<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-34261) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 7
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 8
VANGUARD OHIO
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 28, 1997, pursuant to paragraph (a) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
We have elected to register an indefinite number of shares pursuant to rule
24f-2 under the Investment Company Act of 1940. We filed our rule 24f-2 notice
for the year ended November 30, 1996 on January 31, 1997.
================================================================================
<PAGE> 2
VANGUARD OHIO 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............. The Fund's Objectives; Who Should
Invest; Investment Strategies;
Investment Limitations; Investment
Policies; Investment Performance;
General Information
Item 5. Management of the Fund........................ The Fund and Vanguard; Investment
Adviser
Item 6. Capital Stock and Other Securities............ Buying Shares; Redeeming Shares; The
Share Price of Each Portfolio;
Dividends, Capital Gains and Taxes;
Distribution Options; General
Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Buying Shares
Item 8. Redemption or Repurchase...................... Redeeming 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> 3
VANGUARD
OHIO TAX-FREE
FUND
Prospectus
March 28, 1997
MONEY MARKET PORTFOLIO
INSURED LONG-TERM PORTFOLIO
This prospectus
contains financial data
for the Fund through
the fiscal year ended
November 30, 1996.
[ GRAPHIC OF SAILING VESSEL WITH VANGUARD LOGO ]
<PAGE> 4
VANGUARD OHIO TAX-FREE FUND
A Federal And Ohio State Tax-Exempt Income Mutual Fund
CONTENTS
Portfolio Expenses 3
Financial Highlights 4
A Word About Risk 5
The Portfolios'
Objectives 6
Who Should Invest 6
Investment Strategies 7
Investment Policies 10
Investment Limitations 11
Investment
Performance 11
Share Price 12
Dividends, Capital
Gains, and Taxes 13
The Fund and
Vanguard 13
Investment Adviser 14
General Information 14
Investing with
Vanguard 15
Services and Account
Features 15
Types of Accounts 16
Distribution Options 16
Buying Shares 17
Redeeming Shares 19
Fund and Account
Updates 21
Prospectus Postscript 23
Risk Quiz 24
Glossary Inside Back Cover
INVESTMENT OBJECTIVES AND POLICIES
Vanguard Ohio Tax-Free Fund (the "Fund") is a non-diversified, open-end
investment company that includes two separate mutual fund portfolios: the Money
Market Portfolio and the Insured Long-Term Portfolio (the "Portfolios").
Each Portfolio, intended for Ohio residents only, seeks to provide income
that is exempt from both federal and Ohio personal income taxes. The Money
Market Portfolio emphasizes stability; the Insured Long-Term Portfolio
emphasizes income over stability.
IT IS IMPORTANT TO NOTE THAT THE MONEY MARKET PORTFOLIO SEEKS TO MAINTAIN,
BUT DOES NOT GUARANTEE, A STABLE NET ASSET VALUE OF $1.00 PER SHARE. IN
ADDITION, NEITHER OF THE PORTFOLIOS' SHARES ARE GUARANTEED OR INSURED BY THE
FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT OR THE STATE OF OHIO. ALTHOUGH
THE INTEREST AND PRINCIPAL PAYMENTS OF THE BONDS IN THE INSURED LONG-TERM
PORTFOLIO ARE GUARANTEED, THE VALUE OF THE BONDS THEMSELVES IS NOT GUARANTEED.
AS WITH ANY INVESTMENT IN BONDS, WHICH ARE SENSITIVE TO CHANGES IN INTEREST
RATES, YOU COULD LOSE MONEY BY INVESTING IN EITHER OF THE PORTFOLIOS.
FEES AND EXPENSES
The Portfolios are offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in each Portfolio's expense ratio.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS
A Statement of Additional Information (dated March 28, 1997) containing more
information about the Portfolios is, by reference, part of this prospectus and
may be obtained without charge by writing to Vanguard or by calling our Investor
Information Department at 1-800-662-7447.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategies of each Portfolio
of Vanguard Ohio Tax-Free Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk" explanations along the way.
Reading the prospectus will help you to decide which Portfolio, if any, is the
right investment for you. We suggest that you keep it for future reference.
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
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE> 5
PORTFOLIO PROFILE Vanguard Ohio Tax-Free Fund
WHO SHOULD INVEST (page 6)
- - - Ohio residents seeking a municipal bond mutual fund as part of a balanced
and diversified investment program.
- - - Income-oriented Ohio residents in a high tax bracket.
WHO SHOULD NOT INVEST
- - - Investors primarily seeking growth of their investment over time.
- - - Investors unwilling to accept significant fluctuations in share price
(Insured Long-Term Portfolio).
- - - Investors in a retirement account.
RISKS OF THE PORTFOLIOS (pages 5-11)
Both Portfolios are subject to income risk (the chance that falling interest
rates will cause a Portfolio's income to decline), and objective risk (the
chance that a particular segment of the municipal bond market--such as long-term
or Ohio-issued bonds--will trail returns from the overall municipal bond
market). The Insured Long-Term Portfolio is also subject to interest rate risk
(the chance that bond prices will decline because of rising interest rates).
The Money Market Portfolio seeks to maintain, but does not guarantee, a
constant net asset value of $1.00 per share. The Insured Long-Term Portfolio's
total return will fluctuate within a wide range, so an investor could lose money
over short or even extended periods. More detailed information about
risk--including risks specific to each Portfolio--is provided beginning on page
5.
DIVIDENDS AND CAPITAL GAINS (page 13)
Dividends are declared daily and paid on the first business day of each month.
Capital gains, if any, are paid annually in December.
INVESTMENT ADVISER (page 14)
Vanguard Fixed Income Group, Valley Forge, PA, manages both Portfolios.
MINIMUM INITIAL INVESTMENT:
$3,000; $1,000 for custodial accounts for minors.
ACCOUNT FEATURES (page 15)
- - - Telephone Redemption
- - - Checkwriting
- - - Vanguard Direct Deposit Service (SM)
- - - Vanguard Automatic Exchange Service (SM)
- - - Vanguard Fund Express(R)
- - - Vanguard Dividend Express (SM)
AVERAGE ANNUAL TOTAL RETURNS--
PERIODS ENDED NOVEMBER 30, 1996
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
------ ------- ----------
<S> <C> <C> <C>
Ohio Money Market Portfolio 3.4% 3.0% 3.5%
Lipper Ohio Tax-Exempt
Money Market Average 3.1 2.8 3.3
Ohio Insured Long-Term
Portfolio 5.8% 8.0% 8.6%
Lipper Ohio Tax-Exempt
Municipal Bond Average 4.9 7.3 7.8
</TABLE>
*June 18, 1990.
In evaluating past performance, remember that it is not indicative of future
performance. Performance figures include the reinvestment of any dividends and
capital gains distributions. The returns shown are net of expenses. Note, too,
that both the return and (except for the Money Market Portfolio) principal value
of an investment will fluctuate so that investors' shares, when redeemed, may be
worth more or less than their original cost.
1
<PAGE> 6
PORTFOLIO PROFILE (continued) Vanguard Ohio Tax-Free Fund
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
MONEY MARKET INSURED LONG-TERM
PORTFOLIO PORTFOLIO
- - --------------------------------------------------------------------------------
<S> <C> <C>
INCEPTION DATE: 6/18/90 6/18/90
NET ASSETS AS OF 11/30/96: $254 million $216 million
PORTFOLIO'S EXPENSE RATIO FOR
THE YEAR ENDED 11/30/96: 0.20% 0.20%
LOADS, 12b-1 MARKETING FEES: None None
SUITABLE FOR IRAS: No No
NEWSPAPER ABBREVIATION: VangOH* OHIns
VANGUARD FUND NUMBER: 096 097
- - --------------------------------------------------------------------------------
</TABLE>
* Money market funds are listed separately from the daily mutual fund listings.
2
<PAGE> 7
PORTFOLIO EXPENSES
The examples below are designed to help you understand the various costs you
would bear, directly or indirectly, as an investor in one or both of the
Portfolios.
As noted in this table, you do not pay fees of any kind when you buy, sell,
or exchange shares of the Portfolios:
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
The next table illustrates the operating expenses that you would incur as a
shareholder of either Portfolio. These expenses are deducted from the
Portfolio's income before it is paid to you. Expenses include investment
advisory fees as well as the costs of maintaining accounts, administering a
Portfolio, providing shareholder services, and other activities. The expenses
shown in the table are for the fiscal year ended November 30, 1996.
ANNUAL PORTFOLIO OPERATING EXPENSES
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------
MONEY MARKET INSURED LONG-
PORTFOLIO TERM PORTFOLIO
- - -------------------------------------------------------------------------------------
<S> <C> <C>
Management and
Administrative Expenses: 0.15% 0.16%
Investment Advisory Expenses: 0.01% 0.01%
12b-1 Marketing Fees: None None
Other Expenses
Marketing and Distribution
Costs: 0.03% 0.02%
Fund Insurance: None 0.00%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.01% 0.01%
---- ----
Total Other Expenses: 0.04% 0.03%
---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.20% 0.20%
==== ====
</TABLE>
The example on page 4 illustrates the hypothetical expenses that you would
incur on a $1,000 investment over various periods. The example assumes (1) that
the Portfolio provides a return of 5% a year and (2) that you redeem your
investment at the end of each period.
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with buying, selling, or exchanging shares. These costs can
erode a substantial portion of the gross income or capital appreciation a fund
achieves. Even seemingly small differences in fund expenses can, over time, have
a dramatic impact on a fund's performance.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. For example, the Insured Long-Term Portfolio's expense ratio in fiscal
year 1996 was 0.20%, or $2.00 per $1,000 of average net assets. The average
tax-exempt bond mutual fund (excluding money market funds) had expenses in 1996
of 1.01%, or $10.10 per $1,000 of average net assets, according to Lipper
Analytical Services, Inc., which reports on the mutual fund industry.
3
<PAGE> 8
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL
HIGHLIGHTS TABLE
This explanation uses the Money Market Portfolio as an example. The Portfolio
began fiscal 1996 with a net asset value (price) of $1.00 per share. During the
year, the Portfolio earned $0.034 per share from investment income (interest and
dividends). All of these earnings were returned to shareholders in the form of
dividend distributions. The earnings ($0.034 per share) less distributions
($0.034 per share) resulted in a share price of $1.00 at the end of the year.
Assuming that the shareholder had reinvested the distributions in the purchase
of more shares, total return from the Portfolio was 3.42% for the year.
As of November 30, 1996, the Portfolio had $254 million in net assets; an
expense ratio of 0.20% ($2.00 per $1,000 of net assets); and net investment
income amounting to 3.36% of its average net assets.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market $ 2 $ 6 $11 $26
Insured Long-Term $ 2 $ 6 $11 $26
- - -----------------------------------------------------------------------------------
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following financial highlights tables show, for each Portfolio, the results
for a share outstanding for each period since the Portfolio's inception on June
18, 1990. The financial highlights were audited by Price Waterhouse LLP,
independent accountants. You should read this information in conjunction with
each Portfolio's financial statements and accompanying notes, which appear,
along with the audit report from Price Waterhouse, in the Fund's most recent
Annual Report to shareholders. The Annual Report is incorporated by reference in
the Statement of Additional Information and in this prospectus, and contains a
more complete discussion of each Portfolio's performance. You may have the
Report sent to you without charge by writing to Vanguard or by calling our
Investor Information Department.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
--------------------------------------------------------------------------------
Year Ended November 30,
-------------------------------------------------------------------- 6/18/90*-
1996 1995 1994 1993 1992 1991 11/30/90
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- - ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .034 .037 .026 .023 .030 .045 .027
Net Realized and Unrealized Gain (Loss)
on Investments -- -- -- -- -- -- --
--------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .034 .037 .026 .023 .030 .045 .027
- - ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.034) (.037) (.026) (.023) (.030) (.045) (.027)
Distributions from Realized Capital Gains -- -- -- -- -- -- --
--------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.034) (.037) (.026) (.023) (.030) (.045) (.027)
- - ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============================================================================================================================
Total Return 3.42% 3.78% 2.58% 2.37% 3.01% 4.64% 2.59%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 254 $ 178 $ 147 $ 132 $ 92 $ 79 $ 37
Ratio of Expenses to Average Net Assets 0.20% 0.21% 0.23% 0.21% 0.31% 0.26% 0.23**
Ratio of Net Investment Income to Average
Net Assets 3.36% 3.71% 2.56% 2.34% 2.95% 4.45% 5.65%**
Portfolio Turnover Rate N/A N/A N/A N/A N/A N/A N/A
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Inception date.
