LORD ABBETT TAX-FREE INCOME TRUST
THE GENERAL MOTORS BUILDING
767 FIFTH AVENUE
NEW YORK, NY 10153-0203
800-426-1130
LORD ABBETT TAX-FREE INCOME TRUST (WE OR THE FUND) IS AN OPEN-END,
NON-DIVERSIFIED MANAGEMENT INVESTMENT COMPANY ORGANIZED AS A MASSACHUSETTS
BUSINESS TRUST ON SEPTEMBER 11, 1991, CURRENTLY CONSISTING OF FOUR SEPARATE
SERIES THE FLORIDA SERIES, THE GEORGIA SERIES, THE MICHIGAN SERIES AND THE
PENNSYLVANIA SERIES.
EACH SERIES SEEKS AS HIGH A LEVEL OF INTEREST INCOME EXEMPT FROM FEDERAL INCOME
TAX AND ITS RESPECTIVE STATES PERSONAL INCOME TAX, IF ANY, AS IS CONSISTENT WITH
PRESERVATION OF CAPITAL. EACH SERIES INVESTS IN INTERMEDIATE- AND LONG-TERM
MUNICIPAL BONDS WHICH CAN FLUCTUATE IN VALUE AS INTEREST RATES CHANGE. AT
PRESENT, FLORIDA IMPOSES NO INCOME TAX ON INDIVIDUALS. THERE CAN BE NO ASSURANCE
THAT EACH SERIES WILL ATTAIN ITS OBJECTIVE.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUND THAT A
PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING. ADDITIONAL INFORMATION ABOUT
THE FUND HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS
AVAILABLE UPON REQUEST WITHOUT CHARGE. THE STATEMENT OF ADDITIONAL INFORMATION
IS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS AND MAY BE OBTAINED, WITHOUT
CHARGE, BY WRITING TO THE FUND OR BY CALLING 800-874-3733. ASK FOR PART B OF THE
PROSPECTUS THE STATEMENT OF ADDITIONAL INFORMATION.
THE DATE OF THIS PROSPECTUS AND OF THE STATEMENT OF ADDITIONAL INFORMATION, IS
MARCH 1, 1996.
PROSPECTUS
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS. SHAREHOLDER INQUIRIES SHOULD
BE MADE IN WRITING TO THE FUND OR BY CALLING 800-821-5129. YOU CAN ALSO MAKE
INQUIRIES THROUGH YOUR BROKER-DEALER.
SHARES OF THE SERIES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
AN INVESTMENT IN THE SERIES INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
CONTENTS PAGE
1 Investment Objective 2
2 Fee Table 2
3 Financial Highlights 3
4 How We Invest 4
5 Purchases 8
6 Shareholder Services 10
7 Our Management 11
8 Dividends, Capital Gains
Distributions and Taxes 11
9 Redemptions 13
10 Performance 14
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Each Series may be sold in the following jurisdictions: District of Columbia,
Florida, Georgia, Hawaii, Indiana, New Jersey, New York, and Pennsylvania. The
Michigan Series may also be sold in Michigan and Ohio.
<PAGE>
1 INVESTMENT OBJECTIVES
Our investment objective for each Series is to seek as high a level of interest
income exempt from federal income tax and its states personal income tax, if
any, as is consistent with preservation of capital. Each Series invests in
intermediate and long-term municipal bonds (initially investment-grade or
equivalent) and, therefore, each Series shares can fluctuate in value as
interest rates change more than shares of a short-term municipal bond fund, but
consistent with an investment-grade, longer-term municipal bond fund. Under
normal circumstances, we intend to maintain the average dollar weighted stated
maturity of each Series at between ten and thirty-five years.
2 FEE TABLE
A summary of each Series expenses is set forth in the table below. The example
is not a representation of past or future expenses. Actual expenses may be
greater or less than those shown.
<TABLE>
<CAPTION>
Florida Georgia Michigan Pennsylvania
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
(as a percentage of offering price)
Maximum Sales Load(1) on Purchases
(See "Purchases") 4.75% 4.75% 4.75% 4.75%
Deferred Sales Load (See "Purchases") None(2) None(2) None(2) None(2)
Annual Fund Operating Expenses
(after management fee waivers and
other expense subsidies)
Management Fee (See "Our Management") .36%(3) .00%(3) .00%(3) .36%(3)
12b-1 Fees (See "Purchases") .26% .00%(4) .00%(4) .00%(4)
Other Expenses (See "Our Management") .12% .00%(3) .25% .14%
Total Operating Expenses .74% .00%(3) .25% .50%
<FN>
Example: Assume each Series annual return is 5% and there is no change in the
level of expenses described above. For every $1,000 invested with reinvestment
of all dividends and distributions you would pay the following total expenses if
you closed your account after the number of years indicated.
1 year(5) 3 years(5) 5 years(5) 10 years(5)
Florida Series $55 $70 $87 $135
Georgia Series $48 $48 $48 $48.
Michigan Series $50 $55 $61 $78
Pennsylvania Series $52 $63 $74 $107
(1) Sales "load" is referred to as sales "charge" and "deferred sales load" is
referred to as "contingent deferred reimbursement charge" throughout this
Prospectus.
(2) Redemptions of shares on which a Series' 1% Rule 12b-1 sales-distribution
fee for purchases of $1 million or more has been paid, are subject to a 1%
contingent deferred reimbursement charge, if the redemption occurs within
24 months after the month of purchase.
(3) Although not obligated to, Lord, Abbett & Co. ("Lord Abbett") may waive a
portion of its management fee and assume other expenses with respect to the
Series. It has waived all or a portion of its management fee with respect
to each of the Florida, Michigan and Pennsylvania Series during the past
year (and continues to do so). Lord Abbett also subsidized expenses with
respect to the Georgia Series. The management fee would have been 0.50% for
each Series, absent such waiver. Without such waiver and subsidy, these
expenses would have been .88%, .75%, .64% and .91% (not annualized) for
Florida, Michigan, Pennsylvania and Georgia, respectively. Subsequently,
Lord Abbett may charge these fees and not subsidize these expenses on a
partial or complete basis. Other expenses of the Michigan Series include
reimbursement of certain expenses previously subsidized by Lord Abbett. See
"Our Management". (4)These figures omit Rule 12b-1 fees for the Georgia,
Michigan and Pennsylvania Series because the Fund cannot predict when the
net assets of these Series will reach the required level for effectiveness
of each Series' 12b-1 Plan. The Plans will go into effect on the first day
of the calendar quarter subsequent to each Series' net assets reaching $100
million. The Rule 12b-1 fees for each Series are (1) an annual service fee
(payable quarterly) equal to .15% of the average daily net asset value of
such Series' shares sold by dealers prior to the effective date for such
Series' Plan and .25% of the average daily net asset value of such shares
sold on or after that date and (2) a one-time 1% sales distribution fee, at
the time of sale, on such shares sold at net asset value of $1 million or
more.
(5) Based on total operating expenses shown in the table above. The foregoing
is provided to give investors a better understanding of the expenses that
are incurred by an investment in each Series.
<PAGE>
3 FINANCIAL HIGHLIGHTS
The following tables have been audited by Deloitte & Touche llp, independent
accountants, in connection with their annual audits of the Fund's Financial
Statements, whose report thereon is incorporated by reference in the Statement
of Additional Information and may be obtained on request, and have been included
herein in reliance upon their authority as experts in auditing and accounting.
</TABLE>
<TABLE>
<CAPTION>
FLORIDA SERIES FOR THE PERIOD
September 25, 1991
(Commencement
Per Share Operating Year Ended October 31, of Operations) to
Performance: 1995 1994 1993 1992 October 31, 1991
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $4.49 $5.28 $4.75 $4.76 $4.76
Income from investment operations
Net investment income .271 .291 .297 .308 .027+
Net realized and unrealized
gain on securities .352 (.695) .549 .002 .000
Total from investment operations .623 (.404) .846 .310 .027
Distributions
Dividends from net investment income (.2630) (.2835) (.301) (.320) (.027)
Distributions from net realized gain -- (.1025) (.015) .-- .--
Net asset value, end of period $4.85 $4.49 $5.28 $4.75 $4.76
Total Return* 14.22% (8.03)% 18.24% 6.05% .57%+
Ratios/Supplemental Data:
Net assets, end of period (000) $173,242 $174,844 $191,463 $121,408 $108,550
Ratios to Average Net Assets:
Expenses, including waiver .74% .32% .38% .29% .00%+
Expenses, excluding waiver .88% .82% .88% .78% 5.10%+
Net investment income 5.81% 5.98% 5.71% 5.84% .55%+
Portfolio turnover rate 142.04% 122.92% 89.32% 94.90% 100.00%
</TABLE>
<TABLE>
<CAPTION>
PENNSYLVANIA SERIES For the Period
February 3, 1992
(Commencement
Per Share Operating Year Ended October 31, of Operations) to
Performance: 1995 1994 1993 October 31, 1992
<S> <C> <C> <C> <C>
Net asset value, beginning of period $4.62 $5.33 $4.75 $4.76
Income from investment operations
Net investment income .282 .300 .299 .228
Net realized and unrealized
gain (loss) on securities .395 (.6975) .582 (.006)
Total from investment operations .677 (.3975) .881 .222
Distributions
Dividends from net investment income (.2870) (.2925) (.301) (.232)
Distributions from net realized gain (.02) -- --
Net asset value, end of period $5.01 $4.62 $5.33 $4.75
Total Return* 15.02% (7.73)% 18.95% 4.68%
Ratios/Supplemental Data:
Net assets, end of period (000) $93,494 $81,258 $82,113 $41,207
Ratios to Average Net Assets:
Expenses, including waiver .50% .33% .31% .00%
Expenses, excluding waiver .65% .68% .81% .61%
Net investment income 5.83% 5.98% 5.70% 4.42%
Portfolio turnover rate 126.11% 137.22% 7.71% 32.66%
<FN>
*Total return does not consider the effects of sales loads.
+Not annualized. See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GEORGIA SERIES MICHIGAN SERIES
-------------- -----------------------------------
MICHIGAN SERIES
GEORGIA SERIES FOR THE PERIOD FOR THE PERIOD
DECEMBER 27, 1994 DECEMBER 1, 1992
(COMMENCEMENT OF YEAR ENDED (COMMENCEMENT
PER SHARE OPERATING OPERATIONS) TO OCTOBER 31, OF OPERATIONS) TO
PERFORMANCE: OCTOBER 31, 1995 1995 1994 OCTOBER 31, 1993
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $4.76 $4.53 $5.23 $4.76
INCOME FROM INVESTMENT OPERATIONS
Net investment income .245 .284 .286 .266
Net realized and unrealized
gain on securities .370 .395 (.651) .480
TOTAL FROM INVESTMENT OPERATIONS .615 .679 (.365) .746
DISTRIBUTIONS
Dividends from net investment income (.255) (.279) (.2925) (.276)
Distributions from net realized gain -- -- (.0425) --
NET ASSET VALUE, END OF PERIOD $5.12 $4.93 $4.53 $5.23
TOTAL RETURN* 13.15% 15.39% (7.29)% 16.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $5,203 $54,186 $45,603 $34,957
RATIOS TO AVERAGE
Net Assets: Expenses, including waiver .00% .25% .34% .00%
Expenses, excluding waiver .91% .75% .84% .75%
Net investment income 4.61% 5.95% 5.69% 4.75%
Portfolio turnover rate 142.69% 98.89% 137.31% 68.10%
</TABLE>
4 HOW WE INVEST
Each Series invests primarily in a portfolio of intermediate-term (5-10 years)
to long-term (over 10 years) municipal bonds, the interest on which is exempt
from federal income tax in the opinion of bond counsel to the issuer. Except for
the Florida Series, the interest on the municipal bonds in which each Series
primarily invests also is exempt from its states personal income tax, if any, in
the opinion of bond counsel to the issuer. At present, Florida imposes no income
tax on individuals. The per-share net asset value of each Series can be expected
to fluctuate inversely as interest rates change. When interest rates rise, the
value of securities in the portfolios, as well as the share values, generally
will fall. Conversely, when interest rates fall, the value of securities in the
portfolios and the share values generally will rise.
