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VANGUARD
FLORIDA INSURED
TAX-FREE FUND
Semiannual Report - May 31, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly motivated
men and women--who form the cornerstone of our operations. We could not survive
long--let alone prosper--without them. That's why we chose this fiscal year's
fund reports to celebrate the spirit, enthusiasm, and achievements of our crew.
(We call those who work at Vanguard crew members, not employees, because they
operate as a team to accomplish our mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO] [PHOTO]
JOHN C. BOGLE JOHN J. BRENNAN
Senior Chairman Chairman & CEO
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CONTENTS
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A MESSAGE TO OUR SHAREHOLDERS ............................. 1
THE MARKETS IN PERSPECTIVE ................................ 3
REPORT FROM THE ADVISER ................................... 5
PERFORMANCE SUMMARY ....................................... 7
PORTFOLIO PROFILE ......................................... 8
FINANCIAL STATEMENTS ...................................... 10
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All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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DEAR SHAREHOLDER,
Prices of municipal bonds nudged higher during the first half of Vanguard
Florida Insured Tax-Free Fund's 1998 fiscal year, reflecting a slight easing in
long-term interest rates and docile inflation. These higher prices, combined
with six months of interest income, gave investors in tax-exempt securities a
solid return for the half-year ended May 31, 1998.
In this environment, our Fund's return of +3.9% outpaced those of the
average Florida municipal bond fund and the unmanaged Lehman Brothers Municipal
Bond Index. The adjacent table compares the Fund's six-month return with that of
average competing mutual funds.
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TOTAL RETURNS
SIX MONTHS ENDED
MAY 31, 1998
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<S> <C>
Vanguard Florida Insured Tax-Free Fund +3.9%
Average Florida Municipal Bond Fund +3.5
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</TABLE>
Our Fund's total return (capital change plus reinvested dividends) is based
on an increase in net asset value from $11.21 per share on November 30, 1997, to
$11.37 per share on May 31, 1998, adjusted for dividends totaling $0.276 per
share paid from net investment income. On May 31, the Fund's yield stood at
4.60%.
THE PERIOD IN REVIEW
A storybook environment that featured solid economic growth, declining interest
rates, and well-behaved inflation showed no signs of fading during the
half-year. As a result, the six-month period was a good one for bonds and even
better for stocks.
The decline in interest rates was particularly helpful. Yields on long-term
U.S. Treasury bonds declined on balance during the half-year by approximately 25
to 30 basis points (0.25 to 0.30 percentage point). The yield on the 30-year
Treasury bond ended the period at 5.80%, down from 6.05% on November 30, 1997,
while rates on 3-month T-bills declined by 19 basis points, from 5.20% to 5.01%.
The rate decline stemmed from remarkably good inflation news--consumer prices
were up just 0.8% during the period--and a conviction among market participants
that one consequence of Asia's continuing economic crisis would be to keep a lid
on inflation and interest rates in the United States.
Yields on high-grade, long-term municipal bonds fell on balance to 5.22% on
May 31, down from 5.36% on November 30, 1997. The yield on top-grade (MIG-1)
short-term municipal notes declined to 3.65%, from 3.80% six months earlier.
Despite the good news for bonds, stocks continued to lead the party. The
Standard & Poor's 500 Composite Stock Price Index returned +15.1% for the six
months, a spectacular return for such a brief period.
The +3.9% total return achieved by Vanguard Florida Insured Tax-Free Fund
consisted of a +2.5% income return and a +1.4% capital return that reflected
slightly lower interest rates. The Fund's performance topped the +3.5% return of
the average Florida municipal bond fund and was a hair ahead of the +3.8% return
of the unmanaged Lehman Municipal Bond Index. This national Index, which exists
outside the "real world" of operating expenses and transaction costs, is a tough
standard for all state tax-exempt funds.
In reviewing the results of the past six months, it's important to remember
that the interest rate environment is not always so friendly to bond investors.
During periods
1
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when interest rates are on the rise, existing bond prices fall and thus
diminish, rather than augment, a fund's total return.
Also, we urge you to keep in mind that our six-month performance accounts
for only half of the year's interest income, whereas bond prices react
immediately to interest rate changes. However, over time, unpredictable changes
in interest rates tend to even out, leaving the rate of interest income as the
chief source of long-term bond returns. That's why investors should consider a
full year's interest income as part of a semiannual review. Over the twelve
months ended May 31, 1998--a period when interest rates generally
declined--Vanguard Florida Insured Tax-Free Fund provided a total return of
+9.2%, consisting of an income return of +5.3% and a capital return of +3.9%.
Our excellent long-term performance is largely a function of two elements:
our low expenses and our disciplined management approach. For our shareholders,
these factors are significant and durable advantages that we expect to continue.
Our Fund has an annualized expense ratio (expenses as a percentage of average
net assets) of 0.21%, a small fraction of the 1.03% charged by the average
long-term state tax-exempt fund.
Our cost advantage allows us to offer a portfolio of higher-quality bonds
without compromising the yields earned by our shareholders. Our Fund invests in
bonds that carry private insurance guaranteeing the payment of principal and
interest in the event of an issuer's default. This insurance comes at the cost
of slightly lower gross yields, but our lower costs more than make up the
difference, thus enabling us to provide net returns that are fully competitive
with those of uninsured municipal bond portfolios.
IN SUMMARY
While it's enjoyable to bask in the glow of the financial markets' recent
stellar performance, it's important to remember that the markets are still
subject to cycles. Interest rates cannot--and will not--march lower
indefinitely. Nor will stocks sustain their above-average performance forever.
