<PAGE> 1
VANGUARD
FLORIDA
INSURED
TAX-FREE FUND
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on June
30, 1929. Its first fifteen years were a struggle for survival in an industry
that was shaken to its roots by the Great Crash of 1929-1933. From an initial
base of $100,000, Wellington's assets had grown to but $27 million by the end of
World War II. The Vanguard Group was founded on September 24, 1974. Soon
thereafter, we assumed responsibility for the management of Wellington Fund and
ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked by
exceptional growth. Today, Wellington Fund, with assets of nearly $9 billion,
remains one of the largest mutual funds in the nation. And Vanguard, now
managing 85 mutual fund portfolios, is entrusted with assets of $134 billion,
and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no debt
in an era of high leverage that would soon come back to haunt less cautious
investors. And it was a "balanced" fund--in fact, Wellington is America's oldest
balanced fund--with holdings from each of the three basic financial asset
classes: cash reserves, bonds, and common stocks. In short, Wellington Fund was
a staid investment in an era of stock speculation that was to become, almost
within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still our
watchword, because the three basic financial asset classes have different--and
usually countervailing--investment characteristics. When it began, Wellington
Fund provided a balanced program in a single investment; in 1994, such a balance
is often achieved by a combination of Vanguard money market, bond, and stock
funds.
"Conservatism," too, remains our standard. Over the years, we have tried to
maintain the discipline to eschew offering funds that lack sound financial
principles, often based on marketplace fads that could not--and did not--endure.
Our conservatism applies not only to the funds we offer, but to the instruments
in which they invest. For example, we have steered clear of exotic derivative
securities with unpredictable investment characteristics. Too many fund managers
have been taken in by these highly risky instruments, and their shareholders
have paid a heavy price--except in cases where the manager has "made the fund
whole," when to do otherwise would have shocked investors and impaired their
confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But the
investment principles to which we have adhered since Wellington Fund began in
1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(please turn to inside back cover)
VANGUARD FLORIDA INSURED TAX-FREE FUND SEEKS A HIGH LEVEL OF INCOME THAT IS
EXEMPT FROM FEDERAL AS WELL AS FLORIDA STATE INTANGIBLE TAXES, BY INVESTING
PRIMARILY IN INSURED LONG-TERM MUNICIPAL BONDS ISSUED BY FLORIDA STATE AND LOCAL
MUNICIPALITIES. THE FUND ALSO INVESTS IN BONDS FOR WHICH VANGUARD OBTAINS
INSURANCE COVERAGE, A FEATURE WHICH REDUCES CREDIT RISK AND HELPS TO ASSURE THE
TIMELY PAYMENTS OF PRINCIPAL AND INTEREST.
<PAGE> 3
CHAIRMAN'S LETTER
DEAR SHAREHOLDER:
The 1994 fiscal year for Vanguard State Tax-Free Fund, which ended on
November 30, 1994, was the most difficult year for bonds since the Fund's
inception some eight years ago, in April 1986. A persistent rise in long-term
interest rates during the twelve-month period sharply reduced the prices of
long-term tax-exempt bonds, and the net asset values of our Insured Long-Term
Portfolios declined accordingly. Rates also increased in the short-term arena,
to the substantial benefit of our Money Market Portfolios, which saw sharply
higher income yields during the year.
In each of our Money Market Portfolios and our Insured Long-Term
Portfolios, our returns exceeded the results of competitive funds with similar
objectives. The detailed fiscal year results for each of our State Tax-Free
Portfolios, including per share net asset values, dividends and capital gains
distributions for the year, as well as current yields, are presented in a table
at the conclusion of this letter.
Over the past twelve months, the STATE MONEY MARKET PORTFOLIOS provided
total returns in the area of +2.6%. As expected, net asset values remained at
$1.00 per share. Yields at the end of the fiscal year were generally about 50%
higher than they were at the beginning of the year, as shown in the following
table:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Total Return Seven-Day Annualized Yield
--------------- ---------------------------
Money Market 12 Months Ended Nov. 30, Nov. 30,
Portfolio Nov. 30, 1994 1993 1994 Increase
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA +2.6% 2.32% 3.44% +1.12%
PENNSYLVANIA +2.6 2.25 3.51 +1.26
NEW JERSEY +2.5 2.23 3.34 +1.11
OHIO +2.6 2.36 3.47 +1.11
- ------------------------------------------------------------
</TABLE>
These yields, of course, reflect income that is entirely exempt both from
Federal income taxes and from state and local taxes in the respective states. I
would reemphasize that in each case our yields exceed those available on
comparable state money market portfolios as a group. Indeed, our yield advantage
has persisted with remarkable regularity, year in and year out, such that the
longer-term returns of our Money Market Portfolios have nicely exceeded the
returns of their peer groups.
The STATE INSURED LONG-TERM PORTFOLIOS suffered through a challenging
year of rising rates, resulting in negative total returns (capital change plus
income) ranging from -5.4% to -6.4%. The good news is that current yields are
considerably more generous than they were one year ago, having risen by an
average of 1.5 percentage points (150 basis points).
In contrast to a year ago, when declining interest rates resulted in a
solid positive capital contribution (in the area of 6%) to our Insured Long-Term
Portfolios' total returns, this year the contribution from capital return has
been decidedly negative. The table on the following page summarizes the
components of return for each of our State Insured Long-Term Portfolios over the
past twelve months. If there is a better example of the "two way street" of
interest rate sensitivity, I am not sure that I have seen it.