Municipal bonds used herein, and as more fully described in the Statement of
Additional Information, are debt obligations issued by or on behalf of states,
territories and possessions of the United States, including the District of
Columbia, Puerto Rico, the Virgin Islands and Guam, and their political
subdivisions, agencies and instrumentalities.
Each Series invests primarily in investment-grade municipal bonds rated at the
time of purchase within the four highest grades assigned by Moodys Investors
Service, Inc. (MoodysAaa, Aa, A, Baa), Standard & Poors Ratings Services, Inc.
(S&PAAA, AA, A, BBB) or Fitch Investors Service (Fitch - AAA, AA, A, BBB). Each
Series also may invest in unrated municipal bonds exempt from federal income tax
and its respective states personal income tax, if any, which are determined by
Lord Abbett to be of comparable quality to the rated bonds in which such Series
may invest. At least 70% of the municipal bonds in each portfolio must be rated
within or, if unrated, equivalent to, at the time of purchase, the three highest
such grades. As much as 30% of the municipal bonds in each Series portfolio may
be rated within, or, if unrated, equivalent to, at the time of purchase, the
fourth highest grade. Bonds of this grade, while regarded as having an adequate
capacity to pay interest and repay principal, are considered to be of medium
grade and have speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds. After
a Series purchases a municipal bond, the issuer may cease to be rated, or its
rating may be reduced below the minimum required for purchase, which could have
an adverse effect on
<PAGE>
the market value of the issue. Neither event will require the elimination of the
issue from a Series portfolio.
The Funds internal policy restricts investments to municipal bonds which are
initially investment-grade, i.e., among the four highest grades mentioned above
or their equivalent, and we aim to provide above-average tax-free income
relative to comparable investment-grade, longer term municipal bond funds. In
view of this internal policy and because we manage the maturities of our
investments in accordance with our interest-rate expectations, we anticipate (i)
a higher level of tax-free income than a short-term, tax-free municipal bond
fund and (ii) a share value tending to fluctuate more than such a short-term
fund, but consistent with an investment-grade, longer term municipal bond fund.
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 faith, credit and taxing power of the municipality. The taxes or
special assessments that can be levied for the payment of debt service may be
limited or unlimited as to the rate or amount. Revenue bonds are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise or other specific revenue
source. Industrial development bonds are in most cases revenue bonds and do not
generally constitute the pledge of the faith, credit or taxing power of the
municipality. The credit quality of such municipal bonds is usually 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.
Each Series may purchase new issues of municipal bonds which are generally
offered on a when-issued basis, with delivery and payment (settlement) normally
taking place approximately one month after the purchase date. However, the
payment obligation and the interest rate to be received by the Series are each
fixed on the purchase date. During the period between purchase and settlement,
Series assets consisting of cash and/or high-grade marketable securities, marked
to market daily, of a dollar amount sufficient to make payment at settlement
will be segregated at our custodian. There is a risk that market yields
available at settlement may be higher than yields obtained on the purchase date,
which could result in depreciation of value. While we may sell when-issued
securities prior to settlement, we intend to actually acquire such securities
unless a sale appears desirable for investment reasons.
Under normal market conditions, each Series will attempt to invest 100% and, as
a matter of fundamental policy, will invest at least 80% of its net assets in
municipal bonds, the interest on which is exempt from federal income tax. Under
normal market conditions, each Series also will attempt to invest 100% and, as a
matter of fundamental policy, will invest at least 80% of its net assets in
municipal bonds, the interest on which is exempt from its states personal income
taxes. At present, Florida does not impose a personal income tax. See Dividends,
Capital Gains Distributions and Taxes.
Although normally each Series intends to be fully invested in intermediate to
long-term municipal bonds, a Series may temporarily invest in short-term
tax-exempt securities meeting the above-described quality standards and,
additionally, may temporarily put up to 20% of its assets in cash, in commercial
paper of comparable investment quality or in short-term obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities (U.S.
Government securities), in order to improve liquidity or to create reserve
purchasing power. Because interest earned from commercial paper or U.S.
Government securities is taxable for federal income tax purposes, we intend to
minimize temporary investments in such short-term securities.
Each Series may invest up to 20% of its net assets (less any amount invested in
the temporary taxable investments described above) in private activity bonds.
Series dividends derived from interest on such bonds would be considered a
preference item for purposes of the computation of the alternative minimum tax.
Series dividends derived from such interest may increase the alternative minimum
tax liability of corporate shareholders who are subject to that tax based on the
excess of their adjusted current earnings over their taxable income.
Each Series intends to meet the diversification rules under Subchapter M of the
Internal Revenue Code. Generally, this requires, at the end of each quarter of
the taxable year, that (a) not more than 25% of each Series total assets be
invested in any one issuer and (b) with respect to 50% of each Series total
assets, not more than 5% of each Series total assets be invested in any one
issuer except U. S. Government securities. Since under these rules each Series
may invest its assets in the securities of a limited number of issuers, the
value of each Series investments may be more affected by any single adverse
economic, political or regulatory occurrence than in the case of a diversified
investment company under the Investment Company Act of 1940, as amended (the
Act). The identification of an issuer will be determined on the basis of the
source of assets
<PAGE>
and revenues committed to meeting interest and principal payments of the
securities. When the assets and revenues of a states political subdivision are
separate from those of the state government creating the subdivision, and the
security is backed only by the assets and revenues of the subdivision, then the
subdivision would be considered the sole issuer. Similarly, if a revenue bond is
backed only by the assets and revenues of a nongovernmental user, then such user
would be considered the sole issuer.
No Series intends to invest more than 25% of its total assets in any industry,
except that each Series may, subject to the limits referred to in the preceding
three paragraphs, invest more than 25% of such assets in a combination of U.S
Government securities and in tax-exempt securities, including tax-exempt revenue
bonds whether or not the users of any facilities financed by such bonds are in
the same industry. Where nongovernmental users are in the same industry, there
may be additional risk to that Series in the event of an economic downturn in
such industry, which may result generally in a lowered ability of such users to
make payments on their obligations. Electric utility and health care are typical
but not all inclusive of the industries in which this 25% may be exceeded. The
former is relatively stable but subject to rate regulation vagaries. The latter
suffers from two main problems affordability and access. Tax-exempt securities
issued by governments or political subdivisions of governments are not
considered part of any industry.
Each Series may invest up to 20% of its net assets in residual interest bonds
(RIBs) to enhance and increase portfolio duration. None of the Series invested
more than 15% of its net assets in RIBs at any time during the fiscal year ended
October 31, 1995. A RIB, sometimes referred to as an inverse floater, is a debt
instrument with a floating or variable interest rate that moves in the opposite
direction of the interest rate on another security. Changes in the interest rate
on the other security inversely affect the residual interest rate paid on the
RIB, with the result that when interest rates rise, RIBs interest payments are
lowered and their value falls faster than other similar fixed-rate bonds. In an
effort to mitigate this risk, the Fund purchases other fixed-rate bonds which
are less volatile. When interest rates fall, not only do RIBs provide interest
payments that are higher than other similar fixed-rate bonds, but their values
also rise faster than other similar fixed-rate bonds.
Each Series may invest up to 10% of its net assets in illiquid securities. Bonds
determined by the Trustees to be liquid pursuant to Securities and Exchange
Commission Rule 144A (Rule 144A) will not be subject to this limit. Investments
by a Series in Rule 144A securities initially determined to be liquid could have
the effect of diminishing the level of such Series liquidity during periods of
decreased market interest in such securities. Under Rule 144A, a qualifying
security may be resold to a qualified institutional buyer without registration
and without regard to whether the seller originally purchased the security for
investment.
No Series will borrow money unless such borrowing does not exceed the asset
coverage requirements of the Act with respect to such Series.
Portfolio Turnover. Portfolio turnover rates for the fiscal year ended October
31, 1995 for the Florida, Michigan and Pennsylvania Series were 142.04%, 98.89%
and 126.11%, respectively, compared to 122.36%, 137.31% and 137.22% for the
prior fiscal year. Turnover rates increased due to purchases and sales of
securities relating to purchases and redemptions of our shares and some
portfolio restructuring. The portfolio turnover rate for the Georgia Series for
the period December 27, 1994 to October 31, 1995 was 142.69%.
Options and Financial Futures Transactions. Each Series may deal in options on
securities, securities indexes and financial futures transactions, including
options on financial futures. The Series may write (sell) covered call options
and secured put options on up to 25% of its net assets and may purchase put and
call options provided that no more than 5% of its net assets may be invested in
premiums on such options.
None of the Series is currently employing any of the options and financial
futures transactions described above.
Risk Factors. Securities in which we may invest are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors and laws which may be enacted extending the time of payment of
principal and interest, or both. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of issuers to meet their
obligations for payment of principal and interest may be materially affected or
their obligations may be found to be invalid or unenforceable.
<PAGE>
The ability of each Series to achieve its objective is based on the expectation
that the issuers of the municipal bonds in each Series portfolio will continue
to meet their obligations for the payment of principal and interest. The
following are brief summaries of certain factors affecting the Florida, Georgia,
Michigan and Pennsylvania Series. Also, there follows a brief summary regarding
Puerto Rico bonds which may be purchased by each Series. These summaries do not
purport to be complete and are based upon information derived from
publicly-available documents relating to each state involved, which information
has not been independently verified by the Fund. For more detailed discussions
of the risks applicable to each Series, see the Statement of Additional
Information.
Florida Bonds Risk Factors. Florida, in terms of population, is one of the
largest states in the United States. The State has grown dramatically since
1980. Its population includes a large proportion of senior citizens who have
moved to the State after retirement. Recently, the share of the States 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 a relatively more important source of income.
Through the 1980s, Floridas unemployment rate was below that of the rest of the
nation. Since 1989, however, it has been higher than the national average.
Floridas dependency on the highly cyclical construction and construction-related
manufacturing sectors has declined. Tourism is now one of Floridas most
important industries. Over the years, this industry has become more
sophisticated, attracting visitors year-round, thus, to a degree, reducing its
seasonality.
