<PAGE>
Prospectus / February 1, 1999
Lord Abbett
Tax-Free Income Funds
National Fund
California Fund
Connecticut Fund
Hawaii Fund
Minnesota Fund
Missouri Fund
New Jersey Fund
New York Fund
Texas Fund
Washington Fund
[LOGO](R) LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
As with all mutual funds, the Securities and Exchange Commission does not
guarantee that the information in this prospectus is accurate or complete, and
it has not judged these funds for investment merit. It is a criminal offense to
state otherwise.
Class P shares of the funds are neither offered to the general public nor
available in all states. Please call 800-821-5129 for further information.
<PAGE>
Table of Contents
The Funds Page
Information about past performance, fees and expenses, and state risks
Goal / Approach 2
Main Risks 2
National 3
California 4
Connecticut 5
Hawaii 6
Minnesota 7
Missouri 8
New Jersey 9
New York 10
Texas 11
Washington 12
Your Investment
Information for managing your fund account
Purchases 13
Opening Your Account 15
Redemptions 16
Distributions and Taxes 16
Services For Fund Investors 17
Sales Charges and Service Fees 19
Management 19
For More Information
How to learn more about the funds
Other Investment Techniques 20
Glossary of Shaded Terms 22
Recent Performance 23
Financial Information
Financial highlights of each fund and broker compensation
National 24
California 26
Connecticut 28
Hawaii 30
Minnesota 32
Missouri 34
New Jersey 36
New York 38
Texas 40
Washington 42
Back Cover
How to learn more about the funds and other Lord Abbett funds
<PAGE>
National Fund
California Fund
Connecticut Fund
Hawaii Fund
Minnesota Fund
Missouri Fund
New Jersey Fund
New York Fund
Texas Fund
Washington Fund
The Funds
GOAL / APPROACH
Each fund seeks the maximum amount of interest income exempt from federal
income tax as is consistent with reasonable risk. Each fund (except for
the National fund) also seeks as high a level of interest income exempt
from its state's personal income tax as is consistent with reasonable
risk. The New York fund also seeks as high a level of interest income
exempt from New York City personal income tax as is consistent with
reasonable risk. At present, neither Texas nor Washington imposes a
personal income tax.
To pursue its goal, each fund invests in municipal bonds which are
investment grade. Under normal market conditions, each fund attempts to be
80% invested in municipal bonds, the interest on which is exempt from
federal, its state's and, in the case of New York fund, New York City
personal income tax. Under normal circumstances, we intend to maintain the
average weighted stated maturity of each fund at between ten and
thirty-five years.
In selecting bonds, we focus on:
o Credit Quality - an issuer's ability to pay principal and interest
o Call Protection - assurance by an issuer that it will not redeem a
bond earlier than anticipated
o Income Tax Exemption - the bond issuer's ability to pay interest
free from federal, state and/or local personal income taxes
o Total Return Potential - the return possibilities for an investment
over a period of time, including appreciation and interest
While typically fully invested, at times we may take a temporary defensive
position in: (i) short-term tax-exempt securities, and (ii) cash,
investment grade commercial paper, and short-term U.S. Government
Securities (limited to 20% of our assets). This could reduce tax-exempt
personal income.
MAIN RISKS
Although municipal bonds are generally designed to provide a stable and
steady flow of in-come, their prices move inversely with changes in
interest rates. This means the value of your investment could increase or
decrease, which means that you could lose money. Additional risks that
could reduce each fund's income level and share price include the
following:
o Credit risk - the possibility that an issuer of bonds fails to make
timely payments of principal or interest
o Call risk - as interest rates decline, bond issuers may pay off
their loan early by buying back the bonds
o Governmental risk - government actions could have an adverse risk on
municipal bond prices and could cause prices to fall
An investment in each fund is not a bank deposit. It is not FDIC-insured
or government-endorsed. It is not a complete investment program. You
could lose money in each fund, but you also have the potential to make
money.
Each fund (except National fund) is nondiversified. This means that it
may invest a greater portion of its assets in a single company than a
diversified fund. Thus, it may be exposed to greater risk.
Credit risk may vary among states based upon the economic and fiscal
conditions of each state or the municipality within the state.
We or the funds refers to any one or more of the ten portfolios of Lord Abbett
Tax-Free Income Fund, Inc. (the "company"). Each fund operates under the
supervision of the company's Board with the advice of Lord, Abbett & Co.("Lord
Abbett"), its investment manager.
About each fund. Each fund is a professionally managed portfolio primarily
holding municipal bonds purchased with the pooled money of investors. It strives
to reach its stated goal, although as with all funds, it cannot guarantee
results.
Reasonable risk is the volatility each fund has over time, which we believe will
approximate the Lehman Brothers Current Coupon Long Index.
Municipal Bonds ("bonds") are debt securities issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities which provide income free from
federal, state and/or local personal income taxes. Municipal bonds are generally
divided into two types:
o General Obligation Bonds are secured by the full faith and credit of the
issuer and its taxing power.
o Revenue Bonds are payable from revenue derived from a particular facility
or service, such as bridges, tolls or sewer services. Industrial
development bonds are revenue bonds.
You should read this entire prospectus, including "Other Investment
Techniques," which concisely describe the other investment strategies used by
the funds and their risks.
2 / The Funds
<PAGE>
National Fund/ Symbols: Class A - LANSX
Class B - LANBX
Class C - LTNSX
PAST PERFORMANCE
The information below provides some indication of the risks of investing
in the fund, showing changes in the fund's performance from calendar year
to calendar year and by showing how the fund's average annual returns
compare with those of a broad measure of market performance.
[The following table was depicted as a line chart in the printed material]
"89" 9.5%
"90" 7.3%
"91" 12.5%
"92" 8.7%
"93" 13.0%
"94" -8.3%
"95" 17.7%
"96" 4.0%
"97" 10.0%
"98" 6.4%
Best Quarter: 7.6% Worst Quarter: -6.37%
================================================================================
The table below shows a comparison of the fund's class A, B and C average
annual total return to that of the Lehman Municipal Bond Index. Fund
returns assume reinvestment of dividends and distributions and payment of
the maximum applicable front-end or deferred sales charge. All periods end
on December 31, 1998.
Class 1 Year 5 Years 10 Years Inception(i)
A 1.30% 4.60% 7.34% --
- --------------------------------------------------------------------------------
B 1.65% -- -- 6.49%
- --------------------------------------------------------------------------------
C 5.60% -- -- 8.15%
- --------------------------------------------------------------------------------
Lehman Municipal
Bond Index(ii) 6.48% 6.22% 8.22% 8.15%(iii)
- --------------------------------------------------------------------------------
Past performance is not a prediction of future results.
- --------------------------------------------------------------------------------
(i) The dates of inception for each class are: A -4/2/84; B -8/1/96; and
C-7/15/96.
(ii) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs or management fees.
(iii) Represents total returns for the period 7/31/98 - 12/31/98, to correspond
with class B and C inception dates.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the fund.
================================================================================
Fee table
================================================================================
Class A Class B Class C Class P
Shareholder Fees (Fees paid directly
from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge on Purchases
- --------------------------------------------------------------------------------
(as a % of offering price) 4.75% none none none
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(See "Purchases") none 5.00%(2)(5) 1.00%(3) none
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from fund assets)(as a % of average net assets)(1)
- --------------------------------------------------------------------------------
Management Fees (See "Management") 0.50% 0.50% 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution and Service (12b-1 Fees)(4) 0.35% 1.00% 1.00% 0.45%
- --------------------------------------------------------------------------------
Other Expenses (See "Management") 0.11% 0.11% 0.11% 0.11%
- --------------------------------------------------------------------------------
Total Operating Expenses 0.96% 1.61% 1.61% 1.06%
- --------------------------------------------------------------------------------
================================================================================
EXPENSE EXAMPLE
================================================================================
This example, like that in other funds' prospectuses, assumes a $10,000 initial
investment at maximum sales charge, if any, 5% total return each year and no
changes in expenses. You pay the following expenses over the course of each
period shown if you sell your shares at the end of the period, although your
actual cost may be higher or lower. The expenses include any applicable
contingent deferred sales charges.
Share class 1 Year 3 Years 5 Years 10 Years
Class A shares $568 $766 $981 $1,599
- --------------------------------------------------------------------------------
Class B shares(5) $564 $808 $976 $1,739
- --------------------------------------------------------------------------------
Class C shares $164 $508 $876 $1,913
- --------------------------------------------------------------------------------
Class P shares $108 $337 $585 $1,297
- --------------------------------------------------------------------------------
You would pay the following expenses on the same investment, assuming you kept
your shares.
Class A shares $568 $766 $981 $1,599
- --------------------------------------------------------------------------------
Class B shares(5) $164 $508 $876 $1,739
- --------------------------------------------------------------------------------
Class C shares $164 $508 $876 $1,913
- --------------------------------------------------------------------------------
Class P shares $108 $337 $585 $1,297
- --------------------------------------------------------------------------------
This example is for comparison and is not a representation of the fund's actual
expenses or returns, either past or present.
Management fees are payable to Lord Abbett for the fund's investment management.
12b-1 fees refer to fees incurred for activities that are primarily intended to
result in the sale of fund shares and service fees for shareholder account
service and maintenance.
Other expenses include fees paid for miscellaneous items such as transfer
agency, legal and share registration fees.
- --------------------------------------------------------------------------------
(1) The annual operating expenses have been restated from fiscal year amounts
to reflect current fees.
(2) 5.00% if shares are redeemed before 1st anniversary of purchase, declining
to 1% before 6th anniversary and eliminated on and after 6th anniversary.
(3) 1.00% if shares are redeemed before 1st anniversary of purchase.
(4) Because 12b-1 distribution fees (up to: 0.35%- class A; 0.75%- classes B
and C; and 0.20%- class P) are paid out on an on-going basis, over time
they will increase the cost of your investment and may cost you more than
paying other types of sales charges. Service fees under each class's 12b-1
Plan are up to 0.25%.
(5) Class B shares will convert to class A shares on the eighth anniversary of
your original purchase of class B shares.
Puerto Rico - Risk Factors. (Applicable to each fund). Each fund may
invest in bonds issued by the Commonwealth of Puerto Rico and its
instrumentalities. The economy of Puerto Rico is dominated by the
manufacturing and service sectors. Puerto Rico's economic health is
closely tied to the price of oil and the state of the U.S. economy.
Although its unemployment rate has steadily declined in recent years,
Puerto Rico's unemployment rate continues to exceed the U.S. average.
Puerto Rico's economy has experienced significant growth. Continued
growth depends on factors, such as the state of the U.S. economy,
stability of the price of oil and borrowing costs.
The Funds / 3
<PAGE>
California Fund / Symbols: Class A - LCFIX
Class C - CALAX
PAST PERFORMANCE
The information below provides some indication of the risks of investing
in the fund, showing changes in the fund's performance from calendar year
to calendar year and by showing how the fund's average annual returns
compare with those of a broad measure of market performance.
[The following table was depicted as a line chart in the printed material]
"89" 9.8%
"90" 7.3%
"91" 13.4%
"92" 9.0%
"93" 13.9%
"94" -10.5%
"95" 17.4%
"96" 3.4%
"97" 8.9%
"98" 6.1%
Best Quarter: 7.73% Worst Quarter: -7.3%
================================================================================
The table below shows a comparison of the fund's class A and C average
annual total return to that of the Lehman Municipal Bond Index. Fund
returns assume reinvestment of dividends and distributions and payment of
the maximum applicable front-end or deferred sales charge. All periods end
on December 31, 1998.
Class 1 Year 5 Years 10 Years Inception(i)
A 1.10% 3.63% 7.08% --
- --------------------------------------------------------------------------------
C 5.36% -- -- 7.46%
- --------------------------------------------------------------------------------
Lehman Municipal Bond Index(ii) 6.48% 6.22% 8.22% 8.15%(iii)
- --------------------------------------------------------------------------------
Past performance is not a prediction of future results.
- --------------------------------------------------------------------------------
(i) The dates of inception for each class are: A -9/3/85; and C -7/15/96.
(ii) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs or management fees. This index is composed of municipal
bonds from many different states and, therefore, it may not be valid to
compare to a single-state municipal bond portfolio, such as this fund.
(iii) Represents total return for the period 7/31/96 - 12/31/98, to correspond
with class C inception date.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
================================================================================
Fee table
================================================================================
Class A Class C Class P
Shareholder Fees (Fees paid
directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge on Purchases
- --------------------------------------------------------------------------------
(as a % of offering price) 4.75% none none
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(See "Purchases") none 1.00%(2) none
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from fund assets) (as a % of average net assets)(1)
- --------------------------------------------------------------------------------
Management Fees (See "Management") 0.50% 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution and Service (12b-1 Fees)(3) 0.35% 1.00% 0.45%
- --------------------------------------------------------------------------------
Other Expenses (See "Management") 0.09% 0.09% 0.09%
- --------------------------------------------------------------------------------
Total Operating Expenses 0.94% 1.59% 1.04%
- --------------------------------------------------------------------------------
================================================================================
Expense example
================================================================================
This example, like that in other funds' prospectuses, assumes a $10,000 initial
investment at maximum sales charge, if any, 5% total return each year and no
changes in expenses. You pay the following expenses over the course of each
period shown if you sell your shares at the end of the period, although your
actual cost may be higher or lower. The expenses include any applicable
contingent deferred sales charges.
Share class 1 Year 3 Years 5 Years 10 Years
Class A shares $566 $760 $970 $1,577
- --------------------------------------------------------------------------------
Class C shares $162 $502 $865 $1,892
- --------------------------------------------------------------------------------
Class P shares $106 $331 $574 $1,273
- --------------------------------------------------------------------------------
You would pay the following expenses on the same investment, assuming you kept
your shares.
Class A shares $566 $760 $970 $1,577
- --------------------------------------------------------------------------------
Class C shares $162 $502 $865 $1,892
- --------------------------------------------------------------------------------
Class P shares $106 $331 $574 $1,273
- --------------------------------------------------------------------------------
This example is for comparison and is not a representation of the fund's actual
expenses or returns, either past or present.
Management fees are payable to Lord Abbett for the fund's investment management.
12b-1 fees refer to fees incurred for activities that are primarily intended to
result in the sale of fund shares and service fees for shareholder account
service and maintenance.
Other expenses include fees paid for miscellaneous items such as transfer
agency, legal and share registration fees.
- --------------------------------------------------------------------------------
(1) The annual operating expenses have been restated from fiscal year amounts
to reflect current fees.
(2) 1.00% if shares are redeemed before 1st anniversary of purchase.
(3) Because 12b-1 distribution fees (up to: 0.35%- class A; 0.75%- classes C;
and 0.20%- class P) are paid out on an on-going basis, over time they will
increase the cost of your investment and may cost you more than paying
other types of sales charges. Service fees under each class's 12b-1 Plan
equal up to 0.25%.
California Bonds - Risk Factors. Various constitutional and statutory
provisions may affect the ability of issuers of California municipal bonds
to meet their financial obligations. Decreases in State and local
revenues due to such provisions may reduce the ability of California
issuers to satisfy their obligations. Clifornia's recovery from the early
1990s recession is now nearly complete. Unemployment levels, although they
exceed the national average, have continued to decrease. In addition,
while in the early 1990s the State had depended on external borrowing to
meet its cash needs, the State has not had to resort to such borrowing
after the 1994-95 fiscal year. The substantial budget deficit that was
accumulated by the State during the recession has been eliminated.
4 / The Funds
<PAGE>
Connecticut Fund / Symbol: Class A - LACTX
PAST PERFORMANCE
The information below provides some indication of the risks of investing
in the fund, showing changes in the fund's performance from calendar year
to calendar year and by showing how the fund's average annual returns
compare with those of a broad measure of market performance.
[The following table was depicted as a line chart in the printed material]
"92" 7.9%
"93" 13.8%
"94" -7.7%
"95" 17.3%
"96" 4.2%
"97" 8.8%
"98" 6.3%
Best Quarter: 7.9% Worst Quarter: -5.7%
================================================================================
The table below shows a comparison of the fund's class A average annual
total return to that of the Lehman Municipal Bond Index. Fund returns
assume reinvestment of dividends and distributions and payment of the
maximum applicable front-end or deferred sales charge. All periods end on
December 31, 1998.
Class 1 Year 5 Years 10 Years Inception(i)
A 1.20% 4.41% -- 7.00%
- --------------------------------------------------------------------------------
Lehman Municipal Bond Index(ii) 6.48% 6.22% -- 7.97%(iii)
- --------------------------------------------------------------------------------
Past performance is not a prediction of future results.
- --------------------------------------------------------------------------------
(i) The date of inception for class A shares is 4/1/91.
(ii) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs or management fees. This index is composed of municipal
bonds from many different states and, therefore, it may not be valid to
compare to a single-state municipal bond portfolio, such as this fund.
(iii) Represents total return for the period 3/31/91 - 12/31/98, to correspond
with class A inception date.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the fund.
================================================================================
Fee table
================================================================================
Class A Class P
Shareholder Fees
(Fees paid directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge on Purchases
- --------------------------------------------------------------------------------
(as a % of offering price) 4.75% none
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(See "Purchases") none none
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from fund assets) (as a % of average net assets)(1)
- --------------------------------------------------------------------------------
Management Fees (See "Management") 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution and Service (12b-1 Fees)(2) 0.35% 0.45%
- --------------------------------------------------------------------------------
Other Expenses (See "Management") 0.10% 0.10%
- --------------------------------------------------------------------------------
Total Operating Expenses 0.95% 1.05%
- --------------------------------------------------------------------------------
================================================================================
Expense example
================================================================================
This example, like that in other funds' prospectuses, assumes a $10,000 initial
investment at maximum sales charge, if any, 5% total return each year and no
changes in expenses. You pay the following expenses over the course of each
period shown if you sell your shares at the end of the period, although your
actual cost may be higher or lower. The expenses include any applicable
contingent deferred sales charges.
Share class 1 Year 3 Years 5 Years 10 Years
Class A shares $567 $763 $976 $1,588
- --------------------------------------------------------------------------------
Class P shares $107 $334 $579 $1,285
- --------------------------------------------------------------------------------
You would pay the following expenses on the same investment, assuming you kept
your shares.
Class A shares $567 $763 $976 $1,588
- --------------------------------------------------------------------------------
Class P shares $107 $334 $579 $1,285
- --------------------------------------------------------------------------------
This example is for comparison and is not a representation of the fund's actual
expenses or returns, either past or present.
Management fees are payable to Lord Abbett for the fund's investment management.
12b-1 fees refer to fees incurred for activities that are primarily intended to
result in the sale of fund shares and service fees for shareholder account
service and maintenance.
Other expenses include fees paid for miscellaneous items such as transfer
agency, legal and share registration fees.
- --------------------------------------------------------------------------------
(1) The annual operating expenses have been restated from fiscal year amounts
to reflect current fees.
(2) Because 12b-1 distribution fees (up to: 0.35%- class A; and 0.20%- class
P) are paid out on an on-going basis, over time they will increase the
cost of your investment and may cost you more than paying other types of
sales charges. Service fees under each class's 12b-1 Plan equal up to
0.25%.
Connecticut Bonds - Risk Factors. Connecticut's economy, while
traditionally concentrated in the munufacturing sector, has broadened in
recent years with growth in service, finance, trade and utilities. The
economy continues to improve and recover from its recession in the early
1990s. The average per capita income of Connecticut remains among the
highest in the nation. Connecticut's financial performance has also
improved in recent years. As of June 30, 1997, the State has provided
in full for payment on economic recovery notes issued to fund its
accumulated General Fund deficit as of 1991, and the balance in the budget
reserve fund from unappropriated surplus was $240.97 million. The State's
high level of tax-supported debt remains a concern, however, as it poses
a relatively significant burden on the State's revenue base.
The Funds / 5
<PAGE>
Hawaii Fund / Symbol: Class A - LAHIX
PAST PERFORMANCE
The information below provides some indication of the risks of investing
in the fund, showing changes in the fund's performance from calendar year
to calendar year and by showing how the fund's average annual returns
compare with those of a broad measure of market performance.
[The following table was depicted as a line chart in the printed material]
"92" 8.5%
"93" 14.3%
"94" -8.7%
"95" 18.2%
"96" 3.8%
"97" 8.5%
"98" 6.2%
Best Quarter: 8.07% Worst Quarter: -6.9%
================================================================================
The table below shows a comparison of the fund's class A average annual
total return to that of the Lehman Municipal Bond Index. Fund returns
assume reinvestment of dividends and distributions and payment of the
maximum applicable front-end or deferred sales charge. All periods end on
December 31, 1998.
Class 1 Year 5 Years 10 Years Inception(i)
A 1.10% 4.21% -- 6.45%
- --------------------------------------------------------------------------------
Lehman Municipal Bond Index(ii) 6.48% 6.22% -- 7.62%(iii)
- --------------------------------------------------------------------------------
Past performance is not a prediction of future results.
- --------------------------------------------------------------------------------
(i) The date of inception for class A shares is 10/28/91.
(ii) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs or management fees. This index is composed of municipal
bonds from many different states and, therefore, it may not be valid to
compare to a single-state municipal bond portfolio, such as this fund.
(ii) Represents total return for the period 10/31/91 - 12/31/98, to correspond
with class A inception date.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
================================================================================
Fee table
================================================================================
Class A Class P
Shareholder Fees
(Fees paid directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge on Purchases
- --------------------------------------------------------------------------------
(as a % of offering price) 4.75% none
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (See "Purchases") none none
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from fund assets) (as a % of average net assets)(1)
- --------------------------------------------------------------------------------
Management Fees (See "Management") 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution and Service (12b-1 Fees)(2) 0.35% 0.45%
- --------------------------------------------------------------------------------
Other Expenses (See "Management") 0.13% 0.13%
- --------------------------------------------------------------------------------
Total Operating Expenses 0.98% 1.08%
- --------------------------------------------------------------------------------
================================================================================
Expense example
================================================================================
This example, like that in other funds' prospectuses, assumes a $10,000 initial
investment at maximum sales charge, if any, 5% total return each year and no
changes in expenses. You pay the following expenses over the course of each
period shown if you sell your shares at the end of the period, although your
actual cost may be higher or lower. The expenses include any applicable
contingent deferred sales charges.
Share class 1 Year 3 Years 5 Years 10 Years
Class A shares $570 $772 $991 $1,622
- --------------------------------------------------------------------------------
Class P shares $110 $343 $595 $1,320
- --------------------------------------------------------------------------------
You would pay the following expenses on the same investment, assuming you kept
your shares.
Class A shares $570 $772 $991 $1,622
- --------------------------------------------------------------------------------
Class P shares $110 $343 $595 $1,320
- --------------------------------------------------------------------------------
This example is for comparison and is not a representation of the fund's actual
expenses or returns, either past or present.
Management fees are payable to Lord Abbett for the fund's investment management.
12b-1 fees refer to fees incurred for activities that are primarily intended to
result in the sale of fund shares and service fees for shareholder account
service and maintenance.
Other expenses include fees paid for miscellaneous items such as transfer
agency, legal and share registration fees.
- --------------------------------------------------------------------------------
(1) The annual operating expenses have been restated from fiscal year amounts
to reflect current fees.
(2) Because 12b-1 distribution fees (up to: 0.35%- class A; and 0.20%- class
P) are paid out on an on-going basis, over time they will increase the
cost of your investment and may cost you more than paying other types of
sales charges. Service fees under each class's 12b-1 Plan equal up to
0.25%.
Hawaii Bonds - Risk Factors. Hawaii has exhibited poor economic
performance and modest personal income growth since the early 1990s and its
economic recovery continues to be slow and uneven. Hawaii's economy is
concentrated in retail trade and tourism and also includes construction,
agriculture and military operations. Tourism is a major factor in the
economy, and has been harmed by recent financial and economic down-turns
in Southeast Asia. Construction activity has also declined. Agriculture,
dominated by pineapple and sugar production, has experienced increased
foreign competition. Economic diversification projects are under way,
including expansion of containerized port facilities, aquaculture and
other agricultural products, but these projects have not yet had any
significant positive effects on the State's overall economy.
6 / The Funds
<PAGE>
Minnesota Fund / Symbol: Class A - LAMNX
PAST PERFORMANCE
The information below provides some indication of the risks of investing
in the fund, showing changes in the fund's performance from calendar year
to calendar year and by showing how the fund's average annual returns
compare with those of a broad measure of market performance.
[The following table was depicted as a line chart in the printed material]
"95" 14.5%
"96" 3.4%
"97" 8.7%
"98" 6.4%
Best Quarter: 4.7% Worst Quarter: -2.7%
================================================================================
The table below shows a comparison of the fund's class A average annual
total return to that of the Lehman Municipal Bond Index. Fund returns
assume reinvestment of dividends and distributions and payment of the
maximum applicable front-end or deferred sales charge. All periods end on
December 31, 1998.
Class 1 Year 5 Years 10 Years Inception(i)
A 1.40% -- -- 6.82%
- --------------------------------------------------------------------------------
Lehman Municipal Bond Index(ii) 6.48% -- -- 9.28%(iii)
- --------------------------------------------------------------------------------
Past performance is not a prediction of future results.
- --------------------------------------------------------------------------------
(i) The date of inception for class A shares is 12/27/94.
(ii) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs or management fees. This index is composed of municipal
bonds from many different states and, therefore, it may not be valid to
compare to a single-state municipal bond portfolio, such as this fund.
(iii) Represents total return for the period 12/31/94 - 12/31/98, to correspond
with class A inception date.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the fund.
================================================================================
Fee table
================================================================================
Class A Class P
Shareholder Fees
(Fees paid directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge on Purchases
- --------------------------------------------------------------------------------
(as a % of offering price) 4.75% none
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (See "Purchases") none none
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from fund assets) (as a % of average net assets)(1)
- --------------------------------------------------------------------------------
Management Fees (See "Management") 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution and Service (12b-1 Fees)(2) 0.35% 0.45%
- --------------------------------------------------------------------------------
Other Expenses (See "Management") 0.27% 0.27%
- --------------------------------------------------------------------------------
Total Operating Expenses 1.12% 1.22%
- --------------------------------------------------------------------------------
================================================================================
Expense example
================================================================================
This example, like that in other funds' prospectuses, assumes a $10,000 initial
investment at maximum sales charge, if any, 5% total return each year and no
changes in expenses. You pay the following expenses over the course of each
period shown if you sell your shares at the end of the period, although your
actual cost may be higher or lower. The expenses include any applicable
contingent deferred sales charges.
