<PAGE>
SUPPLEMENT DATED JUNE 3, 1995 TO THE CURRENT STATEMENT OF ADDITIONAL
INFORMATION FOR LORD ABBETT TAX-FREE INCOME TRUST
<PAGE>
LORD ABBETT MUNICIPAL
BOND PORTFOLIOS
-------------------------------------------------------
[P1] [P2] [P3]
-------------------------------------------------------
Would You Like To Pay
Less Income Tax?
[LOGO]
A Tradition of Performance
Through Disciplined Investing
<PAGE>
Talk To Your Investment Professional About...
The Lord Abbett Tax-Free Advantage
[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
- --------------------------------------------------------------------------------
This hypothetical graph illustrates the results of two investors:
. Both investors began with $100,000.
. Both saw their investment return an average of 6% per year during each
period.
. Both were subject to a tax rate of 33%.
Yet, after 25 years, the value of Shareholder B's portfolio is worth $173,765
more than Shareholder A's.
Why?
Shareholder B's investment compounded tax free, while Shareholder A's did not.
[G1]
In this illustration, dividends compound monthly and there is no fluctuation in
the value of the principal. The 6% return used in this illustration is not
representative of future returns for any Lord Abbett-sponsored fund.
<PAGE>
QUESTIONS AND ANSWERS
- ---------------------
Q. If you could find an investment that allowed you to support local
communities and earned you income free of taxes, would you buy it?
A. If the answer is yes, you should consider purchasing municipal bonds.
Municipal bonds are issued by state and local governments to finance many
projects, including bridge, tunnel and road construction, building airports and
public schools and paying for water treatment plants. The purchasers of these
bonds are, in effect, lending money to the government to complete these
projects. The interest paid on these "loans" is tax free to the investor.
Q. Do you want diversification among many holdings, active management and
access to a large pool of municipal issues?
A. If the answer is yes, invest in a professionally managed municipal bond
fund.
THE ADVANTAGES OF INVESTING IN A PROFESSIONALLY MANAGED MUNICIPAL BOND FUND:
- --------------------------------------------------------------------------------
Diversification/Managed Risk:
A mutual fund is an investment that represents partial ownership of a wide
number of holdings. By providing greater diversification than most investors can
achieve on their own, a mutual fund can reduce risk.
Time Savings/Expertise/Economy:
Overseeing your investments is a full-time job requiring expertise in many
areas. Portfolio managers continually monitor the financial markets in an
attempt to maximize returns and minimize risk. Most people lack the time, the
knowledge or the confidence to buy individual bonds. Also, adding to a portfolio
of individual bonds can be expensive; individual municipal bonds typically trade
in amounts of $5,000. There is no minimum dollar amount required for subsequent
investments in Lord Abbett's municipal bond funds.
Access to the Bond Market:
Institutional investors, such as municipal bond funds, utilize many dealers,
each with inventories of bonds. As a result, municipal bond funds can buy and
sell bonds more efficiently than an individual can. This access to large
reserves of bonds provides the potential for better returns.
Ability to Compound Your Earnings:
Because reinvesting mutual fund dividends is relatively easy (compared to
reinvesting the semi-annual interest of an individual municipal bond), a mutual
fund can be a very efficient way to keep all of your money working for you.
Reinvesting distributions is a simple way to add to your account and accumulate
shares: Each time a distribution is reinvested, the number of shares you own
increases.
- --------------------------------------------------------------------------------
Q. Would you also like this actively-managed portfolio to consist of high-
quality municipal bonds, and emphasize call protection and total return
potential?
A. If the answer is yes...
<PAGE>
LORD ABBETT'S TAX-FREE PORTFOLIOS
- --------------------------------------------------------------------------------
Lord Abbett has been investing money for clients since 1929 and currently
manages over $2 billion in tax-free portfolios. We offer the following municipal
bond funds:
National, California, Connecticut, Florida, Georgia, Hawaii,
Michigan, Minnesota, Missouri, New Jersey, New York, Pennsylvania,
Texas and Washington
A portion of income derived from these portfolios may be subject to the
alternative minimum tax. For each portfolio, any capital gains realized would be
subject to the usual taxes.
[P6]
A current prospectus containing more complete information about any of the
portfolios listed above (including charges, expenses and any fees waived and/or
expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus carefully before investing.
LORD, ABBETT & CO.
Investment Management
The GM Building
767 Fifth Avenue . New York, NY 10153-0203
800-426-1130
<PAGE>
Lord Abbett Tax-Free Income Trust
Florida Series
FLORIDA
RESIDENTS
WOULD YOU LIKE TO
PAY LESS
INCOME TAX?
. To pay their share of 1995 federal, state and local taxes, the average Florida
resident will work from January 1st until May 2nd... for the government (1).
- --------------------------------------------------------------------------------
THE LORD ABBETT TAX-FREE
ADVANTAGE
High-Quality Bond Portfolio
(as of 3/31/95)
[G2]
The Florida Series' investment policy restricts investments to municipal
bonds which are investment grade or equivalent at the time of purchase.
THE FLORIDA SERIES PROVIDED
REWARDING TOTAL RETURNS
Account Value Assuming the
Reinvestment of All Distributions
[G3]
Total return assumes the reinvestment of all dividends and capital gains.
Capital gains distributions and any capital gains realized from liquidation
of shares would be subject to the usual taxes. Performance does not reflect
applicable capital gains taxes. The Series investment reflects the reduced
sales charge of 3.75% applicable to investments of $100,000. Past
performance is no indication of future results.
SEC-REQUIRED AVERAGE ANNUAL RATES
OF TOTAL RETURN at the maximum sales charge of
4.75% for the periods ended 3/31/95 were:
<TABLE>
<CAPTION>
Life of Fund 1 Year Life of Fund
(at net asset value)
<S> <C> <C>
+5.27% +0.70% +6.75%
</TABLE>
The investment return and principal value of an investment in the Series
will fluctuate so that shares, on any given day or when redeemed, may be
worth more or less than their original cost. The results quoted herein
represent past performance which is no indication of future results.
- --------------------------------------------------------------------------------
(1) Includes direct and indirect taxes. Source: Tax Foundation.
<PAGE>
THE TAX-FREE ADVANTAGE
Lord, Abbett & Co.'s objective is to provide Florida Series shareholders an
investment free from federal income tax, with shares free from Florida
intangible personal property tax. Taxpayers in a 36% tax bracket would have to
earn 8.59% on a taxable investment to keep the same after-tax earnings provided
by a 5.50% tax-free investment. The Series' yield may be obtained by calling
Lord, Abbett & Co. at 800-426-1130 or your Registered Representative.
These Yields Are Hypothetical and Are Not Representative of Actual or Future
Florida Series Yields.
[G4]
- --------------------------------------------------------------------------------
IMPORTANT INFORMATION
A current prospectus containing more complete information about the Fund, or any
Lord Abbett-managed portfolio (including charges, expenses and any fees waived
and/or expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus(es) carefully before investing.
Interest income derived from private activity bonds in the portfolio will
increase the alternative minimum tax liability only for shareholders subject to
that tax. In the event the portfolio does not invest entirely in municipal
bonds, federal and local taxes may be applicable to interest income and/or
shares of the portfolio. Any capital gains realized would be subject to the
usual taxes.
Although the portfolio may invest up to 20% of its net assets in residual
interest bonds ("RIBs"), as of 3/31/95, the Florida Series had less than 5% of
its assets invested in such securities. A RIB, sometimes referred to as an
inverse floater, is a debt instrument with a floating or variable rate that
moves in the opposite direction of the interest rate on another security or the
value of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest paid on the RIB, with the result that
when interest rates rise, RIBs give lower interest payments and their values
fall faster than other similar fixed-rate bonds. But when interest rates fall,
not only do RIBs give higher interest payments, their values also rise faster
than other similar fixed-rate bonds. The market for RIBs is relatively new.
If used after 6/30/95, this literature must be accompanied by Lord Abbett's
Performance Quarterly for the most recently completed calendar quarter.
- --------------------------------------------------------------------------------
(2) This illustration assumes a federal income tax rate of 36% for single/joint
income between $115,000-$250,000 and $140,000-$250,000, respectively.
[LOGO] LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
- ----------------------------------------------------------------------------
The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 . 800-426-1130
<PAGE>
<PAGE>
Lord Abbett Tax-Free Income Trust
Michigan Series
MICHIGAN
RESIDENTS
WOULD YOU LIKE TO
PAY LESS
INCOME TAX?
. To pay their share of 1995 federal, state and local taxes, the average
Michigan resident will work from January 1st until May 2nd... for the
government(1).
- --------------------------------------------------------------------------------
THE LORD ABBETT TAX-FREE
ADVANTAGE
High-Quality Bond Portfolio
(as of 3/31/95)
[G5]
The Michigan Series' investment policy restricts investments to municipal
bonds which are investment grade or equivalent at the time of purchase.
THE MICHIGAN SERIES PROVIDED
REWARDING TOTAL RETURNS
Account Value Assuming the
Reinvestment of All Distributions
[G6]
Total return assumes the reinvestment of all dividends and capital gains.
Capital gains distributions and any capital gains realized from liquidation
of shares would be subject to the usual taxes. Performance does not reflect
applicable capital gains taxes. The Series investment reflects the reduced
sales charge of 3.75% applicable to investments of $100,000. Past
performance is no indication of future results.
