ANNUAL REPORT
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New Jersey Tax-Free Bond Fund
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February 28, 1997
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REPORT HIGHLIGHTS
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* Interest rates ended the fiscal year slightly higher than a year ago,
resulting in moderate returns for municipal bond investors.
* Municipal bonds outperformed Treasuries during most of the year. As a
result, yields on tax-exempt securities are slightly less attractive than
they were last February compared with Treasury yields.
* For the 6- and 12-month periods ended February 28, your fund returned 4.49%
and 4.57%, respectively.
* We adopted a neutral stance on duration, enhancing our ability to buy bonds
when prices were low and sell some issues when prices appreciated.
* With the economy showing ongoing strength and the Federal Reserve
indicating a bias toward tighter monetary policy, our outlook is somewhat
ca utious for the coming months.
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FELLOW SHAREHOLDERS
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The municipal bond market and your fund generated moderate returns during
the fiscal year ended February 28, 1997. Interest rates fluctuated during the
year and ended slightly higher than where they started at the end of last
February. The U.S. economy was characterized by modest wage inflation with low
unemployment, prompting the Federal Reserve to leave monetary policy unchanged
since January 1996.
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MARKET ENVIRONMENT
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<PAGE>
Much of the movement in interest rates reflected the market's anticipation
of action or inaction by the Federal Reserve. The fiscal year began with
interest rates rising due to signs of stronger growth and the realization that
balanced budget legislation would not be passed in 1996. As market expectations
for a tightening in monetary policy grew throughout the first half, rates
continued to increase. The long-term Treasury bond yield remained in a trading
range between 6.75% and 7.20% during the third quarter. Intermediate and
long-term rates then reversed course and fell through November as it became
evident that the economy was slowing in the third quarter and the Federal
Reserve was not going to raise rates. Another uptick in rates took place late in
1996 as investors once again perceived strength in the economy and anticipated
possible tightening by the Federal Reserve. New Jersey bond yields followed a
similar pattern, as shown in the chart.
[edgar description: a 1-line chart showing yields on New Jersey bonds from
2/29/96 through 2/28/97]
Source: T. Rowe Price Associates
In the municipal market, rates came full circle over the year, rising about
45 basis points (100 basis points equal one percent) during the first six months
before settling slightly above year-ago levels. Long-term high-grade general
obligation bonds yielded 5.50% on February 28, 1997, versus 5.75% on August 31,
1996, and 5.45% a year ago. Five-year high-grade bonds were 20 basis points
higher in yield than in February 1996. One-year note rates traded within a
70-basis-point range during the year, ending at 3.70% compared with 3.25% a year
ago.
Municipals provided higher returns than long-term Treasuries throughout
most of the fiscal year, as concerns regarding tax reform and flat tax
legislation diminished. As a result, long-term municipal yields were 81% of the
yield on comparable Treasuries on February 28, a level that benefits investors
in brackets above 19%, whereas a year ago, with the ratio at 87%, investors in
brackets upwards of 13% benefited from municipals.
In New Jersey, economic growth and overall employment continued to lag the
national averages. Nevertheless, the state's finances remained healthy as
evidenced by more than $5.5 billion in new bond issuance, a 25% increase over
1995. These offerings were well received.
New Jersey's nonfarm employment grew by 1.1% for the calendar year, roughly
half the national rate. The unemployment rate was 5.9%, slightly above the
national average. We expect steady but slow job growth to continue amid
declining manufacturing jobs and government layoffs. Despite the slow economy,
the state has maintained an adequate cash balance while phasing in a 30%
personal income tax reduction. Governor Whitman plans to continue implementing
spending reductions to offset the slower growth of tax revenue.
<PAGE>
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STRATEGY AND PERFORMANCE REVIEW
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The fund began the fiscal year in March 1996 with an aggressive duration of
8.0 years, reflecting our earlier optimism that interest rates would fall due to
the soft economy, an accommodative Fed, and progress toward a balanced budget.
(Duration is a measure of a bond fund's price sensitivity to interest rate
changes.) However, as the year progressed and the economy strengthened, it
became apparent that interest rates were contained in a range. The healthy
economy and low unemployment levels prevented rates from falling too far, while
subdued inflation limited their upward momentum. Therefore, we adopted a more
neutral stance in the summer and ended the year with a duration of 7.2 years.
