<PAGE> 1
CHAIRMAN'S LETTER
DEAR SHAREHOLDER:
During the six months ended May 31, 1995--the first half of the fiscal year for
Vanguard State Tax-Free Portfolios--a fairly substantial decline in long-term
interest rates resulted in higher prices for long-term tax-exempt bonds. These
price increases pushed the six-month total returns (capital change plus income)
of all our Insured Longer-Term Portfolios well into double-digit territory.
While long rates declined during the past six months, shorter-term interest
rates actually increased marginally. In this environment, the yields of our
Money Market Portfolios increased nicely and remained comfortably ahead of the
yields offered by comparable funds.
THE STATE INSURED LONG-TERM PORTFOLIOS
In the wake of repeated interest rate increases by the Federal Reserve during
1994, long-term municipal bond yields peaked in November 1994 at 7.1%. As these
rate hikes seemed to slow the economy's growth, concerns about future inflation
were allayed, and rates began to decline. By the end of May, municipal bond
yields had fallen to 5.8%, a decline of 130 basis points.
In this environment, longer-term municipal bond funds enjoyed
outstanding returns. Indeed, each of Vanguard's Insured Long-Term Portfolios
provided six-month total returns (capital change plus income) in the area of
+14%. This sharp price rally overwhelmed the negative returns of the prior six
months, bringing our total returns for the twelve months strongly into positive
territory. Although fluctuating net asset values are part and parcel of bond
fund investing, the recent swings in market value demonstrate the benefit of
remaining committed to a long-term investment strategy.
The table opposite shows the Longer-Term Portfolios' twelve-month
returns, reflecting a full year's income. To provide some perspective on how
fluctuating interest rates have impacted our Insured Longer-Term Portfolios
over this period, the table breaks down our Portfolios' total returns into
their income and capital components. I would emphasize that the table conceals
the fact that the full period was composed of two vastly different six-month
sub-periods, one in which returns were sharply negative, the other strongly
positive.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Investment Returns
Twelve Months Ended
May 31,1995
-------------------------
Insured Longer-Term Portfolio Income Capital Total
- ---------------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA INTERMEDIATE-TERM +5.2% +2.2% +7.4%
CALIFORNIA LONG-TERM +6.1 +3.8 +9.9
NEW YORK LONG-TERM +6.0 +3.0 +9.0
PENNSYLVANIA LONG-TERM +6.2 +2.1 +8.3
NEW JERSEY LONG-TERM +6.0 +3.5 +9.5
OHIO LONG-TERM +5.9 +3.2 +9.1
FLORIDA LONG-TERM +5.8 +3.6 +9.4
- ---------------------------------------------------------------
</TABLE>
The current tax-exempt yields on our Insured Longer-Term Portfolios are
presently in the area of 5.2%, compared with 6.3% six months ago. The yield for
each Portfolio is presented in the table on page 4 of this report, which also
includes per share net asset values, dividends, and total returns over the past
six and twelve months.
THE STATE MONEY MARKET PORTFOLIOS
As noted earlier, the Federal Reserve Board has remained relatively
tight-fisted in its monetary policy during the past six months, bringing some
stability to money market yields. This stability is a stark contrast to fiscal
1994, when the Board raised the Fed funds rate (at which banks borrow from one
another) on fully six separate occasions. It would appear that the Fed's tough
policy is bearing fruit: inflation so far remains quite subdued, and business
activity has slowed to a more normal growth rate.
While rates have been stable in recent months, the table below shows
the impact of the dramatic surge in short-term rates on our annualized yields
over the past year and one-half. You will note that, during this period, the
yields on our Money Market Portfolios have risen by more than 60%.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Seven-Day Annualized Yield
----------------------------------------
Money Market May 31, Nov. 30, May 31, Nov. 30,
Portfolio 1995 1994 1994 1993
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA 3.8% 3 .4% 2.6% 2.3%
PENNSYLVANIA 3.8 3 .5 2.6 2.3
NEW JERSEY 3.7 3 .3 2.5 2.2
OHIO 3.9 3 .5 2.6 2.4
- ---------------------------------------------------------------------
</TABLE>
(continued)
1
<PAGE> 2
Regardless of future interest rate movements, the yield advantage of our
Vanguard State Money Market Portfolios is virtually certain to remain
attractive relative to other comparable money market funds. The principal
reason for this advantage, as you know, is that our operating expenses are so
much lower than industry norms. Our Portfolios, for example, operate at an
annual expense ratio of about 0.2%, compared with 0.6% for our average
competitor. This advantage of 0.4% carries directly to the bottom line: the
yield you receive. Thus, in a market in which gross yields are, say, 4.0%, our
Portfolios should provide a net yield of 3.8%, compared with 3.4% for other
comparable money market portfolios.