**Annualized.
- - --------------------------------------------------------------------------------
4
<PAGE> 9
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
INSURED LONG-TERM PORTFOLIO
Year Ended November 30,
-------------------------------------------------------------------- 6/18/90*-
1996 1995 1994 1993 1992 1991 11/30/90
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.63 $ 10.28 $ 11.61 $ 11.07 $ 10.60 $ 10.30 $ 10.00
----------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .603 .610 .599 .608 .630 .650 .295
Net Realized and Unrealized Gain (Loss)
on Investments .040 1.350 (1.298) .685 .474 .300 .300
----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .643 1.960 (.699) 1.293 1.104 .950 .595
- - ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.603) (.610) (.599) (.608) (.630) (.650) (.295)
Distributions from Realized Capital Gains -- -- (.032) (.145) (.004) -- --
----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.603) (.610) (.631) (.753) (.634) (.650) (.295)
- - ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.67 $ 11.63 $ 10.28 $ 11.61 $ 11.07 $ 10.60 $ 10.30
====================================================================================================================================
TOTAL RETURN 5.75% 19.45% -6.29% 12.03% 10.69% 9.50% 6.04%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 216 $ 197 $ 149 $ 166 $ 101 $ 61 $ 17
Ratio of Expenses to Average Net Assets 0.20% 0.21% 0.23% 0.21% 0.31% 0.27% 0.22%**
Ratio of Net Investment Income to Average
Net Assets 5.26% 5.45% 5.38% 5.29% 5.77% 6.20% 6.55%**
Portfolio Turnover Rate 17% 7% 16% 10% 27% 20% 2%
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Inception date.
**Annualized.
- - --------------------------------------------------------------------------------
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is an historical measure of dividend income, and total return is
a measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized capital appreciation or depreciation. Neither yield nor
total return should be used to predict the future performance of a fund.
- - --------------------------------------------------------------------------------
A WORD ABOUT RISK
This prospectus describes the risks you will face as an investor in the
Portfolios of Vanguard Ohio Tax-Free Fund. It is important to keep in mind one
of the main axioms of investing: the higher the risk of losing money, the higher
the potential reward. The reverse, also, is generally true: the lower the risk,
the lower the potential reward. As you consider an investment in one or both of
the Portfolios, you should take into account your need to protect your
investment, as well as your need for current income.
Look for this "warning flag" symbol throughout the prospectus. It is used to
mark detailed information about each type of risk that you, as a shareholder of
one or both of the Portfolios, will confront.
- - --------------------------------------------------------------------------------
5
<PAGE> 10
PLAIN TALK ABOUT
TAXABLE VERSUS TAX-EXEMPT INVESTMENTS
You may not always profit from a state tax-exempt investment; sometimes a
taxable investment can serve you better. To determine which is more suitable for
you, figure out the state tax-exempt portfolio's taxable equivalent yield. You
do this by . . .
- - - First figuring out your effective state and local bracket. Simply subtract
your federal tax bracket from 100%; then multiply that number by your state and
local bracket. For example, if you are in a 7.0% state tax bracket and a 36%
federal tax bracket, your effective state tax bracket would be 4.5% ([100% -
36%] x 7.0%).
- - - Then add your federal tax bracket and effective state tax bracket together for
your combined tax bracket. In this example, your combined tax bracket would be
40.5% (36% + 4.5%).
- - - Finally, divide the portfolio's tax-exempt yield by the difference between
100% and your combined tax bracket. Continuing with this example and assuming
that you are considering a state tax-exempt portfolio with a 5% yield, your
taxable equivalent yield would be 8.4% (5% divided by [100% - 40.5%]).
In this example, you would choose the state tax-exempt portfolio if its
taxable equivalent yield of 8.4% were greater than the yield of a similar,
though taxable, investment.
Remember that we have used assumed tax brackets in this example. Please
verify your actual tax brackets--both federal and state--before calculating
taxable equivalent yields of your own.
THE PORTFOLIOS' OBJECTIVES
Both Portfolios seek to provide varying amounts of income that is exempt from
federal and Ohio personal income taxes. The Money Market Portfolio seeks to
maintain, but does not guarantee, a constant net asset value of $1.00 per share.
These objectives are fundamental, which means that they cannot be changed unless
a majority of Portfolio shareholders vote to do so.
[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISKS DESCRIBED ON THE FOLLOWING
PAGES, YOUR INVESTMENT IN ONE OR BOTH OF THE PORTFOLIOS, AS WITH ANY
INVESTMENT IN BONDS, COULD LOSE MONEY.
WHO SHOULD INVEST
Either of the Portfolios may be a suitable investment for you if you are a Ohio
resident and . . .
- - - You wish to add a municipal bond income fund to your existing holdings,
which could include other tax-exempt--as well as stock, money market, and
taxable bond--investments.
- - - You seek income that is exempt from federal and Ohio personal income taxes.
However, one Portfolio may more closely meet your personal investment
objectives than the other. For instance, the Money Market Portfolio may be
suitable for you if:
- - - You do not want fluctuation in the share price of your investment.
- - - You are seeking a short-term investment vehicle.
The Insured Long-Term Portfolio may be suitable for you if:
- - - You are seeking a potentially greater amount of tax-exempt income and are
willing to accept significant fluctuations in share price.
Neither Portfolio is an appropriate investment if you are a market-timer.
Investors who engage in excessive in-and-out trading activity generate
additional costs that are borne by all of the shareholders in a Portfolio. To
minimize such costs, which reduce the ultimate returns achieved by you and other
shareholders, the Fund has adopted the following policies:
- - - Each Portfolio reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Portfolios. This could be because of the timing
of the investment or because of a history of excessive trading by the
investor.
- - - There is a limit on the number of times you can exchange into or out of a
Portfolio (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - - The Fund reserves the right to stop offering shares at any time.
6
<PAGE> 11
INVESTMENT STRATEGIES
This section explains how the Portfolios' investment adviser seeks to provide
income that is exempt from federal and Ohio personal income taxes. It also
explains important risks--income risk, interest rate risk, call risk, objective
risk, credit risk, and manager risk--faced by the Portfolios' shareholders.
Unlike the Portfolios' investment objectives, the adviser's investment
strategies are not fundamental and can be changed by the Fund's board of
trustees without shareholder approval. However, before making any important
change in its strategies, the Fund will give shareholders 30-days notice, in
writing.
MARKET EXPOSURE
Both Portfolios invest primarily in tax-exempt Ohio state and local municipal
bonds that, depending on their maturity and quality, provide varying amounts of
tax-exempt income.
[FLAG] EACH PORTFOLIO IS SUBJECT TO INCOME RISK, WHICH IS THE POSSIBILITY
THAT A PORTFOLIO'S DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING
INTEREST RATES. INCOME RISK IS GENERALLY THE GREATEST FOR SHORT-
TERM BONDS (LIKE THOSE IN THE MONEY MARKET PORTFOLIO) AND THE LEAST
FOR LONG-TERM BONDS (LIKE THOSE IN THE INSURED LONG-TERM PORTFOLIO).
Changes in interest rates can affect bond prices as well as bond income.
[FLAG] THE INSURED LONG-TERM PORTFOLIO IS PARTICULARLY SUBJECT TO INTEREST
RATE RISK, WHICH IS THE POSSIBILITY THAT BOND PRICES OVERALL WILL
DECLINE OVER SHORT OR EVEN EXTENDED PERIODS DUE TO RISING INTEREST
RATES. INTEREST RATE RISK SHOULD BE MODEST FOR SHORTER-TERM BONDS,
MODERATE FOR INTERMEDIATE-TERM BONDS, AND HIGH FOR LONGER-TERM BONDS.
In the past, bond investors have seen the value of their investment rise and
fall--sometimes significantly--with changes in interest rates. Between December
1976 and September 1981, for instance, rising interest rates caused long-term
bond prices to fall by almost 48%.
Because the Insured Long-Term Portfolio invests mainly in longer-term bonds,
changes in interest rates will have a significant impact on the value of that
Portfolio's assets. To illustrate how much of an impact, the following table
shows the effect of a 1% change and a 2% change (both up and down) in interest
rates on a bond with a face value of $1,000, similar to those held by the
Insured Long-Term Portfolio on November 30, 1996.
PLAIN TALK ABOUT
MUNICIPAL BONDS
Municipal bonds are securities issued by state and local governments and
regional government authorities as a way of raising money for public
construction projects (for example, highways, airports, housing); for operating
expenses; or for loans to public institutions and facilities.
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
When interest rates rise, bond prices fall. The opposite is also true: bond
prices go up when interest rates fall. Why do bond prices and interest rates
move in opposite directions? Let's assume that you hold a bond offering a 5%
yield. A year later, interest rates are on the rise and bonds are offered with a
6% yield. With higher-yielding bonds available, you would have trouble selling
your 5% bond for the price you paid--causing you to lower your asking price. On
the other hand, if interest rates were falling and 4% bonds were being offered,
you would be able to sell your 5% bond for more than you paid.
PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond's issuer
must pay back the bond's initial value (known as its "face value"). Bond
maturities generally range from less than one year (short term) to 30 years
(long term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
7
<PAGE> 12
PLAIN TALK ABOUT
CALLABLE BONDS
Although bonds are issued with clearly defined maturities, a bond issuer may be
able to redeem, or call, a bond earlier than its maturity date. The bond holder
must now replace the called bond with a bond that may have a lower yield than
the original. One way for bond investors to protect themselves against call risk
is to purchase a bond early in its lifetime, when it is less likely to be
called. Another way is to buy bonds with call protection--that is, assurance
that a bond will not be called for a specific time period, such as ten years.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT INVESTMENT
- - -------------------------------------------------------------------------------------
Value of a $1,000 Investment
- - -------------------------------------------------------------------------------------
Yield/ After a 1% After a 1% After a 2% After a 2%
Average Maturity Increase Decrease Increase Decrease
- - -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4.83%/9.6 years $ 922 $1,075 $ 856 $1,162
- - -------------------------------------------------------------------------------------
</TABLE>
These figures are for illustration only and should not be regarded as an
indication of future returns from the municipal bond market as a whole, or any
portfolio in particular.
Falling interest rates can cause other problems for bond portfolio
shareholders.
[FLAG] THE INSURED LONG-TERM PORTFOLIO, BUT NOT THE MONEY MARKET PORTFOLIO, IS
SUBJECT TO CALL RISK, WHICH IS THE POSSIBILITY THAT DURING PERIODS OF
FALLING INTEREST RATES, A BOND ISSUER WILL "CALL"--OR REPAY--ITS
HIGH-YIELDING BOND BEFORE ITS MATURITY DATE. FORCED TO INVEST THE
UNANTICIPATED PROCEEDS AT LOWER INTEREST RATES, THE PORTFOLIO WOULD
EXPERIENCE A DECLINE IN INCOME--AND THE POTENTIAL FOR TAXABLE CAPITAL
GAINS.
