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LORD ABBETT MUNICIPAL
BOND PORTFOLIOS
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[P1] [P2] [P3]
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Would You Like To Pay
Less Income Tax?
[LOGO]
A Tradition of Performance
Through Disciplined Investing
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Talk To Your Investment Professional About...
The Lord Abbett Tax-Free Advantage
[P4]
[P5]
Q. "It's important for me to know that my money is buying high-quality
securities. Any fund I invest in has to be as concerned with quality as I am.
Does Lord Abbett fit the bill?"
A. "Yes. Lord Abbett's municipal portfolios are among the highest quality
in the industry. Only investment-grade (AAA, AA, A, BBB) municipal bonds (or
their equivalent) can be purchased by Lord Abbett's portfolio managers."
Q. "I know Lord Abbett uses a team approach to managing fixed-income
portfolios. Is professional management really that important?"
A. "Yes. The Lord Abbett team looks to act, not react. They constantly evaluate
the market and adjust their portfolios based on the anticipation of interest-
rate and economic changes. Since the portfolios invest in intermediate- and
long-term municipal bonds, share prices will fluctuate as interest rates
change."
Q. "Right now, I don't need a monthly dividend check. But, later on, I probably
will. I need a fund that works for me now and in the future. Can Lord Abbett
respond to my changing needs?"
A. "Yes. Lord Abbett's municipal bond funds pay monthly dividends which can be
received by investors in cash or can be reinvested at net asset value. And, you
can add to your investment at any time in any amount."
COMPOUND THE BENEFITS OF TAX-FREE INVESTING
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This hypothetical graph illustrates the results of two investors:
. Both investors began with $100,000.
. Both saw their investment return an average of 6% per year during each
period.
. Both were subject to a tax rate of 33%.
Yet, after 25 years, the value of Shareholder B's portfolio is worth $173,765
more than Shareholder A's.
Why?
Shareholder B's investment compounded tax free, while Shareholder A's did not.
[G1]
In this illustration, dividends compound monthly and there is no fluctuation in
the value of the principal. The 6% return used in this illustration is not
representative of future returns for any Lord Abbett-sponsored fund.
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QUESTIONS AND ANSWERS
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Q. If you could find an investment that allowed you to support local
communities and earned you income free of taxes, would you buy it?
A. If the answer is yes, you should consider purchasing municipal bonds.
Municipal bonds are issued by state and local governments to finance many
projects, including bridge, tunnel and road construction, building airports and
public schools and paying for water treatment plants. The purchasers of these
bonds are, in effect, lending money to the government to complete these
projects. The interest paid on these "loans" is tax free to the investor.
Q. Do you want diversification among many holdings, active management and
access to a large pool of municipal issues?
A. If the answer is yes, invest in a professionally managed municipal bond
fund.
THE ADVANTAGES OF INVESTING IN A PROFESSIONALLY MANAGED MUNICIPAL BOND FUND:
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Diversification/Managed Risk:
A mutual fund is an investment that represents partial ownership of a wide
number of holdings. By providing greater diversification than most investors can
achieve on their own, a mutual fund can reduce risk.
Time Savings/Expertise/Economy:
Overseeing your investments is a full-time job requiring expertise in many
areas. Portfolio managers continually monitor the financial markets in an
attempt to maximize returns and minimize risk. Most people lack the time, the
knowledge or the confidence to buy individual bonds. Also, adding to a portfolio
of individual bonds can be expensive; individual municipal bonds typically trade
in amounts of $5,000. There is no minimum dollar amount required for subsequent
investments in Lord Abbett's municipal bond funds.
Access to the Bond Market:
Institutional investors, such as municipal bond funds, utilize many dealers,
each with inventories of bonds. As a result, municipal bond funds can buy and
sell bonds more efficiently than an individual can. This access to large
reserves of bonds provides the potential for better returns.
Ability to Compound Your Earnings:
Because reinvesting mutual fund dividends is relatively easy (compared to
reinvesting the semi-annual interest of an individual municipal bond), a mutual
fund can be a very efficient way to keep all of your money working for you.
Reinvesting distributions is a simple way to add to your account and accumulate
shares: Each time a distribution is reinvested, the number of shares you own
increases.
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Q. Would you also like this actively-managed portfolio to consist of high-
quality municipal bonds, and emphasize call protection and total return
potential?
A. If the answer is yes...
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LORD ABBETT'S TAX-FREE PORTFOLIOS
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Lord Abbett has been investing money for clients since 1929 and currently
manages over $2 billion in tax-free portfolios. We offer the following municipal
bond funds:
National, California, Connecticut, Florida, Georgia, Hawaii,
Michigan, Minnesota, Missouri, New Jersey, New York, Pennsylvania,
Texas and Washington
A portion of income derived from these portfolios may be subject to the
alternative minimum tax. For each portfolio, any capital gains realized would be
subject to the usual taxes.
[G2]
A current prospectus containing more complete information about any of the
portfolios listed above (including charges, expenses and any fees waived and/or
expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus carefully before investing.
LORD, ABBETT & CO.
Investment Management
The GM Building
767 Fifth Avenue . New York, NY 10153-0203
800-426-1130
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Lord Abbett California
Tax-Free Income Fund
CALIFORNIA
RESIDENTS
WOULD YOU LIKE TO
PAY LESS
INCOME TAX?
. California residents, on average, have the 11th highest tax bill in the United
States(1).
. To pay their share of 1995 federal, state and local taxes, the average
California resident will work from January 1st until May 9th... for the
government(1).
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THE LORD ABBETT TAX-FREE
ADVANTAGE
High-Quality Bond Portfolio
(as of 3/31/95)
[G3]
The California Fund's investment policy restricts investments to municipal
bonds which are investment grade or equivalent at the time of purchase.
THE CALIFORNIA FUND PROVIDED
REWARDING TOTAL RETURNS
Account Value Assuming the
Reinvestment of All Distributions
[G4]
Total return assumes the reinvestment of all dividends and capital gains.
Capital gains distributions and any capital gains realized from liquidation
of shares would be subject to the usual taxes. Performance does not reflect
applicable capital gains taxes. The Fund investment reflects the reduced
sales charge of 3.75% applicable to investments of $100,000. Past
performance is no indication of future results.
SEC-REQUIRED AVERAGE ANNUAL RATES
OF TOTAL RETURN at the maximum sales charge of
4.75% for the periods ended 3/31/95 were:
<TABLE>
<CAPTION>
Life of Fund 5 Years 1 Year Life of Fund
(at net asset value)
<S> <C> <C> <C>
+7.96% +6.67% -0.90% +8.52%
</TABLE>
The investment return and principal value of an investment in the Fund will
fluctuate so that shares, on any given day or when redeemed, may be worth
more or less than their original cost. The results quoted herein represent
past performance which is no indication of future results.
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(1) Includes direct and indirect taxes. Source: Tax Foundation.
