SUPPLEMENT DATED JUNE 3, 1995 TO THE CURRENT STATEMENT OF ADDITIONAL
INFORMATION FOR LORD ABBETT TAX-FREE INCOME FUND, INC.
<PAGE>
<PAGE>
LORD ABBETT MUNICIPAL
BOND PORTFOLIOS
-------------------------------------------------------
[P1] [P2] [P3]
-------------------------------------------------------
Would You Like To Pay
Less Income Tax?
[LOGO]
A Tradition of Performance
Through Disciplined Investing
<PAGE>
Talk To Your Investment Professional About...
The Lord Abbett Tax-Free Advantage
[P3]
[P4]
Q. "It's important for me to know that my money is buying high-quality
securities. Any fund I invest in has to be as concerned with quality as I am.
Does Lord Abbett fit the bill?"
A. "Yes. Lord Abbett's municipal portfolios are among the highest quality
in the industry. Only investment-grade (AAA, AA, A, BBB) municipal bonds (or
their equivalent) can be purchased by Lord Abbett's portfolio managers."
Q. "I know Lord Abbett uses a team approach to managing fixed-income
portfolios. Is professional management really that important?"
A. "Yes. The Lord Abbett team looks to act, not react. They constantly evaluate
the market and adjust their portfolios based on the anticipation of interest-
rate and economic changes. Since the portfolios invest in intermediate- and
long-term municipal bonds, share prices will fluctuate as interest rates
change."
Q. "Right now, I don't need a monthly dividend check. But, later on, I probably
will. I need a fund that works for me now and in the future. Can Lord Abbett
respond to my changing needs?"
A. "Yes. Lord Abbett's municipal bond funds pay monthly dividends which can be
received by investors in cash or can be reinvested at net asset value. And, you
can add to your investment at any time in any amount."
COMPOUND THE BENEFITS OF TAX-FREE INVESTING
- --------------------------------------------------------------------------------
This hypothetical graph illustrates the results of two investors:
. Both investors began with $100,000.
. Both saw their investment return an average of 6% per year during each
period.
. Both were subject to a tax rate of 33%.
Yet, after 25 years, the value of Shareholder B's portfolio is worth $173,765
more than Shareholder A's.
Why?
Shareholder B's investment compounded tax free, while Shareholder A's did not.
[G1]
In this illustration, dividends compound monthly and there is no fluctuation in
the value of the principal. The 6% return used in this illustration is not
representative of future returns for any Lord Abbett-sponsored fund.
<PAGE>
QUESTIONS AND ANSWERS
- ---------------------
Q. If you could find an investment that allowed you to support local
communities and earned you income free of taxes, would you buy it?
A. If the answer is yes, you should consider purchasing municipal bonds.
Municipal bonds are issued by state and local governments to finance many
projects, including bridge, tunnel and road construction, building airports and
public schools and paying for water treatment plants. The purchasers of these
bonds are, in effect, lending money to the government to complete these
projects. The interest paid on these "loans" is tax free to the investor.
Q. Do you want diversification among many holdings, active management and
access to a large pool of municipal issues?
A. If the answer is yes, invest in a professionally managed municipal bond
fund.
THE ADVANTAGES OF INVESTING IN A PROFESSIONALLY MANAGED MUNICIPAL BOND FUND:
- --------------------------------------------------------------------------------
Diversification/Managed Risk:
A mutual fund is an investment that represents partial ownership of a wide
number of holdings. By providing greater diversification than most investors can
achieve on their own, a mutual fund can reduce risk.
Time Savings/Expertise/Economy:
Overseeing your investments is a full-time job requiring expertise in many
areas. Portfolio managers continually monitor the financial markets in an
attempt to maximize returns and minimize risk. Most people lack the time, the
knowledge or the confidence to buy individual bonds. Also, adding to a portfolio
of individual bonds can be expensive; individual municipal bonds typically trade
in amounts of $5,000. There is no minimum dollar amount required for subsequent
investments in Lord Abbett's municipal bond funds.
Access to the Bond Market:
Institutional investors, such as municipal bond funds, utilize many dealers,
each with inventories of bonds. As a result, municipal bond funds can buy and
sell bonds more efficiently than an individual can. This access to large
reserves of bonds provides the potential for better returns.
Ability to Compound Your Earnings:
Because reinvesting mutual fund dividends is relatively easy (compared to
reinvesting the semi-annual interest of an individual municipal bond), a mutual
fund can be a very efficient way to keep all of your money working for you.
Reinvesting distributions is a simple way to add to your account and accumulate
shares: Each time a distribution is reinvested, the number of shares you own
increases.
- --------------------------------------------------------------------------------
Q. Would you also like this actively-managed portfolio to consist of high-
quality municipal bonds, and emphasize call protection and total return
potential?
A. If the answer is yes...
<PAGE>
LORD ABBETT'S TAX-FREE PORTFOLIOS
- --------------------------------------------------------------------------------
Lord Abbett has been investing money for clients since 1929 and currently
manages over $2 billion in tax-free portfolios. We offer the following municipal
bond funds:
National, California, Connecticut, Florida, Georgia, Hawaii,
Michigan, Minnesota, Missouri, New Jersey, New York, Pennsylvania,
Texas and Washington
A portion of income derived from these portfolios may be subject to the
alternative minimum tax. For each portfolio, any capital gains realized would be
subject to the usual taxes.
[P6]
A current prospectus containing more complete information about any of the
portfolios listed above (including charges, expenses and any fees waived and/or
expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus carefully before investing.
LORD, ABBETT & CO.
Investment Management
The GM Building
767 Fifth Avenue . New York, NY 10153-0203
800-426-1130
<PAGE>
Lord Abbett Tax-Free Income Fund
Connecticut Series
CONNECTICUT
RESIDENTS
WOULD YOU LIKE TO
PAY LESS
INCOME TAX?
. Connecticut residents, on average, have the highest tax bill in the United
States (1).
. To pay their share of 1995 federal, state and local taxes, the average
Connecticut resident will work from January 1st until May 24th... for the
government (1).
- --------------------------------------------------------------------------------
THE LORD ABBETT TAX-FREE
ADVANTAGE
High-Quality Bond Portfolio
(as of 3/31/95)
[G2]
The Connecticut Series' investment policy restricts investments to
municipal bonds which are investment grade or equivalent at the time of
purchase.
THE CONNECTICUT SERIES PROVIDED
REWARDING TOTAL RETURNS
Account Value Assuming the
Reinvestment of All Distributions
[G3]
Total return assumes the reinvestment of all dividends and capital gains.
Capital gains distributions and any capital gains realized from liquidation
of shares would be subject to the usual taxes. Performance does not reflect
applicable capital gains taxes. The Series investment reflects the reduced
sales charge of 3.75% applicable to investments of $100,000. Past
performance is no indication of future results.
SEC-REQUIRED AVERAGE ANNUAL RATES
OF TOTAL RETURN at the maximum sales charge of
4.75% for the periods ended 3/31/95 were:
<TABLE>
<CAPTION>
Life of Fund 1 Year Life of Fund
(at net asset value)
<S> <C> <C>
+6.55% +0.60% +7.87%
</TABLE>
The investment return and principal value of an investment in the Series
will fluctuate so that shares, on any given day or when redeemed, may be
worth more or less than their original cost. The results quoted herein
represent past performance which is no indication of future results.
- --------------------------------------------------------------------------------
(1) Includes direct and indirect taxes. Source: Tax Foundation.
<PAGE>
THE TAX-FREE ADVANTAGE
Lord, Abbett & Co.'s objective is to provide Connecticut Series shareholders an
investment free from federal and Connecticut State income taxes. Connecticut
taxpayers in a 38.88% tax bracket would have to earn 9.00% on a taxable
investment to keep the same after-tax earnings provided by a 5.50% tax-free
investment. The Series' yield may be obtained by calling Lord, Abbett & Co. at
800-426-1130 or your Registered Representative.
These Yields Are Hypothetical and Are Not Representative of Actual or Future
Connecticut Series Yields.
[G4]
- --------------------------------------------------------------------------------
IMPORTANT INFORMATION
A current prospectus containing more complete information about the Fund, or any
Lord Abbett-managed portfolio (including charges, expenses and any fees waived
and/or expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus(es) carefully before investing.
Interest income derived from private activity bonds in the portfolio will
increase the alternative minimum tax liability only for shareholders subject to
that tax. In the event the portfolio does not invest entirely in municipal
bonds, federal and local taxes may be applicable to interest income and/or
shares of the portfolio. Any capital gains realized would be subject to the
usual taxes.
Although the portfolio may invest up to 20% of its net assets in residual
interest bonds ("RIBs"), as of 3/31/95, the Connecticut Series had less than 5%
of its assets invested in such securities. A RIB, sometimes referred to as an
inverse floater, is a debt instrument with a floating or variable rate that
moves in the opposite direction of the interest rate on another security or the
value of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest paid on the RIB, with the result that
when interest rates rise, RIBs give lower interest payments and their values
fall faster than other similar fixed-rate bonds. But when interest rates fall,
not only do RIBs give higher interest payments, their values also rise faster
than other similar fixed-rate bonds. The market for RIBs is relatively new.
If used after 6/30/95, this literature must be accompanied by Lord Abbett's
Performance Quarterly for the most recently completed calendar quarter.
- --------------------------------------------------------------------------------
(2) This illustration assumes a combined federal and Connecticut State income
tax rate of 38.88% for single/joint income between $115,000-$250,000 and
$140,000-$250,000, respectively.
[LOGO] LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
- ----------------------------------------------------------------------------
The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 . 800-426-1130
<PAGE>
<PAGE>
Lord Abbett Tax-Free Income Fund
Texas Series
TEXAS
RESIDENTS
WOULD YOU LIKE TO
PAY LESS
INCOME TAX?
. To pay their share of 1995 federal, state and local taxes, the average
Texas resident will work from January 1st until May 2nd... for the
government (1).
- --------------------------------------------------------------------------------
THE LORD ABBETT TAX-FREE
ADVANTAGE
High-Quality Bond Portfolio
(as of 3/31/95)
[G5]
The Texas Series' investment policy restricts investments to municipal
bonds which are investment grade or equivalent at the time of purchase.
THE TEXAS SERIES PROVIDED
REWARDING TOTAL RETURNS
Account Value Assuming the
Reinvestment of All Distributions
[G6]
Total return assumes the reinvestment of all dividends and capital gains.
Capital gains distributions and any capital gains realized from liquidation
of shares would be subject to the usual taxes. Performance does not reflect
applicable capital gains taxes. The Series investment reflects the reduced
sales charge of 3.75% applicable to investments of $100,000. Past
performance is no indication of future results.
SEC-REQUIRED AVERAGE ANNUAL RATES
OF TOTAL RETURN at the maximum sales charge of
4.75% for the periods ended 3/31/95 were:
<TABLE>
<CAPTION>
Life of Fund 5 Years 1 Year Life of Fund
(at net asset value)
<S> <C> <C> <C>
+7.29% +7.22% +1.90% +7.94%
</TABLE>
The investment return and principal value of an investment in the Series
will fluctuate so that shares, on any given day or when redeemed, may be
worth more or less than their original cost. The results quoted herein
represent past performance which is no indication of future results.
- --------------------------------------------------------------------------------
(1) Includes direct and indirect taxes. Source: Tax Foundation.
(2) Includes holdings which are not rated by an independent ratings service but
which are, in Lord Abbett's opinion, of comparable quality.
<PAGE>
THE TAX-FREE ADVANTAGE
Lord, Abbett & Co.'s objective is to provide Texas Series shareholders an
investment free from federal income tax. Taxpayers in a 36% tax bracket would
have to earn 8.59% on a taxable investment to keep the same after-tax earnings
provided by a 5.50% tax-free investment. The Series' yield may be obtained by
calling Lord, Abbett & Co. at 800-426-1130 or your Registered Representative.
These Yields Are Hypothetical and Are Not Representative of Actual or Future
Texas Series Yields.
[G7]
- --------------------------------------------------------------------------------
IMPORTANT INFORMATION
A current prospectus containing more complete information about the Fund, or any
Lord Abbett-managed portfolio (including charges, expenses and any fees waived
and/or expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus(es) carefully before investing.
Interest income derived from private activity bonds in the portfolio will
increase the alternative minimum tax liability only for shareholders subject to
that tax. In the event the portfolio does not invest entirely in municipal
bonds, federal and local taxes may be applicable to interest income and/or
shares of the portfolio. Any capital gains realized would be subject to the
usual taxes.
Although the portfolio may invest up to 20% of its net assets in residual
interest bonds ("RIBs"), as of 3/31/95, the Texas Series had less than 6% of its
assets invested in such securities. A RIB, sometimes referred to as an inverse
floater, is a debt instrument with a floating or variable rate that moves in the
opposite direction of the interest rate on another security or the value of an
index. Changes in the interest rate on the other security or index inversely
affect the residual interest paid on the RIB, with the result that when interest
rates rise, RIBs give lower interest payments and their values fall faster than
other similar fixed-rate bonds. But when interest rates fall, not only do RIBs
give higher interest payments, their values also rise faster than other similar
fixed-rate bonds. The market for RIBs is relatively new.
If used after 6/30/95, this literature must be accompanied by Lord Abbett's
Performance Quarterly for the most recently completed calendar quarter.
- --------------------------------------------------------------------------------
(3) This illustration assumes a federal income tax rate of 36% for single/joint
income between $115,000-$250,000 and $140,000-$250,000, respectively.
[LOGO] LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
- ----------------------------------------------------------------------------
The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 . 800-426-1130
<PAGE>
<PAGE>
Lord Abbett Tax-Free Income Fund
Washington Series
WASHINGTON
RESIDENTS
WOULD YOU LIKE TO
PAY LESS
INCOME TAX?
. Washington residents, on average, have the 7th highest tax bill in the United
States (1).
. To pay their share of 1995 federal, state and local taxes, the average
Washington resident will work from January 1st until May 11th... for the
government (1).
- --------------------------------------------------------------------------------
THE LORD ABBETT TAX-FREE
ADVANTAGE
High-Quality Bond Portfolio
(as of 3/31/95)
[G8]
The Washington Series' investment policy restricts investments to municipal
bonds which are investment grade or equivalent at the time of purchase.
THE WASHINGTON SERIES PROVIDED
REWARDING TOTAL RETURNS
Account Value Assuming the
Reinvestment of All Distributions
[G9]
Total return assumes the reinvestment of all dividends and capital gains.
Capital gains distributions and any capital gains realized from liquidation
of shares would be subject to the usual taxes. Performance does not reflect
applicable capital gains taxes. The Series investment reflects the reduced
sales charge of 3.75% applicable to investments of $100,000. Past
performance is no indication of future results.
SEC-REQUIRED AVERAGE ANNUAL RATES
OF TOTAL RETURN at the maximum sales charge of
4.75% for the periods ended 3/31/95 were:
<TABLE>
<CAPTION>
Life of Fund 1 Year Life of Fund
(at net asset value)
<S> <C> <C>
+5.11% +0.80% +6.86%
</TABLE>
The investment return and principal value of an investment in the Series
will fluctuate so that shares, on any given day or when redeemed, may be
worth more or less than their original cost. The results quoted herein
represent past performance which is no indication of future results.
- --------------------------------------------------------------------------------
(1) Includes direct and indirect taxes. Source: Tax Foundation.
<PAGE>
THE TAX-FREE ADVANTAGE
Lord, Abbett & Co.'s objective is to provide Washington Series shareholders an
investment free from federal income tax. Taxpayers in a 36% tax bracket would
have to earn 8.59% on a taxable investment to keep the same after-tax earnings
provided by a 5.50% tax-free investment. The Series' yield may be obtained by
calling Lord, Abbett & Co. at 800-426-1130 or your Registered Representative.
These Yields Are Hypothetical and Are Not Representative of Actual or Future
Washington Series Yields.
[G10]
- --------------------------------------------------------------------------------
IMPORTANT INFORMATION
A current prospectus containing more complete information about the Fund, or any
Lord Abbett-managed portfolio (including charges, expenses and any fees waived
and/or expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus(es) carefully before investing.
Interest income derived from private activity bonds in the portfolio will
increase the alternative minimum tax liability only for shareholders subject to
that tax. In the event the portfolio does not invest entirely in municipal
bonds, federal and local taxes may be applicable to interest income and/or
shares of the portfolio. Any capital gains realized would be subject to the
usual taxes.
Although the portfolio may invest up to 20% of its net assets in residual
interest bonds ("RIBs"), as of 3/31/95, the Washington Series had less than 6%
of its assets invested in such securities. A RIB, sometimes referred to as an
inverse floater, is a debt instrument with a floating or variable rate that
moves in the opposite direction of the interest rate on another security or the
value of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest paid on the RIB, with the result that
when interest rates rise, RIBs give lower interest payments and their values
fall faster than other similar fixed-rate bonds. But when interest rates fall,
not only do RIBs give higher interest payments, their values also rise faster
than other similar fixed-rate bonds. The market for RIBs is relatively new.