Given that financial markets are not a one-way street, we reiterate our
belief that a balanced portfolio of stock funds, bond funds, and money market
funds can help investors "stay the course" toward their investment
objectives--no matter what the market environment.
We look forward to reporting to you in further detail in our 1998 annual
report six months hence.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
June 16, 1998
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THE MARKETS IN PERSPECTIVE
Six Months Ended May 31, 1998
The U.S. financial markets turned in another excellent performance during the
half-year ended May 31. The stock market's gains would have been good even for
a full year, and the bond market chalked up solid returns.
Consumer spending was the economy's locomotive. Americans spent freely on
houses, automobiles, and just about everything else. Their spirits were buoyed
by a very strong job market--the nation's unemployment rate was 4.3% in May,
tying a 28-year low--and by higher wages (average hourly earnings in May were
4.3% higher than a year before). Growth in the consumer sector, which accounts
for two-thirds of all economic activity, was more than enough to offset the
negative effects of Asia's financial and economic crisis. A strong rise in the
value of the U.S. dollar since mid-1997 in relation to most Asian currencies has
cut into U.S. exports to Asia while lowering the cost of Asian goods for
American buyers. The upshot is intensifying competition for U.S. companies, some
of which have blamed the Asian crisis for reduced profits.
The silver lining in the Asian cloud is that, by offsetting some of the
strength elsewhere in the U.S. economy, it has reduced inflationary pressures.
Ordinarily, low unemployment, rising wages, and a rapidly growing economy might
be expected to push up consumer prices. But thanks in part to lower-priced Asian
imports, inflation has been remarkably well behaved--the Consumer Price Index
rose just 0.8% during the six months ended May 31. Benign inflation and a
conviction that the Asian situation will keep the Federal Reserve Board from
raising interest rates anytime soon allowed interest rates to decline.
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TOTAL RETURNS
PERIODS ENDED MAY 31, 1998
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6 MONTHS 1 YEAR 5 YEARS*
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 15.1% 30.7% 22.2%
Russell 2000 Index 6.5 21.2 16.1
MSCI EAFE Index 16.2 11.4 9.8
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FIXED INCOME
Lehman Aggregate Bond Index 4.1% 10.9% 7.1%
Lehman 10-Year Municipal Bond Index 3.8 9.3 6.9
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.7 5.3 4.9
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OTHER
Consumer Price Index 0.8% 1.7% 2.5%
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</TABLE>
*Annualized.
U.S. EQUITY MARKETS
Stock prices rose in each of the first five months of the period before
declining in May. Gains were largest for large-capitalization stocks. The S&P
500 Index, which is dominated by large-cap stocks, earned a total return of
15.1%, while the rest of the stock market, as measured by the Wilshire 4500
Equity Index, returned 10.4%. The Russell 2000 Index, focusing on small-cap
stocks, gained 6.5%.
Stock prices were supported by declining interest rates and the
surprisingly low inflation rate, which led to an expansion of price/earnings
multiples investors were willing to pay for stocks. The news on corporate
earnings, another key fundamental in stock valuation, was not so positive.
Corporate earnings in the January-March quarter were up by less than 5% from the
previous year, and securities analysts steadily reduced their estimates
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<PAGE> 6
of earnings for the full year. Concern about meager growth in profits--partly
because of increased competition from Asia--was a factor in the stock market's
decline from record highs set in late April.
The consumer spending boom was reflected in the stock market's performance.
The best-performing sector was auto & transportation stocks. This segment of the
S&P 500 Index earned 28.6% for the six months. The consumer discretionary
sector, which makes up 10% of the Index, was up 23.0% for the half-year, and
health-care stocks, which make up nearly 12% of the S&P 500, gained 22.2%. Lower
oil prices were to blame for the two weakest sectors--integrated oil companies
(up 8.2%) and the "other energy" group (down 6.3%).
U.S. FIXED-INCOME MARKETS
The decline in interest rates during the period meant that bond investors saw
modest price increases along with their interest income. The Lehman Brothers
Aggregate Bond Index, a yardstick for the overall taxable bond market, earned
4.1%, bringing its return over the past 12 months to 10.9%, a superb
inflation-adjusted return of 9.2%. Bonds benefited from both an easing of
inflation fears and, reportedly, from a "flight to quality" by Asian investors
who some analysts believe bought U.S. Treasury securities to protect themselves
from further declines in their currencies versus the U.S. dollar.
The rate decline was more pronounced for longer-term bonds. While yields on
3-month Treasury bills declined 19 basis points (0.19 percentage point) during
the half-year, yields on 10- and 30-year Treasuries fell by 32 and 25 basis
points, respectively, to 5.55% and 5.80%. The flattening of the yield curve
during the period signaled that market participants expect interest rates to
remain stable or to decline further. No one knows whether that expectation will
prove correct, but investors certainly are being paid very little to bear the
higher risk of price fluctuations that comes with longer-term bonds. As of May
31, the yield on 10-year Treasuries was only 2 basis points higher than the
5.53% yield on 3-year Treasuries, even though the price of a 10-year note is
three times more sensitive to changes in interest rates than that of a 3-year
note.
INTERNATIONAL EQUITY MARKETS
Europe's stock markets made Wall Street's bull market look like a mere calf
during the first half of the fiscal year, while Asian markets slumped under the
weight of falling currencies and weakening economic activity. Overall, the
Morgan Stanley Capital International Europe, Australasia, Far East Index rose
16.2% in U.S. dollar terms. Its European component was up a remarkable 29.7% in
U.S. dollar terms and an even-stronger 32.7% in local currencies. A
strengthening in the dollar versus other currencies slightly cut returns for
American investors.