From this vantage point, we were better able to take advantage of the
market's high and low extremes, buying bonds when prices fell to attractive
levels and selling some issues when prices appreciated. Your fund essentially
matched its peer group during the last six months and outperformed it for the
full year, as shown in the table on the previous page. This is the sixth
consecutive year that the fund has outpaced its competitor average for the
fiscal year.
We continued to look for bonds that offered attractive yields in an
otherwise low-yield environment, and we found such issues in the hospital and
water and sewer sectors. These represent 17% and 19% of net assets,
respectively, as shown in the table following this letter. Consolidation among
state hospitals continues to present dynamic credit opportunities and
challenges, which we closely monitor. Demand was robust for New Jersey bonds
throughout the year, and we used the pockets of heavy issuance to pick up
attractive holdings.
- -----------------------------
THE MAJOR
ISSUES . . . ARE
WELFARE REFORM
AND . . . THE
REDUCTION IN THE
STATE INCOME TAX.
=============================
In our last report, we mentioned our renewed interest in downtrodden solid
waste issues. When an unfavorable court ruling led to some credit downgrades in
the sector, we kept our eyes out for good issues selling at reasonable
valuations. We found just such an issue in an uninsured resource recovery bond
backed by the Union County Utilities Authority. The bond offers an attractive
7.15% coupon, and we believe the downside risk is limited because potential bad
news was already reflected in its price. In any case, it represents less than 1%
of net assets.
<PAGE>
Looking ahead, the major issues for New Jersey are welfare reform and
coming to terms with the reduction in the state income tax. In our opinion, the
state has both issues under control. As the federal government shifts more of
the welfare burden to the states in the form of block grants, New Jersey's
federal funding levels should remain relatively high due to its historically
higher caseload levels. Meanwhile, the state's tight fiscal policies under
Governor Whitman and its program of spending reductions should help it offset
the slower growth of tax revenue. Overall, we foresee stability in the market
and will look for attractive opportunities among new issues.
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OUTLOOK
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The economy is in its sixth year of expansion, and while it has exhibited
few signs of inflationary pressure, the Federal Reserve remains on alert. Fed
chairman Alan Greenspan stated in recent testimony to the Senate Banking
Committee that the Fed cannot rule out a preemptive tightening in monetary
policy before signs of actual higher inflation become evident.
We expect economic growth and inflation to remain moderate throughout the
rest of 1997, with no evidence of recession visible to date. Consumer and
business sentiment remain high, inventories are not excessive, and availability
of credit is ample. The Federal Reserve, as indicated, could push the fed funds
rate higher to keep prices in check, but we believe any increase will be small
since short-term rates are well above the recent trend rate of inflation. This
was not the case in 1994, when the Fed was forced to move aggressively.
The supply of municipal bonds should increase over the near term, possibly
exerting some downward pressure on bond prices if demand does not increase
commensurately. Given our expectation that interest rates will move in a
relatively narrow channel, we would regard higher rates as an opportunity to
provide additional yield in the fund. Overall, however, we do not expect to see
a significant move in bond pr ices in the months ahead. As in the past year, the
returns from municipal securities should come primarily from income.
Respectfully submitted,
/s/William F. Snider
William F. Snider
Chairman of the Investment Advisory Committee
/s/William T. Reynolds
William T. Reynolds
Director, Fixed Income Division
March 20, 1997
<PAGE>
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PERFORMANCE COMPARISON
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Periods Ended 2/28/97 6 Months 12 Months
--------------------- -------- ---------
New Jersey Tax-Free
Bond Fund 4.49% 4.57%
Lipper New Jersey Municipal
Debt Funds Average 4.45 4.43
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William F. Snider has assumed day-to-day responsibility for management of
the New Jersey Tax-Free Bond Fund as chairman of the fund's Investment Advisory
Committee. Mr. Snider joined
T. Rowe Price's municipal bond department in 1991 and has worked closely
with William T. Reynolds, the fund's previous chairman, as a member of the
fund's Investment Advisory Committee for the past three years. Mr. Reynolds
remains on the fund's Advisory Committee.
