Smith Barney
New Jersey Municipals Fund Inc.
388 Greenwich Street
New York, New York 10013
800-451-2010
Statement of Additional Information
July 29, 1998
As amended October 1, 1998
This Statement of Additional Information (the "SAI")
expands upon and supplements the information contained
in
the current Prospectus of Smith Barney New Jersey
Municipals
Fund Inc. (the "Fund''), dated July 29, 1998, as
amended or
supplemented from time to time, and should be read in
conjunction with the Fund's Prospectus. The Fund's
Prospectus may be obtained from a Smith Barney
Financial
Consultant or by writing or calling the Fund at the
address
or telephone number set forth above. This SAI,
although not
in itself a prospectus, is incorporated by reference
into
the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference the same section headings are
used
in both the Prospectus and the SAI, except where shown
below:
Management of the Fund 1
Investment Objective and Management Policies
5
Municipal Bonds (See in the Prospectus "New Jersey
Municipal Securities'') 9
Purchase of Shares 19
Redemption of Shares 19
Distributor 20
Valuation of Shares 22
Exchange Privilege 22
Performance Data (See in the Prospectus
"Performance'') 23
Taxes (See in the Prospectus "Dividends, Distributions
and Taxes'') 26
Additional Information 29
Financial Statements 29
Appendix A-1
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of
certain
of the organizations that provide services to the
Fund.
These organizations are as follows:
Name
S
ervice
Smith Barney Inc.
("Smith Barney'' or "Distributor")
Distri
butor
Mutual Management Corp.
("MMC" or "Adviser" or "Administrator")
Invest
ment Adviser and
Admini
strator
PNC Bank, National Association
("PNC" or "Custodian")
Custod
ian
First Data Investor Services Group, Inc.
("First Data" or the "Transfer Agent")
Transf
er Agent
These organizations and the functions they perform for
the Fund are discussed in the Prospectus and in this
SAI.
Directors and Executive Officers of the Fund
The names of the Directors and executive officers of
the
Fund, together with information as to their principal
business occupations during the past five years, are
shown
below. Each Director who is an ''interested person''
of the
Fund, as defined in the Investment Company Act of
1940, as
amended (the "1940 Act''), is indicated by an
asterisk.
Herbert Barg, Director (Age 75). Private Investor.
His
address is 273 Montgomery Avenue, Bala Cynwyd,
Pennsylvania
19004.
*Alfred J. Bianchetti, Director (Age 75). Retired;
formerly Senior Consultant to Dean Witter Reynolds
Inc. His
address is 19 Circle End Drive, Ramsey, New Jersey
07466.
Martin Brody, Director (Age 76). Consultant, HMK
Associates; Retired Vice Chairman of the Board of
Restaurant
Associates Corp.; His address is c/o HMK Associates,
30
Columbia Turnpike, Florham, New Jersey 07068.
Dwight B. Crane, Director (Age 60). Professor,
Harvard
Business School. His address is c/o Harvard Business
School,
Soldiers Field Road, Boston, Massachusetts 02163.
Burt N. Dorsett, Director (Age 67). Managing Partner
of
Dorsett, McCabe Capital Management, Inc., an
investment
counseling firm; Director of Research Corporation
Technologies, Inc., a non-profit patent-clearing and
licensing firm. His address is 201 East 62nd Street,
New
York, New York 10021.
Elliot S. Jaffe, Director (Age 72). Chairman of the
Board and President of The Dress Barn, Inc. His
address is
30 Dunnigan Drive, Suffern, New York 10901.
Stephen E. Kaufman, Director (Age 66). Attorney. His
address is 277 Park Avenue, New York, New York 10017.
Joseph J. McCann, Director (Age 67). Financial
Consultant. Retired Financial Executive, Ryan Homes,
Inc.
His address is 200 Oak Park Place, Pittsburgh,
Pennsylvania
15243.
*Heath B. McLendon, Chairman of the Board, President
and
Chief Executive Officer (Age 65). Managing Director of
Smith
Barney, Chairman of the Board of Smith Barney Strategy
Advisors Inc. and President of MMC and Travelers
Investment
Adviser, Inc. ("TIA"). Mr. McLendon is Chairman or
Co-
Chairman of the Board and Director of 58 investment
companies associated with Salomon Smith Barney
Holdings Inc.
Prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc., Vice Chairman of
Shearson
Asset Management, Director of PanAgora Asset
Management,
Inc. and PanAgora Asset Management Limited. His
address is
388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director (Age 64). President,
Cornelius C. Rose Associates, Inc., financial
consultants,
and Chairman and Director of Performance Learning
Systems,
an educational consultant. His address is Meadowbrook
Village, Building 4, West Lebanon, New Hampshire
03784.
Lewis E. Daidone, Senior Vice President and Treasurer
(Age 40). Managing Director of Smith Barney; Director
and
Senior Vice President of MMC and TIA. Mr. Daidone
serves as
Senior Vice President and Treasurer of 42 Smith Barney
Mutual Funds. His address is 388 Greenwich Street,
New
York, New York 10013.
Lawrence T. McDermott, Vice President and Investment
Officer (Age 48). Investment Officer of MMC; prior to
July
1993, Managing Director of Shearson Lehman Advisors.
Mr.
McDermott serves as Investment Officer of 11 Smith
Barney
Mutual Funds. His address is 388 Greenwich Street, New
York,
New York 10013.
Christina T. Sydor, Secretary (Age 46). Managing
Director of Smith Barney; General Counsel and
Secretary of
MMC and TIA. Ms. Sydor also serves as Secretary of 42
Smith
Barney Mutual Funds. Her address is 388 Greenwich
Street,
New York, New York 10013.
As of July 14, 1998, the Directors and officers of the
Fund as a group owned less than 1.00% of the
outstanding
common stock of the Fund. To the best knowledge of the
Directors, as of July 14, 1998 no shareholder or
"group" (as
such term is defined in Section 13(d) of the
Securities
Exchange Act of 1934, as amended) owned beneficially
or of
record more than 5% of the shares of the Funds.
No Director, officer or employee of Smith Barney or of
any of its affiliates receives any compensation from
the
Fund for serving as an officer or Director of the
Fund. The
Fund pays each Director who is not an officer,
director or
employee of Smith Barney or any of its affiliates a
fee of
$1,000 per annum plus $100 per in-person meeting.
Each
Director emeritus who is not an officer, director or
employee of Smith Barney or any of its affiliates
receives a
fee of $500 per annum plus $50 per in-person meeting.
The
Fund reimburses all Directors for travel and out-of-
pocket
expenses incurred to attend meetings. For the fiscal
year
ended March 31, 1998, such expenses totaled $11,423.05
For the fiscal year ended March 31, 1998, the
Directors
of the Fund were paid the following compensation:
Name of Person
Aggregate
Compensation
from Fund
Total
Pension or
Retirement
Benefits Accrued
as part of
Fund Expenses
Compensation
From Fund
and Fund
Complex
Paid to Director
Number of
Funds for
Which Director
Serves Within
Fund Complex
Herbert Barg
$1,500
$0
$101,600
16
Alfred Bianchetti*
1,500
0
49,600
11
Martin Brody
1,500
0
119,814
29
Dwight B. Crane
1,500
0
133,850
22
Burt N. Dorsett
1,500
0
49,600
11
Elliot S. Jaffe
1,500
0
48,500
11
Stephen E. Kaufman
1,500
0
91,964
13
Joseph J. McCann
1,500
0
49,600
11
Heath B. McLendon *
- -
-
- -
58
Cornelius C. Rose, Jr.
1,500
0
18,825
11
* Designates an "interested" Director.
Upon attainment of age 80, Fund Directors are required
to
change to emeritus status. Directors Emeritus are
entitled
to serve in emeritus status for a maximum of 10 years,
during which time they are paid 50% of the annual
retainer
fee and meeting fees otherwise applicable to Fund
Directors,
together with reasonable out-of-pocket expenses for
each
meeting attended. A Director Emeritus may attend
meetings
but has no voting rights. During the Fund's last
fiscal
year, aggregate compensation paid by the Fund to
Directors
achieving emeritus status totaled $750.
Investment Adviser and Administrator -- MMC
MMC serves as investment adviser to the Fund pursuant
to
an investment advisory agreement (the "Investment
Advisory
Agreement") with the Fund which was approved by the
Board
of Directors, including a majority of those Directors
who
are not "interested persons" of the Fund or Smith
Barney
("Independent Directors"). The Adviser is a wholly
owned
subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings''). Holdings is a wholly owned subsidiary
of
Travelers Group Inc. ("Travelers''). The services
provided
by the Adviser under the Advisory Agreement are
described in
the Prospectus under "Management of the Fund.'' The
Adviser
pays the salary of any officer or employee who is
employed
by both it and the Fund.
As compensation for investment advisory services, the
Fund pays the Adviser a fee computed daily and paid
monthly
at the annual rate of 0.30% of the Fund's average
daily net
assets. For the 1996, 1997 and 1998 fiscal years, the
investment advisory fees paid to the Adviser and its
predecessors amounted to $612,606, $651,616 and
$665,651,
respectively.
MMC also serves as administrator to the Fund pursuant
to
a written agreement (the "Administration Agreement'')
which
was approved by the Fund's Board of Directors,
including a
majority of the Independent Directors. The services
provided by the Administrator under the Administration
Agreement are described in the Prospectus under
"Management
of the Fund.'' The Administrator pays the salary of
any
officer and employee who is employed by both it and
the Fund
and bears all expenses in connection with the
performance of
its services.
As compensation for administration services rendered
to
the Fund, the Administrator receives a fee paid at the
following annual rates: 0.20% of average daily net
assets up
to $500 million; and 0.18% of average daily net assets
in
excess of $500 million. For the fiscal year ended
March 31,
1997 and 1998, administration fees paid to the
Administrator
equaled $434,410 and $443,768, respectively.
Prior to June 12, 1995, The Boston Company Advisors,
Inc.
("Boston Advisors"), an indirect wholly-owned
subsidiary of
Mellon Bank Corporation, served as the Fund's sub-
administrator. For the fiscal year ended March 31,
1996
the Fund paid Boston Advisors $65,523 in sub-
investment
advisory and/or administration fees.
MMC maintains office facilities for the Fund,
furnishes
the Fund with statistical and research data, clerical
help
and accounting, data processing, bookkeeping, internal
auditing and legal services and certain other services
required by the Fund, prepares reports to the Fund's
shareholders, and prepares tax returns, reports to and
filings with the Securities and Exchange Commission
(the
"SEC'') and state Blue Sky authorities.
The Fund bears expenses incurred in its operations,
including: taxes, interest, brokerage fees and
commissions,
if any; fees of Directors who are not officers,
directors,
shareholders or employees of Smith Barney or MMC; SEC
fees
and state Blue Sky qualification fees; charges of
custodian;
transfer and dividend disbursing agent's fees; certain
insurance premiums; outside auditing and legal
expenses;
costs of any independent pricing service; costs of
maintaining corporate existence; costs attributable to
investor services (including allocated telephone and
personnel expenses); costs of preparation and printing
of
prospectuses for regulatory purposes and for
distribution to
existing shareholders; costs of shareholders' reports
and
shareholder meetings and meetings of the officers or
Board
of Directors of the Fund.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to
the
Fund. The Independent Directors of the Fund have
selected
Stroock & Stroock & Lavan LLP as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New
York 10154, has been selected as the Fund's
independent
auditors to examine and report on the Fund's financial
statements for the fiscal year ending March 31, 1999.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment
objective
and the policies it employs to achieve that objective.
The
following discussion supplements the description of
the
Fund's investment policies in the Prospectus. For
purposes
of this SAI, obligations of non-New Jersey municipal
issuers, the interest on which is at least exempt from
Federal income taxation ("Other Municipal
Securities''), and
obligations of the State of New Jersey and its
political
subdivisions, agencies and public authorities
(together with
certain municipal issuers such as the Commonwealth of
Puerto
Rico, the Virgin Islands and Guam) that pay interest
which
is excluded from gross income for Federal income tax
purposes and exempt from New Jersey personal income
taxes
("New Jersey Municipal Securities'') are collectively
referred to as "Municipal Bonds.''