Several factors were credited for Europe's bull market, including a
recovery in economic activity across the continent and an increase in U.S.-style
efforts to boost shareholder value, including share repurchases, corporate
restructurings, and mergers. In addition, investors seemed pleased at the smooth
progress toward the January 1, 1999, adoption by 11 countries of a common
currency, the euro.
In the Pacific, stock markets were, on balance, down 2.7% in local-currency
terms. But a weakening of the Japanese yen and several other currencies versus
the U.S. dollar resulted in a decline of 9.9% in U.S. dollar terms. Japan, the
dominant Pacific Rim economy and stock market, officially acknowledged that its
economy had fallen into a recession. A number of investors, analysts, and others
criticized the Japanese government for being slow to adopt economic reforms and
other measures to spur business activity.
4
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REPORT FROM THE ADVISER
The uncertainty facing financial markets at the start of Vanguard Florida
Insured Tax-Free Fund's 1998 fiscal year continued throughout the past six
months. The U.S. economy displayed surprising strength, which obliged the
Federal Reserve Board's Open Market Committee to reinstate a bias toward a
tighter monetary policy. Disruptive events in Asia boosted demand for U.S.
Treasury securities. The dichotomy between domestic and international forces
caused interest rates to trade within a narrow range. Against this backdrop, the
prices of municipal bonds remained relatively stable during the six months. The
Fund's total return was 3.9%, which exceeded the returns on both of its
comparative benchmarks.
During the period, tight labor markets underscored the strength in the
domestic economy, which grew at a robust 5.4% annual pace during the
January-March quarter. Monthly increases in nonfarm payrolls averaged 277,000
during the first half of our fiscal year, and the nation's unemployment rate
dropped to a 28-year low of 4.3% in April and May. On the other hand, economic
and political unrest in Asia cast a bit of a shadow on the strong U.S. economy.
In Indonesia, riots and protests against the government and economic conditions
ultimately forced President Suharto to step down after a 32-year reign. In
Japan, economic lethargy persisted, and the yen fell to its lowest level against
the U.S. dollar in eight years. Asian investors bought U.S. Treasury securities
as a potential safe haven, helping interest rates to fall instead of to rise, as
they might otherwise have done in a strong domestic economy.
A MUNICIPAL MARKET OVERVIEW
Over the fiscal half-year, the yield on the 30-year Treasury bond declined 0.25
percentage point to 5.80%. Rates didn't drop as far for municipal bonds, with
the yield on 30-year, AAA-rated bonds declining 0.13 percentage point to 5.05%.
Municipal bond yields didn't fall as much as yields on taxable bonds primarily
because of an increased supply of new municipals. Municipal issuance for the six
months was 50% higher than during the same period a year earlier, thanks partly
to a heavy volume of refundings (bonds issued to refinance debt at lower
interest rates). Another big factor was a $3.5 billion transaction for the Long
Island Power Authority, the largest single new issue in the history of municipal
finance.
Market conditions appear favorable for municipal bonds. Supply should
diminish as refunding volume subsides. Moreover, in June and July investors will
have an estimated $45 billion to $60 billion of coupon payments and bond
redemptions to reinvest, so demand for bonds should be strong in the summer.
In our last report to you, we discussed the narrowing spread between yields
on high- and lower-quality municipals. The decline stemmed both from the overall
reduction in bond yields and the growing use of municipal bond insurance to
enhance credit quality, which limited the supply of lower-quality,
higher-yielding bonds. This compression in quality spreads continued during
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<PAGE> 8
the first half of fiscal 1998. Nearly half of all newly issued municipal bonds
came with insurance that enabled the bonds to secure a top AAA rating. As a
result, the yield spread between AAA-rated insured and BBB-rated (low-quality)
bonds narrowed to 15 basis points (0.15 percentage point). In short, investors
were taking substantially greater credit risk to earn a very modest incremental
yield. It is difficult to predict when this trend will reverse, but when it
does, prices of low-quality bonds will decline relative to prices of
high-quality insured bonds. Your Insured Tax-Free Fund is positioned to benefit
from such a reversal. The Fund maintains top overall credit quality through a
combination of insured and AA-rated municipal bonds. Coupled with our low
expense ratio, the Fund's high credit quality offers shareholders an unbeatable
combination of minimal credit risk and consistent, above-average performance
relative to our competitors.
Ian A. MacKinnon, Managing Director
Pamela Wisehaupt Tynan, Principal
Reid O. Smith, Principal
John M. Carbone, Principal
Danine A. Mueller, Principal
Christopher M. Ryon, Principal
Vanguard Fixed Income Group
June 15, 1998
INVESTMENT PHILOSOPHY
The Fund reflects a belief that a high level of current income exempt from
federal income tax and Florida's intangible personal property tax can be
achieved by investing primarily in long-term insured bonds issued by state,
county, and municipal governments in Florida.
6
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PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the Fund could
lose money.
FLORIDA INSURED TAX-FREE FUND
TOTAL INVESTMENT RETURNS: SEPTEMBER 1, 1992-MAY 31, 1998
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FLORIDA INSURED TAX-FREE FUND LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
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<S> <C> <C> <C> <C>
1992 1.6% 1.2% 2.8% 1.8%
1993 6.9 5.5 12.4 11.1
1994 -11.0 4.9 -6.1 -5.2
1995 13.8 6.3 20.1 18.9
1996 1.2 5.3 6.5 5.9
1997 1.3 5.2 6.5 7.2
1998** 1.4 2.5 3.9 3.8
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</TABLE>
*Lehman Municipal Bond Index.