If used after 6/30/95, this literature must be accompanied by Lord Abbett's
Performance Quarterly for the most recently completed calendar quarter.
- --------------------------------------------------------------------------------
(2) This illustration assumes a federal income tax rate of 36% for single/joint
income between $115,000-$250,000 and $140,000-$250,000, respectively.
[LOGO] LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
- ----------------------------------------------------------------------------
The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 . 800-426-1130
<PAGE>
<PAGE>
Lord Abbett Tax-Free Income Fund
National Series
WOULD YOU LIKE TO
PAY LESS
INCOME TAX?
. To pay their share of 1995 federal, state and local taxes, the average
American will work from January 1st until May 6th... for the government (1).
- --------------------------------------------------------------------------------
THE LORD ABBETT TAX-FREE
ADVANTAGE
High-Quality Bond Portfolio
(as of 3/31/95)
[G11]
The National Series' investment policy restricts investments to municipal
bonds which are investment grade or equivalent at the time of purchase.
THE NATIONAL SERIES PROVIDED
REWARDING TOTAL RETURNS
Account Value Assuming the
Reinvestment of All Distributions
[G12]
Total return assumes the reinvestment of all dividends and capital gains.
Capital gains distributions and any capital gains realized from liquidation
of shares would be subject to the usual taxes. Performance does not reflect
applicable capital gains taxes. The Series investment reflects the reduced
sales charge of 3.75% applicable to investments of $100,000. Past
performance is no indication of future results.
SEC-REQUIRED AVERAGE ANNUAL RATES
OF TOTAL RETURN at the maximum sales charge of
4.75% for the periods ended 3/31/95 were:
<TABLE>
<CAPTION>
10 Years 5 Years 1 Year 10 Years
(at net asset value)
<S> <C> <C> <C>
+9.10% +6.81% +0.50% +9.64%
</TABLE>
The investment return and principal value of an investment in the Series
will fluctuate so that shares, on any given day or when redeemed, may be
worth more or less than their original cost. The results quoted herein
represent past performance which is no indication of future results.
- --------------------------------------------------------------------------------
(1) Includes direct and indirect taxes. Source: Tax Foundation.
(2) Includes holdings which are not rated by an independent ratings service but
which are, in Lord Abbett's opinion, of comparable quality.
<PAGE>
THE TAX-FREE ADVANTAGE
Lord, Abbett & Co.'s objective is to provide National Series shareholders an
investment free from federal income tax. Taxpayers in a 36% tax bracket would
have to earn 8.59% on a taxable investment to keep the same after-tax earnings
provided by a 5.50% tax-free investment. The Series' yield may be obtained by
calling Lord, Abbett & Co. at 800-426-1130 or your Registered Representative.
These Yields Are Hypothetical and Are Not Representative of Actual or Future
National Series Yields.
[G13]
- --------------------------------------------------------------------------------
IMPORTANT INFORMATION
A current prospectus containing more complete information about the Fund, or any
Lord Abbett-managed portfolio (including charges, expenses and any fees waived
and/or expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus(es) carefully before investing.
Interest income derived from private activity bonds in the portfolio will
increase the alternative minimum tax liability only for shareholders subject to
that tax. In the event the portfolio does not invest entirely in municipal
bonds, federal and local taxes may be applicable to interest income and/or
shares of the portfolio. Any capital gains realized would be subject to the
usual taxes.
Although the portfolio may invest up to 20% of its net assets in residual
interest bonds ("RIBs"), as of 3/31/95, the National Series had less than 6% of
its assets invested in such securities. A RIB, sometimes referred to as an
inverse floater, is a debt instrument with a floating or variable rate that
moves in the opposite direction of the interest rate on another security or the
value of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest paid on the RIB, with the result that
when interest rates rise, RIBs give lower interest payments and their values
fall faster than other similar fixed-rate bonds. But when interest rates fall,
not only do RIBs give higher interest payments, their values also rise faster
than other similar fixed-rate bonds. The market for RIBs is relatively new.
If used after 6/30/95, this literature must be accompanied by Lord Abbett's
Performance Quarterly for the most recently completed calendar quarter.
- --------------------------------------------------------------------------------
(3) This illustration assumes a federal income tax rate of 36% for single/joint
income between $115,000-$250,000 and $140,000-$250,000, respectively.
[LOGO] LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
- ----------------------------------------------------------------------------
The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 . 800-426-1130
<PAGE>
<PAGE>
Lord Abbett Tax-Free Income Fund
New Jersey Series
NEW JERSEY
RESIDENTS
WOULD YOU LIKE TO
PAY LESS
INCOME TAX?
. New Jersey residents, on average, have the 3rd highest tax bill in the United
States (1).
. To pay their share of 1995 federal, state and local taxes, the average New
Jersey resident will work from January 1st until May 18th... for the
government (1).
The Lord Abbett Tax-Free
Advantage
High-Quality Bond Portfolio
(as of 3/31/95)
[G14]
The New Jersey Series' investment policy restricts investments to municipal
bonds which are investment grade or equivalent at the time of purchase.
THE NEW JERSEY SERIES PROVIDED
REWARDING TOTAL RETURNS
Account Value Assuming the
Reinvestment of All Distributions
[G15]
Total return assumes the reinvestment of all dividends and capital gains.
Capital gains distributions and any capital gains realized from liquidation
of shares would be subject to the usual taxes. Performance does not reflect
applicable capital gains taxes. The Series investment reflects the reduced
sales charge of 3.75% applicable to investments of $100,000. Past
performance is no indication of future results.
SEC-REQUIRED AVERAGE ANNUAL RATES
OF TOTAL RETURN at the maximum sales charge of
4.75% for the periods ended 3/31/95 were:
<TABLE>
<CAPTION>
Life of Fund 1 Year Life of Fund
(at net asset value)
<S> <C> <C>
+7.32% +1.10% +8.55%
</TABLE>
The investment return and principal value of an investment in the Series
will fluctuate so that shares, on any given day or when redeemed, may be
worth more or less than their original cost. The results quoted herein
represent past performance which is no indication of future results.
- --------------------------------------------------------------------------------
(1) Includes direct and indirect taxes. Source: Tax Foundation.
(2) Includes holdings which are not rated by an independent ratings service but
which are, in Lord Abbett's opinion, of comparable quality.
<PAGE>
THE TAX-FREE ADVANTAGE
Lord, Abbett & Co.'s objective is to provide New Jersey Series shareholders an
investment free from federal and New Jersey State income taxes. New Jersey
taxpayers in a 40.48% tax bracket would have to earn 9.24% on a taxable
investment to keep the same after-tax earnings provided by a 5.50% tax-free
investment. The Series' yield may be obtained by calling Lord, Abbett & Co. at
800-426-1130 or your Registered Representative.
These Yields Are Hypothetical and Are Not Representative of Actual or Future
New Jersey Series Yields.
[G16]
- --------------------------------------------------------------------------------
Important Information
A current prospectus containing more complete information about the Fund, or any
Lord Abbett-managed portfolio (including charges, expenses and any fees waived
and/or expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus(es) carefully before investing.
Interest income derived from private activity bonds in the portfolio will
increase the alternative minimum tax liability only for shareholders subject to
that tax. In the event the portfolio does not invest entirely in municipal
bonds, federal and local taxes may be applicable to interest income and/or
shares of the portfolio. Any capital gains realized would be subject to the
usual taxes.
Although the portfolio may invest up to 20% of its net assets in residual
interest bonds ("RIBs"), as of 3/31/95, the New Jersey Series had less than 6%
of its assets invested in such securities. A RIB, sometimes referred to as an
inverse floater, is a debt instrument with a floating or variable rate that
moves in the opposite direction of the interest rate on another security or the
value of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest paid on the RIB, with the result that
when interest rates rise, RIBs give lower interest payments and their values
fall faster than other similar fixed-rate bonds. But when interest rates fall,
not only do RIBs give higher interest payments, their values also rise faster
than other similar fixed-rate bonds. The market for RIBs is relatively new.
If used after 6/30/95, this literature must be accompanied by Lord Abbett's
Performance Quarterly for the most recently completed calendar quarter.
- --------------------------------------------------------------------------------
(3) This illustration assumes a combined federal and New Jersey State income tax
rate of 40.48% for single/joint income between $115,000-$250,000 and
$140,000-$250,000, respectively.
[LOGO] LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
- ----------------------------------------------------------------------------
The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 . 800-426-1130
<PAGE>
<PAGE>
Lord Abbett Tax-Free Income Fund
New York Series
NEW YORK
RESIDENTS
WOULD YOU LIKE TO
PAY LESS
INCOME TAX?
. New York residents, on average, have the 2nd highest tax bill in the United
States(1).
. To pay their share of 1995 federal, state and local taxes, the average New
York resident will work from January 1st until May 24th... for the
government(1).
- --------------------------------------------------------------------------------
THE LORD ABBETT TAX-FREE
ADVANTAGE
High-Quality Bond Portfolio
(as of 3/31/95)
[G17]
The New York Series' investment policy restricts investments to municipal bonds
which are investment grade or equivalent at the time of purchase.
THE NEW YORK SERIES PROVIDED
REWARDING TOTAL RETURNS
Account Value Assuming the
Reinvestment of All Distributions
[G18]
Total return assumes the reinvestment of all dividends and capital gains.
Capital gains distributions and any capital gains realized from liquidation
of shares would be subject to the usual taxes. Performance does not reflect
applicable capital gains taxes. The Series investment reflects the reduced
sales charge of 3.75% applicable to investments of $100,000. Past
performance is no indication of future results.
SEC-REQUIRED AVERAGE ANNUAL RATES
OF TOTAL RETURN at the maximum sales charge of
4.75% for the periods ended 3/31/95 were:
<TABLE>
<CAPTION>
10 Years 5 Years 1 Year 10 Years
(at net asset value)
<S> <C> <C> <C>
+8.70% +6.55% -1.70% +9.24%
</TABLE>
The investment return and principal value of an investment in the Series
will fluctuate so that shares, on any given day or when redeemed, may be
worth more or less than their original cost. The results quoted herein
represent past performance which is no indication of future results.
<PAGE>
THE TAX-FREE ADVANTAGE
Lord, Abbett & Co.'s objective is to provide New York Series shareholders an
investment free from federal and New York State and City income taxes. New York
taxpayers in a 41.04% tax bracket would have to earn 9.33% on a taxable
investment to keep the same after-tax earnings provided by a 5.50% tax-free
investment. The Series' yield may be obtained by calling Lord, Abbett & Co. at
800-426-1130 or your Registered Representative.
These Yields Are Hypothetical and Are Not Representative of Actual or Future New
York Series Yields.
[G19]
- --------------------------------------------------------------------------------
IMPORTANT INFORMATION
A current prospectus containing more complete information about the Fund, or any
Lord Abbett-managed portfolio (including charges, expenses and any fees waived
and/or expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus(es) carefully before investing.
Interest income derived from private activity bonds in the portfolio will
increase the alternative minimum tax liability only for shareholders subject to
that tax. In the event the portfolio does not invest entirely in municipal
bonds, federal and local taxes may be applicable to interest income and/or
shares of the portfolio. Any capital gains realized would be subject to the
usual taxes.
Although the portfolio may invest up to 20% of its net assets in residual
interest bonds ("RIBs"), as of 3/31/95, the New York Series had less than 5% of
its assets invested in such securities. A RIB, sometimes referred to as an
inverse floater, is a debt instrument with a floating or variable rate that
moves in the opposite direction of the interest rate on another security or the
value of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest paid on the RIB, with the result that
when interest rates rise, RIBs give lower interest payments and their values
fall faster than other similar fixed-rate bonds. But when interest rates fall,
not only do RIBs give higher interest payments, their values also rise faster
than other similar fixed-rate bonds. The market for RIBs is relatively new.
If used after 6/30/95, this literature must be accompanied by Lord Abbett's
Performance Quarterly for the most recently completed calendar quarter.
- --------------------------------------------------------------------------------
(2) This illustration assumes a combined federal and New York State income tax
rate of 41.04% for single/joint income between $115,000-$250,000 and
$140,000-$250,000, respectively.
[LOGO] LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
- ----------------------------------------------------------------------------
The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 . 800-426-1130
<PAGE>
<PAGE>
Lord Abbett Tax-Free Income Fund
Hawaii Series
HAWAII
RESIDENTS
WOULD YOU LIKE TO
PAY LESS
INCOME TAX?
. Hawaii residents, on average, have the 4th highest tax bill in the United
States (1).
. To pay their share of 1995 federal, state and local taxes, the average
Hawaii resident will work from January 1st until May 17th... for the
government (1).
- --------------------------------------------------------------------------------
THE LORD ABBETT TAX-FREE
ADVANTAGE
High-Quality Bond Portfolio
(as of 3/31/95)
[G20]
The Hawaii Series' investment policy restricts investments to municipal
bonds which are investment grade or equivalent at the time of purchase.
THE HAWAII SERIES PROVIDED
REWARDING TOTAL RETURNS
Account Value Assuming the
Reinvestment of All Distributions
[G21]
Total return assumes the reinvestment of all dividends and capital gains.
Capital gains distributions and any capital gains realized from liquidation
of shares would be subject to the usual taxes. Performance does not reflect
applicable capital gains taxes. The Series investment reflects the reduced
sales charge of 3.75% applicable to investments of $100,000. Past
performance is no indication of future results.
SEC-REQUIRED AVERAGE ANNUAL RATES
OF TOTAL RETURN at the maximum sales charge of
4.75% for the periods ended 3/31/95 were:
<TABLE>
<CAPTION>
Life of Fund 1 Year Life of Fund
(at net asset value)
<S> <C> <C>
+5.36% +0.80% +6.86%
</TABLE>
The investment return and principal value of an investment in the Series
will fluctuate so that shares, on any given day or when redeemed, may be
worth more or less than their original cost. The results quoted herein
represent past performance which is no indication of future results.
- --------------------------------------------------------------------------------
(1) Includes direct and indirect taxes. Source: Tax Foundation.
<PAGE>
THE TAX-FREE ADVANTAGE
Lord, Abbett & Co.'s objective is to provide Hawaii Series shareholders an
investment free from federal and Hawaii State income taxes. Hawaii taxpayers in
a 42.40% tax bracket would have to earn 9.55% on a taxable investment to keep
the same after-tax earnings provided by a 5.50% tax-free investment. The Series'
yield may be obtained by calling Lord, Abbett & Co. at 800-426-1130 or your
Registered Representative.
These Yields Are Hypothetical and Are Not Representative of Actual or Future
Hawaii Series Yields.
[G22]
- --------------------------------------------------------------------------------
IMPORTANT INFORMATION
A current prospectus containing more complete information about the Fund, or any
Lord Abbett-managed portfolio (including charges, expenses and any fees waived
and/or expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus(es) carefully before investing.
Interest income derived from private activity bonds in the portfolio will
increase the alternative minimum tax liability only for shareholders subject to
that tax. In the event the portfolio does not invest entirely in municipal
bonds, federal and local taxes may be applicable to interest income and/or
shares of the portfolio. Any capital gains realized would be subject to the
usual taxes.
Although the portfolio may invest up to 20% of its net assets in residual
interest bonds ("RIBs"), as of 3/31/95, the Hawaii Series had less than 5% of
its assets invested in such securities. A RIB, sometimes referred to as an
inverse floater, is a debt instrument with a floating or variable rate that
moves in the opposite direction of the interest rate on another security or the
value of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest paid on the RIB, with the result that
when interest rates rise, RIBs give lower interest payments and their values
fall faster than other similar fixed-rate bonds. But when interest rates fall,
not only do RIBs give higher interest payments, their values also rise faster
than other similar fixed-rate bonds. The market for RIBs is relatively new.
If used after 6/30/95, this literature must be accompanied by Lord Abbett's
Performance Quarterly for the most recently completed calendar quarter.
- --------------------------------------------------------------------------------
(2) This illustration assumes a combined federal and Hawaii State income tax
rate of 42.40% for single/joint income between $115,000-$250,000 and
$140,000-$250,000, respectively.
[LOGO] LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
- ----------------------------------------------------------------------------
The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 . 800-426-1130
<PAGE>
<PAGE>
Lord Abbett Tax-Free Income Fund
Missouri Series
MISSOURI
RESIDENTS
WOULD YOU LIKE TO
PAY LESS
INCOME TAX?
. To pay their share of 1995 federal, state and local taxes, the average
Missouri resident will work from January 1st until April 25th... for the
government(1).
- --------------------------------------------------------------------------------
The Lord Abbett Tax-Free Advantage
High-Quality Bond Portfolio
(as of 3/31/95)
[G23]
The Missouri Series' investment policy restricts investments to municipal
bonds which are investment grade or equivalent at the time of purchase.
THE MISSOURI SERIES PROVIDED
REWARDING TOTAL RETURNS
Account Value Assuming the
Reinvestment of All Distributions
[G24]
Total return assumes the reinvestment of all dividends and capital gains.