Florida's Constitution permits issuance of State bonds pledging the full faith
and credit of the State, with the vote of the electors, to finance or refinance
fixed-capital outlay projects. Revenue Bonds may be issued by the State or its
agencies without a vote of Floridas electors only to finance or refinance the
cost of State fixed-capital outlay projects which shall be payable solely from
funds derived directly from sources other than State tax revenues.
Georgia Bonds Risk Factors. The largest sources of employment in Georgia, in
descending order, are wholesale and retail trade; services; manufacturing;
government; transportation and other public utilities contract construction;
finance, insurance and real estate; and mining. The largest sources of
government revenues are the States personal income tax and general sales and use
tax.
Michigan Bonds Risk Factors. Michigans 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
contraction of the automobile industry in the State, it has remained the most
significant portion of the States manufacturing sector. The States per capita
income stands slightly below the national level and the States unemployment rate
stands at the national average.
The State has had deficits carried forward during recent fiscal years,
but showed a surplus in fiscal 1993.
Pennsylvania Bonds Risk Factors. The Commonwealth of Pennsylvania is one of the
most populous states, ranking fifth behind California, New York, Texas, and
Florida. Pennsylvania is an established, yet growing, state with a diversified
economy. It is headquarters for 60 major corporations and the home for more than
272,764 businesses. Pennsylvania has been historically identified as a
heavy-industry state, although that reputation has recently changed as the
industrial composition of Pennsylvania diversified when the coal, steel and
railroad industries began to decline. The major new sources of growth are in the
service sector, including trade, medical and health services, education and
financial institutions. Pennsylvania is highly urbanized, with approximately 79%
of the Commonwealths total population contained in the metropolitan areas which
include the cities of Philadelphia and Pittsburgh.
Pennsylvanias natural resources include major deposits of coal, oil, gas and
limestone. Its workforce is more than 5.9 million, ranking as the sixth largest
labor pool in the nation.
After experiencing operating deficits in fiscal 1990 and 1991, for fiscal 1992,
1993 and 1994 the Commonwealths General Fund recorded an operating surplus. As a
result of that surplus, the fund balance has increased and the
unreserved-undesignated fund deficit that existed in 1992 has been eliminated.
Puerto Rico Risk Factors. The Fund may have significant investments in bonds
issued by the Commonwealth of Puerto Rico and its instrumentalities. The economy
of Puerto Rico is dominated by diversified manufacturing and service sectors. It
is closely integrated, through extensive trade, with
<PAGE>
that of the mainland United States, and its economic health is closely tied to
the price of oil and the state of the U.S. economy. Puerto Rico has a rate of
unemployment exceeding the U.S. average.
5 PURCHASES
You may buy our shares through any independent securities dealer having a sales
agreement with Lord Abbett, our exclusive selling agent. Place your order with
your investment dealer or send it to Lord Abbett Tax-Free Income Trust (P.O. Box
419100, Kansas City, Missouri 64141). The minimum initial investment is $1,000
except for Invest-A-Matic and Div-Move ($250 initial and $50 monthly minimum).
Subsequent investments may be made in any amount.
The net asset values of our shares are calculated every business day as of the
close of the New York Stock Exchange (NYSE) by dividing net assets by the number
of shares outstanding. Securities are valued at their market value, as more
fully described in the Statement of Additional Information.
Orders for shares received by the Fund prior to the close of the NYSE, or
received by dealers prior to such close and received by Lord Abbett in proper
form prior to the close of its business day, will be confirmed at the applicable
public offering price effective at such NYSE close. Orders received by dealers
after the NYSE closes and received by Lord Abbett prior to the close of its next
business day are executed at the applicable public offering price effective as
of the close of the NYSE on that next business day. The dealer is responsible
for the timely transmission of orders to Lord Abbett. A business day is a day on
which the NYSE is open for trading. For information regarding proper form of a
purchase or redemption order, call the Fund at 800-821-5129. This offering may
be suspended, changed or withdrawn. Lord Abbett reserves the right to reject any
order.
For each Series, the offering price is based on the per-share net asset value
calculated as of the times described above, plus a sales charge as follows:
<TABLE>
<CAPTION>
Sales Charge as a Dealer's
Percentage of: Concession
as a To Compute
Net Percentage Offering
Offering Amount of Offering Price, Divide
Size of Investment Price Invested Price* NAV by
<S> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 4.00% .9525
$50,000 to $99,999 4.75% 4.99% 4.25% .9525
$100,000 to $249,999 3.75% 3.90% 3.25% .9625
$250,000 to $499,999 2.75% 2.83% 2.50% .9725
$500,000 to $999,999 2.00% 2.04% 1.75% .9800
$1,000,000 or more No Sales Charge 1.00% 1.0000
The following $1 million category is for each of the Georgia,
Michigan and Pennsylvania Series until each such Series' Rule
12b-1 Plan becomes effective, at which time the sales charge
table above will apply to such Series.
$1,000,000 or more 1.00% 1.01% 1.00% .9900
<FN>
*Lord Abbett may, for specified periods, allow dealers to retain the full sales
charge for sales of shares during such period, or pay an additional concession
to a dealer who, during a specified period, sells a minimum dollar amount of our
shares and/or shares of other Lord Abbett-sponsored funds. In some instances,
such additional concessions will be offered only to certain dealers expected to
sell significant amounts of shares. Lord Abbett may from time to time implement
promotions under which Lord Abbett will pay a fee to dealers with respect to
certain purchases not involving imposition of a sales charge. Additional
payments may be paid from Lord Abbetts own resources and will be made in the
form of cash or non-cash payments. The non-cash payments will include business
seminars at resorts or other locations, including meals and entertainment, or
the receipt of merchandise. The cash payments will include payment of various
business expenses of the dealer.
</FN>
</TABLE>
In selecting dealers to execute portfolio transactions, if two or more dealers
are considered capable of providing best execution, we may prefer the dealer who
has sold our shares and/or shares of other Lord Abbett-sponsored funds.
Volume Discounts. This section describes several ways to qualify for a lower
sales charge if you inform Lord Abbett or the Fund that you are eligible at the
time of purchase.
(1) Any purchaser (as described below) may aggregate a purchase in the Fund with
purchases of any other eligible Lord Abbett-sponsored fund, together with the
current value at maximum offering price of any shares in the Fund and in any
eligible Lord Abbett-sponsored funds held by the purchaser. (Holdings in the
following funds are not eligible for the above rights of accumulation: Lord
Abbett Equity Fund (LAEF), Lord Abbett Series Fund (LASF), the other series of
the Lord Abbett Research Fund if not offered to the general public (LARF) and
Lord Abbett U.S.
<PAGE>
Government Securities Money Market Fund (GSMMF), except for existing holdings in
GSMMF which are attributable to shares exchanged from a Lord Abbett-sponsored
fund offered with a front-end sales charge or from a fund in the Lord Abbett
Counsel Group.) (2) A purchaser may sign a non-binding 13-month statement of
intention to invest $100,000 or more in the Fund or in any of the above eligible
funds. If the intended purchases are completed during the period, each purchase
will be at the sales charge, if any, applicable to the aggregate of such
purchasers intended purchases. If not completed, each purchase will be at the
sales charge for the aggregate of the actual purchases. Shares issued upon
reinvestment of dividends or distributions are not included in the statement of
intention. The term purchaser includes (i) an individual, (ii) an individual and
his or her spouse and children under the age of 21 and (iii) a trustee or other
fiduciary purchasing shares for a single trust estate or single fiduciary
account (including a pension, profit-sharing, or other employee benefit trust
qualified under Section 401 of the Internal Revenue Code more than one qualified
employee benefit trust of a single employer, including its consolidated
subsidiaries, may be considered a single trust, as may qualified plans of
multiple employers registered in the name of a single bank trustee as one
account), although more than one beneficiary is involved.
Each Series 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 or by the trustee or custodian under any pension or
profit-sharing plan or Payroll Deduction IRA established for the benefit of such
persons or for the benefit of any national securities trade organization to
which Lord Abbett belongs or any company with an account(s) in excess of $10
million managed by Lord Abbett on a private-advisory-account basis. For purposes
of this paragraph, the terms trustees and employees include a trustees or
employees 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, (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)
under the loan feature of the Lord Abbett-sponsored prototype 403(b) plan for
share purchases representing the repayment of principal and interest, (d) by
certain authorized brokers, dealers, registered investment advisers or other
financial institutions who have entered into an agreement with Lord Abbett 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, (e) by employees, partners and owners
of unaffiliated consultants and advisers to Lord Abbett or Lord Abbett-sponsored
funds who consent to such purchase if such persons provide services to Lord
Abbett or such funds on a continuing basis and are familiar with such funds and
(f) 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 redemptions have
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.
Purchasers should consider the impact, if any, of contingent deferred sales
charges in determining whether to redeem shares for subsequent investment in our
shares. Lord Abbett may suspend or terminate the purchase option referred to in
(f) above at any time.
Our shares may be issued at net asset value in exchange for the assets, subject
to possible tax adjustments, of a personal holding company or an investment
company.
Rule 12b-1 Plan. Each Series has adopted a Rule 12b-1 Plan (the Plans) which
authorizes Lord Abbett to pay fees to dealers in order to provide additional
incentives for them (a) to provide continuing information and investment
services to their shareholder accounts and otherwise to encourage their accounts
to remain invested in the Series and (b) to sell shares of the Series. The Plan
fees indicated below will go into effect on the first day (the effective date)
of the calendar quarter subsequent to a Series net assets reaching $100 million.
The Fund cannot estimate
<PAGE>
when the net assets will reach the required level for effectiveness of the Plans
for the Georgia, Michigan
and Pennsylvania Series. Under the Plans (except as to certain accounts for
which tracking data is not available) the Series pay Lord Abbett, who passes on
to dealers (1) an annual service fee (payable quarterly) of .25% of the average
daily net asset value of the Series shares sold by dealers on or after the Plans
effective date and .15% of the average daily net asset value of shares sold by
dealers prior to that date and (2) a one-time 1% sales distribution fee, at the
time of sale, on all shares at or above the $1 million level sold by dealers on
or after the Series effective date, including sales qualifying at such level
under the rights of accumulation and statement of intention privileges.
Holders of shares on which the 1% sales distribution fee has been paid will be
required to pay to the Series a contingent deferred reimbursement charge of 1%
of the original cost or the then net asset value, whichever is less, of all
shares so purchased which are redeemed out of the Lord Abbett-sponsored family
of funds on or before the end of the twenty-fourth month after the month in
which the purchase occurred. If the shares have been exchanged into another Lord
Abbett series or fund and are thereafter redeemed out of the Lord Abbett family
on or before the end of such twenty-fourth month, the charge will be collected
for the Series by the other Series or fund. Each Series will collect such a
charge for other Series and other Lord Abbett-sponsored funds in a similar
situation. Shares of a fund or series on which the 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.
6 SHAREHOLDERS SERVICES
We offer the following shareholder services:
Telephone Exchange Privilege: Shares of any Series may be exchanged, without a
service charge, for those of any other Series or any available Lord
Abbett-sponsored fund, except for (i) LAEF, LASF, LARF and Lord Abbett Counsel
Group and (ii) certain tax-free, single-state series where the exchanging
shareholder is a resident of a state where such shares are not offered for sale
(together, Eligible Funds).
