<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Vanguard
NEW JERSEY
TAX-FREE FUND A Member of The Vanguard Group
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROSPECTUS--MARCH 28, 1995
--------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
--------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
--------------------------------------------------------------------------------
INVESTMENT Vanguard New Jersey Tax-Free Fund (the "Fund") is an open-end
OBJECTIVE & non-diversified investment company that seeks to provide in-
POLICIES come that is exempt from federal and New Jersey personal in-
come taxes. The Fund will invest primarily in securities is-
sued by New Jersey state and local governments and public fi-
nancing authorities, but may also invest in securities of is-
suers other than New Jersey and its political subdivisions.
The Fund consists of a Money Market Portfolio and an Insured
Long-Term Portfolio, each of which has distinct investment
objectives and policies. The Portfolios are available only to
New Jersey residents. THE MONEY MARKET PORTFOLIO SEEKS TO
MAINTAIN, BUT DOES NOT GUARANTEE, A CONSTANT NET ASSET VALUE
OF $1.00 PER SHARE. ALTHOUGH THE MONEY MARKET PORTFOLIO IN-
VESTS IN HIGH QUALITY INSTRUMENTS, AN INVESTMENT IN THE PORT-
FOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERN-
MENT.
--------------------------------------------------------------------------------
OPENING AN Please complete and return the Account Registration Form. If
ACCOUNT you need assistance in completing this Form, please call the
Investor Information Department, Monday through Friday, from
8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to 4:00
p.m. (Eastern time). The minimum initial investment is $3,000
for each Portfolio or $500 for Uniform Gifts/Transfers to Mi-
nors Act accounts. The Fund is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees). Howev-
er, the Fund incurs expenses for investment advisory, manage-
ment, administrative and distribution services.
--------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation that you should know about the Fund before you invest.
It should be retained for future reference. A "Statement of
Additional Information" containing additional information
about the Fund has been filed with the Securities and Ex-
change Commission. This Statement is dated March 28, 1995,
and has been incorporated by reference into this Prospectus.
It may be obtained, without charge, by writing to the Fund or
by calling the Investor Information Department.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses........ 2
Financial Highlights. 3
Yield and Total Re-
turn................ 4
FUND INFORMATION
Investment Objective. 5
Investment Policies.. 5
Investment Risks..... 8
Who Should Invest.... 11
How to Compare Tax-
Free and Taxable
Yields.............. 11
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Implementation of
Policies........... 13
Investment Limita-
tions.............. 17
Management of the
Fund............... 18
Investment Adviser.. 19
Dividends, Capital
Gains and Taxes.... 20
The Share Price of
Each
Portfolio.......... 21
General Information. 23
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
SHAREHOLDER GUIDE
Opening an Account
and Purchasing
Shares............. 24
When Your Account
Will Be Credited... 27
Selling Your Shares. 28
Exchanging Your
Shares............. 30
Important Informa-
tion About Tele-
phone Transactions. 32
Transferring Regis-
tration............ 32
Other Vanguard Serv-
ices............... 33
</TABLE>
--------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
--------------------------------------------------------------------------------
<PAGE>
FUND EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for the 1994 fiscal year.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
----------------------------------------------------------------
<S> <C>
Sales Load Imposed on Purchases............................ None
Sales Load Imposed on Reinvested Dividends................. None
Redemption Fees*........................................... None
Exchange Fees.............................................. None
</TABLE>
<TABLE>
<CAPTION>
MONEY INSURED
MARKET LONG-TERM
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Management & Administrative Ex-
penses............................. 0.17% 0.17%
Investment Advisory Expense......... 0.01 0.01
12b-1 Fees.......................... None None
Other Expenses......................
Distribution Costs................. 0.03% 0.02%
Miscellaneous Expenses............. 0.00 0.01
Fund Insurance..................... None 0.00
---- ----
Total Other Expenses................ 0.03 0.03
---- ----
TOTAL OPERATING EXPENSES.......... 0.21% 0.21%
==== ====
</TABLE>
*Wire redemptions under $5,000 are subject to a $5 charge.
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Fund.
The following example illustrates the expenses that you would
incur on a $1,000 investment over various periods, assuming
(1) a 5% annual rate of return and (2) redemption at the end
of each period. As noted in the table above, the Fund charges
no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio............ $2 $7 $12 $27
Insured Long-Term Portfolio....... $2 $7 $12 $27
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE HIGHER OR LOWER THAN THOSE SHOWN.
--------------------------------------------------------------------------------
2
<PAGE>
FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period insofar as they relate to each of the
five years in the period ended November 30, 1994, have been
audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information should
be read in conjunction with the Fund's financial statements
and notes thereto, which are incorporated by reference in the
Statement of Additional Information and in this Prospectus,
and which appear, along with the report of Price Waterhouse
LLP, in the Fund's 1994 Annual Report to Shareholders. For a
more complete discussion of the Fund's performance, please
see the Fund's 1994 Annual Report to Shareholders which may
be obtained without charge by writing to the Fund or by call-
ing our Investor Information Department at 1-800-662-7447.
<TABLE>
<CAPTION>
---------------------------------------------------
MONEY MARKET PORTFOLIO
---------------------------------------------------
FEB. 3,**
1988
YEAR ENDED NOVEMBER 30, TO
---------------------------------------- NOV. 30,
1994 1993 1992 1991 1990 1989 1988
--------------------------------------------------------------------------------
<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..... .025 .023 .030 .045 .056 .062 .041
Net Realized and
Unrealized Gain (Loss) on
Investments.............. -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OP-
ERATIONS................ .025 .023 .030 .045 .056 .062 .041
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Invest-
ment Income.............. (.025) (.023) (.030) (.045) (.056) (.062) (.041)
Distributions from Real-
ized Capital Gains....... -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS...... (.025) (.023) (.030) (.045) (.056) (.062) (.041)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD.................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL RETURN............... 2.49% 2.31% 3.04% 4.54% 5.78% 6.33% 4.19%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)................ $ 792 $ 724 $ 627 $ 547 $ 464 $ 259 $ 96
Ratio of Expenses to Aver-
age Net Assets............ .21% .20% .24% .24% .24% .23% .29%*
Ratio of Net Investment
Income to Average Net
Assets.................... 2.46% 2.29% 2.98% 4.43% 5.61% 6.16% 5.24%*
Portfolio Turnover Rate.... N/A N/A N/A N/A N/A N/A N/A
</TABLE>
*Annualized.
**Commencement of operations.
3
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------
INSURED LONG-TERM PORTFOLIO
--------------------------------------------------------------
FEB. 3,**
1988
YEAR ENDED NOVEMBER 30, TO
-------------------------------------------------- NOV. 30,
1994 1993 1992 1991 1990 1989 1988
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 11.77 $11.18 $10.75 $10.51 $10.45 $10.01 $10.00
-------- ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.. .622 .637 .659 .676 .692 .708 .569
Net Realized and
Unrealized Gain (Loss)
on Investments........ (1.307) .725 .438 .245 .073 .440 .010
-------- ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS.......... (.685) 1.362 1.097 .921 .765 1.148 .579
-----------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (.622) (.637) (.659) (.676) (.692) (.708) (.569)
Distributions from
Realized Capital
Gains................. (.063) (.135) (.008) (.005) (.013) -- --
-------- ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (.685) (.772) (.667) (.681) (.705) (.708) (.569)
-----------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $ 10.40 $11.77 $11.18 $10.75 $10.51 $10.45 $10.01
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
TOTAL RETURN............ (6.10)% 12.53% 10.48% 9.01% 7.66% 11.80% 5.97%
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)...... $ 645 $ 748 $ 572 $ 434 $ 245 $ 129 $ 49
Ratio of Expenses to
Average Net Assets..... .21% .20% .25% .24%+ .25%+ .24%+ .29%*+
Ratio of Net Investment
Income to Average Net
Assets................. 5.53% 5.47% 5.99% 6.33% 6.73% 6.88% 7.06%*
Portfolio Turnover Rate. 13% 12% 34% 18% 7% 0% 0%
</TABLE>
*Annualized.
+Insurance expenses represent .01% .01%, .02% and .03%, respectively.
**Commencement of operations.
--------------------------------------------------------------------------------
YIELD AND From time to time a Portfolio of the Fund may advertise its
TOTAL RETURN yield and total return. Both yield and total return figures
are based on historical earnings and are not intended to in-
dicate future performance. The "total return" of a Portfolio
refers to the average annual compounded rates of return over
one-, five- and ten-year periods or over the life of a Port-
folio (as stated in the advertisement) that would equate an
initial amount invested at the beginning of a stated period
to the ending redeemable value of the investment, assuming
the reinvestment of all dividend and capital gains distribu-
tions.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "30-day yield" of the
Insured Long-Term Portfolio is calculated by dividing the net
investment income per share earned during a 30-day period by
the net asset value per share on the last day of the period.
Net investment income includes interest and dividend income
earned on the Portfolio's securities; it is net of all ex-
penses and all recurring and nonrecurring charges that have
been applied to all shareholder accounts. The yield calcula-
tion assumes that the net investment income earned over 30
days is compounded monthly for six months and then
annualized.
4
<PAGE>
The "seven-day" or "current" yield of the Money Market Port-
folio reflects the income earned by a hypothetical account in
the Portfolio during a seven-day period, expressed as an an-
nual percentage rate. The "effective yield" of the Money Mar-
ket Portfolio assumes the income over the seven-day period is
reinvested weekly, resulting in a slightly higher stated
yield through compounding.
Methods used to calculate advertised yields are standardized
for all money market and bond funds. However, these methods
differ from the accounting methods used by the Portfolios to
maintain their books and records, and so advertised yields
may not fully reflect the income paid to your own account or
the yield reported in the Portfolio's Annual Report to Share-
holders.
--------------------------------------------------------------------------------
INVESTMENT The Fund consists of the New Jersey Money Market Portfolio
OBJECTIVE and the New Jersey Insured Long-Term Portfolio, each of which
has a distinct investment objective:
THE FUND SEEKS . The objective of the NEW JERSEY MONEY MARKET PORTFOLIO is
TO PROVIDE to provide investors with income that is exempt from both
INCOME THAT IS federal and New Jersey personal income taxes. The Portfolio
EXEMPT FROM also seeks to maintain, but does not guarantee, a constant
FEDERAL AND net asset value of $1.00 per share. The Portfolio invests
NEW JERSEY in high-quality instruments, and an investment in the
INCOME TAXES Portfolio is neither insured nor guaranteed by the U.S.
Government.
. The objective of the NEW JERSEY INSURED LONG-TERM PORTFOLIO
is to provide investors with a high level of income that is
exempt from federal and New Jersey personal income taxes.
The two Portfolios of the Fund are available only to invest-
ors who reside in New Jersey. There is no assurance that ei-
ther Portfolio of the Fund will achieve its stated objective.
The investment objective of each Portfolio is fundamental and
so may not be changed without the approval of a majority of
the Fund's shareholders.
--------------------------------------------------------------------------------
INVESTMENT Each Portfolio of the Fund will invest at least 80% of its
POLICIES net assets in New Jersey municipal securities, exclusive of
New Jersey AMT bonds (see page 6). New Jersey municipal secu-
rities are debt obligations issued by New Jersey state and
local governments and public financing authorities (and by
certain U.S. territories) that provide interest income that
is exempt from both federal and New Jersey personal income
taxes. The New Jersey municipal securities described above,
may include securities in which the tax exempt interest rate
is determined by an index, swap or some other formula. Al-
though both invest primarily in New Jersey municipal obliga-
tions, the two Portfolios differ in terms of credit quality
and maturity standards.
5
<PAGE>
THE MONEY Under normal circumstances, the New Jersey Money Market Port-
MARKET folio will invest at least 80% of its net assets (and 80% of
PORTFOLIO WILL the aggregate principal amount of all of its investments) in
INVEST IN the following high quality, short-term New Jersey municipal
SHORT-TERM NEW securities:
JERSEY
MUNICIPAL . Municipal notes and variable rate demand instruments, in-
SECURITIES cluding derivative securities, rated MIG-1 or VMIG-1, or P-
1 by Moody's Investors Service, Inc. ("Moody's") or SP-1+,
SP-1, A-1+, or A-1 by Standard & Poor's Corporation ("Stan-
dard & Poor's");
. Tax-exempt commercial paper rated P-1 by Moody's or A-1+ or
A-1 by Standard & Poor's;
. Municipal, including derivative securities, bonds with an
effective maturity of 13 months or less rated a minimum of
A by Moody's or Standard & Poor's; and
. Unrated municipal notes considered by the Board of Trustees
to be comparable in credit quality to securities rated MIG-
1 by Moody's or SP-1+ or SP-1 by Standard & Poor's.
In seeking to provide a stable share price of $1.00, the New
Jersey Money Market Portfolio is expected to maintain an av-
erage weighted maturity of 90 days or less, and will purchase
securities with an effective maturity of 13 months or less
which are eligible for purchase under Rule 2a-7 of the In-
vestment Company Act of 1940 (the "1940 Act").
Normally, the New Jersey Money Market Portfolio will seek to
invest substantially all of its assets in the short-term New
Jersey municipal obligations listed above. However, under
certain circumstances, such as a temporary decline in the is-
suance of New Jersey obligations, the Portfolio may invest up
to 20% of its assets in the following: short-term municipal
securities issued outside of New Jersey (the income from
which may be subject to New Jersey income taxes) or certain
taxable fixed-income securities (the income from which may be
subject to federal and New Jersey income taxes).
Subject to the same 20% limit, the Portfolio is also autho-
rized to invest in short-term New Jersey AMT bonds. The in-
come from New Jersey AMT bonds is exempt from regular federal
and New Jersey income taxes, but may be a tax preference item
for purposes of the federal alternative minimum tax, see "Im-
plementation of Policies."
Under unusual circumstances, such as a national financial
emergency, the Portfolio reserves the right to invest more
than 20% of its assets in securities other than New Jersey
municipal obligations. In most instances, however, the New
Jersey Money Market Portfolio will seek to avoid such hold-
ings in an effort to provide income that is fully exempt from
federal and New Jersey personal income taxes.
6
<PAGE>
THE INSURED Under normal circumstances, the New Jersey Insured Long-Term
LONG-TERM Portfolio will invest at least 80% of its net assets (and 80%
PORTFOLIO of the aggregate principal amount of all of its investments)
INVESTS IN in insured New Jersey municipal securities.