(continued)
[FIGURE 1]
1
<PAGE> 4
[FIGURE 2]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended November 30, 1994
- -------------------------------------------------------------
Since
1 Year Inception*
- -------------------------------------------------------------
<S> <C> <C>
VANGUARD FL LONG-TERM PORTFOLIO -6.08% +3.72%
AVERAGE FL MUNICIPAL FUND -8.45 +1.77
LEHMAN MUNICIPAL BOND INDEX -5.23 +2.97
</TABLE>
*Inception, September 1, 1992. Performance begins on August 31, 1992, to show
competitive data.
Note: Past performance is not predictive of future performance.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Investment Returns
-----------------------------------
Twelve Months Ended
November 30, 1994
Insured Long-Term -----------------------------------
Portfolio Income Capital Total
- ----------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA 5.1% -11.0% -5.9%
NEW YORK 5.1 -11.5 -6.4
PENNSYLVANIA 5.3 -10.7 -5.4
NEW JERSEY 5.1 -11.2 -6.1
OHIO 4.9 -11.2 -6.3
FLORIDA 4.9 -11.0 -6.1
- ----------------------------------------------------------
</TABLE>
Note: The California Insured Intermediate-Term Portfolio began
operations on March 4, 1994. The Portfolio's returns since inception
were: Income +3.4%; Capital -3.6%; Total -0.2%.
In last year's letter, speaking about the remarkable capital returns that had
redounded to long-term bond investors over the prior two years, I cautioned that
"capital returns of the magnitude shown simply cannot be taken for granted,"
adding that "should rates reverse direction and move higher, `capital reward'
will inevitably translate to `capital penalty' for each of our six Insured
Long-Term Portfolios." That capital penalty has surely come to pass.
Despite a difficult 1994, the long-term returns of each of our Insured
Long-Term Portfolios remain exemplary, particularly when considered in the
context of what we would regard as our two most appropriate benchmarks: the
unmanaged Lehman Municipal Bond Index and the average competitive fund in each
respective state category. The chart above shows the cumulative returns earned
by the Florida Insured Long-Term Portfolio since its inception in September
1992, compared with each of these benchmarks.
You can see in the chart that the Portfolio achieved a nice margin over
the average Florida municipal fund and the unmanaged Lehman Municipal Bond
Index. This Index, I would remind you, represents a challenging hurdle for all
state tax-free funds, existing, as it does, outside of the "real world" of
operating expenses and transaction costs. Given that transaction costs in the
bond market are normally quite substantial, our ability to earn a solid positive
performance margin (albeit over a brief period) is exceptional.
2
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[FIGURE 3]
THE FISCAL YEAR IN REVIEW
The declining interest rate environment that had persisted with striking
consistency since October 1987 came to an end in mid-October 1993. By November
30, 1993, the yield on the long-term U.S. Treasury bond had fallen to 6.3%; by
the end of the Fund's fiscal year on November 30, 1994, the long Treasury yield
had jumped back to the 8.0% level. In all, the prices of long-term U.S. Treasury
bonds fell nearly -20% over the fiscal period. In the short-term arena, the
yield on the U.S. Treasury bill rose from 3.2% to 5.8% over the same period.
Because of the bill's short maturity, its price remained virtually flat during
the entire period.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little evidence of it. The CPI has risen just 2.7% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve has acted
to "tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases-- in February, March,
April, May, August, and again in November--combined to raise the federal funds
rate (at which banks borrow from one another) from 3.00% to 5.50%. Still, the
specter of inflation remains, and further rate increases may well lie in
prospect.
Yields on long-term municipal bonds followed the lead of U.S. Treasury
bonds, although the prices of long municipals provided slightly better
resistance than their taxable cousins to the overall decline in the bond market.
This resistance was based largely on the fact that tax-exempt bonds began the
fiscal year with yields that were extremely attractive relative to taxable
bonds. Indeed, as I mentioned a year ago in our Annual Report for fiscal 1993,
"relative values in tax-exempt bonds are as great on a sustained basis as they
have been for two decades." The result was that municipal bond prices pretty
much held their own through January, declined slightly less than long Treasuries
through the end of August, only to fall more sharply in the final months of the
Fund's fiscal year. On balance, for the full period, the yield on high-grade,
30-year tax-exempt bonds rose from 5.5% to 6.9%, reflected in a price decline of
about -18%.
The chart to the left shows the changing pattern of long-term and
short-term tax-exempt yields during our past five fiscal years. It provides some
perspective on the recent increase in yields, which, on the long-term side, have
merely returned to their level in mid-1991, about the same as the yield level at
the beginning of 1990. The 3.8% yield on short-term tax-exempt notes is now
approximately at the level reached in late 1991, but is well below the 5.8%
yield that prevailed when 1990 began.
The interplay of short-term and long-term rates has resulted in dramatic
changes over time in the yield "spread" (the difference between the two yields,
as shown in the lower chart). At the start of the period, the spread amounted to
only 110 "basis points" (1.1%) with 30-year municipal bonds yielding 7.0% and
90-day notes yielding 5.9%. By early 1992 the
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<PAGE> 6
spread had risen to nearly 400 basis points, and investors who decided
to choose short-term notes over long-term bonds had to relinquish nearly
two-thirds of their yield. Today, the spread has narrowed to about 300 basis
points, but fixed-income investors who are willing to extend the maturity of
their bond holdings still earn a solid premium in return for the additional
price volatility that they incur.