You or your representative with proper identification can instruct the Fund to
exchange uncertificated shares by telephone. Shareholders have this privilege
unless they refuse it in writing. The Fund will not be liable for following
instructions communicated by telephone that it reasonably believes to be genuine
and will employ reasonable procedures to confirm that instructions received are
genuine, including requesting proper identification and recording all telephone
exchanges. Instructions must be received by the Fund in Kansas City
(800-821-5129) prior to the close of the NYSE to obtain each funds net asset
value per share on that day. Expedited exchanges by telephone may be difficult
to implement in times of drastic economic or market changes. The exchange
privilege should not be used to take advantage of short-term swings in the
market. The Fund reserves the right to terminate or limit the privilege of any
shareholder who makes frequent exchanges. The Fund can revoke the privilege for
all shareholders upon 60 days prior written notice. A prospectus for the other
Lord Abbett-sponsored fund selected by you should be obtained and read before an
exchange. Exercises of the Exchange Privilege will be treated as sales for
federal income tax purposes and, depending on the circumstances, a capital gain
or loss may be recognized.
Systematic Withdrawal Plan: If the maximum offering price value of your
non-certificated shares is at least $10,000, you may have periodic cash
withdrawals automatically paid to you in either fixed or variable amounts.
Div-Move: You can invest the dividends paid on your account ($50 minimum monthly
investment) into an existing account in any other Eligible Fund. The account
must be either your account, a joint account for you and your spouse, a single
account for your spouse or a custodial account for your minor child under the
age of 21. You should read the prospectus of the other fund before investing.
Invest-A-Matic: Invest-A-Matic allows fixed, periodic investments ($50 minimum
investment) into the Fund and/or any Eligible Fund by means of automatic money
transfers from your bank checking account. You should read the prospectus of the
other fund before investing.
Householding: A new procedure has been inaugurated whereby a single copy of an
annual or semi-annual report is sent to an address to which more than one
registered shareholder of the Fund with the same last name has indicated mail is
to be delivered, unless additional reports are specifically requested in writing
or by telephone.
All correspondence should be directed to Lord Abbett Tax-Free Income Trust (P.O.
Box 419100, Kansas City, Missouri 64141).
<PAGE>
7 OUR MANAGEMENT
Our business is managed by our officers on a day-to-day basis under the overall
direction of our Board of Trustees. We employ Lord Abbett as investment manager
for each Series, pursuant to a Management Agreement. Lord Abbett has been an
investment manager for over 65 years and currently manages approximately $19
billion in a family of mutual funds and advisory accounts. Under the Management
Agreement, Lord Abbett provides us with investment management services and
personnel, pays the remuneration of our officers and of our Trustees affiliated
with Lord Abbett, provides us with office space and pays for ordinary and
necessary office and clerical expenses relating to research, statistical work
and supervision of our portfolios and certain other costs. Lord Abbett provides
similar services to fifteen other funds having various investment objectives and
also advises other investment clients. Zane E. Brown, Lord Abbett Director in
charge of Fixed Income is primarily responsible for the day-to-day management of
the Series. Prior to Mr. Brown, Robert S. Dow, Lord Abbett Partner in charge of
Fixed Income had such primary responsibility and had acted in this capacity
since each Series inception. Mr. Brown is assisted by (as was Mr. Dow), and may
delegate management duties to, other Lord Abbett employees who may be Fund
officers. Prior to joining Lord Abbett in 1992, Mr. Brown was Executive Vice
President in charge of fixed income at Equitable Capital Management Co.
Under the Management Agreement, we are obligated to pay Lord Abbett a monthly
fee at the annual rate of .50 of 1% of average daily net assets of each Series
for each month. For the fiscal year ended October 31, 1995 Lord Abbett waived
$248,100, $126,160 and $249,286 in management fees for the Florida, Pennsylvania
and Michigan Series, respectively. For the period December 27, 1994 to October
31, 1995 Lord Abbett waived $13,900 in management fees for the Georgia Series.
In addition, we pay all expenses not expressly assumed by Lord Abbett. Our
ratios of expenses, including management fee expenses, to average net assets for
the fiscal year ended October 31, 1995 were .74%, .50% and .25% for the Florida,
Pennsylvania and Michigan Series, respectively. The expense ratios for these
Series would have been .88%, .64% and .75%, respectively, had Lord Abbett not
waived all or a portion of its management fee. Our ratios of expenses, including
management fee expenses, to average net assets for the period December 27, 1994
to October 31, 1995 was .00% for the Georgia Series. Lord Abbett waived
management fees and subsidized expenses with respect to the
Georgia Series. Without such subsidy the expense ratio would have been .91% (not
annualized).
The Agreement provides for each Series to repay Lord Abbett without interest for
any expenses assumed by Lord Abbett on and after the first day of the calendar
quarter after the net assets of each such Series first reach $50 million
(commencement date), to the extent that the expense ratio of each Series
(determined before taking into account any fee waiver or expense assumption) is
less than .85%. Commencing with the first day of the calendar quarter after the
net assets of the Series first reach $100 million, such repayments shall be made
to the extent that such expense ratio so determined is less than 1.05%. The
Series shall not be obligated to repay any such expenses after the earlier of
the termination of the Agreement or the end of five full fiscal years after the
commencement date. The Series will not record as obligations in their financial
statements any expenses which may be repaid to Lord Abbett under this repayment
formula unless such repayment is probable at the time. If such repayment is not
probable, the Series will disclose in a note to their financial statements that
such repayments are possible.
The Fund does not hold regular annual meetings and expects to hold meetings of
shareholders only when necessary under applicable law or the terms of the Funds
Declaration of Trust. Under the Declaration of Trust, a shareholders meeting may
be called at the request of the holders of one-quarter of the outstanding stock
entitled to vote. See the Statement of Additional Information for more details.
The Fund was organized as a Massachusetts business trust on September 11, 1991.
Each outstanding share of a Series has one vote on all matters voted upon by
that Series and an equal right to dividends and distributions of that Series.
All shares have noncumulative voting rights for the election of trustees.
8 DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
Dividends from net investment income may be taken in cash or reinvested in
additional shares at net asset value without a sales charge. If you elect a cash
payment (i) a check will be mailed to you as soon as possible after the monthly
reinvestment date or (ii) if you arrange for direct deposit, your payment will
be wired directly to your bank account within one day after the payable date.
<PAGE>
A long-term capital gains distribution is made when we have net profits during
the year from sales of securities which we have held more than one year. If we
realize net short-term capital gains, they also will be distributed. It is
anticipated that any capital gains will be distributed in November. You may take
them in cash or additional shares at net asset value without a sales charge.
Supplemental dividends and distributions may be paid in December or January.
Dividends and distributions declared in October, November or December of any
year to shareholders of record as of a date in such a month will be treated for
federal income tax purposes as having been received by shareholders in that year
if they are paid before February 1 of the following year.
We intend to continue to meet the requirements of Subchapter M of the Internal
Revenue Code and to take any other action necessary to insure that we will pay
no federal income tax and that each of the Series may pay exempt-interest
dividends. Dividends derived from our interest income on obligations exempt from
federal income tax, when designated by the Fund as exempt-interest dividends,
will be exempt from federal income tax when received by shareholders. Dividends
derived from income on our other investments or from any net realized short-term
capital gains, will be taxable to shareholders as ordinary income, whether
received in cash or shares. Dividends derived from net long-term capital gains
which are designated by the Fund as capital gains dividends will be taxable to
shareholders as long-term capital gains, whether received in cash or shares,
regardless of how long a shareholder has held the shares. Under current law, net
long-term capital gains are taxed at the rates applicable to ordinary income,
except that the maximum rate for long-term capital gains for individuals is 28%.
Legislation is pending in Congress as of the date of this Prospectus which would
have the effect of reducing the federal income tax rate on capital gains.
You may be subject to a $50 penalty under the Internal Revenue Code and we may
be required to withhold and remit to the U.S. Treasury a portion (31%) of any
redemption proceeds (including the value of shares exchanged into another Lord
Abbett-sponsored funds) and of any taxable dividend or distribution on any
account where the payee failed to provide a correct taxpayer identification
number or to make certain required certifications.
Shareholders receiving Social Security benefits and certain railroad retirement
benefits may be subject to federal income tax on up to 85% of such benefits as a
result of receiving investment income, including tax-exempt income (such as
exempt-interest dividends) and other distributions paid by the Fund. The tax
will be imposed on up to one-half of such benefits only when the sum of the
recipients adjusted gross income (plus miscellaneous adjustments), tax-exempt
income and one-half of Social Security income exceed $25,000 ($32,000 for
individuals filing a joint return). The tax will be imposed on up to 85% only
when such sum exceeds $34,000 for individuals ($44,000 for individuals filing a
joint return). Shareholders receiving such benefits should consult their tax
advisers.
Florida Taxes Florida imposes no state personal income tax. However, Florida
imposes an intangible personal property tax on shares of the Series owned by a
Florida resident on January 1 of each year unless such shares qualify for an
exemption from that tax. Shares of the Florida Series owned by a Florida
resident will be exempt from the Florida intangible personal property tax
provided that on January 1, the annual statutory assessment date, the Florida
Series portfolio includes only obligations of the State of Florida or a
political subdivision thereof or obligations issued by the U.S. Government or
certain other government authorities, for example, U.S. territories, (U.S.
Government obligations and collectively Florida exempt investments). If, in any
year on the statutory assessment date, the Florida Series were to hold assets
other than Florida exempt investments including assets attributable to options
and financial futures transactions in which the Florida Series may engage (see
How We Invest), then a portion (which might be a significant portion) of the
value of the Florida Series shares would be subject to the Florida intangible
personal property tax.
Georgia Taxes Dividends paid by the Georgia Series will be exempt from Georgia
income tax to the extent they are derived from interest on obligations of the
State of Georgia or U.S. Government obligations. Dividends, if any, derived from
capital gains or other sources generally will be taxable to shareholders of the
Georgia Series for Georgia income tax purposes. For purposes of the Georgia
intangibles tax, shares of the Georgia Series are taxable to shareholders who
are otherwise subject to the Georgia intangibles tax.
Michigan Taxes Dividends paid by the Michigan Series to a Michigan resident will
not be subject to the Michigan State Income Tax to the extent such dividends are
derived from interest paid on obligations of the State of Michigan or a
political subdivision thereof (Michigan exempt investments). Dividends and
distributions derived from interest paid on, and any capital gains from the sale
by the Michigan Series of, U.S. Government obligations, also will be exempt from
the Michigan state Income Tax.
<PAGE>
Shares of the Michigan Series are exempt from the Michigan Intangible Personal
Property Tax to the extent that the portfolio of the Michigan Series consists of
Michigan exempt investments or U.S. Government obligations as described above.
Additionally, in determining yield for Intangible
Personal Property Tax purposes, dividends and distributions derived from such
obligations, and all capital gains distributions to the extent reinvested in
shares of the Michigan Series, will be excluded from the yield calculation. The
Michigan Intangible Personal Property Tax is repealed effective January 1, 1998.