Capital gains distributions and any capital gains realized from liquidation
of shares would be subject to the usual taxes. Performance does not reflect
applicable capital gains taxes. The Series investment reflects the reduced
sales charge of 3.75% applicable to investments of $100,000. Past
performance is no indication of future results.
SEC-REQUIRED AVERAGE ANNUAL RATES
OF TOTAL RETURN at the maximum sales charge of
4.75% for the periods ended 3/31/95 were:
<TABLE>
<CAPTION>
Life of Fund 1 Year Life of Fund
(at net asset value)
<S> <C> <C>
+6.47% +0.0% +7.82%
</TABLE>
The investment return and principal value of an investment in the Series
will fluctuate so that shares, on any given day or when redeemed, may be
worth more or less than their original cost. The results quoted herein
represent past performance which is no indication of future results.
- --------------------------------------------------------------------------------
(1) Includes direct and indirect taxes. Source: Tax Foundation.
(2) Includes holdings which are not rated by an independent ratings service but
which are, in Lord Abbett's opinion, of comparable quality.
<PAGE>
THE TAX-FREE ADVANTAGE
Lord, Abbett & Co.'s objective is to provide Missouri Series shareholders an
investment free from federal and Missouri State income taxes. Missouri taxpayers
in a 38.50% tax bracket would have to earn 8.94% on a taxable investment to keep
the same after-tax earnings provided by a 5.50% tax-free investment. The Series'
yield may be obtained by calling Lord, Abbett & Co. at 800-426-1130 or your
Registered Representative.
These Yields Are Hypothetical and Are Not Representative of Actual or Future
Missouri Series Yields.
[G25]
- --------------------------------------------------------------------------------
IMPORTANT INFORMATION
A current prospectus containing more complete information about the Fund, or any
Lord Abbett-managed portfolio (including charges, expenses and any fees waived
and/or expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus(es) carefully before investing.
Interest income derived from private activity bonds in the portfolio will
increase the alternative minimum tax liability only for shareholders subject to
that tax. In the event the portfolio does not invest entirely in municipal
bonds, federal and local taxes may be applicable to interest income and/or
shares of the portfolio. Any capital gains realized would be subject to the
usual taxes.
Although the portfolio may invest up to 20% of its net assets in residual
interest bonds ("RIBs"), as of 3/31/95, the Missouri Series had less than 5% of
its assets invested in such securities. A RIB, sometimes referred to as an
inverse floater, is a debt instrument with a floating or variable rate that
moves in the opposite direction of the interest rate on another security or the
value of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest paid on the RIB, with the result that
when interest rates rise, RIBs give lower interest payments and their values
fall faster than other similar fixed-rate bonds. But when interest rates fall,
not only do RIBs give higher interest payments, their values also rise faster
than other similar fixed-rate bonds. The market for RIBs is relatively new.
If used after 6/30/95, this literature must be accompanied by Lord Abbett's
Performance Quarterly for the most recently completed calendar quarter.
- --------------------------------------------------------------------------------
(3) This illustration assumes a combined federal and Missouri State income tax
rate of 38.50% for single/joint income between $115,000-$250,000 and
$140,000-$250,000, respectively.
[LOGO] LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
- ----------------------------------------------------------------------------
The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 . 800-426-1130
<PAGE>
LORD ABBETT
STATEMENT OF ADDITIONAL INFORMATION DECEMBER 27, 1994
INTENDED FOR USE
UNTIL FEBRUARY 1, 1996
LORD ABBETT TAX-FREE INCOME FUND, INC.
This Statement of Additional Information is not a Prospectus. A Prospectus may
be obtained from your securities dealer or from Lord, Abbett & Co., The General
Motors Building, 767 Fifth Avenue, New York, New York 10153-0203. This Statement
relates to, and should be read in conjunction with, the Prospectus dated
December 27, 1994.
Our Board of Directors has authority to create and classify shares of common
stock in separate series, without further action by shareholders. To date,
40,000,000 shares of each of the Connecticut, Hawaii, Minnesota, Missouri, New
Jersey, New York, Texas and Washington Series and 80,000,000 shares of the
National Series have been authorized. Although no present plans exist, further
series may be added in the future. The Investment Company Act of 1940 (the
"Act") requires that where more than one series exists, each series must be
preferred over all other series in respect of assets specifically allocated to
such series.
Rule 18f-2 under the Act provides that any matter required to be submitted, by
the provisions of the Act or applicable state law, or otherwise, to the holders
of the outstanding voting securities of an investment company such as the Fund
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each series affected by such
matter. Rule 18f-2 further provides that a series shall be deemed to be affected
by a matter unless the interests of each series in the matter are substantially
identical or the matter does not affect any interest of such series. However,
the Rule exempts the selection of independent public accountants, the approval
of principal distributing contracts and the election of directors from the
separate voting requirements of the Rule.
Shareholder inquiries should be made by writing directly to the Fund or by
calling 800-821-5129. In addition, you can make inquiries through your dealer.
TABLE OF CONTENTS Page
1. Investment Objective and Policies 2
2. Directors and Officers 9
3. Investment Advisory and Other Services 11
4. Portfolio Transactions 12
5. Purchases, Redemptions
and Shareholder Services 13
6. Taxes 18
7. Risk Factors Regarding Investments
in Connecticut, Hawaii, Minnesota, Missouri,
New Jersey, New York, Texas,
Washington and Puerto Rico Municipal Bonds 19
8. Past Performance 29
9. Further Information About the Fund 30
10. Financial Statements 30
<PAGE>
1.
Investment Objective and Policies
The Fund's investment objective and policies are described in the Prospectus on
the cover page and under "How We Invest."
In addition to those policies described in the Prospectus, each Series is
subject to the following investment restrictions which cannot be changed without
approval of a majority of the outstanding shares of the Series. Each Series may
not: (1) sell short or buy on margin (good faith deposits made in connection
with entering into options and financial futures transactions are not deemed to
be margin), although we may obtain short-term credit necessary for the clearance
of purchases of securities; (2) buy or sell put, call, straddle or spread
options, although we may buy, hold or sell options and financial futures; (3)
borrow money except as a temporary measure for extraordinary or emergency
purposes and then not in excess of 5% of its gross assets (at cost or market
value, whichever is lower) at the time of borrowing; (4) invest knowingly more
than 10% of its net assets in illiquid securities (securities qualifying for
resale under Rule 144A that are determined by the Board of Directors, or by Lord
Abbett under the Board's delegation, to be liquid are considered liquid
securities); (5) act as underwriter of securities issued by others, except to
the extent that in connection with the disposition of its portfolio securities
it may be deemed to be an underwriter under federal securities laws; (6) make
loans, except for the purchase of debt securities in which it may invest
consistent with its investment objective and policies; (7) pledge, mortgage or
hypothecate our assets except to secure permitted borrowings described in (3)
above (neither a deposit required to enter into or to maintain municipal bond
index futures contracts nor an allocation or segregation of portfolio assets to
collateralize a position in such options or futures contracts is deemed to be a
pledge, mortgage or hypothecation); (8) buy or sell real estate, including real
estate mortgages in the ordinary course of its business, except that it may
invest in marketable securities secured by real estate or interests therein; (9)
buy securities issued by any other open-end investment company except pursuant
to a merger, acquisition or consolidation; (10) buy or sell oil, gas, or other
mineral leases, commodities or commodity contracts (for this purpose options and
financial futures contracts are not deemed to be commodities or commodity
contracts; (11) with respect to the National Series, buy securities if the
purchase would cause the Series to have more than 5% of its gross assets, at
market value at the time of purchase, invested in securities of any one issuer,
except securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Securities"); (12) buy voting securities if
the purchase would then cause it to own more than 10% of the outstanding voting
stock of any one issuer; (13) own securities of an issuer if, to our knowledge,
our officers and directors or partners of our investment adviser, who
beneficially own more than 1/2 of 1% of the securities of that issuer, together
own more than 5% of such securities; (14) invest more than 25% of its gross
assets taken at market value in any one industry (except that each Series may
invest more than 25% of such gross assets in tax-exempt securities); (15) buy
securities from or sell them to our officers, directors, or employees, or to our
investment adviser or to its partners and employees, other than capital stock of
the Series or (16) issue senior securities as defined in the Act of (neither a
purchase or sale of options nor a collateral arrangement with respect to either
financial futures or the writing of options, all as discussed in the Prospectus
and below, particularly under "Regulatory Restrictions" which refers to the
asset coverage requirements of the Securities and Exchange Commission's Release
No. IC-10666 is deemed to be the issuance of a senior security).
Notwithstanding restrictions 5, 9, 12 and 14 above, in the future, upon
shareholder approval, each of the Series may seek to achieve its investment
objective by investing all of its assets in another investment company (or
series or class thereof) having the same investment objective. Shareholders will
be notified thirty days in advance of such conversion. In the event the Fund
creates other series or Series classes, shareholders of each Series will be able
to exchange Series shares for shares of the other Fund series and/or Series
classes.
While each of the Series may take short-term gains if deemed appropriate,
normally the Series will hold securities in order to realize interest income
exempt from federal income tax and, where applicable, its state's personal
income tax, consistent with preservation of capital. For the year ended
September 30, 1994, the portfolio turnover rates for the National, New York,
Texas, New Jersey, Connecticut, Missouri, Hawaii and Washington Series were
184.07%, 149.13%, 96.79%, 75.62%, 97.42%, 50.59%, 66.04% and 137.74%,
respectively. For the year ended September 30, 1993, the portfolio turnover
rates for the National, New York, Texas, New Jersey, Connecticut, Missouri,
Hawaii and Washington Series were 138.06%, 101.59%, 58.10%, 88.29%, 45.81%,
56.20%, 34.49% and 85.45%, respectively.
The liquidity of a Rule 144A security will be a determination of fact for which
the Board of Directors is ultimately responsible. However, the Directors may
delegate the day-to-day function of such determinations to Lord Abbett, subject
<PAGE>
to the Directors' oversight. Examples of factors which the Directors may take
into account with respect to a Rule 144A security include the frequency of
trades and quotes for the security, the number of dealers willing to purchase or
sell the security and the number of other potential purchasers, dealer
undertakings to make a market in the security and the nature of the security and
the nature of the marketplace (e.g., the time period needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). Rule
144A securities may be considered illiquid in certain circumstances to the
extent necessary to comply with applicable state law requirements.
OTHER INVESTMENT RESTRICTIONS(WHICH CAN BE CHANGED WITHOUT SHAREHOLDER APPROVAL)
- --------------------------------------------------------------------------------
Pursuant to Texas regulations, no Series will invest more than 5% of its net
assets in warrants or more than 2% in warrants not listed on the New York or
American Stock Exchanges, except when they form a unit with other securities. As
a matter of operating policy, no Series will invest more than 5% of its net
assets in rights.
To the extent that any of the Series are sold in the State of California, such
Series will conform to the requirements set forth in Rule 260.140.85(b) of the
California Code of Regulations with respect to futures and options transactions.
MUNICIPAL BONDS
- ---------------
In general, municipal bonds are debt obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and Puerto Rico and by their political subdivisions, agencies and
instrumentalities. Municipal bonds are issued to obtain funds for various public
purposes, including the construction of bridges, highways, housing, hospitals,
mass transportation, schools, streets and water and sewer works. They may be
used to refund outstanding obligations, to obtain funds for general operating
expenses, or to obtain funds to lend to other public institutions and facilities
and in anticipation of the receipt of revenue or the issuance of other
obligations. In addition, the term "municipal bonds" includes certain types of
"private activity" bonds including industrial development bonds issued by public
authorities to obtain funds to provide privately-operated housing facilities,
sports facilities, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities and
certain facilities for water supply, gas, electricity, or sewerage or solid
waste disposal. Under the Tax Reform Act of 1986, as amended, substantial
limitations have been imposed on new issues of municipal bonds to finance
privately-operated facilities. The interest on municipal bonds generally is
excludable from gross income for federal income tax purposes of most investors.
The two principal classifications of municipal bonds are "general obligation"
and limited obligation or "revenue bonds." General obligation bonds are secured
by the pledge of the faith, credit and taxing power of the municipality for the
payment of principal and interest. The taxes or special assessments that can be
levied for the payment of debt service may be limited or unlimited as to rate or
amount. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. "Private activity" bonds,
including industrial development bonds are, in most cases, revenue bonds and
generally do not constitute the pledge of the faith, credit or taxing power of
the municipality. The credit quality of such municipal bonds usually is directly
related to the credit standing of the user of the facilities. There are
variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors.
The yields on municipal bonds are dependent on a variety of factors, including
general money market conditions, supply and demand, general conditions of the
municipal bond market, size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Corporation ("Standard &
Poor's") and Fitch Investors Service ("Fitch") represent their opinions as to
the quality of the municipal bonds which they undertake to rate. It should be
emphasized, however, that such ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields when purchased in the open market,
while municipal bonds of the same maturity and coupon with different ratings may
have the same yield.
DESCRIPTION OF FOUR HIGHEST MUNICIPAL BOND RATINGS
- --------------------------------------------------
Moody's describes its four highest ratings for municipal bonds as follows:
"Bonds that are rated 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
<PAGE>
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.
Bonds that 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 that make the
long-term risks appear somewhat larger than in Aaa securities. 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 some time in the future.
Bonds that 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."
Standard & Poor's describes its four highest ratings for municipal bonds as
follows:
"AAA: Debt rated 'AAA' has the highest rating assigned by S & P. Capacity to and
pay interest and repay principal is extremely strong
AA: Debt rated 'AA' has a very strong capacity to pay interest and repay
principals and differs from the highest rated issues only in small degree.
A: Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
Fitch's describes its four highest ratings for municipal bonds as follows:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt to these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payments. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
OPTIONS AND FINANCIAL FUTURES TRANSACTIONS
- ------------------------------------------
GENERAL. Each Series may engage in options and financial futures transactions
- -------
in accordance with its investment objective and policies. Although none of the
Series are currently employing such options and financial futures transactions,
<PAGE>
and have no current intention of doing so, each may engage in such transactions
in the future if it appears advantageous to the Series to do so, in order to
hedge against the effects of fluctuating interest rates and other market
conditions or to stabilize the value of the Series' assets. The use of options
and financial futures, and possible benefits and attendant risks, are discussed
below, along with information concerning certain other investment policies and
techniques.
FINANCIAL FUTURES CONTRACTS. Each Series may enter into financial futures
- -----------------------------
contracts for the future delivery of a financial instrument, such as a security
or the cash value of a securities index. This investment technique is designed
primarily to hedge (i.e., protect) against anticipated future changes in
interest rates or market conditions which otherwise might adversely affect the
value of securities which a Series holds or intends to purchase. A "sale" of a
futures contract means the undertaking of a contractual obligation to deliver
the securities or the cash value of an index called for by the contract at a
specified price during a specified delivery period. A "purchase" of a futures
contract means the undertaking of a contractual obligation to acquire the
securities or cash value of an index at a specified price during a specified
delivery period. At the time of delivery in the case of fixed- income securities
pursuant to the contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest rate than that
specified in the contract. In some cases, securities called for by a futures
contract may not have been issued at the time the contract was written. A Series
will not enter into any futures contracts or options on futures contracts if the
aggregate of the market value of the outstanding futures contracts of the Series
and futures contracts subject to the outstanding options written by the Series
would exceed 50% of the total assets of the Series.
Although some financial futures contracts by their terms call for the actual
delivery or acquisition of securities, in most cases, a party will close out the
contractual commitment before delivery without having to make or take delivery
of the security by purchasing (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, if effected through a member of an exchange, cancels the
obligation to make or take delivery of the securities. All transactions in the
futures market are made, offset or fulfilled through a clearing house associated
with the exchange on which the contracts are traded. The Series will incur
brokerage fees when they purchase or sell contracts and will be required to
maintain margin deposits. At the time a Series enters into a futures contract,
it is required to deposit with its custodian, on behalf of the broker, a
specified amount of cash or eligible securities called "initial margin." The
initial margin required for a futures contract is set by the exchange on which
the contract is traded. Subsequent payments, called "variation margin," to and
from the broker are made on a daily basis as the market price of the futures
contract fluctuates. The costs incurred in connection with futures transactions
could reduce a Series' return. Futures contracts entail risks. If the investment
adviser's judgment about the general direction of interest rates or markets is
wrong, the overall performance may be poorer than if no such contracts had been
entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio securities being hedged. The degree of difference in
price movements between futures contracts and the securities being hedged
depends upon such things as variations in speculative market demand for futures
contracts and debt securities and differences between the securities being
hedged and the securities underlying the futures contracts, e.g., interest
rates, tax status, maturities and creditworthiness of issuers. While interest
rates on taxable securities generally move in the same direction as the interest
rates on municipal bonds, there are frequently differences in the rate of such
movements and temporary dislocations. Accordingly, the use of a financial
futures contract on a taxable security or a taxable securities index may involve
a greater risk of an imperfect correlation between the price movements of the
futures contract and of the municipal bond being hedged than when using a
financial futures contract on a municipal bond or a municipal bond index. In
addition, the market prices of futures contracts may be affected by certain
factors. If participants in the futures market elect to close out their
contracts through offsetting transactions rather than meet margin requirements,
distortions in the normal relationship could result. Price distortions also
could result if investors in futures contracts decide to make or take delivery
of underlying securities rather than engage in closing transactions because of
the resultant reduction in the liquidity of the futures market. In addition,
because, from the point of view of speculators, margin requirements in the
futures market are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures market could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities and movements in the prices of futures contracts, a correct
forecast of market trends by the investment adviser still may not result in a
successful hedging transaction. If any of these events should occur, a Series
could lose money on the financial futures contracts and also on the value of its
portfolio securities.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. Each Series may purchase and write call
- --------------------------------------
and put options on financial futures contracts. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time during
the period of the option. Upon exercise, the writer of the option delivers the
futures contract to the holder at the exercise price. A Series would be required
to deposit with its custodian initial margin and maintenance margin with respect
to put and call options on futures contracts written by it. Options on futures
contracts involve risks similar to the risks relating to transactions in
financial futures contracts described above. Also, an option purchased by a
Series may expire worthless, in which case the Series would lose the premium
paid therefor.
