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VANGUARD
NEW JERSEY
TAX-FREE FUND
Semiannual Report - May 31, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly motivated
men and women--who form the cornerstone of our operations. We could not survive
long--let alone prosper--without them. That's why we chose this fiscal year's
fund reports to celebrate the spirit, enthusiasm, and achievements of our crew.
(We call those who work at Vanguard crew members, not employees, because they
operate as a team to accomplish our mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Senior Chairman Chairman & CEO
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CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS .................... 1
THE MARKETS IN PERSPECTIVE ....................... 3
REPORT FROM THE ADVISER .......................... 5
PERFORMANCE SUMMARIES ............................ 7
PORTFOLIO PROFILES ............................... 8
FINANCIAL STATEMENTS ............................. 11
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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DEAR SHAREHOLDER,
Prices of municipal bonds nudged higher during the first half of Vanguard
New Jersey Tax-Free Fund's 1998 fiscal year, reflecting a slight easing in
long-term interest rates and docile inflation. These higher prices, combined
with six months of interest income, gave investors in tax-exempt securities a
solid return for the half-year ended May 31, 1998.
In this environment, the +1.6% earned by our Money Market Portfolio and the
+3.8% return of our Insured Long-Term Portfolio outpaced the returns of their
peers. The table at right presents each Portfolio's six-month return as well as
those of average competing mutual funds.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
MAY 31, 1998
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<S> <C>
MONEY MARKET PORTFOLIO +1.6%
Average New Jersey
Tax-Exempt Money Market Fund +1.4
- ------------------------------------------------------------
INSURED LONG-TERM PORTFOLIO +3.8%
Average New Jersey
Municipal Bond Fund +3.4
- ------------------------------------------------------------
</TABLE>
The total return (capital change plus reinvested dividends) of the Insured
Long-Term Portfolio is based on an increase in net asset value from $11.72 per
share on November 30, 1997, to $11.85 per share on May 31, 1998, adjusted for
dividends totaling $0.301 per share paid from net investment income, and a
distribution of $0.011 per share paid from net realized capital gains. The Money
Market Portfolio's net asset value remained at $1 per share, as is expected but
not guaranteed. On May 31, the Insured Long-Term Portfolio's yield stood at
4.58%, and the Money Market Portfolio's yield at 3.41%.
THE PERIOD IN REVIEW
A storybook environment that featured solid economic growth, declining interest
rates, and well-behaved inflation showed no signs of fading during the
half-year. As a result, the six-month period was a good one for bonds and even
better for stocks.
The decline in interest rates was particularly helpful. Yields on long-term
U.S. Treasury bonds declined on balance during the half-year by approximately 25
to 30 basis points (0.25 to 0.30 percentage point). The yield on the 30-year
Treasury bond ended the period at 5.80%, down from 6.05% on November 30, 1997,
while rates on 3-month T-bills declined by 19 basis points, from 5.20% to 5.01%.
The rate decline stemmed from remarkably good inflation news--consumer prices
were up just 0.8% during the period--and a conviction among market participants
that one consequence of Asia's continuing economic crisis would be to keep a lid
on inflation and interest rates in the United States.
Yields on high-grade, long-term municipal bonds fell on balance to 5.22% on
May 31, down from 5.36% on November 30, 1997. The yield on top-grade (MIG-1)
short-term municipal notes declined to 3.65%, from 3.80% six months earlier.
Despite the good news for bonds, stocks continued to lead the party. The
Standard & Poor's 500 Composite Stock Price Index returned +15.1% for the six
months, a spectacular return for such a brief period.
Our low expenses explained the advantage achieved by our Money Market
Portfolio, which returned +1.6%, over the average New Jersey tax-exempt money
market mutual fund, which returned +1.4%.
The +3.8% total return achieved by the Insured Long-Term Portfolio
consisted of a +2.6% income return and a +1.2% capital return that reflected
slightly lower interest rates. The Portfolio's performance topped the +3.4%
return of the average New Jersey
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municipal bond fund and exactly matched the return of the unmanaged Lehman
Brothers Municipal Bond Index. This national Index, which exists outside the
"real world" of operating expenses and transaction costs, is a tough standard
for all state tax-exempt funds.
In reviewing the results of the past six months, it's important to
remember that the interest rate environment is not always so friendly to bond
investors. During periods when interest rates are on the rise, existing bond
prices fall and thus diminish, rather than augment, a fund's total return.
Also, we urge you to keep in mind that our six-month performance accounts
for only half of the year's interest income, whereas bond prices react
immediately to interest rate changes. However, over time, unpredictable changes
in interest rates tend to even out, leaving the rate of interest income as the
chief source of long-term bond returns. That's why investors should consider a
full year's interest income as part of a semiannual review. Over the twelve
months ended May 31, 1998--a period when interest rates generally declined--our
Insured Long-Term Portfolio provided a total return of +8.7%, consisting of an
income return of +5.4% and a capital return of +3.3%.
For Vanguard New Jersey Tax-Free Fund, our excellent long-term
performance is largely a function of two elements: our low expenses and our
disciplined management approach. For our shareholders, these factors are
significant and durable advantages that we expect to continue. Our Portfolios
have annualized expense ratios (expenses as a percentage of average net assets)
of about 0.20%, compared with 1.03% charged by the average long-term state
tax-exempt fund and 0.53% for the average state tax-exempt money market fund.
Our cost advantage allows us to offer a portfolio of higher-quality bonds
without compromising the yields earned by our shareholders. Our Insured
Long-Term Portfolio invests in bonds that carry private insurance guaranteeing
the payment of principal and interest in the event of an issuer's default. This
insurance comes at the cost of slightly lower gross yields, but our lower costs
more than make up the difference, thus enabling our Portfolio to provide net
returns that are fully competitive with those of uninsured municipal bond
portfolios.
IN SUMMARY
While it's enjoyable to bask in the glow of the financial markets' recent
stellar performance, it's important to remember that the markets are still
subject to cycles. Interest rates cannot--and will not--march lower
indefinitely. Nor will stocks sustain their above-average performance forever.
Given that financial markets are not a one-way street, we reiterate our
belief that a balanced portfolio of stock funds, bond funds, and money market
funds can help investors "stay the course" toward their investment
objectives--no matter what the market environment.
We look forward to reporting to you in further detail in our 1998 annual
report six months hence.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
June 16, 1998
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THE MARKETS IN PERSPECTIVE
Six Months Ended May 31, 1998
The U.S. financial markets turned in another excellent performance during the
half-year ended May 31. The stock market's gains would have been good even for
a full year, and the bond market chalked up solid returns.
Consumer spending was the economy's locomotive. Americans spent freely on
houses, automobiles, and just about everything else. Their spirits were buoyed
by a very strong job market--the nation's unemployment rate was 4.3% in May,
tying a 28-year low--and by higher wages (average hourly earnings in May were
4.3% higher than a year before). Growth in the consumer sector, which accounts
for two-thirds of all economic activity, was more than enough to offset the
negative effects of Asia's financial and economic crisis. A strong rise in the
value of the U.S. dollar since mid-1997 in relation to most Asian currencies has
cut into U.S. exports to Asia while lowering the cost of Asian goods for
American buyers. The upshot is intensifying competition for U.S. companies, some
of which have blamed the Asian crisis for reduced profits.
The silver lining in the Asian cloud is that, by offsetting some of the
strength elsewhere in the U.S. economy, it has reduced inflationary pressures.
Ordinarily, low unemployment, rising wages, and a rapidly growing economy might
be expected to push up consumer prices. But thanks in part to lower-priced Asian
imports, inflation has been remarkably well behaved--the Consumer Price Index
rose just 0.8% during the six months ended May 31. Benign inflation and a
conviction that the Asian situation will keep the Federal Reserve Board from
raising interest rates anytime soon allowed interest rates to decline.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED MAY 31, 1998
-----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 15.1% 30.7% 22.2%
Russell 2000 Index 6.5 21.2 16.1
MSCI EAFE Index 16.2 11.4 9.8
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FIXED INCOME
Lehman Aggregate Bond Index 4.1% 10.9% 7.1%
Lehman 10-Year Municipal Bond Index 3.8 9.3 6.9
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.7 5.3 4.9
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OTHER
Consumer Price Index 0.8% 1.7% 2.5%
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</TABLE>
*Annualized.
U.S. EQUITY MARKETS
Stock prices rose in each of the first five months of the period before
declining in May. Gains were largest for large-capitalization stocks. The S&P
500 Index, which is dominated by large-cap stocks, earned a total return of
15.1%, while the rest of the stock market, as measured by the Wilshire 4500
Equity Index, returned 10.4%. The Russell 2000 Index, focusing on small-cap
stocks, gained 6.5%.
Stock prices were supported by declining interest rates and the
surprisingly low inflation rate, which led to an expansion of price/earnings
multiples investors were willing to pay for stocks. The news on corporate
earnings, another key fundamental in stock valuation, was not so positive.