SEC-REQUIRED AVERAGE ANNUAL RATES
OF TOTAL RETURN at the maximum sales charge of
4.75% for the periods ended 3/31/95 were:
<TABLE>
<CAPTION>
Life of Fund 1 Year Life of Fund
(at net asset value)
<S> <C> <C>
+4.57% +1.00% +6.82%
</TABLE>
The investment return and principal value of an investment in the Series
will fluctuate so that shares, on any given day or when redeemed, may be
worth more or less than their original cost. The results quoted herein
represent past performance which is no indication of future results.
- --------------------------------------------------------------------------------
(1) Includes direct and indirect taxes. Source: Tax Foundation.
(2) Includes holdings which are not rated by an independent ratings service but
which are, in Lord Abbett's opinion, of comparable quality.
<PAGE>
THE TAX-FREE ADVANTAGE
Lord, Abbett & Co.'s objective is to provide Michigan Series shareholders an
investment free from federal and Michigan State income taxes, with shares free
from Michigan intangible personal property tax. Michigan taxpayers in a 38.94%
tax bracket would have to earn 9.01% on a taxable investment to keep the same
after-tax earnings provided by a 5.50% tax-free investment. The Series' yield
may be obtained by calling Lord, Abbett & Co. at 800-426-1130 or your Registered
Representative.
These Yields Are Hypothetical and Are Not Representative of Actual or Future
Michigan Series Yields.
[G7]
- --------------------------------------------------------------------------------
IMPORTANT INFORMATION
A current prospectus containing more complete information about the Fund, or any
Lord Abbett-managed portfolio (including charges, expenses and any fees waived
and/or expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus(es) carefully before investing.
Interest income derived from private activity bonds in the portfolio will
increase the alternative minimum tax liability only for shareholders subject to
that tax. In the event the portfolio does not invest entirely in municipal
bonds, federal and local taxes may be applicable to interest income and/or
shares of the portfolio. Any capital gains realized would be subject to the
usual taxes.
Although the portfolio may invest up to 20% of its net assets in residual
interest bonds ("RIBs"), as of 3/31/95, the Michigan Series had less than 5% of
its assets invested in such securities. A RIB, sometimes referred to as an
inverse floater, is a debt instrument with a floating or variable rate that
<PAGE>
LORD ABBETT
Statement of Additional Information December 27, 1994
INTENDED FOR USE
UNTIL MARCH 1, 1996
Lord Abbett
Tax-Free
Income Trust
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a Prospectus. A Prospectus may
be obtained from your securities dealer or from Lord, Abbett & Co., The General
Motors Building, 767 Fifth Avenue, New York, New York 10153-0203. This Statement
relates to, and should be read in conjunction with, the Prospectus dated
December 27, 1994.
Lord Abbett Tax-Free Income Trust (the "Fund") was organized as a Massachusetts
business trust on September 11, 1991. The Fund's Trustees have authority to
create separate series of shares of beneficial interest, without further action
by shareholders. To date, the Fund has only four series of shares: the Florida
Series, the Georgia Series, the Michigan Series and the Pennsylvania Series.
Although no present plans exist, further series may be added in the future. The
Investment Company Act of 1940 (the "Act") requires that where more than one
series exists, each series must be preferred over all other series in respect of
assets specifically allocated to such series.
Rule 18f-2 under the Act provides that, any matter required to be submitted, by
the provisions of the Act or applicable state law or otherwise, to the holders
of the outstanding voting securities of an investment company such as the Fund,
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each series affected by such
matter. Rule 18f-2 further provides that, a series shall be deemed to be
affected by a matter unless the interests of each series in the matter are
substantially identical or the matter does not affect any interest of such
series. However, the Rule exempts the selection of independent public
accountants, the approval of principal distributing contracts and the election
of Trustees from the separate voting requirements of the Rule.
Shareholder inquiries should be made by writing directly to the Fund or by
calling 800-821-5129. In addition, you can make inquiries through your dealer.
TABLE OF CONTENTS PAGE
1. Investment Objective and Policies 2
2. Trustees and Officers 9
3. Investment Advisory and Other Services 11
4. Portfolio Transactions 12
5. Purchases, Redemptions
and Shareholder Services 13
6. Taxes 17
7. Risk Factors Regarding Investments in Florida, Georgia
Michigan, Pennsylvania and Puerto R18o Municipal Bonds 18
8. Past Performance 23
9. Further Information About the Trust 24
10. Financial Statements 25
<PAGE>
1.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective and policies are described in the Prospectus on
the cover page and under "How We Invest."
In addition to those policies described in the Prospectus, each Series is
subject to the following investment restrictions which cannot be changed without
the approval of a majority of the outstanding shares of each Series. Each Series
may not: (1) sell short or buy on margin (good faith deposits made in connection
with entering into options and financial futures transactions, as discussed in
the Prospectus and herein, are not deemed to be margin), although we may obtain
short-term credit necessary for the clearance of purchases of securities; (2)
buy or sell put, call, straddle or spread options, although we may buy, hold or
sell options and financial futures, as discussed in the Prospectus and herein;
(3) borrow money unless such borrowing does not exceed the asset coverage
requirement of Section 18 (f) of the Investment Company Act, as amended, from
time to time, and unless any such borrowing on behalf of a Series, or a class of
that Series, shall be a liability only of such Series or class, as the case may
be; (4) invest knowingly more than 10% of its net assets in illiquid securities
(securities qualifying for resale under Rule 144A that are determined by the
Trustees, or by Lord Abbett pursuant to delegated authority, to be liquid are
considered liquid securities); (5) act as underwriter of securities issued by
others, except to the extent that in connection with the disposition of its
portfolio securities it may be deemed to be an underwriter under federal
securities laws; (6) make loans, except for the purchase of debt securities in
which it may invest consistent with its investment objective and policies; (7)
pledge, mortgage or hypothecate our assets, except to secure permitted
borrowings described in (3) above (neither a deposit required to enter into or
maintain options and financial futures, as discussed in the Prospectus and
herein, nor an allocation or segregation of portfolio assets to collateralize a
position in such options and futures, is deemed to be a pledge, mortgage or
hypothecation); (8) buy or sell real estate, including real estate mortgages in
the ordinary course of its business, except that it may invest in marketable
securities secured by real estate or interests therein; (9) buy securities
issued by any other open-end investment company, except pursuant to a merger,
acquisition or consolidation; (10) buy or sell oil, gas, or other mineral
leases, commodities or commodity contracts (for this purpose options and
financial futures, as discussed in the Prospectus and herein, are not deemed to
be commodities or commodity contracts); (11) buy voting securities if the
purchase would then cause it to own more than 10% of the outstanding voting
stock of any one issuer; (12) own securities of an issuer if, to our knowledge,
our officers and Trustees or partners of our investment adviser, who
beneficially own more than 1/2 of 1% of the securities of that issuer, together
own more than 5% of such securities; (13) invest more than 25% of its gross
assets taken at market value in any one industry (except that each Series may
invest more than 25% of such gross assets in tax-exempt securities); (14) buy
securities from or sell them to our officers, Trustees, employees, or to our
investment adviser or to its partners and employees, other than shares of the
Series; or (15) issue senior securities as defined in the Act (neither the
purchase or sale of options, nor collateral arrangements with respect to either
financial futures transactions or the writing of options, all as discussed in
the Prospectus and below, particularly under "Regulatory Restrictions" which
refers to the asset coverage requirements of the Securities and Exchange
Commission's Release No. IC-10666, are deemed to be the issuance of a senior
security).
Notwithstanding restrictions 5, 9, 11 and 13 above, in the future, upon
shareholder approval, each of the Series may seek to achieve its investment
objective by investing all of its assets in another investment company (or
series or class thereof) having the same investment objective. Shareholders will
be notified thirty days in advance of such conversion. In the event the Fund
creates other series or Series classes, shareholders of each Series will be able
to exchange Series shares for shares of the other Fund series and/or Series
classes.
While each of the Series may take short-term gains if deemed appropriate,
normally, the Series will hold securities in order to realize interest income
exempt from federal income tax and, where applicable, its state's personal
income tax, consistent with preservation of capital. For the period ended
October 31, 1994 the portfolio turnover rates for the Florida and Pennsylvania
Series were 122.36% and 137.22%, respectively, versus 89.32% and 7.71%,
respectively for the prior year. The portfolio turnover rate for the Michigan
Series was 137.31% versus 68.10% for the prior period December 1, 1992
(inception) to October 31, 1993.
<PAGE>
The liquidity of a Rule 144A security will be a determination of fact for which
the Trustees are ultimately responsible. However, the Trustees may delegate the
day-to-day function of such determinations to Lord Abbett, subject to the
Trustees' oversight. Examples of factors which the Trustees may take into
account with respect to a Rule 144A security include the frequency of trades and
quotes for the security, the number of dealers willing to purchase or sell the
security and the number of other potential purchasers, dealer undertakings to
make a market in the security and the nature of the security and the nature of
the marketplace (e.g., the time period needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). Rule 144A securities
may be considered illiquid in certain circumstances to the extent necessary to
comply with applicable state law requirements.
OTHER INVESTMENT RESTRICTIONS (WHICH CAN
- ----------------------------------------
BE CHANGED WITHOUT SHAREHOLDER APPROVAL)
- ----------------------------------------
MICHIGAN SERIES
- ---------------
As a condition of its registration in Ohio, the Michigan Series has agreed not
to invest more than 15% of its assets in the securities of issuers which,
together with any predecessors, have a record of less than three years
continuous operation or securities of issuers which are restricted as to
disposition.