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THE TAX-FREE ADVANTAGE
Lord, Abbett & Co.'s objective is to provide California Fund shareholders an
investment free from federal and California State income taxes. California
taxpayers in a 43.04% tax bracket would have to earn 9.66% on a taxable
investment to keep the same after-tax earnings provided by a 5.50% tax-free
investment. The Fund's yield may be obtained by calling Lord, Abbett & Co. at
800-426-1130 or your Registered Representative.
These Yields Are Hypothetical and Are Not Representative of Actual or Future
California Fund Yields.
[G5]
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IMPORTANT INFORMATION
A current prospectus containing more complete information about the Fund, or any
Lord Abbett-managed portfolio (including charges, expenses and any fees waived
and/or expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus(es) carefully before investing.
Interest income derived from private activity bonds in the portfolio will
increase the alternative minimum tax liability only for shareholders subject to
that tax. In the event the portfolio does not invest entirely in municipal
bonds, federal and local taxes may be applicable to interest income and/or
shares of the portfolio. Any capital gains realized would be subject to the
usual taxes.
Although the portfolio may invest up to 20% of its net assets in residual
interest bonds ("RIBs"), as of 3/31/95, the California Fund had less than 5% of
its assets invested in such securities. A RIB, sometimes referred to as an
inverse floater, is a debt instrument with a floating or variable rate that
moves in the opposite direction of the interest rate on another security or the
value of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest paid on the RIB, with the result that
when interest rates rise, RIBs give lower interest payments and their values
fall faster than other similar fixed-rate bonds. But when interest rates fall,
not only do RIBs give higher interest payments, their values also rise faster
than other similar fixed-rate bonds. The market for RIBs is relatively new.
If used after 6/30/95, this literature must be accompanied by Lord Abbett's
Performance Quarterly for the most recently completed calendar quarter.
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(2) This illustration assumes a combined federal and California State income tax
rate of 43.04% for single/joint income between $115,000-$250,000 and
$140,000-$250,000, respectively.
[LOGO] LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
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The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 . 800-426-1130
<PAGE>
LORD ABBETT
STATEMENT OF ADDITIONAL INFORMATION JANUARY 1, 1995
LORD ABBETT
CALIFORNIA TAX-FREE INCOME FUND
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This Statement of Additional Information is not a prospectus. A prospectus may
be obtained from your securities dealer or from Lord, Abbett & Co. ("Lord
Abbett") at 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 January 1, 1995.
The Fund was incorporated under Maryland law on May 21, 1985. Our authorized
capital stock consists of a single class of 1,000,000,000 shares, $.001 par
value. All shares have equal noncumulative voting rights and equal rights with
respect to dividends, assets and liquidations. They are fully paid and
nonassessable when paid for and issued and have no preemptive or conversion
rights.
Shareholder inquiries should be made by writing directly to the Fund or by
calling 800-821-5129. In addition, you can make inquiries through your dealer.
TABLE OF CONTENTS Page
1. Investment Objective and Policies 1
2. Directors and Officers 4
3. Investment Advivisory and Other Services 6
4. Portfolio Transactions 7
5. Purchases, Redemptions and Shareholder Services 8
6. Taxes 12
7. Risk Factors Relating to California and Puerto Rico
Municipal Bonds 13
8. Past Performance 15
9. Further Information About the Fund 16
10. Financial Statements 16
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1.
Investment Objective and Policies
The Fund's investment objective and policies are described in the Prospectus on
the cover page and under "How We Invest."
In addition to those policies described in the Prospectus, we are subject to the
following investment restrictions which cannot be changed without approval of a
majority of our outstanding shares. We may not: (1) sell short or buy on margin,
although we may obtain short-term credit necessary for the clearance of
purchases of securities; (2) buy or sell put, call, straddle or spread options;
(3) borrow money except as a temporary measure for extraordinary or emergency
purposes, and then not in excess of 5% of our gross assets (at cost or market
value, whichever is lower) at the time of borrowing; (4) invest knowingly more
than 10% of our gross assets, taken at market value at the time of purchase, in
securities or other assets not readily marketable or subject to legal or
contractual restrictions on resale; (5) act as underwriter of securities issued
by others, except to the extent that in connection with the disposition of our
portfolio securities we may be deemed to be an underwriter under federal
securities laws; (6) make loans, except for the purchase of debt securities in
which we may invest, consistent with our investment objective and policies; (7)
buy or sell real estate, including real estate mortgages, in the ordinary course
of our business, except that we may invest in marketable securities secured by
real estate or interests therein; (8) buy securities issued by any other
open-end investment company except pursuant to a merger, acquisition or
consolidation; (9) buy or sell commodities or commodities contracts (for this
purpose, financial futures contracts are not deemed to be commodities or
commodities contracts); (10) with respect to 75% of our gross assets, buy
securities if the purchase would then cause us to have more than 5% of our gross
assets, at market value at the time of purchase, invested in securities of any
one issuer, except securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (for purposes of this restriction, the
identification of the "issuer" will be determined on the basis of the source of
assets and revenues committed to meeting interest and principal payments of the
security but, generally, the State of California and its political subdivisions
are not considered "issuers") or (11) invest more than 25% of our gross assets
taken at market value at the time of purchase in any one industry (tax-exempt
securities and securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities are not considered securities of an "industry" for
purposes of this restriction).
We have no present intent to invest in financial futures contracts. Any
investments in such contracts will be made only after information concerning
such investments has been disclosed in our Prospectus.
For the year ended August 31, 1994, our portfolio turnover rate was 86.05%
versus 81.34% for the prior year.
California Municipal Bonds
In general, California Municipal Bonds are debt obligations issued by or on
behalf of California and its political subdivisions, agencies and
instrumentalities and which meet the requirements of Section 103 of the Internal
Revenue Code of 1986, as amended, in the opinion of bond counsel to the issuer.
California 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 loan to other public institutions and facilities
and in anticipation of the receipt of revenue or the issuance of other
obligations. In addition, the term "California Municipal Bonds" includes certain
types of 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 sewage or solid waste disposal. The
interest on California Municipal Bonds is exempt from federal income tax and
California personal income tax in the hands of investors.
The two principal classifications of California 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 the 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.
Industrial development bonds are in most cases revenue bonds and generally do
not constitute the pledge of the credit or taxing power of the municipality. The
credit quality of such municipal bonds usually is directly related to the credit
standing
<PAGE>
of the user of the facilities. There are variations in the security of
California Municipal Bonds, both within a particular classification and between
classifications, depending on numerous factors.
The yields on California Municipal Bonds are dependent on a variety of factors,
including general money market conditions, supply and demand, general conditions
of the municipal bond market, the size of a particular offering, the maturity of
the obligation and the rating of the issue. The ratings of Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P") and Fitch
Investors Service ("Fitch") represent their opinions as to the quality of the
municipal bonds which they undertake to rate. It should be emphasized, however,
that such ratings are general and are not absolute standards of quality.
Consequently, municipal bonds with the same maturity, coupon and rating may have
different yields when purchased in the open market, while municipal bonds of the
same maturity and coupon with different ratings may have the same yield.
