Lord Abbett CALIFORNIA TAX-FREE
INCOME FUND
Semi-Annual Report for the Six Months Ended February 28, 1995
A mutual fund with the objective of providing you with a high level of interest
income exempt from both federal and state income taxes.
[PICTURE OF TWO GENTLEMEN TEACHING A CHILD TO HIT A SOFTBALL]
Lord
Abbett
& Co
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RONALD P. LYNCH, Chairman
March 8, 1995
Report to Shareholders For the Six Months Ended February 28, 1995
Lord Abbett California Tax-Free Income Fund completed the first six months
of its fiscal year on February 28, 1995 with net assets of $309.5 million. At
the close of the period, the Fund's distribution rate was 5.78%, based on the
February 28th net asset value of $10.27 and 5.51%, based on that same day's
maximum offering price of $10.78. The Fund's total return (the percent change in
net asset value, assuming the reinvestment of all distributions) was +1.3% for
the past six months.
Throughout 1994, the U.S. economy exhibited continuing strength. In an
attempt to slow economic momentum and the inflation fears that accompany it, the
Federal Reserve raised short-term interest rates six times. Despite 1994's 4%
economic growth, overall inflation and wage increases remained quite low.
Data for the first two months of 1995 indicate an economic slowdown is
underway, as evidenced by weak retail and declining home sales. Additionally,
consumer spending (which represents two-thirds of economic activity) is expected
to slow throughout the balance of this year, hindering economic expansion.
The Federal Reserve's actions, combined with indications of slower economic
activity, have had a positive effect on long-term interest rates. Long-term
municipal bond yields have declined 1% from a high of 7.35% in late November
1994 to 6.35% in late February 1995. We believe long-term municipal securities
continue to offer exceptional value in this interest-rate environment, with tax-
equivalent yields approaching 10%. (Tax-equivalent yield is the rate an investor
must earn on a taxable investment to equal the yield on a tax-free investment.)
High-quality municipal bonds continue to be the focus of our investment
strategy and should enhance portfolio value over the long term. Our emphasis on
high-quality issues is important, given the liquidity and credit concerns which
remain in the marketplace (brought on, in part, by Orange County's bankruptcy).
As of February 28, 1995, 66.1% of the Fund's portfolio was invested in AAA-
rated
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The Federal Reserve's actions, combined with indications of slower economic
activity, have had a positive effect on long-term interest rates.
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issues, 24.2% in AA and 9.7% in A. The average maturity of the portfolio was
18.3 years.
The decline in long-term municipal bond issuance, which characterized 1994,
has continued into 1995. Given the attractive supply/demand characteristics,
coupled with the Federal Reserve's anti-inflation policies and a slowing
economy, high-quality long-term municipal bonds should respond favorably in the
year ahead.
While net asset values of the Fund may fluctuate in the interim, we expect
long-term investors will be rewarded with competitive total returns over time.
We welcome any questions or comments you may have about the Fund, and look
forward to helping you achieve your financial goals in the months ahead.
Professional Management at Work
COMMITMENT TO QUALITY IS CENTRAL TO THE FUND'S INVESTMENT STRATEGY
The Fund's investment policy restricts investments to municipal bonds rated
investment grade or equivalent at the time of purchase. The portfolio is
monitored on an ongoing basis. Lord Abbett attempts to identify credit strengths
and weaknesses of issues and focuses on economic trends within municipal market
sectors in an effort to anticipate credit upgrades and downgrades.