As noted in the Prospectus, the Fund is classified as
a
non-diversified investment company under the 1940 Act,
which
means that the Fund is not limited by the 1940 Act in
the
proportion of its assets that may be invested in the
obligations of a single issuer. The identification of
the
issuer of Municipal Bonds generally depends upon the
terms
and conditions of the security. When the assets and
revenues
of an agency, authority, instrumentality or other
political
subdivision are separate from those of the government
creating the issuing entity and the security is backed
only
by the assets and revenues of such entity, such entity
would
be deemed to be the sole issuer. Similarly, in the
case of a
private activity bond, if that bond is backed only by
the
assets and revenues of the nongovernmental user, then
such
nongovernmental user is deemed to be the sole issuer.
If in
either case, however, the creating government or some
other
entity guarantees a security, such a guarantee would
be
considered a separate security and would be treated as
an
issue of such government or other entity.
Ratings as Investment Criteria
In general, the ratings of Moody's Investors Service,
Inc. ("Moody's''), Standard & Poor's Ratings Group
("S&P'')
or another nationally recognized statistical ratings
organization ("NRSRO") represent the opinions of those
agencies as to the quality of the Municipal Bonds and
short-
term investments which they rate. It should be
emphasized,
however, that such ratings are relative and
subjective, are
not absolute standards of quality and do not evaluate
the
market risk of securities. These ratings will be used
by
the Fund as initial criteria for the selection of
portfolio
securities, but the Fund also will rely upon the
independent
advice of the Adviser to evaluate potential
investments.
Among the factors that will be considered are the
long-term
ability of the issuer to pay principal and interest
and
general economic trends. To the extent the Fund
invests in
lower-rated and comparable unrated securities, the
Fund's
achievement of its investment objective may be more
dependent on the Adviser's credit analysis of such
securities than would be the case for a portfolio
consisting
entirely of higher-rated securities.
Subsequent to its purchase by the Fund, an issue of
Municipal Bonds may cease to be rated or its rating
may be
reduced below the rating given at the time the
securities
were acquired by the Fund. Neither event will require
the
sale of such Municipal Bonds by the Fund, but the
Adviser
will consider such event in its determination of
whether the
Fund should continue to hold the Municipal Bonds. In
addition, to the extent the ratings change as a result
of
changes in such organizations or their rating systems
or due
to a corporate restructuring of Moody's, S&P or other
NRSROs, the Fund will attempt to use comparable
ratings as
standards for its investments in accordance with its
investment objective and policies. The Appendix
contains
information concerning the ratings of Moody's, S&P and
other
NRSROs and their significance.
Temporary Investments
The Fund may invest in short-term investments
("Temporary
Investments'') consisting of (a) the following tax-
exempt
securities: notes of municipal issuers having, at the
time
of purchase, a rating within the three highest grades
of
Moody's, S&P or the equivalent from another NRSRO or,
if not
rated, having an issue of outstanding Municipal Bonds
rated
within the three highest grades by Moody's, S&P or the
equivalent from another NRSRO and (b) the following
taxable
securities: obligations of the United States
government, its
agencies or instrumentalities ("U.S. government
securities''), repurchase agreements, other debt
securities
rated within the three highest grades by Moody's, S&P
or the
equivalent from another NRSRO, commercial paper rated
in the
highest grade by either of such rating services, and
certificates of deposit of domestic banks with assets
of $1
billion or more. The Fund intends to purchase tax-
exempt
Temporary Investments pending the investment of the
proceeds
of the sale of portfolio securities or shares of the
Fund's
common stock, or in order to have highly liquid
securities
available to meet anticipated redemptions. At no time
will
more than 20% of the Fund's total assets be invested
in
Temporary Investments unless the Fund has adopted a
defensive investment policy; provided, however, that
the
Fund will seek, to the extent that it makes Temporary
Investments for defensive purposes, to make such
investments
in conformity with the requirements of a qualified
investment fund under New Jersey law.
Repurchase Agreements. As a defensive position only,
the
Fund may enter into repurchase agreements with banks
which
are the issuers of instruments acceptable for purchase
by
the Fund and with certain dealers on the Federal
Reserve
Bank of New York's list of reporting dealers. A
repurchase
agreement is a contract under which the buyer of a
security
simultaneously commits to resell the security to the
seller
at an agreed-upon price on an agreed-upon date. Under
the
terms of a typical repurchase agreement, the Fund
would
acquire an underlying debt obligation for a relatively
short
period (usually not more than seven days) subject to
an
obligation of the seller to repurchase, and the Fund
to
resell, the obligation at an agreed-upon price and
time,
thereby determining the yield during the Fund's
holding
period. This arrangement results in a fixed rate of
return
that is not subject to market fluctuations during the
Fund's
holding period. Under each repurchase agreement, the
selling institution will be required to maintain the
value
of the securities subject to the repurchase agreement
at not
less than their repurchase price. Repurchase
agreements
could involve certain risks in the event of default or
insolvency of the other party, including possible
delays or
restrictions upon the Fund's ability to dispose of the
underlying securities, the risk of a possible decline
in the
value of the underlying securities during the period
in
which the Fund seeks to assert its rights to them, the
risk
of incurring expenses associated with asserting those
rights
and the risk of losing all or part of the income from
the
agreement. The Adviser, acting under the supervision
of the
Fund's Board of Directors, reviews on an ongoing basis
the
value of the collateral and the creditworthiness of
those
banks and dealers with which the Fund enters into
repurchase
agreements to evaluate potential risks.
Investment Restrictions
The Fund has adopted the following investment
restrictions for the protection of shareholders.
Restrictions 1 through 6 below cannot be changed
without the
approval of the holders of a majority of the
outstanding
shares of the Fund, defined as the lesser of (a) 67%
of the
Fund's shares present at a meeting, if the holders of
more
than 50% of the outstanding shares are present in
person or
by proxy, or (b) more than 50% of the Fund's
outstanding
shares. The remaining restrictions may be changed by
the
Board of Directors at any time. The Fund may not:
1. Issue "senior securities" as defined in the 1940
Act
and the rules, regulations and orders thereunder,
except as permitted under the 1940 Act and the rules,
regulations and orders thereunder.
2. Invest more than 25% of its total assets in
securities, the issuers of which are in the same
industry. For purposes of this limitation, securities
of the U.S. government and securities of state or
municipal governments and their political subdivisions
are not considered to be issued by members of any
industry.
3. Borrow money, except that (a) the Fund may
borrow from
banks for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests
which might otherwise require the untimely disposition
of securities, and (b) the Fund may, to the extent
consistent with its investment policies, enter into
reverse repurchase agreements, forward roll
transactions and similar investment strategies and
techniques. To the extent that it engages in
transactions described in (a) and (b), the Fund will
be
limited so that no more than 33 1/3% of the value of
its total assets (including the amount borrowed),
valued at the lesser of cost or market, less
liabilities (not including the amount borrowed) valued
at the time the borrowing is made, is derived from
such
transactions.
4. Make loans. This restriction does not apply to:
(a)
the purchase of debt obligations in which the Fund
may
invest consistent with its investment objectives and
policies; (b) repurchase agreements; and (c) loans of
its portfolio securities, to the fullest extent
permitted under the 1940 Act.
5. Engage in the business of underwriting
securities
issued by other persons, except to the extent that the
Fund may technically be deemed to be an underwriter
under the Securities Act of 1933, as amended, in
disposing of portfolio securities.
6. Purchase or sell real estate, real estate
mortgages,
commodities or commodity contracts, but this
restriction shall not prevent the Fund from (a)
investing in securities of issuers engaged in the real
estate business or the business of investing in real
estate (including interests in limited partnerships
owning or otherwise engaging in the real estate
business or the business of investing in real estate)
and securities which are secured by real estate or
interests therein; (b) holding or selling real estate
received in connection with securities it holds or
held; (c) trading in futures contracts and options on
futures contracts (including options on currencies to
the extent consistent with the Fund's investment
objective and policies); or (d) investing in real
estate investment trust securities.
7. Purchase any securities on margin (except for
such
short-term credits as are necessary for the clearance
of purchases and sales of portfolio securities) or
sell
any securities short (except "against the box"). For
purposes of this restriction, the deposit or payment
by
the Fund of underlying securities and other assets in
escrow and collateral agreements with respect to
initial or maintenance margin in connection with
futures contracts and related options and options on
securities, indexes or similar items is not considered
to be the purchase of a security on margin.
8. Purchase or otherwise acquire any security if,
as a
result, more than 15% of its net assets would be
invested in securities that are illiquid.
9. Purchase or sell oil and gas interests.
10. Invest more than 5% of the value of its total
assets
in the securities of issuers having a record,
including predecessors, of less than three years of
continuous operation, except U.S. government
securities. (For purposes of this restriction issuers
include predecessors, sponsors, controlling persons,
general partners, guarantors and originators of
underlying assets.)
11. Invest in companies for the purpose of
exercising
control.
12.
Invest in securities of other investment companies,
except as they may be acquired as part of a merger,
consolidation or acquisition of assets and except to
the extent permitted by Section 12 of the 1940 Act
(currently, up to 5% of the total assets of the Fund
and no more than 3% of the total outstanding voting
stock of any one investment company).
13. Engage in the purchase or sale of put, call,
straddle
or spread options or in the writing of such options,
except that the Fund may engage in transactions
involving municipal bond index and interest rate
futures contracts and options thereon after approval
of these investment strategies by the Board of
Directors and notice thereof to the Fund's
shareholders.
Certain restrictions listed above permit the Fund to
engage in investment practices that the Fund does not
currently pursue. The Fund has no present intention of
altering its current investment practices as otherwise
described in the Prospectus and this SAI and any
future
change in those practices would require Board of
Directors'
approval and appropriate disclosure to investors.
If a percentage restriction is complied with at the
time
of an investment, a later increase or decrease in the
percentage of assets resulting from a change in the
values
of portfolio securities or in the amount of the Fund's
assets will not constitute a violation of such
restriction.
In order to permit the sale of the Fund's shares in
certain
states, the Fund may make commitments more restrictive
than
the restrictions described above. Should the Fund
determine
that any such commitment is no longer in the best
interests
of the Fund and its shareholders, it will revoke the
commitment by terminating sales of its shares in the
state
involved.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are
made by the Adviser subject to the overall supervision
and
review of the Fund's Board of Directors. Portfolio
securities transactions are effected by or under the
supervision of the Adviser.
Newly issued securities normally are purchased
directly
from the issuer or from an underwriter acting as
principal.
Other purchases and sales usually are placed with
those
dealers from which it appears that the best price or
execution will be obtained; those dealers may be
acting as
either agents or principals. The purchase price paid
by the
Fund to underwriters of newly issued securities
usually
includes a concession paid by the issuer to the
underwriter,
and purchases of after-market securities from dealers
normally are executed at a price between the bid and
asked
prices. The Fund has paid no brokerage commissions
since its
commencement of operations.
Allocation of transactions, including their frequency,
to
various dealers is determined by the Adviser in its
best
judgment and in a manner deemed fair and reasonable to
shareholders. The primary considerations are the
availability of the desired security and prompt
execution of
orders in an effective manner at the most favorable
prices.
Subject to these considerations, dealers who provide
supplemental investment research and statistical or
other
services to the Adviser may receive orders for
portfolio
transactions by the Fund. Information so received
enables
the Adviser to supplement its own research and
analysis with
the views and information of other securities firms.
Such
information may be useful to the Adviser in serving
both the
Fund and its other clients, and, conversely,
supplemental
information obtained by the placement of business of
other
clients may be useful to the Adviser in carrying out
its
obligations to the Fund.
The Fund will not purchase Municipal Bonds during the
existence of any underwriting or selling group
relating
thereto of which Smith Barney is a member, except to
the
extent permitted by the SEC. Under certain
circumstances,
the Fund may be at a disadvantage because of this
limitation
in comparison with other investment companies which
have a
similar investment objective but which are not subject
to
such limitation. The Fund also may execute portfolio
transactions through Smith Barney and its affiliates
in
accordance with rules promulgated by the SEC.