Corporate earnings in the January-March quarter were up by less than 5% from the
previous year, and securities analysts steadily reduced their estimates
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of earnings for the full year. Concern about meager growth in profits--partly
because of increased competition from Asia--was a factor in the stock market's
decline from record highs set in late April.
The consumer spending boom was reflected in the stock market's performance.
The best-performing sector was auto & transportation stocks. This segment of the
S&P 500 Index earned 28.6% for the six months. The consumer discretionary
sector, which makes up 10% of the Index, was up 23.0% for the half-year, and
health-care stocks, which make up nearly 12% of the S&P 500, gained 22.2%. Lower
oil prices were to blame for the two weakest sectors--integrated oil companies
(up 8.2%) and the "other energy" group (down 6.3%).
U.S. FIXED-INCOME MARKETS
The decline in interest rates during the period meant that bond investors saw
modest price increases along with their interest income. The Lehman Brothers
Aggregate Bond Index, a yardstick for the overall taxable bond market, earned
4.1%, bringing its return over the past 12 months to 10.9%, a superb
inflation-adjusted return of 9.2%. Bonds benefited from both an easing of
inflation fears and, reportedly, from a "flight to quality" by Asian investors
who some analysts believe bought U.S. Treasury securities to protect themselves
from further declines in their currencies versus the U.S. dollar.
The rate decline was more pronounced for longer-term bonds. While yields on
3-month Treasury bills declined 19 basis points (0.19 percentage point) during
the half-year, yields on 10- and 30-year Treasuries fell by 32 and 25 basis
points, respectively, to 5.55% and 5.80%. The flattening of the yield curve
during the period signaled that market participants expect interest rates to
remain stable or to decline further. No one knows whether that expectation will
prove correct, but investors certainly are being paid very little to bear the
higher risk of price fluctuations that comes with longer-term bonds. As of May
31, the yield on 10-year Treasuries was only 2 basis points higher than the
5.53% yield on 3-year Treasuries, even though the price of a 10-year note is
three times more sensitive to changes in interest rates than that of a 3-year
note.
INTERNATIONAL EQUITY MARKETS
Europe's stock markets made Wall Street's bull market look like a mere calf
during the first half of the fiscal year, while Asian markets slumped under the
weight of falling currencies and weakening economic activity. Overall, the
Morgan Stanley Capital International Europe, Australasia, Far East Index rose
16.2% in U.S. dollar terms. Its European component was up a remarkable 29.7% in
U.S. dollar terms and an even-stronger 32.7% in local currencies. A
strengthening in the dollar versus other currencies slightly cut returns for
American investors.
Several factors were credited for Europe's bull market, including a
recovery in economic activity across the continent and an increase in U.S.-style
efforts to boost shareholder value, including share repurchases, corporate
restructurings, and mergers. In addition, investors seemed pleased at the smooth
progress toward the January 1, 1999, adoption by 11 countries of a common
currency, the euro.
In the Pacific, stock markets were, on balance, down 2.7% in local-currency
terms. But a weakening of the Japanese yen and several other currencies versus
the U.S. dollar resulted in a decline of 9.9% in U.S. dollar terms. Japan, the
dominant Pacific Rim economy and stock market, officially acknowledged that its
economy had fallen into a recession. A number of investors, analysts, and others
criticized the Japanese government for being slow to adopt economic reforms and
other measures to spur business activity.
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REPORT FROM THE ADVISER
The uncertainty facing financial markets at the start of Vanguard New Jersey
Tax-Free Fund's 1998 fiscal year continued throughout the past six months. The
U.S. economy displayed surprising strength, which obliged the Federal Reserve
Board's Open Market Committee to reinstate a bias toward a tighter monetary
policy. Disruptive events in Asia boosted demand for U.S. Treasury securities.
The dichotomy between domestic and international forces caused interest rates to
trade within a narrow range. Against this backdrop, the prices of municipal
bonds remained relatively stable during the six months. The Insured Long-Term
Portfolio's total return was 3.8%, while the Money Market Portfolio earned 1.6%.
During the period, tight labor markets underscored the strength in the
domestic economy, which grew at a robust 5.4% annual pace during the
January-March quarter. Monthly increases in nonfarm payrolls averaged 277,000
during the first half of our fiscal year, and the nation's unemployment rate
dropped to a 28-year low of 4.3% in April and May. On the other hand, economic
and political unrest in Asia cast a bit of a shadow on the strong U.S. economy.
In Indonesia, riots and protests against the government and economic conditions
ultimately forced President Suharto to step down after a 32-year reign. In
Japan, economic lethargy persisted, and the yen fell to its lowest level against
the U.S. dollar in eight years. Asian investors bought U.S. Treasury securities
as a potential safe haven, helping interest rates to fall instead of to rise, as
they might otherwise have done in a strong domestic economy.
THE INSURED LONG-TERM PORTFOLIO
Over the fiscal half-year, the yield on the 30-year Treasury bond declined 0.25
percentage point to 5.80%. Rates didn't drop as far for municipal bonds, with
the yield on 30-year, AAA-rated bonds declining 0.13 percentage point to 5.05%.
Municipal bond yields didn't fall as much as yields on taxable bonds primarily
because of an increased supply of new municipals. Municipal issuance for the six
months was 50% higher than during the same period a year earlier, thanks partly
to a heavy volume of refundings (bonds issued to refinance debt at lower
interest rates). Another big factor was a $3.5 billion transaction for the Long
Island Power Authority, the largest single new issue in the history of municipal
finance.
Market conditions appear favorable for municipal bonds. Supply should
diminish as refunding volume subsides. Moreover, in June and July investors will
have an estimated $45 billion to $60 billion of coupon payments and bond
redemptions to reinvest, so demand for bonds should be strong in the summer.
In our last report to you, we discussed the narrowing spread between
yields on high- and lower-quality municipals. The decline stemmed both from the
overall reduction in bond yields and the growing use of municipal bond
insurance to enhance credit quality, which limited the supply of lower-quality,
higher-yielding bonds. This compression in quality spreads continued
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during the first half of fiscal 1998. Nearly half of all newly issued municipal
bonds came with insurance that enabled the bonds to secure a top AAA rating. As
a result, the yield spread between AAA-rated insured and BBB-rated (low-quality)
bonds narrowed to 15 basis points (0.15 percentage point). In short, investors
were taking substantially greater credit risk to earn a very modest incremental
yield. It is difficult to predict when this trend will reverse, but when it
does, prices of low-quality bonds will decline relative to prices of
high-quality insured bonds. Your Insured Long-Term Portfolio is positioned to
benefit from such a reversal. The Portfolio maintains top overall credit quality
through a combination of insured and AA-rated municipal bonds. Coupled with our
low expense ratio, the Portfolio's high credit quality offers shareholders an
unbeatable combination of minimal credit risk and consistent, above-average
performance relative to our competitors.
THE MONEY MARKET PORTFOLIO
The economic drama that unfolded throughout the first half of the fiscal year
triggered a 7-basis-point decline in yields on 1-year Treasury bills, which
finished the period with a 5.42% yield. Concurrently, yields on 1-year
municipals fell 6 basis points to conclude the period at 3.75%. With the
domestic economy's strength offset somewhat by ongoing economic uncertainties
abroad, the Money Market Portfolio is positioned neutrally in terms of its
average maturity. In addition to economic forces, two issues had a significant
impact on the short-term municipal securities market.
The first issue was the adoption by the Securities and Exchange Commission
of amendments to Rule 2a-7 under the Investment Company Act of 1940. This
regulation governs certain risk characteristics of money market portfolios. The
changes were designed to tighten regulation of money market funds and improve
the likelihood that the funds will retain a stable net asset value. Because
Vanguard's tax-exempt money market portfolios have been and will continue to be
managed conservatively with a focus on high quality, the impact of these
amendments should be minimal for our shareholders. However, some of our
competitors operate with lower quality standards, and may have to alter their
approach to fund management.
The second issue was the onset of heavy share redemptions during April and
May, a seasonal outflow as shareholders paid personal income taxes. The sector
of the mutual fund market that includes state-specific money market portfolios
lost $4.1 billion in assets, or 6.5% of the total, during tax season, according
to IBC Financial Data. As funds sold securities to provide cash for share
redemptions, an overabundance of supply in the short-term market was created.
This excess supply caused a spike in yields during late April and much of May.
We took advantage of this rise in yields to selectively purchase securities with
maturity dates other than early July, when a seasonal lack of supply is expected
to push yields lower. We also used this buying opportunity to further diversify
the Portfolio and enhance its overall credit quality.
Ian A. MacKinnon, Managing Director
Pamela Wisehaupt Tynan, Principal
Reid O. Smith, Principal
John M. Carbone, Principal
Danine A. Mueller, Principal
Christopher M. Ryon, Principal
Vanguard Fixed Income Group
June 15, 1998
INVESTMENT PHILOSOPHY
The adviser believes that each Portfolio, while operating within stated maturity
and stringent quality targets, can achieve a high level of current income that
is exempt from federal and New Jersey income taxes by investing in insured and
high-quality uninsured securities issued by New Jersey state, county, and
municipal governments.