TAX-EXEMPT VERSUS TAXABLE YIELDS
One of the (too often) unsung advantages of tax-exempt income is the sharp
increase in spendable income compared to the income that would be garnered,
after taxes, on a taxable bond. In the lower rate environment of a year ago, as
I mentioned earlier in this letter, this advantage--for investors in the highest
marginal Federal tax bracket (now 39.6%)--was well above historical norms, with
tax-exempt securities providing net spendable income 45% higher than that
available on taxable U.S. Treasury bonds, and 26% higher than that available on
U.S. Treasury bills.
One year later, this "spread" remains virtually unchanged on the
long-term side (a +44% premium) but has been more than halved on the short-term
side (a +9% premium). This table presents a comparison of the income earned on
tax-exempt and taxable securities as of November 30, 1994, assuming a $100,000
investment.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Illustration of Income on
Hypothetical $100,000 Investment
--------------------------------
Long-Term Short-Term
- ------------------------------------------------------------
<S> <C> <C>
TAXABLE GROSS INCOME $ 8,000 $ 5,800
LESS TAXES (39.6%) (3,200) (2,300)
-------- --------
NET AFTER-TAX INCOME 4,800 3,500
- ------------------------------------------------------------
TAX-EXEMPT INCOME $ 6,900 $ 3,800
- ------------------------------------------------------------
INCREASE IN AFTER-TAX INCOME $ 2,100 $ 300
- ------------------------------------------------------------
</TABLE>
Table assumes current yields (as of November 30, 1994) of 8.0% for U.S.
Treasury bonds, 5.8% for U.S. Treasury bills, 6.9% for long-term municipals, and
3.8% for short-term municipals. The illustration is not intended to represent
future results.
The table provides a clear illustration of the yield improvement available
today to an investor in the top tax bracket. Of course, the comparison is
hardly perfect, since the "full faith and credit" of the U.S. Treasury remains
peerless, while municipal bonds engender some degree of risk. Perhaps nothing
could have made this risk clearer than the recent debacle in Orange County,
California, in which an investment pool managed by the County suffered huge
losses resulting from its leveraged strategy and derivative securities
holdings. This event serves as an important reminder that "state-specific"
portfolios engender an additional level of risk due to their highly concentrated
investments in particular economic regions.
The Orange County bankruptcy reinforces the substantial value of private
portfolio insurance, which is provided--by high-quality insurance companies--for
virtually all of the bonds held in our Insured Portfolios. This insurance, in
effect, guarantees the full payment of annual income and, at maturity, principal
for the municipal bonds that we hold. (It does not, of course, protect against
price volatility.) The result is that each of our Insured Long-Term Portfolios
carries an implied average quality rating of Aaa--the highest rating accorded by
Moody's Investor Services. This insurance provides credit quality enhancement
that virtually eliminates the extra risk that would otherwise be engendered by
the concentration of investments that is inevitably part and parcel of investing
in single-state municipal bond funds. We believe such protection is critical.
Portfolio insurance is generally not available for money market
portfolios, although the same state-specific risks exist. In the absence of
portfolio insurance, our professional money managers must be even more diligent
in their scrutiny of the credit quality of our portfolio holdings. Their efforts
here include purchasing as many high-quality and "credit-enhanced" securities as
they can. The enhancements for these securities consist of irrevocable letters
of credit from high-quality banks guaranteeing each issuer's timely payments of
principal and interest. This credit support, in conjunction with our diligent
credit analysis, has earned each of the holdings in our Money Market Portfolios
Moody's highest quality rating (or the equivalent) for shorter-term instruments.
As far as we know, our Portfolios are unsurpassed with respect to credit quality
by any competitor.
On this point, I would stress that no state money market portfolio is
exempt from credit and
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<PAGE> 7
maturity risk. That is to say, there is no principal guarantee such as that
provided through bank savings accounts and certificates of deposit insured by
the Federal Deposit Insurance Corporation. However, we believe that the $1.00
net asset value will be preserved by state money market funds that maintain
diligent credit analysis, secure letters of credit to the degree possible, and
maintain their average portfolio maturities within the statutory maximum of 90
days.
LOOKING AHEAD
A year ago in my 1993 letter to shareholders, I cautioned that "with rates
having come down so far and so fast, there is always the risk of a sharp
rebound." That risk "came home to roost" during fiscal 1994. However, I believe
that during fiscal 1995 the probabilities now favor greater stability in
long-term tax-exempt rates, and somewhat higher short-term rates. While there
are some recent signals of higher inflation in the economy, it would not be
unusual if the financial markets' expectations are already, at least in part,
manifested in higher yields.
Whatever the future course of interest rates, I urge you to consider the
risk-reward pattern of your investment in the Vanguard State Tax-Free Fund in
terms of your own needs and circumstances. In our Insured Long-Term Portfolios,
that means balancing the need for income stability with a commensurate level of
principal volatility. Our Money Market Portfolios seek to maintain a $1.00 per
share net asset value, but this capital stability comes at the expense of
substantial income volatility.
In the final analysis, the best course of action is almost always to
"stay the course" with the long-term objectives that you have established. We,
too, intend to stay the course with the consistent objectives and policies that
we have established for our Portfolios. In doing so, we are confident that the
Vanguard State Tax-Free Portfolios will continue to provide returns that
generally exceed those of their respective competitors.
In a very real sense, this is no idle boast, since our durable cost
advantage gives us a "leg up" in performance before the year has even begun.