Longer-term bonds, like those held by the Insured Long-Term Portfolio
generally have "call protection"--that is, assurance that a bond will not be
called for a specific period, such as ten years.
SECURITY SELECTION
Vanguard Fixed Income Group, adviser to the Portfolios, selects bonds issued by
Ohio state and local governments. The municipal bonds held by the two
Portfolios, though, differ significantly in terms of maturity and quality.
[FLAG] THE PORTFOLIOS ARE SUBJECT TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY
THAT RETURNS FROM A PARTICULAR BOND MARKET SEGMENT (FOR EXAMPLE,
LONGER-TERM BONDS OR BONDS ISSUED BY THE STATE OF OHIO) WILL TRAIL
RETURNS FROM THE OVERALL BOND MARKET.
The MONEY MARKET PORTFOLIO invests at least 80% of its assets in a variety
of high-quality, short-term Ohio municipal securities. The Portfolio seeks to
provide a stable net asset value of $1.00 per share by investing in securities
with an effective maturity of 13 months or less and by maintaining an average
weighted maturity of 90 days or less. An investment in a money market fund is
neither insured nor guaranteed by the U.S. government, and there can be no
assurance that the portfolio will be able to maintain a stable net asset value
of $1.00 per share.
Under unusual circumstances, such as a national financial emergency, up to
20% of the Money Market Portfolio's assets may be invested in securities other
than Ohio municipal obligations.
8
<PAGE> 13
The INSURED LONG-TERM PORTFOLIO buys longer-term municipal bonds issued by
the state of Ohio, its local governments, and public financing authorities (and,
possibly, by certain U.S. territories). The Portfolio may also buy industrial
revenue bonds and bonds issued by hospitals and universities.
Normally, a fund that concentrates its assets in one state would be exposed
to considerable credit risk. (Details of the risks of investing in one state can
be found in the Statement of Additional Information.) To provide an added level
of credit protection, at least 80% of the Insured Long-Term Portfolio's assets
are invested in Ohio municipal bonds whose principal and interest payments are
guaranteed by top-rated insurance companies at the time of purchase. This
insurance coverage may take one of several forms:
- - - A new issue insurance policy, which is purchased by a bond issuer at the
time the security is issued. This insurance is likely to increase the credit
rating of the security, as well as its purchase price and resale value.
- - - A mutual fund insurance policy, which is used to guarantee specific bonds
only while held by a mutual fund. For the Insured Long-Term Portfolio (which
has obtained a policy from Financial Guaranty Insurance Company), the annual
premiums for the policy may reduce the Portfolio's current yield.
- - - A secondary market insurance policy, which is purchased by an investor (such
as the Insured Long-Term Portfolio) after a bond has been issued and insures
the bond until its maturity date.
Typically, an insured municipal bond in the Portfolio will be covered by
only one of the three policies. For instance, if a bond is covered by a new
issue insurance policy or a secondary market insurance policy, the security will
probably not be insured under the Portfolio's mutual fund insurance policy.
The remaining 20% of the Insured Long-Term Portfolio's assets may be
invested in municipal securities with a minimum quality rating of Aa by Moody's
and AA by Standard & Poor's. Although the Portfolio has no limitations as to
maturity, its dollar-weighted maturity is expected to be between 15 and 25
years.
In addition, up to 20% of either Portfolio may be invested in bonds that are
subject to the Alternative Minimum Tax (AMT).
As tax-advantaged investments, the Portfolios are particularly vulnerable
to federal and Ohio state tax law changes (for instance, if the Internal Revenue
Service ruled that the income from certain types of state-issued bonds could no
longer be considered tax-exempt).
[FLAG] THE PORTFOLIOS ARE SUBJECT TO CREDIT RISK, WHICH IS THE POSSIBILITY
THAT A BOND ISSUER WILL FAIL TO REPAY INTEREST AND PRINCIPAL IN A
TIMELY MANNER.
The Money Market Portfolio invests primarily in high-quality, short-term
Ohio municipal securities, and the Insured Long-Term Portfolio invests primarily
in bonds insured by top-rated insur-
PLAIN TALK ABOUT
CREDIT QUALITY
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) the bond issuer will
default, or fail to meet its payment obligations. Most bond-rating agencies use
a descending alphabet scale to rate bonds (for example, Aaa is the highest
rating, C among the poorest quality). All things being equal, the lower a bond's
credit quality, the higher the yield the bond seeks to pay (as compensation for
the risks an investor must take).
PLAIN TALK ABOUT
ALTERNATIVE MINIMUM TAX
Certain tax-exempt bonds whose proceeds are used to fund private, for-profit
organizations are subject to the Alternative Minimum Tax (AMT)--a special tax
system that insures that individuals pay at least some federal taxes. Although
AMT bond income is exempt from federal regular income tax, a very limited number
of taxpayers who have many tax deductions may have to pay Alternative Minimum
Tax on the income from bonds considered "tax-preference items."
9
<PAGE> 14
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
actively managed tax-exempt bond funds (excluding money market funds) is 48%.
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new, exotic types of derivatives--some of which can
carry considerable risks.
ance companies against the possible default of an issuer. Therefore, credit risk
should be low for the Money Market Portfolio and very low for the Insured
Long-Term Portfolio. The average qualities of the Money Market Portfolio and the
Insured Long-Term Portfolio, as rated by Moody's on November 30, 1996, were
MIG-1 and Aaa, respectively.
The Portfolios try to minimize credit risk by purchasing a wide selection of
Ohio municipal securities. As a result, there is less chance that a Portfolio
will be significantly hurt by a particular bond issuer's failure to repay either
principal or interest.
[FLAG] THE PORTFOLIOS ARE SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY
THAT VANGUARD FIXED INCOME GROUP WILL DO A POOR JOB OF SELECTING
SECURITIES.
To help you distinguish between the two Portfolios and their various risks,
a summary table is presented below.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
RISKS OF THE PORTFOLIOS
- - --------------------------------------------------------------------------------
INCOME INTEREST CALL CREDIT
PORTFOLIO RISK RATE RISK RISK RISK
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market High Low Negligible Low
Insured Long-Term Low High High Very Low
- - --------------------------------------------------------------------------------
</TABLE>
PORTFOLIO TURNOVER
Although the Insured Long-Term Portfolio generally seeks to invest for the long
term, it retains the right to sell securities regardless of how long they have
been held. The Insured Long-Term Portfolio's average turnover rate since
inception has been about 14%. (A Portfolio's turnover rate of 100% would occur,
for example, if the Portfolio sold and replaced securities valued at 100% of its
total net assets within a one-year period.) The Money Market Portfolio will have
a much higher turnover rate because of the short-term nature of money market
instruments. This higher turnover rate should not increase Portfolio costs,
however, since brokerage commissions are not usually charged for the purchase or
sale of money market instruments.
INVESTMENT POLICIES
Besides investing in high-quality municipal bonds, each Portfolio may follow a
number of other investment policies to achieve its objectives.
[FLAG] THE INSURED LONG-TERM PORTFOLIO, BUT NOT THE MONEY MARKET PORTFOLIO, MAY
INVEST, TO A LIMITED EXTENT, IN BOND (INTEREST RATE) FUTURES AND OPTIONS
CONTRACTS, AND OTHER TYPES OF DERIVATIVES.
Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a portfolio. The Insured Long-Term
Portfolio will not
10
<PAGE> 15
use futures and options for speculative purposes or as leveraged investments
that magnify the gains or losses of an investment. Rather, the Portfolio will
keep separate cash reserves or short-term cash-equivalent securities in the
amount of the obligation underlying the futures contract. Only a limited
percentage of the Portfolio's assets--up to 5% if required for deposit and no
more than 20% of total assets--may be committed to such contracts.
The reasons for which the Insured Long-Term Portfolio may use futures and
options are:
- - - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.
- - - To make it easier to trade.
- - - To reduce costs by buying futures instead of actual bonds when futures are
cheaper.
The Statement of Additional Information offers a detailed explanation of the
other types of derivatives in which the Insured Long-Term Portfolio may invest.
The Insured Long-Term Portfolio will usually hold only a small percentage of
its assets in cash reserves, although if the investment adviser believes that
market conditions warrant a temporary defensive measure, the Portfolio may hold
cash reserves without limit.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolios have adopted
limits on some of their investment policies. Specifically, each Portfolio will
not:
- - - Invest more than 25% of its assets in the securities of a single issuer,
except the U.S. government and cash reserves.
- - - Invest more than 50% of its assets in bonds that make up more than 5% of the
Portfolio's total assets.
- - - Borrow money, except for the purpose of meeting shareholder requests to
redeem shares, and not in amounts to exceed 10% of the Portfolio's net
assets.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
a Portfolio's shareholders.
INVESTMENT PERFORMANCE
The Portfolios of Vanguard Ohio Tax-Free Fund invest in bonds with a variety of
maturities from a variety of issuers in Ohio, so their performance will differ
depending on the performance of specific bond market segments. Historically,
changes in interest rates have been--and remain--the strongest influence on bond
market performance.
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
11
<PAGE> 16
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of a portfolio's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either income dividend or capital gains distributions. Income
dividends come from interest the portfolio earns from its money market and bond
investments. Capital gains are realized whenever the portfolio sells securities
for higher prices than it paid for them. These capital gains are either
short-term or long-term depending on whether the portfolio held the securities
for less than or more than one year.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED NOVEMBER 30, 1996
- - ------------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
- - ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ohio Money Market Portfolio 3.4% 3.0% 3.5%
Lipper Ohio Tax-Exempt
Money Market Average 3.1 2.8 3.3
Ohio Insured Long-Term Portfolio 5.8% 8.0% 8.6%
Lipper Ohio Tax-Exempt
Municipal Bond Average 4.9 7.3 7.8
- - ------------------------------------------------------------------------------------
</TABLE>
*June 18, 1990.
The results shown above represent the Portfolios' "average annual total
return" performance, which assumes that any distributions of capital gains and
dividends were reinvested for the indicated periods. Also included is
comparative information for each Portfolio's unmanaged benchmark index.
SHARE PRICE
Each Portfolio's share price, called its net asset value, is calculated each
business day after the close of trading (generally 4 p.m. Eastern time) of the
New York Stock Exchange. The net asset value per share is calculated by adding
up the total assets of the Portfolio, subtracting all of its liabilities, or
debts, and then dividing by the total number of Portfolio shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ------------------------------------
NUMBER OF SHARES OUTSTANDING
The daily net asset value, or NAV, is useful to you as a shareholder because
the NAV, multiplied by the number of Portfolio shares you own, gives you the
dollar amount you would have received had you sold all of your shares back to
the Portfolio that day.
The Insured Long-Term Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the heading Vanguard Group.
Different newspapers use different abbreviations of the Portfolio's name, but
the most common is OHIns. The Money Market Portfolio is listed, along with other
money market funds, separately from other mutual funds; its abbreviation is
VangOH. The Money Market Portfolio's share price is expected--although not
guaranteed--to remain at a constant $1.00.
12
<PAGE> 17
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Portfolios' dividends accrue daily. On the first business day of every
month, the Portfolios distribute to shareholders virtually all of their income
from interest and dividends as dividend distributions. These dividend
distributions are expected to be free from federal, Ohio personal, and (to the
extent relevant) municipal income taxes. Any capital gains realized from the
sale of securities are distributed annually in December. Your distributions of
income and capital gains are automatically invested in more shares of the
Portfolio unless you elect to receive the distributions in cash. In either case,
distributions of capital gains (but not dividends) that are declared in
December--even if paid to you in January--are taxed as if they had been paid to
you in December. Vanguard will process your dividend distributions and send you
a statement each year showing the tax status of all your distributions.
- - - The short-term capital gains that you receive are taxable to you as ordinary
dividend income. Any distributions of net long-term capital gains by a
Portfolio are taxable to you as long-term capital gains, no matter how long
you've owned shares in the Portfolio. Capital gains distributions are
taxable to you whether received in cash or reinvested in additional shares.