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PERFORMANCE SUMMARIES
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolios. Note, too, that
returns can fluctuate widely. An investment in a money market fund is neither
insured nor guaranteed by the U.S. government, and there is no assurance that
the fund will be able to maintain a stable net asset value of $1 per share.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
TOTAL INVESTMENT RETURNS: FEBRUARY 3, 1988-MAY 31, 1998
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MONEY MARKET PORTFOLIO AVERAGE
FUND*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
1988 0.0% 4.2% 4.2% 4.3%
1989 0.0 6.3 6.3 6.4
1990 0.0 5.8 5.8 5.8
1991 0.0 4.5 4.5 4.5
1992 0.0 3.0 3.0 2.8
1993 0.0 2.3 2.3 2.0
1994 0.0 2.5 2.5 2.2
1995 0.0 3.6 3.6 3.3
1996 0.0 3.2 3.2 2.9
1997 0.0 3.3 3.3 3.0
1998** 0.0 1.6 1.6 1.4
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</TABLE>
* Average New Jersey Tax-Exempt Money Market Fund.
** Six months ended May 31, 1998.
See Financial Highlights table on page 21 for dividend information for the past
five years.
<TABLE>
<CAPTION>
INSURED LONG-TERM PORTFOLIO
TOTAL INVESTMENT RETURNS: FEBRUARY 3, 1988-MAY 31, 1998
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INSURED LONG-TERM PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
1988 0.1% 5.9% 6.0% 5.3%
1989 4.4 7.4 11.8 11.0
1990 0.7 7.0 7.7 7.7
1991 2.3 6.7 9.0 10.3
1992 4.1 6.4 10.5 10.0
1993 6.6 5.9 12.5 11.1
1994 -11.2 5.1 -6.1 -5.2
1995 13.3 6.4 19.7 18.9
1996 -0.7 5.4 4.7 5.9
1997 1.0 5.4 6.4 7.2
1998** 1.2 2.6 3.8 3.8
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</TABLE>
* Lehman Municipal Bond Index.
** Six months ended May 31, 1998.
See Financial Highlights table on page 22 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1998*
- --------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Portfolio 2/3/1988 3.33% 3.04% 0.00% 3.91% 3.91%
Insured Long-Term Portfolio 2/3/1988 9.66 6.40 2.15 6.24 8.39
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
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PORTFOLIO PROFILE
Money Market Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of May
31, 1998. Key elements of this Profile are defined on page 9.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
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<S> <C>
Yield 3.4%
Average Maturity 59 days
Average Quality MIG-1
Expense Ratio 0.21%*
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ----------------------------------------------------------
<S> <C>
MIG-1/SP-1+ 60.8%
A-1/P-1 21.1
AAA/AA 13.6
A 4.5
- ----------------------------------------------------------
Total 100.0%
</TABLE>
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AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's duration by the change in rates. If interest
rates rise by 1 percentage point, the share price of a portfolio with an average
duration of five years would decline by about 5%. If rates decrease by a
percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a portfolio's share price will fluctuate in response
to changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating agencies.
The agencies make their judgment after appraising an issuer's ability to meet
its obligations. Quality is graded on a scale, with Aaa or AAA indicating the
most creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy
issuers of money market securities.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate bond
investment.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a portfolio's share
price will fluctuate in response to changes in interest rates.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: average maturity (short, medium, or long) and average credit quality
(high, medium, or low).
NUMBER OF ISSUES. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from the
problems of a particular issue.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
YIELD. A snapshot of a portfolio's interest income. The yield, expressed as a
percentage of the portfolio's net asset value, is based on income earned over
the past 30 days (7 days for money market portfolios) and is annualized, or
projected forward for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
9
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PORTFOLIO PROFILE
Insured Long-Term Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of May
31, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 194
Yield 4.6%
Yield to Maturity 4.6%
Average Coupon 5.4%
Average Maturity 9.7 years
Average Quality AAA
Average Duration 6.9 years
Expense Ratio 0.20%*
Cash Reserves 0.0%
</TABLE>
*Annualized.
INVESTMENT FOCUS
- ---------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
INSURED LONG-TERM LEHMAN
PORTFOLIO INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.97 1.00
Beta 1.08 1.00
</TABLE>
*Lehman Municipal Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ---------------------------------------------------------
<S> <C>
AAA 95.2%
AA 4.8
A 0.0
BBB 0.0
BB 0.0
B 0.0
Not Rated 0.0
- ---------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- ---------------------------------------------------------
<S> <C>
Under 1 Year 5.0%
1-5 Years 18.9
5-10 Years 39.9
10-20 Years 26.9
20-30 Years 8.8
Over 30 Years 0.5
- ---------------------------------------------------------
Total 100.0%
</TABLE>
10
<PAGE> 13
FINANCIAL STATEMENTS
May 31, 1998 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's municipal bond
holdings, including each security's market value on the last day of the
reporting period and information on credit enhancements (insurance or letters of
credit). Securities are grouped and subtotaled according to their insured or
noninsured status. Other assets are added to, and liabilities are subtracted
from, the value of Total Municipal Bonds to calculate the Portfolio's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the
Portfolio to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Portfolio's net assets on both a dollar and per-share
basis. Undistributed Net Investment Income is usually zero because the Portfolio
distributes its net income to shareholders as a dividend each day. Any realized
gains must be distributed annually, so the bulk of net assets consists of Paid
in Capital (money invested by shareholders). The balance shown for Accumulated
Net Realized Gains usually approximates the amount available to distribute to
shareholders as taxable capital gains as of the statement date, but may differ
because certain investments or transactions may be treated differently for
financial statement and tax purposes. Any Accumulated Net Realized Losses, and
any cumulative excess of distributions over net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the value of the Portfolio's investments and their cost, and reflects
the gains (losses) that would be realized if the Portfolio were to sell all of
its investments at their statement-date values.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (99.1%)
- ------------------------------------------------------------------------------------------------------------------------
Bernards Township NJ BAN 4.00% 5/21/1999 $ 4,311 $ 4,323
Burlington County NJ BAN 3.90% 2/10/1999 20,000 20,054
Burlington County NJ BAN 4.00% 3/11/1999 4,842 4,859
Chatham Township NJ BAN 3.875% 2/18/1999 1,215 1,217
Cherry Hill Township NJ 4.50% 10/14/1998 30,034 30,113
Clifton NJ GO 3.875% 6/25/1998 4,500 4,501
Cranbury Township NJ BAN 3.875% 3/10/1999 2,845 2,852
Englewood NJ BAN 4.25% 7/16/1998 5,107 5,109
Essex County NJ Improvement Auth. Pooled Govt. Loan VRDO 3.60% 6/3/1998 LOC 32,650 32,650
Essex Fells NJ BAN 4.25% 12/11/1998 4,750 4,762
Florham Park Borough NJ BAN 4.25% 11/6/1998 3,506 3,513
Gloucester County NJ PCR VRDO
(Mobil Oil Refining Corp. Project) 3.75% 6/3/1998 20,200 20,200
Hackensack City NJ BAN 4.00% 12/17/1998 4,943 4,949
Lawrence Township NJ BAN 4.25% 11/6/1998 8,410 8,426
Linden City NJ BAN 4.40% 6/17/1998 3,000 3,001
Mahwah Township NJ BAN 4.25% 8/21/1998 3,500 3,503
Mercer County NJ BAN 4.00% 3/11/1999 18,005 18,070
Monmouth County NJ BAN 4.375% 8/27/1998 3,900 3,906
Monmouth County NJ GO 4.00% 8/1/1998 1,500 1,501
Monmouth County NJ GO (County College) 4.00% 8/1/1998 730 730
Monmouth County NJ VRDO
(Improvement Auth. Pooled Govt. Loan Program) 3.55% 6/3/1998 LOC 50,000 50,000
Montgomery Township NJ BAN 4.00% 2/10/1999 4,905 4,920
Montgomery Township NJ BAN 4.125% 7/14/1998 2,095 2,096
Moorestown NJ BAN 4.25% 9/4/1998 6,000 6,006
Morris County NJ BAN 4.25% 12/9/1998 13,887 13,926
Morris County NJ General Improvement GO 4.50% 8/15/1998 2,190 2,193
Morris County NJ GO (County College) 4.50% 8/15/1998 840 841
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mount Olive Township NJ BAN 4.125% 10/15/1998 $ 5,624 $ 5,631