I want to underscore that our higher yields do not arise from the
ownership of lower quality money market instruments. The quality of our
Portfolios is, we believe, as high as any tax-exempt money market fund in the
field. Funds which stinted on quality last year ran the risk that their net
asset values might fall below the $1.00 value that investors have come to take
for granted. Our focus on quality--along with, we acknowledge, some good
luck--spared us the consequences of this risk, and we owned no direct
obligations of Orange County, California, the most troubled credit of the
period. Each of our Money Market Portfolios' net asset values remained at $1.00
per share, which as you know, is our objective, but is not guaranteed.
IN SUMMARY
The recent swings in total returns we have witnessed help to demonstrate that
"staying the course"--even in the face of turbulent markets-- will more often
than not lead to a successful long-term investment program. In contrast,
attempting to jump into and out of mutual funds in hopes of timing the
movements of the market is almost certain to result in failure.
Whether rates remain volatile or not, the benefits of investing in
Vanguard State Tax-Free Portfolios endure: high quality, low cost, and
professional management. Along with these advantages, the Portfolios distribute
income that is 100% exempt from both Federal and state income taxes. Together,
these factors should ensure our ability to provide shareholders with efficient
and effective Portfolios in the years to come.
I look forward to reporting to you on our results for the full year in
our 1995 Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
June 9, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 3
A FEW WORDS ABOUT POSSIBLE CHANGES IN THE TAX LAW
The uncertainties related to a variety of new tax proposals seem to have
unnerved some participants in the tax-exempt bond market. Of the options which
have been considered, perhaps the most significant to municipal bond investors
is the "flat tax." Indeed, under one proposed version, municipal bond yields
would have no advantage over taxable yields. Because of this uncertainty, the
rise in municipal bond prices has been significantly less than the rise in U.S.
Treasury bond prices over the past few months.
As a result, the current yield on high-quality long-term municipal
bonds is 94% of the yield on taxable U.S. Treasuries giving municipal bonds
their largest after-tax yield advantage in recent years. What this means is
that an investor in the highest marginal tax bracket (40%) would earn an
after-tax yield of about 3.8% on a U.S. Treasury bond (60% of 6.4%). A
high-grade municipal bond, on the other hand, would provide a tax-exempt yield
of 6.0%--fully 58% higher. Thus, it would appear that tax uncertainty has
created unusual yield opportunity.
In any event, the flat tax option is no longer high on the legislative
agenda, and neither of the tax bills adopted by the Senate or the House of
Representatives would disturb the existing tax-exempt status of municipal bond
interest. Until the details of any tax law changes become clearer, we would
caution municipal bond investors to give careful consideration before making
any shifts in 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
municipal bond funds.
3
<PAGE> 4
PORTFOLIO RESULTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
Total Per Share Dividends Total Return
Net Assets ------------------ --------------- ----------------
(millions) Average Average Nov. 30, May 31, Six Twelve Six Twelve Current
Portfolio May 31, 1995 Maturity Quality* 1994 1995 Months Months Months Months Yield**
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA . . . . . . . $1,114 24 days MIG 1 $ 1.00 $ 1.00 $.019 $.033 + 1.9% +3.3% 3.80%
PENNSYLVANIA . . . . . . 1,148 26 days MIG 1 1.00 1.00 .018 .033 + 1.9 +3.3 3.80
NEW JERSEY . . . . . . . 818 51 days MIG 1 1.00 1.00 .018 .032 + 1.8 +3.2 3.71
OHIO . . . . . . . . . . 166 60 days MIG 1 1.00 1.00 .019 .033 + 1.9 +3.4 3.92
- --------------------------------------------------------------------------------------------------------------------------------
INSURED LONG-TERM
CALIFORNIA
INTERMEDIATE-TERM . . . $ 171 6.6 years Aaa $ 9.64 $ 10.26 $.253 $.499 + 9.2% +7.4% 4.86%
CALIFORNIA . . . . . . . 936 12.7 years Aaa 9.92 11.06 .301 .606 +14.7 +9.9 5.29
NEW YORK . . . . . . . . 799 11.1 years Aaa 9.70 10.80 .293 .587 +14.5 +9.0 5.18
PENNSYLVANIA . . . . . . 1,482 12.8 years Aaa 10.07 11.08 .308 .625 +13.2 +8.3 5.28
NEW JERSEY . . . . . . . 742 10.5 years Aaa 10.40 11.57 .316 .628 +14.4 +9.5 5.12
OHIO . . . . . . . . . . 175 9.5 years Aaa 10.28 11.43 .307 .611 +14.3 +9.1 5.22
FLORIDA . . . . . . . . 362 13.1 years Aaa 9.61 10.75 .281 .562 +14.9 +9.4 5.27
- --------------------------------------------------------------------------------------------------------------------------------
</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.