INSURED NEW
JERSEY Insured municipal bonds are those in which scheduled payments
MUNICIPAL of interest and principal are guaranteed by a private (non-
SECURITIES governmental) insurance company. THE INSURANCE FEATURE DOES
NOT GUARANTEE THE MARKET VALUE OF THE MUNICIPAL BONDS OR THE
VALUE OF THE SHARES OF THE NEW JERSEY INSURED LONG-TERM PORT-
FOLIO. The insurance refers to the face or par value of the
securities in the Portfolio, not the market values of those
securities or the share price of the Portfolio. See "Imple-
mentation of Policies" for a description of the insurance
feature of the New Jersey Insured Long-Term Portfolio.
The New Jersey Insured Long-Term Portfolio is expected to
maintain a dollar weighted average maturity between 15 and 25
years. BONDS WITH LONGER MATURITIES USUALLY OFFER HIGHER
YIELDS, BUT ARE ALSO SUBJECT TO GREATER MARKET FLUCTUATIONS
AS INTEREST RATES CHANGE. See "Investment Risks."
Normally, the New Jersey Insured Long-Term Portfolio seeks to
invest substantially all of its assets in insured New Jersey
municipal obligations. However, under certain circumstances,
the Portfolio may invest up to 20% of its assets in any com-
bination of the following securities:
. Uninsured, long-term New Jersey municipal securities rated
a minimum of Aa by Moody's or AA by Standard & Poor's;
. Uninsured, short-term municipal securities, issued in New
Jersey or in other states, with the same quality standards
that apply for the Money Market Portfolio;
. Certain taxable fixed-income securities, including U.S.
Government securities; and
. Certain tax-exempt municipal securities issued by other
states that have similar characteristics to the securities
typically purchased by the Portfolio.
In such cases, a portion of the Portfolio's income may be
subject to New Jersey income taxes, federal income taxes, or
both. (See page 20).
Subject to the same 20% limit, the Portfolio is authorized to
invest in New Jersey AMT bonds. The income from New Jersey
AMT bonds is exempt from federal and New Jersey income taxes,
but may be a tax preference item for purposes of the federal
alternative minimum, see "Implementation of Policies."
Under unusual circumstances, such as a national financial
emergency, the Portfolio reserves the right to invest more
than 20% of its assets in securities other than New Jersey
municipal obligations. In most instances, however, the New
Jersey Insured Long-Term Portfolio will seek to avoid such
holdings in an effort to provide income that is fully exempt
from federal and New Jersey personal income taxes.
7
<PAGE>
EACH PORTFOLIO Although the Fund is organized as a non-diversified invest-
WILL DIVERSIFY ment company, each Portfolio of the Fund intends to diversify
ITS HOLDINGS its holdings of New Jersey municipal securities by com-
plying with Subchapter M of the Internal Revenue Code. In
part, Subchapter M requires that, at the close of each quar-
ter of the taxable year, those issues which represent more
than 5% of each Portfolio's assets be limited in aggregate to
50% of each Portfolio, and that no one issue exceed 25% of a
Portfolio's total assets. As of November 30, 1994, the New
Jersey Money Market Portfolio held securities of 39 issuers,
with the largest holding representing 17.6% of the Portfo-
lio's assets; the New Jersey Insured Long-Term Portfolio held
securities of 79 issuers, with the largest holding represent-
ing 8.67% of the Portfolio's assets.
Under New Jersey law, in order for a mutual fund to be eligi-
ble to pay dividends to New Jersey residents which will be
exempt from New Jersey personal income taxes, it must have at
least 80% of the aggregate principal amount of all of its in-
vestments, excluding financial options, futures, forward con-
tracts, or other similar financial instruments related to in-
terest-bearing obligations, obligations issued at a discount
or bond indexes related thereto (to the extent such instru-
ments are authorized by section 851(b) of the Internal Reve-
nue Code of 1986, as amended), cash and cash items, invested
in New Jersey municipal obligations (and other qualifying ob-
ligations). In addition, it may have no investments other
than interest-bearing obligations, obligations issued at a
discount, and cash and cash items and financial options,
futures, forward contracts, or other similar financial in-
struments related to interest-bearing obligations, obliga-
tions issued at a discount or bond indexes related thereto.
The Fund's policy of investing at least 80% of its assets in
New Jersey's municipal securities under normal circumstances
is fundamental and may not be changed without shareholder ap-
proval. The other investment policies described above are not
fundamental and so may be changed by the Board of Trustees
without shareholder approval.
--------------------------------------------------------------------------------
INVESTMENT As mutual funds investing in municipal securities, the two
RISKS Portfolios of the Fund are subject to both interest rate,
credit, call, income and manager risk. However, the risk
THE FUND IS characteristics of the two Portfolios vary because of differ-
SUBJECT TO ing maturity and credit quality standards.
INTEREST RATE,
CREDIT, CALL INTEREST RATE RISK is the potential for fluctuations in the
AND INCOME price of a Portfolio's investments due to changing interest
RISK rates. In general, bond prices vary inversely with interest
rates. If interest rates rise, bond prices generally decline;
if interest rates fall, bond prices generally rise. In addi-
tion, for a given change in interest rates, longer-maturity
bonds exhibit greater price fluctuations than shorter-matu-
rity bonds. To compensate investors for this risk, longer-ma-
turity bonds generally offer higher yields than shorter-matu-
rity bonds, other factors, including credit quality, being
equal. Interest rate risk may be increased or decreased when
a portfolio initiates or purchases derivative New Jersey mu-
nicipal securities. Such derivative securities rely on so-
phisticated interest rate calculation mechanisms. For certain
types of derivative bonds, the magnitude of
8
<PAGE>
increases and decreases in their price may be proportionately
larger or smaller than, or inverse to, the price changes that
broad market interest rate fluctuations would produce in long
term bonds.
CREDIT RISK is the possibility that a bond issuer will fail
to make timely payments of interest or principal to a portfo-
lio. The credit risk of a portfolio depends on the credit
quality of its underlying securities. In general, the lower
the credit quality of a portfolio's municipal securities, the
higher a portfolio's yield, all other factors such as matu-
rity being equal.
CALL RISK is the possibility that, during periods of falling
interest rates, a municipal security with a high stated in-
terest rate will be prepaid (or "called") prior to its ex-
pected maturity date. As a result, a portfolio will be re-
quired to invest the unanticipated proceeds at lower interest
rates, and the portfolio's income may decline. Call provi-
sions are most common for intermediate- and long-term munici-
pal bonds.
INCOME RISK is the potential for a decline in a portfolio's
income due to falling market interest rates. Because a port-
folio's income is based on interest rates, which can fluctu-
ate substantially over short periods, income risk is expected
to vary from portfolio to portfolio.
THE FUND IS Finally, the investment adviser manages the Fund's Portfolios
SUBJECT TO according to the traditional methods of "active" investment
MANAGER RISK management, which involve the buying and selling of securi-
ties based upon economic, financial and market analysis and
investment judgment. MANAGER RISK refers to the possibility
that the Fund's investment adviser may fail to execute a
Portfolio's investment strategy effectively. As a result, a
Portfolio may fail to achieve its stated objective.
Given the Portfolio's stated objectives and policies, inter-
est rate risk for the New Jersey Money Market Portfolio is
expected to be negligible. The Money Market Portfolio is ex-
pected to maintain a stable share price of $1.00. In con-
trast, interest rate risk for the New Jersey Insured Long-
Term Portfolio may be high. The average weighted maturity of
the Insured Long-Term Portfolio is expected to exceed 15
years, meaning that the Portfolio's share price will fluctu-
ate, sometimes substantially, when interest rates change.
The following chart illustrates the potential interest rate
risk of the New Jersey Insured Long-Term Portfolio. The chart
shows the market value of a $1,000 investment in a single
bond with the same yield and maturity characteristics as the
Insured Long-Term Portfolio on December 29, 1994, assuming a
1% and 2% increase or decrease in interest rates:
<TABLE>
<CAPTION>
HYPOTHETICAL VALUE OF $1,000 INVESTMENT
---------------------------------------
PERCENTAGE POINT CHANGE IN INTEREST RATES OF:
---------------------------------------------
30-DAY AVERAGE 1% 1% 2% 2%
PORTFOLIO YIELD MATURITY INCREASE DECREASE INCREASE DECREASE
--------- ------ ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Insured Long-Term 6.00% 15.1 years $908 $1,105 $826 $1,225
</TABLE>
9
<PAGE>
This chart is intended to provide you with general guidelines
for evaluating the effect of interest rate changes on the New
Jersey Insured Long-Term Portfolio and determining the degree
of interest rate risk you may be willing to assume. The yield
and price changes shown are purely for illustrative purposes,
and should not be taken as representative of current or fu-
ture yields or expected changes in the share price of the In-
sured Long-Term Portfolio.
CREDIT RISK IS Credit risk depends on the average quality of a Portfolio's
EXPECTED TO BE underlying securities and its degree of diversification. The
LOW New Jersey Money Market Portfolio invests primarily in high
quality, short-term New Jersey municipal securities, and the
New Jersey Insured Long-Term Portfolio invests primarily in
bonds insured by top-rated insurance companies against the
possible default of an issuer as to the timely payment of in-
terest and principal. As a result, the average credit quality
of each Portfolio is expected to be very high, and credit
risk is expected to be minimal.
Ordinarily, an investment company concentrating its invest-
ments in one state, such as the Fund, would be exposed to
greater credit risks than an investment company investing in
a nationally diversified portfolio of municipal securities.
These risks include possible tax law changes, a deterioration
in economic conditions, and differing levels of supply and
demand for New Jersey municipal obligations.
To minimize the effects of concentrating its investments in
New Jersey obligations, each Portfolio of the Fund intends to
diversify its holdings by complying with Subchapter M of the
Internal Revenue Code. (See "Investment Policies" for a de-
scription of the requirements of Subchapter M.) In addition,
the high-quality instruments held by the Money Market Portfo-
lio and the use of municipal bond insurance in the Insured
Long-Term Portfolio should minimize the credit risk associ-
ated with the Fund.
As of November 30, 1994, top ten portfolio holdings, based on
market value, represented 70.62% of the Money Market Portfo-
lio's net assets and 36.86% of the Insured Long-Term Portfo-
lio's net assets.
The following chart summarizes credit, interest rate, income
and call risks for the Fund's Portfolios.
<TABLE>
<CAPTION>
CREDIT INTEREST INCOME PREPAYMENT/
PORTFOLIO RISK RATE RISK RISK CALL RISK
-----------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Low Low High Very Low
Insured Long-Term Very Low High Low Medium
</TABLE>
--------------------------------------------------------------------------------
10
<PAGE>
WHO SHOULD The Fund is intended for New Jersey residents seeking income
INVEST that is exempt from federal and New Jersey personal income
taxes. As a rule, tax-free income is attractive to investors
NEW JERSEY in high federal and New Jersey tax brackets. You can deter-
RESIDENTS mine whether tax-exempt or taxable income is more attractive
SEEKING TAX- in your own case by comparing a Portfolio's tax-free yield
EXEMPT INCOME with the yield from a comparable taxable mutual fund invest-
ment. See "How to Compare Tax-Free and Taxable Yields."
Assuming that tax-free income is attractive in your own tax
bracket, you should base your selection of a Portfolio (or
Portfolios) on its expected price volatility and yield, and
your own investment objectives, risk preferences and time ho-
rizon.
The NEW JERSEY MONEY MARKET PORTFOLIO is intended for invest-
ors who are seeking a stable share price and minimal credit
risk. The yield on the Portfolio is expected to fluctuate
from day to day and to be lower on average than the yield
from the New Jersey Insured Long-Term Portfolio. The New Jer-
sey Money Market Portfolio is suitable as a short-term in-
vestment vehicle, emphasizing maximum protection of princi-
pal.
In contrast, the NEW JERSEY INSURED LONG-TERM PORTFOLIO is
intended for investors who are seeking the highest, most du-
rable streams of income and who can tolerate sometimes sharp
fluctuations in share price in pursuit of their income objec-
tives. The yield of the Portfolio is expected to be higher,
and the level of income provided more stable, than that of
the New Jersey Money Market Portfolio. However, because of
the potential volatility of the Portfolio's share price, the
New Jersey Insured Long-Term Portfolio is appropriate only
for those investors who can hold their investment over the
long term.
The Fund is intended to be a long-term investment vehicle and
is not designed to provide investors with a means of specu-
lating on short-term market movements. Investors who engage
in excessive account activity generate additional costs which
are borne by all of the Fund's shareholders. In order to min-
imize such costs the Fund has adopted the following policies.
The Fund reserves the right to reject any purchase request
(including exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient port-
folio management, either because of the timing of the invest-
ment or previous excessive trading by the investor. Addition-
ally, the Fund has adopted exchange privilege limitations as
described in the section "Exchange Privilege Limitations."
Finally, the Fund reserves the right to suspend the offering
of its shares.
--------------------------------------------------------------------------------
HOW TO COMPARE Before choosing a specific tax-exempt investment, such as a
TAX-FREE AND Portfolio of the Fund, you should determine if you would be
TAXABLE YIELDS better off with taxable or tax-exempt income in your tax
bracket. To compare taxable and tax-free income, you should
first determine your combined federal, state and local tax
bracket. Then you should calculate the "taxable equivalent
yield" for the Portfolio you are considering, and compare it
with the yield of a taxable investment with similar credit
and maturity characteristics.
11
<PAGE>
1. DETERMINE YOUR COMBINED TAX BRACKET. Your combined tax
bracket depends on whether you itemize state and local taxes
as a deduction on your federal return. If you do not itemize,
then your combined tax bracket is the sum of your federal,
state and local tax brackets.
If you do itemize, then your combined tax bracket is calcu-
lated as follows. First, calculate your effective state and
local tax bracket using the following formula:
Effective
Federal State & State &
( 100% - Tax ) X Local = Local
Bracket Bracket Bracket
For example, if you are in a 6.58% state and local tax
bracket and a 28% federal tax bracket, your effective state
and local tax bracket would be 4.74%:
(100% - 28%) X 6.58% = 4.74%
Second, add your effective state and local tax bracket to
your federal tax bracket to determine your combined tax
bracket:
Effective
Federal State & Combined
Tax + Local = Tax
Bracket Bracket Bracket
28% + 4.74% = 32.74%
2. CALCULATE YOUR TAXABLE EQUIVALENT YIELD. The taxable
equivalent yield for a Portfolio is based upon the Portfo-
lio's current tax-exempt yield and your combined tax bracket.