Dividends paid by the Michigan Series will not be subject to the Michigan Single
Business Tax to the extent such dividends are derived from interest on Michigan
exempt investments or U.S. Government obligations, as discussed above. Other
distributions, including those derived from capital gains from the sale by the
Michigan Series of Michigan exempt investments or U.S. Government obligations,
may be subject to the Michigan Single Business Tax if received by a business
subject to such tax.
The portion of the Series dividends and distributions received by a shareholder
that is exempt from the Michigan state Income Tax or Michigan Single Business
Tax may be reduced by interest or other expenses paid or incurred to purchase or
carry shares of the Series.
Pennsylvania Taxes Dividends paid by the Pennsylvania Series will not be subject
to the Pennsylvania personal income tax or corporate net income tax to the
extent that such dividends are attributable to interest derived from obligations
of the Commonwealth of Pennsylvania or a political subdivision thereof or U.S.
Government obligations (collectively, Pennsylvania exempt investments). Capital
gains distributions out of the earnings of the Pennsylvania Series will be
subject to the Pennsylvania personal income tax and corporate net income tax.
Dividends paid by the Pennsylvania Series to a Pennsylvania resident that are
not derived from Pennsylvania exempt investments will be subject to the
Pennsylvania personal income tax, corporation net income tax and (for residents
of Philadelphia) to the Philadelphia school district investment income tax.
Shares of the Pennsylvania Series are exempt from Pennsylvania county personal
property taxes and (as to residents of Pittsburgh) from personal property taxes
imposed by the City of Pittsburgh and the School District of Pittsburgh to the
extent that the portfolio of the Pennsylvania Series consists of Pennsylvania
exempt investments. This exemption, however, will not apply to the extent that
on the annual statutory assessment date, which may fall between January 1 and
January 15, the Pennsylvania Series portfolio consists of securities not exempt
from personal property taxes in Pennsylvania, including assets attributable to
options and financial futures transactions in which the Pennsylvania Series may
engage (see How We Invest).
Annual Information ---- Information concerning the tax treatment of dividends
and other distributions will be mailed annually to shareholders. Each Series
will also provide annually to its shareholders information regarding the source
of dividends and distributions of capital gains paid by that Series. You should
consult your tax adviser regarding the treatment of those distributions and
state and local taxes generally and any proposed changes thereto as well as the
tax consequences of gains or losses from the redemption, or exchange of our
shares.
9 REDEMPTIONS
To obtain the proceeds of an expedited redemption of $50,000 or less, you or
your representative with proper identification can telephone the Fund. The Fund
will not be liable for following instructions communicated by telephone that it
reasonably believes to be genuine and will employ reasonable procedures to
confirm that instructions received are genuine, including requesting proper
identification, recording all telephone redemptions and mailing the proceeds
only to the named shareholder at the address appearing on the account
registration.
If you do not qualify for the procedures described above, send your written
redemption request to Lord Abbett Tax-Free Income Trust (P.O. Box 419100, Kansas
City, Missouri 64141) with signature(s) and any legal capacity of the signer(s)
guaranteed by an eligible guarantor, accompanied by any certificates for shares
to be redeemed and other required documentation. We will make payment of the net
asset value of the shares on the date the redemption order was received in
proper form. Payment will be made within three business days. However, if you
have purchased Fund shares by check and subsequently submit a redemption
request, redemption proceeds will be paid upon clearance of your purchase check,
which may take up to 15 days. To avoid delays, you may arrange for the bank upon
which the check was drawn to communicate to the Fund that the check has cleared.
<PAGE>
Shares also may be redeemed by the Fund at net asset value through your
securities dealer who, as an unaffiliated dealer, may charge you a fee. If your
dealer receives your order prior to the close of the NYSE and communicates it to
Lord Abbett, as our agent, prior to the close of Lord Abbetts business day, you
will receive the net asset value calculated that day. If the dealer does not
communicate such an order to Lord Abbett until the next business day, you will
receive the net asset value as of the close of the NYSE on that next business
day.
Shareholders who have redeemed their shares have a one-time right to reinvest,
into another account having the identical registration, in any of the Eligible
Funds at net asset value without the payment of a sales charge. Such investment
must be made within 60 days of the redemption and is limited to no more than the
amount of the redemption proceeds.
Under certain circumstances and subject to prior written notice, our trustees,
from time to time, may authorize redemption of all of the shares in any account
in which there are fewer than 25 shares.
10 PERFORMANCE
Lord Abbett Tax-Free Income Trust completed fiscal 1995 on October 31 with net
assets totaling $326.1 million up from $301.7 million one year ago. Each Series
seeks to provide shareholders with high current tax-free income from a portfolio
of high-quality municipal bonds. Following are some of the factors that were
relevant to the Series performance over the past year, including market
conditions and investment strategies pursued by the Trusts management.
The past year has been one of extreme volatility in the fixed-income markets and
particularly in the markets for municipal bonds. The Bond Buyer 40 Index, which
measures yields on long-term municipal bonds, stood at 5.99% on October 31,
1995, after having been as high as 7.4% in November of 1994. While talk of tax
reform has heightened investor concerns, the end result has been beneficial:
tax-exempt securities have become less expensive relative to other securities.
Presently, municipal bonds have an average yield that is more than 90% of the
30-year Treasury bond yield, indicating how attractive we believe the tax-exempt
sector has become. Lord Abbett continues to manage the portfolios risk from a
total return perspective and believes that investors will benefit from our
well-diversified, high-quality portfolios.
Yield. Tax-equivalent yield and total return data may from time to time be
included in advertisements about a Series. Yield is calculated by dividing a
Series annualized net investment income per share during a recent 30-day period
by the maximum offering price per share on the last day of that period.
Tax-equivalent yield is calculated by dividing that portion of each Series yield
(as determined above) which is tax-exempt by one minus a stated income tax rate
and adding the product to that portion, if any, of such Series yield that is not
tax-exempt. The Series yield and tax-equivalent yield reflect the deduction of
the maximum initial sales charge and reinvestment of all income dividends and
capital gains distributions. Total return for the one-, five- and ten-year
periods represents the average annual compounded rate of return on an investment
of $1,000 in a Series at the maximum public offering price. Total return also
may be presented for other periods or based on investment at reduced sales
charge levels or net asset value. Any quotation of total return not reflecting
the maximum initial sales charge would be reduced if such sales charge were
used. Quotations of yield, tax-equivalent yield or total return for any period
when an expense limitation is in effect will be greater than if the limitation
had not been in effect. See Past Performance in the Statement of Additional
Information for a more detailed discussion.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFER IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR, IN
SUPPLEMENTAL LITERATURE AUTHORIZED BY THE FUND, AND NO PERSON IS ENTITLED TO
RELY UPON ANY INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN OR THEREIN.
<PAGE>
Comparison of changes in value of a $10,000 investment in Lord Abbett Tax-Free
Income Trust --Florida Series, assuming reinvestment of all dividends and
distributions, Lipper's Average of Florida tax-free funds and the Lehman
Municipal Bond Index
<TABLE>
<CAPTION>
The Series The Series Lipper's Average Lehman
at Net at Maximum Florida tax- Municipal Bond
Date Asset Value Offering Price free funds Index
<S> <C> <C> <C> <C>
9/25/91 $10000 $9520 $10000 $10000
10/31/91 10057 9575 10886 10090
10/31/92 10726 10211 10934 10937
10/31/93 12682 12073 12475 12476
10/31/94 11664 11103 11869 12043
10/31/95 13323 12684 13316 14817
</TABLE>
Comparison of changes in value of a $10,000 investment in Lord Abbett Tax-Free
Income Trust -- Georgia Series, assuming reinvestment of all dividends and
distributions, Lipper's Average of Georgia tax-free funds and the Lehman
Municipal Bond Index
<TABLE>
<CAPTION>
The Series The Series Lipper's Average Lehman
at Net at Maximum Georgia tax- Municipal Bond
Date Asset Value Offering Price free funds Index
<S> <C> <C> <C> <C>
12/27/94 $10000 $9520 $10000 $10000
10/31/95 11315 10772 11391 11445
</TABLE>
Comparison of changes in value of a $10,000 investment in Lord Abbett Tax-Free
Income Trust --Michigan Series, assuming reinvestment of all dividends and
distributions, Lipper's Average of Michigan tax-free funds and the Lehman
Municipal Bond Index
<TABLE>
<CAPTION>
The Series The Series Lipper's Average Lehman
at Net at Maximum Michigan Municipal Bond
Date Asset Value Offering Price free funds Index
<S> <C> <C> <C> <C>
12/1/92 $10000 $9520 $10000 $10000
10/31/93 11600 11044 11190 11207
10/31/94 10754 10238 10812 12016
10/31/95 12409 11814 12638 14796
</TABLE>
Comparison of changes in value of a $10,000 investment in Lord Abbett Tax-Free
Income Trust --Pennsylvania Series, assuming reinvestment of all dividends and
distributions, Lipper's Average of Pennsylvania tax-free funds and the Lehman
Municipal Bond Index
<TABLE>
<CAPTION>
The Series The Series Lipper's Average Lehman
at Net at Maximum Florida tax- Municipal Bond
Date Asset Value Offering Price free funds Index
<S> <C> <C> <C> <C>
2/35/92 $10000 $9520 $10000 $10000
10/31/92 10468 9966 10680 10558
10/31/93 12452 11855 11967 12044
10/31/94 11489 10937 11509 12165
10/31/95 13215 12581 12864 15938
<FN>
(1) Total return is the percent change in value, after deduction of the maximum
sales charge of 4.75%, with all dividends and distributions reinvested for
the periods shown ending October 31, 1995 using the SEC-required uniform
method to compute such return. A portion of each Series' management fee has
been waived.
(2) Data reflects the deduction of the maximum sales charge of 4.75%.
(3) Source: Lipper Analytical Services. (4) Performance numbers for the Lehman
Municipal Bond Index do not reflect transaction costs or management fees.
An investor cannot invest directly in the Index. This Index is composed of
municipal bonds from many different states and, therefore, it may not be a
valid comparison to a single-state municipal bond portfolio, such as each
Series.
</FN>
</TABLE>
<PAGE>
Underwriter and Investment Manager
Lord, Abbett & Co.
The General Motors Building
767 Fifth Avenue
New York, New York 10153-0203
212-848-1800
Custodian
The Bank of New York
48 Wall Street
New York, New York 10286
Transfer Agent and Dividend
Disbursing Agent
United Missouri Bank of Kansas City, N.A.
Tenth and Grand
Kansas City, Missouri 64141
Shareholder Servicing Agent
DST Systems, Inc.
P.O. Box 419100
Kansas City, Missouri 64141
800-821-5129
Auditors
Deloitte & Touche llp
Counsel Debevoise & Plimpton
LORD ABBETT
TAX-FREE
INCOME TRUST
A MUTUAL FUND SEEKING
HIGH TAX-FREE INCOME AND
PRESERVATION OF CAPITAL
<PAGE>
LORD ABBETT
Statement of Additional Information 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 March
1, 1996.