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PORTFOLIO HIGHLIGHTS
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KEY STATISTICS
8/31/96 2/28/97
------- -------
Price Per Share $10.88 $11.08
Dividends Per Share
For 6 months 0.28 0.29
For 12 months 0.57 0.57
Dividend Yield *
For 6 months 5.16% 5.27%
For 12 months 5.29 5.29
Weighted Average Maturity (years) 18.2 19.4
Weighted Average Effective Duration (years) 7.5 7.2
Weighted Average Quality ** AA- A+
+ Taxability of dividends: 100% of the dividends paid for the 12 months
ended 2/28/97 were exempt from federal and New Jersey income taxes.
* Dividends earned and reinvested for the periods indicated are
annualized and divided by the average daily net asset values per share
for the same period.
** Based on T. Rowe Price research.
<PAGE>
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PORTFOLIO HIGHLIGHTS
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SECTOR DIVERSIFICATION
Percent of Percent of
Net Assets Net Assets
8/31/96 2/28/97
---------- ----------
Water and Sewer Revenue 14% 19%
Hospital Revenue 13 17
Dedicated Tax Revenue 11 12
Educational Revenue 13 10
Industrial and Pollution Control Revenue 5 7
General Obligation - Local 9 5
Air and Sea Transportation Revenue 4 5
Housing Finance Revenue 6 4
Nuclear Revenue 2 4
Prerefunded Bonds 3 3
Electric Revenue 1 3
Miscellaneous Revenue 3 3
Escrowed to Maturity 3 3
General Obligation - State 7 3
All Other 5 2
Other Assets Less Liabilities 1 -
Total 100% 100%
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PERFORMANCE COMPARISON
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This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with a broad-based average or index. The index
return does not reflect expenses, which have been deducted from the fund's
return.
(SEC Graph - a line chart showing the cumulative growth of $10,000 invested in
New Jersey Tax-Free Bond Fund from inception compared with $10,000
invested in a broad-based index or average over the same peroiod.)
<PAGE>
================================================================================
AVERAGE ANNUAL COMPOUND TOTAL RETURN
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This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Since Inception
Periods Ended 2/28/97 1 Year 3 Years 5 Years Inception Date
- --------------------- ------ ------- ------- --------- --------
New Jersey Tax-Free Bond Fund 4.57% 5.12% 7.36% 7.79% 4/30/91
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original purchase.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------
For a share outstanding throughout each period
Year
Ended
2/28/97 2/29/96 2/28/95 2/28/94 2/28/93
------- ------- ------- ------- -------
NET ASSET VALUE
Beginning of period $11.16 $10.63 $11.19 $11.23 $10.30
Investment activities
Net investment income 0.57* 0.58* 0.57* 0.56* 0.58*
Net realized and
unrealized gain (loss) (0.08) 0.53 (0.55) 0.10 1.00
Total from
investment activities 0.49 1.11 0.02 0.66 1.58
Distributions
Net investment income (0.57) (0.58) (0.57) (0.56) (0.58)
Net realized gain -- -- (0.01) (0.14) (0.07)
Total distributions (0.57) (0.58) (0.58) (0.70) (0.65)
NET ASSET VALUE
End of period $11.08 $11.16 $10.63 $11.19 $11.23
Ratios/Supplemental Data
Total return 4.57%* 10.67%* 0.37%* 5.97%* 15.90%*
Ratio of expenses to
average net assets 0.65%* 0.65%* 0.65%* 0.65%* 0.65%*
Ratio of net investment
income to average
net assets 5.18%* 5.28%* 5.41%* 4.90%* 5.47%*
Portfolio turnover rate 78.9% 98.4% 139.1% 68.8% 103.3%
Net assets, end of period
(in thousands) $80,289 $70,304 $58,074 $63,160 $38,347
- --------------------------------------------------------------------------------
* Excludes expenses in excess of a 0.65% voluntary expense limitation in
effect through 2/28/97.
The accompanying notes are an integral part of these financial statements.
<PAGE>
February 28, 1997
STATEMENT OF NET ASSETS
-----------------------
Par Value
In thousands
NEW JERSEY 89.2%
Bergen County Utilities Auth., PCR, Water
5.125%, 12/15/11 (FGIC Insured) ............... $1,000 $ 978
Cape May County, Industrial Pollution Control Fin. Auth .....
