<PAGE> 1
A MESSAGE TO SHAREHOLDERS
DEAR SHAREHOLDER:
The declining interest rate environment that prevailed for most of fiscal 1995
reversed course during the first six months of our current fiscal year.
Short-term tax-exempt yields, after falling through late February, stabilized
and then abruptly rose to end the six-month period slightly higher than where
they began. Long-term tax-exempt yields also moved lower at the outset of the
period, before creeping higher to end above their starting point. This overall
increase in interest rates resulted in lower prices for municipal bonds.
During the past twelve months, the net asset values of our Insured
Longer-Term Portfolios were negatively impacted by rising rates, but each
Portfolio's income component more than compensated for any decrease in
principal. Our Money Market Portfolios all gave good accounts of themselves,
providing returns that fully reflect the current level of interest rates. The
table on page 3 of this Report provides detailed results for each of our State
Tax-Free Portfolios, including per share net asset values, dividend and capital
gains distributions, and total returns over the past six and twelve months, as
well as current yields. In summary form, here are the Portfolio highlights:
THE STATE MONEY MARKET PORTFOLIOS--provided total returns ranging from +3.4% to
+3.6% for the past year. As expected, net asset values remained at $1.00 per
share. As the following table illustrates, current yields are in the area of
3.4%, moderately lower than they were twelve months ago:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
SEVEN-DAY
ANNUALIZED YIELD
-------------------------------
MONEY MARKET MAY 31, NOV. 30, MAY 31,
PORTFOLIO 1996 1995 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA 3.39% 3.61% 3.80%
PENNSYLVANIA 3.44 3.64 3.80
NEW JERSEY 3.30 3.57 3.71
OHIO 3.43 3.71 3.92
- ----------------------------------------------------------
</TABLE>
THE STATE INSURED LONGER-TERM PORTFOLIOS--earned sufficient income to offset
the modest decrease in long-term municipal bond prices, providing total returns
(capital change plus reinvested dividends) ranging from +3.4% to +5.0% for the
twelve months. Despite the swings in interest rates during the period, the
current yields on the Insured Longer-Term Portfolios (roughly 5.2%) are nearly
identical to their levels of twelve months ago.
To provide some perspective on how our Insured Longer-Term Portfolios
performed during the past year, the table below breaks out the two components
of total return--income return and capital return. As you can see, the positive
contribution of each Portfolio's income return was marginally reduced by its
negative capital return.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
INVESTMENT RETURNS
------------------------------
TWELVE MONTHS ENDED
MAY 31, 1996
------------------------------
INSURED LONGER-TERM
PORTFOLIO INCOME CAPITAL TOTAL
- ---------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA
INTERMEDIATE-TERM +5.1% -0.1% +5.0%
CALIFORNIA LONG-TERM +5.5 -1.7 +3.8
NEW YORK +5.4 -1.6 +3.8
PENNSYLVANIA +5.6 -1.3 +4.3
NEW JERSEY +5.3 -1.9 +3.4
OHIO +5.4 -1.6 +3.8
FLORIDA +5.2 -1.4 +3.8
- ---------------------------------------------------------
</TABLE>
FIXED-INCOME MARKET REVIEW
Although the Federal Reserve lowered short-term interest rates in December and
January, the bond market fretted over the apparent strength of the U.S. economy
and the possibility of an increase in inflation. During the past six months,
the yield on the long-term U.S. Treasury bond, the benchmark for the bond
market, rose from 6.1% to 6.9%, engendering a price decline of approximately
- -10% (excluding interest income).
The long-term municipal bond market fared much better. On balance for
the six-month period, yields on high-grade municipal bonds increased less
dramatically (5.5% to 5.9%), resulting in a price
1
<PAGE> 2
decline of only -6%. Yields on top-grade (MIG 1) municipal notes remained
essentially unchanged on balance at 3.7%.
Although the future direction of interest rate movements is virtually
impossible to predict with any level of accuracy and consistency, the relative
performance of bond funds with comparable quality and maturity guidelines is
surprisingly predictable. That is to say, bond funds holding similar types of
securities--say, high-quality, long-term municipal bonds--should, on average,
earn roughly equivalent gross returns. What that absolute return will be,
however, is anyone's guess. On the other hand, what can be predicted with some
semblance of accuracy is the relative performance differential due to the
expense ratios of the funds. The average Vanguard Insured Longer-Term
Portfolio, for example, operates with an annual expense ratio of 0.2%, compared
to 0.9% for our average competitor. Therefore, holding all other factors equal,
a typical Vanguard Insured Longer-Term Portfolio begins with an annual income
advantage of +0.7% over a comparable municipal bond fund.