**Six months ended May 31, 1998.
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1998*
<TABLE>
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SINCE INCEPTION
INCEPTION ---------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
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<S> <C> <C> <C> <C> <C> <C>
Florida Insured Tax-Free Fund 9/1/1992 10.39% 6.91% 2.35% 5.39% 7.74%
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</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
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PORTFOLIO PROFILE
Florida Insured Tax-Free Fund
This Profile provides a snapshot of the Fund's characteristics as of May 31,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
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FINANCIAL ATTRIBUTES
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Number of Issues 138
Yield 4.6%
Yield to Maturity 4.6%
Average Coupon 5.7%
Average Maturity 10.3 years
Average Quality AAA
Average Duration 7.2 years
Expense Ratio 0.21%*
Cash Reserves 1.3%
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*Annualized.
INVESTMENT FOCUS
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[GRAPH]
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VOLATILITY MEASURES
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FLORIDA INSURED LEHMAN
TAX-FREE FUND INDEX*
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<S> <C> <C>
R-Squared 0.96 1.00
Beta 1.19 1.00
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*Lehman Municipal Bond Index.
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DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
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AAA 95.6%
AA 4.4
A 0.0
BBB 0.0
BB 0.0
B 0.0
Not Rated 0.0
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Total 100.0%
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DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
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<S> <C>
Under 1 Year 6.6%
1-5 Years 11.8
5-10 Years 32.7
10-20 Years 39.8
20-30 Years 9.1
Over 30 Years 0.0
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Total 100.0%
</TABLE>
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<PAGE> 11
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's duration by the change in rates. If interest
rates rise by 1 percentage point, the share price of a portfolio with an average
duration of five years would decline by about 5%. If rates decrease by a
percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a portfolio's share price will fluctuate in response
to changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating agencies.
The agencies make their judgment after appraising an issuer's ability to meet
its obligations. Quality is graded on a scale, with Aaa or AAA indicating the
most creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy
issuers of money market securities.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate bond
investment.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a portfolio's share
price will fluctuate in response to changes in interest rates.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: average maturity (short, medium, or long) and average credit quality
(high, medium, or low).
NUMBER OF ISSUES. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from the
problems of a particular issue.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
YIELD. A snapshot of a portfolio's interest income. The yield, expressed as a
percentage of the portfolio's net asset value, is based on income earned over
the past 30 days and is annualized, or projected forward for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
9
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FINANCIAL STATEMENTS
May 31, 1998 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's municipal bond holdings,
including each security's market value on the last day of the reporting period
and information on credit enhancements (insurance or letters of credit).
Securities are grouped and subtotaled according to their insured or noninsured
status. Other assets are added to, and liabilities are subtracted from, the
value of Total Municipal Bonds to calculate the Fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the Fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund's net assets on both a dollar and per-share basis.