While investment decisions for the Fund are made
independently from those of the other accounts managed
by
the Adviser, investments of the type that the Fund may
make
also may be made by such other accounts. When the
Fund and
one or more other accounts managed by the Adviser are
prepared to invest in, or desire to dispose of, the
same
security, available investments or opportunities for
sales
will be allocated in a manner believed by the Adviser
to be
equitable to each. In some cases, this procedure may
adversely affect the price paid or received by the
Fund or
the size of the position obtained or disposed of by
the
Fund.
Portfolio Turnover
The Fund's portfolio turnover rate (the lesser of
purchases or sales of portfolio securities during the
year
excluding purchases or sales of short-term securities
divided by the monthly average value of portfolio
securities) generally is not expected to exceed 100%,
but
the portfolio turnover rate will not be a limiting
factor
whenever the Fund deems it desirable to sell or
purchase
securities. Securities may be sold in anticipation of
a rise
in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market
rise)
and later sold. In addition, a security may be sold
and
another security of comparable quality may be
purchased at
approximately the same time in order to take advantage
of
what the Fund believes to be a temporary disparity in
the
normal yield relationship between the two securities.
These
yield disparities may occur for reasons not directly
related
to the investment quality of particular issues or the
general movement of interest rates, such as changes in
the
overall demand or supply of various types of tax-
exempt
securities. For the fiscal years ended March 31, 1997
and
1998, the Fund's portfolio turnover rate was 36% and
55%,
respectively.
MUNICIPAL BONDS
General Information
Municipal Bonds generally are understood to include
debt
obligations issued to obtain funds for various public
purposes, including the construction of a wide range
of
public facilities, refunding of outstanding
obligations,
payment of general operating expenses and extensions
of
loans to public institutions and facilities. Private
activity bonds that are issued by or on behalf of
public
authorities to finance privately operated facilities
are
included within the term Municipal Bonds if the
interest
paid thereon qualifies as excludable from gross income
(but
not necessarily from alternative minimum taxable
income) for
Federal income tax purposes in the opinion of bond
counsel
to the issuer.
The yields on Municipal Bonds are dependent upon a
variety of factors, including general economic and
monetary
conditions, general money market factors, the
financial
condition of the issuer, the general conditions of the
Municipal Bond market, the size of a particular
offering,
the maturity of the obligation offered and the rating
of the
issue. Municipal Bonds are subject to the provisions
of
bankruptcy, insolvency and other laws affecting the
rights
and remedies of creditors, such as the Federal
Bankruptcy
Code, and laws, if any that may be enacted by Congress
or
state legislatures extending the time for payment of
principal or interest, or both, or imposing other
constraints upon enforcement of the obligations or
upon the
ability of municipalities to levy taxes. The
possibility
also exists that as a result of litigation or other
conditions, the power or ability of any one or more
issuers
to pay, when due, principal of and interest on its, or
their, Municipal Bonds may be materially and adversely
affected.
Zero Coupon Securities
Zero coupon securities involve special considerations.
Zero coupon securities are debt obligations which do
not
entitle the holder to any periodic payments of
interest
prior to maturity of a specified cash payment date
when the
securities begin paying current interest (the "cash
payment
date") and therefore are issued and traded at a
discount
from their face amounts or par values. The discount
varies
depending on the time remaining until maturity or cash
payment date, prevailing interest rates, liquidity of
the
security and the perceived credit quality of the
issuer.
The discount, in the absence of financial difficulties
of
the issuer, decreases as the final maturity or cash
payment
date of the security approaches. The market prices of
zero
coupon securities generally are more volatile than the
market prices of other debt securities that pay
interest
periodically and are likely to respond to changes in
interest rates to a greater degree than do debt
securities
having similar maturities and credit quality. The
credit
risk factors pertaining to low-rated securities also
apply
to low-rated zero coupon bonds. Such zero coupon
bonds
carry an additional risk in that, unlike bonds which
pay
interest throughout the period to maturity, the Fund
will
realize no cash until the cash payment date unless a
portfolio of such securities is sold and, if the
issuer
defaults, the Fund may obtain no return at all on its
investment.
Current Federal income tax laws may require the holder
of
a zero coupon security to accrue income with respect
to that
security prior to the receipt of cash payments. To
maintain
its qualification as a registered investment company
and
avoid liability for Federal income taxes, the Fund may
be
required to distribute income accrued with respect to
zero
coupon securities and may have to dispose of portfolio
securities under disadvantageous circumstances in
order to
generate cash to satisfy these distribution
requirements.
When-Issued Securities
The Fund may purchase Municipal Bonds on a "when-
issued''
basis (i.e., for delivery beyond the normal settlement
date
at a stated price and yield). The payment obligation
and the
interest rate that will be received on the Municipal
Bonds
purchased on a when-issued basis are each fixed at the
time
the buyer enters into the commitment. Although the
Fund will
purchase Municipal Bonds on a when-issued basis only
with
the intention of actually acquiring the securities,
the Fund
may sell these securities before the settlement date
if it
is deemed advisable as a matter of investment
strategy.
Municipal Bonds are subject to changes in value based
upon the public's perception of the creditworthiness
of the
issuers and changes, real or anticipated, in the level
of
interest rates. In general, Municipal Bonds tend to
appreciate when interest rates decline and depreciate
when
interest rates rise. Purchasing Municipal Bonds on a
when-
issued basis, therefore, can involve the risk that the
yields available in the market when the delivery takes
place
may actually be higher than those obtained in the
transaction itself. To account for this risk, a
segregated
account of the Fund consisting of cash or liquid debt
securities equal to the amount of the when-issued
commitments will be established at the Fund's
custodian
bank. For the purpose of determining the adequacy of
the
securities in the account, the deposited securities
will be
valued at market or fair value. If the market or fair
value
of such securities declines, additional cash or
securities
will be placed in the account daily so that the value
of the
account will equal the amount of such commitments by
the
Fund. Placing securities rather than cash in the
segregated
account may have a leveraging effect on the Fund's net
assets. That is, to the extent the Fund remains
substantially fully invested in securities at the same
time
it has committed to purchase securities on a when-
issued
basis, there will be greater fluctuations in its net
assets
than if it had set aside cash to satisfy its purchase
commitments. Upon the settlement date of the when-
issued
securities, the Fund will meet its obligations from
then-
available cash flow, sale of securities held in the
segregated account, sale of other securities or,
although it
normally would not expect to do so, from the sale of
the
when-issued securities themselves (which may have a
value
greater or less than the Fund's payment obligations).
Sales
of securities to meet such obligations may involve the
realization of capital gains, which may not be exempt
from
New Jersey personal income taxes, and from Federal
income
taxes.
When the Fund engages in when-issued transactions, it
relies on the seller to consummate the trade. Failure
of the
seller to do so may result in the Fund's incurring a
loss or
missing an opportunity to obtain a price considered
advantageous.
Special Considerations Relating to New Jersey
Municipal
Securities
Some of the significant financial considerations
relating
to the investments of the Fund are summarized below.
The
following information constitutes only a brief
summary, does
not purport to be a complete description and is
largely
based on information drawn from official statements
relating
to securities offerings of New Jersey municipal
obligations
available as of the date of this SAI. The accuracy
and
completeness of the information contained in such
offering
statements has not been independently verified.
Risk Factors: Prospective investors should consider
the
recent financial difficulties and pressures which the
State
of New Jersey (the "State") and certain of its public
authorities have undergone.
National Economy-Overview The performance of the
national
economy in 1997 was, by almost any measure,
extraordinary.
Real Gross Domestic Product (GDP) grew at 3.7%, the
fastest
annual growth since 1986. The expansion continued
into its
82nd month with both strong employment growth (2.3%)
and low
inflation (1.8% over the last 12 months). Strong
profits
growth combined with falling interest rates helped
propel
Wall Street to another record year with the Standard &
Poor's 500 Index of equity prices up 31.7%.
This is a mature economic expansion, and growth cannot
continue to exceed long-run trends. The problems of
the
Asian economies, are expected to help slow the U.S.
growth
in 1998, perhaps enough to forestall any action by the
Federal Reserve to raise interest rates. Most
forecasters
expect the Asian problems to have a limited impact on
the
U.S. financial markets, and consumer confidence are
the
primary threats to our stable growth.
The 1998 GDP growth is anticipated to slow to a more
moderate level of 2.5% and settle into a sustainable
2.2%
range in the 1999-2003 period. Consumer spending is
expected
to remain high in 1998 at 2.9%, just slightly behind
the
3.3% pace of 1997. Concern over high consumer debt
levels
is beginning to wane. Income growth is anticipated to
remain strong, reflecting continued growth in
employment
levels. Business investment in durable equipment is
expected
to remain steady in 1998 at a real growth rate of just
over
13%.
New Jersey Economy-Overview The New Jersey
economy
enjoyed its most balanced and overall best year since
the
current expansion began in 1993. Strong employment
growth of
1.7% drove employment to a level of 3.7 million, more
than
40,000 jobs above the 1989 pre-recession high.
Personal
income grew 5.2%, the third year of better than 4.7%
growth.
Gross State Product (GSP) continued to gain momentum,
growing 5% in 1997, an increase from 3.6% and 4.8% in
1995
and 1996, respectively.
Employment growth has been strong since mid-1996 with
growth for the past six quarters ranging between 1.5%
and
2.0%. This is the best growth in the mid-Atlantic
region.
Although the New Jersey employment growth rate has
been
below the national rate since 1987, the gap
substantially
narrowed in 1997. Construction jobs started growing
again
after two weak years and manufacturing declines shrunk
from
2-3% rates in 1995-1996 to 0.6% in 1997. Aggregate
growth
in the service sector remained strong at 2.6% but that
masks
growth rates in some business service sectors that are
above
the comparable national rates.
The strong employment and income picture, supplemented
by
the three year boom in the financial markets, fueled a
resurgence in consumer spending. Vehicle
registrations grew
steadily through the first three quarters of the year
and
should generate the fastest annual pace since 1994.
Economic Forecast: National economic growth will
continue
in 1998 and beyond at a more moderate but sustainable
pace,
with GDP growth in the range of 2.5% to 2.2%. The
economic
problems of Asia carry a 20%-25% probability that they
could
worsen and reduce GDP growth to 2.0%. Inflationary
pressures are expected to remain in check as the
impact of
tightening labor markets is offset by the impact of
softer
export demand and cheaper import. The Consumer Price
Index
is anticipated to increase 2.3% in 1998 and 2.7% in
1999.
Continuing high levels of employment, steady income
growth, and low interest rates will continue to
support
strong consumer and business spending. The National
Employment growth is expected to moderate slightly
2.3% in
1998 and then gradually slow to 1% by 2000. Personal
income
growth is projected to also moderate in 1998 to 5.0%
and
then remain in that range thereafter. Consumer
durable
expenditures are projected to increase in 1998 and
remain in
the 4-5% range thereafter.
The New Jersey economy is expected to track the
National
trend to slightly less vigorous growth in 1998 and
more
moderate sustainable growth in 1999. Employment growth
is
projected to remain virtually unchanged in 1998 at
1.5%
before easing to 0.9% in 1999. Personal income growth
is
expected to remain in the 4.7% range for the next 2
years.
Housing starts are expected to ease back to 1997
levels and
to stabilize in the 23,000 to 23,700 unit range.
Automobile
sales are projected to remain close to 1997 levels of
340,000 units
Revenue Forecast: Revisions to the fiscal 1998
anticipated
revenue.
The current estimate of $16.9 billion in total
fiscal
1998 revenue is $610 million more than when revenues
were
certified by the Governor in June 1997.
The three largest taxes, gross income, sales and use,
and
corporate business, account for 67% of total revenues
and
are now forecast to yield $11.4 billion. This is an
increase of $507 million and primarily reflects an
upward
revision in the income tax and the sales tax
estimates. The
total revenues from other major taxes are revised
upward by
$103 million primarily to incorporate the impact of
increasing the cigarette excise tax and the year-to-
date
collection patterns of the estate tax and the
corporate
business tax on banks and financial institutions.