IN SUMMARY
As you may know, one of the benefits of Vanguard's Insured Longer-Term
Portfolios is their municipal bond insurance, which guarantees the timely
payment of principal and interest. These insurance provisions provide
protection against deteriorating creditworthiness within the various
municipalities and add an important level of enhanced safety.
There are, of course, "costs" associated with insuring our Portfolios
against potential default. First, bonds that are issued with insurance
typically offer slightly lower yields than non-insured bonds. A second cost is
the explicit expense of purchasing insurance on non-insured bonds. Despite
these costs, however, our top-quality Portfolios continue to benefit from our
expense ratio advantage and provide yields that are fully competitive with
those of uninsured municipal bond portfolios.
Over time, given our high-quality, low-cost advantage, Vanguard State
Tax-Free Portfolios should remain attractive relative to our competitors'
funds. We look forward to reporting to you in further detail in our 1996 Annual
Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
- -------------------
John J. Brennan
President
June 8, 1996
NOTE: MUTUAL FUND DATA FROM LIPPER ANALYTICAL SERVICES, INC.
2
<PAGE> 3
PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value Income
Total Per Share Dividends Total Return
Net Assets ------------------- ----------------- -----------------
(millions) Average Average Nov. 30, May 31, Six Twelve Six Twelve Current
Portfolio May 31, 1996 Maturity Quality* 1995 1996 Months Months Months Months Yield**
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA . . . . . $1,276 42 DAYS MIG 1 $ 1.00 $ 1.00 $.017 $.034 +1.7% +3.5% 3.39%
PENNSYLVANIA . . . . 1,306 32 DAYS MIG 1 1.00 1.00 .017 .035 +1.7 +3.5 3.44
NEW JERSEY . . . . . 888 57 DAYS MIG 1 1.00 1.00 .016 .033 +1.6 +3.4 3.30
OHIO . . . . . . . . 199 60 DAYS MIG 1 1.00 1.00 .017 .035 +1.7 +3.6 3.43
- -----------------------------------------------------------------------------------------------------------------------------------
INSURED INTERMEDIATE-TERM
CALIFORNIA . . . . . $ 264 7.4 YEARS Aaa $10.44 $10.25 $.254 $.512 +0.6% +5.0% 4.77%
INSURED LONG-TERM
CALIFORNIA . . . . . 978 14.1 YEARS Aaa 11.27 10.87 .299 .600 -0.9 +3.8 5.33
NEW YORK . . . . . . 879 11.7 YEARS Aaa 11.01 10.57 .286 .574 -0.8+ +3.8+ 5.23
PENNSYLVANIA . . . . 1,565 11.4 YEARS Aaa 11.28 10.90 .304 .608 -0.4+ +4.3+ 5.28
NEW JERSEY . . . . . 796 11.9 YEARS Aaa 11.78 11.29 .310 .617 -1.1+ +3.4+ 5.23
OHIO . . . . . . . . 203 10.9 YEARS Aaa 11.63 11.25 .302 .605 -0.7 +3.8 5.29
FLORIDA . . . . . . 453 14.2 YEARS Aaa 10.94 10.60 .275 .554 -0.6 +3.8 5.22
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
+ Includes capital gains distributions of $.065 for New York, $.037 for
Pennsylvania, and $.058 for New Jersey.
Note: The shares of each of the Vanguard "single-state" Portfolios are
available for purchase solely by residents of the designated states.