4
<PAGE> 5
AVERAGE ANNUAL TOTAL RETURNS
THE CURRENT YIELDS NOTED IN THE CHAIRMAN'S LETTER ARE CALCULATED IN ACCORDANCE
WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS
(PERIODS ENDED MARCH 31, 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 +6.72% -- +5.61% +4.96% +0.65%
CALIFORNIA INSURED LONG-TERM 4/7/86 +8.14 +8.33% +7.75 +6.55 +1.20
CALIFORNIA MONEY MARKET 6/1/87 +3.09 +3.47 +4.18 +4.18 0.00
NEW YORK INSURED TAX-FREE 4/7/86 +7.84 +8.72 +7.30 +6.54 +0.76
PENNSYLVANIA INSURED LONG-TERM 4/7/86 +7.54 +8.73 +8.04 +6.75 +1.29
PENNSYLVANIA MONEY MARKET 6/13/88 +3.04 +3.52 +4.19 +4.19 0.00
NEW JERSEY INSURED LONG-TERM 2/3/88 +8.06 +8.69 +8.57 +6.55 +2.02
NEW JERSEY MONEY MARKET 2/3/88 +2.96 +3.48 +4.17 +4.17 0.00
OHIO INSURED LONG-TERM 6/18/90 +7.57 -- +8.80 +6.08 +2.72
OHIO MONEY MARKET 6/18/90 +3.08 -- +3.44 +3.44 0.00
FLORIDA INSURED TAX-FREE 9/1/92 +8.74 -- +7.68 +5.44 +2.24
</TABLE>
ALL OF 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
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.
5
<PAGE> 6
REPORT FROM THE INVESTMENT ADVISER
Two significant events occurred during the first six months of the fiscal year.
The first was the stunning market rally that drove long-term municipal yields
approximately -1.1 percentage points lower. The second was the turmoil
surrounding the bankruptcy of Orange County, California.
MONEY MARKETS
The aggressive tightening of monetary policy by the Federal Reserve Board in
1994 slowed down dramatically in the first half of fiscal year 1995. The only
intervention occurred on February 1, 1995, when the Federal Reserve Board
increased the discount and Federal funds rates 0.5%. Participants in the
short-term municipal market reacted favorably to this relative stability in
interest rates and 1-year notes rallied roughly +1%. While yields on 1-year
notes declined, yields on shorter-term variable rate instruments moved in the
opposite direction, resulting in what is known as a flattening of the
short-term municipal yield curve. The average weighted maturities of the
Portfolios were positioned at the lower end of their maturity spectrum, and
consequently benefited from this flattening. During the fiscal half, the
average monthly yield on all non-institutional state-specific money funds rose
+0.78%.
In the upcoming months, increased supply of short-term municipal
issuance should present an opportunity for our Money Market Portfolios to
extend their average maturities, but not at the expense of sacrificing quality.
BOND MARKETS
For the first half of the fiscal year, investors pushed long-term interest
rates lower as economic indices pointed increasingly to slower domestic
economic growth. Investors viewed the slowing as beneficially affecting
inflation. Long-term interest rates declined for virtually the entire six
months. For example, the benchmark 30-year U.S. Treasury bond began the fiscal
year yielding 8.0%, and by the end of May, the yield had fallen -1.4% to 6.6%.
Long-term tax-exempt bond yields followed suit, however, not in quite the same
magnitude as the taxable market. The Bond Buyer 20 Municipal Bond Index yield
declined -1.1% (from 6.9% to 5.8%) over the same period.