OPTIONS ON SECURITIES. Each Series may write (sell) covered call options on
- ----------------------
securities so long as it owns securities which are acceptable for escrow
purposes and may write secured put options on securities, which means that, so
long as a Series is obligated as a writer of a put option, it will invest an
amount not less than the exercise price of the put option in eligible
securities. A call option gives the purchaser the right to buy, and the writer
the obligation to sell, the underlying security at the exercise price during the
option period. A put option gives the purchaser the right to sell, and the
writer has the obligation to buy, the underlying security at the exercise price
during the option period. The premium received for writing an option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the price
volatility of the underlying security, the option period, supply and demand and
interest rates. A Series may write or purchase spread options which are options
for which the exercise price may be a fixed- dollar spread or yield spread
between the security underlying the option and another security it does not own,
but which is used as a benchmark. The exercise price of an option may be below,
equal to, or above the current market value of the underlying security at the
time the option is written. The buyer of a put who also owns the related
security is protected by ownership of a put option against any decline in that
security's price below the exercise price less the amount paid for the option.
The ability to purchase put options allows a Series to protect capital gains in
an appreciated security it owns, without being required to actually sell that
security. At times a Series might like to establish a position in securities
upon which call options are available. By purchasing a call option, the Series
is able to fix the cost of acquiring the security, this being the cost of the
call plus the exercise price of the option. This procedure also provides some
protection from an unexpected downturn in the market because the Series is only
at risk for the amount of the premium paid for the call option which it can, if
it chooses, permit to expire.
During the option period, the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain and the buyer a loss in the amount of
the premium. If the covered call option writer has to sell the underlying
security because of the exercise of the call option, the writer realizes a gain
or loss from the sale of the underlying security, with the proceeds being
increased by the amount of the premium.
If a secured put option expires unexercised, the writer realizes a gain and the
buyer a loss in the amount of the premium. If the secured put writer has to buy
the underlying security because of the exercise of the put option, the secured
put writer incurs an unrealized loss to the extent that the current market value
of the underlying security is less than the exercise price of the put option,
minus the premium received.
OVER-THE-COUNTER OPTIONS. As indicated in the Prospectus, each Series may deal
- -------------------------
in over-the-counter traded options ("OTC options"). OTC options differ from
exchange-traded options in several respects. They are transacted directly with
dealers and not with a clearing corporation and there is a risk of
nonperformance by the dealer as a result of the insolvency of such dealer or
otherwise, in which event, the Series may experience material losses. However,
in writing options, the premium is paid in advance by the dealer. OTC options
are available for a greater variety of securities, and a wider range of
expiration dates and exercise prices, than are exchange-traded options. Since
there is no exchange, pricing normally is done by reference to information from
market makers, which information is carefully monitored by the Series'
investment adviser and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any given time. Consequently, a Series may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when a Series writes an OTC option, generally it can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Series originally wrote it. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a purchaser of such put or call option
also might find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Fund understands the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The Fund and its
investment adviser disagree with this position and believe that the dealers with
which they intend to engage in OTC options transactions generally are agreeable
to and capable of entering into closing transactions. The Fund has adopted
procedures for engaging in OTC options for the purpose of reducing any potential
adverse effect of such transactions upon the liquidity of a Series' portfolio. A
brief description of such procedures is set forth below.
The Series only will engage in OTC options transactions with dealers that have
been specifically approved by the Board of Directors of the Fund. The Series and
their investment adviser believe that such dealers present minimal credit risks
to the Series and, therefore, should be able to enter into closing transactions
if necessary. The Series currently will not engage in OTC options transactions
if the amount invested by the Series in OTC options plus a "liquidity charge"
related to OTC options written by the Fund, plus the amount invested by the Fund
in illiquid securities, would exceed 10% of the Fund's net assets. The
"liquidity charge" referred to above is computed as described below.
The Fund anticipates entering into agreements with dealers to which the Series
sell OTC options. Under these agreements a Series would have the absolute right
to repurchase the OTC options from the dealer at any time at a price no greater
than a price established under the agreements (the "Repurchase Price"). The
"liquidity charge" referred to above for a specific OTC option transaction will
be the Repurchase Price related to the OTC option less the intrinsic value of
the OTC option. The intrinsic value of an OTC call option for such purposes will
be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow a Series to repurchase a specific OTC option written by the Series, the
"liquidity charge" will be the current market value of the assets serving as
"cover" for such OTC option.
OPTIONS ON SECURITIES INDICES. Each Series also may purchase and write call and
- -----------------------------
put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Series owns or intends to
purchase, and not for speculation. Through the writing or purchase of index
options, a Series can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash, if the closing level of the securities index upon which the option is
based is greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike security options, all
settlements are in cash and gain or loss depends upon price movements in the
market generally (or in a particular industry or segment of the market), rather
than upon price movements in individual securities. Price movements in
securities which a Series owns or intends to purchase probably will not
correlate perfectly with movements in the level of an index and, therefore, the
Series bears the risk that a loss on an index option would not be completely
offset by movements in the price of such securities.
When a Series writes an option on a securities index, it will be required to
deposit with its custodian and mark-to-market eligible securities equal in value
to at least 100% of the exercise price in the case of a put or the contract
value in the case of a call. In addition, where a Series writes a call option on
a securities index at a time when the contract value exceeds the exercise price,
the Series will segregate and mark-to-market until the option expires or is
closed out, cash or cash equivalents equal in value to such excess.
<PAGE>
Options on futures contracts and index options involve risks similar to those
risks relating to transactions in financial futures contracts described above.
Also, an option purchased by a Series may expire worthless, in which case the
Series would lose the premium paid therefor.
DELAYED DELIVERY TRANSACTIONS. Each Series may purchase or sell portfolio
- -------------------------------
securities on a when-issued or delayed delivery basis. When-issued or delayed
delivery transactions involve a commitment by the Series to purchase or sell
securities with payment and delivery to take place in the future in order to
secure what is considered to be an advantageous price or yield to the Series at
the time of entering into the transaction. When a Series enters into a delayed
delivery purchase, it becomes obligated to purchase securities and it has all
the rights and risks attendant to ownership of a security, although delivery and
payment occur at a later date. The value of fixed- income securities to be
delivered in the future will fluctuate as interest rates vary. At the time the
Series makes the commitment to purchase a security on a when-issued or delayed
delivery basis, it will record the transaction and reflect the liability for the
purchase and the value of the security in determining its net asset value.
Likewise, at the time the Series makes the commitment to sell a security on a
delayed delivery basis, it will record the transaction and include the proceeds
to be received in determining its net asset value; accordingly, any fluctuations
in the value of the security sold pursuant to a delayed delivery commitment are
ignored in calculating net asset value so long as the commitment remains in
effect. The Series, generally, have the ability to close out a purchase
obligation on or before the settlement date rather than take delivery of the
security.
To the extent the Series engage in when-issued or delayed delivery purchases,
they will do so for the purpose of acquiring portfolio securities consistent
with the Series' investment objectives and policies and not for investment
leverage or to speculate in interest rate changes. The Series only will make
commitments to purchase securities on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but the Series reserve
the right to sell these securities before the settlement date if deemed
advisable.
REGULATORY RESTRICTIONS. To the extent required to comply with Securities and
- ------------------------
Exchange Commission Release No. IC-10666, when purchasing a futures contract,
writing a put option or entering into a delayed delivery purchase, each Series
will maintain, in a segregated account, cash or liquid high-grade debt
securities equal to the value of such contracts.
To the extent required to comply with Commodities Futures Trading Commission
Regulation 4.5 and thereby avoid "commodity pool operator" status, no Series
will enter into a futures contract or purchase an option thereon if immediately
thereafter the initial margin deposits for futures contracts held by the Series
plus premiums paid by it for open options on futures would exceed 5% of the
Series' total assets. A Series will not engage in transactions in financial
futures contracts or options thereon for speculation, but only to attempt to
hedge against changes in market conditions affecting the values of securities
which the Series holds or intends to purchase. When futures contracts or options
thereon are purchased to protect against a price increase on securities intended
to be purchased later, it is anticipated that at least 75% of such intended
purchases will be completed. When other futures contracts or options thereon are
purchased, the underlying value of such contracts at all times will not exceed
the sum of: (1) accrued profits on such contracts held by the broker; (2) cash
or high-quality money market instruments set aside in an identifiable manner and
(3) cash proceeds from investments due in 30 days.
2.
Directors and Officers
The following directors are partners of Lord, Abbett & Co. ("Lord Abbett"), The
General Motors Building, 767 Fifth Avenue, New York, New York 10153-0203. They
have been associated with Lord Abbett for over five years and also are officers
and/or directors or trustees of the fifteen other Lord Abbett-sponsored funds
(except for Messrs. Dow and Nordberg, who are not directors of Lord Abbett
Research Fund, Inc.) including those described under "Purchases, Redemptions and
Shareholder Services." They are "interested persons" as defined in the
Investment Company Act of 1940, as amended, and as such, may be considered to
have an indirect financial interest in the Rule 12b-1 Plan described in the
Prospectus.
Ronald P. Lynch, Chairman and President
Robert S. Dow, Vice President
E. Wayne Nordberg, Vice President
<PAGE>
The following outside directors are also directors or trustees of the fifteen
other Lord Abbett-sponsored funds referred to above except for Lord Abbett
Research Fund, Inc. of which only Messrs. Millican and Neff are directors.
E. Thayer Bigelow
Time Warner Cable
300 First Stamford Place
Stamford, CT 06902
President and Chief Executive Officer of Time Warner Cable Programming, Inc.
Formerly President and Chief Operating Officer of Home Box Office, Inc.
Stewart S. Dixon
Wildman, Harrold, Allen & Dixon
225 W. Wacker Drive (Suite 2800)
Chicago, Illinois
Partner in the law firm of Wildman, Harrold, Allen & Dixon.
John C. Jansing
162 South Beach Road
Hobe Sound, Florida
Retired. Formerly Chairman of Independent Election Corporation of America, a
proxy tabulating firm.
C. Alan MacDonald
The Noel Group
Two Greenwich Plaza, Suite 100
Greenwich, Connecticut
Acquisition Consultant, The Noel Group, a private consulting firm. Formerly
Chairman and Chief Executive Officer of Lincoln Foods, Inc., manufacturer of
branded snack foods. Formerly President and Chief Executive Officer of Nestle
Foods Corporation, a subsidiary of Nestle S.A. (Switzerland).
Hansel B. Millican, Jr.
Rochester Button Company
1100 Noblin Avenue
South Boston, Virginia
President and Chief Executive Officer of Rochester Button Company. Formerly
Senior Vice President, Springs Industries, Inc., a textile company, (1986-1989).
Thomas J. Neff
55 East 52nd Street
New York, New York
President of Spencer Stuart & Associates, an executive search consulting firm.
Effective September 21, 1994, Thomas F. Creamer retired as a director of the
Fund.
For the fiscal year ended September 30, 1994, the Fund accrued for all outside
directors as a group, directors' fees totaling $63,370 (exclusive of expenses).
This amount has been deemed invested in shares of the Fund under a deferred
compensation plan for later distribution to the outside directors. The Fund has
adopted a retirement plan under which the outside directors receive an annual
retirement benefit equal to 80% of their final annual retainer following
retirement at or after age 72 with at least 10 years of service. This plan also
provides for a reduced benefit upon early retirement under certain circumstances
and a preretirement death benefit. For the year ended September 30, 1994, the
Fund accrued $18,556 for the payment of benefits under this plan.
Except where indicated, the following executive officers have been associated
with Lord Abbett for over five years. Of these officers, Messrs. Allen, Carper,
Cutler, Henderson and Walsh are partners and the others are employees: Barbara
A. Grummel (with Lord Abbett since 1990 - formerly Vice President, Merrill Lynch
Asset Management); John Mousseau (with Lord Abbett since 1993 - formerly First
Vice President, Shearson Lehman Brothers), Executive Vice Presidents; Philip
Fang (with Lord Abbett since 1991 - formerly Municipal Evaluator for Muller &
Co.), Executive Vice President; Stephen I. Allen, Daniel E. Carper, Vice
President; Kenneth B. Cutler, Vice President and Secretary; Thomas S. Henderson,
John J. Walsh, John J. Gargana, Jr., Jeffery H. Boyd (with Lord Abbett since
1994 - formerly partner in the law firm of Robinson & Cole), Thomas F. Konop, E.
Wayne Nordberg and Victor W. Pizzolato, Vice Presidents; and Keith F. O'Connor,
Treasurer.
The Fund does not hold regular annual meetings of shareholders. Under the Fund's
By-laws shareholder meetings may be called at any time by certain officers of
the Fund or by a majority of the Board of Directors (i) for the purpose of
taking action upon any matter requiring the vote or authority of the Fund's
shareholders or upon other matters deemed to be necessary or desirable or (ii)
upon the written request of the holders of at least one-quarter of the shares of
the Fund outstanding and entitled to vote at the meeting. When any such annual
meeting is held, the shareholders will elect directors and select independent
auditors of the Fund.
As of October 31, 1994, our officers and directors as a group owned less than 1%
of our outstanding shares.
Investment Advisory and Other Services
As described under "Our Management" in the Prospectus, Lord Abbett is the Fund's
investment manager. The eight general partners of Lord Abbett, all of whom are
officers and/or directors of the Fund, are: Stephen I. Allen, Daniel E. Carper,
Kenneth B. Cutler, Robert S. Dow, Thomas S. Henderson, Ronald P. Lynch, E. Wayne
Nordberg and John J. Walsh. The address of each partner is The General Motors
Building, 767 Fifth Avenue, New York, New York 10153- 0203.
The services performed by Lord Abbett are described under "Our Management" in
the Prospectus. Under both Management Agreements described in the Prospectus, we
are obligated to pay Lord Abbett a monthly fee, based on average daily net
assets of each Series for each month, at the annual rate of .5 of 1%. In
addition, we pay all expenses not expressly assumed by Lord Abbett, including
without limitation, 12b-1 expenses; outside directors' fees and expenses;
association membership dues; legal and auditing fees; taxes; transfer and
dividend disbursing agent fees; shareholder servicing costs; expenses relating
to shareholder meetings; expenses of preparing, printing and mailing stock
certificates and shareholder reports; expenses of registering our shares under
federal and state securities laws; expenses of preparing, printing and mailing
prospectuses to existing shareholders; insurance premiums and brokerage and
other expenses connected with executing portfolio transactions.
For the fiscal years ended September 30, 1992 ,1993 and 1994, the management
fees paid to Lord Abbett for the National Series amounted to $2,356,769,
$3,127,152 and $3,480,257, respectively, and for the New York Series $1,314,982,
$1,718,608 and $1,831,676, respectively.
Although not obligated to do so, Lord Abbett has waived or may waive, all or
part of its management fees and has assumed or may assume, other expenses of the
Connecticut, Hawaii, Minnesota, Missouri, New Jersey, Texas and Washington
Series. For the fiscal years ended September 30, 1992 , 1993 and 1994, Lord
Abbett waived $456,314, $699,078 and $615,642 in New Jersey Series management
fees and assumed $36,253 of other expenses for the fiscal year 1992. For the
fiscal years September 30, 1992, 1993 and 1994, Lord Abbett waived $334,460,
$385,097 and $400,148, of the Texas Series' management fees, respectively. For
the fiscal years ended September 30, 1992 and 1993, the management fees paid to
Lord Abbett by the Texas Series amounted to $81,166 and $98,172 respectively.
With respect to the Connecticut Series, for the fiscal years ended September 30,
1992, 1993 and 1994, Lord Abbett waived $198,594, $362,661 and $381,757,
respectively, in management fees and assumed $16,836 of other expenses for the
fiscal year 1992. With respect to the Missouri Series, for the fiscal years
ended September 30, 1992, 1993 and 1994, Lord Abbett waived $226,481, $374,551
and $364,906, respectively, in management fees and assumed $14,904 of other
expenses for the fiscal year 1992.