3
<PAGE> 4
AVERAGE ANNUAL TOTAL RETURNS
THE CURRENT YIELDS QUOTED IN THE MESSAGE TO SHAREHOLDERS ARE CALCULATED IN
ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED MARCH 31, 1996) 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 +7.60% -- +6.56% +5.08% +1.48%
CALIFORNIA INSURED LONG-TERM 4/7/86 +7.73 +8.17% +7.75 +6.47 +1.28
CALIFORNIA MONEY MARKET 6/1/87 +3.57 +3.12 +4.11 +4.11 0.00
NEW YORK INSURED TAX-FREE 4/7/86 +7.50 +8.37 +7.32 +6.44 +0.88
PENNSYLVANIA INSURED LONG-TERM 4/7/86 +7.15 +8.41 +7.95 +6.64 +1.31
PENNSYLVANIA MONEY MARKET 6/13/88 +3.62 +3.12 +4.11 +4.11 0.00
NEW JERSEY INSURED LONG-TERM 2/3/88 +7.13 +8.10 +8.39 +6.43 +1.96
NEW JERSEY MONEY MARKET 2/3/88 +3.50 +3.08 +4.09 +4.09 0.00
OHIO INSURED LONG-TERM 6/18/90 +7.13 +8.08 +8.50 +5.97 +2.53
OHIO MONEY MARKET 6/18/90 +3.72 +3.17 +3.49 +3.49 0.00
FLORIDA INSURED TAX-FREE 9/1/92 +7.50 -- +7.62 +5.43 +2.19
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE NOTE THAT AN INVESTMENT IN A MONEY MARKET FUND, SUCH AS THE MONEY MARKET
PORTFOLIOS OF VANGUARD STATE TAX-FREE FUNDS, IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
4
<PAGE> 5
REPORT FROM THE INVESTMENT ADVISER
The two major factors affecting the Longer-Term Insured Portfolios
over the last six months were the sharp rise in interest rates and the
relatively better performance of municipal bonds versus their taxable
counterparts. The yield on the 30-year U.S. Treasury bond increased 0.8
percentage points (from 6.1% to 6.9%). This was a decidedly unpleasant turn of
events for bondholders and their total returns. The increase in interest rates
was prompted by signs of an improving economy and investor concerns about
inflation. During the same period, the yield on high-grade, long-term municipal
bonds rose 0.4 percentage points (from 5.5% to 5.9%). The question of tax
reform first raised by Senator Armey (R-TX) and later championed by Steve
Forbes in the Republican Presidential primaries seemed to have been, at least
in part, answered. The reduced intensity of the rhetoric around the question of
tax reform was a contributing factor in explaining why the municipal market
performed better than the Treasury market.
The Federal Reserve Board's last action on January 31, 1996, was to
reduce the Federal funds rate and the discount rate by 0.25 percentage points.
At that time, the economy appeared to be struggling, a situation further
exacerbated by the severity of the winter. Unfortunately for bond investors,
the release of February's economic statistics showed a much stronger than
anticipated economy. Concurrently, an increase in the prices of oil, gasoline,
wheat, and corn prodded some investors to become concerned about the specter of
higher inflation. The combined effects caused the yield on the 30-year U.S.
Treasury bond to increase sharply. The beginning of the Presidential primary
season added an extra degree of uncertainty to the market.
While bear markets are never pleasant, they often offer investment
opportunities that can be exploited to the shareholders' eventual benefit.
First, the Portfolios' dividend distribution can be positively impacted by
swapping bonds with lower yields to maturity for bonds with higher yields to
maturity. Second, capital gains distributions can usually be reduced by
realizing offsetting capital losses. Finally, bear markets are generally the
best time to buy bonds that have superior protection from early redemption. As
interest rates rise, bonds which are noncallable or have long periods before
they are callable are often available at close to the same price as bonds with
less desirable characteristics. When the time comes for interest rates to
reverse course and fall, these bonds will furnish excellent capital returns
while providing a more stable dividend.
The past six months have been a very volatile period of time. The
future remains unknown, but the State Insured Longer-Term Portfolios will
continue to focus on their objectives. It is through this commitment to
high-quality Federal and state tax-exempt municipal bonds and low-cost, prudent
management that superior and durable investment results can be achieved.
MONEY MARKETS
The volatility experienced in the Treasury market over the past six months has
had little impact on yields in the short-term municipal bond market. Yields on
one-year municipal notes ended the period very close to where they began,
despite a 0.3% rise in yields on one-year Treasury bills. Nevertheless, there
were two issues which had a substantial impact on the short-term market.
First, seasonal supply constraints that typically plague the short-term
municipal market in the spring dampened the average weighted maturities of
money market funds. Second, and most notably, the Securities and Exchange
Commission (SEC) announced changes in the regulations governing money market
funds which became effective June 3, 1996.