Share class 1 Year 3 Years 5 Years 10 Years
Class A shares $584 $814 $1,063 $1,776
- --------------------------------------------------------------------------------
Class P shares $124 $387 $670 $1,480
- --------------------------------------------------------------------------------
You would pay the following expenses on the same investment, assuming you kept
your shares.
Class A shares $584 $814 $1,003 $1,776
- --------------------------------------------------------------------------------
Class P shares $124 $387 $670 $148
- --------------------------------------------------------------------------------
This example is for comparison and is not a representation of the fund's actual
expenses or returns, either past or present.
Management fees are payable to Lord Abbett for the fund's investment management.
Although not obligated to, Lord Abbett may waive all or a portion of its
management fee. Lord Abbett is currently waiving the management fee for the
Minnesota fund.
12b-1 fees refer to fees incurred for activities that are primarily intended to
result in the sale of fund shares and service fees for shareholder account
service and maintenance.
The 12b-1 Plan for the Minnesota fund will not become operative for class A
shares until the class A net assets reach $100 million.
Other expenses include fees paid for miscellaneous items such as transfer
agency, legal and share registration fees.
- --------------------------------------------------------------------------------
(1) The annual operating expenses have been restated from fiscal year amounts
to reflect current fees.
(2) Because 12b-1 distribution fees (up to: 0.35%- class A; and 0.20%- class
P) are paid out on an on-going basis, over time they will increase the
cost of your investment and may cost you more than paying other types of
sales charges. Service fees under each class's 12b-1 Plan equal up to
0.25%.
Minnesota Bonds - Risk Factors. Minnesota's significant public debt
includes the State's general obligation debt, as well as university and
other agency debt that is not an obligation of the State. The State
relies heavily on individual, sales and corporate income taxes for
revenues, all of which are sensitive to ecomonic conditions and could be
adversly affected by an ecomonic downturn.
The Funds / 7
<PAGE>
Missouri Fund / Symbol: Class A - LAMOX
PAST PERFORMANCE
The information below provides some indication of the risks of investing
in the fund, showing changes in the fund's performance from calendar year
to calendar year and by showing how the fund's average annual returns
compare with those of a broad measure of market performance.
[The following table was depicted as a line chart in the printed material]
"92" 9.0%
"93" 14.6%
"94" -9.1%
"95" 17.2%
"96" 3.7%
"97" 8.5%
"98" 5.7%
Best Quarter: 7.7% Worst Quarter: -6.8%
================================================================================
The table below shows a comparison of the fund's class A average annual
total return to that of the Lehman Municipal Bond Index. Fund returns
assume reinvestment of dividends and distributions and payment of the
maximum applicable front-end or deferred sales charge. All periods end on
December 31, 1998.
Class 1 Year 5 Years 10 Years Inception(i)
A 0.70% 3.83% -- 6.78%
- --------------------------------------------------------------------------------
Lehman Municipal Bond Index(ii) 6.48% 6.22% -- 7.83%
- --------------------------------------------------------------------------------
Past performance is not a prediction of future results.
- --------------------------------------------------------------------------------
(i) The date of inception for class A shares is 5/31/91.
(ii) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs or management fees. This index is composed of municipal
bonds from many different states and, therefore, it may not be valid to
compare to a single-state municipal bond portfolio, such as this fund.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the fund.
================================================================================
Fee table
================================================================================
Class A Class P
Shareholder Fees
(Fees paid directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge on Purchases
- --------------------------------------------------------------------------------
(as a % of offering price) 4.75% none
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(See "Purchases") none none
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses (Expenses deducted from fund assets) (as a % of
average net assets)(1)
- --------------------------------------------------------------------------------
Management Fees (See "Management") 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution and Service (12b-1 Fees)(2) 0.35% 0.45%
- --------------------------------------------------------------------------------
Other Expenses (See "Management") 0.13% 0.13%
- --------------------------------------------------------------------------------
Total Operating Expenses 0.98% 1.08%
- --------------------------------------------------------------------------------
================================================================================
Expense example
================================================================================
This example, like that in other funds' prospectuses, assumes a $10,000 initial
investment at maximum sales charge, if any, 5% total return each year and no
changes in expenses. You pay the following expenses over the course of each
period shown if you sell your shares at the end of the period, although your
actual cost may be higher or lower. The expenses include any applicable
contingent deferred sales charges.
Share class 1 Year 3 Years 5 Years 10 Years
Class A shares $570 $772 $991 $1,622
- --------------------------------------------------------------------------------
Class P shares $110 $343 $595 $1,320
- --------------------------------------------------------------------------------
You would pay the following expenses on the same investment, assuming you kept
your shares.
Class A shares $570 $772 $991 $1,622
- --------------------------------------------------------------------------------
Class P shares $110 $343 $595 $1,320
- --------------------------------------------------------------------------------
This example is for comparison and is not a representation of the fund's actual
expenses or returns, either past or present.
Management fees are payable to Lord Abbett for the fund's investment management.
12b-1 fees refer to fees incurred for activities that are primarily intended to
result in the sale of fund shares and service fees for shareholder account
service and maintenance.
Other expenses include fees paid for miscellaneous items such as transfer
agency, legal and share registration fees.
- --------------------------------------------------------------------------------
(1) The annual operating expenses have been restated from fiscal year amounts
to reflect current fees.
(2) Because 12b-1 distribution fees (up to: 0.35%- class A; and 0.20%- class
P) are paid out on an on-going basis, over time they will increase the
cost of your investment and may cost you more than paying other types of
sales charges. Service fees under each class's 12b-1 Plan equal up to
0.25%.
Missouri Bonds - Risk Factors. Economic reversals in either Kansas City or
St. Louis metropolitan areas, whose Missour portions together contain a
significant portion of the State's popultion, would have a major impact
on the State's overall economic condition. Missouri's unemployment levels
have steadily declined and have remained below the national average since
1991, as employment levels have continued to grow. Changes in military
appropriations, which play an important role in the State's economy, could
adversly affect unemployment rates. As discussed in the Statement of
Additional Information, payment on Missouri municipal bonds could be
adversely affected by certain provisions of the Constitution of Missouri.
8 / The Funds
<PAGE>
New Jersey Fund / Symbol: Class A - LANJX
PAST PERFORMANCE
The information below provides some indication of the risks of investing
in the fund, showing changes in the fund's performance from calendar year
to calendar year and by showing how the fund's average annual returns
compare with those of a broad measure of market performance.
[The following table was depicted as a line chart in the printed material]
"92" 9.2%
"93" 14.3%
"94" -6.8%
"95" 17.2%
"96" 4.1%
"97" 8.9%
"98" 6.5%
Best Quarter: 7.4% Worst Quarter: -5.7%
================================================================================
The table below shows a comparison of the fund's class A average annual
total return to that of the Lehman Municipal Bond Index. Fund returns
assume reinvestment of dividends and distributions and payment of the
maximum applicable front-end or deferred sales charge. All periods end on
December 31, 1998.
Class 1 Year 5 Years 10 Years Inception(i)
A 1.40% 4.68% -- 7.47%
- --------------------------------------------------------------------------------
Lehman Municipal Bond Index(ii) 6.48% 6.22% -- 8.02%(iii)
- --------------------------------------------------------------------------------
Past performance is not a prediction of future results.
- --------------------------------------------------------------------------------
(i) The date of inception for class A shares is 1/2/91.
(ii) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs or management fees. This index is composed of municipal
bonds from many different states and, therefore, it may not be valid to
compare to a single-state municipal bond portfolio, such as this fund.
(iii) Represents total return for the period 12/31/90 - 12/31/98, to correspond
with class A inception date.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the fund.
================================================================================
Fee table
================================================================================
Class A Class P
Shareholder Fees
(Fees paid directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge on Purchases
- --------------------------------------------------------------------------------
(as a % of offering price) 4.75% none
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(See "Purchases") none none
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from fund assets) (as a % of average net assets)(1)
- --------------------------------------------------------------------------------
Management Fees (See "Management") 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution and Service (12b-1 Fees)(2) 0.35% 0.45%
- --------------------------------------------------------------------------------
Other Expenses (See "Management") 0.11% 0.11%
- --------------------------------------------------------------------------------
Total Operating Expenses 0.96% 1.06%
- --------------------------------------------------------------------------------
================================================================================
Expense example
================================================================================
This example, like that in other funds' prospectuses, assumes a $10,000 initial
investment at maximum sales charge, if any, 5% total return each year and no
changes in expenses. You pay the following expenses over the course of each
period shown if you sell your shares at the end of the period, although your
actual cost may be higher or lower. The expenses include any applicable
contingent deferred sales charges.
Share class 1 Year 3 Years 5 Years 10 Years
Class A shares $568 $766 $981 $1,599
- --------------------------------------------------------------------------------
Class P shares $108 $337 $585 $1,297
- --------------------------------------------------------------------------------
You would pay the following expenses on the same investment, assuming you kept
your shares.
Class A shares $568 $766 $981 $1,599
- --------------------------------------------------------------------------------
Class P shares $108 $337 $585 $1,297
- --------------------------------------------------------------------------------
This example is for comparison and is not a representation of the fund's actual
expenses or returns, either past or present.
Management fees are payable to Lord Abbett for the fund's investment management.
12b-1 fees refer to fees incurred for activities that are primarily intended to
result in the sale of fund shares and service fees for shareholder account
service and maintenance.
Other expenses include fees paid for miscellaneous items such as transfer
agency, legal and share registration fees.
- --------------------------------------------------------------------------------
(1) The annual operating expenses have been restated from fiscal year amounts
to reflect current fees.
(2) Because 12b-1 distribution fees (up to: 0.35%- class A; and 0.20%- class
P) are paid out on an on-going basis, over time they will increase the
cost of your investment and may cost you more than paying other types of
sales charges. Service fees under each class's 12b-1 Plan equal up to
0.25%.
New Jersey Bonds - Risk Factors. The State's economy has been steadily
improving since the recent recession as shown by employment gains and
growth in other economic activity. New Jersey is a mjor recipient of
federal assistance. Hence, a decrease in federal financial assistance
may adversely affect New Jersey's financial condition. In an attempt to
ensure that local governmental entities remain on a sound financial basis,
State law restricts total appropriations increases to 5% annually for such
entities, with certain exceptions. Statutory or legislative restrictions of
such character may adversely affect a municipality's or any other bond-
issuing authority's ability to repay its obligations.
The Funds / 9
<PAGE>
New York Fund / Symbols: Class A - LANYX
Class C - NYLAX
PAST PERFORMANCE
The information below provides some indication of the risks of investing
in the fund, showing changes in the fund's performance from calendar year
to calendar year and by showing how the fund's average annual returns
compare with those of a broad measure of market performance.
[The following table was depicted as a line chart in the printed material]
"89" 9.3%
"90" 6.3%
"91" 13.7%
"92" 8.9%
"93" 12.7%
"94" -9.3%
"95" 15.9%
"96" 3.7%
"97" 8.5%
"98" 6.1%
Best Quarter: 7.1% Worst Quarter: -5.9%
================================================================================
The table below shows a comparison of the fund's class A and C average
annual total return to that of the Lehman Municipal Bond Index. Fund
returns assume reinvestment of dividends and distributions and payment of
the maximum applicable front-end or deferred sales charge. All periods end
on December 31, 1998.
Class 1 Year 5 Years 10 Years Inception(i)
A 1.10% 3.64% 6.85% --
- --------------------------------------------------------------------------------
C 5.32% -- -- 7.19%
- --------------------------------------------------------------------------------
Lehman Municipal Bond Index(ii) 6.48% 6.22% 8.22% 8.15%(iii)
- --------------------------------------------------------------------------------
Past performance is not a prediction of future results.
- --------------------------------------------------------------------------------
(i) The dates of inception for each class are: A -4/2/84; and C -7/15/96.
(ii) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs or management fees. This index is composed of municipal
bonds from many different states and, therefore, it may not be valid to
compare to a single-state municipal bond portfolio, such as this fund.
(iii) Represents total returns for the period 7/31/96 - 12/31/98, to correspond
with class C inception date.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the fund.
================================================================================
Fee table
================================================================================
Class A Class C Class P
Shareholder Fees
(Fees paid directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge on Purchases
- --------------------------------------------------------------------------------
(as a % of offering price) 4.75% none none
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(See "Purchases") none 1.00%(2) none
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from fund assets) (as a % of average net assets)(1)
- --------------------------------------------------------------------------------
Management Fees (See "Management") 0.50% 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution and Service (12b-1 Fees)(3) 0.35% 1.00% 0.45%
- --------------------------------------------------------------------------------
Other Expenses (See "Management") 0.10% 0.10% 0.10%
- --------------------------------------------------------------------------------
Total Operating Expenses 0.95% 1.60% 1.05%
- --------------------------------------------------------------------------------
================================================================================
Expense example
================================================================================
This example, like that in other funds' prospectuses, assumes a $10,000 initial
investment at maximum sales charge, if any, 5% total return each year and no
changes in expenses. You pay the following expenses over the course of each
period shown if you sell your shares at the end of the period, although your
actual cost may be higher or lower. The expenses include any applicable
contingent deferred sales charges.
Share class 1 Year 3 Years 5 Years 10 Years
Class A shares $567 $763 $976 $1,588
- --------------------------------------------------------------------------------
Class C shares $163 $505 $871 $1,902
- --------------------------------------------------------------------------------
Class P shares $107 $334 $579 $1,285
- --------------------------------------------------------------------------------
You would pay the following expenses on the same investment, assuming you kept
your shares.
Class A shares $567 $763 $976 $1,588
- --------------------------------------------------------------------------------
Class C shares $163 $505 $871 $1,902
- --------------------------------------------------------------------------------
Class P shares $107 $334 $579 $1,285
- --------------------------------------------------------------------------------
This example is for comparison and is not a representation of the fund's actual
expenses or returns, either past or present.
Management fees are payable to Lord Abbett for the fund's investment management.
12b-1 fees refer to fees incurred for activities that are primarily intended to
result in the sale of fund shares and service fees for shareholder account
service and maintenance.
Other expenses include fees paid for miscellaneous items such as transfer
agency, legal and share registration fees.
- --------------------------------------------------------------------------------
(1) The annual operating expenses have been restated from fiscal year amounts
to reflect current fees.
(2) 1.00% if shares are redeemed before 1st anniversary of purchase.
(3) Because 12b-1 distribution fees (up to: 0.35%- class A; 0.75%- classes C;
and 0.20%- class P) are paid out on an on-going basis, over time they will
increase the cost of your investment and may cost you more than paying
other types of sales charges. Service fees under each class's 12b-1 Plan
equal up to 0.25%.
New York Bonds - Risk Factors. New York State has recorded balanced
budgets for its last six fiscal years. While the State budget for fiscal
1998-99 again calls for a balanced budget, gaps between actual revenues and
expenditures may arise in the current year and in future fiscal years. The
State, New York City, the State's other political subdivisions and the
State Authorities are perceived in the marketplace to be financially
interdependent. The State's credit is presently involved with the
indebtedness of the Authorities because of the State's guarantee or other
support. This indebtedness is substantial. The Authorities are likely
to require further financial assistance from the State. Shortfalls and
budget gaps have been predicted for future years and will require further
action by New York City's government.
10 / The Funds
<PAGE>
Texas Fund / Symbol: Class A - LATIX
PAST PERFORMANCE
The information below provides some indication of the risks of investing
in the fund, showing changes in the fund's performance from calendar year
to calendar year and by showing how the fund's average annual returns
compare with those of a broad measure of market performance.
[The following table was depicted as a line chart in the printed material]
"89" 10.7%
"90" 7.7%
"91" 13.2%
"92" 8.7%
"93" 13.0%
"94" -6.9%
"95" 18.0%
"96" 4.0%
"97" 9.7%
"98" 5.9%
Best Quarter: 7.4% Worst Quarter: -6.6%
================================================================================
The table below shows a comparison of the fund's class A average annual
total return to that of the Lehman Municipal Bond Index. Fund returns
assume reinvestment of dividends and distributions and payment of the
maximum applicable front-end or deferred sales charge. All periods end on
December 31, 1998.
Class 1 Year 5 Years 10 Years Inception(i)
A 0.80% 4.80% 7.66% --
- --------------------------------------------------------------------------------
Lehman Municipal Bond Index(ii) 6.48% 6.22% 8.22% --
- --------------------------------------------------------------------------------
Past performance is not a prediction of future results.
- --------------------------------------------------------------------------------
(i) The date of inception for class A shares is 1/20/87.
(ii) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs or management fees. This index is composed of municipal
bonds from many different states and, therefore, it may not be valid to
compare to a single-state municipal bond portfolio, such as this fund.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the fund.
================================================================================
Fee table
================================================================================
Class A Class P
Shareholder Fees
(Fees paid directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge on Purchases
- --------------------------------------------------------------------------------
(as a % of offering price) 4.75% none
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(See "Purchases") none none
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from fund assets) (as a % of average net assets)(1)
- --------------------------------------------------------------------------------
Management Fees (See "Management") 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution and Service (12b-1 Fees)(2) 0.35% 0.45%
- --------------------------------------------------------------------------------
Other Expenses (See "Management") 0.12% 0.12%
- --------------------------------------------------------------------------------
Total Operating Expenses 0.97% 1.07%
- --------------------------------------------------------------------------------
================================================================================
Expense example
================================================================================
This example, like that in other funds' prospectuses, assumes a $10,000 initial
investment at maximum sales charge, if any, 5% total return each year and no
changes in expenses. You pay the following expenses over the course of each
period shown if you sell your shares at the end of the period, although your
actual cost may be higher or lower. The expenses include any applicable
contingent deferred sales charges.
Share class 1 Year 3 Years 5 Years 10 Years
Class A shares $569 $769 $986 $1,611
- --------------------------------------------------------------------------------
Class P shares $109 $340 $590 $1,308
- --------------------------------------------------------------------------------
You would pay the following expenses on the same investment, assuming you kept
your shares.
Class A shares $569 $769 $986 $1,611
- --------------------------------------------------------------------------------
Class P shares $109 $340 $590 $1,308
- --------------------------------------------------------------------------------
This example is for comparison and is not a representation of the fund's actual
expenses or returns, either past or present.
Management fees are payable to Lord Abbett for the fund's investment management.
12b-1 fees refer to fees incurred for activities that are primarily intended to
result in the sale of fund shares and service fees for shareholder account
service and maintenance.
Other expenses include fees paid for miscellaneous items such as transfer
agency, legal and share registration fees.
- --------------------------------------------------------------------------------
(1) The annual operating expenses have been restated from fiscal year amounts
to reflect current fees.
(2) Because 12b-1 distribution fees (up to: 0.35%- class A; and 0.20%- class
P) are paid out on an on-going basis, over time they will increase the
cost of your investment and may cost you more than paying other types of
sales charges. Service fees under each class's 12b-1 Plan equal up to
0.25%.
Texas Bonds - Risk Factors. Texas' economy recovered from the recession
that began in the mid-1980s after a collapse in oil prices. The economy
has become more stable due to increased diversification, with the oil and
gas industry diminishing in relative importance while service-producing
sectors are the major soucre of job growth. The biennial all funds
budget for the State did not require increasing state taxes, primarily
due to a healthy state economy, a $2 billion surplus from the previous
biennium, and a legislative leadership mandate to "hold-the-line" on
spending growth. The State has had a positive balance in its general
revenue fund for ten consecutive years. Any circumstances that affect the
market value of bonds held by the Texas fund, as a result of a dependency
of local governments and other authorities upon State aid and reimburse-
ment programs may have an adverse affect on the Texas fund.
The Funds / 11
<PAGE>
Washington Fund / Symbol: Class A - LAWAX
PAST PERFORMANCE
The information below provides some indication of the risks of investing
in the fund, showing changes in the fund's performance from calendar year
to calendar year and by showing how the fund's average annual returns
compare with those of a broad measure of market performance.
[The following table was depicted as a line chart in the printed material]
"93" 14.2%
"94" -8.5%
"95" 18.1%
"96" 4.7%
"97" 10.1%
"98" 6.5%
Best Quarter: 7.3% Worst Quarter: -7.2%
================================================================================
The table below shows a comparison of the fund's class A average annual
total return to that of the Lehman Municipal Bond Index. Fund returns
assume reinvestment of dividends and distributions and payment of the
maximum applicable front-end or deferred sales charge. All periods end on
December 31, 1998.
Class 1 Year 5 Years 10 Years Inception(i)
A 1.40% 4.80% -- 6.90%
- --------------------------------------------------------------------------------
Lehman Municipal Bond Index(ii) 6.48% 6.22% -- 7.63%(iii)
- --------------------------------------------------------------------------------
Past performance is not a prediction of future results.
- --------------------------------------------------------------------------------
(i) The date of inception for class A shares is 4/15/92.
(ii) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs or management fees. This index is composed of municipal
bonds from many different states and, therefore, it may not be valid to
compare to a single-state municipal bond portfolio, such as this fund.
(iii) Represents total return for the period 4/30/92 - 12/31/98, to correspond
with class A inception date.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the fund.
================================================================================
Fee table
================================================================================
Class A Class P
Shareholder Fees
(Fees paid directly from your investment)
- --------------------------------------------------------------------------------
Maximum Sales Charge on Purchases
- --------------------------------------------------------------------------------
(as a % of offering price) 4.75% none
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge
(See "Purchases") none none
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from fund assets) (as a % of average net assets)(1)
- --------------------------------------------------------------------------------
Management Fees (See "Management") 0.50% 0.50%
- --------------------------------------------------------------------------------
Distribution and Service (12b-1 Fees)(2) 0.35% 0.45%
- --------------------------------------------------------------------------------
Other Expenses (See "Management") 0.15% 0.15%
- --------------------------------------------------------------------------------
Total Operating Expenses 1.00% 1.10%
- --------------------------------------------------------------------------------
================================================================================
Expense example
================================================================================
This example, like that in other funds' prospectuses, assumes a $10,000 initial
investment at maximum sales charge, if any, 5% total return each year and no
changes in expenses. You pay the following expenses over the course of each
period shown if you sell your shares at the end of the period, although your
actual cost may be higher or lower. The expenses include any applicable
contingent deferred sales charges.
Share class 1 Year 3 Years 5 Years 10 Years
Class A shares $572 $778 $1,001 $1,644
- --------------------------------------------------------------------------------
Class P shares $112 $349 $606 $1,343
- --------------------------------------------------------------------------------
You would pay the following expenses on the same investment, assuming you kept
your shares.
Class A shares $572 $778 $1,001 $1,644
- --------------------------------------------------------------------------------
Class P shares $112 $349 $606 $1,343
- --------------------------------------------------------------------------------
This example is for comparison and is not a representation of the fund's actual
expenses or returns, either past or present.
Management fees are payable to Lord Abbett for the fund's investment management.
12b-1 fees refer to fees incurred for activities that are primarily intended to
result in the sale of fund shares and service fees for shareholder account
service and maintenance.
The 12b-1 Plan for the Washington fund will not become operative for class A
shares until the class A net assets reach $100 million.
Other expenses include fees paid for miscellaneous items such as transfer
agency, legal and share registration fees.
- --------------------------------------------------------------------------------
(1) The annual operating expenses have been restated from fiscal year amounts
to reflect current fees.
(2) Because 12b-1 distribution fees (up to: 0.35%- class A; and 0.20%- class
P) are paid out on an on-going basis, over time they will increase the
cost of your investment and may cost you more than paying other types of
sales charges. Service fees under each class's 12b-1 Plan equal up to
0.25%.
Washington Bonds - Risks Factors. The State of Washington's economy
includes manufacturing and service industries as well as agricultural and
timber production. The State's leading export industries are aerospace,
forest products, agriculture and timber production. The Boeing Company,
one of the world's largest aerospace firms, in the State's largest employer
and as such has a significant impact, in terms of production, employment
and labor earnings, on the State's economy. Continued declines in the
forest products industry are expected in the future, and although a
decrease in employment in this area is also expected, the impact is not
expected to significantly affect the State's overall economic performance.
State law requires a balanced budget.
12 / The Funds
<PAGE>
Your Investment
PURCHASES
This prospectus offers four classes of shares for the National fund: class
A, B, C and P. Three classes of shares are offered for both the California
and New York funds: class A, C and P. Two classes of shares is offered for
the other funds: class A and P. Although a fund may have more than one
class of shares, these different classes of shares represent investments
in the same portfolio of securities but are subject to different expenses.
Our shares are continuously offered. The offering price is based on the
Net Asset Value ("NAV") per share next determined after we receive your
purchase order submitted in proper form. A front-end sales charge is added
to the NAV, in the case of the class A shares. There is no front-end sales
charge, although there is a CDSC in the case of the class B and C shares,
as described below.
You should read this section carefully to determine which class of shares
represents the best investment option for your particular situation. It
may not be suitable for you to place a purchase order for class B shares
of $500,000 or more or a purchase order for class C shares of $1,000,000
or more. You should discuss pricing options with your investment
professional.
For more information, see "Alternative Sales Arrangements" in the
Statement of Additional Information.
We reserve the right to withdraw all or any part of the offering made by
this prospectus or to reject any purchase order. We also reserve the right
to waive or change minimum investment requirements. All purchase orders
are subject to our acceptance and are not binding until confirmed or
accepted in writing.
================================================================================
Front-End Sales Charges - Class A Shares (All Funds)
================================================================================
To Compute
As a % of As a % of Offering Price
Your Investment Offering Price Your Investment Divide NAV by
- --------------------------------------------------------------------------------
Less than $50,000 4.75% 4.99% .9425
- --------------------------------------------------------------------------------
$50,000 to $99,999 4.75% 4.99% .9525
- --------------------------------------------------------------------------------
$100,000 to $249,999 3.75% 3.90% .9625
- --------------------------------------------------------------------------------
$250,000 to $499,999 2.75% 2.83% .9725
- --------------------------------------------------------------------------------
$500,000 to $999,999 2.00% 2.04% .9800
- --------------------------------------------------------------------------------
$1,000,000 and over No Sales Charge 1.0000
- --------------------------------------------------------------------------------
Reducing Your Class A Front-End Sales Charges. Class A shares may be
purchased at a discount if you qualify under either of the following:
o Rights of Accumulation -- A Purchaser can apply the value (at public
offering price) of the shares you already own to a new purchase of
class A shares of any Eligible Fund in order to reduce the sales
charge.
o Statement of Intention -- A Purchaser of class A shares can purchase
additional shares of any Eligible Fund over a 13-month period and
receive the same sales charge as if you had purchased all shares at
once. Shares purchased through reinvestment of dividends or
distributions are not included. A statement of intention can be
backdated 90 days. Current holdings under rights of accumulation
can be included in a statement of intention.