Indeed, while the average competitive state tax-free fund charges annual fees at
the rate of 0.78% of average net assets, the expense ratio for the Vanguard
State Tax-Free Portfolios, at 0.20%, is only about one-quarter of this amount.
In the case of a municipal money market portfolio earning a current gross yield
of, say, 3.8%, the expenses for the average state tax-free fund would consume
about 20% of their income; Vanguard's expenses, on the other hand, would consume
but 5%. This remarkable income advantage--available with no sacrifice whatsoever
in credit quality--is there for the taking.
I look forward to writing to you again six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board December 20, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value
Total Per Share
Net Assets ------------------ Twelve Months
(millions) Average Average Nov. 30, Nov. 30, ------------------------ Current
Portfolio Nov. 30, 1994 Maturity Quality* 1993 1994 Dividends Total Return Yield**
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA............ $1,159 51 DAYS MIG 1 $ 1.00 $ 1.00 $.026 + 2.6% 3.44%
PENNSYLVANIA.......... 1,105 45 DAYS MIG 1 1.00 1.00 .025 + 2.6 3.51
NEW JERSEY............ 792 48 DAYS MIG 1 1.00 1.00 .025 + 2.5 3.34
OHIO.................. 147 50 DAYS MIG 1 1.00 1.00 .026 + 2.6 3.47
- -------------------------------------------------------------------------------------------------------------------------
INSURED LONG-TERM
CALIFORNIA............ $ 834 18.7 YEARS Aaa $11.30 $ 9.92 $.756+ - 5.9% 6.49%
CALIFORNIA INTERMEDIATE-
TERM................ 100 8.2 YEARS Aaa -- 9.64 .346++ - 0.2++ 5.80
NEW YORK.............. 695 16.1 YEARS Aaa 10.97 9.70 .600+ - 6.4 6.32
PENNSYLVANIA.......... 1,299 18.4 YEARS Aaa 11.36 10.07 .704+ - 5.4 6.41
NEW JERSEY............ 645 17.2 YEARS Aaa 11.77 10.40 .685+ - 6.1 6.28
OHIO.................. 149 17.6 YEARS Aaa 11.61 10.28 .631+ - 6.3 6.31
FLORIDA............... 284 18.5 YEARS Aaa 10.86 9.61 .620+ - 6.1 6.31
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* MIG 1 and Aaa are Moody's highest ratings for short-term and long-term
municipal bonds, respectively.
** Money Market Portfolios' yields are 7-day annualized yields; others are
30-day SEC yields.
+ Include capital gains distributions of $.152 for California, $.012 for New
York, $.079 for Pennsylvania, $.063 for New Jersey, and $.032 for Ohio, and
$.070 for Florida.
++ Since inception, March 4, 1994.
Note: The shares of each of the Vanguard "single-state" Portfolios are
available for purchase solely by residents of the designated states.
THE CURRENT YIELDS NOTED IN THE CHAIRMAN'S LETTER ARE CALCULATED IN
ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED SEPTEMBER 30, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
---------------------------------
INCEPTION TOTAL INCOME CAPITAL
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA INSURED LONG-TERM 4/7/86 -3.33% +7.74% +7.44% +6.55% +0.89%
CALIFORNIA INSURED INTERMEDIATE-TERM 3/4/94 -- -- +2.23 +2.63 -0.40
CALIFORNIA MONEY MARKET 6/1/87 +2.46 +3.69 +4.22 +4.22 0.00
NEW YORK INSURED TAX-FREE 4/7/86 -3.25 +8.04 +6.96 +6.54 +0.42
PENNSYLVANIA INSURED LONG-TERM 4/7/86 -2.23 +8.36 +7.81 +6.77 +1.04
PENNSYLVANIA MONEY MARKET 6/13/88 +2.44 +3.77 +4.25 +4.25 0.00
NEW JERSEY INSURED LONG-TERM 2/3/88 -3.30 +8.10 +8.22 +6.56 +1.66
NEW JERSEY MONEY MARKET 2/3/88 +2.36 +3.73 +4.23 +4.23 0.00
OHIO INSURED LONG-TERM 6/18/90 -3.32 -- +8.31 +6.05 +2.26
OHIO MONEY MARKET 6/18/90 +2.44 -- +3.43 +3.43 0.00
FLORIDA INSURED TAX-FREE 9/1/92 -2.98 -- +5.99 +5.25 +0.74
</TABLE>
THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL
VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE NOTE THAT AN INVESTMENT IN A MONEY MARKET FUND, SUCH AS THE MONEY
MARKET 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.
6
<PAGE> 9
REPORT FROM THE INVESTMENT ADVISER
STATE INSURED LONG-TERM PORTFOLIOS
LOOK TO THE LONG TERM
It has been a volatile fiscal year for fixed-income investors. The economy
continued down the path of robust expansion, raising fears of a pick-up in
inflation and resulting in a broadbased decline in bond prices. For example, the
Bond Buyer 40 Municipal Bond Index lost -18% of its principal value over the
period as its yield rose from 5.7% to 7.2%.
Considering this hostile economic environment, the State Insured
Long-Term Portfolios performed somewhat better than one might expect. On a total
return basis, each Portfolio performed competitively relative to similar
long-term bond funds. It is particularly important in difficult markets to
remain focused on long-term objectives. While share price volatility is far
easier to endure when prices rise than when they fall, the long-term reward of a
period of falling prices is ultimately a higher and more durable level of
tax-exempt income.