For the fiscal year ended September 30, 1994 the management fees paid to Lord
Abbett by the Series indicated were $324,732 (New Jersey), $137,767 (Texas),
$131,324 (Connecticut), $218,967 (Missouri), $38,975 (Hawaii) and $94,261
(Washington).
For the period October 28, 1991 (commencement of operations) to September 30,
1992 and for the fiscal years ended September 30, 1993 and 1994, Lord Abbett
waived $116,404, $348,988 and $433,616, respectively, in Hawaii Series'
management fees and assumed $55,146 of other expenses for the fiscal year 1992.
Lord Abbett may pay or reimburse the Hawaii Series for certain of its other
expenses. Any such expenses have been repaid to Lord Abbett by the Hawaii Series
pursuant to a formula based on the expense ratio of the Hawaii Series. From
April 15, 1992 (commencement of operations) to September 30, 1992 and for the
fiscal year ended September 30, 1993 and 1994, Lord Abbett waived $63,031,
$298,656 and $313,694, respectively, in Washington Series' management fees and
assumed $39,597, $0 and $0 respectively, of other expenses. Lord Abbett may pay
or reimburse the Washington Series for certain of its other expenses. Any such
expenses have been repaid to Lord Abbett by the Washington Series pursuant to a
formula based on the expense ratio of the Washington Series.
Lord Abbett has given the Fund the right to use the identifying name "Lord
Abbett" and this right may be withdrawn if Lord Abbett ceases to be the Fund's
investment manager.
Lord Abbett serves as the principal underwriter for each Series.
The State of California limits our operating expenses (including management fees
but excluding taxes, interest, extraordinary expenses and brokerage commissions)
to 2 1/2% of average annual net assets up to $30,000,000, 2% of the next
$70,000,000 of such assets and 1 1/2% of such assets in excess of $100,000,000.
The expense limitation is a condition of the registration of investment company
shares for sale in the State, and applies so long as our shares are registered
for sale in that state. Lord Abbett's management fee will be allocated to each
Series based on average daily net assets, and any expense reimbursement will be
credited to the Series whose expenses exceeded the limitation.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281, are
the independent auditors of the Fund and must be approved at least annually by
our Board of Directors to continue in such capacity. They perform audit services
for the Fund including the audit of financial statements included in our annual
report to shareholders.
Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York
10005, serves as the Fund's custodian.
4.
Portfolio Transactions
Our policy is to have purchases and sales of portfolio securities executed at
the most favorable prices, considering all costs of the transaction, including
brokerage commissions and dealer markups and markdowns, consistent with
obtaining best execution except to the extent we may pay a higher commission as
described below. This policy governs the selection of brokers or dealers and the
market in which the transaction is executed. To the extent permitted by law, we
may, if considered advantageous, make a purchase from or sale to another Lord
Abbett-sponsored fund without the intervention of any broker-dealer.
We expect that most purchases and sales of portfolio securities will be
principal transactions. Portfolio securities normally will be purchased directly
from the issuer or from an underwriter or marketmaker for the securities. We
usually will pay no brokerage commissions for such purchases. Purchases from
underwriters of portfolio securities will be at a fixed price which will include
fees paid to the underwriter, and purchases from dealers serving as marketmakers
will include a dealer's markup.
We select broker-dealers on the basis of their professional capability and the
value and quality of their brokerage and research services. Normally, the
selection is made by our traders, who are officers of the Fund and also
employees of Lord Abbett. Our traders do the trading as well for other accounts
- -- investment companies (of which they are also officers) and other clients --
managed by Lord Abbett. They are responsible for the negotiation of prices and
commissions.
<PAGE>
A broker may receive a commission for portfolio transactions exceeding the
amount another broker would have charged for the same transaction if Lord Abbett
determines that such amount of commission is reasonable in relation to the value
of the brokerage and research services performed by the executing broker viewed
either in terms of the particular transaction or its overall responsibilities
with respect to us and other accounts managed by Lord Abbett. Brokerage services
may include such factors as showing us trading opportunities including blocks,
willingness and ability to take positions in securities, knowledge of a
particular security or market, proven ability to handle a particular type of
trade, confidential treatment, promptness, reliability and quotation and pricing
services. Research may include the furnishing of analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. Such research may be used by Lord Abbett in
servicing all their accounts and not all of such research will necessarily be
used by Lord Abbett in connection with their services to us; conversely,
research furnished in connection with brokerage of other accounts managed by
Lord Abbett may be used in connection with their services to us and not all of
such research will necessarily be used by Lord Abbett in connection with their
services to such other accounts. We have been advised by Lord Abbett that,
although such research is often useful, no dollar value can be ascribed to it
nor can it be accurately ascribed or allocated to any account and it is not a
substitute for services provided by them to us; nor does it materially reduce or
otherwise affect the expenses incurred by Lord Abbett in the performance of such
services. We make no commitments regarding the allocation of brokerage business
to or among dealers.
If two or more broker-dealers are considered capable of offering the equivalent
likelihood of best execution, the broker-dealer who has sold our shares and/or
shares of other Lord Abbett-sponsored funds may be preferred.
If other clients of Lord Abbett buy or sell the same security at the same time
we do, transactions will, to the extent practicable, be allocated among all
participating accounts in proportion to the amount of each order and will be
executed daily until filled so that each account shares the average price and
commission cost of each day.
We will not seek "reciprocal" dealer business (for the purpose of applying
commissions in whole or in part for our benefit or otherwise) from dealers as
consideration for the direction to them of portfolio business.
During the fiscal years ending September 30, 1994, 1993 and 1992, we paid no
commissions to independent dealers.
5.
Purchases, Redemptions
and Shareholder Services
Information concerning how we value our shares for the purchase and redemption
or repurchase of our shares is contained in the Prospectus under "Purchases" and
"Redemptions" respectively.
As disclosed in the Prospectus, we calculate our net asset value and are
otherwise open for business on each day that the New York Stock Exchange
("NYSE") is open for trading. The NYSE is closed on Saturdays and Sundays and
the following holidays -- New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas.
Securities in our portfolio are valued at their market value as of the close of
the NYSE. Market value will be determined as follows: securities listed or
admitted to trading privileges on the New York or American Stock Exchange or on
the NASDAQ National Market System are valued at the last sales price, or, if
there is no sale on that day, at the mean between the last bid and asked prices,
or, in the case of bonds, in the over-the-counter market if, in the judgment of
the Funds's officers, that market more accurately reflects the market value of
the bonds. Over-the-counter securities not traded on the NADAQ National Market
System market are valued at he mean between the last bid and asked prices.
Securities for which market quotations are not available are valued at fair
market value under procedures approved by the Trustees.
Although our shares are continuously offered, we are under no obligation to
maintain the offering or its terms and the offering may be suspended, changed or
withdrawn. The sales agreements between Lord Abbett and independent securities
dealers provide that all orders are subject to acceptance in New York and that
the right is reserved to reject any order.
<PAGE>
The maximum offering prices of our shares on September 30, 1994 were computed as
follows:
<TABLE>
<CAPTION>
National New York Texas Connecticut
SERIES SERIES SERIES SERIES
------ -------- ------ ------------
<S> <C> <C> <C> <C>
Net asset value per
share (net assets
divided by shares
outstanding) $10.62 $10.54 $9.59 $9.71
Maximum offering
price per share
(net asset value
divided by .9525) $11.15 $11.07 $10.07 $10.19
Missouri Minnesota New Jersey Hawaii Washington
SERIES SERIES SERIES SERIES SERIES
-------- --------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Net asset value per
share (net assets
divided by shares
outstanding) $4.88 $4.762 $4.95 $4.72 $4.72
Maximum offering
price per share
(net asset value
divided by .9525) $5.12 $5.00 $5.20 $4.96 $4.96
</TABLE>
The Minnesota Series intends to commence operations on December 27, 1994. Net
asset value and maximum offering price per share are shown for this series
estimated as of such date.
The Fund has entered into a distribution agreement with Lord Abbett under which
Lord Abbett is obligated to use its best efforts to find purchasers for the
shares of the Fund, and to make reasonable efforts to sell Fund shares so long
as, in Lord Abbett's judgment, a substantial distribution can be obtained by
reasonable efforts.
For our last three fiscal years, Lord Abbett as our principal underwriter
received net commissions after allowance of a portion of the sales charge to
independent dealers as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
SEPT. 30, 1994 SEPT. 30, 1993 SEPT. 30, 1992
-------------- -------------- --------------
<S> <C> <C> <C>
Gross sale $9,325,629 $15,646,506 $18,902,867
Amount allowed
to dealers $8,113,864 13,527,446 16,657,963
Net Commissions received
by Lord Abbett $1,211,765 $ 2,119,060 $ 2,244,904
========== ============ ===========
</TABLE>
As described in the Prospectus, each Series has adopted a Distribution Plan and
Agreement (a "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended. With respect to the Washington and Minnesota Plan, as
described in the Prospectus, the Plan must reach a specific asset level before
becoming effective. In adopting a Plan for each Series and in approving its
continuance, the Board of Directors has concluded that, based on information
provided by Lord Abbett, there is a reasonable likelihood that each Plan will
benefit each Series and its shareholders. The expected benefits include greater
sales, lower redemptions of Series shares and a higher quality of service to
shareholders by dealers than otherwise would be the case. Lord Abbett is
required to use all amounts received under each Plan for payments to dealers for
(i) providing continuous services to the Series' shareholders, such as answering
shareholder inquiries, maintaining records and assisting shareholders in making
redemptions, transfers, additional purchases and exchanges and (ii) their
assistance in distributing shares of the Series.
The fees payable under the Plans are described in the Prospectus. For the fiscal
year ended September 30, 1994 fees paid to dealers were as follows: National
Series - $1,778,410; New York Series - $810,546; Texas Series - $284,625; New
Jersey Series - $401,469; Connecticut Series - $251,770; Missouri Series -
$299,677 and Hawaii Series - $230,344. Each Plan requires the Board of Directors
to review, on a quarterly basis, written reports of all amounts expended
pursuant to the Plan and the purposes for which such expenditures were made.
Each Plan shall continue in effect only if its continuance is specifically
approved at least annually by vote of the Board of Directors and of the
directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Plan or in any agreements
related to the Plan ("outside directors"), cast in person at a meeting called
for the purpose of voting on the Plan and Agreements. No Plan may be amended to
increase materially the amount spent for distribution expenses without approval
by a majority of the outstanding voting securities of the Plan's Series and the
approval of a majority of the directors, including a majority of the outside
directors. Each Plan may be terminated at any time by vote of a majority of the
outside directors or by vote of the holders of a majority of the outstanding
voting securities of that Plan's Series.
As stated in the Prospectus, a 1% "contingent deferred reimbursement charge"
("CDRC") will be imposed with respect to those shares (or shares in another Lord
Abbett fund or series acquired through exchange of such shares) on which a
Series has paid the one-time 1% 12b-1 sales distribution fee if such shares are
redeemed out of the Lord Abbett family of funds within a period 24 months from
the end of the month in which the original sale occurred. The CDRC will be
received by a Series and is intended to reimburse all or a portion of the amount
paid by a Series if the shares are redeemed before a Series has had an
opportunity to realize the anticipated benefits of having a large, long-term
account in a Series. Shares of a Fund or Series on which such 1% sales
distribution fee has been paid may not be exchanged into a fund or series with a
Rule 12b-1 Plan for which the payment provisions have not been in effect for at
least one year.
The other Lord Abbett-sponsored funds which participate in the Telephone
Exchange Privilege (except Lord Abbett U.S. Government Securities Money Market
Fund ("GSMMF"), as well as certain series of Lord Abbett Tax-Free Income Trust
and the Washington and Minnesota Series mentioned above whose plans has not yet
become effective collectively, the "Series") have instituted a CDRC on the same
terms and conditions. No CDRC will be charged on an exchange of shares between
Lord Abbett funds. Upon redemption out of the Lord Abbett family of funds the
CDRC will be charged on behalf of and paid to the Lord Abbett fund in which the
original purchase (subject to a CDRC) occurred. Thus, if shares of a Lord Abbett
fund are exchanged for shares of another such fund and the shares tendered
("Exchanged Shares") are subject to a CDRC, the CDRC will carry over to the
shares being acquired, including shares of each Series and GSMMF ("Acquired
Shares"). Any CDRC that is carried over to Acquired Shares is calculated as if
the holder of Acquired Shares had held those shares from the date on which he or
she became the holder of Exchanged Shares. Although GSMMF and the Series will
not pay a 1% sales distribution fee on $1 million purchases of their own shares
and, therefore, will not impose their own CDRC, they will collect the CDRC on
behalf of other Lord Abbett funds or series. Acquired shares held in GSMMF and
the Series which are subject to a CDRC will be credited with the time such
shares are held in that fund.
In no event will the amount of the CDRC exceed 1% of the lesser of (a) the net
asset value of the shares redeemed or (b) the original cost of such shares (or
if the Exchanged Shares for which such shares were acquired). No CDRC will be
imposed when the investor redeems (i) amounts derived from increases in the
value of the account above the total cost of shares being redeemed due to
increases in net asset value, (ii) shares with respect to which no Lord Abbett
fund paid a 1% sales distribution fee on issuance (including shares acquired
through reinvestment of dividend income and capital gains distributions) or
(iii) shares which, together with Exchanged Shares, have been held continuously
for 24 months from the end of the month in which the original sale occurred. In
determining whether a CDRC is payable, (a) shares not subject to a CDRC will be
deemed redeemed before shares subject to a CDRC and (b) shares subject to a CDRC
and held the longest will be deemed the first to be redeemed.
Under terms of a Statement of Intention to invest $100,000 or more over a
13-month period, as described in the Prospectus, shares of all Lord
Abbett-sponsored funds (other than shares of Lord Abbett Equity Fund ("LAEF"),
Lord Abbett Series Fund ("LASF"), Lord Abbett Research Fund ("LARF"), Lord
Abbett Counsel Group and GSMMF, unless holdings in GSMMF are attributable to
shares exchanged from a Lord Abbett-sponsored fund offered with a sales charge)
currently owned by you are credited as purchases (at their current offering
prices on the date the Statement is signed) toward achieving the stated
investment. Shares valued at 5% of the amount of intended purchases are escrowed
and may be redeemed to cover the additional sales charge payable if the
Statement is not completed. The Statement of Intention is neither a binding
obligation on you to buy, nor on the Fund to sell, the full amount indicated.
As stated in the Prospectus, purchasers (as defined in the Prospectus) may
accumulate their investment in Lord Abbett- sponsored funds (other than LAEF,
LARF, LASF, Lord Abbett Counsel Group and GSMMF, unless holdings in GSMMF are
attributable to shares exchanged from a Lord Abbett-sponsored fund offered with
a sales charge) so that a current investment, plus the purchaser's holdings
valued at the current maximum offering price, reach a level eligible for a
discounted sales charge.
As stated in the Prospectus, our shares may be purchased at net asset value by
our directors, employees of Lord Abbett, employees of our shareholder servicing
agent and employees of any securities dealer having a sales agreement with Lord
Abbett who consents to such purchases. For purposes of this paragraph, the terms
"directors" and " employees" include a director's or employee's spouse
(including the surviving spouse of a deceased director or employee). The terms
"directors" and "employees of Lord Abbett" also include other family members and
retired directors and employees.
Our shares also may be purchased at net asset value (a) at $1 million or more
(subsequent to the effective date of the Rule 12b-1 Plan for any such series),
(b) with dividends and distributions from other Lord Abbett-sponsored funds,
except for dividends and distributions on shares of LARF, LAEF, LASF and Lord
Abbett Counsel Group, (c) by certain authorized brokers, dealers, registered
investment advisers or other financial institutions who have entered into an
agreement with Lord Abbett in accordance with certain standards approved by Lord
Abbett, providing specifically for the use of our shares in particular
investment products made available for a fee to clients of such brokers,
dealers, registered investment advisers and other financial institutions, and
(d) by employees, partners and owners of unaffiliated consultants and advisors
to Lord Abbett or Lord Abbett-sponsored funds who consent to such purchase if
such persons provide service to Lord Abbett or such funds on a continuing basis
and are familiar with such funds. Shares are offered at net asset value to these
investors for the purpose of promoting goodwill with employees and others with
whom Lord Abbett and/or the Fund have business relationships.
Our shares may also be purchased, subject to appropriate documentation, through
a securities dealer where the amount invested represents redemption proceeds
from shares ("Redeemed Shares") of a registered open-ended management investment
company not distributed or managed by Lord Abbett (other than a money market
fund), if such redemption has occurred no more than 60 days prior to the
purchase of our shares, the Redeemed Shares were held for at least six months
prior to redemption and the proceeds of redemption were maintained in cash or a
money market fund prior to purchase. Lord Abbett may suspend, change, or
terminate this option at any time.
Our shares may be issued at net asset value in exchange for the assets, subject
to possible tax adjustment, of a personal holding company or and investment
company. There are economies of selling efforts and sales related expenses with
respect to offers to these investors and those referred to above.