In April, the SEC adopted amendments to rule 2a-7 under the Investment
Company Act of 1940. Section 2a-7 contains regulations that protect the quality
and safety of money market funds. For the most part, the changes emphasize
higher quality and increased diversification. The new guidelines were designed
to tighten the regulations imposed on tax-exempt money market funds and improve
the likelihood that the funds maintain a stable net asset value. Compliance
with the amendments may prove challenging for the industry. Many of our
competitors operate under somewhat lower quality standards and, as a result,
may be forced to significantly restructure their funds in order to meet the
standards. In contrast, our Money Market Portfolios have
5
<PAGE> 6
always been managed quite conservatively with credit quality our most important
consideration. Consequently, we expect the impact of the changes on Vanguard's
State Tax-Free Money Market Portfolios to be minimal.
The scarcity of new issue supply in the short-term municipal market
contributed to the relative stability in yields over the period. The supply of
short-term municipals tends to be quite seasonal, the timing of which depends
upon an issuer's fiscal year. The vast majority of issuers have fiscal years
beginning July 1 and ending June 30, causing new issue supply to decline in the
months leading up to June and increase dramatically in July. Looking forward,
the glut of new issue supply should provide ample opportunities for us to
extend our average maturities, increase our diversification, and further
enhance our overall quality.
In conclusion, the months ahead should be challenging for the
industry, with tighter regulations governing tax-free money market funds coming
at a time when short-term issuance is at its peak. Hopefully, the new
amendments adopted by the SEC will "level the playing field," bringing
competitors closer to Vanguard's already conservative style of management,
thereby further enhancing the performance advantage that arises from our "rock
bottom" expense ratios.
Sincerely,
Ian A. MacKinnon David E. Hamlin
Senior Vice President Principal
Pamela W. Tynan Danine A. Mueller
Principal Principal
Reid O. Smith Jerome J. Jacobs
Principal Principal
Vanguard Fixed Income Group
June 18, 1996
6
<PAGE> 7
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
May 31, 1996
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (102.5%)
- --------------------------------------------------------------------------------
ISSUER INSURED (87.3%)
Alachua County FL Health Facilities
(Shands Teaching Hosp.)
6.25%, 12/1/11 (1) $ 3,095 $ 3,285
6.25%, 12/1/16 (1) 8,695 9,204
Allegany FL Health System Rev.
(St. Mary's Hosp.)
5.00%, 12/1/12 (1) 7,380 6,678
Boynton Beach FL Utilities System
6.25%, 11/1/20 (3) 2,500 2,554
Broward County FL Solid Waste
5.75%, 7/1/13 (1) 4,130 4,121
Canaveral FL Port Auth.
6.00%, 6/1/06 (3) 1,000 1,048
Charlotte County FL Utility System
5.25%, 10/1/11 (3) 1,070 1,018
6.75%, 10/1/13 (3) 2,750 2,971
6.875%, 10/1/21 (3) 8,500 9,193
Collier County FL COP
6.25%, 2/15/13 (4) 12,500 13,303
Coral Springs FL Improvement
Dist. GO
6.00%, 6/1/10 (1) 2,300 2,411
Dade County FL Health
Facilities Auth.
(Baptist Hosp. Miami)
5.25%, 5/15/13 (1) 5,500 5,114
Dade County FL School GO
6.125%, 6/1/14 (1) 6,660 6,777
6.875%, 8/1/02 (1) 5,000 5,532
Dade County FL Seaport GO
5.125%, 10/1/26 (1) 6,000 5,270
6.25%, 10/1/01 (2) (Prere.) 2,000 2,156
6.50%, 10/1/01 (2) (Prere.) 4,090 4,457
Dade County FL Water & Sewer
System Rev.
VRDO 3.50%, 6/5/96 (3) 8,820 8,820
5.50%, 10/1/15 (3) 2,000 1,908
6.25%, 10/1/07 (3) 1,000 1,084
6.25%, 10/1/09 (3) 1,500 1,615
Davie FL Water & Sewer
6.375%, 10/1/12 (2) 2,500 2,705
Dunedin FL Utility System
6.75%, 10/1/08 (3) 1,115 1,256
6.75%, 10/1/10 (3) 2,465 2,768
Florida Municipal Power Agency
(Tricity Project)
5.00%, 10/1/10 (2) 4,340 4,025
Florida Turnpike Auth.
5.00%, 7/1/16 (3) 3,700 3,307
5.00%, 7/1/19 (3) 5,900 5,215
5.50%, 7/1/17 (3) 12,025 11,448
Fort Pierce FL Utilities Auth.
5.25%, 10/1/16 (2) 9,000 8,302
Greater Orlando FL Aviation Auth.