The Florida, New Jersey, New York, Ohio, California, and Pennsylvania
Insured Long-Term Portfolios performed well over the six-month period. The
Portfolios benefited from an extension in their average weighted maturity that
began in the fourth quarter of the last fiscal year. Additionally, the
Portfolios' structure, with superior protection from early calls, aided in
maintaining the price responsiveness of the Portfolios during the market rally.
Looking ahead there are three main strategies that we expect to pursue
regarding the management of the money invested in the Florida, New Jersey, New
York, Ohio, California, and Pennsylvania Insured Long-Term Portfolios. The
first is a continued focus on improvements in call protection to enhance the
durability of dividends; second is investing to minimize taxable capital gains
distributions when it does not interfere with superior total return potential;
and third is a focus on higher coupon bonds that would position the Portfolios
more defensively should interest rates reverse direction and move higher.
ORANGE COUNTY
During the afternoon of December 1, 1994, reports began to appear in the media
that Orange County, California, had experienced massive losses from its
investment pool in the range of $1.5 billion. Several days later, a news
conference convened by county officials confirmed the losses. On December 6,
acting to prevent creditors from forcing the county to become insolvent, the
officials filed for bankruptcy protection under Chapter 9 of the Federal
Bankruptcy Code. This was the first municipal bankruptcy filing by a major
government since the Great Depression. So far, there have been no major
defaults on bonds by the county or the other 187 government pool participants
(mainly from Orange County). However, if plans for a financial rescue of the
County are not completed before the end of June 1995, a series of defaults
could occur which would rival the $2.5 billion default by the Washington Public
Power Supply System in 1984. Importantly, Vanguard has no direct exposure to
losses stemming from Orange County.
How this debacle happened is still being discussed and investigated.
The County Treasurer used reverse repurchase agreements to leverage the
6
<PAGE> 7
portfolio to roughly three times the value of the underlying investments. He
then invested about a quarter of the pool in exotic derivative securities which
had coupons that reset inversely to changes in interest rates. As rates rose
rapidly during 1994, the portfolio suffered massive unrealized market value
losses. Orange County was not the only jurisdiction to have experienced massive
investment losses in 1994. Highly publicized, but less serious problems
occurred in the investments of the State of Wisconsin, Cuyahoga County (Ohio),
and Odessa (Texas) Junior College District. As a result, state and local
government investments, investment policies, and investment oversight will be
more carefully scrutinized in the future.
Nevertheless, the aftershock of the bankruptcy extended well beyond
the boundaries of California, and consequently, all municipal money market
funds experienced its effects. The immediate reaction in the short-term
municipal market resulted in a rise in yields of +0.75 percentage points on all
general market notes. Orange County Tax and Revenue Anticipation Notes, and any
related credits, faced a much more severe crisis with virtually no bid for
these securities. Since then, liquidity for general market notes has returned,
and yields have rallied through their December levels. However, illiquidity
persists for Orange County investors as bondholders negotiate payment on the
notes that are due in July.
The Orange County bankruptcy underscores the benefit of the additional
layer of credit protection provided by the AAA-rated insurance policies
attached to the bonds that are owned by the State Insured Long-Term Portfolios.
As the bankruptcy story unfolded, most uninsured Orange County investment pool
related bonds were illiquid. In contrast, while insured Orange County related
bonds underperformed other insured bonds by three points, the insured market
was liquid. By late December, much of that underperformance had disappeared,
and at the end of the fiscal half, insured Orange County related bonds were
trading at prices just slightly lower than other insured bonds.
CONCLUSION
The Orange County bankruptcy has reinforced our commitment to rigorous credit
evaluation of the municipal securities in which we invest. This conservative
approach to assessing credit quality combined with Vanguard's low expenses
provides a high-quality investment that is exempt from both Federal and state
income taxes.
Respectfully,
Ian A. MacKinnon
Senior Vice President
Jerome J. Jacobs
Vice President
Pamela W. Tynan
Vice President
David E. Hamlin
Assistant Vice President
Reid O. Smith
Assistant Vice President
Danine A. Mueller
Portfolio Manager
Vanguard Fixed Income Group
June 14, 1995
7
<PAGE> 8
FINANCIAL STATEMENTS
(unaudited)
May 31, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (104.2%)
- -----------------------------------------------------------------------------------------------------
ISSUER INSURED (92.6%)
Allegany Health System Rev.
(St. Mary's Hosp.)
5.00%, 12/1/12 (1) $ 7,380 $ 6,882
Boynton Beach Utilities System
6.25%, 11/1/20 (3) 2,500 2,594
Broward County Solid Waste
5.75%, 7/1/13 (1) 5,130 5,177
Canaveral Port Auth.