For more information on eligibility for these privileges, read the
applicable sections in the attached application.
NAV per share for each class of fund shares is calculated each business day at
the close of regular trading on the New York Stock Exchange ("NYSE"). Each fund
is open on those business days when the NYSE is open. Purchases and sales of
fund shares are executed at the NAV next determined after the fund receives your
order. In calculating NAV, securities for which market quotations are available
are valued at those quotations. Securities for which such quotations are not
available are valued at fair value under procedures approved by the Board.
Share classes
Class A (All funds)
o normally offered with a front- end sales charge
Class B (National only)
o no front-end sales charge, how-ever, a contingent deferred sales charge is
applied to shares sold prior to the sixth anniversary of purchase
o higher annual expenses than class A shares
o automatically convert to class A shares after eight years
Class C (National, California and New York funds only)
o no front-end sales charge
o higher annual expenses than class A shares
o a contingent deferred sales charge is applied to shares sold prior to the
first anniversary of purchase
Class P
o available to certain pension or retirement plans and pursuant to a Mutual
Fund Advisory Program
Your Investment / 13
<PAGE>
Class A Share Purchases Without A Front-End Sales Charge. Class A shares
may be purchased without a front-end sales charge under any of the
following:
o purchases of $1 million or more *
o purchases by Retirement Plans with at least 100 eligible employees *
o purchases under a Special Retirement Wrap Program *
o purchases made with dividends and distributions on class A shares of
another Eligible Fund
o purchases representing repayment under the loan feature of the Lord
Abbett-sponsored prototype 403(b) plan for class A shares
o purchases by employees of any consenting securities dealer having a
sales agreement with Lord Abbett Distributor
o purchases under a Mutual Fund Advisory Program
o purchases by trustees or custodians of any pension or profit sharing
plan, or payroll deduction IRA for employees of any consenting
securities dealer having a sales agreement with Lord Abbett
Distributor
See the Statement of Additional Information for a listing of other
categories of purchasers who qualify for class A share purchases without a
front-end sales charge.
Class A Share CDSC. If you buy class A shares under one of the starred (?)
categories listed above and you redeem any of them within 24 months after
the month in which you initially purchased them, the fund normally will
collect a CDSC of 1%.
The class A share CDSC generally will be waived for the following:
o benefit payments such as Retirement Plan loans, hardship
withdrawals, death, disability, retirement, separation from service
or any excess distribution under Retirement Plans (documentation may
be required)
o redemptions continuing as investments in another fund participating
in a Special Retirement Wrap Program
Class B Share CDSC. The CDSC for class B shares normally applies if you
redeem your shares before the sixth anniversary of their initial purchase.
The CDSC declines the longer you own your shares, according to the
following schedule:
================================================================================
Contingent Deferred Sales Charges - Class B Shares
================================================================================
Anniversary(1) of Contingent Deferred Sales Charge
the day on which the on redemption (as % of amount
purchase order was accepted subject to charge)
On Before
- --------------------------------------------------------------------------------
1st 5.0%
- --------------------------------------------------------------------------------
1st 2nd 4.0%
- --------------------------------------------------------------------------------
2nd 3rd 3.0%
- --------------------------------------------------------------------------------
3rd 4th 3.0%
- --------------------------------------------------------------------------------
4th 5th 2.0%
- --------------------------------------------------------------------------------
5th 6th 1.0%
- --------------------------------------------------------------------------------
on or after the 6th(2) None
- --------------------------------------------------------------------------------
(1) Anniversary is the 365th day subsequent to a purchase or a prior
anniversary.
(2) Class B shares will automatically convert to class A shares on the eighth
anniversary of the purchase of class B shares.
* This may be subject to a Contingent Deferred Sales Charge ("CDSC").
Retirement Plans include employer-sponsored retirement plans under the Internal
Revenue Code, excluding Individual Retirement Accounts.
Lord Abbett Distributor LLC ("Lord Abbett Distributor") acts as agent for the
funds to work with investment professionals that buy and/or sell shares of the
funds on behalf of their clients. Generally, Lord Abbett Distributor does not
sell fund shares directly to investors.
Benefit Payment Documentation.
(Class A only)
o under $50,000 - no documentation necessary
o over $50,000 - reason for benefit payment must be received in writing. Use
the address indicated under opening your account.
CDSC regardless of class, is not charged on shares acquired through reinvestment
of dividends or capital gains distributions and is charged on the original
purchase cost or the current market value of the shares at the time they are
being sold, which-ever is lower. In addition, repayment of loans under
Retirement Plans and 403(b) plans will constitute new sales for purposes of
assessing the CDSC.
To determine if a CDSC applies to a redemption, the fund redeems shares in the
following order:
1. shares acquired by reinvestment of dividends and capital gains
2. shares held for six years or more (class B) or two years or more after the
month of purchase (class A) or one year or more (class C)
3. shares held the longest before the sixth anniversary of their purchase
(class B) or before the second anniversary after the month of purchase
(class A) or before the first anniversary of their purchase (class C)
14 / Your Investment
<PAGE>
The class B share CDSC generally will be waived under any one of the
following:
o benefit payments such as Retirement Plan loans, hardship
withdrawals, death, disability, retirement, separation from service
or any excess contribution or distribution under Retirement Plans
o Eligible Mandatory Distributions under 403(b) plans and individual
retirement accounts
o death of the shareholder (natural person)
o redemptions of shares in connection with Div-Move and Systematic
Withdrawal Plans (up to 12% per year)
See "Systematic Withdrawal Plan" under "Services For Fund Investors" below
for more information on CDSCs with respect to class B shares.
Class C Share CDSC (National, California and New York fund only). The 1%
CDSC for class C shares normally applies if you redeem your shares before
the first anniversary of your original purchase.
Class P Shares. Class P shares have lower annual expenses than class B and
class C shares, no front-end sales charge, and no CDSC. Class P shares are
currently sold and redeemed at NAV pursuant to Mutual Fund Advisory
Program, to the trustees of, or employer-sponsors with respect to, pension
or retirement plans with at least 100 eligible employees (such as a plan
under Section 401(a), 401(k) or 457(b) of the Internal Revenue Code) which
engage an investment professional providing or participating in an
agreement to provide, certain recordkeeping, administrative and/or
sub-transfer agency services to the fund on behalf of the class P
shareholders.
OPENING YOUR ACCOUNT
MINIMUM INITIAL INVESTMENT
o Regular account $1,000
o Individual Retirement Accounts and
403(b) plans under the Internal Revenue Code $250
o Uniform Gift to Minor Account $250
For Retirement Plans and Mutual Fund Advisory Programs, no minimum
investment is required, regardless of share class.
You may purchase shares through any independent securities dealer who has
a sales agreement with Lord Abbett Distributor or you can fill out the
attached application and send it to the fund you select at the address
stated below. You should carefully read the paragraph below entitled
"Proper Form" before placing your order to assure your order will be
accepted.
Name of Fund
P.O. Box 419100
Kansas City, MO 64141
Proper Form. An order submitted directly to the fund must contain: (1) a
completed application, and (2) payment by check. For more information
regarding proper form of a purchase order, call the fund at 800-821-5129.
Payment must be credited in U.S. dollars to our custodian bank's account.
By Exchange. Telephone the fund at 800-821-5129 to request an exchange
from any eligible Lord Abbett-sponsored fund.
Important Information. You may be subject to a $50 penalty under the Internal
Revenue Code if you do not provide a correct taxpayer identification number
(Social Security Number for individuals) or make certain required
certifications. In addition, we may be required to withhold from your account
and pay to the U.S. Treasury 31% of any redemption proceeds and any dividend or
distribution from your account.
Eligible Guarantor is any broker or bank that is a member of the medallion stamp
program. Most major securities firms and banks are members of this program. A
notary public is not an eligible guarantor.
Your Investment / 15
<PAGE>
REDEMPTIONS
By Broker. Call your investment professional for directions on how to
redeem your shares.
By Telephone. To obtain the proceeds of a redemption of $50,000 or less
from your account, you or your representative can call the fund at
800-821-5129.
By Mail. Submit a written redemption request indicating, the name(s) in
which the account is registered, the fund's name, the class of shares,
your account number, and the dollar value or number of shares you wish to
sell.
Include all necessary signatures. If the signer has any Legal Capacity,
the signature and capacity must be guaranteed by an Eligible Guarantor.
Certain other legal documentation may be required. For more information
regarding proper documentation call 800-821-5129.
Normally a check will be mailed to the name and address in which the
account is registered (or otherwise according to your instruction) within
three business days after receipt of your redemption request. Your account
balance must be sufficient to cover the amount being redeemed or your
redemption order will not be processed. Redemptions of shares purchased by
check will take up to 15 days.We will verify that the shares being
redeemed (if purchased by check) were purchased at least 15 days earlier.
To determine if a CDSC applies to a redemption, see "Class A share CDSC,"
"Class B share CDSC" or "Class C share CDSC."
DISTRIBUTIONS AND TAXES
Each fund pays its shareholders dividends from its net investment income,
and distributes net capital gains that it has realized. Each fund expects
that its dividends from investment income will be tax exempt and expects
to pay such dividends to shareholders monthly. If a capital gain
distribution is declared, it will be paid annually. Your distributions
will be reinvested in your fund unless you instruct the fund to pay them
to you in cash. There are no sales charges on reinvestments.
The tax status of distributions are the same for all shareholders
regardless of how long they have been in the fund or whether distributions
are reinvested or paid in cash. In general, distributions are taxable as
follows:
================================================================================
Federal Taxability Of Distributions
Type of Tax rate for Tax rate for
distribution 15% bracket 28% bracket and above
- --------------------------------------------------------------------------------
Income Generally Generally
dividends tax exempt tax exempt
- --------------------------------------------------------------------------------
Short-term Ordinary
capital gains 15% income rate
- --------------------------------------------------------------------------------
Long-term
capital gains 10% 20%
- --------------------------------------------------------------------------------
Except in tax-advantaged accounts, any sale or exchange of fund shares may
be a taxable event.
Annual Information - Information concerning the tax treatment of dividends
and other distributions will be mailed to shareholders each year. Each
fund will also provide annually to its shareholders information regarding
the source of dividends and distributions of capital gains paid by that
fund. Because everyone's tax situation is unique, you should consult your
tax adviser regarding the treatment of those distributions under the
federal, state and local tax rules that apply to you as well as the tax
consequences of gains or losses from the redemption or exchange of your
shares.
Small Accounts. Our Board may authorize closing any account in which there are
fewer than 25 shares if it is in a fund's best interest to do so.
Social Security and Railroad Retirement Benefit Recipients. Shareholders
receiving social security benefits and certain railroad re-tirement benefits may
be subject to federal income tax on up to 85% of such benefits as a result of
receiving investment income, including tax-exempt income (such as
exempt-interest dividends) and other distributions paid by each fund. The tax
will be imposed on up to one-half of such benefits only when the sum of the
recipient's adjusted gross income (plus miscellaneous adjustments), tax-exempt
interest income and one-half of social security income exceeds $25,000 for
individuals ($32,000 for individuals filing a joint return). The tax will be
imposed on up to 85% of such benefits only when such sum exceeds $34,000 for
individuals ($44,000 for individuals filing a joint return).
Taxes on Transactions. The chart at left also can provide a "rule of thumb"
guide for your potential U.S. federal tax liability when selling or exchanging
fund shares. The second row, "Short-term capital gains," applies to fund shares
sold within 12 months of purchase. The third row, "Long-term capital gains,"
applies to shares held for more than 12 months.
Starting January 1, 2001, sales of securities held for more than five years will
be taxed at special lower rates.
Any gains realized on a fund's transactions in options and financial futures
will be treated as taxable long- or short-term capital gains.
16 / Your Investment
<PAGE>
SINGLE-STATE TAXABILITY OF DISTRIBUTIONS
For All Funds - With respect to any particular state fund, exempt-interest
dividends derived from interest income on obligations of that state or its
political subdivisions, agencies or instrumentalities and on obligations
of the federal government or certain other government authorities (for
example, U.S. territories) paid to individual shareholders will, in most
cases, be exempt from tax in that state. However, special rules, described
below, may apply. Exempt-interest dividends may be subject to that state's
franchise or other corporate taxes if received by a corporation subject to
such taxes and to state and local taxes in states other than that state.
Generally, dividends and distributions, whether received in cash or
additional shares, derived from a state fund's other investment income and
capital gains will be subject to state income tax. The following are
special rules that apply to the states named below:
Minnesota Taxes - Exempt-interest dividends paid by the Minnesota fund
will only be exempt from Minnesota personal income tax if 95% or more of
the exempt-interest dividends paid by the Minnesota fund come from
Minnesota sources. The Minnesota fund intends to invest so that the 95%
test is met each year. Generally, at least 80% of the value of the net
assets of the Minnesota fund will be maintained in debt obligations that
are exempt from federal income tax and Minnesota personal income tax.
For Minnesota corporations, S corporations and partnerships holding shares
of the fund, Minnesota fund distributions may be taken into account in
determining the minimum fee that is imposed by the state.
Missouri Taxes - The portion of the fund's dividends received by a
shareholder that is exempt from Missouri personal or corporate income tax
each year may be reduced by interest or other expenses in excess of $500
paid or incurred to purchase or carry shares of the fund or other
investments producing income that is exempt from Missouri income tax.
Dividends paid by the Missouri fund generally will be exempt from Missouri
corporate income tax to the extent that they are derived from interest on
obligations of the State of Missouri or any of its political subdivisions
or authorities or obligations issued by certain other government
authorities.
New Jersey Taxes - Exempt-interest dividends paid by the New Jersey fund
will only be exempt from New Jersey Gross Income Tax if at least 80% of
the interest-bearing and discount obligations held by the fund are
obligations of the State of New Jersey or other New Jersey government
agencies and the fund meets certain other investment and filing
requirements. We intend to meet those requirements. As long as we meet
those requirements, exempt-interest dividends derived from those
obligations, capital gains distributions derived from the fund's sale or
exchange of those obligations, and each shareholder's net gains or income
derived from the disposition of shares of the New Jersey fund will not be
subject to New Jersey Gross Income Tax.
New York Taxes - Dividends derived from interest on obligations of the
State of New York or its political subdivisions that are exempt from
federal income tax or on obligations issued by certain other governmental
entities paid by the New York fund will be exempt from New York City, as
well as New York State, personal income taxes.
SERVICES FOR FUND INVESTORS
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. With each service, you select a schedule and amount, subject to
certain restrictions. You can set up most of these services when filling
out your application or by calling 800-821-5129.
Your Investment / 17
<PAGE>
================================================================================
For investing
Invest-A-Matic You can make fixed, periodic investments ($50 minimum) into
(Dollar-cost your fund account by means of automatic money transfers from
averaging) your bank checking account. See the attached application for
instructions.
Div-Move You can automatically reinvest the dividends and
distributions from your account into another account in any
Eligible Fund. ($50 minimum)
For selling shares
Systematic You can make regular withdrawals from most Lord Abbett
Withdrawal funds. Automatic cash withdrawals can be paid to you from
Plan ("SWP") your account in fixed or variable amounts. To establish a
plan, the value of your shares must be at least $10,000,
except for Retirement Plans for which there is no minimum.
Your shares must be in non-certificate form.
Class B shares The CDSC will be waived on redemptions of up to 12% of the
current net asset value of your account at the time of your
SWPrequest. For class B share redemptions over 12% per year,
the CDSC will apply to the entire redemption. Please contact
the fund for assistance in minimizing the CDSC in this
situation.
Class B and Redemption proceeds due to a SWP for class B and class C
C shares shares will be redeemed in the order described under
"Contingent Deferred Sales Charges" under "Purchases."
================================================================================
OTHER SERVICES
Telephone Investing. After we have received the attached application
(selecting "yes" under Section 7C and completing Section 7), you can
instruct us by phone to have money transferred from your bank account to
purchase shares of the fund for an existing account. The fund will
purchase the requested shares when it receives of the money from your
bank.
Telephone Exchanges. You or your investment professional, with proper
identification, can instruct your fund by telephone to exchange shares of
any class for shares of the same class of any Eligible Fund by calling
800-821-5129. The fund must receive instructions for the exchange before
the close of the NYSE on the day of your call. If you meet this
requirement, you will get the NAV per share of the Eligible Fund
determined on that day. Exchanges will be treated as a sale for federal
tax purposes. Be sure to read the current prospectus for any fund into
which you are exchanging.
Reinvestment Privilege. If you sell shares of the fund, you have a one
time right to reinvest some or all of the proceeds in the same class of
any Eligible Fund within 60 days without a sales charge. If you paid a
CDSC when you sold your shares, you will be credited with the amount of
the CDSC. All accounts involved must have the same registration.
Account Statements. Every Lord Abbett investor automatically receives
quarterly account statements.
Householding. Shareholders with the same last name and address will
receive a single copy of a prospectus and an annual or semi-annual report,
unless additional reports are specifically requested in writing to the
fund.
Account Changes. For any changes you need to make to your account, consult
your investment professional or call the fund at 800-821-5129.
Systematic Exchange. You or your investment professional can establish a
schedule of exchanges between the same classes of any Eligible Fund.
Lord Abbett offers a variety of Retirement Plans. Call 800-253-7299 for
information about:
o Traditional, Rollover, Roth and Education IRAs
o Simple IRAs, SEP-IRAs, 401(k) and 403(b) accounts
o Defined Contribution Plans
Telephone Transactions. You have this privilege unless you refuse it in writing.
For your security, telephone transaction requests are recorded. We will take
measures to verify the identity of the caller, such as asking for your name,
account number, social security or taxpayer identification number and other
relevant information. The fund will not be liable for following instructions
communicated by telephone that it reasonably believes to be genuine.
Transactions by telephone may be difficult to implement in times of drastic
economic or market change.
Exchanges by telephone should not be used to take advantage of short-term swings
in the market. The fund reserves the right to limit or terminate this privilege
for any shareholder making frequent exchanges or abusing the privilege and may
revoke the privilege for all shareholders upon 60 days' written notice.
18 / Your Investment
<PAGE>
SALES CHARGES AND SERVICE FEES
Sales and Service Compensation. As part of its plan for distributing
shares, each fund and Lord Abbett Distributor pay sales and service
compensation to Authorized Institutions that sell the fund's shares and
service its shareholder accounts.
Sales compensation originates from two sources: sales charges and 12b-1
distribution fees that are paid out of each fund's assets. Service
compensation originates from 12b-1 service fees. The 12b-1 fee rates vary
by share class, according to the Rule 12b-1 plan adopted by each fund. The
sales charges and 12b-1 fees paid by investors are shown in the
class-by-class information under "Fees and Expenses" and "Purchases." The
portion of these expenses that is paid as sales and service compensation
to Authorized Institutions, such as your dealer, is shown in the chart at
the end of this prospectus. The portion of such sales and service
compensation paid to Lord Abbett Distributor is discussed under "Sales
Activities" and "Service Activities". Sometimes we do not pay sales and
service compensation where tracking data is not available for certain
accounts or where the Authorized Institution waives part of the
compensation.
We may pay Additional Concessions to Authorized Institutions from time to
time.
Sales Activities. We may use 12b-1 distribution fees to pay Authorized
Institutions to finance any activity which is primarily intended to result
in the sale of shares. Lord Abbett Distributor uses its portion of the
distribution fees attributable to a fund's class A and class C shares for
activities which are primarily intended to result in the sale of such
class A and class C shares, respectively. These activities include, but
are not limited to, printing of prospectuses and statements of additional
information and reports for other than existing shareholders, preparation
and distribution of advertising and sales material, expenses of organizing
and conducting sales seminars, Additional Concessions to Authorized
Institutions, the cost necessary to provide distribution-related services
or personnel, travel, office expenses, equipment and other allocable
overhead.
Service Activities. We may pay Rule 12b-1 service fees to Authorized
Institutions for any activity which is primarily intended to result in
personal service and/or the maintenance of shareholder accounts. Any
portion of the service fees paid to Lord Abbett Distributor will be used
to service and maintain shareholder accounts.
MANAGEMENT
The funds' investment adviser is Lord, Abbett & Co., 767 Fifth Avenue, New
York, NY 10153-0203. Founded in 1929, Lord Abbett manages one of the
nation's oldest mutual fund complexes, with approximately $28 billion in
more than 35 mutual fund portfolios and other advisory accounts. For more
information about the services Lord Abbett provides to the funds, see the
Statement of Additional Information.
The fund pays Lord Abbett a monthly fee based on average daily net assets
for each month. For the fiscal year ended September 30, 1998, the fee paid
to Lord Abbett was at an annual rate of .50 of 1% for all funds except
Missouri fund, Hawaii fund, and Minnesota fund. The rates for Missouri
fund and Hawaii fund were .49 of 1% and .48 of 1%, respectively. Lord
Abbett waived it entire fee for Minnesota fund. In addition, the fund pays
all expenses not expressly assumed by Lord Abbett.
Lord Abbett uses a team of portfolio managers and analysts acting together
to manage the company's investments. Zane E. Brown, Partner and Director
of Fixed Income of Lord Abbett, heads the team, the senior members of
which are John R. Mousseau, Director of Municipal Bond Management, and
Philip P. Fang, Municipal Portfolio Manager. Mr. Brown has been with Lord
Abbett since 1992, Mr. Mousseau since 1993 and Mr. Fang since 1991.
12b-1 fees are payable regardless of expenses. The amounts payable by a fund
need not be directly related to expenses. If Lord Abbett Distributor's actual
expenses exceed the fee payable to it, a fund will not have to pay more than
that fee. If Lord Abbett Distributor's expenses are less than the fee it
receives, Lord Abbett Distributor will keep the full amount of the fee.
Your Investment / 19
<PAGE>
For More Information
OTHER INVESTMENT TECHNIQUES
This section describes some of the investment techniques that might be
used by the funds and their risks.
Adjusting Investment Exposure. Each fund may, but is not required to, use
various strategies to change its investment exposure to adjust to changing
security prices, interest rates, currency exchange rates, commodity prices
and other factors. These strategies may involve buying or selling
derivative instruments, such as options and futures contracts, stripped
securities, currency exchange contracts, swap agreements, short sales of
securities, indexed securities and rights and warrants. The fund may use
these transactions to change the risk and return characteristics of each
fund's portfolio. If we judge market conditions incorrectly or use a
strategy that does not correlate well with the fund's investments, it
could result in a loss, even if we intended to lessen risk or enhance
returns. These transactions may involve a small investment of cash
compared to the magnitude of the risk assumed and could produce
disproportionate gains or losses. Also, these strategies could result in
losses if the counterparty to a transaction does not perform as promised.
Borrowing. Each fund may borrow from banks. If a fund borrows money, its
share price may be subject to greater fluctuation until the borrowing is
paid off. each underlying fund may borrow only for temporary or emergency
purposes, and not in an amount exceeding 331/3% of its total assets.
Concentration. No fund intends to invest more than 25% of its total assets
in any industry, except that each fund may, subject to the limits referred
to in Diversification, Private Activity Bonds and with respect to
temporary taxable investments under "Main Risks," invest more than 25% of
such assets in a combination of U.S. Government securities and in
tax-exempt securities, including tax-exempt revenue bonds whether or not
the users of any facilities financed by such bonds are in the same
industry. Where nongovernmental users are in the same industry, there may
be additional risk to a fund in the event of an economic downturn in such
industry, which may result generally in a lowered ability of such users to
make payments on their obligations. Electric utility and health care are
typical, but not all inclusive of, the industries in which this 25% may be
exceeded. The former is relatively stable but subject to rate regulation
vagaries. The latter suffers from two main problems affordability and
access. Tax-exempt securities issued by governments or political
subdivisions of governments are not considered part of any "industry."
Diversification. National fund is a diversified fund, which means that
with respect to 75% of its total assets, it will not purchase a security
if, as a result, more than 5% of the fund's total assets would be invested
in securities of a single issuer or the fund would hold more than 10% of
the outstanding voting securities of the issuer. Each fund (except
National fund) is a nondiversified mutual fund. This means that the fund
may invest a greater portion of its assets in, and own a greater amount of
the voting securities of, a single company than a diversified fund. This
may expose the fund to greater risk.
Illiquid Securities. These securities include those that are not traded on
the open market or that trade irregularly or in very low volume. They may
be difficult or impossible to sell at the time and price the fund would
like. Each underlying fund may invest up to 15% of its assets in illiquid
securities.
Investment Grade Debt Securities. These are debt securities which are
rated in one of
20 / For More Information
<PAGE>
the four highest grades assigned by Moody's Investors Service, Inc.,
Standard & Poor's Ratings Services or Fitch Investors Service, or are
unrated but determined by Lord Abbett to be equivalent in quality.
Options and Financial Futures Transactions. Each fund may deal in options
on securities, and securities indices, and financial futures transactions,
including options on financial futures to increase or decrease its
exposure to changing securities prices or interest rates or for bona fide
hedging purposes. Each fund may write (sell) covered call options and
secured put options on up to 25% of its net assets and may purchase put
and call options and purchase and sell futures contracts provided that no
more than 5% of its net assets (at the time of purchase) may be invested
in premiums on such options and initial margin deposits on such futures
contracts.
In addition the use of options and financial futures transactions to
achieve a funds' investment objective could result in a loss due to
unanticipated market conditions and could increase the volatility of the
fund. These transactions may involve a small investment of cash relative
to the risks assumed.
Private Activity Bonds. Each fund may invest up to 20% of its net assets
(less any amount invested in the temporary taxable investments described
under "Main Risks") in private activity bonds. A fund's dividends derived
from interest on such bonds would be considered a preference item for
purposes of the computation of the alternative minimum tax. A fund's
dividends derived from such interest may increase the alternative minimum
tax liability of corporate shareholders who are subject to that tax based
on the excess of their adjusted current earnings over their taxable
income.
Residual Bonds. Each fund may invest up to 20% of its net assets in
residual interest bonds ("RIBs") to enhance and increase portfolio
duration. None of the funds invested more than 16% of its net assets in
RIBs at any time during the fiscal year ended September 30, 1998. A RIB,
sometimes referred to as an inverse floater,is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of
the interest rate on another specific fixed-rate security ("specific
fixed-rate security"). Changes in the interest rate on the specific
fixed-rate security inversely affect the residual interest rate paid on
the RIB, with the result that when interest rates rise, RIBs' interest
payments are lowered and their value falls faster than securities similar
to the specific fixed-rate security. In an effort to mitigate this risk,
each fund purchases fixed-rate bonds which are less volatile. When
interest rates fall, not only do RIBs provide interest payments that are
higher than securities similar to the specific fixed-rate security, but
their values also rise faster than securities similar to the specific
fixed-rate security.