Description of Four Highest Municipal
Bond Ratings
Moody's describes its four highest ratings for municipal bonds as follows:
"Bonds that are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities. Bonds which are
rated A possess many favorable investment attributes and are to be considered as
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Bonds that are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well."
Standard & Poor's describes its four highest ratings for municipal bonds as
follows:
"AAA: Debt rated 'AAA' has the highest rating assigned by S & P. Capacity to and
pay interest and repay principal is extremely strong
AA: Debt rated ' AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
Fitch's describes its four highest ratings for municipal bonds as follows:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
<PAGE>
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated 'AAA'. Because bonds rated in the 'AAA' and
'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt to these issuers is generally rated 'F-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payments. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
2.
Directors and Officers
The following directors are partners of Lord, Abbett & Co. ("Lord Abbett"), The
General Motors Building, 767 Fifth Avenue, New York, New York 10153-0203. They
have been associated with Lord Abbett for over five years and also are officers
and/or directors or trustees of the fifteen other Lord Abbett-sponsored funds.
They are "interested persons" as defined in the Investment Company Act of 1940,
as amended, and as such, may be considered to have an indirect financial
interest in the Rule 12b-1 Plan described in the Prospectus.
Ronald P. Lynch, Chairman and President
Robert S. Dow, Vice President
E. Wayne Nordberg, Vice President
The following outside directors are also directors or trustees of the fifteen
other Lord Abbett-sponsored funds referred to above except for Lord Abbett
Research Fund, Inc. of which only Messrs. Millican and Neff are directors.
E. Thayer Bigelow
Time Warner Cable
300 First Stamford Place
Stamford, CT 06902
President and Chief Executive Officer of Time Warner Cable. Formerly President
and Chief Operating Officer of Home Box Office, Inc.
Stewart S. Dixon
Wildman, Harrold, Allen & Dixon
225 W. Wacker Drive (Suite 2800)
Chicago, Illinois
Partner in the law firm of Wildman, Harrold, Allen & Dixon.
John C. Jansing
162 South Beach Road
Hobe Sound, Florida
Retired. Formerly Chairman of Independent Election Corporation of America, a
proxy tabulating firm.
C. Alan MacDonald
The Noel Group
Two Greenwich Plaza, Suite 100
<PAGE>
Greenwich, Connecticut
Acquisition Consultant, The Noel Group, a private consulting firm. Formerly
Chairman and Chief Executive Officer of Lincoln Foods, Inc., manufacturer of
branded snack foods. Formerly President and Chief Executive Officer of Nestle
Foods Corporation, a subsidiary of Nestle S.A. (Switzerland).
Hansel B. Millican, Jr.
Rochester Button Company
1100 Noblin Avenue
South Boston, Virginia
President and Chief Executive Officer of Rochester Button Company. Formerly
Senior Vice President, Springs Industries, Inc., a textile company, (1986-1989).
Thomas J. Neff
55 East 52nd Street
New York, New York
President of Spencer Stuart & Associates, an executive search consulting firm.
Effective September 21, 1994, Thomas F. Creamer retired as a director of the
Fund.
For the fiscal year ended August 31, 1994, the Fund accrued, for all outside
directors as a group, directors' fees totaling $7,379 (exclusive of expenses).
The Fund has adopted a retirement plan under which the outside directors will
receive an annual retirement benefit equal to 80% of their final annual retainer
following retirement at or after age 72 with at least 10 years of service. This
plan also provides for a reduced benefit upon early retirement under certain
circumstances and a pre-retirement death benefit. As of the fiscal year ended
August 31, 1994, the Fund had accrued $7,215 for the payment of benefits under
this plan.
Except where indicated, the following executive officers have been associated
with Lord Abbett for over five years. Of these officers, Messrs. Allen, Carper,
Cutler, Henderson and Walsh are partners and the others are employees: Barbara
A. Grummel (with Lord Abbett since 1990 - formerly, Vice President, Merrill
Lynch Asset Management) Executive Vice President; Daniel E. Carper, Vice
President; Kenneth B. Cutler, Vice President and Secretary; Stephen I. Allen,
Jeffery H. Boyd (with Lord Abbett since 1994 - formerly partner in the law firm
of Robinson & Cole), John J. Gargana, Jr., Thomas S. Henderson, Thomas F. Konop,
E. Wayne Nordberg, Victor W. Pizzolato and John J. Walsh, Vice Presidents; and
Keith F. O'Connor, Treasurer.
The Fund does not hold regular annual meetings of shareholders. Under the Fund's
By-laws shareholder meetings may be called at any time by certain officers of
the Fund or by a majority of the Board of Directors (i) for the purpose of
taking action upon any matter requiring the vote or authority of the Fund's
shareholders or upon other matters deemed to be necessary or desirable or (ii)
upon the written request of the holders of at least one-quarter of the shares of
the Fund outstanding and entitled to vote at the meeting. When any such annual
meeting is held, the shareholders will elect directors and select independent
auditors of the Fund.
As of November 30, 1994, our officers and directors as a group owned less than
1% of our outstanding shares.
The Fund's By-Laws provide that the Fund shall not hold an annual meeting of its
stockholders in any year unless one or more matters are required to be acted on
by stockholders under the Investment Company Act of 1940, as amended (the
"Act"), or unless called by a majority of the Board of Directors or by
stockholders holding at least one-quarter of the stock of the Fund outstanding
and entitled to vote at the meeting. When any such annual meeting is held, the
stockholders will elect directors to hold the offices of any directors who have
held office for more than one year or who have been elected by the Board of
Directors to fill vacancies. Under these By-Law amendments and in accordance
with the Act, stockholder approval of the independent auditors of the Fund will
not be required except when such meetings are held.
<PAGE>
3.
Investment Advisory and Other Services
As described under "Our Management" in the Prospectus, Lord Abbett is the Fund's
investment manager. The eight general partners of Lord Abbett, all of whom are
officers and/or directors of the Fund, are: Stephen I. Allen, Daniel E. Carper,
Kenneth B. Cutler, Robert S. Dow, Thomas S. Henderson, Ronald P. Lynch, E. Wayne
Nordberg and John J. Walsh. The address of each partner is The General Motors
Building, 767 Fifth Avenue, New York, New York 10153-0203.
The services performed by Lord Abbett are described under "Our Management" in
the Prospectus. Under the Management Agreement described in the Prospectus, we
are obligated to pay Lord Abbett a monthly fee, based on average daily net
assets of the Fund for each month, at the annual rate of .5 of 1%. In addition,
we pay all expenses not expressly assumed by Lord Abbett, including, without
limitation, 12b-1 plan expenses; outside directors' fees and expenses;
association membership dues; legal and auditing fees; taxes; transfer and
dividend disbursing agent fees; shareholder servicing costs; expenses relating
to shareholder meetings; expenses of preparing, printing and mailing stock
certificates and shareholder reports; expenses of registration of our shares
under federal, state and foreign securities laws; expenses of preparing,
printing and mailing prospectuses to existing shareholders; insurance premiums;
brokerage; and other expenses connected with executing portfolio transactions.