Atlantic City Electric Co.,
6.80%, 3/1/21 (MBIA Insured) .................. 1,500 1,760
Edison Township, GO, 6.50%, 6/1/08 .......................... 350 393
Freehold Township, Monmouth County Water and Sewer, GO
6.35%, 10/1/11 (MBIA Insured) ................. 250 279
Jersey City, School Bonds, GO, 6.50%, 2/15/04 ............... 500 548
Middlesex County Pollution Control Fin. Auth ................
Amerada Hess Corp., 6.875%, 12/1/22 .................. 1,500 1,586
Middlesex County Utilities Auth., Sewer, Embedded Interest
Rate Swap (Currently 7.60%)
8/15/10 (MBIA Insured) ........................ 500 552
New Jersey, GO, 7.05%, 7/15/12 * ............................ 1,335 1,516
New Jersey Economic Dev. Auth ...............................
American Water
6.00%, 5/1/36 (FGIC Insured) * ................ 2,205 2,250
6.875%, 11/1/34 (FGIC Insured) * .............. 1,000 1,105
Lawrenceville School, 5.75%, 7/1/16 .................. 2,000 2,020
Market Transition Fac., 5.70%
7/1/05 (MBIA Insured) ......................... 1,750 1,845
Dow Chemical El Dorado
VRDN (Currently 3.30%) ........................ 1,400 1,400
New Jersey EFA
Princeton Univ., 5.875%, 7/1/14 ...................... 1,050 1,084
Rowan College, 6.00%, 7/1/21 (AMBAC Insured) ......... 1,000 1,037
Seton Hall Univ ......................................
6.875%, 7/1/10 ................................ 375 399
7.00%, 7/1/21 ................................. 200 211
5.60%, 7/1/16 (MBIA Insured) .................. 1,000 998
Univ. of Medicine and Dentistry
5.25%, 12/1/15 (AMBAC Insured) ................ 880 858
5.25%, 12/1/25 (AMBAC Insured) ................ 1,500 1,427
<PAGE>
New Jersey Health Care Fac. Fin. Auth .......................
St. Elizabeth Hosp ...................................
6.00%, 7/1/14 $ ............................... $ 1,500 $1,507
6.00%, 7/1/20 ................................. 570 565
New Jersey HFFA
Atlantic City Medical Center, 6.80%, 7/1/11 .......... 1,500 1,619
Chilton Memorial Hosp., 5.00%, 7/1/13 ................ 1,230 1,126
Columbus Hosp., 7.50%, 7/1/21 ........................ 1,640 1,722
Hackensack Medical Center
6.625%, 7/1/11 (FGIC Insured) ................. 500 541
6.625%, 7/1/17 (FGIC Insured) ................. 500 539
Irvington General Hosp ...............................
5.875%, 8/1/06 (FHA Guaranteed) ............... 1,315 1,352
6.375%, 8/1/15 (FHA Guaranteed) ............... 500 523
Monmouth Medical Center
6.25%, 7/1/24 (CGIC Insured) .................. 1,000 1,059
Morristown Memorial Hosp., 7.00%, 7/1/17 ............. 800 838
Overlook Hosp. Assoc .................................
6.70%, 7/1/13 (FGIC Insured) .................. 500 515
Raritan Bay Medical Center, 7.25%, 7/1/27 ............ 700 730
5.75%, 7/1/16 ................................. 1,000 1,005
New Jersey Highway Auth .....................................
Garden State Parkway
7.25%, 1/1/09 (Prerefunded 1/1/99+) ........... 200 215
7.25%, 1/1/16 (Prerefunded 1/1/99+) ........... 260 280
New Jersey Housing and Mortgage Fin. Agency
7.10%, 11/1/11 ................................ 300 318
7.10%, 11/1/12 ................................ 175 185
6.90%, 10/1/16 (MBIA Insured) * ............... 1,000 1,063
Home Buyer, 6.35%, 10/1/27 (MBIA Insured) * .......... 2,000 2,048
New Jersey Sports and Exposition Auth., Monmouth Park
8.00%, 1/1/25 ................................. 650 717
New Jersey Transportation Trust Fund Auth ...................
Transportation Systems, 5.25%, 6/15/15 ............... 3,500 3,396
New Jersey Turnpike Auth ....................................