U.S. Government Securities. These are obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
When-Issued Municipal Bonds. Each fund may purchase new issues of
municipal bonds, which are generally offered on a when-issued basis, with
delivery and payment ("settlement") normally taking place approximately
one month after the purchase date. However, the payment obligation and the
interest rate to be received by a fund are each fixed on the purchase
date. During the period between purchase and settlement, each fund's
assets consisting of cash and/or high-grade marketable debt securities,
marked to market daily, of an amount sufficient to make payment at
settlement will be segregated at our custodian. There is a risk that
market yields available at settlement may be higher than yields obtained
on the purchase date, which could result in depreciation of value. While
we may sell when-issued securities prior to settlement, we intend to
actually acquire such securities unless a sale appears desirable for
investment reasons.
For More Information / 21
<PAGE>
GLOSSARY OF SHADED TERMS
Additional Concessions. Lord Abbett Distributor may, for specified
periods, allow dealers to retain the full sales charge for sales of shares
or may pay an additional concession to a dealer who sells a minimum dollar
amount of our shares and/or shares of other Lord Abbett-sponsored funds.
In some instances, such additional concessions will be offered only to
certain dealers expected to sell significant amounts of shares. Additional
payments may be paid from Lord Abbett Distributor's own resources or from
distribution fees received from a fund and will be made in the form of
cash or, if permitted, non-cash payments. The non-cash payments will
include business seminars at Lord Abbett's headquarters or other
locations, including meals and entertainment, or the receipt of
merchandise. The cash payments may include payment of various business
expenses of the dealer.
In selecting dealers to execute portfolio transactions for a fund's
portfolio, if two or more dealers are considered capable of obtaining best
execution, we may prefer the dealer who has sold our shares and/or shares
of other Lord Abbett-sponsored funds.
Authorized Institutions. Institutions and persons permitted by law to
receive service and/or distribution fees under a Rule 12b-1 plan are
"authorized institutions." Lord Abbett Distributor is an Authorized
Institution.
Eligible Fund. An Eligible Fund is any Lord Abbett-sponsored fund except
for certain tax-free, single-state funds where the exchanging shareholder
is a resident of a state in which such a fund is not offered for sale;
Lord Abbett Equity Fund; Lord Abbett Series Fund; Lord Abbett U.S.
Government Securities Money Market Fund ("GSMMF") (except for holdings in
GSMMF which are attributable to any shares exchanged from the Lord Abbett
family of funds). An Eligible Fund also is any Authorized Institution's
affiliated money market fund satisfying Lord Abbett Distributor as to
certain omnibus account and other criteria.
Eligible Mandatory Distributions. If class B shares represent a part of an
individual's total IRA or 403(b) investment, the CDSC will be waived only
for that part of a mandatory distribution which bears the same relation to
the entire mandatory distribution as the B share investment bears to the
total investment.
Legal Capacity. With respect to a redemption request, if (for example) the
request is on behalf of the estate of a deceased shareholder, John W. Doe,
by a person (Robert A. Doe) who has the legal capacity to act for the
estate of the deceased shareholder because he is the executor of the
estate, then the request must be executed as follows: Robert A.Doe,
Executor of the Estate of John W. Doe. That signature using that capacity
must be guaranteed by an Eligible Guarantor.
Similarly, if (for example) the redemption request is on behalf of the ABC
Corporation by a person (Mary B. Doe) that has the legal capacity to act
on behalf of this corporation, because she is the President of the
corporation, then the request must be executed as follows: ABC Corporation
by Mary B.Doe, President. That signature using that capacity must be
guaranteed by an Eligible Guarantor.
Mutual Fund Advisory Program. Certain unaffiliated authorized brokers,
dealers, registered investment advisers or other financial institutions
who either (a) have an arrangement with Lord Abbett Distributor in
accordance with certain standards approved by Lord Abbett Distributor,
providing specifically for the use of our shares (and sometimes providing
for acceptance of orders for such shares on our behalf) in particular
investment products made available for a fee to clients of such brokers,
dealers, registered investment advisers and other financial institutions,
or (b) who charge an advisory, con-
Guaranteed signature. An acceptable form of guarantee would be as follows:
o In the case of the estate -
Robert A. Doe
Executor of the Estate of
John W. Doe
[Date]
SIGNATURE GUARANTEED
MEDALLION GUARANTEED
NAME OF GUARANTOR
/s/ [ILLEGIBLE]
------------------------------------------------
AUTHORIZED SIGNATURE
(960) X9003470
SECURITIES TRANSFER AGENTS MEDALLION PROGRAM(TM)
SR
o In the case of the corporation - ABC Corporation
Mary B. Doe
By Mary B. Doe, President
[Date]
SIGNATURE GUARANTEED
MEDALLION GUARANTEED
NAME OF GUARANTOR
/s/ [ILLEGIBLE]
------------------------------------------------
AUTHORIZED SIGNATURE
(960) X9003470
SECURITIES TRANSFER AGENTS MEDALLION PROGRAM(TM)
SR
22 / For More Information
<PAGE>
sulting or other fee for their services and buy shares for their own
accounts or the accounts of their clients.
Purchaser. The term "purchaser" includes: (i) an individual, (ii) an
individual and his or her spouse and children under the age of 21, and
(iii) a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing,
or other employee benefit trust qualified under Section 401 of the
Internal Revenue Code - more than one qualified employee benefit trust of
a single employer, including its consolidated subsidiaries, may be
considered a single trust, as may qualified plans of multiple employers
registered in the name of a single bank trustee as one account), although
more than one beneficiary is involved.
Special Retirement Wrap Program. A program sponsored by an authorized
institution showing one or more characteristics distinguishing it, in the
opinion of Lord Abbett Distributor from a mutual Fund Advisory Program.
Such characteristics include, among other things, the fact that an
authorized institution does not charge its clients any fee of a consulting
or advisory nature that is economically equivalent to the distribution fee
under the class A 12b-1 Plan and the fact that the program relates to
participant-directed Retirement Plans.
RECENT PERFORMANCE
During the past fiscal year, economic and political uncertainties abroad
created concern regarding the domestic economy and, investors moved from
lower-rated fixed income investments into higher-quality bonds. Because we
focus on high-quality municipal issues, the funds' net asset values
increased.
Throughout the fiscal year, the funds held some prerefunded bonds. In an
environment of falling rates, many issuers prerefunded existing,
higher-coupon bonds. When an issuer prerefunds bonds, the proceeds from a
newly issued lower-yielding bonds are used to buy Treasury securities.
These Treasury securities are held to pay interest and principal on the
older, higher-coupon bonds on the first call date. (The call date is a
date upon which an issuer may redeem a bond.) When a bond becomes a strong
prerefunding candidate, it trades off its lower yield-to-call rather than
its higher yield-to-maturity. As a result, it appreciates in price due to
the closer maturity date (the call date) and the increase in the
underlying credit quality (through the use of the Treasury securities).
In the spring, Long Island Power Authority ("LIPA") brought to market the
largest municipal bond issue ($3 billion) in history. Before this
offering, many portfolio managers raised cash by selling bonds to raise
the cash needed to invest in the LIPA issue. We correctly anticipated that
managers would need to liquidate some of their high quality bonds to make
room for LIPA, and purchased several issues at prices which we believe
were below their true value.
Year 2000 Issues. Each fund could be adversely affected if the computers used by
each fund and their service providers do not properly process and calculate
date-related information from and after January 1, 2000.
While year 2000-related computer problems could have a negative effect on each
fund, Lord Abbett is working to avoid such problems and has assurances from each
fund's service providers that they are taking similar steps. However, because
the problem is unprecedented and efforts to identify and fix it are on-going, we
don't know whether these efforts will be successful. Accordingly, each fund may
be adversely affected.
For More Information / 23
<PAGE>
National Fund
Financial Information
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the fiscal periods
indicated. "Total return" shows how much your investment in the fund would
have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. These Financial Highlights
have been audited by Deloitte & Touche LLP, the fund's independent
auditors, in conjunction with their annual audit of the fund's financial
statements. Financial statements for the fiscal year ended September 30,
1998 and the Independent Auditors' Report thereon appear in the Annual
Report to Shareholders for the fiscal year ended September 30, 1998 and
are incorporated by reference into the Statement of Additional
Information, which is available upon request.Certain information reflects
financial results for a single fund share.
<TABLE>
<CAPTION>
====================================================================================================================================
Class A Shares
------------------------------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.48 $11.08 $11.00 $10.62 $12.37
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .604 .587 .603 .626 .657
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain (loss) on investments .470 .415 .075 .382 (1.3124)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.074 1.002 .678 1.008 (.6554)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.574) (.602) (.598) (.628) (.6596)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain -- -- -- -- (.435)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $11.98 $11.48 $11.08 $11.00 $10.62
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 9.60% 9.30% 6.31% 9.84% 5.64%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 0.88% 0.87% 0.90% 0.82% 0.86%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.18% 5.27% 5.63% 5.92% 5.76%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Class B Shares Class C Shares
-------------------------------------- --------------------------------------
Year Ended September 30, Year Ended September 30,
-------------------------------------- --------------------------------------
Per Share Operating Performance: 1998 1997 1996(c) 1998 1997 1996(c)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.50 $11.08 $11.05 $11.49 $11.08 $10.90
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .518 .553 .089 .520 .507 .106
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain on securities .466 .413 .033 .471 .423 .190
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .984 .966 .122 .991 .930 .296
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.504) (.546) (.092) (.491) (.520) (.116)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $11.98 $11.50 $11.08 $11.99 $11.49 $11.08
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 8.85% 8.95% 1.16%(b) 8.80% 8.61% 2.71%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 1.47% 1.37% 0.20%(b) 1.61% 1.59% 0.34%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 4.49% 4.65% 0.68%(b) 4.44% 4.54% 0.96%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended September 30,
------------------------------------------------------------------------------------
Supplemental Data For All Classes: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $658,310 $646,736 $672,344 $650,699 $662,380
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 304.15% 232.64% 205.35% 225.39% 184.07%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
(b) Not annualized.
(c) From commencement of operations for each class of shares: August 1, 1996
(class B) and July 15, 1996 (class C).
See Notes to Financial Statements.
24 / Financial Information
<PAGE>
National Fund
Line Graph Comparison
Immediately below is a comparison of a $10,000 investment in class A
shares to the same investment in both Lipper's average of General
Municipal Debt funds and the Lehman Municipal Bond Index, assuming
reinvestment of all dividends and distributions.
================================================================================
CLASS A AT CLASS A AT LEHMAN MUNICIPAL LIPER'S AVERAGE OF
NAV MAXIMUN OFFERING BOND INDEX NATIONAL TAX-FREE FUNDS
PRICE
1988 10,000 9,527 10,000 10,000
1989 10,919 10,402 10,868 10,888
1990 11,581 11,034 11,607 11,468
1991 13,090 12,469 13,138 12,971
1992 14,500 13,813 14,511 14,322
1993 16,612 15,826 16,360 16,236
1994 15,675 14,933 15,960 15,606
1995 17,217 16,402 17,745 17,132
1996 18,302 17,437 18,817 18,098
1997 20,005 19,059 20,514 19,669
1998 21,925 20,886 22,301 21,282
================================================================================
Average Annual Total Return At Maximum Applicable
Sales Charge For The Periods Ending September 30, 1998
1 Year 5 Years 10 Years (or Life)
- --------------------------------------------------------------------------------
Class A(4) 4.40% 4.66% 7.65%
- --------------------------------------------------------------------------------
Class B(5) 4.49% -- 7.25%
- --------------------------------------------------------------------------------
Class C(6) 8.80% -- 9.15%
- --------------------------------------------------------------------------------
PUERTO RICO - Risk Factors (Applicable to each fund)
Each fund may invest in bonds issued by the Commonwealth of Puerto Rico
and its instrumentalities. The economy of Puerto Rico is dominated by the
manufacturing and service sectors. It is closely integrated, through
extensive trade, with that of the mainland United States, and its economic
health is closely tied to the price of oil and the state of the U.S.
economy. Although its unemployment rate has steadily declined in recent
years, Puerto Rico's unemployment rate continues to exceed the U.S.
average.
Recently, Puerto Rico's economy has experienced significant growth.
Continued growth will depend on several factors, including the state of
the U.S. economy, the relative stability of the price of oil and borrowing
costs.
- --------------------------------------------------------------------------------
(1) Reflects the deduction of the maximum initial sales charge of 4.75%.
(2) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs, management fees or sales charges.
(3) Source: Lipper Analytical Services.
(4) This shows total return which is the percent change in value, after
deduction of the maximum initial sales charge of 4.75% applicable to class
A shares, with all dividends and distributions reinvested for the periods
shown ending September 30, 1998 using the SEC-required uniform method to
compute total return. The class A share inception date is 4/2/84.
(5) The class B shares were first offered on 8/1/96. Performance reflects the
deduction of a CDSC of 4% (for 1 year) and 3% (for life of the class).
(6) The class C shares were first offered on 7/15/96. Performance is at net
asset value.
Financial Information / 25
<PAGE>
California Fund
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the fiscal periods
indicated. "Total return" shows how much your investment in the fund would
have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. These Financial Highlights
have been audited by Deloitte & Touche LLP, the fund's independent
auditors, in conjunction with their annual audit of the fund's financial
statements. Financial statements for the fiscal year ended September 30,
1998 and the Independent Auditors' Report thereon appear in the Annual
Report to Shareholders for the fiscal year ended September 30, 1998 and
are incorporated by reference into the Statement of Additional
Information, which is available upon request. Certain information reflects
financial results for a single fund share.
<TABLE>
<CAPTION>
====================================================================================================================================
Class A Shares
----------------------------------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996(d) 1996 1995 1994 1993(e)
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.72 $10.43 $10.32 $10.41 $10.45 $11.79 $11.21
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .538 .560 .046 .566 .588 .623 .656
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain (loss) on investments .388 .290 .112 (.089) (.038) (.989) .872
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .926 .850 .158 .477 .550 (.366) 1.528
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.526) (.560) (.048) (.567) (.590) (.624) (.658)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain -- -- -- -- -- (.350) (.290)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $11.12 $10.72 $10.43 $10.32 $10.41 $10.45 $11.79
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 8.86% 8.39% 1.53%(b) 4.65% 5.58% (3.33%) 14.43%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, including waiver and
reimbursements 0.87% 0.72% 0.07%(b) 0.75% 0.76% 0.67% 0.68%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding waiver and
reimbursements 0.87% 0.85% 0.07%(b) 0.86% 0.86% 0.87% 0.88%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 4.98% 5.38% 0.44%(b) 5.41% 5.84% 5.63% 5.68%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Class C Shares
--------------------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996(d) 1996(c)
<S> <C> <C> <C> <C>
Net asset value, beginning of year $10.72 $10.43 $10.32 $10.28
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .465 .485 .039 .068
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain on investments .383 .287 .113 .041
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .848 .772 .152 .109
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.448) (.482) (.042) (.069)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $11.12 $10.72 $10.43 $10.32
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 8.09% 7.59% 1.47%(b) 1.16%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, including waiver and reimbursements 1.59% 1.46% 0.13%(b) 0.17%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding waiver and reimbursements 1.59% 1.59% 0.13%(b) 0.21%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 4.26% 4.64% 0.38%(b) 0.65%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended September 30,
------------------------------------------------------------------------------------------------
Supplemental Data For All Classes: 1998 1997 1996(d) 1996 1995 1994 1993(e)
<S> <C> <C> <C> <C> <C> <C> <C>
Net assets, end of year (000) $ 264,405 $ 273,009 $ 294,837 $ 291,611 $ 296,274 $ 329,474 $ 336,291
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 187.26% 121.97% 2.74% 132.37% 100.20% 86.05% 81.34%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
(b) Not annualized.
(c) From July 15, 1996, commencement of operations for class C shares.
(d) One month ended September 30, 1996.
(e) Year ended August 31, 1993.
See Notes to Financial Statements.
26 / Financial Information
<PAGE>
California Fund
LINE GRAPH COMPARISON
Immediately below is a comparison of a $10,000 investment in class A
shares to the same investment in both the Lipper's average of California
Municipal Debt funds and the Lehman Municipal Bond Index, assuming
reinvestment of all dividends and distributions.
================================================================================
CLASS A AT CLASS AT MAXIMUM LEHMAN MUNICIPAL LIPPER'S AVERAGE OF
NAV OFFERING PRICE BOND INDEX CALIFORNIA TAX-FREE
FUND
1988 10,000 9,526 10,000 10,000
1989 10,956 10,437 10,868 10,902
1990 11,609 11,058 11,607 11,482
1991 13,214 12,587 13,138 12,944
1992 14,670 13,975 14,511 14,171
1993 16,908 16,106 16,360 16,105
1994 15,795 15,046 15,960 15,437
1995 17,159 16,346 17,745 16,922
1996 18,097 17,240 18,817 18,027
1997 19,615 18,685 20,514 19,624
1998 21,355 20,341 22,301 21,329
================================================================================
Average Annual Total Return At Maximum Applicable
Sales Charge For The Periods Ending September 30, 1998
1 Year 5 Years 10 Years (or Life)
- --------------------------------------------------------------------------------
Class A(4) 3.70% 3.75% 7.36%
- --------------------------------------------------------------------------------
Class C(5) 8.09% -- 8.33%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Reflects the deduction of the maximum initial sales charge of 4.75%
(2) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs, management fees or sales charges. This index is
composed of municipal bonds from many different states and, therefore, it
may not be valid to compare to a single-state municipal bond portfolio,
such as this fund.
(3) Source: Lipper Analytical Services.
(4) This shows total return which is the percent change in value, after
deduction of the maximum initial sales charge of 4.75% applicable to class
A shares, with all dividends and distributions reinvested for the periods
shown ending September 30, 1998 using the SEC-required uniform method to
compute total return. The class A shares inception date is 9/3/85.
(5) The class C shares were first offered on 7/15/96. Performance is at net
asset value.
Financial Information / 27
<PAGE>
Connecticut Fund
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the fiscal periods
indicated. "Total return" shows how much your investment in the fund would
have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. These Financial Highlights
have been audited by Deloitte & Touche LLP, the fund's independent
auditors, in conjunction with their annual audit of the fund's financial
statements. Financial statements for the fiscal year ended September 30,
1998 and the Independent Auditors' Report thereon appear in the Annual
Report to Shareholders for the fiscal year ended September 30, 1998 and
are incorporated by reference into the Statement of Additional
Information, which is available upon request. Certain information reflects
financial results for a single fund share.
<TABLE>
<CAPTION>
===================================================================================================================================
Class A Shares
-----------------------------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.42 $10.13 $10.12 $ 9.71 $11.01
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income .521 .556 .576 .579 .585
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- -----------------------------------------------------------------------------------------------------------------------------------
gain (loss) on investments .322 .287 (.013) .407 (1.1287)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .843 .843 .563 .986 (.5437)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.533) (.553) (.553) (.576) (.6038)
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain -- -- -- -- (.1525)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.73 $10.42 $10.13 $10.12 $ 9.71
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 8.32% 8.56% 5.70% 10.52% (5.13%)
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses, including waiver and
reimbursements 0.81% 0.59% 0.38% 0.41% 0.49%
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding waiver and
reimbursements 0.81% 0.78% 0.80% 0.86% 0.86%
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 4.95% 5.45% 5.66% 5.89% 5.67%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended September 30,
--------------------------------------------------------------------------------------------------
Supplemental Data: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $120,983 $119,909 $122,885 $113,436 $101,619
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 61.06% 37.09% 63.61% 54.19% 97.42%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
See Notes to Financial Statements.
28 / Financial Information
<PAGE>
Connecticut Fund
LINE GRAPH COMPARISON
Immediately below is a comparison of a $10,000 investment in class A
shares to the same investment in both Lipper's average of Connecticut
Municipal Debt funds and the Lehman Municipal Bond Index, assuming
reinvestment of all dividends and distributions.
================================================================================
CLASS A AT CLASS A AT LEHMAN MUNICIPAL LIPPER'S AVERAGE OF
NAV MAXIMUM OFFERING BOND INDEX CONNECTICUT TAX-FREE
PRICE FUNDS
1991 10,692 10,183 10,611 10,529
1992 11,728 11,170 11,720 11,583
1993 13,542 12,899 13,213 13,212
1994 12,847 12,236 12,891 12,669
1995 14,199 13,524 14,332 13,894
1996 15,007 14,294 15,197 14,654
1997 16,293 15,519 16,568 15,851
1998 17,647 16,809 18,011 17,130
================================================================================
Average Annual Total Return At Maximum Applicable
Sales Charge For The Periods Ending September 30, 1998
1 Year 5 Years 10 Years (or Life)
- --------------------------------------------------------------------------------
Class A(4) 3.20% 4.41% 7.17%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Reflects the deduction of the maximum initial sales charge of 4.75%
(2) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs, management fees or sales charges. This index is
composed of municipal bonds from many different states and, therefore, it
may not be valid to compare to a single-state municipal bond portfolio,
such as this fund.
(3) Source: Lipper Analytical Services.
(4) This shows total return which is the percent change in value, after
deduction of the maximum initial sales charge of 4.75% applicable to class
A shares, with all dividends and distributions reinvested for the periods
shown ending September 30, 1998 using the SEC-required uniform method to
compute total return. The class A share inception date is 4/1/91.
Financial Information / 29
<PAGE>
Hawaii Fund
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the fiscal periods
indicated. "Total return" shows how much your investment in the fund would
have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. These Financial Highlights
have been audited by Deloitte & Touche LLP, the fund's independent
auditors, in conjunction with their annual audit of the fund's financial
statements. Financial statements for the fiscal year ended September 30,
1998 and the Independent Auditors' Report thereon appear in the Annual
Report to Shareholders for the fiscal year ended September 30, 1998 and
are incorporated by reference into the Statement of Additional
Information, which is available upon request. Certain information reflects
financial information for a single fund share.
<TABLE>
<CAPTION>
====================================================================================================================================
Class A Shares
-------------------------------------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $5.07 $4.93 $4.91 $4.72 $5.34
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .245 .266 .273 .271 .2918
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain (loss) on investments .180 .138 .015 .198 (.578)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .425 .404 .288 .469 (.2862)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.245) (.264) (.268) (.279) (.2888)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain -- -- -- -- (.045)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $5.25 $5.07 $4.93 $4.91 $4.72
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 8.59% 8.42% 5.94% 10.30% (5.54%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, including waiver and
reimbursements 0.92% 0.58% 0.57% 0.58% 0.41%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding waiver and
reimbursements 0.93% 0.87% 0.87% 0.87% 0.87%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 4.78% 5.39% 5.46% 5.74% 5.80%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended September 30,
Supplemental Data: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------
Net assets, end of year (000) $80,970 $79,079 $85,344 $86,105 $92,972
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 52.65% 29.09% 59.46% 70.64% 66.04%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
See Notes to Financial Statements.
30 / Financial Information
<PAGE>
Hawaii Fund
LINE GRAPH COMPARISON
Immediately below is a comparison of a $10,000 investment in class A
shares to the same investment in both Lipper's average of Hawaii Municipal
Debt funds and the Lehman Municipal Bond Index, assuming reinvestment of
all dividends and distributions.
================================================================================
CLASS A AT CLASS A AT LEHMAN MUNICIPAL LIPPER'S AVERAGE OF
NAV MAXIMUN OFFERING BOND INDEX HAWAII TAX-FREE FUNDS
PRICE
1991 10,000 10,000
1992 10,905 10,382 10,947 10,897
1993 12,634 12,028 12,342 12,342
1994 11,934 11,360 12,041 11,904
1995 13,163 12,531 13,387 12,973
1996 13,943 13,274 14,195 13,737
1997 15,117 14,392 15,476 14,845
1998 16,416 15,629 16,824 16,029
================================================================================
Average Annual Total Return At Maximum Applicable
Sales Charge For The Periods Ending September 30, 1998
1 Year 5 Years 10 Years (or Life)
- --------------------------------------------------------------------------------
Class A(4) 3.50% 4.35% 6.66%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Reflects the deduction of the maximum initial sales charge of 4.75%
(2) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs, management fees or sales charges. This index is
composed of municipal bonds from many different states and, therefore, it
may not be valid to compare to a single-state municipal bond portfolio,
such as this fund.
(3) Source: Lipper Analytical Services.
(4) This shows total return which is the percent change in value, after
deduction of the maximum initial sales charge of 4.75% applicable to class
A shares, with all dividends and distributions reinvested for the periods
shown ending September 30, 1998 using the SEC-required uniform method to
compute total return. The class A share inception date is 10/28/91.
Financial Information / 31
<PAGE>
Minnesota Fund
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the fiscal periods
indicated. "Total return" shows how much your investment in the fund would
have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. These Financial Highlights
have been audited by Deloitte & Touche LLP, the fund's independent
auditors, in conjunction with their annual audit of the fund's financial
statements. Financial statements for the fiscal year ended September 30,
1998 and the Independent Auditors' Report thereon appear in the Annual
Report to Shareholders for the fiscal year ended September 30, 1998 and
are incorporated by reference into the Statement of Additional
Information, which is available upon request. Certain information
reflects financial results for a single fund share.
<TABLE>
<CAPTION>
====================================================================================================================================
Class A Shares
-----------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996 1995(c)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $5.05 $4.90 $5.01 $4.76
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .265 .273 .294 .230
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain (loss) on investments .134 .155 (.078) .249
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .399 .428 .216 .479
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.269) (.278) (.286) (.229)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain -- -- (.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $5.18 $5.05 $4.90 $5.01
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 8.11% 8.97% 4.44% 10.22%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, including waiver and reimbursements 0.27% 0.36% 0.00% 0.00%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding waiver and reimbursements 0.77% 0.86% 0.91% 0.64%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.19% 5.51% 5.91% 4.58%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended September 30,
---------------------------------------------------------------------------------------------------
Supplemental Data: 1998 1997 1996 1995
<S> <C> <C> <C> <C>
Net assets, end of year (000) $14,399 $10,510 $8,047 $4,315
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 40.65% 41.45% 43.08% 121.41%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
(b) Not annualized.
(c) From December 27, 1994, commencement of operations for class A shares.
See Notes to Financial Statements.
32 / Financial Information
<PAGE>
Minnesota Fund
LINE GRAPH COMPARISON
Immediately below is a comparison of a $10,000 investment in class A
shares to the same investment in both Lipper's average of Minnesota
Municipal Debt funds and the Lehman Municipal Bond Index, assuming
reinvestment of all dividends and distributions.