Although not obligated to do so, Lord Abbett may waive all or a portion of its
management fee and has assumed or may assume certain other expenses of the Fund.
For the fiscal years ended August 31, 1992, 1993, and 1994 Lord Abbett waived
$364,548, $550,402 and $700,551, respectively, and received $547,302, $824,063
and $1,038,045, respectively, of its management fee.
Pursuant to California securities regulations, we limit operating expenses
(including management fees but excluding taxes, interest, extraordinary expenses
and brokerage commissions) to a certain percentage of average net assets with
excess expenses to be reimbursed each year by Lord Abbett to the extent of its
management fee. Lord Abbett will reimburse us for any such excess expenses by
reducing its management fee prior to each scheduled monthly payment of such fee.
The expense limitation is currently 2 1/2% of average annual net assets up to
$30,000,000, 2% of the next $70,000,000 of such assets and 1 1/2% of such assets
in excess of $100,000,000. The expense limitation is a condition of the
registration of investment company shares for sale in California and may be
changed or removed.
Lord Abbett serves as the Fund's principal underwriter.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281, are
the independent auditors of the Fund and must be approved at least annually by
our Board of Directors to continue in such capacity. They perform audit services
for the Fund including the audit of financial statements included in our annual
report to shareholders.
Morgan Guaranty Trust Company of New York, 60 Wall St., New York, New York
10005, serves as the Fund's custodian.
4.
Portfolio Transactions
Our policy is to have purchases and sales of portfolio securities executed at
the most favorable prices, considering all costs of the transaction, including
brokerage commissions and dealer markups and markdowns, consistent with
obtaining best execution except to the extent we may pay a higher commission as
described below. This policy governs the selection of brokers or dealers and the
market in which the transaction is executed. To the extent permitted by law, we
may, if considered advantageous, make a purchase from or sale to another Lord
Abbett-sponsored fund without the intervention of any broker-dealer.
We expect that most purchases and sales of portfolio securities will be
principal transactions. Portfolio securities normally will be purchased directly
from the issuer or from an underwriter or marketmaker for the securities. We
usually will pay no brokerage commissions for such purchases. Purchases from
underwriters of portfolio securities will be at a fixed price which will include
fees paid to the underwriter, and purchases from dealers serving as marketmakers
will include a dealer's markup.
<PAGE>
If we use brokers, we select them on the basis of their professional capability
and the value and quality of their brokerage and research services. Normally,
the selection is made by our traders who are officers of the Fund and also
employees of Lord Abbett. Our traders do the trading as well for other accounts
- -- investment companies (of which they are also officers) and other clients --
managed by Lord Abbett. They are responsible for the negotiation of prices and
commissions.
A broker may receive a commission for portfolio transactions exceeding the
amount another broker would have charged for the same transaction if Lord Abbett
determines that such amount of commission is reasonable in relation to the value
of the brokerage and research services performed by the executing broker viewed
either in terms of the particular transaction or its overall responsibilities
with respect to us and other accounts managed by Lord Abbett. Brokerage services
may include such factors as showing us trading opportunities including blocks,
willingness and ability to take positions in securities, knowledge of a
particular security or market, proven ability to handle a particular type of
trade, confidential treatment, promptness, reliability and quotation and pricing
services. Research may include the furnishing of analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. Such research may be used by Lord Abbett in
servicing all their accounts, and not all of such research will necessarily be
used by Lord Abbett in connection with their services to us; conversely,
research furnished in connection with brokerage of other accounts managed by
Lord Abbett may be used in connection with their services to us, and not all of
such research will necessarily be used in connection with their services to such
other accounts. We have been advised by Lord Abbett that, although such research
is often useful, no dollar value can be ascribed to it, nor can it be accurately
ascribed or allocated to any account and it is not a substitute for services
provided by them to us; nor does it materially reduce or otherwise affect the
expenses incurred by Lord Abbett in the performance of such services. We make no
commitments regarding the allocation of brokerage business to or among dealers.
If two or more brokerage considered capable of offering the equivalent
likelihood of best execution, the broker who has sold our shares and/or shares
of other Lord Abbett-sponsored funds may be preferred.
5.
Purchases, Redemptions and Shareholder Services
Information concerning how we value our shares for the purchase and redemption
of our shares is contained in the Prospectus under "Purchases" and
"Redemptions," respectively.
As disclosed in the Prospectus, we calculate our net asset value and are
otherwise open for business on each day the New York Stock Exchange ("NYSE") is
open for trading. The NYSE is closed on Saturdays and Sundays and the following
holidays -- New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Securities in our portfolio are valued at their market value as of the close of
the NYSE. Market value will be determined as follows: securities listed or
admitted to trading privileges on the New York or American Stock Exchange or on
the NASDAQ National Market System are valued at the last sales price, or, if
there is no sale on that day, at the mean between the last bid and asked prices,
or, in the case of bonds, in the over-the-counter market if, in the judgment of
the Funds's officers, that market more accurately reflects the market value of
the bonds. Over-the-counter securities not traded on the 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 Directors.
Although our shares are continuously offered, we are under no obligation to
maintain the offering or its terms and the offering may be suspended, changed or
withdrawn. The sales agreements between Lord Abbett and independent securities
dealers provide that all orders are subject to acceptance in New York and that
the right is reserved to reject any order.
The maximum offering price of our shares on August 31, 1994 was computed as
follows:
Net asset value per share (net assets
divided by shares outstanding). . . . . . . . . . . . . . . . . . . . .$10.45
Maximum offering price per share
(net asset value divided by .9525) . . . . . . . . . . . . . . . . . . .$10.97
<PAGE>
The Fund has entered into a distribution agreement with Lord Abbett under which
Lord Abbett is obligated to use its best efforts to find purchasers for the
shares of the Fund and to make reasonable efforts to sell Fund shares so long
as, in Lord Abbett's judgment, a substantial distribution can be obtained by
reasonable efforts.
For our last three fiscal years ended August 31, 1993, Lord Abbett, as our
principal underwriter, received net commissions after allowance of a portion of
the sales charge to independent dealers as follows:
YEAR ENDED AUGUST 31,
1994 1993 1992
---- ---- ----
Gross sales charge.............. $ 2,172,440 $3,305,871 $3,085,760
Amount allowed to dealers....... 1,888,949 2,869,584 2,721,182
----------- ---------- ----------
Net commissions received by
Lord Abbett..................... $ 283,491 $ 436,287 $ 364,578
=========== ========== ==========
As described in the Prospectus, the Fund has adopted a Distribution Plan and
Agreement (the "Plan") pursuant to Rule 12b-1 of the Investment Company Act of
1940, as amended. In adopting the Plan, the Board of Directors has concluded
that there is a reasonable likelihood that the Plan will benefit the Fund and
its shareholders. The expected benefits include greater sales, lower redemptions
of shares and a higher quality of service provided to shareholders by dealers
than otherwise would be the case. Lord Abbett is required to use all amounts
received under the Plan for payments to dealers for (i) providing continuous
services to the Fund's shareholders, such as answering shareholder inquiries,
maintaining records and assisting shareholders in making redemptions, transfers,
additional purchases and exchanges and (ii) their assistance in distributing
shares of the Fund.