MUNICIPAL BONDS
- ---------------
In general, municipal bonds are debt obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia, Puerto Rico and Guam 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 sewage
or solid waste disposal. Under the Tax Reform Act of 1986, 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 do
not generally 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 upon a variety of factors, including
general money market conditions, supply and demand, general conditions of the
municipal bond market, size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Corporation ("Standard &
Poor's") and Fitch Investors Services, Inc. ("Fitch's") 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.
<PAGE>
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
- --
principals and differs from the highest rated issues only in small degree.
A: Debt rated 'A' has a strong capacity to pay interest and repay principal
- -
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
- ---
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
Fitch's describes its four highest ratings for municipal bonds as follows:
AAA: Bonds considered to be investment grade and of the highest credit quality.
- ---
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
- --
obligor's ability to pay interest and -- repay principal is very strong,
although not quite as strong as bonds rated 'AAA'. Because bonds rated
in the 'AAA' and 'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt to these issuers is generally
rated 'F-1+'.
A: Bonds considered to be investment grade and of high credit quality. The
- -
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
<PAGE>
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
- ---
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payments. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
OPTIONS AND FINANCIAL FUTURES TRANSACTIONS
- ------------------------------------------
GENERAL. Each Series may engage in futures and options transactions in
- -------
accordance with its investment objective and policies. Although no Series is
currently employing such hedging techniques, each Series intends to engage in
such transactions if it appears advantageous to the Series to do so, in order to
pursue its investment objective, to hedge against the effects of fluctuating
interest rates and to stabilize the value of its assets. The use of futures and
options and possible benefits and attendant risks, are discussed below, along
with information concerning certain other investment policies and techniques.
FINANCIAL FUTURES CONTRACTS. Each Series may enter into financial futures
- -----------------------------
contracts for the future delivery of a financial instrument, such as a security
or the cash value of a securities index. This investment technique is designed
primarily to hedge (i.e., protect) against anticipated future changes in
interest rates or market conditions which otherwise might adversely affect the
value of securities which the Series holds or intends to purchase. A "sale" of a
futures contract means the undertaking of a contractual obligation to deliver
the securities or the cash value of an index called for by the contract at a
specified price during a specified delivery period. A "purchase" of a futures
contract means the undertaking of a contractual obligation to acquire the
securities or cash value of an index at a specified price during a specified
delivery period. At the time of delivery in the case of fixed-income securities
pursuant to the contract, adjustments are made which reflect 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.
Each Series will not enter into any futures contracts or options on futures
contracts if the aggregate of the market value of the outstanding futures
contracts of each Series and futures contracts subject to outstanding options
written by each Series would exceed 50% of the total assets of each Series.
Although some financial futures contracts by their terms call for the actual
delivery or acquisition of securities, in most cases a party will close out the
contractual commitment before delivery without having to make or take delivery
of the security by purchasing (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, if effected through a member of an exchange, cancels the
obligation to make or take delivery of the securities. All transactions in the
futures market are made, offset or fulfilled through a clearing house associated
with the exchange on which the contracts are traded. Each Series will incur
brokerage fees when it purchases or sells contracts and will be required to
maintain margin deposits. At the time each Series enters into a futures
contract, it is required to deposit with its custodian, on behalf of the broker,
a specified amount of cash or eligible securities, called "initial margin". The
initial margin required for a futures contract is set by the exchange on which
the contract is traded. Subsequent payments, called "variation margin", to and
from the broker are made on a daily basis as the market price of the futures
contract fluctuates. The costs incurred in connection with futures transactions
could reduce a Series' return. Futures contracts entail risks. If the investment
adviser's judgment about the general direction of interest rates or markets is
wrong, the Series 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 interest
rates on municipal bonds, there are frequently differences in the rate of such
movements and temporary dislocations. Accordingly, the use of a financial
futures contract on a taxable security or a taxable securities index may involve
a greater risk of an imperfect correlation between the price movements of the
futures contract and of the municipal bond being hedged than when using a
financial futures contract on a municipal bond or a municipal bond index. In
addition, the market prices of futures contracts may be affected by certain
factors. If participants in the futures market elect to close out their
contracts through offsetting transactions rather than meet margin requirements,
distortions in the normal relationship between the debt securities and futures
markets could result. Price distortions also could result if investors in
futures contracts decide to make or take delivery of underlying securities
rather than engage in closing transactions because of the resultant reduction in
the liquidity of the futures market. In addition, because, from the point of
view of speculators, margin requirements in the futures market are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures market could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment adviser still may not result in a successful hedging
transaction. If any of these events should occur, a Series could lose money on
the financial futures contracts and also on the value of its portfolio
securities.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. Each Series may purchase and write call
- --------------------------------------
and put options on financial futures contracts. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time during
the period of the option. Upon exercise, the writer of the option delivers the
futures contract to the holder at the exercise price. Each Series would be
required to deposit with its custodian initial margin and maintenance margin
with respect to put and call options on futures contracts written by it. Options
on futures contracts involve risks similar to those risks relating to
transactions in financial futures contracts described above. Also, an option
purchased by a Series may expire worthless, in which case that Series would lose
the premium paid therefor.
OPTIONS ON SECURITIES. Each Series may write (sell) covered call options on
- ----------------------
securities so long as it owns securities which are acceptable for escrow
purposes and may write secured put options on securities, which means that, so
long as a Series is obligated as a writer of a put option, it will invest an
amount not less than the exercise price of the put option in eligible
securities. A call option gives the purchaser the right to buy, and the writer
the obligation to sell, the underlying security at the exercise price during the
option period. A put option gives the purchaser the right to sell, and the
writer has the obligation to buy, the underlying security at the exercise price
during the option period. The premium received for writing an option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the price
volatility of the underlying security, the option period, supply and demand and
interest rates. Each Series may write or purchase spread options, which are
options for which the exercise price may be a fixed-dollar spread or yield
spread between the security underlying the option and another security it does
not own, but that 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 each Series to protect capital gains
in an appreciated security it owns, without being required to actually sell that
security. At times a Series might like to establish a position in securities
upon which call options are available. By purchasing a call option, a Series is
able to fix the cost of acquiring the security, this being the cost of the call
plus the exercise price of the option. This procedure also provides some
protection from an unexpected downturn in the market because the Series is only
at risk for the amount of the premium paid for the call option which it can, if
it chooses, permit to expire.
During the option period, the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away". For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain and the buyer a loss in the amount of
the premium. If the covered call option writer has to sell the underlying
security because of the exercise of the call option, it realizes a gain or loss
from the sale of the underlying security, with the proceeds being increased by
the amount of the premium.
If a secured put option expires unexercised, the writer realizes a gain and the
buyer a loss in the amount of the premium.
If the secured put writer has to buy the underlying security because of the
exercise of the put option, the secured put writer incurs an unrealized loss to
the extent that the current market value of the underlying security is less than
the exercise price of the put option, minus the premium received.
OVER-THE-COUNTER OPTIONS. As indicated in the Prospectus, each Series may deal
- -------------------------
in over-the-counter traded options ("OTC options"). OTC options differ from
exchange-traded options in several respects. They are transacted directly with
dealers and not with a clearing corporation and there is a risk of
nonperformance by the dealer, as a result of the insolvency of such dealer or
otherwise, in which event the Fund may experience material losses. However, in
writing options the premium is paid in advance by the dealer. OTC options are
available for a greater variety of securities and a wider range of expiration
dates and exercise prices, than are exchange- traded options. Since there is no
exchange, normally pricing is done by reference to information from market
makers, which information is carefully monitored by the Series' investment
adviser and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, each Series may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when each Series writes an OTC option, generally it can close out
that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Series originally wrote it. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes, while it is
obligated as a put writer. Similarly, a purchaser of such put or call option
also might find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Fund understands the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The Fund and its
investment adviser disagree with this position and believe that dealers with
which they intend to engage in OTC options transactions are, generally,
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 each Series'
portfolio. A brief description of such procedures is set forth below.
Each Series will only engage in OTC options transactions with dealers that have
been specifically approved by the Trustees of the Fund. The Series and their
investment adviser believe that such dealers present minimal credit risks to the
Series and, therefore, should be able to enter into closing transactions, if
necessary. The Series, currently, will not engage in OTC options transactions if
the amount invested by the Series in OTC options, plus a "liquidity charge"
related to OTC options written by the Series, plus the amount invested by the
Series in illiquid securities, would exceed 10% of the Series' net assets. The
"liquidity charge" referred to above is computed as described below.
The Fund anticipates entering into agreements with dealers to which the Series
sell OTC options. Under these agreements, a Series would have the absolute right
to repurchase the OTC options from the dealer at any time at a price no greater
than a price established under the agreements (the "Repurchase Price"). The
"liquidity charge" referred to above for a specific OTC option transaction will
be the Repurchase Price related to the OTC option less the intrinsic value of
the OTC option. The intrinsic value of an OTC call option, for such purposes,
will be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow a Series to repurchase a specific OTC option written by the Series, the
"liquidity charge" will be the current market value of the assets serving as
"cover" for such OTC option.
OPTIONS ON SECURITIES INDICES. Each Series also may purchase and write call and
- -----------------------------
put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Series owns or intends to
purchase, and not for speculation. Through the writing or purchase of index
options, a Series can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the securities index upon which the option is based
is greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike security options, all settlements are in cash
and gain or loss depends upon price movements in the market generally (or in a
particular industry or segment of the market), rather than upon price movements
in individual securities. Price movements in securities which a Series owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index and, therefore, the Series bears the risk that a loss on an
index option would not be completely offset by movements in the price of such
securities.
