<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-2907) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [X]
[X]
POST-EFFECTIVE AMENDMENT NO. 11
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. [X]
VANGUARD PENNSYLVANIA TAX-FREE FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600,
VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS HEREBY REQUESTED THAT THIS FILING BECOME EFFECTIVE ON MARCH 11, 1994,
PURSUANT TO PARAGRAPH (B) OF RULE 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER
THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED
ITS RULE 24F-2 NOTICE FOR THE YEAR ENDED NOVEMBER 30, 1993, ON JANUARY 25,
1994.
===============================================================================
<PAGE>
VANGUARD PENNSYLVANIA TAX-FREE FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page..................... Cover Page
Item 2. Synopsis....................... Not Applicable
Item 3. Condensed Financial
Information ................... Financial Highlights
Item 4. General Description of
Registrant..................... Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund......... Trustees and Officers; Management
of the Fund
Item 6. Capital Stock and Other
Securities..................... Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of Each Portfolio;
Dividends, Capital Gains and
Taxes; General Information
Item 7. Purchase of Securities Being
Offered........................ Cover Page; Opening an Account
and Purchasing Shares
Item 8. Redemption or Repurchase....... Selling Your Shares
Item 9. Pending Legal Proceedings...... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page..................... Cover Page
Item 11. Table of Contents.............. Cover Page
Item 12. General Information and
History........................ Management of the Fund
Item 13. Investment Objective and
Policies....................... Investment Limitations
Item 14. Management of the Fund......... Management of the Fund;
Investment Management
Item 15. Control Persons and Principal
Holders of Securities.......... Management of the Fund
Item 16. Investment Advisory and Other
Services....................... Management of the Fund;
Investment Management
Item 17. Brokerage Allocation........... Not Applicable
Item 18. Capital Stock and Other
Securities..................... Financial Statements
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered........................ Purchase of Shares; Redemption of
Shares
Item 20. Tax Status..................... Appendix
Item 21. Underwriters................... Not Applicable
Item 22. Calculations of Yield
Quotations of Money Market
Fund........................... Calculation of Yield
Item 23. Financial Statements........... Financial Statements
</TABLE>
<PAGE>
================================================================================
(ART) A Member of The Vanguard Group
================================================================================
PROSPECTUS--MARCH 11, 1994
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
- --------------------------------------------------------------------------------
INVESTMENT Vanguard Pennsylvania Tax-Free Fund (the "Fund") is
OBJECTIVE AND an open-end non-diversified investment company that
POLICIES seeks to provide income that is exempt from federal
and Pennsylvania personal income taxes. The Fund
will invest primarily in securities issued by
Pennsylvania state and local governments and public
financing authorities, but may also invest in secu-
rities of issuers other than Pennsylvania and its
political subdivisions. The Fund consists of a Money
Market Portfolio and an Insured Long-Term Portfolio,
each with distinct investment objectives and poli-
cies. The Portfolios are available only to Pennsyl-
vania residents. THE MONEY MARKET PORTFOLIO SEEKS TO
MAINTAIN, BUT DOES NOT GUARANTEE, A CONSTANT NET AS-
SET VALUE OF $1.00 PER SHARE. ALTHOUGH THE MONEY
MARKET PORTFOLIO INVESTS IN HIGH QUALITY INSTRU-
MENTS, THE SHARES OF THE PORTFOLIO ARE NOT INSURED
OR GUARANTEED BY THE U.S. GOVERNMENT.
- --------------------------------------------------------------------------------
OPENING AN Please complete and return the Account Registration
ACCOUNT Form. If you need assistance in completing this
Form, please call the Investor Information Depart-
ment. The minimum initial investment is $3,000 for
each Portfolio ($500 for Uniform Gifts/Transfers to
Minors Act accounts). The Fund is offered on a no-
load basis (i.e., there are no sales commissions or
12b-1 fees). However, the Fund incurs expenses for
investment advisory, management, administrative, and
distribution services.
- --------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely
PROSPECTUS the information you should know about the Fund be-
fore you invest. It should be retained for future
reference. A "Statement of Additional Information"
containing additional information about the Fund has
been filed with the Securities and Exchange Commis-
sion. This Statement is dated March 11, 1994, and
has been incorporated by reference into this Pro-
spectus. It may be obtained, without charge, by
writing to the Fund or by calling the Investor In-
formation Department.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
<S> <C>
Fund Expenses......... 2
Financial Highlights.. 2
Yield and Total
Return............... 4
FUND INFORMATION
Investment Objective.. 4
Investment Policies... 5
Investment Risks...... 7
Who Should Invest..... 10
How to Compare Tax-
Free and Taxable
Yields............... 11
<CAPTION>
Page
<S> <C>
Implementation of
Policies............ 12
Investment
Limitations......... 16
Management of the
Fund................ 17
Investment Adviser... 18
Dividends, Capital
Gains and Taxes..... 19
The Share Price of
Each Portfolio...... 21
General Information.. 22
<CAPTION>
Page
<S> <C>
SHAREHOLDER GUIDE
Opening an Account
and Purchasing
Shares.............. 23
When Your Account
Will Be Credited.... 26
Selling Your Shares.. 26
Exchanging Your
Shares.............. 29
Important Information
About Telephone
Transactions........ 30
Transferring
Registration........ 31
Other Vanguard
Services............ 31
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
- --------------------------------------------------------------------------------
<PAGE>
FUND EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for the 1993 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
--------------------------------------
<S> <C>
Sales Load Imposed on Purchases.. None
Sales Load Imposed on Reinvested
Dividends....................... None
Redemption Fees*................. None
Exchange Fees.................... None
</TABLE>
<TABLE>
<CAPTION>
MONEY INSURED
MARKET LONG-TERM
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO
----------------------------------------------------------
<S> <C> <C> <C> <C>
Management & Administrative
Expenses................... 0.15% 0.16%
Investment Advisory Ex-
penses..................... 0.01 0.01
12b-1 Fees................. None None
Other Expenses
Distribution Costs........ 0.04 0.02
Miscellaneous Expenses.... 0.00 0.01
Fund Insurance............ None 0.00
---- ----
Total Other Expenses....... 0.04% 0.03%
---- -----
TOTAL OPERATING EX-
PENSES.................. 0.20% 0.20%
==== =====
</TABLE>
* Wire redemptions under $5,000 are subject to a $5
charge.
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Fund.
The following example illustrates the expenses that you would
incur on a $1,000 investment over various periods, assuming
(1) a 5% annual rate of return and (2) redemption at the end
of each period. As noted in the table above, the Fund charges
no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio............. $2 $6 $11 $26
Insured Long-Term Portfolio........ $2 $6 $11 $26
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period insofar as they relate to each of the
five years in the period ended November 30, 1993, have been
audited by Price Waterhouse, independent accountants, whose
report thereon was unqualified. This information should be
read in conjunction with the Fund's financial statements and
notes thereto, which are incorporated by reference in the
Statement of Additional Information and in this Prospectus,
and which appear, along with the report of Price Waterhouse,
in the Fund's 1993 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see the
Fund's 1993 Annual Report to Shareholders, which may be ob-
tained without charge by writing to the Fund or by calling
our Investor Information Department at 1-800-662-7447.
2
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------
MONEY MARKET PORTFOLIO
---------------------------------------------------
YEAR ENDED
NOVEMBER 30, JUNE 13** TO
------------------------------------- NOV. 30,
1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................. $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----- ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income..... .024 .029 .045 .057 .062 .025
Net Realized and
Unrealized Gain (Loss) on
Investments.............. -- -- -- -- -- --
----- ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS.............. .024 .029 .045 .057 .062 .025
- -------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income........ (.024) (.029) (.045) (.057) (.062) (.025)
Distributions from
Realized Capital Gains... -- -- -- -- -- --
----- ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS...... (.024) (.029) (.045) (.057) (.062) (.025)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD.................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===============================================================================
TOTAL RETURN............... 2.38% 2.96% 4.59% 5.85% 6.38% 2.54%
===============================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)................ $935 $782 $818 $730 $448 $173
Ratio of Expenses to
Average Net Assets........ .20% .24% .24% .23% .23% .33%*
Ratio of Net Investment
Income to Average Net
Assets.................... 2.35% 2.93% 4.48% 5.68% 6.19% 5.59%*
Portfolio Turnover Rate.... N/A N/A N/A N/A N/A N/A
</TABLE>
*Annualized.
**Commencement of operations.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
INSURED LONG-TERM PORTFOLIO
--------------------------------------------------------------------------
YEAR ENDED
NOVEMBER 30, APRIL 7** TO
----------------------------------------------------------- NOV. 30,
1993 1992 1991 1990 1989 1988 1987 1986
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $10.96 $10.47 $10.19 $10.16 $ 9.70 $ 9.28 $10.30 $10.00
------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .631 .664 .667 .679 .687 .670 .678 .410
Net Realized and
Unrealized Gain (Loss)
on Investments........ .624 .520 .286 .030 .460 .420 (1.020) .300
------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... 1.255 1.184 .953 .709 1.147 1.090 (.342) .710
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (.631) (.664) (.667) (.679) (.687) (.670) (.678) (.410)
Distributions from
Realized Capital
Gains................. (.224) (.030) (.006) -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (.855) (.694) (.673) (.679) (.687) (.670) (.678) (.410)
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $11.36 $10.96 $10.47 $10.19 $10.16 $ 9.70 $ 9.28 $10.30
====================================================================================================
TOTAL RETURN............ 11.90% 11.65% 9.65% 7.27% 12.16% 12.01% (3.33)% 7.65%
====================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $1,496 $1,130 $828 $556 $416 $270 $194 $122
Ratio of Expenses to
Average Net Assets..... .20% .24%+ .25%+ .25%+ .26%+ .33%+ .31%+ .33%+*
Ratio of Net Investment
Income to Average Net
Assets................. 5.61% 6.17% 6.46% 6.77% 6.87% 6.95% 7.06% 6.65%*
Portfolio Turnover Rate. 14% 17% 2% 9% 8% 3% 15% 0%
</TABLE>
*Annualized.
+Insurance expense represents .01%, .01%, .02%, .03%, .04%, .05%, and .05%.
**Commencement of operations.
- --------------------------------------------------------------------------------
3
<PAGE>
YIELD AND From time to time a Portfolio of the Fund may advertise its
TOTAL RETURN yield and total return. Both yield and total return figures
are based on historical earnings and are not intended to in-
dicate future performance. The "total return" of a Portfolio
refers to the average annual compounded rates of return over
one-, five- and ten-year periods or over the life of a Port-
folio (as stated in the advertisement) that would equal an
initial amount invested at the beginning of a stated period
to the ending redeemable value of the investment, assuming
the reinvestment of all dividend and capital gains distribu-
tions.
The "30-day yield" of the Insured Long-Term Portfolio is cal-
culated by dividing the net investment income per share
earned during a 30-day period by the net asset value per
share on the last day of the period. Net investment income
includes interest and dividend income earned on the Portfo-
lio's securities; it is net of all expenses and all recurring
and nonrecurring charges that have been applied to all share-
holder accounts. The yield calculation assumes that the net
investment income earned over 30 days is compounded monthly
for six months and then annualized.
The "seven-day" or "current" yield of the Money Market Port-
folio reflects the income earned by a hypothetical account in
the Portfolio during a seven-day period, expressed as an an-
nual percentage rate. The "effective yield" of the Money Mar-
ket Portfolio assumes the income over the seven-day period is
reinvested weekly, resulting in a slightly higher stated
yield through compounding.
Methods used to calculate advertised yields are standardized
for money market and bond funds. However, these methods dif-
fer from the accounting methods used by the Portfolios to
maintain their books and records, and so advertised yields
may not fully reflect the income paid to your own account or
the yield reported in the Portfolio's Annual Report to Share-
holders.
- --------------------------------------------------------------------------------
INVESTMENT The Fund consists of the Pennsylvania Money Market Portfolio
OBJECTIVE and the Pennsylvania Insured Long-Term Portfolio, each of
which pursues a distinct investment objective:
THE FUND SEEKS
TO PROVIDE . The objective of the PENNSYLVANIA MONEY MARKET PORTFOLIO is
INCOME THAT IS to provide investors with income that is exempt from both
EXEMPT FROM federal and Pennsylvania personal income taxes. The Portfo-
FEDERAL AND lio also seeks to maintain, but does not guarantee, a con-
PENNSYLVANIA stant net asset value of $1.00 per share. Although the
INCOME TAXES Portfolio invests in high quality instruments, the shares
of the Portfolio are not insured or guaranteed by the U.S.
Government.
. The objective of the PENNSYLVANIA INSURED LONG-TERM PORTFO-
LIO is to provide investors with a high level of income
that is exempt from federal and Pennsylvania personal in-
come taxes.
The two Portfolios of the Fund are available only to invest-
ors who reside in Pennsylvania. There is no assurance that
either Portfolio of the Fund will achieve its stated objec-
tive.
4
<PAGE>
The investment objective of each Portfolio is fundamental and
so may not be changed without the approval of a majority of
the Fund's shareholders.
- --------------------------------------------------------------------------------
INVESTMENT Each Portfolio of the Fund will invest at least 80% of its
POLICIES net assets in Pennsylvania municipal securities, exclusive of
Pennsylvania AMT bonds (see below). Pennsylvania municipal
securities are debt obligations issued by Pennsylvania state
and local governments and public financing authorities (and
debt obligations issued by certain U.S. territories) that
provide interest income that is exempt from both federal and
Pennsylvania personal income taxes. The Pennsylvania munici-
pal securities described above, may include securities in
which the tax exempt interest rate is determined by an index,
swap or some other formula. Although both invest primarily in
Pennsylvania municipal obligations, the two Portfolios differ
in terms of credit quality and maturity standards.
THE MONEY Under normal circumstances, the Pennsylvania Money Market
MARKET PORTFOLIO Portfolio will invest at least 80% of its net assets in the
WILL INVEST IN following high quality, short-term Pennsylvania municipal se-
SHORT-TERM curities:
PENNSYLVANIA
MUNICIPAL . Municipal notes and variable rate demand instruments, in-
SECURITIES cluding derivative securities, rated MIG-1 or VMIG-1, or P-
1 by Moody's Investors Service, Inc. ("Moody's") or SP-1+,
SP-1, A-1+, or A-1 by Standard & Poor's Corporation ("Stan-
dard & Poor's");
. Tax-exempt commercial paper rated P-1 by Moody's or A-1+ or
A-1 by Standard & Poor's;
. Municipal bonds, including derivative securities, with an
effective maturity of 13 months or less rated a minimum of
A by Moody's or Standard & Poor's; and
. Unrated municipal notes considered by the Board of Trustees
to be comparable in credit quality to securities rated MIG-
1 by Moody's or SP-1+ or SP-1 by Standard & Poor's.
In seeking to provide a stable share price of $1.00, the
Pennsylvania Money Market Portfolio is expected to maintain
an average weighted maturity of 90 days or less, and will
purchase securities with an effective maturity of 13 months
or less and are eligible for purchase under Rule 2a-7 of the
Investment Company Act of 1940 (the "1940 Act").
Normally, the Pennsylvania Money Market Portfolio will seek
to invest substantially all of its assets in the short-term
Pennsylvania municipal obligations listed above. However, un-
der certain circumstances, such as a temporary decline in the
issuance of Pennsylvania obligations, the Portfolio may in-
vest up to 20% of its assets in the following: short-term mu-
nicipal sercurities issued outside of Pennsylvania (the in-
come from which may be subject to Pennsylvania income taxes)
or certain taxable fixed income securities (the income from
which may be subject to federal and Pennsylvania income tax-
es).
5
<PAGE>
Subject to the same 20% limit, the Portfolio is also autho-
rized to invest in short-term Pennsylvania AMT bonds. The in-
come from Pennsylvania AMT bonds is exempt from regular fed-
eral and Pennsylvania income taxes, but may be a tax prefer-
ence item for purposes of the federal alternative minimum
tax. See "Implementation of Policies" for more information.