Mount Olive Township NJ BAN 4.25% 7/14/1998 1,694 1,695
Mountain Lakes NJ BAN 4.00% 1/27/1999 1,156 1,158
New Jersey Econ. Dev. Auth. CP (Chambers Cogeneration Project) 3.60% 8/10/1998 LOC 14,100 14,100
New Jersey Econ. Dev. Auth. CP (Chambers Cogeneration Project) 3.60% 9/10/1998 LOC 15,000 15,000
New Jersey Econ. Dev. Auth. CP (Logan Project) 3.40% 6/10/1998 LOC 20,000 20,000
New Jersey Econ. Dev. Auth. CP (Logan Project) 3.55% 8/3/1998 LOC 9,200 9,200
New Jersey Econ. Dev. Auth. CP (Logan Project) 3.65% 8/11/1998 LOC 8,300 8,300
New Jersey Econ. Dev. Auth. Market Transition Fac. Rev. GO 4.80% 7/1/1998 (1) 5,985 5,990
New Jersey Econ. Dev. Auth. Natural Gas Fac. Rev. VRDO
(NJ Natural Gas Project) 3.60% 6/3/1998 (2) 1,745 1,745
New Jersey Econ. Dev. Auth. Natural Gas Fac. Rev. VRDO
(NJ Natural Gas Project) 3.90% 6/2/1998 (2) 19,600 19,600
New Jersey Econ. Dev. Auth. Natural Gas Fac. Rev. VRDO
(NJ Natural Gas Project) 3.95% 6/2/1998 (2) 6,700 6,700
New Jersey Econ. Dev. Auth. PCR VRDO (Exxon Project) 3.50% 6/2/1998 12,500 12,500
New Jersey Econ. Dev. Auth. PCR VRDO
(Public Service Electric & Gas Co.) 3.70% 6/3/1998 (1) 5,000 5,000
New Jersey Econ. Dev. Auth. PCR VRDO
(Public Service Electric & Gas Co.) 3.75% 6/3/1998 (1) 29,220 29,220
New Jersey Econ. Dev. Auth. VRDO (Lawrence School Project) 3.70% 6/4/1998 23,100 23,100
New Jersey Econ. Dev. Auth. VRDO (United States Golf Association) 3.75% 6/4/1998 LOC 2,400 2,400
New Jersey Econ. Dev. Auth. Water Fac. TOB VRDO
(NJ American Water Co. Project) 3.94% 6/4/1998 (3) 4,850 4,850
New Jersey Econ. Dev. Auth. Water Fac. VRDO
(Elizabethtown Water Co. Project) 3.75% 6/3/1998 (2) 16,600 16,600
New Jersey Econ. Dev. Auth. Water Fac. VRDO
(Elizabethtown Water Co. Project) 3.85% 6/3/1998 (2) 13,600 13,600
New Jersey Econ. Dev. Auth. Water Fac. VRDO (United Water Co.) 3.75% 6/2/1998 (2) 20,700 20,700
New Jersey Econ. Dev. Auth. Water Fac. VRDO (United Water Co.) 3.85% 6/2/1998 (2) 5,300 5,300
New Jersey Econ. Dev. Auth. Water Fac. VRDO (United Water Co.) 3.95% 6/2/1998 (2) 20,300 20,300
New Jersey Educ. Fac. Auth Rev. RAN (Princeton Univ.) 3.90% 7/1/1998 1,695 1,695
New Jersey GO 4.50% 3/1/1999 6,365 6,412
New Jersey GO 5.00% 7/15/1998 3,590 3,595
New Jersey Health Care Fac. Finance Auth. VRDO
(Hosp. Capital Asset Pooled Program) 3.70% 6/4/1998 LOC 53,100 53,100
New Jersey Highway Auth. Rev. (Garden State Parkway) 7.25% 1/1/1999 (Prere.) 6,705 6,979
New Jersey Sports & Exposition Auth. VRDO 3.65% 6/4/1998 (1) 40,760 40,760
New Jersey TRAN CP 3.50% 6/15/1998 21,100 21,100
New Jersey TRAN CP 3.55% 6/15/1998 15,000 15,000
New Jersey TRAN CP 3.65% 6/15/1998 5,000 5,000
New Jersey TRAN CP 3.90% 6/15/1998 35,000 35,000
New Jersey Transp. Trust Fund 5.00% 12/15/1998 (ETM) 3,400 3,425
New Jersey Transp. Trust Fund RAN 4.50% 6/15/1998 7,050 7,052
New Jersey Transp. Trust Fund RAN 5.50% 6/15/1998 1,400 1,401
New Jersey Transp. Trust Fund TOB VRDO 3.92% 6/4/1998 4,250 4,250
New Jersey Turnpike Auth. Rev. VRDO 3.75% 6/3/1998 (3) LOC 128,500 128,500
Nutley Township NJ BAN 4.00% 7/31/1998 1,750 1,750
Ocean County NJ BAN 4.25% 6/19/1998 10,000 10,003
Passaic County NJ Util. Auth. 3.90% 8/4/1998 (1) 1,800 1,800
Patterson NJ GO 4.55% 1/15/1999 (4) 2,029 2,039
Pequannock Township NJ BAN 4.25% 12/4/1998 4,285 4,295
Plainsboro Township NJ BAN 4.00% 5/18/1999 2,548 2,555
Port Auth. of New York & New Jersey CP 3.45% 7/16/1998 24,670 24,670
Port Auth. of New York & New Jersey CP 3.55% 8/12/1998 4,300 4,300
Port Auth. of New York & New Jersey CP 3.55% 9/10/1998 12,865 12,865
Port Auth. of New York & New Jersey CP 3.70% 8/13/1998 5,000 5,000
Princeton Township NJ BAN 4.25% 8/14/1998 7,830 7,838
Princeton Univ. NJ CP 3.40% 8/20/1998 2,000 2,000
Princeton Univ. NJ CP 3.60% 8/12/1998 5,800 5,800
Princeton Univ. NJ CP 3.60% 8/13/1998 10,700 10,700
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Princeton Univ. NJ CP 3.85% 7/8/1998 $ 3,500 $ 3,500
Readington Township NJ BAN 4.25% 4/30/1999 6,000 6,030
Ridgewood NJ BAN 4.125% 12/9/1998 4,800 4,809
Rockaway Township NJ BAN 4.25% 7/28/1998 7,331 7,336
Salem County NJ PCR CP (PECO Project) 3.40% 6/10/1998 LOC 6,600 6,600
Salem County NJ PCR CP (PECO Project) 3.55% 8/3/1998 LOC 3,400 3,400
Salem County NJ PCR CP (PECO Project) 3.65% 7/7/1998 LOC 5,000 5,000
Salem County NJ PCR VRDO (Atlantic City Electric Co.) 3.65% 6/3/1998 (1) 9,900 9,900
Salem County NJ PCR VRDO (Atlantic City Electric Co.) 3.75% 6/3/1998 (1) 1,000 1,000
Salem County NJ PCR VRDO (Public Service Electric & Gas Co.) 3.80% 6/3/1998 (1) 6,500 6,500
South Brunswick Township NJ BAN 4.125% 10/8/1998 3,925 3,929
South Orange County NJ BAN 4.00% 10/30/1998 4,892 4,896
Sussex County NJ Muni. Util. Auth. Rev. 7.875% 12/1/1998 (Prere.) 3,500 3,634
Union County NJ PCR VRDO (Exxon Project) 3.50% 6/2/1998 20,300 20,300
Union County NJ PCR VRDO (Exxon Project) 3.60% 6/2/1998 17,500 17,500
Upper Saddle River NJ BAN 4.25% 7/24/1998 1,986 1,987
Watchung Borough NJ BAN 4.00% 5/14/1999 8,950 8,974
OUTSIDE NEW JERSEY:
Puerto Rico Govt. Dev. Bank VRDO 3.80% 6/3/1998 (1) 300 300
Puerto Rico Highway & Transp. Auth. VRDO 3.75% 6/3/1998 LOC 5,400 5,400
Puerto Rico Industrial Medical & Environmental Fac. Auth. PCR PUT
(Abbott Laboratories Project) 3.55% 3/1/1999 8,750 8,750
- ------------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $1,079,539) 1,079,539
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.9%)
- ------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 13,936
Liabilities (4,679)
---------
9,257
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
========================================================================================================================
Applicable to 1,088,810,512 outstanding shares of beneficial interest
(unlimited authorization--no par value) $1,088,796
========================================================================================================================
NET ASSET VALUE PER SHARE $1.00
========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
For key to abbreviations and other references, see page 18.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AT MAY 31, 1998, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,088,826 $1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (30) --
Unrealized Appreciation -- --
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,088,796 $1.00
========================================================================================================================
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INSURED LONG-TERM PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (100.4%)
- -------------------------------------------------------------------------------------------------------------------------
ISSUER INSURED (85.3%)
Atlantic City NJ Board of Educ. GO 6.00% 12/1/2012 (4) $ 4,600 $ 5,213
Atlantic City NJ Board of Educ. GO 6.10% 12/1/2015 (4) 2,000 2,285
Atlantic County NJ COP 6.00% 3/1/2014 (3) 3,685 4,156
Atlantic County NJ COP 6.00% 3/1/2015 (3) 1,480 1,668
Atlantic County NJ COP 7.30% 3/1/2005 (3) 2,000 2,341
Atlantic County NJ COP 7.30% 3/1/2006 (3) 1,800 2,138
Atlantic County NJ COP 7.40% 3/1/2010 (3) 1,755 2,197
Atlantic County NJ COP 7.40% 3/1/2011 (3) 4,025 5,072
Atlantic County NJ Util. Auth. Sewer Rev. 5.85% 1/15/2015 (2) 3,000 3,199
Bayshore NJ Regional Sewer Auth. Rev. 5.40% 5/1/2012 (1) 500 517
Bergen County NJ Util. Auth. Water PCR 5.50% 6/15/2002 (3)(Prere.) 15,750 16,564
Bergen County NJ Util. Auth. Water PCR 5.75% 12/15/2005 (3) 2,000 2,186
Brick Township NJ Muni. Util. Auth. Rev. 5.00% 12/1/2016 (3) 11,150 11,097
Camden County NJ Muni. Util. Auth. Sewer Rev. 0.00% 9/1/2004 (3) 8,345 6,279
Camden County NJ Muni. Util. Auth. Sewer Rev. 0.00% 9/1/2005 (3) 18,545 13,239
Camden County NJ Muni. Util. Auth. Sewer Rev. 0.00% 9/1/2006 (3) 18,545 12,577
Cape May County NJ Muni. Util. Auth. Rev. 5.75% 1/1/2016 (1) 14,975 15,718
Cape May County NJ PCR (Atlantic City Electric) 6.80% 3/1/2021 (1) 15,400 19,121
Delaware River Port Auth. Pennsylvania & New Jersey Rev. 5.40% 1/1/2013 (3) 9,000 9,381
Delaware River Port Auth. Pennsylvania & New Jersey Rev. 5.50% 1/1/2026 (3) 35,600 36,695
Delaware River Port Auth. Pennsylvania & New Jersey Rev. 6.50% 1/1/2009 (2) 3,500 3,555
Delaware River Port Auth. Pennsylvania & New Jersey Rev. 7.375% 1/1/2007 (2) 9,500 9,880
Elizabeth City NJ GO 6.10% 8/15/2007 (2) 5,000 5,583
Elizabeth City NJ GO 6.25% 8/15/2008 (2) 2,100 2,364
Elizabeth City NJ GO Fiscal Year Adjustment Bonds 6.60% 8/1/2006 (1) 8,750 9,534
Essex County NJ Improvement Auth. Lease Rev. 5.50% 12/1/2008 (2) 2,560 2,727
Essex County NJ Improvement Auth. Lease Rev. 5.50% 12/1/2013 (2) 7,500 7,813
Essex County NJ Improvement Auth. Lease Rev.