6.00%, 6/1/06 (3) 1,000 1,063
Charlotte County Utility System
5.25%, 10/1/11 (3) 1,070 1,043
5.50%, 10/1/17 (3) 3,015 2,965
6.75%, 10/1/13 (3) 2,750 3,041
6.875%, 10/1/21 (3) 8,500 9,447
Coral Springs Improvement Dist. GO
6.00%, 6/1/10 (1) 2,300 2,450
Dade County Health Facilities Auth.
(Baptist Hosp. Miami)
5.25%, 5/15/13 (1) 5,500 5,266
(Jackson Memorial Hosp.)
5.25%, 6/1/23 (1) 3,000 2,781
Dade County School GO
6.125%, 6/1/14 (1) 6,660 6,906
Dade County Seaport GO
6.25%, 10/1/10 (2) 2,000 2,098
6.50%, 10/1/26 (2) 4,090 4,335
Dade County Water & Sewer System
VRDO 3.55%, 6/7/95 (3) 13,730 13,730
Davie Water & Sewer
6.375%, 10/1/12 (2) 2,500 2,784
Dunedin Utility System
6.75%, 10/1/08 (3) 1,115 1,274
6.75%, 10/1/10 (3) 2,465 2,816
Florida Municipal Power Agency
(Tricity Project)
5.00%, 10/1/10 (2) 4,340 4,165
Florida Turnpike Auth.
5.00%, 7/1/13 (3) 5,000 4,672
5.00%, 7/1/15 (3) 5,000 4,646
5.00%, 7/1/16 (3) 3,700 3,414
Fort Pierce Utilities Auth.
5.25%, 10/1/16 (2) 9,000 8,578
Greater Orlando Aviation Auth.
6.10%, 10/1/06 (2) 2,500 2,713
Gulf Breeze Local Govt. Pooled
Loan Program VRDO
3.80%, 6/8/95 (3) 19,720 19,720
Hillsborough County Industrial
Development Auth.
(Univ. Community Hosp.)
6.50%, 8/15/19 (1) 14,600 16,391
Indian River County Water & Sewer
5.25%, 9/1/18 (3) 6,415 6,077
6.50%, 9/1/08 (3) 2,540 2,861
Jacksonville Capital Improvement
(Gator Bowl Project)
5.50%, 10/1/19 (2) 5,850 5,749
Kissimee Utility Auth. Electric System
5.25%, 10/1/18 (3) 5,000 4,748
5.50%, 10/1/15 (3) 6,750 6,684
Lakeland Electric & Water
6.00%, 10/1/14* (3) 2,000 2,017
6.50%, 10/1/09* (3) 5,000 5,312
Lee County Transportation Facilities
5.75%, 10/1/22 (1) 4,500 4,494
Marion County Hosp. Dist.
(Monroe Regional Medical Center)
6.20%, 10/1/07 (3) 1,000 1,082
Melbourne Water & Sewer
6.375%, 10/1/12 (3) 1,000 1,056
Miami Beach Health Facilities Auth.
(Mt. Sinai Medical Center)
6.125%, 11/15/14 (4) 1,250 1,288
6.25%, 11/15/08 (4) 2,000 2,165
Miami GO 5.50%, 12/1/13 (3) 1,715 1,707
5.90%, 12/1/08 (3) 1,000 1,060
6.00%, 12/1/09 (3) 1,380 1,477
Orange County Health Auth. Hosp.
(Adventist for Sunbelt Group)
5.50%, 11/15/15 (2) 1,250 1,217
6.25%, 11/15/08 (2) 4,570 4,924
6.25%, 11/15/10 (2) 6,015 6,345
Orange County Tourist Development
5.75%, 10/1/19 (1) 7,750 7,781
5.90%, 10/1/10 (1) 1,250 1,318
Orlando & Orange County
Expressway Auth.
5.375%, 7/1/11 (2) 5,000 4,960
6.50%, 7/1/10 (3) 2,000 2,236
Osceola County Gas Tax Rev.
5.90%, 4/1/08 (3) 1,805 1,886
Palm Beach County Criminal
Justice Facility
5.375%, 6/1/07 (3) 5,280 5,357
5.375%, 6/1/08 (3) 2,375 2,389
5.375%, 6/1/11 (3) 1,120 1,111
7.20%, 6/1/15 (3) 3,000 3,622
Pinellas County Health
Facilities Auth.