================================================================================
CLASS A AT CLASS A AT LEHMAN MUNICIPAL LIPPER'S AVERAGE OF
NAV MAXIMUM OFFERING BOND INDEX MINNESOTA TAX-FREE
PRICE FUNDS
12/31/94 10,000 10,000
1995 11,022 10,493 11,280 11,076
1996 11,512 10,959 11,961 11,653
1997 12,543 11,942 13,040 12,561
1998 13,562 12,910 14,176 13,533
================================================================================
Average Annual Total Return At Maximum Applicable
Sales Charge For The Periods Ending September 30, 1998
1 Year 5 Years 10 Years (or Life)
- --------------------------------------------------------------------------------
Class A(4) 3.00% -- 7.02%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Reflects the deduction of the maximum initial sales charge of 4.75%
(2) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs, management fees or sales charges. This index is
composed of municipal bonds from many different states and, therefore, it
may not be valid to compare to a single-state municipal bond portfolio,
such as this fund.
(3) Source: Lipper Analytical Services.
(4) This shows total return which is the percent change in value, after
deduction of the maximum initial sales charge of 4.75% applicable to class
A shares, with all dividends and distributions reinvested for the periods
shown ending September 30, 1998 using the SEC-required uniform method to
compute total return. The class A share inception date is 12/27/94.
Financial Information / 33
<PAGE>
Missouri Fund
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the fiscal periods
indicated. "Total return" shows how much your investment in the fund would
have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. These Financial Highlights
have been audited by Deloitte & Touche LLP, the fund's independent
auditors, in conjunction with their annual audit of the fund's financial
statements. Financial statements for the fiscal year ended September 30,
1998 and the Independent Auditors' Report thereon appear in the Annual
Report to Shareholders for the fiscal year ended September 30, 1998 and
are incorporated by reference into the Statement of Additional
Information, which is available upon request. Certain information reflects
financial results for a single fund share.
<TABLE>
<CAPTION>
====================================================================================================================================
Class A Shares
----------------------------------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $5.22 $5.08 $5.08 $4.88 $5.51
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .253 .268 .267 .277 .2926
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain (loss) on investments .142 .138 .008 .204 (.5681)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .395 .406 .275 .481 (.2755)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.255) (.266) (.275) (.281) (.297)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain -- -- -- -- (.0575)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $5.36 $5.22 $5.08 $5.08 $4.88
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 7.75% 8.22% 5.54% 10.21% (5.22%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, including waiver and
reimbursements 0.92% 0.70% 0.77% 0.74% 0.60%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding waiver and
reimbursements 0.93% 0.94% 0.92% 0.89% 0.91%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 4.80% 5.22% 5.21% 5.61% 5.60%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended September 30,
---------------------------------------------------------------------------------------------------
Supplemental Data: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $144,155 $140,280 $134,144 $131,823 $119,690
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 72.89% 27.34% 93.17% 58.17% 50.59%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
See Notes to Financial Statements.
34 / Financial Information
<PAGE>
Missouri Fund
LINE GRAPH COMPARISON
Immediately below is a comparison of a $10,000 investment in class A
shares to the same investment in both Lipper's average of Missouri
Municipal Debt funds and the Lehman Municipal Bond Index, assuming
reinvestment of all dividends and distributions.
================================================================================
CLASS A AT CLASS A AT MAXIMUM LEHMAN MUNICIPAL LIPPERS AVERAGE OF
NAV OFFERING PRICE BOND INDEX MISSOURI TAX-FREE
FUNDS
5/31/91 10,000 10,000
1991 10,546 10,044 10,379 10,381
1992 11,756 11,196 11,464 11,408
1993 13,378 12,741 12,924 12,944
1994 12,679 12,075 12,609 12,398
1995 13,973 13,307 14,018 13,643
1996 14,747 14,045 14,865 14,390
1997 15,959 15,199 16,206 15,588
1998 17,196 16,378 17,617 16,797
================================================================================
Average Annual Total Return At Maximum Applicable
Sales Charge For The Periods Ending September 30, 1998
1 Year 5 Years 10 Years (or Life)
- --------------------------------------------------------------------------------
Class A(4) 2.60% 4.14% 6.96%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Reflects the deduction of the maximum initial sales charge of 4.75%
(2) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs, management fees or sales charges. This index is
composed of municipal bonds from many different states and, therefore, it
may not be valid to compare to a single-state municipal bond portfolio,
such as this fund.
(3) Source: Lipper Analytical Services.
(4) This shows total return which is the percent change in value, after
deduction of the maximum initial sales charge of 4.75% applicable to class
A shares, with all dividends and distributions reinvested for the periods
shown ending September 30, 1998 using the SEC-required uniform method to
compute total return. The class A share inception date is 5/31/91.
Financial Information / 35
<PAGE>
New Jersey Fund
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the fiscal periods
indicated. "Total return" shows how much your investment in the fund would
have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. These Financial Highlights have
been audited by Deloitte & Touche LLP, the fund's independent auditors, in
conjunction with their annual audit of the fund's financial statements.
Financial statements for the fiscal year ended September 30, 1998 and the
Independent Auditors' Report thereon appear in the Annual Report to
Shareholders for the fiscal year ended September 30, 1998 and are
incorporated by reference into the Statement of Additional Information,
which is available upon request. Certain information reflects financial
results for a single fund share.
<TABLE>
<CAPTION>
====================================================================================================================================
Class A Shares
-----------------------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $5.32 $5.18 $5.14 $4.95 $5.55
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .262 .272 .277 .287 .300
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain (loss) on investments .223 .144 .041 .192 (.507)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .485 .416 .318 .479 (.207)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.265) (.276) (.278) (.289) (.303)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain -- -- -- -- (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $5.54 $5.32 $5.18 $5.14 $4.95
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 9.34% 8.25% 6.29% 9.98% (3.91%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, including waiver and
reimbursements 0.86% 0.82% 0.79% 0.72% 0.51%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding waiver and
reimbursements 0.86% 0.86% 0.86% 0.87% 0.83%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 4.85% 5.21% 5.31% 5.73% 5.76%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended September 30,
---------------------------------------------------------------------------------------------------
Supplemental Data: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $186,127 $184,465 $186,402 $191,562 $184,230
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 118.38% 154.80% 171.63% 133.11% 75.62%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
See Notes to Financial Statements.
36 / Financial Information
<PAGE>
New Jersey Fund
LINE GRAPH COMPARISON
Immediately below is a comparison of a $10,000 investment in class A
shares to the same investment in both Lipper's average of New Jersey
Municipal Debt funds and the Lehman Municipal Bond Index, assuming
reinvestment of all dividends and distributions.
================================================================================
CLASS A AT CLASS A AT LEHMAN MUNICIPAL LIPPER'S AVERAGE OF NEW
NAV MAXIMUN OFFERING BOND INDEX JERSEY TAX-FREE
PRICE FUNDS
12/31/90 10,000 10,000
1991 10,998 10,474 10,851 10,873
1992 12,154 11,575 11,985 11,973
1993 14,009 13,342 13,512 13,584
1994 13,461 12,821 13,182 13,040
1995 14,805 14,100 14,656 14,311
1996 15,737 14,987 15,541 15,070
1997 17,035 16,223 16,943 16,288
1998 18,624 17,738 18,419 17,607
================================================================================
Average Annual Total Return At Maximum Applicable
Sales Charge For The Periods Ending September 30, 1998
1 Year 5 Years 10 Years (or Life)
- --------------------------------------------------------------------------------
Class A(4) 4.00% 4.81% 7.68%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Reflects the deduction of the maximum initial sales charge of 4.75%
(2) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs, management fees or sales charges. This index is
composed of municipal bonds from many different states and, therefore, it
may not be valid to compare to a single-state municipal bond portfolio,
such as this fund.
(3) Source: Lipper Analytical Services.
(4) This shows total return which is the percent change in value, after
deduction of the maximum initial sales charge of 4.75% applicable to class
A shares, with all dividends and distributions reinvested for the periods
shown ending September 30, 1998 using the SEC-required uniform method to
compute total return. The class A share inception date is 1/2/91.
Financial Information / 37
<PAGE>
New York Fund
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the fiscal periods
indicated. "Total return" shows how much your investment in the fund would
have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. These Financial Highlights
have been audited by Deloitte & Touche LLP, the fund's independent
auditors, in conjunction with their annual audit of the fund's financial
statements. Financial statements for the fiscal year ended September 30,
1998 and the Independent Auditors' Report thereon appear in the Annual
Report to Shareholders for the fiscal year ended September 30, 1998 and
are incorporated by reference into the Statement of Additional
Information, which is available upon request. Certain information reflects
financial results for a single fund share.
<TABLE>
<CAPTION>
====================================================================================================================================
Class A Shares
--------------------------------------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.03 $10.78 $10.85 $10.54 $12.27
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .562 .578 .597 .610 .649
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain (loss) on investments .408 .262 (.081) .316 (1.3665)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .970 .840 .516 .926 (.7175)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.570) (.590) (.586) (.616) (.6475)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain -- -- -- -- (.365)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $11.43 $11.03 $10.78 $10.85 $10.54
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 9.03% 8.01% 4.87% 9.12% (6.21%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 0.85% 0.85% 0.81% 0.82% 0.83%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.06% 5.35% 5.54% 5.83% 5.72%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Class C Shares
------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996(c)
<S> <C> <C> <C>
Net asset value, beginning of period $11.02 $10.78 $10.63
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .485 .483 .111
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain on securities .402 .267 .152
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .887 .750 .263
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.487) (.510) (.113)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.42 $11.02 $10.78
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 8.34% 7.13% 2.48%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 1.57% 1.57% 0.34%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 4.32% 4.60% 1.04%(b)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended September 30,
----------------------------------------------------------------------------------------------
Supplemental Data For All Classes: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $290,257 $300,490 $319,553 $331,618 $338,539
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 64.63% 110.28% 64.25% 105.62% 149.13%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
(b) Not annualized.
(c) From July 15, 1996, commencement of operations for class C shares.
See Notes to Financial Statements.
38 / Financial Information
<PAGE>
New York Fund
LINE GRAPH COMPARISON
Immediately below is a comparison of a $10,000 investment in class A
shares to the same investment in both Lipper's average of New York
Municipal Debt funds and the Lehman Municipal Bond Index, assuming
reinvestment of all dividends and distributions.
================================================================================
CLASS A AT CLASS A AT LEHMAN MUNICIPAL LIPPER'S AVERAGE OF OF NEW
NAV MAXIMUM OFFERING BOND INDEX YORK TAX-FREE FUNDS
PRICE
1988 10,000 9,523 10,000 10,000
1989 10,914 10,394 10,868 10,867
1990 11,495 10,946 11,607 11,370
1991 13,116 12,490 13,138 12,938
1992 14,519 13,825 14,511 14,348
1993 16,544 15,753 16,360 16,324
1994 15,516 14,776 15,960 15,624
1995 16,932 16,124 17,745 17,064
1996 17,758 16,909 18,817 18,017
1997 19,180 18,263 20,514 19,542
1998 29,911 19,913 22,301 21,182
================================================================================
Average Annual Total Return At Maximum Applicable
Sales Charge For The Periods Ending September 30, 1998
1 Year 5 Years 10 Years (or Life)
- --------------------------------------------------------------------------------
Class A(4) 3.80% 3.78% 7.13%
- --------------------------------------------------------------------------------
Class C(5) 8.33% - 8.15%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Reflects the deduction of the maximum initial sales charge of 4.75%
(2) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs, management fees or sales charges. This index is
composed of municipal bonds from many different states and, therefore, it
may not be valid to compare to a single-state municipal bond portfolio,
such as this fund.
(3) Source: Lipper Analytical Services.
(4) This shows total return which is the percent change in value, after
deduction of the maximum initial sales charge of 4.75% applicable to class
A shares, with all dividends and distributions reinvested for the periods
shown ending September 30, 1998 using the SEC-required uniform method to
compute total return. The class A share inception date is 4/2/84.
(5) The class C shares were first offered on 7/15/96. Performance is at net
asset value.
Financial Information / 39
<PAGE>
Texas Fund
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the fiscal periods
indicated. "Total return" shows how much your investment in the fund would
have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. These Financial Highlights
have been audited by Deloitte & Touche LLP, the fund's independent
auditors, in conjunction with their annual audit of the fund's financial
statements. Financial statements for the fiscal year ended September 30,
1998 and the Independent Auditors' Report thereon appear in the Annual
Report to Shareholders for the fiscal year ended September 30, 1998 and
are incorporated by reference into the Statement of Additional
Information, which is available upon request. Certain information
reflects financial results for a single fund share.
<TABLE>
<CAPTION>
====================================================================================================================================
Class A Shares
-------------------------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.40 $10.11 $10.05 $ 9.59 $10.82
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .507 .548 .567 .571 .604
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain (loss) on investments .407 .367 .045 .452 (1.0802)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .914 .915 .612 1.023 (.4762)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.534) (.555) (.552) (.563) (.6038)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain (.09) (.07) -- -- (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.69 $10.40 $10.11 $10.05 $ 9.59
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 9.24% 9.25% 6.11% 11.14% (4.60%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, including waiver and
reimbursements 0.91% 0.88% 0.69% 0.62% 0.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding waiver and
reimbursements 0.91% 0.88% 0.87% 0.87% 0.87%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 4.85% 5.38% 5.58% 5.90% 5.97%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended September 30,
--------------------------------------------------------------------------------------------------
Supplemental Data: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Assets, end of year (000) $92,607 $91,301 $94,414 $100,304 $103,836
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 143.78% 127.88% 112.34% 108.00% 96.79%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
See Notes to Financial Statements.
40 / Financial Information
<PAGE>
Texas Fund
LINE GRAPH COMPARISON
Immediately below is a comparison of a $10,000 investment in class A
shares to the same investment in both Lipper's average of Texas Municipal
Debt funds and the Lehman Municipal Bond Index, assuming reinvestment of
all dividends and distributions.
================================================================================
CLASS A AT CLASS A AT LEHMAN MUNICIPAL LIPPER'S AVERAGE OF TEXAS
NAV MAXIMUM OFFERING BOND INDEX TAX-FREE FUNDS
PRICE
1988 10,000 9,523 10,000
1989 10,961 10,438 10,868
1990 11,683 11,125 11,607
1991 13,366 12,729 13,138
1992 14,794 14,089 14,511
1993 16,812 16,009 16,360
1994 16,038 15,273 15,960
1995 17,825 16,975 17,745
1996 18,912 18,011 18,817
1997 20,662 19,677 20,514
1998 22,569 21,494 22,301
================================================================================
Average Annual Total Return At Maximum Applicable
Sales Charge For The Periods Ending September 30, 1998
1 Year 5 Years 10 Years (or Life)
- --------------------------------------------------------------------------------
Class A(4) 4.10% 5.04% 7.95%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Reflects the deduction of the maximum initial sales charge of 4.75%
(2) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs, management fees or sales charges. This index is
composed of municipal bonds from many different states and, therefore, it
may not be valid to compare to a single-state municipal bond portfolio,
such as this fund.
(3) Source: Lipper Analytical Services.
(4) This shows total return which is the percent change in value, after
deduction of the maximum initial sales charge of 4.75% applicable to class
A shares, with all dividends and distributions reinvested for the periods
shown ending September 30, 1998 using the SEC-required uniform method to
compute total return. The class A share inception date is 1/20/87.
Financial Information / 41
<PAGE>
Washington Fund
FINANCIAL HIGHLIGHTS
This table describes the fund's performance for the fiscal periods
indicated. "Total return" shows how much your investment in the fund would
have increased (or decreased) during each period, assuming you had
reinvested all dividends and distributions. These Financial Highlights
have been audited by Deloitte & Touche LLP, the fund's independent
auditors, in conjunction with their annual audit of the fund's financial
statements. Financial statements for the fiscal year ended September 30,
1998 and the Independent Auditors' Report thereon appear in the Annual
Report to Shareholders for the fiscal year ended September 30, 1998 and
are incorporated by reference into the Statement of Additional
Information, which is available upon request. Certain information
reflects financial results for a single fund share.
<TABLE>
<CAPTION>
====================================================================================================================================
Class A Shares
------------------------------------------------------------------------------
Year Ended September 30,
Per Share Operating Performance: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $5.16 $4.96 $4.91 $4.72 $5.35
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .273 .268 .271 .277 .2976
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
- ------------------------------------------------------------------------------------------------------------------------------------
gain (loss) on investments .206 .206 .056 .200 (.5895)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .479 .474 .327 .477 (.2919)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income (.259) (.274) (.277) (.287) (.2931)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from net realized gain -- -- -- -- (.045)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $5.38 $5.16 $4.96 $4.91 $4.72
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return(a) 9.48% 9.82% 6.80% 10.48% (5.65%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, including waiver and
reimbursements 0.65% 0.57% 0.60% 0.53% 0.29%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding waiver and
reimbursements 0.65% 0.62% 0.68% 0.68% 0.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.20% 5.36% 5.47% 5.84% 5.93%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
Year Ended September 30,
----------------------------------------------------------------------------------------------------
Supplemental Data: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $62,754 $66,215 $71,295 $74,359 $78,854
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 141.56% 132.37% 78.02% 92.85% 137.74%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return does not consider the effects of sales loads and assumes the
reinvestment of all distributions.
See Notes to Financial Statements.
42 / Financial Information
<PAGE>
Washington Fund
LINE GRAPH COMPARISON
Immediately below is a comparison of a $10,000 investment in class A
shares to the same investment in both Lipper's average of Washington
Municipal Debt funds and the Lehman Municipal Bond Index, assuming
reinvestment of all dividends and distributions.
================================================================================
CLASS A AT CLASS A AT MAXIMUM LEHMAN MUNICIPAL LIPPER'S AVERAGE OF
NAV OFFERING PRICE BOND INDEX TAX-FREE
WASHINGTON FUNDS
4/15/92 10,000 10,000
1992 10,647 10,136 10,561 10,662
1993 12,278 11,689 11,906 12,295
1994 11,584 11,028 11,616 11,609
1995 12,798 12,183 12,915 12,941
1996 13,668 13,012 13,695 13,799
1997 15,009 14,289 14,930 14,979
1998 16,433 15,644 16,230 16,294
================================================================================
Average Annual Total Return At Maximum Applicable
Sales Charge For The Periods Ending September 30, 1998
1 Year 5 Years 10 Years (or Life)
- --------------------------------------------------------------------------------
Class A(4) 4.30% 4.95% 7.17%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Reflects the deduction of the maximum initial sales charge of 4.75%
(2) Performance for the unmanaged Lehman Municipal Bond Index does not reflect
transaction costs, management fees or sales charges. This index is
composed of municipal bonds from many different states and, therefore, it
may not be valid to compare to a single-state municipal bond portfolio,
such as this fund.
(3) Source: Lipper Analytical Services.
(4) This shows total return which is the percent change in value, after
deduction of the maximum initial sales charge of 4.75% applicable to class
A shares, with all dividends and distributions reinvested for the periods
shown ending September 30, 1998 using the SEC-required uniform method to
compute total return. The class A shade inception date is 4/15/92.
Financial Information / 43
<PAGE>
COMPENSATION FOR YOUR DEALER
<TABLE>
<CAPTION>
====================================================================================================================================
FIRST YEAR COMPENSATION
Front-end
sales charge Dealer's
paid by investors concession Service fee(1) Total compensation(2)
Class A investments (% of offering price) (% of offering price) (% of net investment) (% of offering price)
====================================================================================================================================
<S> <C> <C> <C> <C>
Less than $50,000 4.75% 4.00% 0.25% 4.24%
- ------------------------------------------------------------------------------------------------------------------------------------
$50,000 - $99,999 4.75% 4.25% 0.25% 4.49%
- ------------------------------------------------------------------------------------------------------------------------------------
$100,000 - $249,999 3.75% 3.25% 0.25% 3.49%
- ------------------------------------------------------------------------------------------------------------------------------------
$250,000 - $499,999 2.75% 2.50% 0.25% 2.74%
- ------------------------------------------------------------------------------------------------------------------------------------
$500,000 - $999,999 2.00% 1.75% 0.25% 2.00%
- ------------------------------------------------------------------------------------------------------------------------------------
$1 million or more(3) or Retirement Plan
- - 100 or more eligible employees(3) or
Special Retirement Wrap Program(3)
- ------------------------------------------------------------------------------------------------------------------------------------
First $5 million no front-end sales charge 1.00% 0.25% 1.25%
- ------------------------------------------------------------------------------------------------------------------------------------
Next $5 million above that no front-end sales charge 0.55% 0.25% 0.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Next $40 million above that no front-end sales charge 0.50% 0.25% 0.75%
- ------------------------------------------------------------------------------------------------------------------------------------
Over $50 million no front-end sales charge 0.25% 0.25% 0.50%
====================================================================================================================================
Class B investments Paid at time of sale (% of net asset value)
- ------------------------------------------------------------------------------------------------------------------------------------
All amounts no front-end sales charge 3.75% 0.25% 4.00%
====================================================================================================================================
Class C investments
- ------------------------------------------------------------------------------------------------------------------------------------
All amounts no front-end sales charge 0.75% 0.25% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Class P investments Percentage of average net assets
- ------------------------------------------------------------------------------------------------------------------------------------
All amounts no front-end sales charge 0.25% 0.20% 0.45%
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
ANNUAL COMPENSATION AFTER FIRST YEAR
Class A investments
- ------------------------------------------------------------------------------------------------------------------------------------
All amounts no front-end sales charge none 0.25% 0.25%
====================================================================================================================================
Class B investments Percentage of average net assets(4)
- ------------------------------------------------------------------------------------------------------------------------------------
All amounts no front-end sales charge none 0.25% 0.25%
====================================================================================================================================
Class C investments
- ------------------------------------------------------------------------------------------------------------------------------------
All amounts no front-end sales charge 0.65% 0.25% 0.90%
====================================================================================================================================
Class P investments
- ------------------------------------------------------------------------------------------------------------------------------------
All amounts no front-end sales charge 0.25% 0.20% 0.45%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The service fee for class A shares is paid quarterly and for class A
shares may not exceed 0.15% for shares sold prior to: June 1, 1990 for the
National fund; January 1, 1993 for the Hawaii fund; the first day of the
calendar quarter subsequent to the Minnesota fund's net assets reaching
$100 million; July 1, 1992 for the New Jersey fund; June 1, 1990 for the
New York fund; June 1, 1990 for the Texas fund; and the first day of the
calendar quarter subsequent to the Washington fund's net assets reaching
$100 million. The first year's service fee on class B and C shares is paid
at the time of sale.
(2) Reallowance/concession percentages and service fee percentages are
calculated from different amounts, and therefore may not equal total
compensation percentages if combined using simple addition. Additional
Concessions may be paid to Authorized Institutions, such as your dealer,
from time to time.
(3) Concessions are paid at the time of sale on all class A shares sold during
any 12-month period starting from the day of the first net asset value
sale. With respect to (a) class A share purchases at $1 million or more,
sales qualifying at such level under rights of accumulation and statement
of intention privileges are included and (b) for Special Retirement Wrap
Programs, only new sales are eligible and exchanges into the fund are
excluded.
(4) With respect to class B and C shares, 0.25% and 0.90%, respectively, of
the average annual net asset value of such shares outstanding during the
quarter (including distribution reinvestment shares after the first
anniversary of their issuance) is paid to Authorized Institutions, such as
your dealer. These fees are paid quarterly in arrears.
44 / Financial Information
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
For more Information
More information on these funds is available free upon request, including
the following:
ANNUAL/SEMI-ANNUAL REPORT
Describes the funds, lists portfolio holdings and contains a letter from
the funds' manager discussing recent market conditions and each fund's
investment strategies.
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
Provides more details about the funds and their policies. A current SAI is
on file with the Securities and Exchange Commission ("SEC") and is
incorporated by reference (is legally considered part of this prospectus).
National Fund
California Fund
Connecticut Fund
Hawaii Fund
Minnesota Fund
Missouri Fund
New Jersey Fund
New York Fund
Texas Fund
Washington Fund
The General Motors Building
767 Fifth Avenue
New York, NY 10153-0203
---------------------------
SEC file number: 811-3942
To obtain information:
By telephone. Call the funds at 800-426-1130
By mail. Write to the funds at:
The Lord Abbett Family of Funds
767 Fifth Avenue
New York, NY 10153-0203
Via the Internet. Text only versions of fund documents can be viewed online or
downloaded from:
Lord, Abbett & Co.
http://www.lordabbett.com
SEC
http://www.sec.gov
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, DC (phone 800-SEC-0330) or by sending your request and a duplicating
fee to the SEC's Public Reference Section, Washington, DC 20549-6009.
================================================================================
---------------
BULK RATE
U.S. POSTAGE
PAID
PERMIT NO. 2405
NEW YORK, N.Y.
---------------
<PAGE>
- --------------------------------------------------------------------------------
LORD ABBETT
Statement of Additional Information February 1, 1999
- --------------------------------------------------------------------------------
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 Distributor LLC
("Lord Abbett Distributor"), 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 February 1, 1999.
Lord Abbett Tax-Free Income Fund, Inc. (referred to as the "Company") was
incorporated under Maryland law on December 27, 1983. Each Portfolio of the
Company is sometimes referred to as a "Fund" or "we". Each Fund, except for
National Fund, is an open-end non-diversified management investment company.
National fund is diversified. Our Board of Directors has authority to create and
classify shares of common stock in separate funds, without further action by
shareholders. To date, 40,000,000 shares of each of the Connecticut, Hawaii,
Minnesota, Missouri, Texas and Washington Funds, 80,000,000 shares of New Jersey
Fund, 100,000,000 shares of each of California and New York Funds, and
120,000,000 shares of the National Fund have been authorized. The National Fund
consists of three classes of shares (A, B and C). Both the New York and
California Funds consist of two classes (A and C). All other funds offer a
single class of shares: Class A shares. The Board of Directors will allocate
these authorized shares among the classes of each Fund from time to time. All
shares have equal noncumulative voting rights and equal rights with respect to
dividends, assets and liquidation, except for certain class-specific expenses.
They are fully paid and nonassessable when issued and have no preemptive or
conversion rights. Although no present plans exist to do so, further funds may
be added in the future. The Investment Company Act of 1940, as amended (the
"Act"), requires that where more than one fund exists, each fund must be
preferred over all other funds in respect of assets specifically allocated to
such fund.