The fees payable under the plan are described in the Prospectus. For the fiscal
year ended August 31, 1994, the Fund paid through Lord Abbett to dealers
$1,888,949 under the Plan. The 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. The Plan shall
continue in effect only if its continuance is specifically approved at least
annually by vote of the Fund's Board of Directors, including the Fund's
directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Plan or in any agreements
related to the Plan ("outside directors"), cast in person at a meeting called
for the purpose of voting on such Plan and agreements. The Plan may not be
amended to increase materially the amount spent for distribution expenses
without approval by a majority of the Fund's outstanding voting securities and
the approval of a majority of the directors, including a majority of the Fund's
outside directors. The Plan may be terminated at any time by vote of a majority
of the Fund's outside directors or by vote of a majority of the Fund's
outstanding voting securities.
As stated in the Prospectus, a 1% contingent deferred reimbursement charge
("CDRC") is imposed with respect to those shares (or shares in another Lord
Abbett-sponsored fund acquired through exchange of such shares) on which the
Fund has paid the one-time 1% 12b-1 sales distribution fee if such shares are
redeemed out of the Lord Abbett family of funds within a period 24 months from
the end of the month in which the original sale occurred. The CDRC is received
by the 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 large, long-term account in the
Fund. Shares of a fund or series on which such 1% sales distribution fee has
been paid may not be exchanged into a fund or series with a Rule 12b-1 plan for
which the payment provisions have not been in effect for at least one year.
The other Lord Abbett-sponsored funds which participate in the Telephone
Exchange Privilege (except Lord Abbett U.S. Government Securities Money Market
Fund ("GSMMF"), as well as certain other Lord Abbett managed funds whose plans
has not yet become effective collectively, the "Series") have instituted a CDRC
on the same terms and conditions. No CDRC will be charged on an exchange of
shares between Lord Abbett funds. Upon redemption out of the Lord Abbett family
of funds the CDRC will be charged on behalf of and paid to the Lord Abbett fund
in which the original purchase (subject to a CDRC) occurred. Thus, if shares of
a Lord Abbett fund are exchanged for shares of another such fund and the shares
tendered ("Exchanged Shares") are subject to a CDRC, the CDRC will carry over to
the shares being acquired, including shares of each Series and GSMMF ("Acquired
Shares"). Any CDRC that is carried over to Acquired Shares is calculated
<PAGE>
as if the holder of Acquired Shares had held those shares from the date on which
he or she became the holder of Exchanged Shares. Although GSMMF and the Series
will not pay a 1% sales distribution fee on $1 million purchases of their own
shares and, therefore, will not impose their own CDRC, they will collect the
CDRC on behalf of other Lord Abbett funds or series. Acquired shares held in
GSMMF and the Series which are subject to a CDRC will be credited with the time
such shares are held in that fund.
In no event will the amount of the CDRC exceed 1% of the lesser of (a) the net
asset value of the shares redeemed or (b) the original cost of such shares (or
of Exchanged Shares for which such shares were acquired). No CDRC will be
imposed when the investor redeems (i) amounts derived from increases in the
value of the account above the total cost of shares being redeemed due to
increases in net asset value, (ii) shares with respect to which no Lord Abbett
fund paid a 1% sales distribution fee on issuance (including shares acquired
through reinvestment of dividend income and capital gains distributions) or
(iii) shares which, together with Exchanged Shares, have been held continuously
for 24 months from the end of the month in which the original sale occurred. In
determining whether a CDRC is payable (a) shares not subject to the CDRC will be
redeemed before shares subject to the CDRC and (b) shares subject to a CDRC and
held the longest will be the first to be redeemed.
Under terms of the Statement of Intention to invest $100,000 or more over a
13-month period, as described in the Prospectus, shares of all Lord
Abbett-sponsored funds (other than shares of Lord Abbett Equity Fund ("LAEF"),
Lord Abbett Series Fund ("LASF"), Lord Abbett Research Fund ("LARF"), Lord
Abbett Counsel Group and GSMMF, unless holdings in GSMMF are attributable to
shares exchanged from a Lord Abbett-sponsored fund offered with a sales charge)
currently owned by you are credited as purchases (at their current offering
prices on the date the Statement is signed) toward achieving the stated
investment. Shares valued at 5% of the amount of intended purchases are escrowed
and may be redeemed to cover the additional sales charge payable if the
Statement is not completed. The Statement of Intention is neither a binding
obligation upon you to buy nor upon the Fund to sell, the full amount indicated.
As stated in the Prospectus, purchasers (as defined in the Prospectus) may
accumulate their investment in Lord Abbett- sponsored funds (other than LAEF,
LARF, LASF, Lord Abbett Counsel Group and GSMMF, unless holdings in GSMMF are
attributable to shares exchanged from a Lord Abbett-sponsored fund offered with
a sales charge) so that a current investment, plus the purchaser's holdings
valued at the current maximum offering price, reach a level eligible for a
discounted sales charge.
As stated in the Prospectus, our shares may be purchased at net asset value by
our directors, employees of Lord Abbett, employees of our shareholder servicing
agent and employees of any securities dealer having a sales agreement with Lord
Abbett who consents to such purchases. For purposes of this paragraph, the terms
"directors" and " employees" include a director's or employee's spouse
(including the surviving spouse of a deceased director or employee). The terms
"directors" and "employees of Lord Abbett" also include other family members and
retired directors and employees.
Our shares also may be purchased at net asset value (a) at $1 million or more
(subsequent to the effective date of the Rule 12b-1 Plan for any such series),
(b) with dividends and distributions from other Lord Abbett-sponsored funds,
except for dividends and distributions on shares of LARF, LAEF, LASF and Lord
Abbett Counsel Group, (c) by certain authorized brokers, dealers, registered
investment advisers or other financial institutions who have entered into an
agreement with Lord Abbett in accordance with certain standards approved by Lord
Abbett, providing specifically for the use of our shares in particular
investment products made available for a fee to clients of such brokers,
dealers, registered investment advisers and other financial institutions, and
(d) by employees, partners and owners of unaffiliated consultants and advisors
to Lord Abbett or Lord Abbett-sponsored funds who consent to such purchase if
such persons provide service to Lord Abbett or such funds on a continuing basis
and are familiar with such funds. Shares are offered at net asset value to these
investors for the purpose of promoting goodwill with employees and others with
whom Lord Abbett and/or the Fund have business relationships.