When a Series writes an option on a securities index, it will be required to
deposit with its custodian, and mark-to-market eligible securities equal in
value to at least 100% of the exercise price in the case of a put, or the
contract value in the case of a call. In addition, where a Series writes a call
option on a securities index at a time when the contract value exceeds the
exercise price, the Series will segregate and mark-to-market until the option
expires or is closed out, cash or equivalents equal in value to such excess.
Options on futures contracts and index options involve risks similar to those
risks relating to transactions in financial futures contracts described above.
Also, an option purchased by a Series may expire worthless, in which case the
Series would lose the premium paid therefor.
DELAYED DELIVERY TRANSACTIONS. Each Series may purchase or sell portfolio
- -------------------------------
securities on a when-issued or delayed delivery basis. When-issued or delayed
delivery transactions involve a commitment by a Series to purchase or sell
securities, with payment and delivery to take place in the future, in order to
secure what is considered to be an advantageous price or yield to the Series at
the time of entering into the transaction. When a Series enters into a delayed
delivery purchase, it becomes obligated to purchase securities and it has all
the rights and risks attendant to ownership of a security, although delivery and
payment occur at a later date. The value of fixed-income securities to be
delivered in the future will fluctuate as interest rates vary. At the time a
Series makes the commitment to purchase a security on a when-issued or delayed
delivery basis, it will record the transaction and reflect the liability for the
purchase and the value of the security in determining its net asset value.
Likewise, at the time a Series makes the commitment to sell a security on a
delayed delivery basis, it will record the transaction and include the proceeds
to be received in determining its net asset value; accordingly, any fluctuations
in the value of the security sold pursuant to a delayed delivery commitment are
ignored in calculating net asset value so long as the commitment remains in
effect. Each Series, generally, has the ability to close out a purchase
obligation on or before the settlement date, rather than take delivery of the
security.
To the extent a Series engages in when-issued or delayed delivery purchases, it
will do so for the purpose of acquiring portfolio securities consistent with its
investment objective and policies and not for investment leverage or to
speculate in interest rate changes. A Series will only make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, but each Series reserves the
right to sell these securities before the settlement date if deemed advisable.
REGULATORY RESTRICTIONS. To the extent required to comply with Securities and
- ------------------------
Exchange Commission Release No. IC-10666, when purchasing a futures contract,
writing a put option or entering into a delayed delivery purchase, each Series
will maintain in a segregated account cash or liquid high-grade securities equal
to the value of such contracts.
To the extent required to comply with Commodities Futures Trading Commission
Regulation 4.5 and thereby avoid "commodity pool operator" status, no Series
will enter into a futures contract or purchase an option thereon if immediately
thereafter the initial margin deposits for futures contracts held by the Series
plus premiums paid by it for open options on futures would exceed 5% of that
Series' total assets. No Series will engage in transactions in financial futures
contracts or options thereon for speculation, but only to attempt to hedge
against changes in market conditions affecting the values of securities which
the Series holds or intends to purchase. When futures contracts or options
thereon are purchased to protect against a price increase on securities intended
to be purchased later, it is anticipated that at least 75% of such intended
purchases will be completed. When other futures contracts or options thereon are
purchased, the underlying value of such contracts will at all times not exceed
the sum of: (1) accrued profit on such contracts held by the broker; (2) cash or
high-quality money market instruments set aside in an identifiable manner and
(3) cash proceeds from investments due in 30 days.
2.
TRUSTEES AND OFFICERS
The following Trustees 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 are also officers
and/or directors or trustees of the fifteen other Lord Abbett-sponsored funds
(except for Messrs. Dow and Nordberg, who are not directors of Lord Abbett
Research Fund, Inc.) including those described under "Purchases, Redemptions and
Shareholder Services." They are "interested persons" as defined in the
Investment Company Act of 1940.
Ronald P. Lynch, Chairman and President
Robert S. Dow, Vice President
E. Wayne Nordberg, Vice President
The following outside Trustees are also directors or trustees of the fifteen
other Lord Abbett-sponsored funds referred to above (except for Lord Abbett
Research Fund, Inc., of which only Messrs. Millican and Neff are directors).
E. Thayer Bigelow
Time Warner Cable
300 First Stamford Place
Stamford, CT 06902
President and Chief Executive Officer of Time Warner Cable Programming, Inc.
Formerly President and Chief Operating Officer of Home Box Office, Inc.
Stewart S. Dixon
Wildman, Harrold, Allen & Dixon
225 W. Wacker Drive (Suite 2800)
Chicago, Illinois
Partner in the law firm of Wildman, Harrold, Allen & Dixon.
John C. Jansing
162 South Beach Road
Hobe Sound, Florida
Retired. Formerly Chairman of Independent Election Corporation of America, a
proxy tabulating firm.
C. Alan MacDonald
The Noel Group
Two Greenwich Plaza
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 trustee of the
Fund.
For the fiscal year ended October 31, 1994, the Fund accrued for all outside
trustees as a group, trustees' fees totaling $7,404 (exclusive of expenses).
This amount has been deemed invested in shares of the Fund under a deferred
compensation arrangements for later distribution to the outside trustees. The
Fund has adopted a retirement plan under which the outside trustees 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. For the year ended October 31,
1994, the Fund had accrued $3,280 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; the others are employees: Barbara A.
Grummel, Executive Vice President (with Lord Abbett since 1990-formerly Vice
President, Merrill Lynch Asset Management); John Mousseau, Executive Vice
President (with Lord Abbett since 1993-formerly First Vice President, Shearson
Lehman Brothers); Philip Fang, Executive Vice President (with Lord Abbett since
1991-formerly Municipal Evaluator Muller & Co.) Daniel E. Carper, Vice
President; Kenneth B. Cutler, Vice President and Secretary; Stephen I. Allen,
Thomas S. Henderson, John J. Walsh, John J. Gargana, Jeffery H. Boyd (with Lord
Abbett since 1994 - formerly partner in law firm of Robinson & Cole), Thomas F.
Konop, E. Wayne Nordberg and Victor W. Pizzolato, Vice Presidents; and Keith F.
O'Connor, Treasurer.
The Fund does not hold regular annual meetings of shareholders. Under the Fund's
Declaration of Trust, shareholder meetings may be called at any time by certain
officers of the Fund or by a majority of the Trustees (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.
As of October 31, 1994 our officers and trustees as a group owned less than 1%
of our outstanding shares.
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 Trustees 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, we are obligated to pay Lord
Abbett a monthly fee, based on average daily net assets of each Series for each
month, at the annual rate of .5 of 1%. In addition, we pay all expenses not
expressly assumed by Lord Abbett, including without limitation 12b-1 expenses;
outside Trustees' 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 share 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.
Although not obligated to do so, Lord Abbett may waive all or part of its
management fees and may assume other expenses of the Series. Subsequently, Lord
Abbett may charge these fees and/or omit these subsidies on a partial or
complete basis.
The Fund's Management Agreement provides for each Series to repay Lord Abbett
without interest for subsidized expenses on and after the first day of the
calendar quarter after the net assets of a Series first reaches $50 million (the
"commencement date") and until the net assets reach $100 million, provided the
ratio of operating expenses of the Series (determined before taking into account
any fee waiver or expense assumption) to average net assets is less than .85%
and the amount repaid is equal in dollars to the difference between the expenses
included in the determination of such expense ratio and those at an expense
ratio of .85%. Beginning on the first day of the calendar quarter after the net
assets of a Series first reach $100 million, the repayment of expenses shall be
measured by the difference between the expenses included in the determination of
each Series expense ratio and those at an expense ratio of 1.05%. A Series shall
not be obligated to repay any such expenses after the earlier of the termination
of the Management Agreement or the end of five full fiscal years after the
commencement date. A Series will not record as obligations in its financial
statements any expenses which may possibly be repaid to Lord Abbett under this
repayment formula, but it will disclose in a note to its financials that such
expenses are possible. However, if such expenses become probable, they will be
recorded as obligations of the Series at that time. The Trustees, upon the
recommendation of the Audit Committee, will determine when such expenses become
probable.
For the fiscal years ended October 31, 1992,1993 and 1994, Lord Abbett waived
$349,373, $794,366 and $954,176, respectively, of Florida Series' management
fees. For the period February 3, 1992 (commencement of operations) through
October 31, 1992 and for the fiscal years ended October 31, 1993 and 1994, Lord
Abbett waived $87,073, $307,168 and $299,609, respectively, in Pennsylvania
Series' management fees and received $129,375 in management fees. For the period
December 1, 1992 (commencement of operations) to October 31, 1993 and for the
fund year ended October 31, 1994, Lord Abbett waived $299,609, $127,327 and
$215,421, respectively, in Michigan Series' management fees. All expenses to be
repaid to Lord Abbett for the Michigan Series have been accrued for by the Fund.
Lord Abbett has given the Fund the right to use the identifying name "Lord
Abbett" and this right may be withdrawn if Lord Abbett ceases to be the Fund's
investment manager.
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 Trustees to continue in such capacity. They perform audit services for the
Fund including the audit of financial statements included in our annual report
to shareholders.
Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York,
serves as the Fund's custodian.
<PAGE>
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 the best execution, except to the extent we may pay a higher
commission as described below. This policy governs the selection of brokers or
dealers and the market in which the transaction is executed. To the extent
permitted by law, we may, if considered advantageous, make a purchase from or
sale to another Lord Abbett-sponsored fund without the intervention of any
broker-dealer.