LIQUIDITY "CRISIS"
Municipal bonds fell sharply in price during the spring, leveled off briefly
during the early summer, and then resumed falling sharply after August.
Shareholder redemptions created periods of distressed municipal bond fund
selling; for many portfolios, maintaining liquidity was a key factor in
weathering the downturn. Our Portfolios carry a high percentage of cash reserves
(8%-10%) to meet shareholder transactions, a policy which proved especially
helpful during the recent price declines. At no time were the State Insured
Long-Term Portfolios forced to sell securities at "distressed" levels.
On the plus side, the higher yields in the marketplace have greatly
reduced the issuance of new municipal bonds. The total issuance of tax-exempt
securities has declined 37% during the fiscal year. Rising yields increased
municipal issuers' cost of funds, eliminating the economic rationale for
refundings that bloated supply last year. Other factors held equal, the drop in
new supply enhances the value of existing tax-exempt securities, particularly in
higher tax states where investor demand is greater.
PURSUING THE DIVIDEND
As we mentioned in our last Semi-Annual Report, a reduction in average maturity
prior to the recent bear market enhanced our relative fund performance. The
State Insured Long-Term Portfolios focused on the slightly lower-yielding but
less volatile securities maturing in the 15- to 20-year range. This strategy
provided a moderate amount of insulation as bond prices fell. Over the next six
months, the Portfolios will pursue 25- to 30-year securities, effecting a
gradual extension of average maturity to a more normal historical range. The
commensurate benefit will be an anticipated increase in dividend, as current
yields on longer securities have reached substantially higher levels.
Looking forward at year end, various market sources estimate that
anywhere from $45 to $60 billion in proceeds will be received by tax-exempt
participants by January 1, 1995. Barring a significant increase in new issuance,
this bodes well for adequate liquidity and should continue to provide more
attractive returns for municipal bonds than their taxable brethren.
STATE MONEY MARKET PORTFOLIOS
WEATHERING THE STORM...
The fiscal year can be characterized as one of protracted economic strength.
In an attempt to curb inflation and target a moderate economic growth rate,
the Federal Reserve Board tightened money supply. During 1994, the Federal
Reserve was forced to raise the Federal funds rate (the rate banks charge each
other for overnight loans) six times, for a total increase of 2.50%. The most
recent change occurred on November 15, when the Fed increased rates 0.75%, the
largest single move by the Fed since 1981. The markets reacted accordingly, with
yields on 1-year U.S. Treasury bills rising 3.3 percentage points over the
fiscal year, to 6.9%, and yields on comparable 1-year municipal notes rising 2.1
percentage points, to 4.5%.
The relative underperformance of municipal versus taxable yields can be
attributed to the dwindling supply of short-term municipal securities. The
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<PAGE> 10
reduction was a result of municipalities extending issuance beyond one year, and
economic strength reducing the amount of borrowing necessary to finance their
cash needs. This filtered down to the fund level, as yields on state tax-exempt
money market funds increased a mere 1.0% over the fiscal year, while taxable
money fund yields increased 2.0%. For investors in lower tax brackets, this
differential meant that taxable money market funds became a viable alternative.
The Vanguard State Tax-Free Money Market Portfolios were prepared for
the rise in interest rates early in the year, as we positioned average weighted
maturities in a bearish range of 45-60 days. This strategy enabled us to take
advantage of rising rates while further assuring our $1.00 net asset value. Our
low expense ratios also helped us to outperform our competitors on a net yield
basis, despite the fact that many of them continue to inflate their gross yields
through quality differentials and securities subject to the alternative minimum
tax (AMT).
HISTORICAL EVENT???
Much has been written this past year about the risks of "derivative securities"
in taxable money market funds. Most notably, Community Banker's U.S.
Government Money Market Fund went down in history as being the first money
fund to "break the buck." The fund sacrificed its net asset value in exchange
for higher returns by investing in certain types of exotic and inappropriate
derivative securities. While it is true that some derivatives can be dangerous
when used inappropriately, not all derivatives are "evil." In fact, certain
derivatives can be used safely and may even improve the total quality of one's
portfolio.
The definition of a derivative (a security whose return is derived from
another security) is broad, and encompasses instruments that are "exotic" as
well as "plain vanilla." The Vanguard State Tax-Free Money Market Portfolios do
invest in securities which fall under the derivative definitional "umbrella,"
but those securities do not even remotely resemble the exotic instruments used
in the now defunct Community Banker's Fund. The derivative structures held in
our Portfolios are floating rate or "put" securities, with minimum ratings of AA
or better. In addition, all of our derivatives have coupons that reset
frequently to ensure that their market prices remain close to par (100), and
they contain the option to tender or sell them at par (100). These securities,
more commonly referred to as tender option bonds, are designed to imitate the
same characteristics of non-derivative variable rate securities. The indexes
used to determine the coupon reset are the same as those used to determine
non-derivative variable rate securities.
In contrast, the derivatives responsible for the recent taxable money
fund problems utilized indexes not directly related to short-term money market
rates. This is a dangerous game to play, particularly in the rising interest
rate environment experienced in 1994. The U.S. Securities and Exchange
Commission (SEC) has clearly outlined the types of derivative securities that
are inappropriate for money market funds. We affirm to our investors that at no
time has any Vanguard Portfolio invested in securities deemed inappropriate by
the SEC.