6.10%, 10/1/06 (2) 2,500 2,640
Gulf Breeze FL Local Govt. Pooled
Loan Program VRDO
3.45%, 6/6/96 (3) 20,550 20,550
Hillsborough County FL IDA
(Univ. Community Hosp.)
6.50%, 8/15/19 (1) 14,600 16,032
Hillsborough County FL School
Board COP
5.625%, 7/1/15 (2) 6,500 6,253
Indian River County FL
Water & Sewer
5.25%, 9/1/18 (3) 6,415 5,879
6.50%, 9/1/08 (3) 2,540 2,802
Jacksonville FL Capital Improvement
(Gator Bowl Project)
5.50%, 10/1/19 (2) 5,850 5,541
Jacksonville FL Water & Sewer
5.00%, 10/1/20 (1) 3,000 2,618
Kissimee FL Utility Auth.
Electric System
5.25%, 10/1/18 (3) 2,500 2,291
Lakeland FL Electric & Water
6.00%, 10/1/14* (3) 2,000 2,048
6.50%, 10/1/09* (3) 5,000 5,432
Lee County FL School Board COP
6.00%, 8/1/07 (4) 5,820 6,097
6.00%, 8/1/08 (4) 6,180 6,434
Lee County FL
Transportation Facilities
5.75%, 10/1/22 (1) 4,500 4,375
Marion County FL Hosp. Dist.
(Monroe Regional Medical Center)
6.20%, 10/1/07 (3) 1,000 1,063
Melbourne FL Water & Sewer
6.375%, 10/1/12 (3) 1,000 1,048
Miami Beach FL Health
Facilities Auth.
(Mt. Sinai Medical Center)
6.125%, 11/15/14 (5) 1,250 1,273
6.25%, 11/15/08 (5) 2,000 2,121
Miami FL GO
5.90%, 12/1/08 (3) 1,000 1,050
6.00%, 12/1/09 (3) 1,380 1,455
Ocala FL Water & Sewer
5.50%, 10/1/15* (2) 4,550 4,325
6.00%, 10/1/05* (2) 2,565 2,722
6.00%, 10/1/10 (2) 2,435 2,521
</TABLE>
7
<PAGE> 8
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Orange County FL Health
Auth. Hosp.
(Adventist for Sunbelt Group)
5.50%, 11/15/15 (2) $ 1,250 $ 1,186
5.75%, 11/15/25 (2) 4,000 3,857
6.25%, 11/15/08 (2) 4,570 4,870
6.25%, 11/15/10 (2) 6,015 6,332
Orange County FL Solid Waste
6.375%, 10/1/17 (3) 3,500 3,610
Orange County FL
Tourist Development
5.90%, 10/1/10 (1) 1,250 1,298
6.50%, 10/1/19 (2) 4,000 4,169
Orlando & Orange County FL
Expressway Auth.
5.375%, 7/1/11 (2) 5,000 4,832
6.50%, 7/1/10 (3) 2,000 2,194
Osceola County FL Gas Tax Rev.
5.90%, 4/1/08 (3) 1,805 1,865
Palm Beach County FL Criminal
Justice Facility
5.375%, 6/1/07 (3) 5,280 5,321
5.375%, 6/1/08 (3) 2,375 2,377
5.375%, 6/1/11 (3) 1,120 1,095
7.20%, 6/1/15 (3) 3,000 3,518
Pinellas County FL Health
Facilities Auth.
(Morton Plant Hosp.)
5.25%, 11/15/12 (1) 2,705 2,554
Pinellas County FL Water
4.50%, 10/1/97 (2) 7,185 7,253
Reedy Creek FL Improvement
5.00%, 6/1/19 (2) 2,000 1,752
St. Lucie County FL Utility System
5.50%, 10/1/15 (3) (ETM) 5,000 4,911
6.00%, 10/1/20 (3) (ETM) 3,165 3,251
6.00%, 9/1/24 (3) 11,750 11,717
6.50%, 10/1/08 (1)(ETM) 4,910 5,384
Sarasota County FL Utility System
5.75%, 10/1/12 (3) 4,325 4,335
7.00%, 10/1/09 (3) 6,260 7,164
Seacoast FL Utility Auth.