The formula is:
Portfolio's Tax-Free Yield Your Taxable
-------------------------------- = Equivalent
100% - Your Combined Tax Bracket Yield
For example, if you are in a combined tax bracket of 32.74%,
and a Portfolio's tax-free yield is 6%, the Portfolio's tax-
able equivalent yield would be 8.92%:
6%
------------- = 8.92%
100% - 32.74%
In this example, you would choose the tax-free investment if
the 8.92% taxable equivalent yield were greater than the tax-
able yield from a comparable investment (e.g., a taxable bond
fund of comparable maturity and credit quality).
--------------------------------------------------------------------------------
12
<PAGE>
IMPLEMENTATION The Fund's adviser uses a variety of investment vehicles to
OF POLICIES achieve each Portfolio's objective.
THE FUND Each Portfolio of the Fund invests principally in tax-exempt
INVESTS IN New Jersey municipal securities, which are debt obligations
MUNICIPAL issued by state and local governments and public financing
BONDS, NOTES authorities (and by certain U.S. territories) that provide
AND SECURITIES interest income which is exempt from federal and New Jersey
DERIVED FROM personal income taxes. Municipal securities include both mu-
MUNICIPAL nicipal bonds (those securities with maturities of five years
BONDS AND or more) municipal notes (those securities with maturities of
NOTES less than five years) and derivative securities (those secu-
rities in which a maturity may have been shortened by a de-
mand feature).
Municipal bonds are issued for a wide variety of reasons: to
construct public facilities, such as airports, highways,
bridges, schools, hospitals, housing, mass transportation,
streets, water and sewer works; to obtain funds for operating
expenses; to refund outstanding municipal obligations; and to
loan funds to various public institutions and facilities.
Certain industrial development bonds are also considered mu-
nicipal bonds if their interest is exempt from federal income
tax. Industrial development bonds are issued by, or on behalf
of, public authorities to obtain funds for various privately-
operated manufacturing facilities, housing, sports arenas,
convention centers, airports, mass transportation systems and
water, gas or sewage works.
General obligation municipal bonds are secured by the is-
suer's pledge of full faith, credit and taxing power. Revenue
or special tax bonds are payable from the revenues derived
from a particular facility or, in some cases, from a special
excise or other tax, but not from general tax revenue. Indus-
trial development bonds are ordinarily dependent on the
credit quality of a private authority.
Municipal notes are issued to meet the short-term funding re-
quirements of local, regional and state governments. Munici-
pal notes include tax anticipation notes, bond anticipation
notes, revenue anticipation notes, tax and revenue anticipa-
tion notes, construction loan notes, short-term discount
notes, tax-exempt commercial paper, demand notes, and similar
instruments. Demand notes permit an investor (such as the
Fund) to demand from the issuer payment of principal plus ac-
crued interest upon a specified number of days' notice.
THE FUND MAY Each Portfolio is authorized to invest up to 20% of its as-
INVEST IN AMT sets in so-called "AMT" bonds. AMT bonds are tax-exempt "pri-
BONDS vate activity" bonds issued after August 7, 1986, whose pro-
ceeds are directed at least in part to a private, for-profit
organization. While the income from AMT bonds is exempt from
regular federal income tax, it is a tax preference item for
purposes of the alternative minimum tax. The alternative min-
imum tax is a special separate tax that applies to a limited
number of taxpayers who have certain adjustments to income or
tax preference items.
13
<PAGE>
THE FUND MAY The Fund may invest in "Market Discount" bonds when, in the
INVEST IN opinion of the Fund's adviser, the investment will be advan-
MARKET tageous to the Fund's shareholders. A Market Discount bond is
DISCOUNT BONDS a bond purchased at a discount from its original issue price
after April 30, 1993 and with a maturity in excess of one
year from its issue date. In certain circumstances, disposi-
tion of a Market Discount bond will result in taxable ordi-
nary income to the extent of any gain realized.
Although the objective of the Fund is to provide income free
of federal income tax, certain market conditions may make
Market Discount bonds desirable investments. The Fund will
purchase Market Discount bonds only if the Fund's adviser ex-
pects that the purchase of these investments, on an after-tax
basis, will enhance the Fund's total return.
THE INSURED The New Jersey Insured Long-Term Portfolio may utilize bond
LONG-TERM futures contracts and options to a limited extent. Specifi-
PORTFOLIO MAY cally, the Portfolio may enter into futures contracts pro-
USE FUTURES vided that not more than 5% of its assets are required as a
CONTRACTS AND futures contract deposit; in addition, the Portfolio may en-
OPTIONS ter into futures contracts and options transactions only to
the extent that obligations under such contracts or transac-
tions represent not more than 20% of the Portfolio's assets.
Futures contracts and options may be used for several rea-
sons: to maintain cash reserves while simulating full invest-
ment; to facilitate trading; and to reduce transaction costs,
or to seek higher investment returns when a futures contract
is priced more attractively than the underlying municipal se-
curity or index. The Portfolio may not use futures contracts
or options transactions to leverage its net assets.
For example, in order to simulate full investment in bonds,
while maintaining liquidity to meet potential shareholder re-
demptions, the New Jersey Insured Long-Term Portfolio may in-
vest a portion of its assets in a bond futures contract. Be-
cause futures contracts only require a small initial margin
deposit, the Portfolio would then be able to maintain a cash
reserve to meet potential redemptions, while at the same time
remaining fully invested. Also, because the transaction costs
of futures and options may be lower than the costs of invest-
ing in bonds directly, it is expected that the use of futures
contracts and options may reduce the Portfolio's total trans-
action costs.
FUTURES The primary risks associated with the use of futures and op-
CONTRACTS AND tions are: (i) imperfect correlation between the change in
OPTIONS POSE market value of the bonds held by the Portfolio and the
CERTAIN RISKS prices of futures and options; and (ii) possible lack of a
liquid secondary market for a futures contract and the re-
sulting inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be min-
imized by investing in those contracts whose price fluctua-
tions are expected to resemble those of the Portfolio's un-
derlying securities. The risk that the Portfolio will be un-
able to close out a futures position will be minimized by en-
tering into such transactions on a national exchange with an
active and liquid secondary market. In general, the futures
market is more liquid than the
14
<PAGE>
municipal bond market; therefore, the Portfolio's liquidity
may be improved by investing in futures.
The risk of loss in trading futures contracts in some strate-
gies can be substantial, due both to the low margin deposits
required and the extremely high degree of leverage involved
in futures pricing. As a result a relatively small price
movement in a futures contract may result in immediate and
substantial loss (or gain) to the investor. When investing in
futures contracts, a Portfolio will segregate cash or cash
equivalents in the amount of the underlying obligation.
DERIVATIVE Derivative securities represent the purchaser's right to re-
SECURITIES ceive principal and interest payments from underlying bonds.
A Fund may purchase a derivative security from another port-
folio within the Vanguard Group, as permitted by the Invest-
ment Company Act of 1940 and applicable rules thereunder, or
from an outside financial institution. There are different
derivative structures. An example of the steps involved in
creating and using a derivative structure follows: 1) a de-
positor places the underlying bond into a trust supervised by
an independent party; 2) a financial institution provides the
purchasers the right, at periodic intervals, to tender the
derivative security; 3) the financial institution receives
the difference between the prevailing short-term interest
rate (which is paid to the Portfolio holding the derivative
security) and the coupon on the underlying bond in considera-
tion for providing the tender option; and 4) the tender op-
tion may be discontinued upon the occurrence of certain
events, in which case, the Fund which owns the derivative se-
curity should receive its proportional share of the under-
lying bond. The primary risks associated with the use of de-
rivative securities are the interest rate risks discussed un-
der "Investment Risks," the possible lack of a liquid second-
ary market, the risk that the other party in a contractual
derivative agreement cannot meet its obligations and the po-
tential for greater price volatility relative to the under-
lying security on which the derivative is based.
The Portfolios intend to limit the risk of derivative securi-
ties by purchasing only those derivative securities that are
consistent with a Portfolio's investment objectives and poli-
cies. The Portfolios will not use such instruments to lever-
age securities. Hence, derivative securities' contributions
to the overall market risk characteristics of a Portfolio
will not materially alter its risk profile and will be fully
representative of the Portfolio's maturity guidelines.
THREE TYPES OF To provide an added level of credit protection, the New Jer-
INSURANCE MAY sey Insured Long-Term Portfolio purchases securities which
BE USED IN THE have one of the following types of insurance: new issue, mu-
INSURED LONG- tual fund and secondary market insurance. A new issue insur-
TERM PORTFOLIO ance policy is purchased by a bond issuer who wishes to in-
crease the credit rating of a security. By paying a premium
and meeting the insurer's underwriting standards, the bond
issuer is able to obtain a high credit rating for the secu-
rity (usually Aaa from Moody's or AAA from Standard &
Poor's). New issue insurance policies are non-cancellable and
continue in force as long as the bonds are outstanding.
15
<PAGE>
A mutual fund insurance policy may be used to guarantee spe-
cific bonds only while owned by a mutual fund. The Insured
Long-Term Portfolio of the Fund has obtained a mutual fund
insurance policy from Financial Guaranty Insurance Company
("Financial Guaranty"), a AAA-rated insurance company. Based
upon the expected composition of the Portfolio, the annual
premiums for the policy are likely to range from 0.20% to
0.40% of the principal value of the bonds insured under the
policy, thereby reducing the Portfolio's current yield.
A secondary market insurance policy is purchased by an in-
vestor (such as the Insured Long-Term Portfolio) subsequent
to the bond's original issuance and generally insures a par-
ticular bond for the remainder of its term. The Portfolio may
purchase bonds which have already been insured under a sec-
ondary market insurance policy by a prior investor, or the
Portfolio may itself purchase such a policy from Financial
Guaranty for bonds that are currently uninsured.
An insured municipal bond in the Portfolio will typically be
covered by only one of the three policies. For instance, if a
bond is already covered by a new issue insurance policy or a
secondary market insurance policy, then that security will
not be insured under the Portfolio's mutual fund insurance
policy. All of the insurance policies used by the Portfolio
will be obtained only from insurance companies rated Aaa by
Moody's or AAA by Standard & Poor's.
THE INSURED Each Portfolio of the Fund observes strict maturity guide-
LONG-TERM lines as set forth in detail under "Investment Policies."
PORTFOLIO MAY These maturity standards are specified in terms of a Portfo-
REPORT AN lio's average weighted maturity. From time to time, however,
EFFECTIVE the Fund may also report an effective average weighted matu-
AVERAGE rity for the Insured Long-Term Portfolio, which reflects,
WEIGHTED among other items, the likelihood that a municipal bond or
MATURITY note held by the Portfolio may be redeemed or "called" prior
to its stated maturity date. For example, if the Portfolio
consists entirely of 20-year bonds, some of which may be
"called" prior to their stated maturity in 20 years, the
Portfolio's average weighted maturity will be 20 years, while
its effective average maturity will be shorter.
A Portfolio's effective average weighted maturity will be in-
fluenced by bond market conditions, and so may vary from day
to day, even if no change has been made to the Portfolio's
underlying investment securities. For example, if interest
rates decline, a greater proportion of a Portfolio's securi-
ties may be subject to call (redemption) prior to their
stated maturity. As a result, reflecting this increased call
risk, the effective average maturity of the Portfolio will
shorten, independent of actual purchases or sales of portfo-
lio securities.
TEMPORARY Except as described on Page 7, each Portfolio will not invest
INVESTMENTS in securities other than municipal bonds except that each
Portfolio may make temporary investments for defensive pur-
poses in (a) notes issued by or on behalf of municipal or
corporate issuers, obligations of the U.S. Government and its
agencies, commercial paper, bank certificates of deposit; (b)
investment companies investing in such securities which have
investment objectives consistent with those of the
16
<PAGE>
Portfolio to the extent permitted by the Investment Company
Act of 1940; and (c) any such securities or municipal bonds
subject to repurchase agreements.
THE FUND MAY Each Portfolio may purchase tax-exempt securities on a "when-
PURCHASE WHEN- issued" basis. In buying "when-issued" securities, a Portfo-
ISSUED lio commits to buy securities at a certain price even though
SECURITIES the securities may not be delivered for up to 45 days. The
Portfolio pays for the securities and begins earning interest
when the securities are actually delivered. As a consequence,
it is possible that the market price of the securities at the
time of delivery may be higher or lower than the purchase
price.
THE FUND MAY Each Portfolio may lend its investment securities to quali-
LEND ITS fied institutional investors for either short-term or long-
SECURITIES term purposes of realizing additional net investment income.
Loans of securities by a Portfolio will be collateralized by
cash, letters of credit, or securities issued or guaranteed
by the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the loaned
securities. Income derived from the lending of securities is
not tax-exempt, and a portion of the tax-exempt interest
earned when a municipal security is on loan must be charac-
terized as taxable income. Therefore, each Portfolio will
limit such activity in accordance with its investment objec-
tive.
THE FUND MAY Each Portfolio may purchase municipal lease obligations,
INVEST IN which are securities issued by state and local governments to
MUNICIPAL acquire land, equipment and facilities. These obligations
LEASE typically are not backed by the issuing municipality's full
OBLIGATIONS authority to assess taxes to meet its debt obligations. If
the issuing authority fails to make the appropriations neces-
sary to cover lease payments, then the lease may terminate,
with the possibility of default on the lease obligation and
loss to investors.
--------------------------------------------------------------------------------
INVESTMENT The Fund has adopted certain limitations designed to reduce
LIMITATIONS its exposure to specific situations. These limitations in-
clude the following:
THE FUND HAS (a) The New Jersey Insured Long-Term Portfolio will invest a
ADOPTED minimum of 80% of its net assets in insured municipal
CERTAIN bonds, the interest on which is exempt from federal and
FUNDAMENTAL New Jersey personal income taxes except that it may make
LIMITATIONS temporary investments except as described in the section
"Implementation of Policies".
(b) The New Jersey Money Market Portfolio will invest a mini-
mum of 80% of its net assets in short-term municipal se-
curities, the interest on which is exempt from federal
and New Jersey personal income taxes except that it may
make temporary investments as described on the section
"Implementation of Policies".
(c) At the close of each quarter of the taxable year, those
issues which represent more than 5% of a Portfolio's as-
sets will be limited in aggregate to 50% of the assets of
that Portfolio (except U.S. Government and cash items, as
defined in the Internal Revenue Code).