10.375%, 1/1/03
(Escrowed to Maturity) ........................ 1,875 2,250
VRDN (Currently 3.15%)
(FGIC Insured) ................................ 600 600
New Jersey Wastewater Treatment Trust
6.30%, 4/1/10 $ ............................... 1,180 $1,272
6.375%, 4/1/11 ................................ 750 809
<PAGE>
North Hudson Sewage Auth., 5.25%, 8/1/16 (FGIC Insured) ..... $ 2,000 $ 1,929
Ocean County Utilities Auth
Wastewater
6.125%, 1/1/01 .............................. 500 531
6.125%, 1/1/02 .............................. 500 536
6.30%, 1/1/11 ............................... 1,300 1,395
Passaic Valley Sewage Commission
5.70%, 12/1/03 (AMBAC Insured) .............. 1,000 1,065
Port Auth. of New York and New Jersey
6.125%, 6/1/94 .............................. 1,000 1,057
6.125%, 7/15/22 * ........................... 1,000 1,038
6.50%, 11/1/26 * ............................ 1,000 1,063
6.50%, 7/15/19 (FGIC Insured) * ............. 500 545
Special Project
6.50%, 10/1/01 * ............................ 500 517
6.75%, 10/1/11 * ............................ 1,000 1,030
Salem County Pollution Control Fin. Auth., PCR
E. I. Du Pont Chambers, 6.50%, 11/15/21 * .......... 1,230 1,302
Public Service Electric and Gas
6.25%, 6/1/31 (MBIA Insured) ................ 1,500 1,581
South Brunswick Township
Board of Ed., GO
6.40%, 8/1/09 (FGIC Insured) ................ 1,250 1,376
6.40%, 8/1/10 (FGIC Insured) ................ 1,500 1,636
South Jersey Transportation Auth ..........................
Raytheon Aircraft Service, Inc., 6.15%, 1/1/22* .... 1,010 1,015
Southeast Morris County Municipal Utilities Auth ..........
Water, 6.50%, 1/1/11 (FGIC Insured) ................ 750 811
Union County, GO, 6.50%, 2/1/11 (Prerefunded 2/1/01+) ..... 100 109
Union County Utilities Auth., Solid Waste, 7.15%, 6/15/09 * 500 514
Univ. of Medicine and Dentistry of New Jersey
6.50%, 12/1/18 (MBIA Insured)
(Prerefunded 12/1/01+) ...................... 750 830
Wanaque Valley Regional Sewage Auth .......................
5.75%, 9/1/18 (AMBAC Insured) ............... $ 2,000 $ 2,068
Warren County, PCR, Warren Energy Resource Co. ............
6.55%, 12/1/06 (MBIA Insured) ............... 600 666
Total New Jersey (Cost $ 68,483) 71,654
- --------------------------------------------------------------------------------
PUERTO RICO 10.8%
Puerto Rico Commonwealth, GO
6.45%, 7/1/17 ............................... 500 533
6.80%, 7/1/21 (Prerefunded 7/1/02+) ......... 200 225
7.625%, 7/1/10 (Prerefunded 7/1/00+) ........ 80 90
7.75%, 7/1/13 (Prerefunded 7/1/98+) ......... 25 27
<PAGE>
Puerto Rico Electric Power Auth ...........................
5.25%, 7/1/21 ............................... 2,000 1,843
7.125%, 7/1/14 .............................. 500 537
8.00%, 7/1/08 (Prerefunded 7/1/98+) ......... 625 672
Puerto Rico Highway and Transportation Auth ...............
5.00%, 7/1/36 ............................... 500 442
6.625%, 7/1/12 .............................. 1,000 1,076
7.75%, 7/1/16 (Prerefunded 7/1/00+) ......... 10 11
6.375%, 7/1/08 (FSA Insured) ................ 1,000 1,077
6.625%, 7/1/12 (FSA Insured) ................ 500 549
5.50%, 7/1/15 (MBIA Insured) ................ 1,000 1,015
Puerto Rico Infrastructure Fin. Auth ......................