5.00%, 3/1/19 (3) 7,450 6,523
5.50%, 3/1/10 (3) 2,500 2,478
5.50%, 3/1/17 (3) 2,400 2,336
5.50%, 3/1/19 (3) 1,595 1,535
Seminole County FL School
Board COP
6.125%, 7/1/14 (1) 1,000 1,020
6.125%, 7/1/19 (1) 2,500 2,525
6.50%, 7/1/21 (1) 2,750 3,040
Seminole County FL Water &
Sewer Rev.
6.00%, 10/1/09 (1) 1,800 1,896
6.00%, 10/1/12 (1) 5,000 5,212
6.00%, 10/1/19 (1) 7,500 7,690
Tamarac FL Water & Sewer Utility
5.90%, 10/1/11 (3) 3,980 4,117
Tampa FL Water & Sewer
6.25%, 10/1/02 (3) (Prere.) 7,395 8,004
6.25%, 10/1/12 (3) 5,805 6,015
Titusville FL Water & Sewer
6.00%, 10/1/24 (1) 2,500 2,493
West Palm Beach FL Public
Service Tax
6.125%, 3/1/10 (1) 1,560 1,597
--------
GROUP TOTAL 395,441
--------
- --------------------------------------------------------------------------------
NON-INSURED (15.2%)
Florida Board of Education
5.00%, 6/1/12 6,000 5,463
5.50%, 6/1/16 9,100 8,676
6.75%, 4/1/01 (Prere.) 2,000 2,195
Florida State Housing
Finance Agency
6.25%, 7/1/11 1,855 1,878
6.35%, 7/1/14 2,325 2,350
Gainesville FL Utility System
6.50%, 10/1/12 1,500 1,638
Hillsborough County FL IDA
PCR VRDO
(Tampa Electric Co.)
3.60%, 6/4/96 1,755 1,755
Orlando FL Utilities Comm.
BAN VRDO 3.50%, 6/6/96 13,400 13,400
6.75%, 10/1/17 11,700 13,065
Palm Beach County FL VRDO
(Norton Gallery of Art)
3.60%, 6/5/96 LOC 3,000 3,000
St. Lucie County FL PCR VRDO
(Florida Power & Light)
3.60%, 6/4/96 13,400 13,400
Tallahassee FL Consolidated
Utility System
6.20%, 10/1/19 2,000 2,028
--------
GROUP TOTAL 68,848
--------
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $457,517) 464,289
- --------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Market
Value
(000)+
- --------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-2.5%)
- --------------------------------------------------------------------------------
Other Assets--Note B $ 6,751
Liabilities (17,886)
---------
(11,135)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 42,743,604 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $453,154
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.60
================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MAY 31, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
PAID IN CAPITAL $451,306 $10.55
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES (4,774) (.11)
UNREALIZED APPRECIATION
(DEPRECIATION)--NOTE E:
INVESTMENT SECURITIES 6,772 .16
FUTURES CONTRACTS (150) --
- --------------------------------------------------------------------------------
NET ASSETS $453,154 $10.60
- --------------------------------------------------------------------------------
</TABLE>
BAN=Bond Anticipation Note
COP=Certificate of Participation
CP=Commercial Paper
GO=General Obligation
IDA=Industrial Development Authority Bond
PCR=Pollution Control Revenue
TOB=Tender Option Bond
VRDO=Variable Rate Demand Obligation
(ETM)=Escrowed to Maturity
(Prere.)=Prerefunded
*Security purchased on a when-issued or delayed delivery basis for which the
Fund has not taken delivery as of May 31, 1996.
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association)
(2) AMBAC (AMBAC Indemnity Corporation)
(3) FGIC (Financial Guaranty Insurance Company)
(4) FSA (Financial Security Assurance)
(5) CGI (Capital Guaranty Insurance)
(6) BIGI (Bond Investors Guaranty Insurance)
(7) Connie Lee Inc.
(8) FHA (Federal Housing Authority)
The insurance does not guarantee the market value of the
municipal bonds.
LOC=Scheduled principal and interest payments are guaranteed by
bank letter of credit.