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
Company shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each class or fund
affected by such matter. Rule 18f-2 further provides that a class or fund shall
be deemed to be affected by a matter unless the interests of each class or fund
in the matter are substantially identical or the matter does not affect any
interest of such class or fund. However, the Rule exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of directors from the separate voting requirements of the Rule.
Shareholder inquiries should be made by writing directly to the Company or by
calling 800-821-5129. The 1998 Annual Shareholder Report is available, without
charge, upon request by calling that number. In addition, you can make inquiries
through your dealer.
TABLE OF CONTENTS Page
1. Investment Objectives and Policies 2
2. Directors and Officers 9
3. Investment Advisory and Other Services 12
4. Portfolio Transactions 13
5. Purchases, Redemptions and Shareholder Services 14
6. Taxes 23
7. Risk Factors Regarding Investments in California, Connecticut,
Hawaii, Minnesota, Missouri, New Jersey, New York, Texas,
Washington and Puerto Rico Municipal Bonds 24
8. Past Performance 34
9. Information About the Company 35
10. Financial Statements 35
<PAGE>
Investment Objective and Policies
Each Fund will not change its investment objective mentioned in the prospectus
and the following Fundamental Investment Restrictions without shareholder
approval. If a Fund determines that its objective can best be achieved by a
change in any non-fundamental investment policy, strategy or restriction, it may
make such change without shareholder approval by disclosing it in the Prospectus
or Statement of Additional Information.
Fundamental Investment Restrictions. Each Fund may not: (1) borrow money (except
that (i) each Fund may borrow from banks (as defined in the Act) in amounts up
to 33 1/3% of its total assets (including the amount borrowed), (ii) each Fund
may borrow up to an additional 5% of its total assets for temporary purposes,
(iii) each Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) each Fund may
purchase securities on margin to the extent permitted by applicable law); (2)
pledge its assets (other than to secure such borrowings or to the extent
permitted by each Fund' investment policies as permitted by applicable law); (3)
engage in the underwriting of securities except pursuant to a merger or
acquisition or 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; (4) make loans to other persons, except that the acquisition of
bonds, debentures or other corporate debt securities and investment in
government obligations, commercial paper, pass-through instruments, certificates
of deposit, bankers acceptances, repurchase agreements or any similar
instruments shall not be subject to this limitation, and except further that
each Fund may lend its portfolio securities, provided that the lending of
portfolio securities may be made only in accordance with applicable law; (5) buy
or sell real estate (except that each Fund may invest in securities directly or
indirectly secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein), commodities or commodity
contracts (except to the extent each Fund may do so in accordance with
applicable law and without registering as a commodity pool operator under the
Commodity Exchange Act as, for example, with futures contracts); (6) with
respect to 75% of the gross assets of the National Fund, buy securities of one
issuer representing more than (i) 5% of the Fund' gross assets, except
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or (ii) 10% of the voting securities of such issuer; (7)
invest more than 25% of its assets, taken at market value, in the securities of
issuers in any particular industry (excluding tax-exempt securities such as
tax-exempt securities financing facilities in the same industry or issued by
nongovernmental users and securities of the U.S. Government, its agencies and
instrumentalities); or (8) issue senior securities to the extent such issuance
would violate applicable law.
With respect to the restrictions mentioned herein, compliance therewith will not
be affected by change in the market value of portfolio securities but will be
determined at the time of purchase or sale of such securities.
Non-Fundamental Investment Restrictions. In addition to the investment
restrictions above which cannot be changed without shareholder approval, we also
are subject to the following non-fundamental investment policies which may be
changed by the Board of Directors without shareholder approval. Each Fund may
not: (1) borrow in excess of 33 1/3% of its total assets (including the amount
borrowed), and then only as a temporary measure for extraordinary or emergency
purposes; (2) make short sales of securities or maintain a short position except
to the extent permitted by applicable law; (3) invest knowingly more than 15% of
its net assets (at the time of investment) in illiquid securities, except for
securities qualifying for resale under Rule 144A of the Securities Act of 1933
deemed to be liquid by the Board of Directors; (4) invest in securities of other
investment companies, except as permitted by applicable law; (5) invest in
securities of issuers which, together with predecessors, have a record of less
than three years of continuous operation, if more than 5% of the Fund's total
assets would be invested in such securities (this restriction shall not apply to
mortgaged-backed securities, asset-backed securities or obligations issued or
guaranteed by the U. S. government, its agencies or instrumentalities); (6) hold
securities of any issuer if more than 1/2 of 1% of the issuer's securities are
owned beneficially by one or more of the Company's officers or directors or by
one or more partners or members of each Fund's underwriter or investment adviser
if these owners in the aggregate own beneficially more than 5% of the securities
of such issuer; (7) invest in warrants if, at the time of acquisition, its
investment in warrants, valued at the lower of cost or market, would exceed 5%
of each Fund's total assets (included within such limitation, but not to exceed
2% of the Fund's total assets, are warrants which are not listed on the New York
or American Stock Exchange or a major foreign exchange; (8) invest in real
estate limited partnership interests or interests in oil, gas or other mineral
leases, or exploration or development programs, except that each Fund may invest
in securities issued by companies that engage in oil, gas or other mineral
exploration or development activities; (9) write, purchase or sell puts, calls,
straddles, spreads or combinations thereof, except to the extent permitted in
the Fund's prospectus and statement of additional information, as they may be
amended from time to time or (10) buy from or sell to any of the Company's
officers, directors, employees, or each Fund's
2
<PAGE>
investment adviser or any of the investment advisor's officers, directors,
partners or employees, any securities other than shares of the Fund's common
stock.
With respect to each Fund other than the National Fund, there is no fundamental
policy or restriction with respect to diversification, but each Fund will be
required to meet the diversification rules under Subchapter M of the Internal
Revenue Code.
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 reasonable risk. For the year ended September 30,
1997, the portfolio turnover rates for the National, New York, California,
Texas, New Jersey, Connecticut, Missouri, Hawaii, Washington and Minnesota
Series were 304.15%, 64.63%, 187.26%, 143.78%, 118.38%, 61.06%, 72.89%, 52.65%,
141.56% and 40.65%, 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 & Co.
("Lord Abbett"), subject 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 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.
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 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 Ratings Services ("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.
3
<PAGE>
Description of Four Highest Municipal Bond Ratings
Moody's describes its four highest ratings for municipal bonds as follows:
Aaa 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 and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds 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.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa 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 An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions are changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation."
Fitch describes its four highest ratings for municipal bonds as follows:
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
4
<PAGE>
BBB Good credit quality. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
Options and Financial Futures Transactions
General. Each Fund may engage in options and financial futures transactions in
accordance with its investment objective and policies. Although none of the Fund
are currently employing such options and financial futures transactions, and
have no current intention of doing so, each may engage in such transactions in
the future if it appears advantageous to the Fund 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 Fund' 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 Fund 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 Fund 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 Fund
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 Fund
and futures contracts subject to the outstanding options written by the Fund
would exceed 50% of the total assets of the Fund.
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 Fund will incur
brokerage fees when they purchase or sell contracts and will be required to
maintain margin deposits. At the time a Fund 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 Fund' 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, frequently there are 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
5
<PAGE>
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 Fund could lose money on the financial
futures contracts and also on the value of its portfolio securities.
Options on Financial Futures Contracts. Each Fund 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 Fund 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 Fund
may expire worthless, in which case the Fund would lose the premium paid
therefor.
Options on Securities. Each Fund 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 Fund 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 Fund 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 Fund to protect capital gains in an
appreciated security it owns, without being required to actually sell that
security. At times a Fund might like to establish a position in securities upon
which call options are available. By purchasing a call option, the Fund 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 Fund 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 Fund 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 Fund may experience material losses. However, in
writing
6
<PAGE>
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 Fund' 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 Fund 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 Fund 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 Fund 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 Fund' portfolio. A
description of such procedures is set forth below.
The Fund only will engage in OTC options transactions with dealers that have
been specifically approved by the Board of Directors of the Fund. The Fund and
their investment adviser believe that such dealers present minimal credit risks
to the Fund and, therefore, should be able to enter into closing transactions if
necessary. The Fund currently will not engage in OTC options transactions if the
amount invested by the Fund 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 Fund
sell OTC options. Under these agreements a Fund 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 Fund to repurchase a specific OTC option written by the Fund, the
"liquidity charge" will be the current market value of the assets serving as
"cover" for such OTC option.
Options on Securities Indices. Each Fund 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 Fund owns or intends to
purchase, and not for speculation. Through the writing or purchase of index
options, a Fund 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 Fund owns or intends to purchase probably will not correlate
perfectly with movements in the level of an index and, therefore, the Fund bears
the risk that a loss on an index option would not be completely offset by
movements in the price of such securities.
7
<PAGE>
When a Fund writes an option on a securities index, it will be required to
deposit with its custodian and market-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 Fund writes a call
option on a securities index at a time when the contract value exceeds the
exercise price, the Fund will segregate and market to market cash or cash
equivalents equal in value to such excess until the option expires or is closed
out.
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 Fund may expire worthless, in which case the Fund
would lose the premium paid therefor.
Delayed Delivery Transactions. Each Fund 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 Fund 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 Fund at
the time of entering into the transaction. When a Fund 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
Fund 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 Fund 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 Fund, 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 Fund engage in when-issued or delayed delivery purchases, they
will do so for the purpose of acquiring portfolio securities consistent with the
Fund' investment objectives and policies and not for investment leverage or to
speculate in interest rate changes. The Fund 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 Fund 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 Fund
will maintain, in a segregated account, cash or high-grade marketable 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 Fund will
enter into a futures contract or purchase an option thereon if immediately
thereafter the initial margin deposits for futures contracts held by the Fund
plus premiums paid by it for open options on futures would exceed 5% of the
Fund' total assets. A Fund 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 Fund 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 within 30 days.
2.
Directors and Officers
The following director is a partner of Lord Abbett, The General Motors Building,
767 Fifth Avenue, New York, New York 10153-0203. He has been associated with
Lord Abbett for over five years and is also an officer and/or director or
trustee of the twelve other Lord Abbett-sponsored funds. He is an "interested
person" as defined in the Act, and as
8
<PAGE>
such, may be considered to have an indirect financial interest in the Rule 12b-1
Plan described in the Prospectus.
Robert S. Dow, age 53, Chairman and President
The following outside directors are also directors or trustees of the twelve
other Lord Abbett-sponsored funds referred to above.
E. Thayer Bigelow
Time Warner Inc.
1271 Avenue of the Americas
New York, New York
Senior Adviser, Time Warner Inc. Formerly, Acting Chief Executive Officer of
Courtroom Television Network (1997-1998). Formerly, President and Chief
Executive Officer of Time Warner Cable Programming, Inc. (1991-1997). Prior to
that, President and Chief Operating Officer of Home Box Office, Inc. Age 57.
William H. T. Bush
Bush-O'Donnell & Co., Inc.
101 South Hanley Road, Suite 1025
St. Louis, Missouri
Co-founder and Chairman of the Board of financial advisory firm of
Bush-O'Donnell & Company. Age 60.
Robert B. Calhoun, Jr.
Monitor Clipper Partners
650 Madison Avenue, 9th Floor
New York, New York
Managing Director of Monitor Clipper Partners and President of the Clipper Group
L.P., both private equity investment funds. Age 56.
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. Age 68.
John C. Jansing
162 S. Beach Road
Hobe Sound, Florida
Retired. Former Chairman of Independent Election Corporation of America, a proxy
tabulating firm. Age 73.
C. Alan MacDonald
Directorship Inc.
8 Sound Shore Drive
Greenwich, Connecticut
Managing Director of Directorship Inc., a consultancy in board management and
corporate governance. Formerly General Partner of The Marketing Partnership,
Inc., a full service marketing consulting firm (1994-1997). Prior to that,
Chairman and Chief Executive Officer of Lincoln Snacks, Inc., manufacturer of
branded snack foods (1992-1994). His career spans 36 years at Stouffers and
Nestle with 18 of the years as Chief Executive Officer. Currently serves as
Director of DenAmerica Corp., J. B. Williams Company, Inc., Fountainhead Water
Company and Exigent Diagnostics. Age 65.
9
<PAGE>
Hansel B. Millican, Jr.
Rochester Button Company
1328 Broadway (Suite 816)
New York, New York
President and Chief Executive Officer of Rochester Button Company. Age 70.
Thomas J. Neff
Spencer Stuart
277 Park Avenue
New York, New York
Chairman of Spencer Stuart, an executive search consulting firm. Currently
serves as Director of Ace, Ltd. (NYSE). Age 61.
The second column of the following table sets forth the compensation accrued for
the Fund's outside directors. The third column sets forth information with
respect to the equity-based benefits accrued for outside directors maintained by
the Lord Abbett-sponsored funds. The fourth column sets forth the total
compensation payable by such funds to the outside directors. No director of the
Fund associated with Lord Abbett and no officer of the Fund received any
compensation from the Fund for acting as a director or officer.
For the Fiscal Year Ended September 30, 1998
<TABLE>
<CAPTION>
Pension or For Year Ended
Retirement Benefits December 31, 1998
Accrued by the Total Compensation
Aggregate Fund and Accrued by the Fund and
Compensation Twelve Other Lord Twelve Other Lord
Accrued by Abbett-sponsored Abbett-sponsored
Name of Director the Fund(1) Funds(2) Funds(3)
- ---------------- ----------- -------------------- ------------------------
<S> <C> <C> <C>
E. Thayer Bigelow $6,452 $17,068 $ 57,400
William H. T. Bush* $3,091 None $ 27,500
Robert B. Calhoun** $3,765 None $ 33,500
Stewart S. Dixon $6,351 $32,190 $ 56,500
John C. Jansing $6,238 $45,085(4) $ 55,500
C. Alan MacDonald $6,182 $30,703 $ 55,000
Hansel B. Millican, Jr. $6,238 $37,747 $ 55,500
Thomas J. Neff $6,351 $19,853 $ 56,500
</TABLE>
*Elected trustee as of August 13, 1998.
**Elected trustee as of June 17, 1998.
1. Outside directors' fees, including attendance fees for board and committee
meetings, are allocated among all Lord Abbett-sponsored funds based on the
net assets of each fund. A portion of the fees payable by the Fund to its
outside directors is being deferred under a plan that deems the deferred
amounts to be invested in shares of the Fund for later distribution to the
directors.
2. The amounts in Column 3 were accrued by the Lord Abbett-sponsored Funds
for the twelve months ended October 31, 1998 with respect to the equity
based plans established for independent directors in 1996. This plan
supercedes a previously approved retirement plan for all future directors.
Current directors had the option to convert their accrued benefits under
the retirement plan. All of the outside directors except one made such an
election. Each plan also provides for a pre-retirement death benefit and
actuarially reduced joint-and-survivor spousal benefits.
3. This column shows aggregate compensation, including directors fees and
attendance fees for board and committee meetings, of a nature referred to
in footnote one, accrued by the Lord Abbett-sponsored funds during the
year ended
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<PAGE>
December 31, 1998. The amounts of the aggregate compensation payable by
the Fund as of September 30, 1998 deemed invested in Fund shares,
including dividends reinvested and changes in net asset value applicable
to such deemed investments, were: Mr. Bigelow, $30,286; Mr. Dixon,
$40,764; Mr. Jansing, $116,723; Mr. MacDonald, $51,213; Mr. Millican,
$117,535 and Mr. Neff, $18,315. If the amounts deemed invested in Fund
shares were added to each director's actual holdings of Fund shares as of
September 30, 1998, each would own, the following: Mr. Bigelow, no shares;
Mr. Dixon, no shares; Mr. Jansing, 2,933 shares; Mr. McDonald, no shares;
Mr.Millican, shares; and Mr. Neff, 294 shares.
4. Mr. Jansing chose to continue to receive benefits under the retirement
plan which provides that outside directors (Trustees) may receive annual
retirement benefits for life equal to their final annual retainer
following retirement at or after age 72 with at least ten years of
service. Thus, if Mr. Jansing were to retire and the annual retainer
payable by the funds were the same as it is today, he would receive annual
retirement benefits of $50,000.
Except where indicated, the following executive officers of the Fund have been
associated with Lord Abbett for over five years. Of the following, Messrs.
Allen, Brown, Carper, Ms. Foster, Messrs. Hilstad, Morris, Noelke and Walsh are
partners of Lord Abbett; the others are employees:
Executive Vice Presidents:
Zane E. Brown, age 47
Vice Presidents:
Paul A. Hilstad, age 56, Vice President and Secretary (with Lord Abbett since
1995 - formerly Senior Vice President and General Counsel of American Capital
Management & Research, Inc.)
Daniel E. Carper, age 47
Philip Fang, age 33
Lawrence H. Kaplan, age 42 (with Lord Abbett since 1997 - formerly Vice
President and Chief Counsel of Salomon Brothers Asset Management Inc from 1995
to 1997, prior thereto Senior Vice President, Director and General Counsel of
Kidder Peabody Asset Management, Inc.)
Thomas F. Konop, age 56
Robert G. Morris, age 54
John Mousseau, age 42
A. Edward Oberhaus III., age 39
Keith F. O'Connor, age 43
Treasurer:
Donna M. McManus, age 38 (with Lord Abbett since 1996, formerly a Senior Manager
at Deloitte & Touche LLP)
The Fund does not hold annual meetings of its stockholders unless one or more
matters are required to be acted on by the stockholders under the Act. Under the
Fund's Articles of Incorporation, shareholder meetings may be called at any time
by certain officers of the Fund or by a majority of the directors (i) for the
purpose of taking action upon any matter requiring the vote or authority of the
Fund's stockholders 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.
As of February 1, 1999, our officers and directors as a group owned less than
1% of the Fund's outstanding shares. As of February 1, 1999 there were no
record holders of 5% or more of the Fund's outstanding shares.
11
<PAGE>
3.
Investment Advisory and Other Services
As described under "Management" in the Prospectus, Lord Abbett is the Fund's
investment manager. Of the seventeen general partners of Lord Abbett, who are
officers and/or directors of the Fund, are: Zane E. Brown, Daniel E. Carper,
Robert S. Dow, Paul Hilstad, and Robert G. Morris .The other general partners of
Lord Abbett who are neither officers nor directors of the Fund are Stephen I.
Allen, John E. Erard, Robert P. Fetch, Daria L. Foster, Robert I. Gerber, W.
Thomas Hudson, Stephen J. McGruder, Michael B. McLaughlin, Robert J. Noelke, R.
Mark Pennington, Christopher J. Towle 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 "Management" in the
Prospectus. Under the Management Agreement, we are obligated to pay Lord Abbett
a monthly fee, based on average daily net assets of each Fund for each month, at
the annual rate of .50 of 1%. For the National, New York and California Fund
this fee is allocated among the separate classes based on such class'
proportionate share of the Fund' average daily net assets.
The Fund pays all of its expenses not expressly assumed by Lord Abbett,
including, without limitation, 12b-1 expenses, outside directors' fees and
expenses, association membership dues, legal and audit 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, 1996 ,1997 and 1998, the management
fees paid to Lord Abbett for the National Fund amounted to $3,318,985,
$3,310,474 and $3,240,212, respectively, and for the New York Fund, $1,632,539,
$1,546,703 and $1,472,880, respectively.
For the fiscal year September 30, 1996, Lord Abbett waived $172,582 of the Texas
Fund's management fees, respectively. For the fiscal year ending September 30,
1997, and 1998 the management fees paid to Lord Abbett amounted to $463,328 and
$453,092, 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 and Washington Fund. For
the fiscal years ended September 30, 1996, 1997, Lord Abbett waived $148,339,
$76,825 in New Jersey Fund management fees, respectively.
With respect to the Connecticut Fund, for the fiscal years ended September 30,
1996 and 1997, Lord Abbett waived $500,557 and $220,975, respectively, in
management fees. With respect to the Missouri Fund, for the fiscal years ended
September 30, 1996, 1997 and 1998, Lord Abbett waived $201,043, $329,040 and
$17,497, respectively, in management fees.
For the fiscal years ended September 30, 1996, 1997 and 1998, Lord Abbett waived
$258,022, $227,090 and $13,205, respectively, in Hawaii Fund's management fees.
For the fiscal years ended September 30, 1996, 1997and 1998, Lord Abbett waived
$55,661 , $34,553 and $2,740, respectively, in Washington Fund's management
fees. Lord Abbett may pay or reimburse the Washington Fund for certain of its
other expenses. Any such expenses have been repaid to Lord Abbett by the
Washington Fund pursuant to a formula based on the expense ratio of the
Washington Fund.
For the fiscal year ended August 31, 1996, Lord Abbett waived $322,490 in
management fees with respect to the California Fund and its "predecessor", Lord
Abbett California Tax-Free Income Fund, Inc. For the fiscal year ending
September 30, 1997, Lord Abbett waived $344,451 in management fees for the
California Fund.
For the period December 27, 1994 through September 30, 1996, Lord Abbett waived
all management fees and subsidized expenses with respect to the Minnesota Fund.
Any such expenses may be repaid to Lord Abbett by the Minnesota Fund pursuant to
a formula based on the expense ratio of the Minnesota Fund. For the fiscal
years, ended September 30, 1997 and 1998, Lord Abbett waived $45,321 and $64,326
in management fees for the Minnesota Fund.
12
<PAGE>
For the fiscal years ended September 30, 1996, 1997 and 1998 the management fees
paid to Lord Abbett by the Fund indicated were $816,011, $843,359, $919,485 (New
Jersey), $88,673, $379,369, $599,546 (Connecticut), $466,662, $360,135, $688,411
(Missouri), $172,842, $173,255, $386,484 (Hawaii) and $313,966, $309,809,
$318,520 (Washington).
For the fiscal years ended August 31, 1996 the management fees paid to Lord
Abbett by the California Fund (from July 15, 1996) and by its "predecessors",
Lord Abbett California Tax-Free Income Fund, Inc. prior to that date were
$1,217,777 and $1,137,106. For the period September 1, 1996, to September 30,
1996 the management fees paid to Lord Abbett by the California Fund was
$123,314. For the years ended September 30, 1997 and 1998 the management fees
paid to Lord Abbett by the California Fund was $1,061,790 and $1,336,847.
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 each Fund's
investment manager.
Lord Abbett Distributor LLC serves as the principal underwriter for each Fund.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281, are
the independent auditors of each Fund and must be approved at least annually by
our Board of Directors to continue in such capacity. Deloitte & Touche LLP
perform audit services for each Fund, including the examination of financial
statements included in our annual report to shareholders.
The Bank of New York ("BONY"), 40 Wall Street, New York, New York 10268, serves
as each Fund's custodian.
United Missouri Bank of Kansas City, N.A., Tenth and Grand Kansas City, Missouri
64141, acts as the Transfer Agent and Dividend Disbursing Agent for each Fund.
4.
Portfolio Transactions
Purchases and sales of portfolio securities usually will be principal
transactions and normally such securities will be purchased directly from the
issuer or from an underwriter or purchased from or sold to a market maker for
the securities. Therefore, the Fund usually will pay no brokerage commissions on
such transaction. Purchases from underwriters of portfolio securities will
include a commission or concession paid by the issuer to the underwriter and
purchases from or sales to dealers serving as market makers will include a
dealer's markup or markdown. Principal transactions, including riskless
principal transactions, are not afforded the protection of the safe harbor in
Section 28 (e) of the Securities Exchange Act of 1934.
Our policy is to obtain best execution on all our portfolio transactions, which
means that we seek to have purchases and sales of portfolio securities executed
at the most favorable prices, considering all costs of the transaction including
dealer markups and markdowns and any brokerage commissions. 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.
Broker-dealers are selected on the basis of their professional capability and
the value and quality of their brokerage and research services. Normally, the
selection is made by traders who are officers of the Fund and also are employees
of Lord Abbett. These traders do the trading as well for other accounts --
investment companies (of which they are also officers) and other investment
clients -- managed by Lord Abbett. They are responsible for negotiation of
prices and any commissions.
We may pay a brokerage commission on the purchase or sale of a security that
could be purchased from or sold to a market maker if our net cost of the
purchase or the net proceeds to us of the sale are at least as favorable as we
could obtain on a direct purchase or sale. Brokers who receive such commissions
may also provide research services at least some of which are useful to Lord
Abbett in their overall responsibilities with respect to us and the other
accounts they manage. Research includes trading equipment and computer software
packages, acquired from third-party suppliers, that enable Lord Abbett to access
various information bases and may include the furnishing of analyses and reports
13
<PAGE>
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Such services may be used by
Lord Abbett in servicing all their accounts, and not all of such services will
necessarily be used by Lord Abbett in connection with their management of the
Fund; conversely, such services furnished in connection with brokerage on other
accounts managed by Lord Abbett may be used in connection with their management
of the Fund, and not all of such services will necessarily be used by Lord
Abbett in connection with their advisory services to such other accounts. We
have been advised by Lord Abbett that research services received from brokers
cannot be allocated to any particular account, are not a substitute for Lord
Abbett's services but are supplemental to their own research effort and, when
utilized, are subject to internal analysis before being incorporated by Lord
Abbett into their investment process. As a practical matter, it would not be
possible for Lord Abbett to generate all of the information presently provided
by brokers. While receipt of research services from brokerage firms has not
reduced Lord Abbett's normal research activities, the expenses of Lord Abbett
could be materially increased if it attempted to generate such additional
information through its own staff and purchased such equipment and software
packages directly from the suppliers.
No commitments are made regarding the allocation of brokerage business to or
among brokers, and trades are executed only when they are dictated by investment
decisions of the Fund to purchase or sell portfolio securities.
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
as 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. Other clients who direct that their brokerage
business be placed with specific brokers or who invest through wrap accounts
introduced to Lord Abbett by certain brokers may not participate with us in the
buying and selling of the same securities as described above. If these clients
wish to buy or sell the same security as we do, they may have their transactions
executed at times different from our transactions and thus may not receive the
same price or incur the same commission cost as we do.
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, 1996, 1997 and 1998, we paid no
commissions to independent dealers.
5.
Purchases, Redemptions
and Shareholder Services
The Fund values its portfolio securities at 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
Fund's officers, that market more accurately reflects the market value of the
bonds. Over-the-counter securities not traded on the NASDAQ National Market
System are valued at the 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 Board of Directors.
Information concerning how we value our shares for the purchase and redemption
of our shares is described 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 NYSE is open for trading. The
NYSE is closed on Saturdays and Sundays and the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value per share for the Class B and Class C shares is determined
in the same manner as for the Class A
14
<PAGE>
shares (net assets divided by shares outstanding). Our Class B and Class C
shares are sold at net asset value.