The gross income tax forecast is revised to $5.3
billion,
and increase of $304 million. Stronger than
anticipated
income and employment growth in 1997 accounts for part
of
the change. Personal income is now projected to grow
5.2%,
compared to the 4.8% estimated in June. Employment
growth
of 1.7% compares to the 1.3% originally projected.
The
Budget estimate assumed that capital gains
realizations
would remain at their historic high level. The
revised
estimate assumed that the volatility of the financial
markets in the last half of 1997, combined with the
new
reduced federal tax rate on long-term capital gains
income,
will result in continued strong growth in capital
gains
income.
The property tax deduction/credit program, which was
phased-in during the 1996 tax year, was originally
expected
to reduce collections by $120 million in fiscal 1997
and
another $80 million in fiscal 1998. Recently
available data
from the 1996 tax year indicates that the fiscal 1997
cost
is $100 million, leading to a revised fiscal 1998 cost
increase of $6.7 million, for a total cost of $167
million
in fiscal 1998.
Fiscal 1999 revenue projections: Revenues for
fiscal
1999 are expected to increase more modestly as the
national
economy slows to more sustainable long-run growth
levels.
Sales Tax: The forecast of $4.9 billion for fiscal
1999
sales tax revenue is an increase of $208 million, or
4.4%,
compared to fiscal 1998. This reflects an expectation
of
continued growth but a moderation of the underlying
economic
forces compared to fiscal 1998. Spending in the two
key
consumer sectors of housing and autos is expected to
pull
back somewhat from the 1997 levels and to remain
fairly flat
for the next two years.
The reform of the gross receipts and franchise tax
will
subject energy sales to the sales tax starting in
1998.
This additional revenue is not included in the
estimate.
Corporate Business Tax: The forecast of $1.4
billion for
fiscal 1999 Corporate Business Tax (CBT) revenue is
an
increase of $116 million, or 8.8%, compared to fiscal
1998.
This includes $81 million from the energy tax reform
and $35
million in base growth. The base increase assumes
that the
growth of U.S. corporate before-tax profits, which is
a
proxy for New Jersey business profitability, will slow
significantly to about 3% in 1998. This reflects the
continued cycle slowing of the national economy from
the
strong 16% profit growth in 1995 to more moderate
levels of
9% and 8% in 1996 and 1997, respectively. Profit
growth is
anticipated to remain in the low single digits through
the
year 2000.
Gross Income Tax: The forecast of $5.9 billion for
fiscal
1999 is an increase of $520 million, or 9.7%, over
fiscal
1998 revenue. This represents a moderation of the
5.2%
growth in New Jersey personal income forecast for 1997
to
about 4.7% in both 1998 and 1999. Growth in wage
income and
proprietors' (business) income is expected to continue
strong in 1998, but start to ease back in 1999 and
beyond.
Capital gains income, which has been growing at about
21%
per year from 1991-1996, is projected to reach that
trend
level in 1998 and then grow slightly faster in the
out-
years. All the major tax policy changes are now
phased in
with one exception. The 1998 property tax deduction
will
increase to 10,000, or a $50 credit. This is expected
to
reduce the fiscal 1999 collections by about $67
million
compared to fiscal 1998.
Other Revenues The cigarette excise tax and the
wholesale
tax on other tobacco products were doubled, effective
January 1, 1998. The cigarette excise tax is
anticipated to
generate an additional $77 million during the last
half of
fiscal 1998. The other tobacco products tax is
anticipated
to increase revenues by at least 50%. The fiscal 1998
and
1999 estimates are increased by $2 and $4 million,
respectively.
The State's 1997 fiscal year budget became law on June
27,
1997.
Effective January 1, 1994, New Jersey personal income
tax
rates were cut by 5% for all taxpayers. Effective
January 1,
1995, the personal income tax rates were cut by an
additional
10% for most taxpayers. By a bill signed into law on
July 4,
1995, New Jersey personal income tax rates have been
further
reduced so that coupled with the prior rate
reductions,
beginning with tax year 1996, personal income tax
rates will
be , depending on a taxpayer's level of income and
filing
status, 30%, 15% or 9% lower than 1993 rates. At this
time,
the effect of the tax reductions cannot be evaluated.
Reflecting the downturn, the rate of unemployment in
the
State rose from a low of 3.6% during the first quarter
of
1989 to a recessionary peak of 8.5% during 1992. Since
then,
the unemployment rate fell to an average of 6.4% in
1995 and
6.1% for the four month period from May 1996 through
August
1996.
For the recovery period as a whole, May 1992 to August
1996, service-producing employment in New Jersey has
expanded
by 228,500 jobs. Hiring has been reported by food
stores,
auto dealers, wholesale distributors, trucking and
warehousing firms, utilities, business and
engineering/management service firms, hotels/hotel
casinos,
service agencies and health care providers other than
hospitals. Employment growth was particularly strong
in
business services and its personnel supply component
with
increases of 17,500 and 8,100, respectively, in the 12
month
period ended August 1996.
In the manufacturing sector, the employment losses
slowed
between 1992 and 1994. After an average annual job
loss of
33,500 from 1989 through 1992, New Jersey's factory
job
losses fell to 13,300 during 1993 and 7,300 during
1994.
During 1995, however, manufacturing job losses
increased
slightly to 9,100, reflecting a slowdown in national
manufacturing production activity. While experiencing
growth
in the number of production workers in 1994, the
number
declined in 1995 at the same time that managerial and
office
staff were also reduced as a part of nationwide
downsizing.
Through August 1996 layoffs of white collar workers
and
corporate downsizing appears to be abating.
Conditions have slowly improved in the construction
industry, where employment has risen by 15,600 since
its low
in May 1992. Between 1992 and 1995, this sector's
hiring
rebound was driven primarily by increased homebuilding
and
nonresidential projects. During 1996, public works
projects
and homebuilding became the growth segment while
nonresidential construction lessened.
Nonresidential construction activity, as measured by
contract awards, grew by 9.7% in 1993, 19.6% in 1994
and 3.0%
in 1995. More recently, nonresidential building
construction
contracts fell by 20.5% in the first eight months of
1996.
This decline is largely attributable to an abundance
of
large, one-time contract awards during 1995, including
a
$202.9 million contract for the construction of a
state
prison.
Residential construction contracts through August
1996,
despite monthly fluctuations, increased by 1.4% for
the first
eight months of 1996 as compared to the first eight
months of
1995($1,502 million and $1,481 million, respectively).
Nonbuilding or infrastructure construction rose by
17.8%
during this period. Despite these increases, total
construction contracts declined by 3.9% when comparing
the
first eight months of 1995 and 1996.
Improvements in overall employment opportunities and
the
economy in general have led to an increased consumer
spending
during the recovery. While overall retail sales in
New
Jersey grew by only 1.6% during 1993, they performed
much
better in 1994, advancing by 7.8% which exceeded the
7.5%
growth registered nationwide. During 1995, especially
the
winter months, consumer confidence and actual consumer
spending moderated both nationally and in the State.
For all
of 1995, retail sales in New Jersey grew by 2.3%.
Retail
sales regained momentum in 1996 and have been on a
moderate
upward trend, rising to an annual rate of $76.5
billion
through June. The State's pickup in growth after a
blizzard-
related January decline resulted in sales growth of
4.2% when
comparing the first six months of 1995 with those of
1996.
The rising trend in retail sales has translated into
steady
increases in retail trade jobs (both full- and part-
time)
with a rise in retail employment from December 1995 to
August
1996 of 6,900 jobs.
Total new vehicle registrations (new passenger cars
and
light trucks and vans) rose robustly in 1993 by more
than 18%
and in 1994 by 5.8%, but declined by 4.4% in 1995.
Through
July 1996 however, total new vehicle registration rose
by
3.5% compared to the same time period in 1995.
Unemployment in the State through August 1996 has been
receding. According to the U.S. Bureau of Labor
Statistics,
the jobless rate dropped from 7.5% in 1993 to 6.8% in
1994
and to 6.4% in 1995. Subsequently it has dropped to
6.1% for
the four-month period from May 1996 through August
1996.
The insured unemployment rate, i.e., the number of
individuals claming benefits as a percentage of the
number of
workers covered by unemployment insurance, declined
from 3.9%
during calendar years 1991 and 1992 to 3.3% during
1993 and
then averaged 3.2% throughout 1994, 1995 and the first
six
months of 1996. As of August 1, 1996 the State's
unemployment insurance trust fund balance stood at
$2.1
billion.
State Aid to Local Governments is the largest portion
of
fiscal year 1997 appropriations. In fiscal year 1997,
$6,419.0 million of the State's appropriations
consisted of
funds which are distributed to municipalities,
counties and
school districts. The largest State Aid
appropriation, in
the amount of $4,877.4 million, was provided for local
elementary and secondary education programs. Of this
amount,
$2,721.7 million is provided as foundation aid to
school
districts by formula based upon the number of students
and
the ability of a school district to raise taxes from
its own
base. In addition, the State provided $601.1 million
for
special education programs for children with
disabilities. A
$292.9 million program was also funded for pupils at
risk of
educational failure, including basic skills
improvement. The
State appropriated $667.4 million on behalf of school
districts as the employer share of the teachers'
pension and
benefits programs, $247.2 million to pay for the cost
of
pupil transportation.
Appropriations to the Department of Community Affairs
("DCA") total $840.4 million in State Aid monies for
fiscal
year 1997. Many of the DCA State Aid programs and
many
Treasury State Aid appropriations to the State
Department of
the Treasury total $212.4 million in State Aid monies
for
fiscal year 1997. The principal programs funded by
these
appropriations are: aid to county colleges ($128.8
million),
the cost of senior citizens, disabled and veterans
property
tax deductions and exemptions ($55.8 million); the
State
contribution to the Consolidated Police and Firemen's
Pension
fund ($9.7 million) and aid to densely populated
municipalities ($9.0 million).
The second largest portion of appropriations in fiscal
1997 is applied to Direct State Services, the
operation of
State government's 16 departments, the Executive
Office,
several commissions, the State Legislature and the
Judiciary.
In fiscal 1997, appropriations for Direct State
Services
aggregate $5,175.7 million. Some of the major
appropriations
for Direct State Services during fiscal 1997 are
detailed
below.
$602.1 million was appropriated for programs
administered
by the Department of Human Services. Of that amount,
$439.2
million is appropriated for mental health and
developmentally
disabled programs, including the operation of seven
psychiatric institutions and eight development
centers.
The Department of Health and Senior Services was
appropriated $45.1 million for the prevention and
treatment
of diseases, alcohol and drug abuse programs,
regulation of
health care facilities, and the uncompensated care
program,
and senior services programs.
$732.9 million is appropriated for the support of nine
State colleges, Rutgers University, the New Jersey
Institute
of Technology and the University of Medicine and
Dentistry of
New Jersey.
$908.4 million was appropriated to the Department of
Law
and Public Safety and the Department of Corrections.
$159.4 million was appropriated to the Department of
Transportation for the various programs it
administers, such
as the maintenance and improvement of the State
highway
systems and the registration and regulation of motor
vehicles
and licensed drivers.
$179.9 million was appropriated to the Department of
Environmental Protection for the protection of air,
land,
water, forest, wildlife and shellfish resources and
for the
provision of outdoor recreational facilities.
The primary method for State financing of capital
projects
is through the sale of the general obligation bonds of
the
State. These bonds are backed by the full faith and
credit
of the State. State tax revenues and certain other
fees are
pledged to meet the principal and interest payments
and, if
provided, redemption premium payments, if any required
to
fully pay the bonds. The appropriation for debt
servicing
obligation on outstanding indebtedness is $446.9
million for
fiscal 1997 required to pay the debt fully. No
general
obligation debt can be issued by the State without
prior
voter approval, except that no voter approval is
required for
any law authorizing the creation of a debt for the
purpose of
refinancing all or a portion of outstanding debt of
the
State, so long as such law requires that the
refinancing
provide a debt service savings.
Taxes: By the end of June 1997, Governor Christine
Todd
Whitman claims that tax cut savings will total $2.8
billion.
By the end of the next fiscal year, those savings will
rise
to $4.4 Billion. Even though she has cut taxes 10
times,
total revenues have gone up by $1.2 billion.