17
<PAGE>
(d) Each Portfolio will limit the aggregate value of holdings
of a single issuer (except U.S. Government and cash items
as defined in the Code) to a maximum of 25% of the Port-
folio's total assets. For the purposes of this limita-
tion, identification of the issuer will be based on a de-
termination of the source of assets and revenues commit-
ted to meeting interest and principal payments on each
security.
(e) A Portfolio will not borrow money except for temporary or
emergency purposes, and then not in excess of 10% of the
Portfolio's total assets. The Portfolio will repay all
borrowings before making additional investments, and the
interest paid on such borrowings will reduce income.
(f) A Portfolio will not pledge, mortgage, or hypothecate
more than 10% of its total assets.
These investment limitations are considered at the time in-
vestment securities are purchased. The limitations described
here and in the Statement of Additional Information may be
changed only with the approval of a majority of the Fund's
shareholders.
--------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
VANGUARD in excess of $130 billion. Through their jointly-owned sub-
ADMINISTERS AND sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and
DISTRIBUTES THE the other funds in the Group obtain at cost virtually all of
FUND their corporate management, administrative, shareholder ac-
counting and distribution services. Vanguard also provides
investment advisory services on an at-cost basis to certain
Vanguard funds. As a result of Vanguard's unique corporate
structure, the Vanguard funds have costs substantially lower
than those of most competing mutual funds. In 1994, the aver-
age expense ratio (annual costs including advisory fees di-
vided by total net assets) for the Vanguard funds amounted to
approximately .30% compared to an average of 1.05% for the
mutual fund industry (data provided by Lipper Analytical
Services).
The Officers of the Fund manage its day-to-day operations and
are responsible to the Fund's Board of Trustees. The Trustees
set broad policies for the Fund and choose its Officers. A
list of the Trustees and Officers of the Fund and a statement
of their present positions and principal occupations during
the past five years can be found in the Statement of Addi-
tional Information.
Vanguard employs a supporting staff of management and admin-
istrative personnel needed to provide the requisite services
to the funds and also furnishes the funds with necessary of-
fice space, furnishings and equipment. Each fund pays its
share of Vanguard's total expenses, which are allocated among
the funds under methods approved by the Board of Trustees
(Directors) of each fund. In addition, each fund bears its
own direct expenses, such as legal, auditing and custodian
fees.
18
<PAGE>
Vanguard also provides distribution and marketing services to
the Vanguard funds. The funds are available on a no-load ba-
sis (i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's distribu-
tion costs.
--------------------------------------------------------------------------------
INVESTMENT The two Portfolios of the Fund receive all investment advi-
ADVISER sory services on an at-cost basis from Vanguard's Fixed In-
come Group. The Group also provides investment advisory serv-
VANGUARD ices to more than 40 Vanguard money market and bond portfo-
MANAGES THE lios, both taxable and tax-exempt. Total assets under manage-
FUND'S ment by Vanguard's Fixed Income Group were $55 billion as of
INVESTMENTS December 31, 1994. The Fixed Income Group is supervised by
the Officers of the Fund. Ian A. MacKinnon, Senior Vice Pres-
ident of Vanguard, has been in charge of the Group since its
inception in 1981.
. David Hamlin, Assistant Vice President of Vanguard, serves
as portfolio manager of the New Jersey Insured Long-Term
Portfolio. Mr. Hamlin has managed the Portfolio since its
inception in 1988. Prior to joining Vanguard, Mr. Hamlin
managed tax-exempt money market funds for a major invest-
ment company. During the period of April 1992-January 1994,
the portfolio was managed by Reid Smith of the Fixed Income
Group. For 3 years prior to joining Vanguard, Mr. Smith was
associated with another mutual fund advisory firm as a
fixed-income portfolio manager.
The Fixed Income Group manages the investment and reinvest-
ment of the assets of the Fund's Portfolios and continuously
reviews, supervises and administers each Portfolio's invest-
ment program, subject to the maturity and quality standards
specified in this Prospectus and supplemental guidelines ap-
proved by the Fund's Board of Trustees. The Fixed Income
Group's selection of investments for the Portfolios is based
on: (a) continuing credit analysis of those instruments held
in the Portfolios and those being considered for inclusion
therein; (b) possible disparities in yield relationships be-
tween different fixed-income securities and money market in-
struments; and (c) actual or anticipated movements in the
general level of interest rates.
Vanguard's Fixed Income Group places all orders for purchases
and sales of portfolio securities. Purchases of portfolio se-
curities are made either directly from the issuer or from mu-
nicipal securities dealers. The Fixed Income Group may sell
portfolio securities prior to their maturity if circumstances
and considerations warrant and if it believes such disposi-
tions advisable. The Fund's policy of investing in short-term
instruments in the New Jersey Money Market Portfolio will
likely result in significant portfolio turnover. The Fixed
Income Group seeks to obtain the best available net price and
most favorable execution for all portfolio transactions.
--------------------------------------------------------------------------------
19
<PAGE>
DIVIDENDS, Dividends consisting of virtually all of the ordinary income
CAPITAL GAINS of each Portfolio are declared daily and are payable to
AND TAXES shareholders of record at the close of the previous business
day. Such dividends are paid on the first business day of
each month. Capital gains distributions, if any, will be made
annually.
THE FUND PAYS Dividend and capital gains distributions may be automatically
MONTH-END reinvested or received in cash. See "Choosing a Distribution
DIVIDENDS Option" for a description of these distributions methods.
In addition, in order to satisfy certain distribution re-
quirements of the Tax Reform Act of 1986, each Portfolio may
declare special year-end dividend and capital gains distribu-
tions during December. Such distributions, if received by
shareholders by January 31, are deemed to have been paid by
the Portfolio and received by the shareholders by December 31
of the prior year.
DIVIDENDS WILL Each Portfolio of the Fund intends to continue to qualify for
BE EXEMPT FROM taxation as a "regulated investment company" under the Inter-
FEDERAL AND nal Revenue Code so that each Portfolio will not be subject
NEW JERSEY to federal income tax to the extent that its income is dis-
INCOME TAXES tributed to shareholders. In addition, each Portfolio intends
to invest a sufficient portion of its assets in municipal
bonds and notes so that it will qualify to pay "exempt-inter-
est dividends" to shareholders. Such exempt-interest divi-
dends are excluded from a shareholder's gross income for fed-
eral tax purposes. The Revenue Reconciliation Act enacted
during 1993 provides that market discount on tax-exempt bonds
purchased after April 30, 1993 must be taxed as ordinary in-
come. Accordingly, to the extent that the Fund purchases such
discounted securities, taxable income may result. Further-
more, each Portfolio expects to invest at least 80% of the
aggregate principal amount of all of its investments in New
Jersey municipal securities. As a result, each Portfolio will
be eligible to pay dividends to New Jersey residents that
will be exempt from New Jersey personal income taxes.
Net long-term capital gains realized by a portfolio from the
sale of securities will be distributed as taxable capital
gains distributions. Any short-term capital gains or any tax-
able interest income will be distributed as a taxable ordi-
nary dividend distribution. In general, such taxable income
distributions from a Portfolio are expected to be negligible
in comparison with tax-exempt dividends. However, under cer-
tain circumstances, a Portfolio may invest in securities
other than New Jersey municipal obligations. In such cases, a
portion of the Portfolio's income may be subject to New Jer-
sey income taxes, federal income taxes, or both.
At present, only the Money Market Portfolio invests in AMT
bonds. When a Portfolio invest in such bonds, a portion of
the Portfolio's dividends, while exempt from the regular fed-
eral income tax, would be a tax preference item for purposes
of the federal alternative minimum tax.
20
<PAGE>
A CAPITAL GAIN A sale of shares in the Insured Long-Term Portfolio is a tax-
OR LOSS MAY BE able event and may result in a capital gain or loss. A capi-
REALIZED UPON tal gain or loss may be realized from an ordinary redemption
EXCHANGE OR of shares, a checkwriting redemption, or an exchange of
REDEMPTION shares between two mutual funds (or two portfolios of a mu-
tual fund). In addition, if you held shares in the Insured
Long-Term Portfolio for six months or less, any capital loss
realized upon redemption is disallowed to the extent of the
tax-exempt dividend income you received.
Capital gains distributions from a Portfolio and any capital
gains or losses realized from the sale or exchange of shares
may also be subject to state and local taxes.
The Fund is required to withhold 31% of any taxable divi-
dends, capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer identi-
fication regulations. You may avoid this withholding require-
ment by indicating your proper Social Security or Taxpayer
Identification Number on your Account Registration Form and
by certifying that you are not subject to backup withholding.
Up to 85% of an individual's Social Security benefits may be
subject to federal income tax. Along with other factors, to-
tal tax-exempt income, including any tax-exempt dividend in-
come from Portfolios of the Fund, is used to calculate the
taxable portion of Social Security benefits.
The Fund is organized as a Pennsylvania business trust and,
in the opinion of counsel, is not liable for any income or
franchise tax in the Commonwealth of Pennsylvania. The Fund
will be subject to Pennsylvania county personal property tax
in the county which is the site of its principal office.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an in-
vestment in the Fund.
--------------------------------------------------------------------------------
THE SHARE The share price or "net asset value" per share of each Port-
PRICE OF EACH folio is computed daily by dividing the total value of the
PORTFOLIO investments and other assets of each Portfolio, less any lia-
bilities, by the total outstanding shares of such Portfolio.
NEW JERSEY MONEY MARKET PORTFOLIO. For the purpose of calcu-
lating the New Jersey Money Market Portfolio's net asset
value per share, securities are valued by the "amortized
cost" method of valuation, which does not take into account
unrealized gains or losses. This involves valuing an instru-
ment at its cost and thereafter assuming a constant amortiza-
tion 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.
The use of amortized cost and the maintenance of the New Jer-
sey Money Market Portfolio's per share net asset value at
$1.00 is based on its election to operate
21
<PAGE>
under the provisions of Rule 2a-7 under the Investment Com-
pany Act of 1940. As a condition of operating under that
rule, the New Jersey Money Market Portfolio must maintain a
dollar-weighted average portfolio maturity of 90 days or
less, purchase only instruments having remaining maturities
of 13 months or less, and invest only in securities that are
determined by the Trustees to present minimal credit risks
and that are of high quality as determined by any major rat-
ing service, or in the case of any instrument not so rated,
considered by the Trustees to be of comparable quality.
The Trustees have established procedures designed to stabi-
lize the net asset value per share as computed for the pur-
poses of sales and redemptions at $1.00. These procedures in-
clude periodic review, as the Trustees deem appropriate and
at such intervals as are reasonable in light of current mar-
ket conditions, of the relationship between the amortized
cost value per share and a net asset value per share based
upon available indications of market value. In such a review,
investments for which market quotations are readily available
are valued at the most recent bid price or quoted yield
equivalent for such securities or for securities of compara-
ble maturity, quality and type as obtained from one or more
of the major market makers for the securities to be valued.
Other investments and assets are valued at fair value, as de-
termined in good faith by the Trustees.
In the event of a deviation of over 1/2 of 1% between a Port-
folio's net asset value based upon available market quota-
tions or market equivalents and $1.00 per share based on am-
ortized cost, the Trustees will promptly consider what ac-
tion, if any, should be taken. The Trustees will also take
such action as they deem appropriate to eliminate or to re-
duce, to the extent reasonably practicable, any material di-
lution or other unfair results to investors or existing
shareholders which might arise from differences between the
two. Such action may include redeeming shares in kind, sell-
ing instruments prior to maturity to realize capital gains or
losses or to shorten average maturity, withholding dividends,
paying distributions from capital or capital gains, or util-
izing a net asset value per share based upon available market
quotations.
NEW JERSEY INSURED LONG-TERM PORTFOLIO. The net asset value
per share of the New Jersey Insured Long-Term Portfolio is
determined at the close of regular trading on the Exchange
each day the Exchange is open for business. When approved by
the Board of Trustees, bonds and other fixed-income securi-
ties of each of the Portfolios may be valued on the basis of
prices provided by a pricing service when such prices are be-
lieved to reflect the fair market value of such securities.
(The prices provided by pricing services are generally deter-
mined without regard to bid or last sale prices. Because of
the large number of outstanding municipal bonds, the majority
of issues do not trade each day; therefore, last sale prices
are not normally available. In valuing such securities, the
pricing services generally take into account institutional
size trading in similar groups of securities and any develop-
ments related to specific securities.) The methods used by
the pricing service and the valuations so established are re-
viewed by the Officers of the Fund under the general supervi-
sion of the Trustees.
22
<PAGE>
There are a number of pricing services available and the
Trustees, on the basis of ongoing evaluation of these servic-
es, may use other pricing services or discontinue the use of
any pricing service.
Securities not priced in this manner are priced at the most
recent quoted bid price provided by investment dealers.
Short-term instruments maturing within 60 days of the valua-
tion date may be valued at cost, plus or minus any amortized
discount or premium. Other assets and securities for which no
quotations are readily available will be valued in good faith
at their fair value using methods determined by the Trustees.
The price per share of the Insured Long-Term Portfolio can be
found daily in the mutual fund section of most major newspa-
pers under the heading of The Vanguard Group.
--------------------------------------------------------------------------------
GENERAL Vanguard New Jersey Tax-Free Fund is a Pennsylvania business
INFORMATION trust. The Declaration of Trust permits the Trustees to issue
an unlimited number of shares of beneficial interest, without
par value, from an unlimited number of classes of shares.
Currently the Fund is offering two classes of shares (known
as "Portfolios").
Shares of each Portfolio when issued are fully paid and non-
assessable; participate equally in dividends, distributions
and net assets; are entitled to one vote per share; have pro
rata liquidation rights; and do not have pre-emptive rights.
Also, shares of the Fund have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares vot-
ing for the election of the Trustees can elect all of the
Trustees if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other ap-
plicable law. An annual meeting will be held to vote on the
removal of a Trustee or Trustees of the Fund if requested in
writing by the holders of not less than 10% of the outstand-
ing shares of the Fund.
All securities and cash are held by CoreStates Bank, N.A.,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing Agent.
Price Waterhouse LLP serves as independent accountants for
the Fund and audits its financial statements annually. The
Fund is not involved in any litigation.