It is unfortunate that all derivatives are being branded as speculative,
when indeed many are used to enhance the overall quality of a portfolio. Unlike
Vanguard, some money market funds may engage in investments that fail to adhere
to conservative guidelines. Consequently, investors should remember that there
is no such thing as a "free lunch." When money market funds are offering yields
too good to be true, they probably are too good to be true, unless a fund has
the advantage of low expenses. We have this advantage. Our extremely low expense
ratios permit us to take and maintain the "high ground" with respect to both
liquidity and quality.
Sincerely,
Ian A. MacKinnon Jerome J. Jacobs
Senior Vice President Vice President
Pamela W. Tynan David E. Hamlin
Vice President Assistant Vice President
Reid O. Smith Danine A. Mueller
Assistant Vice President Portfolio Manager
December 12, 1994
8
<PAGE> 11
FINANCIAL STATEMENTS
November 30, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (101.7%)
- ----------------------------------------------------------
ISSUER INSURED (92.0%)
Allegany Health System Rev.
(St. Mary's Hosp.)
5.00%, 12/1/12 (1) $ 7,380 $ 5,927
Brevard County GO
5.80%, 3/1/05 (1) 1,200 1,151
Broward County Solid Waste
5.75%, 7/1/13 (1) 5,130 4,551
Canaveral Port Auth.
6.00%, 6/1/06 (3) 1,000 973
Charlotte County Utility System
5.25%, 10/1/11 (3) 1,070 897
5.50%, 10/1/17 (3) 3,015 2,536
6.75%, 10/1/13 (3) 2,750 2,734
6.875%, 10/1/21 (3) 8,500 8,528
Coral Springs Improvement Dist. GO
6.00%, 6/1/10 (1) 2,300 2,144
Dade County Health Facilities Auth.
(Baptist Hosp. Miami)
5.25%, 5/15/13 (1) 5,500 4,541
(Jackson Memorial Hosp.)
5.25%, 6/1/23 (1) 3,000 2,343
Dade County School GO
5.00%, 8/1/13 (1) 2,000 1,604
6.125%, 6/1/14 (1) 6,660 6,171
Dade County Seaport GO
6.25%, 10/1/10 (2) 2,000 1,916
6.50%, 10/1/26 (2) 4,000 3,824
Dade County Water & Sewer
VRDO 3.40%, 4/5/95 (3) 8,210 8,210
5.00%, 10/1/13 (3) 10,900 8,734
Davie Water & Sewer
6.375%, 10/1/12 (2) 2,500 2,421
Daytona Beach Water & Sewer
5.75%, 11/15/08 (2) 2,470 2,270
Dunedin Utility System
6.75%, 10/1/08 (3) 1,115 1,145
6.75%, 10/1/10 (3) 2,465 2,505
Florida Municipal Power Agency
(Tricity Project)
5.00%, 10/1/10 (2) 4,340 3,549
Florida Turnpike Auth.
TOB VRDO 3.80%, 1/1/95 (3) 3,540 3,540
5.00%, 7/1/13 (3) 5,000 4,031
5.00%, 7/1/15 (3) 5,000 3,959
5.00%, 7/1/16 (3) 3,700 2,910
6.35%, 7/1/22 (3) 2,305 2,156
Fort Pierce Utilities Auth.
5.25%, 10/1/16 (2) 9,000 7,310
Greater Orlando Aviation Auth.
6.10%, 10/1/06 (2) 2,500 2,469
Gulf Breeze Local Govt. Pooled
Loan Program VRDO
3.65%, 12/1/94 (3) 3,805 3,805
Hillsborough County Industrial
Development Auth.
(Univ. Community Hosp.)
6.50%, 8/15/19 (1) 8,600 8,242
Hillsborough Solid Waste
& Resource Rev.
5.60%, 10/1/07 (1) 5,145 4,683
Indian River County Water & Sewer
5.25%, 9/1/18 (3) 3,215 2,574
6.50%, 9/1/08 (3) 2,540 2,560
Jacksonville Capital Improvement
(Gator Bowl Project)
5.50%, 10/1/19 (2) 5,850 4,895
Kissimee Utility Auth. Electric
System
5.25%, 10/1/18 (3) 5,000 4,002
5.50%, 10/1/15 (3) 6,750 5,772
Marion County Hosp. Dist.
(Monroe Regional Medical Center)
6.20%, 10/1/07 (3) 1,000 981
Melbourne Water & Sewer
6.375%, 10/1/12 (3) 1,000 963
Miami Beach Health Facilities Auth.
(Mt. Sinai Medical Center)
6.125%, 11/15/14 (4) 1,250 1,147
6.25%, 11/15/08 (4) 2,000 1,946
Miami GO
5.50%, 12/1/13 (3) 1,715 1,473
5.90%, 12/1/06 (3) 1,280 1,224
5.90%, 12/1/08 (3) 1,000 933
6.00%, 12/1/09 (3) 1,380 1,288
Orange County Tourist Development
5.75%, 10/1/19 (1) 7,750 6,718
5.90%, 10/1/10 (1) 1,250 1,140
6.00%, 10/1/21 (2) 2,975 2,649
Orlando & Orange County
Expressway Auth.
5.375%, 7/1/11 (2) 5,000 4,249
6.50%, 7/1/10 (3) 2,000 1,994
Osceola County Gas Tax Rev.