5.60%, 7/1/23 (1) 7,000 6,825
(Morton Plant Hosp.)
5.25%, 11/15/12 (1) 2,705 2,615
5.50%, 11/15/18 (1) 2,000 1,966
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
St. Lucie County Utility System
5.50%, 10/1/15 (3)(ETM) $ 5,000 $ 4,951
6.00%, 10/1/20 (3) 3,165 3,389
6.00%, 9/1/24 (3) 11,750 11,898
6.50%, 10/1/08 (1)(ETM) 4,910 5,523
Sarasota County Utility System
5.75%, 10/1/12 (3) 4,325 4,384
7.00%, 10/1/09 (3) 6,260 7,312
Seacoast Utility Auth. 5.50%, 3/1/10 (3) 2,500 2,511
5.50%, 3/1/17 (3) 2,400 2,382
5.50%, 3/1/19 (3) 1,595 1,582
5.00%, 3/1/19 (3) 7,450 6,820
Seminole County School Board COP
6.125%, 7/1/14 (1) 1,000 1,037
6.125%, 7/1/19 (1) 2,500 2,574
6.50%, 7/1/21 (1) 2,750 2,951
Seminole County Water & Sewer Rev.
6.00%, 10/1/09 (1) 1,800 1,927
6.00%, 10/1/12 (1) 5,000 5,349
6.00%, 10/1/19 (1) 7,000 7,417
Tamarac Water & Sewer Utility
5.90%, 10/1/11 (3) 3,980 4,167
Tampa Water & Sewer
6.25%, 10/1/12 (3) 13,200 13,846
West Palm Beach Public Service Tax
6.125%, 3/1/10 (1) 1,560 1,630
----------
GROUP TOTAL 334,930
----------
- -----------------------------------------------------------------------------------------------------
NON-INSURED (11.6%)
Florida Board of Education
4.00%, 6/1/95 1,845 1,845
6.75%, 6/1/21 2,000 2,133
Florida Loan Council CP
4.25%, 8/9/95 (LOC) 6,000 6,004
Florida State Housing Finance
6.25%, 7/1/11 1,955 2,024
6.35%, 7/1/14 2,440 2,516
Gainesville Utility System
6.50%, 10/1/12 1,500 1,666
Hillsborough County Industrial
Development Auth. PCR VRDO
(Tampa Electric Co.)
4.10%, 6/2/95 1,755 1,755
Orlando Utilities Comm.
BAN VRDO 3.80%, 6/8/95 3,545 3,545
6.75%, 10/1/17 11,700 13,385
8.50%, 10/1/95 (Prere.) 2,000 2,070
Palm Beach County VRDO
(Norton Gallery of Art)
3.85%, 6/7/95 (LOC) 3,000 3,000
Tallahassee Consolidated Utility
6.20%, 10/1/19 2,000 2,066
----------
GROUP TOTAL 42,009
----------
- -----------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $364,024) 376,939
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-4.2%)
- -----------------------------------------------------------------------------------------------------
Other Assets--Note B 5,574
Payables for Securities Purchased (19,414)
Other Liabilities (1,229)
----------
(15,069)
- -----------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------
Applicable to 33,649,494 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $361,870
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.75
=====================================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AT MAY 31, 1995, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $352,622 $10.48
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses (1,994) (.06)
Unrealized Appreciation
of Investments--Note D 11,242 .33
- -----------------------------------------------------------------------------------------------------
NET ASSETS $361,870 $10.75
- -----------------------------------------------------------------------------------------------------
</TABLE>
BAN=Bond Anticipation Note
COP=Certificate of Participation
CP=Commercial Paper
GO=General Obligation
PCR=Pollution Control Revenue
TOB=Tender Option Bond
VRDO=Variable Rate Demand Obligation
(ETM)=Escrowed to Maturity
(Prere.)=Prerefunded
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association)
(2) AMBAC (AMBAC Indemnity Corporation)
(3) FGIC (Financial Guaranty Insurance Company)
(4) CGI (Capital Guaranty Insurance)
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.
* Security purchased on a when-issued or delayed delivery basis for which the
Fund has not taken delivery as of May 31, 1995.