(Jail & Youth House Project) 7.00% 12/1/2004 (2)(Prere.) 9,525 11,163
Essex County NJ Util. Auth. Solid Waste Rev. 5.60% 4/1/2016 (4) 2,200 2,310
Evesham NJ Muni. Util. Auth. Rev. 7.00% 7/1/2010 (1) 1,700 1,796
Evesham NJ Muni. Util. Auth. Rev. 7.00% 7/1/2015 (1) 450 475
Gloucester County NJ Util. Auth. Sewer Rev. 5.40% 1/1/2016 (1) 3,410 3,500
Gloucester Township NJ GO 5.75% 7/15/2010 (2) 2,880 3,199
Gloucester Township NJ Muni. Util. Auth. Rev. 5.65% 3/1/2018 (2) 2,755 2,996
Hamilton Township NJ Muni. Util. Auth. Rev. 6.00% 8/15/2017 (3) 1,000 1,090
Hoboken-Union City-Weehawken NJ Sewer Auth. Rev. 0.00% 8/1/2003 (1) 3,800 3,057
Hoboken-Union City-Weehawken NJ Sewer Auth. Rev. 0.00% 8/1/2004 (1) 3,750 2,884
Hoboken-Union City-Weehawken NJ Sewer Auth. Rev. 0.00% 8/1/2005 (1) 3,805 2,785
Hoboken-Union City-Weehawken NJ Sewer Auth. Rev. 0.00% 8/1/2006 (1) 2,000 1,395
Hoboken-Union City-Weehawken NJ Sewer Auth. Rev. 6.25% 8/1/2013 (1) 9,590 11,121
Hudson County NJ Correctional Fac. COP 6.30% 6/1/2004 (1) 1,720 1,865
Hudson County NJ Correctional Fac. COP 6.30% 12/1/2004 (1) 1,770 1,919
Hudson County NJ Correctional Fac. COP 6.50% 12/1/2011 (1) 9,000 9,759
Hudson County NJ General Improvement GO 6.55% 7/1/2004 (3) 1,300 1,463
Hudson County NJ General Improvement GO 6.55% 7/1/2005 (3) 1,290 1,467
Hudson County NJ General Improvement GO 6.55% 7/1/2006 (3) 700 805
Hudson County NJ General Improvement GO 6.55% 7/1/2007 (3) 1,300 1,509
Hudson County NJ General Improvement GO 6.55% 7/1/2009 (3) 635 748
Hudson County NJ Improvement Auth. Lease Rev. 6.00% 12/1/2012 (3) 6,525 7,049
Irvington Township NJ GO 0.00% 8/1/2007 (1) 1,000 664
Irvington Township NJ GO 0.00% 8/1/2009 (1) 2,580 1,552
Irvington Township NJ GO 0.00% 8/1/2010 (1) 2,080 1,182
Lenape NJ Regional High School Dist. GO 5.00% 4/1/2011 (3) 2,625 2,676
Lenape NJ Regional High School Dist. GO 5.00% 4/1/2021 (3) 3,500 3,448
Lenape NJ Regional High School Dist. GO 5.00% 4/1/2022 (3) 4,000 3,938
Lenape NJ Regional High School Dist. GO 5.00% 4/1/2023 (3) 4,000 3,936
Middlesex County NJ Util. Auth. Sewer Rev. 5.125% 12/1/2016 (3) 2,250 2,268
Middlesex County NJ Util. Auth. Sewer Rev. 5.25% 3/15/2010 (2) 2,740 2,869
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Middlesex County NJ Util. Auth. Sewer Rev. 5.25% 9/15/2010 (2) $ 1,790 $ 1,874
Middlesex County NJ Util. Auth. Sewer Rev. 5.25% 12/1/2010 (3) 3,145 3,321
Middlesex County NJ Util. Auth. Sewer Rev. 5.375% 9/15/2015 (2) 3,775 3,893
Middlesex County NJ Util. Auth. Sewer Rev. 6.50% 3/15/2001 (3)(Prere.) 6,300 6,824
Monmouth County NJ Improvement Auth. Rev. Governmental Loan 5.40% 12/1/2012 (1) 2,505 2,631
Monmouth County NJ Improvement Auth. Rev.
(Howell Township Board of Ed.) 5.80% 7/15/2017 (2) 1,180 1,267
Mount Laurel Township NJ Muni. Util. Auth. Util. System Rev. 6.00% 7/1/2015 (1) 4,250 4,510
New Brunswick NJ Housing & Urban Dev. Rev. 5.75% 7/1/2024 (1) 13,640 14,171
New Brunswick NJ Housing & Urban Dev. Rev. 6.00% 7/1/2012 (1) 6,000 6,451
New Jersey Econ. Dev. Auth. Natural Gas Fac. Rev. VRDO
(NJ Natural Gas Project) 3.60% 6/3/1998 (2) 1,000 1,000
New Jersey Econ. Dev. Auth. Natural Gas Fac. Rev. VRDO
(NJ Natural Gas Project) 3.95% 6/2/1998 (2) 2,800 2,800
New Jersey Econ. Dev. Auth. Rev. (Market Transition) 5.80% 7/1/2007 (1) 1,000 1,084
New Jersey Econ. Dev. Auth. Rev. (Market Transition) 5.80% 7/1/2009 (1) 7,250 7,878
New Jersey Econ. Dev. Auth. Rev. (Market Transition) 5.875% 7/1/2011 (1) 23,175 25,182
New Jersey Econ. Dev. Auth. Rev. (Market Transition) 7.00% 7/1/2004 (1) 1,745 1,993
New Jersey Econ. Dev. Auth. Rev. (Hillcrest Health Service) 0.00% 1/1/2012 (2) 2,500 1,295
New Jersey Econ. Dev. Auth. Rev. (Hillcrest Health Service) 0.00% 1/1/2013 (2) 3,000 1,474
New Jersey Econ. Dev. Auth. Rev. (St. Barnabas Project) 0.00% 7/1/2008 (1) 2,305 1,467
New Jersey Econ. Dev. Auth. Rev. (St. Barnabas Project) 0.00% 7/1/2011 (1) 4,650 2,499
New Jersey Econ. Dev. Auth. Rev. (St. Barnabas Project) 0.00% 7/1/2012 (1) 4,550 2,300
New Jersey Econ. Dev. Auth. Rev. (St. Barnabas Project) 0.00% 7/1/2013 (1) 4,500 2,158
New Jersey Econ. Dev. Auth. Rev. (St. Barnabas Project) 0.00% 7/1/2014 (1) 4,210 1,908
New Jersey Econ. Dev. Auth. Water Fac. Rev. VRDO
(United Water Co.) 3.75% 6/2/1998 (2) 3,000 3,000
New Jersey Econ. Dev. Auth. Water Fac. Rev. VRDO
(United Water Co.) 3.85% 6/2/1998 (2) 700 700
New Jersey Educ. Fac. Auth. Rev. (Higher Educ. Trust Fund) 5.125% 9/1/2008 (2) 8,795 9,220
New Jersey Educ. Fac. Auth. Rev. (Kean College) 6.60% 7/1/2021 (1) 3,700 4,041
New Jersey Educ. Fac. Auth. Rev. (NJ Institute of Technology) 6.00% 7/1/2024 (1) 1,500 1,629
New Jersey Educ. Fac. Auth. Rev. (Rider College) 6.20% 7/1/2017 (2) 4,000 4,338
New Jersey Educ. Fac. Auth. Rev. (Seton Hall Univ.) 5.60% 7/1/2016 (1) 1,765 1,854
New Jersey Educ. Fac. Auth. Rev. (Seton Hall Univ.) 5.625% 7/1/2019 (1) 3,625 3,793
New Jersey Educ. Fac. Auth. Rev. (Trenton State College) 6.00% 7/1/2012 (2) 3,005 3,231
New Jersey Health Care Fac. Auth. Rev.