5.90%, 4/1/08 (3) 1,805 1,690
Palm Beach County Criminal
Justice Facility
5.375%, 6/1/07 (3) 5,280 4,669
5.375%, 6/1/08 (3) 2,375 2,070
5.375%, 6/1/11 (3) 1,120 946
7.20%, 6/1/15 (3) 3,000 3,169
Palm Beach County Solid
Waste Auth.
5.75%, 12/1/04 (1) 2,000 1,926
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------
<S> <C> <C>
Pinellas County Health
Facilities Auth.
5.60%, 7/1/23 (1) $ 7,000 $ 5,810
(Morton Plant Hosp.)
5.25%, 11/15/12 (1) 2,705 2,240
5.50%, 11/15/18 (1) 2,000 1,658
St. Lucie County Utility System
5.50%, 10/1/15 (3)(ETM) 5,000 4,244
6.00%, 10/1/20 (3) 3,165 2,880
6.00%, 9/1/24 (3) 11,750 10,453
6.50%, 10/1/08 (1)(ETM) 4,910 4,963
Sarasota County Utility System
5.75%, 10/1/12 (3) 4,325 3,851
7.00%, 10/1/09 (3) 6,260 6,530
Seacoast Utility Auth.
5.50%, 3/1/10 (3) 2,500 2,188
5.50%, 3/1/17 (3) 2,400 2,059
5.50%, 3/1/19 (3) 1,595 1,353
Seminole County School Board COP
6.125%, 7/1/14 (1) 1,000 926
6.125%, 7/1/19 (1) 2,500 2,279
6.50%, 7/1/21 (1) 2,750 2,623
Seminole County Water &
Sewer Rev.
6.00%, 10/1/09 (1) 1,800 1,687
6.00%, 10/1/12 (1) 5,000 4,590
6.00%, 10/1/19 (1) 7,000 6,294
Tamarac Water & Sewer Utility
5.90%, 10/1/11 (3) 3,980 3,616
Tampa Hosp. Rev.
(St. Joe's Hosp.)
6.50%, 12/1/23 (1) 1,000 945
Tampa Water & Sewer
6.25%, 10/1/12 (3) 5,700 5,418
West Palm Beach Public Service Tax
6.125%, 3/1/10 (1) 1,560 1,488
---------
GROUP TOTAL 260,852
---------
- ----------------------------------------------------------
NON-INSURED (9.7%)
Florida Board of Education
4.00%, 6/1/95 1,845 1,835
6.75%, 6/1/21 2,000 1,978
Florida State Housing Finance
6.25%, 7/1/11 2,000 1,860
6.35%, 7/1/14 2,500 2,315
Gainesville Utility System
6.50%, 10/1/12 1,500 1,480
Hillsborough County Industrial
Development Auth. PCR VRDO
(Tampa Electric Co.)
3.45%, 12/1/94 1,300 1,300
Orlando Utilities Comm.
BAN VRDO 3.60%, 12/1/94 3,545 3,545
6.75%, 10/1/17 7,700 7,735
Tallahassee Consolidated Utility
6.20%, 10/1/19 3,900 3,603
Volusia County Tourist
Development TOB VRDO
3.80%, 12/1/94 2,000 2,000
---------
GROUP TOTAL 27,651
---------
- ----------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $315,714) 288,503
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.7%)
- ----------------------------------------------------------
Other Assets--Note B 10,786
Accounts Payable for Securities Purchased (14,311)
Other Liabilities (1,291)
---------
(4,816)
- ----------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------
Applicable to 29,530,298 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $283,687
- ----------------------------------------------------------
NET ASSET VALUE PER SHARE $9.61
==========================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
AT NOVEMBER 30, 1994, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital $311,094 $10.53
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses--Note C (179) --
Unrealized Depreciation
of Investments--Note D (27,228) (.92)
- ----------------------------------------------------------
NET ASSETS $283,687 $9.61
- ----------------------------------------------------------
</TABLE>
BAN=Bond Anticipation Note
COP=Certificate of Participation
GO=General Obligation
PCR=Pollution Control Revenue
TOB=Tender Option Bond
VRDO=Variable Rate Demand Obligation
(ETM)=Escrowed to Maturity
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.