--------------------------------------------------------------------------------
23
<PAGE>
SHAREHOLDER GUIDE
OPENING AN To open a new account, either by mail or by wire, simply com-
ACCOUNT AND plete and return an Account Registration Form and any re-
PURCHASING quired legal documentation. Please indicate the Portfolio you
SHARES have chosen and the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum initial
investment requirement in any Portfolio ($500 for Uniform
Gifts/Transfers to Minors Act accounts). In addition, you
must be a New Jersey resident to invest in the Fund. If you
need assistance with the Account Registration Form or have
any questions, please call our Investor Information Depart-
ment at 1-800-662-7447.
NOTE: For other types of account registrations (e.g. corpora-
tions, associations, other organizations, trust or powers of
attorney), please call our Investor Information Department to
determine which additional forms you may need.
Because of the risks associated with bond investments, the
Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating
on short-term market movements. Consequently, the Fund re-
serves the right to reject any specific purchase (and ex-
change purchase) request. The Fund also reserves the right to
suspend the offering of shares for a period of time.
Each Portfolio's shares are purchased at the next-determined
net asset value after your investment has been received in
the form of Federal Funds. See "When Your Account Will Be
Credited". The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees).
ADDITIONAL Subsequent investments may be made by mail ($100 minimum per
INVESTMENTS Portfolio), wire ($1,000 minimum per Portfolio), exchange
from another Vanguard Fund account, or Vanguard Fund Express.
--------------------------------------------------------------
NEW ACCOUNT ADDITIONAL INVESTMENTS TO
EXISTING ACCOUNTS
PURCHASING BY Please include the Additional investments should
MAIL Complete amount of your initial include the Invest-by-Mail re-
and sign the investment and the mittance form attached to your
enclosed name of the Portfolios Fund confirmation statements.
Account you have selected on Please make your check payable
Registration the registration form, to The Vanguard Group-- (Port-
Form make your check pay- folio Number). See page 25 for
able to The Vanguard the appropriate Portfolio num-
Group-- (Portfolio ber, write your account number
Number). See page 25 on your check and, using the
for the appropriate return envelope provided, mail
Portfolio number, and to the address indicated on the
mail to: Invest-by-Mail Form.
VANGUARD FINANCIAL CENTER
P.O. BOX 2600
VALLEY FORGE, PA 19482
24
<PAGE>
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered 455 DEVON PARK DRIVE mailed to one of the addresses
mail, send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box ad-
dress.
VANGUARD NEW JERSEY TAX-FREE PORTFOLIO NUMBERS:
New Jersey Money Market Portfolio-95
New Jersey Insured Long-Term Portfolio-14
--------------------------------------------------------------
PURCHASING BY CORESTATES BANK, N.A.
WIRE Money ABA 031000011
should be CORESTATES NO 0141 1274
wired to: ATTN VANGUARD
VANGUARD NEW JERSEY TAX-FREE FUND
BEFORE WIRING NAME OF PORTFOLIO
Please contact ACCOUNT NUMBER
Client ACCOUNT REGISTRATION
Services
(1-800-662-2739)
To assure proper receipt, please be sure your bank includes
the Portfolio name, the account number Vanguard has assigned
to you and the eight digit CoreStates number. If you are
opening a new account, please complete the Account Registra-
tion Form and mail it to the "New Account" address after com-
pleting your wire arrangement. NOTE: Federal Funds wire pur-
chase orders will be accepted only when the Fund and Custo-
dian Bank are open for business.
--------------------------------------------------------------
PURCHASING BY You may open an account or purchase additional shares of the
EXCHANGE (from Fund by making an exchange from an existing Vanguard Fund ac-
a Vanguard count. Accounts opened by exchange will have the same regis-
account) tration as the existing account. Please note: the Fund re-
serves the right to reject any exchange purchase request. For
more information, please call our Client Services Department
at 1-800-662-2739.
--------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move money
FUND EXPRESS from your bank account to your Vanguard account on an "as
needed" basis. Or if you choose the Automatic Investment op-
Special tion, money will be moved automatically from your bank ac-
Purchase and count to your Vanguard account on the schedule (monthly, bi-
Automatic monthly [every other month], quarterly or yearly) you select.
Investment To establish these Fund Express options, please provide the
appropriate information on the Account Registration Form. We
will send you a confirmation of your Fund Express service;
please wait three weeks before using the service.
--------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital
gains distributions will be reinvested in additional Fund
shares. This option will be selected for you automatically
unless you specify one of the other options.
25
<PAGE>
2. CASH DIVIDEND OPTION--Your dividends will be paid in cash
and your capital gains will be reinvested in additional
Fund shares.
3. ALL CASH OPTION--Both dividend and capital gains distribu-
tions will be paid in cash.
You may change your option by calling our Client Services De-
partment (1-800-662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department (1-
800-662-2739) for information. You may also elect Vanguard
Dividend Express which allows you to transfer your cash divi-
dends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
--------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute
net capital gains and investment income to Fund shareholders.
INVESTORS These distributions are made to all shareholders who own Fund
SHOULD ASK shares as of the distribution's record date, regardless of
ABOUT THE how long the shares have been owned. Purchasing shares just
TIMING OF prior to the record date could have a significant impact on
CAPITAL GAINS your tax liability for the year. For example, if you purchase
AND DIVIDEND shares immediately prior to the record date of a sizable cap-
DISTRIBUTIONS ital gain, you will be assessed taxes on the amount of the
BEFORE capital gain distribution later paid even though you owned
INVESTING the Fund shares for just a short period of time. (Taxes are
due on the distributions even if the capital gain is rein-
vested in additional Fund shares.) While the total value of
your investment will be the same after the capital gain dis-
tribution--the amount of the capital gain distribution will
offset the drop in the net asset value of the shares--you
should be aware of the tax implications the timing of your
purchase may have.
Prospective investors should, therefore, inquire about poten-
tial distributions before investing. The Fund's annual capi-
tal gains distribution normally occurs in December, while in-
come dividends are generally paid on the first business day
of each month. For additional information on distributions
and taxes, see the section titled "Dividends, Capital Gains,
and Taxes."
--------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO ADD
ESTABLISHING SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
OPTIONAL WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
SERVICES CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FUR-
THER ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature guaran-
GUARANTEES tee on certain written transaction requests. A signature
guarantee verifies the authenticity of your signature, and
may be obtained from banks, brokers and any other guarantor
institutions that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
26
<PAGE>
CERTIFICATES With the exception of the Money Market Portfolio, share cer-
tificates will be issued upon request. If a certificate is
lost, you may incur an expense to replace it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or ad-
viser may charge a service fee.
CANCELLING The Fund will not cancel any trade (e.g., a purchase, ex-
TRADES change or redemption) believed to be authentic, received in
writing or by telephone, once the trade request has been re-
ceived.
ELECTRONIC If you would prefer to receive a prospectus for the Fund or
PROSPECTUS any of the Vanguard Funds in an electronic format, please
DELIVERY call 1-800-231-7870 for additional information. If you elect
to do so, you may also receive a paper copy of the prospec-
tus, by calling 1-800-662-7447.
--------------------------------------------------------------------------------
WHEN YOUR The trade date is the date on which your account is credited.
ACCOUNT WILL It is generally the day on which the Fund receives your in-
BE CREDITED vestment in the form of Federal Funds (monies credited to the
Fund's Custodian Bank by a Federal Reserve Bank). Your trade
date varies according to your method of payment for your
shares.
Purchases of Fund shares by check (except the Money Market
Portfolio) will receive a trade date the day the funds are
received in good order by Vanguard. Thus, if your purchase by
check is received by the close of regular trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time), your
trade date is the business day your check is received in good
order. If your purchase is received after the close of the
exchange your trade date is the business day following re-
ceipt of your check. Vanguard will not accept third-party
checks to open an account. Please be sure your purchase check
is made payable to the Vanguard Group.
For purchases by check for the Money Market Portfolio, the
Fund is ordinarily credited with Federal Funds within one
business day. Thus, if your purchase by check is received by
the close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time), your trade date is the business day following
receipt of your check. If your purchase is received after the
close of the Exchange, your trade date is the second business
day following receipt of your check.
For purchases by Federal Funds wire or exchange, the Fund is
credited immediately with Federal Funds. Thus, if your pur-
chase by Federal Funds wire or exchange is received by the
close of the Exchange your trade date is the day of receipt.
If your purchase is received after the close of the Exchange,
your trade date is the business day following receipt of your
wire or exchange.
Your shares are purchased at the net asset value determined
on your trade date. You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.) For a
purchase of the Money Market Portfolio by Federal Funds wire,
you may qualify for a dividend on the date of purchase if you
have notified the Fund of your
27
<PAGE>
intention to make the purchase by 10:45 a.m. (Eastern time)
on the business day of the wire.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a for-
eign check which has been drawn in U.S. dollars AND has been
issued by a foreign bank with a U.S. correspondent bank. The
name of the U.S. correspondent bank must be printed on the
face of the foreign check.
--------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are nor-
mally mailed, credited or wired--depending upon the method of
withdrawal you have PREVIOUSLY chosen--within two business
days after the receipt of the request in Good Order.
SELLING BY You may withdraw funds from your account by writing a check
WRITING A payable in the amount of $250 or more. When a check is pre-
CHECK sented for payment to the Fund's agent, CoreStates Bank, the
Fund will redeem sufficient shares in your account at the
next determined net asset value to cover the amount of the
check.
In order to establish the checkwriting option on your ac-
count, all registered shareholders must sign a signature
card. After your completed signature card is received by the
Fund, an initial supply of checks will be mailed within 10
business days. There is no charge for checks or for their
clearance. CORPORATIONS, TRUSTS AND OTHER ORGANIZATIONS
SHOULD CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739)
BEFORE SUBMITTING SIGNATURE CARDS, AS ADDITIONAL DOCUMENTS
MAY BE REQUIRED TO ESTABLISH THE CHECKWRITING SERVICE.
Before establishing the checkwriting option, you should be
aware that:
1. Writing a check (a redemption of shares) is a taxable
event.
2. The Fund does not allow an account to be closed through
the checkwriting option.
3. Vanguard cannot guarantee a stop payment on any check. If
you wish to reverse a stop payment order, you must do so
in writing.
4. Shares held in certificate form cannot be redeemed using
the checkwriting option.
5. The Fund reserves the right to terminate or alter this
service at any time.
--------------------------------------------------------------
SELLING BY Requests should be mailed to VANGUARD FINANCIAL CENTER, VAN-
MAIL GUARD NEW JERSEY TAX-FREE FUND, P.O. BOX 1120, VALLEY FORGE,
PA 19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard New Jersey Tax-Free
Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
--------------------------------------------------------------
28
<PAGE>
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners EXACTLY as they are registered on
the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be re-
quired in the case of estates, corporations, trusts, and
certain other accounts.
6. Any certificates that you hold for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO
YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT AT
1-800-662-2739.
--------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized rep-
TELEPHONE resentative may call our Client Services Department at 1-800-
662-2739. For telephone redemptions, you may have the pro-
ceeds sent to you by mail or by wire. In addition to the de-
tails below, please see "Important Information About Tele-
phone Transactions."
BY MAIL: Telephone mail redemption is automatically estab-
lished on your account unless you indicate otherwise on your
Account Registration Form. You may redeem any amount by call-
ing Vanguard. The proceeds will be paid to the registered
shareholders and mailed to the address of record.
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect telephone
wire redemption is at the time you complete your Account Reg-
istration Form. If you do not presently have telephone wire
redemption and wish to establish it, please contact our Cli-
ent Services Department.
With the wire redemption option, you may withdraw a minimum
of $1,000 and have the amount wired directly to your bank ac-
count. Wire redemptions less than $5,000 are subject to a $5
charge deducted by Vanguard. There is no Vanguard charge for
wire redemptions of $5,000 or more. However, your bank may
assess a separate fee to accept incoming wires.
A request to change the bank associated with your wire re-
demption option must be received in writing, signed by each
registered shareholder, and accompanied by a voided check or
preprinted deposit slip. A signature guarantee is required if
your bank registration is not identical to your Vanguard Fund
account registration.
--------------------------------------------------------------
SELLING BY If you select the Fund Express Automatic Withdrawal option,
FUND EXPRESS money will be automatically moved from your Vanguard Fund ac-
count to your bank account according to the schedule you have
Automatic selected. The Special Redemption option lets you move money
Withdrawal & from your Vanguard account to your bank account on an "as
Special needed" basis. To establish these Fund Express options,
Redemption please provide the appropriate information on the Account
Registration Form. We will send you a
29
<PAGE>
confirmation of your Fund Express service; please wait three
weeks before using the service.
--------------------------------------------------------------
You may sell shares of a Portfolio by making an exchange into
SELLING BY another Vanguard Fund account. Please see "Exchanging Your
EXCHANGE Shares" for details.
--------------------------------------------------------------
Shares purchased by check or Fund Express may be redeemed at
IMPORTANT any time. However, your redemption proceeds will not be paid
REDEMPTION until payment for the purchase is collected, which may take
INFORMATION up to ten calendar days.
--------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the close
REDEMPTION of the New York Stock Exchange (generally 4:00 p.m. Eastern
PROCEEDS time) are processed on the business day of receipt and the
redemption proceeds are normally sent on the following
business day.
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following re-
ceipt and the proceeds are normally sent on the second busi-
ness day following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It
will be implemented at the net asset value next determined
after your request has been received by Vanguard in Good Or-
der. The Fund reserves the right to revise or terminate the
telephone redemption privilege at any time.
The Fund may suspend the redemption right or postpone payment
at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the United
States Securities and Exchange Commission.
--------------------------------------------------------------
VANGUARD'S If you make a redemption from a qualifying account, Vanguard
AVERAGE COST will send you an Average Cost Statement which provides you
STATEMENT with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
--------------------------------------------------------------
MINIMUM Due to the relatively high cost of maintaining smaller ac-
ACCOUNT counts, the Fund reserves the right to redeem shares in any
BALANCE account that is below the minimum initial investment amount
REQUIREMENT of $3,000. If at any time your total investment does not have
a value of at least $3,000, you may be notified that your ac-
count is below the Fund's minimum account balance require-
ment. You would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds would
be promptly paid to the registered shareholder.
The Fund's minimum account balance requirement will not apply
if your account falls below $3,000 solely as a result of de-
clining markets (i.e., a decline in a Portfolio's net asset
value).
--------------------------------------------------------------------------------
EXCHANGING Should your investment goals change, you may exchange your
YOUR SHARES shares of Vanguard New Jersey Tax-Free Fund for those of
other available Vanguard Funds.
30
<PAGE>
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Portfolio name, account number, Social Security Number or Em-
ployer Identification Number listed on the account, and the
Call Client exact name and address in which the account is registered.