Although the Portfolios do not seek to realize any particular amount of
capital gains during a year, such gains are realized from time to time as
byproducts of the ordinary investment activities of the Portfolios.
- - - If you sell or exchange shares of a Portfolio, any gain or loss you have is
a taxable event, which means that you may have a capital gain to report as
income, or a capital loss to report as a deduction, when you complete your
federal income tax return.
- - - Distributions of capital gains, and capital gains or losses from your sale
or exchange of Portfolio shares, may be subject to state and local income
taxes as well.
The tax information in this prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences of an
investment in either of the Portfolios.
THE FUND AND VANGUARD
Vanguard Ohio Tax-Free Fund is a member of The Vanguard Group, a family of more
than 30 investment companies with more than 90 distinct investment portfolios
and total net assets of more than $250 billion. All of the Vanguard funds share
in the expenses associated with business operations, such as personnel, office
space, equipment, and advertising.
PLAIN TALK ABOUT
"BUYING A CAPITAL GAIN"
It is not to your advantage to buy shares of a portfolio shortly before it makes
a capital gains distribution, because part of your investment will come back to
you as a taxable distribution. This is known as "buying a capital gain." For
example: on December 15, you invest $5,000, buying 250 shares for $20 each. If
the portfolio pays a capital gains distribution of $1 per share on December 16,
its share price would drop to $19 (not counting market change). You would still
have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1
= $250 in capital gains distributions), but you would owe tax on the $250
capital gain you received, even if you had reinvested it in more shares. To
avoid "buying a capital gain" check the portfolio's distribution schedule before
you invest.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE
CORPORATE STRUCTURE
The Vanguard Group, Inc. is the only mutual mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
13
<PAGE> 18
PLAIN TALK ABOUT
THE FUND'S ADVISER
Vanguard Fixed Income Group currently manages more than $79 billion in assets
and provides investment advisory services on an at-cost basis to more than 40
Vanguard Portfolios.
The managers responsible for the Fund are:
IAN A. MACKINNON, Senior Vice President of Vanguard; fixed-income
investment adviser since 1974, primarily responsible for Vanguard's internal
fixed-income policy and strategy since 1980; B.A. from Lafayette College, M.B.A.
from Pennsylvania State University.
JOHN CARBONE, Principal of Vanguard; Money Market Portfolio adviser since
1996, in the investment business since 1986; B.S. from Babson College, M.B.A.
from Southern Methodist University.
DANINE MUELLER, Principal of Vanguard; Insured Long-Term Portfolio adviser
since 1996, managing Vanguard funds since 1989, in the investment business since
1985; B.S. from Villanova University.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 marketing fees, each fund
pays its allocated share of The Vanguard Group's costs.
A list of the Fund's trustees and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
Vanguard Fixed Income Group, P.O. Box 2600, Valley Forge, PA 19482, provides
investment advisory services to the Portfolios of Vanguard Ohio Tax-Free Fund on
an at-cost basis, subject to the control of the officers and trustees of the
Fund.
The Fixed Income Group chooses brokers or dealers to handle the purchase and
sale of the Portfolios' securities, and is responsible for getting the best
available price and most favorable execution for all transactions. When the
Portfolios purchase a newly issued security at a fixed price, the Group may
designate certain members of the underwriting syndicate to receive compensation
associated with that transaction. Certain dealers have agreed to rebate a
portion of such compensation directly to the Portfolios to offset their
management expenses."
GENERAL INFORMATION
Vanguard Ohio Tax-Free Fund is a Pennsylvania business trust. Shareholders of
the Fund have rights and privileges similar to those enjoyed by other corporate
shareholders. If any matters are to be voted on by shareholders (such as a
change in a fundamental investment objective or the election of trustees), each
share outstanding at that point would be entitled to one vote. Annual meetings
will not be held by the Portfolios except as required by the Investment Company
Act of 1940. A meeting will be scheduled (for example, to vote on the removal of
a trustee) if the holders of at least 10% of a Portfolio's shares request a
meeting in writing.
14
<PAGE> 19
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer you as a shareholder of one of the Portfolios of Vanguard Ohio Tax-Free
Fund. Booklets providing detailed information are available on the services
marked with a [BOOK GRAPHIC]. Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.
TELEPHONE REDEMPTIONS Automatically set up for each Portfolio
(SALES AND EXCHANGES) unless you notify us otherwise.
Checkwriting Method for drawing money from your
account by writing a check for $250 or
more.
VANGUARD DIRECT DEPOSIT Automatic method for depositing your
SERVICE paycheck or U.S. government payment
[BOOK GRAPHIC] (including Social Security and
government pension checks) into your
account.
VANGUARD AUTOMATIC EXCHANGE Automatic method for moving a fixed
SERVICE amount of money from one Vanguard fund
[BOOK GRAPHIC] account to another.*
VANGUARD FUND EXPRESS Electronic method for buying or selling
[BOOK GRAPHIC] shares. You can transfer money between
your Vanguard fund account and an
account at your bank, savings and loan,
or credit union on a systematic schedule
or whenever you wish.*
VANGUARD DIVIDEND EXPRESS Electronic method for transferring
[BOOK GRAPHIC] dividend and/or capital gains
distributions directly from your
Vanguard fund account to your bank,
savings and loan, or credit union
account, or to another Vanguard fund
account.
VANGUARD BROKERAGE SERVICES A cost-effective way to trade stocks,
(VBS) bonds, and options on major exchanges,
[BOOK GRAPHIC] Nasdaq, and other domestic
over-the-counter markets at reduced
rates, and to buy and sell shares of
non-Vanguard mutual funds. Call VBS
(1-800-992-8327) for additional
information and the appropriate forms.
*Can be used to "dollar-cost average" [BOOK GRAPHIC].
15
<PAGE> 20
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
accounts.
FOR ONE OR MORE PEOPLE To open an account in the name of one
(individual) or more (joint tenants)
people. $3,000 minimum initial
investment.
FOR A MINOR CHILD To open an account as an UGMA/UTMA
[BOOK GRAPHIC] (Uniform Gifts/Transfers to Minors Act).
Age of majority and other requirements
are set by state law. $1,000 minimum
initial investment.
FOR HOLDING TRUST ASSETS To invest assets held in an existing
[BOOK GRAPHIC] trust. $3,000 minimum initial
investment.
FOR AN ORGANIZATION To open an account as a corporation,
partnership, or other entity. These
accounts may require a corporate
resolution or other documents to name
the individuals authorized to act.
$3,000 minimum initial investment.
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number of
ways:
REINVESTMENT Dividends and capital gains are
automatically reinvested in additional
shares of the Portfolio unless you
request a different distribution method.
DIVIDENDS IN CASH Dividends are paid by check and mailed
to your account's address of record, and
capital gains are reinvested in
additional shares of the Portfolio.
DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains are
IN CASH paid by check and mailed to your
account's address of record.
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, or to another Vanguard fund account,
see Vanguard Dividend Express under "Services and Account Features."
16
<PAGE> 21
BUYING SHARES
For the Insured Long-Term Portfolio, you buy your shares at the Portfolio's
next-determined net asset value after Vanguard receives your request, provided
we receive your request before 4 p.m. Eastern time (the close of trading on the
New York Stock Exchange). You begin earning dividends the calendar day after
your account is credited.
Before it can begin earning dividends, your investment in the Money Market
Portfolio must be converted to federal funds, which usually takes about one
business day. (Federal funds are Federal Reserve deposits that banks and other
financial institutions "borrow" from one another to meet short-term cash needs;
portfolio advisers must use federal funds to pay for the securities they buy.)
You begin earning dividends the calendar day after your account is credited. For
instance, if we received your check before 4 p.m. on a Thursday, your account
would be credited Friday, and you would begin earning dividends Saturday. If the
check arrives after 4 p.m. Eastern time, your account is credited after two
business days, and you begin earning dividends the calendar day after that. (If
we received your check after 4 p.m. on a Thursday, your account would be
credited Monday, and you would begin earning dividends Tuesday.)
Each of the Fund's Portfolios is offered on a no-load basis, meaning that you
do not pay sales commissions or 12b-1 marketing fees.
<TABLE>
<S> <C> <C>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
MINIMUM INVESTMENT $3,000 (regular account); $1,000 $100 by mail or exchange; $1,000
(custodial accounts for minors). by wire.
BY MAIL Complete and sign the application form. Mail your check with an Invest-By-Mail
[ENVELOPE GRAPHIC] form detached from your confirmation
Make your check payable to: statement to the address listed on the form.
First-class mail to: The Vanguard Group-(appropriate
The Vanguard Group Portfolio number; see below) Make your check payable to:
P.O. Box 2600 Money Market 96 The Vanguard Group-(appropriate
Valley Forge, PA 19482 Insured Long-Term 97 Portfolio number; see below)
Money Market 96
Express or Registered mail to: All purchases must be made in Insured Long-Term 97
The Vanguard Group U.S. dollars, and checks must be
455 Devon Park Drive drawn on U.S. banks. All purchases must be made in
Wayne, PA 19087 U.S. dollars, and checks must be
drawn on U.S. banks.
</TABLE>
**IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
17
<PAGE> 22
BUYING SHARES (continued)
<TABLE>
<S> <C> <C>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
BY TELEPHONE Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
[PHONE GRAPHIC] hours a day--or Client Services hours a day--or Client Services
during business hours--to during business hours--to exchange
1-800-662-6273 exchange from another Vanguard from another Vanguard fund account
Vanguard Tele-Account(R) fund account with the same with the same registration (name,
registration (name, address, address, taxpayer I.D., and account
1-800-662-2739 taxpayer I.D., and account type). type).
Client Services
Use Vanguard Fund Express (see
"Services and Account Features")
to transfer assets from your bank
account. Call Client Services before
your first use to verify that this
option is in place.
</TABLE>
*You must obtain a Personal Identification Number
through Tele-Account at least seven days before
you request your first exchange.
FOR THE MONEY MARKET PORTFOLIO ONLY: If you buy Portfolio shares through an
exchange from another Vanguard Fund by 4 p.m. Eastern time, your investment does
not have to be converted to federal funds; you begin earning dividends the next
calendar day.
IMPORTANT NOTE: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.
<TABLE>
<S> <C> <C>
BY WIRE Call Client Services to arrange your Call Client Services to arrange your
[WIRE GRAPHIC] wire transaction. wire transaction.
Wire to:
CoreStates Bank, N.A.
ABA 031000011
CoreStates No 0141-1274
[Temporary Account Number]
Vanguard Ohio Tax-Free Fund
[Portfolio Name]
[Account Registration]
Attention: Vanguard
</TABLE>
FOR THE MONEY MARKET PORTFOLIO ONLY: If you buy Portfolio shares through a
federal funds wire, your investment begins earning dividends the next calendar
day. You can begin earning dividends immediately if you notify Vanguard by 10:45
a.m. Eastern time that you intend to make a wire purchase that day.
<TABLE>
<S> <C> <C>
AUTOMATICALLY -- Vanguard offers a variety of ways
[GRAPHIC OF ARROWS ROTATING that you can add to your account
IN A CIRCLE] automatically. See "Services
and Account Features."
</TABLE>
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten days.
NOTE: If you buy Portfolio shares through a registered broker-dealer or
investment adviser, the broker-dealer or adviser may charge you a service fee.
18
<PAGE> 23
BUYING SHARES (continued)
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. We must consider the interests of all Portfolio
shareholders and so reserve the right to delay or refuse any purchase that will
disrupt the Portfolio's operation or performance.