Lord Abbett Tax-Free Income Trust (the "Fund") was organized as a Massachusetts
business trust on September 11, 1991. The Fund's Board of Trustees has authority
to create separate series of shares of beneficial interest, without further
action by shareholders. To date, the Fund has 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, as amended (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 18
7. Risk Factors Regarding Investments in Florida, Georgia
Michigan, Pennsylvania and Puerto Rico Municipal Bonds 19
8. Past Performance 24
9. Further Information About the Trust 25
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 Rule144A 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 fiscal year ended
October 31, 1995 the portfolio turnover rates for the Florida, Michigan and
Pennsylvania Series were 142.04%, 126.11% and 98.89%, respectively, versus
122.36%, 137.22% and 137.31%, respectively for the prior year. The portfolio
turnover rate for the Georgia Series was 142.69% for the period December 27,
1994 to October 31, 1995.
2
<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).
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 Investors Services ("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.
3
<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 Standard & Poor's.
Capacity to and pay interest and repay principal is extremely strong
AA: Debt rated ' AA' has a very strong capacity to pay interest and repay
principals and differs from the highest rated issues only in small degree.
A: Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
Fitch's describes its four highest ratings for municipal bonds as follows:
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and
AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt to these issuers is generally rated F-1+.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings. BBB: Bonds considered to be
investment grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore impair timely payments. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
4
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. For example, if participants in the futures market elect to close out
their
5
<PAGE>
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
6
<PAGE>
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 Series may experience material losses.
However, in writing options the premium is paid in advance by the dealer. OTC
options are available for a greater variety of securities and a wider range of
expiration dates and exercise prices, than are exchange- traded options. Since
there is no exchange, 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 a Series writes an OTC option, generally it can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Series originally wrote it. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes, while it is
obligated as a put writer. Similarly, a purchaser of such put or call option
also might find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Fund understands the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The Fund and its
investment adviser disagree with this position and believe that 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 will not engage in OTC options transactions if the amount
invested by a Series in OTC options, plus a "liquidity charge" related to OTC
options written by such Series, plus the amount invested by such 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
7
<PAGE>
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 applicable
Securities and Exchange Commission requirements, 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
8
<PAGE>
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
(in the case of Mr. Nordberg) and/or directors or trustees (in the case of
Messrs. Lynch and Dow) of the fifteen other Lord Abbett-sponsored funds
including those described under "Purchases, Redemptions and Shareholder
Services." They are "interested persons" as defined in the Act.
Ronald P.Lynch, age 60, Chairman
Robert S. Dow, age 50, President
E. Wayne Nordberg, age 59 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, Connecticut
President and Chief Executive Officer of Time Warner Cable Programming, Inc.
Formerly President and Chief Operating Officer of Home Box Office, Inc. Age 54.
Stewart S. Dixon
Wildman, Harrold, Allen & Dixon
225 W. Wacker Drive (Suite 2800)
Chicago, Illinois
Partner in the law firm of Wildman, Harrold, Allen & Dixon. Age 65.
John C. Jansing 162 S. Beach Road Hobe Sound, Florida Retired. Former Chairman
of Independent Election Corporation of America, a proxy tabulating firm. Age 70.
C. Alan MacDonald
The Marketing Partnership, Inc.
27 Signal Road
Stamford, Connecticut
General Partner, The Marketing Partnership, Inc., a full service marketing
consulting firm. Formerly Chairman and Chief Executive Officer of Lincoln
Snacks, Inc., manufacturer of branded snack foods (1992-1994). Formerly
President & CEO of Nestl Foods Corp, and prior to that, President & CEO of
Stouffer Foods Corp., both subsidiaries of Nestl SA, Switzerland. Currently
serves as Director of Den West Restaurant Co., J. B. Williams, and Fountainhead
Water Company. Age 62.
9
<PAGE>
Hansel B. Millican, Jr.
Rochester Button Company
1100 Noblin Avenue
South Boston, Virginia
President and Chief Executive Officer of Rochester Button Company. Age 67.
Thomas J. Neff
Spencer Stuart & Associates
277 Park Avenue
New York, New York
President of Spencer Stuart & Associates, an executive search consulting firm.
Age 58.
The second column of the following table sets forth the compensation accrued for
the Fund's outside trustees. The third and fourth columns set forth information
with respect to the retirement plan for outside trustees maintained by the Lord
Abbett-sponsored funds. The fifth column sets forth the total compensation
payable by such funds to the outside trustees. No trustee of the Fund associated
with Lord Abbett and no officer of the Fund received any compensation from the
Fund for acting as a trustee or officer.
<TABLE>
<CAPTION>
For the Fiscal Year Ended October 31, 1995
(1) (2) (3) (4) (5)
Pension or Estimated Annual For Year Ended
Retirement Benefits Benefits Upon December 31, 1995
Accrued by the Retirement Proposed Total Compensation
Aggregate Fund and to be Paid by the Accrued by the Fund and
Compensation Fifteen Other Lord Fund and Fifteen Fifteen Other Lord
Accrued by Abbett-sponsored Other Lord Abbett- Abbett-sponsored
Name of Director the Fund1 Funds sponsored Funds2 Funds3
<S> <C> <C> <C> <C>
E. Thayer Bigelow $1,014 $9,772 $33,600 $41,700
Stewart S. Dixon $1,032 $22,472 $33,600 $42,000
John C. Jansing $1,044 $28,480 $33,600 $42,960
C. Alan MacDonald $1,021 $27,435 $33,600 $42,750
Hansel B. Millican, Jr. $1,045 $24,707 $33,600 $43,000
Thomas J. Neff $1,021 $16,126 $33,600 $42,000
<FN>
1. Outside trustees' fees, including attendance fees for board and committee
meetings, are allocated among all Lord Abbett-sponsored funds based on net
assets of each fund. A portion of the fees payable by the Fund to its outside
trustees are being deferred under a plan that deems the deferred amounts to be
invested in shares of the Fund for later distribution to the trustees. The total
amount accrued under the plan for each outside trustee since the beginning of
his tenure with the Trust, including dividends reinvested and changes in net
asset value applicable to such deemed investments as of October 31, 1995 were as
follows: Mr. Bigelow, $1,081; Mr. Dixon, $2,038; Mr. Jansing, $3,141; Mr.
MacDonald, $2,231; Mr. Millican, $3,122 and Mr. Neff, $3,659.
2. Each Lord Abbett-sponsored fund has a retirement plan providing that outside
trustees and directors will receive annual retirement benefits for life equal to
80% of their final annual retainers following retirement at or after age 72 with
at least 10 years of service. Each plan also provides for a reduced benefit upon
early retirement under certain circumstances, a pre-retirement death benefit and
actuarially reduced joint-and-survivor spousal benefits. The amounts stated
would be payable annually under such retirement plans if the trustee were to
retire at age 72 and the annual retainers payable by
10
<PAGE>
such funds were the same as they are today. The amounts accrued in column 3 were
accrued by the Lord Abbett-sponsored funds during the fiscal year ended October
31, 1995 with respect to the retirement benefits in column 4.
3. This column shows aggregate compensation, including director's fees and
attendance fees for board and committee meetings, of a nature referred to in
footnote one, accrued by the Lord Abbett-sponsored funds during the year ended
December 31, 1995.
</FN>
</TABLE>
Except where indicated, the following executive officers of the Fund have been
associated with Lord Abbett for over five years. Of the following, Messrs.
Allen, Carper, Cutler, Dow, Henderson, Morris, Nordberg and Walsh are partners
of Lord Abbett; the others are employees: Zane Brown, age 45; Barbara A.
Grummel, age 39; John Mousseau, age 40 (with Lord Abbett since 1993 - formerly
First Vice President, Shearson Lehman Brothers); Philip Fang, age 30 (with Lord
Abbett since 1993 - formerly Municipal Evaluator for Muller & Co.), Executive
Vice Presidents; Kenneth B. Cutler, age 63, Vice President and Secretary;
Stephen I. Allen, age 42; Daniel E. Carper, age 44; Robert S. Dow, age 50;
Thomas S. Henderson, age 64 Robert G. Morris, age 51, E. Wayne Nordberg, age 59;
John J. Gargana, Jr., age 64; Paul A. Hilstad, age 53 (with Lord Abbett since
1995 - formerly Senior Vice President and General Counsel of American Capital
Management & Research, Inc.); Thomas F. Konop, age 53; Victor W. Pizzolato, age
63; John J. Walsh, age 58, Vice Presidents; and Keith F. O'Connor, age 40,
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, 1995 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 nine 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, Robert
G. Morris, 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
11
<PAGE>
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, 1993, 1994 and 1995, Lord Abbett waived
$794,366, $954,176 and $248,100, respectively, of Florida Series' management
fees. For the fiscal years ended October 31, 1993, 1994 and 1995, Lord Abbett
waived $307,168, $299,609 and $126,160, respectively, of Pennsylvania Series'
management fees. For the year ended October 31, 1993, 1994, and 1995 Lord Abbett
waived $127,327, $215,421 and $249,286, respectively, of Michigan Series'
management fees. All expenses to be repaid to Lord Abbett for the Florida,
Pennsylvania and Michigan Series have been paid of by the Fund. For the period
December 27, 1994 to October 31, 1995 Lord Abbett waived $13,900 in Georgia
Series' management fees and assumed $16,100 in other expenses.
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 public accountants 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.
Bank of New York, 40 Wall Street, New York, New York, serves as the Fund's
custodian.
4.
Portfolio Transactions
Purchases and sales of portfolio securities usually will be principal
transactions and normally such securities will be purchased directly from the
issuer or from an underwriter or purchased from or sold to a market maker for
the securities. Therefore, the Fund usually will pay no brokerage commissions on
such transaction. Purchases from underwriters of portfolio securities will
include a commission or concession paid by the issuer to the underwriter and
purchases from or sales to dealers serving as market makers will include a
dealer's markup or markdown. Principal transactions, including riskless
principal transactions, are not afforded the protection of the safe harbor in
Section 28 (e) of the Securities Exchange Act of 1934.
Our policy is to obtain best execution on all our portfolio transactions, which
means that we seek to have purchases and sales of portfolio securities executed
at the most favorable prices, considering all costs of the transaction including
dealer markups and markdowns and any brokerage commissions. This policy governs
the selection of brokers or dealers and the market in which the transaction is
executed. To the extent permitted by law, we may, if considered advantageous,
make a purchase from or sale to another Lord Abbett-sponsored fund without the
intervention of any broker-dealer.
Broker-dealers are selected on the basis of their professional capability and
the value and quality of their brokerage and research services.Normally, the
selection is made by traders who are officers of the Fund and also are employees
of Lord Abbett.These traders do the trading as well for other accounts --
investment companies (of which they are also officers) and other investment
clients -- managed by Lord Abbett.They are responsible for the negotiation of
prices and any commissions.