(Burdette Tomlin Memorial Hosp.) 6.50% 7/1/2012 (3) 1,500 1,615
New Jersey Health Care Fac. Auth. Rev. (Community Medical Center/
Kimball Medical Center/Kensington Manor Care Center) 5.00% 7/1/2010 (4) 4,695 4,803
New Jersey Health Care Fac. Auth. Rev. (Community Medical Center/
Kimball Medical Center/Kensington Manor Care Center) 5.25% 7/1/2009 (4) 5,500 5,783
New Jersey Health Care Fac. Auth. Rev. (Community Medical Center/
Kimball Medical Center/Kensington Manor Care Center) 5.25% 7/1/2012 (4) 1,500 1,543
New Jersey Health Care Fac. Auth. Rev. (Community Medical Center/
Kimball Medical Center/Kensington Manor Care Center) 7.00% 7/1/2020 (1) 2,850 3,053
New Jersey Health Care Fac. Auth. Rev. (Helene Fuld Medical Center) 6.60% 7/1/2021 (2) 4,080 4,439
New Jersey Health Care Fac. Auth. Rev. (Holy Name Hosp.) 5.25% 7/1/2020 (2) 4,100 4,110
New Jersey Health Care Fac. Auth. Rev. (Memorial Health Alliance) 6.25% 7/1/2010 (3) 8,000 8,315
New Jersey Health Care Fac. Auth. Rev. (Mercer Medical Center) 6.50% 7/1/2010 (1) 6,000 6,472
New Jersey Health Care Fac. Auth. Rev. (Mountainside Hosp.) 5.35% 7/1/2007 (1) 3,215 3,395
New Jersey Health Care Fac. Auth. Rev.
(Muhlenberg Medical Center) 8.00% 7/1/2018 (2) 750 767
New Jersey Health Care Fac. Auth. Rev.
(Newark Beth Israel Medical Center) 6.00% 7/1/2016 (4) 8,500 9,160
New Jersey Health Care Fac. Auth. Rev. (Riverview Medical Center) 6.25% 7/1/2010 (2) 2,935 3,377
New Jersey Health Care Fac. Auth. Rev. (Shore Medical Center) 6.20% 7/1/2013 (2) 3,130 3,437
New Jersey Health Care Fac. Auth. Rev. (Shore Medical Center) 6.20% 7/1/2014 (2) 3,075 3,394
New Jersey Health Care Fac. Auth. Rev. (Shore Medical Center) 6.25% 7/1/2016 (2) 2,000 2,201
New Jersey Health Care Fac. Auth. Rev. (Society of the Valley Hosp.) 6.625% 7/1/2010 (1) 2,750 2,876
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INSURED LONG-TERM PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Jersey Health Care Fac. Auth. Rev.
(St. Clare's Riverside Medical Center) 5.75% 7/1/2014 (1) $ 8,500 $ 9,036
New Jersey Health Care Fac. Auth. Rev. (West Jersey Health System) 6.00% 7/1/2009 (1) 5,175 5,568
New Jersey Higher Educ. Assistance Auth. Student Loan Rev. 4.95% 6/1/2010 (2)++ 6,325 6,325
New Jersey Higher Educ. Assistance Auth. Student Loan Rev. 5.05% 6/1/2011 (2)++ 5,100 5,100
New Jersey Higher Educ. Assistance Auth. Student Loan Rev. 5.15% 6/1/2012 (2)++ 5,250 5,250
New Jersey Higher Educ. Assistance Auth. Student Loan Rev. 5.20% 6/1/2013 (2)++ 6,000 6,000
New Jersey Housing & Mortgage Finance Auth. Rev. 7.875% 10/1/2017 (1) 450 464
New Jersey Sports & Exposition Auth. VRDO 3.65% 6/4/1998 (1) 13,400 13,400
New Jersey Transp. Trust Fund Rev. 5.50% 6/15/2011 (1) 5,000 5,296
New Jersey Transp. Trust Fund Rev. 5.50% 6/15/2013 (1) 3,000 3,150
New Jersey Transp. Trust Fund Rev. 6.00% 6/15/2011 (1) 31,280 34,781
New Jersey Turnpike Auth. Rev. 6.50% 1/1/2013 (1) 20,000 23,560
New Jersey Turnpike Auth. Rev. VRDO 3.75% 6/3/1998 (3) LOC 11,400 11,400
Newark NJ General Improvement GO 5.30% 10/1/2006 (2) 1,710 1,819
Newark NJ General Improvement GO 5.40% 10/1/2007 (2) 1,685 1,809
Newark NJ General Improvement GO 5.50% 10/1/2008 (2) 1,660 1,790
Newark NJ Water Util. GO 5.30% 10/1/2006 (2) 2,625 2,792
North Bergen Township NJ GO 8.00% 8/15/2006 (4) 1,885 2,351
North Brunswick Township NJ Board of Educ. GO 5.50% 2/1/2008 (3) 1,915 2,073
North Brunswick Township NJ Board of Educ. GO 5.50% 2/1/2009 (3) 2,030 2,184
North Brunswick Township NJ GO 5.50% 5/15/2013 (3) 1,390 1,468
North Hudson NJ Sewer Auth. Rev. 5.125% 8/1/2008 (3) 2,000 2,101
North Hudson NJ Sewer Auth. Rev. 5.125% 8/1/2022 (3) 23,950 23,866
North Hudson NJ Sewer Auth. Rev. 5.25% 8/1/2016 (3) 14,360 14,574
North Jersey Water Dist. Rev. (Wanaque South Project) 6.00% 7/1/2012 (1) 10,125 10,984
Ocean County NJ Util. Auth. Waste Water Rev. 5.00% 1/1/2014 (3) 2,000 2,000
Ocean County NJ Util. Auth. Waste Water Rev. 6.60% 1/1/2018 (3) 4,000 4,257
Ocean County NJ Util. Auth. Waste Water Rev. 6.60% 1/1/2018 (3)(ETM) 2,500 2,956
Ocean Township NJ Muni. Util. Auth. Rev. 6.00% 8/1/2017 (1) 3,975 4,488
Old Bridge Township NJ Muni. Util. Auth. Rev. 6.25% 11/1/2016 (3) 1,400 1,528
Old Bridge Township NJ Muni. Util. Auth. Rev. 6.40% 11/1/2009 (3) 3,000 3,315
Passaic Valley NJ Sewer Comm. Rev. 5.75% 12/1/2008 (2) 4,450 4,795
Passaic Valley NJ Sewer Comm. Rev. 5.75% 12/1/2013 (2) 4,000 4,266
Plainfield NJ GO 6.25% 7/15/2007 (2) 6,930 7,568
South Brunswick Township NJ Board of Educ. GO 5.25% 8/1/2020 (3) 3,535 3,553
South Brunswick Township NJ Board of Educ. GO 5.25% 8/1/2022 (3) 4,630 4,650
South Brunswick Township NJ Board of Educ. GO 5.50% 8/1/2024 (3) 2,500 2,580
South Brunswick Township NJ Board of Educ. GO 6.40% 8/1/2005 (3)(Prere.) 4,520 5,115
South Jersey Transp. Auth. Transp. System Rev. 5.90% 11/1/2006 (1) 3,435 3,707
South Jersey Transp. Auth. Transp. System Rev. 5.90% 11/1/2007 (1) 2,545 2,741
South Jersey Transp. Auth. Transp. System Rev. 6.00% 11/1/2012 (1) 5,250 5,666
Stafford NJ Muni. Util. Auth. Water & Sewer Rev. 5.50% 6/1/2011 (3) 3,100 3,361
Sussex County NJ Muni. Util. Auth. Solid Waste Rev. 5.75% 12/1/2009 (1) 19,820 21,271
Sussex County NJ Muni. Util. Auth. Waste Water Rev. 5.25% 12/1/2008 (1) 1,150 1,207
Union County NJ Improvement Auth. Rev. (Plainfield Board of Educ.) 5.80% 8/1/2020 (3) 4,000 4,249
Union County NJ Improvement Auth. Rev. (Plainfield Board of Educ.) 6.25% 8/1/2005 (3) 695 777
Union County NJ Improvement Auth. Rev. (Plainfield Board of Educ.) 6.25% 8/1/2006 (3) 740 835