REDEEMING SHARES
IMPORTANT TAX NOTE: Any sale or exchange of Portfolio shares could result in
a taxable gain or a loss. However, because the Money Market Portfolio seeks
to maintain a stable net asset value of $1.00 per share, you will not incur a
taxable gain or loss when you sell or exchange shares of this Portfolio.
The ability to redeem (that is, sell or exchange) Portfolio shares by telephone
is automatically established for your account unless you tell us in writing that
you do not want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
- Portfolio name.
- 10-digit account number.
- Name and address exactly as registered on that account.
- Social Security or Employer Identification number as registered on that
account.
If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.
If we follow reasonable security procedures, neither the Fund nor Vanguard
will be responsible for the authenticity of transaction instructions received by
telephone. We believe that these procedures are reasonable and that, if we
follow them, you bear the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares.
One way to sell shares is the checkwriting option (established when you set
up your account or by calling Client Services). Your personalized Vanguard
checks work in much the same way as bank checks, except that Vanguard checks are
considered drafts and cannot be cashed immediately like a bank check. You cannot
write a Vanguard check to redeem shares that you purchased by check within the
previous ten days.
When you sell shares by telephone or mail, sale proceeds are normally mailed
within two business days after Vanguard receives your request. The sale price of
your shares will be the Portfolio's next-determined net asset value after
Vanguard receives your request in good order. Good order means that the request
includes:
- Portfolio name and account number.
- Amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account.
- Signature guarantees (if required).
- Any supporting legal documentation that may be required.
- Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New
York Stock Exchange (generally 4 p.m. Eastern time) are processed the next
business day.
The Portfolios reserve the right to close any account whose balance falls
below the minimum initial investment. The Portfolios will deduct a $10 annual
fee if your account balance falls
19
<PAGE> 24
REDEEMING SHARES (continued)
below $2,500 or if your UGMA/UTMA account balance falls below $500. The fee is
waived if your total Vanguard account assets are $50,000 or more.
Some written requests require a signature guarantee from a bank, broker, or
other acceptable financial institution. A notary public cannot provide a
signature guarantee.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard fund to purchase shares of
another.
Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate the exchange privilege, limit the
amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of the
Portfolios and increase transaction costs, Vanguard limits exchange activity to
two substantive exchange redemptions (at least 30 days apart) from each
Portfolio (except the Money Market Portfolio) during any 12-month period.
"Substantive" means either a dollar amount large enough to have a negative
impact on a Portfolio or a series of movements between Vanguard funds.
Before you exchange into a new Vanguard fund, be sure to read its prospectus.
For a copy and for answers to questions you might have, call Investor
Information.
SELLING OR EXCHANGING SHARES INSTRUCTIONS
BY TELEPHONE Call Vanguard Tele-Account* 24 hours a
[PHONE GRAPHIC] day--or Client Services during business
hours--to sell or exchange shares. You
1-800-662-6273 can exchange shares from either
Vanguard Tele-Account Portfolio to open an account in another
Vanguard fund or to add to an existing
1-800-662-2739 Vanguard fund account with an identical
Client Services registration.
*You must obtain a Personal
Identification Number through
Tele-Account at least seven days before
you request your first redemption.
BY MAIL Send a letter of instruction signed by
[ENVELOPE GRAPHIC] all registered account holders. Include
the portfolio name and account number
and (if you are selling) a dollar amount
FIRST-CLASS mail to: or number of shares OR (if you are
The Vanguard Group exchanging) the name of the portfolio
Vanguard Ohio Tax-Free Fund you want to exchange into and a dollar
P.O. Box 1120 amount or number of shares.
Valley Forge, PA 19482
EXPRESS or REGISTERED mail to:
The Vanguard Group
Vanguard Ohio Tax-Free Fund
455 Devon Park Drive
Wayne, PA 19087
BY CHECK You can sell shares by writing a check
[CHECK GRAPHIC] for $250 or more.
AUTOMATICALLY Vanguard offers several ways to sell or
[GRAPHIC OF ARROWS exchange shares automatically (see
ROTATING IN A CIRCLE] "Services and Account Features"). Call
Investor Information for the appropriate
booklet and application if you did not
elect a feature when you opened your
account.
20
<PAGE> 25
REDEEMING SHARES (continued)
It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Portfolio shareholders and so
reserve the right to delay your redemption proceeds--up to seven days--if the
amount will disrupt a Portfolio's operation or performance.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares 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. If you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions
on selling or exchanging shares by mail in the "Redeeming Shares" section.
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you clear, concise account and tax statements to help you keep
track of your Portfolio account throughout the year as well as when you are
preparing your income tax returns.
In addition, you will receive financial reports about each Portfolio twice a
year. These comprehensive reports include an assessment of each Portfolio's
performance (and a comparison with its industry benchmark), an overview of the
markets, a report from the adviser, as well as a listing of its holdings and
other financial statements.
CONFIRMATION STATEMENT Sent each time you buy, sell, or
exchange shares; confirms the date and
the amount of your transaction.
PORTFOLIO SUMMARY Mailed quarterly; shows the market value
of your account at the close of the
statement period, as well as
distributions, purchases, sales, and
exchanges for the current calendar year.
FUND FINANCIAL REPORTS Mailed in January and July for each
Portfolio.
TAX STATEMENTS Generally mailed in January; report
previous year's taxable distributions
and proceeds from the sale of Portfolio
shares.
AVERAGE COST STATEMENT Issued quarterly (accompanies your
[BOOK GRAPHIC] Portfolio Summary); shows the average
cost of shares that you redeemed during
the calendar year, using the average
cost single category method.
AUTOMATED TELEPHONE ACCESS
VANGUARD TELE-ACCOUNT Toll-free access to Vanguard fund and
account information--as well as some
1-800-662-6273 transactions--through any TouchTone(TM)
Any time, seven days a week, telephone. Tele-Account provides total
from anywhere in the continental return, share price, price change, and
United States and Canada. yield quotations for all Vanguard funds;
[BOOK GRAPHIC ] gives your account balances and history
(e.g., last transaction, latest dividend
distribution, redemptions by check
during the last three months); and
allows you to sell or exchange fund
shares.
21
<PAGE> 26
FUND AND ACCOUNT UPDATES (continued)
COMPUTER ACCESS
VANGUARD ON THE Use your personal computer to visit
WORLD WIDE WEB Vanguard's education-oriented website,
http://www.vanguard.com which provides timely news and
information about Vanguard funds and
services; an on-line "university" that
offers a variety of mutual fund classes;
and easy-to-use, interactive tools to
help you create your own investment and
retirement strategies.
VANGUARD ONLINE(SM) Use your personal computer to learn more
KEYWORD: about Vanguard funds and services;
keep in touch with your Vanguard
accounts; map out a long-term
investment strategy; and ask questions,
make suggestions, and send messages to
Vanguard. Vanguard Online is offered
through America Online(R) (AOL). To
establish an AOL account, call
1-800-238-6336.
22
<PAGE> 27
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about the
Portfolios of Vanguard Ohio Tax-Free Fund, including their investment
objectives, risks, strategies, and expenses, as well as services available to
you as a shareholder.
It is important that you understand these facts so that you can decide
whether an investment in a Portfolio is right for you. The following questions
offer a quick review of some of the subjects covered by this prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
/ / Each Portfolio's objective? (page 6)
/ / Each Portfolio's investment strategies? (page 7)
/ / Who should invest in each Portfolio? (page 6)
/ / The risks associated with each Portfolio? (pages 5-11)
/ / Whether each Portfolio is federally insured? (inside front cover)
/ / Each Portfolio's expenses? (page 3)
/ / The background of the Portfolios' investment managers? (page 14)
/ / How to open an account? (page 17)
/ / How to sell or exchange shares? (page 19)
/ / How often you'll receive statements and financial reports? (page 21)
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether one or both of the
Portfolios is suitable for your investment goals. If you decide to invest, don't
throw the prospectus out; you will no doubt need it for future reference.
23
<PAGE> 28
A SIMPLE RISK QUIZ
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL
STOCKS OR BONDS) FOR . . .
1. Less than a year
2. 1 - 2 years
3. 3 - 4 years
4. 5 - 9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M . . .
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to accurately gauge your risk
tolerance. Scoring for the quiz is below.
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: if you chose answer #1
or #2 to Question C, subtract five points from your total score.)
- - - If you scored between 0 and 25 points, you are considered a conservative
investor.
- - - If you scored between 26 and 32 points, you are considered a moderate
investor.
- - - If you scored between 33 and 35 points, you are considered an aggressive
investor.
24
<PAGE> 29
GLOSSARY OF INVESTMENT TERMS
ALTERNATIVE MINIMUM TAX (AMT)
A separate tax system designed to assure that individuals pay at least a minimum
amount of federal income taxes. Certain securities used to fund private,
for-profit activities are subject to AMT.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
bank CDs, repurchase agreements, and U.S. Treasury bills.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DURATION
A measure of the sensitivity of bond--and bond fund--prices to interest rate
movements. For example, if a bond has a duration of two years, its price would
fall by about 2% when interest rates rose one percentage point. On the other
hand, the bond's price would rise by about 2% when interest rates fell by one
percentage point.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
marketing fees.
FACE VALUE
The value of a bond at the time it was issued (that is, initially sold).
FIXED-INCOME SECURITIES
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.
INSURED BONDS
Bonds whose payments of both principal and interest are guaranteed. The
insurance does not guarantee the value of the bonds, only that bond payments
will be made in a timely fashion.
INVESTMENT GRADE
Bonds whose credit quality is considered by independent bond-rating agencies to
be among the highest.
MATURITY
The date when a bond issuer agrees to return the bond's principal, or face
value, to the bond's buyer.
MUNICIPAL BOND
A bond issued by a state or local government. Dividend income from municipal
bonds is generally free from federal income taxes, as well as taxes in the state
in which it was issued.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRINCIPAL
The amount of your own money you put into an investment.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 30
[VANGUARD LOGO]
Post Office Box 2600
Valley Forge, PA 19482
<TABLE>
<S> <C> <C>
INVESTOR INFORMATION VANGUARD BROKERAGE ELECTRONIC ACCESS TO THE
DEPARTMENT SERVICES VANGUARD MUTUAL FUND
1-800-662-7447 (SHIP) 1-800-992-8327 EDUCATION AND INFORMATION
TEXT TELEPHONE: For information on trading CENTER
1-800-952-3335 stocks, bonds, and options World Wide Web
For information on our funds, at reduced commissions http://www.vanguard.com
fund services, and retirement
accounts; requests for VANGUARD TELE-ACCOUNT(R) E-mail
literature 1-800-662-6273 (ON-BOARD) [email protected]
For 24-hour automated access
CLIENT SERVICES DEPARTMENT to price and yield, information
1-800-662-2739 (CREW) on your account, certain
TEXT TELEPHONE: transactions (C) 1997 Vanguard Marketing
1-800-662-2738 Corporation, Distributor
For information on your
account, account transactions,
account statements
</TABLE>
<PAGE> 31
PART B
VANGUARD OHIO TAX-FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 28, 1997
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus dated March 28, 1997. 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
Investment Policies....................................................................... B-3
Ohio Risk Factors......................................................................... B-5
Yield and Total Return.................................................................... B-7
Calculation of Yield...................................................................... B-7
Performance Measures...................................................................... B-8
Investment Management..................................................................... B-10
Portfolio Transactions.................................................................... B-10
Purchase of Shares........................................................................ B-11
Redemption of Shares...................................................................... B-11
Valuation of Shares....................................................................... B-12
Management of the Fund.................................................................... B-14
Description of Shares and Voting Rights................................................... B-17
Financial Statements...................................................................... B-17
Appendix A -- Description of Municipal Bonds and their Ratings............................ B-18
Appendix B -- Municipal Lease Obligations................................................. B-20
</TABLE>
INVESTMENT LIMITATIONS
The following limitations cannot be changed without the consent of the
holders of a majority of the applicable Portfolio's outstanding shares (as
defined in the Investment Company Act of 1940 (the "1940 Act")).