Under unusual circumstances, such as a national financial
emergency, the Portfolio reserves the right to invest more
than 20% of its assets in securities other than Pennsylvania
municipal obligations. In most instances, however, the Penn-
sylvania Money Market Portfolio will seek to avoid such hold-
ings in an effort to provide income that is fully exempt from
federal and Pennsylvania personal income taxes.
THE INSURED Under normal circumstances, the Pennsylvania Insured Long-
LONG- TERM Term Portfolio will invest at least 80% of its net assets in
PORTFOLIO insured Pennsylvania municipal securities.
INVESTS IN
INSURED Insured municipal bonds are those in which scheduled payments
PENNSYLVANIA of interest and principal are guaranteed by a private (non-
MUNICIPAL governmental) insurance company. THE INSURANCE FEATURE DOES
SECURITIES NOT GUARANTEE THE MARKET VALUE OF THE MUNICIPAL BONDS OR THE
VALUE OF THE SHARES OF THE PENNSYLVANIA INSURED LONG-TERM
PORTFOLIO. The insurance refers to the face or par value of
the securities in the Portfolio, not the market values of
those securities or the share price of the Portfolio. See
"Implementation of Policies" for a description of the insur-
ance feature of the Pennsylvania Insured Long-Term Portfolio.
The Pennsylvania Insured Long-Term Portfolio is expected to
maintain a dollar weighted average maturity between 15 and 25
years. BONDS WITH LONGER MATURITIES USUALLY OFFER HIGHER
YIELDS, BUT ARE ALSO SUBJECT TO GREATER MARKET FLUCTUATIONS
AS INTEREST RATES CHANGE. See "Investment Risks."
Normally, the Pennsylvania Insured Long-Term Portfolio seeks
to invest substantially all of its assets in insured Pennsyl-
vania municipal obligations. However, under certain
circumstances, such as a temporary decline in the issuance of
Pennsylvania obligations, the Portfolio may invest up to 20%
of its assets in any combination of the following securities:
. Uninsured, long-term Pennsylvania municipal securities
rated a minimum of Aa by Moody's or AA by Standard &
Poor's;
. Uninsured, short-term municipal securities, issued in Penn-
sylvania or in other states, with the same quality stan-
dards that apply for the Pennsylvania Money Market Portfo-
lio; and
. Certain taxable fixed income securities, including U.S.
Government securities.
In such cases, a portion of the Portfolio's income may be
subject to Pennsylvania income taxes, federal income taxes,
or both.
6
<PAGE>
Subject to the same 20% limit, the Portfolio is also autho-
rized to invest in Pennsylvania AMT bonds. The income from
Pennsylvania AMT bonds is exempt from federal and Pennsylva-
nia income taxes, but may be a tax preference item for pur-
poses of the federal alternative minimum tax. See "Implemen-
tation of Policies" for more information.
Under unusual circumstances, such as a national financial
emergency, the Portfolio reserves the right to invest more
than 20% of its assets in securities other than insured Penn-
sylvania municipal obligations. In most instances, however,
the Pennsylvania Insured Long-Term Portfolio will seek to
avoid such holdings in an effort to provide income that is
fully exempt from federal and Pennsylvania personal income
taxes.
EACH PORTFOLIO Although the Fund is organized as a non-diversified invest-
WILL DIVERSIFY ment company, each Portfolio of the Fund intends to diversify
ITS HOLDINGS its holdings of Pennsylvania municipal securities by comply-
ing with Subchapter M of the Internal Revenue Code. In part,
Subchapter M requires that, at the close of each quarter of
the taxable year, those issues which represent more than 5%
of each Portfolio's assets be limited in aggregate to 50% of
each Portfolio, and that no one issue exceed 25% of a Portfo-
lio's total assets. As of November 30, 1993, the Pennsylvania
Money Market Portfolio held securities of 40 issuers, with
the largest holding representing 8.10% of the Portfolio's as-
sets; the Pennsylvania Insured Long-Term Portfolio held secu-
rities of 111 issuers, with the largest holding representing
2.84% of the Portfolio's assets.
The Fund's policy of investing at least 80% of its assets in
Pennsylvania municipal securities under normal circumstances
is fundamental and may not be changed without shareholder ap-
proval. The other investment policies described above are not
fundamental and so may be changed by the Board of Trustees
without shareholder approval.
- --------------------------------------------------------------------------------
As mutual funds investing in municipal securities, both Port-
INVESTMENT folios of the Fund are subject to interest rate, credit,
RISKS call, income and manager risk. However, the risk characteris-
tics of the two Portfolios vary because of differing maturity
THE PORTFOLIOS and credit quality standards.
VARY IN TERMS
OF POTENTIAL INTEREST RATE RISK is the potential for fluctuations in the
INTEREST RATE price of a Portfolio's investments due to changes in interest
RISK rates. In general, bond prices vary inversely with interest
rates. If interest rates rise, bond prices generally decline;
if interest rates fall, bond prices generally rise. In addi-
tion, for a given change in interest rates, longer-maturity
bonds exhibit greater price fluctuations than shorter-matu-
rity bonds. To compensate investors for this risk, longer-ma-
turity bonds generally offer higher yields than shorter-matu-
rity bonds, other factors, including credit quality, being
equal. Interest rate risk may be increased or decreased when
a portfolio initiates or purchases derivative Pennsylvania
municipal securities. Such derivative securities rely on so-
phisticated interest rate calculation mechanisms. For certain
types of derivative bonds, the magnitude of
7
<PAGE>
increases and decreases in their price may be proportionately
larger or smaller than, or inverse to, the price changes that
broad market interest rate fluctuations would produce in long
term bonds.
CREDIT RISK is the possibility that a bond issuer will fail
to make timely payments of interest or principal to a Portfo-
lio. The credit risk of a Portfolio depends on the credit
quality of its underlying securities. In general, the lower
the credit quality of a Portfolio's municipal securities, the
higher a Portfolio's yield, all other factors such as matu-
rity being equal.
CALL RISK is the possibility that, during periods of falling
interest rates, a municipal security with a high stated in-
terest rate will be prepaid (or "called") prior to its ex-
pected maturity date. As a result, a Portfolio will be re-
quired to invest the unanticipated proceeds at lower interest
rates, and the Portfolio's income may decline. Call provi-
sions are most common for intermediate- and long-term munici-
pal bonds.
INCOME RISK is the potential for a decline in a Portfolio's
income due to falling market interest rates. Because a Port-
folio's income is based on interest rates, which can fluctu-
ate substantially over short periods, income risk is expected
to vary from Portfolio to Portfolio.
THE FUND IS Finally, the investment adviser manages the Fund's Portfolios
SUBJECT TO according to the traditional methods of "active" investment
MANAGER RISK management, which involves the buying and selling of securi-
ties based upon economic, financial and market analysis and
investment judgment. MANAGER RISK refers to the possibility
that the Fund's investment adviser may fail to execute a
Portfolio's investment strategy effectively. As a result, a
Portfolio may fail to achieve its stated objective.
Given the Portfolio's stated objectives and policies, inter-
est rate risk for the Pennsylvania Money Market Portfolio is
expected to be negligible. The Money Market Portfolio is ex-
pected to maintain a stable share price of $1.00. In con-
trast, interest rate risk for the Pennsylvania Insured Long-
Term Portfolio may be high. The average weighted maturity of
the Insured Long-Term Portfolio is expected to exceed 15
years, meaning that the Portfolio's share price will fluctu-
ate, sometimes substantially, when interest rates change.
The following chart illustrates the potential interest rate
risk of the Pennsylvania Insured Long-Term Portfolio. The
chart shows the market value of a $1,000 investment in a sin-
gle bond with the same yield and maturity characteristics as
the Insured Long-Term Portfolio on November 30, 1993, assum-
ing a 1% and 2% point increase or decrease in interest rates:
8
<PAGE>
<TABLE>
<CAPTION>
HYPOTHETICAL VALUE OF $1,000 INVESTMENT
---------------------------------------
AFTER CHANGE IN INTEREST RATES OF:
-----------------------------------
30-DAY AVERAGE 1% POINT 1% POINT 2% POINT 2% POINT
PORTFOLIO YIELD MATURITY INCREASE DECREASE INCREASE DECREASE
--------- ------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Insured Long-Term 4.83% 8.4 years $934 $1,071 $874 $1,148
</TABLE>
This chart is intended to provide you with general guidelines
for evaluating the effect of interest rate changes on the
Pennsylvania Insured Long-Term Portfolio and determining the
degree of interest rate risk you may be willing to assume.
The yields and price changes shown are purely for illustra-
tive purposes, and should not be taken as representative of
current or future yields or expected changes in the share
price of the Pennsylvania Insured Long-Term Portfolio.
CREDIT RISK IS Credit risk depends on the average quality of a Portfolio's
EXPECTED TO BE underlying securities and its degree of diversification. The
LOW Pennsylvania Money Market Portfolio invests primarily in
high-quality, short-term Pennsylvania municipal securities,
and the Pennsylvania Insured Long-Term Portfolio invests pri-
marily in bonds insured by top-rated insurance companies
against the possible default of an issuer as to the timely
payment of interest and principal. As a result, the average
credit quality of each Portfolio is expected to be very high,
and credit risk is expected to be minimal.
Ordinarily, an investment company concentrating its invest-
ments in one state, such as the Fund, would be exposed to
greater credit risks than an investment company investing in
a nationally diversified portfolio of municipal securities.
These risks include possible tax law changes, a deterioration
in economic conditions, and differing levels of supply and
demand for Pennsylvania municipal obligations.
To minimize the effects of concentrating its investments in
Pennsylvania obligations, each Portfolio of the Fund intends
to diversify its holdings by complying with Subchapter M of
the Internal Revenue Code. (See "Investment Policies" for a
description of the requirements of Subchapter M.) In addi-
tion, the high quality instruments held by the Pennsylvania
Money Market Portfolio and the use of municipal bond insur-
ance in the Pennsylvania Insured Long-Term Portfolio should
minimize the credit risk associated with the Fund.
As of November 30, 1993, top ten portfolio holdings, based on
market value, represented 54.1% of the Money Market Portfo-
lio's net assets and 16.02% of the Insured Long-Term Portfo-
lio's net assets.
9
<PAGE>
The following chart summarizes credit, interest rate and in-
come risks for the Fund's Portfolios:
<TABLE>
<CAPTION>
---------------------------------------------------------------
CREDIT INTEREST INCOME PREPAYMENT/
PORTFOLIO RISK RATE RISK RISK CALL RISK
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Low Low High Very Low
Insured Long-Term Very Low High Low Medium
---------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
WHO SHOULD The Fund is intended for Pennsylvania residents seeking in-
INVEST come that is exempt from federal and Pennsylvania personal
income taxes. As a rule, tax-free income is attractive to in-
PENNSYLVANIA vestors in high federal tax brackets. You can determine
RESIDENTS whether tax-exempt or taxable income is more attractive in
SEEKING TAX- your own case by comparing a Portfolio's tax-free yield with
EXEMPT INCOME the yield from a comparable taxable mutual fund investment.
See "How to Compare Tax-Free and Taxable Yields".
Assuming that tax-free income is attractive in your own tax
bracket, you should base your selection of a Portfolio (or
Portfolios) on its expected price volatility and yield, and
your own investment objectives, risk preferences and time
horizon:
The PENNSYLVANIA MONEY MARKET PORTFOLIO is intended for in-
vestors who are seeking a stable share price and minimal
credit risk. The yield on the Portfolio is expected to fluc-
tuate from day to day and to be lower on average than the
yield from the Pennsylvania Insured Long-Term Portfolio. The
Pennsylvania Money Market Portfolio is suitable as a short-
term investment vehicle, emphasizing maximum protection of
principal.
In contrast, the PENNSYLVANIA INSURED LONG-TERM PORTFOLIO is
intended for investors who are seeking the highest, most du-
rable streams of income and who can tolerate sometimes sharp
fluctuations in share price in pursuit of their income objec-
tives. The yield of the Portfolio is expected to be higher,
and the level of income provided more stable, than that of
the Pennsylvania Money Market Portfolio. However, because of
the potential volatility of the Portfolio's share price, the
Pennsylvania Insured Long-Term Portfolio is appropriate only
for those investors who can hold their investment over the
long term.
The Fund is intended to be a long-term investment vehicle and
is not designed to provide investors with a means of specu-
lating on short-term market movement. Investors who engage in
excessive account activity generate additional costs which
are borne by all of the Fund's shareholders. In order to min-
imize such costs, the Fund has adopted the following poli-
cies. The Fund reserves the right to reject any purchase re-
quest (including exchange purchases from other Vanguard port-
folios) that is reasonably deemed to be disruptive to effi-
cient portfolio management either because of the timing of
the investment or previous excessive trading by the investor.
Additionally, the Fund has adopted exchange privilege limita-
tions as described in the section "Exchange Privilege Limita-
tions." Finally, the Fund reserves the right to suspend the
offering of its shares.
- --------------------------------------------------------------------------------
10
<PAGE>
HOW TO COMPARE Before choosing a specific tax-exempt investment, such as a
TAX-FREE AND Portfolio of the Fund, you should determine if you would be
TAXABLE YIELDS better off with taxable or tax-exempt income in your tax
bracket. To compare taxable and tax-free income, you should
first determine your combined federal, state and local tax
bracket. Then you should calculate the "taxable equivalent
yield" for the Portfolio you are considering, and compare it
with the yield of a taxable investment with similar credit
and maturity characteristics.
1. DETERMINE YOUR COMBINED TAX BRACKET. Your combined tax
bracket depends on whether you itemize state and local taxes
as a deduction on your federal return. If you do not itemize,
then your combined tax bracket is the sum of your federal,
state and local tax brackets.
If you do itemize, then your combined tax bracket is calcu-
lated as follows. First, calculate your effective state and
local tax bracket using the following formula:
Federal State & Effective
(100% - Tax ) X Local Bracket = State &
Bracket Local Bracket
For example, if you are in a 2.8% state and local tax bracket
and a 28% federal tax bracket, your effective state and local
tax bracket would be 2.0%:
(100% - 28%) X 2.8% = 2.0%
Second, add your effective state and local tax bracket to
your federal tax bracket to determine your combined tax
bracket:
Federal Effective Combined
Tax + State & = Tax
Bracket Local Bracket Bracket
28% + 2.0% = 30%
2. CALCULATE YOUR TAXABLE EQUIVALENT YIELD. The taxable
equivalent yield for a Portfolio is based upon the Portfo-
lio's current tax-exempt yield and your combined tax bracket.
The formula is:
Portfolio's Tax-Free Yield
-------------------------------- = Your Taxable
100% - Your Combined Tax Bracket Equivalent Yield
For example, if you are in a combined tax bracket of 30%, and
a Portfolio's tax-free yield is 6%, the Portfolio's taxable
equivalent yield would be 8.6%:
6%
---------- = 8.6%
100% - 30%
In this example, you would choose the tax-free investment if
the 8.6% taxable equivalent yield were greater than the tax-
able yield from a comparable investment (e.g., a taxable bond
fund of comparable maturity and credit quality).
- --------------------------------------------------------------------------------
11
<PAGE>
IMPLEMENTATION The Fund's adviser uses a variety of investment vehicles to
OF POLICIES achieve the objective of the Fund.
THE FUND Each Portfolio of the Fund invests principally in tax-exempt
INVESTS IN Pennsylvania municipal securities, which are debt obligations
MUNICIPAL issued by state and local governments and public financing
BONDS, NOTES authorities (and by certain U.S. territories) that provide
AND SECURITIES interest income that is exempt from federal and Pennsylvania
DERIVED FROM personal income taxes. Municipal securities include both mu-
MUNICIPAL nicipal bonds (those securities with maturities of five years
BONDS AND or more) municipal notes (those securities with maturities of
NOTES less than five years) and derivative securities (those secu-
rities in which a maturity may have been shortened by a de-
mand feature).
Municipal bonds are issued for a wide variety of reasons: to
construct public facilities, such as airports, highways,
bridges, schools, hospitals, housing, mass transportation,
streets, water and sewer works; to obtain funds for operating
expenses; to refund outstanding municipal obligations; and to
loan funds to various public institutions and facilities.