Union County NJ Improvement Auth. Rev. (Plainfield Board of Educ.) 6.25% 8/1/2007 (3) 785 892
OUTSIDE NEW JERSEY:
Guam Govt. Ltd. Obligation Infrastructure Improvement Rev. 5.125% 11/1/2011 (2) 3,400 3,542
Guam Govt. Ltd. Obligation Infrastructure Improvement Rev. 5.50% 11/1/2007 (2) 4,340 4,719
Puerto Rico Electric Power Auth. Rev. 6.50% 7/1/2006 (1) 11,820 13,545
Puerto Rico GO 5.00% 7/1/2018 (1) 11,500 11,456
Puerto Rico Infrastructure Fin. Auth Special Tax Rev. 5.00% 7/1/2021 (2) 8,000 7,892
Puerto Rico Infrastructure Fin. Auth Special Tax Rev. 5.00% 7/1/2028 (2) 5,000 4,908
Puerto Rico Public Building Auth. Rev. 0.00% 7/1/2002 (3) 4,000 3,388
Puerto Rico Public Building Auth. Rev. 5.00% 7/1/2027 (2) 14,810 14,542
--------
865,423
--------
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECONDARY MARKET INSURED (7.7%)
Atlantic County NJ Util. Auth. Sewer Rev. 6.875% 1/1/2012 (2)(ETM) $ 3,000 $ 3,502
New Jersey Highway Auth. Rev. (Garden State Parkway) 6.00% 1/1/2016 (2) 5,000 5,227
New Jersey Highway Auth. Rev. (Garden State Parkway) 6.20% 1/1/2010 (2) 20,000 22,829
New Jersey Sports & Exposition Auth. Rev. 6.50% 3/1/2013 (1) 10,000 11,829
New Jersey Turnpike Auth. Rev. 6.50% 1/1/2016 (1) 18,250 21,605
Port Auth. of New York & New Jersey Rev. 5.375% 7/15/2022 (3) 5,000 5,083
Port Auth. of New York & New Jersey Rev. 6.875% 1/1/2025 (2) 3,200 3,359
Univ. of Medicine & Dentistry NJ Rev. 6.50% 12/1/2012 (1) 4,000 4,746
--------
78,180
--------
NONINSURED (7.4%)
Burlington County NJ Bridge Comm. Rev. 5.30% 10/1/2013 9,500 9,798
Cherry Hill Township NJ GO 6.30% 6/1/2012 3,745 4,049
Mercer County NJ Improvement Auth. Library System Rev. 6.00% 12/1/2014 1,000 1,078
Mercer County NJ Improvement Auth. Solid Waste Rev. 5.375% 9/15/2012 11,120 11,632
Mercer County NJ Improvement Auth.
Special Services School Dist. Rev. 5.75% 12/15/2007 1,110 1,227
Mercer County NJ Improvement Auth.
Special Services School Dist. Rev. 5.75% 12/15/2008 1,165 1,286
Mercer County NJ Improvement Auth.
Special Services School Dist. Rev. 5.95% 12/15/2012 4,895 5,523
Monmouth County NJ Improvement Auth. GO
(Capital Equipment Pooled Leases) 5.25% 10/1/1998 1,410 1,418
Monmouth County NJ Improvement Auth. GO (Correctional Fac.) 6.40% 8/1/2001 (Prere.) 1,850 2,013
New Jersey Econ. Dev. Auth. Natural Gas Fac. Rev. VRDO
(NJ Natural Gas Project) 3.90% 6/3/1998 6,300 6,300
New Jersey Environmental Infrastructure Trust Waste Water Rev. 5.00% 9/1/2006 1,735 1,815
New Jersey Environmental Infrastructure Trust Waste Water Rev. 5.00% 9/1/2008 1,930 2,020
New Jersey Environmental Infrastructure Trust Waste Water Rev. 5.00% 9/1/2009 1,955 2,039
New Jersey Transp. Trust Fund 4.40% 6/15/1999 5,000 5,032
Ocean County NJ Util. Auth. Waste Water Rev. 6.30% 1/1/2013 2,215 2,434
Ocean County NJ Util. Auth. Waste Water Rev. 6.35% 1/1/2014 2,360 2,600
Ocean County NJ Util. Auth. Waste Water Rev. 6.35% 1/1/2015 2,515 2,771
Port Auth. of New York & New Jersey VRDO 3.85% 6/2/1998 1,800 1,800
Port Auth. of New York & New Jersey VRDO 4.00% 6/2/1998 600 600
Rahway NJ BAN 4.12% 6/26/1998 2,424 2,424
Randolph Township NJ BAN 4.25% 9/4/1998 2,737 2,741
Rutgers State Univ. NJ Rev. 6.40% 5/1/2013 3,000 3,518
OUTSIDE NEW JERSEY:
Puerto Rico Govt. Dev. Bank VRDO 3.80% 6/3/1998 LOC 820 820
----------
74,938
----------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $944,201) 1,018,541
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.4%)
- -------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 21,488
Liabilities (25,398)
----------
(3,910)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------
Applicable to 85,658,090 outstanding shares of beneficial interest
(unlimited authorization--no par value) $1,014,631
=========================================================================================================================
NET ASSET VALUE PER SHARE $11.85
=========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
For key to abbreviations and other references, see page 18.
17
<PAGE> 20
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
INSURED LONG-TERM PORTFOLIO (000) SHARE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AT MAY 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
Paid in Capital $ 942,439 $11.01
Undistributed Net Investment Income -- --
Overdistributed Net Realized Gains (2,148) (.03)
Unrealized Appreciation--Note F 74,340 .87
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,014,631 $11.85
==========================================================================================================================
</TABLE>
KEY TO ABBREVIATIONS
BAN--Bond Anticipation Note.
COP--Certificate of Participation.
CP--Commercial Paper.
GO--General Obligation Bond.
PCR--Pollution Control Revenue Bond.
PUT--Put Option Obligation.
RAN--Revenue Anticipation Note.
TOB--Tender Option Bond.
TRAN--Tax Revenue Anticipation Note.
VRDO--Variable Rate Demand Obligation.
(ETM)--Escrowed to Maturity.
(Prere.)--Prerefunded.
++Security purchased on a when-issued or delayed delivery basis for which the
Portfolio has not taken delivery as of May 31, 1998.
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association).
(2) AMBAC (Ambac Assurance Corporation).
(3) FGIC (Financial Guaranty Insurance Company).
(4) FSA (Financial Security Assurance).
The insurance does not guarantee the market value of the municipal bonds.
LOC--Scheduled principal and interest payments are guaranteed by bank letter of
credit.