7.50%, 7/1/09 ............................... 475 504
7.75%, 7/1/08 ............................... 45 48
Total Puerto Rico (Cost $ 8,273) 8,649
- --------------------------------------------------------------------------------
Total Investments in Securities
100.0% of Net Assets (Cost $ 76,756) $80,303
Other Assets Less Liabilities ............................. (14)
-------
NET ASSETS ................................................ $80,289
-------
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 2
Accumulated net realized gain/loss - net of distributions (1,807)
Net unrealized gain (loss) 3,547
Paid-in-capital applicable to 7,247,997
no par value shares of beneficial interest outstanding;
unlimited number of shares authorized 78,547
-------
NET ASSETS ................................................ $ 80,289
==========
NET ASSET VALUE PER SHARE ................................. $ 11.08
==========
* Interest subject to alternative minimum tax
+ Used in determining portfolio maturity
AMBAC AMBAC Indemnity Corp.
CGIC Capital Guaranty Insurance Corp.
EFA Educational Facility Authority
FGIC Financial Guaranty Insurance Company
FHA Federal Housing Authority
FSA Financial Security Assurance Corp.
GO General Obligation
HFFA Health Facility Financing Authority
MBIA Municipal Bond Investors Assurance Corp.
PCR Pollution Control Revenue
VRDN Variable Rate Demand Note
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
STATEMENT OF OPERATIONS
-----------------------
In thousands
Year
Ended
2/28/97
-------
INVESTMENT INCOME
Interest income $ 4,324
-------
Expenses
Investment management 244
Custody and accounting 100
Shareholder servicing 91
Prospectus and shareholder reports 19
Legal and audit 10
Registration 6
Trustees 6
Miscellaneous 6
-------
Total expenses 482
-------
NET INVESTMENT INCOME 3,842
-------
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS)
Securities (441)
Futures 35
Written options 25
-------
Net realized gain (loss) (381)
-------
Change in net unrealized gain or loss
Securities (71)
Futures 6
-------
Change in net unrealized gain or loss (65)
-------
Net realized and unrealized gain (loss) (446)
-------
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 3,396
========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
----------------------------------
In thousands
Year
Ended
2/28/97 2/29/96
------- -------
Increase (Decrease) in Net Assets
Operations
Net investment income $ 3,842 $ 3,401
Net realized gain (loss) (381) 1,477
Change in net unrealized gain or loss (65) 1,594
-------- --------
Increase (decrease) in net assets from operations 3,396 6,472
-------- --------
Distributions to shareholders
Net investment income (3,842) (3,401)
-------- --------
Capital share transactions *
Shares sold 20,966 19,425
Distributions reinvested 2,921 2,581
Shares redeemed (13,456) (12,847)
------- -------
Increase (decrease) in net assets from capital
share transactions 10,431 9,159
Net Assets
Increase (decrease) during period 9,985 12,230
Beginning of period 70,304 58,074
End of period $80,289 $70,304
======= =======
*Share information
Shares sold 1,913 1,774
Distributions reinvested 266 235
Shares redeemed (1,230) (1,171)
------ ------
INCREASE (DECREASE) IN SHARES OUTSTANDING 949 838
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
February 28, 1997
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
================================================================================
T. Rowe Price State Tax-Free Income Trust (the trust) is registered under
the Investment Company Act of 1940. The New Jersey Tax-Free Bond Fund (the
fund), a nondiversified, open-end management investment company, is one of the
portfolios established by the trust and commenced operations on April 30, 1991.
Valuation Debt securities are generally traded in the over-the-counter
market. Investments in securities are stated at fair value as furnished by
dealers who make markets in such securities or by an independent pricing
service, which considers yield or price of bonds of comparable quality, coupon,
maturity, and type, as well as prices quoted by dealers who make markets in such
securities.
<PAGE>
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Trustees.
Premiums and Discounts Premiums and original issue discounts on municipal
securities are amortized for both financial reporting and tax purposes. Market
discounts are recognized upon disposition of the security as gain or loss for
financial reporting purposes and as ordinary income for tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Distributions to shareholders are
recorded by the fund on the ex-divide nd date. Income and capital gain
distributions are determined in accordance with federal income tax regulations
and may differ from those determined in accordance with generally accepted
accounting principles.
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT TRANSACTIONS
================================================================================
Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.
Options Call and put options on futures contracts give the holder the right
to purchase or sell, respectively, a particular futures contract at a specified
price on a certain date. Risks arise from possible illiquidity of the options
market and from movements in underlying futures prices. Transactions in options
written and related premiums received during the year ended February 28, 1997,
were as follows:
- --------------------------------------------------------------------------------
T. Rowe Price New Jersey Tax-Free Bond Fund
Number of
Contracts Premiums
--------- --------
Outstanding at beginning of period -- $ --
Written 37 42,000
Closed (37) (42,000)
Outstanding at end of period -- $ --
- --------------------------------------------------------------------------------
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $69,681,000 and $56,081,000, respectively, for the year
ended February 28, 1997.