In fact, between school funding, county court
takeover,
transportation aid, and other forms of assistance, the
State
will provide nearly $750 million more property tax
relief
this year than when she took office. The 1997-1998
budget
preserves the 30% income tax cut, the property tax
deduction, and all other tax cuts, as well as
maintaining a
$550mm surplus.
Revenues: The budget reflects an estimated bottom
line
loss for fiscal year ended June 30, 1997 of
$419million with
total state revenues equaled to $15.7 billion and
total
state expenditures equaled to $16.2 billion. The
largest
decrease in sources of revenues are in the
Miscellaneous
Taxes, Fees and Revenue category, primarily the 1)
Executive
Branch, a (80.31%) decrease; 2) Department of Health
and
Senior Services, a (40.26%) decrease; Department of
Human
Services, a (20.50%) decrease; 4) Department of Labor,
a
(42.96%) decrease; 5) the Judicial Branch, a (27.31%)
decrease. The Revenue Fund also decreased (8.22%) to
$313million. Major Tax revenues decreased (0.47%)
from
fiscal year 1996 to fiscal year 1997.
Expenditures: On the expenditure side, total state
expenditures have decreased (0.80%) from fiscal year
1996 to
fiscal year 1997. The largest decrease in
expenditures are
in the Executive Branch, primarily the 1) Department
of
Agriculture, a (15.99%) decrease; 2) Department of
Labor, a
(15.99%) decrease; 2) Department of Labor, a (14.59%)
decrease; 3) Department of Military and VA, a (23.27%)
decrease; and 4) Department of Personnel, a (15.25%)
decrease.
Increased spending occurred in the following
categories:
the Department of Commerce and Economic Development, a
10.61% increase; 2) the Department of Education, a
17.06%
increase; and 3) Department of Transportation, 11.34%
increase.
Litigation. At any given time, there are various
numbers
of claims and cases pending against New Jersey, New
Jersey
agencies and employees, seeking recovery of monetary
damages
that are primarily paid out of the fund created
pursuant to
the Tort Claims Act, N.J.S.A. 59:1-1 et seq. (the
"Tort
Claims Act''). At any given time there are various
contract
and other claims against New Jersey and New Jersey
agencies,
including environmental claims arising from the
alleged
disposal of hazardous waste, seeking recovery of
monetary
damages or other relief which would require the
expenditure
of funds. In addition, at any given time there are
various
numbers of claims and cases pending against the
University
of Medicine and Dentistry of New Jersey and its
employees,
seeking recovery of monetary damages or other relief
which
would require the expenditure of funds. New Jersey is
unable
to estimate its exposure for these claims.
As of August, 1994, the following cases are presently
pending or threatened in which New Jersey has the
potential
for either a significant loss of revenue or
significant
unanticipated expenditures: Abbot v. Burke,
challenging the
constitutionality of the Quality Education Act of
1990,
which was found to be unconstitutional by the Trial
Court
and was recently affirmed by the New Jersey Supreme
Court
and requires that a funding formula be adopted by
September,
1996 which will achieve by the 1997-98 school year the
mandated parity in spending and will address the
special
educational needs of children in poor and urban school
districts; County of Essex v. Waldman, et al. and
similar
cases involving eleven other counties, challenging the
methods by which the New Jersey Department of Human
Services
shares with county governments and maintenance
recoveries
and costs for residents in New Jersey psychiatric
hospitals
and residential facilities for the developmentally
disabled,
all of which are on appeal in the New Jersey courts;
County
of Essex v. Commissioner of Human Services, et al. and
similar cases involving ten other counties, in which
the
Appellate Division ruled that all counties were
entitled to
100% of Social Security benefits and other maintenance
recoveries received by New Jersey and were entitled to
credits for payments made to New Jersey for the
maintenance
of Medicare and Medicaid-eligible county residents of
certain New Jersey facilities, which is on petition
for
review by the New Jersey Supreme Court; New Jersey
Association of Health Care Facilities, Inc., et al. v.
Gibbs, et al., a class action on behalf of all New
Jersey
long-term care facilities providing services to
Medicaid
patients, seeking a declaration that the New Jersey
Department of Human Services has violated Federal law
in the
setting and paying of 1990 long-term care facility
Medicaid
payment rates, where the Third Circuit affirmed the
District
Court's denial of plaintiff's motion for preliminary
injunction, and the parties are currently negotiating
the
form of an order to dismiss the action with prejudice;
Exxon
v. Hunt and related cases, where taxpayers sought
refund of
taxes paid to the Spill Compensation Fund and the New
Jersey
Supreme Court, on remand from the U.S. Supreme Court,
ruled
that plaintiffs would receive refunds only in the
event the
New Jersey Legislature refused to reimburse the Spill
Compensation Fund for expenditures for preempted
purposes
and, after exhaustion of appeals and other legal
avenues, a
motion by the State for dismissal of all such claims
is
pending before the Tax Court; Fair Automobile
Insurance
Reform Act ("FAIR Act'') litigation challenging
various
portions of FAIR Act, including surtax and assessment
provisions, is still pending; County of Passaic v.
State of
New Jersey alleging tort and contractual claims
against New
Jersey and the New Jersey Department of Environmental
Protection in connection with a resource recovery
facility
plaintiffs had planned to build in Passaic County,
seeking
approximately $30 million in damages; Pelletier, et
al., v.
Waldman, et al., a challenge by State Medicaid-
eligible
children to the adequacy of Medicaid reimbursement for
services rendered by doctors and dentists, is
currently in
mediation; Barnett Memorial Hospital v. Commissioner
of
Health, an appeal by several hospitals of the
Commissioner's
calculation of the hospital assessment required by the
Health Care Cost Reduction Act of 1991, was decided
against
the Commission and successful claimants were refunded
the
amount of their overpayment in April, 1994, which
amount
totaled $4,636,576; New Jersey Hospital Association,
et al.
v. Leonard Fishman, seeking the same relief as in
Barnett;
Robert E. Brennan v. Richard Barry, et al., a suit
filed
against two members of the New Jersey Bureau of
Securities
alleging causes of action for defamation, injury to
reputation, abuse of process and improper disclosure,
based
on the Bureau's investigation of certain publicly-
traded
securities to which the state has filed a motion to
dismiss
and/or for summary judgment; Camden Co. v. Waldman, et
al.,
now consolidated with similar suits filed by
Middlesex,
Monmouth and Atlantic Counties, seeking reimbursement
of
federal funds received by New Jersey for
disproportionate
share hospital payments made to county psychiatric
facilities from July 1, 1988 through July 1, 1991 has
been
transferred to the Appellate Division; Interfaith
Community
Organization v. Fox, et al., a suit filed by a
coalition of
churches and church leaders in Hudson County against
the
Governor, the Commissioners of the Department of
Environmental Protection and Energy and the Department
of
Health, concerning chromium contamination in Liberty
State
Park in Jersey City; American Trucking Associations,
Inc.
and Tri-State Motor Transit v. State of New Jersey,
challenging the constitutionality of annual hazardous
and
solid waste licensure fees collected by the Department
of
Environmental Protection, seeking a permanent
injunction
enjoining future collection of fees and refund of all
renewal fees, fines and penalties collected; and Waste
Management of Pennsylvania, et al. v. Shinn, et al.,
an
action filed in federal district court seeking
declaratory
and injunctive relief and compensatory damages from
Department of Environmental Protection Commissioner
Shinn
and Acting Commissioner Fox, alleging violations of
the
Commerce Clause and the Contracts Clause of the United
States Constitution based on emergency redirection
orders
and a draft permit.
In addition to litigation against New Jersey, at any
given time there are various numbers of claims and
cases
pending or threatened against the political
subdivisions of
New Jersey, including but not limited to New Jersey
authorities, counties, municipalities and school
districts,
which have potential for either a significant loss of
revenue or significant unanticipated expenditures.
Ratings. There is no assurance that the ratings of
New
Jersey General Obligation Bonds will continue for any
given
period of time or that they will not be revised
downward or
withdrawn entirely. Any such downward revision or
withdrawal
could have an adverse effect on the market prices of
New
Jersey's general obligation bonds.
The various political subdivisions of New Jersey are
rated independently by S&P and/or Moody's. These
ratings are
based upon information supplied to the rating agency
by the
political subdivision. There is no assurance that such
ratings will continue for any given period of time or
that
they will not be revised downward or withdrawn
entirely. Any
such downward revision or withdrawal could have an
adverse
effect on the market prices of bonds issued by the
political
subdivision.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares
described
in the Prospectus applies to purchases made by any
"purchaser,'' which is defined to include the
following: (a)
an individual; (b) an individual and his or her
immediate
family purchasing shares for his or her own account;
(c) a
trustee or other fiduciary purchasing shares for a
single
trust estate or single fiduciary account; and (d) a
trustee
or other professional fiduciary (including a bank, or
an
investment adviser registered with the SEC under the
Investment Advisers Act of 1940, as amended)
purchasing
shares of the Fund for one or more trust estates or
fiduciary accounts. Purchasers who wish to combine
purchase
orders to take advantage of volume discounts should
contact
a Smith Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedule
in
the Prospectus, apply to any purchase of Class A
shares if
the aggregate investment in Class A shares of the Fund
and
in Class A shares of other Smith Barney Mutual Funds
that
are offered with a sales charge, including the
purchase
being made, of any purchaser is $25,000 or more. The
reduced sales charge is subject to confirmation of the
shareholder's holdings through a check of appropriate
records. The Fund reserves the right to terminate or
amend
the combined right of accumulation at any time after
written
notice to shareholders. For further information
regarding
the right of accumulation, shareholders should contact
a
Smith Barney Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a
continuous
basis. The public offering price for a Class A and
Class Y
share of the Fund is equal to the net asset value per
share
at the time of purchase, plus for Class A shares an
initial
sales charge based on the aggregate amount of the
investment. The public offering price for a Class B
and
Class L share (and Class A share purchases, including
applicable rights of accumulation, equaling or
exceeding
$500,000), is equal to the net asset value per share
plus
for Class L shares an initial sales charge of 1% at
the time
of purchase. A contingent deferred sales charge
("CDSC''),
however, is imposed on certain redemptions of Class B
and
Class L shares, and Class A shares when purchased in
amounts
exceeding $500,000. The method of computation of the
public
offering price is shown in the Fund's financial
statements,
incorporated by reference in their entirety into this
SAI.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date
of
payment postponed (a) for any period during which the
New
York Stock Exchange, Inc. ("NYSE'') is closed (other
than
for customary weekend and holiday closings), (b) when
trading in markets the Fund normally utilizes is
restricted,
or an emergency exists, as determined by the SEC, so
that
disposal of the Fund's investments or determination of
net
asset value is not reasonably practicable or (c) for
such
other periods as the SEC by order may permit for
protection
of the Fund's shareholders.
Distribution in Kind
If the Board of Directors of the Fund determines that
it
would be detrimental to the best interests of the
remaining
shareholders of the Fund to make a redemption payment
wholly
in cash, the Fund may pay, in accordance with SEC
rules, any
portion of a redemption in excess of the lesser of
$250,000
or 1% of the Fund's net assets by a distribution in
kind of
portfolio securities in lieu of cash. Securities
issued as
a distribution in kind may incur brokerage commissions
when
shareholders subsequently sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal
Plan'') is available to shareholders who own shares
with a
value of at least $10,000 and who wish to receive
specific
amounts of cash monthly or quarterly. Withdrawals of
at
least $100 may be made under the Withdrawal Plan by
redeeming as many shares of the Fund as may be
necessary to
cover the stipulated withdrawal payment. Any
applicable
CDSC will not be waived on amounts withdrawn by
shareholders
that exceed 1.00% per month of the value of a
shareholder's
shares at the time the Withdrawal Plan commences.
(With
respect to Withdrawal Plans in effect prior to
November 7,
1994, any applicable CDSC will be waived on amounts
withdrawn that do not exceed 2.00% per month of the
value of
a shareholder's shares at the time the Withdrawal Plan
commences.) To the extent withdrawals exceed
dividends,
distributions and appreciation of a shareholder's
investment
in the Fund, there will be a reduction in the value of
the
shareholder's investment, and continued withdrawal
payments
will reduce the shareholder's investment and may
ultimately
exhaust it. Withdrawal payments should not be
considered as
income from investment in the Fund. Furthermore, as
it
generally would not be advantageous to a shareholder
to make
additional investments in the Fund at the same time he
or
she is participating in the Withdrawal Plan, purchases
by
such shareholders in amounts of less than $5,000
ordinarily
will not be permitted.