Our shares may also be purchased, subject to appropriate documentation, through
a securities dealer where the amount invested represents redemption proceeds
from shares ("Redeemed Shares") of a registered open-ended management investment
company not distributed or managed by Lord Abbett (other than a money market
fund), if such redemption has occurred no more than 60 days prior to the
purchase of our shares, the Redeemed Shares were held for at least six months
<PAGE>
prior to redemption and the proceeds of redemption were maintained in cash or a
money market fund prior to purchase. Lord Abbett may suspend, change, or
terminate this option at any time.
Our shares may be issued at net asset value in exchange for the assets, subject
to possible tax adjustment, of a personal holding company or investment company.
There are economies of selling efforts and sales-related expenses with respect
to offers to these investors and those referred to above.
Our shares also may be issued at net asset value plus the applicable sales
charge in exchange for securities for which market quotations are readily
available and which are desired for our portfolios and which have a market value
not less than the net asset value of our shares issued in exchange.
The Prospectus briefly describes the Telephone Exchange Privilege. You may
exchange some or all of your shares for those of Lord Abbett-sponsored funds
currently offered to the public with a sales charge and GSMMF, to the extent
offers and sales may be made in your state. You should read the prospectus of
the other fund before exchanging. In establishing a new account by exchange,
shares of the Fund being exchanged must have a value equal to at least the
minimum initial investment required for the fund into which the exchange is
made.
Shareholders in such other funds have the same right to exchange their shares
for the Fund's shares. Exchanges are based on relative net asset values on the
day instructions are received by the Fund in Kansas City if the instructions are
received prior to the close of the NYSE in proper form. No sales charges are
imposed except in the case of exchanges out of GSMMF (unless a sales charge was
paid on the investment before GSMMF in another Lord Abbett fund). Exercise of
the exchange privilege will be treated as a sale for federal income tax
purposes, and, depending on the circumstances, a gain or loss may be recognized.
In the case of an exchange of shares that have been held for 90 days or less
where no sales charge is payable on the exchange, the original sales charge
incurred with respect to the exchanged shares will be taken into account in
determining gain or loss on the exchange only to the extent such charge exceeds
the sales charge that would have been payable on the acquired shares had they
been acquired for cash rather than by exchange. The portion of the original
sales charge not so taken into account will increase the basis of the acquired
shares.
Shareholders have the exchange privilege unless they refuse it in writing. You
should not view the exchange privilege as a means for taking advantage of
short-term swings in the market, and we reserve the right to terminate or limit
the privilege of any shareholder who makes frequent exchanges. We can revoke or
modify the privilege for all shareholders upon 60 days' prior notice. Other Lord
Abbett-sponsored funds are eligible for the exchange privilege (together,
"Eligible Funds"), except LASF which offers its shares only in connection with
certain variable annuity contracts, LAEF which is not issuing shares, LARF and
Lord Abbett Counsel Group.
A redemption order is in proper form when it contains all of the information and
documentation required by the order form or supplementally by Lord Abbett or the
Fund to carry out the order. The signature(s) and any legal capacity of the
signer(s) must be guaranteed by any eligible guarantor. See the Prospectus for
expedited redemption procedures.
The right to redeem and receive payment, as described in the prospectus, may be
suspended if the NYSE is closed (except for weekends or customary holidays),
trading on the NYSE is restricted or the Securities and Exchange Commission
deems an emergency to exist.
Our Board of Directors may authorize redemption of all shares in any account in
which there are fewer than 25 shares. Before authorizing such redemption, the
Board must determine that it is in our economic best interest or necessary to
reduce disproportionately burdensome expenses in servicing shareholder accounts.
At least 60 days' prior written notice will be given before any such redemption,
during which time shareholders may avoid redemption by bringing their accounts
up to the minimum set by the Board.
Under the Div-Move service described in the Prospectus, you can invest the
dividends paid on your account into an existing account in any Eligible Fund.
The account must be either your account, a joint account for you or your spouse,
a single account for your spouse, or a custodial account for your minor child
under the age of 21. You should read the prospectus of the other fund before
investing.
<PAGE>
The Invest-A-Matic method of investing in the Fund and/or any other Lord
Abbett-sponsored fund is described in the Prospectus. To avail yourself of this
method, you must complete the Fund portion of the form, selecting the time and
amount of your bank checking account withdrawals and the Lord Abbett funds for
investment, include a voided, unsigned check and complete the bank
authorization.
The Systematic Withdrawal Plan also is described in the Prospectus. You may
establish a systematic withdrawal plan if you own or purchase uncertificated
shares having a current offering price value of at least $10,000. The Plan
involves the planned redemption of shares on a systematic basis by receiving
either fixed or variable amounts at periodic intervals. Since the value of
shares redeemed may be more or less than their cost, gain or loss may have to be
recognized for income tax purposes on each periodic payment. Normally, you may
not make regular investments at the same time you are receiving systematic
withdrawal payments because it is not in your interest to pay a sales charge on
new investments when in effect a portion of that new investment is soon
withdrawn. The minimum investment accepted while a withdrawal plan is in effect
is $1,000. The systematic withdrawal plan may be terminated by you or by us at
any time by written notice.
Shareholders in the other Lord Abbett funds listed above who are residents of
California, Arizona, Colorado, District of Columbia, Nevada, Wyoming, Hawaii or
New Jersey (other than shareholders of GSMMF unless a sales charge was paid on
the initial investment) have the same right to exchange their shares for the
Fund's shares. All such shareholders have this privilege unless they refuse it
in writing.
6.
Taxes
In order for the Fund to qualify to pay dividends which are exempt from federal
income tax, at the end of each fiscal quarter at least 50% of the Fund's total
assets must be invested in obligations exempt from federal income tax.
Moreover, dividends derived from interest on California Municipal Bonds or
obligations of the Federal government or certain other government authorities
(for example, Puerto Rico) will be exempt from California personal income tax
only if at least 50% of the Fund's total assets are invested in any combination
of such obligations at the end of each fiscal quarter.
The value of any shares redeemed by the Fund or repurchased through dealers may
be more or less than your tax basis in the shares at the time the redemption or
repurchase is made. Any gain (or loss) realized generally will be taxable (or
deductible) for federal and California tax purposes. However, if you have shares
redeemed which you have held for 6 months or less, any capital loss realized on
such a redemption will be disallowed for federal income tax and California
personal income tax purposes to the extent of any tax-exempt distributions which
you have received on the shares.
Any loss realized on the sale of Fund shares which you have held for six months
or less will be treated for federal income tax and California personal income
tax purposes as a long-term capital loss to the extent of any capital gains
distribution which you received with respect to the shares.
Taxable distributions paid by the Fund will not qualify for the federal
dividends-received deduction for corporations.
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.
The Fund will be subject to a 4 percent nondeductible federal 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 tax. 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 California 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. Certain financial institutions and property and
casualty insurance companies may be subject to special rules not discussed above
and should consult their tax adviser prior to purchasing shares of the fund.
<PAGE>
Except as discussed in the Prospectus with respect to California personal income
taxes, the receipt of dividends from the Fund may be subject to tax under laws
of states or localities. You should consult your tax adviser on state and local
tax matters.