9
<PAGE> 10
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
May 31, 1995
(000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,475
- ------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . 9,475
- ------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . . . . . . . . . $ 21
Management and Administrative . . . . . . . . . . . . . . . . . . . 257
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . 41 319
-----
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . 13
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . 3
Trustees' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 1
- ------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . 339
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . 9,136
- ------------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . (1,104)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . (711)
- ------------------------------------------------------------------------------------------------------------------
Realized Net Loss . . . . . . . . . . . . . . . . . . . . . (1,815)
- ------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . 40,126
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,656)
- ------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . . . . . 38,470
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . $45,791
==================================================================================================================
</TABLE>
10
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
MAY 31, November 30,
1995 1994
(000) (000)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . $ 9,136 $ 15,726
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . . (1,815) 2,813
0Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . . . . . . . 38,470 (38,293)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . 45,791 (19,754)
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . (9,136) (15,726)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . -- (1,923)
- ------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . (9,136) (17,649)
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . 37,598 84,351
-- In Lieu of Cash Distributions . . . . . . . . . . 5,767 11,780
-- Exchange . . . . . . . . . . . . . . . . . . . . 63,541 91,705
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . (30,688) (46,879)
-- Exchange . . . . . . . . . . . . . . . . . . . . (34,690) (89,056)
- ------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . . . . . . . . . . . . 41,528 51,901
- ------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . 78,183 14,498
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . 283,687 269,189
- ------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . $361,870 $283,687
==================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . $.281 $.550
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . -- $.070
- ------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,968 16,779
Issued in Lieu of Cash Distributions . . . . . . . . . . . . 555 1,133
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (6,404) (13,179)
- ------------------------------------------------------------------------------------------------------------------
4,119 4,733
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended November 30, September 1 to
SIX MONTHS ENDED ----------------------- November 30,
For a Share Outstanding Throughout Each Period MAY 31, 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $9.61 $10.86 $10.16 $10.00
----- ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . .281 .550 .537 .122
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . 1.140 (1.180) .700 .160
----- ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 1.421 (.630) 1.237 .282
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.281) (.550) (.537) (.122)
Distributions from Realized Capital Gains . . . . . -- (.070) -- --
----- ------ ------ ------
Total Distributions . . . . . . . . . . . . . (.281) (.620) (.537) (.122)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $10.75 $9.61 $10.86 $10.16
======================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . +14.93% -6.08% +12.38% +2.84%
- ----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . $362 $284 $269 $63
Ratio of Expenses to Average Net Assets . . . . . . . . 20%* .22% .21% .24%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 5.45%* 5.31% 5.01% 5.10%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . 26%* 43% 34% 15%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
Vanguard Florida Insured Tax-Free Fund is registered under the Investment
Company Act of 1940 as an open-end investment company. The Fund invests in
securities of municipal issuers whose ability to meet their obligations may be
affected by economic and political developments in the State of Florida.
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: 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: 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 Fund 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
Fund may purchase futures contracts instead of municipal bonds when
futures contracts are believed to be priced more attractively than
municipal bonds. The Fund 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 Fund 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 May 31, 1995, the Fund had contributed capital of $49,000 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.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (continued)
The Fund's investment adviser may direct certain new issue portfolio trades,
subject to obtaining the best price and execution, to underwriters who have
agreed to rebate or credit to the Fund a portion of the underwriting fees
generated. For the six months ended May 31, 1995, directed brokerage
arrangements reduced expenses of the Fund by $11,000 (an annual rate of .01 of
1% of average net assets).
C. During the six months ended May 31, 1995, the Fund made purchases of
$59,433,000 and sales of $37,438,000 of investment securities other than
temporary cash investments.
At November 30, 1994, the Fund had available a capital loss carryforward of
$197,000 to offset future net capital gains through November 30, 2002.
D. At May 31, 1995, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $12,915,000 of
which $14,195,000 related to appreciated securities and $1,280,000 related to
depreciated securities.
At May 31, 1995, the Fund had short positions in Municipal Bond Index and U.S.
Treasury Bond futures contracts expiring through September 1995, with an
aggregate settlement value and net unrealized depreciation of $33,540,000 and
$1,673,000, respectively. The market value of securities deposited as initial
margin for open futures contracts was $1,499,000.
14
<PAGE> 15
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 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
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
15
<PAGE> 16
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 LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard 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
[THE VANGUARD GROUP LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1-(800) 662-7447 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.
Q182-5/95
VANGUARD
FLORIDA
INSURED
TAX-FREE FUND
SEMI-ANNUAL REPORT
MAY 31, 1995