Our shares also may be issued at net asset value plus the applicable sales
charge in exchange for securities for which market quotations are readily
available and which are desired for our portfolios and which have a market value
not less than the net asset value of our shares issued in exchange.
The Prospectus briefly describes the Telephone Exchange Privilege. You may
exchange some or all of your shares for those of Lord Abbett-sponsored funds
currently offered to the public with a sales charge and GSMMF, to the extent
offers and sales may be made in your state. You should read the prospectus of
the other fund before exchanging. In establishing a new account by exchange,
shares of the Fund being exchanged must have a value equal to at least the
minimum initial investment required for the fund into which the exchange is
made.
Shareholders in such other funds have the same right to exchange their shares
for the Fund's shares. Exchanges are base on relative net asset values on the
day instructions are received by the Fund in Kansas City if the instructions are
received prior to the close of the NYSE in proper form. No sales charges are
imposed except in the case of exchanges out of GSMMF (unless a sales charge was
paid on the initial investment). Exercise of the exchange privilege will be
treated as a sale for federal income tax purposes, and, depending on the
circumstances, a gain or loss may be recognized. In the case of an exchange of
shares that have been held for 90 days or less where no sales charge is payable
on the exchange, the original sales charge incurred with respect to the
exchanged shares will be taken into account in determining gain or loss on the
exchange only to the extent such charge exceeds the sales charge that would have
been payable on the acquired shares had they been acquired for cash rather than
by exchange. The portion of the original sales charge not so taken into account
will increase the basis of the acquired shares.
Shareholders have the exchange privilege unless they refuse it in writing. You
should not view the exchange privilege as a means for taking advantage of
short-term swings in the market, and we reserve the right to terminate or limit
the privilege of any shareholder who makes frequent exchanges. We can revoke or
modify the privilege for all shareholders upon 60 days' prior notice. Other Lord
Abbett-sponsored funds are eligible for the exchange privilege , except LASF
which offers its shares only in connection with certain variable annuity
contracts, LAEF which is not issuing shares, LARF and Lord Abbett Counsel Group
(together "Eligible Funds").
A redemption order is in proper form when it contains all of the information and
documentation required by the order form or supplementally by Lord Abbett or the
Fund to carry out the order. The signature(s) and any legal capacity of the
signer(s) must be guaranteed by any eligible guarantor. See the Prospectus for
expedited redemption procedures.
The right to redeem and receive payment, as described in the prospectus, may be
suspended if the NYSE is closed (except for weekends or customary holidays),
trading on the NYSE is restricted or the Securities and Exchange Commission
deems an emergency to exist.
Our Board of Directors may authorize redemption of all shares in any account in
which there are fewer than 25 shares. Before authorizing such redemption, the
Board must determine that it is in our economic best interest or necessary to
reduce disproportionately burdensome expenses in servicing shareholder accounts.
At least 60 days' prior written notice will be given before any such redemption,
during which time shareholders may avoid redemption by bringing their accounts
up to the minimum set by the Board.
Under the Div-Move service described in the Prospectus, you can invest the
dividends paid on your account into an existing account in any Eligible Fund.
The account must be either your account, a joint account for you or your spouse,
a single account for your spouse, or a custodial account for your minor child
under the age of 21. You should read the prospectus of the other fund before
investing.
The Invest-A-Matic method of investing in the Fund and/or any other Lord
Abbett-sponsored fund is described in the Prospectus. To avail yourself of this
method, you must complete the Fund portion of the form, selecting the time and
amount of your bank checking account withdrawals and the Lord Abbett funds for
investment, include a voided, unsigned check and complete the bank
authorization.
The Systematic Withdrawal Plan also is described in the Prospectus. You may
establish a systematic withdrawal plan if you own or purchase uncertificated
shares having a current offering price value of at least $10,000. The Plan
involves the planned redemption of shares on a systematic basis by receiving
either fixed or variable amounts at periodic intervals. Since the value of
shares redeemed may be more or less than their cost, gain or loss may have to be
recognized for income tax purposes on each periodic payment. Normally, you may
not make regular investments at the same time you are receiving systematic
withdrawal payments because it is not in your interest to pay a sales charge on
new investments when in effect a portion of that new investment is soon
withdrawn. The minimum investment accepted while a withdrawal plan is in effect
is $1,000. The systematic withdrawal plan may be terminated by you or by us at
any time by written notice.
6.
Taxes
Each Series will be treated as a separate entity for federal income tax
purposes. As a result, the status of each Series as a regulated investment
company is determined separately by the Internal Revenue Service.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of the Fund may not be deductible, in whole or in part, for federal, or for
state or personal income tax purposes. Pursuant to published guidelines, the
Internal Revenue Service may deem indebtedness to have been incurred for the
purpose of acquiring or carrying shares of the Fund even though the borrowed
funds may not be directly traceable to the purchase of shares.
Our shares may not be an appropriate investment for "substantial users" of
facilities financed by industrial development bonds or persons related to such
"substantial users." Such persons should consult their tax advisers before
investing in shares of the Fund.
<PAGE>
Certain financial institutions, like other taxpayers, may be denied a federal
income tax deduction for the amount of interest expense allocable to an
investment in the Fund and the deduction for loss reserves available to property
and casualty insurance companies may be reduced by a specified percentage as a
result of their investment in the Fund. Shareholders will not be allowed to
recognize for tax purposes any loss realized on the redemption or repurchase of
Fund shares which they have held for six months or less to the extent of any
tax-exempt distributions received on the shares.
The value of any shares redeemed by the Fund or repurchased or otherwise sold
may be more or less than your tax basis at the time the redemption, repurchase
or sale is made. Any gain or loss generally will be taxable for federal income
tax purposes. Any loss realized on the sale, redemption or repurchase of Fund
shares held for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any capital gains distribution received
with respect to such shares. Moreover, shareholders will not be allowed to
recognize for tax purposes any capital loss realized on the redemption or
repurchase of Fund shares which they have held for six months or less to the
extent of any tax-exempt distributions received on the shares. Losses on the
sale of stock or securities are not deductible if, within a period beginning 30
days before the date of the sale and ending 30 days after the date of the sale,
the taxpayer acquires stock or securities that are substantially identical.
Each Series will be subject to a 4% nondeductible excise tax on certain amounts
not distributed (and not treated as having been distributed) on a timely basis
in accordance with a calendar year distribution requirement. The Fund intends to
distribute to shareholders each year an amount adequate to avoid the imposition
of such excise taxes.
Limitations imposed by the Internal Revenue Code of 1986, as amended, on
regulated investment companies may restrict the Fund's ability to engage in the
options and financial futures transactions discussed above or in other
investment techniques and practices. Moreover, in order to continue to qualify
as a regulated investment company for federal income tax purposes, each Series
may be required in some circumstances to defer closing out options or futures
contracts that might otherwise be desirable to close out. State law may restrict
a Series' ability to engage in the options and financial futures transactions
discussed above. A current interpretation of New Jersey law issued by the New
Jersey Department of the Treasury would preclude the New Jersey Series from
engaging in some or all of the options and financial futures transactions
discussed above. Each Series may engage in such transactions to the extent they
currently are or become permissible under applicable state law.
Except as discussed in the Prospectus, the receipt of dividends from the Series
may be subject to tax under laws of state or local tax authorities. You should
consult your tax adviser on state and local tax matters.
7.
Risk Factors Regarding Investments
in Connecticut, Hawaii, Minnesota, Missouri, New Jersey, New York,
Texas, Washington and Puerto Rico Municipal Bonds
The following information is a summary of special factors affecting the states
and territory indicated. It does not purport to be complete or current and is
based upon information and judgments derived from public documents relating to
such states and territory and other sources. The Fund has not verified any of
this data.
CONNECTICUT BONDS
- -----------------
Connecticut is a mature and highly developed State located in proximity to
significant centers of consumer and industrial activity. During the 1980s and
until 1993, unemployment rates generally have stayed at or below the national
figures. Personal income has exceeded regional and national levels. However,
while the State has a high level of personal income, large gaps exist between
the low figure for its largest cities and the remainder of the State.
Connecticut's economy is diverse, with manufacturing, services and trade
accounting for approximately 70% of total nonagricultural employment.
Manufacturing employment has been on a downward trend since 1984 while non-
manufacturing employment has risen significantly. Rapid relative growth in the
non-manufacturing sector as compared to the manufacturing sector is a trend that
is in evidence nationwide and reflects the increased importance of the service
industry. From 1970 to 1993, manufacturing employment in the State declined
33.5%, while non-manufacturing employment rose 63.3%, particularly in the
services, trade and finance sectors, resulting in an increase of 27.6% in total
growth in non-agricultural establishment sectors. The State's manufacturing
sector is diversified, with transportation equipment (primarily aircraft
engines, helicopters and submarines) the dominant industry, followed by
non-electrical machinery, fabricated metal products and electrical machinery.
Because of the important role of defense-related businesses in the State,
changes in military appropriations enacted by the United States Congress will
disproportionately affect the State's economy.
Connecticut has no constitutional or other organic limit on its power to issue
obligations or incur indebtedness other than that it may only borrow for public
purposes. In 1991, legislation was enacted providing that no indebtedness
payable from General Fund tax receipts of the State shall be authorized by the
General Assembly, except as shall not cause the aggregate amount of (1) the
total amount of indebtedness payable from General Fund tax receipts authorized
by the General Assembly but which have not been issued and (2) the total amount
of such indebtedness which has been issued and remains outstanding (with certain
exceptions), to exceed 1.6 times the total estimated General Fund tax receipts
of the State for the fiscal year in which any such authorization will become
effective, as estimated for such fiscal year by the joint standing committee of
the General Assembly having cognizance of finance, revenue and bonding.
During the period from 1989 through 1993, the State's gross direct debt and net
direct debt more than doubled. In addition, the State has a significant amount
of authorized but unissued direct general obligation indebtedness and has
limited or contingent liability on substantial additional amounts. Operating
deficits aggregating approximately $1,068 million were incurred in the fiscal
years ended June 30, 1990 and 1991, which were financed primarily by Economic
Recovery Notes. Operating surpluses aggregating approximately $223 million were
incurred in the fiscal years ended June 30, 1992 and 1993. These surpluses have
been used for debt services, including retirement of Economic Recovery Notes.
On November 3, 1992, Connecticut voters approved a constitutional amendment
which requires a balanced budget for each year and imposes a cap on the growth
of expenditures. The General Assembly is required by the constitutional
amendment to adopt by three-fifths vote certain spending cap definitions, which
has not yet occurred. Accordingly, the 1994-95 budget complies with the current
statutory spending cap definitions enacted in 1991. The statutory spending cap
limits the growth of expenditures to either (1) the average of the annual
increase in personal income in the State for each of the preceding five years or
(2) the increase in the consumer price index for urban consumers during the
preceding twelve-month period, whichever is greater. Expenditures for the
payment of bonds, notes and other evidences of indebtedness are excluded from
the constitutional and statutory definitions of general budget expenditures.
Several tax reduction measures were adopted during the 1993 legislative session.
HAWAII BONDS
- ------------
The Constitution of the State of Hawaii empowers the issuance of four types of
bonds. They are:
1. General obligation bonds (all bonds for the payment of the principal
and interest for which the full faith and credit of the State or a political
subdivision are pledged and, unless otherwise indicated, including reimbursable
general obligation bonds);
2. Bonds issued under special improvements statutes;
3. Revenue bonds (all bonds payable from revenues, or user taxes, or any
combination of both, of a public undertaking, improvement, system or loan
program); and
4. Special purpose revenue bonds (all bonds payable from rental or
other payments made or any issuer by a person pursuant to contract). Such bonds
shall only be authorized or issued to finance manufacturing, processing or
industrial enterprise facilities, utilities serving the general public, health
care facilities provided to the general public by not-for-profit corporations or
low and moderate income governmental housing programs.
<PAGE>
All bonds other than special purpose revenue bonds may be authorized by a
majority vote of the members of each House of the Hawaii Legislature. Special
purpose revenue bonds may be authorized by two-thirds vote of the members of
each House of the Hawaii Legislature.
The Hawaii Constitution contains a limitation on issuance of State general
obligation bonds which is the amount of bonds outstanding that would cause the
debt service (principal and interest) payable on such bonds (either the higher
of the current or projected debt service), to exceed 18 1/2% of the average of
the general fund revenues of Hawaii in the three fiscal years immediately
preceding such issuance (general fund revenue excludes grants from the federal
government and receipts in reimbursement of any indebtedness excluded in
computing the total State debt). This limitation on the power of the State to
incur indebtedness applies only to the issuance of general obligation bonds, is
computed at the time of issuance and includes only issued, outstanding and
proposed to be issued general obligation bonds.
GENERAL INFORMATION. Through 1992, total personal income in Hawaii has continued
- -------------------
to grow, as has per capita personal income although the rate of growth for both
has slowed in recent years. Unemployment, although increased, remains low
compared to the national average. In general, the State's economy has remained
stable with increases in retail sales but decreases in diversified agriculture,
construction and tourism. Hurricane Iniki passed directly over the island of
Kauai on September 11, 1992, causing damage estimated at over $1.7 billion.
Through mid-1993 the State had not experienced any materially adverse economic
or financial impact as a result of the hurricane, but could not make any
predictions as to what the ultimate economic and financial impact may be.
MINNESOTA BONDS
- ---------------
Diversity and a significant natural resource base are two important
characteristics of Minnesota's economy. When viewed in 1993 at a highly
aggregative level of detail, the structure of the State's economy parallels the
structure of the United States economy as a whole. State employment in 10 major
sectors was distributed in approximately the same proportions as national
employment. Some unique characteristics in the State's economy were apparent in
employment concentrations in industries that comprise the durable goods
manufacturing categories. In the durable goods industries, the State's
employment in 1993 was highly concentrated in the industrial machinery,
fabricated metals, instrument and miscellaneous categories. Of particular
importance is the industrial machinery category in which 32.6% of the State's
durable goods employment was concentrated in 1993, as compared to 18.9% for the
United States as a whole. The emphasis is partly explained by the location in
the state of Ceridian, Unisys, IBM, Cray Research, and other computer equipment
manufacturers which are included in the machinery classification.
The importance of the State's rich resource base for overall employment is
apparent in the employment mix in the non-durable goods industries. In 1993,
29.4% of the State's non-durable goods employment was concentrated in food and
kindred industries, and 19.1% in paper and allied industries. This compares to
21.4% and 8.8%, respectively for comparable sectors in the national economy.
Both of these rely heavily on renewable resources in the State. Over half of the
State's acreage is devoted to agricultural purposes, and nearly one-third to
forestry. Printing and publishing is also relatively more important in the State
than in the U.S.
The State's per capita income, which is computed by dividing personal income by
total resident population, has generally remained above the national average in
spite of early 1980's recessions and some difficult years in agriculture. In
1992, Minnesota per capita personal income was 101.0% of its U.S. counterpart.
During 1992 and 1993, the State's monthly unemployment rate was generally less
than the national unemployment rate, averaging 5.1% in 1993, as compared to the
national average of 7.4%.
The Minnesota Constitution authorizes public debt to be incurred (i) for the
acquisition and betterment of public land, buildings, and other improvements of
a capital nature or appropriation or loans to State agencies or political
subdivisions for such purposes and (ii) to finance the development of
agricultural resources of the State by extending credit on real estate security.
All such debt must be evidenced by the issuance of State bonds maturing within
20 years of their date of issue, for which the full faith and credit and taxing
powers of the State are irrevocably pledged. The Constitution places no
limitation on the amount which may be authorized for these purposes. As of April
1, 1994, the outstanding principal amount of general obligation bonds of the
State was $1.768 billion.
The University of Minnesota, established as a separate entity by the Minnesota
Constitution, and various State agencies or instrumentalities established by the
Legislature, are authorized by law to issue various forms of obligations. These
obligations may be supported by the full faith and credit of the University and
the other issuers, or by various revenue pledges, or both. However, such
obligations are not debts of the State and the State is not required to provide
monies for their repayment. As of April 1, 1994, such issuers (and principal
amount of obligations outstanding) include: Minnesota Housing Finance Agency
($1.837 billion), University of Minnesota ($317 million), Minnesota Higher
Education Coordinating Board ($91 million), Minnesota State University Board
($67 million), Minnesota Higher Education Facilities Authority ($221 million),
and Minnesota Public Facilities Authority ($235 million).
MISSOURI BONDS
- --------------
Article X, Sections 16-24 of the Constitution of Missouri (the "Tax Limitation
Amendment"), imposes limitations on the amount of State taxes which may be
collected by the State of Missouri in any fiscal year. The limit is tied to
total State revenues for fiscal year 1980-81, as defined in the Tax Limitation
Amendment, adjusted annually, in accordance with the formula set forth in the
Amendment, which adjusts the limit based on increases in the average personal
income of Missouri for certain designated periods. The details of the Amendment
are complex and clarification from subsequent legislation and further judicial
decisions may be necessary. If total State revenues exceed the State revenue
limit by more than one percent, the State is required to refund the excess. The
revenue limit can only be exceeded if the General Assembly approves by a
two-thirds vote of each House an emergency declaration by the Governor.