Certain industrial development bonds are also considered mu-
nicipal bonds if their interest is exempt from federal income
tax. Industrial development bonds are issued by or on behalf
of public authorities to obtain funds for privately-operated
manufacturing facilities, housing, sports arenas, convention
centers, airports, mass transportation systems, and water,
gas or sewage works.
General obligation municipal bonds are secured by the is-
suer's pledge of full faith, credit and taxing power. Revenue
or special tax bonds are payable from the revenues derived
from a particular facility or, in some cases, from a special
excise or other tax, but not from general tax revenue. Indus-
trial development bonds are ordinarily dependent on the
credit quality of a private authority.
Municipal notes are issued to meet the short-term funding re-
quirements of local, regional and state governments. Munici-
pal notes include tax anticipation notes, bond anticipation
notes, revenue anticipation notes, tax and revenue anticipa-
tion notes, construction loan notes, short-term discount
notes, tax-exempt commercial paper, demand notes, and similar
instruments. Demand notes permit an investor (such as the
Fund) to demand from the issuer payment of principal plus ac-
crued interest upon a specified number of days' notice.
Derivative securities represent the purchaser's right to re-
ceive principal and interest payments from underlying munici-
pal bonds, general obligation municipal bonds or municipal
notes. A Portfolio may purchase a derivative security from
another portfolio within the Vanguard Group, as permitted by
the Investment Company Act of 1940 and applicable rules
thereunder, or from an outside financial institution. There
are different derivative structures. An example of the steps
involved in creating and using a derivative structure fol-
lows: 1) a depositor places the underlying Pennsylvania mu-
nicipal security into a trust supervised by an independent
party; 2) a financial institution provides the purchasers the
right, at periodic intervals, to tender the derivative secu-
rity; 3) the financial
12
<PAGE>
institution receives the difference between the prevailing
short-term interest rate (which is paid to the portfolio
holding the derivative security) and the coupon on the under-
lying Pennsylvania municipal security in consideration for
providing the tender option; and 4) the tender option may be
discontinued upon the occurrence of certain events, in which
case the portfolio of the derivative security should receive
its proportional share of the underlying Pennsylvania munici-
pal security. The primary risks associated with the use of
derivative securities are: certain interest rate risks dis-
cussed under "Investment Risks," the possibility of a tax law
ruling which affects the status of the state or federal opin-
ions which are necessary to support the issuance of a deriva-
tive security, and the possible lack of a liquid secondary
market.
The Portfolios intend to limit the risk of derivative securi-
ties through policies that restrict the maximum amount of a
Portfolio's overall market risk that can be tolerated. Hence,
derivative securities' contributions to overall market risk
will be restricted, such that the risk/return characteristics
of the portfolios will be fully representative of their broad
maturity guidelines.
THE FUND MAY Each Portfolio of the Fund is authorized to invest up to 20%
INVEST IN AMT of its assets in so-called "AMT" bonds. AMT bonds are tax-ex-
BONDS empt "private activity" bonds issued after August 7, 1986,
whose proceeds are directed at least in part to a private,
for-profit organization. While the income from AMT bonds is
exempt from regular federal income tax, it is a tax prefer-
ence item for purposes of the alternative minimum tax. The
alternative minimum tax is a special separate tax that ap-
plies to a limited number of taxpayers who have certain ad-
justments to income or tax preference items.
THE INSURED The Pennsylvania Insured Long-Term Portfolio may utilize bond
LONG- TERM futures contracts and options to a limited extent. Specifi-
PORTFOLIO MAY cally, the Portfolio may enter into futures contracts pro-
USE FUTURES vided that not more than 5% of its assets are required as a
CONTRACTS AND futures contract deposit; in addition, the Portfolio may en-
OPTIONS ter into futures contracts and options transactions only to
the extent that obligations under such contracts or transac-
tions represent not more than 20% of the Portfolio's assets.
Futures contracts and options may be used for several rea-
sons; to maintain cash reserves while simulating full invest-
ment or to reduce transaction costs. The Portfolio may not
use futures contracts or options transactions to leverage its
net assets.
For example, in order to simulate full investment in bonds,
while maintaining liquidity to meet potential shareholder re-
demptions, the Pennsylvania Insured Long-term Portfolio may
invest a portion of its assets in a bond futures contract.
Because futures contracts only require a small initial margin
deposit, the Portfolio would then be able to maintain a cash
reserve to meet potential redemptions, while at the same time
remaining fully invested. Also, because the transaction costs
of futures and options may be lower than the costs of invest-
ing in bonds directly, it is expected that the use of futures
contracts and options may reduce the Portfolio's total trans-
action costs.
13
<PAGE>
FUTURES The primary risks associated with the use of futures and op-
CONTRACTS AND tions are: (i) imperfect correlation between the change in
OPTIONS POSE market value of the bonds held by the Portfolio and the
CERTAIN RISKS prices of futures and options; and (ii) possible lack of a
liquid secondary market for a futures contract and the re-
sulting inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be min-
imized by investing in those contracts whose price fluctua-
tions are expected to resemble those of the Portfolio's un-
derlying securities. The risk that the Portfolio will be un-
able to close out a futures position will be minimized by en-
tering into such transactions on a national exchange with an
active and liquid secondary market. In general, the futures
market is more liquid than the municipal bond market; there-
fore, the Portfolio's liquidity may be improved by investing
in futures.
The risk of loss in trading futures contracts in some strate-
gies can be substantial, due both to the low margin deposits
required and the extremely high degree of leverage involved
in futures pricing. As a result, a relatively small price
movement in a futures contract may result in immediate and
substantial loss (or gain) to the investor. When investing in
futures contracts, a Portfolio will segregate cash or cash
equivalents in the amount of the underlying obligation.
IN UNUSUAL Although none of the Portfolios are expected to do so, except
CIRCUMSTANCES, in unusual circumstances, each Portfolio of the Fund may in-
THE FUND MAY vest up to 20% of its assets in the following non-tax-exempt
INVEST IN securities; obligations of the United States Government and
TAXABLE its agencies or instrumentalities; commercial paper, bank
SECURITIES certificates of deposit, and bankers' acceptances, and repur-
chase agreements collateralized by these securities.
THREE TYPES OF To provide an added level of credit protection, the Pennsyl-
INSURANCE MAY vania Insured Long-Term Portfolio uses three types of insur-
BE USED IN THE ance: new issue, mutual fund and secondary market insurance.
INSURED LONG- A new issue insurance policy is purchased by a bond issuer
TERM PORTFOLIO who wishes to increase the credit rating of a security. By
paying a premium and meeting the insurer's underwriting stan-
dards, the bond issuer is able to obtain a high credit rating
for the security (usually Aaa from Moody's or AAA from Stan-
dard & Poor's). New issue insurance policies are non-
cancellable and continue in force as long as the bonds are
outstanding.
A mutual fund insurance policy may be used to guarantee spe-
cific bonds only while owned by a mutual fund. The Insured
Long-Term Portfolio of the Fund has obtained a mutual fund
insurance policy from Financial Guaranty Insurance Company
("Financial Guaranty"), a AAA-rated insurance company. Based
upon the expected composition of the Portfolio, the annual
premiums for the policy are likely to range from 0.20% to
0.40% of the principal value of the bonds insured under the
policy, thereby reducing the Portfolio's current yield.
A secondary market insurance policy is purchased by an in-
vestor (such as the Insured Long-Term Portfolio) subsequent
to the bond's original issuance and generally insures a par-
ticular bond for the remainder of its term. The Portfolio may
purchase bonds which have already been insured under a sec-
ondary mar-
14
<PAGE>
ket insurance policy by a prior investor, or the Portfolio
may itself purchase such a policy from Financial Guaranty for
bonds that are currently uninsured.
An insured municipal bond in the Portfolio will typically be
covered by only one of the three policies. For instance, if a
bond is already covered by a new issue insurance policy or a
secondary market insurance policy, then that security will
not be insured under the Portfolio's mutual fund insurance
policy. All of the insurance policies used by the Portfolio
will be obtained only from insurance companies rated Aaa by
Moody's or AAA by Standard & Poor's.
THE INSURED Each Portfolio of the Fund observes strict maturity guide-
LONG- TERM lines as set forth in detail under "Investment Policies."
PORTFOLIO MAY These maturity standards are specified in terms of a Portfo-
REPORT AN lio's average weighted maturity. From time to time, however,
EFFECTIVE the Fund may also report an effective average weighted matu-
AVERAGE rity for the Insured Long-Term Portfolio, which reflects,
WEIGHTED among other items, the likelihood that a municipal bond or
MATURITY note held by the Portfolio may be redeemed or "called" prior
to its stated maturity date. For example, if the Portfolio
consists entirely of 20-year bonds, some of which may be
"called" prior to their stated maturity in 20 years, the
Portfolio's average weighted maturity will be 20 years, while
its effective average maturity will be shorter.
A Portfolio's effective average weighted maturity will be in-
fluenced by bond market conditions, and so may vary from day-
to-day, even if no change has been made to the Portfolio's
underlying investment securities. For example, if interest
rates decline, a greater proportion of a Portfolio's securi-
ties may be subject to call (redemption) prior to their
stated maturity. As a result, reflecting this increased call
risk, the effective average maturity of the Portfolio will
shorten, independent of actual purchases or sales of portfo-
lio securities.
TEMPORARY Each Portfolio will not invest in securities other than mu-
INVESTMENTS nicipal bonds except that each Portfolio may make temporary
investments for temporary defensive purposes in (a) notes is-
sued by or on behalf of municipal or corporate issuers, obli-
gation of the U.S. Government and its agencies, commercial
paper, bank certificates of deposits; (b) investment compa-
nies investing in such securities which have investment ob-
jectives consistent with those of the Portfolio to the extent
permitted by the Investment Company Act of 1940; and (c) any
such securities or municipal bonds subject to repurchase
agreements.
THE FUND MAY Each Portfolio may purchase tax-exempt securities on a "when-
PURCHASE WHEN- issued" basis. In buying "when-issued" securities, a Portfo-
ISSUED lio commits to buy securities at a certain price even though
SECURITIES the securities may not be delivered for up to 45 days. The
Portfolio pays for the securities and begins earning interest
when the securities are actually delivered. As a consequence,
it is possible that the market price of the securities at the
time of delivery may be higher or lower than the purchase
price.
THE FUND MAY Each Portfolio may lend its investment securities for either
LEND ITS short-term or long-term purposes to qualified institutional
SECURITIES investors for the purpose of realizing
15
<PAGE>
additional net investment income. Loans of securities by a
Portfolio will be collateralized by cash, letters of credit,
or securities issued or guaranteed by the U.S. Government or
its agencies. The collateral will equal at least 100% of the
current market value of the loaned securities. Income derived
from the lending of securities is not tax-exempt, and a por-
tion of the tax-exempt interest earned when a municipal secu-
rity is on loan must be characterized as taxable income.
Therefore, each Portfolio will limit such activity in accor-
dance with its investment objective.
THE FUND MAY Each Portfolio may purchase municipal lease obligations,
INVEST IN which are securities issued by state and local governments to
MUNICIPAL acquire land, equipment and facilities. These obligations
LEASE typically are not backed by the issuing municipality's full
OBLIGATIONS authority to assess taxes to meet its debt obligations. If
the issuing authority fails to make the appropriations neces-
sary to cover lease payments, then the lease may terminate,
with the possibility of default on the lease obligation and
loss to investors.
EACH PORTFOLIO Each Portfolio will invest in securities to benefit from the
WILL AVOID income they generate and not to generate trading profits. Un-
TRADING der the Fund's Declaration of Trust, the Portfolios have no
PROFITS power to vary the portfolio investments except to: (1) elimi-
nate unsafe investments and investments not consistent with
the preservation of the capital or the tax status of the
Portfolios; (2) honor redemption orders and meet anticipated
redemption requirements; (3) reinvest the earnings from secu-
rities in like securities; (4) defray normal administrative
expenses; or (5) in the case of the Pennsylvania Money Market
Portfolio, maintain a constant net asset value per share pur-
suant to, and in compliance with, an order or rule of the
United States Securities and Exchange Commission (the "Penn-
sylvania Investment Restrictions").
- --------------------------------------------------------------------------------
INVESTMENT The Fund has adopted certain limitations designed to reduce
LIMITATIONS its exposure to specific situations. These limitations in-
clude the following:
THE FUND HAS a) The Pennsylvania Insured Long-Term Portfolio will invest a
ADOPTED minimum of 80% of its net assets in insured municipal
CERTAIN bonds, the interest on which is exempt from federal and
FUNDAMENTAL Pennsylvania personal income taxes except that it may make
LIMITATIONS temporary investments, except as described in the section
"Implementation of Policies."
b) The Pennsylvania Money Market Portfolio will invest a min-
imum of 80% of its net assets in short-term municipal se-
curities, the interest on which is exempt from federal and
Pennsylvania personal income taxes except that each Port-
folio may make temporary investments, except as described
in the section "Implementation of Policies."
c) At the close of each quarter of the taxable year, those
issues which represent more than 5% of a Portfolio's as-
sets will be limited in aggregate to 50% of the assets of
that Portfolio except U.S. Government securities and cash
items, as defined in the Internal Revenue Code (the
"Code").
16
<PAGE>
d) Each Portfolio will limit the aggregate value of holdings
of a single issuer (except U.S. Government and cash items
as defined in the Code) to a maximum of 25% of the Portfo-
lio's total assets. For the purposes of this limitation,
identification of the issuer will be based on a determina-
tion of the source of assets and revenues committed to
meeting interest and principal payments on each security.
e) A Portfolio will not borrow money except for temporary or
emergency purposes, and then not in excess of 10% of the
Portfolio's total assets. The Portfolio will repay all
borrowings before making additional investments, and the
interest paid on such borrowings will reduce income.
f ) A Portfolio will not pledge, mortgage, or hypothecate
more than 10% of its total assets.
The above-mentioned investment limitations are considered at
the time investment securities are purchased. The investment
limitations described here and in the Statement of Additional
Information may be changed only with the approval of a major-
ity of the Fund's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of 32 investment companies with 77 distinct
investment portfolios and total assets in excess of $120 bil-
VANGUARD lion. Through their jointly owned subsidiary, The Vanguard
ADMINISTERS Group, Inc. ("Vanguard"), the Fund and the other funds in the
AND Group obtain at cost virtually all of their corporate manage-
DISTRIBUTES ment, administrative, shareholder accounting and distribution
THE FUND services. Vanguard also provides investment advisory services
on an at-cost basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard funds
have costs substantially lower than those of most competing
mutual funds. In 1993, the average expense ratio (annual
costs including advisory fees divided by total net assets)
for the Vanguard funds amounted to approximately .30% com-
pared to an average of 1.02% for the mutual fund industry
(data provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations and
are responsible to the Fund's Trustees. The Trustees set
broad policies for the Fund and choose its Officers. A list
of Trustees and Officers of the Fund and a statement of their
present positions and principal occupations during the past
five years can be found in the Statement of Additional Infor-
mation.
Vanguard employs a supporting staff of management and admin-
istrative personnel needed to provide the requisite services
to the funds and also furnishes the funds with necessary of-
fice space, furnishings and equipment. Each fund pays its
share of Vanguard's total expenses, which are allocated among
the funds under methods approved by the Board of Trustees
(Directors) of each fund. In addition, each fund bears its
own direct expenses, such as legal, auditing and custodian
fees.
17
<PAGE>
Vanguard also provides distribution and marketing services to
the Vanguard funds. The funds are available on a non-load ba-
sis (i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's distribu-
tion costs.
