scheduled principal and interest payments are guaranteed by
bank letter of credit.
13
<PAGE> 16
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INSURED LONG-TERM MONEY MARKET
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
November 30, 1995 November 30, 1995
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . $ 9,762 $6,425
- -------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . 9,762 6,425
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . $ 22 $ 21
Management and Administrative . . . . . . . . . 269 253
Marketing and Distribution . . . . . . . . . . . 39 330 45 319
Custodians' Fees . . . . . . . . . . . . . . . . . ---- 7 ---- 8
Auditing Fees . . . . . . . . . . . . . . . . . . . 7 7
Shareholders' Reports . . . . . . . . . . . . . . . 14 9
Annual Meeting and Proxy Costs . . . . . . . . . . 3 2
Trustees' Fees and Expenses . . . . . . . . . . . 1 1
- -------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . 362 346
Expenses Paid Indirectly--Note C . . . . . . (7) (8)
- -------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . 355 338
- -------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . 9,407 6,087
- -------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . 115 --
Futures Contracts . . . . . . . . . . . . . . . . . (604) --
- -------------------------------------------------------------------------------------------------------------------
Realized Net Loss . . . . . . . . . . . . (489) --
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . 20,571 --
Futures Contracts . . . . . . . . . . . . . . . . . 138 --
- -------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . . 20,709 --
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . $29,627 $6,087
===================================================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INSURED LONG-TERM MONEY MARKET
PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
NOVEMBER 30, November 30, NOVEMBER 30, November 30,
1995 1994 1995 1994
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . $ 9,407 $ 8,876 $ 6,087 $ 3,523
Realized Net Gain (Loss) . . . . . . . . . . . . . . . (489) 897 -- (5)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . . 20,709 (20,587) -- --
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . 29,627 (10,814) 6,087 3,518
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . (9,407) (8,876) (6,087) (3,523)
Realized Net Gain . . . . . . . . . . . . . . . . . . . -- (462) -- --
- --------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . (9,407) (9,338) (6,087) (3,523)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . . 31,792 35,213 151,972 105,947
--In Lieu of Cash Distributions . . . . . . 6,817 6,873 5,640 3,286
--Exchange . . . . . . . . . . . . . . . . . 22,505 17,949 32,551 41,136
Redeemed --Regular . . . . . . . . . . . . . . . . . (17,921) (27,595) (113,136) (94,221)
--Exchange . . . . . . . . . . . . . . . . . (14,977) (30,244) (46,702) (40,486)
- --------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . . . . . . . 28,216 2,196 30,325 15,662
- --------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . 48,436 (17,956) 30,325 15,657
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . 148,520 166,476 147,259 131,602
- --------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . . . . . . . $196,956 $148,520 $ 177,584 $147,259
====================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . $.610 $.599 $.037 $.026
Realized Net Gain . . . . . . . . . . . . . . . -- $.032 -- --
- --------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . 4,867 4,731 184,523 147,083
Issued in Lieu of Cash Distributions . . . . . . 608 619 5,640 3,286
Redeemed . . . . . . . . . . . . . . . . . . . . (2,987) (5,248) (159,838) (134,707)
- --------------------------------------------------------------------------------------------------------------------
2,488 102 30,325 15,662
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INSURED LONG-TERM PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
-------------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . $10.28 $11.61 $11.07 $10.60 $10.30
-------- ------- -------- -------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .610 .599 .608 .630 .650
Net Realized and Unrealized Gain (Loss) . . . . . . . .
on Investments . . . . . . . . . . . . . . . . . . 1.350 (1.298) .685 .474 .300
-------- ------- -------- -------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 1.960 (.699) 1.293 1.104 .950
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.610) (.599) (.608) (.630) (.650)
Distributions from Realized Capital Gains . . . . . . . -- (.032) (.145) (.004) --
-------- ------- -------- -------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.610) (.631) (.753) (.634) (.650)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . $11.63 $10.28 $11.61 $11.07 $10.60
===================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . +19.45% -6.29% +12.03% +10.69% +9.50%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . . $197 $149 $166 $101 $61
Ratio of Expenses to Average Net Assets . . . . . . . . . . .21% .23% .21% .31% .27%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . 5.45% 5.38% 5.29% 5.77% 6.20%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . 7% 16% 10% 27% 20%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
------------------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . .037 .026 .023 .030 .045
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . -- -- -- -- --
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . .037 .026 .023 .030 .045
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.037) (.026) (.023) (.030) (.045)
Distributions from Realized Capital Gains . . . . . . . -- -- -- -- --
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (.037) (.026) (.023) (.030) (.045)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00
===================================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +3.78% +2.58% +2.37% +3.01% +4.64%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . . . . $178 $147 $132 $92 $79
Ratio of Expenses to Average Net Assets . . . . . . . . . . .21% .23% .21% .31% .26%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . 3.71% 2.56% 2.34% 2.95% 4.45%
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
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, 1995, the Fund had contributed capital of
$44,000 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. The Fund's custodian bank has agreed to reduce its fees when the Fund
maintains cash on deposit in the non-interest bearing custodian account. For
the year ended November 30, 1995, custodian fee offset arrangements reduced
expenses of the Insured Long-Term and Money Market Portfolios by $7,000 and
$8,000, respectively.
D. During the year ended November 30, 1995, the Insured Long-Term
Portfolio made purchases of $45,492,000 and sales of $11,598,000 of investment
securities other than temporary cash investments.
At November 30, 1995, the Insured Long-Term Portfolio had available a capital
loss carryforward of $58,000 to offset future net capital gains through
November 30, 2002.
E. At November 30, 1995, unrealized appreciation of investment securities
of the Insured Long-Term Portfolio for financial reporting and Federal income
tax purposes aggregated $10,901,000, of which $10,949,000 related to
appreciated securities and $48,000 related to depreciated securities.
At November 30, 1995, the Insured Long-Term Portfolio had long positions in
Municipal Bond Index futures contracts expiring in December 1995, with an
aggregate settlement value and net unrealized appreciation of $5,772,000 and
$251,000, respectively. The aggregate settlement value of short positions in
U.S. Treasury Bond futures contracts expiring in December 1995, and the related
unrealized depreciation were $9,791,000 and $398,000, respectively. The market
value of securities deposited as initial margin for open futures contracts was
$564,000.
18
<PAGE> 21
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, 1995, and the results of each of their operations, the changes in
each of their net assets and the financial highlights for each of the
respective periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards 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 29, 1995
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 of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
Robert A. DiStefano Ian A. MacKinnon
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
Jeremy G. Duffield F. William McNabb III
Senior Vice President Senior Vice President
Planning & Development Institutional
James H. Gately Ralph K. Packard
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
20
<PAGE> 23
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
[THE VANGUARD GROUP OF INVESTMENT COMPANIES(R) LOGO]
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q960-11/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 24
VANGUARD OHIO TAX-FREE FUND
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through six.
Line charts illustrating cumulative performance between Vanguard Ohio Insured
Long-Term Portfolio, Lehman Municipal Bond Index and Average Ohio Municipal
Fund, average Annual Total Returns for the period June 18, 1990, to November
30, 1995 appear at the top of page two.
A line chart of the Month-End Yields of 30-Year Prime Municipal Bond and 90-Day
MIG 1 Note for the fiscal years 1991 through 1995 appears at the upper left of
page three.
A running head featuring an hour glass, compass & telescope, and battleships in
the background appears at the top of page seven.
A running head featuring ships wheel, rope and battleships in the background
appears at the top of pages eight & nine.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages ten through nineteen.
A running head featuring a sextant, a map, and battleships in the background
appear at the top of page twenty.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