Undistributed Net Investment Income is usually zero because the Fund distributes
its net income to shareholders as a dividend each day. Any realized gains must
be distributed annually, so the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The balance shown for Accumulated Net Realized
Gains usually approximates the amount available to distribute to shareholders as
taxable capital gains as of the statement date, but may differ because certain
investments or transactions may be treated differently for financial statement
and tax purposes. Any Accumulated Net Realized Losses, and any cumulative excess
of distributions over net realized gains, will appear as negative balances.
Unrealized Appreciation (Depreciation) is the difference between the value of
the Fund's investments and their cost, and reflects the gains (losses) that
would be realized if the Fund were to sell all of its investments at their
statement-date values.
<TABLE>
<CAPTION>
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FACE MARKET
MATURITY AMOUNT VALUE*
FLORIDA INSURED TAX-FREE FUND COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (98.7%)
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<S> <C> <C> <C> <C>
ISSUER INSURED (91.1%)
Alachua County FL Health Fac. (Shands Teaching Hosp.) 6.25% 12/1/2011 (1) $ 3,095 $ 3,598
Alachua County FL Health Fac. (Shands Teaching Hosp.) 6.25% 12/1/2016 (1) 8,695 10,017
Alachua County FL Health Fac. VRDO (Shands Teaching Hosp.) 3.95% 6/3/1998 (1) 3,000 3,000
Boynton Beach FL Utilities System 6.25% 11/1/2020 (3) 2,085 2,271
Boynton Beach FL Utilities System 6.25% 11/1/2020 (3)(ETM) 415 482
Brevard County FL Health Fac. (Holmes Medical Center) 5.625% 10/1/2014 (1) 3,000 3,177
Broward County FL School 5.75% 7/1/2005 (2) 4,615 5,023
Broward County FL Solid Waste 5.75% 7/1/2013 (1) 4,130 4,420
Canaveral FL Port Auth. 6.00% 6/1/2006 (3) 1,000 1,081
Collier County FL COP 6.25% 2/15/2013(4) 12,500 14,467
Coral Springs FL Improvement Dist. GO 6.00% 6/1/2010 (1) 2,300 2,594
Dade County FL Health Fac. Auth. (Baptist Hosp. Miami) 5.25% 5/15/2013(1) 5,500 5,625
Dade County FL School Board Certificates 5.60% 8/1/2026 (2) 22,420 23,281
Dade County FL School Board Certificates 5.70% 8/1/2016 (2) 4,300 4,558
Dade County FL School GO 5.00% 2/15/2017(1) 21,240 21,136
Dade County FL School GO 5.50% 8/1/2014 (1) 5,980 6,229
Dade County FL School GO 6.125% 6/1/2014 (1) 6,660 7,318
Dade County FL School GO 6.875% 8/1/2002 (1) 5,000 5,529
Dade County FL Seaport GO 6.25% 10/1/2001 (2)(Prere.) 2,000 2,157
Dade County FL Seaport GO 6.50% 10/1/2001 (2)(Prere.) 4,090 4,442
Dade County FL Solid Waste System Rev. 6.00% 10/1/2005 (2) 5,000 5,500
Dade County FL Solid Waste System Rev. 6.00% 10/1/2007 (2) 8,700 9,678
Dade County FL Water & Sewer System Rev. 5.25% 10/1/2011 (3) 4,000 4,191
Dade County FL Water & Sewer System Rev. 5.25% 10/1/2012 (3) 6,000 6,234
Dade County FL Water & Sewer System Rev. 5.50% 10/1/2015 (3) 2,000 2,087
Dade County FL Water & Sewer System Rev. 6.25% 10/1/2007 (3) 1,000 1,142
Dade County FL Water & Sewer System Rev. 6.25% 10/1/2009 (3) 1,500 1,730
Dade County FL Water & Sewer System Rev. VRDO 3.90% 6/3/1998 (3) 11,485 11,485
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Davie FL Water & Sewer 6.375% 10/1/2012 (2) $ 2,500 $ 2,930
Dunedin FL Utility System 6.75% 10/1/2008 (3) 1,115 1,322
Dunedin FL Utility System 6.75% 10/1/2010 (3) 2,465 2,965
Florida Dept. of Environmental Protection 5.00% 7/1/2011 (2) 6,500 6,655
Florida Dept. of Environmental Protection 5.50% 7/1/2000 (2) 14,095 14,557
Florida Dept. of Environmental Protection 5.75% 7/1/2013 (2) 2,585 2,764
Florida Muni. Power Agency 6.25% 10/1/2002 (2)(Prere.) 4,500 4,960
Florida Muni. Power Agency (Tricity Project) 5.00% 10/1/2010 (2) 4,340 4,439
Greater Orlando FL Aviation Auth. 6.10% 10/1/2006 (2) 2,500 2,723
Gulf Breeze FL Local Govt. Pooled Loan Program VRDO 3.70% 6/4/1998 (3) 1,800 1,800
Hillsborough County FL IDA (Univ. Community Hosp.) 6.50% 8/15/2019 (1) 14,600 17,431
Hillsborough County FL School Board COP 5.25% 7/1/2017 (1) 12,000 12,155
Hillsborough County FL School Board COP 5.50% 7/1/2018 (1) 15,945 17,031
Hillsborough County FL School Board COP 5.625% 7/1/2015 (2) 6,500 7,147
Indian River County FL Water & Sewer 5.25% 9/1/2018 (3) 6,415 6,461
Indian River County FL Water & Sewer 6.50% 9/1/2008 (3) 2,540 2,958
Jacksonville FL Capital Improvement (Gator Bowl Project) 5.50% 10/1/2019 (2) 5,850 6,023