To the extent that the payment of general obligation bonds issued by the State
of Missouri or a unit of local government in the Series' portfolio is dependent
on revenues from the levy of taxes and such obligations have been issued
subsequent to the date of the Tax Limitation Amendment's adoption, November 4,
1980, the ability of the State of Missouri or the appropriate local unit to levy
sufficient taxes to pay the debt service on such bonds may be affected.
Debt obligations of certain State and local agencies and authorities are not, by
the terms of their respective authorizing statutes, obligations of the State or
any political subdivision, public instrumentality or authority, county,
municipality or other state or local unit of government. The debt obligations of
such issuers are payable only from the revenues generated by the project or
program financed from the proceeds of the debt obligations they issue.
Missouri has a diverse economy with a distribution of earnings and employment
among manufacturing, trade, service and other sectors closely approximating the
average national distribution. Since 1980, Missouri unemployment levels
generally have approximated, and at times have been higher than, the national
average.
The Missouri portions of the St. Louis and Kansas City metropolitan areas
together contain a significant portion of Missouri's population. Economic
reversals in either of these two areas would have a major impact on the overall
economic condition of the State of Missouri. Additionally, the State of Missouri
has a significant agricultural sector which may experience problems comparable
to those which are occurring in other states. To the extent that any such
problems intensify, there could possibly be an adverse impact on the overall
economic condition of the State.
Defense-related business plays an important role in Missouri's economy. In
addition to the large number of civilians employed at the various military
installations and training bases in the State, aircraft and related businesses
in Missouri are the recipients of substantial annual dollar volumes of defense
contract awards. Since 1980, Missouri's rank among the top states in total
military contract awards has been significantly higher than its population
ranking. Recent changes in the levels of military appropriations may
significantly affect McDonnell Douglas Corporation, the State's largest
employer. To the extent that changes in military appropriations are enacted by
the United States Congress, Missouri could be disproportionately affected.
NEW JERSEY BONDS
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New Jersey's economic base is diversified, consisting of a variety of
manufacturing construction and service industries, supplemented by selective
commercial agriculture. After a period of strong growth in the mid-1980s, New
Jersey as well as the rest of the Northeast slipped into a slow-down well before
the onset of the national recession which officially began in July 1990. The
onset of recession caused an acceleration of New Jersey's job losses in
construction and manufacturing, as well as an employment downturn in such
previously growing sectors as wholesale trade, retail trade, finance, utilities,
trucking and warehousing. The net effect was a decline in the State's total
nonfarm wage and salary employment from a peak of 3,706,400 in March 1989 to a
low of 3,445,000 in March 1992. This loss has been followed by an employment
gain of 118,700 from March 1992 to September 1994.
Evidence of the State's improving economy can be found in increased homebuilding
and other areas of construction activity, rising consumer spending for new cars
and light trucks, substantial new job creation and the decline in the
unemployment rate.
The New Jersey Constitution provides, in part, that no money shall be drawn from
the State treasury except for appropriations made by law and that no law
appropriating money for any State purpose shall be enacted if the appropriations
contained therein, together with all prior appropriations made for the same
fiscal period, shall exceed the total amount of the revenue on hand and
anticipated to be available to meet such appropriations during such fiscal
period, as certified by the Governor.
New Jersey's Local Budget Law imposes specific budgetary procedures upon
counties and municipalities ("local units"). Every local unit must adopt an
operating budget which is balanced on a cash basis, and items of revenue and
appropriation must be examined by the Director of the Division of Local
Government Services in the State Department of Community Affairs (the
"Director").
The Local Government Cap Law (the "Cap Law") generally limits the year-to-year
increase of the total appropriations of any municipality and the tax levy of any
county to either five percent or an index rate determined annually by the
Director, whichever is less. However, where the index percentage rate exceeds
five percent, the Cap Law permits the governing body of any municipality or
county to approve the use of a higher percentage rate up to the index rate.
Further, where the index percentage rate is less than five percent, the Cap Law
also permits the governing body of any municipality or county to approve the use
of a higher percentage rate up to five percent. Regardless of the rate utilized,
certain exceptions exist to the Cap Law's limitation on increases in
appropriations. The principal exceptions to this limitation are municipal and
county appropriations to pay debt service requirements; to comply with certain
other State or federal mandates; amounts approved by referendum; and, in the
case of municipalities only, to fund the preceding year's cash deficit or to
reserve for shortfalls in tax collections.
State law also regulates the issuance of debt by local units. The Local Budget
Law limits the amount of tax anticipation notes that may be issued by local
units and requires the repayment of such notes within 120 days of the end of the
fiscal year (six months in the case of the counties) in which issued. With
certain exceptions, no local unit is permitted to issue bonds for the payment of
current expenses. Local units may not issue bonds to pay outstanding bonds,
except for refunding purposes, and then only with the approval of the Local
Finance Board. Local units may issue bond anticipation notes for temporary
periods not exceeding in the aggregate approximately ten years from the date of
first issue. The debt that any local unit may authorize is limited to a
percentage of its equalized valuation basis, which is the average of the
equalized value of all taxable real property and improvements within the
geographic boundaries of the local unit, as annually determined by the Director
of the Division of Taxation, for each of the three most recent years.
NEW YORK BONDS
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Circumstances adversely affecting the State's credit rating may directly or
indirectly affect the market value of bonds issued by the State's political
subdivisions and its Authorities to the extent that those entities depend, or
are perceived to depend, upon State financial assistance. Conversely, the fiscal
stability of the State is related to the fiscal stability of New York City and
of the Authorities. The State's experience has been that if New York City or any
of the Authorities suffers serious financial difficulty, the ability of the
State, New York City, the State's political subdivisions and the Authorities to
obtain financing in the public credit markets is adversely affected. This
results, in part, from the expectation that to the extent that any Authority or
local government experiences financial difficulty, it will seek and receive
State financial assistance. Moreover, New York City accounts for a substantial
portion of the State's population and tax receipts, so New York City's financial
integrity affects the State directly. Accordingly, if there should be a default
by New York City or any of the Authorities, the market value and marketability
of all New York State tax-exempt bonds could be adversely affected. This would
have an adverse effect on the net asset value and liquidity of the Series, even
though securities of the defaulting entity may not be held by the Series.
<PAGE>
NEW YORK STATE. New York State has experienced a slowdown in the regional and
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State economy in recent years and a severe economic downturn during the national
recession that commenced in mid-1990. The State economy remained in recession
until 1993, when employment growth resumed. Employment growth has been hindered
in recent years by cutbacks in the computer and instrument manufacturing,
utility and defense industries. The State completed its 1992-93 fiscal year with
a balance of $671 million in the tax refund reserve account, and $67 million in
the Tax Stabilization Reserve Fund.
The 1994-95 State Financial Plan, which is based upon the enacted State budget,
projects a balanced General Fund. However, in the September 1994 GAAP-basis
update, the Division of the Budget projected a General fund operating deficit of
$690 million for the 1994-95 fiscal year. However, there can be no assurance
that the State's projections for tax and other receipts for the 1994-95 fiscal
year are not overstated and will not be revised downward, or that disbursements
will not be in excess of the amounts projected. In addition, projections of
State disbursements for future fiscal years may be affected by uncertain factors
relating to the economy of the Nation and the State and the financial condition
of the Authorities, New York City and other localities. In the event that these
factors affect, or are perceived to affect, the State's ability to meet its
financial obligations, the market value and marketability of its bonds also may
be adversely affected.
AUTHORITIES. New York State's Authorities generally are responsible for
- -----------
financing, constructing and operating revenue-producing public benefit
facilities. As of September 30, 1993, there were outstanding approximately $63.5
billion aggregate principal amount of bonds and bond anticipation notes issued
by 18 Authorities which either were guaranteed by the State or supported by the
State through lease-purchase or contractual-obligation financing arrangements or
through moral obligation provisions. While principal and interest payments on
outstanding Authority obligations normally are paid from revenues generated by
projects of the Authorities, in the past the State has had to appropriate large
amounts to enable certain Authorities (in particular, the New York State Urban
Development Corporation and the New York State Housing Finance Agency) to meet
their financial obligations. Further assistance to these Authorities may be
required in the future.
The Metropolitan Transportation Authority (the "MTA") oversees the operation of
New York City's bus and subway systems by its affiliates, the New York City
Transit Authority and the Manhattan and Bronx Surface Transit Operating
Authority (collectively, the "TA") and, through subsidiaries, operates certain
commuter rail and bus lines and a rapid transit line on Staten Island. Through
its affiliated agency, the Triborough Bridge and Tunnel Authority (the "TBTA"),
the MTA operates certain intrastate toll bridges and tunnels. The MTA has
depended and will continue to depend upon Federal, State, local government and
TBTA support to operate the mass transit portion of these operations because
fare revenues are insufficient. For the 1994-1995 State fiscal year, total State
assistance to the MTA is estimated at approximately $1.3 billion.
In 1993, State legislation authorized the funding of a $9.56 billion MTA capital
plan for the five-year period, 1992 through 1996 (the "1992-96 Capital
Program"). This is the third five-year plan since the Legislature authorized
procedures for the adoption, approval and amendment of a five year plan in 1981
for a capital program designed to upgrade the performance of the MTA's
transportation systems and to supplement, replace and rehabilitate facilities
and equipment. The MTA, the TBTA and the TA are collectively authorized to issue
an aggregate of $3.1 billion of bonds (net of certain statutory exclusions) to
finance a portion of the 1992-96 Capital Program. The 1992-96 Capital Program is
expected to be financed in significant part through dedication of State
petroleum business taxes.
There can be no assurance that all necessary governmental actions for the
Capital Program will be taken, that funding sources currently identified will
not be decreased or eliminated, or that the 1992-96 Capital Program, or parts
thereof, will not be delayed or reduced. Furthermore, the power of the MTA to
issue certain bonds expected to be supported by the appropriation of State
petroleum business taxes is currently the subject of a court challenge. If the
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional State assistance.
THE CITY OF NEW YORK. The fiscal health of the State is closely related to the
- --------------------
fiscal health of its localities, particularly the City of New York (the "City"),
which has required and continues to require significant financial assistance
from the State.
<PAGE>
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among these actions,
the State created the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for the City of New York (the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs. The State also established the Office of the State Deputy Comptroller
for New York City ("OSDC") in the Office of the State Comptroller to assist the
Control Board in exercising its powers and responsibilities.
The City operates under a four-year Financial Plan which is prepared annually
and is periodically updated. In 1986, the Control Board's powers of approval
over the City's Financial Plan were suspended when certain statutory conditions
were met. However, the Control Board, MAC and OSDC continue to exercise various
monitoring functions relating to the City's financial position and upon the
occurrence of certain events, including, but not limited to, a City operating
budget deficit of more than $100 million, the Control Board is required by law
to impose a Control Period. The City submits its financial plans as well as
periodic updates to the Control Board for its review.
The City requires significant amounts of financing for seasonal and capital
purposes. The City issued $1.75 billion of notes for seasonal financing purposes
during its fiscal year ending June 30, 1994. The City's capital financing
program projects long-term financing requirements of approximately $17 billion
for the City's fiscal years 1995 through 1998. The major capital requirements
include expenditures for the City's water supply and sewage disposal systems,
roads, bridges, mass transit, schools, hospitals and housing.
The City achieved balanced operating results for the 1994 fiscal year.
On October 25, 1994, the City published the Financial Plan for the 1995-1998
fiscal years, which is a proposed modification to a Financial Plan submitted to
the Control Board on July 8, 1994 and which relates to the City, the Board of
Education and the City University of New York.
The City's July 8, 1994 Financial Plan set forth proposed actions for the 1995
fiscal year to close a previously projected gap of approximately $2.3 billion
for the 1995 fiscal year.
The 1995-1998 Financial Plan published on October 25, 1994 reflects actual
receipts and expenditures and changes in forecast revenues and expenditures
since the July Financial Plan and projects revenues and expenditures for the
1995 fiscal year balanced in accordance with GAAP. For the 1995 fiscal year, the
Financial Plan includes actions to offset an additional potential $1.1 billion
budget gap, resulting in part from a $104 million decrease in the $171 million
projected surplus from the 1994 fiscal year to be transferred to the 1995 fiscal
year.
The gap closing measures for the 1995 fiscal year include additional proposed
agency actions aggregating $851 million, which , together with the $1.1 billion
of agency actions proposed in the July Financial Plan, are substantial and may
be difficult to implement.
The Financial Plan also sets forth projections for the 1996 through 1998 fiscal
years and outlines a proposed gap-closing program to close projected gaps of
$1.0 billion, $1.5 billion and $2.0 billion for the 1996 through 1998 fiscal
years, respectively, after successful implementation of the $1.1 billion
gap-closing program for the 1995 fiscal year.
The City's capital plan for fiscal years 1995 through 1998 contemplates the
issuance of $11.3 billion of general obligation bonds to make capital
investments.
The City's financial plans have been the subject of extensive public comment and
criticism. On October 14, 1994, the City Comptroller issued a report concluding
that the budget gap for the 1995 fiscal year had increased to $1.4 billion, due,
in part, to continuing shortfalls in tax revenues. The City Council and the
Mayor currently disagree as to the steps to take to close the budget gap and the
disagreement is now a subject of litigation.
Although the City has balanced its budget since 1981, estimates of the City's
revenues and expenditures are based on numerous assumptions and are subject to
various uncertainties. If expected Federal or State aid is not forthcoming, if
unforeseen developments in the economy significantly reduce revenues derived
from economically sensitive taxes or necessitate increased expenditures for
public assistance, if the City should negotiate wage increases for its employees
greater than the amounts provided for in the City's Financial Plan or if other
uncertainties materialize that reduce expected revenues or increase projected
expenditures, then, to avoid operating deficits, the City may be required to
implement additional actions, including increases in taxes and reductions in
essential City services. The City also might seek additional assistance from the
State.
OTHER LOCALITIES. Certain localities in addition to the City could have
- -----------------
financial problems leading to requests for additional State assistance during
the State's 1994-95 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1994-95 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted in
the creation of the Financial Control Board of the City of Yonkers (the "Yonkers
Board") by the State in 1984. The Yonkers Board is charged with overseeing
fiscal affairs of Yonkers. Future actions taken by the Governor or the State
Legislature to assist Yonkers could result in allocation of State resources in
amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowing. In 1992, the total indebtedness of all localities in the
State other than the City was approximately $15.7 billion; a small portion
(approximately $71.6 million) of this indebtedness represented borrowing to
finance budgetary deficits and was issued pursuant to enabling State
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than the City authorized by State law to finance deficits during the period that
such deficit financing is outstanding. Seventeen localities had outstanding
indebtedness for deficit financing at the close of their fiscal years ending
1992.
From time to time, proposed Federal expenditure reductions would reduce, or in
some cases eliminate, Federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the Authorities were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. The longer range problems of declining
city populations, increasing expenditures, and other economic trends could
adversely affect localities and require increasing State assistance in the
future.
LITIGATION. Certain litigation pending or determined against the State or its
- ----------
officers or employees could have a substantial or long-term adverse effect on
State finances. Among the more significant of these cases are those that
involve: challenges to the State's finance policies, claims challenging
different aspects of the State's social welfare programs, claims of racial
segregation, real property claims, contract and tort claims, and challenges to
funding methods of various retirement systems. In its audited financial
statements for 1992-93 the State estimated its liability for awarded and
anticipated unfavorable judgments at $721 million.
PUERTO RICO BONDS
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The economy of Puerto Rico is dominated by the manufacturing and service
sectors. The manufacturing sector has experienced a basic change over the years
as a result of increased emphasis on higher wage, high technology industries
such as pharmaceuticals, electronics, computers, microprocessors, professional
and scientific instruments and certain high technology machinery and equipment.
Much of the development of the manufacturing sector in Puerto Rico can be
attributed to various federal and Commonwealth tax incentives, most notably
Section 936 of the Internal Revenue Code and the Commonwealth's Industrial
Incentives Program. The service sector, including finance, insurance and real
estate, also plays a major role in the economy. The service sector ranks second
only to manufacturing in contribution to the gross domestic product and leads
all sectors in providing employment. In recent years, the service sector has
experienced significant growth in response to the expansion of the manufacturing
sector.
Puerto Rico's economy is closely integrated with that of mainland United States.
During fiscal 1993, approximately 86% of Puerto Rico's exports were to the
United States mainland, which also was the source of approximately 69% of Puerto
Rico's imports. In fiscal 1993, Puerto Rico experienced a $2.5 billion positive
adjusted merchandise trade balance.
<PAGE>
Puerto Rico's decade-long economic expansion continued throughout the five-year
period from fiscal 1989 through fiscal 1993, and affected almost every sector of
its economy and resulted in record levels of employment (although Puerto Rico's
unemployment rate has chronically exceeded the average for the United States).
Factors behind this expansion included Commonwealth-sponsored economic
development programs, the relatively stable prices of oil imports, periodic
declines in the exchange value of the United States dollar and the relatively
low cost of borrowing during the period.