- --------------------------------------------------------------------------------
INVESTMENT The two Portfolios of the Fund receive all investment advi-
ADVISER sory services on an at-cost basis from Vanguard's Fixed In-
come Group. The Group also provides investment advisory serv-
VANGUARD ices to 33 other Vanguard money market and bond portfolios,
MANAGES THE both taxable and tax-exempt. Total assets under management by
FUND'S Vanguard's Fixed Income Group were $52 billion as of December
INVESTMENTS 31, 1993. The Fixed Income Group is supervised by the Offi-
cers of the Fund. Ian A. MacKinnon, Senior Vice President of
Vanguard, has been in charge of the Group since its inception
in 1981.
. Reid Smith, Assistant Vice President of Vanguard, serves as
portfolio manager of the Pennsylvania Insured Long-Term
Portfolio. Mr. Smith has managed the Insured Long-Term
Portfolio since 1992. (Previously, the Insured Long-Term
Portfolio was managed by David Hamlin of the Fixed Income
Group.) For 3 years prior to joining Vanguard, Mr. Smith
was associated with another mutual fund advisory firm as a
fixed income portfolio manager.
The Fixed Income Group manages the investment and reinvest-
ment of the assets of the Fund's Portfolios and continuously
reviews, supervises and administers each Portfolio's invest-
ment program, subject to the maturity and quality standards
specified in this Prospectus, and supplemental guidelines ap-
proved by the Fund's Board of Trustees. The Fixed Income
Group's selection of investments for the Portfolios is based
on: (a) continuing credit analysis of those instruments held
in the Portfolios and those being considered for inclusion
therein; (b) possible disparities in yield relationships be-
tween different fixed income securities and money market in-
struments; and (c) actual or anticipated movements in the
general level of interest rates.
Vanguard's Fixed Income Group places all orders for purchases
and sales of portfolio securities. Purchases of portfolio se-
curities are made either directly from the issuer or from mu-
nicipal securities dealers. The investment management staff
may sell portfolio securities prior to their maturity if cir-
cumstances and considerations warrant and if it believes such
dispositions advisable. The Fund's policy of investing in
short-term instruments in the Pennsylvania Money Market Port-
folio will likely result in significant portfolio turnover.
The staff seeks to obtain the best available net price and
most favorable execution for all portfolio transactions.
- --------------------------------------------------------------------------------
18
<PAGE>
DIVIDENDS, Dividends consisting of virtually all of the ordinary income
CAPITAL GAINS of each Portfolio are declared daily and are payable to
AND TAXES shareholders of record at the close of the previous business
day. Such dividends are paid on the first business day of
THE FUND PAYS each month. Capital gains distributions if any will be made
MONTH-END annually.
DIVIDENDS
Dividend and capital gains distributions may be automatically
reinvested or received in cash. See "Choosing a Distribution
Option" for a description of these distribution methods.
In addition, in order to satisfy certain distribution re-
quirements of the Tax Reform Act of 1986, each Portfolio may
declare special year-end dividend and capital gains distribu-
tions during December. Such distributions, if received by
shareholders by January 31, are deemed to have been paid by
the Portfolio and received by shareholders by December 31 of
the prior year.
DIVIDENDS WILL Each Portfolio of the Fund intends to qualify for taxation as
BE EXEMPT FROM a "regulated investment company" under the Internal Revenue
FEDERAL AND Code so that each Portfolio will not be subject to federal
PENNSYLVANIA income tax to the extent its income is distributed to share-
INCOME TAXES holders. In addition, each Portfolio intends to invest a suf-
ficient portion of its assets in municipal bonds and notes so
that it will qualify to pay "exempt-interest dividends" to
shareholders. Such exempt-interest dividends are excluded
from a shareholder's gross income for federal tax purposes.
The Revenue Reconciliation Act enacted during 1993 provides
that market discount on tax-exempt bonds purchased after
April 30, 1993 must be taxed as ordinary income. Accordingly,
to the extent that the Fund purchases such discounted securi-
ties, taxable income may result. Furthermore, each Portfolio
expects to invest substantially all of its assets in Pennsyl-
vania municipal securities. As a result, each Portfolio will
be eligible to pay dividends to Pennsylvania residents that
will be exempt from Pennsylvania personal income taxes.
Net long-term capital gains realized by a Portfolio from the
sale of securities will be distributed as taxable capital
gains distributions. Any short-term capital gains or any tax-
able interest income will be distributed as taxable ordinary
dividend distribution. In general, such taxable income dis-
tributions from a Portfolio are expected to be negligible in
comparison with tax-exempt dividends. However, under unusual
circumstances, a Portfolio may invest in securities other
than Pennsylvania municipal obligations. In such cases, a
portion of the Portfolio's income may be subject to Pennsyl-
vania income taxes, federal income taxes, or both.
At present, neither Portfolio invests in AMT bonds. (See "In-
vestment Policies.") However, were a Portfolio to invest in
such bonds, a portion of the Portfolio's dividends, while ex-
empt from the regular federal income tax, would be a tax
preference item for purposes of the alternative minimum tax.
19
<PAGE>
A CAPITAL GAIN A sale of shares in the Insured Long-Term Portfolio is a tax-
OR LOSS MAY BE able event and may result in a capital gain or loss. A capi-
REALIZED UPON tal gain or loss may be realized from an ordinary redemption
EXCHANGE OR of shares, a check-writing redemption, or an exchange of
REDEMPTION shares between two mutual funds (or two portfolios of a mu-
tual fund). In addition, if you held shares in the Insured
Long-Term Portfolio for six months or less, any capital loss
realized upon redemption is disallowed to the extent of the
tax-exempt dividend income you received.
Capital gains distributions from a Portfolio and any capital
gains or losses realized from the sale or exchange of shares
may also be subject to state and local taxes.
The Fund is required to withhold 31% of any taxable divi-
dends, capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer identi-
fication regulations. You may avoid this withholding require-
ment by indicating your proper Social Security or Taxpayer
Identification Number on your Account Registration Form and
by certifying that you are not subject to backup withholding.
Up to 50% of an individual's Social Security benefits may be
subject to federal income tax. Along with other factors, to-
tal tax-exempt income, including any tax-exempt dividend in-
come from Portfolios of the Fund, is used to calculate the
taxable portion of Social Security benefits.
Shares of the Portfolio are not subject to Pennsylvania
county personal property taxes, the personal property tax of
the City of Pittsburgh or the personal property tax of the
School District of Pittsburgh. Further, shareholders are not
subject to the investment income tax of the School District
of Philadelphia, to the extent that the income of the Portfo-
lios is derived from Pennsylvania obligations.
The Fund is organized as a Pennsylvania business trust and,
in the opinion of counsel, is not liable for any income or
franchise tax in the Commonwealth of Pennsylvania. The Fund
will be subject to Pennsylvania county personal property tax
in the county which is the site of its principal office.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an in-
vestment in the Fund.
- --------------------------------------------------------------------------------
20
<PAGE>
THE SHARE The share price or "net asset value" per share of each Port-
PRICE OF EACH folio is computed daily by dividing the total value of the
PORTFOLIO investments and other assets of each Portfolio, less any lia-
bilities, by the total outstanding shares of such Portfolio.
PENNSYLVANIA MONEY MARKET PORTFOLIO. The net asset value per
share of the Pennsylvania Money Market Portfolio is deter-
mined as of the close of regular trading on the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day
that the Exchange is open for business. It is the policy of
the Money Market Portfolio to attempt to maintain a net asset
value of $1.00 per share for purposes of sales and redemp-
tions. The Money Market Portfolio seeks to maintain, but does
not guarantee, a constant net asset value of $1.00 per share.
Although the Money Market Portfolio invests in high quality
instruments, the shares of the Portfolio are not insured or
guaranteed by the U.S. Government. The instruments held by
the Pennsylvania Money Market Portfolio are valued on the ba-
sis of amortized cost, which does not take into account
unrealized capital gains or losses.
PENNSYLVANIA INSURED LONG-TERM PORTFOLIO. The net asset value
per share of the Pennsylvania Insured Long-Term Portfolio is
determined as of the close of regular trading on the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on each day
the Exchange is open for business. When approved by the Board
of Trustees, bonds and other fixed income securities of each
of the Portfolios may be valued on the basis of the prices
provided by a pricing service when such prices are believed
to reflect the fair market value of such securities. (The
prices provided by pricing services are generally determined
without regard to bid or last sale prices. Because of the
large number of outstanding municipal bonds, the majority of
issues do not trade each day; therefore, last sale prices are
not normally available. In valuing such securities, the pric-
ing services generally take into account institutional size
trading in similar groups of securities and any developments
related to specific securities.) The methods used by the
pricing service and the valuations so established are re-
viewed by the Officers of the Fund under the general supervi-
sion of Trustees. There are a number of pricing services
available and the Trustees, on the basis of on-going evalua-
tion of these services, may use other pricing services or
discontinue the use of any pricing service.
Valuation of securities not priced in this manner are priced
at the most recent quoted bid price provided by investment
dealers. Short-term instruments maturing within 60 days of
the valuation date may be valued at cost, plus or minus any
amortized discount or premium. Other assets and securities
for which no quotations are readily available will be valued
in good faith at their fair value using methods determined by
the Trustees.
The price per share of the Insured Long-Term Portfolio can be
found daily in the mutual fund section of most major newspa-
pers under the heading of The Vanguard Group.
- --------------------------------------------------------------------------------
21
<PAGE>
GENERAL Vanguard Pennsylvania Tax-Free Fund is a Pennsylvania busi-
INFORMATION ness trust. The Declaration of Trust permits the Trustees to
issue an unlimited number of shares of beneficial interest,
without par value, from an unlimited number of classes
of shares. Currently the Fund is offering two classes of
shares (known as "Portfolios").
Shares of each Portfolio, when issued, are fully paid and
non-assessable; participate equally in dividends, distribu-
tions and net assets; are entitled to one vote per share;
have pro rata liquidation rights; and do not have pre-emptive
rights. Also, shares of the Fund have non-cumulative voting
rights, meaning that the holders of more than 50% of the
shares voting for the election of the Trustees can elect all
of the Trustees if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other ap-
plicable law. An annual meeting will be held to vote on the
removal of a Trustee or Trustees of the Fund if requested in
writing by the holders of not less than 10% of the outstand-
ing shares of the Fund.
All securities and cash are held by CoreStates Bank, N.A.,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing Agent.
Price Waterhouse serves as independent accountants for the
Fund and will audit its financial statements annually. The
Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
22
<PAGE>
SHAREHOLDER GUIDE
OPENING AN To open a new account, either by mail or by wire, simply com-
ACCOUNT AND plete and return an Account Registration Form and any re-
PURCHASING quired legal documentation. Please indicate the Portfolio you
SHARES have chosen and the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum initial
investment requirement ($500 for Uniform Gift/Transfer to Mi-
nors Act Accounts). In addition, you must be a Pennsylvania
resident to invest in the Fund. If you need assistance with
the Account Registration Form or have any questions, please
call our Investor Information Department at 1-800-662-7447.
NOTE: For other types of account registrations (e.g., corpo-
rations, associations, other organizations, trusts or powers
of attorney), please call us to determine which additional
forms you may need.
Because of the risks associated with bond investments, the
Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating
on short-term market movements. Consequently, the Fund re-
serves the right to reject any specific purchase (and ex-
change purchase) request. The Fund also reserves the right to
suspend the offering of shares for a period of time.
Each Portfolio's shares are purchased at the next-determined
net asset value after your investment has been received in
the form of Federal Funds. See "When Your Account Will Be
Credited". The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees).
ADDITIONAL Subsequent investments may be made by mail ($100 minimum per
INVESTMENTS Portfolio), wire ($1,000 minimum per Portfolio), exchange
from another Vanguard Fund account, or Vanguard Fund Express.
--------------------------------------------------------------
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY Please include the Additional investments
MAIL amount of your initial should include the In-
Complete and investment and the vest-by-Mail re-
sign the name of the Portfolios mittance form attached
enclosed you have selected on to your Fund confirma-
Account the registration form, tion statements.
Registration make your check pay- Please make your check
Form able to The Vanguard payable to The Van-
Group--(Portfolio Num- guard Group--(Portfo-
ber). See page 24 for lio Number). See page
appropriate Portfolio 24 for appropriate
number, and mail to: Portfolio number,
write your account
VANGUARD FINANCIAL number on your check
CENTER and, using the return
P.O. BOX 2600 VALLEY envelope provided,
FORGE, PA 19482 mail to the address
indicated on the In-
vest-by-Mail Form.
For express or VANGUARD FINANCIAL All written requests
registered CENTER 455 DEVON PARK should be mailed to
mail, send to: DRIVE WAYNE, PA 19087 one of the addresses
indicated for new ac-
counts. Do not send
registered or express
mail to the post of-
fice box address.
23
<PAGE>
VANGUARD PENNSYLVANIA TAX-FREE PORTFOLIOS:
Pennsylvania Money Market Portfolio--63 Pennsylvania Insured
Long-Term Portfolio--77
--------------------------------------------------------------
PURCHASING BY CORESTATES BANK, N.A.
WIRE ABA 031000011
Money should CORESTATES NO 0141 1274
be wired to: ATTN VANGUARD
VANGUARD PENNSYLVANIA TAX-FREE FUND
BEFORE WIRING NAME OF PORTFOLIO
Please contact ACCOUNT NUMBER
Client ACCOUNT REGISTRATION
Services (1-
800-662-2739)
To assure proper receipt, please be sure your bank includes
the Portfolio name, the account number Vanguard has assigned
to you and the eight digit CoreStates number. If you are
opening a new account, please complete the Account Registra-
tion Form and mail it to the "New Account" address above af-
ter completing your wire arrangement. NOTE: Federal Funds
wire purchase orders will be accepted only when the Fund and
Custodian Bank are open for business.
--------------------------------------------------------------
PURCHASING BY You may open an account or purchase additional shares of the
EXCHANGE (from Fund by making an exchange from an existing Vanguard Fund ac-
a Vanguard count. Call our Client Services Department at 1-800-662-2739.
account) The new account will have the same registration as the exist-
ing account.
--------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move money
FUND EXPRESS from your bank account to your Vanguard account at your re-
quest. Or if you choose the Automatic Investment option,
Special money will be moved from your bank account to your Vanguard
Purchase and account on the schedule (monthly, bimonthly [every other
Automatic month], quarterly or yearly) you select. To establish these
Investment Fund Express options, please provide the appropriate informa-
tion on the Account Registration Form. We will send you a
confirmation of your Fund Express service; please wait three
weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital
gains distributions will be reinvested in additional Fund
shares. This option will be selected for you automatically
unless you specify one of the other options.
2. CASH DIVIDEND OPTION--Your dividends will be paid in cash
and your capital gains will be reinvested in additional
Fund shares.
3. ALL CASH OPTION--Both dividend and capital gains distribu-
tions will be paid in cash.
You may change your option by calling our Client Services De-
partment (1-800-662-2739).
24
<PAGE>
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department (1-
800-662-2739) for information. You may also elect Vanguard
Dividend Express which allows you to transfer your cash divi-
dends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute
net capital gains and investment income to Fund shareholders.
INVESTORS These distributions are made to all shareholders who own Fund
SHOULD ASK shares as of the distribution's record date, regardless of
ABOUT THE how long the shares have been owned. Purchasing shares just
TIMING OF prior to the record date could have a significant impact on
CAPITAL GAINS your tax liability for the year. For example, if you purchase
AND DIVIDEND shares immediately prior to the record date of a sizable cap-
DISTRIBUTIONS ital gain or income dividend distribution, you will be as-
BEFORE sessed taxes on the amount of the capital gain and/or divi-
INVESTING dend distribution later paid even though you owned the Fund
shares for just a short period of time. (Taxes are due on the
distributions even if the dividend or gain is reinvested in
additional Fund shares.) While the total value of your in-
vestment will be the same after the distribution--the amount
of the distribution will offset the drop in the NAV of the
shares--you should be aware of the tax implications the tim-
ing of your purchase may have.
Prospective investors should, therefore, inquire about poten-
tial distributions before investing. The Fund's annual capi-
tal gains distribution normally occurs in December, while in-
come dividends are generally paid on the first business day
of each month. For additional information on distributions
and taxes, see the section titled "Dividends, Capital Gains,
and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
complete your Account Registration Form. If you wish to add
ESTABLISHING shareholder options later, you may need to provide Vanguard
OPTIONAL with additional information and a signature guarantee. Please
SERVICES call our Client Services Department (1-800-662-2739) for fur-
ther assistance.