18
<PAGE> 21
STATEMENT OF OPERATIONS
This Statement shows interest earned by each Portfolio during the reporting
period, and details the operating expenses charged to the Portfolios. These
expenses directly reduce the amount of investment income available to pay to
shareholders as tax-exempt income dividends. This Statement also shows any Net
Gain (Loss) realized on the sale of investments, and the increase or decrease in
the Unrealized Appreciation (Depreciation) on investments during the period. If
a Portfolio invested in futures contracts during the period, the results of
these investments are shown separately.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
MONEY INSURED
MARKET LONG-TERM
PORTFOLIO PORTFOLIO
-------------------------------
SIX MONTHS ENDED MAY 31, 1998
-------------------------------
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest $18,323 $26,096
-------------------------------
Total Income 18,323 26,096
-------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 69 64
Management and Administrative 821 767
Marketing and Distribution 190 124
Custodian Fees 9 7
Auditing Fees 4 4
Shareholders' Reports 15 15
Annual Meeting and Proxy Costs 2 2
Trustees' Fees and Expenses 1 1
-------------------------------
Total Expenses 1,111 984
Expenses Paid Indirectly--Note C (9) (7)
-------------------------------
Net Expenses 1,102 977
- ---------------------------------------------------------------------------------------
NET INVESTMENT INCOME 17,221 25,119
- ---------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold -- 49
Futures Contracts -- (12)
- ---------------------------------------------------------------------------------------
REALIZED NET GAIN -- 37
- ---------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities -- 11,099
Futures Contracts -- 40
- ---------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) -- 11,139
- ---------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $17,221 $36,295
=======================================================================================
</TABLE>
19
<PAGE> 22
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes information
detailed in the Statement of Operations. Because the Portfolio distributes its
income to shareholders each day, the amounts of Distributions--Net Investment
Income generally equal the net income earned as shown under the Operations
section. The amounts of Distributions--Realized Capital Gain may not match the
capital gains shown in the Operations section, because distributions are
determined on a tax basis and may be made in a period different from the one in
which the gains were realized on the financial statements. The Capital Share
Transactions section shows the amount shareholders invested in the Portfolio,
either by purchasing shares or by reinvesting distributions, and the amounts
redeemed. The corresponding numbers of Shares Issued and Redeemed are shown at
the end of the Statement.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSURED LONG-TERM
PORTFOLIO PORTFOLIO
------------------------------- --------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
MAY 31, 1998 NOV. 30, 1997 MAY 31, 1998 NOV. 30, 1997
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 17,221 $ 31,796 $ 25,119 $ 46,319
Realized Net Gain (Loss) -- 22 37 (613)
Change in Unrealized Appreciation (Depreciation) -- -- 11,139 9,271
---------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 17,221 31,818 36,295 54,977
DISTRIBUTIONS ---------------------------------------------------------------------
Net Investment Income (17,221) (31,796) (25,119) (46,319)
Realized Capital Gain -- -- (888) (2,334)
---------------------------------------------------------------------
Total Distributions (17,221) (31,796) (26,007) (48,653)
---------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 554,996 888,898 134,952 209,139
Issued in Lieu of Cash Distributions 16,459 30,361 19,724 37,374
Redeemed (498,946) (820,876) (90,598) (161,566)
---------------------------------------------------------------------
Net Increase from Capital Share Transactions 72,509 98,383 64,078 84,947
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 72,509 98,405 74,366 91,271
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 1,016,287 917,882 940,265 848,994
---------------------------------------------------------------------
End of Period $1,088,796 $1,016,287 $1,014,631 $940,265
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 554,996 888,898 11,412 18,101
Issued in Lieu of Cash Distributions 16,459 30,361 1,668 3,232
Redeemed (498,946) (820,876) (7,667) (13,996)
---------------------------------------------------------------------
Net Increase in Shares Outstanding 72,509 98,383 5,413 7,337
=========================================================================================================================
</TABLE>
20
<PAGE> 23
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total Return
and shows net investment income and expenses as percentages of average net
assets. These data will help you assess: the variability of the Portfolio's net
income and total returns from year to year; the relative contributions of net
income and capital gains to the Portfolio's total return; how much it costs to
operate the Portfolio; and the extent to which the Portfolio tends to distribute
capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in the
Portfolio for one year. Money market portfolios are not required to report a
Portfolio Turnover Rate.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED
THROUGHOUT EACH PERIOD MAY 31, 1998 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .016 .033 .032 .035 .025 .023
Net Realized and Unrealized Gain (Loss)
on Investments -- -- -- -- -- --
----------------------------------------------------------------------
Total from Investment Operations .016 .033 .032 .035 .025 .023
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.016) (.033) (.032) (.035) (.025) (.023)
Distributions from Realized Capital Gains -- -- -- -- -- --
----------------------------------------------------------------------
Total Distributions (.016) (.033) (.032) (.035) (.025) (.023)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
=========================================================================================================================
TOTAL RETURN 1.62% 3.32% 3.22% 3.60% 2.49% 2.31%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,089 $1,016 $918 $859 $792 $724
Ratio of Total Expenses to
Average Net Assets 0.21%* 0.20% 0.20% 0.21% 0.21% 0.20%
Ratio of Net Investment Income to
Average Net Assets 3.23%* 3.27% 3.17% 3.53% 2.46% 2.29%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
21
<PAGE> 24
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
INSURED LONG-TERM PORTFOLIO
YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED
THROUGHOUT EACH PERIOD MAY 31, 1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.72 $11.64 $11.78 $10.40 $11.77 $11.18
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .301 .608 .616 .623 .622 .637
Net Realized and Unrealized Gain (Loss)
on Investments .141 .112 (.082) 1.380 (1.307) .725
-----------------------------------------------------------------------
Total from Investment Operations .442 .720 .534 2.003 (.685) 1.362
-----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.301) (.608) (.616) (.623) (.622) (.637)
Distributions from Realized Capital Gains (.011) (.032) (.058) -- (.063) (.135)
-----------------------------------------------------------------------
Total Distributions (.312) (.640) (.674) (.623) (.685) (.772)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.85 $11.72 $11.64 $11.78 $10.40 $11.77
==========================================================================================================================
TOTAL RETURN 3.80% 6.40% 4.75% 19.66% -6.10% 12.53%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,015 $940 $849 $796 $645 $748
Ratio of Total Expenses to
Average Net Assets 0.20%* 0.18% 0.20% 0.21% 0.21% 0.20%
Ratio of Net Investment Income to
Average Net Assets 5.10%* 5.26% 5.35% 5.50% 5.53% 5.47%
Portfolio Turnover Rate 15%* 13% 11% 7% 13% 12%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
22
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
Vanguard New Jersey Tax-Free Fund is registered under the Investment Company Act
of 1940 as an open-end investment company, or mutual fund, and comprises the
Money Market and Insured Long-Term Portfolios. Each Portfolio invests in debt
instruments of municipal issuers whose ability to meet their obligations may be
affected by economic and political developments in the state of New Jersey.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Money Market Portfolio: Investment securities are
valued at amortized cost, which approximates market value. Insured Long-Term
Portfolio: Bonds, and temporary cash investments acquired over 60 days to
maturity, are valued using the latest bid prices or using valuations based on a
matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value. Securities for which market quotations are not
readily available are valued by methods deemed by the Board of Trustees to
represent fair value.
2. FEDERAL INCOME TAXES: Each Portfolio intends to continue to qualify as a
regulated investment company and distribute all of its income. Accordingly, no
provision for federal income taxes is required in the financial statements.
3. FUTURES CONTRACTS: The Insured Long-Term Portfolio may use Municipal
Bond Index, U.S. Treasury Bond, and U.S. Treasury Note futures contracts, with
the objectives of enhancing returns, managing interest rate risk, maintaining
liquidity, diversifying credit risk, and minimizing transaction costs. The
Portfolio may purchase or sell futures contracts instead of bonds to take
advantage of pricing differentials between the futures contracts and the
underlying bonds. The Portfolio may also seek to take advantage of price
differences among bond market sectors by simultaneously buying futures (or
bonds) of one market sector and selling futures (or bonds) of another sector.
Futures contracts may also be used to simulate a fully invested position in the
underlying bonds while maintaining a cash balance for liquidity. The primary
risks associated with the use of futures contracts are imperfect correlation
between changes in market values of bonds held by the Portfolio and the prices
of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued based upon their quoted daily settlement
prices. The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
4. DISTRIBUTIONS: Dividends from net investment income are declared daily
and paid on the first business day of the following month. Annual distributions
from realized capital gains, if any, are recorded on the ex-dividend date.
5. OTHER: Security transactions are accounted for on the date securities
are bought or sold. Costs used to determine realized gains (losses) on the sale
of investment securities are those of the specific securities sold. Premiums and
original issue discounts are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. The Vanguard Group furnishes at cost investment advisory, corporate
management, administrative, marketing, and distribution services. The costs of
such services are allocated to the Fund under methods approved by the Board of
Trustees. At May 31, 1998, the Fund had contributed capital aggregating $116,000
to Vanguard (included in Other Assets), representing 0.6% of Vanguard's
capitalization. The Fund's Trustees and officers are also Directors and officers
of Vanguard.
23
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (continued)
C. The Fund's custodian bank has agreed to reduce its fees when the Fund
maintains cash on deposit in the non-interest-bearing custody account. For the
six months ended May 31, 1998, custodian fee offset arrangements reduced
expenses of the Money Market and Insured Long-Term Portfolios by $9,000 and
$7,000, respectively.
D. During the six months ended May 31, 1998, the Insured Long-Term Portfolio
purchased $162,841,000 of investment securities and sold $70,601,000 of
investment securities, other than temporary cash investments.
E. Insured Long-Term Portfolio capital gains distributions are determined on a
tax basis and may differ from realized capital gains for financial reporting
purposes due to differences in the timing of realization of gains. At November
30, 1997, the Money Market Portfolio had available a capital loss carryforward
of $30,000 to offset future net capital gains through November 30, 2004.
F. At May 31, 1998, net unrealized appreciation of Insured Long-Term Portfolio
investment securities for financial reporting and federal income tax purposes
was $74,340,000, consisting of unrealized gains of $74,482,000 on securities
that had risen in value since their purchase and $142,000 on securities that had
fallen in value since their purchase.
24
<PAGE> 27
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions,
Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley
College.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and
NACCO Industries.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"STANDARD & POOR'S(R)," "S&P(R)," "S&P 500(R)," "STANDARD & POOR'S 500," AND
"500" ARE TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. FRANK RUSSELL
COMPANY IS THE OWNER OF TRADEMARKS AND COPYRIGHTS RELATING TO THE
RUSSELL INDEXES. "WILSHIRE 4500" AND "WILSHIRE 5000" ARE
TRADEMARKS OF WILSHIRE ASSOCIATES.
<PAGE> 28
VANGUARD FAMILY OF FUNDS
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Index Trust
500 Portfolio
Extended Market Portfolio
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Stock Portfolio
Small Capitalization Stock
Portfolio
Small Capitalization Value
Stock Portfolio
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Value Portfolio
Institutional Index Fund
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Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
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Windsor Fund
Windsor II
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Admiral Funds
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Federal Portfolio
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Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Treasury Money Market Portfolio
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
Q142-5/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
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and should be read carefully before you invest or send money. Prospectuses can
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