Shareholders who wish to participate in the Withdrawal
Plan and who hold their shares in certificate form
must
deposit their share certificates with the Transfer
Agent as
agent for Withdrawal Plan members. All dividends and
distributions on shares in the Withdrawal Plan are
reinvested automatically at net asset value in
additional
shares of the Fund. Withdrawal Plans should be set up
with
a Smith Barney Financial Consultant. A shareholder who
purchases shares directly through the Transfer Agent
may
continue to do so and applications for participation
in the
Withdrawal Plan must be received by the Transfer Agent
no
later than the eighth day of the month to be eligible
for
participation beginning with that month's withdrawal.
For
additional information, shareholders should contact a
Smith
Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a
best
efforts basis pursuant to a written agreement (the
"Distribution Agreement'') which was approved by the
Fund's
Board of Directors, including a majority of the
Independent
Directors. For the fiscal years ended March 31, 1996,
1997
and 1998, Smith Barney received $154,000, $139,000 and
$236,000, respectively, in sales charges from the sale
of
the Fund's Class A shares, and did not reallow any
portion
thereof to dealers. For the fiscal years ended March
31,
1996, 1997 and 1998, Smith Barney received $117,000,
$160,000 and $99,000, respectively, representing CDSC
on
redemptions of the Fund's Class B and Class L shares.
For the fiscal year ended March 31, 1998, Smith Barney
incurred distribution expenses totaling approximately
$682,245, consisting of approximately $44,330 for
advertising, $4,620 for printing and mailing of
Prospectuses, $304,859 for support services, $287,282
to
Smith Barney Financial Consultants, and $8,728 in
accruals
for interest on the excess of Smith Barney expenses
incurred
in distributing the Fund's shares over the sum of the
distribution fees and CDSC received by Smith Barney
from the
Fund.
When payment is made by the investor before settlement
date, unless otherwise requested in writing by the
investor,
the funds will be held as a free credit balance in the
investor's brokerage account and Smith Barney may
benefit
from the temporary use of the funds. The investor may
designate another use for the funds prior to
settlement
date, such as an investment in a money market fund
(other
than Smith Barney Exchange Reserve Fund) of the Smith
Barney
Mutual Funds. If the investor instructs Smith Barney
to
invest the funds in a Smith Barney money market fund,
the
amount of the investment will be included as part of
the
average daily net assets of both the Fund and the
money
market fund, and affiliates of Smith Barney that serve
the
funds in an investment advisory or administrative
capacity
will benefit from receiving fees from both such
investment
companies for managing these assets, computed on the
basis
of their average daily net assets. The Fund's Board of
Directors has been advised of the benefits to Smith
Barney
resulting from these settlement procedures and will
take
such benefits into consideration when reviewing the
Advisory, Administration and Distribution Agreements
for
continuance.
Distribution Arrangements
To compensate Smith Barney for the services it
provides
and for the expense it bears under the Distribution
Agreement, the Fund has adopted a services and
distribution
plan (the "Plan'') pursuant to Rule 12b-1 under the
1940
Act. Under the Plan, the Fund pays Smith Barney a
service
fee, accrued daily and paid monthly, calculated at the
annual rate of 0.15% of the value of the Fund's
average
daily net assets attributable to the Class A, Class B
and
Class L shares. In addition, the Fund pays Smith
Barney a
distribution fee primarily intended to compensate
Smith
Barney for its initial expense of paying Financial
Consultants a commission upon sales of the respective
shares. The Class B distribution fee is calculated at
the
annual rate of 0.50% of the value of the Fund's
average net
assets attributable to the shares of the Class. The
Class L
distribution fee is calculated at the annual rate of
0.55%
of the value of the Fund's average net assets
attributable
to the shares of the Class.
The following service and distribution fees were
incurred
during the fiscal years ended as indicated:
Service and Distribution Fees
3/31/98
3/31/97
3/31/96
Class A
$228,814
$224,109
$185,007
Class B
415,461
393,386
387,729
Class L
37,970
30,638
9,805
Under its terms, the Plan continues from year to year,
provided such continuance is approved annually by vote
of
the Fund's Board of Directors, including a majority of
the
Independent Directors who have no direct or indirect
financial interest in the operation of the Plan or in
the
Distribution Agreement. The Plan may not be amended to
increase the amount of the service and distribution
fees
without shareholder approval, and all material
amendments of
the Plan also must be approved by the Directors and
the
Independent Directors in the manner described above.
The
Plan may be terminated with respect to a Class at any
time,
without penalty, by vote of a majority of the
Independent
Directors or by a vote of a majority of the
outstanding
voting securities of the Class (as defined in the 1940
Act).
Pursuant to the Plan, Smith Barney will provide the
Board of
Directors with periodic reports of amounts expended
under
the Plan and the purpose for which such expenditures
were
made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on
each day, Monday through Friday, except days on which
the
NYSE is closed. The NYSE currently is scheduled to be
closed
on New Year's Day, Martin Luther King, Jr. Day,
Presidents'
Day, Good Friday, Memorial Day, Independence Day,
Labor Day,
Thanksgiving and Christmas, and on the preceding
Friday or
subsequent Monday when one of these holidays falls on
a
Saturday or Sunday, respectively. Because of the
differences
in distribution fees and Class-specific expenses, the
per
share net asset value of each Class may differ. The
following is a description of the procedures used by
the
Fund in valuing its assets.
The valuation of the Fund's assets is made by the
Advisor
after consultation with an independent pricing service
(the
"Service'') approved by the Board of Directors. When,
in the
judgment of the Service, quoted bid prices for
investments
are readily available and are representative of the
bid side
of the market, these investments are valued at the
mean
between the quoted bid and asked prices. Investments
for
which, in the judgment of the Service, there is no
readily
obtainable market quotation (which may constitute a
majority
of the portfolio securities) are carried at fair value
as
determined by the Service. For the most part, such
investments are liquid and may be readily sold. The
Service
may employ electronic data processing techniques
and/or a
matrix system to determine valuations. The procedures
of the
Service are reviewed periodically by the officers of
the
Fund under the general supervision and responsibility
of the
Board of Directors, which may replace any such Service
at
any time if it determines it to be in the best
interests of
the Fund to do so.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of certain Smith
Barney Mutual Funds may exchange all or part of their
shares
for shares of the same class of other Smith Barney
Mutual
Funds, to the extent such shares are offered for sale
in the
shareholder's state of residence, on the basis of
relative
net asset value per share at the time of exchange as
follows:
A. Class A and Class Y shareholders of the Fund who
wish
to exchange all or a portion of their shares for
shares of the respective Class in any of the funds of
the Smith Barney Mutual Fund Complex may do so without
imposition of any charge.
B. Class B shares of any fund may be exchanged
without a
sales charge. Class B shares of the Fund exchanged
for Class B shares of another fund will be subject to
the higher applicable CDSC of the two funds. Upon an
exchange, the new Class B shares will be deemed to
have been purchased on the same date as the Class B
shares of the Fund that have been exchanged.
C. Upon exchange, the new Class L shares will be
deemed
to have been purchased on the same date as the Class L
shares of the fund that have been exchanged.
The exchange privilege enables shareholders to acquire
shares of the same Class in a fund with different
investment
objectives when they believe that a shift between
funds is
an appropriate investment decision. This privilege is
available to shareholders residing in any state in
which the
fund shares being acquired may legally be sold. Prior
to any
exchange, the shareholder should obtain and review a
copy of
the current prospectus of each fund into which an
exchange
is being considered. Prospectuses may be obtained from
a
Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange
are
redeemed at the then-current net asset value and
subject to
any applicable CDSC, the proceeds are immediately
invested,
at a price as described above, in shares of the fund
being
acquired. Smith Barney reserves the right to reject
any
exchange request. The exchange privilege may be
modified or
terminated at any time after written notice to
shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total
return of a Class in advertisements or in reports and
other
communications to shareholders. The Fund may include
comparative performance information in advertising or
marketing the Fund's shares. Such performance
information
may include the following industry and financial
publications: Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune,
Institutional Investor, Investors Daily, Money,
Morningstar
Mutual Fund Values, The New York Times, USA Today and
The
Wall Street Journal. To the extent any advertisement
or
sales literature of the Fund describes the expenses or
performance of any Class, it will also disclose such
information for the other Classes.
Average Annual Total Return
"Average annual total return'' figures described below
are computed according to a formula prescribed by the
SEC.
The formula can be expressed as follows:
P (1+T)n = ERV
Where: P = a hypothetical initial payment
of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a
hypothetical
$1,000 investment made at the beginning of a
1-, 5- or 10-year period at the end of the
1-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions.
The following total return figures for Class A shares
assume that the maximum 4.00% sales charge has been
deducted
from the investment at the time of purchase and have
been
restated to show the change in the maximum sales
charge. The
average annual total return for Class A shares was as
follows for the period indicated:
5.77% for the one-year period beginning April 1, 1997
through March 31, 1998.
5.44% per annum during the five-year period beginning
on
April 1, 1993 through March 31, 1998.
8.03% per annum during the period from the Fund's
commencement of operations on April 22, 1988 through
March
31, 1998.
These total return figures assume that the maximum
4.00%
sales charge assessed by the Fund on purchases of
Class A
shares has been deducted from the investment at the
time of
purchase. Had the investment advisory, sub-investment
advisory and/or administration fees not been partially
waived (and assuming that the maximum 4.00% sales
charge had
not been deducted), the Class A's average annual total
return would have been 10.20%, 6.31% and 8.48%,
respectively, for those same periods.
The Fund's average annual total return for Class B
shares
was as follows for the periods indicated:
5.16% for the one-year period from April 1, 1997
through
March 31, 1998.
5.60% for the five-year period from April 1, 1993
through
March 31, 1998.
6.58% per annum for the period from November 6, 1992
(commencement of operations) through March 31, 1998.
These average annual total return figures assume that
the
applicable maximum CDSC has been deducted from the
investment. Had the investment advisory and sub-
investment
advisory and/or administration fees not been partially
waived and the CDSC had not been deducted, the average
annual total return on the Fund's Class B shares would
have
been 9.66%, 5.76% and 6.58%, respectively, for those
same
periods.
The Fund's average annual total return for Class L
shares
was as follows for the periods indicated:
8.50% for the one year period from April 1, 1997
through
March 31, 1998; and
9.11% per annum for the period from December 13, 1994
(commencement of operations) through March 31, 1998.
These average annual total return figures assume that
the
applicable CDSC has been deducted from the investment.
Had
the CDSC not been deducted, the average annual total
return
on the Fund's Class L shares would have been 9.50% and
9.11%, respectively, for those same periods.
Aggregate Total Return
Aggregate total return figures described below
represent
the cumulative change in the value of an investment in
the
Class for the specified period and are computed by the
following formula:
ERV-P
P
Where: P= A hypothetical initial payment
of $10,000.
ERV= Ending Redeemable Value of a
hypothetical
$10,000 investment made at the beginning of
the 1-, 5- or 10-year period at the end of
the 1-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions.
The aggregate total return for Class A shares was as
follows for the periods indicated (reflecting the
partial
waiver of the investment advisory and sub-investment
advisory and/or administration fees):
5.77% for the one-year period beginning April 1, 1997
through March 31, 1998.
30.35% for the five-year period from April 1, 1993
through
March 31, 1998; and
115.63% for the period from the Fund's commencement of
operations on April 22, 1988 through March 31, 1998.
These aggregate total return figures assume that the
maximum 4.00% sales charge assessed by the Fund on
purchases
of Class A shares has been deducted from the
investment at
the time of purchase. If the maximum sales charge had
not
been deducted at the time of purchase, the Fund's
aggregate
total return reflecting the partial waiver of the
investment
advisory and sub-investment advisory and/or
administration
fees for those same periods would have been 10.20%,
35.79%
and 124.71%, respectively.