We expect that most purchases and sales of portfolio securities will be
principal transactions. Portfolio securities normally will be purchased directly
from the issuer or from an underwriter or marketmaker for the securities. We
usually will pay no brokerage commissions for such purchases. Purchases from
underwriters of portfolio securities will be at a fixed price which will include
fees paid to the underwriter and purchases from dealers serving as marketmakers
will include a dealer's markup.
We select broker-dealers on the basis of their professional capability and the
value and quality of their brokerage and research services. Normally, the
selection is made by our traders, who are officers of the Fund and also
employees of Lord Abbett. Our traders do the trading as well for other accounts
- -- investment companies (of which they are also officers) and other clients --
managed by Lord Abbett. They also are responsible for the negotiation of prices
and commissions.
A broker may receive a commission for portfolio transactions exceeding the
amount another broker-dealer 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 by Lord Abbett in connection
with their services to us, and not all of such research will necessarily be used
by Lord Abbett in connection with their services to such other accounts. We have
been advised by Lord Abbett that, although such research is often useful, no
dollar value can be ascribed to it nor can it be accurately ascribed or
allocated to any account and it is not a substitute for services provided by
them to us; nor does it materially reduce or otherwise affect the expenses
incurred by Lord Abbett in the performance of such services. We make no
commitments regarding the allocation of brokerage business to or among dealers.
If two or more broker-dealers are considered capable of offering the equivalent
likelihood of best execution, the broker-dealer who has sold our shares and/or
shares of other Lord Abbett-sponsored funds may be preferred.
If other clients of Lord Abbett buy or sell the same security at the same time
we do, transactions will, to the extent practicable, be allocated among all
participating accounts in proportion to the amount of each order and will be
executed daily until filled so that each account shares the average price and
commission cost of each day.
We will not seek"reciprocal" dealer business (for the purpose of applying
commissions in whole or in part for our benefit or otherwise) from dealers as
consideration for the direction to them of portfolio business.
During the fiscal years ended October 31, 1994, 1993 and 1992, we paid no
commissions to independent brokers.
<PAGE>
5.
PURCHASES, REDEMPTIONS AND SHAREHOLDER SERVICES
Information concerning how we value our shares for the purchase and redemption
or repurchase of our shares is contained in the Prospectus under "Purchases" and
"Redemptions", respectively.
As disclosed in the Prospectus, we calculate net asset value and are otherwise
open for business on each day that the New York Stock Exchange ("NYSE") is open
for trading. The NYSE is closed on Saturdays and Sundays and the following
holidays -- New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas.
Securities in our portfolio are valued at their market value as of the close of
the NYSE. Market value will be determined as follows: securities listed or
admitted to trading privileges on the New York or American Stock Exchange or on
the NASDAQ National Market System are valued at the last sales price, or, if
there is no sale on that day, at the mean between the last bid and asked prices,
or , in the case of bonds, in the over-the-counter market if, in the judgment of
the 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 market 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 Trustees.
Although our shares are continuously offered, we are under no obligation to
maintain the offering or its terms, and the offering may be suspended, changed
or withdrawn. The sales agreements between Lord Abbett and independent
securities dealers provide that all orders are subject to acceptance in New York
and that the right is reserved to reject any order.
The maximum offering prices of our shares on October 31, 1993 were computed as
follows:
<TABLE>
<CAPTION>
FLORIDA PENNSYLVANIA GEORGIA MICHIGAN
SERIES SERIES SERIES SERIES
------- ------------ ------- --------
<S> <C> <C> <C> <C>
Net asset value per share (net assets
divided by shares outstanding) ..............$4.49 $4.62 $4.762 $4.53
Maximum offering price per share (net
asset value divided by .9525) ...............$4.739 $4.85 $5.00 $4.76
</TABLE>
The Georgia Series expects to commence operations on December 27, 1994. Net
asset value and maximum offering price per share shown for this series are
estimated as of such date.
The Fund has entered into a distribution agreement with Lord Abbett under which
Lord Abbett is obligated to use its best efforts to find purchasers for the
shares of the Fund and to make reasonable efforts to sell Fund shares so long
as, in Lord Abbett's judgment, a substantial distribution can be obtained by
reasonable efforts.
For our last three fiscal years, Lord Abbett as our principal underwriter
received net commissions after allowance of a portion of the sales charge to
independent dealers as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
SEPT. 30, 1994 SEPT. 30, 1993 SEPT. 30, 1992
-------------- -------------- --------------
<S> <C> <C> <C>
Gross sales charge $3,037,207 $5,183,953 $7,104,326
Amount allowed
to dealers $2,635,856 $4,616,423 $6,567,009
Net commissions received
by Lord Abbett $401,351 $ 567,530 $ 537,317
======== ========== ==========
</TABLE>
As described in the Prospectus, each Series has adopted a Distribution Plan and
Agreement (a "Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended, subject to going effective when the required level of net
assets for each Series is reached. The Florida Series' Plan became effective
October 1, 1992. In adopting a Plan for each Series and in approving its
continuance, the Trustees have concluded that, based on information provided to
Lord Abbett, there is a reasonable likelihood that each Plan will benefit each
Series and its shareholders. The expected benefits include greater sales, lower
redemptions of Series shares and a higher quality of service to shareholders by
dealers than would otherwise would be the case. During the last fiscal year, the
Fund paid $406,443 through Lord Abbett to dealers. The Plans for the Georgia,
Pennsylvania and Michigan Series are not yet effective. Lord Abbett is required
to use all amounts received under each Plan for payments to dealers for (i)
providing continuous services to Series' shareholders, such as answering
shareholder inquiries, maintaining records, and assisting shareholders in making
redemptions, transfers, additional purchases and exchanges and (ii) their
assistance in distributing shares of the Series.
Each Plan requires the Trustees 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 Trustees
and of the Trustees 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 Trustees"), cast in person at a meeting
called for the purpose of voting on the Plan. No Plan may be amended to increase
materially the amount spent for distribution expenses without approval by a
majority of the outstanding voting securities of the Plan's Series and the
approval of a majority of the Trustees, including a majority of the outside
Trustees. Each Plan may be terminated at any time by vote of a majority of the
outside Trustees or by vote of a majority of the outstanding voting securities
of that Plan's Series.
As stated in the Prospectus, a 1% "contingent deferred reimbursement charge"
("CDRC") will be imposed with respect to those shares (or shares in another Lord
Abbett-sponsored fund or series acquired through exchange of such shares) on
which a Series has paid the one-time 1% 12b-1 sales distribution fee if such
shares are redeemed out of the Lord Abbett family of funds within a period 24
months from the end of the month in which the original sale occurred. The CDRC
will be received by a Series and is intended to reimburse all or a portion of
the amount paid by the Series if the shares are redeemed before a Series has had
an opportunity to realize the anticipated benefits of having a large, long-term
account in a Series. Shares of a Fund or series on which such 1% sales
distribution fee has been paid may not be exchanged into a fund or series with a
Rule 12b-1 plan for which the payment provisions have not been in effect for at
least one year.
The other Lord Abbett-sponsored funds and series which participate in the
Telephone Exchange Privilege (except Lord Abbett U.S. Government Securities
Money Market Fund ("GSMMF") as well as certain tax-free single-state series for
which a Rule 12b-1 plan is not yet in effect) have instituted a CDRC on the same
terms and conditions. No CDRC will be charged on an exchange of shares between
Lord Abbett funds or series. 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 or
series in which the original purchase occurred. Thus, if shares of a Lord Abbett
fund or series are exchanged for shares of another fund or series and the shares
tendered ("Exchanged Shares") are subject to a CDRC, the CDRC will carry over to
the shares being acquired, including shares of the Series and GSMMF ("Acquired
Shares"). Any CDRC that is carried over to Acquired Shares is calculated as if
the holder of Acquired Shares had held those shares from the date on which he or
she became the holder of Exchanged Shares. Although GSMMF and the Series will
not pay a 1% sales distribution fee on $1 million purchases of their own shares
and, therefore, will not impose their own CDRC, they will collect the CDRC on
behalf of other Lord Abbett funds and 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 a CDRC exceed 1% of the lesser of (a) the net
asset value of the shares redeemed or (b)
<PAGE>
the original cost of such shares (or of the Exchanged Shares for which such
shares were acquired). No CDRC will be imposed when the investor redeems (i)
amounts derived from increases in the value of the account above the total cost
of shares being redeemed due to increases in net asset value, (ii) shares with
respect to which no Lord Abbett fund or series paid a 1% sales distribution fee
on issuance (including shares acquired through reinvestment of dividend income
and capital gains distributions) or (iii) shares which, together with Exchanged
Shares, have been held continuously for 24 months from the end of the month in
which the original sale occurred. In determining whether a CDRC is payable, (a)
shares not subject to a CDRC will be deemed redeemable before shares subject to
a CDRC and (b) shares subject to a CDRC and held the longest will be the first
to be redeemed.
Under the terms of a Statement of Intention to invest $100,000 or more over a
13-month period, as described in the Prospectus, shares of all Lord
Abbett-sponsored funds (other than shares of Lord Abbett Equity Fund ("LAEF"),
Lord Abbett Series Fund ("LASF"), Lord Abbett Research Fund ("LARF"), Lord
Abbett Counsel Group and GSMMF, unless holdings in GSMMF are attributable to
shares exchanged from a Lord Abbett-sponsored fund offered with a sales charge)
currently owned by you are credited as purchases (at their current offering
prices on the date the Statement is signed) toward achieving the stated
investment. Shares valued at 5% of the amount of intended purchases are escrowed
and may be redeemed to cover the additional sales charge payable if the
Statement is not completed. The Statement of Intention is neither a binding
obligation on you to buy, nor on the Fund to sell, the full amount indicated.