Services Only the registered shareholder may complete such an ex-
(1-800-662-2739) change. Requests for telephone exchanges received prior to
the close of trading on the New York Stock Exchange (gener-
ally 4:00 p.m. Eastern time) are processed at the close of
business that same day. Requests received after the close of
the Exchange are processed the next business day. TELEPHONE
EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD BALANCED IN-
DEX, VANGUARD INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND, AND VANGUARD QUAN-
TITATIVE PORTFOLIOS. If you experience difficulty in making a
telephone exchange, your exchange request may be made by reg-
ular or express mail, and it will be implemented at the clos-
ing net asset value on the date received by Vanguard provided
the request is received in Good Order.
--------------------------------------------------------------
EXCHANGING BY Please be sure to include the name and account number of your
MAIL current Fund, and the name of the Fund you wish to exchange
into, the amount you wish to exchange, and the signatures of
all registered account holders. Send your request to VANGUARD
FINANCIAL CENTER, VANGUARD NEW JERSEY TAX-FREE FUND, P.O. BOX
1120, VALLEY FORGE, PA 19482. (For express or registered
mail, send your request to Vanguard Financial Center, Van-
guard New Jersey Tax-Free Fund, 455 Devon Park Drive, Wayne,
PA 19087.)
--------------------------------------------------------------
IMPORTANT Before you make an exchange, you should consider the follow-
EXCHANGE ing:
INFORMATION
. Please read the Fund's prospectus before making an ex-
change. For a copy and for answers to any questions you may
have, call our Investor Information Department (1-800-662-
7447).
. An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
. Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
. The shares to be exchanged must be on deposit and not held
in certificate form.
. New accounts are not currently accepted in Vanguard/Windsor
Fund or Vanguard/PRIMECAP Fund.
. The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
the required documentation in Good Order.
. When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
31
<PAGE>
Every effort will be made to maintain the exchange privilege.
However, the Fund reserves the right to revise or terminate
its provisions, limit the amount of or reject any exchange,
as deemed necessary, at any time.
The exchange privilege is only available in New Jersey, the
only state in which the Fund's shares are registered for
sale.
--------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the man-
agement of the Fund and increase transaction costs, the Fund
has established a policy of limiting excessive exchange ac-
tivity.
Exchange activity generally will not be deemed excessive if
limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30
DAYS APART) from a Portfolio during any twelve month period.
These limitations do not apply to exchanges from Vanguard's
money market portfolios. Notwithstanding these limitations,
the Fund reserves the right to reject any purchase request
(including exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient port-
folio management.
--------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions)
INFORMATION and exchanges by telephone is automatically established on
ABOUT your account unless you request in writing that telephone
TELEPHONE transactions on your account not be permitted. The ability to
TRANSACTIONS initiate wire redemptions by telephone will be established on
your account only if you specifically elect this option in
writing.
To protect your account from losses resulting from unautho-
rized or fraudulent telephone instructions, Vanguard adheres
to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone, the
caller must know (i) the name of the Portfolio; (ii) the 10-
digit account number; (iii) the exact name and address used
in the registration; and (iv) the Social Security or Employer
Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner and
mailed to the address of record, only. In the case of a tele-
phone redemption by wire, the wire transfer will be made only
in accordance with the shareowner's prior written instruc-
tions.
Neither the Fund nor Vanguard will be responsible for the au-
thenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been fol-
lowed. Vanguard believes that the security procedures de-
scribed above are reasonable, and that if such procedures are
followed, you will bear the risk of any losses resulting from
unauthorized or fraudulent telephone transactions on your ac-
count.
--------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER,
32
<PAGE>
P.O. BOX 1110, VALLEY FORGE, PA 19482. ATTENTION: TRANSFER
DEPARTMENT. The request must be in Good Order. Before mailing
your request, please call our Client Services Department (1-
800-662-2739) for full instructions.
--------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time you
REPORTS initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market accounts.
You will also receive a comprehensive account statement at
the end of each calendar quarter. The fourth-quarter state-
ment will be a year-end statement, listing all transaction
activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the aver-
age cost of shares redeemed from your account, using the av-
erage cost single category method. This service is available
for most taxable accounts opened since January 1, 1986. In
general, investors who redeemed shares from a qualifying Van-
guard account may expect to receive their Average Cost State-
ment in February of the following year. Please call our Cli-
ent Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-an-
nually, according to the Fund's fiscal year-end.
--------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call
SERVICES our Investor Information Department at 1-800-662-7447.
VANGUARD With Vanguard's Direct Deposit Service, most U.S. Government
DIRECT DEPOSIT checks (including Social Security and military pension
SERVICE checks) and private payroll checks may be automatically de-
posited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
VANGUARD Vanguard's Automatic Exchange Service allows you to move
AUTOMATIC money automatically among your Vanguard Fund accounts. For
EXCHANGE instance, the service can be used to "dollar cost average"
SERVICE from a money market portfolio into a stock or bond fund or to
contribute to an IRA or other retirement plan. Please contact
our Client Services Department at 1-800-662-2739 for addi-
tional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund Express
application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or re-
demptions are credited to your account. In addition, some
services of Fund Express cannot be used
33
<PAGE>
with specific Vanguard Funds. For more information, please
refer to the Vanguard Fund Express brochure.
VANGUARD Vanguard's Dividend Express allows you to transfer your divi-
DIVIDEND dends and/or capital gains distributions automatically from
EXPRESS your Fund account, one business day after the Fund's payable
date, to your account at a bank, savings and loan associa-
tion, or a credit union that is a member of the Automated
Clearing House (ACH) system. You may elect this service on
the Account Registration Form or call our Investor Informa-
tion Department (1-800-662-7447) for a Vanguard Dividend Ex-
press application.
VANGUARD TELE- Vanguard's Tele-Account is a convenient, automated service
ACCOUNT that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone (TM) telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent dividend
or capital gains payment. To contact Vanguard's Tele-Account
service, dial 1-800-ON-BOARD (1-800-662-6273). A brochure of-
fering detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
--------------------------------------------------------------------------------
34
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Vanguard
NEW JERSEY
TAX-FREE FUND
---------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATIONS SERVICE FOR THE
HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
Vanguard
NEW JERSEY
TAX-FREE FUND
P R O S P E C T U S
MARCH 28, 1995
A member of
THE Vanguard GROUP
OF INVESTMENT COMPANIES(R)
PO14
<PAGE>
PART B
VANGUARD NEW JERSEY TAX-FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 28, 1995
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus dated March 28, 1995. 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
Yield and Total Return..................................................... B-6
Calculation of Yield....................................................... B-6
Comparative Indexes........................................................ B-7
Risk Factors............................................................... B-8
Investment Management...................................................... B-10
Purchase of Shares......................................................... B-10
Redemption of Shares....................................................... B-11
Valuation of Shares........................................................ B-11
Management of the Fund..................................................... B-13
Description of Shares and Voting Rights.................................... B-16
Financial Statements....................................................... B-17
Appendix A--Description of Municipal Bonds and their Ratings............... B-17
Appendix B--Municipal Lease Obligations.................................... B-20
</TABLE>
INVESTMENT LIMITATIONS
The following limitations cannot be changed without the consent of the hold-
ers of a majority of the Fund's outstanding shares (as defined in the Invest-
ment Company Act of 1940 (the "1940 Act")), including a majority of the shares
of each Portfolio.
1. Each Portfolio will limit the aggregate value of all holdings (except
U.S. Government and cash items, as defined under Subchapter M of the Inter-
nal Revenue Code (the "1940 Act")), each of which exceeds 5% of the Portfo-
lio's total assets, to an aggregate amount of 50% of such assets;
2. 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. For the purposes of this
limitation, identification of the issuer will be based on a determination
of the source of assets and revenues committed to meeting interest and
principal payments of each security;
3. Each Portfolio will not borrow money except for temporary or emergency
purposes and then only in an amount not exceeding 10% of the value of the
total assets of that Portfolio. The Portfolio will repay all borrowings be-
fore making additional investments. Interest paid on such borrowings will
reduce income;
4. Each Portfolio will not pledge, mortgage or hypothecate its assets to
any extent greater than 10% of the value of the total assets of the Portfo-
lio;
5. Each Portfolio will not issue senior securities as defined in the 1940
Act;
B-1
<PAGE>
6. Each Portfolio will not engage in the business of underwriting securi-
ties issued by other persons, except to the extent that the Portfolio may
technically be deemed an underwriter under the Securities Act of 1933, as
amended, in disposing of Portfolio securities.
7. Each Portfolio will not purchase or otherwise acquire any securities,
if as a result, more than 15% (10% with respect to the Money Market Portfo-
lio) 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.)
8. Each Portfolio will not purchase or sell real estate, but this shall
not prevent investments in Municipal Bonds secured by real estate or inter-
ests 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 and as provided under "Lending of Securities";
10. Each Portfolio will not purchase on margin or sell short, except as
specified below in Investment Limitation No. 12;
11. Each Portfolio will not purchase or retain securities of an issuer if
those Trustees of the Fund, each of whom owns more than 1/2 of 1% of such
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 New Jersey Insured Long-Term Portfolio may in-
vest in bond futures contracts, bond options and options on bond futures
contracts to the extent that not more than five percent 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 in-
vestment companies except as they may be acquired as part of a merger, con-
solidation, 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 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, bank certifi-
cates of deposit; (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 munic-
ipal bonds subject to repurchase agreements.
15. Each Portfolio will not invest in put, call, straddle or spread op-
tions (except as described above in investment limitation No. 12) or inter-
ests in oil, gas or other mineral exploration or development programs.
The above-mentioned investment limitations are considered at the time in-
vestment securities are purchased. Notwithstanding these limitations, each
Portfolio may own all or any portion of the securities of, or make loans to,
or contribute to the costs or other financial requirements of, any company
which will be (1) wholly owned by the Fund and one or more other investment
companies and (2) primarily engaged in the business of providing, at cost,
management, administrative, distribution and/or related services to the Fund
and such other investment companies. Additionally, the Fund may invest in
when-issued securities without limitation. Please see the Prospectus for a de-
scription of securities.
LENDING OF SECURITIES. Each Portfolio may lend its investment securities to
qualified institutions who need to borrow securities in order to complete cer-
tain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment secu-
rities, the Portfolio attempts to increase its income through the receipt of
interest on the
B-2
<PAGE>
loan. Any gain or loss in the market price of the securities loaned that might
occur during the term of the loan would be for the account of the Portfolio.
The Portfolio may lend its investment securities to qualified brokers, deal-
ers, banks or other financial institutions, so long as the terms and the
structure of such loans are not inconsistent with the 1940 Act, or the Rules
and Regulations or interpretations of the Securities and Exchange Commission
(the "Commission") thereunder, which currently require that (a) the borrower
pledge and maintain with the Portfolio collateral having a value at all times
not less than 100% of the value of the securities loaned, (b) the borrower add
to such collateral whenever the price of the securities loaned rises (i.e.,
the borrower "marks to the market" on a daily basis), (c) the loan be made
subject to termination by the Portfolio at any time and (d) the Portfolio re-
ceive reasonable interest on the loan (which may include the Portfolio invest-
ing any cash collateral in interest bearing short-term investments), any dis-
tribution on the loaned securities and any increase in their market value. A
Portfolio will not lend its investment securities, if as a result, the aggre-
gate of such loans exceeds 10% of the value of its total assets. Loan arrange-
ments made by the Portfolio will comply with all other applicable regulatory
requirements, including the Rules of the New York Stock Exchange, which rules
presently require the borrower, after notice, to redeliver the securities
within the normal settlement time of five business days. All relevant facts
and circumstances, including the creditworthiness of the broker, dealer or in-
stitution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Directors. Income de-
rived from lending of securities is not tax-exempt, and, thus, a portfolio
will limit such activity in accordance with its investment objective.
FUTURES CONTRACTS AND OPTIONS
The Insured Long-Term Portfolio may enter into futures contracts, options,
and options on futures contracts for several reasons: to maintain cash re-
serves while simulating full investment, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when a futures con-
tract 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 Com-
modity Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a
U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or ac-
ceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Clos-
ing out an open futures position is done by taking an opposite position ("buy-
ing" a contract which has previously been "sold," or "selling" a contract pre-
viously purchased) in an identical contract to terminate the position. Broker-
age commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure comple-
tion 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. Bro-
kers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold at prices which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes, to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of ex-
cess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund ex-
pects to earn interest income on its margin deposits.
B-3
<PAGE>
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset unfavor-
able changes in the value of securities otherwise held for investment purposes
or expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
interest rates of underlying securities. The Fund intends to use futures con-
tracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. The Portfolio
will only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, the
Portfolio expects that approximately 75% of its futures contract purchases
will be "completed," that is, equivalent amounts of related securities will
have been purchased or are being purchased by the Portfolio upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this expo-
sure. While the Portfolio will incur commission expenses in both opening and
closing out futures positions, these costs are lower than transaction costs
incurred in the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
The Portfolio will not enter into futures contract transactions to the ex-
tent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of the Fund's total assets. In
addition, the Portfolio will not enter into futures contracts to the extent
that its outstanding obligations to purchase securities under these contracts
would exceed 20% of the Portfolio's total assets. Assets committed to futures
contracts or options will be held in a segregated account at the Fund's custo-
dian bank.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no assur-
ance that a liquid secondary market will exist for any particular futures con-
tract 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 con-
tinue to be required to make daily cash payments to maintain its required mar-
gin. 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 it.
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 sub-
stantial, due both to the low margin deposits required, and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and sub-
stantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin,
a subsequent 10% decrease in the value of the futures contract would result in
a total loss of the margin deposit, before any deduction for the
B-4
<PAGE>
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies of the Portfolio are engaged in only for hedging purposes,
the Adviser does not believe that the Portfolio is subject to the risks of
loss frequently associated with futures transactions. The Portfolio would pre-
sumably 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 con-
tracts 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 mar-
gin 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 unfa-
vorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
The Portfolios are required for federal income tax purposes to recognize as
income for each taxable year their net unrealized gains and losses on certain
futures contracts held as of the end of the year as well as those actually re-
alized during the year. In most cases, any gain or loss recognized with re-
spect 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 in-
tended to hedge against a change in the value of securities held by the Port-
folio may affect the holding period of such securities and, consequently, the
nature of the gain or loss on such securities upon disposition. A 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 se-
curities or of foreign currencies or other income derived with respect to the
Portfolio's business of investing in securities. In addition, gains realized
on the sale or other disposition of securities held for less than three months
must be limited to less than 30% of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures con-
tracts will be considered gain from the sale of securities and therefore be
qualifying income for purposes of the 90% requirement. In order to avoid real-
izing 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 recog-
nized for tax purposes, will not be considered gains on sales of securities
held less than three months for the purpose of the 30% test.