1. 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, obligations
of the U.S. Government and its agencies, commercial paper, and bank
certificates of deposits; (b) investment companies investing in such
securities which have investment objectives consistent with those of the
Portfolio to the extent permitted by the 1940 Act; and (c) any such
securities or municipal bonds subject to repurchase agreements;
2. 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 Code (the "Code")), each of which exceeds 5% of the
Portfolio's total assets, to an aggregate amount of 50% of such assets;
3. 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 Portfolio's total assets;
4. 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 total assets of that Portfolio. The Portfolio will repay all
borrowings before making additional investments. Interest paid on such
borrowings will reduce income;
B-1
<PAGE> 32
5. 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;
6. Each Portfolio will not issue senior securities as defined in the
1940 Act;
7. Each Portfolio will not engage in the business of underwriting
securities issued by other persons except to the extent that the Portfolio
may technically be deemed to be an underwriter under the Securities Act of
1933, as amended, in disposing of investment securities;
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
purchase of bonds, debentures or similar obligations which are publicly
distributed. In addition, although the Portfolios have no present intention
to do so, each Portfolio reserves the right to lend its investment
securities to qualified institutions in accordance with guidelines of the
Securities and Exchange Commission;
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 securities, together own more than 5% of the securities of such
issuer;
12. Each Portfolio will not purchase or sell commodities or
commodities contracts, except that the Ohio 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 deposit 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
investment companies except as they may be acquired as part of a merger,
consolidation, reorganization or acquisition of assets or otherwise, to the
extent permitted by Section 12 of the 1940 Act;
14. Each Portfolio will not invest in put, call, straddle or spread
options (except as described above in investment limitation No. 12) or
interests in oil, gas or other mineral exploration or development programs;
and
15. Each Portfolio will not purchase or otherwise acquire any
security if, as a result, more than 15% (10% with respect to the Money
Market Portfolio) of its net assets would be invested in securities that
are illiquid (included in this limitation is the Fund's investment in The
Vanguard Group, Inc.);
16. Each Portfolio will not purchase an industrial revenue bond if as
a result of such purchase (i) more than 5% of the Portfolio's total assets,
determined at market value at the time of the proposed investment, would be
invested 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 industrial development bonds. These restrictions do not apply
to municipal obligations where the payment of principal and interest is the
responsibility of a government or the political subdivision of a
government.
The above-mentioned investment limitations are considered at the time
investment 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 without limit in
when-issued securities. Please see the prospectus for a description of such
securities.
B-2
<PAGE> 33
INVESTMENT POLICIES
FUTURES CONTRACTS AND OPTIONS
The Insured Long-Term Portfolio may enter into futures contracts, options,
and options on futures contracts for several reasons: to maintain cash reserves
while remaining fully invested, to facilitate trading, to reduce transactions
costs, or to seek higher investment returns when a futures contract is priced
more attractively than the underlying municipal security or index. Futures
contracts 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 exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC"), a U.S. Government Agency.
Assets committed to futures contracts will be segregated at the Fund's custodian
bank to the extent required by law.
Most futures contracts are closed out before the settlement date without
the making or taking of delivery. Closing out an open futures position is done
by taking an opposite position ("buying" a contract which has previously been
"sold," or "selling" a contract previously purchased) in an identical contract
to terminate the position. Brokerage 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
securities with a broker or custodian to initiate and maintain open positions in
futures contracts. A margin deposit is intended to assure completion of the
contract (delivery or acceptance of the underlying security) if it is not
terminated prior to the specified delivery date. Minimal initial margin
requirements are established by the futures exchange and may be changed. Brokers
may establish deposit requirements which are higher than the exchange minimums.
Futures contracts are customarily purchased and sold with margin at prices which
may range upward from less than 5% of the value of the contract being traded.
The Fund expects to earn interest income on its margin deposits.
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
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable 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 prices of underlying securities. The Portfolio intends to use futures
contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Portfolio 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.
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 exposure.
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 Insured Long-Term 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
B-3
<PAGE> 34
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.
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 payments 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 addition, the Portfolio may be required to make
delivery of the instruments underlying futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on the
ability to effectively hedge.
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 principal interest rate futures exchanges in the United States are the Board
of Trade of the City of Chicago and the Chicago Mercantile Exchange.
The risk of loss in trading futures contracts in some strategies 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 (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 initial margin requirement for the contract. However, because the
futures strategies of the Portfolio are engaged in only for hedging purposes,
the Adviser does not believe that the Portfolio is subject to the risks of loss
frequently 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 involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities or other characteristics 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
securities. There is also the risk of loss by the Portfolio of margin deposits
in the event of bankruptcy of a broker with whom the Portfolio has an open
position 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 unfavorable
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.
OTHER TYPES OF DERIVATIVES
In addition to futures and options, The Insured Long-Term Portfolio may
invest in other types of derivatives, including warrants, swap agreements and
partnerships or grantor trust derivative products. Derivatives are instruments
whose value is linked to or derived from an underlying security. Derivatives may
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<PAGE> 35
be traded separately on exchanges or in the over-the-counter market, or they may
be imbedded in securities. The most common imbedded derivative is the call
option attached to or imbedded in a callable bond. The owner of a traditional
callable bond holds a combination of a long position in a non-callable bond and
a short position in a call option on that bond.
Derivative instruments may be used individually or in combination to hedge
against unfavorable changes in interest rates, or to speculate on anticipated
changes in interest rates. Derivatives may be structured with no or a high
degree of leverage. When derivatives are used as hedges, the risk incurred is
that the derivative instrument's value may change differently than the value of
the security being hedged. This "basis risk" is generally lower than the risk
associated with an unhedged position in the security being hedged. Some
derivatives may entail liquidity risk, i.e., the risk that the instrument cannot
be sold at a reasonable price in highly volatile markets. Leveraged derivatives
used for speculation are very volatile, and therefore, very risky. However, the
Portfolios will only utilize derivatives for hedging or arbitrage purposes, and
not for speculative purposes. Over-the-counter derivatives involve a
counterparty risk, i.e., the risk that the individual or institution on the
other side of the agreement will not or cannot meet its obligations under the
derivative agreement.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
The Insured Long-Term Portfolio is required for federal income tax purposes
to recognize as income for each taxable year 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 securities and, consequently,
the nature of the gain or loss on such securities upon disposition. The
Portfolio may be required to defer the recognition of losses on futures
contracts to the extent of any unrecognized gains on related positions held by
the Portfolio.
In order for the 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
securities 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 contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes 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.
The 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
transactions. Such distribution 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.
OHIO RISK FACTORS
As described above, the Portfolios will invest most of their respective net
assets in securities issued by or on behalf of (or in certificates of
participation in lease-purchase obligations of ) the State of Ohio, political
subdivisions of the State, or agencies or instrumentalities of the State or its
political subdivisions (Ohio Obligations). The Portfolios are therefore
susceptible to general or particular political, economic or regulatory factors
that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the many complex factors that may
affect the Portfolios. The information does not apply
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<PAGE> 36
to "conduit" obligations on which the public issuer itself has no financial
responsibility. This information is derived from official statements of certain
Ohio issuers published in connection with their issuance of securities and from
other publicly available documents, and is believed to be accurate. No
independent verification has been made of any of the following information.
The timely payment of principal of and interest on Ohio Obligations has
been guaranteed by bond insurance purchased by the issuers, the Portfolio or
other parties. The timely payment of debt service on Ohio Obligations that are
so insured may not be subject to the factors referred to in this section of the
Prospectus.
Ohio is the seventh most populous state. Its 1990 Census count of
10,847,000 indicates a 0.5% population increase from 1980.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
15% of total employment in agribusiness. The state's economy has also benefitted
by improved manufacturing productivity and a strong export position which helped
shield the state's economy from domestic recession in the early 1990's.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Portfolio or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
Ohio's debt burden is moderate, and the state and most local governments
observe prudent debt management practices. The state government has maintained
positive year-end balances in its general revenue account during the 1980s,
achieved through timely revisions in tax and spending plans. During the economic
recovery of the mid-1980's, the State accumulated sizable fund balances in its
general revenue fund and maintained a healthy budget stabilization (or "rainy
day") fund. This strong financial position provided the state with far more
flexibility than most states to weather the revenue shortfalls and increased
human services expenditures generated by the most recent recession. The state's
finances remain sound and poised to generate enhanced balances as the national
economy effects a sustained recovery from the recession of the early 1990's.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year ("FY") or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund ("GRF"), for which
personal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national
economic conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
These procedures include general and selected reductions in appropriations
spending.
By 13 constitutional amendments, the last adopted in 1993, Ohio voters have
authorized the incurrence of State debt to the payment of which taxes or excises
were pledged. As of September 1994, $671 million (excluding certain highway
bonds payable primarily from highway use charges) of this debt was outstanding
or awaiting delivery.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Such state obligations are generally secured
by annual appropriation lease agreements with the state.
In general, payment obligations under lease-purchase agreements of Ohio
public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Additionally, state and local agen-
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cies issue revenue obligations that are payable from revenues from or relating
to certain facilities (but not from taxes). By judicial interpretation, these
obligations are not "debt" within constitutional provisions.
Local school districts in Ohio receive a major portion (on a state-wide
basis, recently approximately 46%) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 98 districts from
voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, is pending questioning the
constitutionality of Ohio's system of school funding. A small number of the
State's 612 local school districts have in any year required special assistance
to avoid year-end deficits. A current program provides for school district cash
need borrowing directly from commercial lenders, with diversion of State subsidy
distributions to repayment if needed.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations, and, with other local governments,
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced significant
financial problems, there are statutory procedures for a joint State/local
commission to monitor the municipality's fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. Since inception in
1979, these procedures have been applied to 23 cities and villages; for 18 of
them the fiscal situation was resolved and the procedures terminated.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited the amount
of the aggregate levy (including a levy for unvoted general obligations) of
property taxes by all overlapping subdivisions, without a vote of the electors
or a municipal charter provision, to 1% of true value in money, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
YIELD AND TOTAL RETURN
The yield of the Ohio Insured Long-Term Portfolio for the 30-day period
ended November 30, 1996 was 4.83%.
The average annual total return of the Ohio Insured Long-Term Portfolio for
the one- and five-year periods ended November 30, 1996, and since the inception
of the Fund on June 18, 1990 was +5.75% and +7.98% and +8.62%, respectively. The
average annual total return of the Ohio Money Market Portfolio for the one- and
five-year periods ended November 30, 1996, and since the inception of the Fund
on June 18, 1990 was +3.42%, +3.04% and +3.48%, respectively.
CALCULATION OF YIELD
The current yield of the Ohio 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 asset value for the period, and then multiplying it
by 365/7 to get the annualized current yield. The calculation 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 dividends reinvested,
may also be calculated for the Portfolio by adding 1 to the net change for seven
days, raising the sum to the 365/7 power, and subtracting 1 from the result.
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Set forth below is an example, for purposes of illustration only, of the
current and effective yield calculations for the Ohio Money Market Portfolio for
the 7-day base period ended November 30, 1996.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
----------------------
11/30/96
----------------------
<S> <C>
Value of account at beginning of period...................................... $1.00000
Value of same account at end of period*...................................... 1.00066
--------
Net Change in account value.................................................. $ .00066
Annualized Current Net Yield
(Net Change X 365/7) / average net asset value............................. 3.43%
Effective Yield
[(Net Change) + 1] 365/7 -1................................................ 3.49%
Average Weighted Maturity of investments..................................... 62 days
</TABLE>
- - ---------------
* Exclusive of any capital changes.