SIGNATURE For our mutual protection, we may require a signature guaran-
GUARANTEES tee on certain written transaction requests. A signature
guarantee verifies the authenticity of your signature, and
may be obtained from banks, brokers and any other guarantor
institution that Vanguard deems acceptable. A SIGNATURE GUAR-
ANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES With the exception of the Money Market Portfolio, share cer-
tificates will be issued upon request. If a certificate is
lost, you may incur an expense to replace it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or ad-
viser may charge a service fee.
25
<PAGE>
CANCELLING The Fund will not cancel any trade (e.g., a purchase, ex-
TRADES change or redemption) believed to be authentic, received in
writing or by telephone, once the trade has been received.
- --------------------------------------------------------------------------------
WHEN YOUR The trade date is the date on which your account is credited.
ACCOUNT WILL It is generally the day on which the Fund receives your in-
BE CREDITED vestment in the form of Federal Funds (monies credited to the
Fund's Custodian Bank by a Federal Reserve Bank). Your trade
date varies according to your method of payment for your
shares.
For purchases by check the Fund is ordinarily credited with
Federal Funds within one business day. Thus, if your purchase
by check is received by the close of regular trading on the
New York Stock Exchange (generally 4:00 p.m. Eastern time),
your trade date is the business day following receipt of your
check. If your purchase is received after the close of the
Exchange, your trade date is the second business day follow-
ing receipt of your check.
For purchases by Federal Funds wire or exchange, the Fund is
credited immediately with Federal Funds. Thus, if your pur-
chase by Federal Funds wire or exchange is received by the
close of the Exchange, your trade date is the day of receipt.
If your purchase is received after the close of the Exchange,
your trade date is the business day following receipt of your
wire or exchange.
Your shares are purchased at the net asset value determined
on your trade date. You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.) For a
purchase of the Money Market Portfolio by Federal Funds wire,
you may qualify for a dividend on the date of purchase if you
have notified the Fund of your intention to make the purchase
by 10:45 a.m. (Eastern time) on the business day of the wire.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a for-
eign check which has been drawn in U.S. dollars AND has been
issued by a foreign bank with a U.S. correspondent bank.
Each Portfolio reserves the right to suspend the offering of
shares for a period of time. Each Portfolio also reserves the
right to reject any specific purchase request.
- --------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are nor-
mally mailed, credited or wired--depending upon the method of
withdrawal you have previously chosen within two business
days after the receipt of the request in Good Order.
SELLING BY You may withdraw funds from your account by writing a check
WRITING A payable in the amount of $250 or more. When a check is pre-
CHECK sented for payment to the Fund's agent, CoreStates Bank, the
Fund will redeem sufficient shares in your account at the
next determined net asset value to cover the amount of the
check.
26
<PAGE>
In order to establish the checkwriting option on your ac-
count, all registered shareholders must sign a signature
card. After your completed signature card is received by the
Fund, an initial supply of checks will be mailed within 10
business days. There is no charge for checks or for their
clearance. CORPORATIONS, TRUSTS AND OTHER ORGANIZATIONS
SHOULD CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739)
BEFORE SUBMITTING SIGNATURE CARDS, AS ADDITIONAL DOCUMENTS
MAY BE REQUIRED TO ESTABLISH THE CHECKWRITING SERVICE.
Before establishing the checkwriting option, you should be
aware that:
1. Writing a check (a redemption of shares) is a taxable
event.
2. The Fund does not allow an account to be closed through
the checkwriting option.
3. Vanguard cannot guarantee a stop payment on the
checkwriting option. If you wish to reverse a stop payment
order, you must do so in writing.
4. The Fund reserves the right to terminate or alter this
service at any time.
--------------------------------------------------------------
SELLING BY Requests should be mailed to VANGUARD FINANCIAL CENTER, VAN-
MAIL GUARD PENNSYLVANIA TAX-FREE FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482 (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Pennsylvania
Tax-Free Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
--------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners EXACTLY as they are registered on
the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be re-
quired in the case of estates, corporations, trusts, and
certain other accounts.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO
YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT AT
1-800-662-2739.
--------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized rep-
TELEPHONE resentative may call our Client Services Department at 1-800-
662-2739. For telephone redemptions, you may have the pro-
ceeds sent to you by mail or by wire. In addition to the de-
tails, please see "Important Information About Telephone
Transactions."
BY MAIL: Telephone mail redemption is automatically estab-
lished on your account unless you indicate otherwise on your
Account Registration Form. You may redeem any amount by call-
ing Vanguard. The proceeds will be paid to the registered
shareholders and mailed to the address of record.
27
<PAGE>
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect telephone
wire redemption is at the time you complete your Account Reg-
istration Form. If you do not presently have telephone wire
redemption and wish to establish it, please contact our Cli-
ent Services Department.
With the wire redemption option, you may withdraw a minimum
of $1,000 and have the amount wired directly to your bank ac-
count. Wire redemptions less than $5,000 are subject to a $5
charge deducted by Vanguard. There is no Vanguard charge for
wire redemptions of $5,000 or more. However, your bank may
assess a separate fee to accept incoming wires.
A request to change the bank associated with your wire re-
demption option must be received in writing, signed by each
registered shareholder, and accompanied by a voided check or
preprinted deposit slip. A signature guarantee is required
if your bank registration is not identical to your Vanguard
Fund account registration.
--------------------------------------------------------------
SELLING BY If you select the Fund Express Automatic Withdrawal option,
FUND EXPRESS money will be automatically moved from your Vanguard Fund ac-
count to your bank account according to the schedule you have
Automatic selected. The Special Redemption option lets you move money
Withdrawal & from your Vanguard account to your bank account upon your re-
Special quest. You may elect Fund Express on the Account Registration
Redemption Form or call our Investor Information Department at 1-800-
662-7447 for a Fund Express application.
--------------------------------------------------------------
SELLING BY You may sell shares of a Portfolio by making an exchange to
EXCHANGE another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
--------------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may be redeemed at
REDEMPTION any time. However, your redemption proceeds will not be paid
INFORMATION until payment for the purchase is collected, which may take
up to ten calendar days. Your money is invested and earns
dividends during the holding period.
--------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the close
REDEMPTION of regular trading on the New York Stock Exchange (generally
PROCEEDS 4:00 p.m. Eastern time) are processed on the day of receipt
and the redemption proceeds are normally sent on the follow-
ing business day.
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following re-
ceipt and the proceeds are normally sent on the second busi-
ness day following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience diffculty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by
28
<PAGE>
regular or express mail. It will be implemented at the net
asset value next determined after your request has been re-
ceived by Vanguard in Good Order. The Fund reserves the right
to revise or terminate the telephone redemption privilege at
any time.
The Fund may suspend the redemption right or postpone payment
at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the United
States Securities and Exchange Commission.
--------------------------------------------------------------
VANGUARD'S If you make a redemption from a qualifying account, Vanguard
AVERAGE COST will send you an Average Cost Statement which provides you
STATEMENT with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
--------------------------------------------------------------
MINIMUM Due to the relatively high cost of maintaining smaller ac-
ACCOUNT counts, the Fund reserves the right to redeem shares in any
BALANCE account that is below the minimum initial investment amount
REQUIREMENT of $3,000. In addition, if at any time the total investment
does not have a value of at least $1,000, you may be notified
that the value of your account is below the Fund's minimum
account balance requirements. You would then be allowed 60
days to make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the sharehold-
er. This minimum does not apply to Uniform Gifts/Transfers to
Minors Act account.
- --------------------------------------------------------------------------------
EXCHANGING Should your investment goals change, you may exchange your
YOUR SHARES shares of Vanguard Pennsylvania Tax-Free Fund for those of
other available Vanguard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Portfolio name, account number, Social Security Number or
Taxpayer Identification Number listed on the account, and ac-
Call Client count address. Requests for telephone exchanges received
Services (1- prior to the close of regular trading on the New York Stock
800-662-2739) Exchange (generally 4:00 p.m. Eastern time) are processed at
the close of business that same day. Requests received after
the close of the Exchange are processed the next business
day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM VAN-
GUARD BALANCED INDEX, VANGUARD EXPLORER FUND, VANGUARD INDEX
TRUST, VANGUARD INTERNATIONAL EQUITY INDEX FUND--EUROPEAN AND
PACIFIC PORTFOLIOS, AND VANGUARD QUANTITATIVE PORTFOLIOS. If
you experience difficulty in making a telephone exchange,
your exchange request may be made by regular or express mail,
and it will be implemented at the closing net asset value on
the date received by Vanguard provided the request is re-
ceived in Good Order.
--------------------------------------------------------------
EXCHANGING BY Please be sure to include the name and account number of your
MAIL current Fund, and the name of the Fund you wish to exchange
into, the amount you wish to exchange, and the signatures of
all registered account holders. Send your request to VANGUARD
FINANCIAL CENTER, VANGUARD PENNSYLVANIA TAX-FREE FUND, P.O.
BOX 1120, VALLEY FORGE, PA 19482. (For express or registered
mail, send your request to Vanguard Financial Center, Van-
guard Pennsylvania Tax-Free Fund, 455 Devon Park Drive,
Wayne, PA 19087.)
--------------------------------------------------------------
29
<PAGE>
IMPORTANT Before you make an exchange, you should consider the follow-
EXCHANGE ing:
INFORMATION
. Please read the Fund's prospectus before making an ex-
change. For a copy and for answers to any questions you may
have, call our Investor Information Department (1-800-662-
7447).
. An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
. Exchanges are accepted only if the registrations and Tax-
payer Identification numbers of the two accounts are iden-
tical.
. The shares to be exchanged must be on deposit and not held
in certificate form.
. New accounts are not currently accepted in Vanguard/Windsor
Fund.
. The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
the required documentation in Good Order.
. When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange privilege.
However, the Fund reserves the right to revise or terminate
its provisions, limit the amount of or reject any exchange,
as deemed necessary, at any time.
- --------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the man-
agement of the Fund and increase transaction costs, the Fund
has established a policy of limiting excessive exchange ac-
tivity.
Exchange activity generally will not be deemed excessive if
limited to two substantive exchange redemptions (at least 30
days apart) from a Portfolio during any twelve month period.
These limitations do not apply to exchanges from Vanguard's
money market portfolios. Notwithstanding these limitations,
the Fund reserves the right to reject any purchase request
(including exchange purchases from other Vanguard Portfolios)
that is reasonably deemed to be disruptive to efficient port-
folio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions)
INFORMATION and exchanges by telephone is automatically established on
ABOUT your account unless you request in writing that telephone
TELEPHONE transactions on your account not be permitted. The ability to
TRANSACTIONS initiate wire redemptions by telephone will be established on
your account only if you specifically elect this option in
writing.
To protect your account from losses resulting from unautho-
rized or fraudulent telephone instructions, Vanguard adheres
to the following security procedures:
30
<PAGE>
1.SECURITY CHECK. To request a transaction by telephone, the
caller must know (i) the name of the Portfolio; (ii) the 10-
digit account number; (iii) the exact name in which the ac-
count is registered; and (iv) the Social Security or Taxpayer
Identification number listed on the account.
2.PAYMENT POLICY. The proceeds of any telephone redemption by
mail will be made payable to the registered shareowner and
mailed to the address of record, only. In the case of a tele-
phone redemption by wire, the wire transfer will be made only
in accordance with the shareowner's prior written instruc-
tions.
Neither the Fund nor Vanguard will be responsible for the au-
thenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been fol-
lowed. Vanguard believes that the security procedures de-
scribed above are reasonable and that if such procedures are
followed, you will bear the risk of any losses resulting from
unauthorized or fraudulent telephone transactions on your ac-
count. If Vanguard fails to follow reasonable security proce-
dures, it may be liable for any losses resulting from unau-
thorized or fraudulent telephone transactions on your ac-
count.
- --------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1100, VALLEY
FORGE, PA 19482. ATTENTION: TRANSFER DEPARTMENT. The request
must be in Good Order. BEFORE MAILING YOUR REQUEST, PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FULL
INSTRUCTIONS.
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call
SERVICES our Investor Information Department at 1-800-662-7447.
STATEMENTS AND Vanguard will send you a confirmation statement each time you
REPORTS initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market accounts.
You will also receive a comprehensive account statement at
the end of each calendar quarter. The fourth-quarter state-
ment will be a year-end statement, listing all transaction
activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the aver-
age cost of shares redeemed from your account, using the av-
erage cost single category method. This service is available
for most taxable accounts opened since January 1, 1986. In
general, investors who redeemed shares from a qualifying
Vanguard account may expect to receive their Average Cost
Statement in February of the following year. Please call our
Client Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-an-
nually, according to the Fund's fiscal year-end.
31
<PAGE>
(LOGO)
------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE FOR THE
HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
(LOGO)
P R O S P E C T U S
MARCH 11, 1994
[LOGO OF THE VANGUARD GROUP APPEARS HERE]
PO77
<PAGE>
PART B
VANGUARD PENNSYLVANIA TAX-FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 11, 1994
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus dated March 11, 1994. To obtain this Prospectus,
please call:
VANGUARD'S INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Limitations..................................................... B-1
Risks Factors.............................................................. B-6
Yield and Total Return..................................................... B-7
Calculation of Yield....................................................... B-7
Comparative Indexes........................................................ B-8
Investment Management...................................................... B-10
Purchase of Shares......................................................... B-10
Redemption of Shares....................................................... B-11
Valuation of Shares........................................................ B-11
Management of the Fund..................................................... B-13
Description of Shares and Voting Rights.................................... B-15
Financial Statements....................................................... B-16
Appendix A--Description of Municipal Bonds and their Ratings............... B-16
Appendix B--Municipal Lease Obligations.................................... B-19
</TABLE>
INVESTMENT LIMITATIONS
The following limitations cannot be changed without the consent of the hold-
ers of a majority of the Fund's outstanding shares (as defined in the Invest-
ment Company Act of 1940), including a majority of the shares of each Portfo-
lio.
1. Each Portfolio will limit the aggregate value of all holdings (except
U.S. Government and cash items, as defined under Subchapter M of the Internal
Revenue Service Code), each of which exceeds 5% of the Portfolio's total as-
sets, to an aggregate amount of 50% of such assets.
2. Each Portfolio will limit the aggregate value of holdings of a single is-
suer (except U.S. government and cash items, as defined in the Code) to a max-
imum of 25% of the Portfolio's total assets. For the purposes of this limita-
tion, identification of the issuer will be based on a determination of the
source of assets and revenues committed to meeting interest and principal pay-
ments of each security;
3. Each Portfolio will not borrow money except for temporary or emergency
purposes and then only in an amount not exceeding 10% of the value of the to-
tal assets of that Portfolio. The Portfolio will repay all borrowings before
making additional investments. Interest paid on such borrowings will reduce
income;
4. Each Portfolio will not pledge, mortgage or hypothecate its assets to any
extent greater than 10% of the value of the total assets of the Portfolio;
B-1
<PAGE>
5. Each Portfolio will not issue senior securities as defined in the Invest-
ment Company Act of 1940 (the "1940 Act");
6. Each Portfolio will not engage in the business of underwriting securities
issued by other persons, except to the extent that the Portfolio may techni-
cally be deemed an underwriter under the Securities Act of 1933, as amended,
in disposing of portfolio securities.
7. Each Portfolio will not purchase or otherwise acquire any security, if as
a result, more than 15% of its net assets would be invested in securities that
are illiquid (included in this limitation is the Fund's investment in the Van-
guard Group, Inc.).