10
<PAGE> 13
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
November 30, 1994
(000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest............................................................. $ 16,370
- -----------------------------------------------------------------------------------------------------------------------
Total Income................................................ 16,370
- -----------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services...................................... $ 33
Management and Administrative..................................... 490
Marketing and Distribution........................................ 73 596
------
Auditing Fees........................................................ 7
Shareholders' Reports................................................ 35
Annual Meeting and Proxy Costs....................................... 5
Trustees' Fees and Expenses.......................................... 1
- -----------------------------------------------------------------------------------------------------------------------
Total Expenses.............................................. 644
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Income.................................... 15,726
- -----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold........................................... (2,646)
Futures Contracts.................................................... 5,459
- -----------------------------------------------------------------------------------------------------------------------
Realized Net Gain........................................ 2,813
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities................................................ (37,613)
Futures Contracts.................................................... (680)
- -----------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation)........................................ (38,293)
- -----------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations............................. $(19,754)
=======================================================================================================================
</TABLE>
11
<PAGE> 14
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
NOVEMBER 30, 1994 November 30, 1993
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income................................................. $ 15,726 $ 9,441
Realized Net Gain (Loss).............................................. 2,813 (1,044)
Change in Unrealized Appreciation
(Depreciation)..................................................... (38,293) 10,257
- -----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations....................................... (19,754) 18,654
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income................................................. (15,726) (9,441)
Realized Net Gain..................................................... (1,923) --
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions................................................ (17,649) (9,441)
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular.................................................. 84,351 152,794
-- In Lieu of Cash Distributions............................ 11,780 6,508
-- Exchange................................................. 91,705 109,713
Redeemed -- Regular.................................................. (46,879) (23,593)
-- Exchange................................................. (89,056) (48,800)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions...................................... 51,901 196,622
- -----------------------------------------------------------------------------------------------------------------------
Total Increase.................................................... 14,498 205,835
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year..................................................... 269,189 63,354
- -----------------------------------------------------------------------------------------------------------------------
End of Year........................................................... $283,687 $269,189
=======================================================================================================================
(1) Distributions Per Share
Net Investment Income............................................. $.550 $ .537
Realized Net Gain................................................. $.070 --
- -----------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued............................................................ 16,779 24,750
Issued in Lieu of Cash Distributions.............................. 1,133 605
Redeemed.......................................................... (13,179) (6,793)
- -----------------------------------------------------------------------------------------------------------------------
4,733 18,562
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended September 1 to
NOVEMBER 30, November 30, November 30,
For a Share Outstanding Throughout Each Period 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..................... $10.86 $10.16 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.................................. .550 .537 .122
Net Realized and Unrealized Gain (Loss)
on Investments...................................... (1.180) .700 .160
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS ................ (.630) 1.237 .282
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................... (.550) (.537) (.122)
Distributions from Realized Capital Gains.............. (.070) -- --
------ ------ ------
TOTAL DISTRIBUTIONS ............................. (.620) (.537) (.122)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ........................... $9.61 $10.86 $10.16
=======================================================================================================================
TOTAL RETURN ............................................. -6.08% +12.38% +2.84%
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions)...................... $284 $269 $63
Ratio of Expenses to Average Net Assets................... .22% .21% .24%*
Ratio of Net Investment Income to Average Net Assets...... 5.31% 5.01% 5.10%*
Portfolio Turnover Rate................................... 43% 34% 15%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
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
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (continued)
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 November 30, 1994, the Fund had contributed capital of $45,000 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.
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 year ended November 30, 1994, directed brokerage
arrangements reduced expenses of the Fund by $38,000 ( .01 of 1% of average
net assets).
C. During the year ended November 30, 1994, the Fund made purchases of
$175,953,000 and sales of $117,945,000 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 November 30, 1994, unrealized depreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $27,211,000 of
which $197,000 related to appreciated securities and $27,408,000 related to
depreciated securities.
At November 30, 1994, the Fund had short positions in Municipal Bond Index
futures contracts expiring through December 1994, with an aggregate settlement
value and net unrealized depreciation of $2,103,000 and $17,000, respectively.
The market value of securities deposited as initial margin for open futures
contracts was $1,319,000.
14
<PAGE> 17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard Florida Insured Tax-Free Fund
In our opinion, the accompanying statement 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
Vanguard Florida Insured Tax-Free Fund (the "Fund") at November 30, 1994, the
results of its operations, the changes in its net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 30, 1994
15
<PAGE> 18
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc
Rorer Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric Company, and The Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas
Company; Director of Cummins Engine Company; Trustee of
Vanderbilt University and the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of each
of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
16
<PAGE> 19
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to shareholders of
each Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them." But
our principle remains "if it makes sound investment sense, we'll offer it, even
if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of the
benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for its
low costs, which we believe are just as essential a consideration in investing
in mutual funds as risk potential and total return. We call this relationship
between risk, return, and cost the "eternal triangle" of mutual fund investing.
We take special pride in our position as (by far) the lowest-cost
provider of financial services in the world. Under our "no-load" offering
structure, shareholders begin their Vanguard investment program with $1,000 of
assets (not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with sound and
durable goals to investors with long-term time horizons, and doing so at the
fairest financial terms available. We believe that the unique Vanguard structure
"promotes a healthy and viable mutual fund complex within which each Fund can
better prosper; enables the Funds to realize substantial savings from advisory
fee reductions; promotes savings from economies of scale; and provides the Funds
with direct and conflict-free control over distribution functions." We are not
alone in this belief. Indeed, the quotation is taken verbatim from the unanimous
decision of the U.S. Securities and Exchange Commission when, in 1981, it
approved our application for the structure under which we operate today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The Vanguard
Group have come to represent, and we are grateful for the success and growth
with which we have been blessed. We are an industry leader, and, as a competitor
observed a few years ago, we are "the standard by which all fund organizations
are judged."
In battle terms, "the vanguard" is the first wave of troops or ships, and
Vanguard surely is in the first wave of the battle for investment survival. As
we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 20
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q180-11/94
<PAGE> 21
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through six.
A photograph of John C. Bogle appears at the lower-right of page one.
A cumulative performance line chart for the period August 31, 1992, to
November 30, 1994 appears at the top of page two.
Two line charts appear at the upper-left of page three--the top chart
depicts the month-end yields of a 30-Year Prime Municipal Bond and a 90-Day
MIG 1 Note for the fiscal years 1990 through 1994, and the bottom chart
indicates the yield spread for the same periods.
A running head featuring a map and telescope appears on pages seven
and eight.
A running head featuring a log book and pen appears on pages nine
through fifteen.
A running head featuring a compass appears on page sixteen.
At the bottom of the back cover there appears a triangle with the
sides labeled "risk," "cost," and "return."
A seagull in flight is featured at the top of the outside back cover
of the report.