The Fund's aggregate total return for Class B shares
was
as follows for the periods indicated:
5.16% for the one-year period from April 1, 1997
through
March 31, 1998; and
31.33% for the five-year period from April 1, 1993
through
March 31, 1998; and
41.07% for the period beginning on November 6, 1992
(commencement of operations) through March 31, 1998.
These figures assume that the applicable maximum 4.50%
CDSC has been deducted from the investment at the time
of
purchase. If the investment advisory and sub-
investment
advisory and/or administration fees had not been
partially
waived and the maximum CDSC had not been deducted at
the
time of purchase, the Fund's aggregate total returns
for the
same period would have been 9.66%, 32.33%, and 41.07%
respectively, for those same periods.
The Fund's aggregate total return for Class L shares
was
as follows for the periods indicated:
7.41% for the one year period from April 1, 1997
through
March 31, 1998; and
31.98% per annum for the period from December 13, 1994
(commencement of operations) through March 31, 1998.
These aggregate total return figures assume that the
applicable CDSC has been deducted from the investment.
Had
the CDSC not been deducted, the average annual total
return
on the Fund's Class L shares would have been 9.50% and
33.31%, respectively, for those same periods.
It is important to note that the total return figures
set
forth above are based on historical earnings and are
not
intended to indicate future performance. Each Class'
net
investment income changes in response to fluctuation
in
interest rates and the expenses of the Fund.
Performance
will vary from time to time depending upon market
conditions, the composition of the Fund's portfolio
and its
operating expenses and the expenses exclusively
attributable
to the Class. Consequently, any given performance
quotation
should not be considered representative of the Class'
performance for any specified period in the future. In
addition, because the performance will vary, it may
not
provide a basis for comparing an investment in the
Class
with certain bank deposits or other investments that
pay a
fixed yield for a stated period of time. Investors
comparing
a Class' performance with that of other mutual funds
should
give consideration to the quality and maturity of the
respective investment companies' portfolio securities.
TAXES
The following is a summary of selected Federal income
tax
considerations that may affect the Fund and its
shareholders. This summary is not intended as a
substitute
for individual tax advice and investors are urged to
consult
their own tax advisors as to the tax consequences of
an
investment in the Fund.
As described above and in the Prospectus, the Fund is
designed to provide shareholders with current income
which
is excluded from gross income for Federal income tax
purposes and exempt from New Jersey state personal
income
taxes. The Fund is not intended to constitute a
balanced
investment program and is not designed for investors
seeking
capital gains or maximum tax-exempt income
irrespective of
fluctuations in principal. Investment in the Fund
would not
be suitable for tax-exempt institutions, qualified
retirement plans, H.R. 10 plans and individual
retirement
accounts because such investors would not gain any
additional tax benefit from the receipt of tax-exempt
income.
The Fund has qualified and intends to continue to
qualify
each year as a "regulated investment company" under
the
Code. Provided that the Fund (a) qualifies as a
regulated
investment company and (b) distributes at least 90% of
its
taxable net investment income and net realized short-
term
capital gains and 90% of its tax-exempt interest
income
(reduced by certain expenses), the Fund will not be
liable
for Federal and New Jersey state income or franchise
taxes
to the extent its taxable net investment income and
its net
realized capital gains, if any, are distributed to its
shareholders.
Because the Fund will distribute exempt-interest
dividends, interest on indebtedness incurred by a
shareholder to purchase or carry Fund shares is not
deductible for Federal and New Jersey state income tax
purposes. If a shareholder receives exempt-interest
dividends with respect to any share and if such share
is
held by the shareholder for six months or less, then
for
Federal and New Jersey state income tax purposes, any
loss
on the sale or exchange of such share, to the extent
of such
exempt-interest dividend, may be disallowed. In
addition,
the Code may require a shareholder, if he or she
receives
exempt-interest dividends, to treat as taxable income
a
portion of certain otherwise non-taxable social
security and
railroad retirement benefit payments. Furthermore,
that
portion of any exempt-interest dividends paid by the
Fund
which represents income derived from private activity
bonds
held by the Fund may not retain its Federal tax-exempt
status in the hands of a shareholder who is a
"substantial
user" of a facility financed by such bonds or a
"related
person" thereof. Similar rules are applicable for New
Jersey
state personal income tax purposes. Moreover (a) some
or all
of the Fund's dividends and distributions may be a
specific
tax preference item, or a component of an adjustment
item,
for purposes of the Federal individual and corporate
alternative minimum taxes and (b) the receipt of the
Fund's
dividends and distributions may affect a corporate
shareholder's Federal "environmental" tax liability if
such
tax is reinstated as proposed by President Clinton. In
addition, the receipt of Fund dividends and
distributions
may affect a foreign corporate shareholder's Federal
"branch
profits" tax liability and the Federal and New Jersey
state
"excess net passive income" tax liability of a
shareholder
of a Subchapter S corporation. Shareholders should
consult
their own tax advisors as to whether they are (a)
substantial users with respect to a facility or
related to
such users within the meaning of the Code and (b)
subject to
a Federal alternative minimum tax, the Federal
environmental
tax, the Federal branch profits tax or the Federal and
New
Jersey state excess net passive income tax.
As described above and in the Fund's Prospectus, the
Fund
may invest in exchange-traded municipal bond index
futures
contracts and options on interest rates futures
contracts.
As a general rule, these investment activities will
increase
or decrease the amount of long-and short-term capital
gains
or losses realized by the Fund and, accordingly, will
affect
the amount of capital gains distributed to the Fund's
shareholders. For Federal and New Jersey state income
tax
purposes, gain or loss on the futures contracts and
options
(collectively referred to herein as "section 1256
contracts") is taxed pursuant to a special "mark-to-
market
system." Under the mark-to-market system, these
instruments
are treated as if sold at the Fund's fiscal year end
for
their fair market value. As a result, the Fund will be
recognizing gains or losses before they are actually
realized. As a general rule, gain or loss on section
1256
contracts is treated as 60% long-term capital gain or
loss
and 40% short-term capital gain or loss, and,
accordingly,
the mark-to-market system generally will affect the
amount
of capital gains or losses taxable to the Fund and the
amount of distributions taxable to a shareholder.
Moreover,
if the Fund invests in both section 1256 contracts and
offsetting positions in such contracts which together
constitute a straddle, then the Fund may be required
to
defer certain realized losses. The Fund expects that
its
activities with respect to section 1256 contracts and
offsetting positions in such contracts will not cause
it to
be treated as recognizing a materially greater amount
of
capital gains than actually realized and will permit
it to
use substantially all of the losses of the Fund for
the
fiscal years in which such losses actually occur.
Long term capital gains, if any, realized by the Fund
will be distributed annually as described in the
Prospectus.
Such distributions ("capital gain dividends") will be
taxable to shareholders as long-term capital gains,
regardless of how long they have held Fund shares, and
will
be designated as capital gain dividends in a written
notice
mailed to shareholders after the close of the Fund's
taxable
year. If a shareholder receives a capital gain
dividend with
respect to any share and if the share has been held by
the
shareholder for six months or less, then any loss (to
the
extent not disallowed pursuant to the other six-month
rule
described above relating to exempt-interest dividends)
on
the sale or exchange of such share will be treated as
a
long-term capital loss to the extent of the capital
gain
dividend.
If a shareholder incurs a sales charge when acquiring
shares of the Fund, disposes of those shares within 90
days
and then acquires shares in a mutual fund for which
the
otherwise applicable sales charge is reduced by reason
of a
reinvestment right (i.e., exchange privilege), the
original
sales charge will not be taken into account when
computing
gain or loss on the original shares to the extent the
subsequent sales charge is reduced. The portion of the
original sales charge that does not increase the
shareholder's tax basis in the original shares will be
treated as incurred with respect to the second
acquisition
and, as a general rule, will increase the
shareholder's tax
basis in the newly acquired shares. Furthermore, the
same
rule also applies to a disposition of the newly
acquired
shares made within 90 days of the second acquisition.
This
provision prevents a shareholder from immediately
deducting
the sales charge by shifting his or her investment in
a
family of mutual funds.
Each shareholder will receive after the close of the
calendar year an annual statement as to the Federal
income
tax and New Jersey state personal income tax status of
his
or her dividends and distributions from the Fund for
the
prior calendar year. Dividends attributable to New
Jersey
Municipal Securities and any other obligations which,
when
held by an individual, the interest therefrom would be
exempt from taxation by New Jersey, will be exempt
from New
Jersey state personal income taxation ("New Jersey
exempt-
interest dividends"). Any dividends attributable to
interest
on municipal obligations that are not New Jersey
Municipal
Securities generally will be taxable as ordinary
dividends
for New Jersey state personal income tax purposes even
if
such dividends are excluded from gross income for
Federal
income tax purposes. These statements also will
designate
the amount of exempt-interest dividends that is a
specific
preference item for purposes of the Federal individual
and
corporate alternative minimum taxes. Each shareholder
also
will receive, if appropriate, written notice after the
close
of the Fund's taxable year as to the Federal income
tax
status of his or her dividends and distributions.
Shareholders should consult their tax advisors as to
any
other state and local taxes that may apply to these
dividends and distributions. The dollar amount of
dividends
excluded or exempt from Federal income taxation or New
Jersey state personal income taxation and the dollar
amount
subject to Federal income taxation or New Jersey state
personal income taxation, if any, will vary for each
shareholder depending upon the size and duration of
each
shareholder's investment in the Fund.
Investors considering buying shares of the Fund just
prior to a record date for a capital gain distribution
should be aware that, regardless of whether the price
of the
Fund shares to be purchased reflects the amount of the
forthcoming distribution payment, any such payment
will be a
taxable distribution payment.
If a shareholder fails to furnish the Fund with a
correct
taxpayer identification number, fails to fully report
dividend or interest income or fails to certify to the
Fund
that he or she has provided a correct taxpayer
identification number and that he or she is not
subject to
"backup withholding," then the shareholder may be
subject to
a 31% backup withholding tax with respect to (a) any
taxable
dividends and distributions and (b) the proceeds of
any
redemption of Fund shares. An individual's taxpayer
identification number is his or her social security
number.
The backup withholding tax is not an additional tax
and may
be credited against a shareholder's regular Federal
income
tax liability.
Income distributions, including interest income and
gains realized by the Fund upon disposition of
investments paid from a "qualified investment fund''
should be exempt from the New Jersey personal income
tax to the extent attributable to New Jersey Municipal
Securities or to obligations that are free from state
or local taxation under New Jersey or Federal laws
("Tax-Exempt Obligations''). A "qualified investment
fund'' is any investment or trust company, or series
of such investment company or trust registered with
the SEC, which for the calendar year in which a
distribution is paid, has no investments other than
interest-bearing obligations, obligations issued at a
discount, financial options, futures, forward
contracts or other similar financial instruments
related to interest-bearing obligations, obligations
issued at a discount or related bond indexes and cash
and cash items, including receivables, and which has,
at the close of each quarter of the taxable year, at
least 80% of the aggregate principal amount of all of
its investments, excluding financial options, futures,
forward contracts, or other similar financial
instruments related to interest-bearing obligations,
obligations issued at a discount or bond indexes
related thereto as authorized under the Code, cash and
cash items, such as receivables, invested in New
Jersey Municipal Securities or in Tax-Exempt
Obligations. Furthermore, gains resulting from the
redemption or sale of shares of the Fund to the extent
attributable to interest or gain from obligations
issued by New Jersey or its local government entities
or obligations which are free from state or local
taxes under New Jersey or Federal law, are exempt from
the New Jersey personal income tax.
The New Jersey personal income tax is not
applicable to corporations. For all corporations
subject to the New Jersey Corporation Business Tax,
dividends and distributions from a "qualified
investment fund'' are included in the net income tax
base for purposes of computing the Corporation
Business Tax. Furthermore, any gain upon the
redemption or sale of Fund shares by a corporate
shareholder is also included in the net income tax
base for purposes of computing the Corporation
Business Tax.