8. Each Portfolio will not purchase or sell real estate, but this shall not
prevent investments in Municipal Bonds secured by real estate or interests
therein;
9. Each Portfolio will not make loans to other persons, except by the pur-
chase of bonds, debentures or similar obligations which are publicly distrib-
uted and as provided under "Lending of Securities";
10. Each Portfolio will not purchase on margin or sell short, except as
specified below in Investment Limitation No. 12;
11. Each Portfolio will not purchase or retain securities of an issuer if
those Trustees of the Fund, each of whom owns more than 1/2 of 1% of such se-
curities, together own more than 5% of the securities of such issuer:
12. Each Portfolio will not purchase or sell commodities or commodities con-
tracts, except that the Pennsylvania Insured Long-Term Portfolio may invest in
bond futures contracts, bond options and options on bond futures contracts to
the extent that not more than 5% of the Portfolio's assets are required as de-
posit on futures contracts and not more than 20% of the Portfolio's assets are
invested in futures contracts and/or options transactions at any time;
13. Each Portfolio will not invest its assets in securities of other invest-
ment companies except as they may be part of a merger, consolidation, reorga-
nization or acquisition of assets or otherwise to the extent permitted by Sec-
tion 12 of the 1940 Act;
14. Each Portfolio will not invest in securities other than municipal bonds
except that each Portfolio may make temporary investments in (a) notes issued
by or on behalf of municipal or corporate issuers, obligation of the U.S. Gov-
ernment and its agencies, commercial paper, bank certificates of deposit; (b)
investment companies investing in such securities which have investment objec-
tives consistent with those of the Portfolio to the extent permitted by the
Investment Company Act of 1940; and (c) any such securities or municipal bonds
subject to repurchase agreements.
15. Each Portfolio will not invest in put, call, straddle or spread options
(except as described above in investment limitation No. 13) or interests in
oil, gas or other mineral exploration or development programs;
16. Each Portfolio will not purchase an industrial revenue bond if as a re-
sult of such purchase (i) more than 5% of the Portfolio's total assets, deter-
mined at market value at the time of the proposed investment, would be in-
vested in industrial revenue bonds where the payment of principal and interest
is the responsibility of a company with less than three (3) years operating
history, or (ii) more than 20% of the Portfolio's total assets, determined at
market value at the time of the proposed investment, would be invested in in-
dustrial development bonds. These restrictions do not apply to municipal obli-
gations where the payment of principal and interest is the responsibillity of
a government or the political subdivision of a government.
B-2
<PAGE>
The above-mentioned investment limitations are considered at the time in-
vestment securities are purchased. Notwithstanding these limitations, each
Portfolio may own all or any portion of the securities of, or make loans to,
or contribute to the costs or other financial requirements of, any company
which will be (1) wholly-owned by the Fund and one or more other investment
companies and (2) primarily engaged in the business of providing, at cost,
management, administrative, distribution and/or related services to the Fund
and such other investment companies. Additionally, the Fund may invest in
when-issued securities without limitation. Please see the prospectus for a de-
scription of such securities.
LENDING OF SECURITIES Each Portfolio may lend its investment securities to
qualified institutions who need to borrow securities in order to complete cer-
tain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment secu-
rities, the Portfolio attempts to increase its income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account
of the Portfolio. The Portfolio may lend its investment securities to quali-
fied brokers, dealers, banks or other financial institutions, so long as the
terms and the structure of such loans are not inconsistent with the Investment
Company Act of 1940, or the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder, which cur-
rently require that (a) the borrower pledge and maintain with the Portfolio
collateral having a value at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price
of the securities loaned rises (i.e., the borrower "marks to the market" on a
daily basis), (c) the loan be made subject to termination by the Portfolio at
any time and (d) the Portfolio receive reasonable interest on the loan (which
may include the Portfolio investing any cash collateral in interest bearing
short-term investments), any distribution on the loaned securities and any in-
crease in their market value. A portfolio will not lend its investment securi-
ties, if as a result, the aggregate of such loans exceeds 10% of the value of
its total assets. Loan arrangements made by the Portfolio will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of five business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board of
Trustees. Income derived from lending of securities is not tax-exempt, and,
thus, a portfolio will limit such activity in accordance with its investment
objective.
FUTURES CONTRACTS AND OPTIONS The Insured Long-Term Portfolio may enter into
futures contracts, options, and options on futures contracts for the purpose
of simulating full investment and reducing transactions costs. Futures con-
tracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security at a specified future time and at
a specified price. Futures contracts which are standardized as to maturity
date and underlying financial instrument are traded on national futures ex-
changes. Futures exchanges and trading are regulated under the Commodity Ex-
change Act by the Commodity Futures Trading Commission ("CFTC"), a U.S. Gov-
ernment Agency.
Although futures contracts by their terms call for actual delivery or ac-
ceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Clos-
ing out an open futures position is done by taking an opposite position ("buy-
ing" a contract which has previously been "sold," or "selling" a contract pre-
viously purchased) in an identical contract to terminate the position. Broker-
age commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin
B-3
<PAGE>
deposit is intended to assure completion of the contract (delivery or accept-
ance of the underlying security) if it is not terminated prior to the speci-
fied delivery date. Minimal initial margin requirements are established by the
futures exchange and may be changed. Brokers may establish deposit require-
ments which are higher than the exchange minimums. Futures contracts are cus-
tomarily purchased and sold at prices which may range upward from less than 5%
of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes, to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of ex-
cess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund ex-
pects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset unfavor-
able changes in the value of securities otherwise held for investment purposes
or expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
interest rate of underlying securities. The Fund intends to use futures con-
tracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. The Portfolio
will only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, the
Portfolio expects that approximately 75% of its futures contract purchases
will be "completed," that is, equivalent amounts of related securities will
have been purchased or are being purchased by the Portfolio upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this expo-
sure. While the Portfolio will incur commission expenses in both opening and
closing out futures positions, these costs are lower than transaction costs
incurred in the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS The Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of the Fund's total assets. In addition, the Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts would exceed 20% of the Portfolio's
total assets. Assets committed to futures contracts or options will be held in
a segregated account at the Fund's custodian bank.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market
will exist for any particular futures contract at any specific time. Thus, it
may not be possible to close a futures position. In the event of adverse price
movements, the Portfolio would continue to be required to make daily cash pay-
ments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In ad-
dition, the Portfolio may be required to make delivery of the instruments un-
derlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to effec-
tively hedge it.
B-4
<PAGE>
The Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be sub-
stantial, due both to the low margin deposits required, and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and sub-
stantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin,
a subsequent 10% decrease in the value of the futures contract would result in
a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Portfolio are engaged in only for hedging purposes, the Ad-
viser does not believe that the Portfolio is subject to the risks of loss fre-
quently associated with futures transactions. The Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Portfolio does not involve the
risk of imperfect or no correlation where the securities underlying futures
contracts have different maturities than the portfolio securities being
hedged. It is also possible that the Portfolio could both lose money on
futures contracts and also experience a decline in value of its portfolio se-
curities. There is also the risk of loss by a Portfolio of margin deposits in
the event of bankruptcy of a broker with whom the Portfolio has an open posi-
tion in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of unfa-
vorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Except for transactions a Portfo-
lio has identified as hedging transactions, the Portfolio is required for fed-
eral income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts held as of the end of
the year as well as those actually realized during the year. In most cases,
any gain or loss recognized with respect to a futures contract is considered
to be 60% long-term capital gain or loss and 40% short-term capital gain or
loss, without regard to the holding period of the contract. Furthermore, sales
of futures contracts which are intended to hedge against a change in the value
of securities held by the Portfolio may affect the holding period of such se-
curities and, consequently, the nature of the gain or loss on such securities
upon disposition.
In order for a Portfolio to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of se-
curities or of foreign currencies or other income derived with respect to the
Portfolio's business of investing in securities. In addition, gains realized
on the sale or other disposition of securities held for less than three months
must be limited to less than 30% of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures con-
tracts will be considered
B-5
<PAGE>
gain from the sale of securities and therefore be qualifying income for pur-
poses of the 90% requirement. In order to avoid realizing excessive gains on
securities held less than three months, the Portfolio may be required to defer
the closing out of futures contracts beyond the time when it would otherwise
be advantageous to do so. It is anticipated that unrealized gains on futures
contracts, which have been open for less than three months as of the end of
the Portfolio's fiscal year and which are recognized for tax purposes, will
not be considered gains on sales of securities held less than three months for
the purpose of the 30% test.
Each Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures trans-
actions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the transactions.
RISK FACTORS VANGUARD PENNSYLVANIA TAX-FREE FUND
Vanguard Pennsylvania Tax-Free Fund invests primarily in the obligations of
Pennsylvania state government, state agencies and various local governments,
including counties, cities, townships, special districts, and authorities. In
general, the credit quality and credit risk of any issuer's debt depend on the
state and local economy, the health of the issuer's finances, the amount of
the issuer's debt, the quality of management, and the strength of legal provi-
sions in debt documents that protect debt holders. Credit risk is usually
lower wherever the economy is strong, growing and diversified; financial oper-
ations are sound; and the debt burden is reasonable.
The average rating among American states for full faith and credit state
debt is "Aa" and "AA" by Moody's Investors Service and Standard & Poor's Cor-
poration, respectively. Against this measure and the criteria listed above,
the credit risk associated with direct obligations of the Commonwealth of
Pennsylvania and State agencies, including general obligation and revenue
bonds, lease debt, and notes, compares somewhat unfavorably. During most of
the last two decades, the Commonwealth's general obligation bonds have been
rated just below this average by both rating agencies. Nonetheless, during
this period the Commonwealth's obligations could still be characterized as
providing upper medium grade security, with a strong capacity for timely re-
payment of debt.
Factors contributing positively to credit quality in Pennsylvania include a
favorable debt structure, a diversifying economic base, and conservatively
managed financial operations on the part of state government. Tax-supported
debt is only slightly above average state levels on a per capita basis and as
a percent of state personal income. Over the past two decades, this debt bur-
den has improved considerably in Pennsylvania, and debt continues to be rap-
idly retired, while state borrowing plans are modest.
In the past twenty years, Pennsylvania's economy has undergone a healthy,
though traumatic, transformation. Manufacturing employment has declined from
35% of total state employment in 1970 to 18.7% of total employment in 1992,
only slightly above the U.S. average. Growth in service sector jobs offset the
loss of manufacturing jobs, and Pennsylvania's economy is now much more
closely aligned with the national economy. In the future, economic booms and
busts should be milder than in the past and more closely follow national aver-
ages. The positive change in the economy has not been without costs. Growth
levels in employment, population and personal income lagged behind U.S. aver-
ages in the 1980s. During this period, per capita personal income slipped to
about the U.S. average. Many communities dominated by a single industry were
particularly hurt, and recent growth in the state economy has bypassed much of
the state outside of the immediate Philadelphia and Pittsburgh metropolitan
areas. As a result, the credit quality of these areas is often marginal.
B-6
<PAGE>
During the 1991-1992 national economic recession, Pennsylvania fared a bit
worse than the U.S. average but better than many neighboring Northeastern and
Mid-Atlantic states. Led by continuing declines in manufacturing, employment
decreased about 4%, or double the U.S. loss rate. The Commonwealth is expected
to experience economic recovery in line with the U.S.
Fiscally, Pennsylvania has historically maintained balanced budgets, a re-
sult of sound and conservative budgeting policies. During the period of eco-
nomic growth in the late 1980's, operating surpluses were recorded, and a
"rainy day" fund was established. The recent recession tested these policies,
but the Commonwealth emerged from the recession with its finances and credit
quality intact. In 1990 and 1991, as the recession worsened, budget balances
were eliminated, and the state ended 1991 in a deficit position. However, a
combination of expenditure restraint and broad-based tax increases enabled the
state to end 1992 with a surplus. Finances are now stable.
The risk factors in Pennsylvania's credit quality may be summarized as slow
growth, an aging population, average income, and a continuing challenge to
maintain balanced budgets. In addition, a number of local governments in the
Commonwealth, most notably Philadelphia, are in serious fiscal difficulty, and
are unable to address serious economic, social and healthcare problems within
revenue constraints. Philadelphia's credit prospects have recently improved
but remain a challenge to the credit quality of Pennsylvania.
YIELD AND TOTAL RETURN
The yield of the Pennsylvania Insured Long-Term Portfolio for the 30 day pe-
riod ended November 30, 1993 was +4.83%. Yield is calculated daily and premium
and discounts on asset-backed securities are not amortized.
The average annual total return of the Pennsylvania Insured Long-Term Port-
folio for the one year and five year period ending November 30, 1993 and since
its inception on April 7, 1986 was +11.90%, +10.53% and +8.92%, respectively.
The average total return of the Pennsylvania Money Market Portfolio for the
one year and five year period ending November 30, 1993 and since its inception
on June 13, 1988 was +2.38%, +4.43% and +4.51%, respectively. Total return is
computed by determining the average compounded rates of return over the period
set forth above that would equate an initial amount invested at the beginning
of the period to the ending redeemable value of the investment.
CALCULATION OF YIELD
The current yield of the Pennsylvania Money Market Portfolio is calculated
daily on a base period return of a hypothetical account having a beginning
balance of one share for a particular period of time (generally 7 days). The
return is determined by dividing the net change (exclusive of any capital
changes) in such account by its average net assets value for the period, and
then multiplying it by 365/7 to get the annualized current yield. The calcula-
tion of net change reflects the value of additional shares purchased with the
dividends by the Portfolio, including dividends on both the original share and
on such additional shares. An effective yield, which reflects the effects of
compounding and represents an annualization of the current yield with all div-
idends reinvested, may also be calculated for the Portfolio by adding 1 to the
net change, raising the sum to the 365/7 power, and subtracting 1 from the re-
sult.
B-7
<PAGE>
Set forth below is an example, for purposes of illustration only, of the
current and effective yield calculations for the Pennsylvania Money Market
Portfolio for the 7 day base period ended November 30, 1993.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
----------------------
11/30/93
--------
<S> <C>
Value of account at beginning of period.............. $1.00000
Value of same account at end of period*.............. 1.00043
--------
Net Change in account value.......................... $ .00043
Annualized Current Net Yield (Net Change X 365/7) av-
erage net asset value............................... 2.25%
Effective Yield [(Net Change) +1] 365/7 - 1.......... 2.27%
Average Weighted Maturity of Investments............. 71 Days
</TABLE>
- --------
* Exclusive of any capital changes.
The net asset value of the Pennsylvania Money Market Portfolio is $1.00 and
it is not expected to fluctuate. The yield of the Portfolio will fluctuate.
The Money Market Portfolio seeks to maintain, but does not guarantee, a con-
stant net asset value of $1.00 per share. Although the Money Market Portfolio
invests in high quality instruments, the shares of the Portfolio are not in-
sured or guaranteed by the U.S. Government. The annualization of a week's div-
idend is not a representation by the Portfolio as to what an investment in the
Portfolio will actually yield in the future. Actual yields will depend on such
variables as investment quality, average maturity, the type of instruments the
Portfolio invests in, changes in interest rates on instruments, changes in the
expenses of the Fund and other factors. Yields are one basis investors may use
to analyze the Portfolios of the Fund, and other investment vehicles, however,
yields of other investment vehicles may not be comparable because of the fac-
tors set forth in the preceding sentence, differences in the time periods com-
pared, and differences in the methods used in valuing portfolio instruments,
computing net asset value and calculating yield.
COMPARATIVE INDEXES
Each of the investment company members of the Vanguard Group, including Van-
guard Pennsylvania Tax-Free Fund, may from time to time, use one or more of
the following unmanaged indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of nearly 5,000 common equity securi-
ties, covering all stocks in the U.S. for which daily pricing is available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 ex-
cept for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of over 3,000 common
stocks accounting for over 90% of the market value of publicly traded stocks
in the U.S.
RUSSELL 2000 STOCK INDEX -- a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000; a widely used benchmark for small capi-
talization common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
B-8
<PAGE>
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for convert-
ible issues of 100 million or greater in market capitalization. The index is
priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by pri-
vate lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly is-
sued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
SHEARSON LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S. Trea-
sury, Agency and investment grade corporate bonds.