The maximum offering prices of our Class A shares on September 30, 1998 were
computed as follows:
<TABLE>
<CAPTION>
National New York Texas Connecticut California
Fund Fund Fund Fund Fund
-------- -------- ----- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value per
share (net assets divided by
shares outstanding) $11.98 $11.43 $10.69 $10.73 $11.12
Maximum offering
price per share (net asset value
divided by .9525) $12.58 $12.00 $11.22 $11.27 $11.67
<CAPTION>
Missouri Minnesota New Jersey Hawaii Washington
Fund Fund Fund Fund Fund
-------- -------- ----- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value per
share (net assets divided by
shares outstanding) $5.36 $5.18 $5.54 $5.25 $5.38
Maximum offering
price per share (net asset
value divided by .9525) $5.63 $5.44 $5.82 $5.51 $5.65
</TABLE>
The maximum offering prices of our Class B shares on September 30, 1998 were
computed as follows:
National
Fund
--------
Net asset value per
share (net assets divided by shares
outstanding) ........................... $11.98
The maximum offering prices of our Class C shares on September 30, 1998 were
computed as follows:
National New York California
Fund Fund Fund
-------- -------- ----------
Net asset value per
share (net assets divided by shares
outstanding) .......................... $11.99 $11.42 $11.12
The Fund has entered into a distribution agreement with Lord Abbett Distributor
LLC, a New York limited liability company ("Lord Abbett Distributor"), under
which Lord Abbett Distributor 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 Distributor'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 and carried over to future years a
portion of the sales charge to independent dealers with respect to Class A
shares as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Gross sales charge $3,023,934 $2,686,781 $3,375,031
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C> <C>
Amount allowed
to dealers $2,631,133 2,338,259 2,934,816
--------- ----------
Net commissions received
by Lord Abbett $ 392,801 $ 348,522 $ 440,215
========== ========== ==========
</TABLE>
For the last three fiscal years, Lord Abbett as principal underwriter received
net commissions after allowance of a portion of the sales charge to independent
dealers with respect to Class A shares of the California Fund' "predecessor",
Lord Abbett California Tax-Free Fund, Inc. and for the California Fund for the
period September 1, 1996 to September 30, 1996 as follows:
Period
Sept. 1, 1996 Year Ended
to Sept. 30, 1996 August 31, 1996
----------------- ---------------
Gross sales charge $23,132 $433,713
Amount allowed 20,471 378,916
to dealers ------- --------
Net Commissions received
by Lord Abbett $ 2,661 $ 54,797
======= ========
Conversion of Class B Shares. The conversion of Class B shares of the National
Fund on the eighth anniversary of their purchase is subject to the continuing
availability of a private letter ruling from the Internal Revenue Service or an
opinion of counsel to the effect that the conversion of Class B shares does not
constitute a taxable event for the holder under Federal income tax law. If such
a revenue ruling or opinion is no longer available, the automatic conversion
feature may be suspended, in which event no further conversions of Class B
shares would occur while such suspension remained in effect. Although Class B
shares could then be exchanged for Class A shares on the basis of relative net
asset value of the two classes, without the imposition of a sales charge or fee,
such exchange could constitute a taxable event for the holder.
ALTERNATIVE SALES ARRANGEMENTS
Classes of Shares. This Prospectus offers three classes of shares designated as
Class A, B, C and P (which may differ for each Fund). The different classes of
shares represent investments in the same portfolio of securities but are subject
to different expenses and will likely have different share prices. Investors
should read this section carefully to determine which class represents the best
investment option for their particular situation.
Class A Shares. If you buy Class A shares, you pay an initial sales charge on
investments of less than $1 million (or on investments for employer-sponsored
retirement plans under the Internal Revenue Code (hereinafter referred to as
"Retirement Plans") with less than 100 eligible employees or on investments that
do not qualify to be under a "special retirement wrap program" as a program
sponsored by an authorized institution showing one or more characteristics
distinguishing it, in the opinion of Lord Abbett Distributor from a mutual fund
wrap fee program). If you purchase Class A shares as part of an investment of at
least $1 million (or for Retirement Plans with at least 100 eligible employees
or under a special retirement wrap program) in shares of one or more Lord
Abbett-sponsored funds, you will not pay an initial sales charge, but if you
redeem any of those shares within 24 months after the month in which you buy
them, you may pay to the Fund a contingent deferred sales charge ("CDSC") of 1%
except for redemptions under a special retirement wrap program. Class A shares
are subject to service and distribution fees that are currently estimated to
total annually approximately 0.23 of 1% of the annual net asset value of the
Class A shares. The initial sales charge rates, the CDSC and the Rule 12b-1 plan
applicable to the Class A shares are described in "Buying Class A Shares" below.
Class B Shares. If you buy Class B shares, you pay no sales charge at the time
of purchase, but if you redeem your shares before the sixth anniversary of
buying them, you will normally pay a CDSC to Lord Abbett Distributor LLC
16
<PAGE>
("Lord Abbett Distributor"). That CDSC varies depending on how long you own
shares. Class B shares are subject to service and distribution fees at an annual
rate of 1% of the annual net asset value of the Class B shares. The CDSC and the
Rule 12b-1 plan applicable to the Class B shares are described in "Buying Class
B Shares" below.
Class C Shares. If you buy Class C shares, you pay no sales charge at the time
of purchase, but if you redeem your shares before the first anniversary of
buying them, you will normally pay the Fund a CDSC of 1%. Class C shares are
subject to service and distribution fees at an annual rate of 1% of the annual
net asset value of the Class C shares. The CDSC and the Rule 12b-1 plan
applicable to the C shares are described in "Buying Class C Shares" below.
Which Class of Shares Should You Choose? Once you decide that the Fund is an
appropriate investment for you, the decision as to which class of shares is
better suited to your needs depends on a number of factors which you should
discuss with your financial adviser. The Fund's class-specific expenses and the
effect of the different types of sales charges on your investment will affect
your investment results over time. The most important factors are how much you
plan to invest and how long you plan to hold your investment. If your goals and
objectives change over time and you plan to purchase additional shares, you
should re-evaluate those factors to see if you should consider another class of
shares.
In the following discussion, to help provide you and your financial adviser with
a framework in which to choose a class, we have made some assumptions using a
hypothetical investment in the Fund. We used the sales charge rates that apply
to Class A, Class B and Class C, and considered the effect of the higher
distribution fees on Class B and Class C expenses (which will affect your
investment return). Of course, the actual performance of your investment cannot
be predicted and will vary, based on the Fund's actual investment returns, the
operating expenses borne by each class of shares, and the class of shares you
purchase. The factors briefly discussed below are not intended to be investment
advice, guidelines or recommendations, because each investor's financial
considerations are different. The discussion below of the factors to consider in
purchasing a particular class of shares assumes that you will purchase only one
class of shares and not a combination of shares of different classes.
How Long Do You Expect to Hold Your Investment? While future financial needs
cannot be predicted with certainty, knowing how long you expect to hold your
investment will assist you in selecting the appropriate class of shares. For
example, over time, the reduced sales charges available for larger purchases of
Class A shares may offset the effect of paying an initial sales charge on your
investment, compared to the effect over time of higher class-specific expenses
on Class B or Class C shares for which no initial sales charge is paid. Because
of the effect of class-based expenses, your choice should also depend on how
much you plan to invest.
Investing for the Short Term. If you have a short-term investment horizon (that
is, you plan to hold your shares for not more than six years), you should
probably consider purchasing Class A or Class C shares rather than Class B
shares. This is because of the effect of the Class B CDSC if you redeem before
the sixth anniversary of your purchase, as well as the effect of the Class B
distribution fee on the investment return for that class in the short term.
Class C shares might be the appropriate choice (especially for investments of
less than $100,000), because there is no initial sales charge on Class C shares,
and the CDSC does not apply to amounts you redeem after holding them one year.
However, if you plan to invest more than $100,000 for the short term, then the
more you invest and the more your investment horizon increases toward six years,
the more attractive the Class A share option may become. This is because the
annual distribution fee on Class C shares will have a greater impact on your
account over the longer term than the reduced front-end sales charge available
for larger purchases of Class A shares. For example, Class A might be more
appropriate than Class C for investments of more than $100,000 expected to be
held for 5 or 6 years (or more). For investments over $250,000 expected to be
held 4 to 6 years (or more), Class A shares may become more appropriate than
Class C. If you are investing $500,000 or more, Class A may become more
desirable as your investment horizon approaches 3 years or more.
For most investors who invest $1 million or more or for Retirement Plans with at
least 100 eligible employees or for investments pursuant to a special retirement
wrap program, in most cases Class A shares will be the most advantageous choice,
no matter how long you intend to hold your shares. For that reason, it may not
be suitable for you to place a purchase order for Class B shares of $500,000 or
more or a purchase order for Class C shares of
17
<PAGE>
$1,000,000 or more. In addition, it may not be suitable for you to place an
order for Class B or C shares for a Retirement Plan with at least 100 eligible
employees or for a special retirement wrap program. You should discuss this with
your financial advisor.
Investing for the Longer Term. If you are investing for the longer term (for
example, to provide for future college expenses for your child) and do not
expect to need access to your money for seven years or more, Class B shares may
be an appropriate investment option, if you plan to invest less than $100,000.
If you plan to invest more than $100,000 over the long term, Class A shares will
likely be more advantageous than Class B shares or Class C shares, as discussed
above, because of the effect of the expected lower expenses for Class A shares
and the reduced initial sales charges available for larger investments in Class
A shares under the Fund's Rights of Accumulation. Of course, these examples are
based on approximations of the effect of current sales charges and expenses on a
hypothetical investment over time, and should not be relied on as rigid
guidelines.
Are There Differences in Account Features That Matter to You? Some account
features are available in whole or in part to Class A, Class B and Class C
shareholders. Other features (such as Systematic Withdrawal Plans) might not be
advisable in non-Retirement Plan accounts for Class B shareholders (because of
the effect of the CDSC on the entire amount of a withdrawal if it exceeds 12%
annually) and in any account for Class C shareholders during the first year of
share ownership (due to the CDSC on withdrawals during that year). See
"Systematic Withdrawal Plan" under "Shareholder Services" in the Prospectus for
more information about the 12% annual waiver of the CDSC. You should carefully
review how you plan to use your investment account before deciding which class
of shares you buy. For example, the dividends payable to Class B and Class C
shareholders will be reduced by the expenses borne solely by each of these
classes, such as the higher distribution fee to which Class B and Class C shares
are subject, as described below.
How Does It Affect Payments to My Broker? A salesperson, such as a broker, or
any other person who is entitled to receive compensation for selling Fund shares
may receive different compensation for selling one class than for selling
another class. As discussed in more detail below, such compensation is primarily
paid at the time of sale in the case of Class A and B shares and is paid over
time, so long as shares remain outstanding, in the case of Class C shares. It is
important that investors understand that the primary purpose of the CDSC for the
Class B shares and the distribution fee for Class B and Class C shares is the
same as the purpose of the front-end sales charge on sales of Class A shares: to
compensate brokers and other persons selling such shares. The CDSC, if payable,
supplements the Class B distribution fee and reduces the Class C distribution
fee expenses for the Fund and Class C shareholders.
Class A, B and C Rule 12b-1 Plans. As described in the Prospectus, the Fund has
adopted a Distribution Plan and Agreement on behalf of each Fund pursuant to
Rule 12b-1 of the Act for each class of such Fund: the "A Plan" (all Fund), the
"B Plan" (National Fund only) and the "C Plan" (National, New York and
California Fund only), respectively. In adopting each Plan and in approving its
continuance, the Board of Directors has concluded that there is a reasonable
likelihood that each Plan will benefit its respective Class and such Class'
shareholders. The expected benefits include greater sales and lower redemptions
of shares, which should allow each Class to maintain a consistent cash flow, and
a higher quality of service to shareholders by authorized institutions than
would otherwise be the case. Lord Abbett used all amounts received under the A,
B and C Plans for payments to dealers for (i) providing continuous services to
the 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 each
Fund.
The fees payable under the A, B and C Plans are described in the Prospectus. For
the fiscal year ended September 30, 1998 fees paid to dealers under the A Plans
were as follows: National Fund $1,597,953; New York Fund $726,923 California
Fund $706,386; Texas Fund $206,855; New Jersey Fund $464,497; Connecticut Fund
$249,641; Missouri Fund $436,037and Hawaii Fund $246,740.
For the fiscal year ended September 30, 1998 fees paid to dealers under the B
Plan for the National Fund were $51,071. For the fiscal year ended September 30,
1998 fees paid under the C Plan for the National, New York and California Fund
were $416,101, $62,541and $141,182.
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
18
<PAGE>
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 relevant class of the Fund
in question 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 the relevant class of the Fund
in question.
Contingent Deferred Sales Charges. A Contingent Deferred Sales Charge ("CDSC"),
applies upon early redemption of shares, regardless of class, and (i) will be
assessed on the lesser of the net asset value of the shares at the time of
redemption or the original purchase price and (ii) is not imposed on the amount
of your account value represented by the increase in net asset value over the
initial purchase price (including increases due to the reinvestment of dividends
and capital gains distributions).
Class A Shares. As stated in the Prospectus, a CDSC is imposed with respect to
those Class A shares (or Class A shares of another Lord Abbett-sponsored fund or
fund acquired through exchange of such shares) on which a Fund has paid the
one-time 1% distribution fee if such shares are redeemed out of the Lord
Abbett-sponsored family of funds within a period of 24 months from the end of
the month in which the original sale occurred.
Class B Shares (National Fund only). As stated in the Prospectus, if Class B
shares of the National Fund (or Class B shares of another Lord Abbett-sponsored
fund or fund acquired through exchange of such shares) are redeemed out of the
Lord Abbett-sponsored family of funds for cash before the sixth anniversary of
their purchase, a CDSC will be deducted from the redemption proceeds. The Class
B CDSC is paid to Lord Abbett Distributor to reimburse its expenses, in whole or
in part, of providing distribution-related service to the Fund in connection
with the sale of Class B shares.
To determine whether the CDSC applies to a redemption, the Fund redeem shares in
the following order: (1) shares acquired by reinvestment of dividends and
capital gains distributions, (2) shares held on or after the sixth anniversary
of their purchase, and (3) shares held the longest before such sixth
anniversary.
The amount of the contingent deferred sales charge will depend on the number of
years since you invested and the dollar amount being redeemed, according to the
following schedule:
Anniversary of Contingent Deferred Sales Charge
Purchase on Redemptions (As % of Amount Subject to Charge)
Before the 1st 5.0%
On the 1st, before the 2nd 4.0%
On the 2nd, before the 3rd 3.0%
On the 3rd, before the 4th 3.0%
On the 4th, before the 5th 2.0%
On the 5th, before the 6th 1.0%
On or after the 6th anniversary None
In the table, an "anniversary" is the 365th day subsequent to the acceptance of
a purchase order or a prior anniversary. All purchases are considered to have
been made on the business day on which the purchase order was accepted.
Class C Shares (National, New York and California fund only). As stated in the
Prospectus, if Class C shares are redeemed for cash before the first anniversary
of their purchase, the redeeming shareholder will be required to pay to the
applicable Fund on behalf of Class C shares a CDSC of 1% of the lower of cost or
the then net asset value of Class C shares redeemed. If such shares are
exchanged into the same class of another Lord Abbett-sponsored fund and
subsequently redeemed before the first anniversary of their original purchase,
the charge will be collected by the other fund on behalf of the Fund' Class C
shares.
General. Each percentage (1% in the case of Class A and C shares and 5% through
1% in the case of Class B shares) used to calculate CDSCs described above for
the Class A, Class B and Class C shares is sometimes hereinafter referred to as
the "Applicable Percentage".
19
<PAGE>
With respect to Class A and Class B shares, no CDSC is payable on redemptions by
participants or beneficiaries from employer-sponsored retirement plans under the
Internal Revenue Code for benefit payments due to plan loans, hardship
withdrawals, death, retirement or separation from service and for returns of
excess contributions to retirement plan sponsors. In the case of Class A and
Class C shares, the CDSC is received by the applicable Fund and is intended to
reimburse all or a portion of the amount paid by the Fund if the shares are
redeemed before the Fund has had an opportunity to realize the anticipated
benefits of having a long-term shareholder account in the Fund. In the case of
Class B shares, the CDSC is received by Lord Abbett Distributor and is intended
to reimburse its expenses of providing distribution-related service to the
National Fund (including recoupment of the commission payments made) in
connection with the sale of Class B shares before Lord Abbett Distributor has
had an opportunity to realize its anticipated reimbursement by having such a
long-term shareholder account subject to the B Plan distribution fee.
The other funds which participate in the Telephone Exchange Privilege (except
(a) Lord Abbett U.S. Government Securities Money Market Fund, Inc. ("GSMMF"),
(b) certain fund of the Fund and Lord Abbett Tax-Free Income Trust for which a
Rule 12b-1 Plan is not yet in effect, and (c) any authorized institution's
affiliated money market fund satisfying Lord Abbett Distributor as to certain
omnibus account and other criteria, hereinafter referred to as an "authorized
money market fund" or "AMMF" (collectively, the "Non-12b-1 Funds")) have
instituted a CDSC for each class on the same terms and conditions. No CDSC will
be charged on an exchange of shares of the same class between Lord Abbett funds
or between such funds and AMMF. Upon redemption of shares out of the Lord Abbett
family of funds or out of AMMF, the CDSC will be charged on behalf of and paid:
(i) to the fund in which the original purchase (subject to a CDSC) occurred, in
the case of the Class A and Class C shares and (ii) to Lord Abbett Distributor
if the original purchase was subject to a CDSC, in the case of the Class B
shares. Thus, if shares of a Lord Abbett fund are exchanged for shares of the
same class of another such fund and the shares of the same class tendered
("Exchanged Shares") are subject to a CDSC, the CDSC will carry over to the
shares of the same class being acquired, including GSMMF and AMMF ("Acquired
Shares"). Any CDSC that is carried over to Acquired Shares is calculated as if
the holder of the Acquired Shares had held those shares from the date on which
he or she became the holder of the Exchanged Shares. Although the Non-12b-1
Funds will not pay a distribution fee on their own shares, and will, therefore,
not impose their own CDSC, the Non-12b-1 Funds will collect the CDSC (a) on
behalf of other Lord Abbett funds, in the case of the Class A and Class C shares
and (b) on behalf of Lord Abbett Distributor, in the case of the Class B shares.
Acquired Shares held in GSMMF and AMMF which are subject to a CDSC will be
credited with the time such shares are held in GSMMF but will not be credited
with the time such shares are held in AMMF. Therefore, if your Acquired Shares
held in AMMF qualified for no CDSC or a lower Applicable Percentage at the time
of exchange into AMMF, that Applicable Percentage will apply to redemptions for
cash from AMMF, regardless of the time you have held Acquired Shares in AMMF.
In no event will the amount of the CDSC exceed the Applicable Percentage of the
lesser of: (i) the net asset value of the shares redeemed or (ii) the original
cost of such shares (or of the Exchanged Shares for which such shares were
acquired). No CDSC 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 or fund paid a 12b-1 fee and, in the case of Class B shares,
Lord Abbett Distributor paid no sales charge or service fee (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 the case of Class A shares); for six years or more (in the
case of Class B shares) or for one year or more (in the case of Class C shares).
In determining whether a CDSC is payable, (a) shares not subject to the CDSC
will be redeemed before shares subject to the CDSC and (b) of the shares subject
to a CDSC, those held the longest will be the first to be redeemed.
Exchanges. The Prospectus briefly describes the Telephone Exchange Privilege.
You may exchange some or all of your shares for those of the same class of: (i)
Lord Abbett-sponsored funds currently offered to the public with a sales charge
(front-end, back-end or level), (ii) GSMMF or (iii) AMMF, 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 other Lord Abbett-sponsored funds and AMMF have the same right
to exchange their shares for the Fund's shares. Exchanges are based on relative
net asset values on the day instructions are received by the Fund in
20
<PAGE>
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 or AMMF (unless a sales charge (front-end, back-end or level) 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. "Eligible
Funds" are AMMF and other Lord Abbett-sponsored funds which are eligible for the
exchange privilege, except Lord Abbett Fund Fund ("LASF") which offers its
shares only in connection with certain variable annuity contracts, Lord Abbett
Equity Fund ("LAEF") which is not issuing shares, and fund of Lord Abbett
Research Fund not offered to the general public ("LARF").
Statement of Intention. Under the terms of the Statement of Intention to invest
$100,000 or more over a 13-month period as described in the Prospectus, shares
of Lord Abbett-sponsored funds (other than shares of LAEF, LASF, LARF and GSMMF,
unless holdings in GSMMF are attributable to shares exchanged from a Lord
Abbett-sponsored fund offered with a front-end, back-end or level 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 and reduced initial charges for Class A shares. Class A 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.
Rights of Accumulation. 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, and GSMMF, unless holdings in GSMMF are
attributable to shares exchanged from a Lord Abbett-sponsored fund offered with
a front-end, back-end or level 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 for Class A shares.
Net Asset Value Purchases of Class A Shares. As stated in the Prospectus, our
Class A 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 or by the trustee or custodian under any pension or
profit-sharing plan or Payroll Deduction IRA established for the benefit of such
persons or for the benefit of employees of any national securities trade
organization to which Lord Abbett belongs or any company with an account(s) in
excess of $10 million managed by Lord Abbett on a private-advisory-account
basis. 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 Class A shares also may be purchased at net asset value (a) at $1 million or
more, (b) with dividends and distributions from Class A shares and other Lord
Abbett-sponsored funds, except for LARF, LAEF and LASF, (c) under the loan
feature of the Lord Abbett-sponsored prototype 403(b) plan for share purchases
representing the repayment of principal and interest, (d) by certain authorized
brokers, dealers, registered investment advisers or other financial institutions
who have entered into an agreement with Lord Abbett Distributor in accordance
with certain standards approved by Lord Abbett Distributor, 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 (e) by employees, partners and
owners of unaffiliated consultants and advisors to Lord Abbett, Lord Abbett
Distributor or Lord Abbett-sponsored funds who consent to such purchase if such
persons provide service to Lord Abbett, Lord Abbett Distributor 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 Distributor and/or the Fund has
business relationships.
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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 an investment
company. There are economies of selling efforts and sales-related expenses with
respect to offers to these investors and those referred to above.
Redemptions. 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 Distributor or the Fund to carry out the order. The signature(s) and
any legal capacity of the signer(s) must be guaranteed by an 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 of the 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 30 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.
Div-Move. Under the Div-Move service described in the Prospectus, you can invest
the dividends paid on your account into an existing account in any other
Eligible Fund. The account must be either your account, a joint account for you
and 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.
Invest-A-Matic. The Invest-A-Matic method of investing in the Fund and/or any
other Eligible Fund is described in the Prospectus. To avail yourself of this
method you must complete the application form, selecting the time and amount of
your bank checking account withdrawals and the funds for investment, include a
voided, unsigned check and complete the bank authorization.
Systematic Withdrawal Plans. The Systematic Withdrawal Plan (the "SWP") also is
described in the Prospectus. You may establish a SWP if you own or purchase
uncertificated shares having a current offering price value of at least $10,000.
Lord Abbett prototype retirement plans have no such minimum. With respect to a
SWP for Class B shares, the CDSC will be waived on redemptions of up to 12% per
year of either the current net asset value of your account or your original
purchase price, whichever is higher. With respect to Class C shares, the CDSC
will be waived on and after the first anniversary of their purchase. The SWP
involves the planned redemption of shares on a periodic 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 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 SWP may be terminated by you or by us at any time by written
notice.
Retirement Plans. The Prospectus indicates the types of retirement plans for
which Lord Abbett provides forms and explanations. Lord Abbett makes available
the retirement plan forms and custodial agreements for IRAs (Individual
Retirement Accounts including Simplified Employee Pensions), 403(b) plans and
qualified pension and profit-sharing plans, including 401(k) plans. The forms
name Investors Fiduciary Trust Company as custodian and contain specific
information about the plans. Explanations of the eligibility requirements,
annual custodial fees and allowable tax advantages and penalties are set forth
in the relevant plan documents. Adoption of any of these plans should be on the
advice of your legal counsel or qualified tax adviser.
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6.
Taxes
Each Fund will be treated as a separate entity for federal income tax purposes.
As a result, the status of each Fund as a regulated investment company is
determined separately by the Internal Revenue Service. Each Fund qualified as a
regulated investment company last fiscal year and intends to do so for this
fiscal year, if any fund does not qualify it will be taxed as a normal
corporation.
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.
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.
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 distribution designated by the Fund
as a "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 Fund 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 Fund 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 Fund' 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 Fund from
engaging in some or all of the options and financial futures transactions
discussed above. Each Fund 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 Fund
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 California, Connecticut, Hawaii, Minnesota, Missouri, New Jersey,
New York, Texas, Washington and Puerto Rico Municipal Bonds
The following information is a summary of special risks affecting the states and
territory indicated, each of which could affect the bonds purchases by the Fund.
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
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verified any of this data.
California Bonds
California Constitutional and statutory provisions limit the taxing and spending
authority of California governmental entities and impair the ability of
California issuers to maintain debt service on their obligations. California's
economy has major components in high technology, trade, entertainment,
agriculture, manufacturing, tourism, construction and services. Unemployment in
the State has , but still exceeds the national average. Per capita income has
grown in recent years, and is greater than the national average. The State's
financial condition has improved since 1994, with increased revenues, slowdown
in the growth of social welfare programs and continued spending restraint and
economic growth. Revenues are expected to continue to increase during the
1998-99 fiscal year, with a corresponding increase in expenditures. The State's
budget reserve was $461 million as of June 30, 1997, and is estimated to be $329
million at June 30, 1998.
California's economy is expected to grow more slowly through 1998. The Asian
economic crisis is expected to have a dampening effect on the State's economy,
as exports will decrease, but increased needs for import services and lower
interest rates may help offset the negative impact. Rapidly growing exports to
Mexico and Latin America have been taking up some of the slack from Asia, but
could be reduced by global economic problems.
The taxing and spending authority of California's governmental entities has been
limited by the adoption of constitutional amendments. Proposition 13, enacted in
1978, constrains the fiscal condition of local governments by limited ad valorem
taxes on real property and restricting the ability of taxing entities to
increase real property and other taxes. In 1996, voters approved Proposition
218, which limits the ability of local government agencies to impose or raise
various taxes, fees, charges and assessments without voter approval, and
clarifies the right of local voters to reduce taxes, fees, assessments or
charges through local initiatives. Proposition 218 is generally viewed as
restricting the flexibility of local governments, and consequently has and may
further cause reductions in ratings of some cities and counties. The State is
also subject to an annual appropriations limit imposed by Article XIII B of the
State Constitution, which prohibits the state from spending the proceeds of tax
revenues, regulatory licenses, user charges or other fees beyond imposed
appropriations limits that are adjusted annually based on per capital personal
income and changes in population. Revenues that exceed the limitation are
measured over consecutive two-year periods, and any excess revenues are divided
equally between transfers to schools and community colleges and refunds to
taxpayers. Certain appropriations, including appropriations for the debt service
costs of bonds existing or authorized by January 1, 1979, or subsequently
authorized by voters, are subject to this limitation.