[PIE CHART DEPICTING THE PORTFOLIO COMPOSITION WITH RESPECT
TO BOND RATINGS: 24.2% AA; 66.1% AAA; AND 9.7% A]
Portfolio Composition
as of 2/28/95
Fund Performance
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THE FUND HAS PROVIDED A HIGH LEVEL OF TAX-FREE DIVIDENDS
AND REWARDING TOTAL RETURNS
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Information About the Following Investment/(1)/
Investment Period: 9/3/85 to 2/28/95
Amount Invested: $100,000
Sales Charge: 3.75% (for investments of $100,000)
Distributions: Dividends and capital gains reinvested
Conservative investors use tax-free investments not only to avoid taxes, but to
build their nest eggs
[LINE CHART APPEARS HERE DEPICTING THE TABULAR CHART INFORMATION PROVIDED BELOW]
INITIAL INVESTMENT
DATE TOTAL VALUE PLUS GROWTH
- ---- ----------- ------------------
9-3-85 $ 96,262 $ 96,263
8-31-86 115,543 106,667
8-31-87 117,429 100,817
8-31-88 125,549 100,210
8-31-89 140,195 104,465
8-31-90 148,142 103,249
8-31-91 167,267 109,228
8-31-92 186,979 115,588
8-31-93 213,953 126,804
8-31-94 206,815 118,122
2-28-95 209,404* 116,086
* COMPOUNDED TAX-FREE DIVIDENDS
<TABLE>
<CAPTION>
SEC Tax-equivalent
Yield (for the 42.40%
combined federal
SEC-Required Average Annual Rates of Total Return at the maximum sales charge of and California
4.75% for the periods ended 3/31/95 were: SEC Yield effective tax rate)
- -------------------------------------------------------------------------------- ------------------------------------
Life of Fund Life of Fund
(inception: 9/3/85) 5 Years 1 Year (at net asset value) 30 days ended 3/31/95
- -------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <S> <C>
+7.96% +6.67% -0.90% +8.52% 4.99% 8.66%
</TABLE>
The results quoted above represent past performance which is no indication of
future results. The investment return and principal value of a Fund investment
will fluctuate so that shares, on any given day or when redeemed, may be worth
more or less than their original cost.
MONTHLY TAX-FREE INCOME: $.0495 PER SHARE, PER MONTH
- ----------------------------------------------------
The Fund provided a tax-free dividend distribution rate of 5.51%/(2)/ on
2/28/95. This is based on the maximum offering price of $10.78 per share and the
monthly dividend of $.0495, annualized. The dividend distribution rate based on
this dividend and the net asset value of $10.27 was 5.78%.
/(1)/Performance does not reflect applicable taxes on capital gains. /(2)/The
Fund's distribution rate reflects the current monthly dividend, annualized, and
the maximum offering price on 2/28/95. The alternative minimum tax, personal
exemptions, the phase-out of the tax benefits of exemptions and the partial
disallowance of deductions are not reflected. Fund dividends derived from
interest on private activity bonds will increase the alternative minimum tax
liability only for shareholders subject to that tax. In the event the Fund does
not invest entirely in municipal bonds, federal and California personal income
tax may be applicable to interest income of the Fund. If interest rates rise,
the value of bonds held by the Fund would decrease, causing a decrease in the
Fund's share value. The Fund may invest up to 20% of its net assets in residual
interest bonds ("RIBs"). 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 security or the value of an
index. Changes in the interest rate on the other security or index inversely
affect the residual interest paid on the RIB, with the result that when interest
rates rise, RIBs give lower interest payments and their values fall faster than
other similar fixed-rate bonds. But when interest rates fall, not only do RIBs
give higher interest payments, their values also rise faster than other similar
fixed-rate bonds. The market for RIBs is relatively new. As of 2/28/95, the
California Fund had less than 10% of its assets invested in such bonds. See the
prospectus for a history of fees waived and expense subsidies. If used as sales
material after 6/30/95, this report must be accompanied by Lord Abbett's
Performance Quarterly for the most recently completed calendar quarter.