As stated in the Prospectus, purchasers (as defined in the Prospectus) may
accumulate their investment in Lord Abbett- sponsored funds (other than LAEF,
LARF, LASF, Lord Abbett Counsel Group and GSMMF, unless holdings in GSMMF are
attributable to shares exchanged from a Lord Abbett-sponsored fund offered with
a sales charge) so that a current investment, plus the purchaser's holdings
valued at the current maximum offering price, reach a level eligible for a
discounted sales charge.
As stated in the Prospectus, our shares may be purchased at net asset value by
our Trustees, 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
"Trustees" and employees" include a Trustee's or employee's spouse (including
the surviving spouse of a deceased Trustee or employee). The terms "Trustees"
and "employees of Lord Abbett" also include other family members and retired
Trustees 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 be purchased at net asset value, subject to appropriate
documentation, through a securities dealer where the amount invested represents
redemption proceeds from shares ("Redeemed Shares") of a registered open-end
management investment company not distributed or managed by Lord Abbett (other
than a money market fund), if such redemption has occurred no more than 60 days
prior to the purchase of our shares, the Redeemed Shares were held for at least
six months prior to redemption and the proceeds of redemption were maintained in
cash or a money market fund prior to purchase. Lord Abbett may suspend, change,
or terminate this option at any time.
Our shares may be issued at net asset value in exchange for the assets, subject
to possible tax adjustment, of a personal holding company or 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.
Our shares also may be issued at net asset value plus the applicable sales
charge in exchange for securities for which market quotations are readily
available and which are desired for our portfolios and which have a market value
not less than the net asset value of our shares issued in exchange.
The Prospectus briefly describes the Telephone Exchange Privilege. You may
exchange some or all of your shares for those of Lord Abbett-sponsored funds
currently offered to the public with a sales charge and GSMMF, to the extent
offers and sales may be made in your state. You should read the prospectus of
the other fund before exchanging. In establishing a new account by exchange,
shares of the Fund being exchanged must have a value equal to at least the
minimum initial investment required for the fund into which the exchange is
made.
Shareholders in such other funds have the same right to exchange their shares
for the Fund's shares. Exchanges are base on relative net asset values on the
day instructions are received by the Fund in Kansas City if the instructions are
received prior to the close of the NYSE in proper form. No sales charges are
imposed except in the case of exchanges out of GSMMF (unless a sales charge was
paid on the initial investment). Exercise of the exchange privilege will be
treated as a sale for federal income tax purposes, and, depending on the
circumstances, a gain or loss may be recognized. In the case of an exchange of
shares that have been held for 90 days or less where no sales charge is payable
on the exchange, the original sales charge incurred with respect to the
exchanged shares will be taken into account in determining gain or loss on the
exchange only to the extent such charge exceeds the sales charge that would have
been payable on the acquired shares had they been acquired for cash rather than
by exchange. The portion of the original sales charge not so taken into account
will increase the basis of the acquired shares.
Shareholders have the exchange privilege unless they refuse it in writing. You
should not view the exchange privilege as a means for taking advantage of
short-term swings in the market, and we reserve the right to terminate or limit
the privilege of any shareholder who makes frequent exchanges. We can revoke or
modify the privilege for all shareholders upon 60 days' prior notice. Other Lord
Abbett-sponsored funds are eligible for the exchange privilege , except LASF
which offers its shares only in connection with certain variable annuity
contracts, LAEF which is not issuing shares, LARF and Lord Abbett Counsel Group
(together, "Eligible Funds").
A redemption order is in proper form when it contains all of the information and
documentation required by the order form or supplementally by Lord Abbett or the
Fund to carry out the order. The signature(s) and any legal capacity of the
signer(s) must be guaranteed by 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 Trustees may authorize redemption of all of the shares in any account in
which there are fewer than 25 shares. Before authorizing such redemption, the
Trustees 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 Trustees.
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.
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. A Plan
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 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.
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.
6.
TAXES
Each Series will be treated as a separate entity for federal income tax
purposes. As a result, the status of each Series as a regulated investment
company is determined separately by the Internal Revenue Service.
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
writing of call options, in financial futures transactions or in other
investment techniques and practices. In addition, in order to qualify for
exemption from state and local personal property taxes in Florida, Michigan and
Pennsylvania, each Series may be required to refrain from engaging in
transactions, techniques or practices it is otherwise permitted to engage in or,
in the case of Florida and Pennsylvania, to dispose of investments attributable
to such transactions each year before the relevant "statutory assessment dates".
Moreover, as described in the Prospectus, in order to continue to qualify as a
regulated investment company for federal income tax purposes, each Series may be
required, in some circumstances, to defer closing out options or futures
contracts that it might otherwise be desirable to close out.
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 local 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 capital gains distributions received
with respect to such shares. Moreover, shareholders will not be allowed to
recognize for tax purposes any capital loss realized on the redemption or
repurchase of Fund shares which they have held for six months or less to the
extent of any tax-exempt distributions received on the shares. Losses on the
sale of stock or securities are not deductible if, within a period beginning 30
days before the date of the sale and ending 30 days after the date of the sale,
the taxpayer acquires stock or securities that are substantially identical.
Each Series will be subject to a 4% nondeductible excise tax on certain amounts
not distributed (and not treated as having been distributed) on a timely basis
in accordance with a calendar year distribution requirement. The Fund intends to
distribute to shareholders each year an amount adequate to avoid the imposition
of such excise taxes.
Except as otherwise discussed in the Prospectus, the receipt of dividends and
distributions from the Fund may be subject to tax under the 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
FLORIDA, GEORGIA, MICHIGAN, PENNSYLVANIA AND PUERTO RICO MUNICIPAL BONDS
The following information is a summary of special factors affecting the states
and territory indicated. It does not purport to be complete or current and is
based upon information and judgments derived from public documents relating to
such states and territory and other sources. The Trust has not verified any of
this data.
FLORIDA BONDS
- -------------
The State of Florida is, in terms of population, one of the largest states in
the United States. The State is the fastest growing of the eleven largest
states. Its continuing rapid population growth has increased demand for services
such as education, criminal justice and transportation at the same time that
federally mandated social-service costs have increased. Its population includes
a large proportion of senior citizens who have moved to the State after
retirement. Recently, the share of the State's working age population (18-59) to
total State population was approximately 54%. That share is not expected to
change appreciably into the twenty-first century. Because Florida has a
proportionally greater retirement-age population than the rest of the nation and
the southeast, property income (dividends, interest and rent) and transfer
payments (Social Security and pension benefits, among other sources of income)
are, relatively, a more important source of income.
The services sector is Florida's largest employer. While structurally the
southeast and the nation are endowed with a greater proportion of manufacturing
jobs, which tend to pay higher wages, services jobs have tended to be less
sensitive to business cycle swings. Florida has a concentration of manufacturing
jobs in high-tech and high value-added sectors, such as electrical and
electronic equipment, as well as printing and publishing. These kinds of jobs
have tended to be less cyclical than other forms of manufacturing employment.
Recently, Florida's dependence on the highly cyclical construction and
construction-related manufacturing sectors has declined. This trend is expected
to continue as the State's economy continues to diversify. In addition, tourism
is one of Florida's most important industries. The State's tourism industry over
the years has become more sophisticated, attracting visitors year-round, thus,
to a degree, reducing its seasonality. Moreover, the dollar's depreciation has
helped attract foreign visitors to Florida.
An important element of Florida's economic outlook is the construction sector,
which was severely affected by Hurricane Andrew. Total construction expenditures
are forecasted to increase 15.6% in 1994 and to increase 13.3% next year.
Real personal income in Florida is estimated to increase 5.5% in 1993-94 and
4.7% in 1994-95. Florida's unemployment rate is forecast to be 6.7% in 1993-94
and 6.1% in 1994-95.
As of May 1994, estimated fiscal year 1993-94 General Revenue plus Working
Capital funds available total $13.583 billion, an 8.4% increase over 1992-93.
This amount reflects a transfer of $190.0 million, out of an estimated $220.0
million in non-recurring revenue due to Hurricane Andrew, to a hurricane relief
trust fund. The $12.944 billion Estimated Revenues (excluding the Hurricane
Andrew impacts) represent an increase of 7.3% over the previous year's Estimated
Revenues. With effective General Revenue plus Working Capital Fund
appropriations at $13.277 billion, unencumbered reserves at the end of the
fiscal year are estimated at $305.8 million.
In fiscal year 1994-95 estimated General Revenue plus Working Capital funds
available total $14.294 billion, a 5.2% increase over 1993-94. This amount
reflects a transfer of $159.0 million in non-recurring revenue due to Hurricane
Andrew, to a hurricane relief trust fund. The $13.877 billion in Estimated
Revenue (excluding the Hurricane Andrew impacts) represent a 7.2% increase over
the analogous figure in 1993-94.