SHEARSON LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index in-
cludes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current cou-
pon high grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of four high grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not in-
clude income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers
High-Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers
High-Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that con-
tains individually priced U.S. Treasury, agency, corporate, and mortgage pass-
through securities corporate rated BBB -- or better. The Index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB -- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX --
is a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB -- or better with maturities be-
tween 5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a mar-
ket weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB -- or better with maturities greater than
10 years. The index has a market value of over $900 billion.
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LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper de-
fines a small company growth fund as a fund that by prospectus of portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average perfor-
mance and/or the average expense ratio of the small company growth funds. (The
fund category was first established in 1982. For years prior to 1982, the re-
sults of the Lipper Small Company Growth category were estimated using the re-
turns of the Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives
and policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of aver-
age government money market funds with similar investment objectives and poli-
cies, as measured by Lipper Analytical Services, Inc.
INVESTMENT MANAGEMENT
The Fund receives all investment advisory services on an "internalized," at-
cost basis from an experienced investment management staff employed directly
by The Vanguard Group, Inc. ("Vanguard"), a subsidiary jointly-owned by the
Fund and the other Funds in The Vanguard Group of Investment Companies. The
investment management staff is supervised by the senior officers of the Fund.
The investment management staff is responsible for: maintaining the speci-
fied standards; making changes in specific issues in light of changes in the
fundamental basis for purchasing such securities; and adjusting the Fund to
meet cash inflow (or outflow), which reflects net purchases and exchanges of
shares by investors (or net redemptions of shares) and reinvestment of the
Fund's income.
A change in securities held by the Fund is known as "portfolio turnover" and
may involve the payment of the Fund of dealer mark-ups, underwriting commis-
sions and other transaction costs on the sales of securities as well as on the
reinvestment of the proceeds in other securities. The annual portfolio turn-
over rate for each of the Fund's portfolios is set forth under the heading
"Financial Highlights" in the Pennsylvania Tax-Free fund prospectus. The port-
folio turnover rate is not a limiting factor when management deems it desir-
able to sell or purchase securities. It is impossible to predict whether or
not the portfolio turnover rate in future years will vary significantly from
the rates in recent years.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offer-
ing of its shares, (ii) to reject purchase orders when in the judgment of man-
agement such rejection is in the best interest of the Fund, and (iii) to re-
duce or waive the minimum for initial and subsequent investments under circum-
stances where certain economies, can be achieved in sales of the Fund's
shares.
STOCK CERTIFICATES. Your purchase will be made in full and fractional shares
of the Fund calculated to three decimal places. Shares are normally held on
deposit for shareholders by the Fund, which will send to shareholders a state-
ment of shares owned at the time of each transaction. This saves the share-
holders the trouble of safe-keeping the certificates and saves the Fund the
cost of issuing certificates. Share certificates are, of course, available at
any time upon written request at no additional cost to shareholders. No cer-
tificates will be issued for fractional shares.
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<PAGE>
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading
on the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not rea-
sonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods
as the Commission may permit.
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities held by the Fund in lieu of cash in confor-
mity with applicable rules of the Commission. Investors may incur brokerage
charges on the sale of such securities so received in payment of redemptions.
No charge is made by the Fund for redemptions except for wire redemptions of
under $5000 which may be charged a maximum fee of $5.00. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Fund.
SIGNATURE GUARANTEES. To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Fund to verify the identity of the person who has autho-
rized a redemption from your account. Signature guarantees are required in
connection with: (1) redemptions involving more than $25,000 on the date of
receipt by Vanguard of all necessary documents; (2) all redemptions, regard-
less of the amount involved, when the proceeds are to be paid to someone other
than the registered owners); and (3) share transfer requests.
A signature guarantee may be obtained from banks, brokers and any other
guarantor institution that Vanguard deems acceptable. Notaries public are not
acceptable guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption, (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed, or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
VALUATION OF SHARES
The valuation of shares of the Pennsylvania Insured Long-Term Portfolio is
described in detail in the Prospectus.
PENNSYLVANIA MONEY MARKET PORTFOLIO. The net asset value per share of the
Pennsylvania Money Market Portfolio is determined on each day that the New
York Stock Exchange is open and on any other day on which there is sufficient
trading in the Fund's securities to materially affect the Fund's net asset
value per share.
It is the policy of the Pennsylvania Money Market Portfolio to attempt to
maintain a net asset value of $1.00 per share for purposes of sales and re-
demptions. The Portfolio seeks to maintain, but does not guarantee, a constant
net asset value of $1.00 per share. Although the Money Market Portfolio in-
vests in high quality instruments, the shares of the Portfolio are not insured
or guaranteed by the U.S. Government. The instruments held by the Pennsylvania
Money Market Portfolio are valued on the basis of amortized cost which does
not take into account unrealized capital gains or losses. This involves valu-
ing an instrument at-cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the
B-11
<PAGE>
market value of the instrument. While this method provides certainty in valua-
tion, it may result in periods during which value, as determined by amortized
cost, is higher or lower than the price the Portfolio would receive if it sold
the instrument. During periods of declining interest rates, the daily yield on
shares of the Portfolio computed as described above may tend to be higher than
a like computation made by a fund with identical investments utilizing a
method of valuation based upon market prices and estimates of market prices
for all of its portfolio instruments. Thus, if the use of amortized cost of
the Portfolio resulted in a lower aggregate portfolio value on a particular
day, a prospective investor in the Portfolio would be able to obtain a some-
what higher yield than would result from investment in a fund utilizing solely
market values, and existing investors in the Portfolio would receive less in-
vestment income. The converse would apply in a period of rising interest
rates.
The valuation of the Pennsylvania Money Market Portfolio's instruments based
upon their amortized cost and the commitment to maintain the Portfolio's per
share net asset value of $1.00 is permitted by Rule 2a-7 under the Investment
Company Act of 1940 pursuant to which the Fund must adhere to certain condi-
tions. Accordingly, the Fund has agreed to maintain a dollar-weighted average
portfolio maturity for the Pennsylvania Money Market Portfolio of 90 days or
less, to purchase instruments having remaining maturities of thirteen months
or less only, and to invest only in securities determined by the Board of
Trustees to be of good quality with minimal credit risks.
It is a fundamental objective of management to maintain the Portfolio's
price per share as computed for the purpose of sales and redemptions at $1.00.
The Trustees have established procedures designed to achieve this objective.
Such procedures will include a review of the Portfolio's holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
the Portfolio's net asset value calculated by using available market quota-
tions deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Trustees. If such deviation exceeds 1/2 of
1%, the Trustees will promptly consider what action, if any, will be initiat-
ed. In the event the Trustees determine that a deviation exists which may re-
sult in material dilution or other unfair results to investors or existing
shareholders, they have agreed to take such corrective action as they regard
as necessary and appropriate, including the sale of portfolio instruments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity; withholding dividends; making a special capital distribu-
tion; redemptions of shares in kind; or establishing a net asset value per
share by using available market quotations.
B-12
<PAGE>
MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The Officers of the Fund manage its day to day operations and are responsible
to the Fund's Trustees. The Trustees set broad policies for the Fund and choose
its Officers. The following is a list of Trustees and Officers of the Fund and
a statement of their present positions and principal occupations during the
past five years is set forth below. As of November 30, 1993, the Trustees owned
less than 1% of the Fund's outstanding shares. The mailing address of the
Fund's Trustees and Officers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, Chief JOHN C. SAWHILL, Trustee
Executive Officer and Trustee* President and Chief Executive Of-
Chairman, Chief Executive Offi- ficer, The Nature Conservancy;
cer, and Director of The Vanguard formerly, Director and Senior
Group, Inc., and of each of the Partner, McKinsey & Co., Presi-
investment companies in The Van- dent, New York University; Direc-
guard Group. Director of The Mead tor of Pacific Gas and Electric
Corporation and General Accident Company and NACCO Industries.
Insurance.
JAMES O. WELCH, JR., Trustee
JOHN J. BRENNAN, President & Retired Chairman of Nabisco
Trustee* Brands Inc. retired Vice Chairman
President and Director of the and Director of RJR Nabisco; Di-
Fund, The Vanguard Group, Inc. rector of TECO Energy, Inc.
and each of the other investment
companies in The Vanguard Group.
J. LAWRENCE WILSON, Trustee
Chairman and Director of Rohm &
ROBERT E. CAWTHORN, Trustee Haas Company; Director of Cummins
Chairman and Chief Executive Of- Engine Company and Vanderbilt
ficer, Rhone-Poulenc Rorer, Inc.; University; Trustee of the Culver
Director of Immune Response Corp. Educational Foundation.
and Sun Company, Inc.; Trustee,
Universal Health Realty Income
Trust.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secre-
tary of The Vanguard Group, Inc.;
Secretary of each of the invest-
ment companies in The Vanguard
Group.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic
and Pacific Tea Company, Alco
Standard Corp., Raytheon Company,
Knight-Ridder, Inc., and Massa-
chusetts Mutual Life Insurance
Co.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group,
Inc. and of each of the invest-
ment companies in The Vanguard
Group.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Profes-
sor of Economics, Princeton Uni-
versity; Director of Prudential
Insurance Co. of America, Amdahl
Corporation, Baker Fentress &
Co., Jeffrey Co., and The South-
ern New England Telephone Compa-
ny.
KAREN E. WEST, Controller*
Vice President of The Vanguard
Group, Inc.; Controller of each
of the investment companies in
The Vanguard Group.
--------
ALFRED M. RANKIN, Trustee * Officers of the Fund are "inter-
President, Chief Executive Offi- ested persons" as defined in the
cer and Director of NACCO Indus- Investment Company Act of 1940.
tries, Inc.; Director of the
BFGoodrich Company, The Standard
Products Company and The Reliance
Electric Company.
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<PAGE>
THE VANGUARD GROUP
Vanguard Pennsylvania Tax-Free Fund is a member of The Vanguard Group of In-
vestment Companies. Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group obtain at-
cost virtually all of their corporate management, administrative and distribu-
tion services. Vanguard also provides investment advisory services on an at-
cost basis to several of the Vanguard Funds, including the Vanguard Pennsylva-
nia Tax-Free Fund.
Vanguard employs a supporting staff of management and administrative person-
nel needed to provide the requisite services to the Funds and also furnishes
the Funds with necessary office space, furnishings and equipment. Each Fund
pays its share of Vanguard's net expenses which are allocated among the Funds
under methods approved by the Board of Trustees (Directors) of each Fund. In
addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees. In order to generate additional revenues for Vanguard and
thereby reduce the Funds' expenses, Vanguard also provides certain administra-
tive services to other organizations.
The Fund's officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external ad-
viser for the Funds.
The Vanguard Group, Inc. ("Vanguard") was established and operates under a
Funds' Service Agreement which was approved by the shareholders of each of the
Funds in 1992. The amounts which each of the Funds have invested are adjusted
from time to time in order to maintain the proportionate relationship between
each Fund's relative net assets and its contribution to Vanguard's capital. At
November 30, 1993 Vanguard Pennsylvania Tax-Free Fund had contributed capital
of $394,000 to Vanguard representing 2.0% of Vanguard's capitalization. Pend-
ing shareholder approval, the Funds' Service Agreement was amended on May 10,
1993 to provide as follows: (a) each Vanguard Fund may invest up to 0.40% of
its current net assets in Vanguard, and (b) there is no other limitation on
the amount that each Vanguard Fund may contribute to Vanguard's capitaliza-
tion.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian rela-
tionships; (6) shareholder reporting; and (7) review and evaluation of advi-
sory and other services provided to the Funds by third parties. During the
fiscal year ended November 30, 1993, the Funds share of Vanguard's actual net
costs of operations relating to management and administrative services (in-
cluding transfer agency) totaled approximately $3,370,000.
DISTRIBUTION. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc. acts as Sales Agent for shares of the
Funds, in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional materi-
als and marketing personnel. Distribution services may also include organizing
and offering to the public, from time to time, one or more new investment com-
panies which will become members of the Group. The Trustees (Directors) and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to or-
ganize new investment companies.
One-half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remain-
ing one-half of these expenses is allocated among the Funds based upon each
Fund's sales for the preceding 24 months relative to the total sales of the
Funds as a Group, provided, however, that no Fund's aggregate quarterly rate
of contribution
B-14
<PAGE>
for distribution expenses of a marketing and promotional nature shall exceed
125% of the average distribution expense rate for the Group, and that no Fund
shall incur annual distribution expenses in excess of 20/100 of 1% of its av-
erage month-end net assets. During the year ended November 30, 1993 the Fund
paid approximately $614,000 of the Group's distribution and marketing ex-
penses.
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to the Fund; Vanguard Municipal Bond Fund; Vanguard Money Market Re-
serves; Vanguard Institutional Portfolios; Vanguard Admiral Funds; the several
Portfolios of Vanguard Fixed Income Securities Fund; Vanguard Institutional
Index Fund; Vanguard Bond Index Fund; the Vanguard State Tax-Free Funds; Van-
guard Balanced Index Fund; Vanguard Index Trust and Vanguard International Eq-
uity Index Fund. These services are provided on an at-cost basis from a money
management staff employed directly by Vanguard. The compensation and other ex-
penses of this staff are paid by the Funds utilizing these services. During
the years ended November 30, 1991, 1992 and 1993 the Fund paid approximately
$137,000, $164,000 and $204,000 of Vanguard's investment advisory expenses.
REMUNERATION OF TRUSTEES AND OFFICERS. The Fund pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. During the year ended November 30, 1993 the Fund
paid $8,000 in Trustees' expenses. The Fund's officers and employees are paid
by Vanguard which, in turn, is reimbursed by the Fund, and each other Fund in
the Group, for its proportionate share of Officers' and employees' salaries
and retirement benefits. During the year ended November 30, 1993, the Fund's
proportionate share of remuneration paid to all officers of the Fund, as a
group, was approximately $99,422.
Trustees who are not Officers are paid an annual fee based on the number of
years of service on the Board upon retirement. The fee is equal to $1,000 for
each year of service (up to fifteen years) and each investment Company member
of the Vanguard Group contributes a proportionate amount to this fee based on
its relative net assets. Under its retirement plan, Vanguard contributes annu-
ally an amount equal to 10% of each eligible officer's annual compensation
plus 5.7% of that part of an eligible officer's compensation during the year,
if any, that exceeds the Social Security Taxable Wage Base then in effect. Un-
der its thrift plan, all eligible officers are permitted to make pre-tax con-
tributions in an amount up to 4% of total compensation, subject to federal tax
limitations, which are matched by Vanguard on a 100% basis. The Fund's propor-
tionate share of retirement contributions made by Vanguard under its retire-
ment and thrift plans on behalf of all Officers of the Fund, as a group, dur-
ing the 1993 fiscal year was approximately $ . .
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Pennsylvania Trust on January 15, 1986.
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest, without par value, from an unlimited number
of separate classes ("Portfolios") of shares. Currently, the Fund is offering
shares of two Portfolios.
The shares of the Fund are fully paid and nonassessable, except as set forth
under "Shareholder and Trustee Liability," and have no preference as to con-
version, exchange, dividends, retirement or other features. The shares of the
Fund have no pre-emptive rights. The shares of the Fund have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held), then standing in
his name on the books of the Fund. On any matter submitted to a vote of share-
holders, all shares of the Fund then issued and outstanding and entitled to
vote, irrespective of the class, shall be voted in the aggregate and not by
class: except (i) when required by the Investment Company
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<PAGE>
Act of 1940, shares shall be voted by individual class; and (ii) when the mat-
ter does not affect any interest of a particular class, then only shareholders
of the affected class or classes shall be entitled to vote thereon.
The Fund will continue without limitation of time, provided, however that:
1) Subject to the majority vote of the holders of shares of the Fund out-
standing, the Trustees may sell or convert the assets of the Fund to
another investment company in exchange for shares of such investment
company, and distribute such shares, ratably among the shareholders of
the Fund.