Jacksonville FL Rev. 5.50% 10/1/2012 (2) 4,900 5,091
Jacksonville FL Water & Sewer 5.00% 10/1/2020 (1) 2,650 2,792
Lakeland FL Electric & Water 6.00% 10/1/2014 (3) 2,000 2,267
Lakeland FL Electric & Water 6.50% 10/1/2009 (3) 4,000 4,712
Lee County FL Local Option Gas Tax Rev. 5.50% 10/1/2009 (1) 2,000 2,045
Lee County FL School Board COP 6.00% 8/1/2007 (4) 5,820 6,511
Lee County FL School Board COP 6.00% 8/1/2008 (4) 6,180 6,898
Marion County FL Hosp. Dist. (Munroe Regional Medical Center) 6.20% 10/1/2007 (3) 1,000 1,093
Melbourne FL Water & Sewer 6.375% 10/1/2012 (3) 1,000 1,092
Miami Beach FL Health Fac. Auth. (Mt. Sinai Medical Center) 6.125% 11/15/2014 (4) 1,250 1,356
Miami Beach FL Health Fac. Auth. (Mt. Sinai Medical Center) 6.25% 11/15/2008 (4) 2,000 2,194
Miami FL GO 5.90% 12/1/2008 (3) 1,000 1,114
Miami FL GO 6.00% 12/1/2009 (3) 1,380 1,558
Naples FL Hosp. Rev. 5.50% 10/1/2016 (1) 2,250 2,327
North Broward FL Hosp. Dist. Rev. 5.25% 1/15/2017 (1) 3,500 3,525
North Broward FL Hosp. Dist. Rev. 5.375% 1/15/2013 (1) 1,750 1,825
North Broward FL Hosp. Dist. Rev. 5.75% 1/15/2007 (1) 2,560 2,804
Ocala FL Water & Sewer 5.50% 10/1/2015 (2) 4,550 4,773
Ocala FL Water & Sewer 6.00% 10/1/2005 (2) 2,565 2,845
Ocala FL Water & Sewer 6.00% 10/1/2010 (2) 2,435 2,760
Orange County FL COP 5.375% 8/1/2017 (1) 7,590 7,784
Orange County FL COP 5.375% 8/1/2022 (1) 6,880 6,985
Orange County FL COP 6.00% 8/1/2011 (1) 6,000 6,605
Orange County FL Health Auth. Hosp. (Adventist for Sunbelt Group) 5.25% 11/15/2020 (2) 3,000 3,000
Orange County FL Health Auth. Hosp. (Adventist for Sunbelt Group) 5.50% 11/15/2015 (2) 1,250 1,303
Orange County FL Health Auth. Hosp. (Adventist for Sunbelt Group) 6.25% 11/15/2008 (2) 4,570 5,156
Orange County FL Health Auth. Hosp. (Adventist for Sunbelt Group) 6.25% 11/15/2010 (2) 6,015 6,705
Orange County FL Health Fac. Auth. (Orlando Regional Health) 6.25% 10/1/2009 (1) 6,980 8,022
Orange County FL Health Fac. Auth. (Orlando Regional Health) 6.25% 10/1/2010 (1) 7,435 8,580
Orange County FL Health Fac. Auth. (Orlando Regional Health) 6.25% 10/1/2011 (1) 3,910 4,514
Orange County FL Health Fac. Auth. (Orlando Regional Health) 6.25% 10/1/2013 (1) 2,465 2,856
Orange County FL Health Fac. Auth. (Orlando Regional Health) 6.25% 10/1/2016 (1) 5,500 6,353
Orange County FL Health Fac. Auth. (Orlando Regional Health) 6.25% 10/1/2018 (1) 2,700 3,134
Orange County FL Sales Tax Rev. 5.125% 1/1/2028 (3) 8,000 7,957
Orange County FL Solid Waste 6.375% 10/1/2017 (3) 3,500 3,818
Orange County FL Tourist Dev. 5.90% 10/1/2010 (1) 1,250 1,409
Orange County FL Tourist Dev. 6.50% 10/1/2019 (2) 4,000 4,448
Orlando & Orange County FL Expressway Auth. 5.375% 7/1/2011 (2) 5,000 5,201
Orlando & Orange County FL Expressway Auth. 6.50% 7/1/2010 (3) 2,000 2,362
Osceola County FL Gas Tax Rev. 5.90% 4/1/2008 (3) 1,805 1,952
Palm Beach County FL Criminal Justice Fac. 5.375% 6/1/2007 (3) 5,280 5,680
Palm Beach County FL Criminal Justice Fac. 5.375% 6/1/2008 (3) 2,375 2,563
Palm Beach County FL Criminal Justice Fac. 5.375% 6/1/2011 (3) 1,120 1,202
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
FLORIDA INSURED TAX-FREE FUND COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Palm Beach County FL Criminal Justice Fac. 7.20% 6/1/2015 (3) $ 3,000 $ 3,798
Palm Beach County FL Solid Waste Auth. 6.00% 10/1/2007 (2) 10,000 11,255
Palm Beach County FL Solid Waste Auth. 6.00% 10/1/2008 (2) 17,395 19,563
Pinellas County FL Health Fac. Auth. (Morton Plant Hosp.) 5.25% 11/15/2012 (1) 2,705 2,781
St. Lucie County FL Utility System 5.50% 10/1/2015 (3)(ETM) 5,000 5,422
St. Lucie County FL Utility System 6.00% 10/1/2020 (3)(ETM) 3,165 3,551
St. Lucie County FL Utility System 6.00% 9/1/2024 (3) 11,750 12,916
St. Lucie County FL Utility System 6.50% 10/1/2008 (1)(ETM) 4,910 5,638
Sarasota County FL Utility System 5.75% 10/1/2012 (3) 4,325 4,614
Sarasota County FL Utility System 7.00% 10/1/2009 (3) 6,260 7,619
Seacoast FL Utility Auth. 5.00% 3/1/2019 (3) 2,000 1,982
Seacoast FL Utility Auth. 5.50% 3/1/2010 (3) 2,500 2,596
Seacoast FL Utility Auth. 5.50% 3/1/2013 (3) 4,000 4,114
Seacoast FL Utility Auth. 5.50% 3/1/2017 (3) 2,400 2,563
Seacoast FL Utility Auth. 5.50% 3/1/2019 (3) 1,595 1,704
Seminole County FL School Board COP 6.125% 7/1/2014 (1) 1,000 1,119
Seminole County FL School Board COP 6.125% 7/1/2019 (1) 2,500 2,798