1
Statement of Net Assets February 28, 1995
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<TABLE>
<CAPTION>
Rating: Market
S& P or Principal Value
Security Moody's Amount (Note 1a)
-------- ------- --------- ---------
<S> <C> <C> <C> <C>
Prerefunded California Health Fac 8% 1/1/2016 AAA $ 2,880M $ 3,092,400
26.03% California Health Fac CA MTGE* 7.85% 12/1/2018 AAA 500M 556,875
Concord CA Redev Agy BIG+ 8% 7/1/2018 AAA 1,715M 1,905,794
Grossmont Hosp CA MBIA+ 8% 11/15/2017 AAA 2,260M 2,480,350
Local Govt Fin/Anaheim Redev 8.20% 9/1/2015 AAA 1,500M 1,678,125
Los Angeles CA Ctfs Civic Ctr 8% 6/1/2010 AAA 3,000M 3,318,750
Los Angeles CA Dept Wtr & Pwr Elec Plt Rev 63/4% 12/15/2029 AAA 2,300M 2,484,000
Los Angeles CA Dept Wtr & Pwr Elec Plt Rev 65/8% 10/1/2031 AAA 8,455M 9,184,244
Los Angeles CA Harbor Rev 7.60% 10/1/2018 AAA 3,000M 3,281,250
Los Angeles CA Wastewater 6.80% 8/1/2019 AAA 4,000M 4,310,000
Los Angeles Co CA Flood 77/8% 7/15/2017 AAA 4,000M 4,340,000
Los Angeles Trans Comm 8% 7/1/2018 AAA 1,575M 1,750,219
Oakland Redev Museum Ctfs AMBAC+ 81/8% 4/1/2012 AAA 1,085M 1,175,869
Orange Co CA Ctfs 81/4% 12/1/2018 AAA 1,250M 1,381,250
Puerto Rico Commonwealth 8% 7/1/2018 AAA 3,500M 4,051,250
Puerto Rico Elec Pwr Auth 8% 7/1/2008 AAA 3,000M 3,345,000
Sacramento CA Muni Util Dist Elec Rev 77/8% 8/15/2016 AAA 6,280M 6,978,650
San Francisco CA City & Co Sewer AMBAC+ 61/2% 10/1/2021 AAA 11,750M 12,675,313
Santa Clara CA Redev FGIC+ 73/4% 6/1/2014 AAA 2,000M 2,205,000
University of California Rev 73/4% 11/1/2012 AAA 1,000M 1,067,500
University of California Rev AMBAC+ 63/4% 9/1/2023 AAA 8,545M 9,292,688
Total 80,554,527
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General Obligation Puerto Rico Commonwealth FSA+ 6% 7/1/2022 AAA 1,000M 995,000
State .32% ----------
General Obligation San Francisco CA City & Co FGIC+ 6.30% 6/15/2014 AAA 2,600M 2,655,250
Local 1.44% San Francisco CA City & Co Sch Dist Facs Imp
FGIC+ 6.20% 6/15/2011 AAA 1,755M 1,792,293
Total 4,447,543
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Education California Ed Fac Auth Rev/Loyola Marymount Univ-Series B
3.86% 6.60% 10/1/2022 A 1,165M 1,189,755
California Ed Fac Auth Rev/Stanford Univ 6% 1/1/2018 AAA 2,000M 1,992,500
University of California Revs MBIA+ 63/8% 9/1/2019 AAA 8,575M 8,746,500
Total 11,928,755
----------
Health and Hospital California Health Fac/Cedarknoll CA MTGE* 71/2% 8/1/2020 A 1,000M 1,051,250
3.04% California Health Fac/Kaiser Permanente 91/8% 10/1/2015 AA 350M 364,438
California Health Fac/Kaiser Permanente AMBAC+ 61/4% 3/1/2021 AAA 2,350M 2,367,625
California Health Fac/Robert F Kennedy Med Ctr
CA MTGE* 73/4% 3/1/2014 A 1,000M 1,052,500
California Health Fac/San Diego Hosp Assn MBIA+
6.95% 10/1/2021 AAA 2,250M 2,379,375
California Health Fac/Sisters of Providence 71/2% 10/1/2010 AA 600M 645,750
California Health Fac/Small Fac 63/4% 3/1/2020 A 1,550M 1,563,562
Total 9,424,500
----------
</TABLE>