Financial operations of the State of Florida, covering all receipts and
expenditures, are maintained through the use of three funds-the General
Revenue Fund, the Trust Funds and the Working Capital Fund. The General Revenue
Fund receives the majority of State tax revenues. Florida's Constitution does
not permit a personal income tax so the State must rely on a sales tax, a more
volatile and unreliable revenue source. The Trust Funds consist of monies
received by the State which under law or a trust agreement are segregated for a
purpose authorized by law. Revenues in the General Reserve Fund which are in
excess of the amount needed to meet appropriations may be transferred to the
Working Capital Fund. The Florida Constitution and Statutes mandate that the
State budget as a whole, and each separate fund within the State budget, be kept
in balance from currently available revenues each State fiscal year.
<PAGE>
GEORGIA BONDS
- -------------
The largest sources of employment by industry group within the State, in
descending order, are wholesale and retail trade; services; manufacturing;
government; transportation and other public utilities; finance, insurance and
real estate; and contract construction. The unemployment rate of the civilian
labor force in the State as of April 1994 was 6.3%. Per capita income during
1993 was $19,278 in Georgia (as compared with $20,817 in the United States).
State Treasury receipts for the year ending June 30, 1994 was $9.132 billion
(estimated), representing a 9.41% increase over receipts collected during the
prior year. The State's personal income tax, which has a graduated scale of 1%
to 6%, accounted for 46% of the State's total revenue collections. The State's
general sales and use tax accounted for 36% of such revenue collections.
The Georgia Constitution provides that the State may incur public debt of two
types for public purposes: (1) general obligation debt and (2) guaranteed
revenue debt. General obligation debt may be incurred (i) to acquire, construct,
develop, extend , enlarge or improve land, waters, property, highways,
buildings, structures, equipment or facilities of the State, its agencies,
departments, institutions and certain State Authorities; (ii) to provide
educational facilities for county and independent school systems; (iii) to
provide public library facilities for county and independent school systems,
counties, municipalities, and boards of trustees of public libraries or boards
of trustees of public library systems; (iv) to make loans to counties, municipal
corporations, political subdivisions, local authorities and other local
governmental entities for water or sewage facilities or systems; and (v) to make
loans to local governmental entities for regional or multi-jurisdictional solid
waste recycling or solid waste facilities or systems. Guaranteed revenue debt
may be incurred by guaranteeing the payment of certain revenue obligations
issued by an instrumentality of the State.
As of June 30, 1994, the outstanding principal amount of indebtedness of the
State was $4.138 billion, and the total debt per capita was equal to $598.26,
representing 3.32% of personal income.
MICHIGAN BONDS
- --------------
Michigan's economy remains heavily concentrated in the manufacturing sector,
although the relative percentage of total employment accounted for by
manufacturing has declined in recent years. Despite the continuing contraction
of the automobile industry in the State, it has remained the most significant
portion of the State's manufacturing sector. The State's per capita income
stands somewhat below the national level. Despite the recent national recession,
the State's economic forecast projects for calendar 1995 modest growth in real
GNP and total wage and salary employment, as well as increased car sales.
As a result of renewed state economic growth , the state administration projects
that the Michigan unemployment rate will remain in step with the U.S.
unemployment rate, declining to 6.6% for both 1994 and 1995.
As a result of legislative action in 1993, and a statewide referendum in 1994,
the State is making major changes in the financing of local public schools. Most
local property taxes, which had been the primary source of school financing,
have been repealed. They have been replaced by other revenues with the principal
replacement revenue being an increased sales tax. These additional revenues will
be included within the State's constitutional revenue limitations and may have
an impact on the State's ability to raise additional revenues in the future.
The unreserved General Fund balance was $26.0 million at 1993 year-end. The
deficit was $310.4 million at September 30, 1990 and $169.4 million at September
30, 1991 and exactly zero at September 30, 1992. By statute, any ending
unreserved fund balance in excess of $26.0 million, is to be deposited to the
Budget Stabilization Fund, so $282.6 million was transferred. During the year,
executive orders were used to avoid a projected deficit and spending was again
closely controlled to avoid overexpenditures. A stated objective of the current
state administration has been to improve financial management and eliminate
chronic overspending. In fiscal year 1992-93, no department had net budget
overexpenditures, the first such performance by the State in 15 years.
During the fiscal year ended September 30, 1993, the State's level of general
obligation debt decreased by $4.9 million to $386.2 million, and total special
obligation debt decreased by $54.4 million to $2,216.7 million. Other
state-related revenue debt decreased $486.2 million to $2,041.0 million during
the 1992-93 fiscal year.
The State maintains a risk management division, whose activities include
analysis of and control over insurance coverage and risk exposure and the
planning and implementing of a statewide safety and health policy and program.
All types of risk and insurance coverage are currently under review and State
practices will likely change in the future. Currently, however, the State is
self-insured for many types of general liability and property losses.
In 1978, the Michigan Constitution was amended to limit the amount of total
State revenues raised from taxes and other sources. State revenues (excluding
federal aid and revenues for payment of principal and interest on general
obligation bonds) in any fiscal year are limited to a fixed percentage of State
personal income in the prior calendar year or the average of the prior three
calendar years, whichever is greater. The percentage is fixed by the amendment
to equal the ratio of the 1978-79 fiscal year revenues to total 1977 State
personal income. The State may, however, raise taxes in excess of the limit for
emergencies, when deemed necessary by the Governor and two-thirds of the members
of each House of the Legislature.
PENNSYLVANIA BONDS
- ------------------
GENERAL. Historically, Pennsylvania has been identified as a heavy industry
- -------
state, although that reputation has changed with the decline of the coal, steel
and railroad industries and the resulting diversification of Pennsylvania's
industrial composition. The major new sources of growth are in the services
sectors, including trade, medical and health services, education and financial
institutions.
REVENUES AND EXPENDITURES. Pennsylvania utilizes the fund method of accounting.
- -------------------------
The General Fund, the Commonwealth's largest and principal operating fund,
receives all tax receipts, non-tax revenues, Federal grants and entitlements
that are not specified by law to be deposited elsewhere. Debt service on all
bond obligations, except those issued for highway purposes or for the benefit of
other special revenue funds, is payable from the General Fund. The Pennsylvania
Constitution mandates that total operating budget appropriations made by the
Commonwealth's General Assembly may not exceed the sum of (a) the actual and
estimated revenues in a given year, and (b) the surplus of the preceding year.
The General Fund experienced an $861.2 million operating deficit resulting in a
fund balance deficit of $980.9 million at June 30, 1991. The operating deficit
was a consequence of the effect of a national recession that restrained budget
revenues and pushed expenditures above budgeted levels. At June 30, 1991, a
negative unreserved-undesignated balance of $1,146.2 million was reported.
During fiscal 1991, the balance in the Tax Stabilization Reserve Fund was used
to maintain vital state spending. Higher than budgeted expenditures and lower
than estimated revenues during the fiscal year resulted in a $453.6 million
budget deficit at fiscal year-end.
During fiscal 1992, the General Fund recorded a $1.1 billion operating surplus.
This surplus was achieved through legislated tax rate increases and tax base
broadening measures and by controlling expenditures through numerous cost
reduction measures. As a result of the fiscal 1992 operating surplus, the fund
balance has increased to $87.5 million and the unreserved-undesignated deficit
has dropped to $138.6 million from its fiscal 1991 level. As of the beginning of
1993, the adopted fiscal 1993 budget was balanced within the official revenue
estimate and a planned drawdown of a $8.8 million beginning budgetary basis
surplus carried forward from fiscal 1992.
During fiscal 1993, the fund balance of the General Fund increased by $611.4
million, led by an increase in the unreserved balance of $576.8 million over the
prior fiscal year balance. At June 30, 1993, the fund balance totaled $698.9 and
the unreserved-undesignated balance totaled $64.4 million. A continuing recovery
of the Commonwealth's financial condition from the effects of the national
economic recession of 1990 and 1991 is demonstrated by this increase in the
balance and a return to a positive unreserved-undesignated balance.
COMMONWEALTH DEBT. The current Constitutional provisions pertaining to
- ------------------
Pennsylvania debt permit the issuance of the following types of debt: (i) debt
to suppress insurrection or rehabilitate areas affected by disaster, (ii)
electorate-approved debt, (iii) debt for capital projects, subject to an
aggregate debt limit of 1.75 times the annual average tax revenues of the
preceding five fiscal years and (iv) tax anticipation notes payable in the
fiscal year of issuance. All debt except tax anticipation notes must be
amortized in substantial and regular amounts.
Outstanding general obligation debt totaled $5,038.8 million on June 30, 1993,
an increase of $163.7 million from June 30, 1992. In its current debt financing
plans, Pennsylvania is emphasizing infrastructure investment to improve and
rehabilitate existing capital facilities, such as water supply systems, and to
construct new facilities, such as roads, prisons and public buildings. Beginning
in early 1987, a limited return to the issuance of long-term bonds was required
to finance immediately needed repairs to highways and bridges.
Pennsylvania engages in short-term borrowing to fund expenses within a fiscal
year through the sale of tax anticipation notes, for the account of the General
Fund or the Motor License Fund or both such funds, which must mature within the
fiscal year of issuance. The principal amount issued, when added to that
outstanding, may not exceed, in the aggregate, 20% of the revenues estimated to
accrue to the appropriate fund or both funds in the fiscal year. The
Commonwealth is not permitted to fund deficits between fiscal years with any
form of debt. All year-end deficit balances must be funded within the succeeding
fiscal year's budget. Pennsylvania issued $400.0 million of tax anticipation
notes for the account of the General Fund in fiscal 1994.
Pending the issuance of bonds, Pennsylvania may issue bond anticipation notes,
subject to the applicable statutory and Constitutional limitations generally
imposed on bonds. The term of such borrowings may not exceed three years.