B-5
<PAGE>
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 trans-
actions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the transactions.
YIELD AND TOTAL RETURN
The yield of the New Jersey Insured Long-Term Portfolio for the 30-day pe-
riod ended November 30, 1994 was 6.28%.
The average annual total return of the New Jersey Insured Long-Term Portfo-
lio for the one- and five-year periods ended November 30, 1994 was -6.10% and
+6.50%, respectively. The average annual total return of the New Jersey In-
sured Long-term Portfolio since its inception on February 3, 1988 is +7.37%.
The average annual total return of the New Jersey Money Market Portfolio for
the one- and five-year periods ended November 30, 1994 was +2.49%, and +3.63%,
respectively. The average annual total return of the New Jersey Money Market
Portfolio since its inception on February 3, 1988 was +4.20%. Total return is
computed by finding the average compounded rates of return over the period set
forth above that would equate an initial amount invested at the beginning of
the period to the ending redeemable value of the investment.
CALCULATION OF YIELD
The current yield of the New Jersey 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 calcula-
tion of net change reflects the value of additional shares purchased with the
dividends by the Portfolio, including dividends on both the original share and
on such additional shares. An effective yield, which reflects the effects of
compounding and represents an annualization of the current yield with all div-
idends reinvested, may also be calculated for the Portfolio by adding 1 to the
net change, raising the sum to the 365/7 power, and subtracting 1 from the re-
sult.
Set forth below is an example, for purposes of illustration only, of the
current and effective yield calculations for the New Jersey Money Market Port-
folio for the 7-day base period ended November 30, 1994.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
----------------------
11/30/94
--------
<S> <C>
Value of account at beginning of period................. $1.00000
Value of same account at end of period*................. 1.00064
--------
Net Change in account value............................. $ .00064
Annualized Current Net Yield (Net Change X 365/7/average
net asset value........................................ 3.34%
Effective Yield [(Net Change) + 1] 365/7 - 1............ 3.39%
Average Weighted Maturity of Investments................ 48 Days
</TABLE>
* Exclusive of any capital changes.
The New Jersey Money Market Portfolio seeks to maintain but does not guaran-
tee, a constant net asset value of $1.00 per share. Although the Money Market
Portfolio invests in high-quality instruments, the shares of the Portfolio are
not insured or guaranteed by the U.S. Government. The yield of the Portfolio
will fluctuate. The annualization of a week's dividend is not a representation
by the
B-6
<PAGE>
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, av-
erage 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 preced-
ing sentence, differences in the time periods compared, and differences in the
methods used in valuing portfolio instruments, computing net asset value and
calculating yield.
COMPARATIVE INDEXES
Each of the investment company members of the Vanguard Group, including Van-
guard Variable Insurance Fund, may from time to time, use one or more of the
following unmanaged indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES--consists of more than 6,000 common equity secu-
rities, 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 com-
mon stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.
RUSSELL 2000 STOCK INDEX--a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000; a widely-used benchmark for small capi-
talization common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market val-
ue-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for convert-
ible issues of 100 million or greater in market capitalization. The index is
priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mort-
gage 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--is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND--consists of over 4,500 U.S. Trea-
sury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX--all publicly offered fixed-rate, noncon-
vertible 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.
B-7
<PAGE>
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND--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 Index and 30% NASDAQ Industrial Index.
COMPOSITE INDEX--35% Standard & Poor's 500 Index and 65% Salomon Brothers
High-Grade Bond Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Salomon Brothers
High-Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that 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 $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is
a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between
5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX--is a 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.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper de-
fines a small company growth fund as a fund that by prospectus 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 perfor-
mance 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 BALANCED FUND AVERAGE--An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Analyt-
ical Services, Inc.
RISK FACTORS VANGUARD NEW JERSEY TAX-FREE FUND
The Vanguard New Jersey Tax-Free Fund invests primarily in the obligations
of New Jersey state government and various local governments, including coun-
ties, cities, special districts, agencies and authorities. In general, the
credit quality and credit risk of any issuer's debt depend on the state and
local economy, the health of the issuer's finances, the amount of the issuer's
debt, the quality of management, and the strength of legal provisions in debt
documents that protect debt holders. Credit risk is usually lower wherever the
economy is strong, growing and diversified; financial operations are sound;
and the debt burden is reasonable.
B-8
<PAGE>
Measured against these criteria, the credit risk associated with direct ob-
ligations of the State of New Jersey and State agencies, including general ob-
ligation and revenue bonds, and lease debt, compares very favorably. For most
of the last two decades, the State's general obligation bonds have enjoyed the
highest rating by either Moody's Investors Service or Standard & Poor's. In
the early 1990's, however, both Moody's and Standard & Poors both slightly
downgraded the state's credit rating to the high "AA" level due to an economy
and state finances weakened by recession. In general, New Jersey's high credit
quality over time reflects the strong growth and diversification of its econo-
my, a moderate debt position, wealth levels much higher than the national av-
erage, and a historically sound and stable financial position.
New Jersey's economy continues to gradually emerge from the depths of the
1990-92 national recession. Between 1989 and 1992, the state lost 8.7 percent
of its employment total or about one job in 12. Significant job losses oc-
curred in the construction, manufacturing, wholesale and retail trades, and in
financial and real estate services. The only sectors to experience growth dur-
ing the period were the healthcare and government sectors. Unemployment rates
exceeded the national averages and reached a high of 9.8% in July of 1992.
Economic variables indicate a slowly improving New Jersey economy, as evi-
denced by a decrease in the unemployment rate for 1993. However, this progress
could be mitigated by layoffs in the pharmaceutical industry and AT&T, New
Jersey's largest employer.
The most recent cyclical weakening of the New Jersey economy follows an un-
precedented period of diversification and growth for the state in the 1980's.
Like many other northeastern and "rust-belt" states, New Jersey's economy de-
clined during the 1970s. This set the stage for a remarkable period of trans-
formation in the 1980s. The State economy changed from a manufacturing-domi-
nated base to an economy balanced among manufacturing, trade and services,
closely mirroring the U.S. economy. Population growth exceeded the regional
average during this time, and growth in employment and income outpaced the
U.S. average. This growth occurred not only in the developed northeastern and
Delaware River Valley areas, but also in central New Jersey around Princeton
and the Atlantic coastal region. Despite the recession of 1990 to 1992, New
Jersey remains a wealthy state, and continues to be the second wealthiest af-
ter Connecticut. Per capita state income is over a third higher than the U.S.
average.
The State's debt burden is moderate in relation to the state's wealth and
resources, but has increased significantly since 1991 as the state has fi-
nanced capital outlays previously funded out of current revenues and stepped
up debt issuance to stimulate a weakened economy. Tax-supported debt as mea-
sured against income and population is close to average levels among the
states. Debt retirement is rapid even though debt service has a modest claim
on State revenues. New debt issuance is expected to be manageable.
After a decade of sound financial operations in the 1980's, characterized by
robust increases in revenues and fund balances, the State has now faced four
years of budgetary distress which remains to be resolved. Declining tax reve-
nues and swelling expenditures for Medicaid, public assistance, and correc-
tions have generated repeated budget gaps that the State has been able to
close only by utilizing non-recurring revenue sources. Stabilization of the
state's fiscal situation could be hampered by newly-elected Governor Christine
Todd Whitman's pledge to cut state taxes by 30 percent over three years. Con-
tinued high credit quality will depend on the resolve of State leaders and
taxpayers to maintain fiscal balance while diminishing a reliance on one-time
revenue sources.
A positive credit factor for local governments in New Jersey is the strong
State oversight of local government operations. The State can and has seized
control of mismanaged jurisdictions. In general, the high level of wealth and
the strong economic base in the State have resulted in credit quality for lo-
cal government that is among the highest in the U.S. In addition, the State
guarantees the debt
B-9
<PAGE>
service of many local government bond issues. As state finances remain under
pressure, however, local governments may see levels of state aid reduced, a
development that could result in a dilution of local credit quality. Success-
ful tax appeals by property owners in many municipalities have also reduced
revenues for some local governments.
Despite the strengths of New Jersey credit quality, there are risks. New
Jersey has a number of older urban centers, including Newark and Camden, that
present a continuing vulnerability with respect to economic and social prob-
lems. The State is facing educational finance reforms which could affect the
credit quality of certain school districts as well as state financial opera-
tions. In addition, health-care and welfare reform proposals must be addressed
in the coming fiscal year. State taxes were increased in 1990 to balance the
State's budget and then reduced in 1992 after a "taxpayer revolt" reversed the
political power balance in the state legislature. Finally, overbuilding in the
residential and commercial real estate sector has weakened property values as
well as the general health of the construction industry and related financial
institutions.
INVESTMENT MANAGEMENT
The Fund receives all investment advisory services on an "internalized," at-
cost basis from an experienced investment management staff employed directly
by The Vanguard Group, Inc. ("Vanguard"), a subsidiary jointly owned by the
Fund and the other Funds in The Vanguard Group of Investment Companies. The
investment management staff is supervised by the senior Officers of the Fund.
The investment management staff is responsible for: maintaining the speci-
fied standards; making changes in specific issues in light of changes in the
fundamental basis for purchasing such securities; and adjusting the Fund to
meet cash inflow (or outflow), which reflects net purchases and exchanges of
shares by investors (or net redemptions of shares) and reinvestment of the
Fund's income.
A change in securities held by the Fund is known as "portfolio turnover" and
may involve the payment of the Fund of dealer mark-ups, underwriting commis-
sions and other transaction costs on the sales of securities as well as on the
reinvestment of the proceeds in other securities. The annual portfolio turn-
over rate for each of the Fund's portfolios is set forth under the heading
"Financial Highlights" in the New Jersey Tax-Free Fund prospectus. The portfo-
lio 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.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offer-
ing of its shares, (ii) to reject purchase orders when in the judgment of man-
agement such rejection is in the best interest of the Fund, and (iii) to re-
duce or waive the minimum for initial and subsequent investments under circum-
stances where certain economies can be achieved in sales of the Fund's shares.
STOCK CERTIFICATES. Your purchase will be made in full and fractional shares
of the Fund calculated to three decimal places. Shares are normally held on
deposit for shareholders by the Fund, which will send to shareholders a state-
ment of shares owned at the time of each transaction. This saves the share-
holders the trouble of safekeeping the certificates and saves the Fund the
cost of issuing certificates. Share certificates are, of course, available at
any time upon written request at no additional cost to shareholders. No cer-
tificates will be issued for fractional shares.
B-10
<PAGE>
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading
on the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not rea-
sonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods
as the Commission may permit.
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities held by the Fund in lieu of cash in confor-
mity with applicable rules of the Commission. Investors may incur brokerage
charges on the sale of such securities so received in payment of redemptions.
No charge is made by the Fund for redemptions except for wire redemptions of
under $5000 which may be charged a maximum fee of $5.00. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Fund.
SIGNATURE GUARANTEES. To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Fund to be sure that you are the person who has autho-
rized a redemption from your account. Signature guarantees are required in
connection with: (1) redemptions involving more than $25,000 on the date of
receipt by Vanguard of all necessary documents; (2) all redemptions, regard-
less of the amount involved, when the proceeds are to be paid to someone other
than the registered owners); and (3) share transfer requests.
A signature guarantor may be obtained from banks, brokers and any other
guarantor institution that Vanguard deems acceptable.
The signature guarantees must appear either: (1) on the written request for
redemption, (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed, or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
VALUATION OF SHARES
The valuation of shares of the New Jersey Insured Long-Term Portfolio is de-
scribed in detail in the Prospectus.
NEW JERSEY MONEY MARKET PORTFOLIO. The net asset value per share of the New
Jersey Money Market Portfolio is determined on each day that the New York
Stock Exchange is open and on any other day on which there is sufficient trad-
ing in the Fund's securities to materially affect the Fund's net asset value
per share.
It is the policy of the New Jersey Money Market Portfolio to attempt to
maintain a net asset value of $1.00 per share for purposes of sales and re-
demptions. The New Jersey Money Market Portfolio seeks to maintain, but does
not guarantee a constant net asset value of $1.00 per share. Although the New
Jersey Money Market Portfolio invests in high-quality instruments, the shares
of the Portfolio are not insured or guaranteed by the U.S. Government. The in-
struments held by the New Jersey Money Market Portfolio are valued on the ba-
sis of amortized cost which does not take into account unrealized capital
gains or losses. This involves valuing an instrument at-cost and thereafter
assum-
B-11
<PAGE>
ing a constant amortization to maturity of any discount or premium, regardless
of the impact of fluctuating interest rates on the market value of the instru-
ment. While this method provides certainty in valuation, it may result in pe-
riods 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 Portfo-
lio computed as described above may tend to be higher than a like computation
made by a fund with identical investments utilizing a method of valuation
based upon market prices and estimates of market prices for all of its portfo-
lio instruments. Thus, if the use of amortized cost by the Portfolio resulted
in a lower aggregate portfolio value on a particular day, a prospective in-
vestor 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 ex-
isting investors in the Portfolio would receive less investment income. The
converse would apply in a period of rising interest rates.
The valuation of the New Jersey 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 has agreed to adhere to cer-
tain conditions. Accordingly, the Fund has agreed to maintain a dollar-
weighted average portfolio maturity for the New Jersey Money Market Portfolio
of 90 days or less, to purchase instruments having remaining maturities of one
year or less only, and to invest only in securities determined by the Board of
Trustees to be of good quality with minimal credit risks.
It is a fundamental objective of management to maintain the Portfolio's
price per share as computed for the purpose of sales and redemptions at $1.00.
The Trustees have established procedures designed to achieve this objective.
Such procedures will include a review of the Portfolio's holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
the Portfolio's net asset value calculated by using available market quota-
tions deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Trustees. If such deviation exceeds 1/2 of
1%, the Trustees will promptly consider what action, if any, will be initiat-
ed. In the event the Trustees determine that a deviation exists which may re-
sult in material dilution or other unfair results to investors or existing
shareholders, they have agreed to take such corrective action as they regard
as necessary and appropriate, including the sale of portfolio instruments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity; withholding dividends; making a special capital distribu-
tion; redemptions of shares in kind; or establishing a net asset value per
share by using available market quotations.