We may pay a brokerage commission on the purchase or sale of a security that
could be purchased from or sold to a market maker if our net cost of the
purchase or the net proceeds to us of the sale are at least as favorable as we
could obtain on a direct purchase or sale. Brokers who receive such commissions
may also provide research services at least some of which are useful to Lord
Abbett in their overall responsibilities with respect to us and the other
accounts they manage. Research includes trading equipment and computer software
packages, acquired from third-party suppliers, that
12
<PAGE>
enable Lord Abbett to access various information bases and may include the
furnishing of analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
Such services may be used by Lord Abbett in servicing all their accounts, and
not all of such services will necessarily be used by Lord Abbett in connection
with their management of the Fund; conversely, such services furnished in
connection with brokerage on other accounts managed by Lord Abbett may be used
in connection with their management of the Fund, and not all of such services
will necessarily be used by Lord Abbett in connection with their advisory
services to such other accounts. We have been advised by Lord Abbett that
research services received from brokers cannot be allocated to any particular
account, are not a substitute for Lord Abbett's services but are supplemental to
their own research effort and, when utilized, are subject to internal analysis
before being incorporated by Lord Abbett into their investment process. As a
practical matter, it would not be possible for Lord Abbett to generate all of
the information presently provided by brokers. While receipt of research
services from brokerage firms has not reduced Lord Abbett's normal research
activities, the expenses of Lord Abbett could be materially increased if it
attempted to generate such additional information through its own staff and
purchased such equipment and software packages directly from the suppliers.
No commitments are made regarding the allocation of brokerage business to or
among brokers, and trades are executed only when they are dictated by investment
decisions of the Fund to purchase or sell portfolio securities.
If two or more broker-dealers are considered capable of offering the equivalent
likelihood of best execution, the broker-dealer who has sold our shares and/or
shares of other Lord Abbett-sponsored funds may be preferred.
If other clients of Lord Abbett buy or sell the same security at the same time
as we do, transactions will, to the extent practicable, be allocated among all
participating accounts in proportion to the amount of each order and will be
executed daily until filled so that each account shares the average price and
commission cost of each day. Other clients who direct that their brokerage
business be placed with specific brokers or who invest through wrap accounts
introduced to Lord Abbett by certain brokers may not participate with us in the
buying and selling of the same securities as described above. If these clients
wish to buy or sell the same security as we do, they may have their transactions
executed at times different from our transactions and thus may not receive the
same price or incur the same commission cost as we do.
We will not seek "reciprocal" dealer business (for the purpose of applying
commissions in whole or in part for our benefit or otherwise) from dealers as
consideration for the direction to them of portfolio business.
During the fiscal years ended October 31, 1995, 1994 and 1993, we paid no
commissions to independent brokers.
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.
13
<PAGE>
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, 1995 were
computed as follows:
<TABLE>
<CAPTION>
Pennsylvania Georgia Michigan Florida
Series Series Series Series
<S> <C> <C> <C> <C>
Net asset value per share (net assets
divided by shares outstanding) .................$4.85 $5.01 $5.12 $4.93
Maximum offering price per share (net
asset value divided by .9525) ..................$5.09 $5.26 $5.38 $5.18
</TABLE>
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
Oct. 31, 1995 Oct. 31, 1994 Oct. 31, 1993
<S> <C> <C> <C>
Gross sales charge $1,438,904 $3,019,207 $5,183,953
Amount allowed
to dealers $1,265,847 $2,617,856 $4,616,423
Net commissions received
by Lord Abbett $ 173,057 $ 401,351 $ 567,530
</TABLE>
As described in the Prospectus, each Series has adopted a Distribution Plan and
Agreement (a "Plan") pursuant to Rule12b-1 under the Act, each to become
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 $452,235 through Lord Abbett to
dealers pursuant to the Plans. 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
14
<PAGE>
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") is imposed with respect to those shares (or shares of 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-sponsored family of funds within a
period of 24 months from the end of the month in which the original sale
occurred.
No CDRC is payable on redemptions by tax qualified plans under section 401 of
the Internal Revenue Code for benefit payments due to plan loans, hardship
withdrawals, death, retirement or separation from service with respect to plan
participants. The CDRC is received by a Series and is intended to reimburse all
or a portion of the amount paid by a Series if the shares are redeemed before a
Series has had an opportunity to realize the anticipated benefits of having a
large, long-term shareholder 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, Inc. ("GSMMF") and certain series of the Fund and Lord Abbett
Tax-Free Income Trust for which a Rule12b-1 Plan is not yet in effect
(collectively, the "Series")) have instituted a CDRC on the same terms and
conditions. No CDRC will be charged on an exchange of shares between Lord Abbett
funds. Upon redemption of shares out of the Lord Abbett family of funds, the
CDRC will be charged on behalf of and paid to the fund in which the original
purchase (subject to a CDRC) occurred. Thus, if shares of a Lord Abbett fund are
exchanged for shares of another such fund and the shares tendered ("Exchanged
Shares") are subject to a CDRC, the CDRC will carry over to the shares being
acquired, including GSMMF ("Acquired Shares"). Any CDRC that is carried over to
Acquired Shares is calculated as if the holder of the Acquired Shares had held
those shares from the date on which he or she became the holder of the Exchanged
Shares. Although GSMMF and the Series will not pay a 1% sales distribution fee
on $1 million purchases of their own shares, and will therefore not impose their
own CDRC, GSMMF will collect the CDRC on behalf of other Lord Abbett funds.
Acquired shares held in GSMMF which are subject to a CDRC will be credited with
the time such shares are held in that fund.
In no event will the amount of the CDRC exceed 1% of the lesser of (i) the net
asset value of the shares redeemed or (ii) the original cost of such shares (or
of the Exchanged Shares for which such shares were acquired). No CDRC will be
imposed when the investor redeems (i) amounts derived from increases in the
value of the account above the total cost of shares being redeemed due to
increases in net asset value, (ii) shares with respect to which no Lord Abbett
fund paid a 1% sales distribution fee on issuance (including shares acquired
through reinvestment of dividend income and capital gains distributions) or
(iii) shares which, together with Exchanged Shares, have been held continuously
for 24 months from the end of the month in which the original sale occurred. In
determining whether a CDRC is payable, (a) shares not subject to the CDRC will
be redeemed before shares subject to the CDRC and (b) of shares subject to a
CDRC, those held the longest will be the first to be redeemed.
Under the terms of the Statement of Intention to invest $100,000 or more over a
13-month period as described in the Prospectus, shares of Lord Abbett-sponsored
funds (other than shares of Lord Abbett Equity Fund ("LAEF"), Lord Abbett Series
Fund ("LASF"), Lord Abbett Research Fund if not offered to the general public
("LARF"), and GSMMF, unless holdings in GSMMF are attributable to shares
exchanged from a Lord Abbett-sponsored fund offered with a sales charge or from
a fund in the Lord Abbett Counsel Group) 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.
15
<PAGE>
As stated in the Prospectus, purchasers (as defined in the Prospectus) may
accumulate their investment in Lord Abbett-sponsored funds (other than LAEF,
LARF, LASF, and GSMMF, unless holdings in GSMMF are attributable to shares
exchanged from a Lord Abbett-sponsored fund offered with a front-end sales
charge or from Lord Abbett Counsel Group) 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 or by the trustee or custodian under any
pension or profit-sharing plan or Payroll Deduction IRA established for the
benefit of such persons or for the benefit of employees of any national
securities trade organization to which Lord Abbett belongs or any company with
an account(s) in excess of $10 million managed by Lord Abbett on a
private-advisory-account basis. For purposes of this paragraph, the terms
"trustees" and "employees" include a director's or employee's spouse (including
the surviving spouse of a deceased director 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,
(b) with dividends and distributions from other Lord Abbett-sponsored funds,
except for LARF, LAEF, LASF and Lord Abbett Counsel Group, (c) under the loan
feature of the Lord Abbett-sponsored prototype 403(b) plan for share purchases
representing the repayment of principal and interest, (d) by certain authorized
brokers, dealers, registered investment advisers or other financial institutions
who have entered into an agreement with Lord Abbett 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 (e) 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 has business
relationships.
Our shares also 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. Purchasers should consider the
impact, if any, of contingent deferred sales charges in determining whether to
redeem shares for subsequent investment in our shares. Lord Abbett may suspend,
change or terminate this purchase 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.
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 other Lord Abbett-sponsored funds have the same right to
exchange their shares for the Fund's shares. Exchanges are based on relative net
asset values on the day instructions are received by the Fund in Kansas City if
the instructions are received prior to the close of the NYSE in proper form. No
sales charges are imposed except in the case of exchanges out of GSMMF (unless a
sales charge was paid on the 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
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payable on the acquired shares had they been acquired for cash rather than by
exchange. The portion of the original sales charge not so taken into account
will increase the basis of the acquired shares.
Shareholders have the exchange privilege unless they refuse it in writing. You
should not view the exchange privilege as a means for taking advantage of
short-term swings in the market, and we reserve the right to terminate or limit
the privilege of any shareholder who makes frequent exchanges. We can revoke or
modify the privilege for all shareholders upon 60 days' prior notice. "Eligible
Funds" are other Lord Abbett-sponsored funds which 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.
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 Board of 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 Board must determine that it is in our economic best interest or
necessary to reduce disproportionately burdensome expenses in servicing
shareholder accounts.At least 30 days' prior written notice will be given
before any such redemption, during which time shareholders may avoid redemption
by bringing their accounts up to the minimum set by the Board.
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 Invest-A-Matic method of investing in the Fund and/or any other Eligible
Fund is described in the Prospectus. To avail yourself of this method you must
complete the application form, selecting the time and amount of your bank
checking account withdrawals and the funds for investment, include a voided,
unsigned check and complete the bank authorization.
The Systematic Withdrawal Plan (the "SWP") also is described in the Prospectus.
You may establish a SWP if you own or purchase uncertificated shares having a
current offering price value of at least $10,000.Lord Abbett prototype
retirement plans have no such minimum. The SWP involves the planned redemption
of shares on a periodic basis by receiving either fixed or variable amounts at
periodic intervals.Since the value of shares redeemed may be more or less than
their cost, gain or loss may be recognized for income tax purposes on each
periodic payment.Normally, you may not make regular investments at the same
time you are receiving systematic withdrawal payments because it is not in your
interest to pay a sales charge on new investments when in effect a portion of
that new investment is soon withdrawn. The minimum investment accepted while a
withdrawal plan is in effect is $1,000.The SWP may be terminated by you or by
us at any time by written notice.
The Prospectus indicates the types of retirement plans for which Lord Abbett
provides forms and explanations.Lord Abbett makes available the retirement plan
forms and custodial agreements for IRAs (Individual Retirement Accounts
including Simplified Employee Pensions), 403(b) plans and qualified pension and
profit-sharing plans, including 401(k) plans.The forms name Investors Fiduciary
Trust Company as custodian and contain specific information about the plans.
Explanations of the eligibility requirements, annual custodial fees and
allowable tax advantages and penalties are set forth in the relevant plan
documents. Adoption of any of these plans should be on the advice of your legal
counsel or qualified tax adviser.
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6.
Taxes
Each 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, in order to continue to qualify as a regulated investment company for
federal income tax purposes as described in the Prospectus, 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.
The foregoing discussion relates solely to U. S. federal income tax law as
applicable to United States persons (United States citizens or residents and
United States domestic corporations, partnerships, trusts and estates). Each
shareholder who is not a United States person should consult his tax adviser
regarding the U. S. and foreign tax consequences of the ownership of shares of a
Series, including a 30% (or lower treaty rate) United States withholding tax on
dividends representing ordinary income and net short-term capital gains, and the
applicability of United States gift and estate taxes to non-United States
persons who own Series shares.