Currently, there are no bond anticipation notes outstanding.
COMMONWEALTH-RELATED OBLIGATIONS. Certain Commonwealth-created agencies have
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statutory authorization to incur debt for which no legislation providing for
Commonwealth appropriations to pay debt service thereon is required. The debt of
these agencies is supported by assets of or revenues derived from the various
projects financed; it is not an obligation of the Commonwealth. Some of these
agencies, however, are indirectly dependent on Commonwealth appropriations.
Commonwealth-related agencies and their outstanding debt as of December 31, 1993
include the Delaware River Joint Toll Bridge Commission ($57.4 million), the
Delaware River Port Authority ($239.4 million), the Pennsylvania Economic
Development Financing Authority ($380.8 million), the Pennsylvania Energy
Development Authority ($163.7 million), the Pennsylvania Higher Education
Assistance Agency ($1,158.8 million), the Pennsylvania Higher Education
Facilities Authority ($1,805.9 million), the State Public School Building
Authority ($306.4 million), the Pennsylvania Turnpike Commission ($1,152.6
million) and the Pennsylvania Industrial Development Authority ($256.4 million).
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Obligations of Commonwealth-created agencies in Pennsylvania which bear a moral
obligation of the Commonwealth are those issued by the (i) Pennsylvania Housing
Finance Agency, a Commonwealth-created agency which provides housing for lower
and moderate income families in Pennsylvania and (ii) the Hospitals and Higher
Education Facilities Authority of Philadelphia.
The Commonwealth, through several of its departments and agencies, has entered
into various agreements to lease, or sublease, certain real property and
equipment, and to make lease payments for the use of such property and
equipment. All lease payments due from Commonwealth departments and agencies are
subject to and dependent upon an annual spending authorization approved through
the Commonwealth's annual budget process. The Commonwealth is not required by
law to appropriate or otherwise provide moneys from which the lease payments are
to be made. The principal amount outstanding as of June 30, 1993 on such
obligations equalled approximately $1.663 billion.
LOCAL GOVERNMENT DEBT. The City of Philadelphia ended fiscal 1992 with a
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cumulative general fund balance deficit of $224.9 million. The Commonwealth
established the Pennsylvania Intergovernmental Cooperation Authority ("PICA") to
assist "first class" cities, such as Philadelphia, in remedying fiscal
emergencies by issuing debt and by making factual findings and recommendations
on budgetary and fiscal affairs. In June 1992, PICA issued $474.6 million of
Special Tax Revenue Bonds to provide financial assistance to Philadelphia and to
liquidate the cumulative General Fund balance deficit and, in July 1993, PICA
issued $643.4 million of Special Tax Revenue Bonds to refund certain general
obligation bonds of the city and to fund additional capital projects.
PUERTO RICO BONDS
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The economy of Puerto Rico is dominated by the manufacturing and service
sectors. The manufacturing sector has experienced a basic change over the years
as a result of increased emphasis on higher wage, high-technology industries
such as pharmaceuticals, electronics, computers, microprocessors, professional
and scientific instruments and certain high-technology machinery and equipment.
Much of the development of the manufacturing sector in Puerto Rico can be
attributed to various federal and Commonwealth tax incentives, most notably
Section 936 of the Internal Revenue Code and the Commonwealth's Industrial
Incentives Program. The service sector, including finance, insurance and real
estate, also plays a major role in the economy. The service sector ranks second
only to manufacturing in contribution to the gross domestic product and leads
all sectors in providing employment. In recent years, the service sector has
experienced significant growth in response to the expansion of the manufacturing
sector.
Puerto Rico's economy is closely integrated with that of mainland United States.
During fiscal 1993, approximately 86% of Puerto Rico's exports were to the
United States mainland, which also was the source of approximately 69% of Puerto
Rico's imports. In fiscal 1993, Puerto Rico experienced a $2.5 billion positive
adjusted merchandise trade balance.
Puerto Rico's decade-long economic expansion continued throughout the five-year
period from fiscal 1989 through fiscal 1993 affecting almost every sector of its
economy and resulting 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.
In the first ten months of fiscal 1993, the economy experienced its highest
growth rate for the same period since fiscal 1989. Growth in fiscal 1994 and
1995 will continue to depend on several factors, including the state of the
United States economy and the relative stability in the price of oil, the
exchange value of the U.S. dollar and the cost of borrowing.
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 amounts 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. During the five fiscal years ended June 30, 1993,
public sector debt increased 22.3% while gross product rose 25.3%.
<PAGE>
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
Each Series computes its average annual compounded rate of total return during
specified periods that would equate the initial amount invested to the ending
redeemable value of such investment by adding one to its computed average annual
total return, raising the sum to a power equal to the number of years covered by
the computation and multiplying the result by $1,000 which represents a
hypothetical initial investment. The calculation assumes deduction of the
maximum sales charge from the initial amount invested and reinvestment of all
income dividends and capital gains distributions on the reinvestment dates at
prices calculated as stated in the Prospectus. The ending redeemable value is
determined by assuming a complete redemption at the end of the period(s) covered
by the average annual total return computation.
The total returns for the one-year period ended October 31, 1994 for the
Florida, Michigan and Pennsylvania Series were (12.40%), (11.70%) and (12.20%),
respectively. The average annual compounded rates of total return for the life
of the Florida Series (commencing on September 25, 1991 and ending October 31,
1994), the life of the Pennsylvania Series (commencing on February 3, 1992 and
ending October 31, 1994) and the life of the Michigan Series (commencing on
December 1, 1992 and ending October 31, 1994), were as follows: 3.45%, 3.33%,
and 1.25%, respectively.
Each Series' yield quotation is based on a 30-day period ended on a specified
date, computed by dividing the Series' net investment income per share earned
during the period by the Series' maximum offering price per share on the last
day of the period. This is determined by finding the following quotient: Take a
Series' dividends and interest earned during the period minus its expenses
accrued for the period (net of reimbursements) and divide by the product of (i)
the average daily number of Series shares outstanding during the period that
were entitled to receive dividends and (ii) the Series' maximum offering price
per share on the last day of the period. To this quotient, add one. This sum is
multiplied by itself five times. Then one is subtracted from the product of this
multiplication and the remainder is multiplied by two. For the 30-day period
ended October 31, 1994 the yields for the Florida, Pennsylvania and Michigan
Series were 5.99%, 5.65%, and 5.83%, respectively.
Each Series' tax-equivalent yield is computed by dividing that portion of the
Series' yield (as determined above) which is tax exempt by one minus a stated
income tax rate (Florida - 36%; Pennsylvania - 37.79% and Michigan - 38.86%) and
adding the product to that portion, if any, of the Series' yield that is not tax
exempt. For the 30-day period ended on October 31, 1994, the tax-equivalent
yields for the Florida, Pennsylvania and Michigan Series were 9.36%, 9.08% and
9.54%, respectively.
It is important to remember that these figures represent past performance and an
investor should be aware that the investment return and principal value of a
Series investment will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Therefore, there is no
assurance that this performance will be repeated in the future.
9.
FURTHER INFORMATION ABOUT THE TRUST
Lord Abbett Tax-Free Income Trust(for purposes of this discussion, the "Trust")
was established on September 11, 1991 as a Massachusetts business trust by a
Declaration of Trust. A copy of the Declaration of Trust is on file with the
Secretary of the Commonwealth of Massachusetts. As a trust, the Trust does not
hold regular meetings of shareholders, although special meetings may be called
for a specific series or for the Trust as a whole, for purposes such as electing
or removing Trustees, changing fundamental policies or approving an advisory
contract. The Trust will promptly call a meeting of shareholders to vote on
whether to remove a Trustee(s) when requested to do so in writing by record
<PAGE>
holders of not less than 10% of the Trust's outstanding stock, and the Trustees,
within 5 business days of a written request by 10 or more shareholders who have
been of record for at least 6 months and who hold in the aggregate the lesser of
either shares having a net asset value of at least $25,000 or 1% of such
outstanding Trust stock, shall give such shareholders access to a list of the
names and addresses of all other shareholders or inform them of the number of
shareholders and the cost of the Trust's mailing their request.
Under the Declaration of Trust, the Trustees may provide for additional series
from time to time. Any additional series would have rights separate from the
other series. Within each series, all shares have equal voting rights and equal
rights with respect to dividends, assets and liquidation.
Under Massachusetts law, shareholders could, under certain circumstances, be
held liable for the obligations of the Trust. However, the Declaration of Trust
disclaims shareholder liability for acts, obligations or affairs of the Trust
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or the Trustees.
The Declaration of Trust also provides for indemnification out of a series'
property for all losses and expenses of any shareholder of the series held
liable on account of being or having been a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the series itself would be unable to meet its
obligations. The Trust believes that, in view of the above, the risk of personal
shareholder liability is remote.
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,
profiting from trades of the same security within 60 days and trading on
material non-public information. The Code imposes certain similar requirements
and restrictions on the independent directors and trustees of each of the Lord
Abbett-sponsored mutual funds to the extent contemplated by the recommendations
of such Advisory Group.
10.
FINANCIAL STATEMENTS
The financial statements for the fiscal half year and fiscal year ended October
31, 1994 and opinion of Deloitte & Touche LLP, independent auditors, included in
the 1994 Annual Report to Shareholders of Lord Abbett Tax-Free Income Trust, are
incorporated herein by reference in reliance upon the authority of Deloitte &
Touche LLP as experts in auditing and accounting.