7.
Risk Factors Relating to
California Municipal and Puerto Rico Bonds
CALIFORNIA BONDS
Since the California Trust invests primarily in California municipal bonds, it
is affected by any political, economic or regulatory developments affecting the
ability of California issuers to pay interest or repay principal. Certain
provisions of the California Constitution and State statutes which limit the
taxing and spending authority of California governmental entities may impair the
ability of California issuers to maintain debt service on their obligations.
Based on certain recent official statements describing California municipal
bonds and other official statements of the State of California, the following is
a very brief summary of some of the above-mentioned developments.
GENERAL - Recently, California has faced its worst economic, fiscal and budget
conditions since the 1930s. Construction, manufacturing (especially aerospace),
exports and financial services, among others, have all been severely affected;
agriculture has been hurt by weather conditions. Job losses have been the worst
of any post-war recession and continued through the end of 1993. The Department
of Finance now projects that non-farm employment levels will be stable in 1994
and show modest growth in 1995 but that pre-recession job levels will not be
reached for several more years. Unemployment is expected to remain well above
the National average through 1994. The Department of Finance foresees slow
recovery from the recession in California beginning in 1994. Both the California
and national economic recoveries are much weaker than in previous business
cycles, and could be harmed by several factors, including rising interest rates.
The recession seriously affected State tax revenues, which basically mirror
economic conditions. It also caused increased expenditures for health and
welfare programs. The State also is facing a structural imbalance in its budget
with the largest programs supported by the General Fund -- K-12 schools and
community colleges, health, welfare and corrections -- growing at rates higher
than the growth rates for the principal revenue sources of the General Fund. As
a result, the State experienced recurring budget deficits, with expenditures
exceeding revenues for four of the five fiscal years ending with 1991-92, and
were essentially equal in 1992-93. By June 30, 1994, the State's General Fund
had an accumulated deficit, on a budget basis, of approximately $2 billion.
The accumulated budget deficits over the past several years, together with
expenditures for school funding which have not been reflected in the budget, and
reduction of available internal borrowable funds, have combined to significantly
deplete the State's cash resources to pay its on going expenses. In order to
meet its cash needs, the State has had to rely for several years on a series of
external borrowings, including borrowings past the end of a fiscal year. To meet
its cash flow needs in the 1994-95 fiscal year, the State issued, in July and
August, 1994, $4 billion of revenue anticipation warrants which mature on April
25, 1996, and $3 billion of revenue anticipation notes maturing on June 28,
1995.
The 1994-95 Budget Act is projected to have $41.9 billion of General Fund
revenues and transfers and $40.9 billion of budgeted expenditures. In addition,
the 1994-95 Budget Act anticipates deferring retirement of about $1 billion of
the accumulated budget deficit to the 1995-96 fiscal year when it is intended to
be fully retired by June 30, 1996.
On July 15, 1994, all three of the rating agencies rating the State's long-term
debt lowered their ratings of the State's general obligation bonds. Moody's
Investors Service lowered its rating from "Aa" to "A1", Standard & Poor's
Ratings Group lowered its rating from "A+" to "A" and termed its outlook as
"stable", and Fitch Investors Service lowered its rating from "AA" to "A".
On January 17, 1994, an earthquake of the magnitude of an estimated 6.8 on the
Richter Scale struck Los Angeles causing significant damage to public and
private structures and facilities. Although some individuals and businesses
suffered losses totaling in the billions of dollars, the overall effect of the
earthquake on the regional and State economy is not expected to be serious.
<PAGE>
ARTICLE XIII B OF THE CALIFORNIA CONSTITUTION. In 1979, California voters
adopted Article XIII B to the California Constitution, imposing an
appropriations limit (the "Appropriations Limit") on the spending authority of
the State. Article XIII B was modified substantially by Propositions 98 and 111
in 1988 and 1990, respectively. (See "Proposition 98" below.)
Article XIII B prohibits the State from spending "appropriations subject to
limitation" in excess of the Appropriations Limit. "Appropriations subject to
limitation," with respect to the State, are authorizations to spend "proceeds of
taxes," which consist of tax revenues, and certain other funds, including
proceeds from regulatory licenses, user charges or other fees, to the extent
that such proceeds exceed "the cost reasonably borne by that entity in providing
the regulation, product or service," but "proceeds of taxes" exclude most State
subventions to local governments, tax refunds and some benefit payments such as
unemployment insurance. No limit is imposed on appropriations of funds which are
not "proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt service
costs of bonds existing or authorized by January 1, 1979 or subsequently
authorized by the voters, appropriations required to comply with mandates of
courts or the federal government and, pursuant to Proposition 111,
appropriations for qualified capital outlay projects and appropriations of
revenues derived from any increase in gasoline taxes and motor vehicle weight
fees above January 1, 1990 levels. In addition, a number of recent initiatives
were structured to create new tax revenues dedicated to certain specific uses,
with such new taxes expressly exempted from the Article XIII B limits (e.g.,
increased cigarette and tobacco taxes enacted by Proposition 98 in 1988). The
Appropriations Limit also may be exceeded in cases of emergency. However, unless
the emergency arises from civil disturbance or natural disaster declared by the
Governor, and the appropriations are approved by two-thirds of the Legislature,
the Appropriations Limit for the succeeding three years must be reduced by the
amount of the excess.
PROPOSITION 98. On November 8, 1988, voters of the State approved Proposition
98, a combined initiative constitutional amendment and statute called the
"Classroom Instructional Improvement and Accountability Act." Proposition 98
changed State funding of public education below the university level and the
operation of the State Appropriations Limit, primarily by guaranteeing K-14
schools a minimum share of General Fund revenues.
Proposition 98 permits the Legislature, by two-thirds vote of both Houses with
the Governor's concurrence, to suspend the K-14 schools' minimum funding formula
for a one-year period. In the fall of 1989, the Legislature and the Governor
utilized this provision to avoid having 40.3% of revenues generated by a special
supplemental sales tax enacted for earthquake relief go to K-14 schools.
Proposition 98 also contains provisions transferring certain State tax revenues
in excess of the Article XIII B limit to K-14 schools.
The effect of these various constitutional and statutory amendments upon the
ability of California issuers to pay interest and principal on their obligations
remains unclear and in any event 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. It is possible that other measures affecting the
taxing or spending authority of the State of California or its political
subdivisions may be approved or enacted in the future.
PUERTO RICO BONDS
The economy of Puerto Rico is dominated by the manufacturing and service
sectors. The manufacturing sector has experienced a basic change over the years
as a result of increased emphasis on higher wage, high technology industries
such as pharmaceuticals, electronics, computers, microprocessors, professional
and scientific instruments and certain high technology machinery and equipment.