- --------------------------------------------------------------------------------
NOTE 3 - FEDERAL INCOME TAXES
================================================================================
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
income. The fund has unused realized capital loss carryforwards for federal
income tax purposes of $1,718,000, of which $1,298,000 expires in 2003, and
$420,000 in 2005. The fund intends to retain gains realized in future periods
that may be offset by available capital loss carryforwards.
<PAGE>
In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, the following
reclassifications were made during the year ended February 28, 1997. The results
of operations and net assets were not affected by the reclassifications.
- --------------------------------------------------------------------------------
T. Rowe Price New Jersey Tax-Free Bond Fund
Undistributed net investment income $ 1,000
Undistributed net realized gain (6,000)
Paid-in-capital 5,000
- --------------------------------------------------------------------------------
At February 28, 1997, the aggregate cost of investments for federal income
tax and financial reporting purposes was $76,756,000, and net unrealized gain
aggregated $3,547,000, of which $3,600,000 related to appreciated investments
and $53,000 to depreciated investments.
- --------------------------------------------------------------------------------
NOTE 4 - RELATED PARTY TRANSACTIONS
================================================================================
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management fee,
of which $22,000 was payable at February 28, 1997. The fee is computed daily and
paid monthly, and consists of an individual fund fee equal to 0.10% of average
daily net assets and a group fee. The group fee is based on the combined assets
of certain mutual funds sponsored by the manager or Rowe Price-Fleming
International, Inc. (the group). The group fee rate ranges from 0.48% for the
first $1 billion of assets to 0.305% for assets in excess of $50 billion. At
February 28, 1997, and for the year then ended, the effective annual group fee
rate was 0.33%. The fund pays a pro-rata share of the group fee based on the
ratio of its net assets to those of the group.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through February 28, 1997, which would cause the
fund's ratio of expenses to average net assets to exceed 0.65%. Thereafter,
through February 28, 1999, the fund is required to reimburse the manager for
these expenses, provided that average net assets have grown or expenses have
declined sufficiently to allow reimbursement without causing the fund's ratio of
expenses to average net assets to exceed 0.65%. Pursuant to this agreement,
$74,000 of management fees were not accrued by the fund for the year ended
February 28, 1997, and $77,000 remains unaccrued from the prior period.
In addition, the fund has entered into agreements with the manager and a
wholly owned subsidiary of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and maintains
the financial records of the fund. T. Rowe Price Services, Inc., is the fund's
transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. The fund incurred expenses pursuant to
these related party agreements totaling approximately $134,000 for the year
ended February 28, 1997, of which $12,000 was payable at period-end.
================================================================================
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Shareholders and Board of Trustees of
T. Rowe Price New Jersey Tax-Free Bond Fund
We have audited the accompanying statement of net assets of T. Rowe Price
New Jersey Tax-Free Bond Fund (one of the portfolios comprising the T. Rowe
Price State Tax-Free Income Trust) as of February 28, 1997, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
February 28, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of T.
Rowe Price New Jersey Tax-Free Bond Fund as of February 28, 1997, the results of
its operations, the changes in its net assets, and financial highlights for each
of the respective periods stated in the first paragraph, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 19, 1997
================================================================================
<PAGE>
T. ROWE PRICE SHAREHOLDER SERVICES
----------------------------------
INVESTMENT SERVICES AND INFORMATION
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
ACCOUNT SERVICES
Checking Available on most fixed income funds ($500 minimum).
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access (Registration Mark) and
T.Rowe Price OnLine.
DISCOUNT BROKERAGE*
Individual Investments Stocks, bonds, options, precious metals, and other
securities at a savings over regular commission rates.
INVESTMENT INFORMATION
Combined Statement Overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and results.
T. Rowe Price Report Quarterly investment newsletter discussing markets and
financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial
markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
* A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access (Registration Mark):
1-800-638-2587 toll free
<PAGE>
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price New Jersey Tax-Free
Bond Fund.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
T. Rowe Price Investment Services, Inc., Distributor RPRTNJB 2/28/97