The foregoing is only a summary of certain tax
considerations generally affecting the Fund and its
shareholders, and is not intended as a substitute for
careful tax planning. Further, it should be noted
that, for
New Jersey state tax purposes, the portion of any Fund
dividends constituting New Jersey exempt-interest
dividends
is exempt from income for New Jersey state personal
income
tax purposes only. Dividends (including New Jersey
exempt-
interest dividends) paid to shareholders subject to
New
Jersey state franchise tax or New Jersey state
corporate
income tax may therefore be taxed as ordinary
dividends to
such shareholders, notwithstanding that all or a
portion of
such dividends is exempt from New Jersey state
personal
income tax. Potential shareholders in the Fund,
including,
in particular, corporate shareholders which may be
subject
to either New Jersey franchise tax or New Jersey
corporate
income tax, should consult their tax advisors with
respect
to (a) the application of such corporate and franchise
taxes
to the receipt of Fund dividends and as to their own
New
Jersey state tax situation in general, (b) the
application
of other state and local taxes to the receipt of Fund
dividends and distributions and (c) their own specific
tax
situations.
ADDITIONAL INFORMATION
The Fund was incorporated under the laws of the State
of
Maryland on November 12, 1987. The Fund commenced
operations
on April 22, 1988 under the name Shearson Lehman New
Jersey
Municipals Inc. On December 15, 1988, March 31, 1992,
July
30, 1993 and October 14, 1994, the Fund changed its
name to
SLH New Jersey Municipals Fund Inc., Shearson Lehman
Brothers New Jersey Municipals Fund Inc., Smith Barney
Shearson New Jersey Municipals Fund Inc. and Smith
Barney
New Jersey Municipals Fund Inc., respectively.
PNC, located at 17th and Chestnut Streets,
Philadelphia,
Pennsylvania 19101, serves as the Fund's custodian
pursuant
to a custody agreement. Under the custody agreement,
PNC
holds the Fund's portfolio securities and keeps all
necessary accounts and records. For its services, PNC
receives a monthly fee based upon the month-end market
value
of securities held in custody and also receives
securities
transaction charges. The assets of the Fund are held
under
bank custodianship in compliance with the 1940 Act.
First Data, located at Exchange Place, Boston,
Massachusetts 02109, serves as the Fund's transfer
agent.
Under the transfer agency agreement, the Transfer
Agent
maintains the shareholder account records for the
Fund,
handles certain communications between shareholders
and the
Fund and distributes dividends and distributions
payable by
the Fund. For these services, the Transfer Agent
receives a
monthly fee computed on the basis of the number of
shareholder accounts it maintains for the Fund during
the
month and is reimbursed for out-of-pocket expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended
March
31, 1998 is incorporated herein by reference in its
entirety.
APPENDIX A
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of
states
and political subdivisions. Ratings are assigned to
general obligation and revenue bonds. General
obligation bonds are usually secured by all resources
available to the municipality and the factors outlined
in the rating definitions below are weighed in
determining the rating. Because revenue bonds in
general are payable from specifically pledged
revenues, the essential element in the security for a
revenue bond is the quantity and quality of the
pledged revenues available to pay debt service.
Although an appraisal of most of the same factors that
bear on the quality of general obligation bond credit
is usually appropriate in the rating analysis of a
revenue bond, other factors are important, including
particularly the competitive position of the municipal
enterprise under review and the basic security
covenants. Although a rating reflects S&P's judgment
as to the issuer's capacity for the timely payment of
debt service, in certain instances it may also reflect
a mechanism or procedure for an assured and prompt
cure of a default, should one occur, i.e., an
insurance program, Federal or state guarantee or the
automatic withholding and use of state aid to pay the
defaulted debt service.
The ratings are based, in varying degrees, on the
following
considerations:
I. Likelihood of default - capacity and willingness
of the obligor as to the timely payment of
interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation; and
III. Protection afforded by, and relative position
of, the obligation in the event of bankruptcy,
reorganization or other arrangement under the
laws of bankruptcy and other laws affecting
creditors' rights.
AAA - This is the highest rating assigned by S&P to a
debt obligation and indicates an extremely strong
capacity
to pay interest and repay principal.
AA - Bonds rated AA have a very strong capacity to pay
interest and repay principal, and in the majority of
instances they differ from AAA issues only in small
degrees.
A - Bonds rated A have a strong capacity to pay
interest
and repay principal, although they are somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in
higher-
rated categories.
BBB - Bonds rated BBB are regarded as having an
adequate
capacity to pay interest and repay principal. Whereas
they
normally exhibit adequate protection parameters,
adverse
economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest
and
repay principal for bonds in this category than for
bonds in
the higher-rated categories.
BB - An obligation rated BB is less vulnerable to
nonpayment than other speculative issues. However, it
faces
major ongoing uncertainties or exposure to adverse
business,
financial, or economic conditions which could lead to
the
obligor's inadequate capacity to meet its financial
commitment on the obligation.
B - An obligation rated B is more vulnerable to
nonpayment than obligations rated BB, but the obligor
currently has the capacity to meet its financial
commitment
on the obligation. Adverse business, financial, or
economic
conditions will likely impair the obligor's capacity
or
willingness to meet its financial commitment on the
obligation.
CCC - An obligation rated CCC is currently vulnerable
to
nonpayment, and is dependent upon favorable business,
financial, and economic conditions for the obligor to
meet
its financial commitment on the obligation. In the
event of
adverse business, financial, or economic conditions,
the
obligor is not likely to have the capacity to meet its
financial commitment on the obligation.
CC - An obligation rated CC is currently highly
vulnerable to nonpayment.
C - The C rating may be used to cover a situation
where a
bankruptcy petition has been filed or similar action
has
been taken, but payments on this obligation are being
continued.
D - An obligation rated D is in payment default. The D
rating category is used when payments on an obligation
are
not made on the date due even if the applicable grace
period
has not expired, unless Standard & Poor's believes
that such
payments will be made during such grace period. The
'D'
rating also will be used upon the filing of a
bankruptcy
petition or the taking of a similar action if payments
on an
obligation are jeopardized.
Plus(+) or minus(-) - The ratings from AA to CCC may
be
modified by the addition of a plus or minus sign to
show
relative standing within the major rating categories.
P - The letter P following a rating indicates the
rating
is provisional. A provisional rating assumes the
successful
completion of the project being financed by the
issuance of
the bonds being rated and indicates that payment of
debt
service requirements is largely or entirely dependent
upon
the successful and timely completion of the project.
This
rating, however, while addressing credit quality
subsequent
to completion, makes no comment on the likelihood of,
or the
risk of default upon failure of, such completion.
Accordingly, the investor should exercise his own
judgment
with respect to such likelihood and risk.
L - The letter L indicates that the rating pertains to
the principal amount of those bonds to the extent that
the
underlying deposit collateral is federally insured,
and
interest is adequately collateralized. In the case of
certificates of deposit, the letter L indicates that
the
deposit, combined with other deposits being held in
the same
right and capacity, will be honored for principal and
pre-
default interest up to federal insurance limits within
30
days after closing of the insured institution or, in
the
event that the deposit is assumed by a successor
insured
institution, upon maturity.
Conditional rating(s), indicated by "Con" are given to
bonds for which the continuance of the security rating
is
contingent upon S&P's receipt of an executed copy of
the
escrow agreement or closing documentation confirming
investments and cash flows and/or the security rating
is
conditional upon the issuance of insurance by the
respective
insurance company.
NR - Not rated.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less
are usually given note ratings (designated SP-1, -2 or
- -3)
by S&P to distinguish more clearly the credit quality
of
notes as compared to bonds. Notes rated SP-1 have a
strong
capacity to pay principal and interest. An issue
determined
to possess a very strong capacity to pay debt service
is
given a plus(+) designation. Notes rated SP-2 have a
satisfactory capacity to pay principal and interest,
with
some vulnerability to adverse financial and economic
changes
over the term of the notes. Notes rated SP-3 have
speculative capacity to pay principal and interest.
Commercial Paper Ratings
A-1 - This designation indicates that the degree of
safety regarding timely payment is strong. Those
issues
determined to possess extremely strong safety
characteristics are denoted with a plus sign (+)
designation.
A-2 - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative
degree of
safety is not as high as for issues designated A-1.
A-3 - Issues carrying this designation have an
adequate
capacity for timely payment. They are, however, more
vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher
designations.
B - Issues rated B are regarded as having only
speculative capacity for timely payment.
C - This rating is assigned to short-term debt
obligations with a doubtful capacity for payment.
D - Debt rated D is in payment default. The D rating
category is used when interest payments or principal
payments are not made on the due date, even if the
applicable grace period has not expired, unless S&P's
believes such payments will be made during such grace
period.
Moody's Ratings for Municipal Bonds
Aaa - Bonds which are Aaa are judged to be of the best
quality. They carry the smallest degree of investment
risk
and are generally referred to as "gilt edge.''
Interest
payments are protected by a large or by an
exceptionally
stable margin and principal is secure. While the
various
protective elements are likely to change, such changes
as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group
they
comprise what are generally known as high-grade bonds.
They
are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which
make
the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable
investment attributes and are to be considered as
upper
medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but
elements
may be present which suggest a susceptibility to
impairment
sometime in the future.
Baa - Bonds which are rated Baa are considered as
medium-
grade obligations, i.e., they are neither highly
protected
nor poorly secured. Interest payments and principal
security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds
lack
outstanding investment characteristics and in fact
have
speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have
speculative elements; their future cannot be
considered as
well assured. Often the protection of interest and
principal
payments may be very moderate and therefore not well
safeguarded during both good and bad times over the
future.
Uncertainty of position characterizes bonds in this
class.
B - Bonds which are rated B generally lack
characteristics of the desirable investment. Assurance
of
interest and principal payments or of maintenance of
other
terms of the contract over any long period of time may
be
small.
Caa - Bonds that are rated Caa are of poor standing.
These issues may be in default or present elements of
danger
may exist with respect to principal or interest.
Ca - Bonds that are rated Ca represent obligations
that
are speculative in a high degree. These issues are
often in
default or have other marked short-comings.
C - Bonds that are rated C are the lowest rated class
of
bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
Rating symbols may include numerical modifiers "1,"
"2",
or "3". The numerical modifier "1" indicates that the
security ranks at the high end, "2" in the mid-range,
and
"3" nearer the low end of the generic category. These
modifiers of rating symbols "Aa", "A" and "Baa" are to
give
investors a more precise indication of relative debt
quality
in each of the historically defined categories.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and
other
short-term loans are designated Moody's Investment
Grade
("MIG") and for variable rate demand obligations are
designated Variable Moody's Investment Grade ("VMIG").
This
distinction is in recognition of the differences
between
short-term credit risk and long-term risk. Loans
bearing the
designation MIG 1 or VMIG 1 are of the best quality,
enjoying strong protection by established cash flows
of
funds for their servicing, superior liquidity support
or
from established and broad-based access to the market
for
refinancing or both. Loans bearing the designation MIG
2 or
VMIG 2 are of high quality, with ample margins of
protection
although not as large as the preceding group. Loans
bearing
the designation MIG 3 or VMIG 3 are of favorable
quality,
with all security elements accounted for, but lacking
the
undeniable strength of the preceding grades. Liquidity
and
cash flow may be narrow and market access for
refinancing is
likely to be less well established.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper
rating
assigned by Moody's. Among the factors considered by
Moody's
in assigning ratings are the following: (a) evaluation
of
the management of the issuer; (b) economic evaluation
of the
issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in
certain
areas; (c) evaluation of the issuer's products in
relation
to competition and customer acceptance; (d) liquidity;
(e)
amount and quality of long-term debt; (f) trend of
earnings
over a period of ten years; (g) financial strength of
a
parent company and the relationships which exist with
the
issuer; and (h) recognition by the management of
obligations
which may be present or may arise as a result of
public
interest questions and preparations to meet such
obligations.
Smith Barney
New Jersey
Municipals
Fund Inc.
Statement of
Additional Information
July 29, 1998
As amended October 1, 1998
Smith Barney
New Jersey Municipals Fund Inc.
388 Greenwich Street
New York, NY 10013
SMITH BARNEY
A Member of Travelers Group
- - 2 -
A-1