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.
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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 population includes a large proportion of senior citizens who have
moved to the State after retirement. In 1995, 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.
An important element of Florida's economic outlook is the construction sector.
Total construction expenditures are forecasted to increase 4.0% in 1996 and to
increase 5.3% next year.
Real personal income in Florida is estimated to increase 4.6% in 1995-96 and
3.8% in 1996-97. Florida's unemployment rate is forecast to be 5.6% in 1995-96
and 5.7% in 1996-97.
As of December 1995, estimated fiscal year 1995-96 General Revenue plus Working
Capital and Budget Stabilization funds available total $15.149.1 million, a
2.21% increase over 1994-95. The $14,456.7 million Estimated Revenues represent
an increase of 5.9% over the previous year's Estimated Revenues. With combined
Revenue, Working Capital and Budget Stabilization Fund appropriations at $14,824
million, unencumbered reserves at the end of the fiscal year are estimated at
$325.1 million.
In fiscal year 1996-97 estimated General Revenue plus Working Capital and Budget
Stabilization funds available total $15,717 8 million, a 3.8% increase over
1995-96 The $15,262.3 million in Estimated Revenue represent a 5.6% increase
over the analogous figure in 1995-96.
Financial operations of the State of Florida, covering all receipts and
expenditures, are maintained through the use of four fund types the General
Revenue Fund, the Trust Funds, and the Working Capital Fund, and beginning in
fiscal year 1994-95, the Budget Stabilization 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 Revenue Fund which are in
excess of the amount needed to meet appropriations may be transferred to the
Working Capital Fund. Pursuant to a constitutional amendment which was ratified
by the voters on November 8, 1994, the rate of growth in state revenues in a
given fiscal year is limited to no more than the average annual growth in
Florida personal income over the previous five years. Revenues collected in
excess of the limitation are to be deposited into the Budget Stabilization Fund
unless 2/3 of the members of both houses of the state legislature vote to raise
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the limit. 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.
Georgia Bonds
The largest sources of employment by industry group within the State, in
descending order, are wholesale and retail trade; manufacturing; services;
government; transportation and other public utilities; contract construction;
finance, insurance and real estate; and mining. The unemployment rate of the
civilian labor force in the State as of May 1995 was 4.4.3%. Per capita income
during 1994 was $20,251 in Georgia (as compared with $21,809 in the United
States).
State Treasury receipts for the year ending June 30, 1995 was $9.998 billion
(estimated), representing a 6.25% 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 44% 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 July 31, 1995, the outstanding principal amount of indebtedness of the
State was $4.693 billion, and the total debt per capita was equal to $665.15,
representing 3.28% 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 Michigan unemployment rate
has remained in step with the U.S. unemployment rate, declining to 5.9% for 1994
from 7.0% for 1993.
As a result of legislative action in 1993, and a statewide referendum in 1994,
the State has made 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 $310.3 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 of the General Fund, is to be deposited to the Budget
Stabilization Fund, so $460.2 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
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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, 1994 the State's level of general
obligation debt decreased by $4.0 million to $382.2 million, and total special
obligation debt increased by $194.5 million to $2,411.2 million. Other
state-related revenue debt decreased $64,535 million to $1,976.5 million during
the 1993-94 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.
During the period from fiscal 1990 through fiscal 1994, public health and
welfare costs rose by an average annual rate of 9.4 percent while tax revenues
were growing at an average annual rate of 5.8 percent. Consequently, spending on
other budget programs was restrained to a growth rate of 4.7 percent and sources
of revenues other than taxes became larger components of General fund revenues.
Among those sources were transfers from other funds and hospital and nursing
home pooling of contributions to use as federal matching funds.
Tax revenues declined in fiscal 1991 as a result of the recession in the
economy. A $2.7 billion tax increase, including one-time revenues from several
retroactive measures, enacted for fiscal 1992 brought financial stability to the
General Fund. the absence of those one-time revenues and a reduction in the
personal income tax rate in fiscal 1993 contributed to a decline in tax revenues
for fiscal 1993. Fiscal 1994 tax revenues increased by 4.1 percent, but a
decline in other revenues caused by the end of medical assistance pooled
financing in fiscal 1993 held total revenues to a 1.8 percent gain. Expenditures
for fiscal 1994 rose by 4.3 percent.
The General Fund balance increased $194.0 million in fiscal 1994 due largely to
an increased reserve for encumbrances and an increase in other designated funds.
The unreserved-undesignated balance increased by $14.8 million to $79.2 million.
Revenues and other sources increased by 1.8 percent over the prior fiscal year
while expenditures and other uses increased by 4.3 percent. consequently, the
operating surplus declined to $179.4 million for fiscal 1994 from $686.3 million
for fiscal 1993.
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The Commonwealth maintained an operating balance on a budgetary
basis for fiscal 1994 producing a fiscal year-end unappropriated surplus of
$335.8 million. by state statute, ten percent ($33.6 million) of that surplus
was transferred to the Tax Stabilization Reserve Fund and the remaining balance
was carried over into the fiscal 1995 fiscal year.
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 $5,045.4 million on June 30, 1995 a
decrease of $3.4 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 $500.0 million of tax anticipation
notes for the account of the General Fund in fiscal 1996.
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
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 June 30, 1995
include the Delaware River Joint Toll Bridge Commission ($56.3 million), the
Delaware River Port Authority ($185.5 million), the Pennsylvania Economic
Development Financing Authority ($1,015.8 million), the Pennsylvania Energy
Development Authority ($123.1 million), the Pennsylvania Higher Education
Assistance Agency ($1,283.8 million), the Pennsylvania Higher Education
Facilities Authority ($2,102.9 million), the State Public School Building
Authority ($316.2 million), the Pennsylvania Turnpike Commission ($1,252.6
million) and the Pennsylvania Industrial Development Authority ($350.0 million).
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 paid. The principal amount outstanding as of June 30, 1995 on such
obligations equalled approximately $1.637 billion.
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Local Government Debt. The Commonwealth established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA") in 1991 to assist Philadelphia,
in remedying fiscal emergencies by issuing debt and by making factual findings
and recommendations on budgetary and fiscal affairs. At this time, Philadelphia
is operating under a five year fiscal plan approved by pica on April 17, 1995.
PICA has issued $1,418,680,000 of its Special Tax Revenue Bonds.
This financial assistance has included the refunding of certain city general
obligation bonds, funding of capital projects and the liquidation of the
Cumulative General Fund balance deficit as of June 30, 1992, of $244.9 million.
The audited General Fund balance of the city as of June 30, 1994 showed a
surplus of approximately $15.4 million, up from approximately $3 million as of
June 30, 1993. City preliminary unaudited General Fund financial statements at
June 30, 1995 project a surplus approximating $59.6 million.
Puerto Rico Bonds
The economy of Puerto Rico is dominated by the manufacturing and service
sectors. The manufacturing sector has experienced a basic change over the years
as a result of increased emphasis on higher wage, high technology industries
such as pharmaceuticals, scientific instruments, computers, microprocessors,
medical products and electrical products and certain high technology machinery
and equipment. The service sector, including wholesale and retail trade,
finance, insurance and real estate, also plays a major role in the economy. The
service sector ranks second only to manufacturing in contribution to the gross
domestic product and leads all sectors in providing employment. In recent years,
the service sector has experienced significant growth in response to and
paralleling the expansion of the manufacturing sector.
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.
Legislation is currently pending in Congress which, if passed, would repeal
section 936, which allows companies with operations in Puerto Rico and other
U.S. territories to receive a credit to be used against U.S. tax on certain
income from operations.
Puerto Rico's economy is closely integrated with that of mainland United States.
During fiscal 1994, approximately 87% of Puerto Rico's exports were to the
United States mainland, which also was the source of approximately 67% of Puerto
Rico's imports. In fiscal 1994, Puerto Rico experienced a $4.3 billion positive
adjusted merchandise trade balance.
Puerto Rico's more than decade-long economic expansion continued throughout the
five-year period from fiscal 1990 through fiscal 1994, and affected almost every
sector of its economy and resulted in record levels of employment (although
Puerto Rico's unemployment rate has chronically exceeded the average for the
United States). Factors behind this expansion included Commonwealth-sponsored
economic development programs, the relatively stable prices of oil imports,
periodic declines in the exchange value of the United States dollar, the level
of federal transfers and the relatively low cost of borrowing during the period.
Growth in fiscal 1996 will depend on several factors, including the state of the
United States economy and relative stability of the price of oil imports
increases in visitors to the island and in exports, the exchange value of the
U.S. dollar, the level of federal transfers and the cost of borrowing.
The Constitution of Puerto Rico provides that public debt of the Commonwealth
will constitute a first claim on available Commonwealth revenues. Public debt
includes general obligation bonds and notes of the Commonwealth and any payments
required to be made by the Commonwealth under its guarantees of bonds and notes
issued by its public instrumentalities.
The Constitution of Puerto Rico also provides that direct obligations of the
Commonwealth evidenced by full faith and credit bonds or notes shall not be
issued if the amount of the principal of and interest on such bonds and notes
and on all such bonds and notes theretofore issued which is payable in any
fiscal year, together with any amount paid by the
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Commonwealth in the preceding fiscal year on account of bonds or notes
guaranteed by the Commonwealth, exceeds 15% of the average annual revenues
raised under the provisions of Commonwealth legislation and covered into the
Treasury of Puerto Rico (principally income taxes, property taxes and excise
taxes) in the two fiscal years preceding the then current fiscal year.
With the approval of the North American Free Trade Agreement by the United
States Congress which is intended to eliminate certain restrictions on trade
between Canada, the United States and Mexico, certain of Puerto Rico's
industries, including those that are lower salaried and labor intensive, may
face increased competition from Mexico. However, Puerto Rico's favorable
investment environment, skilled work force, infrastructure development and tax
structure (especially Section 936) would tend to create expanded trade
opportunities for Puerto Rico in sectors such as pharmaceuticals and
high-technology manufacturing.
8.
Past Performance
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, 1995 for the
Florida, Michigan and Pennsylvania Series were (8.90%), (9.80%) and (9.60%),
respectively. The average annual compounded rates of total return for the life
of the Florida Series (commencing on September 25, 1991 to October 31, 1995),
the life of the Georgia Series (commencing on December 27, 1994 to October 31,
1995), the life of the Pennsylvania Series (commencing on February3, 1992 to
October 31, 1995) and the life of the Michigan Series (commencing on December 1,
1992 to October 31, 1995), were as follows:5.98%, 7.70%, 5.90% and 6.32%,
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, 1995 the yields for the Florida, Georgia, Pennsylvania and
Michigan Series were 4.80%, 4.86%,4.98%and 5.13%, 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% , Michigan - 38.86% and
Georgia 39.84%) 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, 1995,
the tax-equivalent yields for the Florida, Georgia, Pennsylvania and Michigan
Series were 7.50%, 8.28%, 7.81%, and 8.28%, 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.
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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
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 Trust'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, 1995 and opinion of Deloitte & Touche LLP, independent public accountants,
included in the 1995 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.