9
<PAGE> 10
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
May 31, 1996
(000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,065
- ---------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . 12,065
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . . . . . . . . . $ 27
Management and Administrative . . . . . . . . . . . . . . . . . . . . 365
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . 55 447
-----
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . 2
Trustees' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . 1
- ---------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 473
Expenses Paid Indirectly--Note C . . . . . . . . . . . . . . . . (7)
- ---------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 466
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . 11,599
- ---------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . 217
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433
- ---------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . 650
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED
APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . (16,566)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,205
- ---------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . . . . . . . . . . . (15,361)
- ---------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . $ (3,112)
===============================================================================================================
</TABLE>
10
<PAGE> 11
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
MAY 31, 1996 November 30, 1996
(000) (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . $ 11,599 $ 19,041
Realized Net Gain (Loss) . . . . . . . . . . . . . . . . . . . 650 (5,245)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . . . . . . (15,361) 49,211
- ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . (3,112) 63,007
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . (11,599) (19,041)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . -- --
- ----------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . (11,599) (19,041)
- ----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,803 178,020
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . 7,514 12,044
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (88,769) (94,400)
- ----------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . 44,548 95,664
- ----------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . 29,837 139,630
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . 423,317 283,687
- ----------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . $453,154 $423,317
==========================================================================================================
(1) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . 11,503 17,155
Issued in Lieu of Cash Distributions . . . . . . . . . . . 693 1,144
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . (8,150) (9,131)
- ----------------------------------------------------------------------------------------------------------
4,046 9,168
- ----------------------------------------------------------------------------------------------------------
</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, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . $10.94 $ 9.61 $10.86 $10.16 $10.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . .275 .560 .550 .537 .122
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . . . (.340) 1.330 (1.180) .700 .160
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . (.065) 1.890 (.630) 1.237 .282
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . (.275) (.560) (.550) (.537) (.122)
Distributions from Realized Capital Gains . . . . . . . -- -- (.070) -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . (.275) (.560) (.620) (.537) (.122)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . $10.60 $10.94 $ 9.61 $10.86 $10.16
===================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . -0.62% +20.05% -6.08% +12.38% +2.84%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . $453 $423 $284 $269 $63
Ratio of Total Expenses to Average Net Assets . . . . . . . .21%* .21% .22% .21% .24%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . . . 5.05%* 5.33% 5.31% 5.01% 5.10%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . 28%* 20% 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 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, 1996, the Fund had contributed capital of $47,000 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)
C. The Fund's custodian bank has agreed to reduce its fees when the Fund
maintains cash on deposit in the non-interest bearing custodian account. For
the six months ended May 31, 1996, custodian fee offset arrangements reduced
expenses of the Fund by $7,000.
D. During the six months ended May 31, 1996, the Fund made purchases of
$74,772,000 and sales of $57,871,000 of investment securities other than
temporary cash investments.
At November 30, 1995, the Fund had available a capital loss carryforward of
$3,676,000 to offset future net capital gains of $177,000 through November 30,
2002, and $3,499,000 through November 30, 2003.
E. At May 31, 1996, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $6,772,000 of
which $10,295,000 related to appreciated securities and $3,523,000 related to
depreciated securities.
At May 31, 1996, the aggregate settlement value of open futures contracts
expiring through September 1996 and the related unrealized depreciation were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(000)
--------------------------------
Aggregate
Settlement Unrealized
Futures Contracts Value Depreciation
- ------------------------------------------------------------------
<S> <C> <C>
LONG U.S. TREASURY BOND $9,678 $(150)
- ------------------------------------------------------------------
</TABLE>
The market value of securities deposited as initial margin for open futures
contracts was $1,438,000.
14
<PAGE> 15
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman of the Board
Chairman and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President and Chief Executive Officer
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.; Director of
Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, Director of The Great
Atlantic and Pacific Tea Co., Alco Standard Corp.,
Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BURTON G. MALKIEL, Chemical Bank Chairman's
Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern
New England Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and
Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co.,
and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer
of The Nature Conservancy; formerly, Director and
Senior Partner of McKinsey & Co. and President of New
York University; Director of Pacific Gas and Electric Co.
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco
Brands, Inc.; retired Vice Chairman and Director of RJR
Nabisco; Director of TECO Energy, Inc. and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive
Officer of Rohm & Haas Co.; Director of Cummins
Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice
President and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The
Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The
Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DiSTEFANO F. WILLIAM McNABB III
Senior Vice President Senior Vice President
Information Technology Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
IAN A. MacKINNON
Senior Vice President
Fixed Income Group
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 Selected Value Portfolio
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 Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
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]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 1 (800) 662-2739
This Report has been prepared for shareholders and may be distributed
to others only if preceded or accompanied by a current prospectus.
All Funds in the Vanguard Family are offered by prospectus only.
Q182-5/96
VANGUARD
FLORIDA
INSURED
TAX-FREE FUND
SEMI-ANNUAL REPORT
MAY 31, 1996