B-12
<PAGE>
MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The Fund's Officers, under the supervision of the Board of Trustees, manage
the day-to-day operations of the Fund. The Trustees, which are elected annu-
ally by shareholders, 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 5 years is set
forth below. As of November 30, 1994, the Trustees owned less than 1% of the
Fund's outstanding shares. The mailing address of the Fund's Trustees and Of-
ficers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, Chief Executive Officer and Trustee*
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group; Director of
The Mead Corporation and General Accident Insurance.
JOHN J. BRENNAN, President & Trustee*
President and Director of The Vanguard Group, Inc., and of each of the in-
vestment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Trustee
Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and Pacific Tea Company, Alco Standard Corp.,
Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual Life Insur-
ance Co. and Trustee Emerita of Wellesley College.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Direc-
tor of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications Com-
pany.
ALFRED M. RANKIN, Trustee
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of the BFGoodrich Company, The Standard Products Company and the Re-
liance Electric Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, The Nature Conservancy; formerly, Di-
rector and Senior Partner, McKinsey & Co. and President, New York University;
Director of Pacific Gas and Electric Company and NACCO Industries.
JAMES O. WELCH, JR., Trustee
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver Edu-
cational Foundation.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc., Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment companies
in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc., Controller of each of the invest-
ment companies in The Vanguard Group.
--------
* Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.
THE VANGUARD GROUP
Vanguard New Jersey Tax-Free Fund is a member of The Vanguard Group of In-
vestment Companies. Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group obtain at-
cost virtually all of their corporate management, administrative and distribu-
tion services. Vanguard also provides investment advisory services on an at-
cost basis to several of the Vanguard Funds, including the Vanguard New Jersey
Tax-Free Fund.
B-13
<PAGE>
Vanguard employs a supporting staff of management and administrative person-
nel needed to provide the requisite services to the Funds and also furnishes
the Funds with necessary office space, furnishings and equipment. Each Fund
pays its share of Vanguard's net expenses which are allocated among the Funds
under methods approved by the Board of Trustees (Directors) of each Fund. In
addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees. In order to generate additional revenues for Vanguard and
thereby reduce the Fund's expenses, Vanguard also provides certain administra-
tive services to other organizations.
The Fund's Officers are also Officers and employees of Vanguard. No Officer
or employee owns, or is permitted to own, any securities of any external ad-
viser for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to pre-
vent 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 per-
mitted to engage in personal securities transactions. However, such transac-
tions 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
Fund's Service Agreement which was approved by the shareholders of each of the
Funds. The amounts which each of the Funds have invested are adjusted from
time to time in order to maintain the proportionate relationship between each
Fund's relative net assets and its contribution to Vanguard's capital. At No-
vember 30, 1994 Vanguard New Jersey Tax-Free Fund had contributed capital of
$223,000 to Vanguard representing 1.1% of Vanguard's capitalization. The
Fund's Service Agreement provides as follows: (a) each Vanguard Fund may in-
vest up to 0.40% of its current net assets in Vanguard and (b) there is no
other limitation on the amount that each Vanguard Fund may contribute to Van-
guard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian rela-
tionships; (6) shareholder reporting; and (7) review and evaluation of advi-
sory and other services provided to the Funds by third parties. During the
year ended November 30, 1994, the Fund's share of Vanguard's actual net costs
of operations relating to management and administrative services (including
transfer agency) totaled approximately $2,521,000.
DISTRIBUTION. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc. acts as Sales Agent for shares of the
Funds, in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional materi-
als and marketing personnel. Distribution services may also include organizing
and offering to the public, from time to time, one or more new investment com-
panies which will become members of the Group. The Trustees (Directors) and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to or-
ganize new investment companies.
One-half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remain-
ing one-half of these expenses is allocated among the Funds based upon each
Fund's sales for the preceding 24 months relative to the total sales of the
Funds as a Group, provided, however, that no Fund's aggregate quarterly rate
of contribution for distribution expenses of a marketing and promotional na-
ture shall exceed 125% of the average
B-14
<PAGE>
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, 1994, the Fund paid approximately
$366,000 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 Institutional Money Market Portfolio,
Vanguard New York Insured Tax-Free Fund, Vanguard Ohio Tax-Free, Vanguard
Florida Insured Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard
California Tax-Free Fund, Vanguard Admiral Funds, Vanguard International Eq-
uity Index Fund, Vanguard Balanced Index Fund, Vanguard Institutional Index
Fund, Vanguard Index Trust, Vanguard Tax-Managed 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 years ended
November 30, 1992, 1993 and 1994 the Fund paid approximately $105,000,
$127,000 and $170,000 of Vanguard's investment advisory expenses.
REMUNERATION OF TRUSTEES AND OFFICERS. The Fund pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. During the year ended November 30, 1994, the Fund
paid $6,000 in Trustee 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, 1994 the Fund's pro-
portionate share of remuneration paid to all Officers as a group was approxi-
mately $60,514.
Trustees who are not Officers are paid an annual fee based on the number of
years of service on the Board upon retirement. The fee is equal to $1,000 for
each year of service (up to fifteen years) and each investment company member
of the Vanguard Group contributes a proportionate amount to this fee based on
its relative net assets. Under its retirement plan, Vanguard contributes annu-
ally an amount equal to 10% of each eligible officer's annual compensation
plus 5.7% of that part of an eligible officer's compensation during the year,
if any, that exceeds the Social Security Taxable Wage Base then in effect. Un-
der its thrift plan, all eligible officers are permitted to make pre-tax con-
tributions in an amount up to 4% of total compensation, subject to federal tax
limitations, which are matched by Vanguard on a 100% basis. The Fund's propor-
tionate share of retirement contributions made by Vanguard under its retire-
ment and thrift plans on behalf of all Officers of the Fund, as a group, dur-
ing the 1994 fiscal year was approximately $6,633.
B-15
<PAGE>
The following table provides detailed information with respect to the
amounts paid or accrued for the Trustees for the fiscal year ended November
30, 1994.
VANGUARD NEW JERSEY TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM ALL
AGGREGATE ACCRUED AS ESTIMATED VANGUARD FUNDS
COMPENSATION PART OF ANNUAL BENEFITS PAID TO
NAMES OF TRUSTEES FROM FUND FUND EXPENSES UPON RETIREMENT TRUSTEES(2)
----------------- ------------ ------------- --------------- --------------
<S> <C> <C> <C> <C>
John C. Bogle(1)........ -- -- -- --
John J. Brennan(1)...... -- -- -- --
Barbara Barnes
Hauptfuhrer............ $755 $153 $15,000 $50,000
Robert E. Cawthorn...... $755 $128 $13,000 $50,000
Burton G. Malkiel....... $755 $102 $15,000 $50,000
Alfred M. Rankin, Jr. .. $755 $ 81 $15,000 $50,000
John C. Sawhill......... $755 $ 96 $15,000 $50,000
James O. Welch, Jr. .... $725 $118 $15,000 $48,000
J. Lawrence Wilson...... $740 $ 85 $15,000 $49,000
</TABLE>
--------
(1) As "Interested Trustees," Messrs. Bogle and Brennan receive no compensa-
tion for their service as Trustees.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Director or Trustee of 33 Vanguard
Funds.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Pennsylvania Trust on September 25, 1987.
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest, without par value, from an unlimited number
of separate classes ("Portfolios") of shares. Currently, the Fund is offering
shares of two Portfolios.
The shares of the Fund are fully paid and nonassessable, except as set forth
under "Shareholder and Trustee Liability," and have no preference as to con-
version, exchange, dividends, retirement or other features. The shares of the
Fund have no pre-emptive rights. The shares of the Fund have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held), then standing in
his name on the books of the Fund. On any matter submitted to a vote of share-
holders, all shares of the Fund then issued and outstanding and entitled to
vote, irrespective of the class, shall be voted in the aggregate and not by
class; except (i) when required by the Investment Company 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 out-
standing, the Trustees may sell or convert the assets of the Fund to an-
other investment company in exchange for shares of such investment company,
and distribute such shares, ratably among the shareholders of the Fund.
2) Subject to the majority vote of shares of the Fund outstanding, the
Trustees may sell and convert into money the assets of the Fund and dis-
tribute such assets ratably among the shareholders of the Fund; and
B-16
<PAGE>
Upon completion of the distribution of the remaining proceeds or the remain-
ing 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 par-
ties 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 lia-
ble for errors of judgment or mistakes of fact or law, but nothing in the Dec-
laration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross negli-
gence, or reckless disregard of the duties involved in the conduct of his of-
fice.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended November 30, 1994, in-
cluding the financial highlights for each of the five years in the period
ended November 30, 1994, appearing in the Fund's 1994 Annual Report to Share-
holders, and the report thereon of Price Waterhouse LLP, independent accoun-
tants, also appearing therein, are incorporated by reference in this Statement
of Additional Information. The Fund's 1994 Annual Report to Shareholders is
enclosed with this Statement of Additional Information.
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 obliga-
tion" and "revenue" or "special tax" bonds. General obligation bonds are se-
cured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are pay-
able only from the revenues derived from a particular facility or class of fa-
cilities or, in some cases, from the proceeds of a special excise or other
tax, but not from general tax revenues. The Fund may also invest in tax-exempt
industrial development bonds, short-term municipal obligations (rated SP-1+ of
SP--1 by Standard & Poor's Corp. or MIG. by Moody's Investors Service), proj-
ect notes, demand notes and tax-exempt commercial papers (rated A-1 by Stan-
dard & Poor's Corp. or P-1 by Moody's Investors Service).
Industrial revenue bonds in most cases are revenue bonds and generally do
not have the pledge of the credit of the issuer. The payment of the principal
and interest on such industrial revenue bonds
B-17
<PAGE>
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 mu-
nicipal obligations issued by states, cities, municipalities or municipal
agencies, include Tax Anticipation Notes, Revenue Anticipation Notes, Bond An-
ticipation Notes, Construction Loan Notes and Short-Term Discount Notes.
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 ob-
ligations are secured by letters of credit or other credit support arrange-
ments provided by banks. The issuer of such notes normally has a corresponding
right, after a given period, to repay in its discretion the outstanding prin-
cipal of the note plus accrued interest upon a specific number of days' notice
to the bondholders. The interest rate on a demand note may be based upon a
known lending rate, such as a bank's prime rate, and be adjusted when such
rate changes, or the interest rate on a demand note may be a market rate that
is adjusted at specified intervals. The demand notes in which the Fund will
invest are payable on not more than one year's notice. Each note purchased by
the Fund will meet the quality criteria set out above for the Fund.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bonds market, the size of a
particular offering, the maturity of the obligation, and the rating of the is-
sue. The ratings of Moody's Investors Service, Inc. and Standard and 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 the investment management staff to ap-
praise independently the fundamental quality of the bonds held by the Fund.
Municipal Bonds are sometimes purchased on a "when-issued" basis meaning the
Fund has committed to purchasing certain specified securities at an agreed
upon price when they are issued. The period between commitment date and issu-
ance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.
From time to time proposals have been introduced before Congress to restrict
or eliminate the Federal income tax exemption for interest on Municipal Bonds.
Similar proposals may be introduced in the future. If any such proposal were
enacted, it might restrict or eliminate the ability of the Fund to achieve its
investment objective. In that event, the Fund's Trustees and officers would
reevaluate its investment objective and policies and consider recommending to
its shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State and
local legislatures to restrict or eliminate the State and local income tax ex-
emption for interest on Municipal Bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or elimi-
nate the ability of each Portfolio to achieve its respective investment objec-
tive. In that event, the fund's trustees and officers would reevaluate its in-
vestment objective and policies and consider recommending to its shareholders
changes in such objective and policies. (For more information please refer to
"Risk Factors" on page 8.)
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
B-18
<PAGE>
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 Moody's ratings of state and municipal notes: Moody's ratings
for state and municipal notes and other short-term obligations are designated
Moody's Investment Grade ("MIG"). Symbols used will be as follows: MIG-1--Best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both; MIG-2--High quality with margins of protection ample al-
though not so large as in the preceding group.
Description of Moody's highest commercial paper rating: PRIME-1 ("P-1")--
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
Excerpts from Standard & Poor's Corporation's Municipal Bond ratings: AAA--
has the highest rating assigned by S&P; extremely strong capacity to pay prin-
cipal and interest; AA--has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree; A--
has a strong capacity to pay principal and interest, although somewhat more
susceptible to the adverse changes in circumstances and economic conditions;
BBB--regarded as having an adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters but adverse economic condi-
tions or changing circumstances are more likely to lead to a weakened capacity
to pay principal and interest than for bonds in A category; BB--B--CCC--CC--
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with terms of obligation; BB is being paid; D--in de-
fault, and payment of principal and/or interest is in arrears.
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Excerpt from Standard & Poor's Corporation's rating of municipal note is-
sues: SP-1+--very strong capacity to pay principal and interest; SP-1--strong
capacity to pay principal and interest.
Description of S&P's highest commercial papers ratings: A-1+--This designa-
tion indicates the degree of safety regarding timely payment is overwhelming.
A-1--This designation indicates the degree of safety regarding timely payment
is very strong.
B-19
<PAGE>
APPENDIX B--MUNICIPAL LEASE OBLIGATIONS
Each Portfolio may invest in municipal lease obligations. Such securities
will be treated as liquid under the following guidelines have been established
by the Board of Trustees:
1. The obligation has been rated "investment grade" by at least on NRSRO and
is considered to be investment grade by the investment adviser.
2. The obligation is secured by payments from a governmental lessee which is
generally recognized and has debt obligations which are actively traded by a
minimum of five broker/dealers.
3. At least $25 million of the lessee debt is outstanding either in a single
transaction or on parity, and owned by a minimum of five institutional invest-
ors.
4. The investment adviser has determined that the obligation, or a compara-
ble lessee security, trades in the institutional marketplace at least periodi-
cally, 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 obli-
gation 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 criti-
cal to the lessee"s ability to deliver essential services.
7. Specific legal features such as covenants to maintain the tax-exempt sta-
tus 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 payment are net of property
maintenance, taxes and insurance).
9. If the lessor is a private entity, there must be a sale and absolute as-
signment of rental payments to the trustee, accompanied by a legal opinion
from recognized bond counsel that lease payments would not be considered prop-
erty of the lessor's estate in the event of lessor's bankruptcy.
B-20