The Money Market Portfolio seeks to maintain, but does not guarantee a
constant net asset value of $1.00. The yield of the Portfolio will fluctuate.
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 Fund has obtained private insurance that partially protects the Money Market
Portfolio against default of principal or interest payments on the instruments
it holds, and against bankruptcy by issuers and credit enhancers of these
instruments. Treasury and other U.S. Government Securities held by the Portfolio
are excluded from this coverage. The annualization of a week's dividend 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 factors set forth
in the preceding sentence, differences in the time periods compared, and
differences in the methods used in valuing portfolio instruments, computing net
asset value and calculating yield.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of the Vanguard Group of Investment Companies.
The Fund may 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 INDEX -- consists of more than 7,000 common equity
securities, 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 except
for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of approximately 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
capitalization 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.
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<PAGE> 39
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
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.
LEHMAN LONG-TERM TREASURY BOND INDEX -- 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 INDEX -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
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
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL (20 YEAR) BOND INDEX -- is a yield index on current coupon
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 include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publically
issued, fixed rate, non-convertible investment grade, dollar-denominated, SEC
registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market-weighted index that contains
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 $1.6 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 between 5 and 10
years. The index has a market value of over $700 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (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 greater than 10
years. The index has a market value of over $900 billion.
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<PAGE> 40
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or 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 performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
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 average
government money market funds with similar investment objectives and policies,
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 staff is supervised by the Senior Officers of the Fund.
The investment management staff is responsible for: maintaining the
specified 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 a Portfolio is known as "portfolio turnover"
and may involve the payment by the Portfolio of dealer mark-ups, underwriting
commissions and other transaction costs on the sales of securities as well as on
the reinvestment of the proceeds in other securities. The portfolio turnover
rate is not a limiting factor when management deems it desirable 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.
PORTFOLIO TRANSACTIONS
HOW TRANSACTIONS ARE AFFECTED
The types of securities in which the Portfolios invest are generally
purchased and sold through principal transactions, meaning that the Portfolios
normally purchase securities directly from the issuer or a primary market-maker
acting as principal for the securities on a net basis. Brokerage commissions are
not paid on these transactions, although the purchase price for securities
usually includes an undisclosed compensation. Purchases from underwriters of
securities typically include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers typically
include a dealer's mark-up (i.e., a spread between the bid and the asked
prices). During the fiscal years ended November 30, 1994, 1995 and 1996, the
Portfolios did not pay any brokerage commissions.
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HOW BROKERS AND DEALERS ARE SELECTED
Vanguard's Fixed Income Group chooses brokers or dealers to handle the
purchase and sale of the Portfolios' securities, and is responsible for getting
the best available price and most favorable execution for all transactions. When
the Portfolios purchase a newly issued security at a fixed price, the Group may
designate certain members of the underwriting syndicate to receive compensation
associated with that transaction. Certain dealers have agreed to rebate a
portion of such compensation directly to the Portfolios to offset their
management expenses. The Group is required to seek best execution of all
transactions and is not authorized to pay a brokage commission in excess of that
which another broker might have charged for effecting the same transaction
solely on account of the receipt of research or other services.
HOW THE REASONABLENESS OF BROKERAGE COMMISSIONS IS EVALUATED
As previously explained, the types of securities that the Portfolios
purchase do not normally involve the payment of brokerage commissions. If any
brokerage commissions are paid, however, the Fixed Income Group will evaluate
their reasonableness by considering: (a) historical commission rates; (b) rates
which other institutional investors are paying, based upon publicly available
information; (c) rates quoted by brokers and dealers; (d) the size of a
particular transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular transaction in
terms of both execution and settlement; (f) the level and type of business done
with a particular firm over a period of time; and (g) the extent to which the
broker or dealer has capital at risk in the transaction.
PURCHASE OF SHARES
Each Portfolio of the Fund reserves the right in its sole discretion (i) to
suspend the offering of its shares, (ii) to reject purchase orders when in the
judgment of management such rejection is in the best interest of a Portfolio,
and (iii) to reduce or waive the minimum investment for or any other
restrictions on initial and subsequent investments under circumstances where
certain economies can be achieved in sales of a Portfolio's shares.
STOCK CERTIFICATES. Your purchase will be made in full and fractional
shares of a Portfolio calculated to three decimal places. Shares are normally
held on deposit for shareholders by the Fund, which will send to shareholders a
statement of shares owned at the time of each transaction. This saves the
shareholders the trouble of safekeeping the certificates and saves the Fund the
cost of issuing certificates. For the Insured Long-Term Portfolio, share
certificates are available at any time upon written request at no additional
cost to shareholders. No certificates will be issued for the Money Market
Portfolio, nor will certificates be issued for fractional shares in the Insured
Long-Term Portfolio.
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
reasonably practicable for a Portfolio 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 a Portfolio to make payment
wholly or partly in cash, a Portfolio may pay the redemption price in whole or
in part by a distribution in kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission. Investors may incur
brokerage charges on the sale of such securities so received in payment of
redemptions.
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No charge is made by a Portfolio for redemptions except for wire
redemptions of under $5,000 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
Portfolio's net asset value.
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 authenticity of the person who has
authorized a redemption from your account. SIGNATURE GUARANTEES ARE REQUIRED IN
CONNECTION WITH: (1) ALL REDEMPTIONS, REGARDLESS OF THE AMOUNT INVOLVED, WHEN
THE PROCEEDS ARE TO BE PAID TO SOMEONE OTHER THAN THE REGISTERED OWNERS; AND (2)
SHARE TRANSFER REQUESTS.
A signature guarantee may be obtained from a bank, broker, or any other
guarantor that Vanguard deems to be acceptable.
A signature guarantee 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 Ohio Insured Long-Term Portfolio is
described in detail in the Prospectus.
OHIO MONEY MARKET PORTFOLIO. The net asset value per share of the Ohio
Money Market Portfolio is determined on each day that the New York Stock
Exchange is open.
It is the policy of the Ohio Money Market Portfolio to attempt to maintain
a net asset value of $1.00 per share for purposes of sales and redemptions. The
constant net asset value is not guaranteed. 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 Ohio Money
Market Portfolio are valued on the basis of amortized cost which does not take
into account unrealized capital gains or losses. This involves valuing an
instrument at-cost and there-after assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. While this method provides
certainty in valuation, 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
under Calculation of Yield 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 by 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 somewhat higher yield than would result
from investment in a fund utilizing solely market values, and existing investors
in the Portfolio would receive less investment income. The converse would apply
in a period of rising interest rates.
The valuation of the Ohio 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 conditions.
Accordingly, the Fund has agreed to maintain a dollar-weighted average portfolio
maturity for the Ohio 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 high
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 quotations
deviates from $1.00 per share based on amortized cost. The extent of any
B-12
<PAGE> 43
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 initiated. In
the event the Trustees determine that a deviation exists which may result 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 selling portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity;
withholding dividends; making a special capital distribution; redeeming shares
in kind; or establishing a net asset value per share by using available market
quotations.
B-13
<PAGE> 44
MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The Fund's Officers, under the supervision of the Board of Trustees, manage
the day-to-day operations of the Fund. The Trustees set broad policies for the
Fund and choose its Officers. A list of the Trustees and Officers of the Fund
and a brief statement of their present positions and principal occupations
during the past five years is set forth below. The mailing address of the Fund's
Trustees and Officers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman and Trustee*
Chairman and Director of The Vanguard Group, Inc. and of each of the
investment companies in The Vanguard Group; Director of The Mead
Corporation, General Accident Insurance and Chris-Craft Industries, Inc.
JOHN J. BRENNAN, President, Chief Executive
Officer and Trustee*
President, Chief Executive Officer and Director of The Vanguard Group, Inc.
and each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Trustee
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Director of
Sun Company, Inc. and Westinghouse Electric Corporation.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and Pacific Tea Company, ALCO Standard
Corp., Raytheon Company, Knight-Ridder, Inc., Massachusetts Mutual Life
Insurance Co., and Trustee Emerita of Wellesley College.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications
Company.
JAMES O. WELCH, JR., Trustee
Retired Chairman of Nabisco Brands Inc. and retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corporation.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co. and President, New York
University; Director of Pacific Gas and Electric Company, Procter & Gamble
Company and NACCO Industries.
ALFRED M. RANKIN, JR., Trustee
Chairman, President, Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company, and The Standard Products Company.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary
of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- - ---------------
* Mr. Bogle and the Officers of the Fund are "interested persons" as defined in
the Investment Company Act of 1940.
THE VANGUARD GROUP
Vanguard Ohio Tax-Free Fund is a member of The Vanguard Group of Investment
Companies. Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and other Funds in the Group obtain at cost virtually all
of their corporate management, administrative and distribution services.
Vanguard also provides investment advisory services on an at-cost basis to
several other Vanguard Funds, including the Vanguard Ohio Tax-Free Fund.
B-14
<PAGE> 45
Vanguard employs a supporting staff of management and administrative
personnel 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.
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 adviser
for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
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. The amounts which each of the Funds has 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,
1996, Vanguard Ohio Tax-Free Fund had contributed capital of $41,000 to Vanguard
representing 0.2% of Vanguard's capitalization. The Funds' Service Agreement
provides as follows: (1) each Vanguard Fund may invest a maximum of 0.40% of its
assets in Vanguard and (2) there is no restriction on the maximum cash
investment that the Vanguard Funds may make in Vanguard.
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
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended November 30, 1996, the Fund's share at Vanguard's actual net
costs of operations relating to management and administrative services including
transfer agency totaled approximately $619,000.
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
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies 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 organize 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 remaining
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 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 average month-end net assets. During the year ended November 30, 1996,
the Fund paid approximately $102,000 of the Group's distribution and marketing
expenses.
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to the Fund, Vanguard Municipal Bond Fund, Vanguard Bond Index Fund,
Vanguard Money Market Reserves, Vanguard Florida Insured Tax-Free Fund, Vanguard
New Jersey Tax-Free Fund, Vanguard New York Insured Tax-Free Fund, Vanguard
Pennsylvania Tax-Free Fund, Vanguard California Tax-Free Fund, Vanguard
Tax-Managed Fund, the Aggressive Growth Portfolio of Vanguard Horizon Fund,
Vanguard Index Trust, Vanguard Admiral
B-15
<PAGE> 46
Funds, Vanguard International Equity Index Fund, Vanguard Balanced Index Fund,
Vanguard Institutional Index Fund, Vanguard REIT Index Portfolio, Vanguard
Treasury Fund, several portfolios of Vanguard Variable Insurance Fund, several
Portfolios of Vanguard Fixed Income Securities Fund, a portion of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as well as several
indexed separate accounts. These services are provided on an at-cost basis from
a money management staff employed directly by Vanguard. The compensation and
other expenses of this staff are paid by the Funds utilizing these services.
During the year ended November 30, 1994, 1995 and 1996, the Fund paid
approximately $34,000, $43,000 and $49,000 respectively, 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, 1996, the Fund paid
$1,000 in Trustee's 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, 1996, the Fund's
proportionate share of remuneration paid to all Officers of the Fund, as a
group, was approximately $13,044.
Trustees who are not officers receive an annual fee upon retirement equal
to $1,000 for each year of service on the board up to a maximum of $15,000.
Under its retirement plan, Vanguard contributes annually an amount equal to 10%
of each officer's annual compensation plus 5.7% of that part of the officer's
compensation during the year, if any, that exceed the Social Security Taxable
Wage Base then in effect. Under Vanguard's thrift plan, all employees are
permitted to make pre-tax contributions in a maximum amount equal to 4% of total
compensation. Vanguard matches the basic contribution on a 100% basis. During
the year ended November 30, 1996 the Fund's proportionate share of retirement
benefits paid to all officers of the Fund, as a group, was approximately $300.