The effect of these various provisions upon the ability of California issuers to
pay interest and principal on their obligations remains unclear in many cases.
In any event, the effect may depend upon whether a particular California
Municipal Bond is a general or limited obligation bond (limited obligation bonds
generally being less affected by such changes) and on the type of security, if
any, provided for the bond. Future amendments to the California Constitution or
statutory changes also may harm the ability of the State or local issuers to
repay their obligations.
The failure of the State or other organizations or governmental agencies with
which the State electronically interacts, including State vendors and the
federal government, to be Year 2000 compliant may materially affect the State's
revenue and operations.
Connecticut Bonds
Manufacturing employment has been on a downward trend since the mid-1980's while
non-manufacturing employment has recovered most of its losses from its peak in
the late 1980s. Defense-related business remains important, although its
significance in the State's economy has declined considerably.
Connecticut has no constitutional limit on its power to issue obligations or
incur indebtedness, other than that it may only borrow for public purposes.
However, Connecticut law provides 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
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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.
In 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 cannot authorize an increase in general budget expenditures
for any fiscal year above the amount of general budget expenditures for the
previous fiscal year by a percentage which exceeds the greater of the percentage
increase in personal income or the percentage increase in inflation. There is an
exception provided if the governor declares an emergency or the existence of
extraordinary circumstances and at least three-fifths of the members of each
house of the General Assembly vote to exceed the limit for purposes of such
emergency or extraordinary circumstances.
As of May 31, 1998, the estimated 1997-98 fiscal year General Fund revenues and
expenditures, according to the Comptroller's report, will result in a projected
surplus of $257.0 million. The adopted Midterm Budget Adjustments for fiscal
1998-99 anticipates a General Fund surplus of $19.6 million. Expenditures for
the payment of bonds, notes and other evidences of indebtedness are excluded
from the constitutional and statutory definitions of general budget
expenditures.
The State expects its Year 2000 plan to be completed on a timely basis, and is
monitoring the activities of its third-party vendors in developing and
implementing plans to address the Year 2000 issue. The failure to complete such
modifications and conversions in a timely manner may materially affect the
revenues and operations of the State.
Hawaii Bonds
The Constitution of the State of Hawaii empowers the issuance of four types of
bonds: 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); bonds issued under special improvements statutes;
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 special purpose revenue bonds (all bonds payable from rental or
other payments made or any issuer by a person pursuant to contract). 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 provides that general obligation bonds may only be
issued by the State if such bonds at the time of issuance will not cause the
total amount of principal and interest payable in the current or any future
fiscal year, whichever is higher, on such bonds and on all outstanding general
obligation bonds in the current or any future fiscal year, whichever is higher,
to exceed 18.5% of the average general fund revenues of Hawaii in the three
fiscal years immediately before the issuance.
General Information. The construction and manufacturing industries have
experienced significant job losses in recent years, while unemployment rates
have increased or remained steady for five years. In contrast to the overall
strong performance of the U.S. economy in the 1990s, Hawaii's economic activity
has been flat during that time.
The failure of the State or other organizations or governmental agencies with
which the State electronically interacts, including State vendors and the
federal government, to be Year 2000 compliant may materially affect the State's
revenue and operations.
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Minnesota Bonds
Diversity and a significant natural resource base are two important
characteristics of Minnesota's economy. While the structure of the State's
economy parallels the structure of the United States economy as a whole, there
is some concentration in manfacturing categories. The importance of the State's
rich resource base for overall employment is apparent in the employment mix in
the non-durable goods industries.
The recession that began in 1990 was less severe in Minnesota than in the
national economy, and Minnesota's recovery was more rapid than the nation's. The
State's per capita income has generally remained above the national average in
spite of recessions and some difficult years in agriculture. Since 1995, the
State's monthly unemployment rate generally has been less than the national
unemployment rate.
The Minnesota Constitution places no limitation on the amount of debt which may
be authorized for permissible purposes. As of June 1, 1998, the outstanding
principal amount of general obligation bonds of the State was approximately $2.4
billion.
The Minnesota legislature has enacted a provision that interest on obligations
of Minnesota governmental units be included in the net income of individuals,
trusts and estates for Minnesota income tax purposes if a court determines that
Minnesota's exemption of such interest is unlawful in that it discriminates
against interstate commerce because interest on obligations of governmental
issuers in other states is so included. This provision applies to taxable years
that begin during or after the calendar year in which any such court decision
becomes final, no matter when the obligations were issued. Should a court so
rule, the value of securities held by the Fund, and thus the value of the Fund's
shares, would likely decrease, perhaps significantly.
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.
The failure of the State or other organizations or governmental agencies with
which the State electronically interacts, including State vendors and the
federal government, to be Year 2000 compliant may materially affect the State's
revenue and operations.
Missouri Bonds
The State Constitution provides that the General Assembly may issue general
obligation bonds without voter approval solely for the purpose of (1) refunding
outstanding bonds or (2) upon the recommendation of the Governor, for a
temporary liability by reason of unforeseen emergency or of deficiency in
revenue in an amount not to exceed $1,000,000 for any one year and to be paid in
not more than five years or as otherwise specifically provided. When the
liability exceeds $1,000,000, the General Assembly, or the people by initiative,
may submit the proposition to incur indebtedness to the voters of the State, and
the bonds may be issued if approved by a majority of those voting.
The Constitution imposes in the Tax Limitation Amendment limits 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. Revenues have exceeded the limit in each year since 1995, and the
state expects that the limit will again be exceeded in Fiscal Year 1998 by
approximately $118 million, which will trigger an income tax refund liability
under the Constitution.
The State's general revenue fund has had a surplus for five consecutive years,
increasing in fiscal 1997 to a balance
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of $1.71 billion.
To the extent that the payment of general obligation bonds issued by the State
of Missouri or a unit of local government in the Fund' 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.
The State 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 be an adverse impact on the overall
economic condition of the State. Per capita income is slightly below the
national average.
Defense-related business plays an important role in Missouri's economy. To the
extent that changes in military appropriations are enacted by the United States
Congress, Missouri could be disproportionately affected.
The failure of the State or other organizations or governmental agencies with
which the State electronically interacts, including State vendors and the
federal government, to be Year 2000 compliant may materially affect the State's
revenue and operations.
New Jersey Bonds
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,
followed by a recovery up to June 1997 of 97% of the jobs lost during the
recession.
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 a decline in the unemployment
rate. Looking further ahead, prospects for New Jersey appear favorable, although
a return to the pace of the 1980's is highly unlikely.
While personal income growth has been slower than the national average, per
capita income in New Jersey is second among the states.
The State ended fiscal 1997 with a general fund surplus and an undesignated fund
balance of $1.1 billion, and anticipates that it will again have a general fund
surplus at the end of fiscal 1998, with an expected undesignated fund balance of
$1 billion.
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. State law also regulates the issuance of debt by local
units, by limiting the amount of tax anticipation notes that may be issued by
local units and requiring their repayment 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 or to pay
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outstanding bonds, except 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 by statute.
The failure of the State or other organizations or governmental agencies with
which the State electronically interacts, including State vendors and the
federal government, to be Year 2000 compliant may materially affect the State's
revenue and operations.
New York Bonds
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 Fund, even
though securities of the defaulting entity may not be held by the Fund.
New York State. New York's economy features the services, trade, finance,
insurance and real estate sectors. The New York economy has expanded as it
continues to recover from the national recession of the early 1990s, although
growth remains somewhat slower than the national level. While new jobs have been
added, employment growth has been hindered in recent years by cutbacks in the
computer and instrument manufacturing, utility, defense and banking industries.
The State's economy is expected to continue to expand during 1998, although
employment growth is projected to slow. The unemployment rate is expected to
decrease, although it is projected to remain above the national rate. Per capita
income, which has historically exceeded the national average, is projected to
show moderate growth.
New York State's financial operations have improved during recent fiscal years.
During the period 1989-90 through 1991-92, the State incurred General Fund
operating deficits that were closed with receipts from the issuance of tax and
revenue anticipation notes. The national recession, followed by the lingering
economic slowdown in the New York and regional economy, resulted in repeated
shortfalls in receipts and three budget deficits during those years. Since
1992-93, however, the State has had balanced budgets, on a cash basis, in each
fiscal year.
The adopted 1998-99 budget projects an increase in General Fund disbursements of
7.1 percent over 1997-98 levels. State Funds (excluding federal grants)
disbursements are projected to increase by 9.8 percent from the prior fiscal
year. All Governmental Funds projected disbursements increase by 8.3 percent
over the prior fiscal year. The 1998-99 State Financial Plan is projected to be
balanced on a cash basis, with an estimated reserve for future needs of $761
million. The total amount of non-recurring resources included in the 1998-99
Financial Plan are projected to be $264 million.
The State has closed substantial projected budget gaps in recent years, and the
Executive Budget estimated General Fund budget gaps of $1.7 billion and $3.7
billion in 1999-00 and 2000-01, respectively. After application of reserves
created as part of the 1998-99 budget process, the 1999-00 gap is now expected
to be approximately $1.3 billion. Sustained growth in the State's economy could
contribute to closing projected budget gaps over the next several years;
however, the projections in 1999-00 currently assume actions to significantly
lower disbursements and achieve additional receipts.
There can be no assurance that the State's projections for tax and other
receipts for the 1998-99 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 and the financial
condition of the Authorities, New York City and other localities. In the event
that these
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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.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1998-99 fiscal
year. The State expects to issue $528 million in general obligation bonds
(including $154 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $419 million in Certificates of Participation
during the State's 1998-99 fiscal year for equipment purchases. The projection
of the State regarding its borrowings for the 1998-99 fiscal year may change if
circumstances require.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financing for capital programs of the State are projected
to total approximately $2.9 billion in the 1998-99 fiscal year, including costs
of issuances, reserve funds, and other costs, net of anticipated refundings and
other adjustments.
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, and real
property claims.
The State is addressing Year 2000 data processing compliance issues, and is
focusing on mission-critical and high-priority computer systems.
"Mission-critical" systems are those impacting health, safety and welfare, while
"high-priority" applications are those critical for a state agency to fulfill
its mission and deliver services, but for which there are manual alternatives.
There can be no guarantee, however, that all of the State's mission-critical and
high-priority computer systems will be Year 2000 compliant and that the State's
operations or finances will not be adversely affected as a result.
Authorities. The fiscal stability of the State is related to the fiscal
stability of its Authorities, which generally are responsible for financing,
constructing and operating revenue-producing public facilities. Authorities are
not subject to the constitutional restrictions on the incurrence of debt which
apply to the State itself and may issue bonds and notes within the amounts
indicated in their legislative authorization. The State's access to the public
credit markets could be impaired, and the market price of its outstanding debt
may be adversely affected, if any of the Authorities were to default on their
respective obligations. As of December 31, 1997, there were outstanding
approximately $84 billion aggregate principal amount of bonds and bond
anticipation notes issued by 17 Authorities, only a portion of which 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 State, local government and TBTA
support to operate the mass transit portion of these operations because fare
revenues are insufficient. For the 1998-99 fiscal year, State assistance to the
MTA is estimated at approximately $1.3 billion.
State legislation accompanying the 1996-97 adopted State budget authorized the
MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of a new $11.98 billion MTA capital plan for the 1995 through 1999
calendar years (the "1995-99 Capital Program"). In July 1997, the Capital
Program Review Board approved the 1995-99 Capital Program, which supersedes the
overlapping portion of the MTA's 1992-96 Capital Program. This is the fourth
capital plan since the Legislature authorized procedures for the adoption,
approval and amendment of MTA capital programs and is designed to upgrade the
performance of the MTA's transportation systems by investing in new rolling
stock, maintaining replacement schedules for existing assets and bringing the
MTA system into a state of good repair. The 1995-99 Capital Program assumes the
issuance of an estimated $5.2 billion in bonds under this $6.5 billion
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aggregate bonding authority. The remainder of the plan is projected to be
financed through assistance from the State, the federal government, and the City
of New York, and from various other revenues generated from actions taken by the
MTA.
There can be no assurance that all the necessary governmental actions for future
capital programs will be taken, that funding sources currently identified will
not be decreased or eliminated, or that the 1995-99 Capital Program, or parts
thereof, will not be delayed or reduced. Should funding levels fall below
current projections, the MTA would have to revise its 1995-99 Capital Program
accordingly. If the 1995-99 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 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.
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 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.
In 1997, the State created the New York City Transitional Finance Authority to
finance a portion of the City's capital program because the City was approaching
its State Constitutional general debt limit. Despite this additional financing
mechanism, the City currently projects that, if no further action is taken, it
will reach its debt limit in City fiscal year 1999-2000. Future developments
concerning the City or entities issuing debt for the benefit of the City, and
public discussions of such developments, as well as prevailing market conditions
and securities credit ratings, may affect the ability or cost to sell securities
issued by the City or such entities and may also affect the market for their
outstanding securities.
Although the City has balanced its budget since 1981, estimates of the City's
revenues and expenditures are based on various assumptions and contingencies.
Unforeseen developments and changes in major assumptions could significantly
affect the City's ability to balance its budget as required by State law and t
meet its annual cash flow and financing requirements.
The staffs of the Control Board, OSDC and City Comptroller issue periodic
reports on the City's Financial Plans. Recent reports note that the City had a
substantial surplus in City fiscal year 1996-97 and indicate that the City
projects another substantial surplus for City fiscal year 1997-98. While several
sectors of the City's economy have expanded recently, especially tourism and
business and professional services, City tax revenues remain heavily dependent
on the continued profitability of the securities industry and the national
economy. Recent reports have indicated that the City's long-term expenditure
growth is not in line with recurring revenue growth and that, consequently,
substantial budget gaps between forecast revenues and expenditures that must be
closed with reduced expenditures and/or increased revenues are likely in future
years.
Other Localities. Certain localities in addition to the City have experienced
financial problems and have received additional State assistance during the last
several State fiscal years. The potential impact on the State of such actions by
localities is not included in the projections of the State receipts and
disbursements for the State's 1998-99 fiscal year.
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Municipalities and school districts have engaged in substantial short-term and
long-term borrowing. In 1995, the total indebtedness of all localities in the
State other than the City was approximately $20.0 billion; a small portion
(approximately $77 million) of this indebtedness represented borrowing to
finance budgetary deficits and was issued pursuant to enabling State
legislation. Twenty-one localities had outstanding indebtedness for deficit
financing at the close of their fiscal years ending in 1996.
From time to time, Federal expenditure reductions could 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 may also face unanticipated problems resulting
from certain pending litigation, judicial decisions and long-range economic
trends. Other large-scale problems, such as declining city populations,
increasing expenditures, and other economic trends could adversely affect
localities, necessitating State assistance.
Puerto Rico Bonds
Puerto Rico's manufacturing sector has become more diversified as industrial
development has become more capital intensive and more dependent on skilled
labor. The service sector, including wholesale and retail trade, 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 and paralleling
the expansion of the manufacturing sector. Growth in construction and tourism
also contributed to contributed increased economic activity in fiscal 1997.
Much of the development of the manufacturing sector in Puerto Rico to date can
be attributed to various federal and Commonwealth tax incentives, most notably
Section 936 of the Internal Revenue Code (the "Code"), which allows companies
with operations in Puerto Rico and other U.S. territories to receive a credit to
be used against U.S. tax on certain income from operations and the
Commonwealth's Industrial Incentives Program. However, in 1996 amendments were
passed that phase out Section 936 tax credits over ten years for existing
claimants and eliminate it for corporations without established operations after
October 1995. The long-term effects on the Puerto Rico economy of the repeal of
section 936 cannot yet be determined, although the repeal is not expected to
have material adverse effects on the Commonwealth's economy in the short- or
medium-term. The Commonwealth also needs to address its substantial unfunded
pension liabilities to its two main public pension systems, which together total
approximately $6 billion.
Puerto Rico's economy has continued to expand for over a decade, with almost
every sector participating and resulting in record levels of employment
(although Puerto Rico's unemployment rate has continued to exceed the average
for the United States). Factors behind this expansion included
Commonwealth-sponsored economic development programs, periodic declines in the
exchange value of the United States dollar, increases in the level of federal
transfers and the relatively low cost of borrowing. Personal income, both
aggregate and per capita, has increased consistently each year since 1985, but
per capita income remains lower than in the United States.
The Commonwealth's general fund has had a positive cash balance in recent years,
and was forecast to have a balance of $38 million at the end of fiscal 1998. The
balance at the end of fiscal 1997 was $127.5 million.
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 (principally income
taxes, property taxes and excise taxes) in the two fiscal years preceding the
then current fiscal year.
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The Commonwealth has historically maintained a fiscal policy providing for a
prudent relationship between the growth of public sector debt and the growth of
the economic base required to service that debt. However, in recent years there
have been higher levels of public sector debt compared to the growth in nominal
gross product. These higher levels are due to the increase during fiscal 1996
and 1997 in the amount of debt incurred to finance infrastructure projects. This
trend is expected to continue during the next few fiscal years as the level of
public sector capital investment remains high.
The failure of the Commonwealth or other organizations or governmental agencies
with which the Commonwealth electronically interacts, including Commonwealth
vendors and the federal government, to be Year 2000 compliant may materially
affect the Commonwealth's revenue and operations.
Texas Bonds
The State Comptroller of Public Accounts has predicted that the overall State
economy will slightly outpace national economic growth in the long term. 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, although the rate of growth of goods-producing
jobs has been nearly as fast as that of service-producing jobs since 1994.
Construction has been the State's fastest growing industry in recent years. The
State now ranks second in manufacturing employment, and job growth in
manufacturing is expected to continue. The predominant manufacturing sectors are
high technology and petroleum-related manufacturing.
Texas has added more jobs than any other state during the 1990s, and the State's
unemployment rate has declined for five consecutive years. While job growth has
been strong, personal income growth per capita has been slower, and per capita
income remains below the national average.
Due to the State's expansion in Medicaid spending and other Health and Human
Services programs requiring federal matching revenues, federal receipts were the
State's main revenue source during fiscal year 1997. Sales tax, which had been
the main source of revenue for 12 years prior to 1993, was second. Licenses,
fees and permits, the motor fuels tax and other excise taxes also are important
sources of revenue. 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's debt position has grown in recent years, and although much of the
indebtedness of the State is designed to be self-supporting, the State has begun
to issue more debt supported by the general revenue fund.
The State Constitution prohibits the State from levying ad valorem taxes on
property for general revenue purposes. 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.
In 1997, voters approved a constitutional amendment that prohibits the
legislature from authorizing additional state debt payable from general revenues
if the resulting annual debt service exceeds five percent of an amount equal to
the average amount of general revenue for the three immediately preceding years,
excluding revenues constitutionally dedicated for purposes other than payment of
debt service.
The State is focusing its Year 2000 efforts on mission-critical computer systems
(those that impact public health, public safety and revenue
collection/distribution), and currently believes that most will be operable in
the Year 2000. There is no guarantee, however, that the State systems and
systems of other entities on which the State's system relies will be Year 2000
compliant. Failure of any systems to be Year 2000 compliant will have an adverse
effect on the State's revenues and operations.
Washington Bonds
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On a combined basis, the aerospace, timber and food processing industries employ
about 9% of the State's non-farm workers. Agriculture, combined with food
processing, is the State's most important industry .
The State's manufacturing base includes aircraft manufacture, which comprised
approximately 25% of total manufacturing in 1995. The aerospace industry
currently represents approximately 8% of all taxable business income generated
in the State. The Boeing Company is the State's largest employer. While the
primary activity of Boeing is the manufacture of commercial aircraft, Boeing has
played leading roles in the aerospace and military missile programs of the
United State and has undertaken a broad program of diversification activities
including Boeing Information and Support Services. Although Boeing has dominated
manufacturing employment, other manufacturers have experienced growth, thus
reducing Boeing's percentage of total manufacturing jobs in the State. The most
significant growth in manufacturing jobs, other than aerospace, has been in high
technology-based companies.
The State ranks fourth among all states in the percentage of its work force
employed in technology-related industries and ranks third among the largest
software development centers.
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 impact of the Asian financial crisis
on the Washington economy is expected to be disproportionately high due to the
State's above-average dependence on trade with the affected countries.
Washington expects a slowdown in employment growth as a result of slower U.S.
economic growth, the Asian financial crisis and mild downturn in aerospace
unemployment.
While personal income growth, which has been strong in recent years, is expected
to slow, it is projected to continue to outpace average U.S. personal income
growth.
For the 1997-99 biennium, General Fund-State revenues are estimated to finish at
$19.9 billion. The General Fund is projected to end the 1997-99 biennium with a
$820 million fund balance.
As of July 1, 1995, Initiative 601, which was voted into law in November 1993,
limits increases in General Fund-State government expenditures to the three-year
average rate of population and inflation growth. Thus far, Initiative 601 has
not had a restrictive impact on the State's budget.
Washington's Constitution, as interpreted by the State Supreme Court, prohibits
the imposition of net income taxes. For the fiscal year ending June 30, 1997,
approximately 76.1% 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.
The State has taken action to ensure that its computer systems are Year 2000
compliant. It does not expect the cost of bringing its systems into compliance
to be material or that its operations will be materially impaired with the
advent of the Year 2000. It is possible, however, that costs will exceed the
State's expectations. Also, the State cannot quantify potential losses due to
systems disruption, and the amount of any potential recovery by the State. The
failure of the State or other organizations or governmental agencies with which
the State electronically interacts to be Year 2000 compliant may materially
affect the State's revenue and operations.
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8.
Past Performance
Each Fund computes the average annual rate of total return for each class 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.
In calculating total returns for Class A shares, the current maximum sales
charge of 4.75% (as a percentage of the offering price) is deducted from the
initial investment (unless the return is shown at net asset value). For Class B
shares (National Fund only), the payment of the applicable CDSC (5.0% prior to
the first anniversary of purchase, 4.0% prior to the second anniversary of
purchase, 3.0% prior to the third and fourth anniversaries of purchase, 2.0%
prior to the fifth anniversary of purchase, 1.0% prior to the sixth anniversary
of purchase and no CDSC on and after the sixth anniversary of purchase) is
applied to the National Fund's investment result for that class for the time
period shown (unless the total return is shown at net asset value). For Class C
shares, the 1.0% CDSC is applied to the applicable Fund's investment result for
that class for the time period shown prior to the first anniversary of purchase
(unless the total return is shown at net asset value). Total returns also assume
that all dividends and capital gains distributions during the period are
reinvested at net asset value per share, and that the investment is redeemed at
the end of the period.
The total returns for the Class A shares of the National, New York, Texas, New
Jersey, Connecticut, Missouri, Hawaii, Washington, Minnesota and California Fund
of the Fund using the computation method described above for the one-year period
ended on September 30, 1998 were as follows: 4.40%, 3.80%, 4.10%, 4.00%, 3.20%,
2.60%, 3.50%, 4.30% 3.00% and 3.70% respectively. The average annual compounded
rates of total return for the National, New York, Texas, New Jersey,
Connecticut, Missouri, Hawaii, Washington and California Fund for the five years
ending on September 30, 1998 were as follows: 4.66%, 3.78%, 5.04%, 4.81%, 4.41%,
4.14%, 4.35%, 4.95% and 3.75% respectively. The average annual compounded rates
of total return for the National, New York, Texas, New Jersey, Connecticut,
Missouri, Hawaii, Washington, Minnesota and California Fund for ten years or
life of the Fund were as follows: 7.65%, 7.13%, 7.95 %, 7.68 %, 7.17%, 6.96%,
6.66%, 7.17 %, 7.02% and 7.36% respectively. These five and ten year total
returns included the California Fund' Class A predecessor until July 15, 1996.
The total return for Class B Shares of the National Fund for the one year period
ended September 30, 1998 was 7.25%.
The total return for Class C Shares of the National, New York and California
Fund for the one year period ending September 30, 1998 were 8.80%, 8.33% and
8.09 % and life 9.15%, 8.15% and 8.33% respectively.
Each Fund's yield quotation for each class is based on a 30-day period ended on
a specified date, computed by dividing the Fund' net investment income per share
earned during the period by the Fund' maximum offering price per share on the
last day of the period. This is determined by finding the following quotient:
Take the Fund' 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 Fund shares outstanding during the
period that were entitled to receive dividends and (ii) the Fund' 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. Yield
for the Class A shares reflects the deduction of the maximum initial sales
charge, but may also be shown based on the Fund's net asset value per share.
Yields for Class B and C shares do not reflect the deduction of the CDSC. For
the 30-day period ended September 30, 1998, the yields for Class A shares of the
National, California, Connecticut, Missouri, New Jersey, New York, Texas,
Hawaii, Washington and Minnesota Funds were 4.15%, 4.02%,4.28%, 3.92%, 4.05%,
4.28%, 4.19%, 4.04%, 4.46%, and 4.46%, respectively.
Each Fund's tax-equivalent yield for each class is computed by dividing that
portion of the class' yield (as determined above) which is tax exempt by one
minus a stated income tax rate (National 7.14%; California 8.16%; Connecticut
7.31%; Missouri 7.66%; New Jersey 7.36%; New York 7.69%; Texas 6.75%; Hawaii
7.83%; Washington 7.77% and
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Minnesota 7.67%) and adding the product to that portion, if any, of the class'
yield that is not tax exempt. For the 30-day period ended on September 30, 1998,
the tax-equivalent yields for Class A shares of the National, California,
Connecticut, Missouri, New Jersey, New York, Texas, Hawaii, Washington and
Minnesota Fund were 4.44%, 4.38%, 4.62%, 4.25%, 4.37%, 4.64%, 4.49%, 4.38%,
4.84% and 4.83%, 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
Fund 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.
Information About the Company
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 Company's Code of Ethics which
complies, in substance, with each of the recommendations of the Investment
Company's 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 year ended September 30, 1998 and the
opinion thereon of Deloitte & Touche LLP, independent auditors, included in the
1998 Annual Report to Shareholders of the Lord Abbett Tax-Free Income Fund,
Inc., are incorporated herein by reference in reliance upon the authority of
Deloitte & Touche LLP as experts in auditing and accounting.
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