Seminole County FL School Board COP 6.50% 7/1/2004 (1)(Prere.) 2,750 3,111
Seminole County FL Water & Sewer Rev. 6.00% 10/1/2009 (1) 1,800 2,036
Seminole County FL Water & Sewer Rev. 6.00% 10/1/2012 (1) 5,000 5,667
Seminole County FL Water & Sewer Rev. 6.00% 10/1/2019 (1) 7,500 8,509
Sunrise FL Utility System 5.20% 10/1/2022 (2) 17,805 18,209
Sunrise FL Utility System 5.75% 10/1/2016 (2) 2,000 2,218
Tamarac FL Water & Sewer Utility 5.90% 10/1/2011 (3) 3,980 4,483
Tampa FL Health System Rev. (Catholic Healthcare East) 5.00% 11/15/2010 (1) 2,490 2,555
Tampa FL Health System Rev. (Catholic Healthcare East) 5.25% 11/15/2012 (1) 3,385 3,494
Tampa FL Health System Rev. (Catholic Healthcare East) 5.25% 11/15/2013 (1) 4,615 4,734
Tampa FL Health System Rev. (Catholic Healthcare East) 5.50% 11/15/2004 (1) 1,000 1,068
Tampa FL Health System Rev. (Catholic Healthcare East) 5.50% 11/15/2012 (2) 2,000 2,156
Tampa FL Health System Rev. (Catholic Healthcare East) 5.50% 11/15/2013 (2) 2,800 3,015
Tampa FL Health System Rev. (Catholic Healthcare East) 5.50% 11/15/2014 (2) 1,000 1,073
Tampa FL Hillsborough County Expressway Auth. 6.00% 7/1/2004 (2) 4,980 5,465
Tampa FL Hillsborough County Expressway Auth. 6.50% 7/1/2002 (2) 4,130 4,504
Tampa FL Rev. (Allegany Health System-St. Mary's Hosp.) 5.00% 12/1/2012 (1) 7,380 7,566
Tampa FL Water & Sewer 6.25% 10/1/2012 (3) 5,805 6,268
Titusville FL Water & Sewer 6.00% 10/1/2024 (1) 2,500 2,721
West Palm Beach FL Public Service Tax 6.125% 3/1/2002 (1)(Prere.) 1,560 1,684
-----------
638,513
-----------
NONINSURED (7.6%)
Dade County FL IDA Fac. Rev. (Florida Power & Light Co.) 4.05% 6/2/1998 3,570 3,570
Florida Board of Educ. 5.00% 6/1/2012 6,000 6,000
Florida Board of Educ. 6.75% 4/1/2001 (Prere.) 2,000 2,172
Florida Housing Finance Agency 6.25% 7/1/2011 1,610 1,712
Florida Housing Finance Agency 6.35% 7/1/2014 2,030 2,156
Gainesville FL Utility System 6.50% 10/1/2012 1,500 1,769
Hillsborough County FL IDA PCR VRDO (Tampa Electric Co. Project) 3.85% 6/2/1998 1,000 1,000
Hillsborough County FL IDA PCR VRDO (Tampa Electric Co. Project) 4.00% 6/2/1998 4,100 4,100
Jacksonville FL Pollution Control VRDO (Florida Power & Light Co.) 3.85% 6/2/1998 4,000 4,000
Orlando County FL Health Fac. Auth. Rev. VRDO
(Adventist Health System/Sunbelt) 3.80% 6/4/1998 LOC 6,800 6,800
Orlando FL Utilities Comm. 6.75% 10/1/2017 11,700 14,301
St. Lucie County FL PCR Rev. VRDO (Florida Power & Light Co.) 3.85% 6/2/1998 3,700 3,700
Tallahassee FL Consolidated Utility System 6.20% 10/1/2019 2,000 2,197
-----------
53,477
-----------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $650,528) 691,990
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (1.3%)
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B $ 10,828
Liabilities (1,755)
-----------
9,073
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------------------------------
Applicable to 61,673,245 outstanding shares of beneficial interest
(unlimited authorization--no par value) $701,063
===================================================================================================================================
NET ASSET VALUE PER SHARE $11.37
===================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
For key to abbreviations and other references, see below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AT MAY 31, 1998, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $661,982 $10.74
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (2,381) (.04)
Unrealized Appreciation--Note F 41,462 .67
===================================================================================================================================
NET ASSETS $701,063 $11.37
===================================================================================================================================
</TABLE>
KEY TO ABBREVIATIONS
COP--Certificate of Participation.
GO--General Obligation.
IDA--Industrial Development Authority Bond.
PCR--Pollution Control Revenue.
VRDO--Variable Rate Demand Obligation.
(ETM)--Escrowed to Maturity.
(Prere.)--Prerefunded.
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association).
(2) AMBAC (Ambac Assurance Corporation).
(3) FGIC (Financial Guaranty Insurance Company).
(4) FSA (Financial Security Assurance).
The insurance does not guarantee the market value of the municipal bonds.
LOC--Scheduled principal and interest payments are guaranteed by bank letter of
credit.