Growth in fiscal 1994 and 1995 will depend on several factors, including the
state of the United States economy and relative stability of the price of oil
imports, the exchange value of the U.S. dollar and the cost of borrowing.
The Constitution of Puerto Rico provides that public debt of the Commonwealth
will constitute a first claim on available Commonwealth revenues. Public debt
includes general obligation bonds and notes of the Commonwealth and any payments
required to be made by the Commonwealth under its guarantees of bonds and notes
issued by its public instrumentalities.
The Constitution of Puerto Rico also provides that direct obligations of the
Commonwealth evidenced by full faith and credit bonds or notes shall not be
issued if the amount of the principal of and interest on such bonds and notes
and on all such bonds and notes theretofore issued which is payable in any
fiscal year, together with any amount paid by the Commonwealth in the preceding
fiscal year on account of bonds or notes guaranteed by the Commonwealth, exceeds
15% of the average annual revenues raised under the provisions of Commonwealth
legislation and covered into the Treasury of Puerto Rico in the two fiscal years
preceding the then current fiscal year.
With the approval of the North American Free Trade Agreement by the United
States congress which is intended to eliminate certain restrictions on trade
between Canada, the United States and Mexico, certain of Puerto Rico's
industries, including those that are lower salaried and labor intensive, may
face increased competition from Mexico. However, Puerto Rico's favorable
investment environment, skilled work force, infrastructure development and tax
structure (especially Section 936) would tend to create expanded trade
opportunities for Puerto Rico in sectors such as pharmaceuticals and
high-technology manufacturing.
TEXAS BONDS
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The economy of Texas recovered from the recession that began in the mid-1980s
after a collapse in oil prices and although the State's economy was slowed by
the Nation's 1990-91 recession, the State Comptroller has predicted that the
overall State economy will slightly outpace national economic growth in the long
term. In 1981, drilling, production, refining, chemicals and energy-related
manufacturing accounted for 25% of the State's total output of goods and
services. By late 1993, these businesses accounted for 12% of the State's
economy. The service-producing sectors (which include transportation, public
utilities, finance, insurance, real estate, trade, services and government) are
the major sources of job growth in Texas.
During the 1993 regular legislative session, the State legislature passed a
1994-95 biennial all funds budget of approximately $70.1 billion without
increasing State taxes. This was accomplished by incorporating savings proposals
contained in the Governor's report, Working for Texas, the State Comptroller's
report, Against the Grain (approximately $3.8 billion in savings), cutting
spending in certain areas, and increasing Federal funding. The State also
anticipates receiving a record $19.8 billion in Federal funds, an increase of $4
billion over the 1992-93 budget level.
Due to the State's expansion in Medicaid spending and other Health and Human
Services programs requiring federal matching revenues, federal receipts became
the State's main revenue source, accounting for approximately 29.2% of State
revenues during fiscal year 1993. Sales taxes which had been the main source of
revenue for the previous 12 years, dropped to second, accounting for
approximately 27.0 of total revenues during fiscal year 1993. The remainder of
the State's revenues are derived primarily from interest and investment income,
licenses, fees and permits, the motor fuels tax and other excise taxes. The
State has no personal or corporate income tax, although the State does impose a
corporate franchise tax based on the amount of a corporation's capital and
"earned surplus", which includes corporate net income and officers' and
directors' compensation.
The State Constitution prohibits the State from levying AD VALOREM taxes on
property for general revenue purposes.
<PAGE>
The State Constitution also limits the rate of growth of appropriations from tax
revenues not dedicated by the Constitution during any biennium to the estimated
rate of growth for the State's economy. The Legislature may avoid the
constitutional limitation if it finds, by a majority vote of both Houses, that
an emergency exists. The State Constitution authorizes the Legislature to
provide by law for the implementation of this restriction, and the Legislature,
pursuant to such authorization, has defined the estimated rate of growth in the
State's economy to mean the estimated increase in State personal income.
WASHINGTON BONDS
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The economic base of the State of Washington includes manufacturing and services
industries as well as agriculture and timber production. A review of employment
within various segments of the economy indicates that recent growth in the
State's economy has been broadly based. Between 1987 and 1992, employment within
the State experienced growth in manufacturing as well as non-manufacturing
industries. Sectors of the State's employment base in which growth has exceeded
comparable figures reported for the United States include durable and
non-durable goods manufacturing, services and government.
The State's leading export industries are aerospace, forest products,
agriculture and food processing. On a combined basis, the aerospace, timber and
food processing industries employ about 9% of the State's non-farm workers. In
recent years, the non-manufacturing sector has played an increasingly
significant role in contributing to the State's economy.
The State's manufacturing base consists primarily of aircraft manufacture, which
comprised approximately 45% of total manufacturing in 1992. The aerospace
industry currently represents approximately 8% of all taxable business income
generated in the State. The Boeing Company, the State's largest employer, is
preeminent in aircraft manufacture. Boeing exerts a significant impact on
overall State production, employment and labor earnings. Boeing announced in
early 1993 that it would decrease commercial aircraft production by
approximately 35% over 18 months. Consistent with these projections, as of the
end of 1993 Boeing had reduced its work force in Washington by 11,289. In
January 1994 Boeing stated that it expected to eliminate a total of 7,000 jobs
in 1994.
Forest products rank second behind aerospace in value of total production. A
continued decline in overall production during the next few years is expected
due to federally imposed limitations on the harvest of old-growth timber and the
inability to maintain the recent record levels of production increases.
International trade plays an important role in the State's employment base, as
one in six jobs in the State is related to international trade. The State's
trade levels depend largely on national and world (rather than local) economic
conditions, including consumer demands.
The State ranks fourth among 12 leading states in the percentage of its work
force employed in technology-related industries and ranks third among the
largest software development centers.
The State operates on a July 1 to June 30 fiscal year and on a biennial budget
basis. Fiscal controls are exercised during the biennium through an allotment
process which requires each agency to submit a monthly expenditure plan. The
plan must be approved by the Governor's budget agency and provides the authority
for agencies to spend funds within statutory maximums specified in a
legislatively adopted budget. State law requires a balanced biennial budget.
Whenever it appears that disbursements will exceed the aggregate of estimated
receipts plus beginning cash surplus the Governor is required to reduce
allotments, thereby reducing expenditures of appropriated funds.
For the 1993-95 biennium, General Fund-State revenues are projected to be
$16.334 billion, an increase of 9.7% over the 1991-93 biennium, plus a
carry-forward of $234 million. This represents the smallest increase in biennial
revenue since the mid-1960s. Assuming current State program and service
requirements, these forecasted increases in revenues are below the expenditure
increases driven by caseload, enrollment and inflation.
The State Legislature passed a 1993-95 Operating Budget on May 6, 1993, and the
Governor signed the budget bill on May 28, 1993. This budget contains $650
million in general tax increases, $163 million in other revenues, $700 million
in program and administrative reductions, and $622 million in fund shifts (such
as to federal funding sources). The 1994 Supplemental Operating Budget passed
the State Legislature on March 24, 1994, and the Governor signed the
Supplemental budget bill on April 6, 1994. The budget includes $48 million in
tax cuts, an $11 million revenue increase from a variety of sources and $168
million in additional expenditures, many of which represent one-time
investments. No assurance can be given that changes in economic conditions will
not require significant changes to the budget as so passed and supplemented.
State law prohibits State tax revenue growth from exceeding an averaged growth
rate of State personal income. To date, State revenue increases have remained
substantially below the State revenue limit. In addition, the State may not
impose on local governments responsibility for new programs or increased levels
of service under existing programs without providing the financing to pay for
the added services.
Washington's Constitution, as interpreted by the State Supreme Court, prohibits
the imposition of net income taxes. For the fiscal year ending June 30, 1993,
approximately 77% of the State's tax revenues derived from general and selective
sales and gross receipts taxes.
With certain exceptions, the amount of State general obligation debt which may
be incurred is limited by constitutional and statutory restrictions. The
limitations in both cases are imposed by prohibiting the issuance of new debt if
the new debt would cause the maximum annual debt service on all thereafter
outstanding general obligation debt to exceed a specified percentage of the
arithmetic mean of general State revenues for the preceding three years. These
are limitations on the incurrence of new debt and are not limitations on the
amount of debt service which may be paid by the State in future years.
Initiative 601, which was voted into law in November 1993, limits increases in
General Fund-State government expenditures to the average rate of population and
inflation growth. Initiative 601 is to be fully effective by July 1, 1995. A
lawsuit has been filed challenging the constitutionality of Initiative 601 on
various grounds.
8.
Past Performance
Each Series computes its average annual compounded rate of total return during
specified periods that would equate the initial amount invested to the ending
redeemable value of such investment by adding one to the computed average annual
total return, raising the sum to a power equal to the number of years covered by
the computation and multiplying the result by $1,000 which represents a
hypothetical initial investment. The calculation assumes deduction of the
maximum sales charge from the initial amount invested and reinvestment of all
income dividends and capital gains distributions on the reinvestment dates at
prices calculated as stated in the Prospectus. The ending redeemable value is
determined by assuming a complete redemption at the end of the period(s) covered
by the average annual total return computation.
The total returns for the National, New York, Texas, New Jersey, Connecticut,
Missouri, Hawaii and Washington Series of the Fund using the computation method
described above for the one-year period ending on September 30, 1994 were as
follows: (10.10%), (10.60%), (9.20%), (8.60%), (9.70%), (9.70%), (10.20%), and
(10.20%), respectively. The average annual compounded rates of total return for
the first three Series for the five years ending on September 30, 1994 were as
follows: 6.47%, 6.23% and 6.87%, respectively.
Each Series' yield quotation is based on a 30-day period ended on a specified
date, computed by dividing the Series' net investment income per share earned
during the period by the Series' maximum offering price per share on the last
day of the period. This is determined by finding the following quotient: Take
the Series' dividends and interest earned during the period minus its expenses
accrued for the period (net of reimbursements) and divide by the product of (i)
the average daily number of Series shares outstanding during the period that
were entitled to receive dividends and (ii) the Series' maximum offering price
per share on the last day of the period. To this quotient add one. This sum is
multiplied by itself five times. Then, one is subtracted from the product of
this multiplication and the remainder is multiplied by two. For the 30-day
period ended September 30, 1994, the yields for the National, Connecticut,
Missouri, New Jersey, New York, Texas, Hawaii and Washington Series were 5.41%,
5.50%, 5.66%, 5.47%, 5.42%, 5.71%, 5.32% and 5.78%, respectively.
Each Series' tax-equivalent yield is computed by dividing that portion of the
Series' yield (as determined above) which is tax exempt by one minus a stated
income tax rate (National - .36%; New York - .4104%; Texas - .36%; New Jersey -
.4026%; Connecticut - .3888%; Missouri - .3850%; Hawaii - .4240; and Washington
- - .36%) and adding the product to that portion, if any, of the Series' yield
that is not tax exempt. For the 30-day period ended on September 30, 1994, the
<PAGE>
tax-equivalent yields for the National, Connecticut, Missouri, New Jersey, New
York, Texas, Hawaii and Washington Series were 8.45%, 9.00%, 9.20%, 9.16%,
9.19%, 8.92%, 9.24% and 9.03%, respectively.
It is important to remember that these figures represent past performance and an
investor should be aware that the investment return and principal value of a
Series investment will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Therefore, there is no
assurance that this performance will be repeated in the future.
9.
Further Information About the Fund
The directors, Trustees and officers of Lord Abbett-sponsored mutual funds,
together with the partners and employees of Lord Abbett, are permitted to
purchase and sell securities for their personal investment accounts. In engaging
in personal securities transactions, however, such persons are subject to
requirements and restrictions contained in the Fund's Code of Ethics which
complies, in substance, with each of the recommendations of the Investment
Company Institute's Advisory Group on Personal Investing. Among other things,
the Code requires that Lord Abbett partners and employees obtain advance
approval before buying or selling securities, submit confirmations and quarterly
transaction reports, and obtain approval before becoming a director of any
company; and it prohibits such persons from investing in a security 7 days
before or after any Lord Abbett-sponsored fund trades in such security,
prohibiting profiting on trades of the same security within 60 days and trading
on material and non-public information. The code imposes certain similar
requirements and restrictions on the independent directors and Trustees of each
Lord Abbett-sponsored mutual funds to the extent contemplated by the
recommendations of such Advisory Group.
10.
Financial Statements
The financial statements for the fiscal half year and the fiscal year ended
September 30, 1994 and the opinion thereon of Deloitte & Touche LLP, independent
auditors, included in the 1994 Annual Report to Shareholders of the Lord Abbett
Tax-Free Fund, Inc., are incorporated herein by reference in reliance upon the
authority of Deloitte & Touche LLP as experts in auditing and accounting.
<PAGE>
GRAPHIC APPENDIX
P1 PHOTO - A BRIDGE
P2 PHOTO - HYDROELECTRIC DAM
P3 PHOTO - A TUNNEL
P4 PHOTO - A WOMAN
P5 PHOTO - A GENTLEMAN
G1 BAR GRAPH
SHAREHOLDER A SHAREHOLDER B
INITIAL INVESTMENT $100,000 $100,000
AFTER 25 YEARS 272,732 446,497
P6 MAP OF THE UNITED STATES WITH THOSE STATES LORD ABBETT HAS TAX-FREE
PORTFOLIOS, HIGHLIGHTED.
G2 PIE CHART - AAA - 61.6%
AA - 19.0%
A - 16.8%
BBB - 2.6%
G3 LINE GRAPH SHOWING A $100,000 INVESTMENT ON 4/1/91 AND WHAT IT WOULD BE
WORTH ($130,260) ON 3/31/95.
G4 BAR GRAPH
TAX-FREE YIELD TAX-EQUIVALENT YIELD
5.00% 8.18%
5.50% 9.00%
6.00% 9.82%
G5 PIE CHART - AAA - 54.7%
AA - 28.9%
A - 15.9%
BBB - 0.5%
G6 LINE GRAPH SHOWING A $100,000 INVESTMENT ON 1/20/87 AND WHAT IT WOULD BE
WORTH ($180,087) ON 3/31/95.
G7 BAR GRAPH
TAX-FREE YIELD TAX-EQUIVALENT YIELD
5.00% 7.81%
5.50% 8.59%
6.00% 9.38%
G8 PIE CHART - AAA - 81.9%
AA - 9.0%
A - 9.1%
G9 LINE GRAPH SHOWING A $100,000 INVESTMENT ON 4/15/92 AND WHAT IT WOULD BE
WORTH ($117,049) ON 3/31/95.
G10 BAR GRAPH
TAX-FREE YIELD TAX-EQUIVALENT YIELD
5.00% 7.81%
5.50% 8.59%
6.00% 9.38%
G11 PIE CHART - AAA - 67.8%
AA - 18.4%
A - 7.5%
BBB - 6.2%
G12 LINE GRAPH SHOWING A $100,000 INVESTMENT ON 12/84 AND WHAT IT WOULD BE
WORTH ($250,320) ON 3/31/95.
G13 BAR GRAPH
TAX-FREE YIELD TAX-EQUIVALENT YIELD
5.00% 7.81%
5.50% 8.59%
6.00% 9.38%
G14 PIE CHART - AAA - 71.0%
AA - 17.5%
A - 6.2%
BBB - 5.3%
G15 LINE GRAPH SHOWING A $100,000 INVESTMENT ON 1/2/91 AND WHAT IT WOULD BE
WORTH ($136,324) ON 3/31/95.
G16 BAR GRAPH
TAX-FREE YIELD TAX-EQUIVALENT YIELD
5.00% 8.40%
5.50% 9.24%
6.00% 10.86%
G17 PIE CHART - AAA - 60.9%
AA - 14.0%
A - 19.6%
BBB - 5.5%
G18 LINE GRAPH SHOWING A $100,000 INVESTMENT ON 12/84 AND WHAT IT WOULD BE
WORTH ($242,063) ON 3/31/95.
G19 BAR GRAPH
TAX-FREE YIELD TAX-EQUIVALENT YIELD
5.00% 8.48%
5.50% 9.33%
6.00% 10.18%
G20 PIE CHART - AAA - 77.9%
AA - 12.7%
A - 9.4%
G21 LINE GRAPH SHOWING A $100,000 INVESTMENT ON 10/28/91 AND WHAT IT WOULD BE
WORTH ($120,802) ON 3/31/95.
G22 BAR GRAPH
TAX-FREE YIELD TAX-EQUIVALENT YIELD
5.00% 8.68%
5.50% 9.55%
6.00% 10.42%
G23 PIE CHART - AAA - 78.7%
AA - 16.0%
A - 4.6%
BBB - 4.7%
G24 LINE GRAPH SHOWING A $100,000 INVESTMENT ON 5/31/91 AND WHAT IT WOULD BE
WORTH ($128,425) ON 3/31/95.
G25 BAR GRAPH
TAX-FREE YIELD TAX-EQUIVALENT YIELD
5.00% 8.13%
5.50% 8.94%
6.00% 9.76%