The following table provides detailed information with respect to the
amounts paid or accrued for the Trustees for the fiscal year ended November 30,
1996.
VANGUARD OHIO TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF TRUSTEES FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO TRUSTEES(2)
- - --------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $143 $23 $15,000 $65,000
Robert E. Cawthorn $143 $17 $13,000 $65,000
Burton G. Malkiel $143 $15 $15,000 $65,000
Alfred M. Rankin, Jr. $143 $12 $15,000 $65,000
John C. Sawhill $143 $14 $15,000 $65,000
James O. Welch, Jr. $143 $18 $15,000 $65,000
J. Lawrence Wilson $143 $13 $15,000 $65,000
</TABLE>
- - ---------------
(1)As interested Trustees, Messrs. Bogle and Brennan receive no compensation for
their service as Trustees.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Director or Trustee of 34 Vanguard
Funds (33 in the case of Mr. Malkiel).
B-16
<PAGE> 47
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Pennsylvania business trust on March 16, 1990.
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
conversion, 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
shareholders, 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 Act of 1940, shares
shall be voted by individual class; and (ii) when the matter 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
outstanding, 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; and
2) Subject to the majority vote of shares of the Fund outstanding, the
Trustees may sell and convert into money the assets of the Fund and
distribute such assets ratably among the shareholders of the Fund.
Upon completion of the distribution of the remaining proceeds or 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 obligations
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 request,
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 circumstances in which the Fund itself would be unable to meet its
obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended November 30, 1996 and
the financial highlights for each of the periods presented, appearing in the
Fund's 1996 Annual Report to Shareholders, and the report thereon of Price
Waterhouse LLP, independent accountants, also appearing therein, are
incorporated by reference in this Statement of Additional Information. The
Fund's 1996 Annual Report to Shareholders is available upon request.
B-17
<PAGE> 48
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 authorities and corporations, 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 facilities.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured 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 payable
only from the revenues derived from a particular facility or class of facilities
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+ or SP-1 by
Standard & Poor's Corp. or MIG-1 or MIG-2 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, Inc.). The Fund may invest in
unrated notes of issuers considered by the Board of Trustees to be of credit
quality comparable to that required for rated notes.
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 ability
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 insured 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, they are also secured by the full faith and credit of the United
States.
Note obligations with demand or put options may have a stated maturity in
excess of one year, but permit any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal 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 normally 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
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Corporation 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
absolute standards of quality. Consequently, municipal bonds with the same
maturity, 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 Vanguard's Fixed Income Group 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 issuance
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
B-18
<PAGE> 49
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.
Similarly, from time to time proposals have been introduced before state
and local legislatures to restrict or eliminate the state and local 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 each Portfolio to achieve its respective 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.
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 considered "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 standing; 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 extremely poor
prospects for ever attaining any real investment standing.
Description of Moodys' 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 although 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
principal 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 conditions
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 obligations; BB is being paid;
D -- in default, 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.
Excerpt from Standard & Poor's Corporation's rating of municipal notes
issues: 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
designation 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.
B-19
<PAGE> 50
APPENDIX B -- MUNICIPAL LEASE OBLIGATIONS
Each Portfolio may invest in municipal lease obligations. Such securities
will be treated as liquid under the following guidelines established by the
Board of Trustees:
1. The obligation has been rated "investment grade" by at least one 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 institutional
investors.
4. The investment adviser has determined that the obligation, or a
comparable lessee security, trades in the institutional marketplace at least
periodically, 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
property 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 opinion
from recognized bond counsel that lease payments would not be considered
property of the lessor's estate in the event of lessor's bankruptcy.
B-20
<PAGE> 51
PART C
VANGUARD OHIO 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, 1996, including Price Waterhouse LLP's, report thereon, are incorporated by
reference, in the Statement of Additional Information, from the Registrant's
1996 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, 1996
2. Statement of Operations for the year ended November 30, 1996
3. Statement of Changes in Net Assets for each of the years ended November
30, 1995 and 1996
*4. Financial Highlights for each of the five years in the period ended
November 30, 1996, and for the period June 18, 1990 to November 30,
1990
5. Notes to Financial Statements
6. Report of Independent Accountants
- - ---------------
* In addition, the financial highlights for each of the respective periods
presented is included in Part A of this registration.
(B) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
---------------------------- ---------------------------------------------------
<S> <C>
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*
27 ......................... Financial Data Schedule*
</TABLE>
- - ---------------
* 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 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> 52
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of November 30, 1996 the number of shareholders of each Portfolio of the
Fund was as follows:
<TABLE>
<S> <C>
Insured Long-Term Portfolio......................................... 4,390
Money Market Portfolio.............................................. 3,091
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Articles of Incorporation.
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 appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final 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 Registrant
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,
Pennsylvania 19482; and the Registrant's Custodian, CoreStates Bank, N.A.,
Philadelphia, PA.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard 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
Registrant hereby 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> 53
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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 21st day of March, 1997.
VANGUARD OHIO TAX-FREE FUND
By: /s/ JOHN J. BRENNAN
---------------------------------------
(Raymond J. Klapinsky)
John J. Brennan,
President 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>
SIGNATURES
---------- TITLE DATE
----------------------- ---------------
<C> <S> <C>
By: /s/ JOHN C. Chairman of the Board March 21, 1997
BOGLE and Trustee
- - -------------------------------------------------------
(Raymond J. Klapinsky)
John C. Bogle*
By: /s/ JOHN J. President, Chief March 21, 1997
BRENNAN Executive Officer
- - ------------------------------------------------------- and Trustee
(Raymond J. Klapinsky)
John J. Brennan*
By: /s/ BARBARA B. HAUPTFUHRER Trustee March 21, 1997
- - -------------------------------------------------------
(Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*
By: /s/ BURTON G. Trustee March 21, 1997
MALKIEL
- - -------------------------------------------------------
(Raymond J. Klapinsky)
Burton G. Malkiel*
By: /s/ JOHN C. Trustee March 21, 1997
SAWHILL
- - -------------------------------------------------------
(Raymond J. Klapinsky)
John C. Sawhill*
By: /s/ ROBERT E. CAWTHORN Trustee March 21, 1997
- - -------------------------------------------------------
(Raymond J. Klapinsky)
Robert E. Cawthorn*
By: /s/ ALFRED M. RANKIN, Trustee March 22, 1997
JR.
- - -------------------------------------------------------
(Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*
By: /s/ JAMES O. WELCH, Trustee March 21, 1997
JR.
- - -------------------------------------------------------
(Raymond J. Klapinsky)
James O. Welch, Jr.*
By: /s/ J. LAWRENCE WILSON Trustee March 21, 1997
- - -------------------------------------------------------
(Raymond J. Klapinsky)
J. Lawrence Wilson*
By: /s/ RICHARD F. Treasurer and Principal March 21, 1997
HYLAND Financial Officer and
- - ------------------------------------------------------- Accounting Officer
(Raymond J. Klapinsky)
Richard F. Hyland*
By: /s/ RAYMOND J. KLAPINSKY Secretary March 21, 1997
- - -------------------------------------------------------
Raymond J. Klapinsky*
</TABLE>
* By Power of Attorney -- See File Number 2-14336, January 23, 1990.
Incorporated by Reference.
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<S> <C>
CONSENT OF INDEPENDENT ACCOUNTANTS................................................... EX-99.B11
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS................................... EX-99.B16
FINANCIAL DATA SCHEDULE.............................................................. EX-27
</TABLE>
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 7 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated December 31, 1996 relating to the financial
statements and financial highlights appearing in the November 30, 1996 Annual
Report to Shareholders of Vanguard Ohio Tax-Free Fund, which are incorporated by
reference into the Registration Statement. We also consent to the references to
us under the heading "Financial Highlights" in the Prospectus and under the
heading "Financial Statements" in the Statement of Additional Information.
Price Waterhouse LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
March 20, 1997
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD OHIO TAX-FREE FUND
INSURED LONG-TERM PORTFOLIO
1. AVERAGE ANNUAL TOTAL RETURN (As of November 30, 1996)
P (1 + T)(n) = ERV
<TABLE>
<S> <C> <C>
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 = +5.75%
N = 1
ERV = $1,057.45
Five Year
P = $1,000
T = +7.98%
N = 5
ERV = $1,467.99
Ten Year
P = $1,000
T = +8.62%*
N = *
ERV = $1,704.58*
</TABLE>
- - ---------------
* Since Inception June 18, 1990
2. YIELD (30 Days Ended November 30, 1996)
<TABLE>
<CAPTION>
a - b
------
<S> <C> <C>
Yield = 2 [ ( + 1)(6) - 1]
c X d
Where: a = dividends and interest paid during the period
b = expense dollars 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 = $884,765.04
b = $32,706.63
c = 18,361,791.328
d = $11.65
Yield = 4.83%
</TABLE>
<PAGE> 2
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD OHIO TAX-FREE FUND
MONEY MARKET PORTFOLIO
1. AVERAGE ANNUAL TOTAL RETURN (As of November 30, 1996)
P (1 + T)(n) = ERV
<TABLE>
<S> <C> <C>
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 = +3.42%
N = 1
ERV = $1,034.23
Five Year
P = $1,000
T = +3.04%
N = 5
ERV = $1,161.34
Ten Year
P = $1,000
T = +3.48%*
N = *
ERV = $1,246.85*
</TABLE>
- - ---------------
* Since Inception June 18, 1990
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000862341
<NAME> VANGUARD OHIO TAX-FREE FUND
<SERIES>
<NUMBER> 01
<NAME> OHIO INSURED LONG-TERM PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 202,265
<INVESTMENTS-AT-VALUE> 212,879
<RECEIVABLES> 4,090
<ASSETS-OTHER> 74
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 217,043
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 592
<TOTAL-LIABILITIES> 592
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 205,118
<SHARES-COMMON-STOCK> 18,542
<SHARES-COMMON-PRIOR> 16,930
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 697
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,636
<NET-ASSETS> 216,451
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,166
<OTHER-INCOME> 0
<EXPENSES-NET> 406
<NET-INVESTMENT-INCOME> 10,760
<REALIZED-GAINS-CURRENT> 1,004
<APPREC-INCREASE-CURRENT> (118)
<NET-CHANGE-FROM-OPS> 11,646
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,760
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,954
<NUMBER-OF-SHARES-REDEEMED> 3,016
<SHARES-REINVESTED> 674
<NET-CHANGE-IN-ASSETS> 19,495
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (309)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 25
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 413
<AVERAGE-NET-ASSETS> 205,253
<PER-SHARE-NAV-BEGIN> 11.63
<PER-SHARE-NII> 0.603
<PER-SHARE-GAIN-APPREC> 0.040
<PER-SHARE-DIVIDEND> 0.603
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.67
<EXPENSE-RATIO> 0.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000862341
<NAME> VANGUARD OHIO TAX-FREE FUND
<SERIES>
<NUMBER> 02
<NAME> OHIO MONEY MARKET PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 259,276
<INVESTMENTS-AT-VALUE> 259,276
<RECEIVABLES> 2,855
<ASSETS-OTHER> 107
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 262,238
<PAYABLE-FOR-SECURITIES> 7,368
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 910
<TOTAL-LIABILITIES> 8,278
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 253,968
<SHARES-COMMON-STOCK> 253,965
<SHARES-COMMON-PRIOR> 177,589
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 253,960
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,247
<OTHER-INCOME> 0
<EXPENSES-NET> 403
<NET-INVESTMENT-INCOME> 6,844
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 6,844
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,844
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 247,383
<NUMBER-OF-SHARES-REDEEMED> 177,257
<SHARES-REINVESTED> 6,250
<NET-CHANGE-IN-ASSETS> 76,376
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (8)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 410
<AVERAGE-NET-ASSETS> 203,626
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.034
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.034
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