Much of the development of the manufacturing sector in Puerto Rico can be
attributed to various federal and Commonwealth tax incentives, most notably
Section 936 of the Internal Revenue Code and the Commonwealth's Industrial
Incentives Program. The service sector, including finance, insurance and real
estate, also plays a major role in the economy. The service sector ranks second
only to manufacturing in contribution to the gross domestic product and leads
all sectors in providing employment. In recent years, the service sector has
experienced significant growth in response to and paralleling the expansion of
the manufacturing sector.
Puerto Rico's economy is closely integrated with that of mainland United States.
During fiscal 1993, approximately 86% of Puerto Rico's exports were to the
United States mainland, which also was the source of approximately 69% of Puerto
Rico's imports. In fiscal 1993, Puerto Rico experienced a $2.5 billion positive
adjusted merchandise trade balance.
<PAGE>
Puerto Rico's decade-long economic expansion continued throughout the five-year
period from fiscal 1989 through fiscal 1993, and affected almost every sector of
its economy and resulted in record levels of employment (although Puerto Rico's
unemployment rate has chronically exceeded the average for the United States).
Factors behind this expansion included Commonwealth-sponsored economic
development programs, the relatively stable prices of oil imports, periodic
declines in the exchange value of the United States dollar and the relatively
low cost of borrowing during the period.
Growth in fiscal 1994 will depend on several factors, including the state of the
United States economy and relative stability of the price of oil imports, the
exchange value of the U.S. dollar and the cost of borrowing.
The Constitution of Puerto Rico provides that public debt of the Commonwealth
will constitute a first claim on available Commonwealth revenues. Public debt
includes general obligation bonds and notes of the Commonwealth and any payments
required to be made by the Commonwealth under its guarantees of bonds and notes
issued by its public instrumentalities.
The Constitution of Puerto Rico also provides that direct obligations of the
Commonwealth evidenced by full faith and credit bonds or notes shall not be
issued if the amount of the principal of and interest on such bonds and notes
and on all such bonds and notes theretofore issued which is payable in any
fiscal year, together with any amount paid by the Commonwealth in the preceding
fiscal year on account of bonds or notes guaranteed by the Commonwealth, exceeds
15% of the average annual revenues raised under the provisions of Commonwealth
legislation and covered into the Treasury of Puerto Rico (principally income
taxes, property taxes and excise taxes) in the two fiscal years preceding the
then current fiscal year.
With the approval of the North American Free Trade Agreement by the United
States Congress which is intended to eliminate certain restrictions on trade
between Canada, the United States and Mexico, certain of Puerto Rico's
industries, including those that are lower salaried and labor intensive, may
face increased competition from Mexico. However, Puerto Rico's favorable
investment environment, skilled work force, infrastructure development and tax
structure (especially Section 936) would tend to create expanded trade
opportunities for Puerto Rico in sectors such as pharmaceuticals and
high-technology manufacturing.
8.
Past Performance
The Fund computes the average annual compounded rate of total return during
specified periods that would equate the initial amount invested to the ending
redeemable value of such investment by adding one to the computed average annual
total return, raising the sum to a power equal to the number of years covered by
the computation and multiplying the result by $1,000 which represents a
hypothetical initial investment. The calculation assumes deduction of the
maximum sales charge from the initial amount invested and reinvestment of all
income dividends and capital gains distributions on the reinvestment dates at
prices calculated as stated in the Prospectus. The ending redeemable value is
determined by assuming a complete redemption at the end of the period(s) covered
by the average annual total return computation.
The average annual compounded rate of total return for the Fund, using the
computation method described above, for the Fund's one-year and five-year
periods ended on August 31, 1994 is -3.33 and 8.09%, respectively. The rate of
total return for the life of the Fund, which commenced operations on September
3, 1985 and ending on August 31, 1994, is 8.87%.
The Fund's yield quotation is based on a 30-day period ended on a specified
date, computed by dividing the Fund's net investment income per share earned
during the period by the Fund's maximum offering price per share on the last day
of the period. This is determined by finding the following quotient: Take the
Fund's 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, multiplied by (ii) the Fund's maximum offering
price per share on the last day of the period. To this quotient add one. This
sum is multiplied by itself five times. Then, one is subtracted from the product
of this multiplication and the remainder is multiplied by two. For the 30-day
period ended August 31, 1994, the yield for the Fund was 5.48%.
The Fund's tax-equivalent yield is computed by dividing that portion of the
Fund's yield (as determined above) which is tax exempt by one minus a stated
income tax rate (42.40% in this case) and adding the product to that portion, if
any, of the Fund's yield that is not tax exempt. For the 30-day period ended on
August 31, 1994, the tax-equivalent yield for the Fund was 9.51%.
<PAGE>
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.
Further Information About the Fund
The directors, Trustees and officers of Lord Abbett-sponsored mutual funds,
together with the partners and employees of Lord Abbett, are permitted to
purchase and sell securities for their personal investment accounts. In engaging
in personal securities transactions, however, such persons are subject to
requirements and restrictions contained in the Fund's Code of Ethics which
complies, in substance, with each of the recommendations of the Investment
Company Institute's Advisory Group on Personal Investing. Among other things,
the Code requires that Lord Abbett partners and employees obtain advance
approval before buying or selling securities, submit confirmations and quarterly
transaction reports, and obtain approval before becoming a director of any
company; and it prohibits such persons from investing in a security 7 days
before or after any Lord Abbett-sponsored fund trades in such security,
prohibiting profiting on trades of the same security within 60 days and trading
on material and non-public information. The code imposes certain similar
requirements and restrictions on the independent directors and Trustees of each
Lord Abbett-sponsored mutual funds to the extent contemplated by the
recommendations of such Advisory Group.
10.
Financial Statements
The 1994 Annual Report to Shareholders of Lord Abbett California Tax-Free Income
Fund, Inc., which includes the financial statements for the fiscal year ended
August 31, 1994, and the opinion on such financial statements of Deloitte &
Touche, LLP, independent accountants, are incorporated herein by reference to
such reports in reliance upon the authority of Deloitte & Touche, LLP as experts
in auditing and accounting.
<PAGE>
GRAPHIC APPENDIX
P1 PHOTO - A BRIDGE
P2 PHOTO - HYDROELECTRIC DAM
P3 PHOTO - A TUNNEL
P4 PHOTO - A WOMAN
P5 PHOTO - A GENTLEMAN
G1 BAR GRAPH
SHAREHOLDER A SHAREHOLDER B
INITIAL INVESTMENT $100,000 $100,000
AFTER 25 YEARS 272,732 446,497
P6 MAP OF THE UNITED STATES WITH THOSE STATES LORD ABBETT HAS TAX-FREE
PORTFOLIOS, HIGHLIGHTED.
G2 PIE CHART - AAA - 59.3%
AA - 22.4%
A - 8.3%
G3 LINE GRAPH SHOWING A $100,000 INVESTMENT ON 9/3/85 AND WHAT IT WOULD BE
WORTH ($210,632) ON 3/31/95.
G4 BAR GRAPH
TAX-FREE YIELD TAX-EQUIVALENT YIELD
5.00% 8.78%
5.50% 9.66%
6.00% 10.53%