13
<PAGE> 16
STATEMENT OF OPERATIONS
This Statement shows interest earned by the Fund during the reporting period,
and details the operating expenses charged to the Fund. These expenses directly
reduce the amount of investment income available to pay to shareholders as
tax-exempt income dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If a
Fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
FLORIDA INSURED TAX-FREE FUND
SIX MONTHS ENDED MAY 31, 1998
(000)
- --------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Interest $17,338
-----------
Total Income 17,338
-----------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 44
Management and Administrative 548
Marketing and Distribution 92
Custodian Fees 5
Auditing Fees 4
Shareholders' Reports 12
Annual Meeting and Proxy Costs 1
Trustees' Fees and Expenses 1
-----------
Total Expenses 707
Expenses Paid Indirectly--Note C (30)
-----------
Net Expenses 677
- --------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 16,661
- --------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 3,631
Futures Contracts (294)
- --------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 3,337
- --------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 5,423
Futures Contracts 3
- --------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 5,426
- --------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $25,424
==============================================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. Because the Fund distributes its income to
shareholders each day, the amounts of Distributions--Net Investment Income
generally equal the net income earned as shown under the Operations section. The
amounts of Distributions--Realized Capital Gain may not match the capital gains
shown in the Operations section, because distributions are determined on a tax
basis and may be made in a period different from the one in which the gains were
realized on the financial statements. The Capital Share Transactions section
shows the amount shareholders invested in the Fund, either by purchasing shares
or by reinvesting distributions, and the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FLORIDA INSURED TAX-FREE FUND
-------------------------------------
SIX MONTHS YEAR
ENDED ENDED
MAY 31, 1998 NOV. 30, 1997
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 16,661 $ 28,360
Realized Net Gain (Loss) 3,337 (2,189)
Change in Unrealized Appreciation (Depreciation) 5,426 9,742
-------------------------------------
Net Increase in Net Assets Resulting from Operations 25,424 35,913
-------------------------------------
DISTRIBUTIONS
Net Investment Income (16,661) (28,360)
Realized Capital Gain -- --
-------------------------------------
Total Distributions (16,661) (28,360)
-------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 185,492 238,250
Issued in Lieu of Cash Distributions 10,845 18,246
Redeemed (121,108) (162,027)
-------------------------------------
Net Increase from Capital Share Transactions 75,229 94,469
- ---------------------------------------------------------------------------------------------------------------------
Total Increase 83,992 102,022
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 617,071 515,049
-------------------------------------
End of Period $701,063 $617,071
=====================================================================================================================
(1)Shares Issued (Redeemed)
Issued 16,361 21,630
Issued in Lieu of Cash Distributions 957 1,654
Redeemed (10,678) (14,772)
-------------------------------------
Net Increase in Shares Outstanding 6,640 8,512
=====================================================================================================================
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the Fund;
and the extent to which the Fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the Fund for
one year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FLORIDA INSURED TAX-FREE FUND
-----------------------------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED YEAR ENDED NOVEMBER 30,
THROUGHOUT EACH PERIOD MAY 31, 1998 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.21 $11.07 $10.94 $ 9.61 $10.86 $10.16
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .276 .561 .550 .560 .550 .537
Net Realized and Unrealized Gain (Loss)
on Investments .160 .140 .130 1.330 (1.180) .700
-----------------------------------------------------------------------
Total from Investment Operations .436 .701 .680 1.890 (.630) 1.237
-----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.276) (.561) (.550) (.560) (.550) (.537)
Distributions from Realized Capital Gains -- -- -- -- (.070) --
-----------------------------------------------------------------------
Total Distributions (.276) (.561) (.550) (.560) (.620) (.537)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.37 $11.21 $11.07 $10.94 $ 9.61 $10.86
=========================================================================================================================
TOTAL RETURN 3.92% 6.54% 6.45% 20.05% -6.08% 12.38%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $701 $617 $515 $423 $284 $269
Ratio of Total Expenses to
Average Net Assets 0.21%* 0.19% 0.19% 0.21% 0.22% 0.21%
Ratio of Net Investment Income to
Average Net Assets 4.88%* 5.10% 5.09% 5.33% 5.31% 5.01%
Portfolio Turnover Rate 23%* 13% 19% 20% 43% 34%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
16
<PAGE> 19
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, or mutual fund. The Fund
invests in debt instruments of municipal issuers whose ability to meet their
obligations may be affected by economic and political developments in the state
of Florida.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Bonds, and temporary cash investments acquired more
than 60 days to maturity, are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by independent
pricing services. Other temporary cash investments are valued at amortized cost,
which approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
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 CONTRACTS: The Fund may use Municipal Bond Index, U.S. Treasury
Bond, and U.S. Treasury Note futures contracts, with the objectives of enhancing
returns, managing interest rate risk, maintaining liquidity, diversifying credit
risk, and minimizing transaction costs. The Fund may purchase or sell futures
contracts instead of bonds to take advantage of pricing differentials between
the futures contracts and the underlying 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. The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
4. DISTRIBUTIONS: Distributions from net investment income are declared
daily and paid on the first business day of the following month. Annual
distributions from realized capital gains, if any, are recorded on the
ex-dividend date.
5. OTHER: Security transactions are accounted for on the date securities are
bought or sold. Costs used to determine realized gains (losses) on the sale of
investment securities are those of the 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, 1998, the Fund had contributed capital of $38,000 to
Vanguard (included in Other Assets), representing 0.2% of Vanguard's
capitalization. The Fund's Trustees and officers are also Directors and officers
of Vanguard.
C. The Fund's investment adviser may direct new issue purchases, subject to
obtaining the best price and execution, to underwriters who have agreed to
rebate or credit to the Fund part of the underwriting fees generated. Such
rebates or credits are used solely to reduce the Fund's administrative expenses.
The Fund's custodian bank has also agreed to reduce its fees when the Fund
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
maintains cash on deposit in the non-interest-bearing custody account. For the
six months ended May 31, 1998, directed brokerage and custodian fee offset
arrangements reduced expenses by $25,000 and $5,000, respectively. The total
expense reduction represented an effective annual rate of 0.01% of the Fund's
average net assets.
D. During the six months ended May 31, 1998, the Fund purchased $127,475,000 of
investment securities and sold $74,704,000 of investment securities, other than
temporary cash investments.
E. Capital gains (losses) may be realized in a different time period for tax
purposes than for financial reporting purposes. At November 30, 1997, the Fund
had available a capital loss carryforward of $1,422,000 to offset future net
capital gains through November 30, 2005.
F. At May 31, 1998, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $41,462,000, consisting
of unrealized gains of $41,819,000 on securities that had risen in value since
their purchase and $357,000 in unrealized losses on securities that had fallen
in value since their purchase.
18
<PAGE> 21
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions,
Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley
College.
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 Telecommunications 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., Procter & Gamble 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. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
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investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
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IAN A. MACKINNON
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F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
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Managing Director and Chief Financial Officer.
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Managing Director, Core Management Group.
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<PAGE> 22
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Q182-5/1998
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