2) Subject to the majority vote of shares of the Fund outstanding, the
Trustees may sell and convert into money to the assets of the Fund and
distribute such assets ratably among the shareholders of the Fund; and
Upon completion of the distribution of the remaining assets of any Portfolio
as provided in paragraphs 1) and 2) above the Fund shall terminate and the
Trustees shall be discharged of any and all further liabilities and duties
hereunder and the right, title and interest of all parties shall be cancelled
and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Pennsylvania law shareholders of
such a Trust may under certain circumstances, be held personally liable as
partners for the obligations of the Fund. Therefore, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obliga-
tions of the Fund and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Fund or
the Trustees. The Declaration of Trust provides for indemnification out of the
Fund property of any shareholder held personally liable for the obligations of
the Fund. The Declaration of Trust also provides that the Fund shall, upon re-
quest, assume the defense of any claim made against any shareholder for any
act or obligation of the Fund and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability
is limited to circustances in which the Fund itself would be unable to meet
its obligations.
The Declaration of Trust further provides that the Trustees will not be lia-
ble for errors of judgment or mistakes of fact or law but nothing in the Dec-
laration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross negli-
gence, or reckless disregard of the duties involved in the conduct of his of-
fice.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended November 30, 1993, in-
cluding the financial highlights for each of the five years in the period
ended November 30, 1993, appearing in the Vanguard Pennsylvania Tax-Free Fund
1993 Annual Report to Shareholders, and the report thereon of Price
Waterhouse, independent accountants, also appearing therein, are incorporated
by reference in this Statement of Additional Information. The Fund's 1993 An-
nual Report to Shareholders is enclosed with this Statement of Additional In-
formation.
APPENDIX A--DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS
MUNICIPAL BONDS--GENERAL. Municipal Bonds generally include debt obligations
issued by states and their political subdivisions, and duly constituted au-
thorities and corporation, to obtain funds to construct, repair or improve
various public facilities such as airports, bridges, highways, hospitals,
housing, schools, streets and water and sewer works. Municipal Bonds may also
be issued to refinance outstanding obligations as well as to obtain funds for
general operating expenses and for loan to other public institutions and fa-
cilities.
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<PAGE>
The two principal classifications of Municipal Bonds are "general obliga-
tion" and "revenue" or "special tax" bonds. General obligation bonds are se-
cured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are pay-
able only from the revenues derived from a particular facility or class of fa-
cilities or, in some cases, from the proceeds of a special excise or other
tax, but not from general tax revenues. The Fund may also invest in tax-exempt
industrial development bonds, short-term municipal obligations (rated SP-1+ of
SP-1 by Standard & Poor's Corp. or MIG. by Moody's Investors Service), project
notes, demand notes and tax-exempt commercial papers (rated A-1 by Standard &
Poor's Corp. or P-1 by Moody's Investors Service).
Industrial revenue bonds in most cases are revenue bonds and generally do
not have the pledge of the credit of the issuer. The payment of the principal
and interest on such industrial revenue bonds is dependent solely on the abil-
ity of the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed
as security for such payment. Short-term municipal obligations issued by
states, cities, municipalities or municipal agencies, include Tax Anticipation
Notes, Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan
Notes and Short-Term Discount Notes. Project Notes are instruments issued by
the Department of Housing and Urban Development but issued by a state or local
housing agency. While the issuing agency has the primary obligation on such
Project notes, the are are also secured by the full faith and credit of the
United States.
Note obligations with demand onput options may have a stated maturity in ex-
cess of one year, but permit any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such ob-
ligations are secured by letters of credit or other credit support arrange-
ments provided by banks. The issuer of such notes normally has a corresponding
right, after a given period, to repay in its discretion the outstanding prin-
cipal of the note plus accrued interest upon a specific number of days' notice
to the bondholders. The interest rate on a demand note may be based upon a
known lending rate, such as a bank's prime rate, and be adjusted when such
rate changes, or the interest rate on a demand note may be a market rate that
is adjusted at specified intervals. The demand notes in which the Fund will
invest are payable on not more than one year's notice. Each note purchased by
the Fund will meet the quality criteria set out above for the Fund.
The yields of Municipal Bonds depend on, among other things, general money
market conditions conditions in the Municipal Bond market, the size of a par-
ticular offering, the maturity of the obligation, and the rating of the issue.
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Corpora-
tion represent their opinions of the quality of the Municipal Bonds rated by
them. It should be emphasized that such ratings are general and are not abso-
lute standards of quality. Consequently, Municipal Bonds with the same maturi-
ty, coupon and rating may have different yields, while Municipal Bonds of the
same maturity and coupon, but with different ratings may have the same yield.
It will be the responsibility of the investment management staff to appraise
independently the fundamental quality of the bonds held by the Fund.
Municipal Bonds are sometimes purchased on a "when issued" basis meaning the
Fund has committed to purchasing certain specified securities at an agreed
upon price when they are issued. The period between commitment date and issu-
ance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.
From time to time proposals have been introduced before Congress to restrict
or eliminate the Federal income tax exemption for interest on Municipal Bonds.
Similar proposals may be introduced in the future. If any such proposal were
enacted, it might restrict or eliminate the ability of the Fund to achieve its
investment objective. In that event, the Fund's Trustees and officers would
reevaluate its investment objective and policies and consider recommending to
its shareholders changes in such objective and policies.
B-17
<PAGE>
Similarly, from time to time proposals have been introduced before State and
local legislatures to restrict or eliminate the State and local income tax ex-
emption for interest on Municipal Bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or elimi-
nate the ability of each Portfolio to achieve its respective investment objec-
tive. In that event, the fund's trustees and officers would reevaluate its in-
vestment objective and policies and consider recommending to its shareholders
changes in such objective and policies. (For more information please refer to
"Risk Factors" on page 6.) Ratings. Excerpts from Moody's Investors Service,
Inc.'s Municipal Bond ratings; Aaa--judged to be of the "best quality" and are
referred to as "gilt edge"; interest payments are protected by a large or by
an exceptionally stable margin and principal is secure; Aa--judged to be of
"high quality by all standards" but as to which margins of protection or other
elements make long-term risks appear somewhat larger than Aaa-rated Municipal
Bonds; together with Aaa group they comprise what are generally known as "high
grade bonds"; A--possess many favorable investment attributes and are consid-
ered "upper medium grade obligations." Factors giving security to principal
and interest of A-rated Municipal Bonds are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future; Baa--considered as medium grade obligations; i.e., they are neither
highly protected nor poorly secured; interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time; Ba--
protection of principal and interest payments may be very moderate; judged to
have speculative elements; their future cannot be considered as well-assured;
B--lack characteristics of a desirable investment; assurance of interest and
principal payments over any long period of time may be small; Caa--poor stand-
ing; may be in default or there may be present elements of danger with respect
to principal and interest; Ca--speculative in a high degree; often in default;
C--lowest rated class of bonds; issues so rated can be regarded as having ex-
tremely poor prospects for ever attaining any real investment standing.
Description of Moody's ratings of state and municipal notes: Moody's ratings
for state and municipal notes and other short-term obligations are designated
Moody's Investment Grade ("MIG"). Symbols used will be as follows: MIG-1--Best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both; MIG-2--High quality with margins of protection ample al-
though not so large as in the preceding group.
Description of Moody's highest commercial paper rating. PRIME-1 ("P-1)--
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
Excerpts from Standard & Poor's Corporation's Municipal Bond ratings: AAA--
has the highest rating assigned by S&P; extremely strong capacity to pay prin-
cipal and interest; AA--has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree; A--
has a strong capacity to pay principal and interest, although somewhat more
susceptible to the adverse changes in circumstances and economic conditions;
BBB--regarded as having an adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters but adverse economic condi-
tions or changing circumstances are more likely to lead to a weakened capacity
to pay principal and interest than for bonds in A category; BB--B--CCC--CC--
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with terms of obligation; BB is being paid; D--in de-
fault, and payment of principal and/or interest is in arrears.
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
B-18
<PAGE>
Excerpt from Standard & Poor's Corporation's rating of municipal note is-
sues: SP-1+--very strong capacity to pay principal and interest; SP-1--strong
capacity to pay principal and interest.
Description of S&P's highest commercial papers ratings: A-1+--This designa-
tion indicates the degree of safety regarding timely payment is overwhelming.
A-1--This designation indicates the degree of safety regarding timely payment
is very strong.
APPENDIX B--MUNICIPAL LEASE OBLIGATIONS
Each Portfolio may invest in municipal lease obligations. Such securities
will be treated as liquid under the following guidelines which have been es-
tablished by the Board of Trustees.
1. The obligation has been rated "investment grade" by at least on NRSRO
and is considered to be investment grade by the investment adviser.
2. The obligation is secured by payments from a governmental lessee which
is generally recognized and has debt obligations which are actively traded
by a minimum of five broker/dealers.
3. At least $25 million of the lessee debt is outstanding either in a
single transaction or on parity, and owned by a minimum of five institu-
tional investors.
4. The investment adviser has determined that the obligation, or a compa-
rable lessee security, trades in the institutional marketplace at least pe-
riodically, with a bid/offer spread of 20 basis points or less.
5. The governmental lessee has a full faith and credit general obligation
rating of at least "A-" as published by at least one NRSRO or as determined
by the investment adviser. If the lessee is a state government, the general
obligation rating must be at least BAA1, BBB+, or equivalent, as determined
above.
6. The projects to be financed by the obligation are determined to be
critical to the lessee's ability to deliver essential services.
7. Specific legal features such as covenants to maintain the tax-exempt
status of the obligation, covenants to make lease payments without the
right of offset or counterclaim, covenants to return leased property to the
lessor in the event of non-appropriation, insurance policies, debt service
reserve fund, are present.
8. The lease must be "triple net" (i.e., lease payments are net of prop-
erty maintenance, taxes and insurance).
9. If the lessor is a private entity, there must be a sale and absolute
assignment of rental payments to the trustee, accompanied by a legal opin-
ion from recognized bond counsel that lease payments would not be consid-
ered property of the lessor's estate in the event of lessor's bankruptcy.
B-19
<PAGE>
PART C
VANGUARD PENNSYLVANIA TAX-FREE FUND
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Registrant's audited Financial Statements for the year ended November
30, 1993, including Price Waterhouse's report thereon, are incorporated by
reference, in the Statement of Additional Information, from the Registrant's
1993 Annual Report to Shareholders which has been filed with the Commission.
The financial statements of each Portfolio included in the Annual Report are:
1. Statement of Net Assets as of November 30, 1993
2. Statement of Operations for the year ended November 30, 1993
3. Statement of Changes in net Assets for the years ended November 30, 1992
and 1993
*4. Financial Highlights for each of the five years in the period ended Novem-
ber 30, 1993
5. Notes to Financial Statements
6. Report of Independent Accountants
- --------
*In addition, the financial highlights for each of the respective periods pre-
sented is included in Part A of this registration.
(B) EXHIBITS
1.Declaration of Trust**
2.By-Laws of Registrant**
3.Not Applicable
4.Not Applicable
5.Not Applicable
6.Not Applicable
7. Reference is made to the section entitled "Management of the Fund"
in the Registrant's Statement of Additional Information
8.Form of Custody Agreement**
9.Form of Vanguard Service Agreement**
10.Opinion of Counsel**
11.Consent of Independent Accountants*
12.Financial Statements--reference is made to (a) above
13.Not Applicable
14.Not Applicable
15.Not Applicable
16.Schedule for Computation of Performance Quotations*
--------
* Filed herewith
** Previously filed
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person. The
officers of the Registrant, the 32 investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference
is made to the caption "Management of the Fund" in the Prospectus constituting
Part A and in the Statement of Additional Information constituting Part B of
this Registration Statement.
C-1
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of November 30, 1993 the number of shareholders of each portfolio of the
Fund was as follows:
<TABLE>
<S> <C>
Insured Long-Term Portfolio........................................... 29,837
Money Market Portfolio................................................ 18,881
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Declaration of Trust.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a trustee, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of ap-
propriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the fi-
nal adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Investment advisory services are provided to the Registrant on an at-cost
basis by The Vanguard Group, Inc., a jointly-owned subsidiary of the Regis-
trant and the other Funds in the Group. See the information concerning The
Vanguard Group set forth in Parts A and B.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge, Pennsyl-
vania 19482; and the Registrant's Custodian, Corestates Bank, Philadelphia,
PA.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The Van-
guard Group, Inc. which was previously filed as Exhibit 9(c) and described in
Part B hereof under "Management of the Fund;" the Registrant is not a party of
any management-related service contract.
ITEM 32. UNDERTAKINGS
Annual meetings of shareholders will not be held except as required by the
Investment Company Act of 1940 ("1940 Act") or other applicable law. Regis-
trant undertakes to comply with the provisions of Section 16(c) of the 1940
Act in regard to shareholders' rights to call a meeting of shareholders for
the purpose of voting on the removal of Directors and to assist in shareholder
communications in such matters, to the extent required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
C-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS THE
REQUIREMENTS FOR EFFECTIVENESS PURSUANT TO RULE 485(B) UNDER THE SECURITIES
ACT OF 1933 AND HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE TOWN OF VALLEY FORGE AND THE COMMONWEALTH OF
PENNSYLVANIA, ON THE 8TH DAY OF MARCH, 1994.
Vanguard Pennsylvania Tax-Free Fund
(signature)
BY: ________________________________
(RAYMOND J. KLAPINSKY)
JOHN C. BOGLE*, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-
EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
(signature)
BY: ________________________________ John C. Bogle*, March 8, 1994
(RAYMOND J. KLAPINSKY) Chairman of the
Board, Trustee, and
Chief Executive
Officer
(signature)
BY: ________________________________ John J. Brennan*, March 8, 1994
(RAYMOND J. KLAPINSKY) President and
Trustee
(signature)
BY: ________________________________ Barbara B. March 8, 1994
(RAYMOND J. KLAPINSKY) Hauptfuhrer*,
Trustee
(signature)
BY: ________________________________ Burton G. Malkiel*, March 8, 1994
(RAYMOND J. KLAPINSKY) Trustee
(signature)
BY: ________________________________ John C. Sawhill*, March 8, 1994
(RAYMOND J. KLAPINSKY) Trustee
(signature)
BY: ________________________________ James O. Welch, March 8, 1994
(RAYMOND J. KLAPINSKY) Jr.*, Trustee
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
(signature) J. Lawrence Wilson*, March 8, 1994
BY: ________________________________ Trustee
(RAYMOND J. KLAPINSKY)
(signature) Richard F. Hyland*, March 8, 1994
BY: ________________________________ Treasurer and
Principal Financial
(RAYMOND J. KLAPINSKY) Officer and
Accounting Officer
</TABLE>
- --------
* By Power of Attorney--See File Number 2-143036, January 23, 1990. Incorpo-
rated by Reference.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants.......................................... 11
Schedule for Computation of Performance Quotations.......................... 16
</TABLE>
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and in
the Statement of Additional Information, constituting parts of this amended
Registration Statement on Form N-1A, of our report dated December 27, 1993,
relating to the financial statements, including financial highlights,
appearing in the November 30, 1993 Annual Report to Shareholders of Vanguard
Pennsylvania Tax-Free Fund, which are also incorporated by reference into this
Registration Statement. We also consent to the references to us under the
headings "Financial Highlights" and "General Information" in the Prospectus
and "Financial Statements" in the Statement of Additional Information.
PRICE WATERHOUSE
Philadelphia, PA
March 7, 1994
<PAGE>
EXHIBIT 16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
INSURED LONG-TERM PORTFOLIO
1. Average Annual Total Return (as of November 30, 1993)
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = 1,000
T = +11.90%
N = 1
ERV = $1,119.05
Five Year
P = 1,000
T = +10.53%
N = 5
ERV = $1,649.55
-------
Since inception
P = 1,000
T = +8.92%*
N = *
ERV = $1,922.81*
* Since inception on April 7, 1986
2. YIELD (30 Days Ended November 30, 1993)
Yield = 2 [( a + 1)/6/ - 1] - b X 100
----
c X d
Where: a = dividends and interest paid during the period
b = expense ratios during the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period
d = the maximum offering price per share on the last day of the
period
Example
a = $6,178,402.00
b = .180
c = 131,223,047.782
d = $11.36
Yield = 4.85%
